Transitions in Latin America and in Poland and Syria

LIST OF CONTRIBUTORS Jane Hardy

Centre for Research in European Business and Economy, Business School, University of Hertfordshire, UK

Jerome Joffe

Division of Social Science, St. John’s University, NY, USA

Angela Joya

Department of Political Science, York University, Toronto, Canada

Samezo¯ Kuruma

Now deceased: translation by E. Michael Schauerte

Terrence McDonough

Department of Economics, National University of Ireland, Galway, Ireland

E. Michael Schauerte

Administrator of the Japanese Section of the Marxist Internet Archive at marxists.org; Freelance Translator, Tokyo, Japan

Curtis Skinner

Pelliparius Consulting, Brooklyn, NY, USA

Oliver Villar

Department of Politics, University of Western Sydney, Australia

Gregory Wilpert

Venezuelanalysis.com, Editor; Freelance Writer, Caracas, Venezuela

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FOREWORD With a world balance of forces in tension, this volume slices the political map in two dimensions, the geographical dimension and the imperialism– socialism dimension (‘‘socialism’’, of course, having widely varying meanings). As a region, Latin America is in the forefront of resistance to imperial schemes, particularly those by the United States. Venezuela and Cuba represent leading edges of resistance, and Colombia, a leading edge of U.S. hegemony. Chapters addressing the political economies of these countries form the first part of the volume. Poland has led the anti-Soviet transition into a pro-market realignment, a realignment of this country which is particularly oriented toward the United States. Syria, on the other hand and even as it moves into a pro-market orientation, is subject to particular U.S. hostility. Both cases are analyzed in Part II, with the chapter on Poland having considerably broader applicability. Also included here is the continued deeper penetration of capitalist relations within the United States, represented by analysis of the transition of its medical sector. For almost a century, stages of capitalism has been an important theme within Marxism. The theme is analyzed at the beginning of Part III, and connects to the more empirical work represented by the prior six chapters. The volume concludes with translation from Japanese of an important critique of the classical political economy of Adam Smith and David Ricardo, who, in a certain sense, were the leading proponents, historically, of the market, of capitalism. Most poignantly, this chapter argues that Ricardian value theory opens the door to a vulgar system of economic thought.

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CHAVEZ’S VENEZUELA AND 21ST CENTURY SOCIALISM Gregory Wilpert ABSTRACT This paper explores the sociological, economic, and political reasons for the collapse of Venezuela’s 40-year ‘‘pacted’’ democracy, the eight-year conflict between the country’s new president and the opposition, where this conflict has led Venezuela, and what its prospects are for the near future. It proposes that the collapse of Venezuela’s ‘‘ancien regime’’ can best be understood by an examination of the impact the rise and fall of oil prices had on its economy, society, and polity. A 20-year economic decline led to the election of Hugo Chavez, a radical outsider, who refused to play along with the country’s old political class. This class, in turn, refused to accept Chavez as the legitimately elected president and launched the country on an eight-year roller-coaster ride of counter-revolution and radicalization, which recently ended with the reelection of Chavez and a massive popular endorsement for the establishment of ‘‘21st century socialism’’ in Venezuela. Exactly what such a project means is still unclear, but it so far involves state support for self-managed workplaces and an anti-capitalist and participatory democratic state in the midst of a still functioning capitalist economy. With the apparent defeat of obstacles that are external to the Bolivarian movement, as the pro-Chavez movement is called, such as the domestic opposition and U.S. intervention, the movement is now forced to confront its internal obstacles, such as clientelism, corruption, and personalism, if it is to succeed in the long run. Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 3–42 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24001-5

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The perhaps two most common questions about Venezuela over the past eight years have been, first, is President Hugo Chavez a typical Latin American autocrat? And, second, just how revolutionary or transformative are the policies of the Chavez government? The present paper proposes to examine the second question and, in the process, answers the question of what Chavez’s proposal to build 21st century socialism means for Venezuela. Indirectly, this paper will also answer the first question of whether this is an autocratic or a democratic government because, if it is indeed pursuing some form of socialism, then it must be profoundly democratic because socialism, in my conception, is at heart democracy in its truest sense – a point that Chavez emphasized immediately following his recent reelection.1 Chavez himself was a relatively late convert to socialism. It was not until six years into his presidency that he announced that he was planning to pursue ‘‘21st century socialism.’’ Before that point he had always only talked about bringing about a ‘‘Bolivarian Revolution,’’ so named after Venezuela’s 19th century independence hero, Simon Bolivar. As Bolivar’s history and Chavez’s own statements suggest, the Bolivarian project was, at first, fundamentally a nationalist project, which sought to defend Venezuela against the powers of neo-liberal globalization and against U.S. domination. Certainly, the project had, from the start, progressive social justice impulses, but it was not socialist, in the sense that it opposed capitalism in favor of a new and more just and more democratic economic system. It was not until January 30, 2005, in a speech to the 5th World Social Forum, that Chavez announced that he supported the creation of a socialism of the 21st century in Venezuela. According to Chavez, this socialism would be different from the socialism of the 20th century. While Chavez was vague about exactly how this new socialism would be different, he implied it would not be a state socialism as was practiced in the Soviet Union and Eastern Europe or as is practiced in Cuba today. Rather, it would be a socialism that would be more pluralistic and less statecentered. But what does this new policy focus mean for Venezuela? Is Venezuela indeed moving away from capitalism and towards some form of socialism? Before we can answer these questions, though, it makes sense to find out how and why Chavez shifted from a ‘‘third way’’ Bolivarian nationalism towards ‘‘21st century socialism.’’ That is, how did it become possible that a radical socialism was placed once again on the agenda in a Latin American country and what lessons might be learnt from this for other movements that seek radical change?

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1. CAPITALIST DEMOCRACY WITH REPRESSION AND PATRONAGE (1958–1978) The perhaps most important reason Venezuela was open to a radical transformation, at first in favor of replacing representative democracy with participatory democracy and later of replacing capitalism with socialism, was Venezuela’s rather disappointing experience with both capitalism and representative democracy in the last two decades of the 20th century. That is, while the period from the end of Venezuela’s last dictatorship in 1958 to the end of its oil boom days in 1978 caused Venezuelans to believe that their country would soon join the developed world, the period from 1979 to 1999 proved to be two decades of bitter disappointment. In order to understand where this disappointment came from, we need to first examine what made Venezuelan democracy so unusually stable and apparently solid, at a time when most of the rest of Latin America was governed by brutal dictatorships. Venezuelan democracy during the 1960s and 1970s and beyond tended to revolve around two diametrically opposed images. In the positive image of Venezuelan democracy, Venezuela was blessed with one of the very few functioning democracies of Latin America (with Costa Rica being the other), ever since the defeat of the Marcos Perez Jimenez dictatorship in 1958.2 In this view, while most other countries in Latin America, especially in the 1970s, were struggling with dictatorships of varying degrees of brutality, Venezuelan citizens enjoyed full civil rights, universal suffrage, and regular free and fair elections. According to the more negative image, Venezuela between 1958 and 1998 was a phony or limited democracy, where citizens enjoyed limited civil rights and restricted choices for regularly occurring elections.3 Recently, though, a consensus has been emerging, first, that in the 40-year period of 1958–1998 Venezuela was indeed a democracy of sorts, but a significantly flawed one.4 Second, despite the fact that it was a ‘‘limited’’ or ‘‘restricted’’ democracy, it was still almost unique in the Latin American context, at least during the first half of this period (1958–1978), because nearly all other countries were governed by dictatorships.5 There are at least five factors that explain why Venezuela was significantly different from most other Latin American countries: economic, political, social, cultural, and military.6 Let us examine each in turn.

1.1. Economic Factors for Stability The economic factor has to do with the ways in which Venezuela’s vast oil wealth allowed the state to purchase the loyalty of large sectors of society,

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such as the labor movement, the party members of the two dominant political parties, and of civil society in general. However, so as to make sure that other sectors, which were not benefiting from the oil wealth, did not challenge the country’s political class, this class devised a restricted representative democracy, in which only the two governing parties (Accio´n Democra´tica (AD) and Comite´ de Organizacio´n Polı´ tica Electoral Independiente (Copei)) were allowed to compete in the political arena.7 Partly this was achieved through restrictive electoral rules, partly through limiting campaign financing and access to the media to the two dominant parties, and partly though outright repression and human rights violations. The resulting system, known as the Punto Fijo pact8 and designated as a ‘‘pacted democracy’’ by some analysts,9 was almost completely dependent on the country’s oil wealth for it to work. However, the dominance of the oil industry provoked what among economists is known as the ‘‘Dutch disease.’’ This economic disease, named after the effect the discovery of North Sea gas had on Holland’s economy, refers to the problems that are associated with the rapid growth in one sector of the economy will produce problems in other sectors. Applied to Venezuela’s oil industry, this meant that domestic industry and agriculture could not keep up with the rapid rise in oil income and so both industrial and agricultural goods were imported. Hellinger (2000) takes issue with the argument that the Dutch disease is a serious issue for Venezuela, dismissing it as a neo-liberal analysis and adding that if it does apply then it would have to be applicable to all Third World societies, since they all have imbalances in their economic activity. While it might very well be true that many Third World societies suffer from this problem, countries suffer far more from it the more one sector predominates. Since Venezuela is exceptionally dependent on oil, it is particularly applicable to Venezuela. Karl’s (1997) comparative analysis of oil producing countries and of other countries in which oil is dominant shows very well how the Dutch disease affects all of these countries. Compounding the problem of the Dutch disease, Venezuela had a fixed exchange rate in the 1970s and early 1980s. As a result, the currency was persistently overvalued and so it was much cheaper to import goods than to produce them domestically. This meant that industrialization in Venezuela never really caught on and agriculture was effectively killed off. Instead, the service sector, whose products cannot be imported as easily, grew dramatically, while agriculture and industry shrank. Agricultural production thus declined from one-third of GNP in the 1920s to less than one-tenth in the 1950s. As a result of the declining agricultural activity, a massive land flight

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and urbanization process set in, so that Venezuela rapidly became the second most urbanized country of Latin America10 and the only one to be a net food importer. The economic factor also had a tremendous impact on the country’s culture. That is, since there was little non-oil related productive activity, the vast majority of Venezuela’s entrepreneurs tried to associate themselves with either the state or the oil industry because these were the two sectors that were the most lucrative. The state also engaged in this type of rentier behavior in that it neglected to enforce its own tax laws, since oil revenues seemed to provide sufficient resources to finance the state apparatus. Finally, the oil state generated the expectation that Venezuela was one of the richest countries in the world and the state could, using this wealth, do practically anything. In Venezuela’s political culture it came to be taken for granted, across the political spectrum, that the Venezuelan state would play a very active role in the country’s economy.

1.2. Political Factors for Stability The political factors for maintaining Venezuelan representative democracy have to do with the country’s institutions, especially its political parties, and how these were able to manage the demands coming from Venezuelan society (Coppedge, 1994; Roberts, 2003, 2001; Buxton, 2001). That is, the center parties of Venezuela, the social democratic AD, and the Christiandemocratic Copei, formed the Punto Fijo pact, which was designed to exclude radical tendencies of both the left and the right. The pact of Punto Fijo was the result of hard political learning from past experiences, particularly the trienio period, which was the three-year democratic period of 1945–1948 between dictatorships. During that time AD dominated Venezuelan political life almost totally. Other parties resented this domination and ended up supporting the military coup against AD President Romulo Gallegos. Later, the parties regretted their support for the coup because it resulted in one of Venezuela’s most brutal dictatorships. The lesson that the political class learned from this experience was that if democracy is to survive in Venezuela, then power must be shared among the dominant groups of the time, which, in the case of the immediate post-1958 period were AD, Copei, and the smaller left of center URD (which later became defunct). Also, important decisions were to involve not just the pact parties, but also the main employer associations and the main union federation (which the parties dominated via patronage and clientelism).

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As mentioned earlier, another important element in this arrangement was the political repression of dissent and of groups that were interested in participating in the country’s political life. According to some, Venezuelan democracy in the 1958–1993 period should be called a ‘‘partyarchy’’ rather than a democracy because the parties controlled all political life in Venezuela (Coppedge, 1994). All decisions were made in the parties or in their subordinate civil society organizations. What this also meant is that political participation had to go through the parties. ‘‘Citizens tend to participate either within the parties or not at all’’ (Coppedge, 1994, p. 15). Another part of the reason for this strong party orientation was that Venezuelan political parties are the oldest organizations of civil society and could thus dominate all other forms of organizations that came later. Elections in non-party organizations, such as professional associations, unions, and student organizations were dominated by the existing political parties, principally AD and Copei, where each party would present its slate of candidates for the organization and the members would choose only amongst these. Also, both the relative number of AD party members in Venezuela and even the absolute number exceeded that of nearly all other parties in all of Latin America (with the exception of Costa Rica) (Coppedge, 1994, p. 30).

1.3. Social Factors for Stability The social factors for Venezuelan stability have to do with the relative size and strength of different social classes and of civil society. Contrary to some Marxist theories, which argue that liberal democracy is a bourgeois form of socio-political organization, an examination of this factor calls attention to the finding that liberal democracy is generally the result of a strong working class, a strong civil society, a strong state that follows the rule of law, and a weak upper class that is forced to give in to the demands of civil society.11 Capitalist development thus contributes to democratization because it tends to reduce the power of the landed elite and increases the power of the urban working class, which is one of the main advocates for democracy within a society. This trend holds true, though, only if the state is not at the mercy of a strong urban upper class. That is, the state has to be relatively independent but civil society must still be able to influence it. Finally, one other important factor for the success of democratization is the constellation of international conditions, such as foreign interventions and economic pressure (Huber et al., 1999).

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Examining this factor in Latin America as a whole, one can see that mobilizations to oppose dictatorship generally resulted in a weak civil society because once a country adopted liberal democracy, the mobilization of civil society subsided because its goal had been reached. Also, political parties, whose ability to articulate the demands of lower classes are crucial, play an important role in maintaining democracy. However, in most of Latin America, most parties did not maintain close ties with the lower classes. Rather, instead of articulating demands and acting on them in the political arena, parties built clientelistic networks, which produced cynicism towards democracy and thus generally weakened it. In the case of Venezuela, AD started out as a party with strong ties to the urban working class, but eventually transformed itself into a multiclass patronage-based party. Similarly, the international context, while favorable for establishing formal democracy, is not helpful for solidifying democracy and for engaging the population’s participation. That is, international pressures for countries to adopt neo-liberal economic policies often cause governments to adopt these policies even when voters thought they were voting for a completely different policy orientation. This could be seen quite clearly in Venezuela, for example, when both President Carlos Andre´s Perez (1989–1994) and President Rafael Caldera (1994–1999) adopted neo-liberal economic policies, even though their campaigns had promised something completely different. Again, such contravening of voters’ intent results in cynicism, apathy, and a weakened democracy. When we compare different Latin American countries, though, in order to make sense of what makes Venezuela different and in which ways it is similar to the rest of Latin America, one can see that certain structuralsocial arrangements in the different countries have produced different political results. At first, it would appear that within Latin America the thesis that capitalist development produces stronger trends towards democracy is contradicted because those countries that were more industrially developed, such as Chile, Argentina, Uruguay, and Brazil, tended to experience some of the most brutal dictatorships. Less developed countries, such as Bolivia, Venezuela, and Colombia, have longer histories of democratic government. However, other factors appear to play a stronger role than economic development when one takes a closer look at the factors that contribute to the development of a stable representative democracy (Mainwaring, 1999). A more important factor than the size of the industrial working class or the degree of capitalist development for the development of democracy is the relative strength of the upper class, which generally seeks to prevent

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democratization (Anderson, 1988). For example, Venezuela, which has had one of the longest lasting liberal democratic governments of Latin America, also has one of the weakest landed elites. First, Venezuela went through a series of civil wars and a brutal dictatorship that ended up decimating the country’s landed elite. Second, Venezuela’s large oil reserves, which were discovered relatively early in the 20th century (well before it was discovered in the Middle East) meant that oil became the principal means of accumulation, instead of land, as was the case in the rest of Latin America, and this oil income was quickly directed by the state rather than by a national business elite. Another factor that helps explain the prevalence of liberal democracy in Venezuela, when dictatorship was the norm in the rest of Latin America, is that Venezuela’s working class was relatively weak and unorganized. While normally a strong working class is a predictor for the development of liberal democracy, it can also work against it, because a strong working class represents a threat to the country’s elites, making them more willing to support a dictatorship in order to control the working class. The reason Venezuela’s working class is relatively weak and unorganized again has to do with oil. The country’s sudden influx of oil revenues caused massive and rapid urbanization, as was explained earlier. What this rapid urbanization meant was that there was insufficient time for the working class to organize and to pose a threat to the country’s elites. Democracy, thus, turned out to be a relatively safe bet for the elites (who were probably too weak to prevent democratization anyway). In contrast to Venezuela, countries such as Argentina, Brazil, Uruguay, and Chile, had working classes that did present a real threat to the elites of their respective countries. Plus, these elites were relatively strong and conservative landed elites, who provided the support base for a dictatorship in these countries. Despite these country-by-country differences, the ultimate result of dictatorship or democracy across Latin America appears to have been the ‘‘defanging’’ of the working class, of rendering it harmless. Another term that has been used is the ‘‘padlocking’’ of democracy, which prevents radical leftist movements from taking power, much as happened in Venezuela (Alan Knight, 2001; Anderson, 1988). History repeated itself in nearly all countries of Latin America, so that an early foray into democracy ended in dictatorship shortly after radical left movements either won the presidency or threatened to do so. Then, following the decimation of the radical movement and the institution of mechanisms, such as the Venezuelan pact of Punto Fijo, democracy returned, but without the radical movements having

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a real possibility of gaining power again. This pattern repeated itself various forms in numerous countries, but especially in Brazil, Chile, Guatemala, and Argentina. Also, by the 1980s the international context of neo-liberal globalization and of the IMF ensured that radical experiments would be practically impossible. However, the ‘‘pad-lock’’ that kept leftist parties out of power for so long in Latin America is gradually falling apart, as can be seen by the recent leftward shift in the continent.

1.4. Cultural Factors for Stability A fourth important factor for Venezuelan stability that more and more analysts are paying attention to is political culture.12 A focus on this factor implies that political actors can always choose different oil policies and create different political institutions and that it is the political culture that is important in determining the direction these policies and institutions took. As Mainwaring (1999) says, ‘‘Structural factors are important, but political actors develop values and behaviors that are far from reducible to the structural situation’’ (p. 60). Unfortunately, most studies are too general to specify exactly what it is about Venezuelan political culture that makes it different from other Latin American countries, to explain why Venezuela had a different history of democracy. Global and continent-wide studies can only say why Latin America has a different political and economic development trajectory than other regions of the world, but not what specifically makes Venezuela different. For example, Ronald Inglehart’s analysis of the World Values Survey argues that while economic development does produce greater proclivities towards democracy, a country’s culture also exerts a force on its political arrangements. ‘‘The fact that a society was historically Protestant, Orthodox, Islamic, or Confucian gives rise to cultural zones with highly distinctive value systems that persist when we control for the effects of economic development,’’ says Ingelhart (2000, p. 82). According to the Inglehart’s analysis of the World Values Survey, Latin American countries rank in the middle of a survival versus self-expression scale, which measures the degree to which the culture values conformity or individual expression, and towards the traditional of the traditional versus secular authority scale. Anglo-European countries, in contrast, rank towards the secular and the self-expression ends of the two scales. The implication is that a stronger cultural preference for traditional authority will make authoritarian governments more likely, while a preference for secularrational authority will make liberal democratic governments more likely.13

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Accordingly, Venezuela must have a political culture in which democratic commitment is stronger than in most other countries of Latin America.14 This hypothesis is supported by the Latin America-wide survey of political culture, Latinobarometro, which finds that support for democracy in Venezuela has been among the highest of Latin America, at least for the period in which the surveys were conducted, 1996–2004.15

1.5. The Military as a Factor for Stability Something that most analysts of Venezuela oddly enough leave out is the role of the military in both supporting Venezuela’s liberal or pacted democracy and in changing it under Chavez.16 Traditionally, in most of Latin America, the military has been a very conservative force. Largely, with U.S. encouragement, the armed forces were set up to stifle domestic dissent rather than to protect the respective countries from foreign attack or to protect the democratic system (if there was one). Training in the U.S. and an elite education in domestic military officers’ schools, with officers drawn from the upper class, ensured that the military would share the ideology of the domestic upper class and of U.S. foreign policy circles. As a result, whenever radical movements threatened to take power in Latin America, the U.S. government and the country’s domestic elites could count on the military to be on their side in suppressing these movements. However, this strategy did not always work, most notably, in Peru under General Juan Velasco (1968–1976) and in Panama under General Omar Torrijos (1968–1981), where Generals took a populist and nationalistic approach to their dictatorships, in opposition to the U.S. This small countertradition in Latin American military forces has also existed in Venezuela. That is, prior to the 1970s, Venezuela’s military was very much like the conservative military forces in the rest of Latin America. Several factors changed Venezuela’s military in the 1970s, though. First, Venezuelan officer training was decentralized, which meant that officers began to take courses at regular public universities, thus strengthening their exposure to civilians and to a wide variety of viewpoints. In some cases, such as with Chavez and his friends, they became particularly interested in leftist ideas and ideology. Another factor that distinguished the Venezuelan military was that officers were not recruited principally from the upper class, but often came from lower middle-class backgrounds (such as Chavez) and rose up through the ranks. This tied the Venezuelan military leadership much less to upper class concerns and ideology than was the case in most other Latin American

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countries. Thus, by 1989, when the military was ordered to repress the riots of the February 27 ‘‘caracazo,’’ the disgust that many soldiers and officers felt for this mission was great. Human rights violations were still the rule, but the action planted the seeds and the legitimacy for two left-oriented coup attempts in 1992.

1.6. Venezuela’s Uniqueness and Ordinariness in Latin America The main debate that emerges among Venezuela analysts is about the relative importance of Venezuela’s oil wealth in shaping the country’s economy, polity, and culture. There is little dispute that the oil wealth fundamentally shaped Venezuela’s economy, but there is some dispute about whether this wealth shaped the polity and culture or if, instead, it was the country’s culture and political institutions that shaped how the oil wealth was used, which then, in turn, shaped the economy. Given the controversy over this issue, it makes sense to say that both sides of this debate make valid points and that, rather than to take sides, a combination of the two approaches is probably the most fruitful interpretation of Venezuela’s reality. That is, this controversy boils down to the age-old debate within the social sciences and social theory as to whether it is culture and the actor’s world view that shape social, economic, and political structures or whether it is social, economic, and political structures that shape the culture and the actor’s world view. By now most social scientists and theorists will admit, though, that there is a dialectic between the two and that it might not make too much sense to favor one or the other side in terms of original causality.17 In addition to the culture-structure debate, there is also a sub-debate about whether it is the country’s economy, its political institutions, or its social structure and civil society that are most important in shaping Venezuela’s destiny. Here too, I propose that we examine each of these factors or social sub-systems as having more or less equal weight. However, there is a fundamental difference between structural factors of economy, polity, and society and cultural factors. If we subdivide the cultural factor into one that focuses on political culture, one that focuses on economic culture, and one that focuses on civic culture, we can see more easily how the different factors might fit together and complement each other. That is, the economic structure operates under a specific economic culture, the political structure under a specific political culture, and civil society under a specific civic culture. The following section suggests how the different elements of Venezuelan social structure and culture relate to each other, according to the factors presented above.

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1.7. Bringing the Factors Together Applied to Venezuela between 1958 and 1978 then (the years in which Venezuela’s democratic system was consolidated and maintained), one can say that there was dialectic between Venezuela’s oil-based economy and an economic culture that favored rentierism. On the one hand, oil income tended to drown out all other economic activity and, on the other, the oil economy was maintained as the dominant form of economic activity because this is what rentierism and the Dutch disease kept everyone focused upon. The country’s economic structure, in turn, shaped its social structure, to produce a weak working class because of the slow industrialization process. Also, it produced a weak landed elite, at least partly because of a rapid urbanization process (due to the decline of agriculture) that did not give much time for such an elite to develop. A weak working class, in turn, meant a relatively demobilized and apathetic civil society, whose support for democracy was based on the benefits of a relatively high standard of living. The weak landed elite meant that even if representative democracy threatened their interests, there was not too much this elite could do about it to turn Venezuela towards dictatorship, as had happened in most other countries of Latin America at the time. Another consequence of the oil-oriented economy was that wealth was accumulated and directed by the state, rather than through an economic elite. This meant that it was the political parties that had control over the country’s oil wealth and these kept challengers at bay via a corporatist and clientelist culture, which, in turn, reinforced the strength of the state and of the parties. In addition, this arrangement made the state, due to its power, appear to be ‘‘magical’’ (Coronil, 1997). This political culture and political structure also contributed further towards the weakening of civil society (of the classes) and the creation of a pragmatic democratic culture. While I place oil income as one of the main drivers of this socio-cultural system, one must keep in mind that Venezuela did not always have oil and that the decisions that were made once were based on its history and its learning from past experiences. That is, if Venezuela had had a different history in the 19th century, it might very well have pursued a different set of policies once it exploited its oil wealth. Crucial in this regard are the experiences of the numerous civil wars of the 19th century and the very repressive dictatorships of the early 20th century.18

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2. THE DECLINE OF VENEZUELAN REPRESENTATIVE DEMOCRACY AND STABILITY (1978–1998) How and why did this relatively stable system come apart? Also, why did this collapse lead to the election of a radical outsider, such as Hugo Chavez? As we will see, since most of the above outline of Venezuelan economic, political, social, and cultural dynamics were the result of the country’s oil industry, the decline of the political system was also directly related to the decline of the oil industry. The end of Venezuela’s golden years came with the presidencies of Copei’s Luis Herrera Campins (1979–1984) and of AD’s Jaime Lusinchi (1984–1989), which were quite unremarkable except for the fact that this was when Venezuela entered a steady 20-year decline. There were occasional oil booms in this period, such as during the Iranian revolution (1980) and the Gulf War (1991), but by then the booms could not make up for the lost ground that had already taken place due to heavy indebtedness, increasing oil production costs, declining oil price, and population growth. The decline of per capita oil income and thus also of per capita GDP was steady and unprecedented in the world during this period, dropping by 35% between 1970 and 1998.19 Key to the downfall of Venezuela’s political system was the steady 20-year decline in oil revenues, from 1981 to 1998, which dropped from $32 per barrel to $12.28.20 However, while per-capita oil revenues declined fairly steadily, nominal oil revenues declined in more of a roller-coaster manner, thus periodically giving policy makers the illusion that the Venezuelan economy might still recover from the decline, which then lowered the incentives to fundamentally overhaul the country’s economic base or its political institutions. Eventually, not enough resources were available to maintain the clientelistic-corporatistic political culture, which then dealt a deadly blow to the two main political parties and enabled the rise and election of a political outsider. A combination of factors thus came together in Venezuela over the course of the last 20 years or so: 1. Declining per capita oil revenue (47% drop from 1963 to 1997). 2. Doubling of the population (from 12 million in 1975 to 24 million in 2000). 3. Continuing ‘‘Dutch disease’’ (declining industrial and agricultural sectors). 4. Increasing state indebtedness (from 9% of GNP in 1970 to 53% in 1994).

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These four factors together combined to produce two key consequences that are very important for understanding today’s Venezuela. First, the declining per capita state oil revenues and growing population meant a smaller redistribution of Venezuela’s mineral wealth. That is, although per capita Gross National Income (GNI) remained relatively stable ($5,845 in 1984 and $6,012 in 1998, fluctuating above and below these figures between these two periods),21 poverty increased dramatically, from 18% of the population in 1980 to over 65% in 1996.22 This is the greatest increase in poverty of any country in Latin America during the 16-year period. What this combination of increased poverty and stagnant per capita income means is that inequality increased tremendously in Venezuela, between 1984 and 1998.23 Second, declining agricultural production, as a result of the ‘‘Dutch disease’’ and perceived oil wealth, produced a massive exodus from the countryside to the cities. The new immigrants to the cities, of course, formed the bulk of the country’s poor, residing in ‘‘barrios’’ of self-built homes on occupied land. Anyone visiting Venezuela cannot help but be impressed by the hills upon hills filled with these barrios, lining the road from the airport to the country’s capital. The economic crisis pushed the government to turn to the IMF for loans, which required the introduction of neo-liberal ‘‘structural-adjustment’’ reforms in early 1989 and again in 1996. These reforms further reinforced the decline in social spending and of corporatism and clientelism. Also, the fact that the presidents that introduced these reforms, Carlos Andre´s Perez and Rafael Caldera, instituted these reforms despite their promise to do the opposite, added to the delegitimation of and disgust for politics and the country’s political class. In effect, loyalty to the system had been bought with hard cash rather than earned through persuasion, so when the money ran out, so did the loyalty.24 This then led to one political crisis after another, culminating in riots and massacres in 1989, two coup attempts in 1992, and the election of a leftist populist president in 1998. Another political factor in the fall of Venezuela’s Punto Fijo political system (besides the economic crisis) was that the parties lacked any kind of innovative capacity.25 Ossified political structures, a focus on personalism rather than political program, and a general cross-party ideological consensus, made an innovative approach to politics and to the economic crisis practically impossible. Faced with a rapidly changing society and circumstances, the pressure for change grew while an appropriate response to the pressure remained absent.

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3. THE CHAVEZ PRESIDENCY: DIALECTIC BETWEEN COUNTER-REVOLUTION AND RADICALIZATION Given the foregoing explanations for the decline of Venezuelan pacted democracy, it should have been no surprise that in 1998 a complete outsider, promising to totally overhaul Venezuela’s corrupt political system, was elected by an overwhelming margin. However, even though Chavez had a clear mandate for the task of completely reforming the political system, the country’s old political class, once it realized that Chavez could not be coopted, rejected Chavez as the legitimately elected president. At first, there was not much this old elite could do, except to denounce the new president in the private mass media outlets that it controlled. Eventually, though, the old elite gained momentum and managed to severely destabilize the country in their all-out effort to oust Chavez. Why and how they did this and what the consequences of this battle between Chavez and the old elite were is the topic of this section. One can divide this battle into four distinct phases: new constitution and consolidation of power, coup attempt and Chavez’s retreat, oil industry shutdown and Chavez’s comeback, and recall referendum and radicalization. 3.1. 1999 Constitution and Consolidation of Power Chavez’s landslide election, with 56% of the vote,26 which a large segment of Venezuela’s middle and political classes initially supported, gave him a mandate to convoke a constitutional assembly and to introduce far-reaching changes to Venezuela’s political system. Chavez immediately set to work, organizing a referendum on whether to hold a constitutional assembly. Voters easily approved the project and, next, a vote was held for who should constitute this assembly. Again, Cha´vez won this vote in that 95% of the assembly members who were elected were Chavez supporters. Following a relatively accelerated discussion process, the new constitution was put to a vote in December 1999, when it passed with 72% voting in its favor. With the new constitution in place, all elected offices were renewed in 2000. Legislative elections were held, in which the pro-Chavez coalition won twothirds of the seats. Also, in the regional elections for state governors and city mayors Chavez supporters won a majority of these. Finally, Chavez was also re-elected, this time to a six-year term, winning 59% of the vote.

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At the time, the Chavez coalition included not just Chavez’s own party, the Fifth Republic Movement (Movimiento Quinta Repu´blica, MVR), but the Movement towards Socialism (Movimiento al Socialismo, MAS), Fatherland for All (Patria Para Todos, PPT), the Communist Party of Venezuela (Partido Comunista de Venezuela, PCV), Red Flag (Bandera Roja, BR), and a few other small parties. By the end of 2000, Chavez had consolidated his control over the country’s executive, with his supporters controlling the other four branches of government: the judiciary, the legislature, the electoral power, and the ‘‘moral’’ power (Attorney General, Comptroller General, and Human Rights Defender). Meanwhile, the opposition, since it was locked out of the center of political power for the first time in 40 years, could not accept Chavez as the legitimately elected president. At first, given Chavez’s political momentum, there was little the opposition could do to stop him. However, as Chavez’s honeymoon began to wear off and his approval ratings started to go down – as they had to – from the unheard of heights of 90% approval, the former political class managed to re-gain its foothold in Venezuela’s middle class. Chavez, though, ignored this development, which occurred in the second half of 2001, and forged ahead with his program, presenting a set of 49 laws that were supposed to bring Venezuela’s legal framework up to date with the new constitution and introduced far-reaching reforms, particularly in terms of a land reform and in the oil industry.

3.2. Heightened Resistance, Coup Attempt, and Retreat: November 2001 to December 2002 The outcry against these laws was immediate. Fedecamaras, the country’s largest and most important chamber of commerce, which unites most of Venezuela’s big businesses, complained that these laws were anti-business, undermined private property rights, and were passed without consulting them or anyone outside government circles. Venezuela’s main union federation, the Confederation of Venezuelan Workers (CTV) quickly joined the fray. Ironically, their main argument against the laws was that they were harmful to Venezuela’s business community and therefore harmful to Venezuelan workers. A more likely explanation for the CTV’s support of the employer federation, aside from their ties to the former governing party AD, was that the CTV had just gone through a pitched battle with the government over who would control the organization. A month earlier Chavez had forced the CTV leadership to submit itself to a grassroots vote, which the

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federation’s old established leadership won amid the government’s claims of fraud, resulting in the government’s non-recognition of that leadership to this day. The result of this vehement CTV/Fedecamaras opposition to the government was that the two organizations called for a ‘‘general strike’’ on December 10, 2001. The strike met with moderate success, but the media and the private sector’s lockout of their employees for a day gave the ‘‘strike’’ a heightened visible effect. But it was not only the package of 49 laws that added fire to Venezuela’s conflict. Another crucial factor was that the economy suddenly slowed down in the wake of the September 11 terrorist attack on the U.S. The attack had sparked a worldwide recession and, with it, a decline in the price of oil. This double-blow – low oil prices and a global economic slowdown – forced the government to adjust its budget and cut back spending in all areas by at least 10%. The impact was almost immediately noticeable, as unemployment began inching upwards again, after it had steadily declined in 2000 and 2001. Meanwhile, an escalation in verbal attacks between Chavez and his opposition began reaching new heights. The economic downturn, the 49 laws, and Chavez’s strong discourse against the ‘‘squalid opposition’’ and the ‘‘rancid oligarchy,’’ all made it relatively easy for the opposition to chip away at Chavez’s popularity, along with substantial help from the private mass media. Opinion polls – which can show some trends, but which are not necessarily reliable because their ability to reach into the hearts of the poor neighborhoods is doubtful – indicate that Chavez went from a popularity rating of around 60–70% to 30–40% between June 2001 and January 2002. This was the context in which the opposition became convinced that it could oust Chavez, whose legitimacy they never truly accepted, before the end of his presidency. Three concrete attempts thus took place between January 2002 and August 2004. The first was the April 2002 coup attempt,27 whose apparent detonator was the oil industry management’s resistance to Chavez’s efforts to gain control over the state-owned oil industry. Crucial to this attempt, however, was a disgruntled sector of the military that, for a variety of ideological and opportunistic reasons, believed that it could and should get rid of Chavez. The failure of the coup, a mere 47 h after Chavez was removed from office, was emblematic of all subsequent opposition failures to oust Chavez from the presidency. The opposition consistently underestimated the president’s popularity, believing instead the mass media’s constant claim that Chavez was highly unpopular and incapable as president. Instead, it was Chavez’s popularity amongst the country’s poor and the military that swept him back into the presidency.

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For the opposition, this was a bitter defeat because it lost an important base of its power, in the military. Previously, with Chavez’s election, the country’s old elite had already lost the presidency, which in Venezuela, as a very presidentialist society, is perhaps the most important base of power. Each subsequent effort to oust Chavez, the oil industry shutdown and the recall referendum, represented the loss of another base of opposition power. Chavez’s reaction to the coup attempt, after his return, was to moderate his tone and to play it safe. He put a new economic team in charge that appeared to be more mainstream and promised to include the opposition more in his policy deliberations. Also, he reinstated the old board of directors and former managers of the state oil company PDVSA, whose replacement had been one of the reasons for the coup.

3.3. Oil Industry Shutdown and Chavez’s Comeback: December 2002 to March 2003 Following a brief period of uncertain calm, the opposition interpreted Chavez’s retreat as an opportunity for another offensive against him, this time by organizing an indefinite shutdown of the country’s all-important oil industry in early December 2002. While the opposition labeled this action a ‘‘general strike,’’ it actually was a combination of management lockout, administrative and professional employee strike, and general sabotage of the oil industry. Also, it was mostly the U.S. fast food franchises and the upscale shopping malls that were closed for about two months. The rest of the country operated more or less normally during this time, except for food and gasoline shortages throughout the country, mostly because many distribution centers were shutdown. Eventually, though, the oil industry shutdown was defeated, once again due to the opposition’s underestimation of Chavez’s support. That is, while about 19,000 or half of the oil company’s employees were eventually fired for abandoning their workplaces, the government managed nonetheless to re-start the oil company with the help of retired workers, foreign contractors, and the military. According to government figures, the industry is now operating at normal levels, producing over 3.1 million barrels of oil per day. The opposition, however, claims, to this day, that production has not exceeded 2.6 million bpd since the end of the shutdown. The opposition thus tried to find solace in another failure. As such, it lost another crucial base of power, this time in the oil industry, whose managers were practically all opposition supporters and were all replaced.

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The oil industry’s recovery, along with a dramatically increasing price of oil and thus of oil revenues, meant that Chavez now had the resources to introduce new social programs, known as ‘‘missions,’’ to address the desperate needs of the country’s poor. The first missions Chavez introduced between late 2003 and early 2004 were for literacy training (Mission Robinson), high school completion (Mission Ribas), university scholarships (Mission Sucre), community health care (Mission Barrio Adentro), and subsidized food markets (Mission Mercal).

3.4. Recall Referendum and Radicalization: April 2003 to December 2006 The third and presumably last attempt to oust Chavez during his first full term was the August 2004 recall referendum. After having suffered defeat in two consecutive illegal attempts, the opposition was forced to follow the democratic and constitutional route for getting rid of Chavez. At the end of the oil-industry shutdown, on February 2, 2003, the opposition had initiated a process for organizing a wide variety of referenda against Chavez, but these were subsequently dismissed by the Supreme Court or dropped by the opposition itself, mostly due to the incorrect manner in which the referendum petitions were formulated or due to the timing of the signature collection process.28 The agreement to follow a strictly constitutional route for resolving Venezuela’s political crisis was formalized in a signed agreement between opposition and government that the Organization of American States and the Carter Center facilitated in May 2003. Eventually, once the CNE and the rules governing recall referenda were in place, which took until the end of 2003, the opposition collected 3.1 million signatures in December. Of these, following much political debate, 2.5 million signatures were validated and a referendum was convoked for August 15, 2004, only four days before another constitutional deadline (August 19, 2004) that would have led to the vice-president filling the rest of the president’s term, should the president’s mandate be revoked. Shortly after 4 am on August 16, CNE president Francisco Carrasquero announced the first preliminary results of the referendum, giving Chavez a 58%-to-42% victory.29 Immediately after Carrasquero’s announcement, opposition leaders held a press conference in which they stated unequivocally that fraud had been perpetrated. They offered no evidence for this claim except to say that they were convinced of it. Despite this claim, the election observer mission of the Organization of American States and of the Carter Center ratified the official result.

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For the opposition, this was perhaps the most bitter defeat of all the defeats it had to suffer. Not only did it no longer have a base of power in the executive, in the military, or in the oil industry, it now lost its perhaps most important base of power, in the middle class. That is, following three years of continuous battle with Chavez, promising its supporters that he was on his way out any day and that Chavez was illegitimate because they represented the majority, opposition supporters saw just how hollow and incompetent the opposition leaders were. Polls shortly after the recall referendum documented a dramatic loss of support for the opposition, so that only 15% of Venezuelans said they identified with the opposition. Chavez, realizing this near total loss of opposition power, announced in his victory speech that now would begin a new phase of his government. ‘‘From today until December 2006 begins a new phase of the Bolivarian revolution, to give continuity to the social missions, to the struggle against injustice, exclusion, and poverty. I invite all, including the opposition, to join in the work to make Venezuela a country of justice, with the rule of law and with social justice.’’ Later, in January 2005, Chavez took this call for a new phase even further, by announcing that from now on his government would seek to build a socialism of the 21st century in Venezuela. Thus, the continuous efforts of the opposition to oust Chavez, based on its non-recognition of his legitimacy, led to a continuous weakening of this opposition and the concomitant opportunity for Chavez to radicalize his program. Chavez’s call to build 21st century socialism received another boost on December 3, 2006, when he decisively won a second six-year term in the presidency. Chavez beat the opposition candidate, Manuel Rosales, with 62.8 to 36.9%. As such, Chavez’s 26-percentage point margin of victory was the largest in Venezuelan history. Also, Chavez managed to double his support from an initial 3.7 million votes in 1998 (56.2% of the total votes cast) to 7.3 million in 2006. More significant than the increase in support, though, was that the opposition candidate, Manuel Rosales, admitted that he was defeated by Chavez. This is the first time since Chavez’s initial election that an opposition leader conceded defeat in a confrontation with Chavez since he was first elected in 1998. In none of the opposition’s confrontations with Chavez, whether following the 2002 coup attempt, the 2003 oil industry shutdown, or the 2004 recall referendum, did the opposition take responsibility for its actions. This implies that this is the first time in Chavez’s presidency that the opposition recognizes Chavez as the legitimately elected president and thus opens the path towards the normalization of Venezuelan politics in the

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Chavez era. As such, the election further smoothes the path for Chavez to lead Venezuela towards 21st century socialism.30

4. THE IDEAL OF 21ST CENTURY SOCIALISM What, though, does Chavez mean by ‘‘21st century socialism’’? After his initial announcement, at the January 2005 World Social Forum in Porto Alegre, Chavez often repeated the call, but did not provide much more details, other than a list of values upon which this new socialism would be based. These values can be characterized as involving the ideals of the French Revolution, of utopian socialism, and of Christianity. ‘‘We have assumed the commitment to direct the Bolivarian Revolution towards socialism and to contribute to the socialist path, with a new socialism, a socialism of the 21st century, which is based in solidarity, in fraternity, in love, in justice, in liberty, and in equality,’’ said Chavez in a speech in mid-2006.31 Also, this socialism is not pre-defined. Rather, said Chavez, we must, ‘‘transform the mode of capital and move towards socialism, towards a new socialism that must be constructed every day.’’32 Chavez often mentions that one of his most important ideological influences, Simon Bolivar’s teacher Simon Rodriguez was an early socialist, a utopian socialist in the tradition of Robert Owen and Charles Fourier. ‘‘If Simon Bolivar had lived like Simon Rodriguez, for 30 years more, y [he] would have been one of the precursors of utopian socialism, here in the lands of the Americas y.’’33 At other times Chavez makes a strong connection between the values of Christianity and socialism, saying that Christ was the world’s first socialist: ‘‘The symbol of capitalism is Judas and of socialism it is Christ.’’34 With regard to concrete institutions, Chavez has stated that 21st century socialism would involve, ‘‘the transformation of the economic model, increasing cooperativism, collective property, the submission of private property to the social interest and to the general interest y.’’35 Further, such a socialism is community-based, stressing that the center-piece of the project, the new ‘‘communal system of production and consumption’’ must be created ‘‘from the popular bases, with the participation of the communities, through the community organizations, the cooperatives, self-management, and different ways to create this system.’’36 Also, on various occasions Chavez mentioned that this socialism is not just economic, but also political, saying, ‘‘Socialism of the political: this has a combination of elements, but one is central: participatory and protagonist

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democracy. This is the central axis of socialism in the political [realm], democracy from below, from inside, full democracy y.’’37 Finally, this socialism is not pre-defined. Rather, said Chavez, we must, ‘‘transform the mode of capital and move towards socialism, towards a new socialism that must be constructed every day.’’38 Repeatedly Chavez emphasizes that this socialism has to be homegrown and must be developed gradually. Given this rather vague explanation and the concrete policies the Chavez government has pursued in the past eight years, is Venezuela really heading towards something that could be called ‘‘Socialism of the 21st century’’? That is, is Venezuela heading towards something that might be called a postcapitalist order in which the age-old dream of individual freedom, equality, and social justice (liberte´, egalite´, et fraternite´, to use the motto of the French Revolution) becomes a reality for all its citizens? To find out one has to examine the concrete policies of the Chavez government and the ways in which it creates institutions that work towards these ideals, while moving away from the institutions of capitalism. Thus, before we can identify the ways the Chavez government is creating socialist institutions, we need to clear about what are the main institutions of capitalism that need to be overcome.

5. THE INSTITUTIONS OF CAPITALISM A relatively simple definition of capitalism identifies at least three key institutions for us to call their combination capitalist. First, capitalism involves the institution of private control and ownership of the means of production, that is, of land, factories, and other forms of capital that allow the production of sellable goods and services. The second crucial institution of capitalism – in its ‘‘pure’’ form – is that distribution and exchange are regulated via competitive markets. Competitive markets are an essential and integral institution of capitalism, which helps regulate not only distribution, but also prices and thereby guide what things are or are not produced. As long as owners are interested in making sure that they do not lose their investment to competitors who try to maximize their profit and who reinvest this profit in their business, all owners must aim to maximize profits. That is, private ownership/control of production, combined with competitive markets also necessarily implies the pursuit of profit maximization. Finally, the third essential institution of capitalism is a regulatory system, a state, which facilitate the functioning of the other two institutions. That is,

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a capitalist state not only helps correct capitalism’s frequent dysfunctions and erratic behavior, but also makes sure that contracts between individuals, upon which exchanges are based, are adjudicated in cases where disputes arise and acts as a mediator in social conflicts, usually between owners and non-owners, who enter into frequent conflicts over issues relating to inequality. While social movements have historically managed to demand that the state responds better to their needs, mostly by democratizing the state, the capitalist state is influenced to a very large extent by the owners of capital because these lobby, finance political campaigns and mass media, and blackmail elected representatives. Moving away from capitalism, however, does not, by itself, mean that a society is moving towards socialism. After all, it could move towards feudalism, fascism, or some other form of undesirable social organization. What, then, would constitute socialism or, more specifically 21st century socialism? The short answer to this question is that socialism would be the establishment of institutions that transcend the above-named institutions of capitalism, which fail to fulfill the ideals of socialism, while moving towards institutions that do fulfill these ideals. Assuming we accept the ideals Chavez outlined for 21st century socialism, this would mean that the society would move towards the fulfillment of liberty, equality, social justice, and sustainability. Twenty-first century socialism distinguishes itself from ‘‘real existing’’ 20th century socialism, in that the latter kind focused mainly on realizing the ideals of equality (to a limited extent, since party members were ‘‘more equal’’ (Orwell) than non-members) and of social justice, but did not pursue the ideals of liberty and of sustainability. In other words, for 21st century socialism to distinguish itself from 20th century state socialism, it would have to be a libertarian socialism, which assures that the ‘‘free development of each is a condition for the free development of all’’ (Marx).

6. IS VENEZUELA MOVING TOWARDS 21ST CENTURY SOCIALISM? With this general definition of capitalism and of 21st century socialism, we can now examine how the policies of the Chavez government compare. I will begin the analysis with the ways in which Chavez is moving to transform the institutions of capitalism into what might be called socialist institutions, beginning with the one that has been transformed the most.

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6.1. Transformation of the Capitalist State into a Socialist State With regard breaking away from the institution of the capitalist state – a system of governance that is under the sway, if not control, of powerful private interests – Venezuela has advanced the most. There are at least three ways in which the Chavez government has done this over the last few years. First, it has had the opportunity to break free from the sway of private capital, due to the combination of massive oil revenues and the nearly complete loss of power of the country’s old (mostly capitalist) elite. Second, it has instituted forms of direct democracy and increased citizen participation in the state. Third, it has weakened the possibility that the military could be used to repress the civilian population, via what it calls civilmilitary union. The first aspect is perhaps the most important because it has enabled practically all other anti-capitalist measures of the Chavez government. That is, Venezuela’s oil revenues, which increased, on an annual per-capita basis, from $226 in 1998 to $728 in 2005,39 has been a bonanza that has given the Chavez government a tremendous amount of freedom from private capital’s ability to threaten with investment strikes. Also, the institution of capital controls in early 2003 further expanded the government’s independence from private capital. While most leftist governments, such as that of President Lula of Brazil, are constantly faced with the choice of pursuing progressive policies and thus alienating capital and thereby endangering economic well-being or abandoning progressive policies and encouraging private investment, the Chavez government is by and large freed from this dilemma. Enormous oil revenues allow the government to invest, to pursue progressive tax policies and regulations, and to spend freely, without having to worry much about capital flight or disinvestment. This freedom, combined with the opposition’s progressive self-destruction (via the coup attempt, the oil industry shutdown, the failed recall referendum, and the boycott of the December 2005 National Assembly elections) is the main reason why the Chavez government has been free to pursue increasingly more anti-capitalist policies with every passing year in office. This stands in stark contrast to the history of most progressive governments, which time and again start out with radical rhetoric, only to rapidly succumb to the demands of private capital. The second way in which the government is shaking loose the influence of private capital is by introducing participatory democracy in numerous areas of the state. This is happening in a variety of spheres. For example, one of the most important forms of citizen participation are the local planning

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councils, which were launched in Venezuela in 2001, but were at first stillborn due to a variety of limitations in the local planning council law, such as creating councils that were too large to be manageable or participatory. A new effort was launched in early 2006 with the communal council law, which bases councils on units of 200–400 families and which practice direct democracy in their communities, allocating financial resources and creating local ordinances. Participatory democracy in Venezuela also takes the form of citizen participation in the recently created ‘‘missions,’’ which provide education, health care, subsidized food, social services, land reform, and environmental protection. These missions, rather than being just imposed from above are largely directed by the citizens in any given community, in the form of health committees, land committees, and educational task forces. Also, there are the constitutionally guaranteed rights to participatory democracy, in the form of four different types of citizen-initiated referenda (recall, approbatory, abrogatory, and consultative), the right to conduct citizen-initiated audits of state institutions (contraloria social), and the right of civil society organizations to co-nominate candidates to the Supreme Court, the National Electoral Council, and the Moral Republican Council (consisting of Attorney General, Comptroller General, and Human Rights Defender). Citizen involvement in all levels of government like this increases accountability and weakens the sway of powerful private interests. While citizens might still succumb to threats of disinvestment from private capital, at least they have more influence over decision-making than when elected representatives decide matters mainly under the influence of powerful private groups that are constantly lobbying them and paying for their electoral campaigns. The third area where the Chavez government has made a conscious effort to enable a more direct democracy has to do with transforming one of the traditional means for suppressing citizen involvement and discontent: the military. Historically, the military in Latin America was used to repress the citizenry and to keep it from resisting the imposition of government policies it did not like. For Chavez and for most poor Venezuelans, the 1989 riots against IMF-imposed economic policies, which dramatically increased the price for public transportation and for many food staples, was an expression of discontent with the relatively undemocratic government of Carlos Andre´s Perez. This outburst of discontent was immediately suppressed with massive military force, which ended up killing anywhere between 300 and 3,000 poor Venezuelans.

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According to Chavez, the reason Venezuela’s and Latin America’s military forces were able to repress their own populace so often and so easily was because the military was always kept separate from the population. That is, their lack of contact with civilians, their sequestration, made it easier for them to act without sympathy or remorse against their own people. In contrast, Chavez, following a Maoist maxim, argues that, ‘‘the military should be to the people like the fish is to water.’’ The application of this principle is called ‘‘civil-military union,’’ and means, in practice, that the military should be as integrated as possible with the civilian population, being in constant contact with them and even taking on civilian tasks in the process. The military has thus become heavily involved in the various ‘‘missions,’’ often providing services such as food distribution, construction help, and transportation, for example. Furthermore, the civilian population is being asked to sign up for Venezuela’s military reserves, to learn to fight a guerilla war, should an outside force such as the U.S. ever invade. This, according to Chavez, is supposed to further strengthen the civil-military union. Critics of this re-conceptualization of Venezuela’s military argue that it has militarized civilian society and could become a means for doing precisely what Chavez says it is supposed to ward against, of repressing the population. However, there is no concrete evidence for this. As any visitor to Venezuela can attest, the military in Venezuela has a far less militaristic presence in the general population than it did in countries where the military was indeed used for repression, such as in Argentina in the 1970s or in El Salvador in the 1980s. No one in Venezuela fears the military and its activity in the general population is limited to fulfilling the civilian functions mentioned above, but not to repress. Human rights groups such as Human Rights Watch do not cite the military as being perpetrators of human rights violations. Rather, in Venezuela, the main culprit in this regard remains (since long before Chavez’s coming into office) the notoriously corrupt and local government controlled police force. In other words, it would appear that rather than militarizing civil society, the civil-military union has served to ‘‘civilize’’ the military. These three factors, the tremendous oil revenues, the creation of a more participatory democracy, and the ‘‘civilizing’’ of the military, have meant that the Chavez government is far freer to pursue policies that are independent of the powerful private interests that normally shape government policy in capitalist countries. The freedom the Chavez government enjoys to pursue leftist policies is unique in comparison to most of the rest of world in many ways. While there are other countries that enjoy such a freedom due to their wealth in natural resources (such as a state-owned national oil

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industry), these other countries tend to be in the hands of extremely conservative authoritarian regimes (such as in the Middle East) and have no interest in pursuing progressive policies. This freedom has allowed the Chavez government to pursue policies that clearly move away from private ownership and control over the means of production, away from market-determined allocation and distribution, and towards what could be called more socialist economic and governance forms. However, this is clearly not the state-socialism of the 20th century, as was practiced in Eastern Europe and China and still is in Cuba. Rather, it is a more libertarian form of socialism, in that it actively seeks citizen participation and even forms of direct democracy.

6.2. Transforming Private Ownership/Control of Production into Collective Ownership/Control While the vast majority of Venezuela’s productive capacity is still either privately or publicly owned and controlled, one of the government’s main areas of emphasis has been to expand collective and self-managed forms of ownership and control, such as via cooperatives, co-management, and expanded state management/ownership. For example, during the Chavez presidency the number of cooperatives in Venezuela has increased from about 800 in 1998 to over 100,000 in 2006 – an over 100-fold increase in seven years. Over 1.5 million Venezuelans are thus now involved in cooperatives, which represents about 10% of the country’s adult population.40 The government has been actively supporting the creation of cooperatives in all sectors, mostly via credit, preferential purchasing from cooperatives, and training programs. With regard to co-management, the government has been experimenting with several state-owned enterprises in this regard, such as the electricity company CADAFE and the aluminum production plant Alcasa. Depending on how these experiments go, the government is considering turning over more state-owned enterprises to co-management. These businesses will not be turned over to complete worker control, however, because, according to the government, they are too important for Venezuela to be governed only by the people that work there. That is, they have an impact on the entire society and thus, according to the principle of subsidiarity, the society, through its representatives in the state, should also have a say in how the enterprise is run. Another strategy for changing the ownership and control over the means of production has been the expropriation of idle factories. Currently about a

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dozen production plants, which produce paper, valves, and agricultural products, have been expropriated and turned over to worker control. Working together with the national union federation UNT, the government is evaluating 700 other idle production facilities that could also be expropriated and turned over to former workers of these plants. Finally, with regard to expanding state management, the Chavez government has created several new state-owned enterprises, such as in the areas of telecommunications, air travel, and petrochemicals. Also, it reinedin the previously semi-autonomous state oil company PDVSA and brought it under tighter government control. Of course, just because there are more enterprises that go against the logic of capitalism and that are in essence anti-capitalist endeavors, such as cooperatives, co-managed enterprises, and state-owned enterprises, does not mean that Venezuela is now a post-capitalist society with regard to the ownership of the means of production. However, there is a definite movement in this direction. Whether such forms of ownership will become predominant within the Venezuelan economy, it is too early to tell. The real test of the extent to which the government is willing to go in this direction will come if and when private capital is forced to become marginal in the overall economy. Whether such a direct confrontation will take place and how it will play out is impossible to say at this point. An unpublicized draft of Chavez’s 2007–2013 government program does state, though, that the government plans to expand the self-managed business sector, so that it becomes just as large as the other two sectors, the private and the publicly owned/managed. However, creating a sphere of collectively owned and self-managed production by itself is not much of a change if such ownership and control follows the same principles as private ownership does, of maximizing profit above all else and of funneling non-reinvested profits towards elite consumption. Thus, so as to ensure that the cooperative, co-managed, and state managed enterprises follow a new set of principles, the Chavez government has created a new type of economic production unit, which is known as social production enterprise (EPS, in Spanish). Social production enterprises are, ‘‘economic entities dedicated to the production of goods or services in which work has its own meaning, without social discrimination nor privileges associated with one’s position in a hierarchy, in which there is substantive equality between its members, planning is participatory and operate under either state, collective, or mixed ownership.’’41 In order to qualify as an EPS and thus for preferential treatment for low-interest credits and state contracts, companies must fulfill a list

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of requirements, such as to, ‘‘privilege the values of solidarity, cooperation, complementarity, reciprocity, equity, and sustainability, ahead of the value of profitability.’’42 To provide companies with an incentive to fulfill the criteria of the EPS, the government has promised to make these eligible for government subsidized loans and for preferential contracting with the government. If these values are indeed fulfilled, then one can say that with regard to ownership and control over the means of production Venezuela is moving away from capitalist institutions of ownership and towards 21st century socialist ownership.

6.3. Moves Away from Market Exchange With regard to moving beyond market exchange for regulating production and distribution of goods and services, the Chavez government has so far mainly focused on using the state as a non-market based mechanism. That is, the state has been very active in redistributing wealth during the Chavez presidency, whether through its rural and urban land reform program, its oil revenue-funded social programs for free health care, education, and subsidized food markets, or the provision of subsidies and other support for key sectors, such as cooperatives and ‘‘endogenous development nucleuses.’’ Of course, while state redistribution mechanisms go against a basic principle of capitalism, these do not break the logic of capital as long as most exchange still occurs in a free market context, as is still the case in Venezuela. As such, such policies are more social democratic than socialist. Another area where the government has been moving away from marketbased distribution has been in international trade. Not only has the Chavez government vehemently opposed the free trade agreements the U.S. has been promoting, but it is also involved in a large number of trade deals that are based on principles of solidarity instead of competition. For example, the Petrocaribe agreement provides for discounted financing of Venezuelan oil for Caribbean nations and also allows them to pay for oil with in-kind payments. In the most prominent case Cuba has been providing Venezuela with 20,000 doctors and medical assistants in exchange for Venezuelan oil shipments. Similar agreements exist with Argentina, Uruguay, and Ecuador. Again, this kind of non-market based trade, which emphasizes cooperation, complementarity, and solidarity over competition, is still far smaller than traditional market exchange. How and if the Chavez government can find ways to increase non-market and non-state based exchange mechanisms remains to be seen, especially since exactly how cooperative (instead of

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competitive) exchange could function on a large scale is still quite unclear in Venezuela. Chavez, though, has hinted at one possible a model for such a non-market and non-state based exchange, which is inspired by the Marxist theorist Me´sza´ros (1995), who has proposed ‘‘communities of production and consumption.’’ While it is not clear exactly what is meant by this, it could represent a bringing together of Venezuela’s participatory democracy, such as the communal councils, with the self-managed economy, so that consumers and producers democratically plan their consumption needs and production capabilities together, without mediating these via the market.43

7. OBSTACLES FOR 21ST CENTURY SOCIALISM IN VENEZUELA The main obstacles to 21st century socialism in Venezuela fall into the two general categories of those that are external to the Bolivarian movement and those that are internal to the Bolivarian movement. External obstacles include the domestic opposition that continuously seeks to overthrow the Chavez government without engaging in the political process, a U.S. government that is intent on isolating and undermining the Chavez government, and domestic and international forces of capital that make 21st century socialism in one country extremely difficult to institute. The internal obstacles include the persistence of an anti-democratic political culture of patronage and of personalism.

7.1. External Obstacles The opposition includes practically all sectors that used to have a determining role in Venezuelan society, such as the former governing parties, the old union federation, the church hierarchy, big business, and almost all the private mass media. The key problem for the Chavez government with this opposition is not so much its power, which it has lost steadily largely due to its own disorganization and failures, but its unwillingness to play the democratic game, as it did during the April 2002 coup attempt, the December 2003 oil industry shutdown, and the December 2005 boycott of the National Assembly elections. Rarely during the Chavez presidency has this opposition come forward with concrete proposals about how it would govern

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Venezuela differently. Only with the 2004 recall referendum and the 2006 presidential election did it agree to participate in the political process. The second external obstacle to creating 21st century socialism is the Bush administration. From documents that have become available in the past few years, it is clear that the Bush administration knew about the 2002 coup attempt in advance, but instead of opposing it beforehand or while it was in progress, Bush gave it support by denying that it was a coup and by blaming Chavez for his own downfall. Also, via the National Endowment for Democracy and the U.S. Agency for International Development (USAID) the Bush administration has been funneling several million dollars per year to opposition groups in Venezuela, in an effort to create an opposition in its own image. And, in terms of applying overt measures against the Chavez government, the Bush administration has been applying a variety of minor economic sanctions44 and has been conducting a campaign to isolate Venezuela internationally. All in all, each one of these measures has been a relative failure. For example, the opposition, despite its receiving funds and advice from the U.S., is hopelessly disorganized and of little consequence in Venezuela, following its many failures during the Chavez presidency. The economic sanctions have little effect, given that Venezuela’s foreign currency income comes almost entirely from oil revenues, which the U.S. will not cut off. Last, the efforts to isolate Venezuela have met with little approval elsewhere in the world. Finally, the third external obstacle is for many countries the most serious obstacle to progressive governing because of its ability to initiate an investment strike if a government initiates too many policies against its interests. Venezuela, though, with the recent boom in oil revenues (essentially since mid 2003) remains a lucrative place for investment, despite the government’s anti-capitalist rhetoric and policies and its frequent tax increases for the oil industry. Also, capital flight has been held in check via a restrictive exchange rate policy. As a result, domestic and international capital is not that much of an obstacle now as it was earlier in Chavez’s presidency.

7.2. Internal Obstacles The much more serious obstacles to instituting 21st century socialism in Venezuela thus are the internal obstacles. The most serious of these is probably the persistence of a culture of clientelism-patronage. That is, there is much anecdotal evidence that despite Chavez’s criticism that previous governments were riddled with patronage systems, new forms of patronage

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have taken their place. While previously it was practically impossible for people who were not members of one of the ruling parties to get government jobs or services, evidence has emerged that although party membership is not an issue now, officials in the Chavez government are often preventing anti-Chavistas, as Chavez opponents are known, from acquiring government jobs and some kinds of services. The most notorious example of this practice has been the so-called ‘‘Tascon List,’’ which pro-Chavez National Assembly deputy Luis Tascon set up, which lists all Venezuelans who signed the petition in favor of a recall referendum against President Chavez.45 The original purpose of the list was to allow Chavez supporters to make sure that they did not appear on the list because they were concerned that the list fraudulently included many who did not intend to be on it. Patronage that gives government jobs and services mainly to Chavistas not only counteracts Chavez’s campaign promise of creating a government that will not exclude anyone, but it also undermines the rule of law, thus providing an opening for corruption and the delegitimization of the government and it counters the principle of formal equality. More than that, patronage systems encourage a limited form of solidarity, which extends only to one’s own group (in this case one’s political group) and is fundamentally at odds with an effort to create a society in which solidarity includes all people, regardless of nationality or political beliefs. The second internal obstacle is the latent personality cult around Chavez and the tendency towards personalistic politics in Venezuela in general. On the one hand, Chavez’s ability to bring people together in a large ‘‘Bolivarian’’ movement for radical change in Venezuela is practically unparalleled in recent Venezuela history. On the other, this ability has resulted in an extreme dependency of the movement on Chavez, to the exclusion of a clearly defined political program or political organization. Thus, if Chavez were to disappear from one day to the next, the entire movement would fall into a thousand pieces because it would have lost it unifying glue. This extreme dependence on Chavez also means that it is very difficult for Chavez supporters to criticize Chavez because every criticism threatens to undermine the project because it gives rhetorical ammunition to the opposition. A further consequence is that the lack of criticism insulates Chavez and makes it very difficult for him to test his ideas and policies against reality. Criticism from within the ranks is rarely present and criticism from outside the ranks is easily dismissed. The result is a strong potential for wrong-headed policies.46 Chavez has recently suggested that he might seek to amend the constitution, sometime between 2007 and 2009, so that a president could be

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reelected more than once, perhaps an indefinite number of times. Such a change to the constitution would only deepen the problem of making the Bolivarian socialist project dependent on Chavez and it would postpone efforts to overcome this dependency. The third internal obstacle is a strong tendency towards top-down leadership, not only by Chavez, but also by everyone in the public administration. Despite the very real pursuit of participatory democracy at local levels, the government bureaucracy is still by and large a top-down operation, which Chavez’s military instincts have reinforced. Such leadership in the public administration further exacerbates the problems mentioned of a personalistic political culture, so that questioning of one’s superiors and correcting errors in the administration of public policies is extremely difficult.

8. PROSPECTS It is very probable that the Chavez government will continue on its course of increasing radicalization because it has managed to either defeat or avoid nearly all of the obstacles to governing that progressive governments normally face. That is, most governments face what some political scientists have called, the ‘‘contradictions of the welfare state,’’ whereby democratically elected governments in capitalist countries have to answer to two contradictory masters.47 On the one hand, governments have to fulfill the wishes of the population that elected them, lest they be removed from power in the next electoral cycle. On the other, they have to fulfill the wishes of capital, lest they face a capital strike and economic crisis. These two pulls on governments are a serious problem because they tend to pull in diametrically opposite directions. Citizens generally want the government to protect them from the ravages of capitalism (advocating for regulations on businesses, environmental protection, workplace safety, protection from economic crisis, etc.), while capital wants to be as free of government regulations and taxes as possible and wants the government to protect their interests. From the 1970s to the 1990s, governments around the world tended to try to resolve the contradiction between spending but not taxing via debt spending. Governments in both the First and Third World borrowed heavily, so that they could fulfill the financial needs of the welfare state, without having to tax either capital or the general population. However, once the debt crisis became too much of a drain on the economy, governments cut back debt spending and by and large adopted neo-liberal economic policies, thus resolving the contradiction in favor of capital.

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Recently, though, with the failure of neo-liberalism to provide for any meaningful increase in people’s standard of living and with a dramatic increase in inequality, the peoples of Latin America have been voting against neo-liberalism and in favor of a wide variety of leftist governments. The contradiction between the pulls of capitalism and of the general population remains in nearly all of these countries. The only exception seems to be Venezuela, which, by virtue of its oil wealth, is far less dependent on private capital and thus on its demands. Added to this economic independence comes the Venezuelan old elite’s repeated failures to topple Chavez. Chavez, who started out as a fairly moderate politician in 1998, increasingly saw the representatives of capital as being irreconcilable with social justice and also could easily afford to become increasingly more radical with each subsequent defeat and loss of power of the opposition. Also, as someone who was not formed politically by a political party or ideology, but more as a result of his confrontations with state power, Chavez steers a path that is pragmatic and free from orthodoxies of any kind, thus opening him up to a more radical path, should opportunity and his perceived analysis of what Venezuela needs lead him in that direction. The lack of a clearly defined ideology within the Bolivarian movement further allows this movement (not necessarily Chavez’s MVR party) to also steer such a path and to push the government in increasingly more radical directions. In other words, while further advances in defining and applying 21st century socialism in Venezuela are very possible, due to the relative lack of external obstacles, it is the internal obstacles of the cultures of patronage and personalism that are most likely to threaten to derail the project. Figuring out how to overcome these obstacles, which would require a re-building of the state, in order to overcome patronage structures, and the creation of an effective political movement that does not depend on Chavez, in order to overcome personalism, remain the greatest challenges for 21st century socialism in Venezuela.

NOTES 1. Chavez said in the press conference following his reelection on December 3, 2006, ‘‘Socialism is the path towards a true democracy, socialism is democracy, in capitalism democracy is impossible’’ (December 5, 2006). To answer in detail, the question about autocracy or democracy in Venezuela would require a careful rebuttal of all of the accusations that opponents of the Chavez government have raised over the past few years. While this is important, it is not the main topic of this paper.

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Those interested in exploring this issue should read the reports of Venezuela’s most important human rights group Provea (www.derechos.org.ve), which generally does a good job of discussing human rights in Venezuela. Their reports, though, leave out historical and geographic comparisons, which thus tend to give the impression that the human rights situation is worse under Chavez than under other governments, while, in actuality, the opposite is the case. 2. Levine (1977), Naı´ m and Pin˜ango (1984), and Martz (1984), among others represent the academic expressions of this view. 3. Crisp (2000), Derham (2002a, 2002b), Ellner and Hellinger (2003), Vilas (2001), and McCoy (2004), among others, present this view. 4. The more recent writings of Venezuela analysts that had a positive image of Venezuelan democracy (Such as Levine and Naı´ m) now say that electoral laws during this period made ‘‘it difficult for other (non-established) kinds of groups to compete’’ (Levine, 2002, p. 249) and that ‘‘It is true that Venezuela y was governed for decades by inept and corrupt politicians who looted the country’s riches in cahoots with greedy and equally corrupt economic elites’’ (Naı´ m 2001, p. 20. Naı´ m relativizes this statement, though, by adding, ‘‘But this is not the whole story.’’). 5. The notion of Venezuelan exceptionalism that has undergone some recent serious revision is its strong version, that Venezuela is a country that has more in common with North America and Europe than with South America. This notion, especially ever since poverty has been growing steadily in the early 1980s, the International Monetary Fund (IMF) riots of 1989, the coup attempts of 1992, and the election of Hugo Chavez in 1998, has been thoroughly discredited. These events and processes have brought home how similar Venezuela is to other countries in Latin America. However, a weaker version of the exceptionalism thesis, which tries to make sense of why Venezuela was a limited representative democracy in the 1960s and 1970s, when most Latin American countries were dictatorships, still has some validity. One must be careful, though, as Steve Ellner and Miguel Tinker Salas point out, not to conflate Venezuela’s exceptional aspects, such as its ability to manage conflicts via pacts and political exclusion with its more typical Latin American aspects of human rights violations, electoral fraud, and corruption (Ellner & Tinker Salas, 2005, p. 7). The theorists of Venezuelan exceptionalism, ‘‘failed, however, to draw the connection between political exclusion and the related phenomena of clientelism, on the one hand, and the violation of human rights, electoral manipulation, and corruption, on the other.’’ 6. The debate among Venezuela analysts typically revolves around which, if any, of these factors is more important than the others. I propose that these factors or explanations are complementary and not mutually exclusive. 7. Karl (1997), Coronil (1997), and Romero (1997) emphasize this approach to Venezuela. 8. So named after the Venezuelan city in which it was signed. 9. A term coined by Karl (1997), but used by many others. 10. With Uruguay being the most urbanized, which has most of its population in Montevideo. 11. It is interesting to note that none of the Venezuela specialists seem to take this factor into account for their analysis of Venezuela. Perhaps, part of the reason for this has to do with the fact that almost all of the Venezuela specialists reviewed so far

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are political scientists and the social-structural analysis of Venezuela is more typical of sociologists than of political scientists. Since there seem to be very few sociologists specializing in Venezuelan society, most of the social-structural analysis comes from analysts who examine the democratization processes of the entire Latin American region or of the entire world. The literature on democratization that emphasizes the structural-social perspective is large, but work I refer to here includes: Huber, Rueschemeyer, and Stephens (1999), Rueschemeyer, Stephens, and Stephens (1992), Anderson (1988), and Therborn (1979). 12. Important proponents of this approach include Mainwaring (1999), Ingelhart (2000), and Hillman (1994). 13. Mainwaring (1999) makes a similar argument in that he focuses on Latin Americans’ commitment to democracy. ‘‘The Latin American evidence y suggests that changes in political attitudes have been important in sustaining democracy in the post-1980 period. Structural changes have been consequential, but they have been overshadowed by a new valuing of political democracy,’’ says Mainwaring (p. 60). 14. However, rather than focusing on commitment to democracy, recent studies of Venezuela have been more negative, arguing more along the lines that Venezuelan political culture is committed to corporatism and to clientelism and that this is what has maintained Venezuela’s ‘‘light’’ democracy. This argument is made by Hillman (1994), for example. 15. www.latinobarometro.org is a project, based in Chile, of annual surveys that is funded by the European Union, Swedish International Development Agency (SIDA), the United Nations Development Program (UNDP) and the Inter American Development Bank (IDB), ILO, local governments, private enterprises, and scholars around the world. 16. Notable exceptions to this are Trinkunas (2004), Harnecker (2003), and Norden (2003). 17. Often this debate is one that is said to have begun with Karl Marx and Max Weber over whether consciousness that shape social conditions or social conditions that shape consciousness. While it is true that Marx tended to prioritize social conditions and Weber prioritized consciousness, both did recognize the existence of a dialectic between the two. The works of Ju¨rgen Habermas (1985), Anthony Giddens (1984), and Pierre Bourdieu (1984) have probably contributed the most towards unifying these initially opposing approaches in the social sciences. 18. McCoy and Meyers (2004) highlight the importance that learning from past experience has had for Venezuela’s leaders and their more recent decision-making. 19. Per capita GDP fell from $10,528 in 1970 to $6,863 in 1998, Penn World Tables, Table 6.1, http://pwt.econ.upenn.edu/php_site/pwt61_retrieve.php 20. In nominal terms. In real terms the drop was far more dramatic. Adjusting for exchange rates and for inflation, the price dropped from $15.55 in 1981 to $3.20 in 1998 (in 1970 dollars) (OPEC Annual Statistical Bulletin, 2005). 21. Ministerio de Finanzas, ‘‘Los numeros no mienten.’’ Source: Central Bank of Venezuela. 22. Universidad Cato´lica Andre´s Bello, Instituto de Investigaciones Econo´micas y Sociales, www.ucab.edu/investigacion/iies/pobreza.htm

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23. See Francisco Rodrı´ guez, ‘‘Understanding the Determinants of Venezuelan Inequality’’ (http://www.bsos.umd.edu/econ/Rodriguez/Venezuela.pdf) for a detailed explanation of how and why Venezuela’s inequality increased. 24. Those who emphasize the structural-political factor, though, argue that the downfall of the Punto Fijo system had its roots more in the rejection of the partyarchy than of the steadily worsening economy. Roberts (2001) places much stronger emphasis on the economic argument than Coppedge, Crisp, or Buxton do. Coppedge, p. 4: ‘‘People who turned to extra-constitutional solutions, as in the 1989 riots and the 1992 coup attempts, did so out of frustration with the functioning of democratic institutions and the blockage of formal channels of representation’’ (Roberts, 2003). 25. Buxton (2001) and Crisp (2000) both make this argument. 26. This is one of the highest percentages of any president in Venezuelan history and nearly double that of the previous president, Rafael Caldera, who garnered only 30% when he was elected in 1993. 27. For more information on the coup, see: http://www.zmag.org/ venezuela_watch.cfm 28. The president may only be recalled once half of his term has expired. The Supreme Court thus ruled that recall referendum petition signatures that are collected before the halfway point, such as the ones collected on February 2, 2003, are invalid. 29. The final official result would increase the margin of Cha´vez’s victory slightly, with 59% for ‘‘no’’ and 41% for ‘‘yes’’ – many of the additional no votes came from the countryside, which had to be counted manually and which went 70–30 in favor of Cha´vez. 30. The reason for the shift within the opposition has to do with more moderate factions within the opposition gaining an upper hand, which is directly related to the discrediting of the more radical factions in the opposition, due to their long string of failures in the previous eight years. 31. Chavez (2006), ‘‘Linking Alternatives II Conference,’’ Vienna, May 13, 2006 (www.gobiernoenlinea.gob.ve). 32. Ibid. 33. Ibid. 34. Groundbreaking ceremony for the Refinery of Pernambuco, in Brazil, December 16, 2005. 35. Ibid. 36. Alo´ Presidente, No. 229, July 17, 2005. 37. Swearing in ceremony of pro-Chavez candidates for the National Assembly, September 13, 2005. 38. Op. Cit., Swearing-in ceremony of candidates. 39. Author’s own calculation, based on data from Venezuela’s finance ministry, the national statistics institute, and the Central Bank of Venezuela. 40. SUNACOOP (National Superintendence of Cooperatives), www.sunacoop. gob.ve. 41. ‘‘Empresas de Produccio´n Social,’’ article in PDVSA’s corporate magazine, Siembra Petrolera, Issue, No. 1, January–March, 2006, pp. 55.

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42. Article 3 of Decree No. 3,895, of September 13, 2005, published in Gaceta Oficial No. 38,271. 43. An example of how this might work in practice is proposed by Participatory Economics, as developed by MichaAlbert (2003) and Robin Hahnel (2005). 44. These sanctions are the result of putting Venezuela on a variety of lists, such as one of the countries that are not doing enough in fighting terrorism, fighting drug trafficking, and in fighting human trafficking. 45. There are probably nearly as many accounts of opposition employers using this list to weed out Chavez supporters. However, this does not excuse the practice, especially not for a government that originally campaigned against patronage systems. 46. An example of such a wrong-headed policy is the recent passage of changes to the penal code, which slightly broadened penalties for insulting government officials. The law has been on the books for decades, but an increase of the maximum penalty for such offenses is anti-civil rights and did not serve any useful purpose. 47. One of the main theorists of this thesis was Claus Offe, in his book, The Contradictions of the Welfare State, 1984, MIT Press.

REFERENCES Albert, M. (2003). Parecon: Life after capitalism. London: Verso Books. Anderson, P. (1988). Democracia y Dictadura en America Latina, Cuadernos de Sociologı´ a No. 2: Universidad de Buenos Aires. Bourdieu, P. (1984). Distinction: A social critique of the judgement of taste. Cambridge, MA: Harvard University Press. Buxton, J. (2001). The failure of political reform in Venezuela. Aldershot, England: Ashgate. Chavez, H. (2006). Linking alternatives II conference. Public speech. Vienna, Austria, May 13. Coppedge, M. (1994). Strong parties and lame ducks: Presidential partyarchy and factionalism in Venezuela. Stanford: Stanford University Press. Coronil, F. (1997). The magical state. Chicago: University of Chicago Press. Crisp, B. (2000). Democratic institutional design: The powers and incentives of Venezuelan politicians and interest groups. Stanford: Stanford University Press. Derham, M. (2002a). Contemporary politics in Venezuela: Introduction. Bulletin of Latin American Research (Vol. 21, No. 2, pp. 191–198). London: Blackwell Publishers. Derham, M. (2002b). Undemocratic democracy: Venezuela and the distorting of history. Bulletin of Latin American Research (Vol. 21, No. 2, pp. 270–289). London: Blackwell Publishers. Ellner, S., & Hellinger, D. (Eds) (2003). Venezuelan politics in the Chavez era: Class, polarization, and conflict. London: Lynne Rienner Publishers. Ellner, S., & Salas, M. T. (2005). The Venezuelan exceptionalism thesis: Separating myth from reality, Latin American Perspectives (Vol. 32, No. 2), London: Sage. Giddens, A. (1984). The constitution of society. Berkeley: University of California Press. Habermas, J. (1985). Theory of communicative action. Boston: Beacon Press. Hahnel, R. (2005). Economic justice and Democracy. London: Routledge. Harnecker, M. (2003). Militares junto al pueblo. Caracas: Vadell hnos.

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Hellinger, D. (2000). Understanding Venezuela’s crisis. In: Latin American perspectives (Vol. 27, No. 1, pp. 105–119). London: Sage. Hillman, R. S. (1994). Democracy for the privileged: Crisis and transition in Venezuela. Boulder: Lynne Rienner. Huber, E., Rueschemeyer, D., & Stephens, J. D. (1999). The paradoxes of contemporary democracy: Formal, participatory, and social dimensions transitions to democracy. New York: Columbia University Press. Ingelhart, R. (2000). Culture and democracy. In: Culture matters: How values shape human progress (pp. 80–97), New York: Basic Books. Karl, T. L. (1997). The paradox of plenty. Berkeley: University of California Press. Knight, A. (2001). Democratic and revolutionary traditions in Latin America. Bulletin of Latin American Research, 20(2), 147–186. Levine, D. (2002). The decline and fall of democracy in Venezuela: Ten Theses. Bulletin of Latin American Research (Vol. 21, No. 2, pp. 248–269). Oxford: Blackwell Publishers. Levine, D. H. (1977). Venezuelan politics: Past and future contemporary Venezuela and its role in international affairs. New York: New York University Press. Mainwaring, S. (1999). Democratic survivability in Latin America. In: Democracy and its limits: Lessons from Asia, Latin America, and the Middle East, Notre Dame: Notre Dame University Press. Martz, J. D. (1984). Venezuela, Colombia, and Ecuador. In: J. K. Black (Ed.), Latin America: Its problems and its promises (pp. 381–401). Boulder: Westview Press. McCoy, J. (2004). From representative to participatory democracy? Regime transformation in Venezuela, In: J. McCoy, & D. Myers (Eds), The unraveling of representative democracy in Veneuzela. Baltimore: Johns Hopkins University Press. McCoy, J., & Myers, D. (Eds) (2004). The unraveling of representative democracy in Venezuela. Baltimore: Johns Hopkins University Press. Me´sza´ros, I. (1995). Beyond capital. London: Merlin Press. Naı´ m, M. (2001). The real story behind Venezuela’s woes. Journal of Democracy (Vol. 12, No. 2, pp. 17–31). Washington: Johns Hopkins University Press. Naı´ m, M., & Pin˜ango, R. (Eds) (1984). El Caso Venezolano: Una Ilusio´n de Armonı´a. Caracas: Ediciones IESA. Norden, D. (2003). Democracy in uniform: Chavez and the Venezuelan armed forces. In: S. Ellner & D. Hellinger (Eds), Venezuelan politics in the Chavez era (pp. 93–112). London: Lynne Rienner Publishers. OPEC (2005). OPEC statistical bulletin. Vienna: OPEC. Roberts, K. (2001). La descomposicio´n del sistema polı´ tico venezolano visto desde un ana´lisis comparativo. Revista Venezolana de Economı´a y Ciencias Sociales, 7(2), 183–200. Roberts, K. (2003). Social polarization and the populist resurgence in Venezuela. In: S. Ellener & D. Hellinger (Eds), Venezuelan politics in the Chavez era. London: Lynne Rienner Publishers. Romero, A. (1997). Rearranging the deck chairs on the Titanic: The agony of democracy in Venezuela. In: Latin American Research review (Vol. 32, No. 1, pp. 7–36), Austin: University of Texas Press. Rueschemeyer, D., Stephens, E. H., & Stephens, J. (1992). Capitalist development and democracy. Chicago: University of Chicago Press. Therborn, G. (1979). The travail of Latin American democracy, In: New left review (pp. 113–114). Oxford: Alden Press.

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Trinkunas, H. A. (2004). The military: From marginalization to center stage. In: M. Jennifer & D. Myers (Eds), The unraveling of representative democracy in Venezuela (pp. 50–70). Baltimore: Johns Hopkins University Press. Vilas, C. (2001). La sociologı´ a latinoamericana y el ‘caso’ Cha´vez: Entre la sorpresa y el de´ja` vu. Revista Venezolana de Economı´a y Ciencias Sociales, 7(2), 129–145.

AGAINST THE CURRENT: ECONOMIC POLICY AND SOCIALIST DEVELOPMENT IN CUBA Curtis Skinner ABSTRACT This article evaluates contemporary Cuban economic policy and development prospects after a decade of market experimentation in a socialist context. An introductory historical review assesses the successes and failures of Cuban development policy in the 1970s and 1980s and describes the staggering dimensions of the economic crisis triggered by the abrupt disruption of Cuba’s relations with the Soviet bloc in 1989–1991. The next section, ‘‘To the market in the 1990s,’’ examines Cuban efforts to stabilize the economy in the early 1990s while maintaining a strong social safety net. The historic policy shift toward limited market liberalization within a state-dominated economy is analyzed and the key market concessions described. The economic turnaround of the late 1990s and Cuban macroeconomic and industrial performance over the past decade are then examined. The final part of the article evaluates the coherence and sustainability of Cuba’s emerging economic model and assesses prospects for the survival of some form of Cuban socialism.

Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 43–95 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24002-7

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CURTIS SKINNER To struggle for a utopia is, in part, to build it. – Fidel Castro: They say that there is a way out of purgatory, but there’s never any way out of hell. If we’re in purgatory, we are not going back to hell. At least we have escaped from Satan and are patiently waiting for the moment of reaching heaven. – Fidel Castro

When I first visited Havana in 1999, I took a photograph of an ancient Chevrolet with its engine hood propped open parked neatly beside a freshly painted ‘‘¡Socialismo o Muerte!’’ slogan emblazoned on a wall. Lonely, defiant, absurd, fatigued, resourceful – the moods and meanings in the image seemed to summarize the contradictions of the great Cuban revolution at the cusp of the 21st century. Astonishing the world, the government of Fidel Castro has survived the collapse of international socialism and weathered the worst depression in modern Cuban history, radically restructuring the economy while preserving a strong social safety net for the population. Buoyed by booming growth in international tourism and nickel exports, Cuban economic growth outstripped the Latin American average during the past decade and recovered the island’s pre-crisis volume of production in 2005. Yet, this extraordinary feat of economic management has come at high cost as the unavoidable rapprochement with the capitalist world market undermines the revolutionary achievements of social equity and solidarity, still striking to the visitor familiar with the squalid extremes of poverty and wealth elsewhere in Latin America. Does Cuban socialism have a future? How do the economic successes and failures of the island’s socialist past shape its present development prospects? As Cuba completes a remarkable decade of market experimentation in a socialist context, the hour appears ripe to attempt a brief historical evaluation of the island’s economic policy and development prospects. This article begins by reviewing the immediate causes and staggering dimensions of the economic crisis triggered by the abrupt disruption of Cuba’s economic relations with the Soviet bloc in 1989–1991. The next two sections offer some historical context toward understanding this crisis. The successes and failures of Cuban economic development policy in the 1970s and 1980s based on large social investments, capital-intensive agricultural and industrial production, and export specialization to the Soviet bloc are evaluated and the island’s deepening economic dependence on the Soviet Union discussed. The mounting problems of hard currency shortage, trade deficit and slowing economic growth in the 1980s are examined. This is followed by an analysis of possible reasons for Cuba’s failure to diversify export markets and products as intended and a discussion of policy efforts late in the decade

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to raise state farm efficiency and labor productivity with new moral and material incentives. The next section, ‘‘To the market in the 1990s,’’ examines Cuban efforts to stabilize the economy in the early 1990s while maintaining a strong social safety net. The historic policy shift toward limited market liberalization within a state-dominated economy is analyzed and the key market concessions described. The economic turnaround of the late 1990s and Cuban macroeconomic and industrial performance over the past decade are then examined, with a discussion of economic growth, the problem of monetary dualism, the limitations of tourism and other natural resource-based production, the radical downsizing of the sugar industry, new success in laborintensive agriculture and the continuing deep depression in manufacturing. The final part of the article examines the coherence and sustainability of Cuba’s emerging economic model and assesses prospects for the survival of some form of Cuban socialism. Among the important economic problems discussed are the sharp increase in income and consumption inequality consequent to the market liberalization, the continuing hard currency shortage, prospects for export diversification and Cuba’s important but limited success in attracting direct foreign investment. The complex and evolving consumer product pricing and distribution system is described along with the rapid growth in private output and employment and the government’s efforts to restrict their scale and scope. New efforts to improve state firm performance by means of managerial and financial decentralization are critically assessed and compared to similar policies in other postcapitalist societies. A brief conclusion evaluates the social, economic and political institutions supporting and undermining socialist values in contemporary Cuba.

1. TRADE SHOCK AND ECONOMIC COLLAPSE The worst economic crisis in modern Cuban history drove the Castro government, holding its collective nose, to an arm’s-length embrace of the market. A punishing external shock – the sharp decline in Cuba’s terms of trade and financing with its trading partners in the Council of Mutual Economic Assistance (CMEA) in 1989–1991 – sent an open and vulnerable economy into collapse. Pushed by the stubborn United States trade embargo and pulled by the CMEA’s favorable trade and financing terms, Cuba conducted about 80% of its foreign trade in goods with the Soviet Union and Eastern Europe during the late 1980s, essentially exporting sugar, nickel

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and citrus for petroleum and capital goods (Comite´ Estatal de Estadı´ sticas (CEE), 1990, Tables XI.2, XI.9–10; CEE, 1989, Tables XI.17–18). The terms of trade in this socialist-bloc exchange were generally far better for Cuba than those prevailing in the capitalist world market, and the value of Cuban trade exploded after the island joined the CMEA in 1972, rising more than five-fold in nominal peso terms from 2.4 billion pesos in 1970 to 12.9 billion in 1986 (CEE, 1987, Tables XI.13–14). Most importantly, Cuba sold its sugar to the Soviet Union in multiyear contracts at a price typically two to four times as high as the residual (‘‘free’’) world market price and also usually significantly higher than the bilateral trade preferential prices paid by the major capitalist country buyers (Pollitt, 1985, pp. 7–9; Blasier, 1993, p. 81). In turn, Cuba bought Soviet petroleum priced as a five-year moving average of the world price to smooth volatility and was permitted to re-export a share of this petroleum to earn convertible foreign currency. Perhaps most importantly, this trade with the USSR and bilateral commerce with the Eastern European CMEA members (usually exchanging sugar for manufactures) was conducted in non-convertible currency (the so-called ‘‘transferable ruble’’), with bilateral trade deficits more or less automatically financed with lending by the surplus country. Cuba ran large and growing trade deficits with its major CMEA partners during the late 1980s even as the value of trade approached 70% of gross domestic product (GDP), resulting in a large, accumulated debt to the Soviet Union along with smaller ones to East Germany, Czechoslovakia and other partners (Comisio´n Econo´mica para Ame´rica Latina y el Caribe (Cepal), 2000, Table A1; CEE, 1990, Table III.1; Linden, 1993; Mesa-Lago, 1993a). The stunningly swift collapse of the socialist regimes in Eastern Europe in late 1989, accompanied by deepening economic crisis and political ferment in the Soviet Union, brought an abrupt end to these comradely trading and financing arrangements. Politically hostile to Havana and eager to reintegrate their economies with the capitalist West, the center-right governments restoring capitalism in Czechoslovakia, Hungary and East Germany in 1990 quickly reduced trade and aid ties with Cuba, which reciprocated by reducing its exports. By 1991, when the CMEA was formally dissolved, Cuban trade with Eastern Europe had plummeted 78%, with a growing share of this residual trade denominated at market prices and in convertible currencies (Cepal, 2000, Tables A33–34; Linden, 1993; Mesa-Lago, 1993a). At the same time, the disintegrating Soviet Union – far and away Cuba’s most important economic partner, accounting for 65% of Cuban trade in 1989, including virtually all of the island’s oil needs and more than half of its sugar

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exports – staggered the island economy by sharply reducing its own economic support (CEE, 1990, Table XI.2; CEE, 1989, Tables XI.17–18). An onerous new one-year trade pact signed in December 1990 cut Soviet oil deliveries by almost a quarter (ending Cuban re-exports) and reduced the price paid for Cuban sugar by 38%; all other exchanges were denominated at world market prices, with the Cubans instructed to negotiate directly with thousands of Soviet enterprises, greatly complicating commerce (Castro, 1992; Blasier, 1993). The dissolution of the Soviet Union and ascendance of Boris Yeltsin to power in late 1991 brought a complete end to the sugar price subsidy and to the billions of dollars in repayable trade credits and project-based development aid that had contributed mightily to the Cuban economy for decades (Mesa-Lago, 1993a). The results for Cuba were catastrophic. Confronting abysmally low world sugar and high petroleum prices and blacklisted from the hard currency market after defaulting on its Club of Paris debt in 1986, Cuba held only a fraction of the convertible foreign exchange it needed to keep its importintensive economy running at the 1989 level of production. The volume and value of trade fell precipitously, dragging the broader economy down with it. By 1993, when the free fall touched bottom, the real volume of trade had fallen by more than half (with imports declining by more than two-thirds) and real GDP per capita had declined by 34% (Cepal, 2000, Tables A1, A10, A31). A few grim statistics reveal the staggering dimensions of the crisis. From 1989 to 1993, as Cuba’s terms of trade (the ratio of export to import prices) fell 46% and the purchasing power of exports (the price of exports multiplied by the volume of exports) declined 74%, the island was forced to cut petroleum and derivative imports by 58%, fertilizer chemicals 87%, fodder meal 98%, laminated steel 94% and sawn lumber 99% (Cepal, 2000, Tables A31, A40). The scarcity of these and other critical inputs contributed to a 61% decline in industrial physical output during those terrible four years, with consumer goods production falling 58% and capital goods 90% (Oficina Nacional de Estadı´ sticas (ONE), 2000, Table VIII.2). The foreign exchange and import crisis had a comparable devastating effect on Cuban crops, livestock and fisheries, grown highly dependent on mechanical and chemical inputs. Liquid milk production fell 57%, chicken 53%, fish 53% and rice 63%. In the critical sugar sector, output fell from 7.9 million tons in 1989 to 4.2 million in 1993, while cane production per hectare declined 40% (Cepal, 2000, Tables A86, A92). Even today – more than a decade after the CMEA implosion and long after Cuba has resumed economic growth under a very different production and trade model – key Cuban indicators remain appallingly depressed

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relative to their 1989 performance. The most recent official statistics, for 2002, show that consumer goods output stood at 60% of 1989 output, capital goods at 12% and intermediate goods at 48% (ONE, 2003, Table VIII.2). Deeply depressed manufacturing industries in 2005 include textiles (8% of 1989 output), garments (17%), paper (6%), fertilizers (7%), construction materials (24%) and petroleum and other non-metal mineral processsing (13%). The only broad-category manufacturing industries to reach even 80% of 1989 output in 2005 were food products, beverages, tobacco products, chemicals, common metals and radio, television and communication equipment (ONE, 2006, Table IX.1). Crude sugar production, meanwhile, has stagnated since 1993 at half or less of pre-crisis output, reaching a 100-year low of 1.2 million tons in 2005–2006, less than one-fifth of 1989 production (CEE, 1990, Table VI.3; ONE, 2000, 2003, Table VIII.3; Focal, 2006). The evident loss of the many millions of pesos and labor hours invested in these industries represents a huge economic burden for Cuba even as the country successfully reorients production to tourism services and other sectors, as discussed below.

2. CUBA AND THE SOCIALIST DIVISION OF LABOR The depth and breadth of the crisis invites retrospective debate about the wisdom of the Cuban development strategy of the 1970s and 1980s based on primary commodity production for the CMEA market. Despite the presumed developmental advantages accruing over three decades of socialist endeavor and consisting of a stable political regime, economic planning with centralized control of productive resources, a well-educated and healthy population and quite favorable foreign trade and financing agreements, the Cuban economy in 1989 displayed many of the classic distortions of underdevelopment that left the island quite vulnerable to an external shock. On the trade ledger, unrefined sugar accounted for 72% of the value of goods exports and manufacturing products for a mere two percent; furthermore, as noted, the market for Cuban exports was highly concentrated in the CMEA bloc (Cepal, 2000, Table A38). (It should be noted, however, that the large sugar share partly reflects the preferential prices Cuba received for this commodity.) Capital goods and other manufactures, meanwhile, accounted for 45% of imported goods and Cuba also became increasingly dependent on fuel and food imports (CEE, 1987, Table XI.14; Cepal, 2000, Table A37). Although the manufacturing share of GDP grew to comprise about a quarter of Cuban GDP by 1985, this industry displayed many of the

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weaknesses of first-stage import substitution: import dependence, export non-competitiveness, a dearth of backward and forward linkages and sectoral imbalances (Cepal, 2000, p. 391; Cepal, 2004b, Table 179). Added to these problems were some uniquely Cuban industrial distortions arising from the U.S. trade embargo and the island’s participation in the CMEA division of labor, including high transportation costs and replication of the highly capitalized, over-scaled and resource-intensive production methods characteristic of the industrialized CMEA nations. It seems evident in retrospect that life in the CMEA cocoon helped prolong 200 years of much-despised sugar monoculture in Cuba and contributed to industrial distortions and inefficiencies that perpetuated serious external imbalances for the island economy. Yet, paradoxically, it is hard to argue against the overall development strategy Cuban policymakers chose. In the first place, of course, Cuban policy options were constrained by the unrelenting U.S. hostility that ended strong traditional trade and investment relations with that country, inhibited political and economic relations with many other Latin American and Caribbean nations, and encouraged the Castro government to strengthen ties with the rival superpower and its economic bloc. Second, there was a persuasive economic case to be made for exploiting Cuban comparative advantage in sugar production and favorable CMEA trade terms to build the investment resources needed to gradually diversify the national industrial and export base. Weaning the economy from sugar – a notoriously price volatile, easily substitutable, lowvalue-added product subject to world overproduction – and industrializing were essential revolutionary goals from the beginning, but an early effort at crash industrialization in the early 1960s quickly ran up against investment and balance of payments constraints (Boorstein, 1968). A gradual approach toward transition from the sugar-export economy seemed indicated. Cuban efforts along these lines were impressive, if ultimately unsuccessful in easing dependence on sugar and other primary commodity exports. First and foremost, the socialist government undertook a radical wealth and income redistribution and large public investments to improve popular health, nutrition and education, with strong results that are universally recognized and elevated Cuba to the front ranks of Latin America with respect to these vital social indicators by the late 1960s (Huberman & Sweezy, 1969). The Castro government showed its commitment to improving living standards – even at the risk of slower economic growth than otherwise attainable – by consistently spending about a quarter of GDP on social services (education, health, housing and community services and social security) from the 1970s through even the worst years of the 1990s collapse. An electrification

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campaign brought household power to 85% of the Cuban population by 1984 (Castro, 1985, p. 39). The government also spent large sums to maintain full employment (often at the cost of over-staffing public enterprises) and to subsidize prices for a wide range of basic goods and services (food, transportation, household appliances, etc.). Finally, the revolution and the participatory political and social institutions it created gave a genuine new voice to millions of workers and farmers in workplace and community affairs (Roman, 1999). The result is a relatively high-skilled, well-educated and self-confident workforce that is undoubtedly one of Cuba’s greatest economic assets. A second major achievement of the socialist system in the 1970s and 1980s was development of a sophisticated domestic industrial base in the sugar industry. Recognizing the indispensable need to raise labor productivity in sugar production, the government committed a large investment to mechanizing cane cutting and loading, arduous tasks performed entirely with manual labor in the early 1960s. The comparatively simple process of mechanizing the loading of cut cane onto carts and railroad cars for transportation to the mills was fully achieved by the mid-1970s (Feuer, 1987, p. 71). Mechanizing cane cutting was a much more difficult challenge, requiring development of new, indigenous technology. Remarkably, Cuban engineers in the early 1970s succeeded in designing and patenting a successful harvester, the Libertadora, that was subsequently manufactured in West Germany and exported all over the world; a Cuban–Soviet collaboration later designed an improved harvester, the KTP-1, that was manufactured in Cuba beginning in 1973 (Mesa-Lago, 1974; Brundenius, 1987). By the late 1980s, Cuba was building 600 combines a year and more than two-third of the sugar harvest was cut by machine (CEE, 1987, Table VI.34; Feuer, 1987, p. 71). Successful mechanization increased harvest labor productivity dramatically and contributed to a 30% increase in the average annual cane harvest during the late 1980s compared to the early 1970s (Pollitt, 1985; Pollitt & Hagelburg, 1994; CEE, 1987, Table VIII.13; CEE, 1990, Table VIII.10). Cuban planners also successfully developed backward and forward linkages to the sugar industry. Relying on assured and growing CMEA export markets, economic policymakers quite logically put sugar at the center of their industrial development strategy. Such sugar industry inputs as harvesters, cane carts, syrup boilers and cane grinding machinery dominated the Cuban capital goods sector and the metallurgy industry. Large investments in mill modernization and capacity during the 1980s raised annual grinding capacity to ten million tons by the end of the decade,

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accommodating the growth in milled output to the 7.5–8 million range (Cepal, 2000, pp. 306–307; CEE, 1990, Table VI.3). By 1989, Cuba manufactured most of its mill machinery and equipment domestically and was close to achieving energy self-sufficiency in milling by burning bagasse (cane pulp after sugar extraction) (Cepal, 2000, pp. 307, 379). Downstream, Cuba produced bagasse paper and particleboard, molasses, ethanol, rum and high-protein animal feeds, among other sugar-based products. The price paid for this substantial success in sugar sector industrialization was increasing dependence on imported fertilizers, pesticides and fuel to maintain yields in depleted soils and run the machines to plant, cultivate, irrigate and harvest the cane. Beyond the sugar-linked sectors, Cuba succeeded in developing a relatively broad range of import substituting heavy and light industries during the 1970s and 1980s, although many of these remained highly dependent on imported inputs and fuel, as the industrial collapse of the 1990s very painfully demonstrated. Equally importantly, the Castro government undertook large investments to develop the transportation and utilities infrastructure needed to support the island’s industrial development and accommodate the rapid growth of merchandise trade, with impressive results. Gross electrical power generation (primarily from oil-burning plants) more than quintupled from 2,550 GW h in 1958 to 5,020 GW h in 1971 and 13,167 GW h in 1986 (CEE, 1987, Table VI.40; ONE, 2003, Table VII.11). The state extended the island’s rail and highway networks to serve all of Cuba’s major cities and ports and modernized the country’s deep-water port facilities, building a super-tanker terminal in Matanzas. Cuba’s merchant fleet grew 22-fold from 38,200 tons gross register in 1958 to 881,500 tons in 1986 (CEE, 1987, Table IX.36). Telecommunications development lagged, however, with only six fixed-line telephones per 100 people as late as 2002 (ONE, 2003, Table XI.12). In value terms, non-sugar industrial output measured in 1981 prices grew 86% from 1975 to 1986 (CEE, 1987, Table VI.2). Measured in physical units during the 1975–1986 period, Cuban output rose substantially in products typically targeted for import substitution, including radio and television assembly, steel castings, gray cement, electrical wire, storage batteries, toothpaste, processed food and beverages, printing, paper and selected chemicals. But domestic output lagged behind in other important light consumer industries, such as soap, shoes, clothing and textiles (CEE, 1987, Table VI.34). Despite this diversification effort, moreover, industrial investment during the 1980s remained heavily concentrated in sugar and electrical power generation and the share of industrial means of production devoted to sugar mills and harvesting equipment dwarfed all other sectors in 1985

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(CEE, 1987, Table VI.13). Although Cuba succeeded in developing a very modest volume of new manufactured exports – fruit preserves, gray cement, steel bars and wire, ethyl alcohol, frozen fish – to supplement its traditional cigars and rum, a substantial share of these new exports were the product of non-competitive barter deals with CMEA partners. The structure of Cuban exports in 1986 looked remarkably similar to that of 1958: in both years, the food, beverage, tobacco and non-fuel raw materials (mainly nickel) sectors accounted for 92% of the value of exports (CEE, 1987, Table XI.13). In the early 1980s, Cuban planners launched a serious effort to develop an indigenous biotechnology/pharmaceutical industry with import substitution and, ultimately, export substitution goals. The initiative counts some striking technical successes, among, them, successful import substitution of about 90% of Cuba’s medicine and veterinary product needs, representing significant savings (although about 90% of the value of the inputs required to produce these products is imported) (Cepal, 2000, pp. 451–452). Among other very impressive achievements, Cuban medical research centers have developed an epidermal growth factor, a hepatitis-B vaccine (exported to more than 30 countries), the world’s first and only meningitis-B vaccine, and some experimental cancer treatment drugs (Cepal, 2000, pp. 453–454; Focal, 2003). The Cuban advances have attracted research and licensing collaborations with Canadian, German, British and Indian biotech and pharmaceutical firms, and even the Americans are getting involved, despite the embargo. In July 2004, the San Diego-based firm CancerVax won unprecedented U.S. Treasury approval to license two experimental cancer vaccines developed by Cuba’s Center for Molecular Immunology and originally licensed to Canada’s YM Biosciences (YM Biosciences, 2004). Although Cuban exports of 40.6 million pesos of medical products and pharmaceuticals (mostly to Latin America) represented just two percent of the value of total exports in 2001, the potential payoff from a breakthrough product could be substantial even in a world market dominated by powerful transnationals (ONE, 2002, Table VI.12). The development of the Cuban biotech/pharmaceutical industry appears to be a successful case of investing earnings from traditional commodity exports to build a high-value-added potential export industry that makes effective use of Cuba’s high-skilled workforce. Recognizing the achievements and potential of this high-tech industry, the government made a determined and successful effort to maintain investment in the sector through the worst of the 1990s crisis years. As in the case of manufacturing, Cuban agricultural development policy fostered centralized, large-scale and import-intensive industrial farming methods that yielded some impressive results at considerable resource cost.

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Radical agrarian reforms in 1959 and 1963 and subsequent policy measures concentrated 80% of agricultural land into large state farms by 1985, with remaining holdings operated as multi-owner cooperatives (12%) and small, individual private holdings (8%) (Rodrı´ guez, 1987, p. 29). Development policy goals emphasized diversification from sugar monoculture toward production of non-traditional export crops, raw material inputs for industry and food for domestic consumption. For most of the post-revolutionary period until 1993, the state monopolized agricultural trade, buying fixed quotas of cooperative and private output at fixed prices and selling the product (along with state farm output) to Cuban consumers and foreign buyers. In the early 1970s, however, the government introduced a ‘‘parallel market’’ to distribute a share of state farm and co-op output above the quota price and from 1980 to 1986, the regime permitted free agricultural markets to distribute private output above quotas for a limited range of products (Brundenius, 1984; Zimbalist & Eckstein, 1987). Large state agroindustrial complexes dominated sugar, citrus, rice and livestock production in the mid-1980s, but non-state farmers produced most of Cuba’s tobacco, cacao and selected staple vegetable crops (tomatoes, onions, sweet peppers and beans) and substantial shares of coffee, plantains and tubers and roots (CEE, 1987, Tables VIII.23–25). The Castro government directed about 15% of gross annual state investment to the non-sugar agriculture and livestock sectors from the mid-1970s to the mid-1980s and achieved some remarkable output gains, especially in the state-dominated livestock and animal products sectors (CEE, 1987, Table V.8). The state swineherd quadrupled and the chicken flock doubled in size from 1970 to 1986, while egg production rose 70% during that period. An innovative breeding program and the use of supplementary feeds contributed to a 233% increase in annual milk production per cow from 1966 to 1986 (CEE, 1987, Tables VIII.36, 43, 47, 49). Per capita production of some important domestic food crops – tomatoes, potatoes and other root crops, melons, oranges and grapefruit – compared favorably to output in Costa Rica, the Dominican Republic and Mexico in 1985 (Food and Agriculture Organization of the United Nations (FAO), 1987, Tables 3, 25, 26, 52, 64, 71, 72). Substantial investments in the state fishing fleet and aquaculture brought large output gains of fish for domestic consumption and lobster and shrimp for export. Citrus fruit production almost quadrupled in volume terms from 1970 to 1986 and exports rose 17-fold, most going to the Soviet Union and East Germany (CEE, 1987, Tables VIII.23, XI.17). Despite these substantial achievements, Cuba generally fell short of its agricultural development goals. Food imports as a share of total goods

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imports fell from 20% in 1958 to 9% in 1986, but imports per capita tripled in nominal terms during these years (CEE, 1987, Tables II.1, XI.14). The import share of total food consumption rose from one-third to one-half during this period, and in 1989 Cuba ran a large overall trade deficit in agriculturally related goods (including machinery and other inputs) and food deficits in cereals, meat, dairy products and eggs (Cepal, 2000, p. 337; CEE, 1990, Tables XI.9–10). Production of rice, a staple of the Cuban diet, was particularly disappointing, with state farms managing only a 16% increase in output during the 1975–1986 period even as the yield per hectare grew 54% (CEE, 1987, Tables VIII.24, 29). Other major food crops generally showed respectable increase in overall output, land productivity and labor productivity as land and chemical/mechanical inputs were increased, but production of henequen and agricultural fodder crops lagged. Little progress was made in developing other non-sugar agricultural/forestry inputs for industry; production of hides and sawn wood stagnated during the 1980s and fiber production was essentially limited to henequen and kenaf, each with a narrow range of industrial uses, primarily in cordage and sacking.

3. PROBLEMS IN THE CUBAN DEVELOPMENT MODEL Evaluating industrial, agricultural and trade performance in the 1970s and 1980s, a case can be made that the Castro government failed to take full advantage of a 20-year window of favorable trade terms to build a sounder commercial basis for Cuban development. Even with the Soviet sugar subsidy, the unsustainability of Cuba’s unbalanced, resource-intensive and import-intensive growth model became increasingly clear as balance of payments problems worsened and the economy slowed in the latter 1980s. In 1985, the price of sugar in the world residual market – an important source of Cuban foreign exchange – fell to its lowest level since the 1930s and the Soviet Union modestly cut its price subsidy in the latter years of the decade (Eckstein, 2003, p. 72; Mesa-Lago, 1993a). A weakening dollar in the late 1980s hurt Cuba because sugar is sold in dollars but Cuban hard currency imports and debt were paid in other currencies. Declining oil prices also affected Cuba adversely in the late 1980s, as it paid a higher-than-world price to the Soviet Union under the bilateral moving average pricing system and earned less foreign exchange from its petroleum re-exports. The declining terms of trade contributed to rapid growth in Cuba’s current

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account deficit (trade and non-capital financial flows), peaking at $3 billion in 1989 (Cepal, 2000, Tables A1, A32). Convertible currency imports plummeted, seriously compromising production (Castro, 1989). In 1986, Cuba suspended servicing its hard currency debt of about $4 billion, much of it incurred to help finance the rapid growth of the 1970s; the default closed lending markets to Cuba for all but short-term, high-interest trading credits, a costly financial quarantine that persists to this day (Mesa-Lago, 2000, p. 258). The growing foreign trade and financing deficits helped stifle the economy at zero real growth during the 1986–1989 period compared to 5.2% average annual growth from 1979 to 1986 (CEE, 1987, Table III.1; CEE, 1990, Table III.1). (Following Cuban and CMEA practice at the time, the ‘‘Global Social Product’’ (GSP) measure of output is used for these years; this metric differs from the standard GDP measure, which Cuba adopted in 1996. The Cubans and others (e.g., Brundenius, 1984) have estimated GDP for some earlier years). Could sounder policy in the 1970s and 1980s have better armored the Cuban economy against these external shocks and against the ultimate shock – the catastrophic collapse of the socialist bloc? As an island economy with a relatively small domestic market and a limited natural resource base, Cuba should benefit from a high volume of trade relative to domestic production. The wisdom of hindsight might counsel more determined efforts to re-direct investment from the sugar sector to more effective import substitution, especially in food, and to the production of high-value-added goods and services exports for hard currency. Yet Cuban leaders were hardly blind to the desirability of diversifying export markets, generating more hard currency and reducing the chronic trade deficit. The 1981–1985 five year plan set import substitution and export growth as major goals and in an important economic policy speech in December 1984, Fidel Castro trenchantly criticized ‘‘a wasteful mentality, a mentality of little thrift y more of a consumption than a production mentality, more of an import than an export mentality’’ (Castro, 1985, p. 107). Besides building the biotechnology/pharmaceutical sector, the government sought direct foreign investment under a 1982 law permitting minority stakeholding in selected sectors (targeting hard currency import substitution and export earnings) and began seriously promoting foreign tourism in the latter 1980s. Despite some success and much promise, however, these initiatives did not significantly reduce Cuban dependence on sugar exports to the Soviet Union by decade’s end. On the contrary, the ratio of the value of sugar exports to the USSR to total goods exports rose from 51% in 1980 to 57% in 1988 (CEE, 1989, Tables XI.1, XI.17).

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Even as they recognized the risks and limitations of Cuba’s trade structure, policymakers encountered powerful disincentives and obstacles to reform. The Soviet sugar price subsidy and Cuba’s long-term supply contracts were strong sources of inertia, raising the opportunity cost of shifting productive resources to develop riskier non-traditional exports. Assured Soviet financing of the ballooning bilateral trade deficit of the late 1980s permitted year-by-year postponement of the painful day of reckoning. Any ambition to export non-traditional manufactures and services to the world capitalist market – a demanding enterprise in the best of circumstances – encountered the hulking obstacle of the U.S. trade embargo, cutting off the world’s largest market 90 miles away and raising general Cuban trade costs by blacklisting ships servicing Cuban ports from access to U.S. ports. Added to the Cuban investment controls and the visceral suspicion felt by the capitalist entrepreneur toward the socialist state, the embargo contributed to Cuba’s failure to attract significant foreign investment in the 1980s, denying the island a potential source of technology transfer and commercial expertise to support world market exports. As of 1989, Cuba boasted exactly two equity investments by capitalist firms, a Spanish stake in a Varadero tourist hotel and a Latin American investment in telecommunications (Cepal, 2000, Tables A42; Mesa-Lago, 2000, p. 274). Still more fundamental obstacles to change were rooted in domestic political economy. The pursuit of social equity and political unity and stability were higher priorities for the socialist government than maximizing economic growth and accumulating national wealth from world market exports. Generally lacking the technical wherewithal to take the ‘‘high road’’ of world market competition on the basis of high productivity, quality and innovation (the biotech sector excepted), Cuba declined to take the ‘‘low road’’ of sweated labor and rapacious price competition pursued by China and much of the rest of the industrializing Third World, not excluding the Asian NICs in their time. This effectively closed the extra-U.S. capitalist market to Cuban manufactures and other non-traditional exports, with few exceptions. Unquestionably, much of Cuban industry and agriculture was and remains ‘‘inefficient’’ compared to world capitalist standards, requiring a larger volume of inputs to produce a given quantity and quality of output. Technologies and intermediate inputs were primarily imported from the Soviet Union, were of mixed quality, and were designed according to Soviet – not Cuban – productive conditions; for example, abundant energy resources and a relative scarcity of labor. As in other centrally planned economies, Cuban planners showed a predilection for very large, vertically and horizontally integrated enterprises (‘‘gigantism’’), a bias arising from a

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sometimes misplaced confidence in economies of scale and scope, optimistic expectations of CMEA exports, and the imperative to simplify the planning process by reducing the number of productive units. The socialist commitment to full employment meant state industrial firms were used to absorb the labor surplus produced by agricultural mechanization and migration to the major cities, resulting in overstaffing and low labor productivity. Even at its most ‘‘liberal’’ and decentralized, under the System of Economic Management and Planning (SDPE) in effect from 1976 to 1986, the Cuban economic system offered but a very narrow range of individual material incentives and penalties to encourage productive efficiency. Wage differentials were small, productivity norms low and employment effectively guaranteed. Enterprise managers received modest rewards for achieving ‘‘profitability’’ under centrally administered prices, but their primary success criterion was meeting their centrally planned output target (Zimbalist, 1987; Collins, 1993). Private production and free-market sale of agricultural and artisanal products and a limited range of services was strictly controlled and comprised less than 10% of national output (Programa de las Naciones Unidas para el Desarrollo (PNUD), 2000, p. 55). The government subsidized money-losing enterprises with state budgetary financing (the ‘‘soft budget constraint’’). Responding partly to Cuba’s deteriorating trade and hard currency position, the Castro government launched a very interesting drive for socialist efficiency beginning in 1986, the so-called ‘‘campaign to rectify errors and negative tendencies.’’ In a series of public speeches, Fidel Castro denounced chronic problems of high production costs, poor labor and managerial discipline and work effort, low labor and capital productivity, shortages of important industrial inputs and consumption goods and unfinished construction projects, problems that he attributed to inflexible bureaucratic planning, a weakening link between work and reward, the diversion of effort and resources toward individual profit-seeking in the free markets and in state enterprise activities yielding high returns, and most importantly, the Cuban Communist Party’s failure to engage in the ongoing, mass political work required to motivate Cubans morally to work hard for socialist construction (Castro, 1989). The regime sought to attack these problems by replacing technocrats with top politicians as the nation’s economic planners and general managers, repressing extra-state production and distribution (suspending the free farmers’ market and suppressing private commerce and transportation), and launching an energetic political campaign to resuscitate a socialist esprit. At the same time, policymakers sought to increase efficiency in the state sector by raising worker output norms, creating a new

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wage scale to better reflect relative productivity, improving the link between pay and performance, broadening occupational titles, and gradually reducing enterprise personnel (Castro, 1989; Mesa-Lago, 1993a). Yet even as he acknowledged the need to improve material incentives, Castro insisted on the primacy of the political in the drive for socialist efficiency: Are we going to compete with the United States in material goods or material incentives? Are we going to compete with highly developed consumer societies? Can socialism in this country be built on material incentives alone? – that’s the question we must ask. I think we have to use both forms of incentives, we have to use them, we can’t fall back into the egalitarianism we had before, we have to apply the socialist formula [to each according to his work], completely agreed, but we have to discover the secret of efficiency. And it lies in a combination of technical and economic factors and of moral factors, political factors, consciousness; and I’m not speculating here or making up a pretty story, I’m speaking from fact. (p. 285) Perfect as the [economic] mechanisms may be that man invents in the quest for socialist efficiency, these mechanisms will never have the efficiency that they have under capitalism, where everything moves on these springs: market forces, competition, free prices and the total absence of planning. (p. 259) The mistake lies in believing that man is moved only by material incentives and that the great works of history are made only with material incentives, or that socialism can be built with these incentives – with material incentives you only build capitalism. No, money isn’t the basis. It is ideas, principles, certain moral convictions that people value I won’t say just above money, vile money, but even much more than their own lives (p. 35) (Castro, 1989; author’s translation).

The political campaign for rectification included broadening Communist Party membership, enlisting the country’s mass organizations (the official labor union and women’s, youth, campesino (private farmer) and co-op groups) and media to very actively promote the campaign, and encouraging socialist emulation through voluntary work (usually in construction and agriculture) and participation in special construction work teams (the microbrigades and construction contingents). Quite independently of, but concurrently with, the rectification campaign, the Castro government also began to experiment with innovative new forms of decentralized firm management in the late 1980s. Originally developed by one of the army’s industrial enterprises in 1986, the so-called Sistema de Perfeccionamiento Empresarial (SPE) freed firms from central plan output quotas, strengthened managerial controls over the labor force (including job design and the wage paid), linked remuneration closely to performance, required the enterprise to become self-financing within a stipulated time interval, and allowed greater managerial discretion over the disposition of

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enterprise profits as bonus or reinvestment funds. This early version of the SPE was cautiously introduced into a small group of high-performing enterprises, where it appeared to increase labor productivity and reduce costs (Domenech, 1998; Chaviano & Trista´, 1998). At around the same time, the Castro government established two vertically integrated and autonomously managed corporations to develop the tourist industry, Cubanaca´n and Gaviota. These so-called sociedades ano´nimas were fully governmentowned but given independent juridical status and broad independent authority to conduct foreign trade, retain their foreign exchange earnings and develop equity joint ventures and management contracts with foreign investors (Mesa-Lago, 1993b; Carranza, 1997). Sociedades ano´nimas were subsequently organized in a number of other export-oriented industries during the 1990s. Despite all these efforts, labor productivity fell at an average annual rate of 3.4% between 1986 and 1988 (the last year the official estimate was published), led by declines in construction and agriculture (CEE, 1989, Table IV.6). Given the magnitude of the external shocks preceding, accompanying and following rectification, it is difficult to assess the policy’s net economic effects or long-term potential. Rectification’s retreat from markets was soon reversed by the 1990s crisis, but the quest to effectively blend moral and material incentives – a central challenge to any socialist project – remains important to Cuban economic policy even today.

4. TO THE MARKET IN THE 1990S The troubled Cuban macroeconomy of the latter 1980s deepened the island’s vulnerability to the socialist bloc collapse. But the Castro government’s overall management of the crisis can only be judged adroit. Like political leaderships around the world, the Cuban regime was clearly stunned by the precipitous loss of its economic and political allies, but some important economic policies pursued in the late 1980s – consumption austerity and labor discipline, the SPE enterprise management experiment, and development of the institutional supports to build the tourism industry and encourage direct foreign investment – proved prescient, anticipating and helping to underpin the deeper reforms of the 1990s. The Food Program (Programa Alimentario Nacional, PAN) progressively developed in the late 1980s was another timely initiative to raise domestic food production and increase urban self-sufficiency (especially of basic tuber, root and other vegetable crops), in part by encouraging urban schools, factories and

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housing blocks to tend victory gardens. The program also included conversion of sugar land to vegetable production, investment in irrigation and development of biological fertilizers and pesticides to reduce Cuban dependence on chemical imports (Nova Gonza´lez, 2003; Azicri, 2000; Reed, 1992). As part of their security planning, the Cubans had developed a survival strategy in the event of a United States naval blockade of the island that would block all trade. This planning for a ‘‘Special Period in Wartime,’’ including measures to extend food rationing and sharply reduce petroleum consumption, was adapted to the ‘‘Special Period in Peacetime’’ initiated in September 1990 (Castro, 1996).

4.1. Managing the Economic Crisis Cuban efforts to stabilize the economy and blaze a new development path in the 1990s were guided by two interrelated political imperatives that continue to shape economic policy today: first, maintain a basic social safety net for all Cubans and second, introduce market mechanisms slowly, sparingly and strategically while keeping firm state control and direction over the economy. During the early years of the crisis – the terrible period from 1990 to 1993 – the Cuban leadership concentrated on basic economic survival: securing and distributing food to the population and amassing the foreign exchange needed to pay for the most essential imports and gradually restore industrial and agricultural production. The government retained firm central control of the economy while cautiously introducing selective liberalizations. The Cuban Communist Party’s fourth congress, held in October 1991, reaffirmed a strong commitment to planning and to the rectification process’s attempts to raise efficiency through enterprise reforms (including enterprise self-financing) and labor discipline. The congress’s economic resolution also emphasized the import-substituting Food Program and efforts to strengthen the dynamic new export industries (tourism, biotech, health services). At the same time, the resolution acknowledged the contributions of private and cooperative farmers and the self-employed cuentapropistas, intimating the market reforms to follow. Marking a significant policy shift, the document also advocated an end to the state’s foreign trade monopoly in order to further encourage foreign investment and exports, a liberalization codified in the constitutional reform the following year along with the explicit recognition of private production in the socialist economy. While recognizing the need to gradually raise prices and gain control over a yawning fiscal deficit, policymakers intentionally

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subordinated this adjustment to the goal of preserving social services and living standards to the extent possible during the early years of intensifying crisis (Reed, 1992; Mesa-Lago, 2000; Collins, 1993; Gonza´lez Gutie´rrez, 2000). In this, the Cubans were remarkably successful, aided immeasurably by state control over almost all of production and long experience in mass distribution through rationing. In glaring contrast to the impoverishing stabilization strategies pursued elsewhere in Latin America and in many of the formerly socialist countries during the 1980s and 1990s, the Cubans managed to weather the worst years of the depression under great hardship but with universal access to low-cost food, clothing and shelter and free health and education services (Monreal, 2002). The government placed all major consumption goods under rationing to share the burden of scarcity and austerity equitably. Impressively, real public social spending rose as a percentage of GDP every year from 1990 through 1993 and was kept roughly constant in absolute terms through 1992 (Cepal, 2000, Table A55). At the same time, the defense and internal security spending share declined as the government undertook a drastic paring of the Revolutionary Armed Forces (FAR), cutting its troop strength by half early in the decade (Cepal, 2000, Table A14; Walker, 2002, p. 285). Even as growing shortages of fuel, raw materials, intermediate inputs and spare parts reduced industrial and agricultural output to a fraction of capacity, the Castro government kept redundant workers on state factory and farm payrolls in order to maintain employment and wage incomes. Laid-off workers received 60% of their salaries until they were relocated in new jobs. Remarkably, the number of officially unemployed fell from 1989 to 1993 as labor force participation rates declined; at the same time, underemployment rose and labor productivity plummeted by about a third during that period, according to one estimate (Cepal, 2000, Tables V.1, A46). The government’s protective measures effectively buffered Cubans from the mass unemployment, hunger and homelessness characteristic of economic depression in the capitalist Third World, but the hardships attendant on losing a third of domestic production and two-thirds of imports were, of course, unavoidable and many. The reduction or total suspension of a wide range of imports from the Soviet Union used to manufacture basic consumer products (caustic soda and tallow for soap, for example) produced numerous serious and very irritating shortages. The fuel crisis compelled daily scheduled electrical power outages to households and industries and forced the government to suspend much urban and inter-city transportation, partially substituting for the former with one million bicycles imported from China and distributed at low cost to

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the population (Eckstein, 2003, p. 112). Most seriously, average caloric intake fell an estimated 20–30% and protein consumption about 30% during the 1989–1993 period as consumption shifted from pork, chicken, rice and beans to the more abundant, carbohydrate-heavy yucca, sweet potatoes and plantains (Zabala Argu¨elles, 1999, pp. 147–148; United Nations World Food Program (UNWFP), 2004). Dietary vitamin B-12 deficiency was blamed for thousands of cases of temporary blindness reported in 1992– 1993 that were suppressed with an emergency vitamin distribution program (Nova Gonza´lez, 2003, p. 156; Dı´ az-Briquets, 2002, p. 150). The Cuban leadership moved energetically to mobilize productive resources to priority sectors, exploiting a strength of centralized economic planning. Scarce investment funds were allocated to tourism, domestic petroleum production and nickel mining, the only major industries to achieve output growth during the early nineties. Raising – or even maintaining – food production proved more difficult, despite mobilization of large urban and military labor reserves, major investments in irrigation and efficient pasturing systems, and deployment of 100,000 oxen as draft animals to substitute for the missing mechanical and chemical inputs (Reed, 1992). Plantain and potato production rose but output of all other major domestic food crops declined, with a particularly steep decline in rice. Despite efforts to increase fodder crops and substitute a high-protein canebased feed for imported feed, the average weight of slaughtered cattle fell by one quarter and that of hogs by 38% from 1989 to 1993 (Cepal, 2000, Tables A75, A79, A80). The sharp contraction of imports quickly corrected Cuba’s international transactions imbalance, reducing the trade deficit from $2.6 billion in 1989 (12.6% of GDP) to $371 million in 1993 (2.2% of GDP) (Cepal, 2000, Table A1). Reflecting the food emergency, the composition of imports shifted rapidly from capital goods to consumption goods as the Cubans diverted purchases from the Soviet Union/Russian Federation to Spain, France, Italy, China, Mexico and Venezuela, all requiring hard currency. Cuban exports by volume declined across the board during 1989–1993, excepting only nickel sinter and cement, and market shifts mirrored those of imports, moving from the Soviet Union to hard currency buyers in Canada and Europe (Cepal, 2000, Tables A33–35). The painful contraction in the trade deficit and a gradual increase in direct foreign investment helped reduce Cuban foreign borrowing needs during the early crisis years. The so-called ‘‘Cuban Democracy Act’’ (Torricelli law) signed into law by U.S. President George H. W. Bush in October 1992 sought to tighten the screws by extending the U.S. trade embargo to U.S. subsidiaries operating in third

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countries, but Canada, Argentina, Mexico and the European Union effectively blocked its enforcement and limited its effects (Domı´ nguez, 2002).

4.2. Market Concessions By 1993, the fourth consecutive year of steep declines in GDP and trade, the Cuban leadership was ready to launch a bold program of economic reform. The early commitment to keeping redundant workers on the payroll at state enterprises and farms resulted in rapidly mounting enterprise financial losses and huge fiscal deficits – peaking at 30% of GDP in 1993 – which were covered by printing money (Cepal, 2000, Table A1). While price controls restrained open inflation, the excess purchasing power relative to supply had other nefarious effects, stimulating a booming, high-priced underground economy, appreciating the black market value of the United States dollar from seven Cuban pesos in 1990 to 150 pesos in 1993 (even as the official exchange rate remained at parity) and discouraging foreign investment because of devaluation fears (Cepal, 2000, Table A1; Castro, 1996, p. 162). This ‘‘monetary overhang’’ also reduced the incentive to work and respond to productivity-linked wage incentives since peso earnings found little to buy (Castro, 1996). Fiscal and monetary policy was clearly unsustainable and state enterprises were starved of the convertible currency needed to restore production. Although the tourism industry and joint ventures with foreign investors (mostly in tourism, mining, petroleum and light manufacturing) grew steadily, this activity produced but a small fraction of the output, productive jobs and foreign exchange needed to lift the economy out of depression. Once convinced of the need for a decisive policy shift, the Castro government responded with a well-managed stabilization program and a series of initiatives to stimulate sustainable new production by increasing state enterprise autonomy and opening carefully delimited industries and markets to non-state producers: self-employed workers, private farmers, agricultural cooperatives and foreign investors. As Fidel Castro put it in a 1995 speech at the closing ceremony of a youth festival in Havana, ‘‘[I]f we have to introduce a specific amount of capitalism, we’ll introduce it; we are introducing it, with all its inconveniences’’ (Castro, 1996, p. 81). A fiscal austerity program launched in 1994 sharply cut subsidies to insolvent state companies, compelling additional layoffs in manufacturing firms, froze salaries and raised prices on alcohol, tobacco, gasoline and a host of services, from public transportation and utilities to theater tickets (Cepal, 2000; Hamilton,

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2002; Mesa-Lago, 2000). Meanwhile, the government began a momentous structural transformation of the Cuban economy by relinquishing the state’s near-total control of productive activity. The key concessions were introduced in 1993–1994 and included both new initiatives and the restoration and expansion of the markets suppressed during the rectification period. Two subsequent measures, a liberalized foreign investment law in 1995 and a banking reform in 1997, completed Cuba’s market opening. The most important new laws (conveniently compiled by Dirmoser & Estay, 1997, pp. 377–538 and Cepal, 2000, pp. 574–575) and their objectives may be briefly summarized as follows:
Liberalization of self-employment. A 1993 law recognized selfemployment (trabajo por cuenta propia) in 117 occupations (later increased to 161), primarily in repairs, domestic and personal services, transportation, retail sales and artisanal production; the right to operate a small, family-run restaurant (paladar) was recognized shortly thereafter. Clearly fearful of spawning a proto-capitalist class and mindful of the abuses of self-employment during the 1980s, the government imposed many restrictions on self-employment, prohibiting the hiring of extra-family labor, preventing professionals from engaging in the private practice of their professions and imposing strict paperwork requirements and high rates of taxation on earnings. Encouraging self-employment was intended to stimulate production of important services poorly supplied by the state (i.e., to complement, not compete with, state enterprise) and, secondarily, to provide new sources of work for redundant state workers. The initiative was successful as far as it went, but the tight governmental controls acted as a check on participation, limiting self-employment to little more than 3% of total employment during the 1990s (Cepal, 2000, Table A48).
Conversion of state farms to cooperatives. A 1993 law established a new form of agricultural production cooperative called the Basic Unit of Cooperative Production (UBPC) and composed of working sub-units of Cuba’s huge state farms. Under this scheme, state farm workers were given the land to work cooperatively in usufruct (the state retaining formal ownership) and received low-interest loans on easy terms from the Banco Nacional de Cuba to purchase their equipment and installations from the state. The UBPCs were given managerial autonomy and were expected to become self-financing but also received some state direction on crop mix and, like other producers in Cuba, were required to sell a portion of output to the state procurement agency (acopio). Beginning with the sugarcane plantations and continuing with dairy farms and rice,

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citrus, coffee and tobacco farms, the government undertook the conversion with great speed: by the end of the year a majority of state farms had been converted and as of end-2000, the UBPCs controlled about 46% of Cuba’s cultivated land (Mesa-Lago, 2000, p. 297; ONE, 2003, Table IX.2). Responding to the deep crisis in state farm production, the UBPC initiative sought to raise production by substituting cooperative labor for scarce fuel and chemical inputs, with self-financing providing a profit incentive. The state was relieved of its increasingly unsustainable obligation to pay farmworker wages and additional acreage was devoted to food crops for consumption by UBPC members and market sale to help relieve the domestic food shortage. Interestingly, the Cubans eschewed Chinese-style family usufruct productive units on a mass scale, although the government did distribute small parcels of unused state land to about 75,000 individuals (parceleros) between 1993 and 1998 to use in usufruct to produce vegetables, tobacco and coffee (Cepal, 2000, pp. 315–316).
Legalization of private holdings of convertible foreign exchange. This law, again passed in 1993, had several objectives: to help the state capture a share of the large number of United States dollars hoarded and circulating in the underground economy, many of them remittances to relatives from Cuban-Americans; to encourage more remittances of this desperately needed foreign exchange; and to strengthen the exchange value of the Cuban peso. To capture the foreign exchange (and reduce the money supply), the government set up a network of retail stores (the tiendas de recuperacio´n de divisas, TRDs) selling dollar-priced imports and highquality Cuban products to tourists and dollar-bearing Cubans. In 1995, the Cubans introduced the ‘‘convertible peso,’’ convertible on demand at par with the U.S. dollar, intending for it to gradually supplant the use of the dollar in the domestic economy, restore greater governmental control of the money supply, and contribute toward the longer-term goal of a unified exchange rate.
Establishment of free farmers’ and industrial/artisanal markets. Two decrees in late 1994 restored these markets, which had been suppressed entirely (the farmers’ market) or curtailed (the industrial/artisanal market) under rectification. Restoring the farmers’ market was clearly a bitter pill for Fidel Castro to swallow, having excoriated the market a few years earlier as ‘‘a strange experiment that never should have been introduced here,’’ responsible for price gouging, enrichment of private middlemen and the wealthier campesinos, diversion of food from the state

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procurement agency and hindering the growth of producer cooperatives (Castro, 1989, p. 56). But the Cuban president appeared resigned to risking these problems again for the sake of stimulating more food production, noting that the government lacked the capital to re-establish the parallel market active during rectification, wherein the state bought produce from co-ops and campesinos at a higher price than acopio and sold it at a price between the rationed and free market prices (Castro, 1996). The markets were also intended to soak up some of the excess money in circulation, undercut the black market, relieve the government of some of its distributional burden, and, in the case of the industrial/ artisanal market, provide a distributional outlet at market prices for both self-employed production and state-supplied commodities, such as imported used clothing. In 1999, the government finally re-established the parallel agricultural market, supplied primarily by state farms.
Promotion of state enterprise self-financing and managerial autonomy. In a bid to increase firm efficiency and reduce state subsidies, the Cubans began a serious effort in 1994–1995 to require firms to cover their costs from their sales. Beginning with joint ventures with foreign investors and Cuban firms earning foreign exchange, firm managers were given increased control over input sourcing, foreign trade, investment, output mix and pricing and the size and remuneration of the labor force. A particularly effective innovation required all firms to achieve a balanced budget in foreign exchange and permitted Cuban firms to trade inputs priced in foreign exchange directly with one another. A Foreign Exchange Control Commission, established in the mid-1980s, received and distributed foreign exchange to firms according to their approved annual budgets. Self-financing in hard currency was intended to act as a ‘‘hard budget constraint,’’ encouraging enterprises to innovate to reduce hard currency costs and increase hard currency earnings. Competing with imports to source domestic firms promised to raise Cuban efficiency (Cepal, 2000; Gonza´lez Gutie´rrez, 2000). Combined with the new markets, the move toward decentralized decision making and financial controls acted to substantially reduce the scope of traditional central planning based on ‘‘material balances,’’ the economywide, quantitatively based administration of firm inputs, output targets and prices. With multiple actors making investment, import and export, domestic sourcing, output mix and pricing decisions, central control over the scope and scale of detailed production is obviously impossible. In 1994, the government dissolved Juceplan, the central planning agency established

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in 1960, whose operations had already been curtailed during rectification, and in 1996, Minister of Economy and Planning Jose´ Luis Rodrı´ guez asserted that financial planning had supplanted the material balances system (Mesa-Lago, 2000). Nevertheless, the Cuban central government retained and retains strong control over the economy. The state kept its ownership of the means of production – there were no privatizations – and continued to use the acopio system of output quotas in agriculture along with pricesubsidized rationing of food and other basic necessities. The central government retained direct control of most investment with state budget funds, controlled firm entry and exit, set most wages and allocated foreign exchange and fuel to producers. Industrial ministries evaluated and approved annual enterprise plans, assessed performance, participated in product and pricing decisions and validated firms’ investment and profit-sharing decisions. The central government also continued to finance many money-losing firms producing for the domestic market from the state budget.
Creation of a new taxation and banking system appropriate for selffinancing firms. A 1994 tax law set a 35% tax on profits for all enterprises, including profitable state firms, and imposed a personal income tax that temporarily exempted state enterprise and cooperative workers paid in pesos. The 1997 legislation set up a network of commercial banks to lend to firms at interest, permitting additional decentralization of firm investment and general financing. These measures partially replaced the practice of state budgetary financing under central planning, wherein most of the firm’s costs were paid out of the budget and most of its profits paid into the budget. Another decree law established the Banco Central de Cuba as a traditional central bank, charged with controlling the money supply, supervising the banking system and administrating Cuba’s international reserves.
Liberalization of foreign investment. A 1995 law substantially sweetened the terms for investors by permitting up to 100% foreign ownership in any industrial sector (except health, education and certain defense industries) with full after-tax profit repatriation. The government retained control over hiring and wages, however, requiring firms to sub-contract workers through the state. Investors pay the wage bill, calculated in convertible foreign exchange as the Caribbean average for the industry, to a state employment agency and the agency then pays the firm’s workers in pesos according to the prevailing Cuban wage scale, allowing for approved bonuses and special incentives. Given the freeze on Cuban international borrowing and the dearth of project-based aid, attracting foreign

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investment amounted to the island’s only option to develop such vital import-, capital- and technology-intensive industries as nickel mining and petroleum production. All foreign investment furnished critically needed hard currency. The immediate results of the 1994 stabilization program and the complementary structural reforms were spectacular. Largely as a result of the UBPC saving in state farm subsidies, but also helped by substantial revenue gains, the fiscal deficit was cut from 30.4% of GDP in 1993 to only 7% the following year. The dramatic cut in the deficit slowed the rate of growth of the money supply and some of the monetary overhang was absorbed in higher state-set prices and, beginning in late 1994, the new supply of products in the free farmers’ and industrial/artisanal markets. Monetary liquidity declined rapidly from 66.5% of GDP in 1993 to 48.8% the following year. The contrary movements in the relative supply of and demand for the peso and the legalized dollar acted to quickly stabilize the exchange rate, which rose to an annual average of 32:1 in 1995 and 19:1 in 1996, with minor peso depreciation since then. Consumer prices fell sharply in 1995 as the new markets and the legalized dollar undercut the underground economy. Remarkably, the Cuban economy eased back toward growth in 1994, despite the fiscal and monetary tightening, as the new hard currency supply helped boost retail sales and finance the petroleum imports to increase power generation and manufacturing output Cepal, 2000, Table A1). By 1996, the third consecutive year of growth, a solid economic recovery appeared to be underway. Led by a good sugar harvest, robust tourism growth and strong investment in construction and mining (including crude oil production), Cuban GDP soared 7.8% that year as the fiscal deficit declined to 2.5% of GDP and consumer prices fell five percent (ONE, 2000, Tables III.1, IV.4; Cepal, 2000, Table A1). The open unemployment rate began a decline from its 1995 peak of 7.9% that continued through the remainder of the decade (Cepal, 2002, p. 159). Growing nickel, cement and cigar exports helped pay for vital fuel, machinery and agricultural imports and a surge of remittances from Cuban expatriates netted hundreds of millions of additional dollars annually. Direct foreign investment in tourism, nickel mining, petroleum, power generation and consumer goods manufacturing helped finance the relatively small but persistent current account deficit. ‘‘[W]e have managed to halt the abrupt and severe economic decline and have even initiated a growth dynamic under the most difficult imaginable conditions,’’ the Cuban Communist Party’s fifth congress economic resolution declared with justifiable pride in late 1997 (Partido Comunista de

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Cuba (PCC), 1997, p. 13; author’s translation). The resolution strongly endorsed the liberalizing measures undertaken without significantly extending them, stressing the importance of achieving state firm solvency and efficiency and gradually removing wage and price subsidies.

5. THE NEW CUBAN ECONOMIC MODEL: PROBLEMS AND PROSPECTS Is the new Cuban economic model viable? In the decade since the Castro government swallowed its limited dose of capitalism, the economy has performed adequately, though hardly spectacularly, by conventional macroeconomic measures. From 1994 to 2003, real GDP grew at an annual rate of 3.4%, higher than the Latin American and Caribbean weighted average of 2.3% (Cepal, 2004b, p. 530). (Cuban growth also exceeded average regional growth during the seven years through 2000, before Argentina’s economic collapse drove the regional average down in 2001–2002.) Reflecting Cuba’s greater vulnerability to external shocks (principally, weather, commodity prices, tourism flows and U.S. policy), growth is more volatile year-to-year than it was in the days of central planning and Soviet aid. Weather shocks, for example, explain much of the difference between rapid growth in 1996 and static output in 1998, while a sharp drop in international tourism and three powerful hurricanes in 2001–2002 contributed to the sluggish growth rate of 1.2% in 2002 (Cepal, 2004b, p. 530). (The Cepal figures are based on 1995 prices and differ somewhat from the official Cuban figures.) Growth accelerated to 5.4% and an extraordinary 11.8% in 2005, stimulated by booming exports to Venezuela, robust social spending, and vigorous activity in the construction, hospitality, transportation, warehousing and communications industries (ONE, 2006, Table IV.2). (Cuba changed its method of calculating GDP in 2004 in an effort to better account for the value of free and subsidized goods and services provided by the state, so the 2004 and 2005 GDP figures are not comparable to previous years.) Other macroeconomic indicators are mixed. From 1996 to 2004, the unemployment rate declined steadily to a low of 1.9% as state employment grew modestly (shifting from manufacturing to tourism-related services) and the private sector created hundreds of thousands of new jobs (ONE, 2002, 2003, 2006, Tables V.1, V.2; Cepal, 2004a, Cuba Table 1). Selective price controls combined with a sustained rise in the supply of consumer basics succeeded in keeping consumer price inflation at modest rates during this

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period. The Castro government also undertook the fiscal reorganization required for the decentralizing economy, shifting revenues from state firm profit payments to sales taxes and enterprise and personal income taxes and slashing subsidies to state enterprises. The government managed to keep the fiscal deficit below 3% of GDP until a series of external shocks (the terrorist attacks on the United States, destructive hurricanes, a devastating drought in the island’s eastern provinces and declining terms of international trade) widened the breach beginning in 2002 (ONE, 2002, 2003, Table IV.4). Reflecting its commitment to maintaining popular living standards, the government pursued an anti-cyclical fiscal policy, increasing social spending and subsidies to stricken agricultural enterprises and monetizing the growing deficit (Cepal, 2003, 2004a). The relatively large deficits (estimated at 4.1% of GDP in 2004 and 5.0% in 2005) and accompanying monetary overhang threaten renewed pressure on prices and the peso exchange rate, although the peso price inflation rate was held at 3.7% in 2005 (ONE, 2006, Tables IV.2, V.4; Cepal, 2006).

5.1. Monetary Dualism The Castro government has also made little progress toward ending monetary and exchange rate dualism. Permitting Cubans to freely hold and exchange dollars worked very well to stabilize the peso, encourage remittances, stimulate production and replenish the government’s foreign exchange reserves, as noted above. The principal cost usually associated with dollarization – losing national control of the money supply – is less weighty in contemporary Cuba than are the social and political costs. Monetary policy as practiced by central banks in capitalist countries – encouraging changes in private investment and consumption by manipulating the money supply to raise or lower the interest rate or market price of money – plays no role in the Cuban economy. The government sets the interest rates banks charge firms administratively and uses direct controls over prices, output, investment and foreign exchange to guide domestic production. Although the peso exchange rate and dollar-priced consumer and producer goods are vulnerable to some price volatility with the ebb and flow of dollars into Cuba, this problem is minor compared to the economic benefits of Cuba’s dollarization policy. A more serious cost is diversion of resources toward dollar-generating activities as, for example, when highly skilled teachers or doctors abandon their professions to take low-skilled jobs earning dollar tips in the tourism industry (PNUD, 2000). These deskilling

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employment shifts squander human capital just as Cuba’s rusting manufacturing plant destroys physical capital. The dual monetary system has also contributed to undermining Cuba’s celebrated social egalitarianism. Cubans with access to dollars or convertible pesos from work or remittances (estimated at 62% of the population in 1999, including those with only marginal dollar incomes) may purchase a wide variety of products and services from TRD stores, self-employed cuentapropistas and black market vendors that are not available in pesos (Koont, 2004, p. 19). The government has worked to bridge the consumption gap for priority sector state workers (in sugar, petroleum and nickel, for example) by paying bonuses in dollars or convertible pesos and goods in kind, but many workers and pensioners must still try to subsist primarily in the peso economy (PNUD, 2000). Although the Cuban peso goes a long way in making rationed and price-controlled purchases, the national currency is valued at only four U.S. cents for public exchanges at the government-run exchange houses (Cadecas), effectively barring purchases of dollars or convertible pesos for Cubans with access only to ordinary pesos. Responding partly to new U.S. efforts to restrict dollar flows to and from the island, the government has recently moved to tighten central control of convertible currencies by substituting the convertible peso for the dollar in consumer and producer transactions on national territory. Beginning in November 2004, Cubans and foreigners patronizing the TRDs, hotels, restaurants, taxis and other businesses that formerly took payment in dollars must pay in convertible pesos, which are sold for hard currencies at Cadecas and banks. The government also revalued the ordinary peso and the convertible peso against the dollar by 10% for cash conversions (to 23.4 ordinary pesos and 0.90 convertible pesos). Other hard currencies retain their values against both forms of peso and the euro will continue to circulate directly in the tourist zones where it is now accepted. Dollar bank holdings remain fully guaranteed and dollar cash holdings legal (Resolucio´n No. 80/2004, 2004). Restoring a nationally issued currency in consumer transactions follows a similar policy shift in the producer markets. A July 2003 Central Bank resolution now requires Cuban firms (but not joint ventures with foreign investors) to sell all of their foreign exchange earnings to their depository bank for convertible pesos and to substitute these pesos for dollars in domestic inter-firm transactions (the so-called ‘‘exports within borders’’). Firms must buy foreign exchange (subject to Central Bank approval) from the bank to finance imported inputs instead of importing directly with their foreign exchange earnings, as before (Resolucio´n No. 65/2003, 2003).

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Subsequent measures prohibit firms from demanding payment in convertible pesos for services not related to their primary activity and require Central Bank authorization in advance of other inter-firm transactions in convertible pesos (Resolucio´n Conjunta MEP-MFP, 2004; Resolucio´n No. 92/2004, 2004). These measures are intended to reduce dollarization, discourage non-essential use of foreign exchange and orient production closer to plan. They also reduce enterprise financial autonomy, slow international transactions and dampen the potential efficiency gains from competing with foreign suppliers. Replacing dollars with convertible pesos as a medium of exchange retains the inefficiencies and inequities of the dual monetary system. The ability to buy convertible pesos is effectively restricted to a privileged group of Cubans with access to hard currencies through work or remittances. Yet, the system seems a necessary evil under the continuing conditions of acute hard currency shortage that compels the government to maximize its foreign exchange collections. Pricing in convertible pesos obliges even Cubans with high ordinary peso earnings to surrender hard currency in order to make their purchases, as ordinary peso pricing would not. A unified, market-set exchange rate – somewhere between the overvalued official rate of P1 ¼ $1 and the undervalued Cadeca rate of P23 ¼ $1 – and free peso convertibility may be desirable for accurate cost accounting and more efficient input sourcing but must await sustained improvement in foreign exchange earnings. Domestic incomes and output must also strengthen to better absorb the price increases resulting when the official rate for imports is devalued. The hard currency constraint remains a heavy fetter on Cuban economic development. Despite fitful bilateral negotiations and some very limited creditor concessions, Cuba has not yet managed to restructure its accumulated hard currency debt of about $11 billion and still has little access to the long-term bank loans essential for financing investment (ONE, 2003, Table VI.2). Citing the economic damage done to the island by the former Soviet Union’s abrupt termination of trade and aid arrangements, Cuba has also refused to service its multi-billion-dollar debt (now claimed in hard currency) to the Soviet successor states. Foreign direct investment in Cuba remains modest and has declined in recent years, leaving the island highly dependent on trade (principally tourism) and remittances to balance its international payments. Cuba’s wobbly finances are also sustained by an oil import arrangement struck with Venezuela in 2000 permitting Cuba to finance 20% of its purchases with concessionary long-term credits and by ‘‘Operacio´n Milagro,’’ a Venezuelan-financed program that sends thousands of Venezuelans and other Latin Americans to Cuba for eye operations

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(Rodrı´ guez, 2005; Focal, 2005; Grogg, 2002). The foreign exchange shortage prevents the island from modernizing its shattered industrial plant and contributes to many of the hardships and indignities of Cuban daily life, from shortages of cooking fuel to electric power rationing and grossly inadequate public transportation.

5.2. Natural Resource Dependence Fatefully, natural resource exploitation continues to drive the Cuban economy. Policymakers bet well on tourism as a major growth industry early in the Special Period; aided by Cuba’s extraordinary natural beauty, comparatively low costs, competent state industrial planning, and foreign direct investment and facilities management, Cuban tourism grew at a blistering average annual rate exceeding 15% for both number of visitors and gross revenue during the 1990–2000 decade (Gutie´rrez Castillo & Gancedo Gaspar, 2002, p.74). After dipping in 2002, the industry set new records of 1.9 million visitors and more than $2 billion in gross revenue the following year and continues to grow robustly (Rodrı´ guez, 2003b; ONE, 2006, Tables XIII.1, XIII.11). Surpassing sugar as Cuba’s leading export by value in 1994, tourism has emerged as an important new source of demand for the island’s depressed food processing, construction, electrical equipment and wiring, furniture and textile industries (Cuba Industria, 2004; Cepal, 2000, Tables A38, A107). Tourism now sources an estimated 68% of its inputs domestically compared to only 18% in 1990 and employs an estimated 300,000 Cubans directly or indirectly (Gutie´rrez Castillo & Gancedo Gaspar, 2002, pp. 75, 77; Rodrı´ guez, 2003a, p. 220). Nickel and petroleum production round out Cuba’s dynamic, natural resource-based industrial troika. Buoyed by Canadian conglomerate Sherritt International Corporation’s large investments in a nickel-cobalt mining, processing and marketing joint venture with the Cuban state, nickel and cobalt output jumped almost 80% from 1995 to 2001 and the metal dethroned sugar as Cuba’s leading export good by value in 2000, ending a reign of more than two centuries (ONE, 2002, Table VIII.4). As a low-cost producer with ample reserves, Cuba is well positioned to continue to benefit in the near term from the high world prices driven by Chinese demand and China herself recently announced plans to invest directly in Cuban nickel production. Meanwhile, Canadian and European oil companies operating under risk and production-sharing contracts have led a spectacular quintupling of Cuban oil and gas production since 1989 (ONE, 2003, Table VIII.1).

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Domestic petroleum of about 68,000 barrels per day now meets about onethird of total national demand for crude, saving Cuba hundreds of millions of dollars annually in hard currency imports (Cepal, 2003, Cuba, pp. 1–2; Romero, 2004; Focal, 2006). Large public and foreign investments are converting power plants and some factories to burn Cuba’s heavy, high-sulfur (and, unfortunately, highly polluting) crude and the island achieved 83% energy self-sufficiency in electrical power production in 2003 (Rodrı´ guez, 2003b). With potentially ample deep-water reserves of high-quality petroleum in the Gulf of Mexico now under exploration, Cuban oil has substantially eased the island’s foreign energy dependence. The petroleum and nickel booms are helping to compensate for some of the export losses resulting from the vertiginous and almost certainly irreversible decline in Cuban sugar production since the early 1990s. As late as the fifth party congress in 1997, Cuban policymakers envisioned restoring sugar’s ‘‘strategic role’’ in the Cuban economy with minimum annual production of 7 million tons, even as the dearth of mechanical and chemical inputs held crude sugar output to 4.1 million tons that year (PCC, 1997, pp. 16, 44; ONE, 2002, Table VIII.3). Only in June 2002, after continued declines in Cuban harvests and milling productivity, ruinously low world prices and heavy financial losses among the sugar-producing UBPCs, did the Cubans decide to radically downsize and restructure the storied industry. The new plan targets annual production at about 4 million tons to be produced at an efficient average cost of 3.5 cents per pound by concentrating production in the most efficient lands and mills. Methods include converting about half of total sugarcane acreage to other uses (cattle ranching, orchards, lumber plantations and vegetable crops), closing 70 inefficient mills (almost half of the total), and reducing the workforce by about 100,000 workers, all to be offered government retraining and job relocation assistance (Rodrı´ guez, 2003a, p. 219; Focal, 2003; Pollitt, 2004, pp. 97–100). The Cubans also hope to increase ethanol production to take advantage of growing demand for this sugar derivative. But the disastrously poor production of the last two harvest years – 1.3 million tons in 2004–2005 and 1.2 million in 2005–2006, partly affected by drought and hurricanes – suggests Cuba may have difficulty achieving its relatively modest new output target with the reduced land, labor and milling inputs the plan envisions (Pe´rez, 2004; Rodrı´ guez, 2003b; Focal, 2004, 2006). Just as the sustained favorable trade terms for Cuban sugar in the 1970s and 1980s justified a strong productive commitment to the commodity, so the present grim prospects for Cuban exports validate the Castro government’s historic (if somewhat belated) disinvestment from sugar. Booming

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world production, led by Brazil, and stable per-capita consumption have helped cut the nominal free market price in half since 1995 (International Sugar Organization (ISO), 2003, p. 394). Cuban productive efficiency relative to Brazil and other leading regional exporters is constrained by the low volume of cane replanting, erratic rainfall and the continuing dearth of chemical and mechanical inputs. Confronting chronic world overproduction and heavily protected markets and bereft of any preferential trading deal approaching the generous terms struck with the Soviet Union in years past, the Cuban decision to downsize sugar seems eminently sound. Losses in foreign exchange earnings may be offset by gains in food import substitution and the shift to other crops may relieve the financially beleaguered UBPCs that dominate sugar production. But Cuba will pay a cost of redundant capacity in the island’s impressive network of sugar-derived industries. Conversion of sugar land to alternative uses stands to raise domestic food production, the perennial laggard of the Cuban economy. The new food markets and smaller-scale, decentralized production systems have unquestionably increased output of some key food crops, but progress in substituting domestic production for food imports and improving the quality and affordability of the Cuban diet remains slow. The continuing dearth of mechanical and chemical inputs constrains output even as the island continues its transition toward less resource-intensive methods. Despite continuing investments in electrical irrigation systems, water management and reforestation, much of Cuban agriculture remains highly vulnerable to adverse weather shocks, which are frequent on the tropical island. Presently, a worsening, decade-long drought has ravaged livestock and crops in the eastern provinces, killing tens of thousands of cattle and activating a fouryear United Nations World Food Program project to assist vulnerable groups with imported food supplements (UNWFP, 2001, 2004). Nationally, production of rice and livestock continues to lag, point-of-sale shortages of many basic foods are endemic, and free market prices generally remain very high. Nevertheless, per-capita production of important tubers, roots, garden vegetables and legumes now exceeds 1989 levels and per-capita consumption of calories and protein was reported to have recovered to 1989 levels by 2002, well above minimum standards (Cepal, 2000, Table A77; Rodrı´ guez, 2003a, p. 216, 2003b). The government’s highly successful urban agriculture program deserves some credit for these gains. Encompassing a variety of production methods, from large surface and raised-bed farms worked by state enterprises on converted parkland and the urban periphery to tiny

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balcony and backyard plots tended by families (patios), urban agriculture has reclaimed more than 18,000 hectares in cities across the island, becoming the leading supplier of fresh vegetables and herbs to city dwellers (Monteagudo, 2003; Koont, 2004, p. 13). Making a virtue of necessity, Cuban organic farming using biopesticides and biofertilizers is also booming and Cuba recently achieved organic certification for a range of export products to the European Union and Japan (Focal, 2003). Aquaculture, primarily of tilapia and carp for domestic consumption, is another substantial food policy achievement, with output rising 40% from 1989 to 2002 even as the fishing take from Cuba’s highly mechanized fleet has fallen precipitously (ONE, 2003, Table VIII.5; Cepal, 2000, Table A85). In principle, Cuba has great potential to substitute domestic production for food imports – which still account for about half of total consumption – and increase its food exports, presently less than 200 million pesos per year excluding sugar and beverages (Focal, 2003; ONE, 2003, Table VI.12). On the import side, Cuba now benefits from the U.S. Trade Sanctions Reform and Export Enhancement Act of 2000, a concession to U.S. agricultural interests permitting agricultural exports (along with medicine and medical devices) to the island on non-Cuban ships for cash payment. Cuba bought about $400 million worth of U.S. food and other agricultural products in 2004, almost half of its estimated total agricultural imports (United States Department of Agriculture (USDA), 2004; Food and Agriculture Organization of the United Nations Statistical Databases (FAOSTAT), 2005).

5.3. Depressed Manufacturing It is difficult to find positive news in Cuban manufacturing. The sector remains deeply depressed, with overall output of manufactured goods (excluding the sugar industry) at just over half the 1989 volume. Devastated industries run the gamut of vital capital, intermediate and consumer products, including agricultural machinery, transportation equipment, construction materials, basic steel, fertilizers, paper, glass bottles, textiles, garments and footwear (CEE, 1990, Table VI.21; ONE, 2006, Tables IX.1, IX.4). As policymakers continue to channel very scarce investment funds to tourism, energy production, housing and transportation, manufacturing is starved of the capital needed to offset depreciation, much less finance the plant redimensioning and equipment upgrading required for efficient import and export substitution. Tellingly, Cuban fixed capital formation is heavily concentrated in construction, with machinery and equipment accounting for

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a mere 6% of new fixed capital in 2002 compared to a Latin American average of 35% (Cepal, 2004b, Table 78). At around 10% of GDP, Cuban gross capital formation is still little more than one-third of its 1989 ratio and far below what is needed to industrialize (ONE, 2006, Tables IV.1, IV.5; Cepal, 2000, Tables A2, A6). Much of Cuba’s installed heavy industrial plant – in steel, machinery, tires, paper and industrial plastics, for example – is probably permanently lost given the huge capital injections required to raise efficiency and convert sugar industry product lines (such as cane combines and mill boilers) to other outputs. In a world market awash with low-priced product, Cuba may also find it uneconomical to resuscitate its import-intensive and all but moribund textile, garment and footwear light industries. Dynamism in contemporary Cuban manufacturing is found primarily in tourist industry inputs, as shown by output gains relative to 1989 in telephone cables, assembled color televisions, bathroom soap and selected processed foods. Reflecting their priority status for investment funds, the Cuban pharmaceutical and veterinary drug industries have also done well, more than tripling output measured in nominal peso value terms from 1989 to 2005 (CEE, 1990, Table VI.21; ONE, 2006, Table IX.4). In sum, with important exceptions – in addition to pharmaceuticals, the chemical industry (with many forward linkages) has held its own – the nearterm future of Cuban manufacturing appears to lie in comparatively low value-added, low-tech consumer goods typical of first-stage import substitution. The Castro government continues to fight a rear-guard action to save its plant – developing modest new export markets in the Caribbean and Central America for steel, cement, agricultural and medical equipment, electrical cable, water pumps and gas stoves, and actively seeking foreign investment in a broad range of heavy and light industries – but seems to harbor few illusions about Cuban prospects as a manufacturer of standardized products in the contemporary world market. Indeed, Cuban economic policy documents seldom mention manufacturing and policymakers have yet to publicly articulate any global plan to reorganize and develop goods-producing industries. ‘‘We have moved from a sugar-based economy to one based on tourism and other services,’’ declared Minister of Economy and Planning Jose´ Luis Rodrı´ guez with some hyperbole in his annual address to the National Assembly in 2003 (Focal, 2003). Given the country’s continuing serious financial bind, of course, the Castro government has little choice in the near term but to continue its present strategy prioritizing tourism, traditional primary sector exports and food and energy import substitution. Nevertheless, it is surprising that a

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regime still formally committed to economic planning has not elaborated a broader-based, more ambitious plan for long-term development, identifying possible comparative advantages in manufacturing and advanced services. The economic cost of overdependence on sugar and nickel exports subject to vertiginous price oscillations and declining terms of trade against imported manufactures and services is certainly familiar to Cubans. Tourism, Cuba’s lifeline during the Special Period has its own limitations as a national economic engine. The spectacular growth in foreign visitors is likely to slow as Cuba’s primary Canadian and European markets mature. Hotel and restaurant employment is predominantly low skilled, although these and other tourism-related industries do support a modest number of higher skilled jobs both directly and indirectly.

6. WHITHER CUBAN SOCIALISM? While still beset by daunting problems, the Cuban economy has stabilized and there is no reason to believe that output and living standards will not continue to grow modestly under present macroeconomic policies. The economy passed a much-anticipated milestone in 2005, finally recovering and surpassing its pre-crisis output. The island remains vulnerable to external political and economic shocks; U.S. President George W. Bush’s recent restrictions on remittances and visits to Cuba by Cuban-Americans is a relatively minor nuisance, but the removal of President Hugo Cha´vez Frı´ as and suspension of concessionary Venezuelan oil exports and imports of Cuban professional services would have serious repercussions for the island. However, the much-anticipated easing of the U.S. economic embargo – increasingly favored across the U.S. political spectrum – would be an enormous boon to the island’s tourism, trade and direct foreign investment, substantially relieving Cuba’s foreign exchange constraint. A deeper question is whether the Castro government’s carefully circumscribed policies to decentralize economic decision making through markets and other means offer a coherent, sustainable and reasonably efficient solution to the microeconomic problem of production and distribution. Furthermore, the government still insists that Cuban society is socialist, with a ‘‘centrally planned socialist economy that uses regulated markets and money-mercantile relations along with a progressively decentralized system of firm management’’ (Cepal, 2000, p. 97). Is this system identifiably socialist in any meaningful sense? Are there viable socialist solutions to the island’s economic problems? The rich history of ‘‘market socialist’’ theory

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and practice, from the early Soviet Union’s ‘‘New Economic Policy’’ (NEP) to China’s experiments in the 1990s, offers an interesting context for assessing the Cuban model.

6.1. Market and State Distribution Cuban producers (workers, farmers and state enterprise managers) have generally responded to the incentives introduced in the mid-1990s much as policymakers had anticipated. The complex and evolving system of regulated and free markets exchanging in pesos and dollars (now convertible pesos) has raised legal prices, reduced black market prices and stimulated new supply from independent producers (campesinos and the self-employed), agricultural cooperatives and state enterprises. A Cuban consumer can now legally purchase goods and services in six different venues: (i) the state stores and other distribution points for rationed basic necessities (essential foods covering about half of requirements, natural gas for cooking) and priceregulated, government-supplied services (utilities, personal and repair services, entertainment, etc.), all sold in ordinary pesos; (ii) the price-regulated, parallel farmers’ markets (including the local urban agriculture stalls and the larger state markets or placitas) exchanging in pesos; (iii) the free farmers’ market (mercado agropecuario) exchanging in pesos at market prices; (iv) the free industrial, artisanal and service market (MAIS), selling a wide variety of mostly Cuban-made products and services (used clothing, manufactures and services from self-employment, state enterprise consumer durables and nondurables) at market prices in pesos; (v) the tiendas de recuperacio´n de divisas, selling a diverse range of better-quality Cuban and imported goods (shoes, clothing, food, toys, domestic appliances, furniture, hygienic products, cosmetics) in convertible pesos at regulated but essentially market prices (plus a large sales tax); (vi) direct sales from self-employed artisans and service providers (including the paladar restaurateurs) in pesos or convertible pesos at market prices. In addition, schoolchildren, pensioners and some workers receive free or nominally priced meals at schools, health centers and workplaces and certain workers receive incentives in the form of products distributed free or at subsidized prices at the workplace. Finally, Cubans can and do purchase a wide variety of goods (usually stolen from state enterprises or cooperatives) and unlicensed services on the black market (Barreiro Pousa, 2001; Cepal, 2000). Consequently, non-market and regulated market final-product distribution in contemporary Cuba is now effectively restricted to part of the

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island’s food and service output (including free education and health services, of course) while most consumer goods and an important share of services exchange at essentially free market prices. The TRDs and free farmers’ markets have been particularly dynamic in recent years, accounting for rapidly growing shares of household consumption during the 1996–2001 period. But even as market distribution expands, the state retains its dominant position as supplier (producer and importer) of goods and services to Cuban households. In 2005, the ‘‘state market’’ (including all governmentsupplied services) supplied 77% of the value of final household consumption, the free farmers’ market 8.4%, the self-employed 6.3% and ‘‘other sources’’ (including the TRDs and household self-supply of agricultural products) 8.3% (ONE, 2006, Table IV.4). The state is the sole supplier to the TRDs and the dominant supplier to the MAIS and the parallel farmers’ markets. It has steadily increased its presence in the free farmers’ market, now contributing more than 50% of sales (compared to 11% in 1995) as cash-strapped state farms seek to compensate for subsidy cuts with highpriced sales (ONE, 2003; Cepal, 2003, p. 349; Marrero Prieto, 2002; Cepal, 2000).

6.2. Private Production and Rising Inequality Income, employment and sales trends suggest the new free markets are stimulating private production. Private national employment – comprising landowning farmers, individual usufruct farmers, self-employed workers and employees of non-governmental associations and foreign firm branch offices – more than doubled from 1996 to 2005 to comprise 14% of total Cuban employment (ONE, 2002, Table V.1; ONE, 2006, Table VI.2). Meanwhile, income accruing to independent campesinos – a group whose numbers have remained stable in recent years – rose at an astonishing average annual rate of almost 26% from 1995 to 2001 in nominal peso terms while that received by the non-agricultural private sector increased at a blistering 16% average annual rate over the same period, according to government statistics. These figures compare to 5% average annual growth in salary and other remuneration accruing to salaried workers during these six years (ONE, 2002, Table IV.1). In constant prices, household purchases in the free farmers’ market doubled from 1996 to 2001 (ONE, 2002, Table III.5). The reintroduction of the farmers’ market, expansion of self-employment and growth in the share of dollar-priced consumer goods distribution has

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sharply worsened income and consumption inequality in Cuba. One researcher estimated that Cuba’s peso income Gini coefficient (a commonly used measure of income inequality where 0 represents perfect equality, i.e., all households receive the same income, and 1 perfect inequality, i.e., one household receives all of national income) fell from 0.55 in 1953 to 0.22 in 1986 and then rose back to 0.55 in 1995 (Fabienke, 2001, pp. 103–104). Some of the greatest income disparities are between successful private producers (cuentapropistas and private farmers) and low-paid state firm employees in non-export activities, such as education and health services. Income inequality is also growing within the state sector as an inevitable consequence of the new efforts to raise productivity (especially in priority industries) by linking a higher share of wages directly to output. In 2002, 79% of Cuban workers were reported to receive some productivity-based pay and almost a third received bonuses in foreign exchange (Cepal, 2003, Cuba p. 5). While offering market incentives to private producers, the Castro government has done its utmost to control the scale and scope of this production and check rising income inequality with strict regulations that are vigorously enforced. Private campesinos are still required to sell a quota of their production at relatively low, fixed prices to the state collection agency and their free market sales exclude important products in short supply or with high export value, among them, beef, milk, potatoes, eggs, coffee, tobacco and cacao (Cepal, 2000; Marrero Prieto, 2002). Local government representatives at the markets collect a sales tax of up to 15% of the anticipated value of sales from retailers, paid in advance, and campesinos also pay personal income tax. The government has also sought to undercut high free market prices and profiteering by operating the parallel markets, with only modest success, so far. The Castro government has also kept a tight rein on the self-employed cuentapropistas, restricting licenses to about 170,000 workers nationwide (ONE, 2006, Table VI.2). The number of paladares, which can be quite lucrative and are taxed especially heavily, is reported to have declined in recent years (Batista, 2003; Cepal, 2000). Rejecting proposals to permit small private businesses to hire non-family wage labor, the government has recently imposed additional restrictions on self-employment, suspending the granting of new licenses for forty occupations effective October 2004, including paladar restaurateurs, ambulatory food and drink vendors and fabricators of common household hardware and other goods (Resolucio´n No. 11/2004, 2004). Cuban policymakers’ reluctance to permit the sort of small businesses allowed (subject to limits on total employment or capital

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assets) in some other erstwhile centrally planned economies (Poland, Hungary and the German Democratic Republic, among them) might be attributable to a reluctance to worsen social inequality and engender a class base for additional market liberalization. (‘‘[S]mall-scale production engenders capitalism and the bourgeoisie continuously, daily, hourly, spontaneously and on a mass scale,’’ Lenin famously warned (Lenin, 1977, p. 293).) In sharp contrast to the government-directed, progressive restoration of capitalism underway in China and Vietnam, Cuba’s top leadership seems determined to demonstrate that a state-run economy with a strictly subordinated private sector is viable. Foreign direct investment, the third major source of private production in Cuba, has responded to the new market incentives in important but limited ways. The island presently benefits greatly from FDI in the all-important natural resource industries generating or saving convertible currency – tourism, nickel and petroleum. But in 2002, seven years after investment liberalization, cumulative FDI stood at a relatively modest $2.6 billion (compared to $6.3 in Costa Rica and $7.2 billion in the Dominican Republic, both with much smaller populations and economies) and foreign capital has little presence in manufacturing despite standing Cuban joint venture bid solicitations in a wide range of important industries, including sugar derivatives (Cuba Industria, 2004; United Nations Conference on Trade and Development (UNCTAD), 2004, Annex Table B.3; U.S.-Cuba Trade and Economic Council, 2004b, p. 1). Employment in joint ventures totaled only 27,100 in 2002, less than 1% of total Cuban employment, and has been roughly stagnant since 1999 (ONE, 2003, Table V.1). Cuba is not regionally competitive – nor does it aspire to be – in low-wage, laborintensive manufacturing, and the U.S. embargo remains a huge barrier to export-oriented FDI. The Torricelli law and the 1996 Helms–Burton law (Cuban Liberty and Democratic Solidarity Act of 1996, permitting U.S. citizens with claims to Cuban property nationalized by the revolution to pursue U.S. lawsuits against investors who ‘‘traffic’’ in this property and subjecting violators to exclusion from the United States) have also raised the cost of investment despite blocking legislation in the major investor countries to protect their firms. The U.S. State department has sanctioned Canada’s Sherritt International and a Panamanian company under Title IV of the act (excluding senior executives, substantial shareholders and their families from the U.S.) and the law has succeeded in discouraging some potential investors and obliging others to negotiate settlements with claimants under the act (in 1997, the Netherlands’ STET International agreed to pay ITT Corporation $25 million to use telecommunications assets

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nationalized in 1960). A Cuban-American-owned company claiming beachfront property in Holguı´ n province is presently pursuing claims against Spain’s Sol Melia´ and Jamaica’s SuperClubs (U.S.-Cuba Trade and Economic Council, 2004a). Until U.S.-Cuban relations thaw, foreign investment is likely to continue to flow at modest rates primarily into the natural resource sectors. Along with its attractions – a well-educated labor force, political and macroeconomic stability and low corruption – Cuba has a number of market and institutional liabilities from an investor’s viewpoint, including low domestic purchasing power, high labor costs, a state-dominated economy and continued governmental and popular commitment to socialism. The number of Cuban-foreign joint ventures has in fact fallen in recent years from 403 at end-2002 to 258 at end-2005 as the rebounding economy encourages the government to drive harder bargains with investors in non-priority sectors (Focal, 2003, 2006). Cuba must find ways to break the foreign exchange stranglehold and obtain the financing indispensable to recovering production in manufacturing and agriculture, increasing the energy supply and improving the material standard of living. Barring a great stroke of luck – a breakthrough biotech product or discovery of large offshore petroleum reserves, for example – the solution must lie in gradually increasing and diversifying manufacturing and service exports. For reasons discussed, Cuban cannot rely on substantial increases in foreign direct investment or bank lending to meet its financing needs. The rub, of course, lies in the great difficulty in identifying and developing high-value-added goods and services in which Cuba might have comparative advantage and gain access to world markets. Cheap mass production, desirable as it may be, is clearly not the way forward for Cuba. But Cubans are nothing if not innovative, recently developing new, potentially exportable products ranging from medical services, sugar derivatives and hotel management software to the decidedly low-tech but efficient Cocomo´vil cargo tricycle. In an historical irony, intellectual property may prove a rampart of Cuban socialism. Cuba’s difficulty is greatly compounded by its isolation and weak bargaining position for winning access to technology and markets. The privileged access to major export markets and negotiation of domestic sourcing technology transfer agreements with foreign investors that helped such countries as South Korea and Brazil industrialize are obsolete today for all but the strongest, namely China and India, whose leverage is their enormous domestic markets. Progress in Cuba can only be gradual and will require continued active and flexible deal making with foreign industrial and commercial capital.

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6.3. Market Incentives for State Enterprise The Cuban initiatives to improve state enterprise efficiency, output quality and product mix by increasing firm-level managerial autonomy and deepening market incentives recall other famous historical efforts to revitalize post-capitalist economies, among them, Hungary’s post-1968 New Economic Model (‘‘goulash socialism’’), the NEP and perestroika bookends to six decades of highly centralized Soviet planning, and China’s ongoing campaign to build a ‘‘socialist market economy with Chinese characteristics.’’ Since the onset of the 1990s’ crisis, Cuba’s pressing need was and is to stanch the fiscal drain caused by insolvent state firms and free scarce resources to maintain the popular safety net of basic goods and services. To this end, the Cuban leadership has made firm self-financing and profitability a priority objective, at the cost of diluting central control over investment and output and countenancing new managerial and labor controls and incentives characteristic of capitalist production. Although a decentralized system of planning remains in effect, requiring enterprises to strike annual output contracts with industrial branch ministries or provincial administrative councils, the locus of Cuban economic decision making has clearly shifted toward the individual firm director (Comite´ Ejecutivo del Consejo de Ministros, Repu´blica de Cuba (CECM), 1998). In the vanguard of this movement are the gradually growing number of firms operating under the Sistema de Perfeccionamiento Empresarial developed experimentally in the late 1980s and reaffirmed at the 1997 Fifth Party Congress as the managerial model for Cuban state enterprises. The Cuban leadership has moved deliberately to bring firms into the SPE system – about 600 so far, including those in the strategic petroleum, nickel and electricity industries – requiring candidates to demonstrate a sound accounting system, promising output markets and the capacity to self-finance through retained earnings or bank credit (Cepal, 2004a, Cuba p. 4). Though subject to the state output contract specifying minimum targets for selected goods and services, the SPE firms appear to operate in important ways like capitalist enterprises. The firm director exercises top decision-making authority, strives to maximize profit, freely sources inputs (fuel and foreign exchange are allocated centrally), is primarily responsible for determining output price, quantity and mix, sets performance-based pay incentives and productivity norms, and determines the overall size and occupational structure of the enterprise workforce. Worker and managerial bonus pay is linked to firm profitability and the director is responsible for deciding the firm’s investments, which are typically financed by retained earnings or bank

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credit and are subject to higher-level government approval. Although worker representatives participate in a firm management council and the SPE stresses the importance of motivating the workforce to participate actively in solving production problems and identifying efficiency gains, workers exercise no executive authority at the firm. The firm’s annual plan – including detailed general and foreign exchange budgets and targets for sales, profits, capacity utilization, investment, labor productivity and other efficiency gains – has much in common with a standard business plan, subject to the approval and oversight exercised by higher-level state bodies (industrial branch ministries or provincial administrative councils) (Carranza, Gutie´rrez & Monreal, 1995; CECM, 1998; Domenech, 1998; Chaviano & Trista´, 1998; Del Monte y Navarro, 2001; Cepal, 2000). Like similar initiatives in other post-capitalist economies, the Cuban move toward firm-level financial and managerial autonomy is intended to help overcome the incentive and informational problems that typically create inefficiencies in Soviet-style central planning as practiced historically. In Cuba, as in other centrally planned economies, output-based performance criteria coupled with administered prices and state budgetary financing encouraged firm managers to understate output capacity, overstate input requirements, neglect product and production innovation and pay scant attention to reducing costs (Nove, 1969; White, 1987; Kornai, 1992; Domenech, 1998). Workers, too, received few direct material incentives to raise productivity and loafing on the job was a common response to overstaffing and employment security. Although the moral motivation to ‘‘sacrifice for the revolution’’ was and remains far from negligible among Cuban workers and managers, Fidel Castro repeatedly criticized waste and inefficiency during the 1980s, culminating in the rectification campaign that partly dismantled technocratic planning and experimented with new moral and material incentives. The current firm-centered system is intended to harden the budget constraint and give managers and workers a direct and substantial material stake in reducing costs, increasing profits and responding to buyer demand. It also relieves the central government of the enormous burden of coordinating detailed production under material balances central planning. Although increasing firm autonomy and accountability might seem a simple and obvious solution to the efficiency problem, the historical record in post-capitalist economies suggests it is far from simple to put them into practice when the firms are publicly owned and the government retains a strong commitment to employment and social equity (Brus & Laski, 1989; Kornai, 1992; Stiglitz, 1994). First, even measuring firm performance is

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complicated by the retention of some administered prices, notably the overvalued official exchange rate used in Cuban cost accounting. Using ‘‘shadow prices’’ to estimate market prices does not solve the informational problem since the world market prices used to calculate the shadow prices may not reflect local resource conditions. The technical skills and mindset to run an enterprise like a capitalist firm tend to be in short supply in formerly centrally planned economies, and this is certainly the case in Cuba; moreover, government appointment of firm managers may not select well for those qualities (Del Monte y Navarro, 2001). Hardening the firm’s budget constraint to permit bankruptcy, liquidation and mass layoffs can be politically costly, encouraging ‘‘market socialist’’ governments to retain direct or indirect subsidies to inefficient firms and diverting managerial energy from cost cutting to subsidy-seeking. Despite the reductions in recent years, 3.6 billion pesos in transfers to firms still accounted for 30% of total spending in the 2004 budget, although much of this went to state farms, the UBPCs and other producers of basic necessities to offset below-cost consumer prices (Millares, 2003; Ley No. 98, 2003). Lacking an ownership stake in the enterprise and usually subject to little competition, managers are prone to over-price output, maximize short-term profits, under-invest in the enterprise and distribute an excessive share of residual income to themselves and their workers as bonuses. Their independent output choices may also diverge from the social interest. In addition, greater autonomy also brings greater opportunity for managers to engage in fraud and illicit selfenrichment, although the absence of state firm privatizations and severe restrictions on private enterprise in Cuba remove a major incentive for the sort of ‘‘asset stripping’’ of state enterprises observed in China, for example (Hart-Landsberg & Burkett, 2004). A hybrid system may thus compound inefficiency, responding neither to the discipline of the plan nor the discipline of the market. Inequality of power at the workplace is also growing as the SPE model strengthens managerial power at the firm level over hiring and dismissal, job content and work rules, and wages and bonuses. The Cuban economic literature is awash with discussion of capitalist-world managerial and ‘‘human resource’’ theory, seeking to motivate workers without empowering them (see, for example, recent articles in Economı´a y Desarrollo, a leading journal published by the University of Havana’s economics department). The emphasis on authoritarian management may well deliver better immediate results in Cuba’s determined bid to improve output and efficiency compared to a managerial model with greater worker control. (E. A. Preobrazhensky’s summary of the Soviet NEP of the 1920s may be

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apropos: ‘‘The slogan of this period was: expand production at all costs, at the least possible expense.’’ (Preobrazhensky, 1973, p. 44)). But the power disparity may also foster the perception of class difference and antagonistic interests between workers and managers and discourage worker loyalty to the firm and commitment to its social contribution. In sum, firm management decentralization and market incentives introduce a host of potential new obstacles to socially efficient production. Data have not been made available on the performance of the SPE firms compared to traditionally managed state firms. The flexibility and incentives given to the SPE firms are likely to lower costs, but there are limits to the efficiency gains achievable in an economy deprived of both modern capital equipment and the cudgels used to discipline labor in capitalist low-income countries (dismissal, unemployment, hunger and homelessness). Government auditors reportedly discovered financial irregularities in a full third of the state firms examined in 2003, including enterprises owned by Cubanaca´n, Cuba’s leading sociedad ano´nima in the tourism industry (Focal, 2004). Acknowledging the difficulties, the Cuban authorities have proceeded cautiously with the SPE program – which still covers fewer than 15% of domestic firms – and recently tightened control of firm output mix and access to foreign exchange, as noted above (Del Monte y Navarro, 2001, p. 38; Cepal, 2004a, Cuba p. 4). As these developments show, Cuban policymakers are still struggling to find the right balance between centralism and decentralism, market and plan, efficiency and equity consistent with their vision of socialism and the island’s brutally circumscribed resources. The present model is rife with tensions and shortcomings but appears to be working according to some important socialist criteria of success. Enough value is being created, under humane and dignified working conditions, and equitably distributed to secure basic necessities for all Cubans and a gradually rising (though still inadequate) material standard of living compared to the crisis years of the early nineties. The constitutionally guaranteed rights to employment, education and health care are still honored. Despite decentralization, strategic productive decisions, including investment in new and existing enterprises, are determined politically, or planned. Markets play a subordinate role in allocating resources, and the waste and duplication of unplanned production responding to market signals is attenuated. It is not possible to get rich by owning productive resources worked by others. The present Cuban leadership is committed to these pillars of socialism, which enjoy broad popular support, even as it continues to experiment with improved systems of state firm management and market distribution of consumer goods.

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Cuba’s determination and success in preserving some fundamentals of a socialist economy has flummoxed, even outraged, received opinion, which insisted that capitalist restoration was indispensable to the island’s economic recovery (see, for example, contributions to the scholarly annual Cuba in Transition, published since 1991 by the Maryland-based Association for the Study of the Cuban Economy). China’s vaunted economic success achieved by progressively dismantling its centrally planned system is sometimes proposed as a model for a Cuban transition to capitalism. Over the past 25 years, the Chinese have progressively privatized agriculture and selected state enterprises, liberalized prices and wages, created land, labor and capital markets, opened the economy to foreign and domestic private enterprises (including large, wholly-owned firms), dismantled much of the welfare state (including free, universal education and health care) and ended employment security. Taking the capitalist road has turned China into a low-wage export powerhouse and stimulated extraordinarily high rates of growth in output and average income. But the enormous costs are measured in rapidly rising socioeconomic inequality, sweatshop abuses of factory labor, gross environmental damage, wastefully duplicative and speculative real estate and industrial investment, rising unemployment, the exclusion of large numbers of low-income (and mostly rural) Chinese from schools and health services, and the emergence of a destitute population of market losers stripped of the ‘‘iron rice bowl’’ that provided a meager but sure allotment of food, clothing and shelter for all Chinese under the old central planning system. Another cost is sanctification of the individual over the collective interest, an ethos inimical to development of a socialist consciousness. These costs are not peculiar to China but are endemic to successful capitalist production in a low-income country. They are unacceptable to the present Cuban leadership.

7. THE BATTLE FOR SOCIALIST VALUES Cuba’s socialist development confronts staggering ideological and material obstacles. Fidel Castro’s consummate leadership and prestige and the deep well of Cuban pride in their nation’s revolutionary achievements and success in standing up to the U.S. empire have played an incalculably important role in preserving the system through all the hardships of the Special Period. It may well be wondered whether Cuban socialism will survive the loss of the revolutionary leadership, especially Fidel Castro. Capable as it is, the younger generation of Cuban leaders (including National Assembly

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President Ricardo Alarco´n Quesada, Foreign Minister Felipe Pere´z Roque and Council of State Vice-President Carlos Lage Da´vila, Cuba’s top economic manager) will need great popular legitimacy and political skill, a strong personal commitment to the socialist project, and a favorable external environment (especially an easing of the U.S. trade embargo) if it is to have any chance of holding the seawall against the capitalist tide. Solutions, or approaches to solutions, must be found for three longstanding, daunting and inter-related problems in political economy, all of which contributed in various degrees to the weakening of ‘‘actually existing socialism’’ worldwide: inadequate investment resources, productive inefficiency and rising inequality. Cuba’s problems and search for solutions with limited market mechanisms raise serious challenges for the core socialist values of cooperation and participation, public property, egalitarianism and collective consumption, collective control of production, and collective responsibility to provide the material basis for a dignified life for all members of society. Growing private production, rising inequality and the new emphasis given material incentives and authoritarian management in state firms cannot but strengthen, to a greater or lesser degree, the core capitalist values: competition and hierarchy, private property, personal enrichment and exclusionary consumption, private control of production and individualist self-reliance. Weakened by the economic exigencies of the Special Period, socialist values may still find support in Cuban social and political institutions. The government endeavors (largely successfully) to provide health and educational services, housing and utilities, the food ration, sports and exercise programs, and culture (musical concerts, books, artworks, movies, dance, theater and so on) to all Cubans. Much consumption remains collective and non-exclusionary. Special-interest associations and clubs, both public and private, abound, encouraging collective participation. From first through ninth grades, many Cuban children participate in the Jose´ Martı´ Pioneers Organization, engaging in various educational, civic, cultural and sporting activities (somewhat like the scouting movement in the United States) and most adults actively participate in such mass organizations as the Federation of Cuban Women or the Committees for the Defense of the Revolution. These organizations provide important local services, among them, vaccination campaigns, recycling programs, day care services and organizing and monitoring elections. The Cuban system of local representative government (Poder Popular), though circumscribed, includes forms of democratic participation and

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accountability supportive of socialist values. Elections to the municipal assemblies charged with local social, economic, judicial and political administration are non-partisan and competitive, with candidacy open to any adult local resident nominated in open assembly by another resident. Unpaid delegates (representing about 1,000 voters) serve part-time during their two-and-a-half year terms and are subject to recall election at any time if demanded by 20% of district voters or 20% of their fellow delegates. (A paid administrative council, nominated externally by the local mass organization leadership and ratified by the assembly delegates, conducts assembly business between sessions, about six per year.) Each delegate holds semi-annual public accountability sessions to report on his or her efforts on behalf of the district and to take specific proposals and complaints (planteamientos y quejas) from constituents, which must be specifically addressed in the next assembly session. Public participation in elections and accountability sessions tends to be very high, and the system seems to work well in voicing and addressing community needs (Roman, 1999). But paternalism and restricted civil liberties also characterize the Cuban system. Direct democracy ends with the municipal assembly delegate. Elections to the provincial and national assemblies are direct but noncompetitive, featuring single candidates selected by the central leadership (government, party and mass organizations) with municipal assembly participation and vetting. The National Assembly has nominal legislative power but meets only twice a year for a few days at a time; it elects the Council of State, given lawmaking power by decree when the assembly is out of session, and the Council of Ministers, the top executive body. Fidel Castro is president of both the councils (the head of state and the head of government, as required by Cuban law) and first secretary of the Cuban Communist Party, Cuba’s sole legal political party and the primary formative organ for the island’s political leadership. There is substantial freedom of expression and debate in Cuba at the grassroots level, and citizens do not hesitate to criticize their leaders, from Fidel Castro down. Cubans are not a fearful, repressed people. Yet, the regime monopolizes the institutional instruments for political expression and organization (media, political parties, trade unions and other mass organizations) and permits only limited debate and no formal opposition within these institutions. It is indeed difficult to imagine Cuba’s survival as a post-capitalist state through 45 years of unremitting U.S. aggression without Fidel Castro’s extraordinarily able leadership in a unified and disciplined central government and wartime restrictions on civil liberties. Nevertheless, paternalistic government stultifies the active working class empowerment and agency essential to the socialist project.

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In the final analysis, the fate of Cuban socialism will be decided by popular commitment to socialist values and how these are realized in practice. Cubans must have confidence that their system is capable of material, social and political progress – has a future – and must consciously choose socialist values over the dream of getting personally rich, capitalism’s lure. They need a clear understanding of how capitalism works in Latin America and how it is likely to work in Cuba should it be reinstated. In the present historical period, it will be very difficult for socialism to prevail in the battle with capitalist values, especially should the U.S. move (intelligently) toward dollar diplomacy in the post-Castro period. Continuing material hardship, rising inequality, examples of lucrative private production, the presence of comparatively well-off foreign tourists, strong U.S. ties and a natural predilection – perhaps especially strong among the young and within the professional/ managerial strata – to be fully part of the world community and participate in the dominant system create grounds for tacit or active support for a program of market deepening and eventual capitalist restoration. It is patently unrealistic to expect a small, modestly endowed island nation to carry the flame of socialism alone. Yet, from the hour Fidel Castro’s tiny force of rebel exiles beached their boat in Oriente province in early December 1956, the Cuban revolution has challenged the odds and won. Confronting an immensely challenging future, Cuba’s intrepid example of socially centered development stands as a monumental historical achievement.

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U.S. NARCOCOLONIALISM? COLOMBIAN COCAINE AND TWENTY-FIRST CENTURY IMPERIALISM Oliver Villar ABSTRACT For Colombia, cocaine is a product that is sold for profit in the United States. Mainstream political economy, let alone the other social sciences, has little to say about the process of extraction of surplus value in the production and distribution of cocaine, in other words, how cocaine is exploited for profit. The paper argues that the conventional framework, which locates profits generated from the cocaine trade in an economic model of crime shields a much deeper reality than simply ‘money laundering’ as a ‘legal problem.’ The central argument is that the cocaine trade in general, and the cocaine economy in particular, are a vital aspect of U.S. imperialism in the Colombian economic system. The paper tackles a critical problem: the place of cocaine in the re-colonization of Colombia – defined as ‘narcocolonialism’ – and the implications of the cocaine trade generally for U.S. imperialism in this context. The paper evaluates selected literature on the Colombian cocaine trade and offers an alternative framework underpinned by a political economy analysis drawn from Marx and Lenin showing that cocaine functions as an ‘imperial commodity’ – a commodity Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 97–128 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24003-9

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for which there exists a lucrative market and profit-making opportunity. It is also a means of capital accumulation by what could be termed, Colombia’s comprador ‘narcobourgeoisie;’ dependent on U.S. imperialism. It is hoped that by analyzing cocaine with a Marxist interpretation and political economy approach, then future developments in understanding drugs in Colombia’s complex political economy may be anticipated.

1. INTRODUCTION For Colombia, cocaine is a product that is sold for profit in the United States. Mainstream political economy, let alone the other social sciences, has little to say about the process of extraction of surplus value in the production and distribution of cocaine, in other words, how cocaine is exploited for profit. Rather its surplus value is analyzed as ‘money laundering,’1 a ‘process’ associated with globalization, market integration, and technological innovation that have reshaped both the ‘formal’ and ‘informal’ economies (or ‘illegal,’ ‘underground’ economies) of developed and developing countries and of the international economy itself (Hinterseer, 2002). Investigative journalists draw attention to the ‘global’ rise of ‘organized crime’ and the ‘Mafia.’ In a nutshell, the profits generated from the cocaine trade are seen as criminal finance derived from ‘money laundering’ – the financial side of virtually all crime for profit. But Colombian cocaine is a much more complicated process. The drug trade, in general, is as old as the ‘Great Powers’ of Spain and Britain. Long before processed cocaine, the ‘Great Power’ of Spain made great fortunes from the commercial exploitation of the coca plant. Spanish chronicler, Pedro Cieza de Leon, wrote: ‘There has never been in the whole world a plant or root or any growing thing that bears and yields every year as this does y or that is so highly valued’ (Hargreaves, 1992, p. 42). The advantages of preserving coca were realized in 1573 when the colonizers taxed the ‘sinful’ commodity. Another chronicler, Hernando de Santillan wrote: ‘Down there [in the coca plantations] there is one disease worse than all the rest: the unrestrained greed of the Spaniards’ (ibid ). In the late 1800s, North American missionaries on the other corner of the globe lamented the moral and social degeneration wrought by the British colonial opium trade (Bertram, Blachman, Sharpe, & Andreas, 1996). ‘One Chinaman was both producer and consumer, and worth two Indians and four Malays, in value to the state’ (Turnbull, 1975, pp. 109–110). Sir Cecil Beadon (1872, p. 10), commenting on Indian finances in 1871 when the

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Indian government was making £9,000,000 annually from opium, pointedly observed: Indian finances are in this position that, in a majority of years, you have very serious deficits, and you are constantly borrowing y . Shall we sacrifice the whole or any portion of the opium duty? And it seems to me that the present state of the Indian finances is such as to prevent us giving any answer but one to that question-that we cannot give up any of the opium revenue; we cannot afford to do so.

Carl Trocki (1990) argues that the decline of the British Empire might have even begun when the British left the opium business. Like nineteenth century British imperialism in China, India, and Singapore with opium, is cocaine today a vital aspect of twenty-first century U.S. imperialism in the Colombian economic system in its capitalist form? Since the Spanish conquistadores, the region’s economies have been shaped by the demands of foreign markets. From silver and gold in the Spanish era, to the rubber, cotton, tin, and sugar booms of the past century, the rise and fall of world demand for primary commodities has determined the fate of the Colombian people (Mintz, 1989; Kawell, 1989). Cocaine has resulted in a greater degree of regional market integration and incorporation of Colombia into the world market economy than for any previous export commodity (Rabine, 1989).2 Cocaine is the latest manifestation of a centuries-old phenomenon of Colombian dependence on the production of export commodities for foreign consumption and imperialist conquest for profit (see Gibson, 2001; Hargreaves, 1992; Mortimer, 1974). Too much literature on Colombia’s political economy has neglected this historical aspect of cocaine. That is not to say cocaine is at the center of everything in Colombia, only that the political economy of cocaine, within Colombia’s political economy, has been important to the social, economic, political, even cultural, development of the country. Like the nineteenth century British colonies linked to the opium trade, it is impossible to read Colombian archival records of twentieth century U.S. imperialism without encountering coca and cocaine over and over. The statistics and facts show it to have been ubiquitous at least since the ‘cocaine decade’ between 1980 and 1989. Such a factor cannot be ignored or denied if we are to advance our understanding of class and imperialism, as a force in history, that has shaped the social, political, and economic order of the present unipolar world. For centuries, the peculiar economic activities of the world’s ruling classes using underhand methods were understood or dismissed as simply ‘bootlegging.’ Can the process of extracting the surplus value of cocaine be understood entirely on the basis of ‘money laundering?’ As the point of analysis, ‘money

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laundering’ addresses illegal money generated from the cocaine trade as living in ‘one world’ only, an area of the capitalist economy where unlawful economic activity occurs, and what stands between society and this ‘underworld,’ is the law, which divides economic activity into acceptable (legal) and unacceptable (illegal) forms of conduct. With increasing ‘globalization,’ $2 trillion a day is being ‘laundered’ through capitalism’s international mode of circulation, according to a United Nations report (The Internal Auditor, 1998). Are members of the ‘underworld’ truly the sole beneficiaries? Marx’s method of analysis – the concrete analysis of concrete situations in their historical context and from a class perspective – combined with Lenin’s analysis in Imperialism: The Highest Stage of Capitalism (1917) are imperative for understanding Colombian cocaine as a commodity. Lenin showed how the law of capitalist development manifests itself, and how advanced capitalist countries draw the rest of the world into their orbit through the mechanism of imperialism. Capitalism creates rich and poor nations just as it creates rich and poor within each nation by, (1) increasing the concentration of production and creating monopolies, (2) raising the importance of the export of capital above the export of goods, (3) dividing the world among associations of capitalist firms, and (4) dividing the world between the ‘great’ capitalist powers. Similar to the colonial opium trade of imperial Britain as documented by historians, the Colombian cocaine trade sustains dominant political and economic interests through imperialism. Throughout the ‘cocaine decade’ (using the time frame 1980–1989), the global drug trade centered on the United States drew Colombia towards production as an economic relation. The cocaine trade created rich and poor Colombians, as well as rich and poor North Americans (Inter-American Development Bank (IADB), 2001; Knoester, 1998).3 The increasing concentration of production, which saw the creation (and later ‘destruction’) of Colombian drug cartels, abetted the rise of corporate finance capital. The growth of the cocaine trade made cocaine Colombia’s premier ‘illicit’ export commodity. However, most of the profits went to the USA, not Colombia. The income divided among the capitalist enterprises involved favored the United States. As real, although tenuous, as the link between U.S. imperialism and the Colombian cocaine trade may be, proving this is not the intention of the paper. The intention is to move discussion on the subject beyond its conventional understanding. The paper argues that the conventional framework, which locates profits generated from the cocaine trade in an economic model of crime shields a much deeper reality than simply ‘money laundering’ as a ‘legal problem,’ where professional criminals outsmart

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resource-superior authorities and the law. The paper also argues that in order to understand this phenomenon, it is necessary to apply Marx’s argument that economic activity is social and the economic base of the capitalist system is the means of production, and further, those production relations, depend upon the stage of development of the material productive forces of society. From this perspective, bourgeois law is part of the capitalist superstructure (the legal institutions and its drug policies, for example) reflecting its economic base (allowing the cocaine means of production to thrive in both the ‘legal’ and ‘illegal’ world). Moreover, the use of various methods and instruments to shield drug trafficking activities are common practice. The central argument will be that the cocaine trade in general, and the cocaine economy in particular, are a vital aspect of U.S. imperialism in the Colombian economic system. The paper tackles a critical problem: the place of cocaine in the recolonization of Colombia – defined here as ‘narcocolonialism’ – and the implications of the cocaine trade generally for U.S. imperialism in this context. As an unexplained and difficult phenomena to examine and with increasingly outdated empirical evidence available, ‘re-colonization’ and ‘imperialism’ is, therefore, used interchangeably to ‘fill the gap.’ The paper evaluates selected literature on the Colombian cocaine trade and offers an alternative framework underpinned by a political economy analysis drawn from Marx and Lenin showing that cocaine functions as an ‘imperial commodity’ – a commodity for which there exists a lucrative market and profitmaking opportunity. It is also a means of capital accumulation by what could be termed, Colombia’s comprador ‘narcobourgeoisie;’ dependent on U.S. imperialism. The sections which follow, show how the economic development of cocaine production and distribution in Colombia drew the country into the orbit of imperialism and, consequently, towards ‘re-colonization’ by the United States, through a ‘narcoeconomy,’ and a Colombian ‘dependency’ on U.S. capital and the export of cocaine. It is hoped that by analyzing cocaine with a Marxist interpretation and political economy approach, future developments in understanding drugs in Colombia’s complex political economy may then be anticipated.

2. TOWARDS COCAINE PRODUCTION Mainstream economic discussions of illegal drug production are based almost entirely on crime, and, consequently, ‘money laundering.’ It is not that

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the existing economic literature ignores drug production. It ignores class as the point of analyzing drug production as an economic activity that, in Colombia’s case, is also social whether an economic class exploits cocaine for profit. In the interest of political economy, one thing is generally acknowledged, however. Among Bolivia, Peru, and Colombia of the Andean coca-growing zone ‘Crystal Triangle,’ only Colombia, has succeeded in developing very sophisticated drug cartels and international marketing networks (Thoumi, 2003). How did this develop? The debt crisis of the 1970s and 1980s in Latin America involved a drastic balance of payments and external crises, a sharp increase in unemployment, and a decline in national incomes. For Colombia, what became known as the ‘cocaine decade’ of the 1980s (officially termed the ‘lost decade’), was the beginning of stable economic performance with an increase of drug trafficking activity, despite a history of civil war in the country.4 An ambitious young Colombian from the outskirts of Medellin named Pablo Escobar Gaviria, became the most successful of the narcotics entrepreneurs. Prior to venturing into the commercialization of cocaine, he was a tombstone thief and dealer in stolen vehicles. While other traffickers remained immersed in the coastal marijuana trade, Escobar with his associates established contacts with coca producers in Bolivia and Peru. Escobar was uniquely positioned to substitute cocaine for marijuana as Colombia’s growing premier illicit export commodity (Salazar & Jaramillo, 1992). The Colombian cocaine trade expanded rapidly. The capos (the heads of large drug-trafficking clans) began to organize meetings to centralize production, distribution, and commercialization of the drug, and to establish large-scale transportation systems and routes. Those who secured control of trade routes to the Untied States became cocaine’s monopolists (ibid ). Escobar perfected the cocaine-refining technology and developed expertize in cocaine distribution. A former U.S. Central Intelligence Agency (CIA) operative named Trenton Parker has alleged that the CIA set up two preliminary meetings during which ‘various Colombian drug dealers’ organized into a drug trafficking cartel. The first occurred with twenty of the biggest cocaine dealers in Colombia present. The second meeting was held at the Hotel International Medellin attended by two hundred drug dealers. The Medellin Cartel was established in December 1981 (Stich, 2001). A paramilitary organization called Muerte a los Secuestradores (Death to Kidnappers or MAS) was established to assassinate leftists, trade unionists, civil rights activists, peasants collaborating with left-wing guerrillas and members of the Union Patriotica (UP) – the civilian arm of Colombia’s largest Marxist rebel

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organization, Fuerzas Armadas Revolucionarias de Colombia (Revolutionary Armed Forces of Colombia or FARC). MAS members in the Colombian military liaised with the drug mafia and the army (Lee, 1998; Scott & Marshall, 1998). Israeli and British mercenaries, paid with drug money, organized a death squad paramilitary school. Carlos Castan˜o, the future leader of MAS’s successor, Autodefensas Unidas de Colombia (United Self Defence Forces of Colombia or AUC), was an early trainee (Scott, 2003). Another former CIA operative, Gunther Russbacher, has made similar allegations concerning the CIA’s role in establishing the Medellin Cartel. Russbacher attended the CIA initiated 1981 meetings (Stich, 2001). According to Russbacher, ‘At least half a dozen former CIA, Office of Strategic Services (OSS), and Drug Enforcement Administration (DEA) personnel gave me many hours of statements over a three year period concerning Central and South America drug operations in which U.S. intelligence agencies and the [Israeli] Mossad participated’ (ibid; The Telegraph, 1990; Contreras & Gavarito, 2002). Recent allegations published by former CIA operatives, Kenneth C. Bucchi and Al Martin, detail covert drug trafficking operations involving the CIA. Bucchi tells of a third meeting in Zurich, Switzerland in August 1984, linked to a covert operation named Pseudo Miranda (Bucchi, 2000; Martin, 2002).5 According to Bucchi, Vice-President George Bush and CIA Director William Casey were behind Operation Pseudo Miranda (OPM) (Bucchi, 2000). The aim was to centralize the cocaine trade in Colombia by neutralizing Bolivia and Peru as rivals (ibid ). Bucchi attended the Zurich meeting and was tactical commander of OPM. In an interview on CNN (see ‘‘The Drug War: Where Should the Battle Lines Be Drawn?’’, 2001), he stated: We could save a lot of money if the government just went to Colombia and asked, ‘How much for all the cocaine?’ It’s not that farcical. The cost would be tremendous, but it would still be less than what we are spending now for the Drug War. But then we would not be able to justify giving weapons to governments. If we bought it all, the drug dealers would have the same amount of money as the people in power. The CIA doesn’t want leftist guerrillas or Pablo Escobar’s having the same power as the people they help put in power.6

The Medellin Cartel systematically outmaneuvered its competitors, particularly the Florida based Cuban mafia and others involved in the trade (Bagley, 1988). By eliminating these middlemen and installing their own, the Colombians not only improved their profit margins, but also disposed of many Cuban-American informants working with the CIA and other U.S. law enforcement agencies, thereby lowering the risk (ibid ).

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The Medellin’s cocaine traders gained a reputation as ‘violent thugs,’ whose leader, Pablo Escobar, would stop at nothing to maintain control of the market, including mounting a military campaign against the Colombian State. For the urban poor, ‘El Patron,’ as Escobar became known, had popular appeal with his defiant ‘Robin Hood’ image (Frontline, 1997).7 In contrast, rival narcotics traffickers from Cali, consolidated their share of the market through a management and marketing strategy (Salazar & Jaramillo, 1992). As the United States government pursued the Medellin Cartel, the primary source of raw coca and cocaine paste was Bolivian. Bolivia enjoyed a near monopoly in coca production – 80 percent of the world’s cocaine came from this Andean nation in the early half of the 1980s (Cockburn & St. Clair, 1998). Stephen Crittenden, a CIA veteran of Southeast Asia and Latin America, has alleged that the Bolivian Air Force flew numerous CIA flights destined for the United States. According to Crittenden, the CIA’s airlines, Southern Air Transport and Evergreen, distributed cocaine for the DEA as well. In the U.S., Colombian and Bolivian drug cartel figures landed their Cessna Citations and Lear jets at Marana airport, Arizona (ibid; Stich, 2001; Robbins, 1988).8 Salomon Kalmonovitz, an economist from Colombia’s Central Bank, observed that, ‘‘cocaine stopped the balance of payments from collapsing, which would have pushed us into the spiral of hyper-devaluation and hyperinflation that shook most of the rest of the continent, for which the 1980s were a ‘lost decade’’’ (Strong, 1995, p. 184). The ‘cocaine decade’ demonstrated the dynamic and ‘imperialistic’ nature of the drug trade driven by apparently ‘ruling class interests’ in the USA. With the establishment of the drug cartels, coca was exploited, reinforcing existing economic trends generated by the capitalist system with repercussions reaching beyond the ‘Crystal Triangle’ to the whole of South America and indeed the entire Western Hemisphere (Smith & Thongtham, 1992). Colombia became dependent on the export of cocaine.

3. TOWARDS RE-COLONIZATION The ‘cocaine decade’ drew Colombia into the orbit of the global drug trade, and in particular, towards cocaine production. According to a United Nations report, the global drug trade is a ‘self-generating engine’ of economic growth shaping the international economy despite drug seizures and interdiction measures. The report states: ‘Drug traffickers introduce new

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products into an untapped market, buyers are found, and once users become addicted, a minimum level of demand is virtually guaranteed’ (United Nations Office for Drug Control and Crime Prevention (UNDCEP), 1994). The UNDCEP notes the drug trade ‘has been characterized by a trend towards globalization and proliferation of trafficking routes’ (ibid ). The ‘trends,’ associated with ‘globalization’ and market integration noted above, indicate that by entering the global drug trade with cocaine, Colombia was effectively driven into the orbit of imperialism. The ‘self-generating engine’ of the global drug trade, as described by the UN, traces back to the United States. Involved in this economic relation are two main classes in Colombia. The poor campesino (peasant) and the wealthy compradore landlord, our main focus. The compradore is directly involved through ownership of the cocaine means of production (farms on which cocaine is grown, cocaine processing plants), exchange (safe houses, travel agencies, contraband, real estate, front companies), and distribution (routes and networks, and conveyances used to transport narcotics) (Woods, 1998).9 The poor campesino has no choice but to grow coca in order to survive but is indirectly involved. The process of extraction in the surplus value of cocaine begins with the exploitation of the campesino. Specifically, a powerful strata of the comprador class is the ‘narcobourgeoisie.’ Nazih Richani describes this class as an emerging social group of drug traffickers who not only managed to accumulate vast economic resources by investing in the ‘legal economy,’ but who struggled to legitimate themselves politically – moving from being ‘a class in itself to a class for itself,’ that is, conscious of its common class and political interests (Richani, 2002). The narcobourgeoisie are owners of economically significant means of production and the extractors of considerable surplus from the peasantry and wageworkers including those working in their processing plants. They occupy the commanding economic position in the illicit drug industry (ibid, p. 181, n. 54) and arguably in the whole Colombian economy. The secretive and dangerous nature of the cocaine trade makes it difficult to accurately calculate the size of the industry and its economy. The existing available data derives from secondary sources that only provide approximations and not exact figures making any evaluation on the size of the ‘cocaine economy’ a debatable topic. This is due to the conventional framework, which identifies cocaine, not with imperialism, but with ‘organized crime,’ with the ‘Mafia’ (which according to former agents of the imperial State were organized by U.S. imperialism), or, to use the official-diplomatic terminology properly, with ‘narcoterrorists.’ Putting an end to the productive forces of the drug trade has never been the goal of imperialism (see, e.g.,

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McCoy, 2003; Valentine, 2004; Scott, 2003). If material productive forces for cocaine production exist, one can see how fighting ‘crime’ at the superstructural level is not enough to deter the narcobourgeoisie, its lucrative cocaine market in the United States, and its profit-making opportunities globally. Francisco Thoumi (1995, p. 95) argues that Colombia has an ‘underground economy’ where differences between ‘legal’ and ‘illegal’ income appear not to result in a black and white division, but rather in a continuum of gray. Hernando De Soto (1986) (once an advisor to former President of Peru Alberto Fujimori), in his well known study of Peru’s ‘underground economy,’ argues that there are ‘good’ and ‘bad’ laws that regulate and control economic activity. From this ‘underground-informal economic’ perspective, ‘individuals’ who break ‘bad’ laws in their economic endeavors may nevertheless generate ‘good’ illegal income. Economic activity that breaks ‘good’ laws creates ‘bad’ income. This ‘illegal’ economy is defined as part of the legal one’s ‘legitimate’ economic activities, but where activity is performed illegally because of ‘bad’ laws and government regulations that make legal activity nonviable because of the expense and regulatory burden incurred by many low-income entrepreneurs. De Soto (1989, pp. xvii–xxi) explains low-income ‘entrepreneurs’ lose out in this ‘process’ because they are excluded by the ‘legal system.’ The conventional framework ignores the class basis of the cocaine trade but suggests quite sympathetically that low-income ‘entrepreneurs’ should be ‘legally’ included in the process of extraction in the surplus value of cocaine. From a Marxist perspective, laws are made by the ruling class for the ruling class and individuals from this class go largely unpunished if they generate any type of revenue for their economy. ‘Low-income entrepreneurs’ must be punished if the ruling classes wish to remain the main beneficiaries of the cocaine trade. In a ‘cocaine economy,’ they are above concerns about ‘good’ or ‘bad’ laws or sources of income. Colombian ‘democracy’ is clearly an unusual ‘process’ and does not constitute ‘normal’ liberal economic development. The striking continuity of economic performance by the Colombian ruling class demonstrates a considerable amount of ‘good’ but ‘illegitimate’ capital for corrupt ‘individuals’ to accumulate in an apparent ‘liberal democracy.’ It also demonstrates how economic activity is social and the economic base of Colombia is its means of production where cocaine plays a vital part in the process. Many liberal economists like Thoumi and De Soto agree, the ‘underground economy’ is very important in Latin America, but what it ultimately achieves politically; it does so economically through capitalist growth – namely the cocaine trade.

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There is a serious methodological problem when a quantitative assessment of cocaine in Colombian economics or finance is attempted. The ‘illegality’ of the drug business means that the collection of data may be speculative and politically motivated. RAND Corporation economist Peter Reuter (1985) notes: Officials often use the drug issue to build public support for their own agendas. Every statistic on drugs-prices, volume, earnings, arrests, numbers of users and addicts must be interpreted in this light. But although drug statistics are imprecise, they can point toward reasonable generalizations.

Annual profits from the drug trade are estimated to be $500 billion; $250 billion (50 percent) is estimated to go to U.S. banks and is not hard to monitor. The U.S. Federal Reserve System registers any deposit over $10,000 (U.S. Department of Treasury, 2000). Colombia’s Central Bank estimates only $76 billion (15 percent) goes to Colombia; less than half of U.S. annual profits from the drug trade and 30 percent of Colombia’s total wealth (see http://www.unam.mx/cronica/1996/a8096/int006.html).10 Conservatively, the total revenue for the commercial export of cocaine for Colombia is estimated to be $3.5 billion (close to $3.75 billion made from oil and more than two and a half times the earnings made from coffee), while North America’s gross revenue from sales to consumers is $11 billion (Livingstone, 2003; Anonymous, 2002).11 By any standard, Colombia’s premier ‘illicit’ export commodity is pivotal to the business partnership of the comprador and his associates in the United States. ‘Cocaine has created wealth and jobs, ‘‘It has provided the vital capital for economic expansion and in that sense has been an undeniable boon for Colombia’’’ (Strong, 1995, p. 185). There is conclusive evidence that Latin America exported large quantities of illegal drugs to the United States, Canada, and Europe over the past 25 years, creating a massive cocaine economy in the West. Cocaine production has increased so much that it has become the most important economic activity in the ‘Crystal Triangle’ (Henman, 1990). With its revelations of CIA drug trafficking, the ‘Iran-Contra scandal’ partially exposed the economic interests of the imperial–comprador relationship being discussed here (Scott & Marshall, 1998; The Kerry Report, 1989). Colombian dependency on cocaine was a ‘turning point’ for Colombian capitalist development. It has implications for U.S. imperialism generally because it makes economic development rather ‘unique’ if compared with a ‘normal’ Latin American country. It has a ‘narcoimperialist’ qualitative feature that could be defined as ‘narcocolonialism.’ It aims to foster a deeper

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Latin American dependency through a ‘re-colonization’ process of traditionally imperialist ‘illegal’ means. This merits a closer look.

4. TOWARDS A NARCOECONOMY The place of cocaine in the re-colonization process carries with it ‘new’ or ‘unusual’ qualitative features of U.S. imperialism in Colombia. With Colombia’s move towards cocaine production, the imperial–comprador partnership made profound changes in the structure of the Colombian economy, which is why the ‘cocaine decade’ must be seen as a historically significant event. The structure of Colombian capital generated from cocaine (or ‘narco-capital’) established a ‘narcoeconomy.’ The Colombian narcoeconomy differs from the ‘illegal-informal-or-underground’ economies described by liberal economists because cocaine is pervasive and institutionalized into almost every aspect of Colombian life (U.S. General Accounting Office (USGPO), 1999, p. 15).12 Colombia does not have ‘two-economies’ but a narcoeconomy shaped by U.S. imperialism. The narcoeconomy may not be shaping the country’s political economy, but all economic life in Colombia, both legal (oil, coal, coffee) and illegal (drugs, arms, contraband), is dependent on cocaine, allowing that commodity to shape Colombia’s political economy socially and politically as no other commodity before it. The Colombian narcoeconomy is an ‘imperialist-generated engine’ of the ‘Crystal Triangle,’ not a self-generating one, and it supplies 100 percent of the cocaine consumed on North American streets (Lee III, 2002). Surging U.S. demand for cocaine in the 1980s saw the opening of Colombia to a ‘cartel-system narcoeconomy.’ From 1970 to 1987, Peruvian coca production rose from 15,000 to 191,000 tons while Bolivia’s production rate kept pace. Indicative of the rapid economic impact of processed cocaine in Colombia, the number of ‘seized’ laboratories recorded by the U.S. government rose from 275 in 1984 to 725 the following year (McCoy, 2003, p. 443). By the late 1980s, cocaine grew into a major export commodity organized by drug cartels and institutionalized into the Colombian economy, and hence, into legitimate Inter-American economic relations (Lee & Clawson, 1998). The cartel system was a regionally based grouping of different trafficking organizations that coalesced to rationalize the system of production, smuggling, and marketing of cocaine (Lee, 2002). Management was left to contacts in the national military intelligence network, or, according to former DEA and CIA operatives, to advisors of the CIA (see Stich, 1999; Stich, 2001; Levine & Kavanau-Levine, 1993; Levine, 1990; Bucchi, 2000;

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Valentine, 2004; Castillo & Harmon, 1994; Cockburn, 1987; Collins, 1993), depending on the importance of matters, such as details on transportation, exchange, distribution, and policy issues. The aim was to maximize export volumes and profits while reducing risk to each participant. This included various co-financing and co-insurance schemes, as well as the pooling of certain business services – for instance, financial advisors, lawyers, counterintelligence and security operatives, and assassins. The major participating organizations either owned trafficking assets such as planes, cocaine laboratories, shipping companies, even submarines, or enjoyed exclusive access to them (see Lee & Clawson, 1998; The Drug Trade in Colombia: A Threat Assessment, 2002). The principal coalitions centered in Medellin and Cali at one time controlled 80 percent or more of the cocaine exported from Colombia. (Other quasi-independent groupings centered in Bogota´ or the Atlantic Coast maintained loose associations with Medellin and Cali and tended to follow their lead on policy issues). At their zenith around the late 1980s, the cartels earned combined annual revenues of at least $6 billion, of which $3–4 billion was profit, and coordinated a trafficking infrastructure of 8,000–10,000 skilled workers and professionals (Lee & Clawson, 1998; Castillo, 1996; Zabludoff, 1997). This represented an enormous concentration of economic power in this sector of the narcobourgeoisie. To some extent this was directed power; a leadership structure of sorts existed within Colombia’s cartel-system narcoeconomy, exercised by the heads of the dominant trafficking organizations in each coalition. This included Pablo Escobar Gaviria in Medellin and the Rodriguez–Orejuela brothers (Gilberto and Miguel) in Cali. Cartel leaders played a vital role in the national strategy of Colombia’s narcoeconomy and its representation in mainstream politics. The cartel system, in other words, was not simply a group of gangsters who ran around shooting people; it was a system of organization for Colombian cocaine, crucial for the economic stability of the nation dependent on its export. For the cartel system, Colombia’s ongoing civil war between the state and the FARC, Latin America’s longest running Marxist insurgency, represented and represents an economic disaster, a threat to the ‘smooth’ functioning of Colombian capitalism and foreign investment. FARC is largely a peasant army and in areas where the guerrillas exercise political and military control, all capitalist life is hijacked and exploited for their revolutionary campaign. All businesses in the liberated zones, including cocaine, are taxed accordingly (Goff, 2002).13 The narcobourgeoise capitalized on Colombia’s long tradition of smuggling and trading in contraband goods dating back to Spanish colonial rule.

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It industrialized the trafficking process to include large-scale smuggling by boats, planes, and containers. Cocaine could then transform itself into a lucrative commercial commodity and center of entrepreneurial activity. This was truly the world’s first ‘industrial revolution’ in cocaine. The narcobourgeoisie had to rely heavily on the drug cartels. Drug traffickers and ‘money-laundering specialists’ had almost free rein to deposit their funds into banks. Under pressure from the U.S. Money Laundering Control Act of 1986, the narcobourgeoisie was forced to act. Signs of a major restructure and possible amalgamation in the narcoeconomy forced many Colombian traffickers to move almost completely to contracted ‘money laundering services’ from ‘unrelated organizations’ (Grosse, 2001). In contrast to the model of organized crime, which emphasizes a hierarchical system of centralized control, the cartel system provided an ‘unusual’ degree of order and control in terms of structure and organization. When the U.S. backed Colombian State moved successfully against the Medellin Cartel the narcobourgeoisie barely flinched. The narcobourgeoisie’s existence is linked to a moment in Colombia’s development of productive forces (including the drug cartel, new methods and technology, innovations in exchange and distribution), which occurred sometime in the early period of the ‘cocaine decade.’14 Narcocolonialism institutionalized the political and economic preconditions for the cocaine trade, permitting the ‘invisible hand’ of imperialism to reign. The demise of the Medellin Cartel did not affect the overlapping class interests between the narcobourgeoisie, sectors of the ruling class, and the military, particularly in regions where the FARC contested Medellin’s control: in Middle Magdalena, Uraba, North Santander, Bolivar, Putumayo, Antioquia, Cauca, and Caqueta. Business analysts and management consultants emphasize that networks are far superior to traditional hierarchies in terms of organizational effectiveness, especially when it comes to innovation and teamwork (Williams, 1998). Without the consent of the imperial–comprador partnership, the cartel system created a network. Network structures are resistant to disruption and have a degree of resilience that other forms of organization lack. The cartel system implied considerable coordination and control of cocaine trafficking functions but relied too heavily on the industry’s representatives. This was a problem for sections of the narcobourgeoisie loyal to U.S. imperialism. As an instrument of the comprador bourgeoisie, the Colombian State took appropriate measures to ensure a change in the organization of cocaine production. The imperial–comprador partnership turned to the Cali Cartel.

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With the ‘destruction’ of the cartel-system narcoeconomy, the Colombian cocaine industry was decentralized into as many as 80–300 (according to widely varying official estimates) distinct private enterprises (Los Nuevos Narcos, 2001). Its restructure did not hurt cocaine exports (see Lee, 2002) but enabled businesses including corporations to find their place in the sun without taking too many risks, by adopting a management strategy of moving into ‘legal’ business activities, even negotiating with Mexican organizations to hand over parts of their export networks to the United States. One such organization that emerged from this arrangement is the Henao Montoya organization, with which the AUC, an umbrella right-wing paramilitary network, is affiliated (see DEA, Traffickers from Colombia http://www.usdoj.gov/dea/traffickers/colombia/htm; Ricardo Rocha http:// www.odccp.org:80/colombia/rocha.html).15 From an imperialist perspective, Colombia is the most advanced cocaine producing country in the Crystal Triangle with the best opportunities. Two factors made this possible, (1) the institutionalization of the cocaine trade in Colombia, and (2) Colombia’s proximity to neighboring Crystal Triangle countries Peru and Bolivia; service country Panama; transit countries Mexico and the Caribbean (Jamaica and the Dominican Republic); and consumer and distribution countries the U.S. and Spain (as a gateway for smuggling operations in Europe). The Medellin Cartel failed to take advantage of the imperial–comprador partnership. It attempted to establish monopoly control over the cocaine trade without taking U.S. imperialism into consideration.16 The idea that the Cali Cartel posed a threat to the Colombian State is an official myth.17 The Cali Cartel assisted State efforts to liquidate the Medellin Cartel from the cocaine trade (Carrigan, 2002; Lee & Clawson, 1998; Bowden, 2000; The Washington Post, 1996). The various components of the industry were then left for the Cali Cartel to link together as a corporate style transnational trafficking organization with opportunities to branch out into other markets such as heroin and amphetamines.18 According to a United Nations report in 1994 (a year after Pablo Escobar’s death and the end to the cartel system of cocaine production), In spite of the rise of licit transnational corporations in developing countries, the Cali Cartel remains, in effect, the developing countries most successful transnational corporation. That is not only a comment about the importance of the drug-trafficking industry, but is also a reflection of the continued economic problems that face developing countries. In that connection, some researchers credit the Colombian cartels and their huge monetary base with providing much of the economic stability and even prosperity that Colombia enjoyed throughout the 1980s and early 1990s. (Williams, 1994)

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The ‘post-cartel narcoeconomy’ (1994 to the present) system involves a complex network of banks, corporations and professionals, with offices in New York, Miami, the Caribbean, and throughout Latin America. This rise of ‘licit’ transnational corporations coincided with the rise of a new kind of drug trafficker, the ‘white collar’ trafficker in the era of ‘globalization,’ market integration, and technological innovation. Colombian dependence on cocaine for export was intimately linked with the export of capital, which dictated close contact with the United States. The U.S. and Colombia now shared a ‘mutual-dependency’ on the export of cocaine and an interest in preserving the existing status quo of class structure and economic relations. Narco-capital acquired continually greater proportions and assumed greater significance. As is well documented, most of the profits went to the United States as ‘illegal’ money to be laundered in CIA-linked banks. These banks include the Bank of Credit and Commerce International (BCCI); Nugan Hand Bank; J. P. Morgan; Chase Manhattan; World Finance Corporation; Castle Bank of the Bahamas; Citibank; Citicorp; Bank of America; and the Federal Reserve Bank (Stich, 2001; Scott, 2003; Grosse, 2001; Ehlers, 1998; Petras, 2001; Dwyer, 1998). Christian de Brie describes the complex network of banks, corporations and professionals as a ‘service industry in which the Americans have a considerable lead over their competitors, not only in know-how, but also in the vast financial and logistical resources they are able to make available to their multinationals; these include the secret services of the world’s most powerful state apparatus (i.e. the CIA and other U.S. intelligence services), which, with the Cold War over, have moved into economic warfare.’ De Brie lists a number of U.S. corporations from the Fortune 500 he considers experts in the matter: Lockheed Martin, Boeing, IBM, General Motors, Exxon, General Electric, and Texaco (De Brie, 2001; De Brie & de Maillard, 2000). Michael Ruppert concludes that there is an inextricable relationship between the CIA and Wall Street in this arrangement. Since Clark Clifford (who wrote the U.S. National Security Act in 1947, which established the CIA), a number of senior CIA officials have sat on the boards of the largest, richest and most powerful corporations in the United States (Ruppert, 2001; Citigroup, 2001; The Narco News Bulletin, 2000; Federation of American Scientists, 1992). Criminologists William J. Chambliss and Gary W. Potter describe this imperial phenonema as ‘state-organized crime.’ (Chambliss, 1988; Potter, Eastern Kentucky University). As noted earlier, the annual profits from the drug trade are estimated to be $500 billion; U.S. banks handle half. Stanley Morris, Director of the Financial Crimes Enforcement Network suggests that the smart thing to do,

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‘the smart business decision’ with drug money, is to ‘put it in New York’ (Sabbag, 1997). Catherine Austin Fitts (http://www.solari.com) concludes that $250 to $300 billion from the importation of drugs goes to Florida, New York, Texas, and California. These ‘money-laundering’ states are those which provide 80 percent of all presidential campaign funds (Ruppert, 1999).19 Fitts states that corporations trading on Wall Street have stock values that are based upon annual net profits. Known as ‘price earnings’ or ‘the pop,’ Fitts explains that it is a word used in Wall Street to describe the multiple of income at which a stock trades (stock value). The multiplier effect in stock values can be a factor of thirty. She gives the figure (x6) of $250 billion laundered resulting in an estimated $1.5 trillion dollars per year in U.S. cash transactions from the drug trade (http://www.solari.com; Fitts, 2001; Fitts, 1999). Capital accumulated from the drug trade is almost too high and ongoing to control. The ‘cocaine decade’ saw a flooding of the crystalline white powder onto American streets (known as the ‘cocaine epidemic’). Cartels accumulated huge sums of money in a short period of time. Although politically necessary to begin the re-colonization process, the early cartel system was not economically viable for a more ‘competitive’ post-cartel system, where the surplus value of cocaine could be invested into international markets, principally the U.S. market, its banks, and corporations. U.S. banks came into close contact with the cocaine industry and became intermediaries for the narcobourgeoisie by turning narco-capital into ‘legitimate’ bank capital. ‘Money laundering schemes’ involving the CIA and Cali Cartel included the purchase of real estate and corporations and loans amongst other schemes (Stich, 2001; MacGregor, 1993; Richani, 2002).20 Narco-capital fused together with bank capital (industrial capital) is called finance capital, and therefore, the amalgamation of bank capital with the drug trade became a distinctive economic feature of U.S. imperialism in Colombia.21 The U.S. ‘Fortune 500’ benefits from narcocolonialism. The ‘black market peso exchange’ of Colombia’s narcoeconomy eliminates the trade deficit with Colombia (see U.S. Companies Tangle in Web of Drug Dollars, 2000; Zill & Bergman, 2000; Reason, 2001).22 Raymond W. Kelly, a U.S. customs commissioner, suggests the market ‘is the ultimate nexus between crime and commerce, using global trade to mask global money laundering.’ The narcobourgeoisie can exchange U.S. dollars for Colombian pesos, buy American goods for sale back at home which according to U.S. federal officials is worth approximately $5 billion a year, and can direct billions of dollars in narco-capital into ‘legitimate’ commerce and trade (U.S. Companies Tangle in Web of Drug Dollars, 2000). According to Mike Wald,

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who runs a consortium of law enforcement agencies in Florida, ‘This is positive for U.S. business, there is no doubt about it. The Colombian [comprador], if he pays less for his dollars, can buy more goods. That’s a pretty obvious economic fact’ (ibid ). The U.S.-Colombian mutual dependency on cocaine is an economic demonstration of how the cocaine trade is enmeshed in the process bourgeois liberal scholars call ‘globalization’ and Marxists imperialism. The post-cartel system narcoeconomy amalgamated the cocaine trade into the corporate world. By establishing an economic hegemony for ‘criminal’ financial groups in the global economy, U.S. imperialism with its enormous economic and political power, injected and ‘legitimized’ cocaine into the global economy and revolutionized the way of doing business for liberals and agents of corporate globalization through ‘money laundering,’ shaping the ‘legal’ and ‘illegal’ economies of developed and developing countries and of the international economy itself. How does narcocolonialism manifest in Colombia?

5. TOWARDS DEPENDENCY ON U.S. CAPITAL AND THE EXPORT OF COCAINE The process of extraction of the surplus value represented in cocaine by its general economic law (the imperial–comprador partnership) has made profound changes in the structure of Colombian capital, turning huge amounts of profits from the cocaine trade into an ‘unusual’ form of ‘narco-capitalism’ that is organized through a narcoeconomy. From the imperialist perspective, Colombian cocaine must be plundered. The narcoeconomy has impacted the macroeconomic performance of Colombia affecting savings, inflation, and employment, and public debt is close to 54 percent of the Gross National Product (GNP). But the threat of an Argentinean-style collapse is warded off by the strength and competitiveness of cocaine exports.23 Beyond the bulletproof windows of government registered Sports Utility Vehicles (SUVs), outside the gated communities where the bourgeois classes live under siege stands a four-decade peasant based insurgency led by the FARC. Colombian dependency on the export of cocaine must be understood as a negotiated relationship between the compradors and imperialists. Colombia provides American and Colombian capitalists with a cheap labor force and access to narcotics. It is done with the help of paramilitaries and transnational groups linked to big business concerned with drugs, arms, and oil.

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People in Colombia refer to this openly as ‘mega-projects,’ a fairly recent imperialist development. The key to the narcobourgeoisie is not whether they are involved in megaprojects associated with cocaine, but their access to and involvement in the global market which tie them to international capital flows, and, principally, to U.S. capital (for comparative analyses, see Lenin, 1917; Naylor, 1987). U.S. investment in Colombia and its economic growth depends on this. It is the comprador who organizes cocaine production locally and is financially linked to U.S. capital. However, the comprador’s relationship with the imperialists is not merely economic but also political. The historical events in Latin America that facilitated the growth and reproduction of the cocaine trade were the ascendancy of a series of military and civilian regimes committed to ‘free-market’ policies (to name a few examples; Argentina’s military junta of 1976; Bolivia’s ‘Cocaine Revolution’ of 1980; the Nicaraguan ‘Contras;’ Manuel Noriega in Panama; the Honduran military; Alberto Fujimori in Peru; Costa Rica; and the ARENA party of Col. Roberto d’Aubuisson in El Salvador) (see Petras & Morley, 1990; Gugliotta & Leen, 1989; Bagley, 1988; Association d’Etudes Geopolitques des Drogues, 2000; The Kerry Report, 1989). The institutionalization of the cocaine trade in Colombia had a profound impact on the Colombian economy and the social structure of its society creating a powerful transnational class of businessmen and investors (Andreas & Youngers, 1989). As Alfredo Rangel (1998, p. 189) notes, ‘The notorious frequency with which the [paramilitaries] situate themselves where drug dealers are active – or where there are mega-projects such as hydroelectric dams or new highways pushing up land values – indicates that behind paramilitarism there is something other than an altruistic interest in counterinsurgency.’ To protect and secure operations of U.S. capital in Colombia, U.S. imperialism must promote and protect agents of economic operations inside Colombia, one of which is capital accumulation and profit making via drug money laundering banks and U.S. finance capital. But to secure cocaine for American markets, the narcobourgeoisie must rely on large sums of U.S. capital for a counterinsurgency effort under the guise of ‘drugs,’ ‘terrorism,’ or any other pretext, to serve as a justification to secure U.S. imperialism’s own ruling class interests. Behind the rhetoric of fighting drugs and post-September 11th terrorism in Colombia there is a hidden agenda: to secure military victory over FARC and eliminate obstacles to massive U.S. and international investment in mega-projects including mines, dams, roads, and canals for efficient exploitation of Colombia’s rich natural resources (Gedicks, 2002). Automated

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factories with no need for unskilled labor, many of them multinational, relocate to state-declared tax-free zones called ‘industrial parks.’ These developments include several mega-projects that plunder natural and genetic resources: gold, platinum, silver, bauxite, manganese, radioactive cobalt, zinc, chrome, nickel, copper, exotic wood, and large fishing resources (Megaprojects and Neocolonialism in Colombia, 2001; Colombia-Country Profile http://www.nadir.org/nadir/initiativ/agp/free/colombia/colombia.htm). Oil resources in Colombia are as enormous as cocaine. Colombian compradors pronounce: ‘We want to turn this region into a giant enterprise!’ (Colombia-Monthly Report, 1997, p. 4). To secure Colombia’s resources for American markets, the police, military, and paramilitary forces carry out a U.S. led counter-insurgency. The narcobourgeoisie’s interests coincide with those of the rest of the bourgeoisie as a whole, to exploit for profit in a united class front. The counterinsurgent incumbent Colombian State relies upon the support given to it by the exploiting classes: cattlemen, businessmen, agricultural exporters, industrialists, traditional large landowners, the military, and particularly U.S. multinationals. A strategy to take control of territory strategically valuable to economic interests of the imperial–comprador partnership is imperative (Reyes, 1989). Rebel strongholds of the FARC and Colombia’s second largest Marxist insurgency, the National Liberation Army (ELN) contest the counterinsurgency (Murrillo, 2004). One displaced activist from the department of Choco explains, ‘it’s simply a war about land and resources, and the people living in these lands happen to be in the way.’ Right-wing paramilitaries target not only guerrillas but also social, labor, popular, or peasant movements that happen to question the development of mega-projects and the consolidation of economic interests (Corporacion Colectivo de Abogados Jose Alvear Restrepo [Collective Corporation of Lawyers Jose Alvear Restrepo], 2001). A prime objective of the counterinsurgency is establishing and consolidating citadels of capital derived from the cocaine trade. Colombia’s role as the leading supplier of cocaine to the United States and the presence of U.S. multinational investors in the country are important factors in the build-up of U.S. capital in Colombia. AUC paramilitaries serve as U.S. proxies to protect tons of cocaine manufactured and transported off the Pacific coast of southwest Colombia to Mexico for distribution in the United States (Silvestrini, 2004). ‘Technological innovation’ makes surplus value extraction possible (see, for example, Kaihla, 2002; IT Myths, 2003). The process of exploiting coca for cocaine profits generally involves two main steps. The narcotic must be extracted from the coca leaves. Initially the leaves are dried then soaked in a

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solution of sulfuric acid and water. The liquid is drained off from large soaking vats and mixed with an alkaline solution of calcium oxide or sodium carbonate. A thick, alkaloid, whitish fluid is the result. This fluid is mixed with kerosene to take out impurities, and as it settles, the kerosene separates from the top of the mixture. The second stage of processing the mixture is placed into another solution of water and sulfuric acid, producing a clear liquid. Sodium carbonate is again added to the liquid, and a dirty white substance settles from this process-coca paste (Grosse, 2001). The paste is then placed on a fine cloth mesh to allow the liquid to drain off. The coca leaves are run through this process two or three times to ensure that the maximum amount of coca paste is produced. This is the raw material from which cocaine is subsequently distilled and on which campesinos survive.24 The second step is dominated by agents of economic operations who are also connected to the counterinsurgency campaign. In areas under state control, particularly in the north of Colombia, AUC paramilitaries operate freely, in conjunction with the nation-wide intelligence network. They collect the coca paste and deliver it to the facilities, protected by the police or military. In what is known as the ‘shell game’ strategy, sectors of the business elite from the chemical industry provide essential chemicals for processing cocaine through ‘third or fourth level distributors’ (see The Drug Trade in Colombia, 2002; Flounders & Gutierrez, 2003). In areas under guerrilla control, the paramilitaries, like the army and their U.S. ‘advisors,’ are military targets. Traffickers themselves must approach the campesino and pay the price that is demanded. The guerrillas provide the security and enforce a handsome tax. Professional chemists turn the coca paste into cocaine hydrochloride. This requires sophisticated laboratory techniques and industrial volumes of ether, acetone, and hydrochloric acid. According to DEA intelligence, while typically not manufactured in Colombia, essential chemicals required for cocaine processing have become available in vast quantities throughout South America. In Colombia alone, about 4,500 companies are registered to handle these essential chemicals. Colombian chemical companies that have lost their chemical permits for trafficking controlled chemicals have been involved in their purchase and distribution, such as potassium permanganate and n-propyl acetate, diverted for use in cocaine processing (The Drug Trade in Colombia, 2002).25 This final process of refining is extremely corrosive. High-quality containers and expensive processing equipment are needed. Glass or porcelain containers are commonly used to process the coca paste but the latest technology and equipment for the sheer volume of cocaine that is actually

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exported must be anticipated. The paste is first dissolved in acetone and then heated to evaporate the acetone, and hydrochloric acid. From this process a whitish sludge appears. It is then heated by placing light bulbs or other heatgenerating devices above the mixture (Smith & Thongtham, 1992). When it dries, the semi-processed material becomes the crystalline white salt necessary for inhaling-cocaine hydrochloride, ready for packaging and transport for the American market. Cocaine is exported to the United States by air from remote airstrips or by sea from Colombia’s northern and western coasts. Paramilitary helicopters fly to army garrisons to collect the cocaine to be transported to Antioquia and then exported. In the areas to the south of Bolivar and Catatumbo, the helicopters that load the cocaine come from the military bases (Flounders & Gutierrez, 2003, pp. 132–33). Transporting routes change often and are kept secret. In 2000 U.S. President Bill Clinton authorized ‘Plan Colombia,’ a $1.3 billion U.S. package of mostly military assistance (helicopters, planes, and training, a massive chemical and biological warfare effort, as well as electronic surveillance technology) (Storrs & Serafino, 2002; Villar, Cottle, Keys, 2003). Under the legal banner and drug policies of the Colombian plan, Clinton militarized the nation and financed the counterinsurgency (Livingstone, 2003). In 2001 U.S. President George Bush added $550 million renaming it the ‘Andean Initiative’ (Giordano, 2001). Between 1996 and 2001, U.S. military ‘aid’ to Colombia increased fifteen-fold, from $67 million to $1 billion (see U.S. Military and Police Aid http://www.ciponline.org/colombia/ aidprop.htm). During this same period raw coca cultivation grew 150 percent, from 67,200 to 169,800 hectares (1 hectare ¼ 2.471 acres) (Tickner, 2003). A leaked Colombian government document in 2000 estimated that Colombia produced 800–900 tons of cocaine annually, not the 580 tons announced by the U.S. State Department and the DEA (Revista Cambio.com, 2001; Web, 2001). Colombian President Alvaro Uribe Velez and the Bush administration are now working out details for a ‘Plan Colombia II’ that would last until 2009. Uribe has talked up advances in the ‘War on Drugs plus War on terror,’ claiming that U.S. capital injected into Colombia has succeeded in making Colombia a safer country (Anonymous, 2004). For comprador dependence on U.S. imperialism, he is correct, as bourgeois law (particularly U.S.) allows cocaine to be produced in the narcoeconomy with the complicity of Colombia’s legal institutions and fraudulent ‘drug policies.’ The imperial–comprador relationship has established citadels of capital by developing mega-projects, industrial parks, and clandestine infrastructure to

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protect its cocaine means of production, exchange, and distribution. In the countryside land is ‘cleared’ and oil, wood, water, and cash crops are extracted. Communities and neighborhood beaches are replaced with large hotels. In major cities a disciplined, desperate, repressed working class, and peasantry live off starvation wages, without protections or services (Podur & Rozental, 2002). Uribe’s Law 50 has dismantled labor laws and protections of workers rights. Law 100 has privatized social security. According to conservative estimates, in centers of coca crop production like Guaviare, Putumayo, and Caqueta, as much as 50 percent of Colombia’s work force are employed in the cocaine industry (Anonymous, 2002). The Drug Trade (1988) magazine has described it as ‘probably the fastest growing and unquestionably the most profitable’ industry in the world. Ordinary Colombians know where the narcobourgeoisie live, in Bogota´, Medellin, Cali, and Barranquilla, protected by the Colombian State (Leech, 2000). The Colombian ruling class is dependent on U.S. capital for the economic war but also for the political war with which the counterinsurgency is associated, with International Monetary Fund (IMF) structural adjustments, privatization, and the Free Trade Area of the Americas (FTAA) supported by President Uribe. A high level of U.S. capital for the export of cocaine strives to meet its imperial objectives for re-colonization. Meanwhile, the process of imperialism drives workers and peasants into the FARC and the ELN.

6. CONCLUSION: COCAINE AS IMPERIAL COMMODITY Will U.S. imperialism’s current need for oil mean an intensification of the imperial–comprador partnership in Colombia and their mutual dependency on cocaine and other drugs like heroin and amphetamines? Will similar patterns manifest in opium rich Afghanistan where U.S. capital, let alone capitalism, has yet to fully take hold? Cocaine is an imperial commodity that relies on ‘legitimate’ financial institutions for its production and sale, regardless of the bourgeois legislature in place. Commodification makes a lucrative market and profit-making opportunity possible for the narcobourgeoisie. The dominant conventional framework says a lot about the legal and financial problems associated with the investment of drug profits outside of Colombia but says little about the class relationship between the compradors and U.S. imperialism in Colombia.

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Honore de Balzac’s famous quote that ‘behind every great fortune there lay a great crime’ is probably an accurate assessment of the political economy of contemporary Colombia. It is true that both capital and drugs were exported even before the epoch of imperialism. But then it was the practice of mainly one country – England – and it proceeded on a relatively small scale in its colonies. We say that Colombian dependency on U.S. capital and the export of cocaine is typical of ‘narcocolonialism,’ first, because it has now come to play a much more important role than any other export commodity, and, second, because the export of cocaine and narco-capital to the U.S. is both a result and a manifestation of the power of the comprador narcobourgeoisie. Apart from the main purpose of obtaining profits via drug ‘money laundering’ banks and U.S. finance capital, however, the export of capital is an important instrument for expanding and controlling marketing outlets; exploiting a country through a process of re-colonization; and of course, to fight a revolutionary movement. Let us recall the ‘loans’ throughout history in which many regimes around the world (particularly comprador ones in similar circumstances) were given to suppress social insurrections and national liberation struggles. Throughout the ‘cocaine decade,’ the imperial commodity penetrated Colombia’s political economy, intensifying the struggle between the monopoly absentee landlords and landless peasants (the FARC’s main support base). Like the nineteenth century British colonies, Latin America suffered not only from the development of capitalist production, but also from the incompleteness of that development due to a new form of re-colonization. Within this ‘free’ economy, cocaine lent itself to monopoly control. The institutionalization of cocaine into the Colombian social order revealed the drug to be truly an imperial commodity, generating a lucrative market for huge profits in a class system driven by imperialism. The development of the cocaine trade and role of U.S. imperialism in this ‘process’ has been almost totally neglected. Understandably, American historians have not been eager to probe deeply into what must now seem an entirely shameful aspect of the imperial adventure. For similar reasons, mainstream political economy has failed to approach this subject as well. Applying class and imperialism in its historical context to a specific item of private property offers new ways through which to learn about the economic development of Colombia and its premier ‘illegal’ export cocaine; the nature and formation of the Colombian ruling class and State; and their relationship with U.S. imperialism.

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The international bourgeoisie and its organizations seek to disguise the illicit nature of cocaine revenues by introducing them into the stream of state-monopoly capitalism through ‘legitimate’ commerce and finance with their dominant neoliberal free trade policy. From a Marxist perspective, imperialism profits from criminal finance – the financial side of virtually all bourgeois crime for profit, where new qualitative features sometimes ‘unique,’ even ‘unusual,’ have taken form throughout moments in imperial history. The cocaine trade in general, and the cocaine economy in particular, is a vital aspect of U.S. imperialism in the Colombian economic system. This may well be a ‘new’ brand of U.S. imperialism for the twenty-first century, but one with ‘old’ shades of neo-colonial nostalgia.

NOTES 1. The United States Financial Crimes Enforcement Network (FINCEN, 2000, p. 2) describes ‘money laundering’ as the ‘process’ by which criminals or criminal organizations seek to disguise the illicit nature of their proceeds by introducing them into the stream of legitimate commerce and finance. 2. As Peru’s current president Alan Garcia admitted during his first term in office between 1985 and 1990: ‘The only successful transnational enterprise originating in our countries is narcotics trafficking. The most successful effort to achieve Andean integration has been made by the drug traffickers y .’ Quoted in Rabine (1989, p. 94). 3. According to the IADB, 48 percent of Colombian land is owned by wealthy absentee landlords who comprise 1.3 percent of the population. Poor peasants, accounting for 63 percent of the population, own less than 5 percent of the land. Wealth and influence are concentrated in the hands of those with land in Colombia, 42 percent of the arable land is owned by the ‘drug Mafia’ allowing drug traffickers to buy social acceptance in Colombian agribusiness, military defence, and politics. See IADB website http://www.iadb.org/. 4. For analyses of the continuity and success of Colombian macroeconomic policies and the relative economic stability they produced, see Reveiz and Perez (1986) and Garcia (1991). 5. According to Bucchi’s book, in attendance was Bucchi, John Hull (a CIA asset in Costa Rica), a Peruvian drug lord named Luis Porto, and representatives from the Medellin Cartel and ‘La Corporacion’ organization of Bolivia. Bucchi’s book tells of secret meetings with George Bush, William Casey, Medellin Cartel leaders Pablo Escobar, and Fabio Ochoa, Panama’s Manuel Noriega, a CIA agent named Claire George, and mid-level officials from different government agencies that included the DEA, Defense Intelligence Agency (DIA), Federal Bureau of Investigation (FBI), and Department of Defense (DOD). Bucchi claims he spent three years in OPM where the CIA negotiated with the heads of the dominant cartels. This deal would allow the cartels to operate under the condition they gave up half of their

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cocaine exports to the Agency. Al Martin writes of first hand knowledge of covert drug trafficking operations by the CIA. 6. Bucchi has said his task was to fund the drug lords and provide cover for their distribution routes where one operation flew drugs from Colombia to a ‘CIA airstrip’ in Texas. 7. Escobar’s image as a modern Robin Hood was born in the slums that surround Medellin. In a place known as Barrio Pablo Escobar, it is believed that masses have gathered to pray for his soul in a church he built where music from the steeple drifts over 200 homes where he also built for the poor. People in Barrio Pablo Escobar prefer to forget Escobar’s violent reputation. His brother, Roberto Escobar, says they called him ‘El Patron’, ‘the boss,’ because in Colombia, people who own a company are called Patrones. The poor people began to call him El Patron because he would bring two or three trucks to the poor barrios and he would distribute food to people who did not have any. 8. Crittenden described how CIA money was flown from CIA headquarters at McLean, Virginia to the heavily guarded Marana airport, sometimes using a Boeing 707 aircraft with ‘NASA’ markings flown by CIA pilots including him. Crittenden alleges that part of this money paid for drug shipments arriving from South and Central America. The cocaine flights came from a network of private airstrips in Bolivia via Colombia. Robbins argues after the January 1973 ceasefire in Vietnam, the U.S. engaged in what was described as the ‘biggest rummage sale of spy equipment in history.’ By February 1975, the CIA’s proprietary airline Air America allegedly involved in drug smuggling in Southeast Asia, held meetings over ten days in Hong Kong with officials and senior representatives of South American republics. Top-secret deals were made when a large number of transport and semi-military aircraft were sold to these countries’ officials. Robbins writes that the pilots who flew for the ‘[Air America] underworld’ left Southeast Asia as millionaires, smuggling gold, heroin, even human beings. 9. In a list of A–Z case studies featuring countries involved in ‘money laundering,’ the United States is not included in this source. 10. Cited in Richani (2002, p. 181, n. 54). This web page has been taken down. 11. Colombia’s National Association of Financial Institutions (ANIF) estimated the nation’s total 1999 income from the illegal drug trade to be $3.5 billion. The ANIF estimate was based on an assumption that somewhat less than 10 percent of total earnings from illicit drug sales are repatriated to Colombia each year, and on reported total world retail level sales of Colombian cocaine, heroin, and marijuana of $46 billion. The figures are based on a 1999 study. Based on these estimates, Colombian drug earnings would be considerably higher today if we consider current productive forces and relations of production. 12. A major DEA report in 1999, reported heavy involvement in pervasive ‘drugrelated corruption’ in ‘all branches of the [Colombian] government’ including the military. 13. According to U.S. intelligence estimates, the FARC tax on agricultural production which includes coca (not cocaine) is $30 million a year. 14. In ‘Marx to Joseph Weydemeyer in Frankfurt Am Main,’ June 27, 1851, Marx points out that long before him bourgeois historians had described the historical development of class struggle and bourgeois economists the economic anatomy of

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the classes; what he did was demonstrate: (1) that the existence of classes is merely linked to particular historical phases in the development of production, (2) that class struggle necessarily leads to the dictatorship of the proletariat, and (3) that this dictatorship itself only constitutes the transition to the abolition of all classes and to a classless society. 15. The Henao–Montoya organization is also known as the ‘Norte de Valle cartel’ located in Cali. See also http://www.usdoj.gov/dea/briefingbook/page34–48.htm 16. This had to do with their class origins and Pablo Escobar’s own left-wing populism, which greatly influenced the Medellin Cartel’s politics. A study of 20 middle and top-ranking drug traffickers from Antioquia in 1988 revealed: 70 percent were of peasant origin (40 percent from the rural middle and lower classes) and 30 percent from the urban lower class. Fifty-five percent had only primary education, 35 percent secondary, and 10 percent had been to university. The study was cited in Jenny Pearce (1990, p. 114). 17. Other myths include: (1) cocaine is not important to Colombia, (2) the importance of cocaine to Colombia is often exaggerated, (3) the killing or imprisonment of cartel leaders makes a difference, (4) the cocaine trade exists because of ’corruption’ and ‘criminal organizations’ which outsmart resource-superior authorities and the law, and (5) the CIA has never (or hardly ever) trafficked in drugs and drugs are not important to U.S. political economy. 18. Heroin is not a new industry to Colombia, small-scale opium cultivation and heroin processing has existed for approximately 30 years. Most recently, a similar process has developed, paving the way for new drug markets in amphetamines such as speed and ecstasy. Cocaine, however, remains to be Colombia’s premier illicit export. 19. Fitts is a former Managing Director of the Wall Street investment bank Dillon Read before becoming Assistant Secretary of Housing under George Bush Sr. 20. Grosse (2001) describes this process in Colombia as the ‘forex black market.’ 21. This is why imperialism is called the epoch of finance capital. In the interest of the imperial–comprador partnership, these magnates of capital are currently bringing about a great conflict in Colombia, inciting war, suppressing unions and the labor movement, and attempting to crush the popular insurgency. 22. Only two companies have turned up in U.S. government ‘anti-laundering efforts.’ One is Phillip Morris for laundering $40 million in Colombian black market pesos in 1995, case closed without prosecution three years later, and again in 2000 for smuggling Marlboro cigarettes into Colombia purchased with black market pesos. The other company is Bell Helicopter Textron. In August 2000, Panamanian officials seized a Bell Helicopter belonging to Victor Carranza, a Colombian property owner and paramilitary leader of the narcobourgeoisie. The helicopter was purchased from Bell Helicopter Textron with the proceeds from a massive cocaine and heroin operation. Bell Helicopter has been a contractor for Plan Colombia. Only $300,000 was seized from its accounts. The bank was Chase Manhattan. 23. These figures are from Ana Carrigan’s (2002) article. See also, United Nations Drug Control Program (UNDCP) (2002) survey Global Illicit Drugs Trends. The survey estimates the average price of cocaine in 2000: Wholesale (per kg): United States U.S.$20,500/Europe U.S.$38,000. Retail (per gram): United States U.S.$80/ Europe U.S.$70. These are average prices that remain steady. Prices are lower in some major cities. The quality of cocaine will also affect the price.

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24. The ‘laboratories’ owned by campesinos in guerrilla-controlled areas are no more than tin sheds, sometimes described as ‘kitchens.’ This is what is shown in media documentaries. They are located in the rainforest with portable diesel power generators and plastic sheeting. The National Coordinating Committee of Coca and Poppy Growers (COCCA) describes this exploitation by imperialism as ‘the fascist project of the ultra-right tied with paramilitarism and with transnational groups linked to both war and megaprojects exploiting national resources and labor.’ 25. According to the DEA, most chemicals enter Colombia by sea from the United States, Europe (particularly Germany and the Netherlands) or China. Most chemicals destined for drug laboratories enter legally through seaports in Barranquilla, Cartagena, and Buenaventura. The chemicals also enter from Ecuador, Venezuela, and Brazil. The highway between San Antonio (Venezuela) and Cu´cuta (Colombia) is a major chemical transportation route into Colombia. They also enter Colombia from Venezuela via the Orinoco River and Brazil via Amazon River tributaries.

REFERENCES Andreas, P., & Youngers, C. (1989). US drug policy and the Andean cocaine industry. World Policy Journal, (Summer), 529–562. Anonymous. (2002). Profile: Colombia. NACLA Report on the Americas. September/October, Vol. 36, Issue 2, New York. Anonymous. (2004). Colombia: Uribe seeks extension of plan Colombia. NACLA Report on the Americas. May/June, Vol. 37, Issue 6, New York. Association d’Etudes Geopolitiques des Drogues. (2000). Peru: The unsaid in the Montesinos scandal. Geopolitical Drug Newsletter, December. Bagley, B. (1988). Colombia’s drug wars. Foreign Affairs, Fall. Bagley, B. M. (1988). Colombia and the war on drugs. Foreign Affairs, Fall. Beadon, Sir C. (1872). Report on East Indian finances. Papers Relating to the Opium Question. Bertram, E., Blachman, M., Sharpe, K., & Andreas, P. (1996). Drug war politics: The price of denial. California: University of California Press. Bowden, M. (2000). Killing Pablo. New York: Atlantic Monthly Press. Bucchi, K. C. (2000). Operation pseudo miranda: A veteran of the CIA drug wars tells all. California: Penmarin Books. Carrigan, A. (2002). War or peace? Colombia’s new president must choose between Washington and his own people. In These Times, August 2, pp. 1–3. Castillo III, C., & Harmon, D. (1994). Powderburns. London: Sundial. Castillo, F. (1996). Los Nuevos Jinetes de la Cocaina [The new knights of cocaine]. Editorial Oveja Negra, Bogota´. Chambliss, W. J. (1988). On the take: From petty crooks to presidents. Bloomington: Indiana University Press. Citigroup. (2001). Banacci to integrate with Citigroup. Press Room – May 17, at http:// www.citigroup.com Cockburn, L. (1987). Out of control. New York: Atlantic Monthly Press. Cockburn, A., & St. Clair, J. (1998). Whiteout: The CIA, drugs and the press. New York: Verso. Collins, L. (1993). Black eagles. New York: HarperCollins Publishers.

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Colombia-Monthly Report 1997. Colombia-Country Profile, available at http://www.nadir.org/nadir/initiativ/agp/free/colombia/ colombia.htm Contreras, J., & Garavito, F. (2002). Biografı´a No Autorizada de A´lvaro Uribe Ve´lez: El Sen˜or de las Sombras (Unauthorized Biography of Alvaro Uribe Velez: The Shadow Man). Bogota´: Editorial Oveja Negra. Corporacion Colectivo de Abogados Jose Alvear Restrepo [Collective Corporation of Lawyers Jose Alvear Restrepo]. (2001). Terrorismo o Rebelion? Intermedio Editores, Bogota´. DEA, Traffickers from Colombia, available at http://www.usdoj.gov/dea/traffickers/ colombia.htm De Brie, C., & de Maillard, J. (2000). Crime, the world’s biggest free enterprise. Le Monde Diplomatique, April. De Brie, C. (2001). Thick as thieves. Le Monde Diplomatique. May. De Soto, H. (1986). El Otro Sendero: La Revolucion Informal [The other path: The informal revolution]. Lima: Editorial El Barranco. De Soto, H. (1989). The other path: The economic answer to terrorism. New York: Basic Books. Dwyer, P. (1998). The Citi that slept. Business Week, November 2. Reveiz, E., & Perez, M. J. (1986). Colombia: Moderate economic growth, political stability, and social welfare. In: J. Hartlyn & S. A. Morely (Eds), Latin American political economy: Financial crisis and political change. Boulder, CO: Westview Press. Ehlers, S. (1998). Drug trafficking and money laundering. Foreign Policy in Focus, 3(16), 1–4. Federation of American Scientists. (1992). BCCI’s criminality, available at, http://www.fas.org/ irp/congress/1992_rpt/bcci/04crime.htm FINCEN (Financial Crimes Enforcement Network) (2000). United States department of the treasury and United States financial crimes enforcement network, available at http:// www.fincen.gov/ Fitts, Catherine Austin, at http://www.solari.com Fitts, C. A. (1999). Government spends millions in campaign to silence former Wall Street banker, cover up connections to dark alliance stories & CIA inspector general report on drug trafficking. From the Wilderness, May. Fitts, C. A. (2001). Narco-dollars for Beginners – Part Two. The Narco News Bulletin, October 31. Flounders, S., & Gutierrez, T. (2003). War in Colombia: Made in USA. New York: International Action Center. Frontline. (1997). The godfather of cocaine, No. 1309, Original Air Date: March 25. Produced by William Cran and Stephanie Tepper. Written and Directed by William Cran, available at: http://www.pbs.org/wgbh/pages/frontline/shows/drugs/archive/ godfathercocaine.html Garcia, J. G. (1991). Macroeconomic crisis, macroeconomic policies and long run growth: The Colombian experience 1950–1986. Mimeo, Washington, DC. Gedicks, A. (2002). Colombia ‘drug war’ a sham. Abu Saleh, September 16. Gibson, A. C. (2001). Freud’s Magical Drug. In The Mildred E. Mathias Botanical Garden UCLA Website, available at http://www.botgard.ucla.edu/bg-home.htm Giordano, A. (2001). Bush ups ante on plan Colombia. The Lindesmith Center- Drug Policy Foundation, March 13. Goff, S. (2002). Is Colombia the next Vietnam? Workers World News Service, July 30. Grosse, R. E. (2001). Drugs and money: Laundering Latin America’s cocaine dollars. London: Praeger.

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THE TRANSFORMATION OF POST-COMMUNIST ECONOMIES IN A GLOBALISED ECONOMY: THE CASE OF POLAND Jane Hardy ABSTRACT This article argues that the transformation of the economies of Central and Eastern Europe (CEE) has to be understood in the context of the dynamics and development of the global economy. The analysis draws on the notion of combined and uneven development in which there has recently been renewed interest. Too often this notion has been a slogan that lacks substance, but the article elaborates how change is a dynamic process of interaction between economic change and political and social forces. The neoliberal analysis, as well as some Marxist accounts, are criticised for being deterministic, linear and prescriptive. This account emphasises the institutional dimension and role of the state as being critical to understanding the varied outcomes between and within economies in CEE in terms of the way that it has mediated the reinsertion of these countries into the global economy. The story focuses on agency, a neglected aspect of analysis, in emphasising the ideological and discursive aspects of transformation, which attempt to justify and reinforce economic and material changes and to close down debate about alternatives. Crucially, the form and content of development, in its Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 131–162 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24004-0

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widest sense, cannot be known or predicted because the process of transformation has been contested by different factions of the ruling class and by workers. Despite the marginalisation of organised labour in mainstream and many radical accounts, it is argued that trade unions and workers have been central to the process and outcomes of transformation.

In the early 1990s, there appeared to be two mutually hostile camps in the policy and academic communities. In one camp were those who saw Central and Eastern Europe (CEE) as a laboratory in which they could experiment with the implantation of ‘capitalism in the raw’ through neoliberal policies. In the other camp were those who could be broadly described as institutionalist in that they understood the importance of history, politics and institutions in explaining economic change. They envisaged a more inclusive and social democratic variant of capitalism. In addition, there is a stream of radical and Marxist thinking on transformation, which is highly critical of mainstream analyses and neoliberal theories in particular, both for their erroneous reasoning, but also for the detrimental impacts of their policies on the lives of ordinary people. This article begins by looking at the dominant prescriptions that were put forward to transform the economies and societies of CEE. It is tempting to omit reviewing these academic debates, because the ground has been well covered and neoliberalism can appear to be something of a ‘straw target’. However, these ideas need to be laid bare and the arguments against them rehearsed, because their deployment has not been confined to the transformation of post-communist economies. They are continually recycled to justify a particular set of neoliberal policies in both advanced and developing economies by right wing and social democratic governments alike. The main part of the article puts forward a Marxist framework of analysis, which offers an alternative way in which we can understand transformation in the context of restructuring the global economy, and which informs a different way of thinking about economic and social organisation.

1. MAINSTREAM PRESCRIPTIONS 1.1. Neoliberal Fantasies Lipton and Sachs (1990) wrote the seminal article summarising the neoliberal1 position on Poland, which argued that the goal of reforms was to

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produce an economic system comparable to the capitalist economies of Western Europe. The legacy of institutions, and particularly the state, in Poland and CEE generally, was viewed as a problem that had to be sidestepped and circumvented to ensure that existing structures and interests would not derail the reforms. The introduction of a market system was seen mainly in terms of the destructive dismantling of the old communist structures after which technocratic solutions could be implemented to fill the gap. This was manifest in ‘shock therapy’ introduced January 1990, which comprised a package of policies, implemented overnight, imposing draconian cuts in government spending and the money supply, and high interest rates (see Blanchard, Dornbusch, Krugman, Layard, & Summers, 1991; Brada, 1993). This was the macroeconomic package of ‘sound money’ that underpinned the neoliberal project. Therefore, the neoliberal school advocated little less than the complete reconstruction of economic arrangements from the top downwards. In their analysis economic laws are seen universal and well understood, as are the ingredients of a successful economy, namely that they are based on the free market, unambiguous property rights, and the unassailable relationship between competition and efficiency. In this context, it was suggested that new institutions and laws could be transferred unproblematically from one domain to another. In other words, an attempt to jump start a market economy would involve institutional measures which were intended to free up entrepreneurship, abolish barriers to entry and exit to the market and abolish central price controls, with privatisation lying at the core of the policy (Pickel, 1992). History, society and politics were viewed as impediments to the design of the transformation agenda by those who knew best. Thus the ‘economists consensus’ advocated a package of policies, which could be transferred unproblematically from the very varied experiences and institutional set-ups in developed and developing countries (Gowan, 1995; Kozul-Wright & Rayment, 1997; Florio, 2002). Restructuring was to be accomplished by the market and the task of policy makers was to ensure that the necessary conditions existed in which the market for labour and goods could work unimpeded. At the core of IMF policies was the idea of ‘getting the price right’. ‘Countries should allow prices to give appropriate signals as to what goods should be produced’ (Blanchard et al., 1991, p. xxi) and then the invisible hand of the impartial and efficient market could do its job in deciding what to produce and who would benefit. The emphasis on immediacy, comprehensiveness and simultaneity was also intended to side step and replace the old

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(inefficient) institutions and to undercut the power of insiders, both workers and the nomenklatura (Lipton & Sachs, 1990; Frydman & Rapaczynski, 1994). The role of the government was to be confined to that of providing the physical and institutional infrastructure of a market economy. According to Kornai (1990, p. 38) ‘unambiguous and emphatic statutory force should be given to the principle that the private sector has unrestricted scope in the economy’. There is a strong class element to neoliberalism. Specifically these new rules governing the functioning of capitalism include a new discipline for labour and management to the benefit of lenders and shareholders (Dumenil & Levy, 2005). In the case of CEE, this involved consolidating a class through privatisation that would become the new owners and beneficiaries of transformation, while workers faced unemployment and cuts in welfare. In Poland workers in the public sector were immediately faced with a fall in living standards as their wages were restricted (popiwek) in the face of high inflation. The role of state as provider of welfare was diminished, but it still remained a staunch defender of capital with regard to its domestic and international firms. There was a dramatic growth of financial institutions in their own right as well as a new relationship between financial and nonfinancial institutions; and legal frameworks to facilitate the free flow of capital, such as mergers and acquisitions. With hindsight it appears even more risible that these neoliberal economists and policy makers thought that the new capitalism could be instituted according to some textbook blueprint, or sophisticated mathematical model, particularly popular in economics departments. Anyone who has had the merest flirtation with economics will know that its predictive and prescriptive capacity is completely reliant on a set of theoretical propositions known to be true only under highly stylised circumstances (Murrell, 1993). This perspective is in complete denial about the role played by the state historically in economic development, and its continued crucial role in capital accumulation. The mantra of competitive markets demonstrates complete blindness to a central feature of contemporary capitalism, i.e., its domination by a small number of large firms (oligopolies). Further, the rhetoric of the market as an impartial adjudicator was quickly exposed as privatisation got underway. The selling off of vast swathes of assets was not a technical issue, but again an issue of class, which involved squabbling between different sections of the ruling class as to whether their interests lay with domestic or foreign capital and a deepening anger from working class people as they were excluded from the division of the spoils (Kowalik, 2001).

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1.2. The Rediscovery of Institutions From 1990 transformation in Poland unfolded in ways that were unexpected in that State Owned Enterprises (SOEs) did not suddenly become competitive, unintended with high and persistent levels of unemployment and uneven in the misery that was experienced by large sections of working class people while others enriched themselves (Gora, Kotowska, Porek, & Podgorski, 1993; Gomulka, 1993; Paci, Sasin, & Verbeek, 2004). This left the door open for accounts of social change which drew on evolutionary thinking and those that were based on the rediscovery of institutions (Jackson, 1992; Tsang, 1996; Van Ees Garretsen, 1994).2 This broadly institutionalist perspective has several strands.3 One school of thought argued that the institutions of the state could be used to encourage the development of a ‘Western-style corporatist social order’ (Amsden, Kochanwicz, & Taylor, 1994), where planning had to reinvented and capitalism embedded into societies in which, it is argued, for decades it had been unable to fit. Further, it was argued that the lessons of late industrialization in the Newly Industrialised Countries of South East Asia could be transferred to CEE (Lo, 1995; Chang, 1995; Henderson, 1998; Kozul-Wright & Rayment, 1997). The clearest expression of this position is in the work of Amsden et al. (1994) where it is argued that the activities and prescriptions of the Bretton Woods institutions, such as the World Bank and the IMF, allied to a mistaken commitment to the free market based on simplistic eighteenth century liberalism have been little short of disastrous in places such as Poland. They conclude that this was quite simply the ‘wrong capitalist model’ (Amsden et al., 1994). A second perspective drew on the old institutionalists4 to argue that markets are socially embedded and politically constructed (Polanyi, 1944; Granovetter, 1985; Smelser & Swedberg, 1994). This view was succinctly put by Myrdal (1957): The market does not just happen. It is not a natural phenomenon. The market is a set of instituted social relations, a set of rules determining what things can be exchanged, who can exchange them, who will benefit from the exchange, and whom will bear the burden of the exchange. (p. 8)

This emphasised that there was no such thing as a pure market, because any functioning economy puts in place rules to regulate the behaviour of firms, and the relationship between capital and the state. Chang (2002) exposes the way in which what is considered the ‘free market’ and what comprises ‘intervention’ is politically driven and socially constructed. For example,

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environmental regulations in advanced countries are now rarely regarded as ‘intervention’ in that there is a degree of consensus about the desirability of having a clean environment. However, foreign investors from advanced economies operating in developing countries protest against the same legislation as ‘market distorting’ as it interferes with their profitable activities in exploiting natural resources. A third institutionalist strand of thought draws on evolutionary approaches and centres on the behaviour of economic agents as a product of both present and historical social processes (Murrell, 1993; Pickel, 1992; Stark, 1990, 1996a, 1996b; Grabher & Stark, 1997; Chavance & Magnin, 1997). In arguing that past behaviours have shaped economic institutions and the response of economic agents, neoliberal zealots are criticised for their contempt of historical processes. One illustration of this was that reforming economists believed that, when the ‘hard budget constraint’ was imposed (a technical term for the end of subsidies), then firms would lay off workers, innovate new products and become efficient, in the way that textbooks predicted (Winieckie, 1992). However, conditioned by their past behaviour and based on strong informal networks, a system on interfirm debt evolved to deal with the lack of subsidies and many firms carried on operating in much the same way as before. UK consultants that I interviewed at the Nowa Huta steelworks in Krakow in the mid-1990s expressed their frustration at the incumbent management who had to be sent off to ‘team meetings’ in an upmarket hotel three times before they were prepared to delete the goal of providing employment for the community from their mission statement. For all the faults of the previous regime, the idea of removing people’s livelihood and access to the welfare benefits of SOSs was an anathema. Therefore, evolutionary thinking is highly critical of any notion of a blueprint of a market economy or of the market institutions which comprise it. They point to the irrelevance of textbook economic theory when compared to the vividness and variety of arrangements present in past and present capitalist economies (Murrell, 1993; Hodgson, 1996). A fourth strand of thinking came from those who had originally invoked the use of unbridled market forces to restructure the economies of CEE, but abandoned this ‘red in tooth and claw’ approach to capitalism. References to notions such as governance, transparency and institutions began to creep into the vocabulary of the World Bank (1996, 2002). The nonsense of pumping money into these economies and then expecting the market to arise like a phoenix from the ashes became embarrassingly and abundantly clear in the debacle of the IMF in Russia. The millions of dollars of aid which had been poured into assisting with ‘building markets’ and ‘competitive structures’ had

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actually lined the pockets of a small group of people who managed to turn themselves into even more wealthy oligarchs (Florio, 2002). Although less spectacular, the showering of aid to facilitate the move to ‘democracy’ in Poland, benefited sections of the nomenklatura and fed the material ambitions of an emerging ruling class. This approach is evident in the criticisms of dissenters from within the camp of those who were latterly regarded as mainstream economists such as Stiglitz (2002, 2006) and Krugman (2003) who are argued that the market needed to be reined in and embedded in transparent and accountable institutions and structures of governance.

1.3. Different Visions of Capitalism The institutional and evolutionary analyses of post-communist economic transformation deserve some credit for the trenchant criticisms they mounted against the neoliberal fantasies, which had dominated thinking in the early 1990s. However, the difference between the two views should not be overstated (Murrell, 1993; Lo, 1995). In their view the end state, the particular combination of state and market, would evolve (Lo, 1993) through a process of ‘blind drift’ (Cullenberg, 2000, p. 82), with the most efficient institutions of the new capitalism gradually emerging. Therefore, evolutionary thinking explicitly focuses on the processes and is agnostic about and largely uninterested in the outcomes and endpoints (Klein, 1987). The debate between the shock therapists and evolutionary perspective could be reduced to one in which the former emphasised the immediacy, speed and simultaneity of reform, and the latter ultimately argue for gradualism, seeing the seeds of change coming from within existing institutions and prepared to tolerate a wider number of configurations of state, market and firms. In other words these added up to different visions of capitalism, the first a more brutal version where the market could be invoked to restructure and restore competitiveness to these economies with little regard for the social consequences. The second vision of capitalism recognised a necessary role for the state in regulating markets and trade and acknowledges the need to provide at least a minimum safety net of welfare provision.

2. A MARXIST UNDERSTANDING The previous section reviewed the mainstream analyses and their prescriptions for transformation in CEE, which coalesced on the market as the

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pivotal element in the restructuring process, but disagreed about how it should be embedded in institutional frameworks. There is a body of literature of Marxist literature which has adopted a much more critical stance to transformation (Clarke, Fairbrother, Burawoy, & Krotov, 1993; Hardy & Rainnie, 1996; Smith & Swain, 1998). Underpinning their analyses is the centrality of class, and the necessity of understanding these economies in the context of the dynamics of capitalism. Those from a neo-gramscian perspective (Bohle, 2005, 2006; Bieler, 2002; Bohle & Neunhoffer, 2006; Holman, 2001; Shields, 2003, 2004) have been concerned with the way in which transformation has been a hegemonic project by the U.S. and Europe to create neoliberal economic regimes which mirror their own. The essence of the approach taken here is to argue that the transformation of CEE economies has to be understood in the context of the dynamics and development of the global economy. The analysis draws on the notion of combined and uneven development (Trotsky, 1977) in which there has recently been renewed interest (Dunn & Radice, 2006).5 Too often this notion has been a slogan that lacks substance; however, it is argued here that it is essential to seeing change as a dynamic process of interaction between economic change and political and social forces. The idea of combined and uneven development offers the best analysis on which to build a nondeterministic account of transformation and one that departs from accounts that are linear and prescriptive. The account here emphasises the institutional dimension and role of the state as being critical to understanding the varied outcomes between and within economies in CEE in terms of the way that it has mediated the reinsertion of these countries into the global economy. The story focuses on agency, a neglected aspect of analysis, in emphasising the ideological and discursive aspects of transformation, which attempt to justify and reinforce economic and material changes and to close down debate about alternatives. Crucially, the form and content of development, in its widest sense, cannot be known or predicted because the process of transformation have been contested by different factions of the ruling class and by workers. I now try to unpack and elaborate some of these arguments.

2.1. Combined, Uneven and Compressed Transformation Capitalism has to be understood as unifying the world into a single interactive productive system under the dominance of capital. If one single law expresses the capitalist form of combined and uneven development it is the

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‘law of value’. This law has two main aspects. First, competition means that all producers have to produce with the minimum input of labour time and, second, it forces a tendency towards a normal rate of profit in all industries. The transformation of CEE is, therefore, combined in the sense that the growth, stagnation and eventual disintegration of these communist economies has to be understood in the context of the dynamics of the global economy. The 1950s and 1960s were regarded as the golden years of world capitalism. Rates of unprecedented growth and consumption were not only confined to the U.S., Western Europe and Japan, but were also extended to the communist economies in the East. The retrospective brush with which neoliberals paint a picture of uniform inefficiency does not accord with the fact that these regimes were, until the late 1960s at least, able to deliver rising standards of living. Although their development took place behind closed doors, the logic of world capitalism nevertheless impinged on the nature and form of their development as they were forced to compete militarily with the West (Haynes, 1987). Production was distorted towards heavy industry at the expense of the production of consumption goods. In other words, they were not immune from the rhythms of the global economy. By the late 1960s the long boom was ending and this was not only clearly evident in the advanced economies, but was also reflected in a slow down in the growth rates and profit levels of countries in the Communist bloc (Maddison, 1991, 2001). However, while the advanced economies had wellhoned tools for disciplining capital in the face of a crisis, the option of mergers, takeovers, bankruptcy and liquidation were missing from the repertoire of communist economies such as Poland. As Haynes and Hasan (2002) point out: The ‘slow integration with the global economy [through the reforms of the 1970s and 1980s] potentially offered economic advancement, but they also created rising debt trade imbalances, and the international transmission of inflationary pressures which out a severe burden on the domestic planning mechanism’ (270).

In Poland the period of 1948–1989 demonstrated the process of the development and subsequent disintegration of an extreme form of socioeconomic formation, that of state led industrialisation, within a world economy that was increasingly integrated and crisis ridden (Slay, 1994; Simatupang, 1994). State-led industrialisation of one variety or another was the dominant form of organising capitalism during the long boom of the 1950s and 1960s. However, it held within it the seeds of its own destruction.

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As the depth and breadth of linkages in the global economy became greater national development behind trade barriers became increasingly impossible. Successful and expanding firms, initially from the U.S., needed to move outside their national boundaries into new territories in order to accumulate. However, this expansion of capital and internationalisation of circuits of capital (Palloix, 1977) required a number of institutional developments including the liberalisation of trade and investment, privatisation to free up the assets of other economies and the deregulation of finance. The latter was necessary to sell financial services but also to recycle profits to provide the funds for further expansion. Together these interrelated trends and developments have been termed as globalisation. The opening up of CEE after 1990 exposed these countries to a process where economic linkages in the global economy were undergoing profound changes through trade, investment and finance. Therefore, the increasing integration of post-communist economies into the global economy has deepened the combined nature of capitalist development and at the same shaped the context in which transformation has unfolded. The uneven development of capitalism with concentrations of wealth on the one hand and poverty and oppression on the other is ubiquitous and the evidence uncontestable. However, according to neoliberal economics this is a necessary, but transitional stage in the workings of the market in reallocating factors of production and bringing about a convergence of income and rates of growth. Other economists see this as the outcomes of the wrong policies in a ‘banana skin’ version of economics, where domestic or trade policy needs to be tweaked by a technocratic state, usually informed by Keynesian thinking. However, this unevenness is neither an accident of economic change and development, nor a shortcoming of policy, rather it is a necessary and central aspect of capitalism. There is much debate surrounding the origins and socioeconomic mechanism of unevenness (Mandel, 1968; Smith, 1990; Lowy, 1981; Radice & , 2006) but simply put, geographical unevenness is the diverging returns on investment reflected in different opportunities for profit. The result of competition is the creation and/or destruction of entire built (and natural) environments, as well as the social structures that accompany them. Capitalism perpetually seeks to create a geographical landscape to facilitate its activities at one point in time only to destroy it and build a wholly different landscape at a later point in time to accommodate its ‘perpetual thirst for endless capital accumulation’ (Harvey, 1996). The exposure of Poland to the vagaries of global competition through ‘shock therapy’ unleashed a process of ‘creative destruction’. However, there was much more destruction than creation as large sections

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of industry and firms were uncompetitive in comparison to their Western counterparts. Neoliberal accounts of the restructuring of the Polish economy have characterised transformation as being a linear process from a planned communist economy to a capitalist market economy, the ingredients of which are obvious and well understood. Similarly, evolutionary and institutional approaches see development as following a prescribed sequence of stages and ‘no part of this orderly process could be mixed up, shifted around, telescoped or skipped over’ (Novack, 1972, p. 147). Some Marxist accounts, particularly those deriving from the regulation school, have subscribed to this view of linear change by suggesting that capitalism passes through a number of stages, moving from fordism to post-fordism and implying different methods of production and institutional regimes. Capitalist development and transformation, however, cannot be explained through the unfolding of a series of laws. In contrast to institutionalist and evolutionary accounts which emphasise the incremental nature of economic change, the idea that there are historical leaps has been accepted for a long time.6 This is a process whereby a backward country can adopt what is most advanced, but does not have to take things in the same order. In fact the ‘whip of external necessity’ compels firms to try and catch-up with the latest techniques, under threat of punishment for non-compliance with the penalty of economic failure. At the beginning of the transformation process Poland, as well as the other CEE economies, can be understood as being backward in the sense that their level of technology and productivity lagged significantly behind Western market economies. From 1990 an intensification of integration with the world economy through trade and foreign investment, oiled by a greater circulation of finance, has made it possible to get hold of technical and organisational improvements much more quickly. Capitalism can be imported into a new country in its most advanced form and exerts change much more strongly and in a shorter time period. Critical to this process has been the role of foreign investment by large transnational firms, which have either locked in or excluded sections of Polish capital from their networks. The decision to locate a Greenfield car factory, for example GM at Gliwice, could mean the immediate introduction of state of the art technology. However, equally, if not more important is the institution of a range of management know-how across the full range managerial functions which has introduced a lexicon of new material and discourses. Therefore, the growth of productive processes can be faster or slower depending on natural conditions or historical connections (Novack, 1972).

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Rather than understanding change as being incremental and predictable, the integration of CEE with the world economy from 1990 onwards should be understood as a leap incorporating changes (partially or fully) that have compressed time. This is in contrast to changes that took place in Western market economies over a much more extended period. Although restructuring on broadly neoliberal lines has had a different starting point and pace in each economy, this form of restructuring took place from the mid-1970s onwards. So, whereas Western European capitalist economies have had thirty years to restructure, these changes have been compressed into only a decade and a half in post-communist economies. The notion of societal leaps stands in stark contrast to evolutionary and incremental accounts of economic and social change as well as those that see change as a process of sequential stages. It is important in that it implies a much less stable capitalism with heightened competition where the advantages of national capitals and states can only be temporary in a situation where other countries can quickly appropriate technology, skills and organisational innovation.

2.2. Uneven and Hybrid Institutional Architectures Although the world is increasingly integrated into a unified ‘single world market’ it is not a homogenous capitalist milieu and the strong institutional foundations that underpin uneven development have been a neglected part of the analysis. Here we mean institutions in the widest sense, including not simply the different relations among local states, local capitals and local labour forces, but also the whole political and cultural web of social relations in which these are embedded and the corresponding local forms of civil society (Barker, 2006). Myrdal (1957) argued that a ‘backward country’ must have sufficient institutional and cultural capacities to appropriate advanced technology. Davidson (2006) drawing on Veblen, argues that even though technologies could arrive ready made, this would not overcome the legacy of old ways of thinking, with which they could coexist for a period of time at least. This is well illustrated by Van Zon (1998) in his study of the Zaporizhzhya area of the Ukraine, where he observes that the habits and norms that persisted from the previous regime, in terms of a climate of kleptocracy and corruption by the ruling class in an atmosphere of general distrust, led to low levels of foreign investment. Despite the introduction of both formal and informal institutional change through foreign investment and Western management

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techniques, deep structural characteristics in the economy and business such as continuities with the previous period have limited the scale and speed of corporate change (Czaban & Henderson, 1998; Czaban & Whitley, 1999). The borrowing and assimilation of elements of advanced culture and technology is selective, therefore a backward country can ‘import’ some elements of advanced culture while retaining other inherited aspects of its own institutional forms leading to hybridicity. In other words, it can combine within its own internal structures a mixture of ‘advanced’ and archaic ingredients thereby generating a new amalgam with distinct characteristics from those found amongst its rivals. National differences, in those accounts which focus on internal developments to explain how countries are inserted into the global economy, are seen as the product of path dependency. However, national peculiarities are not simply a function of inherited differences in starting points, but a product of the world system as these are inflected within each separate state. Each country is part of a larger whole, standing in a particular and shifting nexus of relations with other parts and with the whole shaped simultaneously both by the development of social relations within its borders and by the multiple form of economic, political, military and cultural traffic across those same borders (Barker, 2006). Therefore, while capitalism is underpinned by specific and universal characteristics (Screpanti, 1999; Meiksins Wood, 1997) namely the ‘the law of value’, individual capitalist systems, in their historical and national development, have all been characterised by a high degree of institutional and organisational diversity (Zysman, 1996; Boyer, 1995; Whitley, 1997, 1998). Similarly, the economies of CEE have exhibited a rich variety of different institutional matrices that depart from the models of designer capitalism and blueprints that were urged in the early days of transformation (Stark, 1995). Thus, the specific and evolving configurations of post-communist economies are characterised by their composite, combined or mixed features, which cannot be viewed as stageposts as the economy moves from one end point (the command economy) to another (the market economy). Similarities shared by CEE economies would include the move towards an emphasis on neoliberal policies and its discourses, the globalising trends of FDI and the agendas of international organisations. Further, communist economies were not homogenous with a single logic and there are important dissimilarities in the routes they have taken to restructuring and reintegration with the global economy. First, there is diversity in the starting point and initial conditions of these economies in terms of the legacies of their industrial structures, the nature and depth of the crisis that pertained in the late 1980s and the degree of integration with the West. A second

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dissimilarity relates to the ‘path of extrication’ (Altvater, 1998) taken by these economies in response to the economic stagnation that was apparent by the late 1960s (Maddison, 1991). Hungary, for example, instituted widespread and relatively successful market reforms in 1968 and became more integrated with West European economies, whereas Poland had two decades of disastrous economic reforms. The third factor influencing nationally specific paths of transformation after 1989 was the balance of political forces and the unique political and economic routes taken. In Poland, the central role of Solidarnosc in bringing about the demise of the previous regime and its massive popularity at the outset of transformation gave the government a unique opportunity to implement a drastic set of reforms (Ost, 1989, 1992; Rainnie & Hardy, 1995). Approaches which observe superficial characteristics to try and pin down capitalism into distinct periods underplay historical complexities whereby modern and archaic features can exist along side each other. The ‘varieties of capitalism’ perspective which tries to label and categorise comparative national capitalisms is a static approach rather than one that emphasises the dynamic and constantly changing nature of the system. This was put succinctly by Novack when he said that ‘History plays pranks with all rigid forms and fixed routines. All kinds of paradoxical developments ensue which perplex people with narrow formalised minds’ (Novack, 1972 quoted in Van der Linden, 2007). Rather than a simple straight, single line of direction in social development, what we have instead is economic change that is complex, contradictory and contested. The theoretical task is to analyse the dialectical interplay of action and reaction of the contending forces in their connection with the historical environment.

2.3. The State and the European Union Neoliberal accounts suggest that the state needs to be dethroned as the owner of assets and stripped of it role in the organisation of economic activity. Lipton and Sachs (1990) suggested that the legacy of the communist bureaucracy made it incapable of intervening even in cases of market failure. However, the state has not withdrawn nor have its activities been diminished, rather the nature and form of state intervention has changed (Shields, 2004). A dramatic reorganisation of institutions was necessary in order for the economies of CEE to integrate with the global economy and the state was central to authoring and instilling new structures consistent with and necessary for neoliberalism. For example, a number of tasks such as the

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regulation of competition, arbitrating between foreign and domestic capital, reassigning property rights and contract law needed to be accomplished. New government departments and quangos were elevated in prestige and importance. The Ministry of Privatisation was central to the transformation project as the department charged with divesting public assets and selling individual SOEs as well as whole sectors of industry. The newly established foreign investment department (PAIZ) was pivotal in taking part in the locational tournaments which characterised the strategies of other European countries in their bid to win a slice of global capital and capture, at least part of, the value chains of large transnational firms. Changes in the organisation of finance and banking were of paramount importance and were ‘a condition of existence for the market economy itself’ (Grahl, 2005, p. 293). Moves towards establishing a Central Independent Bank, which had started before 1990, underpinned the macroeconomic framework necessary for the neoliberal project (Grabel, 2003) to ensure sound money and disentangle finance from domestic capital and the political influence of the nomenklatura. Europe and the U.S. needed new markets in which some of their largest and most profitable financial firms could operate, and this was particularly true of the UK and the U.S. who dominate global financial services (WTO, 2006). The outcome of this scramble for assets is reflected in a high degree of foreign ownership with foreign banks controlling about 70 per cent of domestic banking assets (Weill, 2003). Ten out of the twelve large commercial banks in Poland are owned by foreign institutions, with the State Treasury owning the remaining two. There has been a tendency to focus on the speculative, destabilising and parasitic effect of the deregulation of finance rather than its critical role in recycling the profits to lubricate the restructuring of the productive sector of economies. This adjustment of domestic policies and organisations was not a straightforward process whereby the nation state transmitted or refracted the needs of global capitalism. The competing interests of different sections of the ruling class, and struggles of organised labour made the processes protracted and the outcomes a political compromise, particularly regarding privatisation. Therefore, the restructuring of the state was much more complex than simply guaranteeing the conditions for the operation of transnational capital. If the first stage of transformation can be seen as a rather chaotic and contested attempt to integrate with an increasingly liberalised global economy, then European integration can be seen as a more systematic consolidation of that direction. The aim of the EU’s strategy has been to promote neoliberal reform and the influence of European transnational capital

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through the liberalisation and deregulation of CEE (Holman, 2001; Bieler, 2002; Smith, 2002; Shields, 2004). Dangling the carrot of membership, the EU managed to push the CEEs towards adopting a specific neoliberal reform model, which was a much more radical variant than the one operated in the economies of existing members. Having to conform to EU norms, regarding state aid and rules on competition policy in particular, wedded these countries to the liberalisation of trade and investment in a way that made it difficult to accede to any demands by members of the ruling class for protection or retreat (Bieler, 2002). New regional structures were demanded in line with EU policy even if they did not fit in order to establish administrative units through which to implement structural funds (Smith & Hardy, 2002). Two projects which consolidated the neoliberal project in Europe were extended to Poland and the other accession countries. The first was the European Single Market, a popular symbol used to relaunch European integration in the mid-1980s and implemented in 1992, the aim of which was to restore Europe’s global competitiveness with Japan and the U.S. This opened up all economies and prised open previously protected sectors (e.g., services, utilities and telecommunication) to trade and investment. While the rhetoric was of innovation and economies of scale the reality was that it allowed the reorganisation of European capital over a wider territory, which was manifest in an unprecedented wave of mergers and acquisitions. The aims of the legislation regarding monetary union with a central bank and single currency were threefold. First, it was the final consolidation of the single market as it removed barriers and reduced costs for large firms in providing an undifferentiated terrain on which capital could operate. The second effect was that it ‘disciplined capital’ (Gill & Law, 1993) and particularly public spending through the restrictive monetary policy in the convergence criteria of the Maastricht Treaty and Stability and Growth Pact. This ‘depoliticised’ central policy fields and left little room for manoeuvre for wage increases (for working class people at least) and social policies. The role of monetary policy was therefore to exert a disciplinary neoliberalism, particularly on weaker economies which would face the highest costs in terms of unemployment (Carchedi, 2001). Third, monetary integration in the EU was driven by a need to overcome the fractured and idiosyncratic finance systems of individual European countries to ‘build a huge liquid market in Euro-dominated securities arising from the material necessity to compete with the U.S.’ with the self proclaimed aim of the EU becoming ‘the cheapest and easiest place to do business in the world’ (Grahl, 2005, p. 293).

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While the needs of different sections of capital have not been homogenous, the push for enlargement has broadly reflected the interests of both European and U.S. capital and their ruling classes. However, the global economy does not sit above the Polish state, but is inextricably linked with its internal changes impacting on the structure and activities of other states in a dialectical process. Therefore, the reconfiguration of the Polish state has not been the result of genuflecting to the needs of international capital, it has been the outcome of wider struggles between different sections of the domestic ruling class and labour.

2.4. Ideological Dimensions It is important not only to analyse how the countries of CEE and their regions are fitting into the emerging international division of labour, but also to understand the important ideological dimension to globalisation and the rise of neoliberalism. Notions of private property, competition for scarce resources and the assumption of individuals motivated by self-interest are presented as unchallengeable assumptions of economic life in neoliberal analysis. This extends to ingraining a particular set of ideas and beliefs in ‘habits of heart’ (Harvey, 2005) and the commodification of everything has to become ‘an ethic in itself, capable of acting as a guide to all human action, and substituting for all previously held beliefs’ (Treanor, 2005). Dugger (2000) calls these ideas and discourses ‘enabling myths’ and argues that they amount to a fiction, which plays down differences in institutional conditions to create a deceptive clarity that a specific ways of organising things is self-evident. In the context of the transformation of CEE in general, and Poland in particular, the market, for example, has been a pivotal enabling myth. The notion of the invisible hand is invoked to suggest that the market will produce economic outcomes that are both efficient and equitable, and that will produce economic growth. However, the market and associated enabling myths have not appeared spontaneously but are promulgated by influential agents who have attempted to shift understandings about economic behaviour, both deliberately and unconsciously. From the national level to the workplace those in privileged situations have attempted to marginalise old legacies and engender what are regarded as new and appropriate understandings that are compatible with the market and neoliberalism. There is a long lineage of those who have tried to explain the way in which those with power and wealth have convinced those who have not that this

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state of affairs is a self evident fact and part of the natural order of things. Every established order tends to reproduce, in different ways and to different degrees, the naturalisation of ‘its own arbitrariness’ (Bourdieu, 1972/ 1977, p. 164). It was Gramsci (in Hoare & Nowell-Smith, 19717) who elaborated this idea by suggesting that the ruling class achieved hegemony through their control of the ideological apparatus of the state, and pointed to the existence of ‘organic intellectuals’ whose role was to justify the status quo. Creating hegemony is important at all levels of analysis and neoGramscians have been concerned with developing this notion in the context of international relations and identifying a transnational capitalist class who perpetuate and spread these ideas (Cox, 1993; Gill & Law, 1993; Sklair, 1997; Shields, 2003, 2004). Globalising bureaucrats are viewed as important for laying the conditions for the internationalisation of capital. The instruments of ‘rational’, Western modernisation operating in CEE include some of the most perfectly honed weapons of global governance that have evolved in the post war period (Baker & Welsh, 1999); most notably these include the World Bank, IMF, G7 and the EU. Within certain limits powerful countries try to create international regimes that favour particular firms and sectors by setting the rules of engagement (Hollingsworth & Boyer, 1997). Powerful nations and the supranational organisations they dominate may seek to alter productive systems in their own image and establish some sort of ideological hegemony. This is established through coercion and conditionality on the one hand, and equally important from their point of view the ‘winning hearts and minds’ through replacing old habits and norms with new discourses. Less attention has been paid to the role of foreign investment, transnational corporations (TNCs) and their executives who have played a very important part in establishing new material and discursive practices through the deep restructuring of workplaces and workplace behaviour. Different corporate strategies for instilling these new discourses include increasing the rewards of incumbent managers in terms of their position, incomes and wealth, as well as socialising local executives into the corporate culture of the company (Hardy, 2006). The activities of consultants have been neglected and it is difficult to overstate the role they have played in the transformation of CEE. Erecting the new institutional architecture, privatisation and the restructuring firms are activities that have been central to their lucrative portfolios. They lubricate circuits of intellectual capital which are crucial to firms in crossing national boundaries, not only necessary to smooth the path of circuits of

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productive and financial capital, but also to effect rapid change in situations where managers have to react swiftly and turn businesses around in even shorter time frames in a more competitive environment. The role of international organisations and advisors are important but should not be privileged in the analysis. Gowan’s (1995) account of transformation emphasises the role of institutions such as the IMF and World Bank. However, this focus on actors that are external to the process, neglects the importance of domestic agents and classes in collaborating with, acquiescing or resisting these ideas and practices. It is to this we turn in the next section.

2.5. The Primacy of Class Neoliberals have a very monochromatic view of class in Poland, and CEE generally. According to this view, the old nomenklatura had to be disarmed in terms of their political and economic power and the working class were viewed as a stage army who had been usefully deployed in bringing about the downfall of the old regime, but who then needed re-education (literally) in the ways of the market economy. Lipton and Sachs (1990) bristle with palpable irritation at the failure of politicians and workers to understand that they needed to take a back seat so that the technocrats could implement the project of the market unimpeded. The notion of class has been eviscerated from most accounts of transformation; in institutional accounts it has been replaced by obliquely subsuming it in references to social groups and elites whose interests are mediated by a neutral state. Neo-Gramscians and other radicals, however, have reinserted class analysis into the transformation agenda, but in arguing that there was a ‘bourgeois revolution without the bourgeoisie’ suggest the absence of a capitalist class in Poland (and the rest of CEE) before 1990 (Bohle, 2006; Kowalik, 2001). The analysis presented here departs from the ‘capitalism without capitalists’ (Eyal, Szelenyi, & Townsley, 1998) account by arguing that a ruling class did exist in the communist period, who, even though not having formal ownership of assets had control over them and reaped the benefits of their privileged position in accessing wide ranging advantages from housing, education to the consumption of material goods. The emergence of a new ruling class, or some parts of it at least, has to be understood in the context of the reforms in the two decades preceding transformation. In the 1970s import-led growth, which involved buying technology from the West in order to try and raise productivity, was the

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policy adopted to try and resolve the economic crisis. In addition, the limited establishment of small firms called Polonia was permitted. These policies gave some sections of the nomenklatura exposure to and experience in dealing with Western firms as well as all-important access to foreign networks and business opportunities, some of which were capitalised on by the new entrepreneurs in the small-firm sector. However, it was during the 1980s that opportunities for large-scale kleptocracy opened up. The State Enterprise Act (1986) relaxed the stringent controls on the activities of State Owned Enterprises (SOEs), and enabled managers and well placed bureaucrats to siphon off the most profitable activities into new firms of which they became the owners. They were able to obtain inputs cheaply or for nothing, and use their contacts to establish lucrative markets and contracts. In the post-1990 period they were able to consolidate these gains in what is euphemistically called ‘spontaneous privatisation’ when they simply declared themselves the owners of these new firms (Schoenman, 2005). By the mid-1980s the nature of the crisis facing Russia, and therefore Poland by extension, was that the system was no longer able to reproduce the conditions of their own ruling class (Clarke et al., 1993). Their interests therefore no longer lay in preserving a stagnating and uncompetitive economy, but lay in integrating with the global economy. Debates about privatisation have reflected different factions of the ruling class, with a schism between those who perceived their interests in lying with a domestic capitalism and those who had more to gain through international alliances and further integration with the global economy. After 1990 in Poland, established groups and more often than not the nomenklatura served as gatekeepers for aid from the West as they were already part of networks in government, business and politics. Many astute individuals from the intelligentsia carved out a triad of business foundations and scholarly activities, as well as serving as consultants, brokers and partners. These opportunities were often fleeting, but their ambitions and activities were not curbed by rules and regulations, which were often nonexistent or not enforced. The anthropologist Janine Wedel (2001) gives some fascinating insights into the emergence of this new class and the way in which the nomenklatura managed to manipulate and take advantage of this new orbit of opportunity offered by western assistance after 1989. The money that flooded in to support the ‘market’ and ‘democracy’ built on the backbone of these ‘energised elites’ who cultivated international contacts and set up NGOs and ‘foundations’ to receive western aid. Registering as a foundation typically provided favourable legal and tax advantages and, by 2000, 5,000

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foundations and 21,000 associations had been established, which made it legally possible for private groups and institutions to appropriate public resources (Wedel, 2001). Some have suggested the existence of a social vacuum and atomised behaviour in Poland, but in fact there was a complex system of informal relationships, such as patron-client or horizontal networks, which pervaded the economy and bureaucracy. Cliques of the old nomenklatura and Solidarnosc were therefore able to thrive and survive in a period of uncertainty; prior hierarchies where everything depended on patronage and personal connections were accentuated and consolidated. However, as Shields (2004) rightly argues, ‘Party membership is a poor predictor of the elite after ‘‘communism’’’; in other words, the nomenklatura were not able to simply convert themselves into the new capitalist class. Some Solidarnosc activists were able to capitalise on this gravy train because in the 1980s they: Had redefined reform by redirecting their efforts from political to economic activity and preaching a new philosophy; form a club or lobby to do what needs doing and finance it through entrepreneurial activities. Some people who had previously exchanged underground leaflets at private gatherings turned to trading software and financial schemes. (Shields, 2004, p. 88)

The strand of the new ruling class, which emerged from the ranks of Solidarnosc was also facilitated by the privatisation process which enabled some individuals at least to obtain assets and enrich themselves. Although vigorously opposed by those that had promoted the neoliberal agenda, one of the main forms of privatisation for small and medium sized firms were worker-manager buyouts. However, these were something of a misnomer as it was usually the managers, often members of Solidarnosc, who became the owners with token shares going to the workforce. Tittenbrun (1995) looks at the methods used to acquire companies cheaply, either by undervaluing them or borrowing the funds to buy them at low rates of interest. After having tracked companies over a ten-year period, Tittenbrun (2005) documents the way in which workers’ ownership of firms, measured in terms of shares, has dwindled to a tiny percentage of firms’ stocks and ownership, with the result that it is concentrated in the hands of managers of Polish or international firms. Transformation also created a new layer of managers whose interests were not those of ordinary people because their function was a ‘staging post and direct intermediary for the implantation and reproduction of foreign capital’. Therefore, although not a strictly part of the ruling class,

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transformation and opportunities offered by foreign companies and consultancies created a well-paid and highly rewarded group of people whose interests lay with the new transnational capitalist class. With a few notable exceptions, the role of organised labour is either missing from or marginalised by accounts of transformation. Evolutionary and institutional accounts see economic agents in general as ‘cultural dupes’ (Jessop, 2001, p. 1228), the passive bearers of a set of habits, norms and routines from which they are unable to make a radical break. Other accounts see workers as victims of transformation, the object rather than the subject of history and peripheral to the massive restructuring that was happening. While neo-Gramscians acknowledge the importance of class in theory, they are very pessimistic about the role of organised labour, seeing it as either passive or actively acquiescing to the neoliberal project. The view that organised labour was only briefly centre stage in 1981 amounts to a dismissive account of history and, by treating the decades of ‘communism’ as an homogenous and undifferentiated epoch, fails to take full acknowledge the rich tradition of organised workers in Poland in the post-war period. This period was characterised by a sequence of revolt, reform and repression. Workers’ rebellions, usually triggered by an increase in prices, were followed by a two pronged approach from the ruling class, which were reforms aimed at pacification alongside brutal repression, purges and imprisonment. This pattern was evident in 1956, 1970, 1976, 1980 (see Barker, 1986; Harman, 1988). The working class, organised or otherwise, has had a central role to the pattern of economic change in general, and the pace and form of transformation in particular (Thirkell & Vickerstaff, 1995; Clarke et al., 1993). Further, post-1990 the role of working class resistance has been pivotal in patterning the dialectic of change in Poland (Hardy & Rainnie, 1996). Many accounts of trade unions in Poland have cited declining membership because of restructuring and entrenched ideological differences as sufficient evidence to condemn them to the margins. Although this may amount to wishful thinking in some quarters, it does not accord either with the role that trade unions played either in the early days of transformation or their recent responses to the challenges of the new economy. Organised labour as a force for change has largely been written off or dismissed as either impotent or active supporters of the market (Cox & Mason, 2000; Martin & Critescu-Martin, 2004; Gardawski, Ga˛ ciarz, Mokrzyszewski, & Pan´ko´w, 1999; Gardawski, 2003; Ost, 2002) and it is claimed that their frustration has been channelled into nationalism and xenophobia.

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Undoubtedly the Polish labour movement has faced major challenges since 1990. The traditional bases of Solidarnosc in large SOEs have disappeared or at best been severely contracted, while employment has opened up in new sectors with no tradition of trade union organisation. To compound these problems, foreign investors in many workplaces have been overtly hostile to the formation of trade unions, in some cases sacking workers who tried to initiate organisation. Without fully debating issues related to labour organisations, there are two important counter arguments to the pervasive pessimistic view. First, claims of acquiescence to the market and neoliberal ideas have been exaggerated and treated simplistically. In the early 1990s, while some workers were convinced by the rhetoric of the market, at the level of workplace there were numerous struggles over privatisation, the reduction in welfare provision and job loss. These were not always reflected in strike figures, but were clearly evident in case studies of workplaces (Hardy & Rainnie, 1996). The second argument is that, since the late 1990s, there has been something of a revival, albeit modest, in workplace organisation and rebuilding unions. There has been a reinvigoration of public sector unionism, particularly evident among teachers and nurses. The Union of Polish Teachers (Zwia˛zek Nauczycielo´w Polskich (ZNP)) was involved in two phases of industrial action in 1997 and 1998 against government reforms. This signalled the transformation of the ZNP from being a passive organisation to being a ‘proper’ union focused on defending working conditions and wages of its members and prepared to use industrial action. Further, they have reinterpreted the meaning of political trade unionism by being prepared to criticise all governments8 as well as consistently opposing the war in Iraq. In response to draconian reforms in the health service, nurses formed a completely new union, recruiting women who had not previously been members of any of the main labour organisations. The All-Poland Union of Nurses and Midwives (OZZPiP, Ogo´lnopolski Zwia˛zek Zawadowy Piel˛egniarek i Po!oz˙nych) emerged in 1995 and has grown through the course of reforms to count 100,000 members (approximately half of all nurses). They mounted a high profile campaign, which involved blocking railways lines and major roads and occupying the offices of the Minister of Health in 1999. The ZNP transformed itself from an official organ of the Communist Party limited to a social role to a campaigning organisation with grassroots participation, which has contested the reforms. Whereas the ZNP underwent a process of gaining independence and behaving like a ‘real’ trade union, the nurses, in the OZZPiP, bypassed existing structures to form a new and completely

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independent organisation which was at the forefront of militant and high profile action (Stenning & Hardy, 2005). By 1998 Solidarity took stock of a dismal situation where haemorrhaging members threatened the existence of the union in workplaces and adopted a strategy of very active recruitment. In general, although not exclusively, this was aimed primarily at new sectors of employment and particularly focused on supermarkets, truck drivers and security guards, although there were different regional priorities. This recruitment initiative demanded a fundamentally different strategy which has had to be much more energetic in identifying workplaces, imaginative in establishing contact with workers and persuasive in recruiting employees in the face of a poor media image. In the case of Solidarity, its new initiatives have extended across national boundaries as they have cooperated with the British TUC in trying to organise some of the 700,000 Poles who have come to work in the UK since May 20049(Hardy & Clark, 2007). A reluctance to recruit during most of the 1990s and lingering optimism that rising poverty and unemployment would be stemmed and reversed led to organisational stagnation. Workers had been told that the sacrifices and ‘nasty medicine’ of shock therapy would institute a Polish capitalism that would bring rising living standards and increased opportunities. From the late 1990s, Solidarity turned away from parliamentary politics and their main vehicle for redressing the grievances of members and has gone ‘back to the basics’ of workplace organisation. This has meant rebuilding the membership by recruiting aggressively in new sectors, private companies and foreign investments. Achievements have been modest and mixed but represent a decisive turn in organisational thinking. A second aspect of this modest revival in the fortunes of Polish trade unions is the extension of their ‘community unionism’ role to active intervention in the international and domestic labour market. The role played in the 1990s was a defensive social role in attempting to mitigate the worst effects of transformation. Rather than passively accepting new developments they are attempting to engage with and shape them, particularly by trying to protect their members from exploitation in international labour markets.

3. CONCLUSION The analysis presented here sees the development, collapse and subsequent transformation of the Polish economy (as well as other post-communist economies) both in the context of and contributing to changes in the global

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economy. Not only should we understand transformation as being combined, it is also inherently uneven. The location of economic activity in terms of the production of infrastructure, goods and services are subject to competitive pressures in the global economy, which are the result of and have intensified neoliberal policies. However, outcomes and endpoints are not predetermined. The state, the institutional architecture of individual capitalist economies and the balance of class forces have been critical in shaping the content and processes of transformation. Further, this account has also emphasised the ideological onslaught that was deemed to be necessary by powerful interests to try and secure compliance for the restructuring of these economies. The law of uneven and combined development can only serve as a guide to an investigation and analysis of the processes at work in a given social environment. It can help to understand the peculiarities of past history and aid an analysis of unfolding social processes. The importance of the concept is that it allows the exploration of systematic unevenness in spheres such as production, social reproduction and human domination along lines of class, gender and ethnicity which stresses the social damage associated with uneven capitalist development. Bond (1999) suggests that an analysis of uneven development can inform activists who are focused on reversing unevenness, to escape from production and social relationships driven by the logic of capital and replaced by those which are the outcome of debate and collective and individual choice.

NOTES 1. Neoliberalism is an alliance between neoclassical economics and the political and moral philosophy of the Austrian libertarian tradition. See Chang (reference) for a good critique. 2. Some schools of thought would see evolutionary thinking as a sub set of institutionalist thinking. Indeed, one of Veblen’s (1898) major contributions is an essay on ‘Why Is Economics Not An Evolutionary Science’. As Hodgson (1998) points out, evolutionary economics is a vague and ill-defined term, which does not necessarily imply drawing directly on biology. Evolutionary theory in this section should be understood as those theorists who lean more heavily on the use of biological metaphors. 3. A detailed history of institutionalist thought and a taxonomy of the various strands have been done extensively elsewhere (see e.g., Mayhew, 1988; Samuels, 1995; Hall & Taylor, 1996; DiMaggio, 1998; Hodgson, 2001, 2004; Nielsen, 2001). 4. The old institutionalism (Veblen) belongs to that social science tradition based on a strategy of seeing people as a product of culture, whereas the new institutionalism (Williamson, 1975; North, 1990) favours a view of people as ‘rational choosers’ (Mayhew, 1988).

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5. For a further discussion and critique of combined and uneven development, see Elster (1986). 6. See Aglietta (1979) for the fullest and original synthesis and Glick and Brenner (1991) for a critique. 7. Hoare and Nowell-Smith (1971) assembled and translated Gramsci’s writings from 1917 to 1923, which are collectively known as the ‘Prison Notebooks’. 8. Traditionally, the ZNP has been allied to post-communist parties, but was prepared to criticise them over their educational policies. 9. After Poland and other post-communist economies were admitted to the European Union, only the UK, Ireland and Sweden opened their labour markets. The number of Poles coming to the UK has far exceeded expectations and is now the biggest post-war migration to Britain.

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SYRIA’S TRANSITION, 1970–2005: FROM CENTRALIZATION OF THE STATE TO MARKET ECONOMY$ Angela Joya ABSTRACT This paper examines the transformation of Syrian political economy from 1970 until 2005. I argue that Syria has undergone two important phases of political and economic transformation, from building a centralized state and economy in the early 1970s to embarking on the path of market economy in the early 1990s. With the logic of competitiveness guiding the direction of economic development, the socio-economic changes of the mid-1980s and after have corresponded with an important process of class and state formation. After a brief discussion of the current transition in Syria, the following sections of the paper attempt to provide a critical study of the different strategies for economic development. Section two examines the process of state and economic centralization of the 1970s and 1980s and highlights the contradictions of this period. Section three assesses the impact of economic liberalization through a study of competitiveness in the economic policies of the 1990s and 2000. The final $

A different version of this paper was presented at the Historical Materialism conference, held in London, UK, December 8–10, 2006. I would like to thank Geoff Kennedy for his thoughtful comments on an earlier draft of this paper.

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section examines the economic and political impasse that Syria has been faced with. In conclusion, I argue that the current path of market economy as the strategy for capital accumulation has not resolved the socioeconomic problems that Syria has faced in the last two decades. This strategy will continue to face contestation by marginalized groups such as factions of the Baath Party, landless peasants, workers and small producers as Syria becomes even more integrated into the regional and global economy.

After the collapse of the East Bloc in the early 1990s, Syria was faced with a new world order. This new world order has influenced Syrian development in such a way that the Syrian state and society have seen a decisive shift towards a capitalist market economy. More recently, however, Syria has been entangled in the United States’ global war on terror (US Congress Syria Accountability Act, 2003)1 and has been subjected to US and UN sanctions because of allegations of murder of former Lebanese Prime Minister, Rafik Harriri and its link to Syrian security forces.2 Thus, predominant views have portrayed Syria as a closed economy with heavy state involvement in the economy and restrictions on the private sector, factors, which make Syria appear to be an economic laggard in the eyes of economic liberals. International financial institutions (IFIs) have, nevertheless, maintained a close relationship with Syria, despite the political disconnect between the West and Syria. And, surprisingly, the Economist Intelligence Unit’s 2006 country report and the 2005 International Monetary Fund (IMF) report praised Syria for its slow but significant economic reforms that have set the country on the path to a market economy. With a prevalence of international relations in studies of the Middle East, including that of Syria, discussion of the domestic struggles over the state and the economy in the context of the current economic liberalization has often been left out. It is the goal of this paper to shed light on the domestic political economy of Syria to uncover these struggles and to discuss in detail the policies that have resulted in a radical transformation of state and society in Syria since 1970.3 I argue that Syria has been experiencing a rapid process of transformation towards capitalism over the last three decades. The early 1970s marked the decade when, for the first time a strong, centralized state-building project began under Hafiz al-Assad, whereas the 1990s marked a decisive transition towards a capitalist state and economy. In order to appreciate this dynamic

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history of socio-economic and political changes that have shaped Syria’s social relations since the 1970s, I have divided this paper into three sections. The first section of the paper offers some brief comments on conceptualizing the current transition in Syria. The second section examines the initial phase of state formation under Hafiz al-Assad. This section also discusses the socio-economic crisis of the second half of the 1970s and the popular social forces’ response to the crisis. I end the section with a discussion of policies of economic austerity that Hafiz al-Assad’s regime implemented in response to the economic crisis that unfolded in the early 1980s. The third section examines the origins of neoliberal economic development in Syria in the aftermath of the collapse of the Cold War. Prior to an examination of the contradictions of neoliberal policies and its limits, I discuss the emergence of a new class alliance as well as the consolidation of a neoliberal state and economy in Syria. I conclude the paper by recapping the process of state formation in Syria over the last three decades by focusing on the current process of political and economic transformations in Syria, which are, to a major extent, a response to global economic forces. Finally, questions are raised about the current policy directions and the possible negative impact of neoliberalism upon workers and peasants as well as upon factions of the ‘old guard’.

1. CONCEPTUALIZING THE TRANSITION What is significant about the last three decades of economic development in Syria is the changing nature of the state and the economy, reflecting the impact of the global capitalist market on individual national economies.4 Although Syria appears to be one of the most closed economies with very low levels of external debt to the IMF and the World Bank, as well as a very low volume of trade (Library of Congress, 2005), a closer study of the Syrian state and economy reveals a process of slow, but significant economic integration since the 1970s. The Syrian state and economy still represents some aspects of a planned economy in that the ruling party – which has become synonymous with the state – has been deeply involved in shaping and organizing the economy. According to IFIs, what Syria needs to do is to establish a separation between the ruling party and the state on the one hand, and between the state and the economy on the other. In short, it is argued that Syria needs a modern state, with liberal democratic elements, such as competing parties, free elections, a free media, as well as civil liberties, all of which would create a stable society that could facilitate capital

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accumulation in the capitalist world market. While efforts are being made to achieve Syria’s integration into the global economy, the outcome has been contradictory and uneven. This process of global economic integration is not free of conflict as external capitalist forces collide with domestic forces; i.e., factions of the elite whose interests do not require a larger market and who in fact rely on the protectionist measures of the state. The 1990s marked the beginning of a radical shift in the Syrian state and economy. In response to the failures of the public sector, the regimes of Hafiz al-Assad (1970–2000) and Bashar al-Assad (2000-present) implemented a gradual yet decisive shift towards the market economy. This shift has corresponded to a parallel transformation of the state, reflecting a changing balance of power in Syrian society. The transformation of the state carries serious implications for the various factions of the ruling class. The traditional industrial bourgeoisie who has been associated with the military and security wings of the Baath Party is doomed to lose since state restructuring has also meant a gradual purging of the latter two groups that dominated the state for over three decades. The other factions of the ruling class that have gained their power through different periods of liberalization (infitah) have managed to establish a political alliance with the bureaucratic factions of the ruling class comprised of the sons of the Baath Party officials (Perthes, 1993, p. 45). Many observers have argued that the Syrian ruling class, which has traditionally been very divided, is about to establish a broad class alliance with the various factions of the elite; namely the nouveaux riches, petite bourgeoisie and the state elite. The emerging ruling class factions do not accumulate their wealth through industrial investment or manufacturing; rather, they are interested in the quick turnover of their capital through speculative activities in the stock exchange, the real estate sector and the land market. In the meantime, economic decisions are being de-politicized, with the state transferring its responsibilities of policy making to the ministry of finance and the central bank. This would negatively impact the poor and the majority of Syrians who have come to depend on state subsidies for their daily commodities. The lack of legitimacy of the regime and the growing gap in wealth in Syrian society has made the regime and its recent economic development model quite unpopular. In the absence of any viable alternatives and political will, the regime of Bashar al-Assad has pursued the unpopular development project of market economy, albeit with a lot of caution. Any change in the nature of the state is not merely a technical change in response to global economic and political pressures; rather, changes in the state also have socio-economic dimensions. Each phase of change in the

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Syrian state has corresponded to a new balance of class forces and their influence in shaping the development project. The period of infitah, which was initially undertaken to bring Syria into the capitalist world market, has produced unpredictable negative effects for the Syrian economy and society. Whether the Syrian state and economy can survive yet another period of infitah will be determined by how the citizens of Syria respond to further austerity measures as the new ruling class attempts to form a more coherent alliance in order to successfully continue on a neoliberal path of economic development (Bahout, 1993, p. 77). The next section examines the rise of Hafiz al-Assad to power and the first phase of building a centralized state in Syria.

2. THE HISTORICAL PATH TO CAPITALIST DEVELOPMENT IN SYRIA 2.1. The Demise of Radical Baath and Hafiz Al-Assad’s Project of State Building: 1969–1977 Prior to 1958, Syria’s economy was dependent on cotton as the main cash crop, organized by independent urban notables who owned major tracts of land (Ahsan, 1984, p. 301). During Egypt’s union with Syria (which was known as the United Arab Republic (UAR)), radical reforms such as land redistribution and bank nationalizations were undertaken. These reforms aimed to break the monopoly of the landlords and industrial bourgeoisie over the economy. The state aimed to restructure the economy in the framework of Pan Arabism. These policies proved unpopular among the bourgeoisie who felt threatened and the UAR came to an end with a coup in 1961. The 1960s marked the beginning of various attempts at centralizing the state power and organizing the economy. The state building project in the late 1960s proceeded with a series of nationalizations of private firms and expropriation of large landholdings. Close to 106 private firms including oil distribution companies, cotton ginning companies and 70 per cent of export and import trade were brought under the control of the state. Fiscal policy and tax laws were modified in the interests of more egalitarian revenue generation and redistribution by the state. Rent reductions also served the interests of the working class and the poor (Ahsan, 1984, p. 306; Petran,1972, p. 183). Clearly, the regime sought to have the state as the guide for economic development of Syria. At the end of 1965, the regime

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was pressured by the landlords and the private sector and, as a result, a compromise was reached. The government halted its nationalization policies and allowed the private sector a free hand in real estate and construction. The most radical phase of Baath rule was from 1966–1969. The military wing of Baath Party, which ruled in this period, had their social base among the peasantry and the poor and their policies mostly served the interests of their constituency.5 The reforms of this period included a bigger role for the state in production, redistribution and consumption decisions. At the same time, popular representation was facilitated through independent workers and peasants’ unions. Substantial changes in the industrial and commercial sectors resembled that of state-led industrialization in the USSR, although with a large degree of autonomy for the workers and peasants (Ahsan, 1984, p. 307). The Baath Party in its most radical phase (called as the neo-Baath) in the 1960s introduced a series of reforms and policies that inadvertently tilted the balance of social forces in the interest of the poor, the workers and the small farmers. Attempts were made to organize the economy by limiting the reach of the urban landed notables and monopoly merchants and by integrating the peasantry and minority rural groups (Olson, 1982). However, the radical regimes’ attempts at creating an integrated domestic market and economy were faced with capital strikes of the worst kind. Left cash strapped and open to criticism from the moderate and liberal factions of the Baath Party, the radical regimes could not pursue their policies and finally fell victim to crisis of stagnating growth and increasing foreign debt. By 1969, the regime had succumbed to demands of liberal elements within the party. As a result, a series of reforms were implemented in the interest of the private sector. Having taken over important seats in the cabinet, conditions were provided for a shift to liberalized economy (Perthes, 1993, p. 45). Thus ended the first highly contested phase of state-building, which triggered thirteen coups d’etat in seventeen years (Petran, 1972). Hafez al-Assad’s rule, which began with a bloodless coup on November 14th, 1970, marked the beginning of a period of centralization of the state and economy with the institutional backing of the Baath Party. Al-Assad consolidated his power by appealing to the old bourgeoisie (the merchants and landlords) as a way of securing both the regime and consolidating the state. His economic policies which reflected the political shift in Syria came to be known as relaxation (Infiraj) or opening up to the people (al-infitah ala ash-shab). Thus, the ‘corrective movement’ that began under Hafiz al Assad signified a radical shift towards building a national economy. This shift entailed the uniting of all social forces to generate economic growth.6

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Al-Assad’s path of development, which began in 1969, was a response to the disorganized planning by the state, the rising influence of the merchant classes, with an eye to expanding the political base of the regime among the Sunni merchants (Ahsan, 1984, p. 317). With the stated goal of attracting Syrian capital back to Syria, a series of reforms such as the creation of tax free zones followed (Petran, 1972, p. 216). State building also entailed centralization of political authority, through cooptation of different forces in society (Olson, 1982). Labour unions were absorbed within the newly created institution of National Progressive Front (NPF). Al-Assad’s centralization of the economy and state initially aimed to embark on building capitalism in Syria, although it was not until 1990 that the conditions for private capital accumulation were secured by the state. Perthes has identified al-Assad’s economic development project as publicly financed, but privately managed development (ibid., 1993, p. 47). This project was superceded by the project of state building, which at times required political compromises between the state and the masses. Tabitha Petran has viewed al-Assad’s capitalist development project as the formation of an alliance with the landlords and merchants against the workers and peasants and their supporters within the Baath Party. As part of his expressed loyalty to the landlords and merchants, al-Assad reversed most of the previously sequestered lands, removed import quotas, set up tax free zones to attract capital. Other reforms included establishing economic courts to keep a check on economic activities within the state sector. State redistributive policies were funded through the high rent received from oil sales, remittances and geo-strategic rents of Cold War era (Petran, 1972, p. 210; Perthes, 1993, p. 45). Al-Assad’s economic and political reforms led to a balance of power between different factions in Syria. Through land reforms al-Assad reduced the power of the landlords, but at the same time he gave concessions to merchants and established the institutional power of the military and security forces through the state. Consequently, his policies resulted in giving birth to new classes whose power was directly linked to the state such as the military, the bureaucracy and the Baath Party members. Thus, he reorganized the social forces outside and inside the state either through cooptation or purges (Quilliam, 1999, p. 84; Olson, 1982). All of this was accomplished within a corporatist set of policies, which aimed to incorporate into the state, the left and the unions. The outcome of al-Assad’s policies resulted in the extension of his power base to the minorities, merchants, landlords and the private sector (real estate, construction) into the economic development project of the state. ‘‘Through its direct access to the state

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apparatus, the military y gained a crucial role in the state-building process’’ (ibid., 1999, p. 44). In short, economic liberalization in the 1970s was accompanied by a series of political reforms that facilitated the integration of conservative as well progressive forces into the structures of the state. However, political reforms aimed at isolating and controlling the progressive forces that posed threat to the regime of al-Assad. ‘‘By establishing a parliament and the NPF and by passing a new constitution, al-Assad tried both to broaden his base of support and to institutionalize and stabilize his regime y . For the most part [the independents in the parliament] represented the middle classes and in some cases Syria’s pre-Baathi urban and tribal aristocracy y . There was no legal basis for parties to act outside the front’’ (Perthes, 1993, p. 50; Olson, 1982). This was a very successful method of paralyzing the left in Syria and limiting its role in Syrian society, as they were not allowed to be active among students or become active in the military. All of this led to the centralization of the state power. The period of al-Assad’s rule can be divided into five periods: 1970–1977, 1977–1982, 1983–1985, 1985–1990, 1990–2000, each one corresponding to a new phase of economic liberalization or marking the unfolding of contradictions of market economy and the state’s response to them. Effective social control under al-Assad necessitated a series of compromises by the elite and the state which facilitated upward social mobility. Redistributive policies, which helped al-Assad maintain his power base, included ‘‘government housing projects, state-run health-care and public school systems, and vastly expanded employment opportunities in nationalized industrial, financial, commercial [sectors] and y expanded civil administration. y Both in rural and urban areas, the state emerged as a new class in coordinating socioeconomic activities of the different classes and status groups and replacing or at least reducing the influence of the old elite’’ (Ahsan, 1984, p. 320). Neil Quilliam has defined al-Assad’s strategy of state management as ‘populist corporatism’ which ‘‘includes the incorporation of political elite groups, popular organizations and organised business’’ (Quilliam, 1999, p. 78). As a sincere gesture to the private sector, al-Assad radically increased the role of the private sector in the commercial and industrial sectors of the economy while reducing the role of the public sector by reorganizing it. As a result of the economic reforms, in a short period of one year, more than 100 licenses were issued to individuals or private companies to set up industrial ventures (Lawson, 1989, pp. 22–23). Low-interest loans and subsidies were made available to small private workshops (Perthes, 1993, p. 46).

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Deregulation of the commercial and then industrial sector began as early as 1969. Free trading zones were set up in Aleppo and Tartus in the same year (Petran, 1972, p. 251). The public sector monopoly was removed through the break up of state-run import-export control agencies (Lawson, 1989, pp. 23–24). Finally, the country was opened to foreign direct investment in both trade and manufacturing, giving amnesty to Syrian capital flight (Quilliam, 1999, p. 86). Other reforms included removal of restrictions on import and expanding the range of manufactured goods. ‘‘As of 1972, imports without foreign exchange transfers were allowed in order to enable merchants and other persons who had part of their wealth abroad to repatriate some of it back to Syria’’ (Perthes, 1993, p. 46). In addition, as a concession to Arab regional interests, duties on 191 products imported from the region were lifted completely. In a sense, the 1970s were the testing ground for the ruling class in Syria to take on the role of organizing production. This had occurred after the defeat of the progressive forces within the Baath Party. However, the return of the state as the organizer of the economy in late 1970s clearly points to the failure of Syrian ruling classes and the private sector to independently take on the task of organizing the economy. This said, the private sector made a series of significant gains during different phases of economic liberalization. The autonomy and freedom that was awarded to private sector went hand in hand with its newly established role in overall economic development of Syria. Al-Assad mobilized private resources through the March 1974 decree, which allowed the private sector to sign off loans from private investors for developing private enterprise.7 From 1971–75, private sector accumulation strategies occurred within small industry and real estate sector, a risk free profitable sector. By 1973, the private sector controlled 32 per cent of foreign trade and in 1981, 40 per cent of all export and 35 per cent of all imports (Ahsan, 1984, p. 311). By 1979, private banking began with the establishment of a Syrian–Jordanian bank marking the end of bank nationalizations of the 1960s. Petran argues that liberalization policies of al-Assad regime only succeeded in evoking a ‘cautious response’ from the private sector. Investment levels remained low although three major sectors of the economy, construction, tourism and transport had been opened up to private investors (Petran,1972, p. 252). Liberalization policies also delivered heavy blows to workers in the public sector and in heavy industry. As stated by Lawson, ‘‘In 1971, almost 60 percent of workers were employed in agriculture, approximately 5 percent in construction, almost 10 percent in commerce, and 12 percent in services; eight years later, the proportion employed in agriculture had fallen to around 33 percent, while those for construction, commerce and services

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had risen to approximately 14, 10 and 20 percent respectively’’ (1989, p. 26). Another blow of the liberalization policies entailed the relaxation of labour laws as a way of enticing private investors to Syria(Perthes, 1993, p. 46; Quilliam, 1999, p. 69). While the private sector failed to undertake viable economic development, heavy state intervention produced a number of positive results that benefited the private sector and the Syrian society as a whole. As Quilliam writes as a result of the state’s role in economic planning: Per capita income was rising, albeit unequally, throughout all classes, ‘development’ in the form of electricity, roads and schools was noticeable in all parts of the country, and the expansion of education and of public sector employment allowed a high degree of upward social mobility. (1999, p. 54)

As we will see in the next section, the popular forces as well as factions of the traditional Sunni merchant groups did not quietly accept such experimentations of the private sector with the Syrian economy. We thus look into the crisis that engulfed Syria, so that, for the first time, Hafiz al-Assad’s state building project was seriously challenged by various groups within Syria.

2.2. Popular Protest and the Contestation of State Power: 1977–1982 The first crisis of the centralized economy became apparent in 1977 when the private sector left the mass of Syrian population disillusioned and living standards stagnated. Private sector activities in the unproductive sectors of the economy negatively impacted consumption levels of ordinary Syrians. Aziz al-Ahsan has noted that production of items such as matches, rubber boots – mostly worn by the poor – radically decreased. Instead, salons and luxury shops opened by 1978 appealing to the rising middle classes and the elite (Ahsan, 1984, pp. 309–310). As active opposition to the regime mounted, the state was forced to intervene in order to restore social order and protect the state. The state responded by active intervention, both by crushing dissent and limiting the private sector’s sphere of activity. This active intervention by the state was possible precisely because al-Assad had not abdicated his political powers in the course of limited economic liberalization (ibid., 1984, p. 318). At the same time, he did not want to alienate his newly established broad political base that included groups such as landlords, merchants, peasants and workers. The corporatist state re-emerged once again as the private sector had failed to carry on the task of economic development successfully.

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The crisis took the form of organized opposition to the regime signified in the Hamah rebellion of 1982.8 In the absence of any effective political outlet, opposition movements were forced to hit the streets. The discontent emerged from stagnant living standards, the dominance of the private sector over the public sector, a polarization of land ownership and the alienation of the Sunni-based middle class, muslim brotherhood from the state and inability for social mobility due to dominance of Baath Party in the state.9 In short, there was an overall discontent with al-Assad’s development strategy.10 The state responded to these oppositions by imposing regulations on merchants, and private manufacturing firms.11 Taxes were increased on private sector activities and raw materials were directed towards public sector enterprises. Furthermore, tax evasions were punished by the state, and state-run financial institutions became the central credit offering bodies (Lawson, 1989, p. 27). In the meantime, as Perthes argues, the measures taken by the state in no way represented a serious restriction on the private sector as the private sector was assured that no return to socialism and no expropriations would take place. The measures then were more ‘corrective’ aiming at further facilitating the development of the private sector with the help of the state. Through the establishment of the Committee for the Guidance of Imports, Exports and Consumption in 1981, the state clearly deferred to the private sector for economic development and planning (Perthes, 1993, p. 54). The state indeed played an important role at this point, forcing the private sector to learn to survive, through encouraging competition and overlooking the activities of the private sector.12

2.3. Crisis of the Planned Economy: 1983–1985 Until the early 1980s only limited liberalization had occurred. Liberalization measures of the 1970s had not corresponded to structural changes, as the state was still heavily involved in the economy delivering social policies with the help of oil revenues. The failure of the private sector to invest in the manufacturing or industrial sectors definitely made it necessary for the state to keep a central role in the economy (Ahsan, 1984, p. 312). Another reason for the strong role of the state in the economy and a check on the private sector was the high level of resistance from 1977–1982 to liberalization policies. During the first half of the 1980s, the crisis of centrally planned economy became unmanageable by the state. In response, the state actively encouraged the private sector to play a more central role in the economic

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development of Syria. Faced with a foreign exchange crisis and an unfriendly international climate for loans and economic aid, al-Assad saw private investment as the only way to deal with the crisis. To this end, he introduced a series of radical reforms in the interest of expanding the role of the private sector in the economy. Richards writes that the structural weakness of ISI became apparent in the late 1970s and early 1980s. Due to spiraling down oil prices, the state’s revenue shrank. As a result, the expenditure of the state led to inflation and a growing external debt, which grew ten fold between 1970 and 1983. The $2.3 billion debt plagued the economy (Richards, 2001, p. 47). Faced with the option of going to the IMF and World Bank and subjecting the state to the conditionalities of these institutions, on the one hand, or allowing a bigger role for the private sector, on the other, al-Assad’s regime opted for the latter option. Some form of export-oriented development strategy came to determine the goals of economic development in mid-1980s. However, this did not mean an overnight disappearance of state planning. Clearly, state planning had come to a crisis from which it could not escape without rearticulating the role of the state. This crisis reached its peak point after efforts of the 1980s did not lead to high growth and social problems persisted, while the international political landscape underwent radical change as the USSR faced its collapse. Perthes has argued that the second phase of liberalization in 1983 was qualitatively different from the earlier infitah of the 1970. This qualitative shift was seen in an overall shift in the government’s development strategy. Liberalization was not simply encouraging the private sector to participate in the economy; at this point, it meant the private sector was to be the main agent of economic development (ibid., 1993, p. 55). With the support of the emerging private sector, al-Assad attempted to adopt an independent development policy and reducing the reliance of Syrian development on the official development aid and geopolitical rents (Sukkar, 1993, p. 39). Raymond Hinnebusch (1993) and Nabil Sukkar (1993) have argued that the Syrian state posed a serious threat to successful liberalization. This threat no longer remained strong in the face of crisis of ISI with growth levels dropping to 1 per cent per annum. Building a national power base through state-supported consumption became unsustainable as the revenue sources of the state began spiraling downwards. As Hinnebusch (1993) writes, the Syrian state had overdeveloped with the help of rents and as soon as rents disappeared, it became impossible to support the large public sector. Austerity measures and cutbacks in public spending were pursued as a way of resolving the foreign exchange crisis. Economic reforms

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included a reversal of the role of the private and public sectors in accumulation and redistribution policies. As the government withdrew from planning and industrialization, state revenues and employment generation became dependent on the private sector. The government relaxed regulations and introduced incentives in order to encourage the private sector’s involvement in the economy (Hinnebusch, 1993, p. 101). Contradictory attempts by al-Assad with the goal of extending the life of the planned economy was a sign of the failure of the planned economy to generate growth and meet social needs without facing macroeconomic imbalances in the context of increasingly neoliberal global economy. Policies such as increasing wages and removing import restrictions unmasked the desperate struggle of al-Assad’s regime to revive a failing economy (Perthes, 1993, p. 55). The economic reforms of this period aimed at increasing the sphere of activity of the private sector while at the same time limiting the role of the public sector in the economy. The socio-economic impact of the reforms fell unevenly on the shoulders of that portion of the working class who worked in the public sector and those who depended on state subsidies for reproducing themselves (small farmers, peasants, workers and the unemployed). First, the shift towards an export-oriented economy led to the concentration of private property in land in the hands of few (Quilliam, 1999, pp. 48–49). In the manufacturing and industrial sectors, the private sector was allowed to keep 50 per cent of their hard currency export earnings for their own imports. Another main element of the second phase of infitah was the phased devaluation of Syrian currency in the interest of expanding Syrian exports (Perthes, 1993, pp. 56–58). This currency devaluation was coupled with high levels of inflation and price explosions during 1986–1987. ‘‘Consumer prices rose by 36 per cent in 1986 and 60 per cent in 1987, but true inflation rates were believed to have increased by more than 100 per cent in each of these two years’’ (Sukkar, 1993, p. 28). Next, in order to facilitate private sector activity, the reform of the regulatory framework was undertaken. At the same time, the monopoly of the public sector in basic consumer items such as rice, sugar, tea, coffee and cooking fat was broken with an eye to encouraging the private sector activity. Abandonment of state control over trade, investment and fiscal policies announced the end of state’s central role in determining production and consumption (Perthes, 1993, p. 59). More and more, the Central Bank of Syria had gained power in determining not only monetary and fiscal policies, but also making decisions about the overall economic development of Syria (Sukkar, 1993, p. 28).

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The economic reforms unevenly affected the different social groups and classes. If we look at who gained and who lost, we will notice that at a general level the private sector clearly gained. However, scratching below the surface, we will notice that not everyone within the private sector gained. Those aspects of the private sector, which relied on state protectionism for reproducing themselves lost to a newer private sector whose interests were more directly linked to external markets than to the domestic market. In a sense, the self-imposed Syrian reforms resembled the structural adjustment policies that were often imposed by the IMF on many other economies in the same period or earlier (Perthes, 1993, p. 56). The infitah of the 1980s impacted the public sector unfavorably, exposing the sector to intense competition with the private sector. This often took the form of mixed sector or joint ventures, which was the outcome of legislation passed in the late 1970s and 1980s. The state was ‘‘a silent partner holding a minimum of 25% share’’ (Polling, 1993, p. 15). As Perthes has pointed out in this period, ‘‘Public sector enterprises would not receive foreign exchange for their imports beyond what they obtained for their exports or, if foreign markets were inaccessible to them, from ‘exports to the local market’, that is, local sales of their products against hard currency’’ (Perthes, 1993, p. 57). Despite these reforms, the state avoided a complete erosion of its fragile legitimacy by maintaining a degree of social policy and redistributive mechanisms. This took the form of subsidies and public services, which was supported by the elite for fear of social disorder. The Syrian state at the time was actively engaged in convincing every interest group of its good intentions. On the one hand, it convinced the private sector of its commitment to reform, on the other it continued subsidizing basic commodities through heavy subsidies in order to maintain its base of support (Heydemann, Steve cited in Quilliam, 1999, p. 92). In sum, the burden of state expenditure in the absence of revenues led to a serious economic crisis, which took the form of lack of foreign exchange. State planned economy had reached its logical end and could not go on any longer without falling apart. The alternative path pursued by the state at this point was simultaneous encouragement of mixed sectors, on the one hand, and export led growth, on the other. In short, the state began heavy mobilization of private resources and capital for the purpose of economic development. This shift in economic development project was accompanied by a series of serious reforms, which many argue marked the first phase of non-reversible economic liberalization in Syria. This included measures for liberalizing trade and investment through expanding the reach of the private sector.

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2.4. Market Economy and Competitive Austerity: 1985–1990 This 1985–1990 period marked the beginning of increased competition between the public and the private sectors, which was reflective of the shift in global development strategy whereby private investors gained a dominant role in guiding economic policies of nation states. Rather than privatizing state corporations, the Syrian state imposed the logic of competition on state firms forcing them to sink or swim. While the private sector was offered numerous incentives, including tax breaks and tax holidays, the public sector was constantly scrambling to meet the social needs of the domestic population and keep up with profitability levels (Perthes, 1992). The emerging weakness of the USSR and the East Bloc further strengthened the shift to market economy and the Syrian state preemptively sought a re-orientation in its economic policy through a self-imposed austerity measures and reforms. The state in Syria had been remade time and again, but it had not lost its relevance as a social force and its role as the means for capital accumulation. As we will see in the next section, while the economic role of the state is left for the private sector in many sectors, the state still exerts its power in implementing political changes that would guarantee accumulation as well as survival of the state. Hence, the state has been engaged in performing two tasks: increasing the influence of the private sector, and restructuring the political landscape to reflect the changed balance of social forces. This is a very sensitive task, which is reflected in the gradual and uneven nature of liberalization in Syria. This phase of reforms aimed at liberalizing investment, trade and prices, as a strong policy shift in favour of the private sector (Perthes, 1993, p. 59). As a result, the private sector made many significant gains during this period. For instance, while in 1983 private manufacturers were able to keep 50 per cent of their hard currency earnings from exports, by 1987 this percentage had increased to 75 per cent and the range of goods covered under this law had also broadened (Richards, 2001, p. 48). Richards referred to the new gains of the private sector as a blurring between ‘Mafya Kapitalism’ and ‘Arab Socialism’ as power became more and more concentrated in the private sector through its access to the state bureaucracy. In the agricultural sector, reforms benefited the bigger landlords and improving farmers. As early as 1980s, the private sector had gained entry into the agricultural sector, and, except for cotton, wheat and sugar beets, they had access to all other goods. ‘‘Private sector farming has remained a dominant force in agricultural production, and between 1987 and 1991 it accounted for two-thirds of the cultivable land’’ (Quilliam, 1999, pp. 48–49).

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In response to the profitable terms for exports, agricultural production became more and more specialized and geared towards the external markets. Richards argues that such changes strengthened the relationship between the merchants and the military leading to a ‘soldier-merchant’ alliance (Richards, 2001, p. 49). The second foreign exchange crisis in 1986 prompted the Syrian state to engage in generating foreign exchange resources through encouraging export led growth and a bigger role for the private sector. As Sukkar has noted, ‘‘The new strategy calls for exporting ‘whatever can be exported’, and the policy has been pursued even at the expense of fulfilling domestic needs’’ (Sukkar, 1993, p. 34). Pointing to the same phenomenon Perthes writes: Apart from foreign trade and currency regulations, this initial phase of the second infitah involved a substantial liberalization of Syria’s agricultural economyy . Beneficiaries of the new regulation were mainly ‘new class’ businessmen or crony-capitalists whose economic success depended heavily on their relationship with members of the regime elite. (Perthes, 1993, p. 57)

Liberalization measures of the late 1980s involved a move away from social pricing towards economic pricing, reduced subsidies on farm products, leaving farmers on a level ground with the private sector, reduced quantities of rationed food items, which removed the guaranteed market for the farmers, and an increased base for taxation (15 per cent sales tax imposed on luxury items. As a result, competitiveness has come to determine the survival of different sectors of the economy. The distributive effects of the reforms have often meant that the income gap has widened within Syrian society, with a minority accumulating most of the wealth. While the diminishing of the public sector has led to massive unemployment, the managers and controllers of the public sector will definitely lose, unless they succeed at competing with the private sector (Sukkar, 1993, p. 38). During the decade of the 1980s, the state implemented a number of political reforms to facilitate the involvement of the private sector in the economy. For instance, independent decision-making bodies – such as the Prime Minister’s Committee for the Guidance of Imports, Exports and Consumption with a heavy influence and presence from the private sector – were constituted to deliver policy decisions. In addition, the people’s council was altered to increase the number of independent candidates by bringing in members of the chambers of commerce of different cities. In 1990, one-third of the seats in the People’s Council were indeed reserved for the private sector, highlighting the radical transformation of the Syrian state over the course of the twenty years (1970–1990). ‘‘This was also a sign that the Baath

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Party, though still a patronage-generating entity, was beginning to lose its ideological leadership and its pivotal role in the policy process’’ (Quilliam, 1999, pp. 91–92).

3. THE TRIUMPH OF GLOBAL CAPITALISM AND THE END OF STATE PLANNING: 1990–2000 The new world order ushered in a new phase of substantive infitah in Syria. The Syrian state did not completely abandon its policies of central planning until 1990. It was in 1991 that with the introduction of its Investment Law No. 10, Syria attempted to make a radical break with import substitution through liberalizing investment and banking.13 This break in economic policy corresponded with significant political reforms at the state level. The decade of the 1990s posed serious challenges to the Syrian regime. With the collapse of the East bloc and the dominance of the capitalist economy, and the failing public sector performance, the Syrian regime attempted to reorient its policy direction (Polling, 1993, p. 19; Sukkar, 1993, p. 31; Kienle, 1993, p. 1). This reorientation entailed the introduction of important economic policies that reflected the dominance of the global economy. As Owen and Pamuk have noted, majority of the elite in Middle East have been convinced that except for economic liberalization, there is no other way forward (Owen & Pamuk, 1999, p. 242). In the process, the state underwent a process of restructuring, albeit slow and uneven. New forces, which had gained power during the previous phases of infitah had come to the forefront and they exerted a lot of power in determining economic policy. Thus, Syria began the pursuit of market economy in more pronounced ways than during the previous decade. This section will discuss the important policy shifts of the 1990s and the uneven impact of this policy on different social groups in Syria. It is noteworthy that the policy changes required a radical restructuring of the Syrian state, a project that has continued under Bashar al-Assad. Alan Richards (2001) discusses the period from 1985 crisis till 2000 and how policies have been formed in the period. The first measure of economic development shift was captured in Investment Law No. 10, which aimed to attract Syrian, Kuwaiti and other Arab investors who fled Kuwait during the Iraqi invasion to invest in Syria. The significance of this law lies in the fact that it marks a radical break from the hesitant investment reforms of the 1980s. By introducing this law, the state bestowed full freedom and

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guarntee to investors under very favourable conditions. It also meant that private investors could now engage in any sector of the economy as the public sector become more and more limited in its sphere of activity. As Fida Nasrallah writes, Investment Law No. 10 not only expanded the general sphere of activity and political power of the private sector, it also made ample room for foreign capital, which strategically aimed to encourage Lebanese capital in Syria (Nasrallah, 1993, p. 137). It should not be overlooked that laws that expanded the total share of private sector in the economy had been introduced as early as 1988 when the Ministry of Industry affected a reversal in the role of the public and private sectors in terms of freedom of production and investment. A list of 30 industries was to remain the exclusive domain of the public sector, and the rest was left free for mixed sector and the private sector. Previously the government had identified the industries that the private and mixed sectors were allowed to enter and everything else was the special domain of the public sector (Sukkar, 1993, p. 33). Richards has highlighted important aspects of Investment Law No. 10, which reflects on a new balance of power in favour of the private sector: ‘‘Under this law, which covered investments of over 10 million LS ($240,000), investors could propose projects in any economic sector. Approved projects are given a 7 years’ tax holiday, are largely exempt from customs duties and import restrictions and are granted generous profit and foreign exchange repatriation’’ (Richards, 2001, p. 49). In an attempt to boost export led development, companies that exported over 50 per cent of their production, received an extra two years of tax holiday (Sukkar, 1993, p. 35; Perthes, 1993, p. 60). Beside tax holidays, companies were offered exemptions from customs duties and import restrictions. This law also allowed the formation of joint stock companies and, for the first time, private banks in Syria (Sukkar, 1993, p. 33). Parallel to the Investment Law No. 10, a new tax law was introduced, which reduced corporate and business tax substantially. While the stated goal of government for this law was enticing investors, the law clearly points to the heightened importance of the private investors in Syrian economy, allowing the private sector to engage in sectors that were previously reserved only for the public sector. As Kienle has pointed out, the liberalization of 1990 marked a break from the discreet nature of transitions of the past decades (Kienle, 1993, p. 1). Taking advantage of the failing state of the public sector and of a state without a vision for economic development, the private sector successfully exploited these weaknesses and strengthened its structural position within the Syrian economy.

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By the 1990s, for the first time since 1963, the private sector had a bigger share of the Syrian economy in terms of investments in comparison to the public sector (Perthes, 1993, p. 60; Hinnebusch, 1993, p. 106). As Patrick Seale writes, this law served as a landmark on the path towards capitalist development in Syria (Seale, 1993, p. x). The dominance of the private sector was coined in the term ‘economic pluralism’ which came to characterize Syrian economy during the 1990s and onwards. Although misleading, the term was still significant in that it suggested the end of the public sector dominance in the economy. While during the 1970s and early 1980s, the public sector, the private sector and the mixed sector were said to compliment each other, by late 1980s and in 1990s it was argued that the three sectors must compete with each other (Sukkar, 1993, p. 33).14 In the agriculture for instance, the private sector gained control over production, pricing and marketing during the liberalization of the 1990s. Despite the dominance of the private sector, the public sector still remained in control of food, sugar, textiles, chemicals, engineering, cement and building materials (Quilliam, 1999, pp. 49–50). Commenting on the pace of reforms and obstacles to reform, Sukkar writes that due to the fragile balance of power in Syrian society and the negative social effects of economic liberalization, it is very possible that reforms will follow a slow and gradual pace. Sukkar argues that, in the course of the 1990s, two opposing views have emerged on the particular path of reform: The first deals with the transformation of public enterprises into joint stock companies, grouping them according to their functions under a number of holding companies as, for instance, in Egypt and Algeria, as a prelude to reforming and rehabilitating individual enterprises on a case-by-case basis. This approach leaves the door open for the introduction of necessary new laws and regulations that could convert these enterprises into market-oriented profit-making entities. The other view involves amending existing laws, rules and regulations governing public enterprise operations to make enterprises more autonomous. It suggests that enterprises should be given more say in purchasing inputs, marketing outputs and price fixing, and should retain all the surpluses they generate, only handing over taxes to the central government. This view still holds, however, that price fixing should remain centrally determined, and should be guided by economic and social considerations. (Sukkar, 1993, p. 41)

From the excerpt above, it is clear that the logic of capitalist development, competition and profit seeking have become the uncontested path of economic development. The only difference between these views tends to be on how fast reforms should be implemented and whether the poor and workers need to be protected against the side effects of such reforms or not.

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Maintaining the public sector as the producer of basic commodities speaks more to the socio-economic realities of the Syrian society than to its lack of commitment to economic liberalization. Close to two million of the total eighteen million Syrians live below the poverty line according to UN report of 2005 on Syria. The official 14 per cent unemployment rate does not include those who have precarious and insecure jobs. As long as the public sector remains in control of production of basic commodities, there will be a certain guarantee for political stability and social order, something that the fractured, but newly emerging elite seeks (Perthes, 1993, p. 63). Richards has also offered similar explanations for the slow pace of reform. Beside the fear of social disorder, the vested interests of the old bourgeoisie and state elite are other factors that has put a break on the pace of reforms in Syria, which Richards has called Syrian reforms as ‘dilatory’ (Richards, 2001, p. 46). Another reason for the public sector’s involvement has been the inability of the private sector to take on the task of national economic development through reviving the productive sectors of the economy; this will continue to prevent Syrian economy from abandoning its public sector support (Hinnebusch, 1993, pp. 101–102; Hinnebusch, 1990). Given the interdependence of the global economy with its global division of labour, it is highly unlikely that the Syrian ruling class will ever achieve this goal, when it can find alternative ways for accumulating capital. The economic reforms have definitely led to a polarization of wealth and marginalization of the majority of the Syrian population. There has been a concentration of property in the hands of a minority while the petty bourgeoisie’s share of the national income has shrunk radically in the wake of the Investment Law No. 10. ‘‘In 1991, the average capital of newly established private industrial projects amounted to only US $25,000 whereas the average capital invested in new industrial and service companies established according to Investment Law No. 10 of 1991 exceeded $4 million’’ (Perthes, 1993, p. 62). As the state expands the role of the private sector, it has abandoned its active role in sustaining social policies and redistributive measures. Social policies and state expenditure are often supported, not by taxes, but through sales of oil, which according to the IMF, will be gone by 2020. At the same time, the performance of the private sector has been marginal in terms of the positive growth and redistributive measures. The rate of job creation has declined from 4.8 per cent in 1990 to 2.9 per cent in 2000. According to Arab Human Development Report 2005, unemployment has increased from 912 per cent in 2000 to 14 per cent in 2004. Other reports state unemployment at 20 per cent (United Nations Arab Human Development Report (AHDR), 2005).

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While liberalization will continue, it is not certain that it will pick up pace without requiring serious political reforms as well as political risks for the regime. Perthes has pointed to the establishment of a Syrian stock exchange along with private insurance companies and foreign private banks as part of the package of reform that was underway throughout the 1990s (Perthes, 1993, pp. 63–4). The political risks mentioned earlier indeed forced the regime to opt in favour of selective liberalization, something that the IMF (2005b) report has pointed out. The Syrian regime was faced with a number of social problems and economic imbalances by 2000. These included a 4 per cent labour force growth with a 1 per cent growth in the economy (Richards, 2001, p. 46). In order to deal with these problems, the Syrian regime has continued on the path of economic integration through signing bilateral free trade deals, such as GAFTA, WTO, EU-Mediterranean (Economist Intelligence Unit (EIU), 2005). Hence, liberalization of trade and investment has come to dominate the economic policy dimension of the Syrian regime over the course of 2000–2005. Ever since Bashar al-Assad took power in 2000, different views have emerged as to what his rule might mean for the Syrian state and economy. While the media in the region suspect any substantive change in the Syrian economy and state, evidence suggests otherwise. Bashar al-Assad’s rule indeed represents a crucial breaking point from his father’s era. This shift is reflective of a larger shift in the nature of ruling class interests. In order to successfully integrate into the global economy, the Syrian ruling elites have come to a crucial realization. The framework of Baath Party and its way of organizing the state no longer represents the interests of the newly emerged factions of the ruling class. Although the military and security forces have been resisting any radical change in the nature of the state and Baath Party, a gradual process of de-Baathification has been occurring since the beginning of 1970s as part and parcel of economic liberalization and development of capitalism in Syria.

3.1. Neoliberal Economic Development and Bashar Al-Assad’s Regime: 2000–2005 With the end of Hafiz al -Assad, his son Bashar al-Assad has had to deal with the legacy that his father left behind. Despite various expectations from the era of Bashar al-Assad, his regime continued the path of economic development that was put in place by his father. The developments that the

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Syrian state and economy have undergone under Bashar al-Assad’s regime are evidence of a qualitative transformation of the Syrian state. The rising influence of the pro-reform factions of the ruling class and their participation in the political decision-making process since 1990s, has come to determine the course of economic development and state reform under Bashar al-Assad. While the old guard, embodied in the Baath Party members, have resisted a fast pace of reform, it is a fact that a neoliberal logic of economic reform has been dominant in shaping a wide range of political, legal and institutional reforms. Despite this strong tendency towards market reform, there are serious obstacles to the neoliberal project. These obstacles can be summed up as the remnants of a traditional society such as the persistence of a moral economy and of customs. Other obstacles are structural weaknesses of the Syrian economy and legal framework that are not conducive to a competitive global economy where investors seek guarantee of private property. The results so far has been the formation of crony capitalism where old ties between the ruling classes have led to new opportunities for a transformed ruling class that is more attuned to the global economic logic. This said the concept of a national economy has been withering away in the face of the decline of the public sector. This section will discuss the coming to power of Bashar Al-Assad, the economic and political reforms under him, what these reforms mean in terms of balance of class forces and transformation of the state, and finally the impact of these reforms. In a newspaper article published in 2005 about the nature of Bashar al-Assad’s rule, Sami Moubayed pointed out that the Syrian parliament is adorned by portraits of conservative speakers from as far back as 1919 up to the present day. Ten years ago, these portraits did not exist as part of Syria’s history. While the conservative past has been restored, there still exist pictures of socialist leaders of the 1960s in the current parliament (Moubayed, 2005). This attests to the current conjuncture where conservative forces have come to hold the balance of power. As mentioned earlier, ‘economic pluralism’ is reflected in the various elements that are depicted in the parliament of Syria, although it is very clear and acknowledged by many that the influence of Baath Party has been on a decline for a long time now. Bringing together the emerging factions of the ruling class along with the pro-reform Baathists, Bashar al-Assad has been engaged in the remaking of the Syrian state and economy. Unlike his father, Bashar al-Assad did not hesitate to get help from the IMF and the World Bank.15 In fact, his minister of finance who was appointed in 2005 is an ex-World Bank economist. From this point of view, the period of his rule is quite significant, especially in terms of the impacts of the new path of economic

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development on the process of class formation and socio-economic problems that might accompany it. Adopting a neoliberal economic development agenda, Bashar al-Assad has pursued a series of economic and political reforms, which have further expanded the realm of activity and freedom of the private sector. The economic reforms include further liberalization of trade, investment and other capital flows, all of which transfer political decision making to the hands of a minority in the Central Bank of Syria and ministry of finance. An assessment of the liberalization period from 1990–2005 by IMF tends to praise the series of reforms undertaken by the Syrian regime. According to the report, under Bashar al-Assad’s rule, ‘‘Prices have been largely liberalized, trade and foreign exchange regimes have been simplified and liberalized, the tax system has been streamlined, and the private sector’s field of activity has been broadened to virtually all sectors of the economy, including banking and insurance’’ (IMF, 2005a, p. 25). Political reforms under Bashar al-Assad have been all geared towards facilitating the transition to a market economy. These reforms entail a qualitative shift in the nature of state that reflect structural gains of the emerging elite and are more in tune with the demands of a global capitalist world market (i.e., needs of private investors for regulatory framework and legal protections). Institutions of a modern state are being implemented as economic pressures are mounted against the regime. The failure of the public sector justified the regime’s accommodation with the private sector. The institutions of a modern state, as supported by the IMF and World Bank and making resonance among Syrian reformers, essentially entail a liberal democratic framework whereby rights of private property are guaranteed while market forces are unleashed. Bashar al-Assad’s reforms have led to a reorganization of social forces, although it is too early to determine the final outcome of his reforms as the process is still undergoing. Nonetheless, at this stage, it is still possible to sketch out the general impact of his reforms. An important reform under Bashar al-Assad, has been the grand project of building a modern state. This has entailed the removal of political barriers to such a project. In Syria, this obstacle is identified as the Baath Party’s relation to the Syrian state as well as the role of the executive. The shift in economic policies in the 1980s and onwards has slowly dismantled the power base of the Baath Party. The Baath Party traditionally represented class mobility; however, under Bashar al-Assad more independents and representatives of the private sector have penetrated the state and other positions of power within society. At the same time, Bashar al-Assad has imposed mandatory retirements of the

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security and military forces.16 While the political economy of Baathism is facing a serious threat by rapid liberalization of the economy, the relevance of the military and security forces might not come to an end as easily. As Quilliam has noted, ‘‘The armed forces and the security services have remained the most durable repositories of state power. y Their access to the state and the regime is underwritten by their indispensability to state and regime security. y Unlike the People’s Council, and the NPF, the military centres of power are not subordinate to the president’’ (Quilliam, 1999, p. 81). The destruction of the power of military and security forces within the Baath (either through purges or cooptation) represents a final blow to the structures of the old state that Baathists had built in the 1950s and 1960s. It was not until Bashar al-Assad’s rule that the power of the executive became subjected to change. Prior to Bashar al-Assad, the executive power represented almost the absolute power of the person of the president. The President appoints the prime minister, appoints the speaker of the People’s Council, makes laws when the Council is not in session, legislates without the Council’s consent, vetoes the parliamentary laws, and, finally, dismisses the People’s Council (ibid., 1999, p. 72). The transformation of the executive has been triggered by demands from both the domestic elite as well as IFIs. Despite economic liberalization policies of the last thirty-five years, Syrian and Arab investors do not feel protected enough by the state through rule of law, suggests Quilliam (ibid., 1999, p. 89). This has been one major reason behind the reform project of Bashar al-Assad since he took power in 2000. These demands find support within the IFIs, such as IMF and the World Bank. The IMF report of 2005 on Syria, for instance, has identified the declining oil prospects as a serious worry for the Syrian economy. The report argues that by 2020 Syria would have exhausted its oil resources. The only way that the Syrian economy could sustain the burden of reduced oil revenues is to pursue a rapid process of market economy. The report further argues that Syria has failed to solve the unemployment and poverty problems because of its failure to provide an investment friendly environment for investors. The suggested reforms to help the Syrian economy and society would entail a radical shift away from state planning to free market enterprise. This argument is premised on the lack of efficiency of the public sector enterprises. According to the report, the state-owned enterprises are irrationally organized, over-staffed under-paid employees and cumbersome.17 It is suggested that Syria needs to diversify its economy through expanding the export base of the economy before the oil runs out. Other reforms that are prescribed entail expanding the range of activities of the private sector, and fiscal reforms, which would lead to an overhaul of

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the subsidy system and reduced public expenditure. The report also offers the following recommendations and policy suggestions: make the Central Bank act as the fiscal agent and move the bulk of assets from the commercial bank of Syria to the Central Bank of Syria, unify the exchange rate, liberalize trade, reduce tariffs and the number of banned products radically, maintain efficiency of the public sector by creating competition between public and private sector (impose market imperatives and let the public sector sink or swim). The target industries and firms are pharmaceuticals, textiles, engineering and assembling of durables. In order to implement these economic reforms, however, it is necessary that the Syrian regime implement a series of institutional reforms. The stated goals of institutional reforms according to IMF report are the following: ‘‘Institutional reforms aim at strengthening competition, good governance, property rights and the rule of law. Judiciary reform would aim at strengthening the independence of the judiciary branch and at updating legislation and improving the process and effectiveness of business related penal cases’’ (IMF, 2005a, 2005b). These reforms will increase investment flows to Syria, argues the report. Although most of these reforms have been implemented by Bashar al-Assad’s regime, IMF argues that the reforms have not been fast enough to meet the challenges of Syrian society. There is a further need for comprehensive restructuring of the public enterprises, which could be achieved if the public enterprises are exposed to market logic of competition. According to the IMF, for successful integration into the global economy, Syria needs to modernize its state and economy. Modernization of state has meant the need to separate the ruling or governing party from the state, whereas modernization of the economy has entailed a break away from centralized planning by the Baath Party as well as a separation of the economy from political interests, something that is hoped to render the economy more rational and efficient. In short, it is argued that Syria needs a modern state, with liberal democratic elements, such as competing parties, free elections, free media as well as a set of civil liberties, all of which would create a stable society that could function within the capitalist world market. The obstacles to reform mainly come from the military and security forces along with remnants of the old industrial bourgeoisie who demand slower pace of reform. The old bourgeoisie still requires a certain measure of protectionism due to a lack of competitive edge. All of this suggests that all factions of the elite agree on one point and that is the need for political stability alongside economic freedom. So far, it seems that the need for the first has led to a slower and uneven pace of economic reforms, exposing the

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compromises that the elite are willing to make. Quilliam attests that since 1990, the Baath Party has been losing to the private sector and new classes of infitah elite (1999, p. 87). The public sector has deteriorated over the last twenty years, while the private sector has come to dominate the economy. By the 1990s, the ills of the private sector covered: ‘‘the multiplicity of supervisory organizations, centralized regulations for the purchasing of inputs and the marketing of outputs, poor management, old equipment, excessive employment and undercapitalization. In proposing solutions, comments focused on the need for decentralization and true autonomy, separation of ownership from management, application of economic criteria in assessing performance, differentiating between economic and social objectives and giving the public sector the same incentives as those given to the private and mixed sectors’’ (Sukkar, 1993, pp. 31–32). It is important to note that both Assads’ regimes maintained the public sector, not through active investment and industrial policies, but rather through exposing it to competition with the private sector. The United Nations report on Syria sounded the alarm about the socioeconomic effects of market reforms in that society. The report based its conclusions on the dismal record of the private sector over the past twenty years. As it stands, Syria is gripped with massive unemployment and poverty, an expanding labour force and an incapable private sector that has failed to invest in sectors that could absorb this level of growth of the labour force.18 In the face of this reality, the report strongly advocates the Syrian state to take an active and interventionist role in the economy. In order to expand its revenues, the state must reform the current taxation structures so that taxation becomes more equitable in terms of distributing the costs. The report also warns against liberalization due to the negative effect of the global economy on the smaller industries and on the tariff-protected industries such as consumer durables industries, pharmaceuticals, textiles and clothing industries. In spite of these warnings, the Syrian state under Bashar al-Assad has been transferring economic decision-making powers to a greater degree to the private sector. Later on, economic prices replaced social prices, which could no longer be sustained by a state that had abdicated its sources of revenue as it gave major tax breaks and tax holidays for private sector. Further reforms were paralleled by a process of separation of economic from political over-sight, relegating economic decisions to the forces of the market (represented in the state by the Central Bank and ministry of Finance). The role of technocrats has increased in economic decision making and determining production and consumption options. Experts from the IMF and the World Bank have filled

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in different ministries, filling in the gap that the bankrupt regime of al-Assad has left in place. Institution building also falls within the broader project of introducing a market economy in Syria. The main goal of these institutions is to achieve efficiency while ‘rationalizing’ bureaucracy. In other words, the state has to shed its heavy bureaucracy and reduce the costs of running a state. At the same time, a series of legal and institutional reforms are aimed at securing the rights of private property and contract. As the private sector’s reach has expanded, the state has begun a process of heavy taxation of the population. While, at the moment, this process has many flaws, it is expected that in the near future taxation would be made more rational and effective. The three phases of infitah first aimed at fostering a capitalist class under state direction and guidance; then, in the 1980s, the private sector’s sphere of activity was expanded and its role in the economy became more dominant as opposed to the public sector; and, in the late 1980s and early 1990s, the private sector gained freedom to make decisions on finance and investment, as a way of entering the global economy. By 2000, the role of the private sector further expanded in foreign trade and investment as well as finance. This attests to the dominant role of the private sector in the economy and its power in determining not only fiscal and monetary policy, but shaping the overall development agenda in its own interest. It might be appropriate to end this discussion with the quote by Bashar al-Assad’s deputy Prime Minister for economic affairs, as this statement clearly highlights the dominant trend for economic policy under Bashar al-Assad: ‘‘In an October interview with Arabian Business, a Dubai-based magazine, Mr. Dardari [deputy prime minister for economic affairs] claimed: ‘We are adopting fully free trade, free investment, an open investment climate, we are liberalizing our monetary and fiscal policies, and we are liberalizing and deregulating our banking sector and financial system’’’ (EIU, 2005, p. 22).

3.2. Obstacles to a Neoliberal Market Economy There are different obstacles in the path of developing a market economy, the most important ones are the structural constraints imposed by the global division of labour and the increased integration of the global economy. At the same time, Syrian economy lacks both institutions and a skilled labour force in order to compete in the global economy. In the absence of protection for property rights and the persistence of large state bureaucracy, foreign investment would be discouraged from entering the Syrian economy, a reality that cannot be overlooked (Richards, 2001, p. 51; Karshenas, 2001, pp. 59–79).

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The fear of the elite for political instability also prevents a fast pace of economic reform. This would prevent a full-scale implementation of neoliberal economic development agenda. As Quilliam notes: The state cannot afford to alienate its public sector support for the latter credits the state with legitimacy. Extensive economic liberalization would create widespread dissatisfaction among the Syrian population. The state’s ability to insulate itself form unpopular sentiment would be severely restricted as unemployment, the removal of basic food subsidies, and a diminution of welfare services would erode legitimacy. On the other hand, comprehensive economic liberalization would not benefit the bourgeoisie as it would expose it to intense competition. (1999, pp. 94–95)

Polling points out that the slow pace of liberalization is due to Baath’s fear of regime collapse and the end of its power (1993, p. 15). Thus, with sufficient support against liberalization, the regime would follow a gradual pace of reforms rather than a fast paced one that is recommended by the IMF and World Bank. Furthermore, the experience of the last two decades of reforms suggests that the process of integration into the world market by attrition of the public sector is a messy process with undetermined outcomes. For a start, there is no guarantee that the private sector is capable of taking on the responsibilities for generating growth that would contribute to a better standard of living for Syrian population. The nature of economic activities that the Syrian elites pursue fall within speculative activities that only benefits a few at the expense of many. The productive sector of the economy would stagnate and the brunt of this economic crisis would easily fall on the workers and the poor. This would carry negative implications for the elite as the legitimacy of the regimes erodes with increasing social inequalities. This explains the caution that is displayed in implementing liberalization reforms by the regime and the complicity of the Syrian ruling classes. The polarization of wealth in Syria has led to social inequalities. The main source of state revenue has been oil rents, which according to IMF predictions will completely disappear by 2020. This prevents the state from continuing on its ISI path and, in the absence of an industrial policy; it has turned to the private sector for policy formation. While it is true that the effects of declining oil has not yet been felt and the state still experiences a degree of autonomy in social policy due to oil exports and new gas findings, Syrian Scholar, Bassam Haddad highlights a set of socio-economic problems in Syria. He writes that: An all-time high unemployment rate (between 20 and 25 percent depending on the source) only reinforces these expectations. The entire middle class, shrunken as it may

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be, and the disenfranchised Syrian working classes outside the public sector, including peasants, are feeling the strain of the current economic and political circumstances. (Haddad, 2001)

Government investments in the public sector represent a precautionary measure to provide social safety nets that could cushion the negative effects of liberalization. These investments cannot be seen as an ideological commitment of the state towards the public sector as it is suggested by Bessam Haddad and other scholars of Syria. While in terms of power of the regime, many argue that the oppressive arm of the regime has not tired out and this is therefore taken as a sign for the durability and unchanging nature of the Syrian state, yet there are other signs that the Syrian state is undergoing serious and qualitative change. These changes have destabilized the party-state relations, removing the traditional Baath Party from its dominant role in the state. Indeed, no one should be surprised at this change as the path of economic development since the 1980s had already set this process in motion. In effect, political decisions are taken out of the hand of the Baath Party and are left to the private sector as it has come to dominate the policy-making process. This transformation has become known as de-Baathification of the state, but carries significant implications for the transformation of the state as well. Over the years a division within the Baath Party has appeared where some Baathists have opted to modernize themselves, i.e., reproduce themselves through adjusting in a market economy. This group aims to lead the path of liberal democratic transition by making space for multiple competing political parties. At the same time, the elite and the regime clearly want to make a break from the past. As Sami Moubayed notes, ‘‘There are moves to drop the word ‘socialism’ from the objectives of the Baath Party and replace the longstanding trinity of ‘unity, freedom and socialism’ with ‘unity, democracy, and social equality’’’ (Moubayed, 2005). The Syrian state and economy seem to have reached a critical impasse. There have been disparate attempts at finding a way out of the current impasse through opening up the political space. In the absence of any clear force to lead the economy, the regime is hesitant to give into the demands of any particular group fearing a total collapse of the political order. Although most of the regime’s faith is put in the private sector, the repeated failure of the private sector to effectively organize the economy pose signs of worry among the resisters to reform. The situation has become grimmer in light of

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larger socio-economic problems that exist in Syria. As Omayma Abdel-Latif writes: The economic situation in the country has alarmingly declined. Complaints about price hikes and low salaries are voiced everywhere. Syria, according to the Arab Human Development Report, has the lowest level salaries in the Arab world. With an economic growth rate set at 3.7 per cent and a poverty-line population estimated, according to official figures, at 1.5 million out of Syria’s 18 million total population, many Syrians are struggling to make ends meet. (Abdel Latif, 2006)

4. CONCLUSION The history of class struggle in Syria in the post-war period has entailed a gradual liberation of economic forces from political constraints and social regulations. In Syria, it is clear that pre-capitalist social relations determined the nature of state and economic development until the late 1960s when Hafez al-Assad used the state to fundamentally reorganize production and social relations in Syria. The state in Syria under Hafiz al-Assad became a class in itself that directly organized the Syrian economy. This was achieved precisely because the old landed ruling class had failed to organize the economy and respond to the socio-economic crisis that had engulfed Syria. Such fusion of economic and political powers within the state continued until the early 1990s when the crisis of state planned economy unfolded. State planning had empowered a new class of private interests who begin seeking partial autonomy in organizing production.19 Thus, it was in the 1990s that a crucial phase of state formation led to the beginning of a formal separation of the economic from the political, a process that is still on going and has not been completed. This uneven pace of market reform (infitah or liberalization) can be understood as the complex process of transition to capitalism and integration into the capitalist world market. The difficulty of achieving this task lies in the specific balance of power, the nature of ruling class interests and the degree of their connectedness to the world market. It also depends on the ability of the ruling classes to reproduce themselves within the existing social relations whereby traditional ties (kinship, tribal identities and relations of clientelism) persist within a pre-capitalist system. The process of transition in Syria, as in a number of other developing countries, is important in the larger historical development of global capitalism.20 In order to reproduce the system, all parts need to be integrated and the responsibility for reproducing the system as a whole is divided

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among all member states. While efforts are made to achieve this goal, the outcome has been contradictory and uneven.21 The project of building capitalism in the Middle East has been complicated by the resilience and persistence of non-capitalist social relations. Thus, among other factors such as colonialism that have led to the uneven process of transition and integration into the global economy, in Syria the persistence of non-capitalist social relations has been quite significant. Indeed, the persistence of non-capitalist social relations is a characteristic shared by many Arab states and societies, which has definitely complicated the process of transition to a market economy. In Syria, it can be argued that the transition to capitalism has not occurred as a clean break from a previous mode of production. Transitions can be better understood as processes that are slow, but more importantly dialectical, depending on the particular balance of social forces at the particular historical period. Thus, there is no guarantee that the old ruling class would not return to power, especially in the context of a radical change in the balance of social forces.22 The institutions of the Syrian state are also reflective of the complex interaction between a pre-capitalist set of social relations and a modern, yet centralized state with hierarchically organized institutions. With the takeover of power under Hafiz al-Assad in 1970, a conscious process of capitalist development was launched under the auspices of the state. This project entailed the balancing of different social forces in Syrian society and at the same time gave rise to new classes who benefited from stateled industrialization in agriculture and industry. The contradictions of stateled planning, however, forced the state to encourage the private sector to take a more central role in mobilizing economic resources and managing growth. The inability of the private sector to perform the task of economic growth and management ensured a continuation of the role of the state in the economy throughout the 1980s. It was not until the 1990s that the private sector began to demand more autonomy in organizing the economy (Wood, 1995, p. 25). Emerging private-sector forces demanded a transformation of state institutions with the goal of de-politicizing economic decisions. While these demands did not face serious opposition, the Baath Party and the regime emphasized caution and a gradual transformation in the interest of maintaining and defending the state itself. The Baathists fear that a rapid transition to a market economy and a dramatic transformation of state institutions would destabilize the state altogether (Richards, 2001, pp. 50–51). In 2005, Syria’s state and economy retained some aspects of a planned economy in that the ruling Party has been deeply involved in shaping and

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organizing the economy. IFIs argue that a close relationship between the state and the ruling party does not provide a proper framework for the development and success of a market economy. It is also argued that this deep involvement of the ruling party in the economy and within the state represents a weak state, which could crumble once the ruling party loses power. In order to remove these uncertainties, Syria needs to modernize its state and economy. The prospect of reduced oil production in the coming decade has been used as a pretext to warn Syria to diversify its export base. The process of global economic integration and capitalist restructuring in Syria has corresponded with the dismantling of the socialist and progressive aspects of the Baathist Party. Although these suggestions have only been issued in 2005, Syria has already embarked on a series of reforms of both its economy and state since the 1970s. The difference between Syria and other Middle Eastern states is that liberalization has resulted from pressures by the domestic forces in response to Syria’s socio-economic crisis since the 1970s. By 1991, a serious shift in the Syrian economy had occurred. This shift towards a market economy reflected a larger shift in the nature of ruling class interests and their reorientation towards the global economy in the 1990s. At this point the ruling classes in Syria consisted of four different groups. The divided interests within the ruling class factions, as well as the need for regime and state stability, are the main factors that have stalled the liberalization process of Syria’s economy. Liberalization has been resisted by both the public sector employees and the military wing of Baath, whose power would crumble if the Syrian economy were fully liberalized (Sayyigh, 2005). This process is further complicated by the close relationship between the Baath Party and the military. The path of modernization and the shift towards a market economy has entailed a process of self-destruction of the Baath Party. State restructuring has not reduced the role of the state, but has rather shifted the role of the state in serving the interests of the private sector (e.g., implementation of new laws, removing Baathists and replacing them by technocrats and representatives of the private sector). The political economy of state building under Hafez al-Assad depended upon maintaining a delicate balance between all social forces, at least during the first phase of infitah. Faced with the crisis of the ISI and a hostile international environment in terms of financial aid and support in the 1980s, Assad chose the side of the merchants and the landlords, while crushing any dissent against his policies. Despite small steps to join the global economy, Assad continued to keep a balance between the different social forces and especially among the different faction of the elite and nouveaux riches.

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This style of political leadership became the legacy of al-Assad and was abandoned or was no longer sustainable under his son Bashar. Over the past thirty-five years, the balance of forces has come to favour the liberal reformers who have established their dominance over economic policy. At the same time, the remnants of the statist regime, i.e., the traditional industrial bourgeoisie, the military and security forces have been isolated from the state through the withering away of the Baath Party and the restructuring of the state. Under Hafiz al Assad’s regime, the military and the security forces had gained power through their association to the state and their economic links to the merchant classes, to whom they extended their services and provided protection. This relationship was viable as long as Syria maintained a protectionist economic policy while also keeping a central role for the Baath Party within the state. With the liberalization of the economy and the transformation of the state, this traditional role of the military can no longer exist, as the material base for its existence would disappear. The old bourgeoisie has two options: reorient itself and reform to adjust to world market demands and shed its old ties with the military or go under. It is still too early to determine which path it will opt for. As for the military, the lack of legitimacy of the regime is the last remaining reason for its existence. This explains the clamp down on civil society by the military at end of the Spring of 2001; it represented a struggle for power and survival on the part of the Baathist regime and its military apparatuses. The drive to become competitive has led the Syrian state to remove all sorts of barriers to capital flows and investments. At the same time, the state has reduced or eliminated social policies, exposing insecure workers and peasants to market forces. The maintenance of a certain degree of public sector involvement will rescue the state from full collapse by cushioning society from the activities of the private sector. Nonetheless, even the Baathists have all come to an agreement about the need to reform; the disagreement tends to be more on the pace and nature of reform and not necessarily about the shift to a market economy.

NOTES 1. The US has embarked on an unprecedented project of remaking the Middle East. Prior to the invasion of Iraq and even after, regime change was identified as the tool of achieving this goal, at least in 2003, this was very clear. The US Congress’s Syria Accountability Act (April 2003) was prepared as a preamble to justify regime change in Syria, with the hope that the invasion of Iraq (March 2003) would go

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smoothly and then the next stage of remaking the Middle East would be Syria. There is clearly a link between the US war on terror and the expansion of capitalism especially in the case of the Middle East. As stated by the current US president, ‘The advance of freedom is the calling of our time; it is the calling of our country.’ George W. Bush, November 6th, 2003. See bibliographical entry below. As this citation conveys it well, the United States has assumed an important historical role as the facilitator of capitalist system through distributing risks and integrating different societies into the system. Individual states are being disciplined by the American police state along with international financial institutions, so that these states would accept the capitalist hierarchical and uneven global division of labour and contribute actively in reproducing the system. For a discussion of the significance of The US Congress’s Syria Accountability Act (2003), see Stephen Zunes, 2004 (US policy towards Syria and the triumph of neo-conservatism (2004). Middle East Policy, 11(1), Spring). 2. Although the conflicts between Syria and Lebanon could be traced back to their historical division in the aftermath of the fall of the Ottoman Empire, it was in mid1970s when Syria and Lebanon’s relations became entangled. Syrian aid was requested by the Christian Lebanese president in 1976 to deal with the civil war and the in flow of Palestinians into Lebanon. Syrian forces remained in Lebanon until 2005 when the US and Israel forced their withdrawal. Currently there are over one million Syrian workers in Lebanon, whose remittances are important to the Syrian economy. As well, there is a strong link between Syrian ruling classes and Lebanese bankers. The conflict between Syria and Lebanon could not understood without a study of the role of Israel in the occupation of Palestine and its aggressive interventions and attacks in Lebanon. Scholars have argued that Syria and Israel could be considered as two competitors who struggle for regional influence. In the current situation when the US is in Iraq, Syria is seen as a source of instability in Iraq and therefore the US has been pressuring Bashar al-Assad to control the borders between Syria and Iraq. There are a number of excellent accounts of Syria’s regional foreign relations (see Volker Perthes, 2004). Another excellent scholar of Syria is Bassam Haddad. His articles often appear on Middle East Report online. Haddad (2005) has produced critical and insightful commentary on Syria’s current situation especially in the context of America’s war on terror in the Middle East, available at: (http://www. merip.org/mer/mer236/haddad.html). For voices from an American think-tank that regularly study Middle East policies, see Claude Salhani (2003) (Syria At The Cross Roads. Middle East Policy. 10(3), Fall, 2003). 3. For a useful source that provides a rich study of different angles of Syrian domestic and foreign policies under Hafiz al-Assad until the mid-1980s (see Ma’oz and Yaniv (1986)). 4. In the absence of a better term that could describe the Syrian state in the 1970s and 1980s, I have used the commonly used term ‘planned economy’. Owing to the confusion this might cause, it is important to qualify the use of this term in the case Syria where it does not imply the same thing as scholars attributed to the economies of the East Bloc. Given the predominance of pre-capitalist social relations, the Syrian state played an important role in the economy, albeit this was not a conscious and coordinated role, but one that was constantly contested by various interests in Syrian society. In fact, in the history of modern Syria (since WWI), this was the first instant

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that the centralization of state and economy were taken up in such a decisive manner. Thus, we could conclude that while the Syrian economy was planned by the state, the scope of planning and the incoherence of it along with an undeveloped state, made the Syrian ‘planned economy’ qualitatively different from the traditionally planned economies of the East Bloc. 5. It is argued that these policies were the effect of Nasser’s influence in the same period in Egypt, when very radical social policies were implemented under Nasser, with an eye to achieving Arab socialism. Petran (1972) has argued that despite their commitment to socialism, the radicals were inadvertently promoting agrarian capitalism in Syria. The policies of this regime although aimed at building socialism led to the development of capitalism. 6. As Olson has noted, al-Assad’s institutional innovations and political appointments were all aimed at striking a balance in the power among various factions of the ruling class. Although he reduced the power of the urban landed classes, nonetheless he integrated them into the state alongside other minorities and groups from rural Syria (Olson, 1982, pp. 132–133). 7. Similar to Sadat in Egypt, winning the 1973 war with Israel gave currency and legitimacy to Assad’s unpopular economic policies and rallied Syrians behind his state building project – See Perthes, 1993, p. 54; Quilliam, 1999, p. 54; Petran, 1972. 8. The conflict between the state and the contending Sunni groups lasted for two weeks in the course of which the state coercive apparatus destroyed large portions of the City of Hamah and killed at least 10,000 civilians (Cleveland, 2000, p. 394). 9. Early 1976 marked a high point in the development of overt, organized opposition to the Baath regime in Syria’s north central provinces. During February, rioting occurred in several north central cities following the death of a widely respected leader of the Islamic movement in a government prison. The most serious of these disorders took place in Hamah, where local merchants and students clashed with police and army units. This marked the beginning of the Islamic struggle against the Syrian regime (Lawson, 1989, pp. 24-5). 10. ‘‘In the autumn of 1978, a number of leftists and Nasserists opposed to the regime were elected to [local union committees] from unofficial lists, competing with those prepared by the party hierarchy. These candidates ran on platforms sharply critical of the emphasis being accorded to private enterprise in the country’s development program’’ (Lawson, 1989, p. 27). 11. The Islamic opposition to the regime in this period was the combined protest of the Sunni merchant class and its ideological wing, the muslim brotherhood as well as a popular protest against the rising prices of daily food items. In a sense, the main opposition to the regime came from the traditional ruling class constituting the merchants, urban notables and old landlords as well as the Islamic ‘ulama’ or religious leaders (Olson, 1982, pp. 63–164). The failure of the Islamic opposition to seriously challenge the regime was due to a crucial absence of a broad base of support for the Sunni majority in the rural areas. In other words, Sunni merchants and landlords, who have traditionally been based in the cities, cannot claim support among the peasants. The Baath Party, however, finds mass support among the rural peasantry as well as the minorities whom it effectively integrated into the institutions of the state. Although this was the nature of the struggles in the late 1970s, the current struggles are radically different. These struggles are taking place between a

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reformist, newly constituted ruling class and the classes that gained their power through running state corporations and cooperatives. 12. The unintended outcome was a fragmented bourgeoisie who could not act as a collective negotiator on behalf of capital. This is a unique feature of Syrian bourgeoisie and merchant classes, who are still struggling to form a coherent class alliance (Perthes, 1993, p. 49). 13. Syria’s Investment Law No. 10 can be compared to Egypt’s Investment Law No. 43 of 1974. It has been argued that while Egypt implemented investment and trade liberalizations, Syria lagged behind in these two areas and it was not until 1991, when the Syrian state embarked on such high scale of liberalizing the economy by extending freedom of investment, exchange and trade to the private sector. 14. Sukkar further adds, ‘‘The public sector is dominant in oil, banking, construction and, until recently, foreign trade, while the private sector has been dominant in agriculture, tourism and domestic trade’’ (Sukkar, 1993, p. 26). 15. Under Hafiz al Assad, the revenues from oil exports, workers’ remittances and other strategic rents helped Syria avoid dealing with the IMF and the World Bank (Richards, 2001, p. 49). 16. The Baath Party has penetrated the Syrian society in every way and their influence within the public sector has mass support among Syrians who depend on subsidies. The destruction of Baathists is not an easy fight for the reformers to win. 17. In 2005, the state-owned enterprises ranged from oil sector, telecommunications, ports, power generation and distribution, water, air transfer, prices of key commodities. 18. Child labour constitutes 18 per cent of the total labour force in Syria. Close to 70 per cent of Syrians earn less than $100 a month. Slum dwellers constitute two millions out of the total 18 million population of Syria (UNDP, 2005). 19. It is noteworthy that the global environment also served such private interests very well as the US pursued its project of democratization in the Middle East. The fall of the East Bloc had delivered a blow to state planned economies that now had to learn to adapt to a global capitalist environment by learning the tools of capitalist accumulation. 20. Capitalist expansion has entailed the integration of non-integrated spaces and social relations under the dominant capitalist social relations. According to the IMF and the World Bank, Syria represents a closed economy given its low level of international trade links. Its lack of integration into the capitalist world market is also reflected in the low level of debt that it carries, according to the World Bank and IMF. Syria’s debt has remained at very manageable levels and its foreign reserves can support it for up to 212 years. Although the argument for economic reform uses the declining oil prospects as its main reason, oil constitutes only 15 per cent of the Syria’s GDP and Syrian economy represents one of the most diversified economies in the whole Arab world. Syrian economy is divided into agriculture, industry (food, olive oil), textile, pharmaceuticals, engineering, consumer durables and over time, with the closer integration into the global world market, the share of work force in the agriculture has declined dramatically, while the ratio of labour force in services and construction has increased. (IMF, 2005a, 2005b; UN report on Syria, 2005). United States Library of Congress Report on Syria.

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21. Here I am referring to the ‘democratization’ project of the United States in the global south since the end of the Cold War as a process of transplanting liberal democratic institutions. 22. While here I am thinking of the return of the old conservative ruling class in Syria under Hafiz al Assad, a similar situation occurred in France in the nineteenth century when the old ruling class power was restored under the Second Empire of Louis Napoleon Bonaparte right when the progressive forces had their high hopes and expected a radical social transformation (see Karl Marx, 1963).

REFERENCES Ahsan, S. A. (1984). Economic policy and class structure in Syria: 1958–1980. International Journal of Middle East Studies, 16, 301–323. Bahout, J. (1993). The Syrian business community, its politics and prospects. In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Bush, G. W. (2003). Freedom in Iraq and the Middle East. (Speech calling for the establishment of democracy in the Middle East), November 6th, 2003. Available at: http:// www.state.gov/p/nea/rls/rm/26019.htm Cleveland, W. L. (2000). History of the modern Middle East (2nd ed.). Colorado: Westview. Hinnebusch, R. (1990). Authoritarian power and state formation in Ba’thist Syria: Army, party, and peasant. Boulder, Colo.: Westview. Hinnebusch, R. (1993). Liberalization in Syria: The struggle of economic and political Rationality. In: K. Eberhard (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Karshenas, M. (2001). Structural obstacles to economic adjustment in the MENA region: The international trade aspects. In: H. Hakimian & M. Ziba (Eds), The state and global change: The political economy of transition in the Middle East and North Africa. Richmond, Surrey: Curzon. Kienle, E. (1993). Introduction: Liberalization between Cold War and the Cold Peace. In: E. Kenle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Lawson, F. (1989). History of liberalization in Syria. In: B. Berch (Ed.), Power and stability in the Middle East. London: Zed Books. Ma’oz, M., & Yaniv, A. (Eds) (1986). Syria under Assad: Domestic constraints and regional risks. London: Croom Helm. Marx, K. (1963). The eighteenth Brumaire of Louis Bonaparte. New York: International Publishers. Nasrallah, F. (1993). Syria after Ta’if: Lebanon and the Lebanese in Syrian politics. In: E. Kenle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London.

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Olson, R. W. (1982). The Ba’th and Syria, 1947 to 1982: The evolution of ideology, party, and state. Princeton: The Kingston Press. Owen, R., & Pamuk, S- . (1999). A history of Middle East economies in the twentieth century. Cambridge, Mass: Harvard University. Perthes, V. (1992). The Syrian private industrial and commercial sectors and the state. International Journal of Middle East Studies, 24(2), 207–230. Perthes, V. (1993). Stages of economic and political liberalization. In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Perthes, V. (2004). Syria under Bashar al-Assad: Modernization and the limits of change. New York: Oxford University Press. Petran, T. (1972). Syria. New York: Praeger. Polling, S. (1993). Investment Law No. 10: Which future for the private sector? In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Quilliam, N. (1999). Syria and the new world order. UK: Ithaca. Richards, A. (2001). The political economy of economic reform in the Middle East: The challenge to governance. RAND project. Salhani, C. (2003). Syria at the cross roads. Middle East Policy, 10(3), 136–143. Sayyigh, Y. (2005). US and European support to democratic reform: The intentions and practices as seen from the Middle East. In: B. Rahbek (Ed.), Democratization in the Middle East. London: Aarhus University. Seale, P. (1993). Preface. In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Sukkar, N. (1993). The crisis of 1986 and Syria’s plan for reform. In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British Academic Press in association with Center of Near and Middle Eastern Studies, School of Oriental and African Studies, University of London. Wood, E. M. (1995). Democracy against capitalism. London: Verso. Zunes, S. (2004). U. S. policy towards Syria and the triumph of neo-conservatism. Middle East Policy, 11(1), 52–69.

Reports and News Articles: Abdel Latif, O. (2006). What now for Syria? Available: http://weekly.ahram.org.eg/2006/783/ re202.htm Haddad, B. (2001). Business as usual in Syria? MERIP. Fall. Available: http://www.merip.org/ mero/mero090701.html Haddad, B. (2005). Syria’s curious dilemma. MERIP (236). Fall. Available: www.merip.org/ mer/mer236/haddad.html

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International Monetary Fund (IMF). (2005a). Syrian Arab republic: 2005 article IV consultation-staff report; and public information notice on the executive board discussion. IMF Country Report No. 05/356, October. International Monetary Fund (IMF). (2005b). Syrian Arab republic: Statistical appendix. IMF Country Report No. 05/355, October. Library of Congress – Federal Research Division, Country Profile: Syria (2005). Available: http://lcweb2.loc.gov/frd/cs/profiles/Syria.pdf Moubayed, S. (2005). Soft De-Baathification in Syria. Al-Ahram Weekly. Available: http:// weekly.ahram.org.eg/2006/788/re6.htm The Economist Intelligence Unit (EIU). (2005). Syria at a glance: 2006–2007. Country report. The economist intelligence unit, 15 Regent St, London SW1Y 4LR, United Kingdom. United Nations Arab Human Development Report (AHDR). (2005). Arab human development report 2004: Towards freedom in the Arab world. Syria. United Nations. United Nations Development Programme (UNDP). (2005). Macroeconomic Policies for Poverty Reduction: The case of Syria. United Nations. United States Congress. (2003). Syria Accountability Act. Available at http://www.whitehouse. gov/news/releases/2004/05/20040511-7.html

THE EVOLUTION OF CAPITALIST RELATIONS OF PRODUCTION IN U.S. MEDICAL PRACTICE: AN OUTLINE Jerome Joffe, Ph.D ABSTRACT This paper examines how medical practice, like all other productive activities, has been subject to the transformative elements of the forces and the relations of production involving class struggle and intra-class conflict. It will explore changes in the relations of production of medical practice which have been catalyzed by powerful productive forces. The current period of medical production involves the transformation of simple commodity production into a transitional stage of capitalist production with the seemingly unbounded growth of the medical productive forces. This development was precipitated by the intervention of capital as a whole, to restrict the drain on their variable capital through the placement of units of financial capital into the management of medical production, using the leverage of access to patients. In response, physicians have consolidated and centralized their practices to create enterprises with market power to limit the extraction of surplus by financial capital, and by their own employment of productive labor to extract surplus from hired physician labor and other clinical workers. Rationalization of the production of Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 203–237 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24006-4

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medical service commodities, and the sharing of surplus generated from exploitation of an expanded labor force by managed care financial capital and their capitalist partners owning medical enterprises, constitutes the contemporary relations of production. The contradictions of this mode of medical production and the potential for its reproduction will be analyzed.

1. INTRODUCTION The relations of production in physician practice, a key component of the U.S. medical care system1 is being transformed from simple or independent commodity production (ICP) to capitalist production. The non-correspondence between the forces and the traditional relations of production in the medical sector explains the emergence of the new relations of production. The forces of production embodied in contemporary medical technology are no longer manageable by simple commodity production. This transformation is the result of two developments. The first development – begun in the last quarter of the 20th century – emerged from the health insurance purchase policy of large corporate enterprises in all economic sectors responding to increased costs of medical benefits for their employees, resulting mainly from the growth of the productive forces in the medical sector. Their policy was to collaborate with insurance units of financial capital to convert these units to managers of medical production. This enabled these units to directly appropriate value from the producers of medical service. The second development arose from the response of physicians to this corporate policy. Their reaction was to concentrate and centralize their petty enterprises, to gain sufficient market power to limit the extraction of surplus by financial capital, and further to extract surplus from hired physician labor and other clinical workers in their expanded practices. Contestation over sharing the surplus between managed care financial capital and their capitalist partners in medical practice caused instability and subsequent restructuring of the relationship of these two forms of capitalist production. This paper will examine in the context of developing forces of production, the structural dynamics of the new relations of production, its contradictions and its potential for reproduction. The focus of the analysis will be on two forms of surplus value appropriation; the appropriation by managed care capital of part of the value produced by the physician practice and the appropriation by the owners of the physician practice of surplus value produced by salaried physicians and other clinical workers. Trends in accounting profits

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for enterprises presented in the paper are to be understood as rough approximations of surplus value.

2. THE DEVELOPMENT OF THE FORCES OF PRODUCTION IN MEDICAL CARE This section describes the dynamic nature of the medical sector forces of production and its twofold relationship with the forces of production of the economy as a whole. First, the medical instruments of production rapidly developed because they originated in the technological core of advanced capitalism and not in the ICP sector where they were used. The reciprocal interaction of the medical equipment and pharmaceutical manufacturing units with physician specialists and other clinical personnel especially in large teaching hospitals was an especially powerful catalyst for expansion. The forces of production in medical care include highly skilled scientifically trained labor and pharmaceuticals, supplies and equipment acquired by the health care delivery system1, primarily through its backward linkage to manufacturing and supply firms and to medical, nursing and allied health educational institutions. Second, the rapid growth of the forces of production in medical care is, to a significant extent, a response to the disease externalities of production and the culture of consumerism of contemporary capitalism. These two themes will be briefly developed in turn. The growth of the forces of production can be inferred by the growth in the level of health care expenditures. Expenditures reached $27 billion, 5.1% of GDP in 1960. Over the next 40 years, expenditures increased to $1.3 trillion and almost tripled to 14% of GDP.2 The health care labor force of over 10 million in 2002 more than doubled from 1970, a significantly greater growth than the total labor force. The total health care and especially the hospital labor force, its major component, is a highly scientific and technical labor force using constantly innovative instruments of production. The proportions of ‘‘Professionals’’ (40%) and ‘‘Technologists and Technicians’’ (17%) in the health care sector are significantly higher than the proportions in the rest of the economy; 14% and 2%, respectively.3 Another measure of the ongoing intensification of technology in medical care is the continuing increase of expenditures for medical equipment as a percentage of total medical care expenditures.4 For most of the 20th century, diagnostic and treatment effectiveness rather than cost performance

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motivated the use of technology when introduced for clinical rather than for administrative purposes (Geligns & Rosenberg, 1994, p. 32). Diagnostic and treatment technology responds to the character of disease whether of a degenerative, chronic, traumatic, infectious, congenital or psychological nature and the genesis of disease. The latter is linked to the evolving nature of the social structure. The great expansion of the medical system was enabled by the immense surplus generated by the expansion of the productive forces of the post-war Golden Age. But motivating the expansion was the transformation of the nature of disease and the need of the capitalist order to respond to this transformation.5 The pattern of disease was reshaped with the decline of infectious and the rise of degenerative chronic disease,6 which brought in its wake huge investments in diagnostic and treatment technology to treat circulatory, cancer and other systemic diseases. There is overwhelming evidence that the physical and social environment and personal behavior are the leading factors in the determination of health and susceptibility to premature death, a perspective endorsed by the Centers for Disease Control, the epidemiological agency of the U.S. Government.7 However, only critical sociologists using Marxist and Neo-Marxist methodology8 trace these factors systematically to processes of the capitalist order rather than attribute decisive causality to industrial society per se and either multi-causal or autonomous destructive behavior. Only the former theorize, hypothesize and provide evidence that these diseases are significantly produced by the technologies, work hierarchies, inequalities and health adverse behaviors of the population, the latter an expression of the culture of consumerism, itself a product of contemporary capitalism. Even without resolving the question whether it is the capitalist order or industrial society as such which is responsible for much of disease and premature death, (a question beyond the scope of this study), social determination of disease can cast light on the relationship of the development of the forces and relations of production in the economy as a whole to the development of the forces of medical production. This is crucial to the dialectic of the emerging capitalist relations of production in medical practice and its inherent limitation in accomplishing the tasks set for it by aggregate capital of restraining the medical forces of production. Because disease emerges as an externality to the mode of production9 its prevention would require restructuring the processes for the accumulation of capital in the interest of the health of population. This is strongly resisted and the social order responds only minimally to change the conditions that generate disease. Only with intense class and popular struggle were public

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health measures – though often with weak implementation – such as environmental and occupational standard setting to lessen work injury, reduction of exposure of workers and communities to toxic production processes and food labeling for processed food, put into place. The nature of the response was dictated by the requirements of accumulation by capital in general. Since the forces of production generated by accumulation are powerfully protected by the political and ideological forces of capital, the systemic response is therefore not to prevent but rather to treat disease through a major expansion of personal health care10 – the clinical care system for diseased patients with its massive labor force and productive apparatus. And helping to shape the largely unregulated expansive personal health care system in the direction of intensive capital accumulation are the upstream equipment and pharmaceutical-manufacturing units noted earlier.11 Thus, the growth of the forces of medical production was the social response to the disease-generating externalities of the capitalist system.12 As these expansive medical forces of production came into conflict with the relations of production of the autonomous proprietary physicians clinically directing the forces, located predominantly in hospitals and other institutional settings, new capitalist relations of production in medical practice were engendered. The medical forces of production are financed from the variable capital of employers in the form of the health insurance fringe benefit, workers wages for out of pocket payments and taxes paid by both capital and labor for public financed medical care. As medical care is part of the costs for reproducing the working class, the rise in medical expenditures tends to increase the value of labor power and therefore to reduce surplus value.13 Capital resists this fall by striving to shift these costs to the working class by requiring workers to pay an increasing share of the insurance premium, by directly reducing wages or by reducing or eliminating health insurance coverage. Their success depends on the extent of labor surplus and capital’s ability to overcome workers’ resistance. Only partial success motivated capital to transform the relations of production in medicine so as to constrain expenditures and the growth of the medical forces of production. Different histories of economic development and class conflict have shaped national capitalist systems especially in the sphere of the health services. Though neo liberal restructuring involving privatization and deregulation are being imposed to varying degrees throughout the developed capitalist world, U.S. capitalism remains unique in the extent to which the health system has developed through markets and with the development

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of private capital. Therefore, the history and dynamics of changes in the relations of production of health care discussed in this paper pertain to developments in the U.S. alone. The contrasting health system roles of the state in the U.S. and other nations are briefly discussed in Section 5.

3. THE PHYSICIAN PRACTICE IN SIMPLE COMMODITY PRODUCTION The physician practice in simple commodity production is a solo or small group physician owned enterprise in which medical services are sold directly to patients with or without a passive insurance intermediary. The enterprise has few if any salaried workers. The office practice directly owns its own equipment, but has free access to hospital owned means of production.14 The physician practice in this mode of production can be distinguished from physicians directly employed and salaried by hospitals or public health departments and from employed physicians in large group owned medical practices employing physician and other clinical labor. In the independent mode of production medical service commodities are sold at a price determined by market forces fluctuating around value serving as a center of gravity. By contrast, in large physician owned group practices organized on a capitalist basis, employed physicians and other clinical workers sell their medical services at a salary determined by market forces fluctuating around the value of their labor power. The relations of production of the two types of medical practice – disregarding the level of remuneration – are analogous respectively to that of the family farmer and the capitalist farm employing farm labor.15 The remainder of this section will explore how simple or ICP in medicine was sustained though articulated within a fully developed capitalist economy. The sources of its dynamic growth and the development of the crisis of this mode of medical production will then be examined. 3.1. Sustainability within a Developed Capitalist System Large corporate units – pharmaceutical, equipment and medical supply manufacturers and construction contractors being prime examples – are commodity vendors to physicians and hospitals without being directly involved in the production of medical services. The physician practice has thus been long subject to capitalist market forces involving significant inputs

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to their production process. The practices were also involved with insurance capital, which financed medical (commodity) service realization. But analogous to the pre-industrial capitalist period where merchant capital governed the circulation process between different modes of production, or the period of the dual relations of production of slavery and industrial capitalism in the U.S. in the 19th century, physician exchange relations with the producers of medical inputs and the financial intermediaries necessary for the sale of their medical services did not lead to the assimilation of one mode of production to the other. The producers of medical inputs and their employees related to the medical providers through the circulation of their respective commodities. The dynamics of industrial capitalism did not directly affect the ICP process. The design of the medical instruments of production, for example, was not motivated by physician concern for labor substitution or their need to accumulate capital in a price competitive market environment. However, the expanding or declining state of accumulation of the capitalist economy in which the independent mode of production was integrated did affect the latter through the expansion or contraction of demand for their services. The key characteristic of the ICP is that the product of medical labor was sold at value and not at the value of labor power as would be the case if a significant number of physicians were employed by capital and only a minority had independent practices.16 In addition, rents could be gained as price competition in the market for physician services was restrained by various guild-like practices. Professional conduct as defined by the American Medical Association (AMA) precluded physician advertising and dulled price competition. Limits set on the number of entrants to medical school and limiting capacity expansion of the latter also increased income.17 In addition, asymmetry of information between physicians and patients enabled the former to induce additional demand to increase their income.18

3.2. Growth and Crisis of the Independent Medical Mode of Production From the beginning of the scientific era of medicine at the end of the 19th century, medical technology has been largely accumulated by and concentrated in hospitals. Private practice physicians owned minimal means of production until the rapid growth of substantial group practices in the last decades of the 20th century. Physicians could sustain their small scale enterprises because of their access to hospital owned means of production as well as to the latter’s employed labor force. Most hospitals were philanthropically

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capitalized as not for profit facilities and were regarded as a necessary part of the social infrastructure for stable capital accumulation. They offered their facilities as a free workshop to private practice physicians as the latter held sway over patients. The historic accord that was struck was that of community self-employed physicians gaining access and control of hospital resources for diagnosis and treatment when admitting their patients and in return the hospital as well as the physician would receive payments from these patients. Medical service market growth was furthered by the health insurance system begun in the 1930s, which indemnified covered patients for their payments to medical providers or directly paid physicians and other providers. Employers purchased insurance for their employees and premium costs became part of employers’ variable capital. Except for auditing submitted claims for payment, insurance companies had no authority over providers or patients.19 The initial strategy of capital, in the early 1970s, in response to the rapid growth of the forces of medical production, was to constrain medical service demand by increasing out of pocket payments by patients and to require workers to pay part of the insurance premium. The conflict of interest between capitalist employers wanting to restrain their variable capital costs and physicians as simple commodity producers having no interest in limiting their source of revenue, led to more drastic changes.

4. INTRODUCTION OF CAPITALIST RELATIONS OF PRODUCTION An external intervention of capital into the medical production process began in the early 1970s. Insurance units renamed Health Maintenance Organizations (HMOs) initially employed physicians, but later in the decade forced the affiliation of physician practices through market coercive power. More recently, public financed programs for the elderly and the poor (Medicare and Medicaid, respectively) have enabled HMOs and other managed care plans to initiate, in these programs, a similar physician affiliation process. This shift transferred the mechanism of restriction of utilization from employee patients on the demand side to providers of care on the supply side. Managed Care by the HMO was ideologically justified as a mechanism for eliminating what was described as the perverse incentives associated with physician professional dominance and autonomy which created inefficient market processes on which rising health costs were blamed.20

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HMO insurance units differ from indemnity insurers in their relationship to physicians by usurping prerogatives of particular property rights from the physician. When an employer purchaser enters into a group contract with an HMO, physicians have access to members of this group only by a contract affiliation with the HMO. The HMO as a condition of affiliation, compels physicians to surrender these property rights. The restriction on the ability of the physician to market their commodity without contractual affiliation provided the HMO with the leverage to both intervene in the medical production process and to extract surplus value equivalent to part of what was totally self appropriated by the physician in simple commodity production. Revenue per patient of contract-affiliated physicians was reduced with the provision of fewer units of services and lower payment per unit of service. Fewer units of service reduce the exchange value of the medical commodity, which benefits the employer purchaser through a lower insurance premium. The gain from lower payment per unit of service accrues to the HMO as a lower production cost. Redistribution may occur with shifts in relative power in the insurance market as well as by reduction in premium pricing by an HMO to further market penetration. Above average reduction in physician payment generates transient monopoly profits for the low cost HMOs, which could further abet their insurance market penetration by charging premiums below the social average.21 HMO management of care involved expenditure control through the following historical sequence of production controls: (1) reduction of hospital admissions and average length of stay; (2) reductions of tests, treatments and number of visits to specialists although offset in some managed care arrangements by more visits for disease prevention (immunization and screening tests) than under the indemnity system; (3) reduction of payment per unit of service to physicians and increase in the number of patients treated per physician. The latter modified physician revenue decline while the reduced demand for physicians additionally benefited the HMO by lowering their transaction costs. Techniques employed by HMO to achieve (1)–(3) above range from monetary rewards and penalties to physicians, threat of termination (‘‘delisting’’), and use of ‘‘physician practice guidelines’’ to reduce services. The basis for HMO exploitation of physicians through surplus value extraction is the inability of the physician to freely market her service commodity, an important element of property ownership. Though continuing to capitalize and maintain ownership of the office practice she has less control over its means of production and the production process. As especially

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specialist and surgeon physicians lose their control over patient access, their autonomy with regard to hospitals, which provide them with their principal means of production is also reduced. As hospitals depend on physicians for the admission and treatment of patients and they too are forced into contractual relations with HMOs, their influence over the production process is also compromised.22 HMO power grows to the extent of its penetration of the physician service market, i.e. to the extent of the non-availability of any alternative means of access for physicians to patients. Even if many HMOs are competing in this market, physicians would still be subject to an alienated property relationship and to exploitation. Control over access to patients is therefore a separate issue from market power in the physician service market. If either an HMO or a group of HMOs on the buyer’s side or physician practices on the seller side of the physician service market exercise concentrated market power, only the extent of surplus appropriation would be affected.23 Even when a single bargaining agent collectively represents all workers (or by extension of this market logic to the physician service market, all community physician practices), surplus value extraction would arise from HMO control of the product and the production process as well as of patient access. Such extraction is also expressed through the shifting of underwriting risk to physicians. Primary care physicians receive a fixed payment per time period (capitation) for each assigned enrollee regardless of the number of visits to and treatment by that physician necessitated by the (enrollee) patient’s medical condition. An extension of risk shifting is the requirement that physicians share the cost with the HMO above a specified ceiling for tests, prescription drugs and even hospitalizations for their patients. This additionally imposed risk, however, may be eliminated by the HMO for a price – a reduced capitation payment to the physician. This is an alternative form of surplus extraction. While underwriting risk is intrinsic to the insurance function for which the insurer obtains a return, the HMO has the ability to shift part of this risk to the physician without cost. Conversely, when alternative access to patients exists, risk arrangements may continue but higher physician payments are obtained (Draper, Hurley, Lesser, & Strunk, 2002). The reduction of physician economic status could be likened to the transformation undergone by pre-factory spinner and weaver cottagers whose independent producer status via a product exchange relationship with the merchant is gradually transformed into that of a dependent worker so that they produce only for and through the merchant, who has converted

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into a capitalist. As Marx describes the process, ‘‘He bought their labor originally only by buying their product; y [then] even the illusion that they sold him products disappears. He buys their labor and takes their property first in the form of the product and soon after that the instrument as well, or he leaves it to them as sham property in order to reduce his own production costs.’’ ‘‘[C]apital appears at first sporadically or locally alongside the old modes of production while exploding them little by little y’’ (Marx, 1973, p. 510). Correspondingly, command over patient access and services is taken from the physician by the HMO which alongside still persisting but declining mode of simple commodity production gradually converts heretofore independent medical labor into HMO variable capital. The precondition for the physician to obtain market access is partial loss of control over their own labor and the need to part with a market determined fraction of their imputed surplus. The initial HMO-physician relationship, the staff model, comprised salaried physicians, nurses, other clinical and administrative workers with the managed care organization responsible for housing and equipping the clinic – analogous to the early factory. The later and now dominant models involve HMOs contracting with physicians with the latter retaining their own (either solo or group) practice and incurring the capital and labor costs of the practice This is obviously more advantageous to the HMO and explains its prevalence. This reversal of the historical development sequence from cottage industry to factory that is found in early capitalist development is due to the ability of the managed care enterprise to direct and oversee production processes on a decentralized basis with the aid of computerized databases.24

5. THE EFFECT OF GOVERNMENT ON MEDICAL PRACTICE RELATIONS OF PRODUCTION This section will briefly consider the varying roles of government in both the U.S. and other national economies. It will be shown that the U.S. government reinforces the growth of capitalist relations of production initiated in the private sector. By contrast, government in the other developed national economies has helped maintain physician production within a simple mode of production limiting the role of private insurance and providing structures of collective consumption with strictly limited roles for markets involving private capital.

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5.1. The Role of Government in the United States Government plays a significant and growing role in funding health care service. In 1999, a study by Woolhandler and Himmelstein (2002, pp. 5–6) estimated such funding at 59.8% of national health expenditures. Government financing has two basic channels. (1) Federal and state governments offer managed care insurance to their employees – the same policy as private employers. Their coverage is indeed often more generous than private employers but the impact of their coverage on relations of medical production is no different. (2) Federal financing for the Medicare program for the elderly and disabled and federal and state financing of the Medicaid program for the indigent and other low-income populations to an increasing degree use private managed care companies to deliver services. In the Medicaid program states can obtain waivers from the federal government requiring beneficiaries to enroll in managed care plans. Medicare uses the Prospective Payment System and the Resource Based Relative Value Scale (see Shi & Singh, 2001, p. 211 and p. 215 for details) for paying hospitals and physicians respectively for treatment of non-managed care enrollees. These are administrative mechanisms which Medicare, as a monopsonistic buyer uses to limit the revenue of providers. This is done to lessen the federal government’s tax revenue derived expenditures for health care. However in both the Medicare and Medicaid programs, the managed care companies are appropriating value as they do in the private sector. Where government uses administrative mechanisms to control costs, it increases the already existing tendency to provider consolidation. Providers are motivated both to lower costs through economies of scale and to exercise leverage in the private market to offset the financial impact of monopsony in the government sector. Whatever its impact on access, quality and effectiveness of care, government’s role has been to reinforce changes in the relations of production within physician practices. And this is surely in harmony with the prevailing neo-liberal ideology regarding the role of the state in promoting private capital accumulation through the market in every socioeconomic sphere.

5.2. The Role of Government in Other National Economies Historically, social democratic movements based on the strength of an organized working class in other advanced capitalist societies succeeded in creating National Health Insurance (NHI) and National Health Service

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(NHS) programs, using public financing, planning and regulatory bodies in place of a decentralized market system. These programs are funded either through a single payer financing system as in Canada and Great Britain or a mixed system using taxes and heavily regulated private non-profit sickness funds jointly financed by employers and workers as in Germany to manage social insurance pools. This has enabled the provision of universal coverage for basic health benefits. Common to all national capitalist systems are the disease externalities of production and the consumerism of contemporary capitalism with the corresponding tendency for the growth of the forces of medical production. However, expenditures have been constrained through the use of global budgets to set annual caps on payments to providers. Separate budgets for capital expenditures together with planned hospital collaboration for joint use of technology have also been used to limit the expansion, and especially the redundancies, of the forces of production. Moreover, the absence of competing for profit managed care firms has avoided administrative waste and profit charges. By moderating the contradictions between the forces and relations of production in health care, these components of the national systems have inhibited the kind of transformation in production relations that have occurred in the United States. Nonetheless, capitalist forces in these countries have attempted to weaken the existing system by restricting expansion of tax finance which has eased the way for investor owned company expansion from the marketing of insurance for non-covered NHI/NHS services to covered services. In addition financial incentive systems have been introduced in the guise of economizing, to foster competitive provider behavior in place of cooperative behavior with public body oversight (Light, 1997, chapter 13). These developments, in the context of growing neo liberalism create precedents for politically undermining regulation and collective consumption. The extent of their coercive force will depend on the relations of class power in the overall context of class struggle.

6. THE CURRENT CRISIS OF MANAGED CARE HMOs succeeded in controlling health care costs from the early 1990s to 1996. Profits were high and premiums continuously declined, though the downturn of the insurance premium underwriting cycle during the period also contributed to price stability. However, premiums paid by employer group purchasers since then have sharply risen with double digit premium

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increases from 2000 to 2004 (Kaiser Family Foundation Health Research and Education Trust, 2004). These cost increases were built upon an already existing level of costs, which are significantly higher in the U.S. than in other advanced capitalist nations. This is predominantly due to the use of private insurance with its administrative and marketing waste built into this method of financing personal health care (Woolhandler & Himmelstein, 1991, pp. 1253–1258). There are two structural causes underlying the sharp continuous upward climb of premiums. The first is the near exhaustion of the clinical means to maintain the heretofore rapid pace of reduction of the quantity of services provided; the second is the growth of alternative channels of access to patients for physicians and hospitals which curtailed the ability of the HMO to both manage the production process and to extract surplus. The widening of access is the consequence of the growth of oppositional currents to HMO power. The resulting conflict has been expressed both in the political realm and in the market place. Each source of restraint of HMO dominance will be examined in turn.

6.1. Clinical Limits to the Further Reduction of Medical Care Services By the late 1990s, gains from the management of care drastically slowed. The current stage of development of the forces of production affecting clinical capability limit further extensive shifts from inpatient to less costly outpatient care (especially ambulatory surgery), and further reductions of the length of the hospital inpatient stay.25 Also, the rapid pace of test reduction, specialist referral and shortening of patient contact time could not continue without obviously endangering effectiveness of care. Some technological changes have indeed recently made care less costly and also improved outcomes. ‘‘Replacement technology’’ such as less invasive microsurgery, e.g. laparoscopy, stone crushing lithotripsy replacing kidney surgery and gamma knife (laser) surgery replacing invasive brain surgery have expanded opportunities for same day surgery and shorter lengths of inpatient stay. (Patel & Rashevsky, 1999, p. 234).26 In addition, new drug regimens for circulatory disease, cancer treatment, asthma, etc. often replace or significantly delay a hospital stay. Computerized technology in financial and medical record keeping through labor displacement has also reduced costs. However, most clinical technology is labor using and more expensive than the technology it superseded. And these advances are continuous.

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Barriers to cost control arise only in part from the limits of scientific knowledge. They also result from excess equipment capacity built into hospital cost structure. This excess originated in the indemnity insurance period when all costs were automatically covered, but also sprang from the environment shaped by managed care. One of the contentions of managed care advocates was its ability to reduce the rapid spread of new technology by enforcing competition among hospitals. However, the intense competition among hospitals for HMO selective contracting27 has led to continued rapid diffusion of the most advanced forces of production as hospitals vie for any potential source of revenue.28 ‘‘The diffusion of technology within local markets suggests that services are not being concentrated in a few hospitals y hospitals have been adding services (with technology) to be attractive providers of the range of services sought by managed care plans’’ (Morrisey, 2001, p. 9). These factors, abetted by growing hospital concentration have increased hospital costs, which have been passed through to insurance premiums.

6.2. New Forms of Physician Access to Patients and the Reduction of Surplus Appropriation The second critical cause of declining managed care effectiveness in cost control is the result of the intense antagonism and resistance of both physicians and patients to HMO managed care practices (Tselikis, 2000, pp. 1–6). This has been manifested both politically and in the insurance and medical service markets. Politically, opposition has been incorporated into legislation in numerous states, constraining numerous HMO managed care practices such as setting limits on the number of community physicians who could join the HMO network, or requiring exclusive contracts for those permitting to join. A proposed federal ‘‘Patient Bill of Rights’’ which would federalize constraints on HMO was blocked at the congressional joint committee level reflecting the intense conflict over the powers of the HMO. On the economic front, demands by workers and by employers reacting to worker hostility were accelerated in the tight labor markets of the late 1990s for less restrictive managed care and for broader and more stable provider networks. These challenges to the managing authority of insurance capital and their ability to extract surplus (1) generated new forms of patient access and (2) forced changes in HMO practices: (1) Two new forms of insurance, point of service (POS) plans and preferred provider organizations (PPO) were introduced. The POS, offered

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under duress by a large number of HMOs, allows enrollees for an incremental premium and larger out of pocket payments at the POS, to receive reimbursed services from non-contracted specialist physicians. This arrangement expands the possibilities for physicians to obtain patient access without a contractual relationship to an insurance unit. The PPO arrangement allows an extensive network of physicians to have access to patients with minimal managed care controls by agreeing to accept a discounted fee for service arrangement (Kongsvedt, 1997, pp. 38–39). PPOs may be organized by insurance companies, large employers, hospitals, physicians or a hospital in conjunction with their affiliated physicians. The ultimate payers for their services are primarily employer groups whether through an insurance intermediary or directly when self-insured. A PPO often involves a much broader network of physicians than that affiliated with an HMO. The level of the PPO contract fee schedule reflects the payment level needed to compete with the HMO. However as access to patients was now more accessible without the constraints of the HMO, and as many physicians can migrate between these modes of patient access within the same local physician service market, incomes of all physicians whether HMO, PPO or POS, tended to rise and thus reduce surplus appropriation by the insurance unit. The POS option was the response by many HMOs to patient hostility to access barriers to specialists, and a means to retain enrollment in the face of the growing competitiveness of the PPO. The latter’s expansion is the antagonistic expression of physicians and hospitals to the intensive managed care controls of HMOs. In 1998, more than half of all those covered by employer group insurance were members of PPO or POS plans. Traditional HMOs covered 27% while indemnity insurance (which covered 71% of employees with job based coverage in 1978) covered only 14% in 1998. (2) Even traditional HMOs were forced to respond to this hostile environment by modifying some of their basic techniques of control. This included eliminating or modifying closed provider networks, primary care gate keeping (requiring enrollees to get specialist referral from their primary care physician and often requiring these physicians to obtain HMO approval for such referral). Other elements of control included HMO ‘‘medical necessity’’ authorizations for tests and hospital admissions, and even provider risk sharing for ‘‘excessive’’ expenditures resulting from their referrals and hospitalization. Concessions were necessary to prevent further declines in enrollment size required for economies of scale (Draper et al., 2002).

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HMO control over physicians which depends on the threat of exclusion, was also undermined by less restrictive and larger physician networks. Physicians’ increased leverage enabled them to reduce the scope of risk contracting arrangements and/or obtain higher payments from the HMO. In those states that have mandated ‘‘Any Willing Provider’’ legislation, HMOs were required to contract with any applying physician. Plans become comparable to employers required to hire any and all workers who apply at the plant gate. HMO power is abridged as the insider/outsider division and the threat to ‘‘delist’’ contracted physicians to outsider status is no longer possible. Though the amount of available work is constrained by enrollment size and less than full time contractual employment would be likely, it would be analogous to the disappearance of the boundary separating the internal from the external labor market. As in any labor market, the absence of unemployed workers competing with each other for hire, would compromise surplus appropriation. As HMO power lessened and its premiums rose to offset cost increases, PPOs were able to expand their contracts with both insurers and employer purchasers and/or increase their fees.29 The broad-networked physician– hospital alliances which drive PPO plans would only marginally be able to affect surplus appropriation as long as the HMO remains dominant. But in those markets where the PPOs grew and HMO capability to maintain a stable physician labor force was lessened, the latter’s care management authority was diminished. With the weakening of the HMO, the physician fee for service discount in PPO plans was reduced. A firm base for appropriation through continued restriction of property rights of physicians was attenuated in both the HMO and the PPO and physician surplus shifted back towards self appropriation, whether services were provided under either HMO or PPO auspices In summary, the reduced power of the HMOs in some physician service markets to appropriate surplus resulted from physicians having alternative access to patients, and/or legal limitations on HMO ability to exclude physicians from their networks. While the expansion of physician access can be traced through changes in the structure of the insurance industry and its product composition, these changes are in their essence an expression of state and market contestation of HMO power by physicians and hospitals as well as workers who demanded from their employers contractual adjustments to increase their access to medical services. These effects of class and intra-class struggle modified the relations of production in medical practice limiting control by financial capital.

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HMO declining effectiveness at this time was expressed financially in sharp profit dips and even losses. Exacerbating these losses was the bursting of the stock market bubble with the accompanying steep losses on their premium float.30 To meet these challenges, premiums were sharply hiked to group as well as to individual purchasers, a move enabled by insurance industry consolidation. This in turn provoked large employer group purchasers to increase their employees’ share of the insurance premium as well as their out of pocket costs for medical treatment. Termination and reduction of insurance coverage by some employers then followed.

7. INTERNAL CAPITALIST TRANSFORMATION OF THE PHYSICIAN PRACTICE Alongside and in part stimulated by the growth of the HMO, capitalist relations of production have developed rapidly within the physician practice.31 Such enterprises have become increasingly group-owned and employ physicians and other clinical labor. The increasing size of the production unit (defined by the number of physicians in the practice) has developed as a countervailing power to managed care organizations and growth of many group practices beyond what appears to be the optimum size for economies of scale and scope implies the desire for increased market power (Pope & Burge, 1992, pp. 129–164). In addition, the large group practice has the potential to achieve greater efficiency via the division of clinical labor and economies of scale in technology, marketing and administration. The centralization of capital in the large group practice also expands revenue with a much wider array of services including advanced diagnostic services, chemotherapy and radiation treatment. Some practices have also incorporated laboratory services and ambulatory surgery both in the office and in free-standing surgical centers owned in part or whole by the practice. These expanded product lines and facilities are in direct competition with hospital ambulatory surgical units. The group practices besides being financed by investment of owner surplus also gained access to private investment. Venture capital firms, large institutional investors, the equity market and banking consortia joined in financing physician practices either directly or through investor owned entities called Physician Practice Management companies (PPMs). These units strategized that profits could be generated through uniting many group practices in common ownership and providing the management to increase productivity and gain even greater economies of scale and market power.

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Many physician groups sold their practice in exchange for equity in the PPMs permitting a broader base for outside capital in practice ownership. Conglomeration of group practices by the merger of two large PPMs in the hyper speculative market of the late 1990s brought over 32,000 employed and contracted physicians together under one corporate roof (Pope & Burge, op. cit. pp. 129–164). However, the merger was soon undone by over-expansion, debt and internal dissension as were many of the other physician management corporations. This form of capitalist penetration in medical practice had, at this moment in time, failed to become dominant. The advance of centralization which has eroded the dominance of solo physicians (single owner, mostly single physician) practices has been dramatic. From 1965 to 1996, the number of physicians in group practice rose from 11% to almost a third of all non-federal physicians. During the same period the number of groups increased by 362% while the number of physicians within these groups increased by 628%, 73% more rapidly, as an expression of the emergence of very large groups (Havlicek, 1999, Table 5–5). Twenty nine percent of all group physicians were in practices of over 100 physicians. While 70% of all groups are single specialty and relatively small, those with 16 physicians and more are only 10% of all groups but include 54% of all group physicians (Havlicek, op. cit, Table 5–5).

7.1. Physician Segmentation within the Group Practice The proportion of physicians working as employees as opposed to being self employed has dramatically increased. While owners of the corporate group practice may also take an employee status, the proportion of employed physicians without any or with minimal equity has increased with the growth in the size of group practices.32 In a nationwide 1998 survey of physicians, 36% did not reply affirmatively to the question ‘‘Are you full or part owner of your main practice’’. Employees so defined also included those working in private and state and local government hospitals and medical schools. However, the largest category was in group practice. Fifty percent of all physicians in group practice are employees (Baker, Cantor, Long, & Marquis, 2000, Tables 61–64). Between 1983 and 1994 the percentage of patient care physicians practicing as employees rose from 24.2% to 42.3%. Of those in practice for five years or less, 65% were employed in 1997 compared to 37% in 1983. While some solo practitioners joined group practices as owners, most joined as salaried employees (Havlicek, 1999).

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With income level of solo physicians declining relative to employed physicians, and practice entry cost rising, fewer physicians wanted to remain in or enter solo practice. Young physicians especially, were joining group practices, largely as employees (Kletke, Eammons, & Gillis, 1996, p. 557). Eighty percent of recent medical school graduates are taking salaried jobs with HMOs, clinics or hospitals (Greenhouse, 1999, p. A1). While there had been, over a long time period, an inverse relationship between the percent of physicians in salaried status and years of experience which describes the typical career path, a substantial increase occurred in salaried status for all years of experience between 1988 and 1994 (Kletke et al., 1996, p. 559). This increase in employment status occurred in all specialties, in all parts of the country, and both for males and females. HMO pressure for cost control serves as a catalyst for shaping the group practice in a hierarchical labor process with a commensurate labor discipline. Distinctions between senior partners, junior partners and non-partner physicians have become even more important, creating stresses on one-doctor, one-vote governance mechanisms (Robinson, 1999, p. 121). As the worker cooperative is transformed into a capitalist firm, the group practice gradually perceives the HMO as a business partner, with the latter’s function being patient enrollment for shared generation and realization of surplus value, though the division of the surplus is contested. The segmentation of the physician profession with the transformation of some physicians into the capitalist class has been further accelerated through physician practice joint ownership of laboratories, surgical centers and even specialty hospitals with private investors (Health Care Review, 2002, pp. 1–4).

7.2. Non-Physician Clinical Labor in Group Practice Large practices extensively employ non-physician clinical labor (NPCLs), either in the group’s office practice or in other facilities, under their own or joint ownership. Physician assistants and nurse practitioners (because of their advanced training are identified as physician extenders) and to a lesser extent registered nurses also perform the less complex tasks traditionally assigned to physicians. Laboratory and technical workers produce an extended array of services, such as diagnostic scanning and complex blood tests, not traditional to the physician practice.33 The practice extracts surplus value from these productive workers. The number of NPCLs employed in hospitals and group practices are increasing even more rapidly than physician employment.34 In

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addition, physician extender expansion as substitute labor for the less skilled tasks of the physician has two significant affects on the rate of surplus value extracted from physician employees. First, it reduces the demand for their labor and secondly over the long run, it increases the pool of employable physicians as it accelerates the decline of solo practice. Such physicians lack the patient visit volume to economically bring NPCLs into their practice. The gender dimension of the segmentation of physicians and other clinical workers should also be emphasized. Women are now approximately 50% of all medical school graduates and for the period 1983 to 2002 there was a doubling of the percent of female physicians (Statistical Abstract, 2003, Table 615). Though as noted above, the shift to salaried status has been occurring about equally for male and female physicians, because of the recent disproportionate entry of females into the physician labor force, a higher percent of female than male physicians are salaried. Also, women are more than 80% of both health assessment and treatment professionals (a category which includes nurses, therapists and physician assistants) and health technologists and technicians, the occupational categories which are the preponderance of NPCLs in physician practices. A new structure of commodity value emerges in the group practice which reflects the new relations of production. Commodity value shifts significantly from owner-labor to variable capital with nurses, nurse practitioners and physician assistants increasingly employed especially in the largest group practices alongside physician employees in new combinations of clinical labor. Least cost variable capital becomes a larger proportion of the value of the medical service commodity as physician-owner activity shifts to a greater supervisory role for cost saving management of care including the intensification of the labor of the employed physicians and NPCL employees. The salary equivalent value of this unproductive supervisory labor constitutes an expense of management and is paid from the surplus value appropriated by the enterprise from the employed workers.35 The medical group practice structure of value corresponds to that of the structure of commodity value produced in other capitalist enterprises with similar relations of production in which owners combine productive work and management.

8. PHYSICIAN INCOME TRENDS Though difficult to sort out with statistical precision, physician income trends reflect developments in managed care, group practice, physician segmentation and NPCL developments.

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The dominance of the HMO from the late 1980s to the late 1990s, though subsequently reduced, had a depressive affect on physician income. Corrected for inflation, income for all physicians increased by less than 1% from 1987 to l997 and declined by 5.3% for the period from 1992 to 1997. Both private and public sector financing (Medicare accounts for nearly one-third of physician revenue), contributed to these trends. Income decline was especially notable for those practices heavily dependent on HMOs (Moser, 1999, pp. 1–6). The fewer the alternative sources for patients in the physician service market, the greater the decline in income. A doubling of HMO market penetration was associated with a 6–9% reduction of income (Hadley & Mitchell, 1999, pp. 1116–1127). The self-employed (in all size practices) had median income 43% higher than physician employees (Moser, 1999, p. 8, Table 2). Part of the difference has been attributed to longer hours (13% greater number of office visits per week) more years of experience, a higher percent of board certified physicians and a larger proportion in higher paid specialties (a 50% greater number of surgical procedures (Moser, 1999, p. 54, Table 13 and Table 19, p. 60). But the part of the difference attributed to entrepreneurial risk and ‘‘return on invested capital’’ can in large part be attributed to surplus expropriation. A more recent study covering the period from 1998 to 2000 indicates a rise in median nominal income of 4.6%, though a much smaller increase in real income, following a two year decline of 1.8% (Kane & Loeblich, 2003, pp. 5–11). Another current study forecasts a rise in physician income as ‘‘– the contemporary shift among insurers away from capitation for physician organizations and back to fee for service, (will be) stimulating more billable claims, more revenues for the physician organizations, and higher expenses for insurers.’’ (Robinson, Shortell, Li, & Casolino, 2004, pp. 11–22). This change in method of reimbursement is consistent with the growth of PPO and POS plans noted in Section 6.2 above.

9. UNIONIZATION OF PHYSICIANS An increasing proportion of salaried physicians have been attracted to unionization with the rapid increase in size and capitalization of the physician production unit. Self-employed physicians too, both in solo and small group practices are attempting to use collective bargaining to offset HMO power with its encroachment on physician autonomy and assault on their real income. Approximately, 42,000 physicians, 5.5% of 756,000 practicing

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physicians in 2,000, are union members. A surge in physician unionization occurred in the late 1990s, the likes of which has not been seen since the 1970s as varying forms of unionism reflect the unsettled state of relations of medical production (Phan, 1999, pp. 1–25). Guadagnino (1997, pp. 1–9) describes the complex environment, which is producing a wide variety of forms of collective bargaining, as self employed solo and group owned practices of various sizes as well as salaried physicians organize. When salaried physicians organize, a major choice of affiliation is the numerous medical specialty societies, the prime professional organization for many physicians. Alternatives include The Office and Professional Employees International Union, a union of professionals, implying common status with highly educated and professional workers in many industries, or the American Nurses Association, an organization concerned with professional issues as well as being a union of nurses. Choosing the latter would imply physician common interests with an often antagonistic and almost entirely salaried profession in the medical production process. The AMA, a bastion of physician conservative professionalism has proposed itself as a collective bargaining agent, though excluding salaried physicians in group practices, as an alternative to joining unions for the self employed, salaried hospital or government employed physicians. AMA collective bargaining for self-employed physicians would use their local units, the state and county medical societies, as their vehicle. The Federation of Physicians and Dentists affiliated with American Federation of State County and Municipal Workers, AFL-CIO with 8,500 members is also targeting physicians who own their own practices. Non-profit independent practice organizations (IPAs), which are integrative units for both solo practice physicians and small physician group practices contracting with HMOs, are in some areas, using a ‘‘messenger model’’ of unionism which presently is not held to be in violation of anti-trust law. The messenger model may in the future involve a union to collect information on what each of the physician members of the IPA want in terms of compensation or other aspects of their contractual relationship with the HMO and present it to the latter. However, neither the union nor the IPA can bargain these issues with the HMO. The move towards collective bargaining through union representation of self-employed physicians has been hindered by anti-trust charges of collusion to raise prices. When orthopedic physicians failed to renew their individual contracts with Blue Cross Blue Shield of Delaware, they were charged by the Justice department with an illegal boycott and conspiracy to raise prices (Greenhouse, 1999). A bill to allow self-employed physicians

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to engage in collective bargaining with health plans, passed the House of Representatives in 1999. But it was vigorously and successfully fought in the Senate by the insurance industry and corporate purchasers of care interested in preserving the dominance of HMOs. In a form of industrial unionism, the Service Employees International Union (SEIU, AFL-CIO) has formed the National Doctors Alliance, the largest physician union in the U.S. with 15,000 doctors, through a merger of the Doctors Council, The Committee of Interns and Residents and the United Salaried Physicians and Dentists. The SEIU also represents more than 650,000 nurses, medical technicians and other hospital employees and successfully organized 74,000 home care workers in Los Angeles (Klein, 1999, p. 15). The physician union merger reflects an attempt to gain organizing synergy from a closer affiliation of private and public sector physicians and working graduate medical students. The consolidation in one union of all workers in the medical field ranging from nurses aides to physicians clearly suggests new dimensions of the class struggle in the health care system.

10. EVOLVING RELATIONS OF PRODUCTION Contemporary relations of production in medicine are not irrevocably established. Though a significant fraction of physicians’ patients are enrollees of HMOs enabling leverage for surplus extraction, HMO dominance is not complete as the PPO and the POS forms of managed care are now substantial.36 Large medical group practices have become firmly established, incorporating a salaried labor force and offering an expanded scope of services. Some have replaced the insurance unit as the care manager even accepting global capitation (financial responsibility for all treatment costs including hospitalization and home heath care) in their HMO contracts. However, despite some direct contracting with self insured purchasers of care37 the practices are unlikely for reasons of insufficient capitalization and diseconomies of scale to significantly supplant HMOs in the overall responsibility of administering medical care for the corporate and government purchasers of care. To do so would require greater marketing capacity than they possess and the undertaking of the insurance underwriting function, and of course competition from well established insurance corporations.38 Also, to directly manage the care for the many geographically dispersed employees of large self-insured corporations, would require such practices to

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be multisited which could produce diseconomies of scale. The emerging relations of production in medical practice implies a restructuring of the relationship of HMOs and large group practices (often in alliance with hospitals), with the sharing of the surplus generated from the expanded productive work force in the medical delivery units.39 The HMO’s initial staff model of directly employing physicians was impractical because it did not permit efficient capacity creation. The contracting model that followed of management and oversight of the production of medical services at many distant practice sites by resistant physicians socialized to professional independence generated high costs and also provoked a pervasive public antagonism which led to constraining legislation and a political atmosphere inimical to the reproduction of private health insurance. The current HMO strategy of diluting their role in the direct management of care while extending risk to physician practices with more inclusive (global) capitation, marks a new stage of the relationship between insurers and providers. Physicians organized in large groups are progressively becoming the managers of care whereas the insurers are concentrating on marketing policies and purchasing medical services from providers through global capitation. The scope of utilization review currently developed by physicians in their own medical groups often exceeds that imposed by insurance groups. (Robinson, 1999, p. 108). A recent HMO industry survey found that 40% of enrollees are in plans that delegate utilization and network management to physician groups paid by capitation (Newhouse, 2002, p. 15). Utilization review can be performed on a more intensive basis by large medical groups than by an insurance plan and group owners have greater knowledge of and can exercise greater control over their physicians than an antagonistic external organization. And as the group practice is delegated authority for utilization management they move from a professional fraternity to a business like firm (Robinson, 1999, p. 91). Moreover the increased risks to the physician group with global capitation require their acquisition of additional capital and the furtherance of a capitalist work discipline within the practice. Control over access to patients will still provide the insurers with leverage for surplus appropriation, which they will share with the provider capitals. However, conflict will continue with ongoing attempts by both to consolidate market power against their competitors and against each other. With this strategy, the HMO, the group practices and the employer group purchasers hope to resolve the internecine conflicts between insurers and providers and lessen the estrangement of the population to a system implying profit motivated limits on health care.

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However, new sources of disaffection will likely develop when physician practices in alliance with hospitals take a more active role in managing care for the purchasers, as the perceived physician principal-agent buffer role between patients on the one hand and purchasers and their HMO agents on the other will be undermined. This role which did provide some measure of defense of access and quality will be reduced, and trust between patient and physician will be further strained. Managed care conflicts between insurers and the provider practices will be displaced in part to the labor process of the corporate medical group practice. This displacement in turn can reshape class conflict in medicine creating possibilities for stronger ties between the non-proprietary physicians and other strata of the medical sector working class. A greater difficulty for development of capitalist relations of production in medicine is the contradiction between the drive to accumulation immanent in capitalist enterprise in medicine as in all capitalist enterprises and the need for capital in general to restrain the forces of production in the personal health care system. As the corporate medical delivery system expands, its own accumulative dynamic is to expand the market for personal medical services though unevenly in the population, having at its command financial and marketing resources comparable to other capitalist enterprises. Not only the upstream pharmaceutical, biotechnology and equipment supply firms but also the health care delivery units now organized on a capitalist basis will be accumulation driven. Competitive fragmentation and duplication will continue as will the waste inherent in the competitive process, itself a component of the drive to expand and accumulate. As there is no reason to assume any reduction in the disease externalities of production and consumption of the capitalist (or as it is conventionally defined, ‘‘industrial’’) mode of production the market potential would be present. Micro efficiency and productivity enhancement of the capitalist enterprise which will include reduced contact time with patients and the impact of cost saving clinical guidelines reducing ‘‘unnecessary’’ medical treatment will be hailed as improving consumer welfare. Unavailability and inadequacy of care will worsen with the proportion of the underinsured growing. The attempt to stabilize and legitimize the system by having the corporate medical practice directly manage the care will produce greater distrust of physicians and the consequence of such alienation will increase poorer health outcomes. Concurrent with the restructuring of the relations of production within a capitalist framework, the current health care expenditure crisis has also altered the character of insurance coverage. Health Savings Accounts (HSAs)

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ideologically defined as ‘‘consumer driven plans’’ shift financial risk to workers with rewards to the healthier and higher income employees and increased costs and risks to others.40 The HSAs offered by employers offer tax-free accounts for enrolled workers purchasing a large deductible insurance policy. The logic behind this coverage is to require workers to evaluate their own symptoms to determine if they are serious enough to warrant the opportunity cost of a visit. Such decisions during the deductible period are able to avoid the ‘‘moral hazard’’ of insurance. If they do not reach their deductible during the year, employees will be able to roll over the balance to the next year. Health care insurance is also being re-shaped as pensions have been, from defined benefit to defined contribution contracts.41 A form of this shift is the use of health care vouchers which can be adjusted periodically by an inflation index or by a more arbitrary technique (Cohn & Eliopoulos, 2000, p. 152). Employees would use the voucher which they could supplement with own after tax income to purchase an individual insurance benefit package. Insurance units would continue to compete through benefit design differentials and aggressive marketing. But the cost of maintaining the same level of benefits from one year to the next would be shifted from employers to workers. Access to care would be even more uneven than currently as the single benefit package now generally offered to all eligible employees (generally not including temporary or part time workers) within the enterprise could be replaced by the offer and purchase of many packages, now varying on the basis of employee income and perceived health status. Finally, enabled by a loose labor market, more employers are dropping coverage entirely. These developments which increase the number of uninsured and underinsured also offset their rising variable costs, resulting from the continued rise of heath care expenditures. Capital dominance will not end the multiple dimensions of the crisis of the evolving capitalist health care system. If not politically challenged, the system will continue to reproduce itself to the detriment of the health and well being of the majority of the population.

NOTES 1. ‘‘Health Care Delivery system’’ will be used alternatively with ‘‘medical care’’ and ‘‘medical care delivery system’’. It includes all the economic units for the provision of care; physician practices, hospitals, nursing homes, home health care agencies, the retail sale of pharmaceuticals and the insurance system which links the purchasers of care with the aforementioned producers of care.

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2. U.S. Bureau of the Census (2003), Statistical Abstract of the United States, Table 119. 3. U.S. Bureau of the Census (2001), Statistical Abstract of the United States, derived from Tables 593 and 151 for the year 2000. Calculations excluded management as a category and in calculations of percentages of the noted occupational categories because many health care administrators are not counted as such but are listed separately as financial managers, personnel and labor relations managers, etc. 4. Statistics from Health Care Financing agency and U.S. Department of Commerce reprinted in Shi and Singh (2001, p. 167). 5. While the argument is here conceptualized as part of an evolving socioeconomic formation, it is derived from the theory of the mode of production. Therefore, the great expansion of the medical forces of production initiated and rapidly developing specifically during the Golden Age can be regarded as contingent. The potentiating of the productive forces would have occurred whatever the temporal path of capitalist growth because the motivating forces were present (see Laibman, 1992, chapter 13 for a discussion of modes of production, socioeconomic formations and contingency). 6. The causes and consequences of this epidemiological revolution are discussed in Waitzkin (2000). 7. A large number of such studies are to be found in Conrad (2004) in each of such categories as ‘‘The Social Nature of Disease’’, ‘‘Who Gets Sick: The Unequal Social Distribution of Disease’’ and ‘‘Our Sickening Social and Physical Environment’’. Other studies are cited in Shi and Singh, 2001, chapter two. 8. Studies in ‘‘Materialist Epidemiology’’ are described by Navarro (2002) (see also Waitzkin, 2000; Eyer, 1977; Powels, 1973). 9. The immense growth of the forces of production of the health care system from mid-century therefore was a response to the rapid emergence of degenerative disease, especially cancer caused by the growth of the petrochemical, plastic, food processing and other industries that create disease as an externality to its workers, the surrounding community where production is sited and to consumers. Also contributing to circulatory and respiratory disease is an intensifying pattern of hierarchical and deskilled alienating work and employment insecurity with its stress inducing illnesses. The culture of mass consumption which Critical Sociology argues characterizes advanced capitalism arises from alienation, and is reinforced by commodification of desire. Mainstream sociology identifies the culture of consumerism, variously theorized, as adverse to healthy life styles. The culture inculcates habits of immediate gratification such as smoking, fast food consumption, excess eating, drinking and sedentary behavior with little regard for future health consequences. Because of the uneven incidence of alienation, stress and social capital and risk factors from productive processes, statistics clearly reveal that the impact of morbidity and mortality for degenerative, trauma and infectious disease falls unevenly on the working class Kawachi, Kennedy, and Wilkinson (1999) and racial and certain non European ethnic minorities; the latter, because they are disproportionately members of the working class and because of the caste like circumstances to which they are subject Kawachi, Daniels, and Robinson (2005).

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10. Prevention activities in the personal care system other than immunization for infectious disease and counseling regarding risk factors involve early detection of chronic degenerative disease for more effective treatment. 11. The influence of the upstream agencies on the health care delivery units to adopt new and expensive technologies is described by Waitzkin (2000, pp. 74–96). 12. Corresponding to Mezaros (1998) discussion of the dialectic of the productive and destructive aspects of the forces of production, both the forces of production that create and those which diagnose and treat disease are ideologically perceived as achievements of science. This perception furthers growth of both and accelerates the contradictions of the personal health care system. 13. Vlachou (2002) takes a similar approach in analyzing medical problems caused by pollution. 14. Simple commodity production in medicine was itself transformed from the state of unproductive labor. Marx refers to physician services as being purchased from revenue which defines the category of unproductive labor when he quotes approvingly from Adam Smith that the labor of some of the most respectable orders in society such as physicians, churchman and lawyers, as the labor of menial servants are unproductive of any value (Marx, 1952, p. 156). Payment for the services of physicians was then overwhelmingly from the revenues of the business class and other elements of the bourgeoisie who personally benefited from these services. In contrast, early 20th century physicians were exchanging their services with the population at large and appropriated the equivalent of a self produced surplus with the sale of their commodity. It was the development of medical science in the mid- and late 19th century based on the revolution in biology (e.g. germ theory of disease) chemistry (e.g. anesthesia and anesthetics) and physics (e.g. the X-ray) that led to the development of the forces of medical production and the transformation of the social role of the physician from servant of the upper classes in Marx’s time to producers of medical services for the broad mass of the population in the 20th century. This together with the rise of purchasing power for this population with the development of the general forces of production was the basis of the conversion of the physician from unproductive worker to simple commodity producer. 15. Holland and Carvalho (1985, pp. 1–27) describe how family farming proceeded from independent production of use values to independent commodity production to integration into the capitalist mode of production. 16. Few early 20th century physicians were directly employed by capital both because of the relatively low start up costs of solo practice and because physicians through their professional organizations vehemently and successfully politically opposed such employment. 17. Graduation from medical school and a subsequent one-year internship is required for taking the medical licensing examination in all states. The American Medical Association directly representing physicians holds six of the 17 seats on the board of the medical school accreditation agency with the majority of the seats being held by organizations in which physicians play a commanding role. Graduates from schools without accreditation are not eligible to take the medical licensing examination (see also Wilson & Neuhauser, 1987, chapter 4). 18. Hirth and Chernew (1999, pp. 282–294) cite several sources for mixed evidence of supplier induced demand in the physician service market.

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19. For the history of the largely employment based financing of the delivery of health care in the U.S., see Starr (1982). As opposed to tax based financing, this system directly locates health care as a cost of production to capitals, specifically as a fringe benefit of the wage contract with their workers. The labor market option as opposed to a politically determined tax incidence for financing health care provides some flexibility in shifting health costs to workers. It also satisfies an ideological and political objection to state managed social consumption inclusive of the entire population. 20. The Managed Care model was sold to national health insurance systems in developed industrial countries with these justifications in the same period of national slowdown and neo-liberal retrenchment and deregulation but was later modified as in the U.S. system with perceived cost control failure and the hostile response by broad sectors of the population (Light, 2001, pp. 681–708). 21. Aglietta (1979, pp. 681–708) analyzes the strategic pricing decision, which the most productive capitalists in a branch of production use to increase market share. 22. This is more significant for specialist physicians whose practice is more hospital based than generalist primary care physicians. Because hospital expenditure is the major channel for aggregate medical expenditure, the HMO especially limits activities by specialist physicians, the majority of physicians. Specialists have experienced a corresponding decline in relative and a slowdown in rise of absolute income. 23. A form of market power exercised by some HMOs though now banned in several states are exclusive contracts prohibiting physicians from any other HMO affiliation. These contracts tend to increase surplus appropriation. 24. Salaried HMO physician income determination in the 1970s was conditioned by the predominance of physicians in private practice who had direct access to patients while the contemporary contract physician who is now predominant does not. Therefore, the movement from salaried to contract status over a period of some thirty years can mean even a higher rate of surplus value in the current period and is consistent with a reversal of the traditional development sequence. Only some three million workers are currently enrolled in the staff model HMO, which directly employs physicians. This represents about 4% of all workers enrolled in HMOs in 1998 (see Shi & Singh, 2001, pp. 312–361 for data on the different HMO models and managed care enrollment). 25. For data on changes in recent rates of change of hospital outpatient surgeries and inpatient length of stay, see Shi and Singh, ibid, Fig. 7–2 on p. 243 and Fig. 8–6, p. 284. 26. Strategies of cost control have had via market feedback a significant impact on the direction of research and development and therefore the technological breakthroughs from the medical equipment supply companies (Geligns & Rosenberg, 1994, p. 36). 27. HMO strategy to minimize payments to hospitals through their control of patient access is to contract with only a select number of hospitals in a community. This serves both to foster hospital competition and to obtain a quantity discount for purchase of services. 28. Technology diffusion also occurs in enlarged physician office practices in competition with hospitals.

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29. Insurance companies which sell both forms of insurance are shifting their product mix to favor PPOs as the surplus declines and as demand for this form increases. Insurance companies which are less HMO oriented are achieving greater market success (Cunningham & Sherlock, 2002). 30. Speculative gains in a booming equity market can be even greater than the profits generated from insurance products. Premiums are lowered so that it may only cover insurance commitments to maximize access to investable funds, with all gains coming from investment speculation. 31. Capitalist development began even earlier in the solo practice era with the linkage of physicians as limited partners to clinical laboratories and other health service sectors. Corporate owners in these sectors sought out physicians for joint ventures when the latter were only part of a referral network. Perception of the growth of these type linkages including pharmaceutical companies offering stock ownership and other financial inducements to physicians to influence their prescribing power as a novel phenomenon led the editor of the New England Journal Of Medicine to term it ‘‘The New Medical-Industrial Complex’’ (Relman, 1980, pp. 963–970). Such relationships continue to exist today alongside total clinical integration into the enlarged physician practice (Rodwin, 1993, chapter 2) 32. Physicians, often senior members with unequal claims to residual income are also salaried in group practices with an incremental return based on equity holding and ‘‘productivity’’ i.e. revenue producing differentials. In a multi specialty group, known specialty income differentials can be incorporated into a base income mitigating physician specialty heterogeneity as a source of discord. 33. When physician practices employ purely administrative labor, for example, to process insurance claims, they are employing unproductive labor and making wage payments from revenue to these workers. However, when the same receptionist schedules a patient, the use value involving a temporal dimension of the future visit is incorporating productive labor into the exchange value of the service. By contrast, the employment of a medical clinician, for example, a nurse practitioner involves labor only involved in creating use value and fully generates surplus value for the physician employer. 34. The aggregate number of a defined group of non-physician clinicians (NPCs) graduated annually from professional schools in ten disciplines doubled between 1992 and 1997 and a further increment of 20% is expected by 2001. These ten disciplines include nurse practitioners, physician assistants, nurse midwives, chiropractors, acupuncturists, naturopaths, optometrists, podiatrists, nurse anesthetists and clinical nurse specialists (Cooper, Laud, & Dietrich, 1998, pp. 788–794). Though some NPCs are self employed and directly compete with physicians, others are self employed in primary (basic) care often with state required physician oversight, and still others are mostly salaried either in group practices or as paid hospital employees. Some NPCs like nurse anesthetists are often employed by group practice anesthesiologists who contract with hospitals and perform their services at this site. Analogous to the conflict over property rights between the HMO and physicians is the conflict between physicians and NPCs over the property rights of the latter in the physician practice. ‘‘Key questions regarding future demand and integration into medical practice relate to scope of practice, prescription privileges and autonomy,

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defined by state licensure and practice acts as well as assigned roles and responsibilities in clinical practice’’ (Cooper, Richard, Laud, & Dietrich, 1998). 35. Change in the relations of production is often accompanied by changes in the labor process and the means of payment. This is emphasized by Aglietta (1979, p. 138) when discussing the emergence of Neo-Fordism. 36. Physician independence from both HMO and PPO restraints has been aided by the existence of a large fee for service Medicare population. However, the tying of Medicare pharmaceutical coverage to HMO enrollment and the growth of Medicare managed care intermediation will reduce this source of independence. 37. A large company may act as its own insurer. Such businesses most often purchase reinsurance against unusually large claims. 38. Robinson (1999, chapter 4) describes in detail the disadvantages of vertical integration between insurers and medical providers. 39. An historical example of a transitional relation of production where part if not all of the surplus is shared by different units of capital as described by Marx (1959, pp. 782–783) relates to a transitional form of capital dominance in agriculture. The metayer is a sharecropping system ‘‘under which the (manager) farmer furnishes his labor (his own or another’s) and also a portion of the working capital, and the landlord furnishes aside from the land, another portion of working capital, e.g. cattle, and the product are divided between tenant and landlord in definite proportions y . [T]he share being appropriated by the landlord does not bear the pure form of rent. It may actually include interest on the capital advanced by him and an excess rent. It may also absorb practically the entire surplus labor of the farmer or leave him a greater or smaller portion of this surplus labor – On the one hand the sharecropper whether he employs his own or another’s labor, is to lay claim of a portion of the product not in his capacity as laborer but as possessor of part of the instruments of labor as his own capitalist. On the other hand the landlord claims his share not exclusively on the basis of landownership, but also as lender of capital.’’ 40. Lower income workers would tend to reduce their utilization and sicker patients would incur significantly higher costs. 41. ‘‘More companies will adopt defined contribution plans in which they set aside a fixed amount of money that each employee can use to purchase his or her own medical care. Several large insurers such as Aetna and Humana are helping companies develop such programs’’ (Weintraub, 2003, p. 134).

ACKNOWLEDGMENTS I wish to thank the two anonymous referees for their many helpful suggestions and Paul Zarembka for his guidance and encouragement through several revisions of the paper.

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Light, D. (1997). Lessons for the United States: Britain’s experience with managed competition. In: J. Wilkerson, K. Davis & R. Given (Eds), Competitive managed care. San Francisco: Jossey Bass. Light, D. (2001). Cost containment and the back draft of competition policies. International Journal of Health Services, 31(4), 681–708. Marx, K. (1952). Theories of surplus value. New York: International Publishers. Marx, K. (1959). Capital, volume III. Moscow: Moscow Foreign Language Publishing House. Marx, K. (1973). Grundrisse. New York: Vintage Books. Mezaros, I. (1998). Dialectical Transformations: Teleology, history and social consciousness, Science & Society, Fall. Morrisey, M. R (2001). Competition in hospital and health insurance markets: A review and research. Health Services Research (Proquest Data Base). Moser, J. (1999). Recent developments in physician income. Center for Health Policy Research, Chicago: Chicago American Medical Association. Navarro, V. (Ed.) (2002). A historical review (1965–1997) of studies on class, health, and quality of life: A personal account. In: The politial economy of social inequalities. Amityville: Baywood Publishing. Newhouse, J. (2002). Managed care: An industry snapshot. Inquiry, Fall (Proquest Data Base). Patel, K., & Rushevsky, M. (1999). Health care politics and policy in America. Armonk: M. E. Sharpe. Phan, C. (1999). Physician unionization: The impact on the medical profession. The Journal of Legal Medicine, March (Proquest Data Base). Pope, G. C., & Burge, R. T. (1992). Inefficiencies in physician practices, In: S. Richard & L. Rossiter (Eds), Advances in health economics and health services research (Vol. 13), Greenwich: Jai Press. Powels, J. (1973). On the limitations of modern medicine. Scientific Medical Management, 1, 1–30. Relman, A. S. M. D. (1980). The new medical – industrial complex. New England Journal of Medicine, 303, 963–970. Robinson, J. C. (1999). The corporate practice of medicine: Competition and innovation in health care. Berkeley: University of California Press. Robinson, J. C., Shortell, S., Li, R., & Casolino, T. (2004). The alignment and blending of payment incentives within physician organizations. Health Services Research, 39(5), 11–22. Rodwin, M. A. (1993). Medicine, money and morals. New York: Oxford, University Press. Shi, L., & Singh, D. A. (2001). Delivering health care in America: A systems approach. Gaithersberg: Aspen Publishers. Starr, P. (1982). The social transformation of American medicine. New York: Basic Books. Tselikis, P. (2000). Physicians vs. managed care: Can’t they just get along? Business and Health (Proquest Direct). U.S. Bureau of the Census. (2001). Statistical Abstract of the United States (121st ed.). Washington, DC. U.S. Bureau of the Census. (2003). Statistical Abstract of the United States (123rd ed.). Washington, DC. Vlachou, A. (2002). Nature and value theory. Science & Society, 66(2), 169–201. Waitzkin, H. (2000). The second sickness; contradictions of capitalist health care Lanham, Rowman and Littlefield.

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Weintraub, A. (2003). Health care growing but not glowing. Business Week, January 13. Wilson, F. A., & Neuhaser, D. (1987). Health services in the United States. Cambridge: Ballinger. Woolhandler, S., & Himmelstein, D. (1991). The deteriorating administrative efficiency of the U.S. health care system. New England Journal of Medicine, 10(1), 1253–1258. Woolhandler, S., & Himmelstein, D. (2002). Paying for national health insurance – and not getting it. Health Affairs, 21(4), 88–98.

THE MARXIAN THEORY OF CAPITALIST STAGES$ Terrence McDonough ABSTRACT This article traces the history of a continuous tradition of Marxian stage theory from the beginning of the twentieth century until the present day. The resolution of the first crisis of Marxism was found in the work of Hilferding on finance capital, Bukharin on the world economy and Lenin on imperialism as a new stage of capitalism. Hilferding’s, Bukarin’s and Lenin’s analysis was carried into the post–World War II era through the work of Sweezy and Mandel. A second wave of Marxian stage theorizing emerged with the end of the post–World War II expansion. Mandel’s long wave theory (LWT), the Social Structure of Accumulation Framework (SSAF), and the Regulation Approach (RA) analyzed the stagflationary crises as the end of a long wave of growth. This long wave was underpinned by the emergence of a postwar stage of capitalism, which was analogous to the reorganization brought about by monopoly capital at the turn of the century. These new schools were reluctant to predict the nonresolution of the current crisis, thus opening up the possibility of further stages of capitalism in the future. This elevated Lenin’s theory of the highest stage to a general theory of capitalist stages. The last decade has $

This research partially supported by a thematic grant from the Irish Research Council for the Humanities and Social Sciences.

Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 241–280 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24007-6

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seen a substantial convergence in the three perspectives. In general, this convergence has reaffirmed the importance of Hilferding’s, Bukarin’s and Lenin’s (HBL’s) initial contributions to the stage theoretic tradition. The article concludes with some thoughts on the necessity of stage theory for understanding of the current period of globalization.

This article will argue that there exists a fundamentally continuous tradition of Marxian stage theory from the beginning of the twentieth century until the present day. This tradition is intimately linked to turning points in the historical process of capital accumulation. These turning points mark the inauguration of a period of relatively unproblematic reproduction of capitalist social relations or, symmetrically, the beginning of a period of stagnation and crisis. Simply put the alternating periods of growth and crisis which describe the transition from one capitalist stage to another have left a strong imprint on the history of the Marxian theory of capitalist stages. This history begins with the first crisis of Marxism. This crisis was precipitated by the recovery of the capitalist economy from the first Great Depression at the end of the nineteenth century. Seeing capitalism recover from what was thought to be its final crisis, Marxist activists searched for a way of explaining this recovery without abandoning the revolutionary implications of Marx’s analysis of the contradictory character of capitalist social relations. This explanation was to be found in the pioneering work of Rudolf Hilferding on finance capital, Nicolai Bukharin on the world economy and V.I. Lenin on imperialism. All three argued that the capitalist economy had, with the advent of monopoly capitalism, entered into a new and higher stage of capitalism. This new stage underlay the recovery but it had not transcended the basic Marxian dynamics of capital accumulation. Hilferding’s, Bukarin’s and Lenin’s (HBL) analysis would be carried into the post–World War II era through the work of Paul Sweezy and Ernest Mandel. In their influential expositions of Marxian economics, the HBL analysis of monopoly capitalism was treated by each as essentially a fourth volume of capital. Their descriptions of the transition to monopoly capital consolidated stage theory as an accepted component of Marxian theoretical practice. Both would be influential in forming the basis for the second wave of Marxian stage theory. The second wave of Marxian stage theorizing emerged with the end of the post–World War II expansion. Ernest Mandel’s long wave theory (LWT), the Social Structure of Accumulation Framework (SSAF), and the

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Regulation Approach (RA) analyzed the stagflationary crises of most of the advanced capitalist countries as the end of a long wave of growth following the end of the war. This long wave of accumulation1 was underpinned by the emergence of a new stage of capitalism which was analogous to the reorganization brought about by monopoly capital at the turn of the century. Since this new stage was the resolution of the crisis of the monopoly stage, these new schools were reluctant to predict the non-resolution of the current crisis, thus opening up the possibility of further stages of capitalism in the future. This identification of a new stage following on from HBL’s monopoly stage and the possibility of subsequent stages in the future elevated Lenin’s theory of the highest stage to a general theory of stages of capitalism. The SSAF built on Sweezy’s contribution and that of the American Monopoly Capital School. Mandel’s LWT, not surprisingly, was founded on his earlier analysis of monopoly capital. The RA claimed no precursors apart from Althusser, though Althusser’s admiration for Lenin and specifically his Imperialism is well known. Each of these perspectives differed in some concepts and emphasis and initially formed three separate schools. However, the last decade or so has seen a substantial convergence in their perspectives. In general, this convergence has reaffirmed the importance of HBL’s initial contributions to the stage theoretic tradition. This tradition has contended that a full analysis of capitalism cannot be satisfied with an understanding of the general transhistorical dynamics of capitalism as a mode of production nor with the analysis of particular historical conjunctures. Stage theory undertakes an intermediate level of analysis in the sense that it identifies periods intermediate in length between the conjuncture and overall capitalist history. This intermediate period of analysis is founded on the observation that while all economies are embedded in the broader array of social institutions, this is especially important in the capitalist era because of the conflictual foundations of capitalism in class division and capitalist competition. For accumulation to proceed relatively smoothly, these sources of instability must be countered through the construction of a set of stable institutions at not only the economic but also the political and ideological levels. The construction of such a social structure underpins the profit rate and creates the secure expectations that make long-term investment possible. Nevertheless as accumulation proceeds the institutions are undermined by class conflict, capitalist competition and accumulation itself. These forces and the interdependence of the institutions lead to a breakdown of the institutions, a fall in the profit rate, and the collapse of accumulation,

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initiating a period of crisis and stagnation which is only overcome with the construction of a new set of institutions. Thus capitalist stages are constituted by the sets of interdependent economic, political and ideological institutions which underpin relatively successful accumulation separated by intervening periods of crisis. The remainder of this paper will trace the history of the Marxian theory of capitalist stages and conclude with some thoughts on the necessity of stage theory for the understanding of the current period of globalization.

1. CAPITALIST RECOVERY AND THE CRISIS OF MARXISM At the turn of the twentieth century, Marxists were wrestling with the question of explaining a change in the trajectory of accumulation. They did so with great urgency, as the early twentieth century improvement in capitalist growth posed a much greater challenge to the Marxist worldview than any transition to stagnation could have done. Marxism had first obtained prominence in the context of the Great Depression of the late nineteenth century. Dobb (1947, p. 310) sums up the period as ‘‘essentially a depression of cut-throat competition and cut prices of the classic textbook type.’’ He quotes Walt Rostow to the effect that capitalists ‘‘began to search for an escape (from narrower profit-margins) in the insured foreign markets of positive imperialism, in tariffs, monopolies, employers associations (Dobb, 1947, p. 312).’’ Geary (1987, p. 2) sums up the views of contemporary Marxist observers: The extent to which there really was a ‘great depression between 1873 and 1896 is of course a source of dispute amongst economic historians but there is no doubt that many contemporaries, amongst them August Bebel and Eduard Bernstein (initially), saw the recession as nothing less than the ‘final crisis of capitalism.’

The final crisis of capitalism notwithstanding, in the last years of the nineteenth century and persisting into the early years of the twentieth, capitalism was showing definite signs of recovery. These were all the more dramatic in contrast with the previous long years of stagnation and instability. Geary (1987, p. 36) sums up the developments in the German economy, while indicating their significance in the inauguration of the theoretical debate: Revisionism was not spawned ex nihilo but was the fruit of the economic recovery which took place after 1896 (not only in Germany) and of a change in the political situation of the Second Reich. From 1896 until the First World War the German economy enjoyed

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almost uninterrupted growth and low levels of unemployment, even in the relatively bad years such as 1908–1909. Between 1870 and 1913 weekly real earnings increased by thirty five per cent, with a really significant rise between 1880 and 1900y Increased earnings were reflected in increased living standards.2

The Marxists of the Second International had no concepts with which to handle the phoenix-flight of capitalism which they were witnessing. The Second International had developed a somewhat mechanical view of Marxism and the world. All phenomena were seen as an expression of certain laws inherent in the nature of matter. This notion was transferred to the analysis of the capitalist economy. Marx’s tendencies became laws analogous to the laws of physics. This included Marx’s observations about capitalism’s tendency toward crisis (Colletti, 1972, Morgan, 1984, pp. 4–8, Hansen, 1985, p. 46). Such a view was unable to explain capitalist recovery from long-term crisis. Capitalism’s recovery from the crisis of the late nineteenth century thus precipitated a crisis in Marxism at the beginning of the twentieth.3 The immediate evidence for the crisis is to be found in a largely unconstructive debate over the significance of the recovery for the strategy of the socialist movement. Marxists had looked for a swift, worldwide proletarian revolution produced by the worsening of the capitalist crisis. When recovery instead of revolution materialized, a debate began concerning the role of economic crisis in revolutionary theory.4 This ‘‘breakdown controversy’’ was an argument between orthodox Marxists, who claimed that capitalist crisis would continue to worsen, thereby producing a revolutionary conjuncture, and Bernstein’s followers, who participated in the controversy in order to reject revolutionary tactics. The latter argued that revolution is only required if capitalism breaks down. For if the system will not fail of its own accord, then the class struggle can be ameliorated within the existing political framework, and men will be able to realize ‘‘the continuance of free development’’ (Bernstein, 1961, p. 82–87). Bernstein’s argument5 was based on three contentions. First, he argued that growing financial knowledge dampened speculation and, therefore, crisis tendencies. Secondly, Bernstein contended that as communication and transportation developed, firms would have increasingly accurate foreknowledge as to what and how much to produce, eliminating disproportionalities. The third of Bernstein’s arguments was based on the trust as rationalizer of the market (Bernstein, 1961, pp. 82–87). I have recognized its capacity to influence the relation of productive activity to the condition of the market so far as to diminish the danger of crisis (Bernstein, 1961, p. 87).

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Bernstein attempted to demonstrate that the economy was not conflictridden and consequently that the class struggle would assume less and less importance within the capitalist mode of production. He wished to show that liberal democracy and the capitalist economy were harmoniously linked in a tendency to end class antagonisms. The state was essentially an apparatus, which could be instrumentally used to the benefit of society as ethical values came to the fore in human development. Bernstein’s attempt to solve the crisis facing Marxist theory succeeded only in deepening it. Bernstein sought the solution to Marxism’s problems by introducing concepts from outside the Marxist paradigm. These included the notion of class harmony in advanced capitalist society, an idealist concept of ethics borrowed from Kant6 and a liberal, classless theory of the state. This introduction of concepts from outside of Marxism has been classically described as a ‘‘revisionist’’ intellectual strategy. Conversely, the distinguishing characteristic of Kautsky’s participation in the debate is his adherence to orthodoxy.7 Kautsky demonstrated the smashing of the petit bourgeoisie, the continuing centralization and concentration of capital (Goode, 1983, pp. 16–17, see also Howard & King, 1989, p. 81) and the lack of political rapprochement between capital and labor.8 Kautsky argued that crises were indeed worsening. He posited that the productive forces must expand more quickly than the market in the long run, though short-run ups and downs would continue. Thus, Kautsky arrived at a theory of ‘‘chronic depression,’’ where ‘‘the continued existence of capitalist production remains possible y but it becomes completely intolerable for the masses (Sweezy, 1968, p. 198).’’9 Kautsky’s response to Bernstein is also unconstructive. Kautsky’s basic stance in the debate was the denial of the existence of any crisis within Marxism. Kautsky refused to recognize the creation of a new terrain in the accumulation process in the context of the capitalist recovery which was under way. Since the objective conditions facing Marxism were still the same, no conceptual additions were called for. Although capable of theoretical innovation,10 Kautsky and his allies in the debate contented themselves with the reassertion of the old formulas. Kautsky’s position on the occasion of the revisionism debate can be characterized as dogmatic.11 The breakdown controversy left several important theoretical tasks unaccomplished. The most pressing of these was the development of a consistent Marxist explanation of the end of the Great Depression and the renewal of capitalist growth. This explanation would, on the one hand, have to go beyond the assertion that nothing had really changed. On the other

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hand, it would have to avoid the revisionist trap of seeing the recovery as evidence of the basically harmonious character of future capitalist economic and social development. Such a theoretical advance would have to analyze the contradictory nature of capitalist class society while simultaneously explaining a period of relatively unproblematic capitalist accumulation.

2. FINANCE CAPITAL, THE WORLD ECONOMY AND IMPERIALISM The contemporary Marxist response to this theoretical task can be found in the contributions of Rudolf Hilferding (1980) in his Finance Capital, Nicolai Bukharin (1973) in Imperialism and World Economy, and Lenin in Imperialism, the Highest Stage of Capitalism. It is these three works which taken together form the structure of the early twentieth century Marxist theory of both imperialism and stages of capitalism. 2.1. Hilferding and Finance Capital The first major attempt to explain the resurgence of capital accumulation at the beginning of the twentieth century, using concepts which were consistent with Marxist analysis, appeared in 1910 with the publication of Hilferding’s Finance Capital. It’s reception in Marxist circles as virtually a further volume of Capital (Hilferding, 1980, p. 1) reflected not only the impressive quality of the work, but also the increasing urgency of the task which it addressed.12 A casual perusal of the works makes it clear that Finance Capital was the foundation for both Bukharin’s and Lenin’s later volumes. 2.1.1. The Emergence of Finance Capital Hilferding clearly saw his task as closely related to the one undertaken by Marx. Just as Marx had analyzed the emergence and dynamic growth of industrial capital in contrast to the previously dominant merchant capital in Das Kapital, Hilferding set out in Das Finanzkapital to analyze the emergence from industrial capital of the new form of finance capital. Such a study, Hilferding writes, is essential to achieving a ‘‘scientific understanding of the economic characteristics of the latest phase of capitalist development’’ (Hilferding, 1980, p. 21). Hilferding’s view of the origins of finance capital and the ramifications of its appearance for all levels of society determines the organization of the

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volume. Hilferding begins with a lengthy consideration of the role of money in capitalist economies. This leads to an analysis of the increasing importance of the role of credit in the reproduction of the capitalist valorization process. Banks begin to concern themselves with the ‘‘long-range prospects of the enterprise and the future state of the market’’ (p. 95). With the advent of the joint-stock company, banks become involved in the raising of industrial capital through the promotion of stock issues. The creation of joint-stock companies has several important consequences for the structure of the capitalist economy. The capitalist can now invest in industrial activity without having to undertake the function of the industrial entrepreneur. The organization of a stock exchange makes possible the pooling of capitals and opens the way for an enormous expansion of the scale of capitalist enterprise. The existence of promoter’s profit in the issuance of stock creates large new reservoirs of concentrated bank capital. Since considerably less than one hundred percent of the stock is necessary to exercise control, the organizing reach of an individual capital is greatly extended. A common ownership interest is created among various companies which is reinforced by interlocking boards of directors. Where banks retain stock in corporations, they impose their own personnel on corporate boards of directors. The corporation has numerous competitive advantages over the individually owned enterprise. It has a much greater capacity for growth, drawing as it does upon the whole supply of free money capital. This ability to raise capital grants greater access to credit. The ability to retain profits gives the corporation an advantage in price competition and in surviving business downturns. Increasing bank involvement with industrial production creates a change in business principles: The professional banking principle of maximum security makes the banks inherently averse to competition and predisposed in favour of the elimination of competition in industry through cartels, and its replacement by a ‘steady profit’. (p.179)

Bank capital, increasingly concentrated itself, begins to promote combination rather than competition in industry. Integration raises the profit rate through decreasing competition, greater economies of scale and technical innovation, and greater stability over the business cycle. Concentration is achieved through the formation of cartels and trusts. The necessity of dealing with cartels and trusts encourages the trustification of further industries. Increasingly, these combinations take over the merchandising of their own products.

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Industrial profit incorporates commercial profit, is itself capitalized as promoter’s profit, and becomes the booty of the trinity which has attained the highest form of capital as finance capital. For industrial capital is God the Father, who sent forth commercial and bank capital as God the Son, and money capital is the Holy Ghost. They are three persons united in one, in finance capital. (p.220)

Thus, finance capital is the unification of bank capital and industrial capital. In Hilferding’s analysis, there is an intimate relationship between the growth of the corporate form of ownership, the increasing concentration and centralization of industry and the merging of previously separate spheres of capital activity into finance capital under the control of the banks. While the basic capitalist tendencies toward crises still exist, the concentration of industries tends to mitigate the negative affects for capital. Hilferding observes that the ability of an enterprise to survive increases with its size (p. 289). Joint stock companies can attract additional capital and accumulate reserves in good years. The diversification of business activity on the part of banks and industries, but especially banks, allows for the spreading of risk. Concentrated banking is also in a position to confine speculative movements within certain limits. The ability of cartels to maintain prices means that they can divert the main burden of a crisis to the noncartelized industries. The existence of capitalist crisis then accelerates the process of concentration. 2.1.2. The State and Imperialism Having undertaken the comprehensive description of transformations at the economic level of society, Hilferding makes the transition to political analysis in the following passage: Finance capital signifies the unification of capital. The previously separate spheres of industrial, commercial and bank capital are now brought under the common direction of high finance, in which the masters of industry and of the banks are united in a close personal association. The basis of this association is the elimination of free competition among individual capitalists by the large monopolistic combines. This naturally involves at the same time a change in the relation of the capitalist class to state power. (p. 301)

It is with this transition that Hilferding lays the foundations for analyzing the close relationships among the economic, political and cultural levels of society. Hilferding develops this point about the changing relation of class and state power through a discussion of the tariff. Tariffs maintain a high price regime which ‘‘exacts enormous payments from domestic consumers and transfers them to industrialists and landowners’’ (p. 303). The tariff directly supports cartelization by reducing the number of foreign competitors and

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indirectly by providing increased revenue, which can then be invested in concentration. Increased cartelization in turn creates increased political support for the tariff. The generalization of the protective tariff increases the importance of the size of the protected area and hence the size of the national territory and the control of colonial areas. In order to take advantage of the opportunities for increased prices offered by the tariff, the cartelized industries are forced to restrict production for domestic sales. This restriction of production may raise costs. This provides a strong motivation for the promotion of export sales to raise capacity utilization. The extra profits from the artificially high domestic prices can be used to subsidize the penetration of foreign markets. From being a means of defence against the conquest of the domestic market by foreign industries it (the tariff) has become a means for the conquest of foreign markets by domestic industry. (p. 310)

Monopoly profits increase the volume of capital potentially available for investment at the same time as the monopolization of markets restricts domestic investment opportunities, thus increasing the importance of foreign activity. Investment in transportation opens up the possibility of further investment in vast new areas. Overseas investment develops important sources of raw materials necessary for the expansion of cartelized production at home. This overseas expansion of economic activity can only be accomplished through the threat or actual use of military force. Military force is necessary to pacify native populations and to expropriate them in order to create a free labor force in the colonies. Military force is also necessary to successfully compete against other national capitals for the control of territories and resources. The commitment of resources involved in the creation of an infrastructure and the opening of production facilities increases the need for direct political control of the newly exploited area. As the world is increasingly divided up between the major economic powers, the political and military conflict between them becomes increasingly bitter. Owing to uneven development, newly industrializing powers may find themselves without a proportionate share of colonial possessions. The redistribution of territory can only be accomplished by force and war becomes likely.13 2.1.3. Ideology and Labor Relations Hilferding also seeks to understand the ideological changes which accompany the economic and political transformations associated with finance capital. The new ideology abandons liberalism, demanding organization

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rather than the freedom of the individual capitalist. Finance capital demands a politically powerful state which can protect its interests both at home and abroad. The new ideology ceases to emphasize the harmony of interests in the free market and instead supports the state’s open pursuit of particular national interest in the international arena. Nationalism in the hands of finance capital ceases to be a defense of the right of nations to selfdetermination and becomes the right of one’s own nation to dominate all others. This new nationalism inevitably takes on racialist overtones: Since the subjection of foreign nations takes place by force – that is, in a perfectly natural way – it appears to the ruling nation that this domination is due to some special natural qualities, in short to its racial characteristics. Thus there emerges in racist ideology, cloaked in the garb of natural science, a justification for finance capital’s lust for power, which is thus shown to have the specifity and necessity of a natural phenomenon. An oligarchic ideal of domination has replaced the democratic ideal of equality. (p. 335)

Hilferding also examines the changes in the relation of the various classes to one another in the era of finance capital. Support for the tariff, a strong state, and opposition to the working class increasingly unites capital and large landowners. Small business is increasingly subordinated to big capital and also shares its opposition to labor. A new middle strata arises, consisting of the salaried managerial and technical employees in commerce and industry. This rapidly growing stratum is still politically aligned with big capital and the policy of imperialism. In the field of labor relations, unions find themselves facing a capitalist class increasingly united in employers’ organizations. Hilferding observes that, ‘‘it is obvious that the rise of employers’ organizations involves a change in the balance of power between capital and labor’’ (p. 356). Previously, unions could strike individual employers while the majority of their members remained employed in competing firms. Faced with the loss of business to competing firms, employers were divided and frequently forced to capitulate. This situation is completely changed with the concentration of industry. A large firm has considerably more resources to invest in resisting an organized workforce. Employers are now backed by associations which can temporarily fill orders, compensate losses and prevent strikers from finding alternate employment. These associations can control the timing of conflict and lock out non-striking members of the union. Monopoly corporations are also in a position to claw back wage rises through price increases and to make up for losses incurred during a strike. Hilferding begins his analysis by closely examining the interconnections between changes at the level of the economy. But he does not end his analysis there. He finds that finance capital is associated with changes in the

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class structure, the character of class alliances and the balance of class forces in the conflict over the labor contract. The changing interests of capital lead to changes at the political level. Capital becomes more closely associated with a strong state, which can protect its monopoly position at home while pursuing an aggressive policy of imperialism abroad. At the ideological level, these changes are justified by the abandonment of liberalism and the adoption of a reactionary nationalism and racism. Thus as well as economic changes, the dominance of finance capital brings with it political and ideological transformations. This multilevel analysis and the role of political and social institutions lay the intellectual basis for later multifactoral analysis of capitalist stages. 2.2. Bukharin and the World Economy According to his biographer, Finance Capital was ‘‘the starting point and essential inspiration (Cohen, 1980, p. 25)’’ of Bukharin’s (1973 (1915)) contribution, The World Economy and Imperialism.14 The major difference between Bukharin’s treatment and that of Hilferding was that Bukharin reversed the order of Hilferding’s presentation. Hilferding had argued from finance capital to concentration to the world economy and imperialism. Bukharin started with the world economy: Thus the problem of studying imperialism, its economic characteristics, and its future, reduces itself to the problem of analysing the tendencies in the development of the world economy, and of the probable changes in its inner structure. (Bukharin, 1973, pp. 18–19)

He then set about drawing the connections between the world economy, state policy, class relations, concentration and finance capital.15 In the midst of World War I, it would ill behoove Bukharin to start at the abstract level of the development of credit relations. Nevertheless, this reversal of order amounts at least to a difference of emphasis and beyond this, does lay more causal stress on the development of the world economy than does Hilferding’s analysis. It is easy, however, to overestimate the significance of this difference. Hilferding is very careful throughout his analysis to maintain the reciprocal character of the influences of the various institutions which make up his portrait of finance capital as a phase of capitalist development. The nature of these connections are in general not significantly revised in Bukharin’s treatment. Bukharin’s reversal of Hilferding’s line of argument primarily empasizes the interrelated nature of the economic, political and ideological changes which make up the new era of capitalism being described.

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From the point of view of stages theory, Bukharin’s volume serves to reaffirm, further document, and update Hilferding’s analysis. In one crucial area, Bukharin carries the Marxist theory of capitalist stages forward. Bukharin emphasizes both the integral nature and the historically limited character of this new period of capitalist development. In defining imperialism as ‘‘a definite historical entity’’ he contends that finance capital is ‘‘an historically limited epoch (pp. 114–115).’’ Moreover, the other characteristics associated with imperialism and finance capital also manifest themselves in the context of this delimited time period: y when we speak of imperialism as the policy of finance capital, its conquest character is self-understood; at the same time, however, we point out what production relations are being reproduced by this policy of conquest. Moreover, this definition also includes a whole series of other historic trends and characteristics. Indeed, when we speak of finance capital, we imply highly developed economic organisms and, consequently, a certain scope and intensity of world relations; in a word, we imply the existence of a developed world economy; by the same token we imply a certain state of production relations, of organisational forms of the economic life, a certain interrelation of classes, and also a certain future of economic relations, etc., etc. Even the form and the means of struggle, the organisation of the state power, the military technique, etc., are taken to be a more or less definite entity y (pp. 114–115)

2.3. Lenin and the Monopoly Stage Only after identifying the respective contributions of Hilferding and Bukharin is it possible to assess the specific contribution of Lenin (1968a)16 in Imperialism, The Highest Stage of Capitalism. Lenin’s volume draws extensively on the previous two works. Lenin’s work is also much the shortest of the three. It was not intended as a major independent theoretical treatise, but was in Lenin’s own subtitle, ‘‘a popular outline.’’ Further, Lenin deliberately restricted the scope of the pamphlet: y I shall try to show briefly, and as simply as possible , the connection and relationships between the principle economic features of imperialism. I shall not be able to deal with the non-economic aspects of the question, however much they deserve to be dealt with. (p.176 emphasis in original)

In a later preface, Lenin explains the neglect of the political aspects of imperialism as due to an effort to circumvent czarist censorship (p. 169). The principle economic features identified by Lenin are a subset of those discussed by Hilferding and Bukharin. His discussion of the relationship of these features to each other generally follows the lines initially laid out by Hilferding.

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Given these limitations of the work, it is tempting to view Lenin’s role as lending the weight of his revolutionary prestige to the ideas of the other two men. Such a contribution would not have been inconsiderable. Indeed, it is largely through the medium of Lenin’s Imperialism that these ideas have come down to us, especially in the English-speaking world. Bukharin’s work was for many decades crushed under the weight of Stalinist repression. Remarkably, an English language translation of Finance Capital did not appear in print until 1980. Nevertheless, from the point of view of advancing a Marxist theory of stages of capitalism, Imperialism makes two significant contributions. The first is to identify imperialism specifically as a ‘‘stage’’ of capitalism (see Albritton, 1986, p. 98). The second is to identify the imperialist stage with monopoly capitalism. 2.3.1. Imperialism as a Stage The concept of a stage of capitalism is used in Lenin’s subtitle and appears frequently throughout the work. This is not merely a matter of terminology. Lenin gives substance to his use of the new term by seeking to identify more sharply the boundary between the imperialist stage of capitalism and its predecessor. Lenin is abstractly cautious in approaching this task, contending at one point that ‘‘it would be absurd to argue, for example, about the particular year or decade in which imperialism ‘definitely’ became established’’ (p. 233). Yet throughout Imperialism, Lenin is concerned to identify the time of the transition between stages as closely as possible. For instance, he argues that: For Europe, the time when the new capitalism definitely superseded the old can be established with fair precision; it was the beginning of the twentieth century. (p. 180 emphasis in orginal)

Lenin offers the following extended definition of imperialism, which he says embodies its five basic features: Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed. (p. 232)

These five characteristics form the basis of the organization of much of the pamphlet.17 Lenin is concerned to locate the turning point at which each of these characteristics of imperialism can be said to have been established.

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In discussing the dominance of monopolies, Lenin argues that cartels were a transitory phenomenon until: y the boom at the end of the nineteenth century and the crisis of 1900–03. Cartels become one of the foundations of the whole of economic life. Capitalism has been transformed into imperialism. (p. 181)

Later he says more narrowly, the crisis of 1900 ‘‘marked the turning-point in the history of modern monopoly’’ (p. 187). Regarding the importance of finance capital, Lenin quotes Jeidels to the effect that the crisis of 1900 ‘‘enormously accelerated and intensified the process of concentration of industry and of banking, consolidated that process, for the first time transformed the connection with industry into the actual monopoly of the big banks, and made this connection much closer and more active’’ (p. 200). From this Lenin concludes that, ‘‘the twentieth century marks the turningpoint from the old capitalism to the new, from the domination of capital in general to the domination of finance capital’’ (p. 200). In connection with the export of capital, Lenin quotes statistics which he contends show that ‘‘the export of capital reached enormous dimensions only at the beginning of the twentieth century’’ (p. 213). Regarding the division of the world among capitalist associations, he cites agreement between the German and American electrical trusts in 1907, the division of the world oil market by 1905, an agreement concerning merchant shipping in 1903, the International Rail Cartel formed in 1904 and the International Zinc Syndicate established in 1909. He concludes by citing Liefmann’s calculations that ‘‘in 1897 there were altogether about forty international cartels in which Germany had a share, while in 1910 there were about a hundred’’ (p. 221). Lenin is concerned to locate the time in which the division of the globe among the major powers is completed. He cites Hobson marking the years 1884 to 1900 as the ‘‘epoch of intensified ‘expansion’ of the chief European states’’ (p. 224). Lenin then constructs a table of areas and populations controlled by the major powers which he sums up in the following manner: We clearly see from these figures how ‘‘complete’’ was the partition of the world at the turn of the twentieth century. (p. 226)

This concern with the identification of the turning point which marks the transition from one stage of capitalism to another cannot be found in either Hilferding’s or Bukharin’s treatments. The location of the point of transition from the previous stage of capitalism to the new stage of imperialism emphasizes the qualitative rather than the quantitative nature of the transition. This contribution is specifically Lenin’s. It is this difference which

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lends a different content to Lenin’s change in terminology in designating imperialism as a stage of capitalism rather than a phase or an epoch. 2.3.2. Imperialism as Monopoly Capital The other major difference in Lenin’s work is in the role given specifically to the development of monopoly market structures. I have already discussed how Hilferding began his analysis with finance capital while Bukharin analyzed virtually the same set of institutions using the world economy as his starting point. Lenin adopts still another starting point by emphasizing the role of monopoly capital in imperialism. Indeed, in one of the most often quoted passages from Imperialism Lenin equates the two: If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism. (p. 232)

Lenin begins his discussion of the highest stage of capitalism with a discussion of ‘‘concentration of production and monopolies (p.176).’’ This transposition of the order of the discussion would not have great significance except that Lenin also gives the emergence of monopoly a causative significance in the development of the rest of the basic features of imperialism. Finance capital, the export of capital and the imperialist division of the world all stem from the emergence of the monopoly market structure. Towards the end of the pamphlet Lenin sums up this argument in the following way: We must take special note of the four principal types of monopoly, or principal manifestations of monopoly capitalism, which are characteristic of the epoch we are examining. Firstly, monopoly arose out of the concentration of production at a very high stage y. Secondly, monopolies have stimulated the seizure of the most important sources of raw materials y. Thirdly, monopoly has sprung from the banks y. A financial oligarchy, which throws a close network of dependence relationships over all the economic and political institutions of present-day bourgeois society without exception – such is the most striking manifestation of this monopoly. Fourthly monopoly has grown out of colonial policy. To the numerous ‘‘old’’ motives of colonial policy, finance capital has added the struggle for the sources of raw materials, for the export of capital, for spheres of influence, i.e., for spheres of profitable deals, concessions, monopoly profits, and so on, economic territory in general. (p. 258)

This identification of monopoly capital as the key factor in determining the character of the new stage would have a profound influence on subsequent generations of Marxist stage theorists. This is perhaps most dramatic in the case of Baran and Sweezy’s (1968) monopoly capital school. This influence is also very apparent in Ernest Mandel’s work (see below).

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Finally, Lenin takes explicit note of the effect of the monopoly regime on the rate of growth in the capitalist countries. Bukharin and especially Hilferding had done this implicitly in emphasizing the positive impact of the various aspects of finance capital on the conditions of the profit rate. In emphasizing the uneven character of capitalist growth, Lenin points out that ‘‘on the whole, capitalism is growing far more rapidly than before y.’’ (p. 259)

3. A GENEALOGICAL RELATIONSHIP 3.1. The Monopoly Capital School The HBL theory of monopoly capital as the motive force of a new era in capitalism forms one of the important bases of Paul Sweezy’s (1968) work in The Theory of Capitalist Development. Sweezy’s strategy in constructing a Marxist account of capitalist development is essentially to treat the HBL account as equivalent to the fourth volume of capital. Parts one and two of The Theory explicate Marx on value and surplus value, and the accumulation process. Part four is entitled ‘‘Imperialism’’ and is largely an explication of Hilferding’s Finance Capital and Lenin’s Imperialism. Sweezy’s account differs from Hilferding’s and Lenin’s primarily in that Sweezy argues ‘‘the dominance of bank capital is a passing phase of capitalist development which roughly coincides with the transition from competitive to monopoly capitalism’’ (p. 268). Sweezy notes that Lenin’s treatment of the relationship between manufacturing and finance capital was more balanced and concludes: Lenin’s theory is thus certainly not open to the criticisms which have been directed at Hilferding’s. Nevertheless it is doubtful whether the term ‘finance capital’ can be divested of the connotation of banker dominance which Hilferding gave it. This being the case, it seems preferable to drop it altogether and substitute the term ‘monopoly capital,’ which clearly indicates what is essential to Lenin’s concept of ‘finance capital’ and yet is not so likely as the latter to mislead the unwary reader. (p. 269)

Thus, Hilferding’s and Lenin’s concept of finance capital enters U.S. Marxism as ‘‘monopoly capital.’’ Sweezy’s next major work on Monopoly Capital, done jointly with Paul Baran, seeks to develop the dynamics of the monopoly accumulation process. It does so chiefly by arguing the case for a strong tendency toward underconsumption crises in the monopoly stage of capitalism. Baran and Sweezy’s argument is well known and need not be rehearsed here. Baran’s

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influence is strong. The work owes more to Kalecki and Steindl18 than it does to Hilferding. Though Monopoly Capital contains a wide-ranging analysis of American society, Hilferding’s close analysis of the connections between monopoly capital and the other levels of the social formation is partially lost. This is due to some measure to the space devoted to underconsumption19 and also to a very broad conception of the time period within which monopoly capital is dominant in America. Baran and Sweezy date this period from the end of the Civil War to the present. Thus, all connection of monopoly with specific institutions other than market structure tends to be undermined. The two major works of the Monopoly Capital School which followed Monopoly Capital were Harry Magdoff’s (1969) The Age of Imperialism and Harry Braverman’s (1974) Labor and Monopoly Capital. Both works rely much more closely on Lenin’s Imperialism as the basis for analyzing the monopoly stage of capitalism. They also restore Lenin’s dating of the beginning of the monopoly stage to around the turn of the century. Importantly, both works also extend the range of the monopoly capitalism analysis. Magdoff is concerned with ‘‘the economics of U.S. foreign policy.’’ Braverman sets out to close the gap noted by Sweezy and Magdoff themselves in studying the relationship between monopoly capital and the labor process. In pursuing this task, he analyzes the relationship between monopoly capital and shopfloor control, labor relations, technology and changes in the composition and structure of the working class. These additional studies are important in that they restore to the American Monopoly Capital School the multilevel analysis of capitalist stages pioneered by Hilferding and carried forward by Bukharin and Lenin. At roughly the same time as Braverman was writing, a new generation of Marxist economists was participating in the attempt to address the relationship between labor and monopoly capital. In 1973, Reich, Gordon, and Edwards (1973) published an article connecting labor market segmentation to the emergence of monopoly capital. They argued that the advent of monopoly capital led to a division in the economy between the monopoly sector and the competitive sector. As a result, ‘‘along with the dualism in the industrial structure, there developed a corresponding dualism of working environments, wages and mobility patterns’’ (p. 363). In addition: Monopoly capitalist corporations devised deliberate strategies to resolve the contradictions between the increased proletarianization of the work force and the growth and consolidation of concentrated corporate power. The central thrust of the new strategies was to break down the increasingly unified worker interests that grew out of the proletarianization of work and the concentration of workers in urban areas. As exhibited in

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several aspects of these large firms’ operations, this effort aimed to divide the labor force into various segments so that the actual experiences of workers were different and the basis of their common opposition to capitalists undermined. (p. 361)

3.2. Ernest Mandel Mandel’s (1970) early expositions of the twentieth century economy owe a great deal to the HBL analysis. Chapters 12, 13 and 14 of Marxist Economic Theory are entitled respectively ‘‘Monopoly Capitalism,’’ ‘‘Imperialism’’ and ‘‘The Epoch of Capitalist Decline.’’ These chapters reproduce and update much of the HBL explanation of the era of finance capital. Mandel parallels Sweezy in emphasizing the importance of monopoly self-financing and in substituting the term ‘‘monopoly capitalism’’ for Hilferding’s finance capital and Lenin’s imperialism.

4. THE SECOND WAVE The deep recession of 1974 marked the definitive end of the long period of postwar prosperity. The end of the impressive capitalist expansion which followed the Second World War revived interest in long cycle theory (see Forrester, 1977; Rostow, 1978; van Duijn, 1983; Mandel, 1975 (1978), 1980). Building on the historical experience of the recoveries which followed the two great depressions (the late nineteenth century and the 1930s), it seemed unwise to identify the stagnation of the 1970s with the final crisis of capitalism. Any explanation of the ongoing economic crisis had to recognize its distinctive character as more than an ordinary downturn in the business cycle. At the same time, such an explanation would also have to allow for the possibility of renewed expansion in the future. Analyzing the possible existence of a long cycle in capitalist history fit this bill perfectly.

4.1. Ernest Mandel and Late Capitalism In his monumental Late Capitalism, Mandel develops a theory of long waves of capitalist development. These long waves form the basis for periodizing capitalism into stages: The long waves y do not simply represent statistical averages for given time spans y. They represent historical realities, segments of the overall history of the capitalist mode

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of production that have definitely distinguishable features. For that very same reason they are of irregular duration. The Marxist explanation of these long waves, with its peculiar interweaving of internal economic factors, exogenous ‘‘environmental’’ changes, and their mediation through sociopolitical developments (i.e., periodic changes in the overall balance of class forces and intercapitalist relationship of forces, the outcomes of momentous class struggles and of wars) gives this historical reality of the long wave an integrated ‘‘total’’ character. (Mandel, 1980, p. 97)

Mandel identifies three successive stages in capitalist history, competitive capitalism, classical imperialism and late capitalism. As indicated by the choice of appellation, Mandel is indebted to Lenin’s analysis as the basis for his second stage of classical imperialism ‘‘as described by Lenin’’ (p. 82). As do both HBL and Gordon, Mandel emphasizes the ‘‘key roles’’ of extra economic factors (Mandel, 1980, p. 20). The increase in the profit rate which inaugurates a long wave upturn (and hence a new period in the history of capitalism) can be understood: Only if all the concrete forms of capitalist development in a given environment y are brought into play. And these imply a whole series of noneconomic factors like wars of conquest, extensions and contractions of the area of capitalist operation, intercapitalist competition, class struggle, revolutions and counterrevolutions, etc. These radical changes in the overall social and geographic environment in which the capitalist mode of production operates in turn detonate, so to speak, radical upheavals in the basic variables of capitalist growth y (pp. 21–22)

In connection with the era of classical imperialism, Mandel discusses the concentration and centralization of capital, the export of capital, colonialism, militarism, imperialist competition and unequal exchange, the growing importance of the state, the introduction of welfare measures and changing technology. This multifactoral discussion is also applied to the analysis of late capitalism. In this connection, Mandel discusses changes in technology, the weakening of labor organization, long-term collective bargaining, shopfloor control of the labor process, multinational corporations, the new international division of labor, the international monetary system, the Marshall Plan, the state guarantee of profits through military contracts and other means, deficit finance and inflation, the growth of marketing and customer manipulation, the extension of consumer credit, mass communications and technocratic ideology. 4.2. The Social Structure of Accumulation Framework At the end of the 1970s, David Gordon (1978, 1980) published two articles linking long cycle theory with the concept of stages of capitalism. In this

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context, the advent of monopoly capital at the turn of the century coincides with the completion of the long wave trough at the end of the nineteenth century and the inauguration of the long wave expansion which ended with the Great Depression of the 1930s. The new question which the adoption of a long wave perspective posed to the monopoly stage of capitalism tradition was whether the postwar expansion was associated with a similar set of multidimensional institutional changes. Gordon (1978) answers this question by proposing a set of postwar institutions whose establishment accounted for the long period of postwar prosperity. These institutions included among others multinational corporate structures, dual labor markets associated with a bread-and-butter industrial unionism, American international economic and military hegemony, easy credit, conservative Keynesian state policy and bureaucratic control of workers. In this way, Gordon established the possibility of articulating a postwar set of institutions which conditioned the subsequent expansion of the economy in a way similar to the manner in which the set of institutions analyzed by Hilferding, Bukharin and Lenin accounted for the turn of the century expansion. Thus, the multi-institutional analysis of monopoly capital is implicitly used by Gordon as a model for explaining the postwar expansion. The repetitive use of this kind of explanation raised the question of whether the assembling of such sets of institutions could be generalized as the basis of a comprehensive theory of stages of capitalism. Gordon (1978, 1980) answers this question by proposing that both the institutions comprising monopoly capital and those making up the postwar social order constituted examples of SSAs. The construction of a new SSA provided the basis for a new stage of capitalism. The disintegration of this set of institutions marks the end of each stage. The SSA approach achieved its definitive form shortly thereafter with the publication of Gordon, Edwards and Reich’s Segmented Work, Divided Workers (1982).20 This volume used Gordon’s SSA approach to capitalist stages to reformulate these authors’ earlier analysis of the history of capitallabor relations in the U.S. The authors’ exposition of the SSA which dominated the capitalist world at the beginning of the twentieth century, clearly owes a great deal to HBL’s original description of the era of imperialism. Developments within the SSA school have brought the SSA framework closer to the HBL position. The notion of long cycles or long waves has been deemphasized in favor of a conception of periods of alternating growth and stagnation in capitalist history. The length of these periods is not determined in advance. They do not follow on from one another with the strict logic which a cycle theory would demand. The eclipse of the long cycle argument

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refocuses attention on Lenin’s concept of stages of capitalism (see McDonough, 1994a). In our own work examining the construction of the monopoly capitalist SSA in the United States, we have found some of Lenin’s formulations concerning the transition from the competitive stage to the monopoly stage to be closer to events than Gordon et al.’s reading of this transition. While Gordon et al. emphasize the diversity of institutional change involved in this transition period, we have argued (McDonough, 1994b) that the organizing principle of the SSA put into place at the turn of the century in the United States can be found in the monopoly market structure established in the merger wave of 1898–1902. Each of the other core institutions21 in the SSA was constructed around the emergence of the new monopoly structure of capital (see McDonough, 1994b). Thus as Lenin argued in Imperialism, monopoly capital can be regarded as the lynchpin of the new stage of capitalism. Gordon et al. tend to see the important institutions of the monopoly SSA in the United States as achieving consolidation during the First World War years. I have argued (McDonough, 1994b), in agreement with Lenin’s dating of the monopoly stage of capital to the turn of the century, that the core institutions had achieved their basic shapes in the six-year period between 1898 and 1904. 4.3. The Regulation Approach Though the term regulation had earlier been borrowed from systems theory by French Marxist scholars, the RA effectively begins with Michel Aglietta’s A Theory of Capitalist Regulation: The U.S. Experience published in 1976. In this work Aglietta put forward an analysis of the institutional framework of accumulation cast in Althusserian structuralist terms. Aglietta begins the book with an extended critique of neoclassical general equilibrium theory. While rejecting the notion of equilibrium, Aglietta recognizes the necessity of analyzing the preconditions of the reproduction of the wage relation over time. Hence, he argues that the study of economics must replace the theory of general equilibrium with a theory of capitalist regulation. In his introduction, Aglietta defines part of his project as seeking to show ‘‘that the institutionalization of social relations under the effect of class struggles is the central process of their reproduction’’ (Aglietta, 1979, p. 29). He applies this understanding to capitalist regulation and crises in the following way: This theoretical position will enable us to conceive crises as ruptures in the continuous reproduction of social relations, to see why periods of crisis are periods of intense social

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creation, and to understand why the resolution of a crisis always involves an irreversible transformation of the mode of production. (1979, p. 19)

Aglietta’s book stimulated a great deal of subsequent work in France much of it involved with applying the framework to understanding historical movements in the French economy. This work was accompanied by considerable conceptual innovation. During this period Robert Boyer emerged as the leading figure of what was referred to as the Parisian school of regulation theory. In 1986 Boyer set out to sum up this work in a concise introduction. Boyer does not minimize existing differences, but nevertheless does seek to represent a rough consensus. Despite his success, this consensus would soon be superseded (see below). After discussing the mode of production Boyer then introduces a number of ‘‘intermediate’’ concepts. The first is the regime of accumulation. This set of economic elements includes first the organization of production, then the distribution of the value produced and a related composition of social demand which is consistent with production potentialities. These regimes of accumulation vary over time and space within the overall framework of the capitalist mode of production. ‘‘In conclusion, the imperatives and logic of accumulation can take on distinctly different forms whose consequences are by no means identical in terms of the economic dynamics and types of social organization they engender’’ (Boyer, 1990, pp. 36–37). The regime of accumulation is conditioned and reproduced by further intermediate institutional forms. These institutional forms are collected under five headings; forms of monetary constraint, configurations of the wage relation, forms of competition, position within the international regime and forms of the state. These institutional forms together constitute the mode of regulation. The combination of the regime of accumulation and a type of regulation is the mode of development. The objective of the regulation school is ‘‘too explain the rise and subsequent crises of modes of development’’ (1990, p. 48).

5. THE CONVERGENCE OF THE SECOND WAVE The purpose of this section is two-fold. I will argue first that the main strands of Marxian LWT have theoretically converged over roughly the last decade to the point were they are no longer conceptually distinct. As this is the case, they no longer constitute distinct schools, though they continue to be self-referential in identifying intellectual pedigrees. Secondly, I wish to

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argue that none of the three main traditions is dominant within the specifically Marxian discussion and thus able to simply absorb the others for the purpose of further identification, discussion and development. Further, each of the three current monikers (the RA, the SSAF and Mandel’s LWT) suffers from serious conceptual inadequacies. Fortunately, terminological creativity is unnecessary. The theoretical convergence of the schools within an overall Marxian framework allows and to a certain extent demands recovery of the concept of stage theories of capitalist history pioneered early in the twentieth century by HBL in addressing capitalist structural reorganization.

5.1. Regulation and Social Structures of Accumulation: Divergence and Convergence The relationship between the RA and the SSAF was recognized early. This led to joint work by Samuel Bowles and Robert Boyer (1988, 1990a, 1990b). Bob Jessop lists the SSAF as one of his seven schools of the RA (Jessop, 1990). Still the most widely cited source for social structure of accumulation (SSA) theory, the 1994 Social Structures of Accumulation:The Political Economy of Growth and Crisis (Kotz et al., 1994a) prominently featured a comparison between the SSA approach and regulation theory authored by one of the editors (Kotz, 1994).22 Kotz first sets out to identify the similarities between the two approaches. He argues that both the theories set out to explain long-run patterns of capital accumulation by analyzing the relationship between that process and sets of social institutions which condition or ‘regulate’ it. The dynamic of the accumulation process over relatively long periods of time depends on the success or failure of these institutions in creating the conditions for profitability, reinvestment and growth. Kotz observes that the SSA is roughly analogous to some combination of the regulation theory terms ‘regime of accumulation’ and ‘mode of regulation.’ Both schools view capitalism ‘‘as moving through a series of stages, each characterized by a specific form of the accumulation process embedded in a particular set of institutions’’ (p. 86). Stages end in a long-term structural crisis which involves a significant reduction in the rate of accumulation over a prolonged period of time. These structural crises result from a failure of the institutions to continue to successfully secure the conditions of accumulation. The crisis ends when a new more successful set of institutions is put in place. Finally according to Kotz, both theories ‘‘offer an intermediate level of analysis, more general

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and abstract than a detailed historical account of capitalist development would be, but more specific and concrete than the usual abstract theory of capitalism-in-general’’ (p. 87). Regarding differences between the two schools, Kotz first observes that the RA distinction between the regime of accumulation and the mode of regulation, a distinction subsumed into the overall SSA in the SSAF, is not completely without analytical consequences. Through their separate categorization, the changes within the institutions which form the regime of accumulation, the labor process and the norms of working-class consumption are emphasized in the historical account of successive capitalist stages. Kotz believes this focuses more attention on the qualitative differences in the accumulation process whereas the SSAF is more fixated on differences in the rate of accumulation. Further, in their analysis of the post-World War II Fordist regime regulationists place emphasis on what may be regarded as traditional Marxian concerns with the production and realization of value. Contrastingly, the SSAF in focusing on the speed of accumulation places an emphasis on the determinants of capitalists’ reinvestment decision, privileging Keynesian concerns about stability and confidence in the face of an uncertain future. In addition, within regulation theory the development of the regime of accumulation plays a much greater role in the onset of crisis. In the SSAF the crisis is brought on by a disintegration in the institutions of the SSA. In the RA the institutions in the mode of regulation are more static. They remain on the scene while the regime of accumulation exhausts its potential for growth and then hold back the potential of any new regime, being adequate to the old regime but inadequate to its emerging replacement. The analogies to a traditional Marxian treatment of the relationship between the mode of production and the superstructure are obvious. This difference is concretely manifested in the two schools analysis of the crisis of Fordism (the name given the post-World War II stage in the RA). In the RA the crisis is one of the exhaustion of the productivity enhancing potential of Fordist production whereas in the SSAF the crisis is one of rising struggle against U.S. capitalist domination of the workingclass, the Third World and rising international competitors. In this way the RA leans to structural explanations while the SSAF places more emphasis on agency in the form of class struggle. Similarly, while the SSAF contends that the new SSA emerges from a period of social struggle over possible reforms aimed at the resolution of the crisis, the RA emphasizes the structural requirements of any new regime of accumulation and the inauguration of a new period of successful accumulation awaits

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the achievement of specific institutions which embody these specific requirements. Kotz’s characterization of the two schools in the mid-nineties is broadly accurate. It must be recognized, however, that the initial publication of much of the regulation literature in French creates a several year delay before the important works find their way into English translation. In addition, of course, both schools have undergone considerable change in the last decade. Interestingly, for the purposes of this article many of these changes undermine the distinctions identified by Kotz while potentially opening up other divisions. The major differences identified by Kotz consist of the following contrasts. The RA had maintained a closer fidelity to the Marxian approach through an emphasis on production relations and the class distribution of income within the regime of accumulation while the SSAF had emphasized a more Keynesian concern with the determinants of the capitalist investment decision. The RA located the origin of long-term crises within the regime of accumulation whereas the SSAF located the origin of the crisis in the breakdown of the institutions of the SSA (closer to the mode of regulation in the RA). Consistent with its Althusserian roots, the RA emphasized structure while the SSAF placed more emphasis on agency and class struggle. Finally, the RA emphasized the qualitative character of change from one period to another while the SSAF lay emphasis on changes in the rate of accumulation. We will consider the fate of each of these differences in turn in light of developments within both schools over the past ten years. A concern with class relations rooted in the production process has never been alien to the SSAF. Segmented Work, Divided Workers (Gordon, Edwards, & Reich, 1982) concerned itself primarily with the historical development of capitalist strategies of controlling workers within the labor process. This emphasis has been carried forward in more recent work on the emergence of ‘‘spatialization’’ as a new form of labor control which it is argued is one of the important underlying institutional factors conditioning the construction of a new SSA in the United States. Working from Gordon, Edwards and Reich’s identification of three historical periods in the structure of work and the organization of labor markets as proletarianization, homogenization and segmentation, Grant and Wallace (1994) identify a fourth period as spatialization. This process of spatialization centers on employers’ use of threats of relocation and actual relocations as a key form of labor control strategy from the 1970s. This observation immediately links the mobility of capital to the question of labor control in a restructured capitalism. This new stategy

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of labor discipline became viable at this time due to ‘‘the increased fragmentation of work tasks into simpler components and a highly integrated division of labour that allows different work tasks to be performed in different locations.’’ This is also made possible by advances in telecommunications and transportation which allow capitalists to ‘‘coordinate and control diverse pools of labour in far-flung corners of the US and the world’’ (Grant & Wallace, 1994, p. 37). To these factors Brady and Wallace (2000, p. 95) add geopolitical arrangements which facilitate economic liberalization and globalization like NAFTA and the WTO. In effect corporations are reorganizing the labor process at least partially by changing the labor, moving from markets with high-cost inflexible and militant labor to locations with low-cost, flexible and acquiescent labor. Kotz et al. (1994b) in 1994 identified several related theories evolving in parallel and exercising an influence on SSA theory. These included a number of developments within broadly orthodox microeconomic theory. These tendencies would have supported Kotz’s thesis that the SSAF had strayed farther from its Marxian roots. By 1997, Reich (1997) was arguing that the wing of the theory most concerned with these issues had departed from the original intent of the theory. Reich sought to reemphasize the qualitative and institutional nature of SSA theory. He contends strongly that, ‘‘hypotheses concerning periodization or the relative causal or the endogenous character that we attach to various political and economic forces should emerge from the institutional analysis, not simply from econometric inquiries’’ (p. 2). Subsequent work within SSA theory has generally taken this position as its starting point. There are several somewhat overlapping reasons for this development. It appears that Gordon’s death has had the indirect effect of distancing both Weisskopf and Bowles from the mainstream of the subsequent development of the SSA framework. These two scholars were the most interested in introducing concepts from outside the initial Marxian and Keynesian inspiration. Weisskopf has concentrated his work on studying the transition process in the former Soviet Union. Contrary to Coban’s (2002 [1995]) prediction, Samuel Bowles’ interest in alternative microeconomic theories has become increasingly divorced from the SSA framework. The fact that the majority of work within the framework is now being done within disciplines other than economics is also important. While still concerned with agency, sociology is much less obsessed with micro founding macro- and meso-level behavior than economics. While American sociology is hardly a bastion of progressive thinking, it is far less conservative than the often openly reactionary political character of that nation’s economics

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profession. Pressures to disguise or dilute the Marxian character of the framework have consequently eased. In his 1997 retrospective and prospective on the SSAF, Michael Reich (1997, p. 4) identifies the early theoretical perspective as rooted in ‘‘Marxian insights concerning class conflict over production and distribution at the workplace and in the political arena, and by Marxian and Keynesian macroeconomic analyses.’’ Inquiries into the historical background to the SSA approach have given it a much more specific and explicit Marxian pedigree (see the first section of this paper and McDonough, 1995, 1999). While the SSAF has been re-emphasizing its roots within Marxism, something of the opposite movement has taken place in some wings of the RA. This is most pronounced in the founding Parisian school. The publication of Regulation Theory: The State of the Art edited by Boyer and Saillard (2002a) [1995] demonstrates the emergence of two quite distinct theoretical strands within the RA. One of the introductory articles by Henri Nadel (2002) contends strongly that the Regulation research programme is ‘‘clearly linked with the Marxian project (p. 28).’’ Many of the other contributors are less convinced. In discussing the wage-labor nexus, Boyer and Saillard (2002b, p. 46) let the cat out of the bag: y its initial basis was none other than the Marxist theory of exploitation which in the 1990s is no longer a major reference point. Today the theory centres on relations between power, wage compromise and the institutional determinants of the wage-profit division.

Several other chapters discuss the RA as a variety of institutionalism. This trend was perhaps most dramatically confirmed when in an afterword to the republication of A Theory of Capitalist Regulation, Aglietta (1998) discussed the issues involved in a distinctly un-Marxian manner. In the Boyer and Saillard volume, Olivier Favereau (2002, p. 315) draws a straightforward and helpful distinction between Regulation Theory 1 (RT1) as ‘‘similar to the Marxist analysis of the capitalist mode of production’’ and RT2 as ‘‘separate from this analysis and based on dynamic aspects of institutional forms.’’ Among the Parisians, Lipietz is the only major adherent of RT1 while on the other hand this Marxian strand still dominants Anglophone adherents working within radical sociology and geography. The renunciation of Marxism within some branches of the RA opens up a new (and according to Kotz opposite) contrast with the SSAF regarding Marxian theoretical foundations. Interestingly, the movement toward institutionalism has, at the same time, lessened some of the other differences identified by Kotz. A greater emphasis

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has been placed on the role of institutions (found predominantly within the mode of regulation) both in constituting the period of successful regulation and in the emergence of crisis. Aglietta (1998, p. 56) summarizes these developments: y the various mediation mechanisms are dovetailed to form the framework of a mode of regulation. This dovetailing does not happen automatically, because each of these organizations has its own rationale, the integrity of its own structures that makes it persevere in its perceived social role. That is why the coherence of a mode of regulation does not conform to any pre-established general law. It is a historically unique entity that may be called a growth regime. By contrast, the symptoms of exhaustion of a growth regime, heralding a period of uncertainty, crisis and change, must be sought in malfunctions of the interaction between mediation mechanisms.

This formulation shifts the dynamics of the formation of the ‘growth regime’ into the realm of the dynamic interaction of the institutions. The ‘general laws’ of accumulation no longer dominate, but each growth regime is historically unique, constituted by the coherence of the institutions which make it up. Similarly, it is the malfunctioning interaction of the institutions or ‘mediation mechanisms’ which inaugurate the crisis of the growth regime. In this way the description of the constitution and decay of capitalist social structures and the resulting alternating periods of expansion and crisis converges to the contingent description developed within the SSAF. The RA has become much more concerned with the question of the relationship of agency to structure. The Parisian school has recognized that in the transition from one mode of regulation to another ‘‘conflicts, strategic behaviour and political intervention play a crucial role’’ (Boyer, 2002, p. 322). This is reflected more broadly in the search by the adherents of the broadly institutionalist RA approach (Favereau’s RT2) for a non-orthodox form of ‘microeconomics.’ For Lipietz (1993), a recognition of the importance of social actors represented an early break from an excessive structuralism in the legacy of Althusser. In the Anglophone RA tradition, this trend is represented by Jessop’s (2002, pp. 34–36) advocacy of a ‘‘strategicrelational approach’’ which includes the capacity of actors to engage in struggles which ‘‘overflow’’ structural forms. The remaining area of difference identified by Kotz involves an overemphasis by the SSAF (as compared to the RA) on differential rates of accumulation as opposed to more qualitative differences between capitalist stages. This gap has been partially closed, this time from the SSAF side. In a pair of articles Kotz (2003) and Wolfson (2003) argue that the current institutional structure will not lead to a new period of expansion. Wolfson (2003, p. 260) argues that neoliberalism is ‘‘neither a crisis of the old SSA

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nor a new SSA. y the old SSA is gone.’’ The key problem with neoliberalism according to both Wolfson and Kotz is that it is unlikely to lead to a period of stable growth because of anarchic competition and problems of demand and realization. Nevertheless, according to Kotz (2003, p. 263) neoliberalism is ‘‘a new, coherent set of institutions that impinge on the process of capital acccumulation.’’ It cannot be an SSA, however, because it has not yet promoted sufficient growth, nor is it likely to. Kotz resolves the problem of the existence of a coherent set of institutions in the absence of strong growth by postulating the existence of two kinds of Institutional Structure (IS). A Liberal Institutional Structure (LIS) is characterized by limited state regulation, aggressive dominance of capital over labor, high levels of competition and liberal, free market ideology. A Regulationist Institution Structure (RIS) is characterized, by contrast, by an interventionist state, an element of cooperation and compromise between capital and labor, corespective behavior by corporations, and a recognition of the positive role of government and other non-market institutions. While both institutional structures foster the effective appropriation of surplus value, only an RIS promotes accumulation and growth. Thus only an RIS can lay claim to being a true SSA. Kotz further hypothesizes that there is a tendency for Liberal Institutional Structures to alternate with Regulated Institutional Structures because the crises created by the one type can be partially resolved through the construction and introduction of the other type of institutional structure. Thus the existence of a coherent capitalist stage and successful capitalist extraction of surplus value is not necessarily associated with high rates of capitalist growth. On all of the fronts identified by Kotz, the Marxian variant of the RA (what we might call the RA1) has converged with the SSAF (or vice versa).

5.2. The Long Wave of Ernest Mandel The return to Marx on the part of the RA1 and the SSAF should immediately raise the question of the relationship of these theoretical trends to Ernest Mandel’s LWT. Mandel has never been equivocal about his theoretical commitment to Marxism and his version of LWT has always been carefully consistent with a Marxian approach. This is also by and large true of those writers who have followed Mandel in long wave theorizing. Has the past openness of the RA1 and the SSAF to influences outside the Marxian tradition distanced these perspectives from Mandel’s LWT?

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Mandel grounds his theory in the movements of the rate of profit over time. The long-run tendency of the rate of profit is to decline due to the tendency of the organic composition of capital to rise. In the absence of counteracting forces this conditions the emergence of a period of crisis and stagnation. In a generic way the tendency of the rate of profit to fall can be counteracted by certain contrary developments as identified by Marx: an increase in the rate of surplus value, a sharp slowdown in the rate of increase (or even a fall) in the organic composition of capital, a sudden quickening in the turnover of capital or by the flow of capital into countries and sectors where the average organic composition of capital is lower that that in the basic industry of the core capitalist countries. Long wave expansions are initiated during periods in which the forces counteracting the tendency of the average rate of profit to decline operate in a strong and synchronized way. The areas of possible difference with the other traditions concern the nature of the turning points which mark the beginning and end of the long wave. Mandel makes much of the lack of an endogenous mechanism which accounts for the inauguration of the upturn. Instead he identifies his explanation as exogenous to the dynamic of the long wave itself. In this way Mandel makes sure that his theory is not one which sees potential capitalist success on into the indefinite future. Upturns depend on a fortuitous (for capital) combination of factors which are not guaranteed and may in fact be unlikely. This distinction was always more definite between Mandel and Schumpeterian versions of the long wave rather than with the RA1 or the SSAF. Initially the RA was strongly functionalist in its vision of capitalist reorganization, hypothesizing that the needed institutional restructurings would somehow emerge. By 1990, Boyer (1990) was emphasizing both the role of social conflict and the lack of any agency which ensures that a viable overall restructuring will inevitably ensue. Within the SSAF, McDonough (1994a, 1994b) has argued that the principles of organization of SSAs when investigated concretely turn out to be historically contingent, differing in character from one period of SSA construction to another. This is not very far from Mandel’s notion of exogeneity. Mandel’s theory of the end of long wave rests on the negative impact of the expansion on the organic composition of capital and hence on the rate of profit. To critics from the other Marxian traditions this is too monocausal. The other schools are willing to recognize that a rising cost of capital relative to the labor employed may well be a factor in the end of particular long waves. Nevertheless, the complex character of the institutional conditions of accumulation as well as the multiple ramifications of class struggle and

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capitalist competition create a range of possibilities for the breakdown of the accumulation process in these models. Went (2002, p. 85) writing in the Mandelian tradition recognizes this in arguing that periods of structural stagnation ‘‘occur when previous constellations of processes of accumulation and institutions that once positively reinforced each other become incompatible.’’ Not incidentally, Went also argues that there exists a substantial similarity between the three schools. We may conclude that the long wave theoretical tradition instituted by Ernest Mandel has converged with the RA1 and the SSAF. Or if we privilege the Marxian theoretical foundations, perhaps the RA1 and SSAF have converged with Mandelian LWT.

6. TERMINOLOGICAL PROBLEMS True theoretical convergence rather than a series of parallel similarities demands terminological convergence. What shall we call the Marxian RA1/ SSAF/LWT? Ignoring proprietorial and ego considerations, the obvious course is to adopt the designation of the school which is dominant in the literature. According to this criterion the RA would at one time have been the hands down choice. However, the departure of the majority of the Parisian school from the Marxian tradition leaves the remaining RA1 considerably less robust. Having two different theoretical perspectives (RA1 and RA2) sharing a single designation is unnecessarily confusing and also unstable. This is so even if the perspectives are joined archaeologically beside the Seine. The current period of neoliberal globalization has created a serious problem for the SSAF. As observed earlier Kotz had criticized the framework for being overly focussed specifically on the rate of accumulation. This had created a problem early on in that the late nineteenth century crisis in the United States was characterized by wild swings in the business cycle rather than overall low rates of accumulation. This was historically far enough away, however, to be safely downplayed. The current period poses the opposite problem – an emerging institutional structure which appears increasingly internally coherent but which has not resulted in a rapid pace of accumulation (Kotz, 2003; Wolfson, 2003; Went, 2005). A specifically social structure of accumulation does not allow for the possibility of merely secure reproduction of capitalist social relations but demands an extended reproduction which it appears may or may not eventuate.

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The absence of rapid accumulation poses similar problems for LWT as it is rapid accumulation which constitutes the wave-like movement. In common with the other schools, Mandel has always denied a regular periodicity to these long movements. Waves imply periodicity less rigidly than do cycles. Nevertheless the majority of the uses of the term (sine waves, light waves, etc.) do imply a regular period. The use of the term long wave links Mandel’s theory more closely than is warranted to various neo-Schumpeterian accounts of long wave phenomena. The upshot of this argument is that we should take the opportunity of this convergence to redesignate the tradition. What we are dealing with here as has been demonstrated by the forgoing narrative is the tradition of Marxian stage theories of capitalism. Capitalism in each society can be seen as passing through a series of stages. Each stage consists of an historically unique institutional structure guaranteeing the conditions of the reproduction of capitalist social relations. The conflictual character of capitalism guarantees each stage will have a finite life. Stages are separated from one another by periods of crisis and stagnation. These periods are irregular in length and there is no guarantee that a period of crisis will be followed by a period of reconstruction and recovery.

7. GLOBALIZATION, A NEW STAGE OF CAPITALISM? Though Marxian stage theory carries no guarantee that a period of crisis will be resolved by the construction of a new stage of capitalism, the key question it inevitably poses is whether the current period is one of stage construction. This in turn raises the issue of whether or not globalization can be analyzed in light of stage theory. I argue that stage theory is in fact essential to answering one of the main concerns presented by the globalization thesis. Criticism of the globalization thesis has emerged on a number of bases. One is that globalization is being used as a facile journalistic shorthand. A related but more serious objection is that globalization constitutes a dangerous ideology that seeks to demobilize opposition to neoliberal reforms on the grounds that capital has been able to escape the bounds of regulation by nation states. (Hirst & Thompson, 1999, p. xii) This article will examine whether the concept has a legitimate social scientific meaning despite this critique. If it does not it may perhaps be better abandoned.

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The critics of globalization have mounted two historical attacks. One argues that the period before the First World War saw the creation of a global capitalist system. This global regime was interrupted after World War I, but has now been re-established. Hence globalization is nothing new. A second argument contends that recent internationalization is just the continuation of a longstanding trend emanating from the end of the Second World War. The first of these arguments can be easily conceded. The interruption of globalization was substantial and the institutional basis of the current period differs significantly from that of the earlier period. The second argument that the globalization theorists have mistaken a quantitative change for a qualitative one is the heart of the controversy. The first question that the globalization thesis must answer is whether or not a qualitative change has occurred. Long wave or stage theories of capitalism can provide criteria for identifying qualitative institutional change from one historical period to the next. The possible resolution of the late twentieth century crisis of the Fordist stage will be the ground upon which we can look for the qualitative change in the capitalist order that might mark the emergence of globalization. According to stage theory the current period is one of either continuing crisis or the consolidation of a new institutional framework seeking to resolve this crisis. If such a new institutional framework is forming then by the standards of LWT we are witnessing a qualitative change in the workings of the capitalist economy. The first area to consider is capital/labor relations and the organization of production. Union membership has declined. Many companies are introducing a regime of lean production based on Japanese techniques (Parker & Slaughter, 1994). The use of computerized production technology has led to the replacement of Fordist mass production with specialized batch production. While some corporations are pursuing this ‘‘high road’’ of increasing productivity, others are pursuing the ‘‘low road’’ of cheap labor and casualization deepening the dual labor market. In the area of capital/capital relations increases in both physical and financial capital mobility have been driven by technological developments and deregulation. This has led to the interpenetration of the capitalist class in North America, Western Europe and Japan. Increased trade liberalization has had contradictory results, leading at the same time to increased competition on the product market and increased cooperation through reciprocal share ownership, joint ventures, tight subcontracting arrange ments and the like (Castells, 2000, pp. 77–215). These developments have

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contributed to the creation of global norms of profitability. All decisions about economic activities, even those carried out entirely within national boundaries, are increasingly taken in light of international norms and standards (Bryan, 1995). Political changes involve both a reorientation of domestic state policy and the creation of increasingly powerful international regulatory institutions. Fiscal policy has placed an overwhelming emphasis on price stability and there has been a relative reduction in the size of the non-military sectors of the state. States have pursued a policy of deregulation and privatization. The reinforcement of ‘‘competitiveness,’’ has become the touchstone of domestic policy. There has been a dramatic geographical extension of market relations of production in Eastern Europe and post-Mao China. There has been a reinstatement and extension of U.S. hegemony. All of the forgoing changes demand ideological legitimation, found in the intensive promotion of neoliberalism. It is difficult to define precise criteria for identifying when an institutional reorganization constitutes a fundamental change in the environment of accumulation. The extensive range and depth of institutional transformations since the mid-1970s, however, may absolve us of this task. There exists a prima facie case for the qualitative transformation of the conditions of capitalist growth and expansion. Thus, courtesy of Marxian stage theory the globalization thesis passes its first hurdle.

NOTES 1. Within a Marxian framework, accumulation is not simply the accumulation of physical capital but the extension of capitalist social relations involving the extension of wage relations. Nevertheless, the term is often used synonymously with reinvestment and growth. 2. Gneuss (1962, pp. 36–38) also discusses the influence of the economic recovery on Bernstein’s thinking. 3. Following Althusser, a crisis of Marxism occurs when history poses Marxism a challenge which it cannot explain within its existing problematic (Althusser, 1978). Thus such a crisis has two conditions. The first is a novel and significant problem. The second is an inadequacy within the Marxist paradigm itself. Such inadequacies will frequently take the form of conceptual rigidities. Both of these conditions were met at the turn of the century. 4. Useful summaries of the revisionist or breakdown controversy can be found in Sweezy (1968 [1942] pp.190–213); Lichtheim (1961, pp. 272–300); Howard and King

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(1989, pp. 65–89); McLellan (1979, pp. 20–49); Geary (1987, pp. 46–59); Hansen (1985, pp. 32–49); Salvadori (1979, pp. 48–90). 5. Bernstein’s book length version of the case for revisionism was published in 1899 as The Assumptions of Socialism and the Tasks of Social Democracy. It is more generally translated into English under the title, Evolutionary Socialism (Bernstein, 1961). 6. For a discussion of the role of a revival of interest in Kant’s philosophy see Lichtheim (1961, pp. 290–300). 7. Kautsky’s (1899, 1902(1916)) two major works during this period were Bernstein und das sozialdeokratische Programm and The Social Revolution. While The Social Revolution has been translated into English, Kautsky’s prior work on Bernstein has not. Excerpts can be found in Goode (1983, pp. 15–31). A concise summary can be found in Howard and King (1989, pp. 80–82). A biographical account of this period from Kautsky’s point of view is contained in Steenson (1978, pp. 116–131). See also the other sources in note 3. 8. Rosa Luxemburg (2006) also addressed many of these issues in a series of articles which emphasized the need for maintaining a revolutionary socialist strategy. These were later published as Reform or Revolution. 9. For a more detailed discussion of Kautsky’s views see Howard and King (1989, pp. 82–84). 10. See Geary’s (1987, p. vii) judgment. 11. See McDonough and Drago (1989). 12. Tom Bottomore’s introduction to the translation of Finance Capital (Hilferding, 1980, pp. 1–17) provides a good overview of Hilferding’s theoretical and political career. Useful summaries of the argument in Finance Capital can be found in Brewer (1990, pp. 88–108) and in Howard and King (1989, pp. 94–105). 13. In making this argument, Hilferding is effectively contending that capitalist crises can arise from political factors as well as economic. 14. The title of Bukharin’s work is unaccountably translated into English as Imperialism and the World Economy. Since the order of the title has some small bearing on the argument which follows, I have rendered the title in its original order. 15. Other evaluations of the nature of Bukharin’s contribution in this work have approached it from differing perspectives and have emphasized different aspects of the work. Cohen’s (1980, pp. 25–36) biography contains a useful discussion of The World Economy and Imperialism. Other useful treatments can be found in Kiernan (1974, pp. 27–36), Barone (1985, pp. 35–45), Brewer (1990, pp. 109–116) and Howard and King (pp. 245–248). 16. There is no shortage of material on Lenin in general and Imperialism in particular. One of the best treatments is in Harding (1978, pp.1–70). See also White (2001, pp. 100–128) especially for the wider context of socialist debate during the First World War. 17. In a much quoted passage just prior to the above definition Lenin argues that: ywe must give a definition of imperialism that will include the following five of its basic features: (1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; (2) the merging of bank capital with industrial capital, and the creation, on the basis of this

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‘‘finance capital’’, of a financial oligarchy; (3) the export of capital as distinguished from the export of commodities acquires exceptional importance; (4) the formation of international monopolist capitalist associations which share the world among themselves, and (5) the territorial division of the whole world among the biggest capitalist powers is completed. (p. 232)

18. See especially Kalecki (1954) and Steindl (1952). 19. Baran and Sweezy write in their Introduction that ‘‘we are particularly conscious of the fact that this approach, as we have used it, has resulted in almost total neglect of a subject which occupies a central place in Marx’s study of capitalism: the labor process’’ (pp. 8–9). 20. For a useful collection of articles explaining, reviewing and applying the SSA approach see Kotz, McDonough, and Reich (1994a). This volume also contains a bibliography of the SSA approach (see also McDonough (1990, pp. 129–183)). 21. The distinction between the core institutions which inaugurate an SSA and those institutions which may be put into place later as accumulation proceeds is developed in Kotz (1994). 22. For another comparison from the same time period see O’Hara (1994).

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¯ KURUMA’S LIFE SAMEZO AS A MARXIST ECONOMIST E. Michael Schauerte This prefaces ‘‘A Critique of Classical Political Economy’’ by the Japanese Marxist Samezo¯ Kuruma (1893–1982), which is a translation of the key third chapter of his book Keizaigaku shi (History of Political Economy). An overview of Kuruma’s career as a Marxist economist in Japan is provided, with particular attention paid to the approach of Kuruma to the study of Marx’s thought and the characteristics of his study of the history of political economy.

1. A RESEARCHER AT THE OHARA INSTITUTE Samezo¯ Kuruma’s career as a Marxist economist spans a period of roughly six decades, stretching from the beginning of the 1920s, when Marxism was quickly taking root in Japan, up to the early 1980s, when the nearly hegemonic influence Marxist scholars had enjoyed in the postwar period was on the wane.1 Kuruma was born in 1893 in Okayama prefecture, west of Osaka. As the eldest son of a prosperous paper merchant, Kuruma was expected to take over the business one day, which did not interest him. Although not eager to become a capitalist, the study of capitalism attracted Kuruma early on, spurred by reading The Wealth of Nations at the age of seventeen. In 1914, Kuruma entered prestigious Tokyo Imperial University (now Tokyo University), where he had intended to study economics but switched to political science after finding the economics courses Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 281–294 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24008-8

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uninteresting.2 Graduating in the spring of 1918, he found a job working for Sumitomo Bank in Osaka. Kuruma had been assured that the job would afford him an opportunity to pursue economic research, perhaps related to China, but his duties turned out to be far more mundane. He soon realized that he was not at all suited to a career in banking. That summer in Osaka, as the disgruntled Kuruma was beginning to question capitalism, he witnessed first-hand the explosive riots over the high price of rice that were sweeping the nation. This historic event starkly exposed the existence of class conflict in Japan and the contradictions of its rapidly developing capitalist system. Kuruma saw the powerful police force temporarily helpless in the face of the rebellion and shop owners handing out free rice to placate the angry crowds. This experience left a deep impression on Kuruma, and he soon turned his back on a banking career, taking his first steps toward socialism like many others of his generation. In October, he quit his job and returned to Tokyo without any clear plan in mind. Fortunately for Kuruma, the Rice Riots helped bring into existence an organization that would offer him a far more intellectually stimulating career. The social uprising prompted the wealthy industrialist Magosaburo Ohara (1878–1943), who had already been alarmed by increasing class polarization, to create in February 1919 the Osaka-based Ohara Institute for Social Research, dedicated to the investigation of the root causes of the ‘‘social problem.’’ Kuruma heard through a friend about plans for the Institute and persuaded its Director, Iwasaburo Takano, a former professor of economics at Tokyo Imperial University, to hire him as a researcher. The following summer, the Ohara Institute dispatched Kuruma to Europe to purchase books for its library, along with his colleague Tamizo¯ Kushida (1885–1934) who was making a name for himself as a Marxist economist. The young men spent nearly two years in Europe – with Kuruma based in England and Kushida in Germany – where they took advantage of the strong yen to buy books related to the social sciences. The European stay proved a pivotal experience for Kuruma, who quickly accumulated a broad familiarity with modern European social history and thought. His eyes were also opened to the profundity of Karl Marx’s ideas during this time abroad. Prior to the trip Kuruma had read an English translation of Das Kapital, but he had found Marx’s labor theory of value presented in the initial chapters difficult to understand and was more convinced by the ‘‘marginal utility’’ explanation of value. Kuruma’s view of Marx changed dramatically upon reading Theorien u¨ber den Mehrwert (Theories of Surplus Value) during an idyllic summer spent in Heidelberg in 1921 to recuperate from his

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book-buying efforts. The clarity of Marx’s criticism of the Classical school amazed Kuruma, dissolving many of his doubts regarding Capital. His ‘‘conversion’’ paralleled what was happening back home in Japan, where leftists in the early twenties were turning away from anarcho-syndicalism en masse to embrace Marxism (in some form or another). And in July 1922, just weeks prior to Kuruma’s return to Japan, the Japanese Communist Party (JCP) was established. Upon returning to Japan, Kuruma settled into his life as a researcher at the Ohara Institute, which was establishing itself as a center of leftwing thought, particularly for research on trade union movements and Marxist political economy. Over the course of 1920s, Kuruma regularly contributed articles and translations to the Journal of the Ohara Institute for Social Research, which was created in 1923, and he assisted in research for the Japan Labor Yearbook, the Institute’s annual publication on the labor force. As for his own research, in addition to an interest in crisis theory, Kuruma concentrated on the history of political economy, particularly the Physiocratic and Classical schools. In 1923, he began teaching a course on the history of political economy at Doshisha University in Kyoto, which had been arranged by Kushida and Hajime Kawakami (1879–1946).3 Kuruma’s earliest articles for the Institute’s theoretical journal also dealt with the history of political economy, including a 1923 article commemorating the bicentennial of Adam Smith’s birth and a 1924 article entitled ‘‘He¯ geru no tetsugaku shi to marukusu no keizaigaku shi’’ (Hegel’s History of Philosophy and Marx’s History of Political Economy). This period of research culminated in a series of articles on the history of political economy published in Kawakami’s journal Shakai mondai ko¯za from 1926 to 1927. During his early years at the Ohara Institute, Kuruma devoted a considerable amount of energy to translation work. In addition to translating various parts of Theories of Surplus Value in connection to his study of Quesnay, Smith, and Ricardo, Kuruma co-translated Marx’s On the Jewish Question and translated works by a number of Marxists, including Rosa Luxemburg, Rudolf Hilferding, Karl Kautsky, and August Thalheimer. To aid his research, he began jotting down important passages from the writings of Marx and others on note cards, organized under different topics. This collection quickly expanded, and Kuruma kept the note cards at the Ohara Institute for his own use and that of his colleagues. It was during his early years at the Institute that Kuruma married Kikuyo Miyake, another native of Okayama. A few years after their marriage, the couple experienced tragedy when their nearly one-year-old son and two-year-old daughter both died of illness in 1927.

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With the approach of the new decade, Kuruma began to devote more time to the study of crisis. This issue was already taking on practical significance in Japan following the outbreak of a major economic crisis in 1927. In his first article on the subject, ‘‘Kyo¯ ko¯ kenkyu% joron’’ (An Introduction to the Study of Crisis), published just one month before the 1929 Wall Street Crash, Kuruma expresses a keen awareness of the gravity of the upcoming global crisis. He provides an overview of various theories of crisis, from Sismondi to Rosa Luxemburg and Lenin, stressing the need to prepare theoretically for the upcoming global crisis and clearly noting that ‘‘this new period of crisis will probably once again take the form of a world war; but even prior to this it will likely assume the form of an economic crisis.’’4 Understanding the phenomenon of crisis is no easy task, according to Kuruma, as it requires the deepest understanding of capitalism itself. He repeatedly emphasized Marx’s view of crisis as the collective or concentrated explosion of all the contradictions inherent to capitalist production. To concretely grasp crisis, therefore, it is necessary to uncover these contradictions and the relations between them, clarify each as a ‘‘moment’’ within a totality, and finally elucidate the processes leading up to their explosion as an actual crisis. He felt that crisis theory, as the clarification of capitalism’s essential contradictions, is central to Marx’s overall investigation of capitalism (his ‘‘critique of political economy’’). Kuruma sought to understand how the theory of crisis fits into Marx’s overall plan for his critique of political economy, and he discusses this in the 1930 article ‘‘Marukusu no kyo¯ ko¯ ron no kakunin no tame ni’’ (An Inquiry into Marx’s Theory of Crisis). Kuruma considers how, if at all, Marx’s plan changed over the years through an examination of his discussion of the plan in correspondence and other writings, while also considering the views of Henryk Grossman, Robert Wilbrandt, and others on this issue.5 In the first half of the 1930s, Kuruma continued to publish articles on crisis theory in the Ohara Institute’s journal. In 1936, Kuruma and his wife were dealt another blow when their eldest son died just before his sixth birthday. That same year, Kuruma and his family moved from Osaka to Tokyo when the Ohara Institute transferred its offices there. The move coincided with a significant curtailment of the Institute’s activities for both financial and political reasons. In the late thirties, there was a marked drop in the number of Kuruma’s articles and translations, reflecting the increased restrictions placed on leftwing thought in Japan. The state had given Marxist intellectuals relatively free reign throughout the twenties – at least compared to the draconian tactics applied to deal with trade-union leaders and leftwing political activists – but by the end of the 1930s dissent in any

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form was no longer tolerated. The Ohara Institute did manage to continue its activities, even under the authoritarian wartime government, but it was no longer possible for researchers to openly discuss the ideas of Marx. During the war years, Kuruma spent much of his time studying the theory of money, particularly the phenomenon of inflation, based on an awareness that Japan’s defeat would inevitably usher in a period of rampant inflation. He compiled notebook after notebook on the topic of inflation, filled with passages from various authors and his own margin notes and analysis. Kuruma’s wife Kikuyo did not survive these grim war years. She died in December 1944, at the age of forty-two. The war had a major impact on the Ohara Institute, quite literally, when a U.S. air raid on May 24, 1945 destroyed its offices. Along with many of the Institute’s books, the note cards Kuruma had been compiling for nearly a quarter of a century went up in smoke. Characteristically, though, he started over from scratch, once again patiently writing down useful passages.

¯ ZO ¯ UNO 2. POSTWAR DEBATE WITH KO The end of the war lifted a tremendous weight from the shoulders of Marxist scholars, and despite the dire economic situation, the immediate postwar period was characterized by a dynamic optimism, with the explosive growth of the trade union movement and expanding influence of the JCP among students and intellectuals. Kuruma himself supported the JCP after the war, although he was never a Party ideologue or activist.6 In this period, Kuruma found himself quite busy as the new Director of the Ohara Institute, which proved a difficult task when the rampant inflation he had anticipated became a reality. The financial problems of the Institute were eventually overcome in 1949 when it became a part of Hosei University, a move facilitated by Kuruma, who had joined the university’s faculty three years earlier. Despite his responsibilities as Director, Kuruma continued his own research, including the study of inflation. In 1946, he published an influential article on this topic in the journal Kaizo¯, entitled ‘‘Chingin neage to infure¯ shon’’ (Rise in Wages and Inflation), refuting the idea being propagated at the time that inflation in Japan was the result of wage rises. During this postwar period, Kuruma taught courses on the history of political economy at Hosei and a number of other universities, and he revised his prewar articles on the subject, which resulted in the book Keizaigaku shi (History of Political Economy), published in 1948. The following year his

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prewar articles on crisis were collected in a book entitled Kyo¯ko¯ ron (Theory of Crisis). Kuruma is perhaps best known, however, for the book Kachi keitai ron to ko¯kan katei ron (Theory of the Value-Form and Theory of the Exchange Process).7 Published in 1957, it is a collection of four articles in a series of the same title, three of which appeared at the beginning of the 1950s. As the title suggests, Kuruma examines Marx’s theory of the value-form in Capital (Section three of Chapter one) and his theory of the exchange process (Chapter two), and the relation between them. The idea for the articles emerged from Kuruma’s participation, along with a dozen or so other Marxist scholars, in a series of monthly seminars in 1947 on Marx’s Capital. During one seminar, a debate arose regarding whether Marx had been correct to abstract from the existence of the commodity owner when discussing the value-form. Ko¯ zo¯ Uno (1897–1977) sparked this debate when he insisted that the theory of the value-form cannot be understood without taking into consideration the commodity owner who decides which commodity will be in the equivalent form. Most of the seminar participants disagreed with Uno’s view, and Kuruma took the lead in criticizing it. He pointed out that the theoretical question pertaining to the value-form is the mechanism of value-expression, where the commodity in the relative form expresses its value in the use-value of the commodity in the equivalent form. Understanding this expression of value is a separate issue from considering how a given value-equation is created through the desire of a commodity owner for a particular commodity. Kuruma emphasized that the theory of the value-form can only be understood when the value-equation is taken as a given and then analyzed, which means abstracting from the question of the commodity owner’s existence. Kuruma reached a clearer understanding of how the various theoretical tasks in Part one of Capital fit together by carefully reading the transcript of the seminar discussions, which was published in the journal Hyo¯ron and later as a book, and by critically examining the views expressed by Uno during the seminars and in his subsequently published books. In 1950 and the following year, Kuruma presented a series of three articles in the Hosei University journal Keizai shinrin, entitled ‘‘Theory of the Value-form and Theory of the Exchange Process.’’ In the articles, he criticizes Uno’s idea that Marx had abstracted too far in his theory of the value-form, and Kuruma dissects the three main grounds of Uno’s argument. After a period of illness, he wrote a final article in 1956 that summarized his views on the relation between Section three (value-form) and Chapter two (exchange process) of Capital. Kuruma notes in the article that Marx provides an

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important hint regarding the theoretical tasks of Part one of Capital when he writes, in Chapter two: ‘‘The difficulty lies not in comprehending that money is a commodity, but in discovering how, why, and through what a commodity is money.’’8 For Kuruma the how concerns how the value of one commodity is expressed in the use-value of another commodity (Section three), why concerns the reason why value must be expressed in this roundabout way rather than directly as labor-time (Section four), and through what concerns what it is that generates money as the real resolution of the contradiction inherent to the commodity as a unity of use-value and value (Chapter two). Kuruma discusses each of these three theoretical questions, devoting most of his attention to the ‘‘how’’ and ‘‘through what’’ questions, and the relation between them. Uno, for his part, quickly responded to this criticism in a 1958 article entitled ‘‘Marukusu no kachi shakudo ron’’ (Marx’s Theory of the Measure of Value). Kuruma eventually offered a counter-criticism in 1963, in a discussion that was later published in the journal Shiso¯ under the same title as Uno’s article.

3. MARX-LEXIKON AND KURUMA’S THEORETICAL APPROACH In the late fifties, Kuruma collaborated on a number of projects, including the editing of a Das Kapital dictionary published in 1957 and the founding of the Japan Society of Political Economy the following year. He retired from his position at Hosei University in 1964 at the age of seventy-one, although he remained Director of the Ohara Institute for a few more years. His ‘‘retirement’’ years proved to be perhaps the most productive of his entire life. The year after leaving Hosei University, Naoe Kobayashi, head of the leftwing publishing house Otsuki Shoten, proposed the idea of publishing a series of books incorporating the content of Kuruma’s vast collection of note cards, which numbered around 10,000 at the time. This proposal would eventually result in the 15-volume Marx-Lexikon zur Politischen O¨konomie, published by Otsuki Shoten in collaboration with the Ohara Institute for Social Research, beginning in 1968. Each volume is a collection of passages from Marx, and to a lesser extent Engels, on a particular theoretical topic, with the original German on one page and the Japanese translation on the opposite page. The topics, in the order in which they appeared, are: Competition (1 vol.), Method (2 vols.), Materialist Conception of History

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(2 vols.), Crisis (4 vols.), and Money (5 vols.) – along with a one-volume Index. Kuruma organized the passages under headings and subheadings according to his understanding of the various levels of determinations and categories within Marx’s thought, underlining particularly important sections or terms to emphasize them. Included in each volume was a fifteen to twenty page booklet with a discussion between the editors regarding the given topic or their editorial approach to it, usually centering on questions directed to Kuruma.9 He worked tirelessly at the task of editing the Marx-Lexikon during the last twenty years of his life. Kuruma had just completed three of the volumes on money in September of 1982 when he was hospitalized for lung cancer. On October 20 of that year, he died at the age of 89. Marx-Lexikon characterizes Kuruma’s approach to the study of capitalism, and here I would like to say a word about that approach. One point that he repeatedly emphasized, in his writings and conversations, is the importance of correctly posing a problem. Solving any theoretical problem, he noted, requires uncovering its essential determinations or essence. To do this the tool of abstraction must be employed, which involves setting aside those elements not directly related to the theoretical task at hand. For example, in Theory of the Value-form and Theory of the Exchange Process, as noted already, Kuruma indicates how Marx abstracts from the commodity owner’s existence to consider the mechanism of value-expression within an equation between two commodities, thus setting aside one element that is irrelevant to the task at hand. Kuruma believed that posing a theoretical question is more than half the battle, since the answer is nearly self-evident if this has been done correctly. Conversely, it is like ‘‘casting pearls before swine,’’ he would say on occasion, to provide an answer to someone who has not even grasped the question. In Marx-Lexikon, instead of simply being provided the answers or definitions, as in a dictionary, the reader can see how Marx posed theoretical questions and grasp the relation between various concepts and levels of abstraction and determination. Critics of Kuruma, however, most notably Uno and his followers, labeled his work a mere ‘‘interpretation’’ or ‘‘explanation’’ of Marx, which they felt was a far more pedestrian undertaking than their own ‘‘creative’’ or ‘‘critical’’ work. This criticism aimed at Kuruma is wrong, I believe, in two respects. First, although Kuruma made the utmost effort to correctly understand what Marx had written, he did not engage in the study of Marx for its own sake, but rather as a means of better understanding capitalism. He stated this view of Marx and Marxism all the way back in 1925, in the

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preface to his translation On the Jewish Question, where he wrote: ‘‘Marxism is not a dilettantism that plays around with logic. Nor is it the commonplace ideas of professionals who superficially explain things. And it is not a utopianism that imagines a future of its choosing, either. Marxism, rather, is the scientific solution to problems that exist in reality.’’ The fact that Kuruma took such a keen interest in crisis and inflation already indicates his orientation towards the solution of real problems, for which he looked to Marx for assistance. Second, much of the criticism of Kuruma fails to grasp the relation between interpretation, which aims to correctly understand Marx, and the criticism that aims to go beyond him – merely juxtaposing the two instead. For example, Tomohiko (Thomas) Sekine argues, in the introduction to his English translation of Uno’s Principles of Political Economy, that since Uno’s aim is not to ‘‘reproduce Marx’s theory as it is written’’ but to ‘‘change it freely in a manner that makes more sense to him,’’ he should not ‘‘be criticized for not offering a textually faithful account of Capital.’’ For Kuruma, however, before we set out to freely change around what Marx has written so that it makes more sense to us, we need to possess an adequate understanding of his theories so that we have in mind the real Marx, not one fashioned out of straw. If a criticism of Marx is based on an incorrect interpretation of what he has written, there seems little point in bringing up his name in the first place, apart from whatever marketing value can be gained from claiming to go beyond Marx. Of course, Kuruma did not aim to defend Marx at all cost. Kuruma embraced the ‘‘old’’ ideas of Marx simply because of their usefulness in clarifying capitalism, and he had little interest in ‘‘creative’’ ideas that did not contribute to this end.

4. HISTORY OF POLITICAL ECONOMY The same simple goal of better understanding capitalism guided Kuruma’s investigation of the history of political economy. And to conclude, I would like to say a word about his approach to this field of study and briefly introduce his paper on Ricardo and Smith, which is my translation of the third chapter of his book Keizaigaku shi (History of Political Economy). In the preface to the book, Kuruma notes that his aim is not to provide an exhaustive study of the history of political economy, but rather to ‘‘focus on the development of political economy as a science, setting aside whatever is not essential,’’ He limits his discussion to the doctrines of the Physiocratic school (Franc- ois Quesnay) and the Classical school (Adam Smith and

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David Ricardo), viewing the earlier economic doctrines as forming the ‘‘prehistory’’ of political economy because they had not yet ‘‘broken free of the realm directly pertaining to policy, and even when sharp theoretical analysis was attempted it did extend beyond a partial analysis.’’ In approaching his history of political economy as a science, Kuruma is not interested in merely pointing out that this or that theory was correct or incorrect, viewing such a descriptive approach as a mere accumulation of facts, not ‘‘living knowledge.’’ Instead, he is careful to grasp the development of economic thought, and the relation of theoretical development to the real development of capitalism. As he notes in his preface: ‘‘Political economy itself is the theoretical understanding of the economy of bourgeois society, which, far from existing outside of history, is both historical and developmental; it is generated, unfolds, and is transformed.’’ Therefore, to properly evaluate past economists – and more importantly, to learn from them – Kuruma believes it is necessary to bear in mind the developmental stage of capitalism at the time the economists lived and their general view of capitalism. In the first chapter of his book, Kuruma broadly divides the history of political economy into three stages in relation to the development of capitalism. The first stage corresponds to the emergence of capitalism from out of feudalism, and is represented by the Physiocrats, who viewed capitalism as a ‘‘natural’’ order that should replace an ‘‘artificial’’ one (feudalism) that had become a fetter. Adam Smith belongs to this period to some extent, but he also has one foot in the next stage. In this second stage, Kuruma says, the capitalist mode of production had more or less come into existence, but the contradictions particular to it had yet to be revealed. Ricardo, who is characterized by a faith in capitalism and an earnest desire to uncover its laws, is the representative theorist of this stage. Ricardo brings bourgeois political economy to its highest point, after which it reaches a crossroads at the third stage, when periodic economic crises and a rising workers movement expose the limitations of capitalism, so that there is a choice, according to Kuruma, between ‘‘discarding a capitalist standpoint so that political economy could become thoroughly scientific’’ or ‘‘maintaining this standpoint at the expense of science.’’ The former path, needless to say, leads to Marx, while the latter path leads to the ‘‘vulgar’’ school of economics. Kuruma, however, did not have a simplistic or mechanical view of the relation between the development of capitalism and political economy. He illustrates the nature of this relation in the first chapter of his book, offering the example of Smith’s general concept of labor. Kuruma points out that

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such an abstraction ‘‘was only possible once labor has actually developed and differentiated itself so that it exists as a rich totality of diverse types of labor.’’10 Smith was thus able to arrive at this concept thanks to capitalism having developed the social division of labor to a certain level, but this does not at all diminish his accomplishment. Indeed, Kuruma uses the term ‘‘genius’’ to refer to Adam Smith, describing this as the quality of being able to ‘‘grasp something that has not developed to the point where the public has become aware of it.’’ Thus, instead of merely describing the theories of Smith and Ricardo, or pointing out the degree of their correctness, Kuruma explains the historical and logical reasons underlying their theoretical achievements as well as their errors and contradictions. And based on this, we can better appreciate how Marx moved political economy forward – overcoming the impasse the Classical economists eventually reached. Kuruma’s criticism of the Classical school of political economy, in addition to bringing the key ideas of Smith and Ricardo into focus, contributes to an understanding of the fundamental concepts of Marx. In particular, Kuruma touches on how concepts developed by Marx, such as value, surplus-value, profit, and production price, differ from similar conceptions of Smith and Ricardo. In comparing Marx to his predecessors, Kuruma repeatedly emphasizes that whereas Smith and Ricardo were able, on occasion, to uncover the essence of things, they had difficulty explaining complex phenomena on the basis of this essential understanding. In the thought of Smith and Ricardo, many of the mediating points between an abstract concept and concrete reality are missing, resulting in the tendency to either mechanically apply the essential concept to directly explain concrete reality, or abandon the essential theory altogether to merely describe phenomena as they appear. Ricardo, for instance, was unable to fill in the mediating points between the concept of value and the concrete phenomenon of production price, often treating the two as synonymous. Smith, similarly, uses the term ‘‘profit’’ to refer to both surplus-value (which he occasionally grasps, albeit hazily) and average profit. This absence of developmental links between the core concept and its concrete manifestations is both a reflection and an outcome of their imprecise use of terminology. Kuruma, in the process of criticizing the Classical school, notes how Marx carefully distinguishes between levels of abstraction, using different terms in line with these different levels, thus filling in all of the mediating points between an abstract concept and the concrete reality which seems at first glance to contradict it. Thus, in addition to examining in detail the doctrines of the Classical school and introducing some of Marx’s fundamental concepts, Kuruma’s

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paper outlines the main characteristics of Marx’s scientific method. For these reasons, Kuruma’s study of the Classical school – although written over fifty years ago – remains valuable today.

5. NOTE ON THE TRANSLATION This paper is a translation of the third and final chapter of Kuruma’s book Keizaigaku shi (History of Political Economy), first published in 1948 by Kawade Shobo¯ . Iwanami Shoten published an expanded edition in 1954 under the same title, which included Kuruma’s original book (with additional endnotes) as Part one and a Part one by the economist Yoshiro¯ Tamano¯ i (1918–1985) dealing with the period from the disintegration of the Ricardian school and emergence of ‘‘vulgar’’ political economy up to the appearance of Marx. Iwanami Shoten released a new edition of the book in 1977, but the only changes made were the use of newer Japanese translations of passages quoted from the works of Smith, Ricardo, and Marx, and simplified Kanji characters. My translation is based on this 1977 edition. The English translation differs somewhat from Chapter three of Kuruma’s book (‘‘Classical Political Economy: Smith and Ricardo’’). In addition to minor changes, such as merging or dividing paragraphs, the following modifications have been made. Section four (Value and Production Price) has been divided into three subsections and a new fifth section entitled ‘‘Impasse of the Classical School.’’ The opening paragraph in Section one has been slightly reworded and an additional sentence added to the final paragraph of the same section, in order for Kuruma’s third chapter to better stand on its own as an independent paper. A number of quotations from Smith included in the Notes were replaced by a page number reference in brackets, and in one case a quotation has been moved to the endnotes from the main text (Note 7). Some quotations from Smith in the main body that were repeated by Kuruma have been deleted, which made it possible to trim a long quotation from Chapter five of The Wealth of Nations (beginning with ‘‘Every man is rich or poor’’) in Section 2.1. (It may be beneficial, however, to examine the first seven paragraphs of Chapter five of Smith’s work, originally quoted, when reading this part of Kuruma’s paper.) Finally, some less essential Notes have been deleted, including those offering commonly available biographical information on Smith and Ricardo. I trust that the changes made have resulted in an easier to read text – or at least have not altered the meaning in any significant way.

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NOTES 1. To avoid possible confusion, Japanese names are written with the surname last. 2. At the time Kuruma was a student, economics courses were taught in the faculty of law because an independent faculty of economics had yet to be established. 3. Kushida was Kawakami’s student at Kyoto Imperial University, but he converted to Marxism before Kawakami did. Kushida’s criticism of his former teacher was instrumental in Kawakami’s own conversion from ‘‘bourgeois economics’’ to Marxism. A short biographical sketch I wrote on Kawakami is available on the ‘‘Marxism in Japan’’ page of the Marxist Internet Archive (http://marxists.org/ subject/japan/index.htm) along with a translation of one of his articles. Interested readers can also consult the English biography on Kawakami by Gail Lee Bernstein: Japanese Marxist: A Portrait of Kawakami Hajime, 1879–1946. 4. My translation of ‘‘Kyo¯ ko¯ kenkyu% joron’’ is available on the ‘‘Marxism in Japan’’ page of the Marxist Internet Archive. 5. In investigating Marx’s plan for a critique of political economy, Kuruma was operating under the handicap that Grundrisse, which was not published until 1941, was unavailable to scholars at the time. It was not until Dietz Verlag published a new edition in 1953 that the book was widely available in Japan. 6. Situating Kuruma politically is somewhat difficult. In the prewar period, Kuruma had closer personal relations with scholars in and around the Ohara Institute who can broadly be classified within the ‘‘Ro¯ no¯ school.’’ This tendency was opposed to the JCP-aligned ‘‘Ko¯ za school’’ and many of its members went on to support the leftwing of the Socialist Party after the war. Kuruma does not fit squarely within the Ro¯ no¯ school, however, because he did not participate in the prewar debate between the two schools of thought, which centered on the developmental history of capitalism in Japan and the nature of the ‘‘upcoming revolution.’’ (For more on this debate, readers can consult Marxism and the Crisis of Development in Prewar Japan by Germaine A. Hoston.) After the war, Kuruma seems to have remained indifferent to the lines dividing Marxist intellectuals in Japan. In editing Marx-Lexikon zur Politischen O¨konomie, for instance, two of Kuruma’s main collaborators were the Ko¯ za school economist Seijiro¯ Usami (1915–1997) and ¯ shima (1913–1984). The impression some have of Ro¯ no¯ school economist Kiyoshi O Kuruma as a ‘‘JCP scholar’’ is reinforced by the fact that he was opposed to the ideas of Ko¯ zo¯ Uno (1897–1977), who was embraced in the late fifties and sixties by the anti-JCP New Left. But even in this case, Kuruma maintained cordial relations with Uno – who was another native of Okayama and had been connected to the Ohara Institute – and he did not criticize Uno from the standpoint of defending the JCP. 7. I have translated Kuruma’s Kachi keitai ron to ko¯kan katei ron into English and hope to eventually have it published (in some form or another). 8. The original German ‘‘wie, warum, wodurch Ware Geld ist’’ is mistranslated in the English editions of Capital. In the Penguin Classics edition, for example, this is translated as, ‘‘how, why and by what means a commodity becomes money.’’ 9. For a better idea of what these conversations were like, readers can consult the translations of the discussions for the two volumes on Method, available on the ‘‘Marxism in Japan’’ page of the Marxist Internet Archive.

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10. Kuruma adds, in this first chapter of History of Political Economy, that this is the case for any abstract concept, which can only ‘‘be established once a given thing has developed and differentiated itself so that it exists as a rich totality with manifold aspects.’’

ACKNOWLEDGMENTS In translating this and other works by Samezo¯ Kuruma, I have enjoyed the kind assistance of his son, Dr. Ken Kuruma. As a Marxist economist himself, who taught at Rikkyo University until his recent retirement, Dr. Kuruma was able to patiently explain many passages in his father’s book that I found difficult to understand. Thanks to our frequent discussions, stimulated by the delicious Japanese sweets he provided, I was able to gain a clearer image of his father as a person and better understand his scholarly approach. Dr. Kuruma also introduced me to his friend Dr. Teinosuke Otani, who recently retired from the Faculty of Economics at Hosei University and continues his work as an editor of the Marx-Engels-Gesamtausgabe (MEGA). Dr. Otani provided me with invaluable advice from his standpoint as an economic theorist, translator, and editor of Samezo¯ Kuruma’s Marx-Lexikon zur Politischen O¨konomie. I must note, of course, that neither is responsible for whatever errors may remain in my translation. Finally, I would like to express my sincere gratitude to Dr. Paul Zarembka for publishing this paper by Samezo¯ Kuruma and for his help in preparing the manuscript. I hope that the publication will encourage a greater interest in Kuruma’s work outside of Japan, and perhaps inside the country as well.

A CRITIQUE OF CLASSICAL POLITICAL ECONOMY Samezo¯ Kurumay (Translator: E. Michael Schauerte) ABSTRACT This paper is a translation of the third and most important chapter of Keizaigaku shi (History of Political Economy) by the Japanese Marxist economist Samezo¯ Kuruma (1893–1982), first published in 1948. Kuruma discusses in detail the achievements and limitations of the Classical school of political economy. He examines the fundamental ideas of Adam Smith and David Ricardo regarding the determination of commodity value and the source of surplus-value, and then looks at how these ideas are connected to production price and profit. Kuruma notes that Smith and Ricardo managed to arrive at the essential labor theory of value, but that neither could correctly apply this theory to adequately explain phenomena in the realm of competition – either abandoning the labor theory of value altogether to embrace a composition theory of value (Smith) or directly applying the theory to explain phenomena without grasping the intermediary processes of development (Ricardo). Kuruma’s critique of Smith and Ricardo highlights the achievement of Marx in overcoming the limitations that ultimately led to the breakdown of the Classical school of political economy.

Transitions in Latin America and in Poland and Syria Research in Political Economy, Volume 24, 295–340 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24009-X

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1. INTRODUCTION If we consider what sets the Classical school of political economy apart from preceding economic doctrines, we find that, just as the Physiocrats went beyond Mercantilism by shifting the investigation of surplus-value from the realm of circulation to that of direct production, thereby putting in place a foundation to analyze capitalist production, the Classical economists went beyond Physiocracy by adding to this foundation the concept of labor in general. The foundation grasped by the Physiocrats was thus freed of its agriculture-centered limitations, making it possible to analyze capitalist relations of production to the greatest extent possible from a bourgeois perspective. This achievement corresponds to a period in which the basic relations of capitalist production had already been established, but the contradictions inherent to these relations had yet to be exposed. The most striking characteristics of the Classical school are a firm belief in the methods of capitalist production, an earnest desire to clarify the laws of capitalism, a scientific attempt to analyze phenomenal forms and reduce them to their internal unified relations, and an effort to posit these internal relations as natural universal principles from which deductions can be made. Given this approach, and the conditions of the time, the Classical economists were able to develop the science of political economy to the highest level attainable from a capitalist outlook. The outstanding representatives of Classical political economy, needless to say, are Adam Smith (The Wealth of Nations) and David Ricardo (On the Principles of Political Economy and Taxation). In the case of Smith, who was the first to systematize Classical political economy, this school of thought had yet to appear in its pure form. Alongside the Classical form there exists the approach of directly observing phenomena, which characterized the previous stage of political economy. Marx notes, for instance: Political economy had achieved a certain comprehensiveness with Adam Smith; to a certain extent he had covered the whole of its territory y Smith himself moves with great naivete´ in a perpetual contradiction. On the one hand he traces the intrinsic connection existing between economic categories or the obscure structure of the bourgeois economic system. On the other, he simultaneously sets forth the connection as it appears in the phenomena of competition and thus as it presents itself to the unscientific observer just as to him who is actually involved and interested in the process of bourgeois production. One of these conceptions fathoms the inner connection, the physiology, so to speak, of the bourgeois system, whereas the other takes the external phenomena of life, as they seem and appear and merely describes, catalogues, recounts and arranges them under formal definitions. With Smith both these methods of approach not only merrily run alongside one another, but also intermingle and constantly contradict one another. (Marx, 1989, pp. 390–391)

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Here we have the reason why later generations of economists have universally praised Smith and subsequent schools of political economy can all be traced back to him. The system of ‘‘vulgar’’ political economy was established by severing the phenomenon-centered approach of Smith from his scientific approach – turning what had been naivete´ in the case of Smith into an intentional papering over of the contradictions of capitalist production. Meanwhile, there were those, most notably Ricardo, who purified Smith’s scientific aspects, separating these aspects from the observation of phenomena and making them as rigorous and complete as is possible from a capitalist perspective. Marx describes the task carried out by Ricardo as follows: The basis, the starting-point for the physiology of the bourgeois system – for the understanding of its internal organic coherence and life process – is the determination of value by labor-time. Ricardo starts with this and forces science to get out of the rut, to render an account of the extent to which the other categories – the relations of production and commerce – evolved and described by it, correspond to or contradict this basis, this starting-point; to elucidate how far a science which in fact only reflects and reproduces the manifest forms of the process, and therefore also how far these manifestations themselves, correspond to the basis on which the inner coherence, the actual physiology of bourgeois society rests or the basis which forms its starting-point; and in general, to examine how matters stand with the contradiction between the apparent and the actual movement of the system. This then is Ricardo’s great historical significance for science. (Marx, 1989, p. 391)

In this paper, which traces the process of theoretical developmental within Classical political economy, I will consider two main problems: (1) value and surplus-value, and (2) average profit and production price. The first is directly connected to the Classical school’s theoretical foundation, while the second is the most important application of this fundamental theory to explain concrete reality. The views of Smith and Ricardo regarding these two sets of problems will be examined, clarifying the similarities and differences in their positions as well as the theoretical contradictions that neither was able to overcome.

2. VALUE AND SURPLUS-VALUE 2.1. Determination of Value by ‘‘Labor’’ The Wealth of Nations begins with an explanation of the benefits of the division of labor as the fundamental source of improvements in the productive power of labor. In the mind of Smith, who believed that private

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ownership is a natural, supra-historical system based upon human nature, a social division of labor only seemed possible in the form of commodity production, i.e. through the mediation of the exchange of products produced as commodities. He thought that the apportionment of labor to each production process is only possible by means of the capitalist mode of production based upon commodity production,1 wherein the labor-power of numerous people is purchased by and managed under a given capitalist. This means that Smith’s explanation of the division of labor is above all an elucidation of the benefits of the capitalist mode of production. His primary aim is to clarify that the capitalist mode of production advances the welfare of a nation and that the feudal remnants blocking this development must be eliminated. The theory of the division of labor naturally led Smith, who viewed the social division of labor as inherently linked to commodity production, to examine the fundamental law of commodity production: the law of value. Therefore, after having dedicated the first three chapters, respectively, to an examination of the benefits of the division of labor, the principles that generate it, and market expansion as one of its conditions, Smith begins Chapter four with the following: When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men’s labor as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society. (Smith, 1970, p. 126)

Smith’s particular concern is the law that governs ‘‘commercial society’’ where ‘‘every man lives by exchanging,’’ and the most fundamental law of such a society is the law that governs exchange. Therefore, after discussing the inconvenience of barter and the need for money to mediate exchange, and noting the historical development of various types of money, Smith concludes Chapter four by stating the next problem to consider: What are the rules which men naturally observe in exchanging [goods] either for money or for one another, I shall now proceed to examine. These rules determine what may be called the relative or exchangeable value of goods. (Smith, 1970, p. 131)

Smith, in order to ‘‘investigate the principles which regulate the exchangeable value of commodities,’’ says that he will first seek to explain ‘‘what is the real measure of this exchangeable value; or, wherein consists the real price of all commodities’’ (Smith, 1970, p. 132). This he sets out to accomplish in Chapter five, where he writes:

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Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, is precisely equal to the quantity of labour which it can enable them to purchase or command. (Smith, 1970, p. 133)

At the beginning of this passage, Smith expresses his views on the fundamental problem regarding the value of a commodity. He discusses how, with the development of commodity production, wealth and the labor that produces it undergo a revolutionary change so that everyone’s needs are satisfied through the products of other people’s labor, rather than directly through the products of their own labor. With this change, labor is no longer performed to create use-values for oneself, and the products of a person’s own labor only compose that person’s wealth to the extent that they are exchanged for products of another person’s labor, i.e. only as something that creates exchange-value. Smith thus argues that wealth is made up of exchange-values, and that wealth-creating labor is labor that creates exchange-values. He then goes on to discuss what determines and measures exchange-value. Smith’s discussion of these problems not only lacks a penetrating logic, which results in confusion, but also clearly entails a confusion of concepts, so that he slips into a serious contradiction. This is not the simple outcome of some illogical tendency within his thought. Rather, it stems from an attempt to understand the internal relations of commodity production from the outlook of capitalists; so in a sense, the contradiction that he slips into is a testament to his outstanding talents. The ultimate source of Smith’s error

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is the view of commodity production as the sole form of social production. From the outset, he does not consider the possibility that a form other than commodity production might exist, finding it perfectly natural that, ‘‘when the division of labour has been once thoroughly established y every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society’’ (Smith, 1970, p. 126). Smith views commodity production as the sole form of social production, and is thus unable to grasp its particular character as one type of social production. Commodity production is social production carried out under a system of private ownership by private producers who are independent of each other. The labor of the producers, which is private labor, directly speaking, only first takes on an independent social form in the relation of productexchange. In exchange, the products of the producers’ labor are mutually equated as value, regardless of their manifold shapes as use-values. The various real differences between types of labor as use-value-producing labor are abstracted from when considered as value-forming labor. In the case of value-forming labor, we are only dealing with a certain quantity of the simple expenditure of indiscriminate human labor, or general human labor in abstraction from concrete differences. And it is in the form of ‘‘value’’ as the crystallization of this general human labor, i.e. in the material form of the value of a product, that a commodity producer’s labor first acquires significance as a certain quantity of the total labor-time expended by society to satisfy its needs.2 Bourgeois economists, however, starting with Smith, failed to grasp the character of value as the specific social form of labor particular to commodity production. Economists were aware that the value of a commodity is in fact labor, but they did not understand why labor, instead of appearing as such, manifests itself in the form of the value of the product; in the peculiar form of being an attribute of a thing, which is an upside-down form that requires scholars to uncover and demonstrate the substance of value. Not only did they fail to understand this pivotal point, it was not even posed as a problem to begin with. This was the inevitable outcome of viewing commodity production as the natural form of social production, equating it with social production itself. As Marx notes: Political economy has indeed analyzed value and its magnitude, however incompletely, and has uncovered the content concealed beneath these forms. But it has never once asked the question why this content has assumed that particular form, that is to say, why labor is expressed in value, and why the measurement of labor by its duration is expressed in the magnitude of the value of the product. These formulas, which bear the

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unmistakable stamp of belonging to a social formation in which the process of production has mastery over man, instead of the opposite, appear to the political economists’ bourgeois consciousness to be as much a self-evident and nature-imposed necessity as productive labor itself. (Marx, 1976, pp. 173–175)

Bearing in mind this character of value as the specific social form of commodity-producing labor, which was overlooked by Smith (and every other bourgeois economist), I want to further consider Adam Smith’s theory of value presented in Chapter five of his book. Smith, as we have seen, views wealth and the labor that produces it as undergoing an essential change with the development of commodity production (although he uses the expression: ‘‘development of the division of labor’’). It is immediately apparent, however, that he sees no difference between the ‘‘command’’ or purchase of the product of another person’s labor, and the ‘‘command’’ or purchase of the labor of another person. For instance, Smith clearly asserts that: The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market. His fortune is greater or less, precisely in proportion to the extent of this power; or to the quantity either of other men’s labour, or, what is the same thing, of the produce of other men’s labour, which it enables him to purchase or command. (Smith, 1970, p. 134)

In one respect, Smith’s confusion regarding the two ideas is a manifestation of his insight, insofar as it stems from the fundamental conviction that the relation of commodity exchange is ultimately a relation of labor-exchange. Indeed, in claiming that a commodity producer’s wealth depends on ‘‘the quantity y of the produce of other men’s labour, which it enables him to purchase or command,’’ or ‘‘a certain command over all of the labour y which is then in the market,’’ Smith not only distinguishes between living labor and the labor objectified in a product but also asserts that the labor of a commodity producer only forms that producer’s wealth and constitutes exchange-value when it can be substituted for the labor of every other person. (And Smith seems to be saying this from the perspective that an exchange for the product of another person’s labor is ultimately an exchange for that person’s labor.) He argues that a producer’s labor must be capable of being substituted for social labor in general; not in its specific concrete shape of producing a use-value, but in terms of the general quality it has in common with every other sort of labor.3 Of course, Smith did not fully realize the significance of this view. Despite clarifying that the commodity-exchange relation comes down to an exchange of labor, Smith is unaware of the particularity of commodity production where the relation of labor-exchange is constituted through the

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exchange of products of labor. At the same time, even though he perceives that a commodity producer’s labor only forms the value of the commodity (thereby creating the producer’s wealth) to the extent that it is equal to the labor of other people, Smith overlooks the particular manner in which labor is equated. He thus mistakes an objective equalization of different types of labor, forcefully carried out in a social process that takes place apart from human consciousness, as a subjective act based on a certain degree of ‘‘toil and trouble’’ that equates the labor of different people. Moreover, Smith fails to understand that it is an inevitable outcome of the nature of value itself that the magnitude of a commodity’s value is measured in the quantity of another commodity (and ultimately in the money-commodity gold or silver), rather than by the labor-time actually necessary for its production. Smith instead assumes that this is just a practical custom carried out for the sake of expediency because of the difficulty of actually ascertaining the proportion between different types of labor, or because the ‘‘greater part of people too understand better what is meant by a quantity of a particular commodity, than by a quantity of labour’’ as ‘‘one is a plain palpable object’’ and ‘‘the other an abstract notion, which, though it can be made sufficiently intelligible, is not altogether so natural and obvious’’ (Smith, 1970, p. 135). Smith thus completely fails to grasp the connection between a commodity’s value, which is the quantity of labor necessary for its production, and its exchange-value (or value-form, to use Marx’s more precise terminology). In the case of the value-form, a commodity’s value is expressed in the quantity of another commodity, and this develops into the money-form or price-form where value is expressed as such-and-such yen. In other words, Smith does not understand why – despite the fact that value consists of the quantity of labor necessary for a commodity’s production – the value of a commodity is expressed in the quantity of another commodity rather than being expressed as labor-time. As a result, he also fails to grasp the necessity of money. This is the source of Smith’s inability to understand the relation between value and the value-form, his confusion of the two, as well as his delusional search for an invariable measure of value that stems from this confusion. Here, we also have the basis for Smith overlooking the object-like [taisho¯teki] character of value4 and the source of his confusion between objectified labor and living labor, as well as his mistake of viewing the commonality of value-forming labor in terms of an individualistic, subjective quality. These points are related to the decisively mistaken doctrine, later inherited and developed by the vulgar school of economics (particularly Malthus), that

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value is determined by the ‘‘value of labor;’’ i.e. the idea that labor is an invariable measure of value because its own value does not change. All of the defects in Smith’s grasp of value are on display in the following paragraph from Chapter five, where, after having discussed how money is generally used as the measure of value, he asserts: Gold and silver, however, like every other commodity, vary in their value y . But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities. Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always laydown the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only. (Smith, 1970, pp. 135–136)

We can see how Smith’s ideas result in the mistake of regarding labor as a real measure of value, rather than grasping the labor objectified in a commodity as the measure of value. Instead of labor being the substance of value, Smith has in mind the labor that a commodity can ‘‘command’’ or purchase. The error of this conclusion is immediately apparent. Saying that a certain quantity of labor is purchased by a given commodity means that both have been exchanged as equivalents. And the fact that the two are exchanged as such is naturally premised on the existence of an equal quantity of value in each prior to exchange. Thus, to state that the magnitude of a commodity’s value is determined by the quantity of labor that it can purchase is ultimately the determination of value by value: a circular argument. Smith would not be subject to this criticism of slipping into a circular argument if he were saying that the magnitude of a commodity can be measured by the quantity of gold or silver for which it is exchanged. His view, however, ultimately comes down to the assertion that labor can perform the same money-function as gold or silver as a measure of value, so the question simply becomes whether labor or gold/silver can perform this function more appropriately. Smith says that labor, in this function, is not necessarily superior to gold or silver. What he calls the ‘‘value of labor’’

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(labor-power) is also determined by the social labor necessary for its production, as in the case of the value of commodities in general. This is the labor-time necessary for the production of the materials of subsistence for the worker and his family, which will naturally be influenced by an increase or decrease in productive power within the production sphere that produces these materials. It is only in this sense that ‘‘labor’’ is able to be a measure of value, gauging the magnitude of the value of other commodities; that is, to the extent it is one type of commodity itself whose value fluctuates. There is thus clear conceptual confusion when Smith says that ‘‘labor’’ in this function – ‘‘labor’’ which is itself a thing of value – is ‘‘the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared’’5 (Smith, 1970, p. 136). As Marx writes: What is true of labor itself and consequently of its measure, labor-time – i.e. that the value of commodities is always proportionate to the labor-time realized in them, no matter how the ‘value of labor’ may change – is here claimed for this changing value of labor itself. (Marx, 1988, p. 383)

Ricardo had already perceived the error in Smith’s conclusion, and his criticism was the first theoretical step beyond Smith as well as the starting point of On the Principles of Political Economy and Taxation. At the beginning of his book Ricardo says that, ‘‘The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or lesser compensation which is paid for that labour’’ (Ricardo, 1996, p. 17). He then goes on to criticize Smith: Adam Smith, who so accurately defined the original source of exchangeable value, and who was bound in consistency to maintain, that all things became more or less valuable in proportion as more or less labour was bestowed on their production, has himself erected another standard measure of value, and speaks of things being more or less valuable, in proportion as they will exchange for more or less of this standard measure. Sometimes he speaks of corn, at other times of labour, as a standard measure; not the quantity of labour bestowed on the production of any object, but the quantity which it can command in the market: as if these were two equivalent expressions, and as if because a man’s labour had become doubly efficient, and he could therefore produce twice the quantity of a commodity, he would necessarily receive twice the former quantity in exchange for it. If this indeed were true, if the reward of the labourer were always in proportion to what he produced, the quantity of labour bestowed on a commodity, and the quantity of labour which that commodity would purchase, would be equal, and either might accurately measure the variations of other things: but they are not equal; the first is under many circumstances an invariable standard, indicating correctly the variations of other things; the latter is subject to as many fluctuations as the commodities compared with it.

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Adam Smith, after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of determining the varying value of other things, has himself, by fixing on corn or labour, chosen a medium no less variable. (Ricardo, 1996, p. 19)

Ricardo’s correct assertion that the value of every thing increases or decreases in proportion to the quantity of labor expended on its production freed political economy from the confusion of Smith, thus establishing the fundamental principle of political economy. This is the great historical achievement of Ricardo. However, the confusion within Smith’s thought is rooted in a misconception far more fundamental than Ricardo had imagined. Granted, there is clear confusion in the case of Smith, and by pointing it out Ricardo took a major step forward. But in thinking that he could criticize Smith by merely indicating this confusion, Ricardo ends up exposing the narrowness of his own perspective and the defects in his understanding of value. He criticizes Smith, saying that if it were indeed true that ‘‘the reward of the labourer were always in proportion to what he produced,’’ then the ‘‘quantity of labour bestowed on a commodity, and the quantity of labour which that commodity would purchase, would be equal, and either might accurately measure the variations of other things,’’ whereas in fact ‘‘they are not equal.’’ This simple declaration does not amount to a critique of Smith’s view, however. Certainly, the ‘‘reward of the labourer’’ under relations of capitalist production is not ‘‘in proportion to what he produced,’’ nor is there equality between the ‘‘quantity of labour bestowed on a commodity, and the quantity of labour which that commodity would purchase.’’ Thus, if one takes the relations of capitalist production for granted from the outset, as Ricardo does, Smith’s view must seem thoroughly mistaken. But Smith was not necessarily concerned with the same thing Ricardo has in mind. In fact, Smith is superior to Ricardo in terms of correctly being aware that capitalist production is the outcome of the development of commodity production, so that an analysis of the relations of capitalist production needs to set out from an examination of the relations of simple commodity production. It is for this reason that Smith, in Chapter five, mainly considers these relations of simple commodity production. He assumes that the laborer is at the same time the owner of the conditions of his labor. Based on this assumption, the laborer is naturally the owner of the products of his labor and the seller of these products, so that as long as the products are sold at their value, ‘‘the reward of the labourer [is] always in proportion to what he produced.’’ Therefore, under the assumption above, the proposition Ricardo considers

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impossible is not only possible, but in fact a principle, so that his refutation of Smith loses its basis.

2.2. Exchange of Unequal Quantities of Labor In the relations of simple commodity production, products of labor belong in their entirety to the laborer, so that his ‘‘reward [is] always in proportion to what he produced’’ and there is quantitative agreement between the ‘‘quantity of labour bestowed on a commodity’’ and the ‘‘quantity of labour which that commodity would purchase,’’ with either indicating ‘‘correctly the variations of other things’’ (Ricardo, 1996, p. 19). Even so, a clear distinction needs to be made between ‘‘labor’’ in each of these two cases because the function performed as a measure of value differs completely in nature.6 Smith, having failed to clarify the inherent relation between the two cases, shifts from the relations of simple commodity production to consider capitalist relations of production, where he perceives that the entire product of the laborer no longer belongs to him and therefore the quantity of labor necessary for the production of a commodity and the quantity of labor that it can purchase are no longer in agreement. Smith thus imagines that the original determination of value itself – the principle that a commodity’s value is determined by the quantity of labor necessary for its production – is no longer valid. In Chapter six, for instance, Smith argues: In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day’s or one hour’s labour. (Smith, 1970, p. 150)

In other words, despite having asserted that a commodity’s value is determined by the labor-time embodied within it, Smith says (as Marx noted with skillful irony) that the validity of this proposition is limited to a period that precedes his own, an Eden where, because human beings had yet to consume the forbidden fruit of profit and rent, the value of a commodity is still determined by the quantity of labor it contains. Smith notes that, ‘‘In this state of things, the whole produce of labour belongs to the labourer; and the quantity of labour commonly employed in acquiring or producing any

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commodity, is the only circumstance which can regulate the quantity of labour which it ought to purchase, command, or exchange for’’ (Smith, 1970, p. 151). And he goes on to write: As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced y . In this state of things, the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour. (Smith, 1970, pp. 151–152)

In short, Smith says that with the accumulation of capital, workers no longer obtain the entire product of their labor, so the quantity of labor necessary for production and the quantity of labor that can be ‘‘commanded’’ (or purchased) no longer coincide. From this fact he concludes that once capital has been accumulated the quantities of labor necessary for the production of commodities no longer determine their exchange. This conclusion, however, is clearly mistaken. Smith should have concluded, like Ricardo, that because the quantity of labor necessary for production and the quantity of labor that can be commanded no longer coincide under such circumstances, the latter is no longer the correct measure of value. The changed state of circumstances has an impact on the latter, not the former, because the determination of the magnitude of value is completely separate from the question of how this magnitude is then divided. Ricardo’s tremendous achievement was to have consistently maintained the fundamental proposition that a commodity’s value is determined by the labor-time necessary for its production, without becoming confused by the situation encountered in the case of production prices under capitalism. Still, it should be noted, the confusion and contradiction within Smith’s thought has deeper roots than Ricardo had imagined. Certainly when two normal commodities are exchanged there is nothing at all problematic about

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Ricardo’s position, but what had baffled Smith is the exchange between capital and labor particular to bourgeois society. A capitalist hires workers and provides them with wages (money) in return for the labor they provide him. In this case, however, the value that the workers create for the capitalist through their labor, as Smith emphasizes and Ricardo also recognizes, is ‘‘resolved into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced.’’ In other words, the time that exceeds the labor-time included in the money wage received by the workers is labor performed for the capitalist, constituting the profit component. Therefore, we ultimately have an exchange of more living labor for less objectified labor. Does this fact contradict the original law of value? This doubt was the fundamental cause of Smith’s confusion. But Ricardo is quite unaware of this. He does not even notice that it represents an important question. With his attention focused solely on the exchange between two regular commodities, Ricardo is satisfied to be aware that the distribution of a commodity’s value between worker and capitalist is not related to the determination of this value. This question, which had confused Smith and was later overlooked by Ricardo, ultimately became the basis for a major deadlock within Classical political economy. This was the most important factor – along with the problem of the average rate of profit and production price – determining the theoretical collapse of this school of thought. The subsequent vulgar school of political economy, needless to say, was also unable to solve this problem that had perplexed the Classical economists. In fact, the inability of the Classical school to solve this problem was a major turning point that led bourgeois political economy to reject the original theory of value, replacing it with a completely vulgar system where phenomena are superficially explained. The problem was only solved with the arrival of Marx, who uncovered that it is labor-power – not labor – that the capitalist purchases. Labor-power, like any other type of commodity, has a use-value and value, and Marx has the following to say about its value: In so far as it has value, [labor-power] represents no more than a definite quantity of the average social labor objectified in it. Labor-power exists only as a capacity of the living individual. Its production consequently presupposes his existence. Given the existence of the individual, the production of labor-power consists in his reproduction of himself or his maintenance. For his maintenance he requires a certain quantity of the means of subsistence. Therefore the labor-time necessary for the reproduction of labor-power is the same as that necessary for the production of those means of subsistence; in other words, the value of labor-power is the value of the means of subsistence necessary for the maintenance of its owner. (Marx, 1976, p. 174)

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What, then, is the use-value of labor-power? Labor-power, as its name suggests, is the capacity to labor, so its use-value is the actualization of this capacity, which is to say, labor itself. At the same time, the labor that produces a commodity involves the operation of creating both use-value and value, so the labor-power commodity, along with its own value, has the special use-value of being able to create new value totally unrelated to its own inherent value. Here we have the fundamental secret of capitalist production. The fact that a capitalist receives a profit does not run counter to the law of value, but rather occurs in line with this law. The capitalist buys labor-power at its value, and then, like the purchaser of a normal commodity, comes into possession of its use-value. As Marx writes: The use-value of labor-power, in other words labor, belongs just as little to its seller as the use-value of the oil after it has been sold belongs to the dealer who sold it. The owner of the money has paid the value of a day’s labor-power; he therefore has the use of it for a day, a day’s labor belongs to him. On the one hand the daily sustenance of labor-power costs only half a day’s labor, while on the other hand the very same labor-power can remain effective, can work, during a whole day, and consequently the value which its use during one day creates is double what the capitalist pays for that use; this circumstance is a piece of good luck for the buyer, but by no means an injustice towards the seller. (Marx, 1976, p. 301)

2.3. The Source of Surplus-value (and the Concept of Productive Labor) The Classical school of political economy, having failed to understand the concept of labor-power – viewing the value of labor-power as the value of ‘‘labor’’ – ends up absorbing an unmediated contradiction that eventually leads to its collapse. This does not negate, however, that Classical economists were aware of the source of surplus-value, in a sense. Indeed, they fell into contradiction precisely because of this awareness; precisely because they were at least aware of an exchange of more labor for less labor in reality, and had reduced profit and rent to unpaid labor. A contradiction does exist within reality itself, in terms of an outcome that is the actual reversal of the law of value. The contradiction within Classical political economy is based upon the recognition of this contradictory reality. The Classical economists, under the sway of bourgeois prejudices and thus unable to grasp the historical particularity of capitalist production, were unable to perceive that this actual reversal of the law of value is the outcome of the commodification of labor-power and the development of the law itself. As a result, they were unable to trace the formation of surplus-value from out of, and based upon, the law of value.

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Nevertheless, the Classical economists were aware of the outcome of this formation of surplus-value. They had a de facto awareness of the exchange of more labor for less labor, and reduced profit and rent to unpaid labor. It is here that a contradiction arose within Classical political economy as a doctrine. This contradiction is manifested in a defective understanding of surplus-value, which inevitably accompanied their bourgeois perspective, but at the same time the contradiction is a testament to their greatness compared to vulgar political economy. This applies in particular to Adam Smith, who perceived this contradiction and for this precise reason fell into serious confusion. In many parts of The Wealth of Nations, alongside completely superficial views, Smith clearly reduces profit and rent to unpaid labor, reaching the point where, by taking one step further, he could have established the general category of surplus-labor based on surplus labor. For instance, in the passage quoted earlier from Chapter six, Smith says that, ‘‘The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced’’ (Smith, 1970, p. 151). Here profit is clearly said to be one part of the value workers add to the materials. In other words, workers labor for more than their compensation in wages. And the value created by this surplus labor forms the employer’s profit. This same view is expressed regarding rent: As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce y . [The labourer] must then pay for the licence to gather [this natural produce]; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land. (Smith, 1970, pp. 152–153)

Rent, in other words, is just one part of the labor of workers; a part of their labor that is delivered to the landowner without any compensation.7 Smith clearly states that rent as well as profit are deductions made from the product of the workers, taken from the value that they have added to the materials. He views these deducted parts as being made up of the quantity of surplus-labor performed by the workers over and above their compensation in wages. Thus, to follow Smith’s line of thinking, the source of both profit and rent is the surplus labor of workers. The two are deducted parts of surplus-value, which is itself the concretization of surplus labor. Although not stated explicitly, here we have arrived at a general theory of surplus-value as distinct from – but fundamental to – both profit and rent. The next step would be to

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clearly distinguish this general concept of surplus-value from profit and rent in order to establish it as a separate category. If Smith had been able to do this, he at the same time would have better elucidated the nature of profit and rent, and probably would not have fallen into the fatal contradiction that can be seen in his subsequent arguments. Setting aside this point for a moment, however, it must be said that Smith’s reduction of profit and rent to surplusvalue (at least in fact), and his reduction in turn of surplus-value to surplus labor, were tremendous achievements within the history of political economy. The delusions of the Mercantilists and Physiocrats were completely dissolved. Smith finally achieved, at least to the extent possible from a bourgeois perspective, what they had searched for but had been unable to attain. There is no need for a product to be sold above its value because it already contains a surplus of value that is the outcome of workers’ surplus labor.8 This surplus-value, moreover, is not limited by any means to agriculture. Value is the crystallization of indiscriminate average human labor, while surplus-value is nothing more than one part of this labor that can be obtained anywhere the owner of the conditions of labor exchanges wages (objectified labor) for living labor.9 This correct understanding of the source of surplus-value, and as a natural result the understanding that surplusvalue can potentially be generated in any sphere of production, led Smith to a correct understanding of productive labor. Rather than viewing productive labor as limited to agricultural labor, or as labor that produces export products, he views it as labor in general that produces surplus-value, with surplus-value ultimately generated by labor being directly exchanged with capital. Smith notes: There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants. (Smith, 1970, pp. 429–430)

Smith goes on to write: But if the quantity of food and clothing, which were thus consumed by unproductive, had been distributed among productive hands, they would have reproduced, together with a profit, the full value of their consumption. (Smith, 1970, p. 439)

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We can see that Smith, in defining the concept of productive labor, views it as either the labor a worker ‘‘adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit,’’ as labor through which ‘‘[an employer] grows rich,’’ or as labor that ‘‘reproduce[s], together with a profit, the full value of their consumption.’’ Particularly in the second passage just cited, productive labor is clearly described as labor10 that creates value over and above wages, value over and above the value of the materials of subsistence consumed by the worker, i.e. a surplus in value (which Smith refers to as ‘‘profit’’). Only through exchange with such labor can a certain value become self-valorizing value – becoming capital. The concept of productive labor thus corresponds to the concept of capital, and could be referred to as labor that causes value to become capital, or (from a different aspect) as labor that is directly exchanged with capital. For Smith, the primary form of surplus-value is profit, not rent. Unlike the Physiocrats, who said that profit is paid from rent, Smith says that rent is paid from profit. This is because the capitalist entrepreneur, whether in the sector of industry or agriculture, directly employs the productive worker and exploits his labor, thereby being the first to come into possession of surplus-value. In this sense, and only in this sense, Smith is justified in referring to surplus-value in the passages above as ‘‘profit.’’

3. SURPLUS-VALUE AND PROFIT In the discussion of Smith’s concept of productive labor, I mentioned that profit is the primary form of the surplus-value obtained, and that in this sense we would have to accept his definition of productive labor as labor that generates profit. But even in this case we must note that profit in the general sense (i.e. profit as basically equivalent in content to surplus-value) needs to be distinguished, in terms of form, from surplus-value. Profit is only a phenomenal form in which surplus-value is manifested, albeit the primary one. First we must establish the category of surplus-value, and then we can begin to unfold the category of profit. At the same time, it is important to remember that profit in the general sense is completely different in substance from profit in the proper sense of the term. Indeed, according to Smith’s own theory, profit in the broader or general sense is subsequently divided into profit and rent. We thus need to clarify the distinction between the following three categories: (1) surplus-value, (2) profit in the broad sense, and (3) profit in the narrow sense.

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We have already seen that, despite creating a de facto concept of surplusvalue, Smith was unable to establish it as a single independent concept (as the natural result of not clarifying the concept of labor-power). He confused surplus-value with profit in the broad sense, drawn in by their identity of content, while confusing profit in the broad sense with profit in the narrow sense, befuddled by their identity of form. As a result, Smith fell into a fatal contradiction. According to Smith’s fundamental view, looked at earlier, the sole source of surplus-value is the surplus-labor of productive workers. This means that the quantity of surplus-value appropriated by a given capital, assuming other circumstances to be the same, will naturally be proportional to the number of workers hired and utilized by the capital, or the quantity of labor-power purchased and utilized. But capital is not solely expended on the purchase of labor-power. There is a need for a part of it to be expended on the purchase of material elements, such as machinery and raw materials. These material elements are an indispensable condition for the formation of use-values, and thus for the production of the commodity – and they consequently are indispensable to the production of value and surplus-value. The monopoly of one class over these material elements transforms laborers into wageworkers, and is without question a vital premise for the creation of surplus-value by these workers for capitalists. However, surplus-value itself does not arise directly from these material elements. This is a natural conclusion, as value in general is solely created by labor. Surplus-value only arises from the part of capital expended on the purchase of labor-power, whereas the other parts of capital bear no direct relation to the generation of surplus-value. One significant problem arises from this, which I would like to consider while tracing Smith’s own argument. In relation to this, we can find the following description in Chapter six: The value which the workmen add to the materials, therefore, resolves itself in this case [i.e. under capitalist production] into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected that from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock. (Smith, 1970, p. 151)

The first part of this passage is the core of Smith’s theory of surplus-value examined earlier, where he clearly states that the value which workers add to the materials is divided into two parts. It is not the value of the materials that is divided into two parts, but rather the newly created value that

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workers add to these materials. The value of the materials simply reappears temporarily, as is, as one part of the product’s value. Therefore, the part of value corresponding to these materials is merely compensation for the original value, and cannot be further divided into two parts. This is the natural conclusion according to Smith’s fundamental thinking on value.11 However, although Smith proposes a concept of surplus-value based in actual fact on surplus labor, in the same sentence he uses the term ‘‘profits’’ to refer to the surplus of value that was just defined as the value created by workers in excess of the wage compensation received. Smith also clearly states that profit is the employer’s compensation for the total capital advanced, and he is very careful to emphasize that this total capital encompasses the value of not only wages but the ‘‘materials’’ as well. A surprising confusion of concepts accompanies the failure to establish a category of surplus-value (and to distinguish between constant and variable capital). Smith first speaks plainly about the value added by workers above the wages they receive. Accordingly, this value-component would naturally be thought to correspond directly to the part of capital expended on wages, not to the total capital. If the term ‘‘profit’’ is used in relation to the total capital, then some other term needs to be added (such as ‘‘surplus-value’’) in relation to the part of capital expended on wages. Smith did not create such a term, however, and was unable to establish the category of surplus-value. Instead of unfolding profit from the category of surplus-value, Smith confuses the two, generating the first flaw in his theory of profit. At first glance, drawing a line between surplus-value and profit may seem a scholastic or formalistic distinction. But we need to be aware of the great significance the clarification of this difference of form has for the elucidation of the inner relations of capitalist production. The concept of ‘‘surplusvalue’’ is directly related to its source, so the term immediately calls to mind surplus-labor. In the case of ‘‘profit,’’ by contrast, its true source is completely buried, so it appears to stem from the total capital, as if arising from the character of accumulated value itself. For this reason, what is directly reflected in our everyday consciousness is not the truth of the matter, but its phenomenal form. We need to start from this distorted, upside-down phenomenal form to seek out the underlying internal relations – this is the significance of science. We have seen that Smith did in fact start from the phenomenal forms of profit and rent, ultimately reducing them to the surplus of value over and above the wages paid to workers, which was a tremendous scientific achievement. He should have then established a category of surplus-value,

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clarifying how and why surplus-value becomes profit and rent. This requires, first of all, clarifying the process of the transformation of surplus-value into profit in the broad sense. Yet, not only did Smith fail to do this, he ends up confusing the two concepts. Having confused surplus-value with its primary phenomenal form (profit in the broad sense), Smith goes on, as the natural outcome of the same mistaken method, to confuse profit in the broad sense with profit in the narrow sense (average profit). His confusion is manifested above all in the following passage, cited earlier: ‘‘He could have no interest to employ them, unless he expected that from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock’’ (Smith, 1970, p. 151). We need to recall the explanation provided by Smith just prior to this argument, where he does not subjectively explain ‘‘profit’’ from the ‘‘interests’’ of capitalists, but rather in a purely objective manner as arising entirely from the surplus labor of wageworkers. The natural corollary of that view is that the quantity of ‘‘profit’’ generated by a given capital will differ, regardless of the wishes of the capitalist, depending on the quantity of capital directed to the purchase of labor-power (all other conditions being the same). This cannot correspond to the total capital, as Smith had insisted. But Smith seems quite unaware of the contradiction between these two views. Smith, in refuting the vulgar view that profit is compensation for the capitalist’s labor of direction, goes on to address this in more concrete terms: The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten per cent, there are two different manufactures, in each of which twenty workmen are employed at the rate of fifteen pounds a year each, or at the expense of three hundred a year in each manufactory. Let us suppose too, that the coarse materials annually wrought up in the one cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The capital annually employed in the one will in this case amount only to one thousand pounds; whereas that employed in the other will amount to seven thousand three hundred pounds. At the rate of ten per cent therefore, the undertaker of the one will expect a yearly profit of about one hundred pounds only; while that of the other will expect about seven hundred and thirty pounds. (Smith, 1970, pp. 151–152)

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In a case where different factories employ the same number of workers for the same wages (assuming no difference in labor-time between them), how could one factory have seven-times more profit than the other one? If we follow Smith’s earlier explanation of ‘‘profit,’’ such a situation would be completely impossible. And if, in the real world, profit tends to be obtained in proportion to the total amount of capital – i.e. the tendency of an average rate of profit – this fact clearly runs counter to Smith’s explanation of ‘‘profit’’ above. Here a contradiction clearly exists. The fundamental cause of this contradiction is that Smith confuses surplus-value and profit, and also confuses surplus-value and average profit. Average profit is profit that has been socially averaged out, and profit itself is nothing more than transformed surplus-value. Therefore, average profit is premised on profit, while profit is premised on surplus-value. Average profit is certainly not the original profit or surplus-value. The task for science in this case is to elucidate how surplus-value becomes profit and how profit becomes average profit. Yet Smith, instead of clarifying this development, makes no formal distinction at all between them from the outset. Far from being able to solve the problem, he does not even pose it as such to begin with. All that remains within Smith’s system of thought, which lacks all of the developmental links, are mutually contradictory outcomes. Instead of understanding the relation between the law of surplus-value (an outcome of scientific analysis) and the law of average profit (a demand based on capitalists’ interests) in terms of being a connection between the internal relations and the necessary phenomenal form within the sphere of capitalist competition, Smith simply treats each as an undeniable truth. Moreover, he is completely unaware of the obvious contradiction between them. He simplistically positions two different assertions, from two separate viewpoints, without giving any thought to the relation between them. Ricardo, likewise, along with every other bourgeois economist, could not take one step beyond Smith’s grasp of the problem. In Ricardo’s case, moreover, the general concept of surplus-value, which Smith had occasionally glimpsed (albeit vaguely), is increasingly relegated to the shadows, while the concept of general profit and the corresponding concept of average profit are premised from the outset in a more thorough and uniform manner. Thus, within the thought of Ricardo, the inevitable outcome of incorrectly grasping the problem is revealed – in an ultimate and fatal form – as hopeless confusion within his theory of value. This was the result, at the same time, of Ricardo grasping the fundamental law of value in a more thorough and uniform manner than Smith had done.

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4. VALUE AND PRODUCTION PRICE 4.1. Smith’s View We are now in a position to comment on the contradiction within Ricardo’s theory of value, which was the ultimate deadlock of the Classical school. This concerns the relation between value and production price. Before doing so, however, it seems worthwhile to first consider the view held by Smith. I noted in the previous section that Smith was content to mix together a scientific viewpoint and the everyday consciousness of capitalists, carelessly juxtaposing the internal relations of a thing and its phenomenal forms. Smith did not perceive the difference between surplus-value and profit, so it is no surprise that he treated the relation between value and production price in a similar manner. According to his fundamental view, the value of a commodity depends on the amount of labor expended on its production. Of this labor, one part is the previous concrete labor from the used-up portion of the means of production, while the other part is the labor newly added in the final production process. If we set aside the former, the labor expended on the production of a capitalist product can be further divided into two parts: paid labor and unpaid labor. Paid labor is compensation for wages, whereas unpaid labor forms surplus-value.12 In other words, according to Smith’s fundamental view, the value of a capitalist commodity, setting aside the value of the means of production, is broken down into three parts: wages, profit, and rent. This value is thus the source of the revenue of social classes, rather than the value of a commodity being made up of wages, rent, and profit. What is posited initially is a given quantity of value, with this value broken down into wages, profit, and rent according to certain laws. It is not the case that these three components are posited from the outset, and then determine the magnitude of value. Imagine, for example, that a single apple is cut into three pieces, which are then handed out to three people. The part belonging to each person would depend on the size of the apple and the proportion at which it was distributed. It would be incorrect, clearly, to say instead that the overall size of the apple is composed of the three quantities that belong to these three people. Smith, though, seems quite unaware of the difference between these two propositions. He mainly presents his arguments on the source of surplusvalue and on the deduction of commodity value in Chapter six of The Wealth of Nations, even though it is entitled ‘‘On the Component Parts of the Price of Commodities.’’ When addressing the issue of the deduction of

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commodity value, Smith often switches over to a discussion of the component parts of value. Ultimately, he asserts that, ‘‘Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value’’ (Smith, 1970, p. 155), as if this were the natural conclusion to be drawn from his discussion of the deduction of commodity value. Wages, profit, and rent are suddenly transformed from the deducted parts of exchange-value into its fundamental source. No longer is human labor the fundamental source, with the magnitude of exchange-value determined by the labor expended on a commodity’s production. This is determined instead by the wages and rent a capitalist must pay, and the profit that he can normally expect for the total capital advanced. Instead of the value of the commodity being a given, determined by the duration of labor-time and then divided into three parts, Smith premises the three component parts and says that the commodity’s value is made up of their totality. Having completely overturned his original theory in this manner, he writes at the beginning of Chapter seven: There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock y . There is likewise in every society or neighbourhood an ordinary or average rate of rent y . These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place when they prevail. When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. (Smith, 1970, pp. 157–158)

The internal relations have now been completely overturned, with the concept of value replaced by ‘‘natural price.’’ In some cases Smith seems to lack the slightest awareness of the fundamental difference between these two concepts. He quite simplistically jumps from a scientific standpoint to the perspective of capitalists within the sphere of actual competition. In the everyday consciousness of capitalists, there is no awareness of the determination of value by labor, the proportion between the paid and unpaid part of wage labor, the formation of surplus-value through unpaid labor, or the transformation of surplus-value into profit and rent. These are processes that take place behind their backs, outside the realm of their awareness. Reflected in their consciousness, at best, is the final outcome of these processes, as given facts, such as the ‘‘natural’’ rates of wages, profit, and rent. The internal relations inevitably present themselves in an upside-down

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manner. To those who do not see the intrinsic developmental processes, results appear to be causes. Instead of value being a given, and the ‘‘natural’’ rate of wages, profit, and rent developing from it, the rates of wages, profit, and rent are taken as given that determine ‘‘value’’ (a term basically understood as the ‘‘natural price’’ that is the center or standard around which market prices fluctuate). Smith suddenly turns a theory of value deduction into a theory of value composition, directly replacing the concept of value with ‘‘natural price.’’ This is a precipitous shift from the standpoint of science to a vulgar consciousness, slipping from the sphere of internal relations into the world of phenomena.

4.2. Ricardo’s View The characteristic of Ricardo, compared to Smith, is that he always adheres to the standpoint of scientific analysis and seeks everywhere to defend the original determination of value. This is the basis of his contribution to the development of political economy. If one says (like Smith) that wages, profit, and rent are all components of a commodity’s value, their fluctuation would then be independent of the quantity of labor necessary for the commodity’s production, and the components themselves would be thought to raise or lower its value. This is precisely the view that Ricardo does his utmost to drive out. He says that, as a principle, the value of a commodity is consistently determined by the labor necessary to produce it, so fluctuations in wages, profit, and rent are certainly not the source of fluctuations in value. Wages, profit, and rent are not the components of a commodity’s value, but the divided-up parts of value. Ricardo asserts, therefore, that a change in wages naturally brings about a change in profit but does not alter the value of a product: The proportion which might be paid for wages is of the utmost importance in the question of profits; for it must at once be seen that profits would be high or low exactly in proportion as wages were low or high; but it could not in the least affect the relative value of fish and game y . No alteration in the wages of labour could produce any alteration in the relative value of these commodities; for suppose them to rise, no greater quantity of labour would be required in any of these occupations but it would be paid for at a higher price y . Wages might rise twenty percent, and profits consequently fall in greater or less proportion, without occasioning the least alteration in the relative value of these commodities. (Ricardo, 1996, pp. 27–29)

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Before I quit this subject, it may be proper to observe that Adam Smith, and all the writers who have followed him, have, without one exception that I know of, maintained that a rise in the price of labor would be uniformly followed by a rise in the price of commodities. I hope I have succeeded in showing that there are no grounds for such an opinion. (Ricardo, 1996, p. 40)

Ricardo, who thus establishes a principled relation between value, wages, and profit, goes on to pose the question of the relation between value and rent: It remains however to be considered whether the appropriation of land, and the consequent creation of rent, will occasion any variation in the relative value of commodities independently of the quantity of labour necessary to production. In order to understand this part of the subject we must inquire into the nature of rent, and the laws by which its rise or fall is regulated. (Ricardo, 1996, p. 45)

According to Ricardo’s investigation: The exchangeable value of all commodities, whether they be manufactured, or the produce of mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of production; but by greater quantity of labour necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most unfavorable circumstances; meaning – by the most unfavorable circumstances, the most unfavorable under which the quantity of produce required renders it necessary to carry on the production. (Ricardo, 1996, p. 49)

As a result of value being determined in this manner, says Ricardo, the capitalists engaged in production on the more favorable land will naturally obtain a sort of super-profit, which in certain cases will be transformed into rent. He notes, for example, that land constitutes the most important condition for agricultural production, but there are differences in land fertility and convenience of location, and when land is intensively used the ‘‘law of diminishing returns’’ dictates that a super-profit will naturally arise. Because the super-profit in this case solely depends on the natural conditions of the limited superior land, as long as certain individuals monopolize such land, competition among agricultural capital will drive this profit into the pockets of these landowners, which is precisely what rent is: The reason then, why raw produce rises in comparative value is because more labour is employed in the production of the last portion obtained, and not because a rent is paid to a landlord. The value of corn is regulated by the quantity of labour betowed on its production on that quality of land, or with that portion of capital, which pays not rent. Corn is not high because a rent is paid, but a rent is paid because corn is high. (Ricardo, 1996, p. 50)

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This also implies that Smith is thoroughly mistaken to view rent as one component of value (or of price – which is the money expression of value). If the high price of corn were the effect, and not the cause of rent, price would be proportionally influenced as rents were high or low, and rent would be a component part of price. But that corn which is produced by the greatest quantity of labour is the regulator of the price of corn; and rent does not and cannot enter in the least degree as a component part of its price. Adam Smith, therefore, cannot be correct in supposing that the original rule which regulated the exchangeable value of commodities, namely, the comparative quantity of labour by which they were produced, can be at all altered by the appropriation of land and the payment of rent. Raw material enters into the composition of most commodities, but the value of that raw material, as well as corn, is regulated by the productiveness of the portion of capital last employed on the land and paying no rent; and therefore rent is not a component part of the price of commodities. (Ricardo, 1996, pp. 52–53)

There are many points to note regarding Ricardo’s theory of rent, but we cannot deal with them at this level of discussion. Here it is sufficient to simply note his view that rent is not a component element of value. From the passages cited above, we can see the effort Ricardo made to thoroughly apply the original determination of value and to refute Smith’s upside-down composition theory of value. Ricardo opposed the composition theory of value in a very conscious manner, but he was unable to adopt any sort of critical stance toward the fundamental misconceptions at the basis of this upside-down view, such as the failure to distinguish between constant and variable capital, the confusion between surplus-value and profit, and the positing of a general rate of profit from the outset. Ricardo also fully accepts the concept of ‘‘natural price’’ which is the inevitable outcome of Smith’s upside-down view. As a result, a contradiction naturally arises within Ricardo’s theory of value, which is manifested in a more acute and fatal form than had been the case for Smith. The contradiction within Smith’s thought is the coexistence of two completely different standpoints, with no awareness of the relation between them. Smith simply juxtaposes two different views, from two different standpoints. In contrast, Ricardo endeavors to consistently adhere to a scientific analysis, but he accepts Smith’s points of departure and arrival, which are based on the direct observation of phenomena in the sphere of competition and thus completely incompatible with science. This means that the contradiction for Ricardo, unlike the case of Adam Smith, is inherent to the theory of value itself, appearing as something fatal to this theory. This breakdown in the theory of value, which the entire system of Classical political economy had been based upon, inevitably led to the system’s collapse, bringing this school of thought to an end.

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4.3. Formation of a General Rate of Profit Let’s consider this matter a bit further. In the earlier criticism of Smith’s theory of surplus-value and profit, we saw how profit rates can differ even when the rate of surplus-value is fixed, because surplus-value arises directly from the capital expended on the purchase of labor power, which Marx calls variable capital. The greater or lesser magnitude of surplus-value, when the rate of surplus-value is fixed, will thus exclusively correspond to the greater or lesser amount of variable capital. Therefore, even with the same rate of surplus-value, capitals of the same magnitude will naturally have different quantities of surplus-value if they have a different ratio of variable to constant capital so that their magnitudes of variable capital are different. The rate of profit is the ratio of surplus-value to total capital. This means that if the total amount of capital is equal but the quantity of surplus-value differs, the profit rate will naturally differ because of this different ratio. Assume, for example, that there is capital A and capital B, each with a value of 100. The constant capital of A is 80 and its variable capital 20, while B has a constant capital of 60 and variable capital of 40. If the rate of surplus-value for both is 100 percent, surplus-value would therefore be 20 for capital A and 40 for capital B (100 percent of 20 and 40, respectively), while the profit rate would be 20 percent for the former and 40 percent for the latter (surplus-value of 20 and 40, respectively, vis-a`-vis a total capital of 100). In other words, we are clearly dealing with unequal figures. The difference in the proportion of capital divided into constant and variable capital (i.e. the ‘‘value composition of capital’’) is obviously at the root of the difference in the rate of profit. But what fundamentally determines this proportion is the manner in which the means of production and labor-power are combined (i.e. the ‘‘technical composition’’), which is determined by the developmental level of productive power. This technical combination, however, will clearly differ in many cases between spheres of production that produce different types of products, and thus have different labor processes and production techniques. As a rule, therefore, the proportion at which capital is divided into constant and variable capital will differ between production spheres that produce different types of products. We know that the use of machinery is comparatively advanced in the sector of industry, for example, so that a greater proportion of capital is expended on machines and raw materials as opposed to wages, whereas in the sector of agriculture this proportion is smaller. It is also clear that similar differences exist between the various production spheres within the industrial and agricultural sectors.

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Not only is it possible, then, to suppose a difference in profit rates between different types of capitals, it must be considered inevitable. This conclusion is premised on commodities being sold at their values, so that their surplus-value is fully realized as profit in their sales prices. In other words, it is assumed that no substantial difference exists between value and price, and therefore between surplus-value and profit. Thus, as long as commodities are sold at their values, there would be a difference in profit rates between each sphere in which capitals are invested, according to the ‘‘organic composition’’13 of each capital. However, the reason profit rates would differ between spheres of production (on the basis of the above premise) is not limited to the organic composition alone. There are also disparities in the turnover times of capitals in different production spheres. This naturally results in a difference in the quantity of surplus-value that can be obtained in a certain period of time, bringing about differences in the rate of profit which is the rate of capital augmentation during a given time period. In terms of the problem at hand, however, there is no particular need to further examine turnover time; it is sufficient here to clarify that a difference in the rate of profit would necessarily exist between production spheres if commodities were sold at their values. A difference in the rate of profit obtained by capitalists in different spheres, however, clearly does not correspond to actual phenomena, not to mention that it is intolerable from the perspective of the capitalists’ own notion of fairness. Capitalists invest capital and engage in production to generate a profit. The capital investment is a ‘‘sacrifice’’ made in order to obtain profit, and everyone hopes to obtain the greatest benefit from the smallest sacrifice. A capitalist invests capital in a given sphere, not because the particular products have piqued his interest, but because he believes a high rate of profit can be obtained. If substantial differences in profit rates exist among production spheres, capital is naturally drawn from production spheres with a low rate of profit and concentrated in those where the rate is high. This shifting of capital, and the accompanying increase or decrease in the supply of products, as well as the increase or decrease in sales prices as the natural outcome, does not cease until the rate of profit is ultimately averaged out among production spheres. We know from reality that apart from temporary differences, or those based on special circumstances, profit rates in all production spheres will at least display a tendency toward this equalization. Here we have two things that are ultimately incompatible. If commodities are sold at their values, so that the surplus-value contained in them is fully

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realized as profit in their sales prices, a difference in profit rates would inevitably exist among the capitals invested in different production spheres. Yet, the capitalists’ notion of freedom and equality, and the incessant competition among them based upon this awareness, does not tolerate the continued existence of differences in profit rates among production spheres. This means that commodities must somehow be sold at a special price that differs from value in order for an equal profit to be attained in different spheres. In other words, commodities must be sold at a price that corresponds to the price of the labor-power and means of production expended on production (the cost of production for a capitalist or the ‘‘cost price’’ of a capitalistic commodity), to which is added a special type of profit with an average general proportion to the amount of capital advanced (‘‘average profit’’) – so that the determination of the price is independent of the particular surplusvalue contained in the commodity. This special price is the commodity’s production price. The sale of commodities at this special price, thus constituted, secures the equalization of the profit rate in each sphere of production. It is necessary to consider what significance this divergence of commodity price from value has for the ‘‘general’’ determination of value (determination of value by labor), while also taking into consideration the fact that this is not a mere exception but a principled and inevitable phenomenon.

5. IMPASSE OF THE CLASSICAL SCHOOL The Classical economists, however, were unable to properly account for the fact that price diverges from value, which is not surprising since they did not properly pose the problem to begin with. These economists, under the sway of a bourgeois outlook, were above all incapable of considering how a general rate of profit, common to each sphere of production, comes into existence. Instead of developing the concept of general profit from the law of value and surplus-value, and on the basis of the concept of value, they premised a general rate of profit. Once a general rate of profit has been premised, the natural conclusion is production price that differs from value. And the Classical economists thus naturally posited production price from the beginning. Instead of developing the concept of production price from value, they either juxtaposed it with value, as something that bears no relation to it, or directly equated the two. This means they grasped the problem in a form that was unsolvable from the outset. We have seen that Smith starts from the determination of value by labor (albeit in a confused form), to arrive at surplus-value based on unpaid labor,

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which was a tremendous advance for political economy. But the thread of his argument breaks down as soon as he reaches this point. Smith, in a manner totally unrelated to the prior discussion, then leaps into all of the processes of development. Once a general profit rate has been premised, the natural conclusion is a composition theory of price, and Smith lines up a composition theory of price next to a deduction theory of value, placing a composed price14 next to intrinsic value in a parallel, rather than developmental, relationship. He treats the composition theory as having independent, inherent significance rather than being a particular manifestation, within the world of competition, of the internal relations. He thus poses the problem in an upside-down and vulgar manner, rather than in an understood and scientific form. Turning to Ricardo, the case is somewhat different. He consistently abstracts from the external appearance within the realm of competition, vehemently refuting Smith’s composition theory of price. In one sense, this is Ricardo’s strength compared to Smith, as noted already. Still, despite being opposed to Smith’s composition theory, Ricardo does not take a critical stance toward the idea of a general profit rate that underlies this theory. Like Smith, Ricardo premises a general rate of profit rather than developing it from value and surplus-value. Once a general rate of profit has been premised, a composition theory of price is the natural conclusion. But Ricardo accepts the premise, while trying to drive out its inevitable conclusion. This attempt is clearly doomed from the start. Ricardo rejects the composition theory of price, while inheriting from Smith the idea of natural price, which is itself a composed price. Ricardo treats this natural price, which is premised on a general rate of profit and therefore has as one of its component elements general profit calculated on the basis of this rate,15 as the fundamental source that is then broken down into wages and profit. Instead of consistently viewing natural price as something composed in the manner of Smith, Ricardo views it as intrinsic value – not as price grasped separately from value. The contradiction in Ricardo’s case thus takes on a more fatal form than it had with Smith. This is natural given Ricardo’s claim that production price is equal to value, which is not in fact the case. Smith’s error had simply been to leap over the mediating processes between surplus-value and the formation of the general profit rate. Instead of trying to develop the general rate of profit from surplus-value, Smith treats it as something that bears no relation to surplus-value. Once the developmental links between surplus-value and the general profit rate are correctly established, a composition theory of price is certainly not a mistaken line of thought. Indeed, the process of price composition must inevitably occur

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when the law of value actually unfolds within the sphere of competition. However, because Smith’s argument is constructed on a mistaken basis, it inevitably assumes an upside-down and contradictory form.16 Yet, Ricardo fails to understand the intrinsic meaning of Smith’s upsidedown view. Instead of positing the composition theory of price upon a correct foundation, Ricardo rejects it entirely. He thus compounds Smith’s error, in a sense. That is to say, like Smith, Ricardo is unable to developmentally grasp the movement of actual price within the world of competition on the basis of the movement of intrinsic value. But by firmly rejecting the process of price composition, which he does not understand, Ricardo forcefully identifies it with the process of value deduction, thereby intentionally confusing production price and value. As a result, Ricardo’s advance beyond Smith at the same time reveals his weaknesses. Still, this does not mean that Ricardo fell below the level of Smith. Rather, we are dealing with the logical penetration of a fundamental error common to both men: the lack of developmental links within their thought.17 The characteristic lack of development within Ricardo’s thought arose inevitably from the delusion that the capitalist mode of production is a natural, eternal mode of production. His system, founded upon this view, naturally reaches an impasse. And this impasse is manifested in the most thorough form, just spoken of, where production price is closely equated to value. The inevitability of the collapse of Ricardo’s concept of ‘‘value’’ – which also signifies ‘‘production price’’ – should be clear from our explanation thus far. As long as the term value refers to intrinsic value determined by the quantity of labor necessary for production, profit rates will inevitably vary depending on differences in the spheres of production, and therefore depending on differences in the organic composition of capital and turnover times. As long as ‘‘value’’ for Ricardo in fact signifies production price, however, it is naturally assumed that an equal profit rate is generated in every sphere. Here we have the problematic nature of Ricardo’s concept of value.18 The determination of ‘‘value’’ by labor is the fundamental principle that underlies his entire system, and the abandonment of it would signify the system’s immediate collapse. At the same time, his notion of ‘‘value’’ needs to address the natural and self-evident fact that an equal profit is generated in every production sphere, for to deny this fact would be a denial of reality itself. All of the difficulties Ricardo faced from falling into this dilemma are manifested, in an extremely confused form, in Sections four and five of Chapter one in Principles of Political Economy and Taxation.19 One fundamental reason Ricardo is unable to clearly pose the problem, even

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according to his own mistaken method, is that (1) he fails to clarify the distinction between constant and variable capital, or clarify the concept of the turnover of capital and (2) he confuses the problem of a fluctuation in production price through a general fluctuation in wages20 with the particular problem that arises from a disagreement between value and production price. If we bring some order to Ricardo’s confused argument – by drawing on the ideas of Marx regarding the distinction between constant and variable capital and his concept of the turnover of capital, while detaching the problem arising from a disagreement between value and production price from the problem concerning the influence a general fluctuation in wages has on production price – what Ricardo is basically attempting to say is as outlined in the following paragraph. The magnitude of the value of a commodity, or the purchasing power it has over another commodity (which is the same thing),21 Ricardo argues, is in principle determined by the quantity of labor necessary to produce the commodity. However, this undergoes a revision when there are differences in the organic compositions or turnover times of capitals. Indeed, if the value of each of the products of capitals with such differences is determined solely by the quantity of labor necessary for their production, and the products are exchanged precisely in proportion to this quantity of labor, the rates of profit obtained by each capital would inevitably differ. However, this situation does not occur in reality. The sale of products must generate a uniform rate of profit for all capitals. Thus, products of capitals with a relatively greater amount of constant capital or longer turnover times will be sold at prices that are higher than the quantities of labor necessary for their production. This, Ricardo reasons, is only possible because these commodities are ‘‘more valuable.’’ He says that being ‘‘more valuable’’ is the normal compensation for ‘‘profits being accumulated as capital’’ or a ‘‘just compensation for the time the profits were withheld’’ (Ricardo, 1996, p. 35). In Ricardo’s mind, the fact that the price of a commodity (or what he calls its ‘‘value’’) diverges from the quantity of labor necessary for its production does not negate the validity of the law of value determination according to the quantity of necessary labor. He argues, first of all, that this divergence only arises in the exceptional cases just mentioned; and second, that even in such cases the quantity of labor for production remains the primary factor of value determination, with a change in this quantity immediately bringing about a fluctuation in the magnitude of value. I think that this is the gist of Ricardo’s argument. Here we encounter the fatal self-contradiction brought about by confusing value and production

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price, and Ricardo’s completely ineffective attempt to shake free of this contradiction. The weakness of his argument was already partially exposed by Thomas Malthus, who wrote: [Ricardo] has not confined himself to the assertion of what he calls the value of a commodity is determined by the quantity of labour worked up in it; but he states, in substance y that commodities exchange with each other according to the quantity of manual labour worked up in them y . Now this proposition is contradicted by universal experience. The slightest observation will serve to convince us, that after making all the required allowances for temporary deviations from the natural and ordinary course of things, the class of commodities subject to this law of exchange is most extremely confined, while the classes, not subject to it, embrace the great mass of commodities. Mr. Ricardo, indeed, himself admits of considerable exceptions to his rule; but if we examine the classes which come under his exceptions, that is, where the quantities of fixed capital employed are different and of different degrees of duration, and where the periods of the returns of the circulating capital employed are not the same, we shall find that they are so numerous, that the rule may be considered as the exception, and the exception the rule. (Malthus, 1963, pp. 26–27)

Malthus, instead of developing a correct theory of value from his criticism of Ricardo, ends up constructing a vulgar system of thought. And this was natural considering his standpoint. Still, this does not alter the fact that this criticism struck a fatal blow to Ricardo’s theory. We have seen how the production prices of commodities in different production spheres diverge from their intrinsic values. It is a rare exception, and completely random, for a commodity’s production price and its value to be identical. Nevertheless, Ricardo seeks to defend his theory of value by premising, as a principle, this exceptional correspondence between production price and value. The inappropriateness of this goes without saying, and Malthus exposed this weak point. Ricardo’s defense of his theory does not consist solely of the argument addressed by Malthus above. Ricardo adds that even when value diverges from the quantity of necessary labor, the quantity of necessary labor does not cease to be the primary factor in value determination, as can be perceived from the fact that a change in this quantity of labor will usually result in an immediate fluctuation in the magnitude of value. For Ricardo, therefore, the divergence merely signifies an additional factor mixed in with the primary one. Moreover, he argues that there is simply no comparison between the importance of the two factors in terms of their influence on the magnitude of value. This claim, however, does not effectively defend the labor theory of value. Only by claiming that human labor is the sole source of value can the labor theory of value claim a reason to exist. The recognition of sources of value other than human labor itself signifies a rejection

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of the labor theory of value and a capitulation to vulgar political economy. Ricardo argues that a product of capital with a relatively high organic composition has greater value than that determined by the quantity of labor necessary for its production as a ‘‘just compensation for the time the profits were withheld’’ or as a result of ‘‘profits being accumulated as capital.’’ But if such an explanation were valid, it would be more logically consistent to say that the same holds true for profit in general, rather than there being ‘‘more value’’ in this one case alone. Ricardo’s line of thought ultimately leads to the Trinity Formula, where profit is said to arise from capital, rent from land, and wages from labor. The only escape for Ricardo from his contradictions, therefore, is through a door leading to a vulgar system of thought. It was thus unavoidable, for both social and logical reasons, that Classical political economy after Ricardo was transformed into vulgar economics.

NOTES 1. In the second chapter of The Wealth of Nations [Smith, 1970, pp. 117–119], there is a direct expression of Smith’s view that the system of private property and the individualism particular to it are natural and founded upon human nature, which results in his mistaken idea that commodity production – which is merely one of the particular forms of the division of labor, where this division of labor is achieved through product exchange – is the only form of the social division of labor. It is true, as Smith writes in Chapter two, that the social division of labor was not ‘‘originally the effect of any human wisdom, which foresees and intends that general opulence’’ (Smith, 1970, p. 117), and it was spontaneously generated rather than carried out in a consciously planned way. And it is not necessarily mistaken to say that this arises from a tendency within the character of human beings, in the sense that we are social animals, always engaged in social production. But it is clearly mistaken for Smith to speak of the human tendency that generates this division of labor as ‘‘the propensity to truck, barter, and exchange one thing for another’’ or as the ‘‘same trucking disposition which originally gives occasion to the division of labour,’’ or to say that ‘‘without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted’’ (Smith, 1970, pp. 117, 119). The research of Georg Ludwig von Maurer and Lewis Henry Morgan, as well as many other scholars, has shown in the case of various cultures that the most ancient human societies engaged in communal production. But we do not need to go that far back into the past. Even today’s family provides an example, albeit in an infinitesimal and distorted form, of a division of labor based upon the same basic principle as those ancient societies. For instance, when a mother mends clothing or a son prepares food for a meal, this is not carried out through the actions of ‘‘truck, barter, and exchange’’ where it is said, ‘‘this is mine and that is yours’’ and ‘‘I’ll give you this for that.’’ This is certainly not

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made possible by the products being brought ‘‘into a common stock’’ by means of the ‘‘general disposition to truck, barter, and exchange.’’ Instead, this labor-power exists to begin with as one part of the family’s communal labor-power, operating as one of its organs. The products of their labor, likewise, do not pass through the process of exchange, but directly and literally (rather than figuratively) become the family’s ‘‘common stock.’’ Smith himself says at the beginning of The Wealth of Nations, where he raises his famous example of pinmaking, that the individual workers’ products are not mutually exchanged as commodities. The link between each of the workers in this case is established through the mediation of a capitalist purchasing the labor-power of multiple workers, and these workers gathered together then being distributed to the various sections of the pin factory in a planned manner. Smith does not overlook the essential differences in the way the division of labor is formed, writing the following just before raising the example of pinmaking: ‘‘[In] those trifling manufactures which are destined to supply the small wants of but a small number of people, the whole number of workmen must necessarily be small; and those employed in every different branch of the work can often be collected into the same workhouse, and placed at once under the view of the spectator. In those great manufactures, on the contrary, which are destined to supply the great wants of the great body of the people, every different branch of the work employs so great a number of workmen, that it is impossible to collect them all into the same workhouse. We can seldom see more, at one time, than those employed in one single branch. Though in some manufactures, therefore, the work may really be divided into a much greater number of parts, than in those of a more trifling nature, the division is not near so obvious, and has accordingly been much less observed’’ (Smith, 1970, p. 109). The ‘‘great manufactures’’ refers to the system of the social division of labor formed through the links between products (commodities), and Smith above all can be thought to have in mind the totality of all of the industries that participated in the preceding production for a completed item (for example, at the end of the same chapter Smith discusses how in ‘‘civilized and thriving countries’’ the production of even the coarse clothing of the ‘‘day-labourer’’ is the result of cooperation between a variety of industries). Of course, it could be said that he is using the term ‘‘great manufactures’’ to describe the overall system of the social division of labor in a relative sense, or that this is somewhat tongue-in-cheek, but considering the aim of this section, his focus seems to be on identity at the expense of emphasizing distinction. He does not clarify the essential difference between the two elsewhere in his book, however. Even when he has the best opportunity to do so, at the beginning of Part two where he addresses the relation between capital accumulation and the division of labor, Smith seems quite unaware of the issue itself. Marx was the first to thoroughly examine the essential difference and reciprocal relation between the social division of labor and the division of labor within manufacturing. In Chapter fourteen of Capital, particularly Section four, this problem is thoroughly elucidated. I should note, finally, that saying commodity production is not the sole form of the social division of labor (and that therefore capitalist production is not the only means of dividing labor among the various production processes) certainly does not negate the fact that this form and method have historical necessity within the

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development of social production. The error made by Smith was to view this historical necessity as a natural or universal necessity. 2. My explanation of the particularity of commodity production and the essence of value in the main body of this paper is quite simple, which conversely may make it difficult for many readers to understand, so I would like to offer an additional explanation here. I have placed the explanation in the Note because it pertains to the principles of political economy, not its history, but I want to underscore the fundamental importance of this issue. Commodity production, needless to say, is also a type of social production, wherein commodity producers do not produce the objects they themselves need through their own labor. If that were the case, it would be possible for them to remain unrelated to each other; but in fact a social division of labor is carried out. Commodity producers, instead of producing the objects they need through their own labor, engage in the production of a particular item that is provided for the use of other commodity producers, and in return have their own needs met by the labor of these other commodity producers. In order for this to take place, there is a need, first of all, for the total labor of the commodity producers engaged in the specialized production of various things to compose an organic system as the social division of labor, thereby integrally responding to the needs of society as a whole. That is to say, in order to comprehensively respond to the various needs of the entire society, the total labor-time of society must be distributed to the various spheres of production. Unless this is achieved, in some manner or form, it is impossible for the various things that society requires to be produced in line with necessity; in that case not only would the social division of labor not be carried out in an ideal manner, it could not be carried out at all. Secondly, in order for a social division of labor to be feasible, wherein a person produces a particular use-value for other members of society rather than producing by himself all of the things he requires, and then has his own needs met by the products of the labor of other members of society, it is necessary for distribution to be decided upon in some manner or form so that the producers are able to receive a certain portion of the total product of society. Unless this is determined, social production is not feasible. These two points are the general conditions for social production, and without them being realized in some form or another social production cannot occur. Commodity production is no exception. But the manner in which it is realized under commodity production is fundamentally different from other cases. In other forms of social production, even if there are differences in the manner of determining how to allocate the total labor-time of society to the various production spheres and distribute the total product of society to the various members of society – whether based on the will of a dictatorial individual (or group of individuals) or on a democratic consensus; and whether done in a basically arbitrary manner or instead based on tradition or carried out in a planned fashion – this is always carried out according to some decision based on human will. Things are different in the case of commodity production, where there is no person who makes such decisions. A commodity producer does not engage in the production of a particular thing according to someone else’s direction, but rather completely in line with his own free will and decisions, according to his own responsibility and calculations. The labor-power of the producers is their own private capability as

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autonomous personalities who constitute the subject of private property, and therefore the labor that they expend is carried out as a private matter. Since the laborpower itself is not social, labor also does not directly have a social character. It remains individual labor. The products produced do not belong to society, therefore, but rather come into the producer’s individual possession, so they cannot be freely disposed of by society. In order for society to decide on the distribution of products, it would have to possess them, just as one cannot freely dispose of something without possessing it. If there is no one to determine the method of organizing the division of labor and of carrying out distribution, how exactly is commodity production feasible as a system of social production? Production relations between commodity producers are not formed as direct relations between human beings, but rather are established through the detour of exchanging their products as commodities. We need to consider how the production relations between commodity producers are established through the exchange of their products as commodities, and how the exchangerelation between the commodity producers’ products as commodities mediates the relations of production between them. We know from the discussion thus far that the most fundamental condition for social production to be carried out is the social integration, in some manner, of the labor of individuals so that it becomes one part of society’s total labor. The labor of commodity producers, however, is carried out as private labor, not socially integrated labor. Still, labor must come to have the substance of being one part of the total labor of society, as something that constitutes the overall system of the social division of labor. This represents a fundamental contradiction unique to commodity production. The problem comes down to identifying how this contradiction is mediated via the relation of exchanging products of labor, or locating the ‘‘moment’’ within the exchange of commodity producers’ labor-products through which private labor acquires Determinate Being (Dasein) as social labor. Commodities come in many varieties and are diverse as use-values, which is precisely why they can be exchanged for each other. This exchange presupposes that the use-values of commodities are different, but on the basis of this alone exchange will not be carried out. It is also premised that the thing possessed by person A must be superfluous for him while being useful to person B, and vice-versa for person B. In this way they are first able to exchange their products. There is no question that this is a condition for any sort of exchange to take place, but on the basis of this alone the exchange of products as commodities will not necessarily immediately occur. For instance, if a child with an extra spinning top and another child with extra playing cards exchange these items, we are not dealing with commodity exchange. The children’s exchange does not mediate the establishment of a system of social production between them. What characterizes the exchange of commodities, to repeat, is not merely the mutual difference between things possessed by people as use-values, or the relation between these things and the needs of human beings, but rather a relation whereby commodities are equal as value despite being different as use-values. Commodities as use-values come in an infinite variety, but as value they are indistinguishable. This is why commodities all have the form of being worth such-and-such yen in gold (i.e. price). And the indication of value in price is the ‘‘moment’’ whereby the labor of the commodity producers first comes to obtain unity.

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The labor of commodity producers does not directly have social unity, nor does it have a social character. This is the inevitable outcome of labor-power itself not being social. As long as labor-power is private, rather than social, labor as the functioning of this labor-power also remains private and cannot be social. In the case of commodity production, labor-power is not socialized to begin with, nor does it exist as society’s total labor-power that is expended for various production purposes (as tailoring labor or weaving labor, for example). If that were the case, labor in an active state, from the moment it is carried out, would have a social character in its natural form, i.e. directly as labor itself or as specific concrete labor. The labor of commodity producers, however, is objectified in products, forming their value. As value, all labor is indiscriminate, differing only quantitatively – not qualitatively. In this form, the different types of labor of commodity producers first gain unity, thus becoming social labor; i.e. in the form, first of all, of the character of the product of labor, rather than the character of the labor itself, and secondly, not as use-values for some particular purpose, but in the form of the indiscriminate quality of value. Labor thus comes to have Determinate Being as one part of the total labor-time society expends to satisfy its aggregate needs; as one part of the total labor-power expended by society. The social relations between producers in the case of commodity production are thus established in a manner completely contrary to that of a planned economy, with everything appearing upside-down. Instead of there first being relations between human beings, followed by the carrying out of social production, there first is the independently carried out exchange of products of private labor, which are equated as value in this exchange, through which the labor of commodity producers becomes identical in terms of producing value and is reduced to indiscriminate abstract human labor. This is how the labor of commodity producers obtains unity in a specific form, becoming one part of the total labor-power expended by society. Value, in other words, is the independent form assumed by the private labor of commodity producers in order to become social labor, forming a ‘‘moment’’ that mediates the fundamental contradiction of commodity production noted above. Commodity production develops along with this ‘‘moment’’ (value), developing at precisely the same pace as it does, while on the other hand the development of value means that products have become commodities; i.e. they exist not merely as use-values but at the same time as value. This means that the contradiction particular to commodity production is resolved in the form of the commodity as the direct unity of use-value and value, so that the contradiction is manifested in the more concrete form of being a contradiction that pertains to the commodity. The question then becomes how the commodity unfolds and resolves this contradiction, and to clarify this we above all need to elucidate the necessity for the commodity of an independent form for it to express its own value. If we say that a commodity is both use-value and value, this is something that can first be perceived through theoretical consideration, and the inherent value of a commodity – the fact that there are ten hours of social labor included within it, for example – cannot be expressed as is. This is natural from the perspective of the formation of value just explained. Precisely because the labor of commodity producers does not exist as a certain quantity of social labor, it only first obtains unity in terms of being abstract general labor that produces value (common to the producers’ products), thus becoming social labor. This occurs through the exchange of the products of the

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producers’ labor and the relation whereby their products are mutually equated within exchange. This means that social labor-time does not exist from the outset. Not only does it not exist within labor in an active state, it does not directly exist in an objectified state. If it did, it could be indicated as is, as labor-time. But in that case labor would not be objectified to become value and products would not become commodities. The value of a commodity is not indicated as labor-time because the labor of the commodity producer is not directly social labor, and therefore the labor included in the product is not directly social labor, so that the product of this labor cannot be grasped as the product of directly social labor. How, exactly, is the value of a commodity indicated? As long as a commodity cannot indicate this itself, it is indicated by the other commodity with which it is in a relation of exchange. But in the case of this other commodity as well, its natural form is its use-value – not value – so it does not have a form of value in addition to its natural form. The natural form of this other commodity must therefore become the form of value. This is indeed what happens, as should be clear from the fact that today the value of every sort of commodity is indicated in the form of a certain quantity of gold. But whether gold, or something else, how is it possible for the natural body of a commodity (its material form) to express the value of another commodity, thus becoming the form of value? This is the crux of the problem regarding the value-form, which Marx elucidates in Section 3a of the first chapter of Capital, where he traces back the development of the form itself, and by doing so thoroughly solves the riddle of money. But here we will have to omit this explanation, as well as the explanation of the development of the contradiction of the commodity within the real process of exchange, the necessity of the formation of money, and the manner in which money mediates the contradiction of the exchange process. 3. Smith mistakenly grasps this quality in the individualistic and subjective form of the ‘‘toil and trouble’’ required to obtain a thing. 4. Here ‘‘object-like’’ character refers to the fact that labor only first becomes value through objectification in a crystallized form in a product because living labor, despite forming value, is not value itself nor does it have value. 5. My criticism of Smith is based on the fact his argument is premised on the commodification of labor-power. Smith says that the ‘‘labor’’ qua commodity ( ¼ labor-power) of the wageworker, which is exchanged for wages, is unchanging in value and therefore an invariable measure of value. This is a view that has generally been offered since the time of Ricardo, and at the same time seems the most ‘‘reasonable’’ (or only possible) argument from the common viewpoint of economists. It is clear from the context that Smith is saying that labor is an invariable measure of value in the sense of an external measure like gold or silver. But since a thing can only function as an external measure if it is a commodity itself, for Smith the ‘‘labor’’ that is an invariable measure of value must naturally be the ‘‘labor’’ (-power) of wageworkers. The same conclusion could be reached if he were speaking of the value of labor. The labor of independent commodity producers is objectified in products to form value, but this labor itself is not a commodity, and therefore is not value nor does it have value. What Smith calls labor is ‘‘labor’’ that itself is sold as a commodity, i.e. the ‘‘labor’’ (-power) of wageworkers. As long as it is understood in this manner, Smith’s error is thinking that what pertains solely to labor as the substance of value can also pertain to ‘‘labor’’ as a commodity.

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It can be said that labor forms the substance of value, so that the magnitude of value is determined by the quantity of labor that forms its substance. If there is a change in productive power, the given quantity of labor to produce a commodity will change, and therefore its per-unit magnitude of value will also change, but there is no change in the magnitude of value formed by a given quantity of labor. The magnitude of value is determined by the quantity of labor necessary for production. In this sense (and only in this sense), ‘‘equal quantities of labour, at all times and places, may be said to be of equal value.’’ Smith, however, does not say that an equal quantity of labor will always form an equal quantity of value, but that equal quantities of labor always have equal quantities of value. He also does not say that the quantities of products created with equal amounts of labor will increase or decrease depending on changes in productive power whereas what changes as a result is merely the per-unit value of the product not the magnitude of the value formed by a given quantity of labor; Smith says rather that the amount of commodities that can be purchased with the same amount of labor will at times increase or decrease, but that what changes is not the value of the labor that purchases the commodities. Ultimately, instead of saying that the labor necessary for production forms the substance of value, so that it is the intrinsic measure of value, Smith says that labor is the sole commodity whose value does not change, so that it is an invariable measure in the sense of being an external measure whose own quantity is used to indicate the value magnitudes of other commodities. He has thus clearly confused two different things. Smith confuses ‘‘labor’’ as a commodity that is exchanged for wages with the labor necessary for production (which forms the substance of value and is the intrinsic measure of value). He thinks that what is actually only true of the latter, can also be said of the former. This is obviously a mistake, but if we consider his view further, we can see that even prior to this he had grasped the production process in a distorted form by comparing it to a relation of exchange between wage-labor and wages. That is, he grasps the production process as a process of exchange between man and nature, and labor as the ‘‘first price’’ that each person pays in this exchange (the primary sacrifice each person must make to obtain goods), while products are grasped as the natural compensation or wage given for this labor. All products are evaluated according to the ‘‘first price’’ paid by each person in this exchange (in terms of labor as the amount of a person’s ‘‘ease, liberty, and happiness’’ that must be sacrificed and ‘‘the toil and trouble of acquiring it’’), and what is exchanged in proportion to this is said to be ‘‘nature.’’ Thus, labor as the ‘‘real price’’ of commodities is said to be precisely the ‘‘real measure of the exchangeable value of all commodities’’ and therefore the invariable measure of value as well. As long as the fundamental relation between value and labor is grasped in this individualistic and subjective manner, it is not necessarily unnatural for Smith to think that once the ‘‘accumulation of stock’’ has been achieved, so that labor is carried out by wageworkers, the real and thus invariable measure of value is labor as wage-labor, not the labor necessary for production. This is because, from the outset, Smith understands the labor necessary for production as the primary sacrifice made by a person in exchange for the product, and the product as the ‘‘quantity of goods which he receives in return for it,’’ so that ultimately the labor necessary for production is considered as a sort of wage-labor. It is not unreasonable, then, for Smith

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to think that, with the accumulation of capital, wages in the proper sense of the term are the real and invariable measure of value. In this case, the person who directly makes the sacrifice of labor for the product is the wageworker, not the independent producer, and the exchange is made with a capitalist, not with nature. At the same time, instead of the worker receiving the entire product of his labor as a ‘‘quantity of goods which he receives in return for’’ his labor, he simply receives part of this from the capitalist. As for how much is received from whom, Smith says (based on his individualistic, subjective view of value) that the worker ‘‘must always laydown the same portion of his ease, his liberty, and his happiness’’ for the same amount of labor, and that labor only has value itself in the sense of this sacrifice, so that value is created through the sacrifice made to receive the good. Therefore, Smith writes: ‘‘The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them y . Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only’’ (Smith, 1970, p. 136). These arguments are from Chapter five of The Wealth of Nations, where Smith is dealing with the situation prior to the accumulation of capital, but at first glance his arguments seem to be particular to wage-labor, and this has sometimes confused scholars. The reason it appears as such is that when initially considering the determination of value by the labor necessary for production, Smith was unable to critically abstract from the new relation that accompanies the transformation of labor into wage-labor and its phenomenal form, and instead of developing the wage-labor/ capital relation based on the determination of value by the labor necessary for production, he ends up with a distorted grasp of the latter by inferring it from the former, and thus, despite intentionally not discussing the circumstances particular to wage-labor, he ends up appearing to do so; even though his actual aim is merely to elucidate the general, fundamental principles of the value of a commodity and the measure of value. This is precisely why in Chapter five, even though Smith speaks of wages, neither capital nor profit are dealt with. It is in Chapter six that he first discusses the accumulation of capital and generation of profit. 6. When Ricardo criticized Smith he should have focused on and elucidated this point. If he had done so, he at the same time would have been able to reach a deeper understanding of value, and with this, a grasp of the essence of money. But this was impossible given the limitations from his bourgeois perspective. 7. We can find similar views on rent expressed in many parts of The Wealth of Nations, including Chapter eight [Smith, 1970, p. 168]. 8. We have already seen that Smith thought the law of value no longer regulates the exchange of products when the entire product of the worker no longer belongs to him, but his fundamental view on the source of profit and rent refutes his own mistaken view. His fundamental view clearly premises that products are exchanged according to their value. 9. In terms of this point as well, Smith’s correct view is not always consistently stated, and at times he reverts to the position of the Physiocrats, as in Chapter five of Book Two [Smith, 1970, pp. 462–463].

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10. In the definition of productive labor, Smith at times falls into remarkable confusion. His views in the passages I quoted present the most appropriate definition from the perspective of capitalist production, and therefore from the perspective of the tradition of political economy. And based on his groundbreaking discovery of the source of surplus-value, he was the first to pose, in a correct form, a problem that had been incorrectly and one-dimensionally grasped by previous economists (Mercantilists and Physiocrats). But Smith, in a completely careless fashion, juxtaposes this definition with other definitions in The Wealth of Nations, paying little attention to the existence or non-existence of a relation between them. For example, he defines productive labor simply as labor that ‘‘produces a value,’’ but immediately after this says that a characteristic of productive labor is that it ‘‘fixes and realizes itself in some particular subject or vendible commodity’’ and that it is necessary for the commodity to last ‘‘for some time at least after that labour is past’’ (Smith, 1970, p. 430). There are various factors that might explain why Smith fell into such confusion, but we do not have space to discuss this in detail here. For more on this, and on the concept of productive labor in general, readers can consult the first volume of Marx’s Theories of Surplus-value. 11. Smith says here, ‘‘value added to the materials,’’ but as long as we are dealing with the topic at hand, it is clear that the machinery, tools, and the other means of labor should be grouped together with the ‘‘materials.’’ However, the following differences between them exist. Whereas the raw materials are completely used up in the labor process, the means of labor continue to maintain their original shape and are able to carry out their function repeatedly rather than only one time, so the value of the means of labor are transferred to the products over the entire period that the means are of use, so that in each product only one part of the value of these means is transferred. This difference bears an important relation to the problem we are considering, but at this stage this particular issue can be set aside. What needs to be emphasized here is that, (1) the value of the used-up means of production – both the raw materials and means of labor – is merely transferred to the product, as is, and is certainly not the source of new value, and (2) the value-component of the capital invested in the means of production is not itself value that augments and bears no direct relation to the production of surplus-value. From this perspective, capital needs to be clearly divided into two parts: the part expended to purchase the means of production, and the part expended to purchase labor-power. The value of the former does not change in the production process, so it is fittingly called constant capital, whereas the value amount of the latter does change (augment) and is thus called variable capital. This is the most essential distinction as far as capital is concerned, and this awareness is indispensable to an understanding of capitalist production, although no one prior to Marx had clearly grasped this. Smith implicitly makes this distinction when he clearly states that the ‘‘value which the workmen add to the materials y resolves itself in this case into two parts,’’ but he was not aware of the great significance of his own statement. At any rate, Smith did not establish a distinction between constant and variable capital. This corresponds to how he arrived at a de facto understanding of surplus-value but was incapable of consciously establishing the concept itself, which ultimately stemmed from an inadequate understanding of the source of surplus-value based on a failure to grasp the concept of labor-power.

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12. We have seen that Smith calls surplus-value ‘‘profit,’’ which is further divided into profit in the narrow sense and rent. 13. Marx uses the term ‘‘organic composition of capital’’ to refer to the value composition from the perspective of it being determined by, and reflecting, the technical composition of capital. 14. Smith understands this composed price as the ‘‘natural price,’’ but natural price is nothing more than the production price grasped in a mistaken form; understood in terms of having intrinsic significance itself and bearing no relation to value, rather than being the developed form or particular manifestation of value. 15. It should be noted that general profit also differs, quantitatively, from surplusvalue. 16. The upside-down nature of all ideology has this same basis; namely, the separation of a thing’s internal relations so that they take on their own inherent significance. 17. When a phenomenon is not unfolded from the internal relations, the only method left, in order to be logically consistent, is to view both phenomenon and internal relations as identical. 18. In Section six of the first chapter of On the Principles of Political Economy and Taxation, Ricardo discusses the ‘‘invariable measure of value.’’ He was disquieted by this problem to the end, which was a manifestation of his difficulties outlined in this paper. We have seen that Ricardo not only opposed Smith’s position of making ‘‘commanded labor’’ the invariable measure of value, he was also clearly aware that it is impossible for there to be an invariable measure in this sense of an external measure, and that an invariable measure of value in that sense would have to be a commodity with an invariable value, which is impossible. So Ricardo did not struggle to discover an actual commodity that would be of real use as an invariable measure of value, thinking it a fruitless endeavor. He raised the issue of an invariable measure of value because he found it convenient to advance his study by supposing the value of money to be invariable, making it an invariable measure of value. Ricardo said this made it possible to ‘‘speak of the variations of other things without embarrassing myself on every occasion with the consideration of the possible alteration in the value of the medium in which price and value are estimated’’ (Ricardo, 1996, p. 40). If this were the extent of the matter, however, it would not be that complicated. Other scholars have naturally established this sort of assumption when necessary. For Ricardo the problematic point regarding the invariable measure of value is not the matter of finding a commodity that is actually of use as an invariable measure of value, or the rights and wrongs of supposing (counter to reality) that the value of money is invariable. Rather, the problem concerns the elucidation of the conditions for a commodity’s value to be invariable. Of course, for those who recognize that the value of a commodity is exclusively determined by the labor necessary for its production, this is not particularly problematic. The commodity with an invariable quantity of labor necessary to produce it would have a value that is invariable, so that it could be an invariable measure of value. But for Ricardo this was not the case, because value for him at the same time signifies production price. He must therefore think along the following lines. ‘‘If we suppose this cause of variation [i.e. the fluctuation in the quantity of labor necessary for its production], and the same quantity of labor to be always required to

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obtain the same quantity of gold, still gold would not be the perfect measure of value, by which we could accurately ascertain the variations of all other things; nor with fixed capital of the same durability; nor would it require precisely the same length of time before it could be brought to market. It would be a perfect measure of value for all things produced under the same circumstances precisely as itself, but for no others’’ (Ricardo, 1996, p. 39). But for Ricardo it was not sufficient to say this alone. This is because, as he himself says, ‘‘[it is] clear then that as soon as we are in possession of the knowledge of the circumstances which determine the value of commodities, we are enabled to say what is necessary to give us an invariable measure of value’’ (Ricardo, 1952, p. 358), and that, ‘‘if we were in possession of the knowledge of the law which regulates the exchangeable value of commodities, we should only be one step from the discovery of a measure of absolute value’’ (Ricardo, 1952, p. 377). This means that Ricardo was unable to suppose an invariable measure in theory because he did not fully clarify what determines value itself. Ricardo argues: ‘‘I have already remarked that the effect on the relative prices of things, from a variation of profits, is comparatively slight; that by far the most important effects are produced by the varying quantities of labor required for production; and therefore, if we suppose this important cause of variation removed from the production of gold, we shall probably possess as near an approximation to a standard measure of value as can be theoretically conceived. May not gold be considered as a commodity produced with such proportions of the two kinds of capital as approach nearest to the average quantity employed in the production of most commodities? May not these proportions be so nearly equally distant from the two extremes, the one where little fixed capital is used, and the other where little labor is employed, as to form a just mean between them?’’ (Ricardo, 1996, p. 40). Immediately after saying this, Ricardo, who fails to hold fast to the principle of the determination of labor by value, claims that profit has little influence on what he calls ‘‘value,’’ thus attempting to defend the validity of the labor theory of value. And the first half of the passage just quoted is an application of his own fundamental thoughts to the theory of invariable value. In contrast, the latter half concerns the separate issue that stems from the influence of the profit rate on ‘‘value,’’ and he displays his views on what conditions must be in place for the most ideal measure of value other than an unchanging quantity of labor necessary for its production. His opinion on the problem is stated in detail in his letters and manuscripts (such as his article ‘‘Absolute Value and Exchangeable Value’’), but to summarize, Ricardo is basically saying that the ideal measure of value would be a commodity with a medium-range organic composition of capital and average turnover time. This sort of commodity would have a production price that matches its value, so that even if wages were to rise, causing the general profit rate to fluctuate, it would not be influenced by this. Thus, if the quantity of labor necessary to produce this type of commodity is assumed to be invariable, seen from the perspective of Ricardo, who conflates value and production price, its ‘‘value’’ would be said to be invariable. This is precisely the sort of commodity that Ricardo attempts to suppose in his theory of an invariable measure of value, and he suffered to the end because of the difficulty of defining such a commodity, and because he thought that this sort of commodity could not be an ideal measure to correctly gauge the value of all other commodities as the other types of

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commodities measured by it would not have values that match their production prices. Ricardo’s difficulties from supposing an invariable measure of value were his unavoidable fate for having confused value and production price while trying at the same time to determine value as precisely as possible. 19. Ricardo attaches the heading ‘‘The principle that the quantity of labour bestowed on the production of commodities regulates their relative value, considerably modified by the employment of machinery and other fixed and durable capital’’ to Section four, and the heading ‘‘The principle that value does not vary with the rise or fall of wages, modified also by the unequal durability of capital, and by the unequal rapidity with which it is returned to its employer’’ to Section five, even though the content discussed does not always correspond to these headings, which reflects a further degree of confusion. 20. For more on the influence a general fluctuation in wages has on production price see Chapter eleven of the third volume of Capital. 21. Ricardo treating the two as identical is at the basis of his mistaken view.

REFERENCES Malthus, T. (1963). Definitions of political economy. New York: Augustus M. Kelley. Marx, K. (1976). Capital (Vol. 1). London: Penguin Books. Marx, K. (1988). Karl Marx, Frederick Engels: Collected works (Vol. 30). New York: International Publishers. Marx, K. (1989). Karl Marx, Frederick Engels: Collected works (Vol. 31). New York: International Publishers. Ricardo, D. (1952). The works and correspondence of David Ricardo (Vol. 9) Cambridge: Cambridge University Press. Ricardo, D. (1996). On the principles of political economy and taxation. Amherst: Prometheus Books. Smith, A. (1970). The wealth of nations (Books I–III). Middlesex: Penguin Books.

AUTHOR INDEX Abdel Latif, O. 192 Aglietta, M. 156, 232, 234, 262, 268–269 Ahsan, S.A. 167–173 Albert, M. 40 Albritton, R. 254 Althusser, L. 275 Altvater, E. 144 Amsden, A. 135 Anderson, P. 10, 38 Andreas, P. 98, 115 Azicri, M. 60

Boyer, R. 143, 148, 263–264, 268–269, 271 Brada, J.C. 133 Brady, D. 267 Braverman, H. 258 Brenner, R. 156 Brewer, A. 276 Brundenius, C. 50, 53, 55 Brus, W. 85 Bryan, D. 275 Bucchi, K.C. 103, 108 Bukharin, N. 247, 252 Burawoy, M. 138, 150, 152 Burge, R.T. 220 Burkett, P. 86 Bush, G.W. 196 Buxton, J. 7, 39

Bagley, B.M. 103, 115 Bahout, J. 167 Baker, L. 221 Baker, S. 148 Baran, P.A. 256 Barker, C. 142–143, 152 Barone, C.A. 276 Barreiro Pousa, L.A. 79 Beadon, Sir, C. 98 Bergman, L. 113 Bernstein, E. 245, 276 Bertram, E. 98 Bieler, A. 138, 146 Blachman, M. 98 Blanchard, O. 133 Blasier, C. 46–47 Bohle, D. 138, 149 Bond, P. 155 Boorstein, E. 49 Bourdieu, P. 38, 148 Bowden, M. 111 Bowles, S. 264

Cantor, J.C. 221 Carchedi, G. 146 Carranza Valde´s, J. 59, 85 Carrigan, A. 111, 123 Carvalho, J. 231 Casolino, T. 224 Castells, M. 274 Castillo, F. 109 Castillo, III, C. 109 Castro, F. 47, 50, 55, 57–58, 60, 63, 66 Chambliss, W.J. 112 Chang, H.-J. 135 Chavance, B. 136 Chavez, H. 39 Chaviano Saldan˜a, N. 59, 85 Chernew, M. 231 Clark, N. 154 341

342

AUTHOR INDEX

Clarke, S. 138, 150, 152 Clawson, P.L. 108–109, 111 Cleveland, W.L. 197 Coban, A. 267 Cockburn, A. 104 Cockburn, L. 109 Cohen, S.F. 252, 276 Cohn, L. 229 Colletti, L. 245 Collins, L. 109 Collins, P. 57, 61 Contreras, J. 103 Cooper, R. 233–234 Coppedge, M. 7–8 Coronil, F. 14, 37 Cottle, D. 118 Cox, R. 148 Cox, T. 152 Crisp, B. 37, 39 Cristescu-Martin, A. 152 Cullenberg, S. 137 Cunningham, R. 233 Czaban, L. 143

Dunn, B. 138, 140 Dwyer, P. 112

Daniels, N. 230 Davidson, N. 142 De Brie, C. 112 De Soto, H. 106 Del Monte y Navarro, A. 85–87 Derham, M. 37 Dı´ az-Briquets, S. 62 Dietrich, P. 233–234 DiMaggio, P.J. 155 Dirmoser, D. 64 Dobb, M. 244 Domenech, S.M. 59, 85 Domı´ nguez, J.I. 63 Dornbusch, R. 133 Drago, R. 276 Draper, D. 212, 218 Dugger, W.M. 147 Dumenil, G. 134

Ga˛ ciarz, B. 152 Gancedo Gaspar, N. 73 Garavito, F. 103 Garcia, J.G. 121 Gardawski, J. 152 Garretsen, H. 135 Geary, D. 244, 276 Gedicks, A. 115 Geligns, A. 206, 232 Gibson, A.C. 99 Giddens, A. 38 Gill, S. 146, 148 Gillis, K. 222 Giordano, A. 118 Glick, M. 156 Gneuss, C. 275 Goff, S. 109 Gomulka, S. 135 Gonza´lez Gutie´rrez, A. 61, 66

Eammons, D. 222 Eckstein, S. 43, 53–54, 62 Edwards, R.C. 258, 266 Ehlers, S. 112 Eliopoulos, P. 229 Ellner, S., 37 Elster, J. 156 Estay, J. 64 Eyal, G. 149 Eyer, J. 230 Fabienke, R. 81 Fairbrother, P. 138, 150, 152 Favereau, O. 268 Feuer, C.H. 50 Fitts, C.A. 113 Florio, M. 133, 137 Flounders, S. 117–118 Forrester, J. 259 Frydman, R. 134

Author Index Goode, P. 246, 276 Gora, M. 135 Gordon, D.M. 258, 260–261, 266 Gowan, P. 133, 149 Grabel, I. 145 Grabher, G. 136 Grahl, J. 145–146 Granovetter, M. 135 Grant, D.S. 266–267 Greenhouse, S. 222, 225 Grosse, R.E. 110, 112, 117, 123 Guadagnino, C. 225 Gugliotta, G. 115 Gutierrez, T. 117–118 Gutie´rrez Castillo, O. 73 Gutie´rrez Urdaneta, L. 85 Habermas, J. 38 Haddad, B. 191, 196 Hadley, J. 224 Hagelburg, G.B. 50 Hahnel, R. 40 Hall, P.A. 155 Hamilton, D. 64 Hansen, F.R. 245, 276 Harding, N. 276 Hardy, J. 131, 138, 144, 146, 148, 152–154 Hargreaves, C. 98–99 Harman, C. 152 Harmon, D. 109 Harnecker, M. 38 Hart-Landsberg, M. 86 Harvey, D. 140, 147 Hasan, R. 139 Havlicek, P. 221 Haynes, M. 139 Hellinger, D. 6 Henderson, J. 143 Henman, A. 107 Hilferding, R. 247, 276 Hillman, R.S. 38 Himmelstein, D. 203, 214, 216

343 Hinnebusch, R. 174–175, 181–182 Hinterseer, K. 98 Hirst, P. 273 Hirth, R. 231 Hoare, Q. 148, 156 Hodgson, G.M. 136, 155 Holland, D. 231 Hollingsworth, J.R. 148 Holman, O. 138, 146 Howard, M.C. 246, 276 Huber, E. 8, 38 Huberman, L. 49 Hurley, R. 212, 218 Ingelhart, R. 11, 38 Jackson, M. 135 Jaramillo, A.M. 102, 104 Jessop, B. 152, 264, 269 Joffe, J. 203 Joya, A. 163 Kaihla, P. 116 Kalecki, M. 277 Kane, C. 224 Karl, T.L. 6, 37 Karshenas, M. 189 Kautsky, K. 276 Kavanau-Levine, L. 108 Kawachi, I. 230 Kawell, J.A. 99 Keys, A. 118 Kienle, E. 179–180 Kiernan, V.G. 276 King, J.E. 246, 276 Klein, P.A. 137 Klein, S. 226 Kletke, P. 222 Knight, A. 10 Knoester, M. 100 Kochanwicz, J. 135 Kongsvedt, P.R. 218 Koont, S. 71, 76

344 Kornai, J. 85, 134 Kotowska, I. 135 Kotz, D.M. 264, 267, 269–270, 272, 277 Kowalik, T. 134, 149 Kozul-Wright, R. 133, 135 Krotov, P. 138, 150, 152 Krugman, P. 133, 137 Kuruma, S. 295

AUTHOR INDEX

Laibman, D. 230 Laski, K. 85 Laud, P. 233–234 Law, D. 146, 148 Lawson, F. 170–171, 173, 197 Layard, R. 133 Lee, III, R.W. 103, 108–109, 111 Leech, G.M. 119 Leen, J. 115 Lenin, V.I. 115, 253 Lesser, C. 212, 218 Levine, D.H. 37 Levine, M. 108 Levy, D. 134 Li, R. 224 Lichtheim, G. 275–276 Light, D. 215, 232 Linden, R.H. 46 Lipietz, A. 269 Lipton, D. 132, 134, 144, 149 Livingstone, G. 107, 118 Lo, D. 135, 137 Loeblich, H. 224 Long, S.H. 221 Los Nuevos Narcos, 111 Lowy, M. 140 Luxemburg, R. 276

de Maillard, J. 112 Mainwaring, S. 9, 11, 38 Malthus, T. 328 Mandel, E. 140, 259–260 Marquis, M.S. 221 Marrero Prieto, F. 80–81 Marshall, J. 103, 107 Martin, R. 152 Martz, J.D. 37 Marx, K. 199, 213, 231, 234, 296–297, 301, 304, 308–309 Mason, B. 152 Mayhew, A. 155 McCoy, A.W. 106, 108 McCoy, J. 37 McDonough, T. 241, 262, 267–268, 271, 276–277 McLellan, D. 276 Meiksins Wood, E. 143 Mesa-Lago, C. 46–47, 50, 54–56, 58–59, 61, 64–65, 67 Me´sza´ros, I. 32 Mezaros, I. 231 Millares, M. 86 Mintz, S.W. 99 Mitchell, J. 224 Mokrzyszewski, A. 152 Monreal Gonza´lez, P. 85 Monreal, P. 61 Morgan, D.W. 245 Morley, M. 115 Morrisey, M.R. 217 Mortimer, G.W. 99 Moser, J. 224 Moubayed, S. 184, 191 Murrell, P. 134, 136–137 Murrillo, M.A. 116 Myrdal, G. 135, 142

MacGregor, F.E. 113 Maddison, A. 139, 144 Magdoff, H. 258 Magnin, E. 136

Nadel, H. 268 Naı´ m, M. 37 Nasrallah, F. 180 Navarro, V. 230

Author Index Naylor, T.R. 115 Neuhaser, D. 231 Neunhoffer, G. 138 Newhouse, J. 227 Nielsen, K. 155 Norden, D. 38 North, D. 155 Nova Gonza´lez, A. 60, 62 Novack, G. 141, 144 Nove, A. 85 Nowell Smith, G. 148, 156 O’Hara, P.A. 277 Olson, R.W. 168–170, 197 Ost, D. 144, 152 Owen, R. 179 Paci, P. 135 Pan´ko´w, 152 Palloix, C. 140 Pamuk, S- . 179 Parker, M. 274 Patel, K. 216 Pearce, J. 123 Perez, M.J. 121 Perthes, V. 166, 168–173, 175–178, 180–183, 196–198 Petran, T. 167–169, 171, 197 Petras, J. 115 Petras, P. 112 Phan, C. 225 Pickel, A. 133, 136 Podgorski, J. 135 Podur, J. 119 Polanyi, K. 135 Polling, S. 176, 179 Pollitt, B.H. 50, 74 Pope, G.C. 220 Porek, T. 135 Potter, G.W. 112 Powels, J. 230 Preobrazhensky, E.A. 87 Quilliam, N. 169–172, 175–177, 179, 181, 186, 197

345 Rabine, M. 99, 121 Radice, H. 138, 140 Rainnie, A. 138, 144, 152–153 Rapaczynski, A. 134 Rayment, P. 133, 135 Reason, T. 113 Reed, G. 60–62 Reich, M. 258, 266–268, 277 Relman, A.S.M.D. 233 Reuter, P. 107 Reveiz, E. 121 Reyes, A. 116 Ricardo, D. 304–306, 319–321, 327, 338–339 Richani, N. 105, 113, 122 Richards, A. 174, 177–180, 182–183, 189, 193, 198 Robbins, C. 104 Roberts, K. 7, 39 Robinson, D. 230 Robinson, J.C. 222, 224, 227, 234 Rodrı´ guez, J.L. 53 Rodwin, M.A. 233 Roman, P. 50, 90 Romero, A. 37 Rosenberg, N.S. 206, 232 Rostow, W. 259 Rozental, M. 119 Rueschemeyer, D. 8, 38 Ruppert, M.C. 112–113 Rushevsky, M. 216 Sabbag, R. 113 Sachs, J. 132, 134, 144, 149 Saillard, Y. 268 Salas, M.T. 37 Salazar, A. 102, 104 Salhani, C. 196 Salvadori, M. 276 Sasin, M.J. 135 Sayyigh, Y. 194

346 Schauerte, M. 281 Schoenman, R. 150 Scott, P.D. 103, 106–107, 112 Screpanti, E. 143 Seale, P. 181 Serafino, N.M. 118 Sharpe, K. 98 Sherlock, D.B. 233 Shi, L. 214, 230, 232 Shields, S. 138, 144, 146, 148, 151 Shortell, S. 224 Silvestrini, E. 116 Simatupang, B. 139 Singh, D.A. 214, 230, 232 Skinner, C. 43 Sklair, L. 148 Slaughter, J. 274 Slay, B. 139 Smith, A. 138, 146, 298–304, 306–307, 310–311, 313, 315, 318, 329–330, 336–337 Smith, M.L. 104, 118 Smith, N. 140 St. Clair, J. 104 Stark, D. 136, 143 Starr, P. 232 Steenson, G. 276 Steindl, J. 277 Stenning, A. 154 Stephens, E.H. 38 Stephens, J.D. 8, 38 Stich, R. 102–104, 108, 112–113 Stiglitz, J.E. 85, 137 Storrs, K.L. 118 Strong, S. 104, 107 Strunk, B. 212, 218 Sukkar, N. 174–175, 178–181, 188, 198 Summers, L. 133 Swain, A. 138 Sweezy, P.M. 49, 246, 256–257, 275 Szelenyi, I. 149

AUTHOR INDEX Taylor, C.R. 155 Taylor, L. 135 Therborn, G. 38 Thompson, G. 273 Thongtham, N. 104, 118 Thoumi, F. 106 Thoumi, F.E. 102 Tickner, A.B. 118 Tittenbrun, J. 151 Townsley, E.R. 149 Treanor, P. 147 Trinkunas, H.A. 38 Trista´ Arbesu´, G. 59, 85 Trocki, C.A. 99 Trotsky, L. 138 Tsang, S.-k. 135 Tselikis, P. 217 Turnbull, C.M. 98 Valentine, D. 106, 109 van Duijn, J.J. 259 Van Ees, H. 135 Van Zon, H. 142 Verbeek, J. 135 Vilas, C. 37 Villar, O. 97, 118 Vlachou, A. 231 Waitzkin, H. 230–231 Walker, P.G. 61 Wallace, M. 266–267 Web, J. 118 Wedel, J.R. 150–151 Weintraub, A. 234 Welsh, I. 148 Went, R. 272 White, G. 85 White, J.D. 276 Whitley, R. 143 Williams, F.C. 111 Williams, P. 110 Wilpert, G. 3 Wilson, F.A. 231

Author Index Winieckie, J. 136 Wolfson, M.H. 269, 272 Wood, E.M. 193 Woods, B.F. 105 Woolhandler, S. 214, 216 Youngers, C. 115

347 Zabala Argu¨elles, M.del C. 62 Zabludoff, S.J. 109 Zill, O. 113 Zimbalist, A. 53, 57 Zunes, S. 196 Zysman, J. 143