CONTENTS

LIST OF CONTRIBUTORS PART I: THE DISCIPLINARY ROLE OF CAPITAL UNDER NEOLIBERALISM RESPONDING TO NEOLIBERALISM IN CRISIS: DISCIPLINE AND EMPOWERMENT IN THE WORLD BANKS NEW DEVELOPMENT AGENDA Marcus Taylor AMERICAN IMPERIALISM AND NEW FORMS OF DISCIPLINING THE NON-INTEGRATING GAP Susanne Soederberg THE LOGIC OF NEOLIBERAL FINANCE AND GLOBAL FINANCIAL FRAGILITY: TOWARDS ANOTHER GREAT DEPRESSION? Anastasia Nesvetailova DISCIPLINING LABOUR, PRODUCING POVERTY: NEOLIBERAL STRUCTURAL REFORMS AND THE POLITICAL CONFLICT IN ARGENTINA Viviana Patroni GLOBAL HIGH CULTURE IN THE ERA OF NEO-LIBERALISM: THE CASE OF DOCUMENTA11 Karyn Ball
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PART II: ACCUMULATION AND FINANCE MARX AND THE THEORY OF THE MONETARY CIRCUIT Andrew B. Trigg HILFERDINGS THEORY OF BANKING IN THE LIGHT OF STEUART AND SMITH Costas Lapavitsas ECONOMIC CRISIS AND SOCIALIST REVOLUTION: HENRYK GROSSMANS LAW OF ACCUMULATION, ITS FIRST CRITICS AND HIS RESPONSES Rick Kuhn SPURIOUS VALUE-PRICE CORRELATIONS: SOME ADDITIONAL EVIDENCE AND ARGUMENTS Andrew J. Kliman PART III: ROSA LUXEMBURG THE COHERENCE OF LUXEMBURGS THEORIES AND LIFE Estrella Trincado Aznar LIKE A CANDLE BURNING AT BOTH ENDS: ROSA LUXEMBURG AND THE CRITIQUE OF POLITICAL ECONOMY Riccardo Belloore

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LIST OF CONTRIBUTORS
Kayrn Ball Riccardo Belloore Andrew Kliman Rick Kuhn Costas Lapavitsas Anastasia Nesvetailova Viviana Patroni Susanne Soederberg Marcus Taylor Andrew B. Trigg Estrella Trincado Aznar University of Alberta, Edmonton, Canada University of Bergamo, Bergamo, Italy Pace University, Pleasantville, NY, USA Australia National University, Canberra, Australia University of London, London, UK University of Liverpool, Liverpool, UK York University, Toronto, Canada University of Alberta, Edmonton, Canada University of Warwick, Coventry, UK The Open University, Milton Keynes, UK Complutense University of Madrid, Madrid, Spain

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RESPONDING TO NEOLIBERALISM IN CRISIS: DISCIPLINE AND EMPOWERMENT IN THE WORLD BANKS NEW DEVELOPMENT AGENDA
Marcus Taylor*
ABSTRACT
This paper examines the recent process of transformation within the World Bank as a series of reactive mediations to the crisis-laden course of capitalist development on a global scale over the last two decades. Two aspects of the Banks attempt to construct a new development agenda as a response to contradictions emergent within neoliberal-style social restructuring are highlighted. First, it has embraced the theoretical trends and policy implications of institutional economics. Second, it has refashioned its relations with client countries and their civil societies under the rubrics of ownership, participation and empowerment. The paper proceeds to indicate why the Banks current reformulation of development theory presents itself within mainstream theoretical paradigms as an appropriate prescription to counter the crisis of neoliberal-style social restructuring. Concurrently, on the basis
As of July 2004, Marcus Taylor will be an Assistant Professor at the Department of Sociology and Anthropology, Concordia University, Montreal.

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 330 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21001-X

MARCUS TAYLOR

of a materialist critique of capitalist development, the paper proceeds to indicate the substantive limits to these present reforms by indicating their theoretical weaknesses and their practical contradictions. At the turn of the millennium, the leading international organisation of global capitalist development the World Bank was undergoing a period of upheaval and transition. Whilst its sister organisation, the International Monetary Fund (IMF), remained relatively resolute in its defence of the structural reforms that it had propagated globally since the debt crisis of the early 1980s, the World Bank embraced comparatively substantial changes to its policy prescriptions and modes of interaction with client countries. These changes in the Banks discourse are considered to be part of what Joseph Stiglitz (2000) has christened a post-Washington consensus, or what World Bank President James Wolfensohn (1999) labels Comprehensive Development.1 Contrary to what Stiglitz criticised as the simplistic nature of the original Washington Consensus, the World Banks new framework is presented as a dual sided approach that combines sound economic policy with social and institutional reform and, in so doing, professes that there is more to fostering sustainable development and reducing poverty than asserting the unbridled play of market forces. The ongoing changes have not been limited to the content of World Bank development prescription alone. Fundamentally, the Bank now stipulates that profound changes to the way development practices are conducted are essential for success. These include client country ownership of development programmes and the involvement of all relevant stakeholders including civil society groups in design and implementation. In this vein, the World Bank claims a mandate to empower poor people in order that they are able to achieve development and lift themselves out of poverty (World Bank, 2001a). In the words of James Wolfensohn: Poor people are not liabilities, but assets. We have to invest in them, and empower them. Development must not be done to them, but by them (Wolfensohn, 2001, p. 4). Empowerment is now presented as a central axis in the World Banks development practices and has been integrated into the prescription for a range of institutional reforms. This paper offers a critical examination of the origins and character of this transition in the World Bank. It is argued that the transformations in theory and practice within the World Bank at the close of the millennium represent a series of reactive mediations to the unanticipated results of capitalist development within the context of neoliberal-style structural adjustment. Such contradictions are manifest in the increasingly uneven character of capitalist development on a global scale, recurrent crises across the global South, and the expansion of local and global struggles that target the social limits of development in its capitalist

Responding to Neoliberalism in Crisis

form. The paper indicates why the current reformulation of development theory within the Bank presents itself within mainstream theory as an appropriate prescription to counter the crisis of neoliberal-style societal restructuring. Concurrently, on the basis of a materialist critique of capitalist development, the paper proceeds to indicate the substantive limits to these present reforms by indicating their theoretical weaknesses and contradictions in practice.

CAPITALIST DEVELOPMENT AND MODERN ECONOMICS

The World Banks principal function, as laid out in its founding articles of agreement, is the global promotion of capitalist development. To understand the character of the World Bank at the turn of the millennium, therefore, it is pertinent to survey briey the material and social bases of capitalist development, the way this process represents itself to the social agents involved, and how it has been subsequently comprehended within the paradigm of modern economics. Given the World Banks reliance on the presuppositions of neoclassical economics for its attempts to rationalise the trajectory of global capitalist development and to prescribe appropriate policy responses, this section forms an important prelude to the subsequent critiques of neoliberal structural adjustment and the Banks current reformulation of the latter. As highlighted by the rst theorists of capitalist development the classical political economists the rise of capitalism was correlated with a tendency towards dramatic increases in the productivity of human labour (e.g. Smith, 1991). The importance of this trend cannot be understated, as it constitutes the material basis of the notion of development as a social process. Through productive revolution, growing numbers of socially useful items (use-values) could be produced and, in so doing, capitalist development offered a potential solution to material scarcity. Furthermore, the process of removing humankind from an unending toil for subsistence theoretically offered the basis for personal and social development by increasing the amount of time available to augment human potentials. Material advancement could therefore be seen as paving the way for social, cultural and political progress, a formulation that remains the basis for modern theories of development (Weisband, 1989, p. 16). However, the newly emergent relationship between capitalist labour and wealth creation was a complex one. Although labour was widely recognised as the source of social wealth as explored in the labour theories of value developed by Smith, Ricardo and others the latter assumed a peculiarly dual form that greatly challenged the conceptual apparatus of classical political economy. On the one

MARCUS TAYLOR

hand, the wealth creating properties of labour were represented in the material form of an expanded quantity of use-values. On the other, however, social wealth was represented in the abstract form of a quantitative value ascribed to these commodities and made tangible in the form of money. The tendencies associated with uctuations in value, moreover, appeared as complex laws divorced from the direct control of humankind and which led repeatedly to socially irrational outcomes. With the development of modern economics in the late of the nineteenth century, however, the original questions that had underlain classical political economys interrogation of capitalist development the revolution in the form of labour, the complex appearance and determinations of value, and the causes of the conictual relationship between classes were entombed within the petried categories of bourgeois economics that saw no need to go beyond surface appearances to examine the relations constitutive of social phenomena. This so-called marginalist revolution represents the theoretical movement that freed political economy from extraneous political considerations, and so founded modern scientic economics (Clarke, 1991, p. 182). The marginalist revolution provided the basis on which material production could be constrained within its own asocial discipline of economics without concern for the specic social forms of capitalist social relations. The fundamental theoretical postulate of modern economics is that market relations are the expression of inherently rational individuals who, in conditions of scarcity, maximise the utility of the commodities they possess by making mutually benecial exchanges. In this manner, the market is represented as a device or mechanism for coordinating the plans of many individuals (Hayek, 1978) and production is simply a natural extension of these principles to the creation of more complex goods. On this basis, development is comprehended as a universal, timeless and asocial process of overcoming scarcity and associated human deprivations through the realisation of the rationality of individuals. Material development is maximised when the innate rationality of individuals is liberated allowing them to make mutually benecial exchanges resulting in the optimal distribution of resources within a society, including within the productive realm. Intrinsic to this process is the free circulation of the factors of production and, as such, the creation of the commodity of labour-power through the separation of the labourer from the means of production (primitive accumulation) is merely a further step towards the development of optimal rationality. Whilst restrictions upon individual utility maximisation can be imposed by specic institutional arrangements (slavery, feudalism, communism, etc.), the latter are conceived as articial and illegitimate impediments upon a natural state in which individual rationality and freedom and therein production is maximised to the benet of the common good. From this perspective, development

Responding to Neoliberalism in Crisis

is to be achieved through the formal liberation of the individual from society, a status achieved by stripping away the institutional aberrations that have impeded individual rationality and utility maximisation. Capitalism therefore represents the perfection of this historical movement. The fundamental weakness of liberal economic theory, however, is that modern society is not a social grouping of private individuals but is composed of socially constituted individuals within the context of an historically specic form of social relations. Whereas the genesis of capitalist social relations does indeed disintegrate the overtly social coordination of production that characterised pre-capitalist relations, this does not entail the creation of a society of freely interacting individuals liberated from social mediations. On the contrary, within capitalism social mediation is reconstituted as an abstract social relation or, more precisely, as impersonal forms of social domination that create and structure everyday social practice (Postone, 1993). At heart lies the question of the contradictory duality of capitalist development, one that neoclassical economics does not formally acknowledge. Capitalist development is predicated on the expanded reproduction of the material basis of society through the development of the forces of production and the creation of ever increasing quantities of useful things (use-values). This appears as the formal and rational provision for human needs and is based on a simple circuit starting with production according to needs, distribution of revenues allocated to factors of production, exchange to circulate goods to match human desires, and consumption (Marx, 1973, pp. 8387). However, whilst the notion of development rests on the concrete materialization of an ever-growing number of use-values, its capitalist social form is the expansion of value (the abstract form of social wealth) through the drive to accumulate capital. The formal independence of freely contracting individuals, therefore, masks the objective interdependence of society manifested through the impersonal movement of value that imposes itself upon actors as an objective and alienated social force. Abstract domination of this nature is the social fabric of capitalist society upon which is inscribed increasingly complex forms of social relations. It is the abstract basis upon which the more concrete and immanent forms of exploitation and domination rest and its necessary development is towards a particular relationship between classes predicated on the extraction of surplus value in the production process.2 At a more concrete level, the subordination of use-value production and distribution to the contradictory dynamics of value is the essence of the manifest substantive irrationalities of capitalism as manifested in class struggle, uneven development, un- and under-employment, poverty and recurrent crises. Owing to its theoretical presupposition of the essential rationality of production and

MARCUS TAYLOR

exchange, however, liberal theory has no adequate manner by which to account for the latter except by labelling them as contingent irrationalities that arise from either the failure of capitalist social relations to be adequately established or from the inadequacies of externally imposed institutional forms. In this respect, neoclassical theory remains theoretically shielded from the contradictory essence of capitalist development. Guided by its conceptualisation of money as a technical tool to facilitate mutually benecial market exchanges it is unable to recognise the exploitative essence of market relations sanctied by the impersonal power of money as a fetishised form of value. It therefore disregards the substantive and conict-inducing irrationalities of capitalist development concretely manifested in the subordination of social need to prot, the pervasiveness of human resistance to processes of commodication and exploitation, and the continual crisis tendencies of social relations that stubbornly refuse to conform to general equilibrium models.

THE WORLD BANK, RESTRUCTURING AND THE ESSENCE OF NEOLIBERALISM

In short, development in capitalist form constitutes the extension of the productive forces through the incessant yet profoundly contradictory movement of value. It is on this basis, moreover, that the institutional form and the substantive agency of the World Bank must be understood. The Bank is an organisation suffused within the contradictory dynamics of capitalist development on a global scale, which impact upon it through various mediated forms including its position within the interstate system, its relationship with client countries, and its prominence as a target for global social movements. On the one hand, it is driven continuously to consolidate the conditions for the accumulation of capital at a global level as this drives the process of material development in capitalist form. On the other, it has become increasingly involved in mediating the unseemly dynamics of this process in the global South, including escalating inequality, trenchant poverty, recurrent crises and new forms of social struggle. The augmented involvement of the World Bank in the social relations of global capitalist development took a giant step forward in the crisis-laden decade of the 1970s under the tutelage of Bank president Robert McNamara. Under McNamaras expansion of Bank activities, the Bank shifted from an emphasis on promulgating the infrastructure for capitalist industrialisation, and became integrally involved in a project to mediate the social dynamics of capitalist development in the South. As Colin Leys (1996, p. 12) elaborates, this period of transition was prompted by:

Responding to Neoliberalism in Crisis

the growing realization that the hopes of rapid and widespread development were going to be disappointed . . . [leading to] sympathy for the masses in the ex-colonies and fear of their reactions.

The Banks interventions in global capitalist relations, moreover, underwent a further dramatic shift in the 1980s when the pervasive crisis of global accumulation reached the cataclysmic proportions of the 1982 Debt Crisis. In direct response, driven not least by the predicament of the Western banks threatened with nancial collapse owing to mass default, the IMF and World Bank began to pipeline billions of dollars to debt stricken countries in order to facilitate continued interest payments on their old debt but in return for a commitment to neoliberal-style structural adjustment policies (cf. George & Sabelli, 1994). Alongside the IMF, the Bank therefore began to assume an extended role as a global accumulation caretaker and a purveyor of drastic social engineering in the South. The immediate phase of adjustment, commonly managed by the IMF, focused on the imposition of severe austerity measures to restore macroeconomic balances, particularly the suppression of ination. By undergoing a shock therapy programme of rapid liberalisation of prices, currency devaluation, and scal discipline, a deationary period could be engineered through which excessive demand was curtailed and inefcient producers sacriced, along with their workforces, upon the alter of sound money. An emphasis on liquidity, moreover, was expected to enable capital to overcome the barriers to valorisation by escaping unprotable engagements and concentrating in those sectors that offered more lucrative returns. Capital in mobile money-form would undergo a substantial recomposition: it could renounce inefcient engagements and, freed from established spatial and political constraints, seek a new and protable relationship with labour. Societal rationalisation in this manner almost invariably entailed a substantial destruction of existing capital and was commonly reected in high levels of unemployment, with signicant portions of the labour force relegated to the reserve army (cf. Weeks, 1999). The decomposition of labour would subsequently provide the conditions under which a new and more disciplinary mode of capitalist work with higher levels of absolute surplus value extraction could be imposed, sometimes labelled labour exibilisation (cf. Taylor, forthcoming). Alongside the creative destruction of shock therapy measures, the Bank began to advocate an increasingly rigorous set of reforms that entailed major transformations in the relationship between states and societies in the South and the mode of integration of Southern economies into the world market. The wider parameters of these reforms represented an attempt to transcend the immediate question of economic stabilisation by laying down a longer-term development strategy that disavowed the former emphasis on state-led national developmentalism.

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MARCUS TAYLOR

Within this context, the broad tenets of neoliberal reform appeared uniquely suited to the task of resolving the crisis and re-establishing the conditions for expanded global accumulation. Their salience as policy options did not derive from their often-questionable economic functionality, but because they seemingly offered a more comprehensive set of solutions to the economic, political and social dimensions of crisis in the late 1970s and 1980s. In reaction to the generalised social crisis of the South, manifested in the distinct political and economic expressions of heightened social struggles and economic rupture, neoliberal structural adjustment professed a fundamental re-articulation of social relations that aimed not only to mitigate the symptoms of crisis in the manner of stabilisation, but also to obliterate the social congurations in which crisis had arisen. This was to be achieved through a process of social engineering by which the abstract disciplines inherent to capitalist social relations could be imposed in an increasingly direct fashion upon both state and society. The foremost ideological expression of this strategy, moreover, resided in neoclassical economics which rapidly replaced the formerly dominant Keynesian variant as the primary rationalisation of policy initiatives. The prescriptive core of neoclassical theory argues that sustained accumulation can be achieved through policies that actively impress the discipline of market relations on both state and society. To impose this discipline is to enforce the limits of capitalist social forms upon economic agents through the subordination of social relations to the logic of money as a fetishised form of the social relation of value and the rule of private property (cf. Clarke, 1988). In this manner, social relations can be coercively reduced to technical and ultimately harmonious exchange relations between rational individuals in private possession of different commodities. Crisis would therefore be resolved by forcibly restraining the aspirations of individuals, groups and classes within the seemingly objective limits of capitalist social relations. So long as social actors submit to the play of market forces mediated through monetary relations, the neoclassical argument contends, the optimal conditions for accumulation will predominate to the benet of the individual and common good. Accomplishing the latter, therefore, involves the removal of political and social constraints that prevent society operating in the manner of the abstract models of neoclassical economics. In the 1980s, these constraints were diagnosed as residing primarily in the corpus of an over-interventionist state. In response, politics was to be reconstituted as governance a depoliticised and technocratic exercise of responding to the immediate and objective fetishised forms of capitalist social relations, most evident in the quantitative determination of economic magnitudes that necessitate sound monetary policy. The singular

Responding to Neoliberalism in Crisis

11

proactive function of the state is then to enforce this discipline upon society and its own institutional bodies alike in the name of the common good. To achieve the latter, the strategy promoted by the Bank and eventually adopted across much of the global South was based upon a radical restructuring of the historically developed state forms that mediated capital accumulation, including interventionist macroeconomic management, the forms of labour regulation, and welfare institutions. In practice, successful development was to be achieved through the now-familiar policy package of state retreat, scal discipline, protection of private property, extension of commodication and expansion of market relations, and the containment of social demands within the connes of macro-economic prudence. Specically, to assert the discipline of capital on state and society alike, the restructuring process rapidly tore down the politically imposed barriers to the global movement of money and commodities. As such, structural change involved an intensive liberalisation of trade, the opening of capital accounts and the entrenchment of scal discipline. At a global level, with the emergence of ever-more sophisticated nancial infrastructures in the 1980s and 1990s that facilitate the rent-seeking activities of money-capital to operate at a distance far-removed from productive capital (the apparent de-linking of the productive and nancial realms), the power of money, as alienated labour in its most fetishised and dominating form, has been ever deepened. During the 1980s an expansive infrastructure for the global movement of nance capital was forged, therein heightening the ease of global capital mobility and the pressures upon national states inherent in the threat of the escape of money capital from unsatisfactory conditions (Holloway, 1995). The institutionally facilitated global movement of money capital tightens the pressures upon states to subordinate various forms of intervention to the logic of investment protability whilst concurrently developing new forms of intervention to actively promote the conditions for accumulation.3 As the Bank (2001b, p. 56) elaborates:
Private capital ows now dominate ofcial ows in the world, but they reinforce positive economic developments, either neglecting or punishing countries with weak economic conditions.

In this manner, the new paradigm of a minimalist state that merely promoted the discipline of capital upon society in turn promoted the death of the state as a proactive agent in development practice. Within the parameters of orthodox neoliberal policy prescription, there is little room for the active mediation of the state in social reproduction save for a few basic tasks of providing necessary infrastructure and providing public goods that could not be devolved to the private sector owing to protability constraints. Active development policies are presented as distortioninducing inuences on a natural state of affairs and, therefore, at best profoundly

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counter-productive and, at worst, the malevolent interference of a rent-seeking political cadre. In contrast, market coordination of social relations is posited as the end in and of itself. As Ben Fine (2001a, p. 135) highlights, within this schematic:
There is no need to dene or characterise development its what the market brings if left to its own devices!

To proclaim that the history of development as conscious practice had ended, however, proved to be premature in the extreme. The interventionist state-form that had grown in a sustained manner during the post-War period did not emerge from the subjective irrationality of state managers wedded to erroneous theoretical models, but had developed historically in response to specic social struggles within the context of the contradictory path of uneven capitalist accumulation. On the one hand, therefore, the degree to which the disciplinary character of structural adjustment could be successfully imposed depended greatly on the outcome of political struggles within the environment of crisis. On the other, even where the project of social discipline was most rigorously implemented, such as in authoritarian Chile, struggles did not dissipate but assumed new and challenging forms (Taylor, 2002). In contrast to neoclassical theorists, however, social actors such as the World Bank cannot ignore these contradictions.

THE CRISIS OF NEOLIBERALISM AND THE RISE OF COMPREHENSIVE DEVELOPMENT

The immediate results of rapid and widespread social restructuring across the South disappointed the expectations of World Bank staff and client governments alike, many of which had imposed reforms through political authoritarianism and widespread repression of adversely affected interests. The destructive side of the experiment was apparent enough in the lost decade of development in the 1980s and the enormous human costs of adjustment (cf. Green, 1995). Less evident in this period, however, was any stable or sustained improvement in economic or social indicators in most of the global South, a factor reluctantly conceded by the World Bank (World Bank, 2001a, p. 64). Despite the belief that global monetary disciplines would secure an era of harmonious prosperity, furthermore, the 1990s were marked by the spectre of intense nancial volatility that brought drastic economic and social devastation to many of the Banks most acclaimed success stories (e.g. Argentina, 2001; S. E. Asia, 1997; Mexico, 1995; Russia, 1998). Elsewhere in the global South, the promised rewards of structural adjustment largely failed to materialise. In contrast to the world of prosperity under the tutelage of liberated market forces,

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13

as predicted by the ideologues of the Washington Consensus, two decades of neoliberal restructuring were widely recognised as being characterised by profoundly uneven development, including increased poverty and inequality at the global level. This included the stagnation of Latin America and regression of sub-Saharan Africa, two regions that most dramatically implemented neoliberal forms of restructuring, on a wide spectrum of development indicators (Milanovic, 2003).4 Unsurprisingly, the failure of structural adjustment to realise generalised and sustained growth, alongside successive and devastating nancial crises in the 1990s, severely dented the legitimacy of the Washington based institutions and the neoliberal paradigm of structural adjustment, with the former increasingly denigrated by a range of social actors. The latter includes former insiders and emergent global social movements, but also the forces of the political right in the US, including the constant propositions to downscale, disband or privatise the Bank.5 In this respect, the ongoing process of policy change in the 1990s, culminating in the unveiling of the Comprehensive Development Framework (CDF) in 1999, is best understood as driven by a combination of lost legitimacy and the tangible need to address the failure of development programmes in the South. Without doubt, the new development agenda incorporates a heavy degree of populist rhetoric, including catchwords such as empowerment, partnership and ownership, which are aimed to disarm critique from antagonistic global social movements and internal dissenters. Likewise, a renewed emphasis on poverty-reduction is clearly a central axis in the global legitimation of the World Bank and IMF at the turn of the millennium.6 At one level, the promise of ridding the world of poverty is endowed with greater legitimising potential than the mission of promulgating an increasingly questioned array of neoliberal economic fundamentals, even if the prescription to achieve the former still involves a heavy dose of the latter. At another, the pledge to do so through participatory and country-owned procedures also seems to address a second criticism of combative international social movements that emphasised the externally imposed nature of one size ts all structural adjustment programmes. This process of change, however, represents far more than an instrumentally designed ideological offensive. That the Bank is actively attempting to nd ways to reinvent its practices is an indication of the degree to which alternative policy packages need to be developed in face of growing contradictions in the global South and the political repercussions that these instil. Market-driven restructuring brought a heightening of the conictual tendencies inherent to capitalist social relations and, in contrast to the projected death of conscious development strategy in face of abstract market forces, has induced strong pressures upon national states to intervene actively in the relations of social reproduction.7

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In this fashion, from the late 1980s governments across the global South have faced the recurrent necessity of reinventing structural adjustment policies in order to address new contradictions in a period of escalating social polarisation. A major trend in Latin America, for example, has been to introduce various forms of neoliberalism with a human face, many of which foreshadow the World Banks current discourse by almost a decade. The latter include, for example, the Chilean Growth with Equity strategy, Salinas social liberalism in Mexico, and more recently, the attempts of Brazilian President Luiz In cio da Silva (Lula) to counter a rampant social deprivation within the context of neoliberal style macro-economic management. Such strategies have involved increasingly innovative attempts at modifying the institutional forms of governance and social policy in order to mediate the social struggles engendered in the conict-ridden project of societal restructuring.8 It is precisely the failure of restructuring to realise the conditions adequate to the sustained reproduction of capital, therefore, that has prompted states in the South to readdress their forms of intervention. Concurrently, it is in no small measure as a response to the struggle-driven course of policy change in the South that the Bank has been hurried into a prudent strategic realignment. This has involved a change in the operating practises of the Bank in order to project a renewed relevance of Bank doctrines to the concrete problems faced by governments in the South, a process that has led to the adoption of the principles of comprehensive development, the renewed emphasis on poverty reduction as the central aim of all Bank activities, and the production of guidelines on the restructuring and regulation of an ever-wider array of social relations.

COMPREHENSIVE DEVELOPMENT WITHIN THE AEGIS OF THE POVERTY REDUCTION STRATEGY PAPERS
The introduction of the Comprehensive Development Framework (CDF) as a model of development practice has been achieved through a remodeling of structural adjustment lending by the IMF and World Bank under the new motif of Poverty Reduction Strategy Papers (PRSPs). According to the IMF (2002), these new policy documents have replaced the older Structural Adjustment Facility as the primary means of organising borrowing agreements to low-income countries in order to promote broad-based growth and reduce poverty. They envision a clear yet complementary division of labour between the IMF and World Bank, a relationship that World Bank President James Wolfensohn (1999, p. 2) referred to as breathing in and breathing out. For its part, the IMF (2001, p. 13) has proclaimed

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its need to focus conditionality on those policies that are critical to achieving the macroeconomic objectives of the programs supported by the Fund whilst engaging with a clearer division of labor with other international institutions, especially the World Bank. This new formulation of conditionality and task-division is a reaction to criticism of the ineffectiveness of conditionality that had been growing during the 1980s and 1990s (cf. Killick, 1995). Within this division of labour, therefore, the practice of cross-conditionality that emerged in the debt crisis period has been given a tangible and more clearly formulated existence. Whilst the IMF will concentrate on a familiar range of macroeconomic policies and objectives, albeit with each reform rationalised in terms of its projected effect on poverty reduction, the World Bank is now responsible for overseeing the social and structural policies of participating countries. It is for performing these functions within the formation of national PRSPs that the World Bank has unveiled the CDF. The CDF represents an operational guide, or management tool, for this purpose. On the one hand, it offers four guiding principals for all development practice. On the other, it stipulates fourteen areas of social and structural policy that must be addressed in all national development programmes. Four stated operational pillars are: (1) an emphasis on long-term vision and strategy; (2) enhanced country ownership of development goals and actions; (3) more strategic partnership amongst stakeholders; and (4) accountability for development results (World Bank, 2000b). Substantively, social and structural policies are to be formed with respect to the World Banks new development matrix that identies and delineates all the policy areas that must be addressed. The CDF matrix species fourteen areas that the Bank suggests comprise the hitherto undervalued institutional, human and physical dimensions of development strategy. These areas range from good governance and the rule of law, through to social safety nets, education, health, rural and urban strategies, and environmental and cultural dimensions (Wolfensohn, 1999, pp. 510). Together, they form an ambitious policy agenda covering a holistic range of issues that broadens the scope of policy and institutional reform well beyond the original locus of state scality, interest and exchange rates, and trade liberalisation. Through this extension, the CDF reects a comprehensive delineation of World Bank priorities regarding the course of development strategy. The frontrunners in this new Bank strategy were thirteen diverse but heavily indebted countries that produced PRSPs along CDF guidelines in 1999 in order to receive debt relief from the Bank. By January 2002, however, at least forty-two countries were either implementing or formulating PRSPs and it is the stated objective of the IMF and World Bank to make all lending agreements follow the PRSP/CDF template (Craig & Porter, 2003, p. 54).

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THE CONTENT OF THE CDF: MARKETS AND INSTITUTIONS

A critical assertion of the World Bank is that the range and breadth of the areas for reform in their CDF/PRSP approach to development represent a marked improvement on the prior Washington Consensus model. According to the Banks interpretation of its own history, the original reform prescription focused too stringently upon macroeconomic issues and neglected other institutional and policy areas that are key for the achievement of sustained growth and poverty reduction. In this respect, the World Bank is tacitly acknowledging that its previous approach, resting upon an overriding concern for monetary discipline and state retrenchment, has proved inadequate. In contrast, the new approach rests heavily on the institutional turn in neoclassical economics, as typied by Joseph Stiglitz (chief economist at the Bank between 1997 and 2000) and others such as Douglas North. From this perspective, property rights, sound money, scal solvency, market-oriented incentives remain necessary aspects of a growth strategy, but their sustained achievement involves a high degree of institutional development appropriate to local circumstance. In the words of Joseph Stiglitz (1998, p. 125):
Trying to get government better focused on fundamentals . . . is a vital step. But focusing on the fundamentals is not a recipe for a minimalist government. The state has an important role to play in appropriate regulation, industrial policy, social protection and welfare.

The theoretical basis for this reassessment of neoclassical principles is located in a modied interpretation of the underlying assumptions of the former. Recalling Milton Friedmans famous adage, all consensual exchanges performed under conditions of adequate information are mutually benecial to both parties. Unlike the neoclassical tradition, however, Stiglitz and associated economists emphasize the imperfect nature of information as being a pervasive feature of market transactions:
Incomplete information, incomplete markets, incomplete contracts are all inevitable features of the economy in general and the nancial system in particular (Stiglitz, 1998, p. 14).

In practise, therefore, Stiglitzs reformulation of the Washington Consensus into the post-Washington Consensus that is savvy to the insights of informationtheoretic economics involves a fuller role for the state in promoting efcient regulatory institutions that can prevent informational failures.9 It is precisely the existence of imperfect information that necessitates state action. The latter is not to assume the functions of markets, but to provide a sound regulatory environment that can mitigate informational imperfections. In this manner, as the World Bank (2000a, p. 22) echoes:

Responding to Neoliberalism in Crisis

The efciency of markets, which are themselves institutions, depends on the strength of supporting institutions that help align the expectations of agents regarding the procedures that govern their transactions.

17

Nonetheless, despite these revisions, the primary ontological assumptions of neoclassical economics remain. First and foremost, as Ben Fine has demonstrated, methodological individualism remains the assumption of the post-Washington Consensus formulation. The new framework retains the basis of a perfectly competitive market composed of rational self-maximising individuals, yet it charts how information imperfections impose deviations from this state. As such, the post-Washington Consensus model understands the capitalist economy as a construct of imperfectly informed individuals, imperfectly co-ordinated through the market place, a neat reduction which enables all other analytical principles to be ignored (Fine, 2001b, p. 7). Questions concerning power relations that are not reducible to informational asymmetries remain absent. This leads to an overriding fundamental assumption that if measures are taken to mitigate information imperfections, the heart of the liberal ideal of a world composed of rational utility-maximising individuals engaged in harmonious exchange relations that are mutually benecial can be retained. The post-Washington Consensus arguments therefore provide not only a modied theoretical basis for policy formation, one that attempts to chart new ground in the state vs. markets dichotomy integral to debates over neoliberalism, but also serve as a rationalisation of the dismal historical record of the Washington Consensus in achieving its projected aims. Indeed, if all developing countries were ordered according to economic performance and poverty reduction, then those with the strongest adherence to the major tenets of the Washington Consensus (many Latin American countries and some in Africa) would be placed far down the list. In contrast, those countries heading the list (East and South-East Asia, China and India) have, in different ways, deviated widely from the Washington approach.10 This divergence, however, can now be explained on the basis of information-theoretic economics as the failure of the many early reformers to provide an adequate institutional framework that would have allowed neoliberal-style reforms to succeed. As Dani Rodrik (2003, p. 12) quips, sound economics has too often been delivered in an unsound form. Consequently, the large discrepancy between theoretical projections of neoclassical economics and ugly reality of crisis and stagnation in the structurally adjusted South does not entail that Bank fundamentals or their ontological presuppositions are incorrect. On the contrary, as James Wolfensohn stipulates (1999, p. 1), the aim of liberalisation and the promotion of marketised social reproduction still constitutes one side of the development coin. In this way, the macro-economic fundamentals espoused by the Bretton Woods institutions throughout the 1980s

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and early 1990s, predicated on the imposition of the discipline of scal prudence onto the practises of the national state whilst removing political constraints to the external movement of capital and commodities (free markets, sound money), remain at the heart of the new development corpus. Hence, the Bank (2001a, p. 49) proclaims that its economic fundamentals remain correct:
Some economic policies such as openness to international trade, sound monetary and scal policies (reected in moderate budget decits and the absence of high ination), a well-developed nancial system, and a moderately sized government are strongly conducive to economic growth.11

This remains the lynchpin of the Banks strategy as they stipulate that economic growth to be stimulated through market liberalisation is systematically associated with development and poverty reduction. Good policy therefore involves the furnishing of sound investment environments in order to attract capital for productive investment, and hence continue along the path of capitalist development. On this basis, the theoretical tenets of institutional economics are drawn in to supplement the existing paradigm of liberalisation. For the World Bank, what is required in order to achieve sound and sustained accumulation at a national level is to proceed beyond liberalisation to ensure that the correct institutional forms facilitate the benign operation of market forces. To facilitate the establishment of the full range of institutional prerequisites necessary for a sound investment environment, therefore, it is necessary to broaden the development agenda by way of the CDF. In contrast to the former doctrine of the minimalist state, the new doctrine professes that states need to intervene actively to facilitate and regulate the conditions for free economic exchange, and to correct potential market failures caused by asymmetries of information. The latter are particularly prevalent within the developing world owing to the less well established nature of capitalist social relations, and therefore necessitate a much fuller role of the state in establishing institutions that channel information about market conditions, goods and participants than the anti-state bias of initial restructuring models suggested (World Bank, 2002, p. 8). In this manner, the substantive emphasis of comprehensive development is the refashioning of national and sub-national institutional forms in order to compliment and optimise the basic fundamentals of market relations. Subsequently, good governance, which in the World Banks presentation entails the creation of transparent and accountable institutional forms leading to market-enabling policy content, has become a primary objective of Bank development initiatives in the twenty-rst century. At their core, the social and structural reforms that constitute the mainstay of comprehensive development are deemed necessary in order to

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allow individuals, and particularly the impoverished sections of society, to take full advantage of the opportunities offered by the rst generation of macroeconomic reforms. Indeed, with respect to the overarching aim of poverty-reduction, the new strategy rests upon the hypothesis that numerous social and institutional factors obstruct poor people from effectively exchanging assets in markets and thereby perpetuate their poverty. It is not, therefore, the substantive irrationalities of marketised social relations that are causatively related to the creation and reproduction of poverty, but rather the failure of poor people to adequately access and participate in markets owing to institutional and social impediments such as lack of information, corruption, discrimination, and political voicelessness. Poverty is the result of cumulative human, social and political failures factors that are external to capitalist social relations and that can be remedied by correcting institutional forms. Consistent with the theoretical impetus of the CDF, any development strategy centred on poverty reduction must therefore aim not only to expand economic opportunities through sound macroeconomic management, but also to refashion institutions and social practises in order to remove the imperfections that impair market exchanges (cf. World Bank, 2001a, Chap. 4). In the words of the Bank (2001a, p. 61):
Societies have to help poor people overcome the obstacles that prevent them from freely and fairly participating in markets.

Hence, the World Banks role through the CDF is to foster changes in the social and political frameworks that at current are preventing poor people from socially reproducing themselves via the medium of the market. The prime factor that the Bank identies as restraining market access is the relative lack of accountability and responsiveness of state institutions in the global South (World Bank, 2001a, 2002). This can take either the form of corruption, which blocks poor peoples ability to conduct market exchanges owing to prohibitive rents, or it can be the failure of the state to deliver the health and educational services necessary for poor people to attain the requisite level of human capital for a relationship with capital. Thus, on this prognosis, the state is to be made more responsive to the needs of the poor, which, as presupposed by the Bank, is ultimately access to suitably liberalised markets. This line of theoretisation underscores the Banks concern with transparency and an end to corruption in state functions. The Bank suggests that in nearly every country the public sector often pursues activities that are not socially justied or that create rents for elites, a phenomenon that occurs in two manners. Firstly, the state bureaucracy has tendencies to inefciency and corruption, features that not only undermine the common good but also disproportionately prejudice the poor. Secondly, within governance frameworks that do not provide transparency and pluralist participation, social elites are able to mobilize the distributional

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functions of the state to reect their interests, again primarily at the expense of the poor (World Bank, 2001a). The solution within the CDF is a multi-tiered good governance strategy that seeks to actively remove all institutional constraints upon market activity and to refashion institutions to facilitate more effectively market exchanges. Within the rubric of good governance, public administrations must become efcient, accountable and responsive to users, including the curtailment of corruption and harassment. In this manner, the good governance agenda focuses on creating streamlined and decentralised public sectors that are efcient, accountable and focused on addressing social needs through market-promoting strategies, rather than acting as devices for elite rent creation. The prominent buzzwords are performance incentives, rationalisation and modernization.
Key incentives include merit-based recruitment, clear specication of tasks, rewards for good performance, and insulation from excessive political pressure. Together with skilled technocrats and close collaboration with the business community, these make up what has been termed the developmental state (World Bank, 2001a, p. 100).

Concurrently, enforcing the rule of law is paramount within good governance. At rst impression, the formal equality of all citizens before the law is clearly a progressive aspect of liberal doctrine, especially considering that poor people have often been victims of a lack of access to legal rights. Nevertheless, enforcing the rule of law particularly the sanctity of private property is concurrently a legal expression of the class relations constitutive of capitalism predicated on the extraction of surplus value within the production process (cf. Blanke et al., 1976). This is not formulated as a problem within the World Banks theoretical construct of capitalist society, as the latter is premised upon a harmonious model of individual asset owners looking to maximise the benets of their freely chosen economic exchanges with other individuals. In conjunction with the good governance doctrine, comes empowerment. According to the World Bank, empowerment is a process whereby the poor are politically mobilised to aid the reform of institutions in order to reduce bureaucratic and social constraints on economic activity and upward mobility (World Bank, 2001a, p. 9). Pro-poor coalitions are to be encouraged, which involves the government and development agents providing the conditions under which the interests of the poor and non-poor can be linked in the form of political associations; or, in the World Banks formulation enhancing the perception of common interests between the poor and the non-poor (World Bank, 2001a, p. 109). The manner by which this is to be achieved is threefold: rst, through promoting democracy and the rule of law; second, through reducing informational asymmetries via education and ensuring the transparency of government actions and decision

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making; third, through technical assistance to civil society groups that can help form pro-poor coalitions. In respect of the latter and controversially so in the eyes of the U.S. executive and more conservative elements within the Bank12 poor people are encouraged to form political pressure groups that can act as a countervailing power against state corruption and political rent seeking. As detailed above, corruption is seen as a particular problem as it can serve to restrain the development of capitalist social relations as special interests either extract rents or block social change that would enable the proliferation of free market exchanges. Collective action by the poor, according to the Bank, is therefore to be used for applying political pressure in order to guarantee the quality of state services and peer monitoring of their delivery, thereby mitigating the possibilities of development resource capture by elites. In an apparent reversal of power relations, the World Bank lauds the empowerment of poor people in order to monitor and discipline service providers (World Bank, 2004). Collective action beyond ensuring accountability and a superior quality of service delivery, however, is not welcome. Political movements that might threaten the status quo as enshrined by property rights and the primacy of free markets are symptomatic of poor people who do not recognise their own best interests. In the words of the Genoa report produced by ofcials from the eight richest countries in the world yet speaking on behalf of the global poor (G8, 2001, p. 12):
From the perspective of the poor, there are risks that justied concerns about their interests are manipulated to support a return to protectionism.

The Banks conceptualisation of empowerment, therefore, rests on the notion that empowerment is the removal of obstructions to participation in market relations. More specically, this means harnessing the agency of the poor to remove restraints upon the reproduction and sale of their labour-power. One brief example serves to illustrate the manner in which empowerment within the Comprehensive Development cannon is constituted within the limits of capital. Given the dependence of poor people upon wage labour as noted by the World Bank (1990, p. 15) who label the ability to work as poor peoples most abundant asset the realm of labour and production could be considered a primary area for poor peoples empowerment. However, as systematically elaborated in the 1995 World Development Report, this empowerment is circumscribed within the limits of market conforming behaviour. Building from the theoretical postulate that trade liberalization may not reallocate resources appropriately if labour markets are insufciently exible, the World Bank suggests it is a policy priority to ensure that worker empowerment in no way interferes with the optimal mechanisms of the market. Hence, unionisation historically a vitally important form of

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empowerment for the labouring classes to improve their life conditions must be constrained within strict institutional limits that, rst, bind union action to market facilitating behaviour and, second, prevent collective action from exceeding these bounds (World Bank, 1995). World Bank empowerment, therefore, places responsibilities on the poor to act in accordance with the liberal designs of the Bank and to conne social aspirations within the limits of capital as manifested in the fetishised form of the market. In this way, empowerment is only permissible to the degree that it is market conforming and market facilitating. It is a euphemism for development practice that attempts, rst, a fuller incorporation of poor people into market relations or, to be more specic, to offer their labour-power on suitably exibilised labour markets; and, second, to make those relations more efcient owing to the removal of particular interests that impinge upon the abstract forms of capitalist domination. Empowerment is therefore the new means towards the familiar end of market exchanges. The latter, in turn, present themselves and are subsequently represented as a world of freedom, equilibrium and opportunity, not of asymmetrical power relationships, social imposition and exploitation.

THE FORM OF THE CDF OWNERSHIP, PARTICIPATION AND NATIONAL SPECIFICITIES

The paper now moves away from analysing the substantive content of the new development philosophy to examine the form of World Bank relations with client countries and their societies. For this second generation of reforms to be truly effective, the Bank argues, changes are also needed in the way that development policies are implemented. Hence, although the World Bank has taken the lead in forming the Comprehensive Development Framework, it insists that the design and ownership of the policies formed within its matrix by the participating country is essential for success. According to Bank president James Wolfensohn (1999, p. 5), in contrast to former development programmes that were crafted by international agencies such as the Bank and IMF, ownership entails that:
Countries must be in the driving seat and set the course. They must determine the goals and the phasing, timing and sequencing of programmes.

Furthermore, ownership is suggested to mean that the policies formed within the framework of the PRSP must nd their initiative in the country itself, through a partnership between elements of the government, civil society, private sector and international development community, and not solely in the World Bank. Reforms must not be centrally imposed, therefore, but require the support of all affected social groups.

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Given the emergence of the CDF/PRSPs as part of an effort to readdress the effectiveness of conditionality agreements, the bold assertion that each participant country needs to own its programme and the implications of autonomy that this connotes appear as particularly incongruous aspects of the Comprehensive Development Framework. The notion of ownership is taken directly from business-management science where it has been developed to improve the commitment of employees to rm projects (Cooke, 2003). As such, the practises associated with ownership are constituted within complex power relationships, in this case between international nance provider and national governments. On the one hand, ownership explicitly aims at improving the viability and efciency of programme designs through a specialisation of functions. As highlighted above, the elaboration of a PRSP necessarily involves acceptance of the larger framework of economic liberalisation established by the Washington institutions. Beyond this, however, ownership provides the grounds for national governments to take the lead in establishing social and structural programmes with respect to local conditions and idiosyncrasies including the trajectory of social struggles and the specic concrete tensions that restructuring had engendered that they would be in a relatively privileged position to comprehend. On the other hand, the concept of ownership also belies a transformation and, feasibly, an extension of conditionality. Since both the IMF and World Bank directorships must vet all development programmes before funding is approved, it is highly improbable that the broad trends of the development strategy will be allowed to diverge far from Bank and Fund orthodoxy. On the contrary, given the wide propagation of what the Bank considers to be best development practise, national governments are expected to internalise these lessons in order to receive funding. In this manner, ownership could be considered as a kind of Trojan horse through which Bank inspired doctrines are adopted by countries without need of direct tutelage and with a greater room for their creative adaptation to local circumstances. To overemphasise this aspect, however, is to miss how the Bank has recognised the imperative of giving national governments greater leeway in mediating specic contradictions. As such, behind the World Banks overemphatic pronouncements of the virtues of ownership, participation and shared responsibilities, there is an essential and very real manner in which country ownership must be taken seriously. This is the manner by which governments are to proceed with implementation at a pace in accordance with the generation of compliance from and the effective participation of civil society and private sector groups. In effect, the national government has to ensure that the political conditions for implementation exist, and, as such, the onus of ownership falls upon the leadership role of the former. In the terminology of the Banks Operations Evaluation Department, national governments must seize the locus of initiative to ensure that key policy makers are intellectually convinced

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and that there is evident public support (World Bank, 2003). Specically, the World Bank suggests that policies formed within the ambit of the Comprehensive Development Framework must be subjected to a process of national dialogue between all relevant stakeholders. These not only include the World Bank, IMF and national government, but private sector and civil society organisations as well. A hands off approach to the implementation of programmes by the Bank presents national governments with the obligation to discipline both themselves and various component interest groups in order to receive development nance. Whilst the Bank remains at arms length, able to provide specic guidelines and the funds to carry out operations, this new division of labour places the functions of consensus generating in reaction to the idiosyncrasies of local socio-political environments in the hands of the domestic government. As the Bank (2000b, p. 1) afrms:
The whole framework rests on the premise that the Bank need not lead or even be involved as long as the process produces the desired results.

In the World Banks vision of the PRSP formation process, the private sector, civil society, national and regional governments and the international agencies would all have an equal opportunity to put forward their particular views on different aspects of the system. The projected raison d tre for this participatory form of e deliberation is one of efciency, which relates to the division of expertise that, as noted above, frames the concept of ownership. A shift towards more participatory development projects had begun in the later 1980s in recognition that externally imposed and technocrat-orientated forms of research and implementation showed serious shortcomings (Cooke & Kothari, 2001, p. 5). Participatory development is based on the principle that recipient groups and poor communities are in a privileged position to know their own needs, allowing accurate information regarding the kind of micro-projects necessary to promote capitalist development to oat upwards through the deliberation process. This is intended to lead to better-targeted projects that will have greater chances for success. Moreover, given their common role as equal participants in the programme design process, the Bank intends that recipient groups will view projects as having greater legitimacy and will also act in order to facilitate programme realisation. Like many Bank conceptualisations, however, this vision is shrouded in a model of harmony that, as noted by Else yen (2001, p. 3), is seducing in all its good will and buzzwords of partnership, sharing of social capital, equality and acceptance. The notion of participation masks the problematic nature of power relations that permeate the process. On the one hand, the assumed equality of voices ignores the vast inequalities in material and political power

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that enable privileged groups to exercise a profound inuence over deliberations and implementation. Alongside its own power vis-` -vis client countries, the a World Banks discourse conveniently overlooks deeply imbedded national power structures that profoundly condition the process of political decision-making. Secondly, even within these curtailed possibilities for political pluralism, as in all good management practises derived from business studies, the realm of inuence of subordinate groups is precisely delineated to particular micro levels. The modes in which subordinate groups can participate are shaped at the level of the World Bank and national policy elites, and they enter the national dialogues that are intended to precede PRSP formation on these terms. Within the framework of the PRSPs, which separate the IMFs focus on macro-economic policy from the World Banks social and structural policies undertaken within the CDF, fundamental issues such as trade liberalisation, privatisation and other macro and structural policies are partitioned off from pluralist deliberation at a prior level. This follows the trend witnessed throughout the neoliberal period of removing key decisions (monetary policy aimed at price-stability is in example par excellence) from the ambit of politics and placing them in the realm of technocratic decision making, such as an independent central bank. At issue is the containment of inherently political issues behind a facade of neutrality grounded in technocratic rationality. Emerging empirical case studies provide support for an interpretation of ownership and partnership as a contradictory attempt to incorporate diverse social groups into a tightly constrained realm of decision making in order to promote both efciency and legitimacy. One report made at the request of the IMF and World Bank in Bolivia an initial test case for the PRSPs and CDF suggests that in the political process of debating the CDF programmes, the poor were represented through proxy by sympathetic gures from the established political system, rather than by democratically selected community groups or gures. Moreover, the latter were not permitted to address the issues of economic and political reforms, but were merely invited to express opinions on technical aspects of social programme design and implementation. Many participants, however, expected that they would not just have a voice in the process, but a vote too. As one ofcial put it, the public could become frustrated and highly sceptical of this type of consultation (Cavero et al., 2002, p. 3). Similarly, the Partnership for Governance Reform in Indonesia, initiated through the World Bank, United Nations Development Program, and the Asian Development Bank in October 2000, was also meant to operate according to the principals of partnership between all stakeholders. However, civil society groups were marginalized within the reform process, with strong governmental and private sector representation concretising existing power structures within the deliberations. Of particular note is the systematic exclusion of any trade union

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voices despite the latters recognised role in the democratisation struggles of the late 1990s (Crawford, 2003).

IN CONCLUSION COMPREHENSIVE DEVELOPMENT AND THE FUTURE OF RESTRUCTURING

In essence, the much-heralded novelty of Comprehensive Development, despite claims to the contrary, is not one of aims but rather one of means. At core, Comprehensive Development presents a vision of the extension of social engineering through policy and institutional reforms in order to achieve a projected market utopia in the global South. It builds upon the basis of the neoliberal project to obliterate institutionalised impediments to the discipline of capital, yet acknowledges the need to recompose new institutional forms to facilitate the former. The latter, moreover, can be made more efcient if they are constructed in an environment that can better respond to the locally specic contradictions of capitalist development. Hence the Banks Comprehensive Development Framework lauds the country ownership and participatory design and implementation of development projects, although the latter are constrained within strict limits. Concurrently, the new approach also responds to the social struggles that emerged in response to the effects of restructuring by attempting to harness such movements into a formally progressive project to remove personal and institutional factors, such as corruption, that block the extension of market relations. The telos of Comprehensive Development therefore remains a world constituted in the fetishised appearances of capital, in which neutral market relations facilitate the private activities of rational individuals. The limits of this reformulation, however, lie precisely within the underlying conceptualisation of the social relations of capitalist society. Consideration of markets as constituted within and constitutive of asymmetrical power relations that belie the appearance of free exchange is entirely absent from the Banks conceptual apparatus. When attention is focused upon exchange being not a neutral encounter between rational individuals but, rather, as one moment of the reproduction of capitalist social relations and therefore of a process characterised by asymmetrical relations of exploitation mediated through the social power of money and sanctied by the rule of law it becomes possible to perceive why the real world of capitalist development does not conform to the harmonious social relations predicted by neoclassical thought. As such, the major contradictions that surface within comprehensive development are not in essence those of the World Banks programme, which consistently advocates extending and deepening the discipline of market relations upon all

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social actors in order to maximise the expanded reproduction of capital, but those of capitalist social relations. The latter, do not operate in the general equilibrium mould of neoclassical economics, as is the Banks presupposition, but are predicated upon exploitation and have inherent tendencies towards unequal development and crisis. In short, market relations are not harmonious but antagonistic, and this is why the Bank needs to integrate its calls for pluralism and empowerment within structures of discipline and compulsion. To close, it is worth highlighting that this new World Bank strategy should not be understood as an instrumentally-designed iron cage within which to co-opt struggle, but rather a reection of the crisis-stricken trajectory of capitalist development in the global South and the constant pressure upon the Bank to restructure its own forms of intervention within the context of local and global struggles. In this respect, the form and content of the World Banks move towards Comprehensive Development, and particularly the controversial category of empowerment, are not necessarily constrained within the limits prescribed by the organisation. On the contrary, the realisation of empowerment will be established within the contours of ongoing struggles, many of which are seeking to expand empowerment beyond the social and material limits of capitalist social relations. To this end, the category of empowerment within development practice represents a new object for struggle in the global South.

NOTES
1. Wolfensohn (1999) contains the initial proposal for the Comprehensive Development Framework. The World Development Reports of 1999/2000, 2000/2001 and 2002 (World Bank, 2000a, 2001a, 2002) elaborate in greater detail the substantive content of development practises that are to occur within this framework. 2. The full development of this theoretisation is beyond the scope of this paper. Aside from the work of Marx, this interpretation draws heavily on the development of Marxs social theory presented by Clarke (1988, 1991) and Postone (1993). 3. Simultaneously, the requirements to establish international standards for business are given tangible form by the lists of directives for realising good corporate governance offered by the World Bank, IMF, World Trade Organisation and other international organisations (cf. Soederberg, 2003). 4. The number of people in the world living in conditions of extreme poverty rose considerably in the 1980s and continued a more moderate upward trend in the 1990s. The relative proportion of the population in extreme poverty also rose during the 1980s, but fell moderately in the 1990s, largely due to the inuence of China and India. Inequality between North and South and within Southern countries has escalated dramatically, thereby undermining the neoclassical prediction of a general convergence of wages and wealth amongst national states in conditions of open trade (cf. Milanovic, 2003; Weeks, 2001; World Bank, 2001a).

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5. Such discussions were given tangible form by the Meltzer Commission at the close of the 1990s. For an excellent examination of different notions to reform the Bank (cf. Pincus & Winters, 2002). In this respect, the Bush administrations creation of the Millennium Challenge Account and its reformulation of lending to heavily indebted poor countries is of signicant importance (cf. Soederberg, 2004). 6. The degree to which the discourse of poverty reduction has pervaded the day-to-day operations of the leading international nancial institutions is aptly captured by one World Bank researcher who suggested that: The poverty issue is so red-hot that IMF and World Bank staff began to feel that every action inside these organizations, from reviewing public expenditure to vacuuming the ofce carpet, should be justied by its effect on poverty reduction (Easterly, 2001, p. 4). 7. Petras et al. (1997) presents a range of struggles raised by structural adjustment in Latin America. 8. Social policy restructuring in Mexico (PRONASOL, PROGRESA) and Chile (FOSIS) are prime examples of innovative social programmes designed to disarm social struggle and more effectively manage social polarisation initiated alongside retrenchment of traditional welfare programmes. 9. The most explicit statement of this inuence in the Bank is the World Development Report 2002: Building Institutions for Markets (World Bank, 2002). 10. For example, the use of active industrial policy in the East Asia miracle economies was in direct conict with Washington Consensus fundamentals; cf. Burkett and HartLandsberg (2000) for an excellent critique of the literature on this subject and a convincing presentation of the dynamics of capital accumulation in East Asia. 11. One of the key elements of this macroeconomic framework is the resolute adherence to capital account liberalisation, as laid down in detail in World Bank (2001b). 12. The issue of empowerment has provoked serious conicts within the Bank, and between the Bank and the United States and the resulting discourse represents a compromise reached after several rounds of negotiations (cf. Wade, 2001).

ACKNOWLEDGMENTS
The author thanks Simon Clarke, Paul Zarembka and Susanne Soederberg for comments on an earlier draft.

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Soederberg, S. (2004). American imperialism and new forms of disciplining the non-integrating gap. Research in Political Economy, 21. Neoliberalism in Crisis, Problems of Accumulation, and Understanding Rosa Luxemburgs Legacy. Amsterdam and New York: JAI Press/Elsevier. Stiglitz, J. (1998). More instruments and broader goals: Moving toward the post Washington consensus. 1998 WIDER Annual Lecture. Helsinki, January 7th. http://www.wider.unu.edu/publications/ annual-lectures/annual-lecture-1998.pdf. Stiglitz, J. (2000). Introduction. In: C. Gilbert & D. Vines (Eds), The World Bank: Structure and Policies. Cambridge: Cambridge University Press. Taylor, M. (2002). Success for whom? An historical materialist critique of neoliberalism in Chile. Historical Materialism, 10(2), 4575. Taylor, M. (forthcoming). Interrogating the paradigm of labour exibilisation: neoclassical prescriptions and the Chilean experience. Labour, Capital & Society. Wade, R. (2001). Showdown at the World Bank. New Left Review, 7. Weeks, J. (1999). Wages, employment and workers rights in Latin America, 19701998. International Labour Review, 138(2), 151169. Weeks, J. (2001). The expansion of capital and uneven development on a world scale. Capital & Class, 74, 931. Weisband, E. (1989). Poverty amidst plenty: World political economy and distributive justice. Boulder: Westview Press. Wolfensohn, J. D. (1999). A proposal for a comprehensive development framework. Presented to the World Bank Staff (January 21). http://www.worldbank.org/cdf/cdf-text.htm. Wolfensohn, J. D. (2001). A new compact to meet the challenge of global poverty. Speech given at Brussels, Belgium (May 14). http://www.worldbank.org/html/extdr/extme/jdwsp051401.htm. World Bank (1990). World development report 1990: Poverty. Oxford: Oxford University Press. World Bank (1995). World development report 1995: Workers in an integrating world. Oxford: Oxford University Press. World Bank (2000a). World development report 1999/2000: Entering the 21st century. Oxford: Oxford University Press. World Bank (2000b). Background and overview of the comprehensive development framework. http://www.worldbank.org/cdf/overview.htm. World Bank (2001a). World development report 2000/2001: Attacking poverty. Oxford: Oxford University Press. World Bank (2001b). Global development nance 2001: Building coalitions for effective development nance. http://www.worldbank.org/prospects/gdf2001/vol1.htm. World Bank (2002). World development report 2002: Building institutions for markets. Oxford: Oxford University Press. World Bank (2003). Country ownership. Accessed June 2003. http://web.worldbank.org/WBSITE/ EXTERNAL/PROJECTS/STRATEGIES/CDF/0contentMDK:20072933menuPK:140843 pagePK:139301piPK:139306theSitePK:140576,00.html. World Bank (2004). World development 2004: Making services work for poor people. Oxford: Oxford University Press.

AMERICAN IMPERIALISM AND NEW FORMS OF DISCIPLINING THE NON-INTEGRATING GAP

Susanne Soederberg
ABSTRACT
In March 2002, the Bush administration unveiled what it deems to be a new global development compact: the Millennium Challenge Account (MCA). This new compact builds upon the Millennium Development Goals, e.g. halving world poverty by 2015, put forward by 189 countries at the Millennium General Assembly at the United Nations in September 2000. However, and in stark contrast with the latter strategy, which is aimed at addressing human security issues, the MCA is tied to the objectives of the 2002 National Security Strategy of the United States. As such, the MCA is primarily aimed at bringing excluded states (or, failed states) into the bounds of disciplinary role of capital. For instance, one of the most novel, and coercive, features of this development compact is the pre-emptive method in which it will administer aid. Under the MCA, only countries that govern justly, invest in their people, and open their economies to foreign enterprise and entrepreneurship will qualify for funding. In what follows, I argue that while the form of the MCA represents an unabashed articulation of U.S.-led imperialism vis-` -vis the poorest regions in the South, witnessed by the growa ing privatization of development aid and military intervention, its content reects the same goals and interests that underlie the proceeding development

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 3160 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21002-1

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agenda (i.e. the Washington consensus), namely promoting the idea that the only path to increased growth and prosperity is to be found in countries willingness and ability to adopt policies that promote economic freedom and the rule of law. In September 2000, the heads of state of the industrialized world committed themselves to reducing poverty in the world by 2015 by agreeing to work toward achieving 8 Millennium Development Goals (e.g. poverty reduction, gender equality, maternal health, environment, and so forth).1 The recognition of a global partnership, which underpinned the Millennium Development Goals, was a reection of the wider concept of global governance. The latter term may be described as a steering or control mechanisms initiated at multiple spaces of political organization with no single center of global economic governance (Kirton & von Furstenberg, 2001; Rosenau, 1995). One of the main problems with this seemingly pluralist and multilateralist attempt at dealing with issues of human (in)security in the global South, is that it fails to acknowledge the existence of inherent contradictions and class-based power relations that dene the global capitalist system. As we will see below, the rosy gloss on global governance, and by extension the Millennium Development Goals, has helped to mask temporarily American-led imperialism in the South (cf. Soederberg, 2004). As the crisis of capitalist overaccumulation in the world market began to deepen in the late 1990s, support for a global partnership for development based on the ethos of global governance began to change dramatically. This shift in policy orientation is clearly evident in President George W. Bushs (2001-present) newly proposed Millennium Challenge Account (hereafter MCA), or what the administration refers to as the new global development compact.2 By increasing its core development assistance over the next three years, the Bush administration hopes to replace existing loans to the poorest 79 countries with grants, so as to help governments who rule justly, invest in their people, and encourage economic freedom.3 Aid will be contingent on 16 broadly dened criteria ranging from civil liberties to trade policy that the recipient countries must meet as a precondition to receiving aid. In the words of President, [t]he bottom line for us, and for our developing country partners, is how much development they are achieving (Wayne, 2003, p. 5). The MCA reects the ongoing transformation of American imperialism, which has become more explicit after the tragic events of September 11, 2001. The latter may be readily observed by the growing intensity in which the American state has sought to promote the fact that U.S. values and rules are the most desirable and just in the world is most virulently articulated in both The Project for the New American Century and the 2002 American National Security Strategy.4 In the

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words of President Bush, this strategy will be based on a distinctly American internationalism that reects the union of our values and our national interests. The aim of this strategy is to help make the world not just safer but better. Our goals on the path to progress are clear: political and economic freedom, peaceful relations with other states, and respect for human dignity (The White House, 2002). The NSS signals at least two important changes concerning the relations between the U.S. government and the target of the MCA: 79 of the worlds poorest countries in which it is alleged that failed states thrive.5 First, there is no room for moderates or non-alignment in Americas war on terrorism, only those either for or against the United States. This stance, which has been captured by the term pre-emptive foreign policy, suggests that the U.S. should maintain military strength beyond challenge and use it to prevent acts of terrorism.6 Second, it is believed that the route to achieving a more just and peaceful international environment in the post-Cold War world is to codify American values and rules in the South (Iraq and the Bush Doctrine, The Observer, March 24, 2002). Despite its signicance vis-` -vis the worlds poorest regions, not to mention its ability to a shed more light on the emerging nature of American empire in the post-9/11 world, there have been no systematic attempts to assess critically this new development strategy. Why was the MCA created? What has motivated the worlds stingiest donor (in relation to the size of its economy) in providing new forms of foreign aid for the worlds poorest countries? Whose interests does the MCA serve? Who is involved in the creation of the criteria used to measure what President Bush refers to as greater responsibility from developing nations.7 Said differently, who gets to dene what is meant by the three broad categories of the MCA: (1) ruling justly (good governance); (2) investing in people (health and education for all); and (3) economic freedom (sound economic policies that foster enterprise and entrepreneurship)? (USAID, 2002). And, what are the implications of these power relations? In what follows, I argue that while the neo-conservative form of the MCA appears novel, its content is the same as preceding development agendas, most notably the Washington consensus. On the one hand, form of the MCA seems strikingly different in that it reects an unabashed articulation of U.S. interests dened through the prism of a new phase of American empire vis-` -vis the a South, or what I refer to as pre-emptive development. Unlike the strategy of imposing conditionality, which recipient countries were required to meet after loans were dispensed by the Fund and World Bank, pre-emptive development entails the reverse: withholding funds until all demands made by the donor country are met, largely through quantitative forms of measurement. As we will see below, pre-emptive development, unlike its neoliberal counterparts, reects a neo-conservative agenda, which, as David Harvey suggests, is targeted

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at imposing a respect for order internally and externally (2003a). On the other hand, the content of the MCA reects the same goals and interests that have been propagated by the Washington consensus over the past two decades: that the path to increased growth and prosperity lies in countries willingness and ability to adopt policies that promote economic freedom and the rule of bourgeois law (private property, the commodication and privatization of land, and so forth). Before discussing the MCA in Section V, the rst four sections of the essay explore historically the contradictions from which the MCA emerged in the hopes of moving beyond the common sense assumption that the creation and subsequent raison d tre of this new global development compact are exclusively tied to the e tragic events of 9/11 and the subsequent war on terrorism. The latter position not only legitimizes increased coercion vis-` -vis select countries in the South, a which includes, inter alia, a trend toward the privatization and militarization of development, but also serves to obfuscate the underlying reasons for the creation of, and particular interests served by, the MCA. In short, the application of the historical materialist method allows us to make sense of the shifting nature of political domination inherent in the MCA.

THE CAPITALST NATURE OF OFFICIAL DEVELOPMENT AGENDAS

Accumulation by Dispossession The rise of the neo-conservative, hierarchical, and more overtly coercive form of American domination vis-` -vis the South, which is imbued in the MCA, is rooted a in the contradictions inherent in the attempts by states and capitals to overcome the barriers to capital valorization tied to the current crisis of overaccumulation. According to David Harvey, if system-wide devaluations (and even destruction) of capital are not to transpire, ways must be found to absorb these surpluses generated by the crisis. Geographical expansion and spatial reorganization in non-capitalist modes of production provide one such option (2003b, p. 63). David Harveys notion of accumulation by dispossession is instructive here. This concept which is itself borrowed from Marxs concept of original or primitive accumulation helps us to begin to conceptualize the linkages between ofcial development agendas and the constant necessity for overaccumulated capital to expand geographically and reorganize spatially (spatio-temporal x) (2003a, p. 144; cf. De Angelis, 2001; Perelman, 1984; Zarembka, 2002). This capitalist restructuring, along spatial and temporal lines, is aimed at, inter alia, prying open non-capitalist modes of production in the South, through predation, fraud,

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and violence. For Harvey, accumulation by dispossession helps to solve the accumulation problem, by releasing a set of assets (including labour power) at very low (and in some instances zero) cost. Overaccumulated capital can seize hold of such assets and immediately turn them to protable use (2003a, p. 144). The content of all ofcial development programmes, within the context of global capitalism, are, in essence, attempts to accumulate via dispossession. We now turn to an overview of one of the most infamous development agendas, namely: the Washington consensus.

Development Agendas as Golden Straightjackets: The Washington Consensus From the outset of the debt crises in the early 1980s to the late 1990s, the form of the ofcial development agenda has been marked by the Washington consensus. The latter was premised on the steadfast belief that political and social problems should be solved primarily through market-based mechanisms and the rule of law as opposed to state intervention. The principles of neoliberalism, which underpin the Washington consensus, quickly became guiding principle policy of the international nancial institutions (IFIs) and the largest bilateral aid agency, United States Agency for International Development (USAID) (Fine, 2001, p. 134). Working under the assumption that states should relinquish all power, except for guaranteeing and enforcing the rule of law (such as private property rights, free repatriation of prots, and so forth) to the rational forces of the marketplace over states, the ofcial line of the prescriptions of the Washington consensus sought to conceal processes of accumulation by dispossession by insisting that the implementation of sound economic policy and market-friendly reforms (privatization, liberalization, and deregulation) in the South would help these countries achieve economic stability and prosperity. The logic of neoliberal-based Washington consensus is best captured by Thomas Friedmans notion of the golden straightjacket of globalization (Friedman, 1999). According to this writer, the straightjacket will force contentious publics to understand the logic of globalization is that of peace (since war would interrupt globalization and therefore progress) and democracy (because new technologies increase individual autonomy and encourage initiative) (Hoffman, 2002, p. 106). What Friedman, as well as other neoliberals, fails to realize, however, is that the contradictions inherent in global capital accumulation inevitably create human insecurity. As the following sections demonstrate, neoliberal globalization in the form of structural adjustment programmes (SAPs) has allowed many capitals to reap the benets of privatized state rms, easier access to labour, consumer,

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and credit markets. However, the same modes of export-oriented accumulation and market-orient forms institutional regulation have led to increasing levels of insecurity, albeit in varying levels, in the South (see the articles by Viviana Patroni and Marcus Taylor articles in this volume). Accumulation by dispossession in the form of neoliberal globalization has given a degree of security to the global capitalist system by allowing many capitals to reap the benets of privatized state rms, easier access to labour, consumer, and credit markets. The same modes of export-oriented accumulation and market-orient forms institutional regulation have led to increasing levels of insecurity on all levels of social and individual life, albeit in varying levels, in the South (Altvater, 2002). The latter may be regarded as the security/insecurity paradox of neoliberal-led globalization. One such manifestation of the security/insecurity is the fact that capital has continually by-passed the poorest countries of the South, or what Samir Amin refers to as excluded states, most of which are situated in Sub-Saharan Africa and South Asia (Amin, 1999). The ongoing attempts to liberalize nancial markets has, for the most part, implied that excess short-term ows have seeped to emerging markets when interest rates were advantageously high vis-` -vis a the North, while bypassing the poorest of countries. Multinational corporations (MNCs) and their coveted FDI have tended to stream in the direction of the emerging markets. It follows that the political discontent emerging from these excluded states, particularly the immense peasant population could also act to destabilize the accumulation by dispossession strategy in the South at large, through, for example, strategies of deglobalization (cf. Bello, 2002). As Leo Panitch and Sam Gindin rightfully point out, the most serious problems for U.S.-led imperialism today are to be found in the so-called excluded states or the non-integrating Gap, which refer to those countries not within the orbit of the global capitalism, so that neither penetrating external economic forces nor international institutions can effectively restructure them (2003, p. 31). It is the attempts to deal with the security/insecurity paradox that drives the changing form of American empire in relation to excluded states. Said differently, as the U.S. seeks to respond to perceived threats to its imperial dominance, we see a shift in the form of ofcial development agenda or, which is the same thing, the reproduction of its content in an increasingly coercive and hierarchical manner.

CRISIS OF CONFIDENCE: CONSTRAINING EXCLUDED STATES WITHIN THE BOUNDS OF NEOLIBERAL GLOBALIZATION
While the well-documented poverty rates and income polarization have created much discontent in the South regarding the neoliberal prescription of the IFIs, by

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the mid-1990s, the growing levels of insecurity began to pose serious problems for the reproduction of neoliberal globalization.8 The dangerous combination of the dwindling levels of public support for laissez-faire restructuring and austerity packages, on the one hand, and shrinking room for maneuver regarding national economic and social policy formation, one the other, has led to a crisis of neoliberal governance in the South. As evidence of the latter, in 2003, a full two-thirds of people worldwide disagree with the statement that their country is governed by the will of the people (Brodie, 2003).9 In other words, the common sense assumption that unleashing the market will enhance economic prosperity of the majority not only has proven to be incorrect but also has led to the lack of popular support for neoliberal principles. Up to now the traditional response of the ofcial development agenda to the deterioration of material conditions and legitimacy crisis in the South was to insist that developing countries further implement market-led restructuring: the more governments allow themselves to be disciplined by inherently rational economic actors, the more prosperity they will achieve. Several factors complicated this strategy, however, and, in turn, have led to the reinvention of the Washington consensus in the late 1990s (also known as the Second Generation Reforms, see Marcus Taylors essay in this volume). First, the growth-obsessed and one-size-ts-all nature of the SAPs were heavily criticized not only by the anti-globalization movements during high-prole gatherings of the IFIs and World Trade Organisation (WTO) in Seattle, Genoa, Prague, Washington, and so forth, but also from both the Keynesian and conservative pundits and think tanks in Washington.10 The latter debates became even more heightened with the litany of nancial crises, and subsequent IMF-led bailouts, in the so-called emerging markets most of which were once showcases for the Fund (cf. Soederberg, 2002, 2004). Second, the coffers for public aid were quickly diminishing. As Jose Antonio Ocampo elucidates, bilateral aid fell in real terms throughout the decade, and in 1998 it was estimated to have reached 0.22% of the GDP of industrialized countries, a signicant fall with respect to the 0.35% of GDP reached in the mid-1980s (Ocampo, 2000, p. 43). Overall spending levels in the U.S., which accounts for the worlds largest bilateral donor, have slowly been decreasing since the 1960s. In fact, during the Clinton administration alone, discretionary spending of development aid (loosely dened as development, humanitarian or economic aid) declined by $370 million to $10.7 billion in 2001.11 Third, in the post-Cold War era the overriding security threat for the U.S. shifted. Specically, the American concern with external actions of states, i.e. violation of international norms, such as terrorism or territorial aggression, moved to concern for a regimes domestic behaviour, such as how it treats its own people (Thomas, 2002; cf. UNDP, 1994). For the Clinton administration (19932001), the best way to combat these new wars (Kaldor, 1999) was through multilateral

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tactics, largely in the form of global governance (Commission on Global Governance, 1995).12 Clintons brand of global governance, also known as the strategy of engagement and enlargement, involved the (forced) transformation of all Third World countries (e.g. rogue states, failed states, and emerging markets) into states that were deemed democratic and pursued free market economics (Litwak, 2000, p. 49). In a speech delivered to the 1998 IMF and World Bank Annual Meeting, and drawing on his overarching engagement and enlargement strategy, President Clinton summed up both the concerns of the consequences of the crises and the solution on how this may be averted: unless Third World countries feel empowered with the tools to master economic change, they will feel the strong temptation to turn inward, to close off their economies to the world. Now, more than ever, that would be a grave mistake. At a moment of nancial crisis, a natural inclination is to close borders and retreat behind walls of protectionism. But it is precisely at moments like this we need to increase trade to spur greater growth (Clinton, 1998). In summary, the new form of ofcial development agenda had to overcome a major hindrance: on the one hand, re-creating a neoliberal world system that has the glaring absence of convincing evidence that market-oriented restructuring produces the benets claimed by its promoters. On the other, further exposing the South, be it rogue states, failed states, or emerging markets, to the dictates of the marketplace (Kotz, 2003, p. 16). The most pressing issues that needed to be tackled in the reformulation of the neoliberal development agenda were the growing levels of poverty and social dislocation brought about by what was perceived as top-down, economistic, universalized SAPs.

FROM THE WASHINGTON CONSENSUS TO THE EMPOWERING DEVELOPMENT AGENDA: REFASHIONING ACCUMULATION BY DISPOSSESSION
In response to the above contradictions a new form of the ofcial development agenda arose, armed with new buzzwords, such as ownership and social inclusion, to complement, not diminish, market discipline. According to the World Bank, inclusion treats poor people as co-producers, with authority and control over decisions and resources devolved to the lowest appropriate level, whereas ownership describes the process whereby the recipient country selects the policy mix and takes responsibility for its implementation and outcome (Graham & Masson, 2002). At base, this new agenda also referred to as the post-Washington consensus reduces the problems of development (integrating poor countries

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into the world market via the adherence to neoliberal governance) to those dealing with market imperfections, most notably economic instability and the resulting effects of contagion from the nancial crises of the 1990s, by extending economic to non-economic analysis and policy making through the new-found ability to comprehend the social and the political (Fine, 2001). The World Bank underwent an overhaul not only in terms of its top-down, predominately economic focus to an allegedly more human oriented stance (or, empowering development), but also balancing its stress on increasing productivity with ghting poverty. Since mid-1995, the World Bank has shifted its focus from nancing infrastructure projects in the South to poverty alleviation programmes. The IMF also plays an important role in the ght against poverty. A concrete manifestation of this new focus has been the creation of a joint-programme entitled the Poverty Reduction Strategy Papers (PRSP) (see M. Taylors essay in this edition for an elaboration of this policy, cf. IMF, 2003a). It should be noted that the PRSP are not about doing away with conditionality, but instead should be seen as direct responses to the above mentioned threats to neoliberal-led globalization, which in turn, targeted at reconguring and deepening domination of capitalist relations and American-led imperialism (accumulation by dispossession) over the growing number of poor in the South. These recent transformations have not replaced the emphasis on market-led growth, however. Instead they are targeted at legitimizing, and thus reproducing, the coercive power of transnational capital in these countries (Gill & Law, 1993; see also Anastasia Nesvetailovas essay in this volume for a discussion on role of nance capital). On the other hand, these poverty alleviation programmes pursued by the Bank are accompanied by increased powers of surveillance and control over both public and private spheres in the South. A case in point is the Poverty Reduction Growth Facility (PRGF). Keeping in line with these aims, and the wider PRSP, the Fund has replaced its Enhanced Structural Adjustment Facility (ESAF) with the PRGF. According to the IMF, the latter differs from the former in the following manner. First, through the PRGF, the IMF aims to integrate the objectives of poverty reduction and growth more fully into its operations in the poorest countries, or, more specically, the Highly Indebted Poor Countries (HIPCs). Indeed, the PRGF was designed to give the IMF a more central and legitimate role in the 1996 HIPC initiative, which was proposed by the IFIs in 1996. The PRGF places more emphasis on good governance than its predecessor, which, as mentioned earlier, refers to the proper management of liberalisation policy along with public goods, achieving greater transparency, active public scrutiny, and so forth (IMF, 2002) all of which is prescribed in the IFIs international standards and codes (the Reports on the Observances of Standards and Codes), governing facets of a countrys

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economy, such as corporate governance, transparency and securities regulation (IMF, 2003b). This move not only gives the Banks policies some nancial teeth, but also allows for a more comprehensive and coherent surveillance programme by allowing the IFIs to more effectively monitor, in greater detail, the countries policy actions, the frequency of program reviews, and the role of prior actions.13 Empowering development was an attempt to embed the values and norms of neoliberalism (e.g. market freedom and rule of law) in the rapidly deteriorating social, political and economic life in the non-integrating Gap. Empowering development would not be able to brace the above-mentioned contradictions of neoliberal-led globalization in the excluded states, largely because of its inability to diminish the tensions of the security/insecurity paradox in the South, as well as new forms of insecurity in the United States. In the following section we examine the economic and military roots of the increased unilateral and coercive nature of American dominance. This exercise will, in turn, assist us in understanding the factors underpinning the shift from neo-liberal led empowering to neo-conservative forms of pre-emptive development.

NEW SECURITY AND ECONOMIC THREATS TO NEOLIBERAL GLOBALIZATION BEFORE AND AFTER 9/11
The Bursting of the American Bubble Economy and the Emergence of Pre-Emptive Security Policies After experiencing what was considered by many to be the deepest recessionary period in the post-War era during the early 1990s, the U.S. economy began, once again, to serve as the main engine of growth to the world in the second half of the decade. During the period between 1995 and 2000 GDP growth accelerated, rising from 3.1 to 4.1% (Kotz, 2003, p. 21). The main impetus creating and sustaining American expansion was not, as ofcials claimed, neoliberal restructuring and the new economy; but rather a speculative bubble in the stock market (Shiller, 2000). The latter not only began growing at 4.9% per year from 1997 to 2000, but also became the chief force propelling GDP growth, since it represented about two-thirds of GDP and it was then growing substantially faster than the GDP (Kotz, 2003, p. 21). To get an idea of the dimension of the bubble, Yale economist, Robert Shiller, observes that while [t]he Dow Jones Industrial Average stood at around 3,600 in early 1994. By 1999, it had passed 11,000, more than tripling in ve years, a total increase in stock market prices of over 200%. At the start of 2000, the Dow passed 11,700. Between 19941999, for example, [t]he aggregate

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market value of the outstanding shares of U.S. corporations rose from $5.5 trillion in 1994 to $17.1 trillion in 1999, an increase of $11.6 trillion (Kotz, 2003, p. 26). When the speculatively based expansion came to a screeching halt at the end of August 2000, it not only revealed the fragility of the economys largely jobless growth, but also, given the increasingly dependency of the Third World on the U.S. economy, the sudden economic downturn in the U.S. served to accentuate the already high levels of insecurity in the South. In the aftermath of the bubble, the U.S. continues to be marked by high levels of unemployment, corporate governance scandals, and despite the fact that the U.S. Federal Reserve Bank has forced interest rates down to levels not seen since 1958, low levels of both investment and consumer condence continue to dampen the possibility for growth (Bush goes for broke, The Economist, January 8, 2003).14 Soaring levels of consumer and government debt has not helped the situation. According to the Economic Policy Institute, a Washington based think tank, [b]y 2001, total household debt exceeded total household disposable income by an all-time high of nearly 10%. Much of the run-up in debt occurred over the economic boom, as the ratio of debt to personal disposable income rose from 87.7% in 1992 up to 109.0% in 2001 (Economic Policy Institute, 2002). The current housing bubble, which has bolstered the economy since the plunge in stock market prices, is intimately tied to this rise in debt (cf. IMF, 2003c). Toward the end of March 2002, federal borrowing not only approached its legal ceiling of $5.95 trillion, but also surpassed it on April 1, 2002. In the hopes to avoid a federal default, President Bush asked Congress to raise the limit by $750 billion, which will cover borrowing into 2004 (ONeill set to prevent federal default, The Guardian, March 19, 2002). Largely owing to the continued economic slowdown coupled with the big tax cuts undertaken by the Bush administration in 2001 and 2002, the budget decit is growing at an alarming pace. The current account decit in the U.S. was set to reach $600 billion in 2003. It should be highlighted that in order to feed this decit, the U.S. needs to attract around a net $2.7 billion of overseas inows every working day (Dollars fall giving investors the jitters, Financial Times, May 12, 2003). The inability of the U.S. to live within its own means, whilst imposing this same scal discipline on excluded states not only creates a crisis of condence regarding prudent scal management, but also Americas current account decit poses one of the biggest risks to the world economy, according to the IMF (The ONeill Doctrine The Economist, April 27, 2002). According to some observers, this decit is being paid by foreign investors. In 2002, for example, 97% of the American current account decit was nanced by net foreign purchases of bonds other than government bonds, e.g. U.S. Treasuries. The upshot of this situation, in which the growing current account decit is fed by increasingly short-term credit nancing,

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is yet another source of insecurity (in the form of growing dependence on foreign sources of nancing) for the U.S. economy (The Editors, 2003, p. 26). The lackluster economy not only served to aggravate the security/insecurity paradox in the U.S. but also for the South. Despite the rhetoric of the empowering development, private ows, which make up the bulk of capital streaming to developing countries, have also been affected by the global economic slowdown (The Conference Board, 2003). This decline of foreign investment to the South is demonstrated in the World Banks Global Development Finance 2003 (see Table 1). According to this document, the decline since 1997 has occurred primarily in net capital ows from the private sector, particularly in the debt component (banks loans and bonds). From the peak years of 19951996, when net debt inows from the private sector were about $135 billion per year, they have dropped steadily, becoming net outows in 2001 and 2002 (World Bank, 2003, p. 7). The trend concerning capital ows has reversed to a South to North movement. According to the Washington-based Center for Economic and Policy Research, most developing countries are large exporters of capital, due to, for Table 1. Net Capital Flows to Developing Countries, 19972003 (In Billions of Dollars).
1997 Current account Balance as% of GDP Financed by Net equity ows Net FDI inows Net portfolio equity inows Net debt ows Ofcial creditors World Bank IMF Others Private creditors Net medium-long term debt ows Bonds Banks Others Net short-term debt ows Bilateral aid grants 1998 1999 10.7 2.0 194.3 179.3 15.0 13.9 13.5 8.8 2.2 6.9 0.5 21.9 29.6 5.9 1.8 21.4 29.4 2000 61.9 1.0 186.7 160.6 26.0 1.0 6.2 7.8 10.6 3.4 5.1 14.5 17.4 2.6 5.5 9.4 29.6 2001 27.6 0.5 177.6 171.7 6.0 3.2 28.0 7.5 19.5 1.0 24.8 8.6 10.1 11.8 7.0 16.2 29.5 2002e 48.3 0.8 152.3 143.0 9.4 7.2 16.2 1.5 14.5 0.2 9.0 2.9 18.6 16.0 5.5 6.1 32.9 2003f 26.2 0.4 158.0 145.0 13.0 5.0 0.0 5.0 32.0

91.4 113.6 1.5 2.0 196.4 169.3 26.7 102.1 13.0 9.2 3.4 0.5 89.1 84.0 38.4 43.1 2.5 5.3 26.7 181.9 174.5 7.4 57.4 34.1 8.7 14.1 11.2 23.3 87.4 39.7 51.4 3.6 64.2 28.2

Note: e = estimate; f = forecast. Source: World Bank Global Development Finance, Washington, DC: World Bank (2003), p. 8.

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example, payments of interests and prots (Morrissey & Baker, 2003). The U.S. recessionary environment proved to be even bleaker for HIPCs, areas of the South, which, at the best of times, have been experiencing decreasing public aid levels from the worlds largest source of bilateral assistance. The American economy in the immediate post-bubble era posed two important hurdles for the reproduction of neoliberal globalization. On the one hand, for the ruling class in the U.S., the immediate problem was how to continue to legitimize neoliberal globalization in the face of deteriorating economic and social conditions in the U.S. and in the South. As David Kotz puts it: [o]ne hindrance to the U.S. ruling class agenda of creating a neoliberal world system has been the glaring absence of convincing evidence that neoliberal restructuring produces the benets claimed by its promoters (2003, p. 16). In the week prior to 9/11, for example, President Bushs standing in opinion polls was, relatively speaking, at its lowest point ever, with only 50% of respondents giving him a positive rating (Trading on Fear, The Guardian, July 12, 2003). On the other hand, given the economic slump at home, the U.S. needs to expand production and nancial activities beyond its domestic market. To do so it requires co-operative governments in the South, who are willing to devise and implement policies that support and protect the interests of transnational capitals, such as a well-disciplined labour market, lack of environmental and taxation standards, and so forth. Given the dismal state of the American economy, it has become more vital that ofcial development agendas achieve economic freedom and rule of law in excluded states. Whilst the events of 9/11 are commonly seen as the main impetus for renewed U.S. unilateralism, I suggest that it was the combination of mounting legitimacy problems associated with the tumultuous American and global economy, the presence of a hawkish neo-conservative administration, and the inability of the White House to clearly rene a strategy to tackle the economy that led to the creation of a more intensied form of imperialism. Neo-conservative pundits, for instance, like Robert Kagan, have argued that Americas return to machtpolitik in important geopolitical areas such as economic and military concerns occurred well before the attacks on the World Trade Center and the Pentagon. We should bear in mind that before September 11, the Bush administration had moved toward a more overt and unabashed unilateralist course. Some examples are the withdrawal from the Kyoto Protocol on global warming, pushing National Missile Defense in violation of the ABM treaty with Russia, and the scrapping proposed enforcement measures in the Biological and Toxin Weapons Convention in favor of unilateral U.S. enforcement (Mahajan, 2002, p. 22). In a January 2000 issue of Foreign Affairs, the future National Security Advisor to George W. Bush, Condaleeza Rice, criticized the Clinton administration for replacing national interests with humanitarian interests and the interests of the

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international community. Instead, Rice suggested that the United States should take the attitude that what is in its own interest is good for the world. It should come as no surprise that Rices argument parallels the main thrusts of Bushs National Security Strategy (NSS), which includes a manifesto of pre-emptive foreign policy: strengthen Americas military, scale back military commitments abroad and focus on the big powers (Rice, 2000). Put differently, for the incoming Bush administration, the solution to the above problems was to tighten further the belts of the golden straightjacket. Interestingly, this was to be achieved with increasing forms of economic and military coercion and with little consensus-formation or compromises. The Intensication and Justication of a More Repressive and Unabashed Unilateralism: U.S. Foreign Policy After 9/11
Americas cause is the cause of all mankind. Benjamin Franklin, quoted in Kagan (2003)

The catastrophic events of September 11 not only served to justify military expansion and American imperialism under the gamut of the war on terrorism, but also to legitimate more direct and repressive forms of intervention into strategic areas of the South. On the surface, the Americas war on terrorism both inside and outside national boundaries was justied by the construction of a favorites American myth: the equation that the universal good coincided with American morals. Kagan captures this logic in the following quote: [w]hen Americans sought legitimacy for their actions abroad, they sought it not from supranational institutions but from their own principles. That is why it was always so easy for so many Americans to believe, as so many still believe today, that by advancing their own interests they advance the interests of humanity (Kagan, 2003, p. 88). This sentiment is directly reected in Bushs National Security Strategy (NSS), which was drafted one year after 9/11. The United States possesses unprecedented and unequalled strength and inuence in the world. Sustained by faith in the principles of liberty, and the value of a free society, this position comes with unparalleled responsibilities, obligations, and opportunity. The great strength of this nation must be used to promote a balance of power that favors freedom. In other words, [t]he United States must defend liberty and justice because these principles are right and true for all people everywhere (Unprecedented power, colliding ambitions, The Economist, September 28, 2002). Aside from temporarily boosting both the Presidents approval ratings to an astounding 82% and consumer spending under the mantra of I am American advertisements, at a deeper level, the constructed myth surrounding American

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internationalism and the other assisted in legitimating increased forms of coercion both at home and what the government considered to be strategic areas of the South, namely: failed states. With blatant and reckless disregard for the countrys already high levels of indebtedness, President Bushs proposed 2004 budget is a case in point: the inescapable conclusion the budget reaches is that the federal government must restrain the growth in any spending not directly associated with the physical security of the nation (Ofce of Management and Budget, 2003). To this end, half of the $28 billion increase over 2003 discretionary spending will go to defense. Specically, [t]he administration of President George W. Bush is requesting $399.1 billion for the military in scal year 2004 ($379.9 billion for the Defense Department and $19.3 billion for the nuclear weapons functions of the Department of Energy). This is $16.9 billion above current levels, an increase of 4.4%. In all, the administration plans to spend $2.7 trillion on the military over the next six years and this as both the Ofce of Management and Budget and the Congressional Budget Ofce project a federal decit as high as $200 billion to $300 billion next year [2004] (Center for Defence Information, 2004). It is interesting to note that the focus of the federal budget was more concerned with addressing the military dimensions of insecurity than with the social and economic insecurity. The federal government has shifted more of the nancial burden of social service provisions to the states, leaving state and local governments with an aggregate budget decit of almost $100 billion during FY 2003 (Doubts arise over scope for U.S. reforms, Financial Times, February 13, 2003). This move has served to embed further what many consider to be not only the most regressive welfare system for poor people among developed countries, but also the most punitive in terms of subjecting welfare recipients to personal intrusions and continuous surveillance (Platt, 2003). The other dimension of the NSS involved the deepening and widening of internal forms of state coercion in the U.S. through the rollback of civil liberties. The latter are not only reective of the governments attempt to straddle the security/insecurity paradox internally, but also have important implications for the way in which the U.S. deals with this paradox vis-` -vis the South. A good example a of the linkages between internal and external forms (foreign policy) of coercion may be located in the USA Patriot Act and specic indicators of the MCA, such as civil liberties and political rights. In view of heightening domestic restrictions on the latter, what are we to understand by the United States mandate to extend these abroad.15 While we discuss the MCA in more detail below, it is instructive to look briey at the Patriot Act as it throws light on who exactly is to benet from the MCAs attempt to construct and police civil liberties and political rights in the South. The justication for the Patriot Act, which was passed by Congress in October 2001, was to unite and strengthen America by providing appropriate

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tools required to intercept and obstruct terrorism. The means of achieving this end was to authorize unprecedented leeway in the surveillance and incarceration of both citizens and non-citizens. Moreover, the Act includes provisions that explicitly target people simply for engaging in classes of political speech that are expressly protected by the U.S. constitution. Likewise, the Patriot Act,
expand[s] the ability of police to spy on telephone and Internet correspondence in anti-terrorism investigations and in routine criminal investigations. It authorized secret government searches, enabling the FBI and other government agencies to conduct searches without warrants and without notifying individuals that their property has been searched. It created a broad new denition of domestic terrorism under which political protesters can be charged as terrorists if they engage in conduct that involves acts dangerous to human life. It also put the CIA back in the business of spying on U.S. citizens and allowed the government to detain non-citizens for indenite periods of time without trial. The Patriot Act was followed in November 2001 by a new executive order from Bush, authorizing himself to order a trial in a military court for any non-citizen he designates, without a right of appeal or the protection of the Bill of Rights (Trading on Fear, The Guardian, July 12, 2003).

The above unilateral tendencies reproduce U.S. dominance as well as the ongoing economic crisis both at home and throughout the world, have led to a pre-emptive foreign policy not only both in terms of security but also in terms of the wider ofcial development agenda. According to Saskia Sassen, the United States is attempting to move away from its previous commitments of global governance and multilateralism whilst seeking to shutdown progressive, not-for-prot non-governmental organizations (NGOs) and their growing inuence, especially vis-` -vis those social forces opposed to neoliberal globalization. The former is a illustrated by the American Enterprise Institute, an inuential think tank closely associated with the Bush administration, which launched the attack on the WTO with a conference in Washington.16 At least 42 senior representatives of the Bush administration attended. Civil society is slowly being shut out of development issues by moving to grant more contracts to private companies instead of non-prot organisations (New lords of Africa, The Guardian, Wednesday July 9, 2003). To sum up this section: the deepening economic and security threats, both within and outside U.S. borders, have reshaped the regulatory landscape of a key issue of development: the management of poverty in failed states. It is from this context that a new form of ofcial agenda emerges: pre-emptive development and its ultimate aim of ensuring that the poorest countries are rmly tted in the golden straightjacket. As we will see below, despite its novelty, the basic premise of this new form of the ofcial development agenda is strikingly similar to that of its predecessors, namely: that the path to increased growth and prosperity lies in countries willingness and ability to adopt policies that promote economic freedom and the rule of law.

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THE MILLENNIUM CHALLENGE ACCOUNT: MANAGING THE SECURITY/INSECURITY PARADOX

There is no longer any agreement on the main lines of economic policy between the current U.S. administration and the international nancial institutions. John Williamson, 2003

Excluded States, Poverty and the National Security Strategy According to the 2002 National Security Strategy (NSS), failed states pose a direct threat to U.S. national security. Before continuing it is helpful to elaborate briey on this term. While there is far from a consensus on the meaning of the term, failed states, such as Nigeria, Afghanistan, Sierra Leone, Iran, Bosnia, Somalia, are dened by the U.S. government as countries in which the central government does not exert effective control over, nor is it able to deliver vital services to, signicant parts of its own territory due to conict, ineffective governance [read: adherence to the tenets of neoliberalism], or state collapse (Rice, 2003). Following this logic, failed states are believed not only to provide convenient operational bases and safe havens for international terrorists, but also the lack of development (e.g. economic freedom for capitals and rule of law) inherent in failed states could spawn discontent and violence that would spill over to other countries (White House, 2002). The justication to treat these countries with increased coercion and surveillance stems from the position that other countries have the right to act against the failed states in order to prevent the terrorism that could otherwise harm the other countries.17 To understand the nature of the MCA, it is instructive to explore briey what the U.S. government sees as the main cause of excluded states.18 Although cautious not to draw a simple correlation between poverty and terrorism, the U.S. government strongly suggests that the higher the poverty rates the higher the potential for that environment to breed terrorism. As the National Security Strategy makes clear, the events of September 11, 2001, taught us that weak states, like Afghanistan, can pose as great a danger to our national interests as strong states. Poverty does not make poor people into terrorists and murderers. Yet poverty, weak institutions, and corruption can make weak states vulnerable to terrorist networks and drug cartels within their borders (Daalder et al., 2002). From the above perspective, then, in order to deter future terrorist aggression against America, the government has to gain more control over what occurs within these countries so as to reproduce and protect U.S. dominance in the global political economy by ensuring that failed states adopt market-led policies and embrace globalization so that they may overcome poverty. To date,

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there have been two main ways the poorest regions of the world are being forced to slip on the golden straightjacket: one is by attempting to discipline failed states by shifting loans into measurable grants through the World Banks International Development Association (or, IDA); the other is the MCA.

Intensifying Capitals Discipline Through Aid? Transforming IDA Lending Practices According to the Bush administration, a more efcient way of ensuring that the poorest countries adopt neoliberal principles is through unilateral-inspired solutions administered by a multilateral lending institution, such as the IDA. The latter, which forms key component of the World Bank Group (cf. Pincus & Winters, 2002), was created in 1960 to assist the worlds poorest countries reduce poverty by providing credits, which are loans at zero interest with a 10-year grace period and maturities of 3540 years.19 To achieve maximum control over the development process, the U.S. government has insisted that the IDA should convert its loans to grants. U.S. Treasury Under Secretary John Taylor sums up the logic behind this proposal in the following manner:
[A] novel proposal we have suggested to the World Bank to have shareholders contributions tied to measurable results. Grants can be tied more effectively to performance in a way that longer-term loans simply cannot. You have to keep delivering the service or you dont get the grant. Every three years, the United States and other shareholders in the World Bank contribute a certain amount to this IDA program. The United States has reduced its contributions to IDA in the 1990s. We intend to reverse this trend. We want to increase our contributions to IDA, but we think it is essential to do so in a way that gears the contribution to results (Taylor, 2002).

While far from a novel idea, the concept of performance-based grants instead of traditional loans was enthusiastically supported by the neo-conservative sectors of prestigious and highly inuential American think tanks, such as the Heritage Foundation, as well as the International Financial Institution Advisory Commission, also known as the Meltzer Commission.20 According to long-time advocates of grants, Adam Lerrick and Allan H. Meltzer, performance-based grants are a more effective form of control and surveillance over states and markets of the South than traditional loans. On the one hand, grants can be project-linked and executed under competitive bids (which includes foreign market participants) with payments shared by both the World Bank and the beneciary. On the other, the grant scheme would allow for an independent audit and payments based on clearly quantiable basic needs aimed at improving the quality of life and, relatedly, economic growth: primary education, health, sanitation and water, as well as the numbers of babies vaccinated, improvement

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of literacy rates, and so forth (Lerrick & Meltzer, 2002). It should be underlined that the imposition of performance-based grants via the Banks IDA is not based on an inter-state consensus, as many G-7 countries stand in opposition to this proposal (Sanford, 2002). Thus, in keeping with its non-hegemonic status, the U.S. seeks to implement policy in highly coercive and unilateral terms. In 2002, the U.S. government States proposed additional funding as an incentive contribution if IDA satisfactorily initiated work on a results measurement system and had delivered key country diagnostic assessments. According to U.S. Treasury Secretary, John Snow, [f]or the rst time IDA donors are able to link a portion of their contributions to the achievement of results. The U.S. committed to increase its budgetary request by 18% for IDA. Of the $2.85 billion U.S contribution to IDA, $300 million is contingent on improving results in a concrete and measurable way. Convinced that the IDA has met conditions for additional funding, Snow announced his intention to request an additional $100 million in funding for the IDA in April 2003 (Ofce of Public Affairs of the U.S. Treasury Department, 2003).

The MCA: The New Compact for Global Development As noted in the introductory section of this essay, in September 2000, heads of state committed themselves to reducing poverty in the world by 2015. To meet this objective of the Millennium Declaration, the UN Secretary-General, Ko Annan, called for a Financing for Development (FfD) conference to take place in Monterrey, Mexico in March 2002.21 It was during this meeting that President Bush proposed a dramatic increase in U.S. foreign assistance for poor countries to meet the Millennium Development Goals. This momentous offer calls for an additional increase in ofcial development assistance (ODA) by $5 billion a year, phased in over a three-year period: $1.7 billion in FY 2004, $3.3 billion in FY 2005, and $5 billion in scal year (FY) 2006 and each year thereafter (USAID, 2002). While Congress has reduced Bushs proposed budget by 1.8 billion, it was 6% higher than the amount approved for foreign operations for the current scal year (US Department of State, 2003). What is more, the budgetary limitations of the MCA do not lessen the impact of the MCA to act as a trend-setting mode of managing aid. For one thing, the Millennium Challenge Corporation (MCC), as opposed to USAID, will govern the MCAs funds, although USAID is to be a key partner of the MCA in the sense that it is to act as the implementing agency for many MCA programmes. The White House is trying to establish the MCC as an independent corporation, whose head will be chosen by the President of the United States. Congress, on the other hand, would like to see the MCC

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fall under the jurisdiction of the State Department, thereby curbing some of its independence. For another, unlike traditional forms of development assistance, the programme, in the manner of IDA performance-based grants, seeks to reward performance and measure results so as to create an operational action plan aimed at ensuring that the goals set by the NSS are reached. In the words of President George W. Bush:
Countries that live by these three broad standards ruling justly, investing in their people, and encouraging economic freedom will receive more aid from America. And, more importantly, over time, they will really no longer need it, because nations with sound laws and policies will attract more foreign investment. They will earn more trade revenues. And they will nd that all these sources of capital will be invested more effectively and productively to create more jobs for their people . . . I challenge other nations, and the development banks, to adopt this approach as well (Citizens Network on Essential Services, 2003).

The MCA is to provide aid to those countries who have successfully demonstrated, largely through quantiable scores, that they meet all 16 indicators spanning three broad eligibility criteria: (1) ruling justly; (2) investing in people; and (3) economic freedom (see Table 2). While these conditions reect the concerns of the ofcial development discourse, i.e. reproducing the imperative of economic growth, open current and capital accounts, sound macroeconomic fundamentals, good governance, and democratic values; the empowering features seem to be overshadowed by the pre-emptive nature of the MCA, not to mention the complementary scheme of pre-emptive conditionality imposed by the IDA. This is illustrated by the following quote furnished by the U.S. State Department, the execution of the MCA shares the discourse of empowering development, such as ownership and social inclusion (partnership, participation) whilst further disciplining and controlling failed states to the dictates of the market. The concern for empowering individuals is limited to ensuring that the reform, along lines of the above sixteen criteria, is homegrown. Drawing its lessons from the ineffectiveness of IMF and World Bank conditionalities, the architects of the MCA stress the need for strong domestic movement for change. Yet, as the following lengthy quote reveals, the manner in which this reform is to be achieved was a classical top-down manner with intensied forms of U.S. surveillance. For instance, partnership between the MCA and recipient countries is to be established in the following manner:
the MCA will use time-limited, business-like contracts that represent a commitment between the United States and the developing country to meet agreed performance benchmarks. Developing countries will set their own priorities and identify their own greatest hurdles to development. They will do so by engaging their citizens, businesses and government in an open debate, which will result in a proposal for MCA funding. This proposal will include objectives, a plan and timetable for achieving them, benchmarks for assessing progress and how results will be

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Table 2. Eligibility Criteria for the MCA.

Indicator (I) Ruling justly 1. Control of corruption 2. Rule of law 3. Voice and accountability 4. Government effectiveness 5. Civil liberties 6. Political rights (II) Investing in people 7. Immunization rate: DPT and measles 8. Primary education completion rate 9. Public primary education spending/GDP 10. Public expenditure on health/GDP (III) Economic freedom 11. Country credit rating 12. Ination 13. Regulatory quality 14. Budget decit/GDP 15. Trade policy 16. Days to start a business Source World Bank Institutea World Bank Institute World Bank Institute World Bank Institute Freedom Houseb Freedom House WHO/World Bank World Bank World Bank World Bank Institutional Investor IMF World Bank Institute IMF/World Bank Heritage Foundationc World Bank

Source: Fact Sheet: Millennium Challenge Account, distributed by the administration on November 25, 2002, available at www.cgdev.org. Quoted in Steve Radelet, Will the Millennium Challenge Account be Different? The Washington Quarterly, Spring 2003, Vol. 26 (2), p. 175. a The World Bank Institute (WBI) is a part of the World Bank Group. The goal of the WBI is to create learning opportunities for countries, World Bank staff and clients, and people committed to poverty reduction and sustainable development. WBIs work program includes training, policy consultations, and the creation and support of knowledge networks related to international economic and social development. See http://www.worldbank.org/wbi/. b According to its website, Freedom House is a non-prot, nonpartisan organization, is a clear voice for democracy and freedom around the world. Through a vast array of international programs and publications, Freedom House is working to advance the remarkable worldwide expansion of political and economic freedom. Freedom House was established around the same time as the Bretton Woods Institutions, and is sponsored by, inter alia, the Soros Foundation, USAID, and the Ford Foundation. For more information, see, www.freedomhouse.org. c The Heritage Foundation is a research and educational instituted, which was founded in 1973. It is a think tank whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. For more information see the Heritage Foundation website at: http://www.heritage.org.

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sustained at the end of the contract, delineation of the responsibilities of the MCA and the MCA country, the role of civil society, business and other donors, and a plan for ensuring nancial accountability for funds used. The MCA will review the proposal, consulting with the MCA country. The Board will approve all contracts (Citizens Network on Essential Services, 2003).

In stark contrast with the spirit of multilateralism demonstrated by Clintons engagement and enlargement strategy, as well as empowering development, all the institutions actually performing assessment on these 16 criteria are undertaken by either largely neo-conservative American organisations, such as the Heritage Foundation and the Freedom House, or U.S.-dominated IFIs. As such, the power to pass judgment on the above mentioned criteria would be based from a uniquely American perspective of what constitutes, for example, political rights and civil liberties. It should be emphasized that neither the NSS nor the MCA are clear on what is meant by these criteria, which in turn leads for much discretionary power by these institutions. As such, prejudicial, Western-based, Christian values predominate alongside a highly discretionary means of arriving at the denitions of each criterion. Moreover, given the increasingly repressive environment in the U.S. itself, witnessed by the USA Patriot Act, it is questionable what is understood under the denition of civil liberties. The effect of this rather subjective process is the construction of terms that appear to be an inert fact of nature (Said, 1979). The following quote provides greater insight into the linkages between the Heritage Foundation, an authoritative voice on nancial matters, and the Wall Street Journal, not only reproduce common sense assumptions of the importance of economic freedom and rule of law in the South, but also act as a disciplinary strategy for capital interests:
The Index of Economic Freedom grades 10 factors for 161 countries with 1 being the best score and 5 being the worst score. These factors are: trade policy, scal burden of government, government intervention in the economy, monetary policy, capital ows and foreign investment, banking and nance, wages and prices, property rights, regulation, and black market activity. Those 10 scores for these factors are then averaged to give an overall score for economic freedom. Countries are designated free, mostly free, and mostly unfree, and repressed based on these overall scores. As shown in the Index, free countries on average have a per capita income twice that of mostly free countries, mostly free countries have a per capita income more than three times that of mostly unfree and repressed countries. This relationship exists because countries maintaining policies that promote economic freedom provide an environment that facilitates trade and encourages entrepreneurial activity, which in turn generates economic growth (Schaefer, 2003, p. 3).

Seen from the above perspective, it becomes clear not only how the MCA will operate, but also, and more importantly, that the golden straightjacket is far from a market-driven phenomenon; but rather a political strategy designed to serve particular interests. A failing grade on the Heritage Foundations Index of Economic Freedom, published annually by the Wall Street Journal, signals higher

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risk to transnational capitals. The latter, in turn, punish countries by either capital ight or investment strikes. The assumptions inherent in these scores are also highly subjective. To be sure, the correlation between economic freedom, growth, and democracy has not been substantiated by history. Authoritarian Chile under the Pinochet regime produced the so-called neoliberal model in the South during the 1980s, while the developmental states in East Asian helped produce the miracle economies. Likewise, the assumption that economic freedom will quell historically and culturally rooted civil wars, oppression and human suffering in many of the failed states is not only based on awed Eurocentric ideals, but also justies the increasingly physical and economic coercion undertaken through withholding private investment and now public aid from these states. On another level, the MCA represents a change from a neoliberal to a neo-conservative straightjacket. As Harvey notes, unlike the neoliberal agenda, the primary objective of neo-conservativism
is the establishment of and respect for order, both internally and upon the world stage. This implies strong leadership at the top and unwavering loyalty at the base, coupled with the construction of a hierarchy of power that is both secure and clear. To the neo-conservative movement, adherence to moral principle is also crucial (2003, p. 190).

While there are various schools within conservative thought (e.g. authoritarian conservativism, paternalistic conservativism), I believe that the type to which Harvey is referring is libertarian conservativism. This strand advocates the greatest possible economic liberty and the least possible government regulation of social life, echoing laissez-faire neo-liberalism. Unlike the latter, however, libertarian conservativism harnesses this to a belief in a more traditional, conservative social philosophy that stresses the importance of authority and duty, as embodied in the MCA and its reversal of the traditional aid formula: instead of giving aid to get the hoped for reforms, it is based on reform before aid. Libertarian neo-conservativism thus acts as a complementary stabilizer to the neo-liberal straightjacket by justifying the need for greater and more explicit forms of economic and physical coercion to stabilize laissez-faire forms of accumulation by dispossession. Furthermore, the MCA is infused with cultural and ideological dimensions. The recreation of the us and them divide along the lines of the coalition of the willing and the axis of evil, have acted to ll the vacuum of the Cold War rhetoric (the frequent association of Western governments and media of Communist regimes as unjust, backward, and diabolic) and distort and blur the growing contradictions of neoliberal globalization and American imperialism over the past several decades. As we will see, the MCA has appropriated the altruistic goals set out in the Millennium Development Goals and twisted the means to serve

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the ends of the American empire. While this new global development compact operates primarily through coercive means, it is legitimized to the American people and international system through the construction and reproduction of a discourse that views the other as a passive and silent homogenous unit that is unwilling to embrace neoliberal modernization and thus remains a potential threat to the West. Rather, such discourse found in the MCA renders the people of the colonized culture as powerless objects. Following Edward Said, the culture of powerlessness is enforced by a denition that anything written by those individuals located in the excluded states are deemed by the wider media, IFIs, bilateral donors, and private creditors and investors as illegitimate, non-knowledge, and nonsense (Said, 1979). The result of the culture of the powerless other in ofcial development discourse, particularly the MCA, has been the common sense assumption that there is only one way to develop: by embracing the tenets of neoliberal globalization and Western democracy. All told, the underlying logic of pre-emptive development evolves around the security/insecurity paradox: to safeguard neoliberal globalization and American imperial dominance it is vital to ensure that those states, who have suffered the most under market-led growth embrace the same neoliberal discipline that has led to high levels of insecurity in the rst place.

CONCLUSION
I have argued that while the MCA represents a new departure in terms of a more intrusive, coercive and overtly American-led form of development, its content resembles that of the preceding ofcial development agendas. Through the application of a historical material perspective, the genesis and inner nature of the MCA were exposed as moments of the restructuring of American imperialism in neoliberal-led globalization by way of David Harveys notion of accumulation by dispossession. In attempting to deconstruct the MCA, I sought to go beyond the common sense assumption that the MCA was a direct result of the tragic events of 9/11 in order to reveal the content of the MCA as well as to shed more light on the increasingly coercive and intrusive expressions of American empire vis-` -vis a the South. To this end, I demonstrated that Bushs pre-emptive development agenda emerged from a combination of at least three factors all of which were augmented, not caused, by the events of 9/11. First, there is a perceived crisis of condence not only regarding neoliberal governance in the U.S., particularly in the post-speculative bubble era, but also a crisis of condence regarding neoliberal governance in excluded states. Income levels have plunged in most parts of the developing world, poverty rates are on the rise, and income gaps between rich

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and poor countries have widened. Second, excluded states continue to receive very little private capital ows and bilateral aid. And, third, the U.S. economy, which has acted as the growth engine for the world, has been experiencing a deep economic slowdown since the bursting of its bubble-led after August 2000. Increased levels of unemployment not seen since 1994, spiraling budget and trade decits, unsustainable consumer and corporate debt levels indicate a weak, as opposed to a strong and robust economy, which can no longer serve as the engine of growth for the rest of the world. This discussion was useful not only in revealing the inner nature of the MCA, but also the basic thrust underneath the shifting nature of ofcial development agendas. Whether the MCA, combined with the good governance principles of empowering development, will stave off further aggression toward the U.S. remains to be seen. What is visible is that while the ofcial development agenda continues to push all parts of the South to the exigencies of foreign capital by forcing these countries to adopt to new forms of Anglo-American neo-conservativism or risk any form of capital investment and aid, the present discontent with the existing governance structures, both at the national (e.g. Brazils Landless Workers Movement, the Zapatistas) and international levels (e.g. the World Social Forum, Seattle and Cancun Protests), will continue to grow in the South. This will in turn not only serve to increase the already unsustainable levels of legitimacy decit for the neoliberal programme but also further constrict the golden straightjacket from which the U.S. extracts much of its dominance. In contrast to the rhetoric surrounding Americas war on terrorism, the increasing security concern of the U.S. government lies more in its need to constantly intervene in an increasingly coercive manner into the states and markets of the South in order to protect its interests, as opposed to its much-touted attempts of spreading democracy and freedom in the world. It appears that the trend toward intensied economic and military coercion appears to be the strategy to achieve the American Century propagated in the NSS.

NOTES
1. For more information about the Millennium Development Goals, see http://www. developmentgoals.org. 2. Bush announced the creation of the MCA in March 2003. As of June 18, 2003 the Senate Foreign Relations Committee and the House International Relations Committee have reported out bills to authorize the creation of the MCA. 3. It should be highlighted that the amount of spending put forward by the Bush Administration is contingent on budgetary approval by U.S. Congress. Both House and Senate Budget Committees have cut ambitious amounts. This will be discussed in more detail in the

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second half of the paper. For now, sufce it to say that viewed from a wider lens, U.S. levels of developmental aid, broadly dened, have been decreasing since the 1960s. The spending levels of the MCA are not as dramatic as the Bush administration makes them out to be. What concerns us here, however, is not the amount of aid, but the pre-emptive form in which this aid is distributed, and, in turn, its disciplinary characteristics (quoted in Daalder et al., 2002, p. 5). 4. The Project for the New American Century is a non-prot organization that is dedicated to promoting a few fundamental propositions: that American leadership is good both for America and for the world; that such leadership requires military strength, diplomatic energy and commitment to moral principle; and that too few political leaders today are making the case for global leadership. For more information see: http://www.newamericancentury.org/. 5. As many commentators have noted, the similarities between the second Bush administrations NSS and Deputy Secretary of Defence Paul Wolfowitzs 1992 Draft of the Defence Planning Guidance document are uncanny. See, for example, PBS Frontline, http://www.pbs.org/wgbh/pages/frontline/shows/iraq/etc/wolf.html. 6. Terrorism is a highly contested term. Its subjective meaning is largely determined by whom is doing the dening. A terrorist, for example is considered to be a term of abuse generally used against groups who engage in violent behaviour, by people who oppose the goals of the group. It carries the connotation that suffering has been caused to helpless victims. As Peter Willetts rightfully notes, the term terrorist might be more appropriately applied to those, including governments, who use indiscriminate violence for the purpose of political intimidation (1999, p. 297). 7. In proportion to its size, the U.S. spends the least of all the wealthy countries. In 2002 the United States, for example, spent only 0.12% of its GDP. To put this in perspective, Denmark donated almost 1% of GDP in bilateral aid quoted in The solidarit summit, e The Economist, May 30th 2003. 8. In the early 1980s, for example, low income countries experienced a decline in per capita income of 1.4%, the number of people living on less than $1 a day increased from 1,197 million in 1987 to 1,214 million in 1998, and the 1999 UNDP Human Development Report notes that whereas the income gap between the 20% of the richest people in the wealthiest countries in the world and the 20% of the poorest was 30:1 in 1960, the gap was 74:1 in 1997. UNDP, Human Development Report 1999: Globalization with a Human Face. Available at: http://hdr.undp.org/reports/global/1999/en/. 9. These results were reported at the 2003 meeting of the World Economic Forum. The poll conducted by Gallup International and Environics included 34,000 people from 46 countries. www.weforum.org. Downloaded January 25, 2003. Quoted in Brodie (2003). 10. Aside from the celebrity critics, such as Joseph Stiglitz, Ravi Kanbur, and Jeffrey Sachs, the voices conservative dissenters in Washington, who have long argued for the abolition of the IMF and World Bank, were not only become becoming louder but also had a growing and sympathetic audience. The Heritage Foundation (now a key player in the MCA) and the Cato Institute, for example, have charged the IMF with eliminating the discipline of risk in private markets (moral hazard) by interfering in the natural rationality of markets through bailouts and aid packages. See, for example, Alan Reynolds of the CATO Institute, The IMFs Suffocating Embrace, available at: http://www.worldtrademag.com/CDA/ArticleInformation/features/ BNP Features Item/0,3483,91669,00.html; Edwin J. Feulner, Jr., The IMF Needs Real Reforms, Not More Money, Heritage Foundation Backgrounder No. 1175, May 9, 1998;

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Johnson and Schaefer, No New Funding for the IMF, Heritage Foundation Backgrounder Update No. 287, September 23, 1997. 11. It should be noted that the share of U.S. resources devoted to development, humanitarian or economic aid for other countries has generally fallen since the mid-1960s. The overall decline has been substantial, reducing such spending to exceptionally low levels for the United States. The share of national resources the United States contributes in aid to the worlds poorest nations is now far lower than the share that any other industrialized country contributes, and is at one of the lowest levels in the post-World War II era. The gures stated here are expressed in 2000 dollars and adjusted for ination. Quoted in Shapiro (2000). 12. The term global governance is notoriously imprecise and woolly. The denition that most closely resembles the usage by the Clinton administration is found in the text of the Report of the Commission on Global Governance: Our Global Neighbourhood, Oxford: Oxford University Press, 1995. 13. IMF, IMF Survey (Vol. 30, No. 7, 2001) p. 104. 14. According to the U.S. Labour Department, the unemployment rate rose in May to 6.1% its highest level since July 1994. Unemployment up to 6.1% in May, Financial Times, June 6, 2003. 15. These two indictors are dened and quantitatively measured by the Freedom House. For more information, see, the Freedom Houses 2003 Freedom in the World: Country and Territory Reprot. Available at: http://www.freedomhouse.org/research/ freeworld/2003/countries.htm. 16. More information about the American Enterprise Institute is available at the following URL: http://www.aei.org. 17. Of course, the highly subjective and self-serving aspects of this notion are not called into question by the U.S. government. For a critical assessment, see, Martin Khor, Failed States theory can cause global anarchy, Third World Network, 4 March 2002. Available at: http://www.twnside.org.sg/title/et0125.htm. 18. Of course, the exploitative and repressive nature of centuries of imperial and colonial rule are not brought into the ofcial explanation as to why these states have failed to serve dominant capital interests properly. 19. It should be mentioned that from the early 1980s onward the United States began to exercise its muscle in a much more unilateral and pre-emptory manner vis-` -vis the a International Development Association, see Kapur (2002). 20. See, for example, Schaefer (2001). 21. For more details on the Millennium Declaration, see the United Nations website at http://www.un.org/millennium/declaration/ares552e.htm.

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Citizens Network on Essential Services (2003). The U.S.s millennium challenge account: New paradigm for development assistance? President G. W. Bush, 14 March 2002. News & Notices for IMF and World Bank Watchers, 2(8) (Spring 2003). Downloaded August 29, 2003. Available at http://www.challengeglobalization.org/html/news notices/spring2003/INTRO. Clinton, W. J. (1998). Remarks by the President to opening ceremony of the 1998 International Monetary Fund/World Bank annual meeting. October 6. Downloaded on October 12, 2002. Available at: http://www.usconsulate.org.hk/gf/1998/1006a.htm. Conference Board (The) (2003). U.S. economic growth will slow in 2003; globalization may be stagnating. The Conference Board (April 3). Downloaded on May 5, 2003. Available at: http://www.conference-board.org/economics/press.cfm?press ID=2115. Daalder, I. H. et al. (2002). The Bush national security strategy: An evaluation. Policy Brief, No. 109. Washington, DC: Brookings Institution. De Angelis, M. (2001). Marxs primitive accumulation: The continuous character of capitals enclosures. The Commoner (September 2001), Available at http://www.commoner.org.uk/ 02deangelis.pdf. Economic Policy Institute (2002). Economic snapshots. Downloaded on 1 August 2002. Available at http://www.epinet.org/index.html. Editors (The) (2003). What recovery? Monthly Review, 54(11), 126. Fine, B. (2001). Making the post-Washington consensus. In: Ben Fine et al. (Eds), Development Policy in the Twenty-First Century: Beyond the Post-Washington Consensus (pp. 131154). London: Routledge. Friedman, T. (1999). The Lexus and the olive tree. London: HarperCollins. Graham, C., & Masson, P. (2002). The IMFs dilemma in Argentina: Time for a new approach to lending? Policy Brief No. 111, The Brookings Institution Policy Brief. Washington, DC: Brookings Institution. Gill, S., & Law, D. (1993). Global hegemony and the structural power of capital. In: S. Gill (Ed.), Gramsci, Historical Materialism and International Relations (pp. 93124). Cambridge: Cambridge University Press. Harvey, D. (2003a). The new imperialism. Oxford: Oxford University Press. Harvey, D. (2003b). The new imperialism: Accumulation by dispossession. In: L. Panitch & C. Leys (Eds), Socialist Register (pp. 6387). London: Merlin Press. Hoffman, S. (2002). Clash of globalizations. Foreign Affairs, 81(4) (July/August), 2541. IMF (2002). The IMFs poverty reduction and growth facility (PRGF). Downloaded on 20 April 2002. Available at http://www.imf.org/external/np/exr/facts/prgf.htm. IMF (2003a). Poverty reduction strategy papers. Downloaded on June 26, 2003. Available at: http://www.imf.org/external/np/prsp/prsp.asp. IMF (2003b). Reports on the observances of standards and codes. Downloaded on April 15, 2003. Available at: http://www.imf.org/external/np/rosc/rosc.asp?sort=date. IMF (2003c). World economic outlook: Growth and institutions. Ch. 2, When Bubbles Burst. Downloaded on September 24, 2003. Available at http://www.imf.org/external/pubs/ft/weo/ 2003/01/pdf/chapter2.pdf. Kagan, R. (2003). Of paradise and power. New York: Alfred A. Knopf. Kaldor, M. (1999). New and old wars: Organised violence in a global era. Polity Press/Stanford University Press. Kapur, D. (2002). The changing anatomy of governance of the World Bank. In: J. Pincus & J. A. Winters (Eds), Reinventing the World Bank (pp. 5475). Ithaca: Cornell University Press.

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Kirton, J. J., & von Furstenberg, G. M. (Eds) (2001). New directions in global economic governance: Managing globalization in the 21st Century. Aldershot: Ashgate. Kotz, D. (2003). Neoliberalism and the U.S. economic expansion of the 90s. Monthly Review, 54(11), 1028. Lerrick, A., & Meltzer, A. H. (2002). Grants: A better way to deliver aid. Quarterly International Economics Report. Gailliot Center for Public Policy, Pittsburgh, PA: Carnegie Mellon. Downloaded on September 21, 2003. Available at: http://www.house.gov/jec/imf/grant.pdf. Litwak, R. S. (2000). Rogue states and U.S. foreign policy: Containment after the cold war. Washington, DC: Woodrow Wilson International Center for Scholars. Mahajan, R. (2002). The new crusade: Americas war on terrorism. New York: Monthly Review Press. Morrissey, M., & Baker, D. (2003). When rivers ow upstream: International capital movements in the era of globalization. Issue Brief (March 22). Washington, DC: Center for Economic & Policy Research. Ocampo, J. A. (2000). A broad agenda for international nancial reform. In: J. A. Ocampo et al. (Eds), Financial Globalization and the Emerging Economies (pp. 4162). Santiago, Chile: United Nations Economic Commission for Latin American and the Caribbean. Ofce of Management and Budget (2003). Charting a course for the federal budget (June 15). Washington, DC: White House. Downloaded on September 2003. Available at: http://www. whitehouse.gov/omb/budget/fy2004/charting.html. Ofce of Public Affairs of the U.S. Treasury Department (2003). Treasury secretary John Snow announces request of an additional $100 million for the International Development Association, afrms progress on goals and measurable results (April 13, 2003). Washington, DC: U.S. Treasury Department. Downloaded on May 11, 2003. Available at: http://www.ustreas.gov/ press/releases/js186.htm. Panitch, L., & Gindin, S. (2003). American empire and global capitalism. In: L. Panitch & C. Leys (Eds), Socialist Register (pp. 142). London: Merlin Press. Perelman, M. (1984). Primitive accumulation and the social division of labour. Totowa, NJ: Rowman & Allanheld. Pincus, J. R., & Winters, J. A. (2002). Reinventing the World Bank. In: J. Pincus & J. Winters (Eds), Reinventing the World Bank (pp. 125). Ithaca: Cornell University Press. Platt, T. (2003). The state of welfare: U.S. 2003. Monthly Review, 55(5), 1327. Rice, C. (2000). Promoting the national interest. Foreign Affairs, 79(1), 4563. Rice, S. E. (2003). The new national security strategy: Focus on failed states. Policy Brief No. 116, Washington, DC: Brookings Institution. Rosenau, J. N. (1995). Governance in the twenty-rst century. Global Governance, 1, 1343. Said, E. (1979). Orientalism. New York: Vintage Books. Sanford, J. E. (2002). World Bank: IDA grants or IDA loans. February 8, 2002. Washington, DC: Bank Information Center. Downloaded on March 15, 2002. Available at http://www.bicusa.org/ usgovtoversight/Sanford%20 IDA loans or grants.pdf. Schaefer, B. D. (2001). Real help for poor nations: President Bushs World Bank grant proposal. Backgrounder #1466, Washington, DC: Heritage Foundation. Downloaded on September 27, 2003. Available at http://www.heritage.org/Research/TradeandForeignAid/ BG1466.cfm. Schaefer, B. D. (2003). Promoting growth and prosperity in the developing world through economic freedom. Economic Perspectives. Downloaded on September 5, 2003. Available at: http://usinfo.state.gov/journals/ites/0303/ijee/schaefer.htm.

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Shapiro, I. (2000). Trends in U.S. development aid and the current budget debate. Washington, DC: Center on Budget and Policy Priorities, September 2000. Downloaded on August 2, 2003. Available at: http://www.cbpp.org/42500bud.htm. Shiller, R. J. (2000). Irrational exuberance. New York: Broadway Books. Soederberg, S. (2002). The new international nancial architecture: Imposed leadership and emerging markets. In: L. Panitch & C. Leys (Eds), Socialist Register (pp. 175192). London: Merlin Press. Soederberg, S. (2004). The politics of the new international nancial architecture: Reimposing neoliberal domination in the global south. London and New York: Zed Books. Taylor, J. B. (2002). Improving the Bretton Woods nancial institutions. John B. Taylor, Under Secretary of Treasury for International Affairs Annual Mid-Winter Strategic Issues Conference Bankers Association for Finance and Trade, February 7, 2002, Citizens Network on Essential Services. Downloaded on June 2, 2003. Available at http://www.challengeglobalization.org/ html/econ lit/treasury feb02.shtml. Thomas, C. (2002). Global governance and human security. In: R. Wilkinson & S. Hughes (Eds), Global Governance: Critical Perspectives (pp. 113131) London: Routledge. UNDP (1994). Human development report. Oxford: Oxford University Press. US Department of State (2003). House panel approves $17.1 billion foreign spending bill. July 11, 2003. Washington, DC: U.S. Department of State. Downloaded on August 20, 2003. Available at: http://usinfo.state.gov/xarchives/display.html?p=washle-english&y=2003&m= July&x=20030711103326emmoccmk7.867068e-02&t=usinfo/wf-latest.html. United States Agency for International Development (USAID) (2002). Millennium challenge account update. June 3, 2002. Downloaded on July 5, 2002. Available at http://usinfo.state. gov/journals/ites/0303/ijee/usaidfs/htm. Wayne, A. (2003). The MCA promotes sound economic policies. Economic Perspectives. Washington, DC: U.S. State Department. White House (2002). National security strategy of the U.S.A. Washington, DC: The White House, September 2002. Downloaded on November 4, 2002. Available at http://www.whitehouse.gov/ nsc/nss1.html. Willetts, P. (1999). Actors in global politics. In: J. Baylis & S. Smith (Eds), The Globalization of World Politics: An Introduction to International Relations (pp. 287310). Oxford: Oxford University Press. World Bank (2003). Global development nance: Striving for stability in development nance. Washington, DC: World Bank Group. Zarembka, P. (2002). Primitive accumulation in Marxism, historical or trans-historical separation from means of production? The Commoner (March). Available at www.thecommoner.org.

THE LOGIC OF NEOLIBERAL FINANCE AND GLOBAL FINANCIAL FRAGILITY: TOWARDS ANOTHER GREAT DEPRESSION?
Anastasia Nesvetailova
ABSTRACT
The article provides a comparative critique of the nancial underpinnings of the Great Depression of the 1930s and the recent wave of nancial crises. The collapse of the nancial systems in many developing nations, the bankruptcies in the Anglo-Saxon corporate sectors and a threat of more sovereign defaults on behalf of emerging markets suggest that the current wave of global nancial fragility and recession rivals that of the Great Depression of the 1930s. The paper examines key elements that account for the crisis-prone nature of global capitalism: the political discipline of neo-liberalism, debt-driven expansion of the privatised nancial markets, and the profound disarticulation of the nancial and real economies. These factors suggests that the risk of a global depression is by no means hypothetical, and unless effective and collaborative efforts are made to tame the inherently unstable regime of global nance, even major world economies are faced with a prolonged period of nancial turbulence and economic stagnation. The paper concludes by pondering the possibility of a paradigmatic shift in the transnational political consensus that can

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 6190 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21003-3

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prevent a global repetition of the 1930s. While the increased awareness of nancial instability and crisis may indeed prompt some ad hoc adjustments in national and foreign economic policies of major capitalist powers, in the long run these measures will be insufcient to prevent a major nancial and economic disaster. The continual ascendance of international nancial markets and institutions throughout the 20th century and in particular, since the breakdown of the Bretton Woods regime in 1973 has transformed both the nature and scope of the capitalist system. Finance has acquired a much bigger role in the conguration of national economic systems and orientation of national policies. Since the collapse of the Soviet bloc in 19891991, nance has also been a major engine of capitalist expansion on a global level. The spread of nancial instability and crisis in the late 1990s in particular has nourished the interest of scholars in the dynamics of nancial crisis per se, as well as the structural transformations of nancial capitalism more generally. The profound nance-driven transformations of global capitalism embody some central contradictions of capitalism, and have far-reaching political ramications. On the one hand, money, or credit system more generally, makes societies uniform by allowing all substantial variety to be formalised in a common referent. In a simple society, the function of credit is remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on the par with the man who has capital of his own. And the more casual the conditions under which credit is granted . . . the more impecunious credit is (Galbraith, 1975, p. 86). Yet money and nance also splits societies, for money always has a double purpose: a claim (monetary asset) on the one hand, and a corresponding obligation (debt) on the other. Under the dictate of the free market, a social relationship between creditor and debtor can become an entrenched one-sided conict. In an advanced capitalist economy of today, Strange (1998, p. 121) reminds us, you could not stop the use of credit. And whenever there is a creation of credit, there is always a corresponding, or even larger, creation of debt. With the creditor-debtor relationship globalised, the conict between creditors and debtors also increasingly assumes a global character (Altvater, 1997, p. 49). During the post-1973 evolution of the global credit system, competition between banks and non-bank nancial institutions can and has led to the creation of precarious debt structures, involving large pools of corporate, private and public liabilities in mature economies, as well as a myriad of loans to developing and transition countries (Gill & Law, 1989, p. 494). Facilitated by the recent technological, organisational and political changes in the world economy, the ensuing endogenous growth of the privatised credit system have led to the formation of a nancial sphere dened rst and foremost

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by the proliferation of numerous credit vehicles and therefore multiple forms of debt. According to Minsky a prominent economist who devoted his life to the study of the evolution of nance in capitalism the basic source of nancial instability in such a system lies in the disproportionate development between real prot opportunities and debt commitments. Endogenous nancial innovation and expansion not only makes fragility an inherent element of todays nancial structures, it also disrupts the links between nance and other parts of the economic system, deepening the gulf between nancial markets and non-nancial spheres. Indeed, the breakdown of the xed exchange rate regime and the rise of what Gowan (1999, 2001) calls the Dollar-Wall Street regime of global capitalism, the spectacular growth of nancial markets have not been underpinned by a corresponding growth and prosperity of non-nancial sectors of the economy. Until the mid-1970s, the rising nance, insurance and real estate (FIRE)/GDP ratios were paralleled by rising real growth rates of non-nancial goods and services, supporting the conventional view that nancial deepening promotes real growth. Since the breakdown of the Bretton Woods regime, however, the real growth of non-nancial sectors of each of the G-7 has fallen even more than has the real GDP growth, suggesting that the post-1973 rise of FIRE/GDP has been crowing out non-nancial growth (Felix, 1999). At the same time, since the late 1970s, the levels of indebtedness have been growing at all major tiers of the global economy: private corporations engaged in the largely unregulated process of nancial innovation; governments too, became big borrowers (Skene, 1992, p. 38). In the 1980s, the government of the worlds largest economy the USA became a Ponzi unit, borrowing merely to pay the interest on outstanding debt. On the international front, the stimulation of the Reagan decits shifted the U.S. from a net creditor to a net debtor position. Thus the USA as a country also become a Ponzi unit, borrowing in international capital markets to pay the interest as well as the principal on its international debt. With debt expanding faster than GDP since the early 1980s, the rentier share of G-7 income has been rising persistently. Capitals overall share of national income has thus far been rising, and since bonds and equities are mostly held by the top income decile, household income and wealth concentration has also been rising (Felix, 1999). According to Minskys theory of nancial fragility, such debt-laden economic expansion was bound to collapse in a crash that would match the scale of the 1929 crash in the USA. But it did not happen again, and to his surprise, the system continued to function. Minsky concluded that he had underestimated the exibility of capitalism. The Reagan tax cuts created such a huge decit that the domestic economy was supported throughout the monetarist episodes of double-digit

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interest rates. The apparent stability of prot ows, even in the face of great stress, supported the value of a growing structure of nancial assets. The accumulation of those assets into large pension and insurance institutions began the process of shifting the centre of the system from industry to nance. Money market mutual funds created alternatives to bank deposits, while securitisation of bank assets created alternatives to bank lending. Traditional nancial institutions continued to issue commercial paper, but the asset carrying capacity to hold it increasingly lay elsewhere, with the managers of money. At the same time, the ascendance of speculative nance made the real economy vulnerable to the unpredictable effects of nancial speculation. Mergers and acquisitions (M&As), leveraged buyouts followed by the sell off of assets increase paper prots and speculative fevers while reducing the productive capacity of the traditional sectors of production (Cox & Sinclair, 1996, pp. 181182). Wielding their new-found nancial strength in the market for corporate control, the managers of money came to dominate the managers of industry (Mehrling, 1999, pp. 148149; Nitzan, 1998, 2001). Drawing from the historical experience, this paper attempts to historicize the present fragility of global nance and to scrutinise the unravelling crisis in the neoliberal nancial regime. Specically, it compares the current post-bubble recessionary period in the worlds core economies to the nancial underpinnings of Great Depression of the 1930s. As the experience of both periods conrm, the impact of credit booms on nancial markets and the economy became particularly evident in economies that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. The structure of the policy regime most notably the strong monetarist bias of national economic policies that has been anchoring the spread of the neoliberal globalisation has been a central factor in the crisis dynamics (Eichengreen & Mitchener, 2003). Elaborating on Minskyan theory of nancial fragility and crises, the essay aims to establish the causalities between three key components of modern nancial capitalism: nancial liberalisation and an endogenous credit expansion; progressively illiquid character of todays nancial structures; and a corresponding growth of indebtedness at various tiers of the global political economy. Focusing more specically on the circumstances of the current slowdown in the global economy, it ponders the possibility of a long-term economic recovery in the USA and globally. As the essay contends, a combination of political exibility, scal expansion and adjustment in the international value of the dollar may help postpone a global recurrence of the 1930s-type disaster. However, national and international policymakers will continue to face tremendous challenges unleashed by the current crisis of neoliberalism. Hence in conclusion, the article reviews policy

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challenges that confront economic policymakers today and outlines some central issues of an emerging paradigm of nancial stability. As the paper concludes, while the increased awareness of nancial instability and crisis may indeed prompt some ad hoc adjustments in national and foreign economic policies of major capitalist powers, in the long run these measures still constitute a neoliberal paradigm of economic development, and thus will be insufcient to prevent a major nancial and economic disaster. As long as neoliberalism continues to impose its logic on the economy, community an the nation-state, the benets of nancial stability will accrue to the top layers of societies, poverty and unemployment will remain entrenched in the nance-centred mode of international integration, and future generations will have to bear the burden of todays growing decits of all major OECD economies.

INDEBTED EXPANSION: DEBT, FINANCIAL FRAGILITY AND NEOLIBERALISM

Todays world nancial structure is highly complex and contradictory. On the one hand, an on-going tendency of private borrowers to generate and use new instruments of borrowing facilitates the globalisation of nance and the emergence of increasingly intricate techniques of nancial operations. On the other hand, however, this ability of nancial traders to build up large volumes of credit and thus to incur massive volumes of debt in a pyramid-like fashion is a major factor contributing to the present-day fragility of nance. With the globalisation of nancial capitalism, these institutional problems increasingly translate into insolvency and debt crises at the levels of individual borrowers, economic sectors, countries and regions. The ability to tap credit has become a central factor in shaping the socio-economic conict of capitalism. Since todays capitalist political economy is less dependent on (direct) investment ows than on ows of volatile speculative nance, indebtedness has become a basic feature of a capitalism economy today. One of the crucial socio-economic consequences of this debt-driven development is the difculties of mastering the budgetary and the transfer problems of structurally indebted countries (Altvater, 1998). As Galbraith observes, there is a remarkable discrimination between different classes of goods and services in the ease with which they can be nanced. The most singular feature of todays afuent society is the great contrast between the care and encouragement which it lavishes on the production of private goods and the severe restraint which it imposes on those that must emerge from the public sector. The encouragement to indebtedness which the society accords to the man who wants to buy an

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automobile or even take a trip is matched by the stern mistrust with which it views the local government that might want to borrow for a school (Galbraith, 1998, pp. 152153). On the level of national and global macroeconomy, the consolidation of the debt-laden operation of capitalism unleashed Minskyan elements of nancial fragility and crisis; magnifying the associated risks of speculation, illiquidity and debt crises on the global scale. Following the breakdown of barriers between nancial markets, the consequent consolidation of nancial conglomerates and the spread of securities markets worldwide, the segments of the system are now tightly interdependent, both nationally and internationally. The circulation of short-term capital between nancial institutions and within capital markets intensies the debt structure by piling assets into deeper and yet increasingly narrow pools of capital that in turn make them more susceptible to herd-like behaviour in times of nancial strain or panic. Yet this new source of huge risks is poorly understood and not fully captured by internal monitoring (Eatwell & Taylor, 2000, pp. 4547). The global consolidation of this debt-laden accumulation regime was accomplished via the neoliberal ideology that replaced the welfare state of the 1970s and strove to reduce social expenditures. In the USA, U.K. and elsewhere in Western Europe, capitalism came to operate like a giant Ponzi scheme. The secondary nancial market increasingly becomes a guide of corporate and household behaviour. Firms must now respond to the nancial logic of capital market requirements and households are inuenced by results. Savings subscriptions go into a coupon pool where they are mainly applied to the purchase of existing securities. The price and quantity of coupons within the pool is inuenced by a variety of nancial ows that have nothing to do with productive investment requirements (Froud et al., 2001, pp. 6695). As a consequence, the economies of advanced capitalism face growing nancial pressures. Trade is perpetually under threat from over-exposure and increasingly vulnerable to the vagaries of the business cycle. The cycle itself has proven extremely volatile. Governments nd a growing proportion of their tax receipts absorbed by the demands of interest payments on the national debt, and are obliged to perpetually increase this debt both to meet their public service obligations and to maintain liquidity and demand within the economy (Rowbotham, 2000). In the developing world, countries are confronted with compounded problems of structural indebtedness and exchange rate management. At present, USA is the only country that can settle its foreign debt simply by issuing its national currency. The dollars dominance as an international currency has been declining since the 1970s, but it continues to retain a decisive lead over other currencies in foreign

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exchange reserves, share of world exports denominated in dollars and share of foreign exchange transactions (Aglietta, 1985; Drucker, 1986; Gowan, 2001). Connected to depressive macroeconomic trends, this regime transformed emerging economies debt in a trap, aggravating the economic, social and ecological situation of most non-OECD countries (Serfati, 2000). Since differences in exchange rates, interest rates and stock prices are much lower among the more integrated developed country markets, movements of capital from the advanced capitalist North to emerging markets have been extremely volatile. Thus while crises are endemic to the nance-driven global capitalism, most crises of the last few decades have been concentrated in the emerging markets (Bello et al., 2000; Gowan, 1999, 2001). Two disciplining components of neoliberalism lock emerging markets into the discipline of debt-driven nance. First, debt needs to be nanced, and thus developing and transition economies are pressured into adopting the norms of nancial liberalisation in order to preserve their access to capital markets. Second, the dictate of monetarism and the denomination of debt in foreign currency mean that emerging economies are constrained to target their exchange rate rather than the level of domestic economic activity, since steep changes in the value of their currency automatically increase their debt burdens. Any decline in the decit nations exchange rate encourages domestic residents and foreign investors to move their funds to a safe haven in another country. Almost inevitably, the indebted nation cannot free itself from the increasing weight of its hard currency international debts except by default. The result, as Patroni (2004) shows in her study of the Argentine crisis, is a moribund economy, where production, trade and labour are severely depressed under the dictate of the nance-centred logic of domestic and international policies (Davidson, 2003). As this paper contends, notwithstanding the profound differences in their levels of development, advanced economies today, most notably the USA and Japan, but also Europe, are prone to a similar type of credit-induced crisis and subsequent devastation. The causal links between nancial expansions, progressive illiquidity and indebtedness in capitalist economies reveal the mechanism through which private nancial innovation translates, in times of crises, into acute social losses: collapse of national currencies, price distortions, budget cuts and unemployment. As Altvater (2002, p. 83) notes, the privatised credit system is ridden with conict because wealth owners (and claim holders) are private agents, whereas debtors in most cases are public institutions, or they become public ones when private debtors default. Rescuing individual rms and banks from liquidity and solvency difculties means essentially that the public sector, national and international, is called upon to bail out private creditors and debtors who have

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entered voluntarily into commercial transactions without appropriate safeguards and who subsequently have run into difculties. Resources that could be used for development are thus diverted to support private failures of prudential judgement (Fortin, 2000, p. 38). The regressive effects of debt-driven capitalism are equally evident on the global level as well as in national societies. As Dumenil and Levy (2001) argue, one should never underestimate the suffering of the unemployed and homeless, or of the developing countries. But perhaps the biggest cost stemming from the rise of neo-liberal nance is the increase in the national and global nancial fragility. The debt-dependent growth pattern of the 1980s and 1990s had its pitfalls both for creditors and debtors. Although creditors beneted from strong credit demand and deregulated interest rates, these very forces also caused large increases in debt-servicing charges. In fact, the wealthier the nation, the larger the mountain of debt. The USA, Germany, Japan and all G8 countries carry similarly staggering national private and commercial debts. The U.S. national debt is approaching $6 trillion. The total outstanding debt of the American nancial sector alone is almost 90% of GDP and represents over 35% of total non-governmental debt (Monthly Review, 2002). Fixed-cost burden in turn weakened many debtors to the point of default, especially those hit at the same time by deationary pressures. The fact that the nancial system generates unrepayable debts is obviously of the rst importance in understanding why the Third World nds itself in this position (Guttman, 1994; Rowbotham, 2000). In this instance, one fact about the international nancial system is striking: the nancial balance sheet of the world has been in deep imbalance throughout the 1990s. If to envisage the world economy as a closed system, then the claims and debts within it should add up to 0. In principle, the combined surpluses and the combined decits arising from the current, capital, and nancial account transactions for all countries and international organizations should equal zero, as the credits of one country or international organization are the debits of another. Yet the IMF data indicate that during the 1990s, there have been persistent discrepancies in the global summations of current, capital and nancial transactions. In 2001, the global current account showed an increasing decit of $117 billion. The growth of the global current account imbalance has been gradually accelerating throughout the 1990s, from an average of $25.6 billion in 19951999 to $37.9 billion in 19962000, and $55.8 billion in 19972001. The global capital account comprising capital transfers and acquisitions and disposals of non-produced, non nancial assets had an overall decit of a little under $4 billion in 2001. The global data on nancial account transactions show an excess of recorded net inows over recorded net outows, totaling $110.7 billion (IMF, 2003, pp. 36).

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Economists tend explain these statistical discrepancies by accounting omissions: as the world does not, as yet, trade with Mars, gures must be wrong due to different valuation methods and measuring techniques in different countries. But a more likely explanation is that the combination of global trade decit and nancial surplus must largely reect unrecorded exports and so capital ight from developing countries. In other words, precious resources from poor countries are being used to nance the bloated consumerist habits of the worlds richest people (Wolf, 2002). The ability of private nanciers to exploit regulatory differences and assume signicant market shares of new debt issues marks a new departure in the balance of power between public and private wealth in the global nancial system (Germain, 1997). Ultimately, Altvater continues, the simultaneity of growth in private wealth and a corresponding increase in public poverty, identied by Galbraith in the 1950s, is repeating itself in a new form. At the end of the 20th century, even the most developed capitalist economies have turned to a new form of arbitrage capitalism fostered by nancial innovations and the rapid growth of nancial markets. It is as exploitative as pre-industrial merchant capitalism but on a larger, global scale. At the apex, there are the big players of the international nancial system who exploit differentials of interest rates, exchange rates and stock market quotations. They are moving huge amounts of capital from one place to another following the smallest differentials in the global space, and in so doing triggering currency and nancial crises that affect even big economies.
On a worldwide scale, arbitrage does not diminish differentials, as it increases rather than reduces the risks of capital investment. This is one of the most persistent reasons for high interest rates on global markets and for low levels of investment in productive activities (Altvater, 1998, pp. 591605).

The worldwide nancial liberalisation has meant that the nancial system can more easily accommodate, and reinforce, uctuations in economic activity. In the wake of liberalisation, access to new credit nancing is typically more plentiful and more intimately driven by perceptions of, and appetite for, risk. Thus during investment booms, Minsky-type bubbles can develop, consisting of higher asset prices, muted risk perceptions, weakening external nancing constraints, possibly an appreciating currency, greater capital deepening, rising productivity and higher prots. During contractions however, these processes go into reverse. While such processes are a natural element of all business uctuations, the crisis of the American stock market in 20002001 demonstrated that they can go too far, especially if the system lacks sufcient built-in mechanisms to prevent it from becoming overstretched (Borio et al., 2003, p. 27).

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THE RISE AND DEATH OF THE BUBBLE

Several factors contributed to the rise of the speculative bubble in 19942000: low ination, delusions about the new economy, the inow of capital into the U.S. in the wake of the Asian crisis, easy credit conditions, etc. But as Kotz (2003) argues, the most important of these factors derived from the neo-liberal model. The rapid increase in the rate of prot in 19911996 which reached a level not seen since the 1960s, created a strong incentive to invest in U.S. corporate securities. In addition, the rise in the share of income going to prots and the drastic increase in income inequality placed a growing proportion of income in the hands of those at the upper reaches of the U.S. income pyramid. Inevitably, the investment euphoria of the late 1990s came to an end, as investors become concerned about the real foundations of the reported prots. The dotcom bubble started to deate, and the year 2001 saw the biggest fall in prots since the 1930 (The Economist, 26 January 2002, p. 23). Along with the plummeting asset values, the creditworthiness of the AngloSaxon capitalism came under attack. The money manager capitalism, the aws of which were depicted much earlier by the likes of Galbraith and Minsky, seems to be in shatters. The Financial Times webpage launched a special section called Crisis of Global Capitalism. No issue of The Economist newspaper goes without mentioning a D-word: debt, deation, and increasingly, depression. As a great irony of history, at the time when McDonalds is just a few steps away from the Red Square, the principles of the capitalist organisation are being discredited from the inside of the system. The boardroom executives have pocketed their stock options, the corporate nanciers and other advisers have drawn their multi-million (pound) bonuses, and the nations pension funds have been left to take the strain (Murphy, 2002). An investigation by the Financial Times concluded that top executives had extracted $3.3 billion from companies they led into bankruptcy. These aws are mirror images of Anglo-Saxon capitalism: the marriage of the privately owned corporation with widely dispersed shareholding (Financial Times, 19 November 2002).
They made their money on top of the market, selling shares in companies whose values rocketed in 1999 and 2000. Today their companies, many in telecoms sector, have crashed, destroying hundreds of billions of dollars of investors wealth and almost 100,000 jobs. Along with high-prole cases of accounting fraud and corporate chicanery in the US, the magnitude of these personal gains raises questions about the balance of risks and rewards in U.S. capitalism (Cheng, 2002).

The unprecedented scale of the collapse, the scandal of accounting fraud, as well as the trajectory of the credit-fuelled crisis, led many to compare the dotcom

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crash with the drama of the 1929 Wall Street crash. In what follows, the paper elaborates on such comparisons in more depth.

CREDIT BOOMS OF THE 1920s AND 1990s: SOME HISTORICAL PARALLELS

The Wall Street crash of 1929 and its aftermath was one of the most painful and destructive crises in world economic history. Economic theory provides different views on the causes of the Great Depression. In terms of the macroeconomy, structural vulnerabilities, built up throughout the 1920s, constrained effective demand in the real economy, precipitating crises in the product and labour markets. An inadequate passive monetary stance of the Federal Reserve aggravated the immediate consequences of the stock market crash and effectively transformed the recession into Great Depression. And yet from the perspective of nance-driven transformations of 20th century capitalism, it is clear that the most decisive trigger of the 1930s crisis was the rise and burst of the credit bubble. Credit-driven expansions fuelled a real estate boom in 1925, a Wall Street boom in 19281929, and a consumer durables spending spree of the second half of the 1920s. Internally, accommodating conditions in the U.S. nancial sector coincided with the development of the new network technologies with signicant long-term commercial promise but uncertain immediate potential (such as radio in the 1920s and internet in the 1990s). It was precisely the experience of the 1920s and 1930s that prompted Schumpeter to characterise capitalism as innovation nanced by credit (Eichengreen & Mitchener, 2003, pp. 3233). With ination stabilised and intermediaries competing aggressively in providing credit, the credit boom and its impact became particularly pronounced. Externally, the USA became a net exporter of capital and other counties found themselves on the receiving end of capital inows. In 1928 when U.S. funds were diverted from international loans to Wall Street speculation, the international payments system started to crumble. Money began owing from decit to surplus countries as reserves were liquidated to service debts to the USA. A deationary hurricane swept the world as investors rushed to liquidity (Davidson, 2000, p. 1122). At a glance, the parallels between the 1920s and 1990s are staggering. The combination of a liberalised nancial system, an international money standard with no exogenous anchor, and a monetary policy prioritising short-term low ination, increases the risk of longer and bigger build-ups in credit that make 1929-type asset-price and debt bubbles more likely, and their consequences more destructive. In 1933 Irving Fisher asserted that gross over-indebtedness lay behind Americas three biggest economic calamities to that time the Panics of 1837,

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1873 and the crash of 1929. In each, the debt explosions were sparked by technological developments that transformed the economic landscape, the advent of new industries, the exciting prospects of new lands and markets, or some combination of these factors. The new developments red investors imaginations, encouraging overcondence and greed (Laing, 2003). The familiar tunes of the investor frenzy associated with the new economy euphoria of the late 1990s are too apparent to be ignored. Indeed, in his best-selling text The Great Crash, Galbraith described a scene in the autumn of 1929 when the reverse leverage tore through Wall Street with geometrical ruthlessness:
By now it was also evident that the investment trusts, once considered a buttress of the high plateau and a built-in defence against collapse were really a profound source of weakness. The leverage, of which people only a fortnight earlier had spoken so knowledgeably and even affectionately, was now fully in reverse. With remarkable celerity it removed all of the value from the common stock of a trust (Galbraith, 1955).

Galbraith describes how a bubble developed in response to a combination of the nancial innovation and ample credit in an unregulated nancial environment. Investor enthusiasm was grounded in the primes of new information and communication technologies: Radio Corporation of America (RCA) was the 1920s equivalent of America On Line today. Financial innovation and ample supplies of credit also fuelled the enthusiasm of investors (Borio et al., 2003, p. 29). The pattern of the 1920s was repeated in the 1990s almost to its last detail (The Observer, 23 February 2003). The most signicant analogies between the current situation and the political economy of the 1930s include low ination environment, a hype about the prospects of the new economy, the uncontrolled process of debt-nanced nancial expansion, collapse of the stock market bubbles, the prolonged recessionary environment in the USA and globally, debt deation, growing external debts of the American economy, and a passive stance of monetary authorities. As The Economist warns, at present the external constraint on credit imposed by the gold standard has gone. Central banks now virtually ignore the pace of credit expansion so long as ination is under control. As a result, the elasticity of private credit creation has increased signicantly (The Economist, 28 September 2002, p. 23). Hence it seems that what happened in the rst stage of globalisation in the 19th century can happen again.

CAN HISTORY REPEAT ITSELF?

According to Minsky and his followers, in order for a debt-deation to have the impact similar to the Great Depression, a large build-up of debt is necessary. The

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instability of such an economy follows from the subjective nature of expectations about the future course of investment, as well as subjective determination by nanciers of the appropriate liability structure for the nancing of positions in different types of capital assets (Minsky, 1982, p. 65). In the 1920s, debt in the nancial, real estate and public utilities sectors grew rapidly. Most components of the economys debt structure real estate debt, equity and debt securities of the public utilities, like nancial sector debt was not only held by the corporate sector but was spread to the public through mortgages (Isenberg, 1994). Today the debt structure of the worlds biggest economy is worryingly similar to that of the 1920s; in fact, total private-sector debt is now much higher than when deation was last experienced in the 1930s. In the second half of the 1990s, American rms and households borrowed heavily, expecting rapid growth to nance their debts. When the dotcom boom came to an end, many rms faced severe illiquidity problems that in the context of the large-scale nancial expansions inevitably brought many corporations to the verge of bankruptcy. Although much of the increase in the reported prots in the late 1990s was illusory, the increase in corporate debt to nance that unprotable investment was horribly real (The Economist, 28 September 2002, p. 4). Falling prices not only increase the real debt burden, but they also make it impossible for a central bank to deliver negative real interest rates, because nominal interest rates cannot go below zero. In 2002, the U.S. corporate sector was already suffering from deation, with the price deator of non-nancial businesses falling in the past years for the rst time since 1945. Corporate-sector deation can create wider deation if rms try to cut labour costs, and global deation could be even harder to control. Yet despite the current situation of fragile markets and uncertainty about global political economy, there are still many optimists among nancial critics. Some market supporters continue to argue that the consequences of defaults and bankruptcies in non-banking institutions, however damaging for investors, rarely pose a threat to the nancial system as a whole. Some 800 derivatives contracts worth $8 billion have been settled smoothly after the Enron scandal. Notwithstanding structural similarities between the 1920s and 1990s credit booms, international political economy today does differ markedly from the situation of the 1930s. The consequences of the 1929 crash were greatly exacerbated by the rigid position of the Fed, and by the protectionist pressures from Americas major trading partners. Todays position seems quite different. A return to protectionism is not a real threat. Antiglobalisers however prominent their protests might be are not linked to a clear ideology, nor are they rooted to a powerful social force such as organised working class. The institutional structure of companies makes them less susceptible to protectionist sentiments and pressures. The rise of a transnational corporation has greatly reduced the

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tendency, and the ability, of companies to identify with national interests. A web of international commitments and multilateral institutions makes it more difcult for protectionist interests to capture national legislatures (Bootle, 2003, p. 330). Overall, while comparisons with the Great Depression are not entirely irrelevant today, the preconditions for a radical overhaul of the system are not present. Capitalism is widely criticized but it is not discredited (Eichengreen, 2002, p. 3). Is such optimism warranted? On the one hand, indeed, by 2002, the corporate nancial balance of the American economy was almost in equilibrium and debt started to decline. The U.S. corporate sector has moved into a small surplus. Low interest rates have induced corporations to accelerate their rate of borrowing from the bond markets, from a rate of 2.2% in the last quarter of 2002 to 6.3% in the second quarter of 2003. In the euro area, corporate debt, which rose sharply in the second half of the 1990s, has fallen and the decit in the nancial balance has been reduced since 2000. On the other hand however, the personal sector both in the USA and Europe is still running a decit. Recently, U.S. personal sectors net build-up of debt has actually accelerated (Shaikh et al., 2003, p. 3). In the climate of deationary pressures, this built up of debt looks especially worrisome. Total private-sector debt is now much higher than when deation was last experienced in the 1930s. Deation is particularly harmful when an economy is awash with debt. Deation reverses the relationship between debt and income, because deation tends to lower the prices producers can charge for their products and raises the proportion of income spent on debt repayments. This process makes the build-up of debt increasingly illiquid because it raises the absolute volume of debt relative to incomes, thereby making debt less mobile. Therefore deation adds to debt and illiquidity woes, foreshadowing an increase in systemic fragility and crisis. Moreover, repairing balance sheets is a slow process. The fact that the U.S. corporate debt/value added ratio now stands at 88%, compared with 80% in the early 1990s, may induce further deleveraging. This risk looks even higher in Europe. Hidden corporate liabilities may mean that the underlying picture is less healthy than is suggested by published gures (BIS, 2002/2003, pp. 1516). Uncertainties about global political economy add to concerns about the longevity of a global recession. Although the recession in the USA has bee comparatively mild thus far, the global slowdown among the G7 ranks close to those associated with the oil price shocks of the 1970s. The marked deceleration has ensued from the unusual synchronisation of the downturn across countries. While the slowdown in Japan and in emerging markets, dependent on export to the USA, was to be expected, the intensity of the one in Europe came largely as a surprise. In 2003,

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the global economy was weaker than expected, and forecasts of growth recovery in the largest economies have been pushed back (Borio et al., 2003, p. 22). Can this prolonged recession transform itself into another great depression? In the present climate of historically low interest rates, much depends on the exibility and policy choices of national governments. On the one hand, todays policymakers may be more ready to anticipate the deationary threshold: over the past few years, most nancial observers have been warning about potential dangers of the debt deation spiral. On the other hand, despite more sophisticated economic analysis and forecasting mechanisms, recent experience suggests that the risk of failing to anticipate the onset of deation should not be underestimated. Deation in Japan was unexpected, as weaker than anticipated growth dashed expectations of positive price increases. As the BIS notes, there is a higher risk that at the onset of deation expectations of further price decreases will become more easily entrenched. In similar situations during 18801913, the gold standard played the role of a stable policy anchor. A key question today is whether the credibility of formal or informal ination targeting frameworks would prove to be similarly stabilising (BIS, 2002/2003, pp. 7274). In this regard, the Bank also warns that it is premature to say that the zero interest rate constraint is unlikely to become a relevant consideration. Monetary policy today is much more activist than in the past. While this tends to reduce the likelihood of deation in the rst place, there is a greater chance that central banks will drive the policy rate towards zero during periods of sluggish economic activity if ination threatens to go below the desired rate. Moreover, a deation associated with decient demand could be more disruptive than those a century ago. Downward nominal wage rigidity is more prevalent at present than in the past: labour market practices have changed signicantly over the centuries. Such changes include higher rates of unionisation, more generous unemployment benets and greater protection of workers rights. These rigidities in labour markets are further complicated by the results of the two decades of nancial innovation and credit expansion. Advocates of liberalised nance insist that the post-Bretton Woods changes in the nancial systems have increased their resilience in the face of deationary pressures. They refer to more advanced risk management practices and signicant improvements in prudential frameworks. Yet the aftermath of the 1990s crises has made even nance ofcial like Warren Buffet acknowledge that derivatives are nancial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. Likewise, the BIS also admits that the aftermath of the late 1990s highlights that higher leverage ratios today relative to the more distant past have raised the economies exposure to debt deation (BIS, 2002/2003, p. 75). Despite these sobering warnings, many analysts argue that policy exibility and timely corrections of U.S. scal and monetary

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policies have helped to avoid a deep recession and even facilitated a growth recovery in the U.S. economy in 2003. In what follows, the article scrutinises such claims and analyses the conditions of the recent economic upturn in the USA and globally.

FRAGILITY OF THE CURRENT RECOVERY

According to forecasts, 2004 should bring the long-awaited recovery to the global economy. A removal in geopolitical uncertainties is expected to revive the condence and willingness to spend in both household and corporate sectors. Forecasts see the growth pace quickening, from 3.4% in 2003 to 44.5% in 2004. The U.S. is expected to grow at 2.9% in 2003, rising to 4.1% in 2004. An extraordinary reversal in the U.S. government scal stance in 2003 has buoyed the economy and prevented a deep recession. In the euro-zone, growth in JanuaryMarch 2004 is expected to be between 0.3 and 0.7%. It seems that the destruction phase of the investment bubble has ended and the real balance of the new economy is shifting towards a new frontier: the consumer sector. Indeed, the best and most innovative technologies appear to be consumer-directed, not enterprise-directed. The Nasdaq composite hit rock-bottom on 9 October 2002, at 1114.11. Over the next 13 months, it gained 77%. The dotcom index gained 133%, the SOX semiconductors is up 139%. The FTSE techmark 100 index has jumped by more than 50% in 2003 and almost double its value since the bottom of the market in March. The same is true for much of Europe. In the U.S. online retail sales jumped by 24% to $12.34 billion in the third quarter of 2003. By 2008, according to predictions, the U.S. online sales will hit $230 billion. In other words, it seems that a consolidation phase of the post-bubble market has begun. But growth forecasts notwithstanding, there are serious reasons to worry. American economy continues to be extremely fragile both externally and internally. Domestically, macroeconomic factors fuelling the U.S. recovery appear to be deteriorating. First, although growth in many nancial markets has resumed, investors are not willing to put much faith in a consumer-led recovery, since historically consumers have accounted for only a quarter to a third of technology spending. The is also a question of whether leading internet stocks are rising too quickly on over-optimistic investor assumptions and whether a new bubble is brewing. On the one hand, the current technology rally has none of the fevered, manic edge of the last one which ended in so many tears. There are very few IPOs, and no sings of a gold rush. Yet on the other hand, like last time, the question is whether tech stocks are running ahead of themselves. Ebay now has market value of $40 billion, more than Ford and AT&T combined. Its p/e ratio is almost 100.

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Presumably, sales should gallop ahead by 60 or 70% annually to justify that kind of multiple. That, by any account, is not realistic. Second, the growth of consumer spending is based on shaky grounds. Personal spending has slowed down. U.S. real disposable income fell by 1.2% in September Retail sales fell by 0.4% in September and 0.3% in October 2003. Households have already suffered large drops in their relative net worth because of the collapse of the stock market bubble, and now it appears that the value of housing will grow more slowly, if not fall overnight. Moreover, with interest rates unable to fall much more, further increases in relative household debt will be hard to sustain because they will directly raise household debt service burden in the same proportion. Although corporations have been paying down their short-term debt and retiring equity, their debt has risen relative to both their equity and net worth; their prots have declined and their capital expenditures have fallen to the lowest level in ve quarters (Shaikh et al., 2003, pp. 67). Third, the statistics show that robust growth is still not bringing employment for ordinary Americans. Despite reports about an extraordinary and long-awaited productivity growth in the USA, gaps in the labour market pose a threat to spending and hence, to recovery. Companies are increasing output with the same or fewer workforces and the immediate beneciaries of their increased revenues are higher corporate cash ow and prots. Industries beyond count continue to suffer from far too much capacity and are not taking on new hands, or new plant and equipment. The unemployment rate is at steady 6.1% (Abelson, 2003). The manufacturing sector has been shedding workers for nearly four years, and the trend continued in December 2003, when industry cut 26,000 posts. A lot of those jobs lost have migrated to faraway places. Even during Christmas rush, U.S. retailers did not take extra staff; instead they cut 38,000 jobs. The Bush administration is accused of presiding over the largest destruction of jobs since the 1930s. And although it is likely that a jobless recovery will be a key domestic issue in the 2004 presidential campaign, the impact of any policy stimulus could fade before nal demand strengthens in a self-sustaining way. Public spending and interest-sensitive household demand are already at high levels, and there may be some falling-off in the future. In the USA, a weaker phase in the consumer durables seems to have already begun. In other countries where a buoyant housing market has supported household spending, the stimulus from mortgage renancing could diminish (BIS, 2002/2003, p. 15). Further concerns stem from Americas external decits. Although the dollar continues to depreciate, this has only served to stabilise the current account decit, which has hovered between 5.1 and 5.2% of GDP in the past three quarters and is close to its practical limits. For a long time now, foreigners have been willing to nance the U.S. current account decit by holding U.S. dollars and purchasing

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U.S. nancial assets. In the most recent period, 42% of funds borrowed by U.S. households, businesses and government units came from foreigners. As of now, foreigners hold 37.6% of outstanding marketable government debt ($1.35 trillion), 12.9% of the holdings of agency securities, 17.6% of corporate bonds and 10.3% of corporate equities. Were they to reduce these holdings by even a small fraction, there would be serve adverse impact on the U.S. interest rates, credit availability, and the international value of the dollar. The interest rate impact alone could unravel the growth process by inhibiting both consumption and capital expenditures (Shaikh et al., 2003, p. 8). With current account decit at 5% of GDP, the USA is the worlds biggest debtor. Even in the nal decades of the civil war, Americas decit was generally below 3% of GDP. The U.S. net external debt is now higher than the debt levels at which some Latin American countries hit the disaster of the 1980s, and on par with the peak debt levels in U.S. in the 19th century, but it is not especially high by the standards of other rich countries. Many industrial nations have net foreign debts worth 4050% of GDP (The Economist, 20 September 2003, p. 13). Yet if the USA is to grow faster than other countries, like forecasts suggest, its current account decit will widen, rising net foreign debt. This raises the question of sustainability as well as of the external adjustments and exchange rate changes that can follow (BIS, 2002/2003, p. 32). If net external decit remains at 5% of GDP, and the economy grows at 5% in nominal terms, U.S. debt stock will reach 40% of GDP by 2007 and 60% in a decade. Recently, the IMF warned that although the dollars adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate correction, especially to nancial markets, cannot be ignored. In other OECD economies countries in turn, the scope for further stimulus had largely been exhausted: both policy and government bond rates are now at historically low levels. Despite the Fed and Bank of England continuing to resist raising interest rates, commentators are concerned about an upward correction in long-term rates should investors become worried about price or scal developments. Both the BIS and the IMF warn that recession, tax cuts and high spending for the war on Iraq have led to large decits, both internally and in the balance of payments. That can put upward pressure on interest rates in the USA, and international investors can lose condence in the dollar. Decits continue to deter private investment within the USA, threatening the feeble growth recovery and endangering social welfare programmes. New difculties at the corporate level or hidden nancial vulnerabilities in some countries might restrict lending for some time (BIS, 2002/2003, p. 15). On the one hand, the dollars weakness is surprising. It is still the currency issued by the most powerful economy in the world, and it accounts for 64.8% of

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global ofcial foreign exchange reserves, compared with 14% of the euro. But as the above gures suggest, the U.S. lives beyond its means. Economic observers, including the IMF, predict that the long-standing U.S. trade decit, worsened by the burst of the bubble, may require a severe adjustment resulting in deation and a weak dollar. The dollars fall will reduce the huge international subsidy enjoyed for two decades by the U.S. economy, ultimately shrinking the standard of living of U.S. citizens. At the same time, falling U.S. demand for imports will likely harm economies everywhere else and set off further currency devaluations, trade pressures and nancial instabilities all with devastating consequences. After a decade of global nancial crises, broad economic distress, and neoliberal reorganisation, together the U.S. and Japanese crises may spell deeper global instability in the period ahead (Paul & Quenemoen, 2003). Throughout 2003, the dollar has been losing value both against the euro and against the yen. But economists reckon that the dollar needs to fall by another 1520% on a trade-weighted basis to bring Americas current account decit down to 3% of GDP. Other analysts estimate the necessary downward adjustment in the dollar value at 3550%. Considering the level of the interdependence in the global economy, as well as constrains imposed by a recessionary climate, smooth dollar depreciation will be difcult to attain. With over $3 trillion in foreign exchange crossing borders every day, most economists think that foreign exchange intervention would work at best marginally today. More countries will have to be involved in the adjustment process. While episodes of rapid dollar adjustments failed to inict signicant damage in the past but with U.S. net external debt at record levels, an abrupt weakening of investor sentiments vis-` -vis a the dollar could possibly lead to adverse consequences both domestically and abroad (BBC News, 7 January 2004). Indeed, the main difference today is that the adjustment paths used last time round a big shift in demand away from U.S. towards Japan and Germany are blocked (The Economist, 20 September 2003, pp. 1317). As the newspaper continues, together these factors will make U.S. indebtedness unsustainable, but not for a while longer. More debt could be build up through a few more years of large and rising current account decits before the costs of borrowing start to have a dramatic effect on the economy. In a soft-landing scenario, U.S. budget decit will continue to expand until it reaches levels needed to allow the private sector to run a 3% surplus. The large federal decit would then maintain aggregate demand at a level such that GDP growth remained slightly positive; private sector balance sheets would improve very slowly as households and rms gradually paid down some debt by spending less than they brought in. Barring large defaults that might snowball, the overall nancial position would eventually improve to the point that private spending would begin

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to grow. Net job creation would resume, and the economy would nally enjoy an expansion (Wray & Papadimitriou, 2003, p. 21). A repeat of the 1930s can thus be avoided. Yet in a hard-landing case, when interest rates do go up, the effects of a real estate market crash would be more widespread across American households than were the effects of the stock market tumble after 2000. In such a worst-case scenario, this would lead to re sales of assets, pushing their prices down further and setting off a classic Minsky-Fisher debt deation spiral. Experience shows that the impacts of such crises on expectations and condence are so devastating that recovery can take a decade or more (Wray & Papadimitriou, 2003, p. 20). Thus it appears, despite the gigantic leaps in the organisation of nancial capitalism, the strongest economy in the world may face a repeat of the 1930s drama, pulling other countries with it. As the next section shows, this prospect highlights some key challenges that neo-liberal economic consensus is facing today. While direct parallels between the depression of 1930s and crises of the 1990s have limitations, political economy both as theory and practice seems to be at a crossroads reminiscent of those of the 1930s. The discipline is again divided between those who view the inherited theory as an adequate basis for future progress of both the economy and the discipline, and those who hold that inherited standard theory will do. Today, as in the 1930s, the control of systemic instability is the critical problem in performance and policy, and instability is the phenomenon that renders inherited theory suspect (Minsky, 1982, p. 87).

TOWARDS A PARADIGM OF FINANCIAL STABILITY: A NEW NEO-LIBERAL COMPROMISE

Recurring fears of more corporate collapses at the core of the world economy and a possibility of more sovereign defaults at the international level induce many academic observers and policy-makers to elaborate on the plans for a reform of the fragile international nancial system. In their guidance to a policy change, many experts turn to the experience of politico-economic reforms of the 1940s and 1950s the transformations that facilitated a recovery of the capitalist system after the 1929 stock market crash and the decade of the Great Depression. The Great Depression of the 1930s led to a policy framework devoted to the maintenance of full employment. The great ination of the 1970s led to a widespread monetarism. It is very plausible that the great nancial illusions of the 1990s will have led to a paradigm of nancial stability (Bootle, 2003, p. 334). The 1990s showed that in the new debt-driven capitalism unsustainable credit/ innovation booms are easy to appear, and overt inationary pressures may take

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longer to emerge. This can make it harder for monetary policy to be sufciently pre-emptive. Monetary policy may thus unwittingly accommodate the build up of nancial imbalances and excessive capital accumulation. Once a change in perceptions occurs, debt burdens are exposed, and a deationary spiral unfolds. Considering the central role of nancial imbalances in the dynamics of the economy, in the future central banks will need to respond in a more purposeful way to the imbalances as they build up (Borio et al., 2003, p. 2). There are at least three major challenges presented by the aftermath of credit bubbles of the late 1990s to early 2000s. In an attempt at reforming the global nancial system, it is necessary to discredit the very nature of Ponzi-type nance; to return nancing into real economy and long-term productive projects; and to incorporate emerging markets into the world economy in a fair and non-exploitative way. More specically, it is clear that in order to reduce the likelihood of a nancial crisis and potential debt-deation from reappearing, policymakers need to rein in the nancial innovations, practices and attitudes that have led to the past bouts of exuberant lending (Toporowsky, 2001). A traditional monetarist response to deationary pressures is to supply liquidity. Yet as the recent experience of Japan demonstrates, the willingness of banks and the public to hold idle cash balances can offset the simulative effects of liquidity expansion. The effectiveness of this tactic may also be compromised by the composition of the debt instruments the central bank chooses to purchase to add liquidity. If highly liquid debt were a good substitute for money, central banks purchases of such debt would simply replace one form of money with another, with little net impact on the net provision of liquidity (BIS, 2002/2003, p. 76). This dilemma highlights another core problem of contemporary capitalism: the issue of liquidity. Liquidity is a concept which, while frequently referred to, is seldom well dened. The spread of derivatives and of infomoney has blurred the very denition of money. Only a few central banks continue to believe that pursuing orthodox monetary targets (M1, M2, M3, etc.) can enable them to carry out their responsibility for controlling the quantity of money. Bank deposits have become much less attractive to savers, as have government and state bonds. New nancial instruments have made it more difcult to provide accurate and timely assessments of the net worth of rms and nancial institutions. Not only are many derivatives not regularly reported on the balance sheet, but their market value can change markedly in response to small changes in external circumstances. Often there is no agreed way of valuing a derivative position (Stiglitz & Bhattacharya, 1999). Compared to the past, there is now a vast quantity of derivatives together with a range of options provided by IT. Both these factors very signicantly affect the rate of substitution between monetary and nancial assets. As a result, economic theory and practice have again had to face the eternal question of how

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the effects of changes in the credit structure are transmitted to the real economy (Savona, 2002, p. 181). The experience of the 1990s has prompted some shifts in mainstream understanding of the development and effects of private credit expansion in different technological and institutional environments. A new consensus seems to be emerging today among nancial policymakers. First, it is clear that todays central banks should concern themselves not only with commodity price ination but also with asset price ination, especially in periods of technological dynamism and irrational exuberance. They should have engaged in closer supervision of nancial institutions if they saw signs that loan quality was deteriorating. They should have contemplated increases on capital and liquidity requirements to prevent the credit boom from deepening in ways that heightened the vulnerability of the economy and the nancial system to a subsequent downturn (Eichengreen & Mitchener, 2003, pp. 5455; Stiglitz & Greenwald, 2003). Second, the crises of the late 1990s highlight the importance of exibility and cooperation in the conduct of economic and nancial policies. Heterodox economists increasingly regard cross-border liquidity and debt crises as one element of a global trap for developing nations. But these crises should not imply that emerging economies need to pursue policies that result in a sustained increase in their owned reserves. Indeed, the main failure of the international nancial system is its inability to foster continuous global expansion. The effect of all nations attempting to accumulate foreign reserves is to create persistent high rates of unemployment, and liquidity problems for the global economy and this is true whether the global economy is on either a xed or a exible exchange rate system. The main burden of adjustment to an export-import imbalance is always on the decit nation (Davidson, 2003). Thus along with a new approach to developing counties exchange rate management, a NIFA should include a mechanism of alterative liquidity enhancing policies such as liquidity tiers (Bird & Rajan, 2003). Third, a recurrence of nancial instability in the developing world continues to pose threats to the recovery in the core. Here, an important political challenge relates to rising capital ows to emerging economies. After taking a dip following the 19971998 cruises, private capital ows to developing countries have begun to revive. The boom has not reached the pace seen in 1997, but as the Institute for International Finance acknowledges, the warnings are there. The worlds vulnerability to emerging markets nancial crises has been lessened by the shift to oating exchange rates and by the accumulation of large foreign reserves by the Asian economies. But risks have increased because of the general rise in the debt levels of emerging markets. As shown by Argentinas crisis, mechanisms for crisis avoidance and management by the IMF and the international community leave much room for improvement (Mussa, 2004).

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Fourth, on a broader policy level, the spread of nancial contagion and fragility throughout the world has heightened the need to be able to respond exibly to developments in the nancial sphere. Deationary pressures and the need for painful adjustments to post-bubble realities further exacerbate such insular tendencies. More cooperation is needed at the national level between monetary, scal and prudential authorities and at the international level as well (BIS, 2002/2003, pp. 143144). In this forming political consensus, it is striking to observe the growing importance of the notions of condence, liquidity, the imperfection of nancial markets and political exibility. In previous formulations of the neoliberal doctrine, these issues had been presumed to be automatically sorted by the logic of the free market and thus did not warrant additional attention. Moreover, todays discussions about the governance of the international monetary and nancial institutions recall the debates raised by Keynes about improvements in the gold standard (Cartapanis & Herland, 2002, p. 273). There are also calls for more transparency and even for Keynesian spending in Japan and more recently, in the USA (Davidson, 2003). But despite these ostensibly revolutionary pro-Keynesian shifts in the dominant economic consensus, the proposed changes to the organisation of the global nancial regime seem either inadequate or insufcient to prevent further major crisis outbreaks, and to stave off socio-political dramas that global nancial imperialism imposes on nations across the world. The new consensus is being reduced to a compromise, more neo-liberal than neo-Keynesian. At the heart of nancial fragility is the reversibility of capital ows. In the current reform proposals, it is dealt with in ambiguous fashion. The basis of nance is not only to guarantee the optimal allocation of assets but also to regulate liquidity that is the Achilles heel of nance. For that, one cannot fully rely on markets and international investors (Cartapanis & Herland, 2002, pp. 290292). Unsurprising in light of the class underpinnings of neoliberal nance (Dumenil & Levy, 2001), a radical re-organisation of the global nancial system is hard to achieve. First, the question of the location and mandate of a new nancial regulator whether it can be national, regional or global remains unresolved. While nation-level policies like Malaysian and Chilean capital controls can help stave off speculative attacks, critics point that such protectionist measures do not automatically guarantee a balanced economic growth and socio-economic equality for the emerging market (Soederberg, 2002). Second, the Asian crisis spurred several suggestions for a regional nancial authority that would act as a regional lender of last resort and a regulatory agency. But the U.S.-Japan conict over a possible Asian Monetary Fund highlights the fact that an international consensus on alternative forms of LOLR actions and regional nancial

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structures is unlikely to be reached. Besides, region-level regulatory structures may not be a viable option for emerging markets in other parts of the world, where the conguration of nancial, trade and production inter-linkages is less pronounced. A third scenario a reform that would start with the international nancial institutions themselves may seem a more plausible option, as indeed some recent shifts within the IMF and World Bank illustrate. Following erce criticism of its actions during 19971998, the World Bank had acknowledged its mistakes in the management of the crisis; the IMF has also tried to democratise its policies and increase the transparency of its operation. As Taylor (2004) explains, in the mainstream of international economics, some notable shifts to a post-Washington Consensus that advocate a milder opening of the economy to the market and some room for interventionist policy by the state, are taking place. However, the gradually forming post-Washington Consensus remains deeply conservative in scal and monetary matters; it does not in principle oppose liberalisation and deregulation, and it is broadly in favour of free trade and privatisation (Fine et al., 2001). Despite a backlash and the subsequent debate over capital controls, it is apparent that, six years after the Asian crisis and two recessionary years after the dotcom bubble burst, there has been no widespread de-legitimation of the Washington Consensus; nor has the move towards a NIFA in any way lived up to the hopes of its advocates (Harmes, 2002). In contrast to these unresolved issues of an international nancial reform, it is a fact that Keynesian policies have pulled capitalist economies out of deep crisis in the 1930s and have kept international nancial system stable until the breakdown of the Bretton Woods. As this essay strived to show, there are a lot of notable analogies between the current phase of the nancial expansion and its 1920s1930s predecessor. Such comparisons imply that quite like in the 1940s USA, a new model of political economy may have to emerge out of the ruins of the bubble economy of the 1990s. Even those economists who believe that todays crisis is not as serious as the 1929 crash insist that a real reform is again required to restore condence in the system. And it is little surprise that most alternative approaches to nancial regulation today stem from the Keynesian political economy and the work of his followers. As Minsky suggested, a new type of capitalism can take the model of the 1930s1940s as a taking off place. While it was not a utopian golden age, and while each of us can nd fault with some details of the economy of the 1950s and 1960s, it might very well be its practical best (Minsky, 1993). To many, Keynes theoretical and political plans are unattainable today. First of all, his own version of the global nancial order-based on the so-called clearing

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union was never implemented; instead the participants of Bretton Woods conference went along with an American proposal based on the centrality of the dollar for world trade. Second, at this stage of economic development and global economic integration, a supranational central bank is not politically feasible. Third, even if introduced, nancial reforms are not sufcient to guarantee socioeconomic and political stability for national economies. A stable age of economic growth for the 21st century similar to what the global economy experienced during 19501973 can only be restored through a signicant stimulus to global effective demand (Davidson, 2000, p. 1121). Fourth, Keynesian demand-side economics is not immune to imbalances: it had to be abandoned in the 1970s under the pressures of the world oil price crisis. If implemented hastily, a return to conventional liquidity channels, nancial intermediation, public companies and increased regulation can lead to new rounds of ination and scal populism. Finally, it remains an open question whether the 25 years of growth and nancial stability under the Bretton Woods were, in fact, a golden age of capitalism, and not an abnormality in an otherwise inherently crisis-ridden trajectory of capitalism; an abnormality accounted mainly by the post-war resurgence. And yet as Davidson (2000, p. 1126, 2003) notes, starting with such pessimistic and defeatist assumptions will not make the world economy more stable or crisis-prone. As he suggests, what can be aimed for is a more modest goal of obtaining an international agreement among the major trading nations that insures orderly international monetary markets. To be economically effective and politically feasible, this agreement, while incorporating the economic principles that Keynes laid down in his bancor plan, should not require any nation to surrender control of local banking systems or its domestic scal policies. A bigger architectural change will require developing a system where the creditor nations accept a large share of the responsibility for making adjustments by spending their excessive reserve holdings on imports or direct foreign investment. This will allow the debtor nations to sell more abroad and thereby work their way out of their debtor position. Sceptics undoubtedly will argue that such a radical re-organisation of international nance is utopian and politically unviable. But if the narrow window for a serious overhaul of the ruling economic doctrine offered by the hangover from the 1990s nancial excesses is missed, global nancial fragility will not only remain an inherent feature of capitalism in the future, but will move to a higher and more intense levels once the world overcomes the current slowdown. Debt-driven capitalism has embraced most nations across the globe and the resulting spread of the imperatives of the nancial capitalism and its attendant problems can easily aggravate a global crisis and impede any attempts of its resolution.

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CONCLUSION
The recent chain of nancial crises has opened up a unique window of opportunity to challenge mainstream approaches to the organisation of the global credit system, and its relationship to other elements of the capitalist economy: the real economy, society, the state and the development process. From the disasters in East Asia, Russia, Argentina and the USA, we have learned that the privatised global credit system can transmit economic crises easily and instantaneously, spelling economic disasters and political dramas over communities and nations. Out of many lessons from the nancial expansions of the 1990s, one in particular stands out: the interaction of privatised credit channels with innovation is not only hazardous from a regulatory point of view; but the effects of endogenous credit expansion also constitute a political issue. Specically, in periods of technological dynamism, central banks should concern themselves not only with commodity price ination but also with asset price ination. Not only in East Asia in 19971998, but also in the USA and Europe in the early 2000s, they should have engaged in closer supervision of nancial institutions if they saw signs that loan quality was deteriorating. They should have contemplated increases on capital and liquidity requirements to prevent the credit boom from deepening in ways that heightened the fragility of the economy and led the nancial system to a subsequent downturn (Eichengreen & Mitchener, 2003, pp. 5455). The protracted recession in the USA and concerns about the sustainability of its debt structures warrant that these issues will be on top of the agenda of the worlds policy leaders. In this, despite some serious reservations about sustainability of the current recovery, policymakers in the advanced countries seem prepared for the need to confront the new challenges of deation, recession and endemic nancial instability. While this may be a good enough start to avoid a global repeat of the 1930s, it may be an insufcient measure to counter the underlying crisis tendencies of the system. Paraphrasing Harmes (2002), if policy corrections are conned to individual sectors of the economy or individual countries, and if the foundations of the global fragility are not controlled systematically, the current crisis in the system can transform itself into a crisis of the system, approximating a possibility of a global depression. In this regard, the post-bubble awakening raises some serious alarms. The danger is that the new political priority of nancial stability can easily take over other tasks. Indeed, much like monetarism in the 1980s, the emerging paradigm of nancial stability risks becoming a new and improved formulation of the economic orthodoxy. As other contributions to this volume demonstrate, the rationalisation of classical economic philosophy in international macroeconomic affairs has been a formula for macroeconomic disasters at worst and modest global

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economic growth at best (Davidson, 2000, p. 1121). The combined disciplining effects of neo-liberal political ideology and global nance-driven expansion of the capitalist market have caused crises in most areas of the developing world. The record of the 1990s in the USA too, shows that far from being a superior mode of capitalist organisation, the neoliberal version, even at its best, has failed to live up to the predictions of its advocates (Kotz, 2003). As a result, as Greider (2003) puts it, the USA is now irting with a low-grade depression, one that may last for years unless the government takes decisive action to overcome it. The current slowdown may not rival the scale of the 1930s disaster, but its potential consequences, especially for the less afuent and the young, would be severe enough: a long interlude of stagnation, tepid growth and high unemployment, punctuated occasionally with a renewed recession. A protracted crisis in the worlds largest economy will unavoidably imperil the global upturn. In particular, one of the consequences of a weaker dollar and uncertainties in G7 countries may push investors into other terrains, and thus emerging economies may again appear on the receiving end of large speculative ows. Together with the growing debt levels of developing economies, these factors suggest that the risk of more nancial crises in the emerging markets will remain high in the early 2000s; while the unresolved issues of the global nancial reform leave the IMF and the World Bank as institutions inadequate to contain global nancial fragility, crisis and its likely contagion.

ACKNOWLEDGMENTS
I would like to thank Susanne Soederberg and Paul Zarembka for their helpful comments on this paper. Also many thanks to other contributors to this special issue, as well as to Jonathan Nitzan, Leo Panitch, Ozgur Orhangazi, Paul Burkett and Robert Wendt for their comments on earlier drafts. All the usual disclaimers apply.

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DISCIPLINING LABOUR, PRODUCING POVERTY: NEOLIBERAL STRUCTURAL REFORMS AND POLITICAL CONFLICT IN ARGENTINA
Viviana Patroni
ABSTRACT
One of the most important outcomes of neoliberalism in Argentina has been the drastic and negative transformation of the experience of work for the majority of Argentines. In this sense neoliberalism performed effectively as a disciplining mechanism for the working class. Moreover, under the convertibility regime implemented for a decade since 1991, the pressure exercised over wages and working conditions was increased under conditions that made reducing labour costs the critical variable in the adjustment of whole sectors of the economy to the new context. Under these circumstances, I will argue that the most relevant and enduring implication of structural reforms in Argentina has been the consolidation of precarious work as the new reality of employment for a very large segment of the working class. To develop my argument, I will look at the transformation of Argentina over the last 25 years, that is following the period of military dictatorship that since 1976 was responsible for the rst neoliberal program. Nonetheless, it was really in the 1990s with the implementation of a programme that made the peso fully convertible to the dollar (the convertibility plan) that neoliberal reforms gained momentum. With this discussion as the backdrop,

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I will then address the more concrete implications of convertibility on the transformation of labour markets. In December 2001, Argentina was shaken by a wave of mass protest that not only forced the resignation of the elected government but also provided a new legitimacy to political forces that had been pivotal in contesting neoliberalism since early in the 1990s. While at that time the same traditional parties that were the object of public repudiation managed quite successfully to resolve the institutional crisis, they were not left untouched. Emerging organizational alternatives, in particular the organizations of the unemployed, gained a new political signicance in the period that ensued as did new forms of grassroots organizations like neighbourhood associations. A growing number of workplaces brought back to production by their workers became another important expression of the rich arsenal of responses that solidarity and organization could make possible. In the original optimism that these events aroused among observers of and activists in the process, social protest in Argentina appeared to bear all the ingredients that were decisive in the construction of an effective challenge to neoliberalism. Two years later, though, assessments of the events in Argentina have become much less sanguine.1 Whereas one of the most salient characteristics of the post-December 2001 period was the questioning of traditional electoral politics, the high rates of voter turnout in the March 2003 election came to remind us of the complexity of the moment. Moreover, the narrow margin that separated candidates representing more reformist alternatives from those clearly identied with neoliberal policies underscores once again the ambiguous direction of change in Argentina. Nonetheless, it is evident that the new administration has been open to the need to readdress the course of reforms in Argentina. The effectiveness with which progressive forces engage in this process both within and outside the sphere of politics delimited by the state will have a lot to do with their capacity to comprehend the factors at play in determining the nature and scope of the crisis faced by Argentina. What was the particular area of interaction between international nancial institutions and various fractions of capital within Argentina? What is the role of institutions and political actors in the production of consensus-building? What is the degree of consciousness or awareness about consequences and possible outcomes with which dominant groups in Argentina came to press for specic reforms? These are just but a few of the areas that require urgent clarication if one is to think of the ways in which effective challenges to the power of capital can begin to take shape. In this paper I will focus on the last question of consciousness as it relates concretely to the effect of neoliberal reforms on labour markets. As I suggested in the title, a key area of concern will be the impact of reforms in the deterioration of wages and labour conditions, in the growth

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of unemployment and precarious forms of employment, and the deregulation of labour markets. One of the most important outcomes of neoliberalism has been the drastic and negative transformation of the experience of work for the majority of Argentines. In this sense neoliberalism performed effectively as a disciplining mechanism for the working class. Moreover, under the convertibility regime implemented for a decade since 1991, the pressure exercised over wages and working conditions was increased under conditions that made reducing labour costs the critical variable in the adjustment of whole sectors of the economy to the new context. Under these circumstances, I will argue that the most relevant and enduring implication of structural reforms in Argentina has been the consolidation of precarious work as the new reality of employment for a very large segment of the working class. Yet, while it is not difcult to conceptualise how growing underand unemployment played an important role in weakening the power of workers to resist the increasingly contingent and precarious nature of work, it is quite a different issue to argue that the full weight of change in labour markets was functional to achieving this objective. To put it in other words, it is important to consider at least as a possibility that some of the outcomes of neoliberal reforms on labour markets were the results of policies ill-conceived even when assessed within the context of the objectives pursued by dominant groups. Eventually, the main source of opposition and effective challenge to the regime came precisely from the sectors most affected by changes in labour markets. In order to develop these points, I will look at the transformation of Argentina over the last 25 years, that is following the period of military dictatorship that since 1976 was responsible for the rst neoliberal program. Nonetheless, it was really in the 1990s with the implementation of a programme that made the peso fully convertible to the dollar (the convertibility plan) that neoliberal reforms gained momentum. This plan, engineered by Domingo Cavallo, Minister of the Economy during the presidency of Carlos Menem (19891999), was a radical proposal to address ination, the countrys most taxing predicament from the mid-1970s. Since its inception, convertibility became a critical component of the package of reforms advanced during the 1990s and as such it was much more than a stabilization scheme. With this discussion as the backdrop, I will then address the more concrete implications of convertibility on the transformation of labour markets. Although the convertibility plan generated strong support both domestically and internationally, its devastating effect on the evolution of labour markets was evident from early on. This factor, of course, was far from being the only evident shortcoming of convertibility. Another was the persistent current account decits it generated and thus the reliance on external resources which increasingly were obtained through borrowing. A fully satisfactory explanation

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regarding why policies proving so socially costly and uncertain in terms of their sustainability were pursued remains elusive. Part of the answer lies without question in the enormous and to some extent unprecedented concentration of power in the hands of a small group of key economic actors. Of course, following several contributions within mainstream political literature, one could also consider the inadequacy of political institutions, the nature of political parties, or corruption as relevant variables. But all these are related to the distribution of power that existed in Argentina at the beginning of the 1990s. The reforms implemented since then of which the Convertibility Plan was the linchpin both evidenced it and further consolidated it.

THE NEOLIBERAL SOLUTION IN ARGENTINA

It has become commonplace to consider an alleged exhaustion of import substitution industrialization as one of the main antecedents of the programme of structural reforms promoted under neoliberal regimes in Argentina and in the rest of Latin America. Beyond doubt, Argentina had reached a profound crisis by the mid-1970s reected in an abysmal economic performance. Yet, over the decade that preceded the military take-over, there were important changes in the Argentine economy that resulted in substantial rates of economic growth and, much more importantly, in the avoidance of the cyclical crises in the external sector that had been connected to import substitution. A short review is instructive. These stop-and-go cycles that punctuated the development history of Argentina after the mid-1950s were the outcome of several particularities in the political and economic constitution of the country at that time. One was the complex set of alliances and counter-alliances whose dynamic can be connected in general terms to the changes introduced by Peronism (19461955). As in no other country in Latin America, Peronism granted the working class a political homogeneity and organizational capability that transformed it into a key political actor. Equally important, Peronism provided the terms around which the notion of a more socially just capitalist development persistently and consistently found expression. Nationalism, fundamentally in the sense of the key role the state should play in the protection of the national economy, was also a key component of the alternative. Thus, Peronism was also able to become at key moments the expression of an important segment of industrial capital that sought in the state an instrument to fend off the growing transnationalization of the economy. The particular cyclical nature of development in Argentina was determined by the availability of external resources to sustain the pace of economic growth. This was complicated by the high import requirements of industrialization and

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the low capacity of the export sector (mostly agricultural goods) to provide these resources. There was a further complication: Argentinas principal exports during this period were also basic wage goods (Daz Alejandro, 1965, p. 45). This meant that an increase in domestic demand for them because of higher wages or lower internal prices for foodstuffs immediately reected on a lower export capacity both because of the expansion of domestic consumption and also the negative impact of lower prices on the level of production. In short, periods of rapid growth which were accompanied by low agricultural prices, stable foreign exchange rates, rising demand for imports, and relatively lower ination rates resulted in foreign exchange bottlenecks mainly because of the reduction of exportable agricultural output. Faced with this external constraint, the alternative was usually to adopt a stabilization program involving devaluation and restrictive monetary and scal policy. The adverse impact of these policies on the working and middle classes and the more vulnerable factions of the industrial sector triggered their political action in order to reverse the downward phase of the cycle. Inexorably, though, the new cycle of economic growth would lead to a new balance-of payment crisis (ODonnell, 1978, pp. 913). The availability of a stable source of hard currency was particularly important for the oligopolistic and transnationalized faction of industrial capital since it was required to guarantee access to imported inputs, secure prot remittance and ease its access to external nancial markets (Smith, 1991, p. 36). However, this faction of capital was far from maintaining a coherent course of action. It tended to ally itself with the agro-exporting elite when the expansionary phase of the cycle had revealed its unavoidable signs of distress in the balance-of-payments and thus supported repeatedly the implementation of stabilization programs that produced recession and ination. But once the measures had eased the pressure on external accounts, and more importantly, faced with the resistance of the alternative alliance, it also tended to support the expansionary policies that would feed the next growth cycle (ODonnell, 1978, p. 13). The relative power of these two main alliances was uneven insofar as the working class, even with the support of some fractions of capital, did not have enough strength to displace the most transnationalized segments of capital from their privileged position within the state. However, these opposing forces managed to reverse state policies that marginalized them, even if only in a partial fashion (Smith, 1991, p. 47). Moreover, all these political actors on several occasions exercised veto power over governments, either backing military coups or pressing for a return to elected regimes.2 These political and economic cycles determined not just a situation of deadlock, but also the increasing polarization, radicalization and violence that by the late 1960s had become the central elements in Argentine politics. This transformation

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had special connotations for Peronism and it was the party itself in particular after its electoral victory in 1973 which became the arena where social war was rst waged. But violence was the pervasive form of political expression in society at large from the end of 1973 onwards. By 1975 the Argentine economy was also in a tailspin, a combination of the scope of social conict, changes in the international economy and the abysmal failure of the Peronist administration to respond to these challenges. By the time of the military coup in March 1976, Argentina had become in fact an ungovernable society. However, over the decade that preceded the military take-over, which as I mentioned above is also a decade of growing political radicalization, there were important changes in the Argentine economy that resulted in a reduction of the intensity of the economic cycles. Industrialization in Argentina acquired during this period some dynamic characteristics that, without negating the dependent nature of development in the country, deserved some consideration. The economy grew at a not negligible rate, around 2% per year in per capita terms for the ten years preceding 1976 (Flichman, 1990, p. 16). Growth was sustained by the positive economic performance of rms of various sizes in all branches of industry, both foreign and national. The likely reversal of the deteriorating trend in income distribution might also explain the growth in the internal market for consumer industrial goods.3 The avoidance of the cyclical crises in the external sector was also a fundamental change during this period. The onset of an expansionary phase in the international economy favoured this outcome, but it was also the growth in agricultural production from the end of the 1960s and the increasing importance of industrial exports that accounted for the stronger external position of Argentina (Flichman, 1990, p. 24). Behind all these changes also stood a much stronger labour movement that, while increasingly bureaucratized and authoritarian, was much more effective in reversing the losses inicted in the decade following the downfall of the Peronist government in 1955. It was precisely the nature and scope that class conict had reached by the mid-1970s which constituted the key element of the crisis Argentina confronted then. Neoliberalism in Argentina did not come to ll a developmental void left by the exhaustion of import substitution, but rather to provide a drastic alternative to overcome a problem that was fundamentally political in nature. In March 1976 the military took power with the declared intention of putting an end to the chaos that permeated Argentina. In the military reading of the situation which successfully touched on the deep fears political chaos and violence had instilled among broad sectors of the population the most immediate challenge was to eradicate left-wing opposition. State terror became then the most prominent manifestation of the new military regime. Its main feature, though, was its centrality within a transformative project that explained the profound social

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crisis that aficted Argentina as the outcome of the development pattern followed. By granting key sectors of the economy the capacity to x prices independently from external competition, protectionism had also given labour a greater power to set its own price. Thus, protectionism was conceived as the core policy instrument through which labour had cemented its power (Canitrot, 1981, p. 133). With it, labour had been effective in pressing for reforms that greatly increased the role of the state in the provision of services that were a major drain in the economy. But much more importantly, the pattern of labour struggles in Argentina had favoured the radicalization of the labour movement, which as one more expression of subversion according to the ofcial discourse had placed the very survival of the countrys political and economic institutions in peril. In short, the economic critique of import substitution that had become central in the conguration of the counter-revolution in development ideas by the 1970s, acquired the power of a new instrument in the battle against social mobilization. A neoliberal programme of reforms trade liberalization, capital market deregulation, privatization, a reduced space for state regulation and scal discipline contained the elements required to constitute the core of the political reordering sought by the military. And its outcome was indeed a dramatic transformation of Argentine society. Without qualication, labour was the main loser. Between 1976 and 1981 real wages declined approximately 40%. Labours position was further undermined through industrial restructuring. Trade liberalization, in combination with an overvalued currency after 1979 and changes in nancial regulations, resulted in a drastic fall of manufacturing, from 28.2% of GDP in 1974 to 25.3% in 1978 and 22.4% in 1982. Not all propertied classes beneted in the same way as the crisis unleashed by the programme of reforms affected even those identied originally as key players in the emergence of a new Argentina.4 Small and medium-sized rms were also among those most aficted by the reforms introduced by the military. But even among larger rms there were important breakdowns that led to the conguration of new economic groups that from this period on would play a leading political and economic role. It was in particular larger, established rms controlled by domestic capital that became the main winners in the process. In several cases they were able to benet from the subsidies the military extended during this period to areas considered strategic for instance energy, communication and construction , and from foreign loans. Further, they had invested heavily in expanding their activities horizontally, in import commercialization and in the growing nancial market. Along with this group, the other major winners were the national and international banks, some transnational companies,5 and the conglomerates many controlled by foreign capital that dominated the commercialization of Argentinas agricultural exports (Flichman, 1990, pp. 1920; Smith, 1991, pp. 253254).

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The fall in wages, controls on government expenditures and trade liberalization all were conceived as essential in the anti-inationary programme. However, repeated attempts to nd a resolution to the problem not only failed to bring ination under control but created new and serious difculties, in particular the massive growth of foreign debt, both public and private. The inow of external resources into the nancial system produced a rapid expansion of the sector: from having accounted for 4% of the GDP in 1976, it had increased its share to 9% in 1981 (Smith, 1991, p. 255). In the context of a shrinking economy (by 1982 the economy was almost 13% smaller than it had been 1976), nancial speculation became one of the central economic activities. In fact, gross domestic investment declined 23.5% between 1976 and 1983 (Schamis, 1991, p. 209). Thus, foreign borrowing came to feed a monumental transfer of resources abroad. The nal turn to this tale of speculation was the nationalization of the private debt by means of a number of nancial reforms through which the Central Bank acquired as its own private debt.6 When all was said and done, out of the total growth of foreign debt between 1976 and 1982 (from approximately US$ 8 billion to US$ 43 billion) 44% had nanced capital ight, 33% interest payments on the debt and 23% imports, mostly military equipment (Calcagno & Calcagno, 2000b, p. 2). Unable to resolve the enormous crisis generated by its economic program, and after attempting in vain to recover some political momentum by embarking in a war against Great Britain over the Malvinas Islands, the military fell by the weight of its own dramatic failures. The calling of elections for 1983 and the transition to civilian rule under conditions the military were hardly capable of controlling mark the end of the rst comprehensive attempt to remove the political obstacles for the implementation of a neoliberal programme of reforms. While obviously not fully successful, still the experiment was effective in introducing the structural changes that explain the inability of labour and other forces connected to redistributive concerns from gaining political supremacy again. In fact, the structural transformation resulting from deindustrialization and with it unemployment and growing heterogeneity in labour markets altered in unequivocal ways the context within which labor had framed its struggles in Argentina (Patroni, 2001). The election of Ra l Alfonsn from the Radical Party to the presidency in u 1983 created immediate expectations regarding the possibilities of repairing the main negative trends in income distribution resulting from the military period. However, both the power acquired by key economic groups and the profound crisis aficting the capacity of labour to impose limits on the costs it was called upon to bear in the process of restructuring proved impossible to overcome. The workings of the domestic economy had changed in ways it was not easy to evaluate in the early 1980s (Basualdo, 2001, p. 40).

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Quite certainly the main organization within the labour movement (the General Confederation of Labour-CGT) remained a force to be reckoned with, regardless of the growing heterogeneity of the working class and the weakening of key industrial sectors. Nonetheless, there were a number of conicting forces at play for organized labour and the nal direction of change was toward a less effective intervention in the political arena. For example, the repression unleashed under the military against the most progressive sectors of labour had freed the Peronist union structure of one of its major problems, but at the same time its position within the party itself had been noticeably reduced. During the presidency of Alfonsn, the CGT was able to confront the government including the calling to thirteen general strikes precipitating in some cases the crises that caused various attempts at stabilizations to run aground. Yet it was unable to prevent the fall in wages and employment from which the deteriorating economic conditions derived. The position of the CGT became even more complex during the 1990s, when the Peronist party was in power. The incapacity of the organized labour movement to prevent some of the changes and the support it provided for others in exchange for the preservation of its corporatist privileges explained Menems success in effecting this critical transformation of labour markets. However, the price the labour leadership connected to the Peronist party paid for its consent to Menems policies toward the working class was high. The growth of new union alternatives in Argentina is probably the most evident manifestation of the traditional leaderships weakening position within the labour movement. The economic groups strengthened economically during the military dictatorship were able not only to maintain the privileges gained then, but also to consolidate and extend them during the 1980s. However, having relied heavily on government contracts and the extension of subsidies, the industrial sector was ambivalent about the merits of reforms. In fact, it was only by the late 1980s, when the crisis had reached unprecedented levels, that the consensus around a reduction of the role of the state in the economy, privatisation, and trade liberalization became an active part of the demands of the industrial sector as a whole. The extremely tenuous political situation of the Alfonsn administration and the worsening macroeconomic conditions in the country erupted in the hyperinationary episode of 1989, when price increases reached an annualized rate of 5,000%. This crisis prompted an early transfer of power to the newly elected Peronist government of Carlos Menem. The gravity of the circumstances under which Menem took ofce indisputably limited the options at the disposal of the new administration. Paradoxically, it was also the scope of the crisis that provided the state with the political ammunition it required to undertake the drastic shift in policy orientation that Menem offered as an alternative and that Alfonsn had failed to advance (Palermo & Novaro, 1996, p. 115).

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Although Menem centered his economic policy in the acceleration of a program of structural reforms, this was not very successful given the inability of the government to provide long-term relief to the problem of ination (in 1990 ination reached over 1,300%) or capital ight.7 Under the threat of a further speculative wave against the domestic currency and the prospects of spiralling ination, the Economy Minister was forced to resign and in his place Menem appointed Domingo Cavallo. It was mostly as a response to this critical juncture in Argentina that the new minister proposed his Convertibility Plan.

THE CONVERTIBILITY PLAN

Cavallos anti-inationary plan became law in April 1991, establishing a xed exchange rate between the Argentine currency and the dollar, set originally at US$ 1 for 10,000 australes and, after 1992, at US$ 1 for $1 Argentine peso (where 10,000 australes became equal to 1 peso, the new currency of the country after that year). At that rate, the Central Bank was required to sell all the dollars demanded by the market and to take out of circulation the domestic currency received in the transactions. The law also established that the monetary base of the country could not be larger than the amount of international reserves in the central bank. Additionally, the law banned price and debt indexation and the practice, then quite widespread, of including an indexing clause in contracts. While low levels of liquidity and high foreign reserves made the xing of the exchange rate without devaluation possible, lending credibility to it was a different matter. The scope of the task goes a long way in explaining two features of the Convertibility Law that were not only central but also novel in the context of the countrys experience. First, its adoption was the result of a legal process involving an act of congress and thus it could only be changed with the promulgation of a new law. Devaluation, and thus exchange rate policy, were no longer instruments in the hands of the executive. The possibility of a politically motivated change to the law always remained a potential threat but the dynamic created by convertibility itself made it quite unlikely. On the one hand, there was the support it generated among vast sectors of the population. In fact, the collective horror evoked by the memory of incomes vanishing under the weight of hyperination was reason enough for many to support the program. Convertibility became thus the depository of the broad consensus that the experience of hyperination had consolidated about the importance of stability as a primary target of economic policy. For the middle class, always so attracted to import consumption, the newly acquired purchasing power of its increasingly overvalued pesos was another important variable. Moreover, because most internal debt was eventually nominated in dollars, a very

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large group of loan holders big and small also depended on a xed exchange rate in order to guarantee the value of loans. On the other hand, convertibility became the crux around which the interest of the most powerful economic groups in the country came to be articulated and expressed. The guarantee of a xed exchange rate provided the certainty which foreign investors demanded in order to secure the value of prot remittances. Convertibility was also the essential context for the prots accruing to nancial speculators. In particular, this sector was the direct beneciary of the differential between domestic and international interest rates and of the freedom that ruled the movements of capita (Ale, 2001). Second, since according to the Convertibility Law all money in circulation had to be backed by foreign reserves in the Central Bank then, at least in theory, all holdings in national currency could be exchanged for dollars. That this was the nature of the new convertible domestic currency appeared to be guaranteed by the fact that the monetary base could only increase, as the new law stipulated, by the same amount as the foreign reserves. In reality, up to one-third of the monetary base could be held in the form of dollar-denominated Argentine central government securities valued at their market price. While this gave the central bank some scope for increasing the money supply, the Convertibility Law seriously restricted the states prerogatives in terms of monetary policy. The important point to underline is that not all money that could be used to purchase dollars was actually guaranteed by foreign reserves. In fact, the law specied that it was only money in circulation plus demand deposits in the Central Bank that were required to be backed by hard currency reserves (Calcagno & Calcagno, 2000a, p. 4). Or to put it differently, the money that could be used to demand dollars including current account deposits, savings and time-deposits encompassed amounts considerably larger than the monetary base. Thus, during the crisis unleashed in 1995 by the nancial turmoil in Mexico and in the nal act of the convertibility period in November 2001, the demand for dollars came precisely from money escaping a nancial system which was not backed by reserves in the central bank. Finally, in 1992 the monetary system was further ne-tuned with the enactment of a new Charter for the central bank. The central bank was banned from nancing public sector activities, which obviously meant its decit, and restricted in its capacity to intervene to provide rediscounts and temporary advances to nancial institutions. Moreover, the function of the Central Bank was redened to strip it of its role as lender of last resort (Calcagno, Manuelito & Titelman, 2001, pp. 89). However, this changed rapidly as commercial banks faced a major liquidity crisis in 1995. Then, they swiftly rediscovered the importance of counting on a Central Bank able to extend rediscounts and to guarantee deposits. It was indeed the intervention of the central bank that spared private banks from collapse then as it would be the restrictions imposed on peoples ability to

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withdraw money from their own accounts in early December 2001 and with it the de facto end of convertibility which saved them at this time.8 As I have suggested, the convertibility law was much more than a stabilization program. As the decade progressed, convertibility became the central instrument that opened the oodgates for the implementation of a radical program of reforms along the lines of what has become known as the Washington Consensus: trade and nancial liberalization, privatization, and the withdrawal of the state from its key functions in the regulation of the economy. These policies formed the core of the process that over the 1990s would push Argentina to collapse.

CONVERTIBILITY AND NEOLIBERAL RESTRUCTURING

When viewed from the very narrow perspective of an anti-inationary instrument, the Convertibility Plan was a major success. The ination rate fell from 1,344% in 1990 to 84% in 1991, and continued to decline during the decade to reach 0.1% in 1996 (ECLAC, 2000, pp. 9495). Price stability coincided with a large inow of foreign capital and both resulted in important rates of economic growth between 1991 and 1994. In particular, the remonetarization of the economy and the expansion of credit that capital inows permitted fuelled a process of economic recovery that also positively affected scal accounts. This was the golden era of convertibility and it provided the government, the international nancial institutions, and other supporters of neoliberalism with the elements they required to demonstrate the superiority of market alternatives to overcome situations of economic chaos like the one Argentina had experienced during the 1980s. The economy grew on average 6.5% annually between 1990 and 1994 and at 3.6% between 1994 and 1997. Of course, economic growth and the prognosis of what was the basis of this Argentine miracle painted a very partial picture. Convertibilitys original success, its survival later and, in the nal stretch, the appearance of its sustainability were determined by the availability of external nancial resources essential in funding the several decits it generated. One key problem was the insurmountable tension between economic growth and balance of trade decits. The prevailing perception among policy makers was that economic reforms including labour market deregulation and privatization would produce such large gains in productivity and efciency that imbalances in the external accounts could be overcome in the short run. The performance of exports, neoliberal supporters continued to insist despite all evidence to the contrary, was to be central in providing the foreign resources the economy demanded (Calcagno, Manuelito & Titelman, 2001, p. 17).

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As the evolution of the sector during the 1990s made abundantly clear, exports were never capable of contributing to any improvement in Argentinas external position. This is not because they didnt grow: on average exports increased 2.6% annually between 1990 and 1994 and 14.7% between 1994 and 1997. The pace of growth decelerated after that year, but exports continued to increase throughout the period. There were, nonetheless, negative tendencies in the sector, in particular the growing primarization of exports that is the greater participation of resource-intensive products and the concomitant reduction of industrial exports. The increasing overvaluation of the peso was central in determining the fate of exports, both in terms of their nature and volume. Overall, though, the degree of openness of the national economy was not altered in any radical way by the process of trade liberalization, at least until 1996. Thus, regardless of the stated rationale for reforms, the index of economic openness (as measured by the ration of imports plus exports over the size of the GDP) was only up to 19.2% in 1996 from 16.2% in 1973. But more importantly, the ratio of exports to GDP remained practically unchanged during this period since it had been 9.6% in 1973 and reached only 9.8% in 1996. This means, of course, that it was the increased participation of imports which accounts for the change in the openness of the economy (Nochteff, 1998, p. 32). The central problem with respect to foreign trade was, in fact the staggering growth of imports. As the economy recovered early in the 1990s, imports grew at an annual rate of 39.5%. Overvaluation in combination with trade liberalization proved to be a deadly formula for several economic sectors in Argentina which could simply not compete with the large volume of imports domestic policies were undervaluing. The gap thus created in the trade account set the limit to periods of higher economic activity. In fact, economic growth under the Convertibility Plan resulted in mounting trade decits which could only be nanced by a larger inow of nancial resources or, when this was not possible, be kept in check by recession. But this was far from being the only or even the main external difculty monetary and structural reform generated in Argentina. Besides trade decits, the remittance of prots and interest payments on the foreign debt became heavier burdens on the current account as the decade progressed. By 1998, the year when the last recession started, the current account decit was equivalent to 4.9% of GDP, but interest payments on the foreign debt accounted for over half of that amount (Weisbrot & Baker, 2002). Until 1995, of course, nothing of this really seemed to matter since a large volume of dollars, a total of US$ 10.8 billion per year, came into the country. The majority of these funds (70%) were attracted by private sector operations, particularly short-term deposits, portfolio investment and the stock market. The rest was accounted for by public sector operations, mostly due to privatizations of public companies. All these events the commitment of the government to structural reforms, the growing stability of the country, the high rates

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of economic growth, the international condence generated by the government and measured in terms of the large inow of capital were the proof the Menem administration so proudly paraded in Argentina and around the world about the correct-beyond-doubt path it had chosen. However, troubling signs about the costs of these achievements were evident from the very inception of the reform program. Employment indicators provided an early warning in this respect. Indeed, for the rst time unemployment increased as the economy grew (I will return to this point below).9 But the government also had the solution for that: the deregulation of labour markets. As was argued with all the strength of the neoliberal common sense, low labour absorption was the result of the rigidities that permeated labour relations in Argentina. Thus, as the employment crisis loomed, the ofcial argument in favour of exibilization gained increasing prominence as the policy alternative to overcome the problem (Salvia et al., n.d., p. 134). Several decrees and laws were promulgated during the decade in order to deregulate labour markets, but probably none was as effective as the increasing weight of unemployment, underemployment and the growth of a number of precarious forms of employment to give content to the objective of labour exibilization. For as long as international conditions were favourable, convertibility delivered in terms of providing the context for economic growth and stability. However, international conditions did not take long to change and already in 1995 the Mexican crisis imposed a new set of conditions on the economy and the full weight of the rigidity convertibility had introduced in it was then felt. While within a year Argentina was able to recover some of the pace of economic growth, it could only do so by increasing its foreign debt through the oating of bonds (68% of external nancing), by then the principal source of hard currency as portfolio investment and short-term deposits became negative (2.5 billion per year left the country after that year) (Calcagno & Calcagno, 2000b, p. 3). Foreign direct investment became more important, but it was not sufcient to compensate for the other changes. And thus all the elements for the nal collapse were present, and clearly evident to everyone, from the mid-1990s. The decit in the trade account was quite obviously not a problem that reforms could solve in the short run. Most of what the country had to privatize was sold by this time too, drying up an important source of revenue for the state (US$ 26 billion). Moreover, prot remittances by the privatized sector added one more element of pressure to the weak external front (Azpiazu & Vispo, 1995, pp. 133134). Because a large portion of the investment in the privatized sector was undertaken though foreign borrowing, interest payment on this debt also became an important drain. Between 1992 and 1999 privatized companies remitted US$ 5.8 billion to service their debt (Maas, 2001, p. 2). Just as serious for the government was the fact that the

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reduction in revenues from privatizations produced, once again, a rising decit in scal accounts. But high levels of tax evasion, reduction to payroll taxes, and widespread corruption also contributed to poor scal performance. Of course, one cannot talk about the problem of scal decit in Argentina without addressing the growing weight of payments to service the public foreign debt. In 2001, a full 20% of scal spending was directed to this end (Lascano, 2001, p. 133). As the foreign debt increased, bond investors also became more concerned and thus Argentina could only secure the placement of new bonds by paying rising risk premia. This situation became even more severe as new crises in Asia, Russia and Brazil affected international nancial markets. The government was able to sustain a growing trade decit and mounting debt servicing for a while longer by continuing to increase its foreign debt. However, by 1999 the possibility of placing new debt bonds had for all practical purposes disappeared for Argentina given the risk premia demanded by investors. A key argument of those who at the time defended dollarization as a way out of this conundrum was precisely that eliminating the risk of devaluation that is transforming American dollars as the only legal tender and abandoning the domestic currency would result in the reduction of interest rates. However, the argument was and is awed to the extent that the key determinant in the cost of credit (besides of course the sheer power of the nancial sector and speculators in it) is the perceived capacity of the country to service its debt, and not its exchange rate. That is, eliminating the devaluation risk does not affect the default risk, which is directly and simply related to a countrys external solvency, regardless of the currency used for its internal transactions (Frenkel, 1999). The private debt also grew rapidly during the 1990s, but the sectors resources abroad were much larger (US$ 36 billion and US$ 89 billion respectively) (Calcagno & Calcagno, 2000b, p. 3). By 2001, Argentinas total foreign debt amounted to a staggering US$ 155 billion, up almost threefold since 1991, the beginning of convertibility, when it had been US$ 58.5 billion. In response to Argentinas incapacity to secure new credit, the IMF intervened, showing its support to convertibility by facilitating a number of loans since 1998. During the year 2000, the IMF extended a total of US$ 40 billion to Argentina and another US$ 8 billion during 2001. The key issue for the IMF and the new administration of President De la R a (19992001) was how to lessen fears of u default in the hope that that was the precondition to reduce the interest rates faced by Argentina. Fiscal decit reduction acquired an increasingly key role in the strategy of the government in the expectation that it would secure IMF trust and, through it, obtain once again the inow of private investment to reactivate the economy. But Argentina had fallen into a recession since the second half of 1998 and the situation only worsened from then on. The economy shrank 3.4% in 1999, 0.5% in 2000 and 4.5% in 2001. The major annual fall, though, was registered

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in 2002, following the collapse of convertibility, when economic activity fell by 11%. By the end of March of this year, GDP per capita was almost a quarter smaller than it was in 1976 (Lozano, 2002). Given the rigidity in exchange rate policy, recession was in fact the only alternative to deal with the external imbalance in the face of inadequate resources to continue to nance the current account decit. But recession only increased the scal difculties of the state. And therein lay the crux of the dilemma, or rather the wall that had been waiting all along at the end of the convertibility road: economic growth implied current account decits but recession reduced scal revenues and worsened the budget decit (Calcagno, Manuelito & Titelman, 2001, p. 35). Without constant foreign borrowing there was no way out of this dilemma: foreign debt became the lifeline of convertibility. Ultimately, convertibility was sustained because it was the way of securing payment on the foreign debt. Avoiding devaluation was also central for the privatized sector and the large conglomerates and banks heavily indebted abroad. In a last-ditch attempt to prevent the collapse of the governments economic plan, De la R a appointed Domingo Cavallo as his Minister of the Economy in u March 2001. Cavallos alternative to the crisis was to eliminate the scal decit (the infamous law of zero decit) by cutting down salaries and wages in the public sector by 13%, leaving untouched, it goes without saying, payments on interest of the foreign debt. The measure deepened the recession which in turn resulted in a drastic fall in scal revenues that further exacerbated the decit. His failure increased the tension with the IMF, contributing in turn to heighten concerns about the institutions continuing support to prevent default, which was to happen early in 2002. Capital ight gained momentum as a response to the growing uncertainty about the sustainability of convertibility, but also about the solvency of banks, regardless of the alleged strength granted to the domestic banking system by its growing transnationalization. As the events of December 2001 proved, the foreign headquarters of foreign banks which operated in Argentina were not ready to provide the guarantee on deposits consumers were led to believe was one of the benets of holding accounts with them (Ale, 2002, p. 8). By the end of November capital ight reached crisis proportions prompting the government to set limits on the amount people could withdraw from their bank accounts. As if all of this were not bad enough, in attempting one more rapprochement with the IMF the Minister submitted a new bill for the 2002 budget to Congress with new cuts amounting to 18% of the budget. The end of the government was not far away. The signs of the neoliberal devastation of the country were manifest in every single aspect of life. Not only did the economy perform badly, but political decay, social polarization and the abysmal fall in living standards made it impossible for

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anyone to continue to insist that Argentina was on the right path and only time was needed to see the results of a job well done. In particular, at the end of convertibility it was evident that the restructuring process had led Argentina on a path from which there would be no easy way of return. The destruction of whole sectors of the economy, the transformation of exports into resource-intensive activities, the extremely high levels of public and private indebtedness, the drastic cuts in the provision of public services, and the transfer of a monumental portion of public wealth into private hands represent profound structural changes whose implications will weigh heavily on the country for years to come. The markedly negative change in peoples working lives might show more clearly than any other indicator the extent of the transformation that has taken place in Argentina. As I will discuss below, the consequences of the changes in labour markets implied the existence of new social and political conditions that will not be overcome in the near future. One could say that Argentina gave the neoliberal notion of there is no alternative a whole new meaning. By the end of 2001 the overwhelming feeling among Argentines was the sense of impotence in the face of a reality that overwhelmed them and disbelief in the capacity of anyone to rescue the country from complete collapse.

CHANGES IN LABOUR MARKETS: THE WAY WE LIVE NOW

The convertibility regime set the framework therefore within which structural reforms in Argentina acquired their particular shape. As discussed above, the process of economic restructuring produced a number of dislocations which remained unworkable through the extremely limited set of options neoliberalism made available. This was the case, in particular, with the transformation of labour markets. In particular, the performance of employment indicators provided an early warning about the costs of stability convertibility afforded the country. In fact, while the economy grew rapidly between 1991 and 1994, unemployment increased from 6% to over 12% during this period. There are several factors accounting for this phenomenon, especially the low generation of employment for a given level of economic activity and the rise in the number of those seeking employment, particularly women.10 Both were related to the main strategies adopted by rms in order to adapt to the new conditions economic restructuring under convertibility create and, when this was not possible, to the disappearance of employment due to closures. First, currency appreciation, particularly as the decade progressed, in combination with trade liberalization created a drastically different environment for the industrial sector. The vital element for the survival of rms under these new

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conditions was related to their ability to improve their efciency in order to remain competitive in the market. It is important to emphasize that being competitive in this context implied facing imports that were articially low in price. Those that were not successful quite simply could not survive the process. The result of both trends was an increase in labour productivity, which for the period 19911994 grew by 20% in the industrial sector. The incorporation of new technology played a key role in rising productivity. After a decade in which investment had registered very low levels, the expectations generated by the new stability found through convertibility encouraged a signicant change in this trend. However, the prevailing overvaluation of the peso in combination with the reduction of import tariffs on capital equipment, tended to favour the incorporation of capital intensive technology with therefore low capacity for employment generation (Gastaldi et al., 1997, p. 87). But productivity increases were also the reection of the introduction of new forms of work organization and other changes such as growing work intensity that evidenced the incapacity of labour unions to defend working conditions and the rights guaranteed through labour legislation (Monza, 1995, p. 146). Interestingly, all sectors of the economy registered important productivity gains, not only those that faced increasing external competition. In some cases this was partly the result of the incorporation of new technology, as was the case in the service sector. But the rapid growth of unemployment and the increasingly deteriorating conditions faced by workers operated effectively as disciplining mechanisms throughout the economy. The sometimes drastic reduction in staff within the newly privatized sector and the concomitant rise in its productivity levels is a case in point (Becaria & L pez, 1996, p. 40). o Second, many rms could not adjust to the new conditions created under trade liberalization, in many cases because they did not have access to the nancing required to increase their efciency. The most important consequence of this was the destruction of a growing number of jobs, particularly within those sectors most affected by foreign competition. Small and medium size enterprises were particularly hard-hit in the process, but rms of all sizes were affected by trade liberalization. That is, those rms nancially incapacitated from adopting new technology or that were unsuccessful in introducing changes in the internal organization of labour to secure higher rates of productivity were simply eliminated from the market. Convertibility thus imposed a new pressure toward increasing the rate of exploitation of labour exercised through the limits imposed on capital itself (Bonnet, 2002, p. 41). As the currency continue to appreciate during the decade this tendency was intensied. In short, while economic growth after 1991 resulted in some employment generation, economic restructuring in particular under the conditions it took under convertibility tended to have the oppositve effect. Raising unemployment during

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this period was also related to the growing number of people seeking employment, a fact that in the ofcial version of the period manifested the emergence of positive expectations on the part of sectors that had become marginalized by the decline of the 1980s. More sober voices connected the fact to the increasing incidence of unemployment among head of households, a fact that forced other members of the family to participate in the labour market (Beccaria, 2001, pp. 5556). Be that as it may, by 1993 growing unemployment was closely related to the lack of growth of employment. Moreover, most of the jobs created in this rst phase were part-time and thus underemployment became a key characteristic of the period (Beccaria, 2001, p. 55). Besides the problem of growing unemployment and underemployment, workers in Argentina also faced the reality of declining wages after 1993. The positive impact of the Convertibility Plan on price levels and the growth of employment between 1991 and 1992 allowed wages and salaries to recover some of the loses inicted during the period of high ination between 1989 and 1991. However, the rate of growth of salaries and wages started to slow down in 1993 and became negative the following year (Becaria & L pez, 1996, p. 42). While these o negative trends were therefore evident in a period of economic growth, they became even more accentuated with the economic downturn of 1995. In that year total employment fell by 4%, unemployment reached 17.5% and underemployment rose to 11.9%. Under these circumstances, real salaries fell more than 6% on average. These changes created the conditions for another fundamental transformation: the continuous growth of precarious forms of employment, including the reality of employment for those who work without any form of social security or formal contract (Beccaria, 2001, p. 60). I will return to this point later on, but here it seems important to note that workers were not only expelled from their jobs, but that their re-absorption into the labour market increasingly took the form of precarious employment. Thus, the case of Argentina clearly shows that the key issue for workers was not only the rise of unemployment (a problem obviously serious enough) but also the drastic transformation of working conditions for those with employment. This seems a particularly relevant observation to take into account in conceiving alternatives to the problems employment faced by most Argentines. To put it briey: reactivating the economy might reduce the incidence of unemployment but this by itself will not provide the means to overturn the instability and precariousness those with a job face and will face as part of their daily reality. The recession of 1995 gave way to some economic reactivation the following year. However, it took several months of accelerated economic growth after 1996 to be reected in a reduction of the rate of unemployment, but between mid-1996

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and mid-1998 the rate of employment growth increased to its highest level since 1991: 5% per year. The result was the reduction of the unemployment rate to 12.4% in October of 1998. The transformation gave new political ammunition to the Menem administration. After all, while the previous process of economic growth had not been very promising in terms of employment, it could be argued then that the problems were probably more related to the difculties of the transition to a new model of economic growth than to deciencies intrinsic to the instruments used. However, there were some characteristics in the growth of employment during this period that clearly showed that such an argument was based on only a very partial reading of the situation. This is the case, for instance, with the growth of employment within the public sector. A sizeable portion of the jobs created in this sector can be accounted for in terms of the implementation of special employment programmes which were then and have continued to be characterized by very low wages and low productivity, and are only offered on a temporary basis. Through these programmes the government attempted to provide some relief to the serious crisis of unemployment, but they also became a key instrument for the extension and consolidation of patronage. Eventually some organizations of the unemployed also became involved in the allocation and distribution of work programmes, a fact that has given to these organizations the role of intermediaries between the government and their grassroots with the quite obvious potential for diluting their political work. In general, employment plans under this category known previously as Plan Trabajar and now as Plan Jefes y Jefas de Hogares offered temporary contracts with a duration of three to six months for community public works projects with very low remunerations (between $100 and $200 per month). According to one study, in 1997 these programs were responsible for 80% of the new employment in the public sector (Hidalgo, 1999, p. 134). In all respects, these programmes came to contribute to the general tendency toward growing precariousness and instability in labour conditions, and, one may add, toward accepting relief from complete exclusion from labour markets on a similar basis. In short, they did not diminish the functional power of unemployment and job instability on the constitution of the exible labour force conditions in the 1990s engendered. The other very signicant pattern in this period of economic growth was the steady deterioration in the quality of jobs created. Thus most of the new employment was characterized by its precarious and contingent nature. Only one-third of the overall increase in employment corresponded to jobs that satised all the legal requirements in terms of contributions to social security and other benets. As part of this trend, there was also a growing incidence of temporary employment under the provisions of the new labour legislation introduced earlier in the decade (Employment Law of, 1991). Nearly half of the private-sector

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employment growth in metropolitan Buenos Aires, for example, can be explained by the expansion of limited-term positions (Beccaria, 2001, p. 63). Salaries showed some sluggishness in overcoming the downward trend manifested during 1995. In fact, it took almost 2 years for salaries to show any sign of improvement. Nonetheless, salaries did not fully recover from the losses inicted by the downturn of 1995. The evolution of salaries is certainly congruent with the growth of unemployment, underemployment and precarious forms of employment. In general, it is logical to expect that under these conditions the capacity of workers and unions to protect salaries and working conditions came to be seriously imperilled. However, this limitation was further exacerbated in Argentina, as noted above, by the ambivalent role played by the main confederation of labour in responding to Menems initiatives. Reduction in payroll taxes, one of the employers key demands, further reduced labour costs for them. As Argentina sank once again into recession after mid-1998, the small gains achieved in labour markets were eroded once again. Moreover, this recession was not only longer in duration only in 2003 were there some signs of recovery but also deeper in nature and thus most social indicators worsened to unprecedented levels. Unemployment reached 18.3% in October 2001 (the last census before the crisis in December of that year), a very drastic increase from the 14.7% registered for the same month of the previous year. The increase in unemployment would have been even larger had it not been for a signicant reduction in the number of those seeking employment (P gina 12, 14/12/01, pp. 67). a While the rate of employment had continued to grow during the rst year of the recession, after 2000 almost all sectors of the economy experienced the disappearance of jobs. The losses were particularly serious in the construction sector, but retailing, manufacturing, banking, transport, and health were all affected by the same trend. Salaries continued to decline during the period, and the federal governments decision to reduce salaries and pensions by 13% after July 2001 made the situation even worse. This recessionary period in reality only perpetuated and deepened the trends that characterized the era of convertibility as a whole and that as I have suggested were not only circumscribed to the rise of unemployment. Throughout the 1990s there was a steady increase in the importance of those working in precarious jobs, fundamentally those which do not involve social security contribution, benets granted by labour legislation such as vacation pay or, in some cases, a formal contract. For the area of Metropolitan Buenos Aires the number of jobs in this category represented 26.7% out of total salaried employment in 1990, 36% in 1998 and by the year 2000 it had reached 40%. To this we must add the impact of unemployment and underemployment, which when combined affected 34.6% of the work force in October 2001 (P gina 12, 14/12/01, pp. 67). Most of the a

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jobs lost during the period, probably as many as two-thirds, corresponded to the reduction of employment in the manufacturing sector as industry continued to contract to represent only 17% of GDP in 1998. Salaries also showed a downward tendency, which in a deationary context meant not only reductions in real wages but the decline of nominal wages plain and simple. All these variables suffered a deterioration since the crisis of December 2001. By mid-2002 unemployment was calculated at 22% and while economic reactivation in 2003 (estimates put the gure of GDP growth for this year at around 8%) has resulted in the creation of some jobs, the unemployment gure continues to be in the upper teens. However, growing ination in 2002 and its persistence during 2003 have eroded the value of real wages. The combination of these variables explains why by 2003 more than half the population of Argentina lives under the line of poverty. Along with the growth of poverty, changes in labour markets are also at the core of a worsening distribution of income, the other central transformation in Argentina over its neoliberal period. The income of the lower two deciles fell from 4.55% in 1990 of national income to 3.8% in 1998, while the income of the highest 20% increased from 50.6 to 54.25% during the same period. Moreover, the concentration of income soared in particular for the 10% of the population with the highest income: from 34 to 37% between 1990 and 1998. The explanations given for such a calamitous deterioration in employment and in the working conditions deserve special consideration. It was proposed then, and it has remained one of the elements in explaining the failure of the convertibility plan, that the lack of exibility in labour markets did not allow wages to adjust sufciently in order to maintain competitiveness (Krueger, 2002). In turn, this affected negatively production and thus employment levels could not improve. Let me deal rst with the issue of the alleged rigidities that, according to the argument, would be related to the existing labour legislation. While it is true that the process of reform was uneven during the 1990s, by 1996 Menem had nonetheless successfully introduced a number of laws and executive decrees that radically changed social and labour rights in the country. While the last set of labour laws passed by Congress during the Menem administration reversed some of these reforms, this constitutes a rather insignicant rollback. It is indeed difcult to argue that exibility did not exist in a country where up to 40% of the labour force worked without formal contracts or protection under the existing labour legislation. Moreover, while the negotiation of industry-wide collective agreements remained the letter of the law, in practice unions agreed to negotiate at the plant level, accepting in many cases reductions in wages or the deterioration of working conditions in general.11 The other point that needs addressing is the argument regarding the supposedly high cost of both salaries and wages and indirect costs of labour that would have interfered with the competitive position of the country. The problem here was

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that salaries in Argentina were high in terms of their value in dollars, but real salaries showed a unambiguous tendency to decline. By the end of the decade real salaries were still 23% below their 1986 level and 30% below the level of 1980 (Mancebo, 1998, p. 187). In the context of a xed exchange rate, sustained high interest rates and increasing prices for services provided by the privatized sector, wages and other labour costs became practically the main variables available to reduce production costs. Could even lower wages and less regulation have worked to palliate the problem of employment and underemployment? Once again, it is hard to imagine the scope of the adjustment that would have been required in order to compensate for the effects that restructuring under convertibility had on the productive structure of the country. Or to put it in somewhat different terms, it is hard to imagine the conditions under which this alternative adjustment would have been politically viable, save by a process of open and brutal repression. Ultimately, the level that social mobilization had reached in Argentina by the middle of 2001 must be considered central in explaining the downfall of convertibility and the evaporation of alternatives for the De la R a government. It is also crucial in u explaining some of the growing differences that existed among various factions of capital. An examination of the process of resistance convertibility elicited is then essential to understand its limits and eventual collapse and also to assess the options the new phase in Argentina opens in the struggle against neoliberalism.

ORGANIZING RESISTANCE: NOTES FOR A CONCLUSION

The early success of convertibility in controlling ination was the basis for the strong consensus it generated around both the appropriateness of the instruments used to bring about stability and, equally important, their enduring centrality in maintaining it. This economic success was at the core of the high levels of political support Menem was also capable of securing for his administration, at least until the second half of the 1990s. A key component of the political compromise Menem was able to forge around his restructuring plans for Argentina was the support he gained from a majority sector within the CGT, then the only labour confederation and an important political player within the Peronist Party. Caught between the attempt to protect its own corporate benets and position within the party and the pressure to respond to the impact of reforms on the working class, the CGT suffered a major setback. Growing unemployment, underemployment and the increasing incidence of contingent and precarious work dramatically limited the power of its member unions. More importantly, its obvious unwillingness to oppose the government in defence of historically signicant workers rights cost the CGT

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dearly in terms of its own legitimacy. Eventually both factors also weakened its own claims of a political voice within the party. But the CGTs dilemma at the time involved also the radical transformation of the discourse that previously gave meaning to working class struggles as an expression of the search for social justice as dened by Peronism. Thus, the crisis faced by the CGT was not only related to the disappearing reality of the world of work it represented effectively in the past but also, and much more signicantly, to the fact that it was a Peronist government that altered in such a radical way the context for the shared collective memory that provided an essential component of working class political identity.12 There was probably no more clear indication of the weakening position of the CGT during the 1990s than the growth of new union alternatives, more specically the emergence of the Central of Argentine Workers (CTA-Central de Trabajadores Argentinos) and quite a large spectrum of organizations representing the unemployed. The CTA has been extremely successful in organizing precisely those sectors marginalized by restructuring in the 1990s: the unemployed, the underemployed and those employed under precarious conditions. Moreover, one of the most relevant aspects in the experience of the CTA as a trade union organization has been its capacity to construct itself before large sectors of the population as an alternative to the corporatist practices so prevalent in the history of unionism in Argentina. Its ability to incorporate the growing sectors most affected by the exclusionary nature of reforms, has given the CTA an important venue to challenge not only the policies that engendered poverty and marginalization, but also the antidemocratic and authoritarian nature of the traditional labour movement. Somehow paradoxically, the CTA has achieved a degree of political clout that far exceeds its actual gains as a union organization. On balance, while one could certainly point to a number of problems and tensions within the political perspectives of the CTA and its leaders, this does not reduce its contribution to the constitution of a new unionism in Argentina. In particular, the use of direct or individual forms of afliation, in response to the weakening structural position of the working class and the increasing fragmentation of workers reality, has allowed it to organize effectively a large segment of the working class most directly affected by the negative transformation of labour markets. Regardless of the importance of this key transformation on the union front, over the last few years it has been the emergence of new forms of protest in Argentina, particularly the increasing signicance of organizations of the unemployed and their practice of roadblocks or piquetes, that captured most of the attention of researchers. While unemployed and poor communities have been key actors in these roadblocks largely because this is one of the few forms of protest available to them formal workers and students have also been key participants. There has

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been in fact an important degree of integration among different forms of protest. In this respect again, the trajectory of the CTA represents a key instance as an effort to bring together a range of demands from sectors affected in divergent ways by the process of restructuring and to articulate them through various but coordinated forms of struggles and protest. This is a process which deserves attention because it opens the possibility for a new interaction among unions, the unemployed and those affected by various forms of precarious employment in a way that challenges the notion of the decreasing importance of labour as a key social actor. It is nonetheless undeniable that the growing presence and signicance of organizations of piqueteros became one of the most critical political events during the 1990s, as they gained not only momentum with their struggles but also legitimacy as political actors. This has not contributed, though, to reduce the number of very concrete problems related to their capacity to coordinate their struggles at the regional and national levels. There have been concerted efforts to overcome isolation, but divisions within organizations of the unemployed also run deep. Moreover, the lines that demarcate their various strategies have become even more clearly drawn since the election of President Kirchner. The selective approach developed by his administration vis-a-vis the organizations of the unemployed has certainly contributed to widening the gulf, but to an important degree this only reects the political shortcomings that mark the development of these organizations. Thus and probably not much differently from what is happening to a number of progressive political forces confronted with a new government that appears considerably more responsive to social demands, the tendency has been to respond with either almost uncritical support or to present a frontal opposition. The organization representing the unemployed within the CTA the FTV, Federacion Tierra y Vivienda has opted for the rst approach, in a move that has not only set it in a collision course with other piquetero organizations, but that might also raise major areas of conict within the CTA. The more confrontational organizations, for their part, have become isolated from the government and also from a broad range of political forces that previously provided critical support for their demands. Beyond these differences and the malaise that today affects this sector of working class organizations, their enduring contribution has been the conguration of an essential space for the emergence of a common identity among their participants. In particular, they have provided a new meaning to their experience of exclusion, giving the movement a specic political potential. Moreover, over the last years of the 1990s it was these organizations that in an unambiguous fashion helped to raise awareness about the true cost of restructuring in Argentina, becoming the most militant opposition to it. Nonetheless, they have been less

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effective in identifying successfully the actors, institutions or forces against whom they direct their struggles (P rez, 2002, p. 177). Part of the explanation for this e decit was then and continues to be today the lack of a political alternative capable of providing further meaning to the condition of exclusion. It is in this respect that once again it is important to recognize the role that the CTA as a union actor has played in attempting to bridge this serious gap. In particular, there has been an evident attempt to provide the protests around the issue of unemployment and poverty with broader political objectives and also to coordinate regional struggles at the national level. As an example one could mention its role in the constitution of the National Front Against Poverty (FRENAPO), and the organization of a national referendum in 2001 around the creation of a national employment and training insurance (seguro de empleo y formaci n). o The pace of social conict during 2002 placed a new set of challenges for the CTA. In particular, it increased the pressure to dene its role as a political actor. This has represented an important point of tension within the various sectors that formed the CTA and it was expressed during the 1990s as the crucial choice between becoming the point of conuence of diverse social movements, or focusing energy on the construction of a political party (Novick & Tomada, 2001, p. 102). The decision in December 2002 to build a political movement on the basis of the forces accumulated within the CTA represents then a new way of conceiving the role of a labour organization at this particular juncture in Argentina, but it certainly also creates new points of tension. This is so because there are a number of issues still not resolved within the CTA, particularly in terms of its capacity to generate unity among the struggles of different sectors of the working class. Notwithstanding the contribution of all these forces to the consolidation of a progressive alternative to neoliberalism, current conditions in Argentina represent clearly a new challenge for them. In particular, the surprising levels of public approval President Kirchner has been able to secure, along with the high degree of expectations economic recovery has generated, have both tended to deate mobilization. Kirchner has in fact been successful in lling the political void that stood at the core of the crisis faced by Argentina over the last few years, although it is certainly difcult to say for how long he will be able to enjoy this position. It is probably less problematic to venture that economic recovery will not continue even in the short run unless credit is re-established and the government ensures other necessary conditions for investment. But while most observers and apparently a very large segment of Argentines have opted to remain optimistic about the prospects of economic growth, this by itself will not address the problems in labour markets I have pointed to above. Leaving aside the issue of the kind of reactivation needed in order to provide sufcient levels of employment, the point

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is that without the enforcement of progressive labour legislation and democratic union activity precariousness might be extended to the new jobs created. Thus, proposals for measures that strengthen domestic consumption, a dynamic insertion into international markets through high value-added products, selective protection, and a more equitable distribution of income are all central in the design of an economic alternative to the debacle neoliberalism has inicted on the country. But without an active promotion and defence of labour rights and a greater voice for democratic unions, they are no guarantees of consistent improvements for workers in Argentina.

NOTES
1. See for example (Petras, 2003). 2. During this period Argentina experienced three military governments (19551958, 19621963 and 19761973) and three civilian governments (19581962, 19631966, 19731976). Peronism was banned from presidential electoral competition until 1973 but it was the negotiation of Peronist votes that proved determinant in the electoral victory of the rst two civilian presidents of this period. 3. A careful study of the period is offered by (Gerchunoff & Llach, 1975). 4. That was the case, for instance, for the petrochemical sector, chemicals and steel (see Smith, 1991, p. 253). 5. It is important to note, though, that many transnational companies were discouraged by the poor economic performance and thus simply decided to abandon the Argentine market or reduced the scope of their activities (Ostiguy, 1990, p. 334). 6. Domingo Cavallo, then Secretary of the Central Bank, was responsible for the implementation of the plan. 7. The government was in fact forced to establish a freeze on term deposit during the rst days of 1990. Through the Bonex Plan these deposits were exchange for government bonds denominated in dollars with a maturity of 5 years. While this plan provided some control over the exchange rate, by early in 1991 the pressures against the domestic currency mounted again. 8. In mid-November 2001 foreign exchange reserves in the Central Bank were $18.8 billion, the monetary base $14.8 billion. However, dollar deposits in the banks were equivalent to $49 billion and peso-denominated deposits another $21 billion. In short, the government did not have the reserves or the access to credit necessary to cover the full amount (Wolf, 2001). 9. Before the reforms of the 1990s, for each percentage increase in GDP employment in Argentina tended to grow between 0.33 and 0.5%. This pattern underwent a dramatic change during the 1990s. In this period, for each 1% growth of the GDP, employment only increased by 0.17% (Pagina 12, 01/08/04). 10. For a discussion see in particular Beccaria (2001) and Monza (1995). 11. By 1999 86.1% of the total existing collective agreements were negotiated at the plant level (Salvia et al., p. 135). 12. For an excellent insight into this transformation see James (2000).

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REFERENCES
Ale, A. (2001). Argentina, paraso bancario. Le Monde Diplomatique Southern Cone Edition, No. 23 (May). Retrieve from el Dipl Julio 1999/Junio 2001, CD-ROM. o Ale, A. (2002). D nde est el dinero. Le Monde Diplomatique, Southern Cone, No. 32 (February), p. 8. o a Azpiazu, D., & Vispo, A. (1995). Algunas ense anzas de la privatizaciones en Argentina. Revista de n la CEPAL, No. 54, pp. 129147. Basualdo, E. (2001). Sistema poltico y modelo de acumulaci n. Buenos Aires: Universidad Nacional o de Quilmes. Becaria, L., & L pez, N. (1996). Notas sobre el comportamiento del mercado de trabajo urbano. In: L. o Beccaria & N. L pez (Eds), Sin Trabajo. Las caractersticas del desempleo y sus efectos en la o sociedad Argentina. Buenos Aires: UNICEF/Losasa. Beccaria, L. (2001). Empleo e integraci n social. Buenos Aires: Fondo de Cultura Econ mica. o o Bonnet, A. R. (2002). Que se vayan todos: Crisis, insurrecci n y cada de la convertibilidad. Cuadernos o del Sur, 18(33), 3970. Calcagno, A. E., & Calcagno, E. (2000a). El precio de la convertibilidad. Le Monde Diplomatique Southern Cone Edition, No. 8 (February), pp. 17. Calcagno, A. E., & Calcagno, E. (2000b). La deuda externa, un proyecto poltico. Le Monde Diplo matique, Southern Cone Edition, No. 12 (June). Retrieve from el Dipl Julio 1999/Junio 2001, o CD-ROM. Calcagno, A., Manuelito, S., & Titelman, D. (2001). Dollarization in Ecuador: A parallel with the Argentine convertibility system. Paper presented at the Seminar on Monetary and Financial Integration, Kalamazoo College, Michigan (May 1112). Canitrot, R. (1981). Teora y pr ctica del liberalismo: Poltica inacionaria y apertura econ mica en la a o Argentina, 19761981. Desarrollo Econ mico, 21(82), 131189. o Daz Alejandro, C. F. (1965). Exchange rate devaluation in a semi-industrialized country. The Experi ence of Argentina 19551961. Cambridge: MIT Press. ECLAC (Economic Commission for Latin America and the Caribbean) (2000). Statistical yearbook. Santiago de Chile. Flichman, G. (1990). The state and capital accumulation in Argentina. In: C. Anglade & C. Fortin (Eds), The State and Capital Accumulation in Latin America (pp. 131). London: McMillan. Frenkel, R. (1999). The international nancial architecture issues in Argentina. Studies on International Financial Architecture, Friedrich Ebert Foundation (June). Retrieved July 8, 2002 from http://www.fes.de/nancialsystem/studies/argentinien.html. Gastaldi, S. et al. (1997). Empleo en la Argentina: Clave para una Mayor Prosperidad. Buenos Aires: Fundaci n Bemberg. o Gerchunoff, P., & Llach, J. J. (1975). Capitalismo industrial, desarrollo sociado y distribuci n o del ingreso entre los dos gobiernos peronistas: 19501972. Desarrollo Econ mico, 15(57), o 354. Hidalgo, J. C. (1999). Mercado de trabajo: Teoras econ micas, plan de convertibilidad y opci n de o o desarrollo. Santa Fe: Universidad Nacional del Litoral. James, D. (2000). Do a Maras story: Life history, memory, and political identity. Durham and London: n Duke University Press. Krueger, A. (2002). Crisis prevention and resolution: Lessons from Argentina. Speech delivered at the conference on The Argentina Crisis Cambridge, July 17. Retrieved July 30, 2002, from http://www.imf.org/external/np/speeches/2002/071702.htm. Lascano, M. R. (2001). Elementos de la poltica scal 19912000. Enoikos, 9(19).

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Lozano, C. (2002). Cat strofe social en Argentina. Buenos Aires: Instituto de Estudios y Formaci n a o de la CTA. Maas, L. (2001). Ganar dinero endeudando empresas. Le Monde Diplomatique, Southern Cone Edn. 23 (May). Retrieve from el Dipl Julio 1999/Junio 2001, CD-ROM. o Mancebo, M. (1998). El nuevo bloque de poder y el nuevo modelo de dominaci n (19761996). o In: Hugo Nochteff (Ed.), La economa Argentina a n de siglo: Fragmentaci n presente y o desarrollo ausente (pp. 169202). Buenos Aires: FLACSO & Eudeba. Monza, A. (1995). Situaci n actual y perspectivas del mercado de trabajo en la Argentina. In: Ministerio o de Trabajo y Seguridad Social. Libro blanco sobre el empleo en la Argentina. Buenos Aires. Nochteff, H. (1998). Neoconservadorismo y subdesarrollo. Una mirada a la economa Argentina. In: Hugo Nochteff (Ed.), La economa Argentina a n de siglo: Fragmentaci n presente y desarrollo o ausente (pp. 1746). Buenos Aires: Eudeba. Novick, M., & Tomada, C. (2001). Reforma laboral y crisis de la identidad sindical en Argentina. Cuadernos del CENDES, 18(47), 79110. ODonnell, G. (1978). State and alliances in Argentina, 19561976. Journal of Development Studies, 15(1), 333. Ostiguy, P. (1990). Los capitanes de la industria. Grandes empresarios, poltica y economa en la Argentina de los a os 80. Buenos Aires: Legasa. n Pagina 12 (2001). Buenos Aires (December 14), pp. 67. Pagina 12 (2004). S lo con crecer no alcanza. Retrieved January 8, 2004, from http://www. o pagina12web.com.ar/diario/30167.html. Palermo, V., & Novaro, M. (1996). Politica y poder en el gobierno de Menem. Buenos Aires: Editorial Norma. Patroni, V. (2001). The decline and fall of corporatism? Labour legislation reform in Mexico and Argentina during the 1990s. Canadian Journal of Political Science, 34(2), 249274. P rez, G. J. (2002). Fantasma en la m quina: Identidades colectivas y performatividad polticade las e a protestas de los desocupados. Entrepasados, Year XI, No. 22, 176179. Petras, J. (2003). Argentina: 18 months of popular struggle A balance. Retrieve: July 23, 2003, from http://www.rebelion.org/petras/english/030604petras.pdf. Salvia, A. et al. (n.d.). Reformas laborales y precarizaci n del trabajo asalariado (Argentina o 19902000), pp. 123167. Retrieved from http://www.econ.uba.ar/www/institutos/economia/ ceped/Cuad%204/6%20Equipo.PDF. Schamis, H. E. (1991). Reconceptualizing Latin American authoritarianism in the 1970s: From bureaucratic-authoritarianism to neoconservatism. Comparative Politics, No. 23, 201220. Smith, W. C. (1991). Authoritarianism and the crisis of the Argentine political economy. Stanford UP, Stanford. Weisbrot, M., & Baker, D. (2002). What happened to Argentina? Brieng Paper. Center for Economic and Policy Research, Washington (January 31). Wolf, M. (2001). Argentinas agonising option. Financial Times (December 5). Retrieved: January 12, 2002, from http://www.globalpolicy.org/nations/dollar/1205doll.htm.

GLOBAL HIGH CULTURE IN THE ERA OF NEO-LIBERALISM: THE CASE OF DOCUMENTA11

Karyn Ball
ABSTRACT
Proponents of critical global studies are committed to identifying the ways in which neo-liberal ideology and an Americanized world picture rationalize the multinational exploitation of impoverished groups and their resources. The authority of this eld raises untimely questions about how such a critique can itself avoid rationalization. The inuence of critical global studies was manifest in the 2002 Documenta11 in Kassel, Germany, directed by Okwui Enwezor. In its aim to represent the Zeitgeist of contemporary art every ve years, the Documenta is widely regarded as the most signicant event in the art world. The 2002 Documenta relied predominantly on visual media to archive local instances of socio-economic inequity and persecution. The prestige of this exhibit marks the global Documenta11 as a crucial opportunity for studying the strategic deployment of a high cultural venue to promote critical awareness among comfortable spectators from industrialized nations. In ofciating an overtly political agenda for the exhibit, the curatorial team took the risk that Documenta11 might encourage visitors to take self-afrming pleasure in their sense of enlightened solidarity with its aims. The exhibit was also in danger of reifying the very suffering it displayed as a means to an institutionally sanctioned end. The Frankfurt School explicitly targets the egoism of afrmative culture which includes the culture of critique. This case study

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 121140 2004 Published by Elsevier Ltd. ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21005-7

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draws on their theory of reication in order to enunciate the limits of global critique at Documenta11 while highlighting discontinuities in its format and reception that complicate a facile rejection of its archival rationale.
Amusement always means putting things out of mind, forgetting suffering, even where it is on display. At its root is powerlessness. Max Horkheimer and Theodor W. Adorno, Dialectic of Enlightenment Wenn ich Kultur h re . . . entsichere ich meinen Browning. [Whenever I hear the word culo ture . . . I release the safety-catch of my Browning!] Hans Johst, Schlageter (Act 1, Scene 1) attributed to Hermann G ring o

Proponents of critical global studies claim that it offers a more up to date perspective about current structures and relations of socio-economic inequity across increasingly pliable national boundaries, which nevertheless persist just enough to sustain a variegated political economic terrain. This variegation enables corporations to exploit the impoverished and subaltern groups of other nations and to expropriate their resources without heed to the damages. Though it preceded the beginning of the Cold War, neo-liberal rhetoric promoting free trade as the means to a freer society has assumed an increasingly triumphalist tone with the publication of Francis Fukuyamas End of History? essay of 1989 and the disintegration of the former eastern bloc. The pernicious complacency of this rhetoric has spurred a new emphasis on the macro and micro ows of multinational capital, a study of the strategic disavowal of national borders that enables a transnational exploitation of labor, the occulted mechanisms of international debt administration without proper representation and accountability between impoverished communities and post-industrialized nations, and the pervasive encroachments of neo-liberal ideology through American economic and environmental policy and the entertainment industry. New research institutes and programs have already sprung up in the United States which draw on the critical capital of this burgeoning eld and add to the growing symbolic assets of those who were prescient enough to foresee the transition from Marxian dialectics to what the New York Times once toted as the next big idea: immanent conceptions of empire, revolution, and the multitude a la Michael Hardt and Antonio Negri ` (walking in the footsteps of Gilles Deleuze and F lix Guattari). e The Documenta was inaugurated in 1955 to rehabilitate the so-called degenerate artists banned by the Nazis. Since 1955, the exhibit has reconvened every ve years in Kassel, Germany as a venue for representing the changing Zeitgeist of contemporary art and to provoke debates about its future. It is widely regarded along with the Venice Biennale as one of the most signicant events in the art world.1 Given its prominence as a high cultural exposition, it is worth remarking

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that the most recent Documenta appears to have gone global, to borrow Pamela Allaras phrase (2002).2 With its interdisciplinary, post-Eurocentric, and cosmopolitan motifs, its function as an archive of the myriad forms and locations of democracy unrealized, its proliferating catalogue of persecution, torture, forced disappearance, exploitation, disenfranchisement, and subsistence, the 2002 Documenta indisputably established the cultural cachet of the critical global perspective as a dominant intellectual trend. Yet because of its polemical and archival aesthetic, Documenta11 appeared to demand an impossible continuity at the level of the spectators consent to be coerced into bearing witness to the cross currents of inequality and injustice.3 It would be a capitulation to the neo-conservatives to launch an attack on political correctness at Documenta11 that ignores the real forms of suffering spurring the exhibits critical documentary motifs. To avoid this dead end, I want to borrow Theodor W. Adornos conception of the determinate negation from the Aesthetic Theory (translation, 1997), which locates the prospect of indirectly realizing the material impact of domination in the domain of aesthetic experience. In bringing such an analysis to bear on the 2002 Documenta, my aims are to identify the mode of rationalization inherent in the exhibition as an archive of global misery and to delineate the visceral refraction of its impact on critical reection. At rst glance, Documenta11 polemically over-determined its own reception by reproducing the forces of domination that tend to shut down critical thought and annihilate spontaneous response. Yet in this respect, it paradoxically succeeds where it most appears to fail by enunciating the conditions of its own inability to transcend these very forces. I will begin with a cynical fantasy: If Hermann G ring were alive today, he might o update the notorious dismissal of culture often attributed to him, but which originated in Hans Johsts play Shlageter (dedicated to Hitler in 1932). G ring is often o supposed to have said that when he hears the word culture, he unleashes the safetycatch on his Browning or revolver. A G ring made over for the new millennium o might quip that when he hears the word globalization, he reaches for his remote control. For certainly the Nazi would recognize his traditional Marxist nemesis in the critical discourse of global studies, which has increasingly assumed a global dominance in its own right. In the leftist vision of this postmodern resurrection, the specter of a 21st century G ring conrms a platitude that nowadays mainly o bemuses us from the pages of dogmatic pamphlet literature conating the conspiratorial genius of capitalist domination with the totalitarian violence of National Socialism. This version organizes itself around the culture critics presumed opposition to a reanimated G ring who, deprived of recourse to concentration camps o and ring squads, would opt to switch channels when faced with a leftist rant.

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Yet the logic of this fantasy might prompt an entirely different set of considerations drawing on its implied equivalency between high culture and the discourse of globalization studies on the one hand and between a gun and a remote control on the other. The collaboration between globalization studies and high art that transpired in Documenta11 institutionally converted the consciousness raising aims of critique into a principle of exhibition. It thereby colluded with the rationalization of culture at large, which tends to annihilate genuine reection by formatting it for the age of information. The issue is therefore not whether the global spin of Documenta11 should be taken as a sign of our relative moral progress above and beyond G ring and his war mongering ilk, but rather how o the exhibits consumers may have unconsciously come to resemble him in our responses to an overt attempt to enlighten us about global suffering. The risk of such a critique that originates from the prestigious domain of high culture is that it may force reection to arrive at certain conclusions avant la lettre. Either one joins up immediately on the basis of ones preset convictions or admits to being part of the problem. Conversely, then, the very danger of complacency that the exhibit might be presumed to offset and forestall would actually be aggravated through an identitarian logic: a species of circularity that culminates in a redemptive afrmation of the viewers relationship to a political and moral platform and the idea of community through solidarity. In short, institutional critique permits what Adorno calls a Sinnstiftung, or in my own words, identity capitalism, to signify a compensatory identication with the social whole that occludes inassimilable particularities. It is the self-afrmation of leftist identity capitalists that unleashes my inner G ring, but with a Frankfurt School twist. In the Aesthetic Theory, Adorno writes o that It is the conciliatory element of culture in art that characterizes even its most violent protestation (Adorno, 1997, p. 294). From the standpoint of Adornos repudiation of the afrmative cast of culture including the culture of critique, the 2002 Documentas ofcial emphasis on the inequities of the global order lent itself too easily to a moral validation of leftist cultural critics and producers. Surely any earnest student of globalization studies would have been delighted by the exhibits inclusion of a plurality of explicitly localized and politicized contents. In this mode, Documenta11 presumably set up a system in the cultural domain for reversing the effect of amusement, which allows mass subjects to forget suffering, even where it is on display (Horkheimer & Adorno, 2002, p. 116). The exhibits principle was thus also archival in Michel Foucaults sense of gathering, organizing, concentrating and safeguarding the event of the statement and the immanent historicity of its enunciation (Foucault, 1972, p. 129). In keeping with this principle, the Nigerian-born New York-based artistic director Okwui Enwezor and his curatorial team organized the 2002 Documenta

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into ve platforms consisting of four conferences that culminated in the summer long exhibit in Kassel, Germany. The rst platform involved symposiums in Vienna and Berlin devoted to the theme of Democracy Unrealized. The second in New Delhi focused on the issue of Experiments with Truth: Transitional Justice and the Processes of Truth and Reconciliation. The third in Saint Lucia was devoted to the topic of Cr olite and Cr olization, while the fourth in Lagos e e was titled Under Siege: Four African Cities, Freetown, Johannesburg, Kinshasa, Lagos. A conference volume entitled Democracy Unrealized articulating the ethos of the rst platform features essays by some of the most auratic names in the tradition of politicized cultural criticism among them Stuart Hall, Immanual Wallerstein, Slavoj Zizek, Chantal Mouffe, Michael Hardt and Antonio Negri, Homi K. Bhaba, and Ernesto Laclau. The preface foregrounds the critical interdisciplinary methodology that propels the exhibition, one that acknowledges its own horizon and also points to the the intellectual and artistic circuits that make up aspects of the exhibition projects drive toward the production of knowledge, through a gesture of open contestation, debate, and transparent processes of research. The preface also broaches a politics of nonambiguity, and the idea that all discourses, all critical models (be they artistic or social, intellectual or pragmatic, interpretive or historical) emerge from a location or situation, even when they are not dened or restricted by it (Enwezor et al., 2002, pp. 911).4 As part of 5th platform exhibit in the summer of 2002 in Kassel, the Documenta Hall conscientiously reected the curators call for a nonambiguous politics of location. Apart from Fareed Armaly and Rashid Masharawis From/To, a topography of the fault lines of the Middle East conict, the corridors and enclaves of the Hall were largely given over to television sets playing testimonies about various sites of persecution, expropriation, and impoverishment, or to documenting the lifestyles of those without computers, television sets, or radios existing on the margins of the global world order. The ensemble of televisions displayed the racialized social Darwinism of the political and economic policies that close in upon impoverished and/or resistant groups in Africa, Asia, and Latin America, whose livelihoods and lives are routinely thrown to the wolves. The desire propelling such a presentation was manifestly polemical: the documentaries were intended to bear witness to experiences of persecution or marginalization as a means of promoting critical reection among mainly privileged and comfortable spectators from the industrialized world.5 By appearing to deprive the documents of the linear lesson bearing logic which gives the mainstream news its authoritative force, the exhibition strived to problematize what Stuart Hall has called the mass media ventriloquism of its audiences, which speaks on their behalf at the same time as it tells them what they need (Hall, 2002, p. 27). Ultimately, however, the limits of this democratic agenda were evinced in the reifying effect of the very media that enter into what Homi

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K. Bhaba describes as the gargantuan discourses of the global (Bhaba, 2002, p. 350). In Democracy De-realized, Bhaba argues that The spatial connectivities and contradictions of the late modern world-picture must be placed in a relationship of ethical contiguity with the scrambled sites and subjects of racial separation and cultural discrimination (p. 350).6 His contribution to the Democracy Unrealized platform is an invitation to recognize the consequences of this world picture, a spectacle of what Foucault has called bio-power to designate the administration of the life and death of populations in a disciplinary modernity. Bio-power is Foucaults term for those forces that brought life and its mechanisms into the realm of explicit calculations and made knowledge-power an agent of transformation of human life. It arises when society reaches the threshold of modernity, when the life of the species is wagered on its own political strategies (Foucault, 1990, p. 143). Yet if, as Foucault suggests, modern man is an animal whose politics places his existence into question, it is because his everyday life is irrevocably shaped by the collusion between political-economic administrative principles and the scientic aims that direct technological advances. Such advances deepen the interpenetration of neo-liberal policies governing economic production and distribution into the conditions of survival. With their functionally differentiated economies, post-industrialized nations retain the capital to conduct research to develop the drugs which can regulate HIV and AIDS. These are the very same nations that act as creditors on the global front and whose corporations extract resources and labor from the debtors without properly compensating them. The racism of such creditors is unleashed in the silence before an unconscionable loss of life in Africa. Mass death due to AIDS in this sphere of the world only actualizes what United States Republicans have known all along that if one is rich and powerful, then social Darwinism is more than a disreputable ideology, but a divinely sanctioned way of life. In his discussion of bio-power, Foucault specically alludes to the improvement of agricultural techniques, but he could have just as easily have included the emergence of mass media with the power to transmit visual information instantaneously. The Americanization of the society of the spectacle (as Guy Dubord once labeled it) disseminates neo-liberal complacency that glosses over the moral implications of the assumption that anyone (in other countries) who is exploited by a corporation is, nevertheless, better off than before. This assumption underwrites the commodity fetishism which makes it possible to disavow where and how running shoes, college sweatshirts, and Victoria Secret underwear came into existence. Through its preponderant inclusion of documentary technologies and visual media over and against traditional plastic and two-dimensional mediums, the archival format of the Documenta11 converted spectators into hapless G rings o reaching for their remotes. Indeed, the proigate televisual apparatus became

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a motif in its own right, a fact that spurred Hanno Rauterberg (2002) to hail Documenta11 as a Fest der Fernseher (a television festival) and Village Voice critic Kim Levin (2002) to name it the CNN Documenta.7 The spectator moving through the line-up of televisions in the main hall found herself overwhelmed by the plethora of testimonies about torture, starvation, expropriation and political repression.8 Even though the contents of each lm or video were as varied as the locales they represented, a window-shopping logic prevailed: it was a mall of exotic suffering framed by identical storefronts. The overall effect was to atten out the differences. The bodies and voices documented in the succession of testimonial videos blurred into a manifold of persecutions and unfullled needs, the scission of unclosable gaps, and a haptic sense of traversing simultaneous events that left the viewer awash in a heaving global sea (Fig. 1). According to Allara, this effect suggests that the Documentas promised dialogue on global politics risked reducing the artworks to soundbites. She

Fig. 1. Documenta11s Television Festival (Courtesy of K hn Malvezzi Architekten). u

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nevertheless afrms the good propaganda agency of the documentary works presented at the exhibition, which, in her view, avoid simplistic scenarios of the exploitation of the third world by the rst. She also praises the exhibitions capacity to problematize the truth value of the various media formats (Allara, 2002). Her praise begs the question of the impact of such an enunciation: Did the Documenta11s reliance on visual media formats for its documentary presentations generate a critical self-consciousness that justies and transcends the exhibitions propagandistic aims? In compelling the viewer to navigate and perhaps numb herself against a siege of painful signals, the Documenta11 replicated the conditions of what Walter Benjamin highlights as the modern degeneration of experience in the age of information. In On Some Motifs in Baudelaire, Benjamin relates this atrophy to the repetitive gestures entailed by modern contraptions (the snapping of a camera, the dialing of a telephone) whereby one abrupt movement of the hand triggers a process of many steps . . .. Thus human technology has subjected the human sensorium to a complex kind of training (Benjamin, 1968, pp. 174175).9 The implication is that such repetitions may also serve as a defense mechanism, which hardens the modern subject by mimicking the constant shocks of a harried, crowded existence. It is interesting to note the ways in which Sigmund Freuds scientistic speculations from Beyond the Pleasure Principle (1920) animate Benjamins thesis. In the backdrop of Benjamins claims about the desensitizing impact of modern technology is Freuds phylogenetic allegory for the split between the perceptualconscious and unconscious systems. Under the barrage of environmental stimuli, the protista develops a calloused skin what Freud describes as a baked through [durchgebrannt] cortical layer. The protistas survival depends on this deadened outer layer which is sacriced for the good of the whole. Freud relates this outer layer to the functioning of the perceptual-conscious system, which depends on a ltering process that softens and deects the impact of the outside world upon the vulnerable inner reaches:
This little fragment of living substance is suspended in the middle of an external world charged with the most powerful energies; and it would be killed by the stimulation emanating from these if it were not provided with a protective shield against stimuli. It acquires the shield in this way: its outermost surface ceases to have the structure proper to living matter, becomes to some degree inorganic and thence forward functions as a special envelop or membrane resistant to stimuli. In consequence, the energies of the external world are able to pass into the next underlying layers, which have remained living, with only a fragment of their original intensity; and these layers can devote themselves, behind the protective shield, to the reception of the amounts of stimulus which have been allowed through it. By its death, the outer layer has saved all the deeper ones from a similar fate unless, that is to say, stimuli reach it which are so strong that they break through the protective shield. Protection against stimuli is an almost

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more important function for the living organism than reception of stimuli (Freud, 1955, p. 27. Freuds emphasis).

Freud presents the psyche in this narrative by analogy as a functionally differentiated economy wherein the unconscious domain serves as a storage space which enables the perceptual-system to devote itself to the process of ltering external stimuli. Freuds speculations on an organisms urge to protect itself from the barrage of stimuli through a process of restrictive deadening is linked to his understanding of the agency of the death drive in its limited regulative register. The operation of the death drive dulls down the effects of both external and internal tensions through compulsive repetitions that empty them of their charge. Compulsive repetition is the venue of this systemic aim to neutralize excess tensions through progressive desensitization. On an internal level, this deadening both parallels and goes beyond the protective process of selection. Hence the process of perceptual selection also collaborates with a more radical register of the drive to return to a death-like prior state, to the stasis of inorganic matter.10 Horkheimers and Adornos Dialectic of Enlightenment elaborates on the sociocultural implications of Freuds phylogenetic schema about the split between the perceptual-conscious and unconscious systems. Horkheimer and Adorno seem to take Freud at his word on the death drive, while emphasizing how it is denatured through the repression demanded by society as the price of continuing membership. In this connection, Freuds phylogenetic guration of the split between the unconscious and the perceptual-conscious provides an allegorical supplement to the theory of internal domination elaborated in the Dialectic wherein a socialized subjects deadened cortical layer has become the whole. The civilizing process that ushers primal impulses into their corners enjoins a process of adaptation whereby inner nature comes to resemble a protective outer layer: to become increasingly numb to any stimulus including suffering wherever it is shown. The desire to conform is hereby linked to the process of neutralizing unpleasure (or excessive stimulation) and, indeed, beyond it, the very vitality of organic existence. It is the effect of this deadening process that protects the potentially vulnerable against the shocks of the workplace and the petty passive aggressions that keep a society of Gregor Samsas scurrying to their desks and ultimately to their television sets; however, the same bourgeois society that demands this process of neutralization also fosters its disavowal as a primitive vestige of adaptation. The proof of civil propriety is evinced in the completely reied citizen who obediently repudiates the very defenses that he unthinkingly employs as a means of survival. This repudiation functions to reverse and externalize the death drive as an urge to kill off vitality especially signs of the instinct to preserve life. These signs are experienced as uncanny, which is to say that they announce

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an improper crossing of the boundary between the pre-rationalized need and its reied rejection.11 The uncanny is the effect of the reemergence of a former home in an alien, unhomelike space.12 More generally speaking, the uncanny is affected by a blurring between archaic, animal, or infantile urges and the sphere of their rational exclusion. For Horkheimer and Adorno, the uncanny is a symptom of the dark side of the civilizing process, the inner domination that ostracizes the secret wishes of an abandoned nature and relegates them to the realm of prehistory. The spontaneous resurgence of the drives is subsequently misrecognized as a threat. Horkheimers and Adornos revision of Freud reconceptualizes reication as the internalized aim of a socially inscribed death drive. Freud delimits its radical register as a primordial urge to neutralize all tensions, including those that rise from within. The anxiety triggered by the instinct to preserve life is another tension that excites the organisms primal urge to return to a state of inorganic calm to die in its own fashion. What Horkheimer and Adorno imply throughout the Dialectic is that successful membership in bourgeois society depends on the citizens ability to deaden himself, not only to his own pain, but also to the suffering of others. The value of consideration as a bourgeois virtue is that it enjoins us stoically to refrain from soiling our fellows with our insides: the anxiety of self-preservation and the weakness it belies. Still more stunning is the implication that this self-regulation leads the dominated to treat such deadening as a norm, a tendency that spurs them to hate social and bio-economic survival anxiety in themselves and others. Hence the bourgeois abhorrence for signs of vulnerability is a case of inner and outer nature resembling each other. Thorough reication has progressed beyond the point of no return when a citizenry despises those marginal groups and individuals for the very weakness that it imposes on them. It is this allergic logic of disavowal, projection, and negation that spurs the subjects of administration to loathe viscerally the most visceral need of all: to survive. In this manner, the Dialectic extends Benjamins thesis on the modern atrophy of experience in conceiving desensitization as the conformists vehicle for adapting to the external forces of domination. Despite its archival and polemical presentation, the exhibit established the conditions for an indirect recognition of adaptive deadening as a form of reication. The spectators movements in and out of various displays corporealized the repetitive function of remote switching: when she found a work too oblique, too painful, or too long, she might simply withdraw from one channel of suffering to see what torture and bloodshed were being screened elsewhere (there was always something else potentially more volatile or entertaining further on). She could also enjoy an occasional moment of reprieve in more formal pieces devoid of moral polemic (such as Bernd & Hilla Bechers photographic series, Fassaden Fachwerk/Half-Timbered

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Facades, 19711973). It is signicant as well that the formalized intensication and individuation of this remote experience was a product of the limited freedom extenuated by traversal through the exhibit spaces. The display thus raised ineluctable questions about what it would mean to move on before Gaston Ancelovicis archivally based lms about Chile under Pinochet or Fareed Armalys and Rashid Masharawis tapes of testimony by different generations of Palestinian women had ended. The shuddering awareness of reication affected through this very freedom is a critical refraction, and thus, a determinate negation of the totalizing impact of rationalization that the form of the exhibition itself manifests. It is a negation exacerbated by the gap between the polemical ethos and aesthetic effect of Documenta11 as an ofcial archive for the visceral substrata of history.13 The exhibits principal accomplishment was to enunciate the problem of over-medialization through the spectators sublime failure to comprehend the diversity of struggle and oppression. The exhibit was dominated by video and lm installations, a few spanning an hour or more. Their sheer multiplicity, simultaneity, and length deed a comprehensive experience. The exhibit repudiated the experience of closure: even with a lengthy commitment, one could not possibly see every presentation.14 Some performances were one-time only events while certain screenings had limited runs (Jef Geyss Day and Night and Day and . . . lasted 36 hours). In a typical 23-day visit to Kassel, one could not possibly watch every video all the way through or even locate them easily in the labyrinthian corridors at the new installation space in the Binding-Brauerei. Lapp remarks that There is not one continuous story that visitors follow, in the Brewery, rather there are overlaying themes creating networks of meanings which can be quite different depending on the direction within the exhibition (Lapp, 2002, p. 9). One ducked into each cavity in search of Isaac Juliens allegorical double-screen installation Paradise/Amaros or Allan Sekulas photo series Fish Story only to be confronted with the thickly painted historical montages of Fabian Marcaccios Multiple/Site Paintants in an outer corridor, a physical provocation to ponder the spatio-temporality of political and moral distraction. By orchestrating a differential and distracted viewing style, Documenta11 precipitated an oscillation between the mathematical and dynamic sublime. A shorthand for the experience of the sublime from Immanuel Kants Critique of Judgment is of an apprehension that exceeds comprehension in a single intuition by the faculty of imagination. The mathematical and dynamic sublime respectively involve failures of this faculty during experiences of quantitative or qualitative excess, emotional volatility, or ux.15 In general, the Kantian sublime designates a subjectively individuating experience that reveals a discontinuity among the faculties when imagination fails to synthesize an internal image of a scene.

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This failure propels reason to identify the limits of sense and thereby afrm its own power:
[What happens is that] our imagination strives to progress toward innity, while our reason demands absolute totality as a real idea, and [the imagination,] our power of estimating the magnitude of things in the world of sense, is inadequate to that idea. Yet this inadequacy itself is the arousal in us of the feeling that we have within us a supersensible power; and that what is absolutely large is not an object of sense, but is the use that judgment makes naturally of certain objects so as to [arouse] this (feeling), and in contrast with that use any other use is small. Hence what is to be called sublime is not the object, but the attunement that the intellect [gets] through a certain presentation that occupies reective judgment. Hence we may supplement the formulas already given to explicate the sublime by another one: Sublime is what even to be able to think proves that the mind has a power surpassing any standard of sense (Kant, 1987, p. 106).

Kants account of the logic of the sublime ultimately satises a desire for attunement among conicting faculties by enunciating and thereby superseding this conict in reection. Such a reective enunciation relocates a divine agency (a supersensible power) within the subject of reason a prospect of transcendence that redeems him from the inexorability of a secular stance. Adornos critical aesthetics subjects this redemptive plot to a negative dialectic that repudiates the prospect of an afrmative Sinnstiftung of the minds power to surpass any standard of sense. Instead, reason is redened as the quantifying and utilitarian animus of modernization and industrialization that penetrates and colonizes the social, cultural, and moral realms. Ratio as such represents the reied byproduct of the enlightenment ideal of progress that for Benjamin motivates an exorcism of historical destruction and for Adorno allows for a redemptive identity. Adornos analysis of the critical impact of a work of art retains the negative experience of inadequate imagination that is pivotal to the sublime, but rearticulates it as a refraction of the domination that the formative principle of the work mirrors by necessity. By extension, the diffracted time of viewing Documenta11 permitted a determinate negation of an institutional space of knowledge that formally left judgment in abeyance. The videos and lms had typically already begun before the spectator arrived and she did not watch every segment to its end, hence the sense of mathematical excess affected by the exhibit. By virtue of their simultaneity, the varied depictions of trauma, desperation, and struggle transmitted by each installation were tragically intensive yet diffusive, hence its dynamically sublime effect. At Documenta11 the spectator was compelled to acknowledge her failure to comprehend the dynamic whole of this diverse suffering in a unied image, or to draw a single easily communicable theme from its contiguous yet isolating displays and thereby achieve a climax of reason that could compensate for the prior failure of imagination.

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By evoking a sublime confrontation with the boundaries of the moral imagination, Documenta11 established the limit experience as one of its principal motifs. This motif registered more viscerally in the installations that foregrounded border crossings between the inside and outside of bio-economic power and the disciplinary gaze. Chantal Akermans installation From the Other Side in the Museum Fridericianum consisted of a large dark room with 18 television monitors in rows depicting the infrared surveillance and arrest of Mexicans attempting to cross the United States border. The blurry knot of fugures herded together by border patrols alternated with footage of the migrants movements rendered visible with infrared sensing devices. The series format called for a contemplation of the formal variations and motifs in the content, angle, and resolution of the footage segments. This contemplative stance contrasted ironically with the struggles conveyed in each screen. The installation thereby formalized the dissonance between personal distance and desperation, between voyeuristic complacency and self-preservative necessity, while aggravating the viewers own complicity with the surveillant gaze. In the large scale spectacle of Gallantry and Criminal Conversation in the Binding Brauerei, Yinka Shonibare staged an alternative version of Akermans enforced voyeuristic distance by depicting the sexual commerce of (literally) stuffed British aristocrats cut out of African cloth. Figures in 18th century period dress engage in a sexual orgy amongst commodities and shipping containers. The scenario ironically symbolizes a sexual rite of passage abroad enjoyed by the leisure class youth of the 18th century. It is a rite that prepares them for the obscenities of colonialism as an exchange of bodies, resources, and goods while allegorizing a violent history of dividing and conquering (Fig. 2). The Platform 5 exhibition in the summer of 2002 was also subtly provocative when it inadvertently went beyond the call of Democracy Unrealized for a politics of nonambiguity in piercing the culture consumers luxurious distance. The architects of K hn Malvezzi designed a monumental entrance for the new u installation space at the Binding-Brauerei: an unrenovated portion of the old building was retained as the palimpsest backdrop to the repainted base set off by a white overhang bearing the Documenta11 logo. On sunny days, the high walls and corners cut ominous swathes of shadow across the light-suffused square leading up to the entrance. From a birds eye view, this space would have resembled a scene from a de Chirico painting the perspective skewed by veering chiaroscuro angles, human gures isolated under an empty sky, puppet-stringed in space and time. Perhaps more than any other, it is this seamy experience of faceless vulnerability, of marionette abjection, that exposes the underbelly of the global order. This sense of exposure was echoed in the Binding-Brauerei by Louise Bourgeoiss insomnia drawings alongside her memory cells of insides turned out,

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Fig. 2. Yinka Shonibare, Gallantry and Criminal Conversation (Courtesy of K hn u Malvezzi Architekten).

caged abject gures in esh colors ensconced among part-objects and fragmented symbols. This work portrays losing sleep as the cumulative cringe of a modern organism in the face of the countless shocks of modern existence (Fig. 3). Upon entering the Binding-Brauerei, the spectator is compelled to pause in the wide hall connecting the two wings of the building before a series of 13 half-hour video documents called Our Land by the Igloolik Isuma Productions. Lapp notes that the aim of this production is to preserve oral traditions which have survived for 4,000 years but are now coming to an end (Lapp, 2002, p. 8). The episodes offer glimpses into Igloolik family life the building of an igloo, the hunting of seals, the gutting of sh images of an existence steadily being edged out and hedged in by rampant industrialization and the extraction of resources. The disappearance of this culture is hereby anticipated, commemorated, and mourned in advance (Fig. 4).16 In the Aesthetic Theory, Adorno remarks that Benjamins distinction between the document and the artwork holds good insofar as it rejects works that are not themselves determined by the law of form. According to Adorno, many works are objectively artworks even when they do not present themselves as art. Even while they provide an enormous service, exhibitions such as the Documenta

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Fig. 3. K hn Malvezzi Architekten, Binding-Brauerei Entrance (Courtesy of K hn u u Malvezzi Architekten).

nevertheless gloss over this problem and thereby abet a historicist aesthetic consciousness that they, being museums of the contemporary, want to oppose (Adorno, 1997, p. 182). His critique of the Documentas implicit historicism anticipates Foucaults analysis of archive in The Archaeology of Knowledge, which calls for a dispersal of the temporal identity in which we are pleased to look at ourselves when we wish to exorcise the discontinuities of history in order to break the thread of transcendental teleologies and subtend anthropocentric navel gazing by bursting open the other and the outside (Foucault, 1972, p. 131).17 In my own analysis, I have sought to open up the discontinuities in the Documenta11 as a global archive. On the surface, such an expensive, high prole exhibit might seem to incorporate the spectator into its economic and archival ratio, and thus betray its critical ends and the ends of enlightenment as such. From this standpoint,

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Fig. 4. Igloolik Isuma Productions, Installation of Our Land in the Binding-Braurei (Courtesy of Christian G nshirt, Architect, Berlin). a

then, Documenta11 would be taken as evidence that institutional attempts to give faces to the faceless in the name of politicized critique merely reproduce their own moralistic categories of analysis. Yet to the extent that Documenta11 was able to provoke a self-preservative hardening in response to the technological mediation of this order, the exhibit subtended the prospect for an easy conrmation of leftist political credentials and moral concerns. Between the outer facade that objectied an individual subjects isolation and assailability in a surveillance society and the innards of bio-power displayed within, what one was left with was an uncanny sense that boundaries had been crossed between the outside and inside of domination. This anxious effect harkens back to an archaic defense system, the reproof of vitality long ago hemmed in by repression and the passivity induced by the postmodern reticulations of bourgeois disavowal, conformity, and narcissism. By precipitating the spectators allergic response to its disciplinary injunction to bear witness to diverse forms of suffering, the exhibition also permitted her to vent her resistance to institutionalized critique as a mode of disciplinary power. The death drive pulsates therein: the spectator is reminded that she wants to die or be distracted in her own way (to escape the exigencies of our historical time). Documenta11 formally enunciated the conditions of this allergy, this death drive, as a defensive

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adaptation; it thereby turned its own ratio inside out to make it available for critical reection.

NOTES
1. Various curators of the Documenta have triggered debates in their attempts not only to dene but also to redirect contemporary art. Catherine Davids critical confrontation with the present at Documenta X in 1997 attracted 600,000 visitors and earned 1.4 million DM. 2. Allara notes that the better part of the 117 artists represented at Documenta11 were born in Eastern Europe, Latin America, and Africa, though many now reside in Western Europe or America. They are part of the twentieth centurys diaspora, which has successfully dissolved the distinction between the West and the Other, the center and the margin, local and international. Thus while Documenta continues to address a primarily Western audience where the art worlds power center resides, she observes that the audience could not leave Documenta11 without having its vision of the contemporary art world substantially enlarged (Allara, 2002). 3. Gibbs (2002) observes that While the previous Documenta certainly raised the intellectual prole of what is arguably the worlds most important exhibition of contemporary art, it tended to privilege the late 60s as its key reference. Documenta11, with 70% new work, is decidedly of our times, reecting on a world that many see as having radically changed during the last ve years, particularly after the events of September 11, 2001 (p. 2). 4. Writing for Art Monthly, Axel Lapp (2002) calls Documenta11 an exhibition determined by the aftermath of colonialisation (p. 8). He characterizes the four academic platforms that preceded the exhibition in Kassel as an unnecessary aggrandisement of the exhibition through theoretical discourse (p. 8). Lapps judgment seems to assume that a theoretical, and thus, academic-institutional appropriation of art or culture is too rationalized in its own right to serve the aims of a critique of socio-economic rationalization. At the same time, he acknowledges that despite its overt allegiance to a critical manifesto, Enwezors choice of artists did not capitulate to the expectation to nd a new world of art one that is still unknown and unspoilt by the markets (p. 10). I would argue that in frustrating this desire for authentic colonial otherness, Enwezor sidestepped one form of reication in favor of a historicist conation between materiality and contextual specicity. 5. In this respect, the Documenta11 agenda was clearly shaped by the turn toward the politics of memory in the last decade spurred by the multiculturalist agenda to bear witness to histories of oppression. 6. Bhaba (2002) quotes from the manifesto of the rst platform, which asks us to question whether the notion of democracy can still be sustained within the philosophical grounds of Western epistemology and to explore the potential for revision [and] revaluation in keeping with the transformations of globalization, so that we may investigate the idea and ideals of democracy as an ever-open, essentially unnishable project that in principle has fallen short of its ideals. He goes on to criticize the rhetoric of the manifesto:
To pose the crisis of democracy in terms of its unrealized Ideals does not adequately challenge the failures of its promise. Falling short is often a strategic necessity for democratic discourse, which acknowledges failure as part of its evolutionary, utopian narrative. The argument goes something like the following: we fail because we are mortal and bound to history, the faith

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of democracy lies not in perfectibility but in our perseverance and progress, our commitment to set the highest ideals before ourselves and struggle toward them to revise and reshape our best selves. Such an internal dialectic of the unrealized and the utopian encounters the negative instance of failure only in order to provide a strange moral consolation for itself (Bhaba, 2002, p. 349).

7. Lapp (2002) observes that Video is certainly the medium of choice in this exhibition. There is hardly a room without a screen. Several larger theatres have been built to accommodate the many viewers and if one wanted to see all the videos in the exhibition it would take more than a week (p. 9). 8. Among the artists represented in this collection were Gaston A. Ancelovici, Pere Portabella, Alejandra Riera with Doina Petrescu, Raqs Media Collective, Le Groupe Amos, and Pascale Marthine Tayou. 9. Benjamin writes: Of the countless movements of switching, inserting, pressing, and the like, the snapping of the photographer has had the greatest consequences. A touch of the nger now sufced to x an event for an unlimited period of time. The camera gave the moment a posthumous shock, as it were. Haptic experiences were joined by optic ones, such are supplied by the advertising pages or by the trafc of a big city. Moving through this trafc involves the individual in a series of shocks and collisions (Benjamin, 1968, p. 175). 10. For the Freud of Beyond the Pleasure Principle, the radical register of the death drive represents a primal urge to return to the state of inorganic matter. In this respect, it appears to go beyond the economic aims of the pleasure principle to regulate the quantity and intensity of the tensions introduced into the psycho-physical apparatus. Following the Physicalists, Freud portrays this apparatus as a thermodynamic and homeostatic economy that must neutralize excess tensions; however, the evidence of a primal destructive tendency throws a wrench into this economy by suggesting that the system is inclined to kill off all tensions, even those responsible for the maintenance of life itself. The radical register of the death drive is pivotal to The Economic Problem in Masochism (1924), where Freud presents a theory of internalized and externalized destructive urges that foment depression and aggression respectively. A masochistic disposition allows an individual to redirect the death drive into images of his own suffering that are played out in fantasies of martyrdom, punishment, and afiction. Sadism externalizes these forces by projecting them onto others, who thereby become the target of the urge to neutralize life. One of the questions posed by the Dialectic of Enlightenment is how the conuence of repressive bourgeois norms, positivistic reason, and the administrative mindset produces a sado-masochistic disposition as the basis and conrmation of mass subjection. Freuds metaphysics of primal aggression remains imbedded in the Elements of Anti-Semitism chapter in Horkheimers and Adornos Dialectic as the impetus and distorted aftereffect of xenophobic hatred. Under Hitler, a society of petty bureaucrats organize mass murder with the same oblique ofciousness which they would bring to any administrative task. Anti-Semitic barbarism is presented here as a trained resurgence of primal aggression after it has been deformed through a process of adaptation whereby inner nature comes to resemble a deadened outer nature. In this respect, the chapter submits Freuds metaphysical dualisms and theories of projection and introjection to a critical dialectics that treats them not only as symptoms of the repressed, but also as the very mechanisms that ensure the progress of capitalism. 11. The uncanny experience of violating physical boundaries propels an installation by the Finnish artist Eija-Liisa Ahtila. The House (2002) is a lm on two screens depicting the hallucinations of a woman who hears voices and strange noises. In her isolation, she loses a

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coherent sense of space and time that subtends perceptual logic as sounds with an external locus and their attendant objects increasingly move inside. The eerie calm that surrounds an invading car engine and the appearance of its source literally driving around the house is reversed when the protagonist calmly oats out the door and through the trees. Is this reversal an act of resistance or a nal submission? 12. According to Freud, the sensation of the uncanny is triggered by incidents that appear to realize infantile or primitive wishes and magical thinking banished by bourgeois adults: the longing to return to the womb, the desire for an imaginary friend who is the childs double, belief in the possibility of animating the inanimate and a related ritualistic fascination with repetition as a magical sign of spiritual conspiracy. 13. The Atlas Group founded by Walid Raad of Lebanon illustrates this gap through its catalogue of pseudo documentary objects (the cars supposedly used in terrorist bombings) and testimonies. The ironies are Borgesian in character to the extent that the installations reveal the arbitrariness of knowledge and the philosophies that are presupposed by statements of truth and the organization of facts into systems. In the Kurzf hrers description of u the Atlas Group, Carlos Basualdo writes: The aim is to compose an archive of a ctional nature that both criticizes the feigned objectivity of historical discourse and dismantles the supposed autonomy of artistic works . . .. Surely this is about evoking the substrata of intimate emotions and experiences that ultimately makes up the inexorable foundation of every archive (p. 26). 14. The performative installation of On Kawaras epic project One Million Years (Past and Future) in the Museum Fridericianum involved Documenta visitors reading years backward or forward into time. The abstract repetition of reading years, and thereby expanding time innitely into the future and the past, might be seen as a mise-en-abme of the exhibits temporal diffusions. The viewers would watch as a pair of years was read before shufing into the next room. Those reading could affect suspense by varying the spans of the pauses between years, capturing the viewer in the spectacular mode of waiting for something to happen. 15. Kant links the mathematical sublime with the cognitive agitation associated with the judgment of an object. The dynamic sublime refers this agitation to the power of desire (Kant, 1987, p. 101). 16. Leon Golubs work attests to another extreme of disappearance as evinced in his series of paintings at Documenta11. The black shading of dogs with bared teeth facing off in the left-hand bottom corner of We Can Disappear You links them with the black background of the box inset on the right containing the white scratched outline of an abject gure who cowers before an armed policeman or soldier. The tail of the dog on the left points to the lefthand corner of the light inset in the upper portion of the black box on the right, a diagonal line of sight that implicitly maps their animal viciousness onto the expression of aggressive enjoyment on the face of a policeman with his elongated arm and hand extended in a blocking gesture. Noi Banai notes that Golubs work critiques the irrational social sphere that we inhabit as a dimension of disciplinary power, a reality in which catastrophe, anxiety, and dissolution are omnipresent . . . and in which bodily experience is perpetually threatened by public authorities and the public forms of communication they manipulate (Kurzf hrer, 2002, p. 94). Corporeal aggression is u reected materially here in the solvent-eroded and meat cleaver-scraped canvases which juxtapose fragmented images of torture, interrogation and murder. 17. In a more traditionally Marxist vocabulary, this critique asks us to historicize the parameters of thought and expression which freeze dynamic phenomena in space and time.

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ACKNOWLEDGMENTS
I am grateful to Simon Rolston, Susanne S derberg, and Paul Zarembka for their o help in the preparation of this manuscript for publication.

REFERENCES
Adorno, T. W. (1997). Aesthetic theory (Trans.) Robert Hullot-Kentor. Minneapolis: University of Minnesota Press. Allara, P. (2002). Documenta11: The disappearing element. Art New England (October/November). Benjamin, W. (1968). On some motifs in Baudelaire. Illuminations (Trans.) Harry Zohn (pp. 155200). New York: Schocken Books. Bhaba, H. K. (2002). Democracy de-realized. Documenta11: Platform 1: Democracy Unrealized, 347364. Documenta11: Platform 5: Austellung/Exhibition Kurzf hrer/Short Guide (2002). Ostldern-Ruit. u Germany: Hatje Kantz Publishers. Enwezor, O. et al. (Eds) (2002). Documenta11: Platform 1: Democracy unrealized. Ostldern-Ruit. Germany: Hatje Kantz Publishers. Foucault, M. (1972). The archaeology of knowledge & the discourse of knowledge (Trans.) A. M. Sheridan Smith. New York: Pantheon Books. Foucault, M. (1990). The history of sexuality: Volume I: An introduction (Trans.) Robert Hurley. New York: Vintage. Freud, S. (1955). Beyond the pleasure principle. The Standard Edition of the Complete Psychological Works of Sigmund Freud (Vol. XVIII) (Trans. & Ed.) James Strachey in collaboration with Anna Freud (pp. 764). London: Hogarth Press. Gibbs, M. (2002). Documenta 11/1. Art Monthly, 258 (JulyAugust), 15. Hall, S. (2002). Democracy, globalization, difference. Documenta11: Platform 1: Democracy Unrealized, 347364. Horkheimer, M., & Adorno, T. W. (2002). Dialectic of enlightenment (Trans.) Edmund Jephcott. Stanford: Stanford University Press. Kant, I. (1987). Critique if judgment (Trans.) Werner S. Pluhar. Indianapolis: Hackett Publishing Company. Lapp, A. (2002). Documenta 11/2. Art Monthly, 258, 710. Levin, K. (2002). The CNN documenta. The Village Voice (July), 39. Rauterberg, H. (2002). Infob rse der Bewegten. Die Zeit, 25(June), 13. o

MARX AND THE THEORY OF THE MONETARY CIRCUIT

Andrew B. Trigg
ABSTRACT
The theory of the monetary circuit, as developed in its most powerful form by Graziani (1989), has made a signicant contribution to the analysis of credit money in Marxian economics. A key issue is the extent to which circuit theory fails to take into account the relationship between sectors producing capital and consumption goods. In Marxs reproduction schema, how much money do capitalists need to advance in order for exchange between sectors to balance, and for the circuit to be closed? The purpose of this paper is to address this issue by examining different models of the monetary circuit, each of which has a textual grounding in Marxs often contradictory musings in Capital, Volume 2. Alongside alternative conceptions of the circuit of money, different interpretations exist about the role of the multiplier, which can be nested in Marxs reproduction schema. The problem, from a Marxian point of view, is that in the existing literature investment is usually conned to the capital goods sector. It can be argued that Marx, for the most part, viewed investment as involving accumulation in both departments of production. Using a multiplier framework, derived from input-output technology, this wider treatment of investment is considered as an alternative way of modelling the circulation of money. In addition to contributing to Marxian analysis of the money circuit, this approach could also be more accessible

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to a wider Post Keynesian audience, since a scalar Keynesian multiplier is employed.

INTRODUCTION
Marxian economics has in recent years become increasingly open to the concept of credit money. Of particular importance has been the French and Italian circuit approach, which is argued to provide an institutionally relevant analysis of the relationship between banks, rms and workers. For Belloore and Seccareccia (1999, p. 753), the monetary circuit approach has its antecedents in the writings of Marx on the circuit of money capital . . . Similarly, for Nell (1998, p. 206), the circuit approach in its contemporary form appears to owe its origin to Marx; and for Graziani (1989, p. 2), elements from the Marxian doctrine are surely present in the debates on the monetary circuit. It is generally agreed that the most powerful model of the monetary circuit (Belloore & Realfonzo, 1997, p. 97) is that developed by Graziani (1989). In this model capitalists borrow the total sum of wages from banks, and through the process of production and circulation there is a reux back to the banking system. However, for some writers schooled in Marxs reproduction schema, as devised in Capital, Volume 2, it is argued that the Graziani model should be modied to take into account intersectoral relationships. On the one hand it is argued that the Graziani model underestimates the amount of money that is required by the circulation process. Using a two-sector model, Seccareccia (1996) argues that capitalists need credit to nance all of their income, including wages and prots. This has been referred to as the single swap approach, where all of the money advanced is swapped for total income in one instance. Conversely, for Nell (1998, p. 212) capitalists in this latter model are awash with money. In his model of mutual exchange between sectors, only wages in the capital goods sector have to be advanced in order for the money circuit to be complete. These disputes1 are mirrored in Marxs own musings on the circulation of money in Capital, Volume 2 (see Nell, 1998, p. 207). First, the single swap approach was considered by Marx as a way of resolving the conundrum of how capitalists can advance an amount of money M that is then transformed after the production process into a greater amount M . Marx poses the well known question, Where does this money come from? (Marx, 1978, p. 407). The answer can be resolved if capitalists in practice advance all of gross income in a single swap as the volume of money M . The second mutual exchange approach is mirrored in Marxs writings on the relationships between his departments of production; with the same volume of money funding purchases of both capital and consumption

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goods. In this approach an advance of the variable capital part of M for one of these departments can be sufcient to fund the circulation of money. Intimately connected to these alternative perspectives is a controversy over the size of the multiplier. When all production requires initial nance, as in the single swap approach, the multiplier is equal to 1. For Nell (1998), however, the multiplier is greater than 1 because initial nance is sufcient to stimulate additional rounds of production and expenditure, because of mutual exchange between sectors. The purpose of this paper is to develop an alternative multiplier framework for which the circulation of money incorporates aspects of both the single swap and mutual exchange approaches. A key motivation for developing this approach is the way in which writers engaging with the circuit approach follow Kalecki (1968) in conning capital accumulation to the output of the capital goods sector. As Zarembka (2000, p. 190) demonstrates, however, for Marx accumulation usually involves increases in both constant and variable capital. Capitalists increase the amount of machinery and raw materials (constant capital) that is available, but more consumption goods are also required in order to sustain an increased workforce (variable capital). On this interpretation, capital accumulation by denition involves the reproduction of class relationships with variable capital growing alongside constant capital. Moreover, once this denition of investment is adopted, a simple and accessible model of the circulation of money can be developed. In contrast to the complex multiplier process developed by Nell (2000) for the mutual exchange model, using input-output technology a simple Keynesian multiplier can be derived from Marxs reproduction scheme. Building upon the multiplier framework developed in Trigg (2002), this macroeconomic model of the circulation of money is offered as a contribution to the theoretical understanding of Marxs circulation of money and the Franco-Italian circuit approach more generally. The rst part of the paper considers the three main approaches to the theory of the money circuit: the Graziani, single swap and mutual exchange models. In the second part of the paper an alternative is developed by building upon some of the insights provided by the circuit approach. In the nal part an overall conclusion is presented.

THE THEORY OF THE MONETARY CIRCUIT

The pioneering model of the monetary circuit developed by Graziani (1989) has a distinct Marxian avour. There is a class demarcation between workers and capitalists and, although intersectoral relationships are not fully explored, a distinction is made between consumer and investment goods. The key departure

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from a more traditional Marxian approach, however, is its opposition to a commodity theory of money. In a triangular structure of relationships, banks take center stage, giving credit to rms in order to nance their outlays on workers. Money cannot be a commodity because the purchase of labour power is logically prior to the production of commodities and therefore also to the production of the money commodity itself (Belloore & Realfonzo, 1997, p. 100). Once the monetary requirements of the economic system are taken into account, alongside modern institutional arrangements, money is dened as a credit instrument, money that has symbolic value and no intrinsic value. A monetary circuit must have a starting point and an end point. The starting point in the Graziani model is the initial amount of money borrowed by rms from banks. Firms then use this money to nance their total wage bill, employing workers to produce commodities. Under the assumption that workers do not save, which is maintained throughout the analysis that follows, wages are spent on consumer goods, all of the money returning back to the rms. At the end of the circuit, rms are accordingly able to pay back their debt to the banks. The money, which was originally borrowed, is destroyed when it returns back to the banks, and the circuit is closed. It should be noted that this model also provides a modication of the standard Marxian representation of the circulation of money, since only wages are advanced. In the standard interpretation of Marxs system, the total amount of money (M) that rms advance consists of variable and constant capital, which is transformed in the production process to a new volume of money (M ) that includes prots made by rms. However, for Graziani (1989, p. 4): If we consider rms as a whole, their only external purchase is labour force. All other exchanges being internal transactions, no further monetary payment is required. Only at the end of the production process rms buy capital goods to be used in the following period. In comparison to Marx, therefore, the circuit approach signicantly reduces the amount of money that has to be advanced in order for the production process to be kick started. Although the Graziani model distinguishes between consumption and investment goods, a possible criticism is that there is no systematic analysis of the relationship between the sectors that produce these goods. By internalizing transfers between rms in relation to capital goods, there is no consideration of the two-way exchange that takes place between the capital and consumption goods sectors. In the analysis that follows we explore two alternatives. In the rst, the advance of wages is argued to be insufcient to service a complete monetary circuit (Seccareccia, 1996). In the second, an alternative extreme is adopted in which only the wage bill advanced in the capital goods sector is considered (Nell, 1998, 2000). As discussed earlier, it has been argued by Nell (1998, p. 207) that

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Table 1. Marxs Reproduction Scheme (Kalecki-Type Categories).

Wages Capital goods Consumption goods V 1 V 2 Prots P 1 P 2 Output X1 X2

both these interpretations were considered by Marx in his notes on the circulation of money that were collected in Capital, Volume 2 (Marx, 1978). Consider the representation of a two-sector economy in Table 1, where for simplicity capitalist consumption is subsumed under household consumption out of wages, and there is no government sector or external trade. In this Kalecki-type formulation, gross outputs (Xi ), measured in money units, are made up of prots (P ) and wages (V ). The subscript i takes a value of 1 for the capital goods i i producing sector and 2 for the consumption good sector. After allocating goods to support its own workers, the consumption goods sector produces a surplus (P ) which is used to support workers in the capital 2 goods sector. Workers in the capital goods sector spend their wages (V ) on these 1 surplus consumption goods and hence: P = V 2 1 (1)

This is referred to by Deleplace and Nell (1996, p. 20) as the Marxian principle, that the wages of the capital goods sector determine the prots of the consumption goods sector. Seccareccia (1996, p. 405) uses Eq. (1) to show that the advance of money in the Graziani model (M) is equal to the output of the consumer goods sector: M = V + V = P + V = X2 1 2 2 2 (2)

The total wage bill is equal to the output of the consumer goods sector (X2 ). However, if this is the case, where do rms in the investment goods sector get the money to reimburse the banks, thus closing the circuit of credit? (Seccareccia, 1996, p. 405). A proposed solution is for rms to advance both wages and investment at the start of the circuit (see also Rochon, 1999). A larger amount M = X1 + X2 (3)

is borrowed from banks by rms at the start of the monetary circuit. This is a single swap approach in which the gross product swaps in a single exchange for an equivalent sum of money (Nell, 1998, p. 207). For Nell, this approach closely resembles the rst of Marxs solutions in Capital, Volume 2, to the problem of establishing where the money comes from to service

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the gap between the amount M advanced by capitalists and the amount M they receive as income.2 Marx addresses this issue by positing that capitalists advance the amount M M in addition to M. Ignoring for simplicity the role of capitalist consumption, this amount is required to purchase additional quantities of capital: As far as the additional money capital is concerned, that required for the function of the increased productive capital, this is supplied by the portion of realized surplus value that is cast into circulation by the capitalists as money capital, instead of as the money form of revenue (Marx, 1978, p. 418). Hence, capitalists advance the whole of M . On this view, theoretically, it is correct to speak of M becoming M , but in practice there is no initial sum of money, M, followed later by a larger sum, M ; there is only M (Nell, 1998, p. 207). In the single swap approach this advance of money is sufcient to fund total income in one run of the monetary circuit. A critique of this single swap approach is developed in Nell (1998) by arguing that there is an exaggeration of the amount of money required in the circulation process. The problem with the single swap approach is that
it retains the idea that the total money supply equals the value of total output. This results in a pattern of circulation that appears at times to run counter to economic common sense. If the total wage bill and funds for total investment are both advanced, then the capital goods sector will nd itself awash in unnecessary cash. For when the capital goods sector sells investment goods to the consumer sector, it will receive funds equal to its wage bill. Yet it has just borrowed its wage bill! Why does it borrow this money (incurring expenses and interest) when it can earn it? (Nell, 1998, pp. 212213)

There is no allowance in the single swap approach for transactions taking place sequentially, with a given amount of money circulating between households and rms over time.3 The principle being proposed here is that capitalists will earn income from selling outputs to capitalists in other sectors of production. A mutual exchange model is required that takes into account the mutual benets to capitalists of sectoral interdependence. Nell (2000) sets up his mutual exchange model of Table 1 under the assumption that production is dened in distinct periods. In each production period there is 100% depreciation of capital goods, each item lasting for the duration of that period, before being replaced in the next period. Replacement of capital used up is carried out with capital goods produced in the previous period. The same assumption is applied to households, with consumption goods carried forward from the previous period. At the start of the production period, therefore, inventories of capital and consumption goods are inherited from the previous period of production. As a consequence, production in the current period is geared up for the replacement of items used up by rms and consumers in the current

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period. The production period is effectively a slice of time, which has a before and after.4 This approach is very different from the Graziani model in which time starts with the advance of credit by banks to initiate production, with all items of production generated subsequent to this process (see Fontana, 2002, pp. 156160). The Nell production period takes as its starting point the outlay on wages by rms in the capital goods sector. In strictly Marxian terms, this is the initial moment of exchange between capital and labour (Graziani, 1997, p. 29), under which money takes the form of money capital in the investment goods sector. The starting point could alternatively be in the consumer goods sector, but a choice is required in order to simulate the knock on effects between sectors. A sequence of stages of circulation are examined, all of which take place within the period of production. Three of the initial stages in the money circuit can be explained as follows: Stage 1 At the outset rms in the capital goods sector (sector 1) begin to borrow money from banks in order to nance the wage bill of that sector.5 Out of these wages, workers in sector 1 purchase consumption goods from sector 2. Stage 2 In response, by selling consumption goods to sector 1, rms in the consumption goods sector (sector 2) direct these funds to the payment of sector 2 wages. Workers in sector 2 spend their wages on consumption goods that return back to the rms in sector 2. The money re-emerges in sector 2 to be spent on capital goods produced in sector 1. Stage 3 From sales of capital goods to sector 2, rms in sector 1 are able to pay wage advances and use gross prots to purchase their own capital goods. The money circulates between the two sectors until the initial money advanced as wages in the capital goods sector is put into circulation. The circuit is closed once wages in the capital goods sector (V ) are equal to prots in the consumption 1 goods sector (P ), Eq. (1) providing a balancing constraint between the two 2 sectors. As Graziani (1997, p. 30) has demonstrated, the initial outlay of money as capital, in the hiring of labour, is followed by a phase of money in circulation acting as an intermediary of exchange. The circulation of money in Nells model has some resemblance to Marxs analysis of mutual exchange between departments of production, as discussed in Capital, Volume 2 (Marx, 1978, pp. 474478). Marx provides a similar example in which capitalists in the capital goods sector (department I) advance a sum of 1,000 to workers. He writes:
The workers use this 1,000 to purchase means of consumption of the same value from the capitalists in department II, and thereby transform half of department IIs constant capital

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into money. The capitalists in department II, for their part, use this 1,000 to buy means of production to the value of 1,000 from the capitalists in department I. (Marx, 1978, p. 475)

By selling means of production to the consumption goods sector (department II), the capitalists of department I are able to effect a reux of their money outlay on wages: the same amount ows back to the respective capitalists as they themselves advanced for the monetary circulation (Marx, 1978, p. 477). Although Nell (1988a, pp. 9495) highlights some of the inconsistencies in Marxs development of this example, he argues that it provides the correct starting point for an analysis of the circulation of money between sectors. Moreover, this process of interaction between sectors in Marxs example can be interpreted as a multiplier relationship. The impact of the initial 1,000 advanced by capitalists in department I multiplies between the two sectors. Oiled by the circulation of money, workers in department I purchase consumption goods from department II, that allows capitalists in department II to purchase means of production from department I. The formal model of the multiplier process developed by Nell (2000, pp. 1213) can be demonstrated by writing total money output (XT ) as X T = V + V + P + P = 2V + V + P 1 2 1 2 1 2 1 (4) For the second element in (4) a multiplier relationship is specied (see Nell, 1998, p. 563), where w is the wage rate and n2 is the labour coefcient for the consumption goods sector. Wages paid out in the capital goods sector (V ) have 1 an initial impact upon the wage bill in the consumption goods sector of V , which 1 in the next round is wn 2 V , in the next (wn 2 )2 V , and so on, with the overall 1 1 impact captured by the multiplier relationship: 1 V. (5) 1 wn 2 1 Nell also assumes two subsectors of the capital goods sector, the rst selling capital goods to the consumer goods sector, and the second selling capital goods to other rms in the capital goods sector. Labour coefcients are assumed to be the same in each sector. A multiplier can be constructed that captures the relationship between the subsectors and the consumer goods sector. To start this process the rst subsector sells capital goods to the consumer goods sector, receiving proceeds of P (= V ). In order to repay its loans the rst subsector withdraws wn 1 P , and an 2 1 2 amount (1 wn 1 )P is spent on new and replacement capital goods from the sec2 ond subsector. The second subsector accordingly spends (1 wn 1 )(1 wn 1 )P , 2 leading to a sequence that has as its sum the multiplier relationship V = 2 P = 1 1 P . wn 1 2 (6)

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Substituting into (4) the multiplier expressions from Eqs (5) and (6) yields an overall multiplier relationship between income and the initial outlay on wages in the capital goods sector: XT = V 2 + 1 1 1 wn 2 + 1 wn 1 (7)

In this model the outlay V , once circulated between the capital and consumption 1 goods sector, is sufcient to fund income, including wages and prots, in both sectors. The multiplier effect allows for substantially less monetary advance than in both the Graziani and single swap models, generating the same overall volume of income.

A MARXIAN ALTERNATIVE
Although it has been shown that Nells (2000) model of the circulation of money bears some resemblance to Marxs system, a key issue remains to be resolved. In adopting the Kalecki-type schema of intersectoral ows (Table 1), Nell narrowly associates accumulation with the production of capital goods. There is no mention of the accumulation of consumption goods, which are placed at the centre of Marxs reproduction schema. As demonstrated by Zarembka (2000, p. 190), there is a conception which Marx uses throughout most of his work, that accumulation of capital entails increases in both the value of the means of production used in production processes and in the value of expenditure on labour power, i.e. increases in both constant and variable capital (original emphasis). Moreover, it can be argued that the Kalecki-type approach obscures the role of Marxs category of surplus value in the economic tableau (see Trigg, 2002). This can be demonstrated by effecting a translation between the wage and prot categories in Table 1 and Marxs original categories specied in the third part of Capital, Volume 2. Let V = V i + dV i , i and P = C i + dC i , i (9) (8)

where Vi and Ci respectively are Marxs original terms for variable and constant capital, and dVi and dCi are terms that represent new amounts of capital available for production in the next period. Using these categories, elements of Table 1 can be re-expressed as in Table 2. Gross outputs are the same in both reproduction tables but the capital components are shown in Table 2 in terms of Marxs categories.

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Table 2. Marxs Reproduction Scheme (Original Categories).

Output Capital goods Consumption goods C1 C2 V1 V2 dC1 dC2 dV1 dV2 X1 X2

Comparison of Tables 1 and 2 shows that in the Kalecki-type formulation prots in each sector are dened in gross terms, consisting of expenditure on the replacement of existing constant capital (Ci ) and its expansion (dCi ); whereas in Table 2 prots are dened in net terms (dC i + dV i ). The latter denition of prots is consistent with Marxs interpretation, with the total increment of capital identical to the volume of surplus value, after accounting for the replacement of current inputs of constant and variable capital.6 As discussed earlier in relation to the single swap approach, it may also be posited that capitalists advance the amount M M required to purchase this additional quantity of capital. In addition to funding the production of this capital increment, the monetary advance allows the realization of the volume of surplus value required for its production. Capitalists earn a net volume of prots (surplus value) that is driven by increments dC = dC 1 + dC 2 and dV = dV 1 + dV 2 of constant and variable capital respectively. Ignoring for simplicity the role of capitalist consumption, the total volume of surplus value P = dV + dC is driven by capitalist requirements for new constant and variable capital. In contrast to the single swap approach, however, it can also be argued that the money required for additional capital can be advanced without advancing the whole of the economys gross income. In Marxs terminology it may be possible to model an advance of money M M without assuming that capitalists advance M. As discussed earlier, Nell (2000), in his mutual exchange approach, is led by his critique of the single swap approach to discount the importance of M M, arguing that a proportion of the variable capital part of M may be sufcient to service the circulation of money. In contrast, an alternative perspective can be developed in which we discount the role played by all initial advances contained in M. By focusing on the advance M M of increments in constant and variable capital, an approach can be developed that is more consistent with Marxs treatment of investment. This alternative approach can be developed by interpreting Marxs reproduction schema as an input-output table. Table 3a shows how the rows of the reproduction scheme of Table 2 can be read as column-wise inputs. In Table 3b, the individual elements, measured in money units, are represented using input-output notation, such that aij are input coefcients, lj are labour coefcients, and hj are

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Table 3. Marxs Reproduction Scheme as an Input-Output Table.

Dept. I (a) Marxs categories Dept. I Dept. II Prots Output Dept. II Output

C1 V1 P1 X1

C2 V2 P2 X2 a12 X2 h 2 l2 X 2 P2 X2

dC dV

X1 X2

(b) Input-output categories Dept. I a11 X1 Dept. II h 2 l1 X 1 Prots P1 Output X1

dC dV

X1 X2

consumption coefcients. The starting point for the circulation of money is the expenditure by capitalists on new constant capital (dC) and new variable capital (dV). In addition, embodied in the input-output accounts is the balance between monetary outlays (column sums) and monetary receipts (row sums). The input-output model of Table 3b takes the form: X1 X2 = a11 0 a12 0 0 X1 + [ l1 h2 X2 l2 ] dC X1 + dV X2 (10)

which can be written as7 X = AX + hlX + F (11)

The term X is a column vector of gross outputs, A is the square matrix of input coefcients, h is the column vector of consumption coefcients, l is a row vector of labour coefcients, and F is a column vector representing nal demand. A full blown Leontief multiplier relationship X = [I A hl]1 F (12)

can be specied at this stage as capturing the interindustry input-output effects together with household income-expenditure impacts of nal demand. An explanation is required of how this multiplier relationship captures both the circulation of money and the production and reproduction of investment and consumption goods. The reproduction process is modelled along the lines of Nell (2000, p. 10), in his mutual exchange model, in which there are inventories of consumer goods assumed to be on hand, the result of production in the previous period. It can be assumed that the entire amount of consumption goods purchased in the current period (h2 lX) is supplied from inventories carried over from the

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previous period. This amount also represents the volume of consumer goods produced in the current period in order to replace the amount consumed. The same assumption is applied to the reproduction of capital inputs.8 The total amount of capital inputs (a 11 X 1 + a 12 X 2 ) used up in the current period has been produced in the previous period; and is replaced by output in the current period. Expansions in the volume of consumption goods (dV) and investment goods (dC) show up as new inventories that allow expanded reproduction in the next period of production. Inspection of Table 3b allows a focus upon the way in which nal demand is translated into the output of consumption and investment goods. Following the logic of the input-output approach, at the outset capitalists initiate the nal demand for dC new capital goods from department I. In order to meet this nal demand, inputs (a11 X1 ) are used up, drawing from inventories of capital goods carried over from the previous period. In anticipation of the economys economic activity being sustained in the next period, capitalists in department I replace these used up capital inputs. In addition, workers employed in this renewal, and in the production of the new capital inputs, require consumer goods from department II. Drawing upon inventories of consumer goods, h2 l1 X1 consumer goods are used up by workers in the capital goods sector. Capitalists are assumed to replace these consumer goods with new outputs of consumer goods. The counterpart to reproduction of outputs in this model is the circulation of money. As argued by Bortis (2003, p. 446), . . . money is absolutely necessary to run the system of social production and circulation. There is not exchange of goods against goods, but always goods against money. It should be emphasized that the elements of the input-output model developed here are dened in money units. As a consequence, nal demand (dC), the new investment in capital goods, can also be interpreted as a monetary advance. The monetary demand for output of capital goods (X1 ) puts money into (a) the hands of capital good producing rms who wish to replace some of their own capital by purchasing goods from other capital good producing rms (a11 X1 ); and (b) the hands of workers employed to produce new capital goods and induced replacement capital goods under (a). Out of these wages workers purchase consumption goods (h2 l1 X1 ), which has knock on effects on the consumption of additional workers employed in sector 2 together with additional capital requirements of that sector (a12 X2 ). The initial outlay of investment in the capital goods sector makes money available in the hands of capitalists producing consumption goods. This process continues with the monetary impact bouncing back and forth between the two sectors. The only advance of money that takes place for the capital goods sector is dC. Second, the money advance dV has a multiplier effect on X2 , with the workers employed to produce dV also consuming consumption goods. As X2 increases, more capital goods are required (via a12 X2 ), making more money available to

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capitalists producing capital goods, and so on with more workers employed consuming more goods from sector 2. The initial outlays on dC and dV circulate throughout the two sectors, fuelling expenditure on capital and consumption goods that eventually reach equilibrium levels X1 and X2 . In each production period the initial outlays on investment are sufcient to enable all expenditure to take place. At the end of the production period the circuit is closed, with the multiplier process allowing capitalists to pay off all debts taken out to nance the initial investment.9 This monetary demand-led process is captured precisely and comprehensively by the matrix multiplier in Eq. (12). It should therefore be emphasized that the advance of investment in this model has some resemblance to the advance of wages that Nell models in his mutual exchange multiplier process. In both models the initial outlay on investment induces a knock on effect between the capital and consumption good sectors, which generates a refund to the capitalists of their initial outlay. The main difference is that this wage-expenditure nexus is part of a framework in which investment takes place in both sectors. This multiplier also obviates the need for Nells somewhat unwieldy consideration of sub sectors in the capital goods sector (see Eq. (6)). Moreover, a much more simple macroeconomic multiplier can be specied that captures this circulation of money in succinct form. Specifying Y = (I A)X as the column vector of nal outputs, (11) can be re-expressed as Y = hlX + F By pre-multiplying (13) by i = [ 1 1] it follows that i Y = i h[lX] + i F (14) (13)

which, since the wage rate (w) is represented by the term i h = h 2 = w, can be written as y = wlX + f (15)

where y = i F is a scalar representing total (money) net output, and f = i F is a scalar representing total (money) nal demand. By decomposition, since wlX is the total wage bill, it follows that if w = wlX/y is the share of wages in net income then: y = wy + f A macroeconomic multiplier y= 1 f 1w (17) (16)

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can be specied that is aggregated from the two-sector model. This macroeconomic multiplier provides a very simple model of the monetary circuit. It can be posited at the start of the circuit that rms take out credit to nance their outlay on new investment in constant and variable capital (f = dC + dV). Via the multiplier 1/(1 w) this outlay circulates between the consumption and capital goods sectors, leading to a level of national income (y) that is greater than the initial monetary outlay.10 Equation (17) is comparable to a quantity equation in which 1/(1 w) is a term representing the velocity of money. To take an example given by Marx (1969, p. 341) in Part I of Theories of Surplus Value, say that 1,000 units of money circulate in the economy with a velocity of 3. The total price of commodities, or in the terminology of Eq. (17) the total income, is in this example 3,000. Dividing the income (3,000) by the velocity establishes the amount of money required to circulate (1,000). As shown by Moore (1984, p. 126), the velocity is equal to the multiplier under the assumption that the period of production, and the period during which the multiplier is completed, are the same as the period during which a given volume of money circulates. Under this assumption, the magnitude of spill-over effects, associated with an initial money outlay on investment through the multiplier process, provides an equilibrium constraint upon the size of the velocity.11 This macroeconomic interpretation of the circulation of money provides a direct way of explaining the narrow assumptions implicit in both the Graziani and single swap approaches, in which each production period is restricted to one cycle in the circulation of money. As shown in the rst part of the paper, in the Graziani (single swap) model there is (a) only one round of payment of wages (total income) at the start of the production period; and (b) no allowance for spill-over effects between sectors. This implies that the velocity of circulation is equal to 1, with all income, be it simply total wages (Graziani) or the sum of wages and prots (single swap), circulating in one cycle.12 The parallel assumption of the circuit approach is that the multiplier is also equal to 1, meaning that there are no income-expenditure spill-over effects between sectors, with the amount advanced having no multiplied impact upon income. The multiplier relationship in Eq. (17) can be presented as a general model in which the multiplier/velocity is a parameter that can vary in value. From this perspective, the Graziani and single swap models represent a particularly narrow case in which the value of this parameter is restricted to 1. In contrast to Schmitt (1996), the multiplier in Eq. (17) should not be seen as a barrier to understanding the circulation of money. Schmitts main argument against the multiplier is that there is a confusion between actual amounts of income and increments in income. His complaint is that the multiplier process is

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driven by increments in spending, yet somehow the given level of employment and income has been sustained in the periods preceding the new impulse that initiates the multiplier process . . . (Schmitt, 1996, p. 123, original emphasis). The problem is that the multiplier analysis unjustiably treats the two integral parts of total income . . . in two entirely different ways (ibid, p. 123). Total income is reproduced in the current period but its increment is somehow supposed to initiate a multiplier process.13 However, by locating Eq. (17) in the reproduction schema, the role that the multiplier plays in the reproduction process is explained. In the reproduction schema increments in demand, represented by new capital, and nanced by the advance of credit money, are the driving force of economic activity. Moreover, this injection of money provides the demand impetus and monetary wherewithal for rms to use up inventories and replace them. Reproduction is oiled by the injection of money demand, the outcome being the replacement of inputs and the expanded reproduction of the system once additional inputs are in place. By focusing upon Marxs reproduction schema, a logical attempt can be made to marry increments in income with the reproduction of income in a multiplier framework. As a way of locating increments of demand in the reproduction process, the Keynesian multiplier in Eq. (17) has distinct advantages over the mutual exchange multiplier developed by Nell (2000) in his critique of the single swap approach. As both a way of exposing the narrow assumptions of the single swap and Graziani models, and as way forward for modelling the circulation of money, this alternative approach is advantaged by its simplicity. A comparison with Eq. (7) demonstrates that (17) is considerably less complicated than the far from standard approach to modelling the multiplier developed by Nell (2000). A marked degree of clarity and accessibility is offered by the application of the widely known Keynesian scalar to the circulation of money in a macroeconomy.

CONCLUSIONS
This paper has attempted a synthesis between various aspects of Marxs writings and a number of alternative modelling approaches. The analytical core of this contribution is provided by the derivation of a scalar Keynesian multiplier from Marxs reproduction schema. Furthermore, this synthesis between Marxian and Keynesian traditions is effected by employing modelling techniques from Leontief input-output analysis. This approach has been used to examine two aspects of Marxs discussion of the circulation of money in Capital, Volume 2. These two perspectives, which are mirrored in the recent critiques of the Franco-Italian circuit approach,

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are the single swap and mutual exchange models of money circulation. By picking and mixing from these approaches a new model of the monetary circuit is developed that potentially brings more clarity and understanding of the circulation of credit money in a multisectoral economy. Moreover, this model has the double advantage of being: (a) more consistent with the Marxian tradition, since value categories and Marxs denition of investment are incorporated into the analysis; and (b) more accessible to a wider Post Keynesian audience, since a scalar Keynesian multiplier is employed. As a basis for future research, this model is offered as a way of potentially improving communication between the Franco-Italian circuit school and the Marxian and Post Keynesian traditions.

NOTES
1. A related discussion has also taken place between Renaud (2000) and Nell (2002). 2. Marx also considers the possibility that the additional money is provided by an increase in the production of gold. Sardoni (1989) regards this to be a restrictive assumption that Marx makes in order to clarify the role of money in the reproduction schemes. Marx himself pointed out that he did not take account of credit and banks in the schemes only for simplcitys sake (Sardoni, 1989, p. 215). 3. Several issues with the single swap approach are discussed by Nell (1998, pp. 208209), including its failure to deal with how productivity improvements might speed up turnover, and its exaggeration of the expense incurred by rms in terms of interest payments. 4. I am grateful to Victoria Chick for suggesting to me this interpretation of the production period, and its contrast with the circuit approach. Thanks are also due to Giuseppe Fontana and two excellent anonymous referees for pressing me on this and other points. 5. Nell (2002, p. 527) has made it clear that the wage bill gradually accumulates in the hands of the rms of the consumer goods sector. It isnt spent until the production process in capital goods is complete, at which point the entire wage bill will have been paid out and spent. 6. Following the approach taken by Marx (1978) in Capital, Volume 2, it is assumed that prices are equal to values. Total money prots are therefore identical to total surplus value. 7. The mathematical translation between this matrix formulation and the Nell model can be established by writing (10) as an equation representing total output: X T = X 1 + X 2 = a 11 X 1 + a 12 X 2 + h 2 l 1 X 1 + h 2 l 2 X 2 + dC + dV Comparing parts (a) and (b) of Table 3, it follows that X T = C 1 + C 2 + V 1 + V 2 + dC 1 + dC 2 + dV 1 + dV 2 since dC = dC 1 + dC 2 and dV = dV 1 + dV 2 . Using (8) and (9), this expression for total output can be translated into (4): XT = V + V + P + P 1 2 1 2

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Total output is clearly the same in both models, the key difference being the way in which prots are dened. 8. Following Lange (1969, p. 47), capital inputs in the input-output table can be interpreted as reproduction ows. 9. It is therefore argued that the current periods inventories, which were produced in the previous period, were also nanced in the previous period by initial outlays of investment in that period. As suggested earlier, this production period can be viewed as a slice of time, a typical period in Marxs reproduction schemes. Unlike the circuit approach, there is no initial starting point in which inventories are rst produced and nanced from scratch. 10. This type of scalar multiplier can also be derived from the two-sector Kaleckian schema, as shown by Nell (1988b, p. 112), although this latter multiplier was not applied specically to the circulation of money. A possible advantage of Eq. (17), since it is derived from an input-output framework, is that it could be easily generalised to an m sector framework. 11. For Moore (1984), this identity between the velocity and the multiplier is unlikely to hold in a real nonergodic economy, where expectations are continually changing. It should be emphasized, however, that Marxs reproduction schema provides a limiting extreme in which unlikely conditions, such as those associated with balanced growth, are assumed to hold. 12. In pure circuit theory, the velocity of circulation can be regarded as too orthodox a concept, partly due to the unrealistic quantity theory assumption that it is a stable parameter. However, in an implicit defence of the velocity concept, Graziani (2003, p. 12) has denigrated the extreme case of an undened, innite velocity as being associated with a quasi-barter economy in which money did not exist. 13. Schmitt (1996, p. 123) also argues against the narrow Keynesian specication of the multiplier as a model of impacts . . . between the investment sector and the consumption sector . . . This is the approach taken by Nell (2000). Following Marxs denition of investment as increments in constant and variable capital, the multiplier in Eq. (17) is exempt from this criticism, locating increments in both sectors.

REFERENCES
Belloore, R., & Realfonzo, R. (1997). Finance and the labour theory of value. International Journal of Political Economy, 27(2), 97118. Belloore, R., & Seccareccia, M. (1999). Monetary circuit. In: P. A. OHara (Ed.), Encyclopaedia of Political Economy (Vol. 2, pp. 753756). London: Routledge. Bortis, H. (2003). Keynes and the classics: Notes on the monetary theory of production. In: L.-P. Rochon & S. Rossi (Eds), Modern Theories of Money (pp. 411474). Cheltenham: Edward Elgar. Deleplace, G., & Nell, E. J. (1996). Introduction: Monetary circulation and effective demand. In: G. Deleplace & E. J. Nell (Eds), Money in Motion (pp. 341). Basingstoke: Macmillan. Fontana, G. (2002). Some notes on the monetary debate within the Post Keynesian school. In: S. C. Dow & J. Hillard (Eds), Beyond Keynes (Vol. 2, pp. 148164). London: Edward Elgar. Graziani, A. (1989). The theory of the monetary circuit. Thames Papers in Political Economy. London: Thames Polytechnic.

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Graziani, A. (1997). The Marxist theory of money. International Journal of Political Economy, 27, 2650. Graziani, A. (2003). The monetary theory of production. Cambridge: Cambridge University Press. Kalecki, M. (1968). The Marxian equations of reproduction and modern economics. In: J. Osiatynski (Ed.), Collected Works of Michal Kalecki, Vol. II, Capitalist Economic Dynamics (pp. 459466). Clarendon: Oxford, 1991. Lange, O. (1969). Theory of reproduction and accumulation. Oxford: Pergamon Press. Marx, K. (1969). Theories of surplus value, Part I. London: Lawrence & Wishart. Marx, K. (1978). Capital (Vol. 2). London: Penguin, 1893. Moore, B. J. (1984). The demise of the Keynesian multiplier. Journal of Post Keynesian Economics, 17(1), 121133. Nell, E. J. (1988a). On monetary circulation and the rate of exploitation. In: P. Arestis (Ed.), Post Keynesian Monetary Economics (pp. 72121). London: Edward Elgar. Nell, E. J. (1988b). Prosperity and public spending. Boston: Unwin Hyman. Nell, E. J. (1998). The general theory of transformational growth. Cambridge: Cambridge University Press. Nell, E. J. (2000). Monetizing the classical equations: A theory of circulation. Mimeo, New York: New School for Social Research (forthcoming). Cambridge Journal of Economics. Nell, E. J. (2002). On realizing prots in money. Review of Political Economy, 14(4), 519530. Renaud, J.-F. (2000). The problem of the monetary realization of prots in a Post Keynesian sequential nancing model: Two solutions of the Kaleckian option. Review of Political Economy, 12(3), 285303. Rochon, L.-P. (1999). Credit, money and production: An alternative Post-Keynesian approach. Cheltenham: Edward Elgar. Sardoni, C. (1989). Some aspects of Kaleckis theory of prots: Its relationship to Marxs schemes of reproduction. In: M. Sebastiani (Ed.), Kaleckis Relevance Today (pp. 206219). Basingstoke: Macmillan. Schmitt, B. (1996). A new paradigm for the determination of money prices. In: G. Deleplace & E. J. Nell (Eds), Money in Motion (pp. 104138). Basingstoke: Macmillan. Seccareccia, M. (1996). Post Keynesian fundism and monetary circulation. In: G. Deleplace & E. J. Nell (Eds), Money in Motion (pp. 400416). Basingstoke: Macmillan. Trigg, A. B. (2002). Surplus value and the Kalecki principle in Marxs reproduction schema. History of Economics Review, 35, 104114. Zarembka, P. (2000). Accumulation of capital, its denition: A century after Lenin and Luxemburg. Value, Capitalist Dynamics and Money, Research in Political Economy (Vol. 18, pp. 183241). Amsterdam and New York: JAI/Elsevier.

HILFERDINGS THEORY OF BANKING IN THE LIGHT OF STEUART AND SMITH

Costas Lapavitsas
ABSTRACT
In Finance Capital Hilferding suggests that, in the early stages of capitalist development, banks engage in short-term lending for circulation purposes, while concerning themselves with their liquidity. As capitalist development proceeds, banks lend longer-term for investment purposes, and their concern shifts to securing their solvency. Consequently, banks and industrial enterprises become amalgamated into nance capital, developing mutual commitment relations, and giving a bank-based character to the nancial system. The core of Hilferdings argument resembles Smiths analysis of banking, but in important respects his argument is reminiscent of Steuarts earlier and opposing analysis. Hilferding was able to integrate key elements of both approaches to banking by relying on Marxs concept of loanable money capital, as well as on Marxs claim that the average rate of interest is normally lower than the average rate of prot. However, Hilferdings view that nancial systems spontaneously become bank-based has not stood the test of time well. This failure is probably due to underestimating the importance of state intervention in shaping the nancial system.

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 161180 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21007-0

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1. BANK-BASED AND MARKET-BASED FINANCIAL SYSTEMS IN CAPITALIST DEVELOPMENT

Bank-based nancial systems, in which banks typically make long-term loans to enterprises, are usually contrasted with market-based systems, in which bank loans are of shorter duration. The two types of nancial system are also denoted as, respectively, German-Japanese (or indirect nance) and Anglo-American (or direct nance). There is continuing debate, with a long historical pedigree, on which type of nancial system is more conducive to capitalist development (for instance, Cameron, 1967; Cameron & Bovykin, 1991). In recent years it has been claimed that bank-based systems allow for superior monitoring of enterprises by banks, but also of banks and enterprises by the state (very selectively, Mayer, 1987; Stiglitz, 1985, 1994; Wade & Veneroso, 1998). There is, presumably, a relational or commitment aspect to bank-based systems that contributes to better performance of capitalist enterprises by easing constraints posed by information asymmetries. In contrast, others claim that market-based systems provide vital nancial services through stock markets, such as allocation of risk and monitoring through shareholder action (again selectively, Demirguc-Kunt & Levine, 1999; Demirguc-Kunt & Maksimovic, 1996; Levine & Zervos, 1998). It appears, moreover, that Anglo-American nancial practices have become more prevalent in the developing world in the 1990s. Singh and Hamid (1992), Glen and Pinto (1994) and Singh (1995), for instance, have found that corporate investment in developing countries has depended heavily on new issues of shares rather than debt. This article is concerned primarily with Hilferdings (1910) Finance Capital, which is usually ignored by mainstream literature, despite its sophisticated views and early date of publication.1 In Section 2 it is shown that, for Hilferding, the capitalist nancial system is originally market-based but tends to become bank-based as capitalist accumulation evolves. Hilferdings contention is based on his analysis of the borrowing requirements of enterprises. Capitalist enterprises are presumed initially to require bank loans in order to nance circulating capital alone; as the scale of accumulation grows, enterprises seek external funds to nance xed capital, thus increasing their reliance on bank loans. But once banks begin to lend for purposes of nancing xed capital investment, commitment is created among industrial and banking concerns. At the limit, industrial and banking concerns are fused and create a new type of capital, denoted by Hilferding through his celebrated concept of nance capital. Hilferdings views reveal selective afnities with earlier analysis of bank lending and bank capital, particularly the opposing views of Steuart and Smith. It is suggested in Section 3 that Steuart and Smith can be considered as theoretical pillars of, respectively, the bank-based and the market-based approach to nance.

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Hilferding is able to integrate elements of both approaches in his analysis by relying on Marxs theoretical work on nance. Specically, Hilferding deploys the Marxist concept of loanable money capital, a separate type of capital that operates at one remove from production and is more exible than industrial and merchants capital. Hilferding also relies on Marxs postulate that the average rate of interest tends to be below the average rate of prot, thus creating room for promoters prot, appropriated by nance capital. Nevertheless, Hilferdings claim that, in the long term, capitalist nancial systems evolve spontaneously in a bank-based direction has failed to capture the evolution of capitalist banking in subsequent decades. It is suggested in Section 4 that this failure is due to Hilferding underestimating the role of the state in shaping the nancial system for purposes of capitalist development.

2. HILFERDINGS ANALYSIS OF THE CAPITALIST FINANCIAL SYSTEM

Hilferdings (1910) analysis of banking in the course of capitalist development draws on two closely related theoretical postulates, both of which derive from Marxs work and characterise Marxist theory of nance. The rst is that banks trade loanable money capital, which is understood as neither loanable funds created by saving out of income, nor as liquidity accumulated by storing the means of exchange. Rather, loanable money capital is dened primarily as a special form of capital, which is traded as a commodity in nancial markets, the rate of interest being its price. Loanable money capital carves out its own territory in the capitalist economy, since it is handled by nancial institutions and markets at one remove from production. The main body of Marxs work on this topic (1894, Chaps 2124) leaves some ambiguity on the sources of supply of loanable money capital in capitalist economy. One interpretation is that loanable money capital derives from idle money hoards systematically formed by industrial enterprises, and subsequently mobilised by banks and other nancial institutions.2 This view is fully consistent with Hilferdings (1910, pp. 7081) approach to the supply of loanable money capital, in which he meticulously considers the creation of idle money capital in the normal operations of industrial capital and identies idle money as the wherewithal of bank lending. Moreover, for Hilferding, access to loanable money capital is a lever of competition among industrial and commercial capitals, since it allows for existing capitalist projects to be expanded, or new ones to be started. By the same token, loanable money capital is not systematically tied down either to particular productive capacity or to commodities, and hence possesses greater mobility and exibility than industrial and commercial capital.

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The second postulate refers to the average rate of interest on loanable money capital, which, for Marx (e.g. 1894, p. 482), tends to be below the average rate of prot for capital engaged in production or circulation. Hilferding (1910, pp. 108112) accepts this postulate and turns it into a foundation of his analysis of nance. Denying the equalisation of returns between industrial (and commercial) capital and loanable money capital is a highly distinctive aspect of Marxist theory of nance. At a general level, it can be justied on the grounds that loanable money capital does not enter capitalist production and circulation directly, i.e. it is not a functioning part of a countrys total social capital.3 Since loanable money capital is not directly engaged in production (and circulation) of aggregate prot (surplus value), it cannot earn returns on the same basis as industrial and commercial capitals. Rather, the return to loanable money capital (interest) is a share of the prots generated in production by industrial capitalists, and circulated by commercial capitalists. According to this approach, there is no natural rate of interest, and the market rate is determined purely through demand and supply of loanable money capital. By the same token, economic relations between industrial (and commercial) and loanable money capitalists are not simply determined by the economic mechanisms of competition and the equalisation of returns. Thus, the relational or commitment aspect of banking rests partly on the peculiar character of interest as revenue, that is, as share of prot generated in production. Based on these theoretical postulates, Hilderding develops a theory of banks treated as capitalist enterprises that specialise in collecting and advancing loanable money capital. His analysis (1910, pp. 8283) commences with the nancing requirements of industrial enterprises, in particular circulation credit. This is trade credit, which involves the sale of nished commodity output by enterprises against promises to pay (bills of exchange) rather than money. Characteristically for Marxist theory of nance, Hilferding stresses that capitalist enterprises (industrial and commercial) spontaneously supply circulation credit to each other. They create mechanisms of trade credit, which rest on inter-rm relations and allow systematic drawing, circulation, clearing and settlement of bills of exchange. Trade credit is the most elemental form of credit in a capitalist economy, and its development does not require the prior existence of nancial institutions. On the contrary, the mechanisms and assets of trade credit act as foundation for the emergence of nancial institutions. For Hilferding, the original business of banks as capitalist enterprises is to facilitate and organise trade credit transactions among industrial and commercial enterprises. His analysis has a classical avour, as is more fully established in Section 3 of this article through discussion of Smiths work on banking.4 Specically, Hilferding sees banks as initially providing their own (banking) credit to enterprises through the discounting of bills of exchange. In doing so, banks also

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replace trade bills circulating among enterprises with their own liabilities, i.e. they issue bank notes. In a nutshell, banks are capitalist enterprises that specialise in providing their own promises to pay in exchange for promises to pay made by industrial and commercial enterprises.5 As soon as an interconnected system of banks takes shape, the advance of bank credit replaces spontaneous trade credit among enterprises, and banks take over the clearing and settlement operations relating to bills of exchange. The conclusion that Hilferding draws regarding the balance sheet of banks is important for our purposes: since banks are initially providers of short-term credit to nance the circulation requirements of industrial and commercial capital, it follows that they have no need for substantial amounts of capital of their own:
Since the banker substitutes his own credit for the commercial bills, he requires credit, but only a relatively small money capital of his own, in order to guarantee his ability to pay (1910, p. 86).

These banks lack substantial amounts of own capital, but can secure the liquidity necessary to support their short-term assets by attracting deposits from industrial capitalists, especially money that would have previously lain in reserve to pay for bills of exchange. Hilferding (1910, p. 88) subsequently introduces capital or investment credit. This type of credit involves the advance of loanable money capital, and relies on mobilisation of hoarded money across the economy. Capital or investment credit is qualitatively different from trade credit, since it does not entail the sale of commodities against promises to pay. More signicantly, investment credit directly mobilises money lying idle within the capitalist economy, thus increasing the active money capital at the disposal of the capitalist class as a whole. The system of bank deposits provides the main mechanism for collecting idle money and transforming it into loanable money capital. At this point of the exposition, Hilferdings analysis takes a mercantilist avour, reminiscent of Steuarts original work on banking and quite different from Smiths, as is shown in Section 3 below. To be specic, investment credit supplied by banks is assumed to be available to industrialists for the purpose of increasing either xed capital or circulating capital. Fixed capital refers to plant, machinery and equipment that last for several turnovers of industrial capital (each turnover comprising, in this order, purchase of inputs, production of output, and sale of output). Circulating capital, on the other hand, refers to production inputs that last for only one turnover of industrial capital. When a banks loans are used to nance the xed capital requirements of an enterprise, the money lent is tied up for a long period of time (several turnovers). It follows that the bank loses some degrees of freedom in its operations, and becomes a participant in the fortunes of the enterprise (1910, p. 91). The implications for the banks balance sheet

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are pronounced: long-term involvement with particular industrial enterprises and projects puts the banks solvency in doubt. Consequently, the bank is obliged to maintain substantial amounts of capital of its own:
To the extent that banks tie up their funds, they are obliged to keep a comparatively large capital of their own, as reserve fund, and as a security for the uninterrupted convertibility of deposits. Thus banks which are engaged in supplying long-term credit, in contrast to pure deposit banks, must have at their disposal a substantial capital (1910, p. 91).

Hilferdings subsequent analysis pivots on his assumption that the borrowing requirements of industrial enterprises increase as capitalist development leads to enlargement of the scale of production. When the scale of capitalist production is relatively small, industrial capitalists have limited need for investment credit. Enterprises typically meet their xed capital requirements out of their own capital. Credit obtained from others is typically used to nance the bulk of their circulating capital (1910, p. 94). But in the course of capitalist development, the scale of production grows and capitalist enterprises increasingly seek external funds to nance xed investment. External funds are secured primarily through longerterm borrowing from banks. However, banks can only advance a fraction of the loanable capital at their disposal, since their liabilities remain mostly short-term. Moreover, for banks to supply investment credit with security, they have to reach a minimum size as well as diversifying risks by lending to several enterprises. Once banks begin to provide long-term funds to enterprises for purposes of xed investment, relations between banks and enterprises are transformed and the nancial system becomes increasingly bank-based. As long as banks supply mostly circulation credit to enterprises, the sums lent remain relatively small, and the ability of borrowers to settle debts could well be unrelated to the specic business transactions for which the loans were made. But when banks make loans that nance the xed capital requirements of enterprises, the sums are usually large and the loans are advanced for a long period of time. Moreover, the ability of enterprises to repay the loans depends on the performance of the project for which the funds were lent. Hence, it becomes incumbent upon banks to ascertain the future prospects of industrial capitalists, and to develop close relations with them in order to monitor performance (1910, p. 95). In analysing relational or commitment banking, Hilferding deploys the rst of the two Marxist theoretical postulates mentioned above, and draws powerful conclusions. Namely, the exibility of loanable money capital and its inherent distance from production offer signicant advantages to banks over industrial enterprises, thus affording them inuence over enterprise decision-making:
In this relationship the bank is the more powerful party. The bank always disposes over capital in its liquid, readily available form, money capital. The enterprise, on the other hand, has to depend

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upon reconverting commodities into money . . . The bank enjoys an additional advantage by virtue of the fact that its capital is relatively independent of the outcome of any single transaction, whereas the fate of the enterprise may depend entirely upon a single transaction (1910, p. 95).

In particular, the power of large banks over enterprises tends to rise over time as a result of three factors. First, trade credit acquires an increasingly international character, requiring wide business contacts and large volumes of liquid resources; second, the need for investment credit rises inexorably as the scale of capitalist production grows; and third, there is increasing involvement of banks in managing otations of shares in the stock market. The last point is fundamental to Hilferdings analysis of the evolution of the nancial system; it brings into play the second of the two Marxist theoretical postulates, and merits consideration in more detail. Hilferdings (1910, p. 107) discussion of equity as opposed to debt starts with the joint-stock company and separation of ownership from control. Joint-stock corporations are signicantly different from individually owned enterprises, not least because shareholders are perceived to function similarly to money-lending capitalists, though there are also important differences between them. Specically, shareholders risk only a denite sum of money similarly to lenders of money but receive an uncertain share yield rather than interest. A further difference is that, to secure return of their invested principal, shareholders are obliged to sell their shares. At this point, the postulate that the average rate of interest tends to be below the average rate of prot is put to use. For Hilferding (1910, p. 109), shares in industrial and commercial projects are sold at market prices determined by discounting the expected returns of the projects. The appropriate rate of discount is the rate of interest (risk-adjusted), on the grounds that no systematic difference could persist between the (risk-adjusted) share yield and the rate of interest, as long as idle money could be freely allocated between equity and debt. At the same time, the expected rate of return on the money capital actually invested in an industrial or commercial project is equal to the average rate of prot. In nancial terms, the money capital actually invested in a capitalist project is equivalent to the expected returns discounted by the rate of prot; but the money capital obtained through selling project shares in the stock market is equivalent to the expected returns discounted by the (risk-adjusted) rate of interest. As long as the average rate of prot is above the average rate of interest, it follows that, for any given project, the funds obtained through share otations systematically exceed the funds actually invested. For Hilderding (1910, p. 112) the difference constitutes promoters prot (Gruendergewinn), part of which accrues to nance specialists who manage share otations. Joint-stock corporations are typically formed when the scale of industrial or commercial project makes it necessary to pool capital from many sources.

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For Hilferding (1910, p. 118), joint-stock corporations are associations of capitalists, who are attracted because they can participate as shareholders, i.e. they can minimise exposure while retaining the uidity of their capital. The typical example of a project requiring the formation of joint-stock corporations is railway construction. However, as the scale of capitalist production grows requiring ever-larger injections of xed capital corporations become the most suitable institutional form of capitalist enterprise. Corporations make it easier to obtain fresh supplies of money capital by issuing equity, thus becoming able to restructure production more smoothly. Corporations also facilitate mergers and acquisitions, allowing ever-greater concentrations of capital to emerge. One of the strongest advantages they offer to industrial capitalists is easier access to bank credit. Banks are favourably disposed toward lending to corporations compared to individually owned enterprises partly because a corporations institutional structure facilitates monitoring. Banks could also more easily recoup their funds, since corporations can more easily raise uid capital:
One of the banks employees can be delegated for this purpose [supervision, CL], and the private banker is thus replaced by the bank ofcial. The bank will also provide large amounts of credit more readily to a corporation, because the corporation itself can easily raise capital. There is no danger that credit which has been provided will be immobilized. (ibid. p. 124.)

Hilferdings celebrated concept of nance capital is founded on the close relationship between banks and joint-stock corporations.6 The key point is that large banks are able easily and safely to provide investment credit to joint-stock corporations. As the xed capital needs of corporations grow, and are increasingly met by banks, close commitment relations emerge among banks and corporations. In particular, large banks establish regular mechanisms of supervision over corporations. Supervision entails permanent bank representation on the board of directors of corporations, as well as bank ownership of corporation shares. Thus, supervision leads to banks exercising power over corporations. Moreover, as banks become closely entangled with corporations, they also become intricately engaged in managing share otations in the stock market. The domination of the capitalist economy by joint-stock corporations implies that large banks acquire investment-banking functions and systematically obtain promoters prot. Thus, nance capital is an amalgam of banking and industrial capital, with banks in the ascendant, which emerges as the scale of capitalist accumulation expands and xed capital requirements increase. To recap, for Hilferding, capitalist development rests initially on spontaneous advance of trade credit among enterprises that is gradually replaced by banking credit. Banks initially supply circulation credit through bill transactions, thus having low requirements of own capital, while securing their liquidity by attracting

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deposits. However, as the scale of production grows and the requirements of enterprises for xed capital become larger, banks increasingly supply investment credit by advancing to industrialists and others loanable money capital collected across the economy. Once they begin to lend for xed capital investment, banks nd it necessary to possess substantial amounts of own capital. Moreover, banks have to monitor their investment credit, thus acquiring close commitment relations with rms. Commitment relations are especially strong among banks and joint-stock companies. As the scale of production continues to increase in the course of capitalist development, joint-stock corporations become the most suitable institutional form of capitalist enterprise. Banks are able to make loans for xed investment to joint-stock corporations with greater security compared to other capitalist enterprises. Moreover, banks can obtain investment-banking prots from managing corporate share otations. The involvement of banks in the operations of enterprises becomes closer and greater as joint-stock corporations come to dominate the economy. Thus, large banks and industrial corporations nd themselves in tight commitment relationships, in which the balance of power favours banks. Together they comprise nance capital, the characteristic form of capital in the imperialist stage of development of capitalism. By this token, the nancial system of advanced capitalist economies contains a large stock market, but is also strongly bank-based.

3. STEUART AND SMITH ON BANKING IN THE COURSE OF CAPITALIST DEVELOPMENT

Hilferdings analysis of banking, especially the relationship between industrial and banking capital, represents a signicant development of Marxs own work, while remaining founded on Marxs categories. Fully to appreciate the innovative aspect of Hilferdings views, it is instructive to consider in more detail Steuarts and Smiths writings on banking. The former can be treated as theoretical pillar of the bank-based, while the latter of the market-based approach to banking. Banking and nance takes up a substantial part of Steuarts Principles, written on the cusp of the industrial revolution and the capitalist transformation of Western Europe.7 Steuarts aim is to establish principles that would help the statesman to shape economic and social policy, especially in view of Steuarts belief that money could revitalise economic activity and transform society. The underlying problem for the policy-maker is to ensure a just proportion between the produce of industry and the circulating equivalent available to purchase it (Steuart, 1767, Bk. II, Chap. XXVIII, p. 53). Too little money would lead to stagnation of activity, while too much of it would lead to prodigality that

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would give rise to balance of trade decits. It is clear, however, that Steuart is mostly concerned with shortage rather than overabundance of money. Thus, the statesman must be prepared to deploy policies that draw metallic money out of hoards, or supply symbolical paper money. For Steuart, a countrys lack of economic development is equivalent to the inability of consumption to absorb the produce of industry. The reason is that those who sustain consumption lack circulating value (money) and cannot obtain credit to effect purchases. Hence, the country needs a mechanism for liquidating the assets (especially land) of those who are disposed to consume, thus providing the wherewithal for purchases (Steuart, 1767, Bk. II, Chap. XXVIII, p. 59). It is incumbent upon the statesman to create mechanisms that make credit available to those who would consume the product of those who exercise their industry. Such credit could create a circulating fund of paper money for the country and spur economic activity. Steuarts analysis contains confusion between the money revenue of consumers and the money capital of industrialists (or between the supply of money and the available money capital). This is a characteristically mercantilist confusion, noted by Heckscher (1935, Pt. IV, Chap. II, Sec. 5). In Marxist terms, the money capital used to hire workers and purchase means of production is a very different economic category from the money income that individuals spend on means of consumption. The economic properties of money capital are accounted for by the generation and accumulation of money prot, while those of money income by the need and desire to consume useful things. Thus, a country might not have sufcient money capital to sustain rapidly expanding accumulation, despite possessing adequate money to circulate private income. What is important for our purposes, however, is Steuarts perception of credit as a catalyst of development that could be consciously manipulated by policy-makers. For Steuart, if economic development is slow, effective demand must be continually weak due to a deciency of money and credit. The statesman should make good this deciency, either through mobilisation of money hoards, or through introduction of appropriate institutional changes in the economy to generate credit. These changes require creating banks that facilitate consumer borrowing against xed assets, particularly land.8 The inuence of John Law on Steuart is striking in this regard. Laws (1705, Chap. VIII) best-known work on money and credit is explicitly concerned with the problem of Scotland lagging behind Holland in economic development. Scotlands weak development is assumed to be due to poor trade performance, both domestically and internationally, which Law attributes to lack of money in the country. The mercantilist confusion between money capital and money revenue is also evident in Law: Domestic Trade depends on the Money. A greater Quantity employs more people than a lesser Quantity (1705, p. 11), and The rst Branch of Foreign Trade, which is the Export and Import of Goods, depends on the Money

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(1705, p. 12). The implications of money shortage for national development are assumed to be stark:
National Power and Wealth consists in Numbers of People, and Magazines of Home and Foreign Goods. These depend on Trade, and Trade depends on Money. So to be powerful and wealthy in Proportion to other Nations, we should have Money in Proportion with them; for the best Laws without Money cannot employ the People, improve the Product, or advance Manufacture and Trade. (1705, p. 49).

Laws preferred method of increasing money is through credit. At the same time, Law (1705, Chap. V) is adamant that credit which is based on promises to pay money in the future is insufcient for the purpose of spurring development, as there is not enough money in the country to support it and make it safe. Thus, his preferred institutional transformation is to create a land bank, i.e. a bank that would lend its own banknotes secured by pledges of land. Laws disastrous attempt to put his ideas in practice in France is not of immediate relevance here. It should be noted, however, that Law (1705, p. 10) understood fully that an expansion of money and credit was likely to mean a decline in the power of landed aristocracy, whose land would become commodied. Murphy (1997) has shown that the established old nanciers of France, behind whom lurked the landed aristocracy, played an important role in bringing the downfall of Laws System. Steuarts preferred method of expanding credit and money for purposes of economic development is also the establishment of banks that hold pledges of land. However, his analysis is deeper and more detailed than Laws.9 For Steuart (1767, Bk. IV, Pt. I, Chap. I), there are three generic types of credit. The rst type is private credit, which is advanced against real or personal security (i.e. it either has a specic real asset as collateral, or is based on the personal wealth of the borrower). This is the best form of credit, and its broader social signicance lies in converting (melting down) solid property into money (1767, Bk. IV, Pt. I, Chap. I, p. 196). The soundness of the melting down operation depends on the ability of the collateral asset to maintain its value, with land being by far the best. The second type is mercantile credit, advanced against the creditworthiness of a borrower engaged in trade. Mercantile credit is the most precarious of the three, since it is advanced by traders to each other in the course of their business and has no solid backing. The third type is public credit, advanced by the state against its ability to command future income due to tax. Its reliability depends on historical and political circumstances. To spur economic development, Steuart argues that the statesman should promote establishment of banks of circulation upon mortgage, i.e. banks that issue banknotes against securities backed by pledges of land, and normally lend for long periods of time. In developed countries, on the other hand, appropriate banks are those based on mercantile credit (1767, Bk. IV, Pt. I,

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Chap. I, p. 197). The Bank of England is the model for the latter, i.e. a commercial bank that lends against trade bills and makes short-term loans to the government. Steuarts distinction between development (land) banks and commercial banks as far as capital and reserves are concerned is important for our purposes. The capital of banks upon mortgage comprises any species of property (metallic money, public securities, real estate, and so on) put together in order to provide security for banknotes issued (1767, Bk. IV, Pt. I, Chap. I, p. 201). The aim of a land banks own capital, in other words, is to ensure public condence in its liabilities. Clearly, if a land bank is obliged to convert its banknote liabilities into legal money, it must have sufcient access to reserves (of coin, if legal money is metallic). But that is hardly a major concern, since its assets will be long-term and solid, other liabilities will be insignicant, and banknotes will be easily honoured as assets mature. For Steuarts preferred banks, the purpose of own capital is to foster condence among the public; it is also to cover improper use of bank credit, for instance, if loans were made against poor collateral or to pay for the banks own expenses. In short, Steuart is deeply concerned with the solvency but not the liquidity of banks. The latter is unimportant, except in the subsidiary sense of providing a small reserve of coin for occasional requests to convert banknotes. His relative neglect of liquidity derives from the nature of the assets that are to be held by his banks: the loans made by them would be aimed at sustaining spending by otherwise illiquid social classes, not at nancing the short-term activities of merchants. Land bank liabilities would certainly be short-term, but they would not be issued in connection with trade operations. Hence they would be unlikely suddenly to return to the banks in large volumes demanding conversion into reserves. The contrast with Smith, writing less than a decade later, is pronounced.10 For Smith, economic development is the outcome of the division of labour and of the accumulation of capital through saving, while money and credit play a secondary role. Smith (1776, Bk. II, Chap. II) barely devoted a single chapter of his classic book to the operations of banks.11 His work, however, is largely free of the confusion between money revenue and money capital that stamped Laws and Steuarts. It is notable that Smiths analysis of banking is concerned precisely with those banks that Steuart had considered unimportant, namely commercial banks that lend to merchants by discounting bills of exchange. Moreover, Smith discusses commercial banks as capitalist outts subsisting independently amidst merchant and industrial enterprises, rather than as institutions set up by a statesman in order to provide credit that would spur economic activity. Consequently, Smiths primary concern, in contrast to Steuart, is to analyse the availability of liquidity for banks, which means determining the volume and nature of their reserves. Solvency is a lesser concern, as also follows from his analysis of bank lending policy.

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For Smith (1776, Bk. II, pp. 318323), the proper lending business of banks is to discount short-term bills that arise in the course of commercial transactions among capitalists of established reputation, that is, real bills. To sustain this business, banks need either to keep reserves of gold or silver, or to be able rapidly to obtain backing for their notes in the open market. Keeping metallic reserves is costly because interest is thus foregone; it is also expensive to procure additional reserves at the very moment that pressing needs arise. But if banks practiced real bills lending, their reserves would be regularly sustained as assets matured, thus minimising cost. Economic theory has known for a long time that a real bills policy for banks is a fallacy on several scores, including purely monetary ones, but this is not of critical importance for our purposes.12 The power of Smiths analysis of banking compared to Steuarts comes from his analysis of bank lending in relation to reserves, given that banks are independent prot-making capitalist concerns. Unlike Steuart, Smith (1776, Bk. II, pp. 323324, 341342) is concerned with ascertaining which part of the capital of a functioning capitalist could be provided by a bank with propriety. Thus, a bank should not nance the purchase of xed capital, since that is long-term investment. Even more strongly, a bank should not nance the regular commercial payments of an enterprise, including wages. The appropriate source of nance for both these expenditures is, presumably, the entrepreneurs own capital. Instead, the proper activity of banks is to supply functioning capitalists with the reserves of ready money that are necessary in the normal course of business. As long as commercial banks are prepared to lend against good bills or through overdrafts, capitalists need not hold a dead stock of money reserves, but can invest it in production:
This part of his capital which a dealer is obliged to keep by him unemployed, and in ready money for answering occasional demands, is so much dead stock, which so long as it remains in this situation, produces nothing either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock; (1776, Bk. II, pp. 340341).

Thus, in contrast to Steuart, Smith thinks that it is not incumbent on banks to spur capitalist accumulation by augmenting either the xed or the variable capital of enterprises. Instead, banks should provide reserves to capitalists through short-term lending against real bills, thus also maintaining their own liquidity. The size and uses of banks own capital, especially in terms of providing solvency and sustaining their liabilities, were not of vital importance to Smiths analysis. The same spirit is evident in Smiths analysis of the contribution of banking to the national economy as a whole. After differentiating between gross and net money revenue, Smith (1776, Bk. II, pp. 303305) focuses on the replenishment

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of xed and circulating capital as deduction from gross revenue. Smith thinks that the replenishment of the aggregate circulating capital of society does not represent a deduction from gross revenue on the mistaken grounds that the goods that replenish it will eventually be consumed; hence these goods are erroneously assumed to belong to net revenue (1776, Bk. II, p. 305).13 But on the replenishment of the aggregate quantity of money he is on more solid grounds. Maintaining the great wheel of circulation represents a net deduction from gross revenue, as long as money has to be extracted from the bowels of the earth through expenditure of labour. Banks can save society this expense by providing a reliable paper money, and they can render further benets by allowing the metal to be exported for goods. But bank credit certainly does not augment societys capital, which increases only through saving and accumulation. The most that banks can do in this respect is to reduce the reserves kept by capitalists, thus allowing conversion of idle money into active capital. Steuart and Smith represent two opposing approaches to banks and their relationship with enterprises.14 Steuarts view has a mercantilist character and stresses the catalysing role of nance in capitalist development. Accordingly, banks should be created to provide fresh money that is instrumental to development. However, to do so successfully, bank assets should be long-term and backed by solid collateral (preferably land) while, on the liability side, banks should possess substantial capital that would guarantee their solvency and generate trust in bank-created money. Reserves are necessary but not of exceptional importance to these banks. Smiths view, in contrast, is classical and shuns the belief in the efcacy of credit as catalyst of development. Banks are independent commercial concerns, and the state has no business setting up banks to spur capitalist development. Banks do not provide fresh capital to enterprises and, therefore, cannot signicantly affect a countrys development path. Banks contribution to capitalist development derives from ridding capitalists of some of the cost of holding money reserves (and from reducing the costs of metallic circulation). For Smith, bank assets should be short-term and aimed at nancing real transactions among capitalists. To sustain their assets, banks should possess liquidity, i.e. costly reserves. Own capital and solvency are important but not critical issues for such banks.

4. HILFERDING IN THE LIGHT OF STEUART AND SMITH

Hilferdings analysis of banks and capitalist nance can now be placed in a broader context. For Hilferding, banks in the early stages of industrial capitalism are

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inherently commercial and Smith-like. Specically, banks lend short-term, mostly through the purchase of trade bills, while securing liquidity and adequacy of reserves. Banks also commit their own capital to guaranteeing reserve adequacy. This is a classical (and Anglo-American) view of banking. However, it should also be noted that, for Hilferding, banks provide circulation credit in conjunction with trade credit supplied by enterprises to each other, that is, banks nance enterprise working capital and other expenses recurring over short intervals. This is in contrast to Smith, for whom commercial banks should only provide the reserve funds that industrial capitalists would have maintained in the normal course of their operations. In Hilferdings analysis, nally, the stock market is a venue for mobilisation of idle money to nance large and long-lasting projects; hence equity nance complements commercial banking. Thus, early capitalist development is characterised by market-based nance, comprising commercial banks and a stock-market. According to Hilferding, the nancial system becomes spontaneously bankbased as capitalist development proceeds. He takes it for granted that development brings expansion to the scale of capitalist production, which leads enterprises to seek external funds to nance their xed capital requirements. Consequently, banks begin to supply investment credit, thus undertaking long-term lending. By the same token, commercial banks gradually assume aspects of development banking and become Steuart-like. Specically, since banks lend long-term, they are also heavily concerned about their own solvency, and the size of their own capital becomes vital to securing solvency and reassuring deposit holders and others. In addition, banks that lend long-term engage in close commitment relations with enterprises, and begin directly to inuence their investment and other decisions. Put differently, bank lending takes some of the character of equity, and banks start behaving similarly to industrial capitalists. Commitment is particularly pronounced among joint-stock companies and large banks, partly because large banks acquire investment banking functions by managing share otations and drawing promoters prot. Cross-shareholding and exchange of management personnel further strengthen commitment between industrial and banking capital. Hilferding calls the emerging amalgam nance capital, and sees banks as its dominant component. Hilferding effectively suggests that, in the course of capitalist development, banks become less Smith-like and more Steuart-like. Moreover, it is clear that he considers the bank-based transformation of the nancial system to be the result of spontaneous forces within capitalist accumulation. His argument is based on the investment requirements of enterprises, leading to changes in bank lending, which have implications for bank balance sheets and relations with enterprises. Banks become less Smith-like and more Steuart-like ultimately because the scale of

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capitalist production grows, and banks are called to meet enterprise requirements for external nance. The emphasis on factors endogenous to capitalist accumulation is a strength of Hilferdings analysis, and quite unusual in the literature on nancial systems. By treating capitalist production as the independent variable, moreover, Hilferdings analysis remains very much within the Marxist tradition. But his conclusion regarding the direction of development of the nancial system and the accompanying transformation of banks has not fared well in the course of time. Bank-based systems have not become the norm among developed capitalist countries; on the contrary, market-based systems have persisted, and even thrived in the last quarter of the twentieth century. Moreover, there is evidence that the bulk of investment in present-day advanced capitalist economies is nanced by retained prots of corporations, rather than external funds (Corbett & Jenkinson, 1997). Hilferdings nance capital does not have evident relevance to contemporary capitalism, despite the existence of commitment relations between industrial and banking enterprises in several countries. It is probable that Hilferding generalised inordinately from the historical experience of Austria and Germany at the turn of the twentieth century. This problematic aspect of Hilferdings assessment of the evolution of the nancial system is connected to his relative neglect of the role of the state in consciously shaping nance. In this respect, Hilferding remains classical in spirit, and quite different from Steuart, who stresses the importance of the statesman at the outset. Essentially, Hilferding claims that banks and enterprises become committed to each other because of forces emanating spontaneously from the process of capitalist accumulation. In contrast to Steuart, for whom the statesman must purposely establish banks able to lend for purposes of long-term investment, Hilferding argues that commercial banks begin to lend for xed capital purposes independently of any conscious intervention by the state, thus also acquiring binding relations with enterprises. This is perceived as a general tendency applying across all capitalist economies and being an inevitable outcome of capitalist accumulation. Yet, it is more likely that bank-based nancial systems and long-term bank lending for xed investment are products of state intervention aimed at inducing capitalist development. In late developing countries, such as Austria and Germany, engaged in a race to catch up with those already developed, policy-makers (statesmen) typically aim at securing large-scale xed investment in key sectors of the economy. For this purpose, banks appear to be a more appropriate policy vehicle than stock markets. Due to their discounting operations, for instance, banks have immediate access to idle money generated amongst enterprises. Discounting operations also provide banks with information regarding prospects

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and performance of enterprises and industrial sectors. Thus, it is more likely that bank-based nance is the outcome of state-imposed institutional transformation of the nancial system, rather than of spontaneous evolution of banks and enterprises. In the same vein, if bank behaviour is originally Smith-like, as in Hilferdings analysis, state intervention is necessary in order to allow banks to become more Steuart-like. Institutional changes much be brought in by the state to allow banks to operate in ways appropriate for bank-based systems. To give an obvious example, if bank assets are to become longer-term in order to nance xed investment by enterprises, there must also be state intervention to lengthen the maturity of bank liabilities. Such intervention could take the form, for instance, of instituting preferential terms for banks to issue long-term bonds and equity, as typically happens in the nancial systems of developing countries. Similarly, there could be implicit or explicit state guarantees of bank solvency, as is again typical of developing countries. In this respect, Hilferdings discussion of bank-based nance, though it diverges from Smiths treatment of banking, falls short of the earlier analysis of Steuart. Bank-based nance, and the emergence of extensive commitment relations among banks and industrial enterprises are less an inevitable outcome of capitalist development, and more the result of state-imposed institutional transformation of the nancial system aimed at fostering capitalist development.

NOTES
1. The relationship between banks and enterprises and the contrast between banks and stock markets have long attracted the attention of Marxist economics. The revival of post-war mainstream interest in nancial system design owes much to Gerschenrkron (1962), who was well versed in Marxist political economy. 2. See Lapavitsas (2000). 3. Hilferding does not offer a full discussion of this difcult issue. For an analysis that draws upon the mechanisms of mobilisation of loanable money capital as the total social capital goes through its cyclical motion see Itoh and Lapavitsas (1999, Chap. 6). 4. Horwitz (1994) has rightly identied analytical similarities between Hilferding and the Free Banking current. But it should be noted that, unlike the Free Banking tradition, Marxist political economy treats central banks as a necessary outgrowth of capitalist nance (Lapavitsas, 1997). Moreover, Horwitzs (1994, pp. 227228) claim that, for Hilferding, banks are pure nancial intermediaries is incorrect. Hilferdings banks initially provide circulation credit to industrial capitalists by issuing their own promises to pay. The function of nancial intermediation accrues to them subsequently. 5. This theoretical approach to banking is not necessarily an explanation of the historical emergence of banks, the latter being an ancient phenomenon related to the lending of money (Marx, 1894, Chap. 20). Rather, this approach focuses on the establishment of banking business within a capitalist economy. It has similarities with what Schumpeter (1954, pp. 729730) calls the Commercial-Bill Theory of Banking, which he partly

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associates with the Banking School. Schumpeter is too easily dismissive of this approach to banking, his views probably marred by his notorious lack of regard for Smith. 6. Finance capital has been deployed extensively in Marxist analysis of imperialism, by none more inuentially than Lenin (1916), who used it to account for economic and political phenomena of imperialism. 7. Interest in Steuart has mushroomed in recent years, for instance, Doujon (1994), Yang (1994), Brewer (1997) and Dome (2001). However, Steuarts views on money and banking have attracted comparatively little attention. This relative neglect is surprising for a reason that is not directly relevant to this paper, but still worth mentioning. Since the early 1980s, the Law of the Reux has been extensively re-examined, and the writings of Smith and the Banking School have been trawled in order to establish origins and nuances of the concept of Reux. Much of this literature belongs to the Free Banking current and several references can be found in Horwitz (1994), mentioned in a different context above. But, surprisingly, it is not generally appreciated that Steuart also discussed credit money as subject to Reux. His claim that superuous credit money regorges back to its issuer can be considered as the earliest formulation of the Law of the Reux (Itoh & Lapavitsas, 1999, Chap. 1). 8. It was to be expected that such institutional changes would contribute to dispossession of the landed aristocracy, that is, of the main social class that was short of money but also in possession of xed assets (land) likely to be sold or used as collateral for borrowing. Steuart, an old Jacobite, did not inch from the implied social transformation. 9. As Murphy (1997, pp. 6062, 113115) points out, Law probably considered the equity of banks as a new kind of money comparable to their banknotes. That indicates a profound misunderstanding of the role of own capital in banking. 10. Nevertheless, both belong to the broad anti-quantity-theory tradition in monetary theory. Mints (1945, Chap. III) notes the afnity between Steuart and Smith on the subject of banks and the quantity of money, but asserts that Smith downplayed the need of banks to hold reserves. 11. Smiths work on banking has been the object of consistent attention, for instance, Checkland (1975), Laidler (1981), Santiago-Valliente (1988) and Gherity (1994). Interest has typically focused on the monetary aspects of his analysis, particularly the signicance of real bills for determining the quantity of credit money in circulation. In this article, Smiths work is considered purely in terms of banking theory, i.e. as analysis of the banking rm. 12. The literature on real bills is very large and not directly relevant here. For a discussion of real bills and the Law of the Reux from a Marxist perspective see Lapavitsas (1994). 13. Marx (1969, pp. 97103) remarked on the confusion in Smiths discussion of gross and net revenue. There is no doubt, however, that Smith clearly distinguished between money revenue and money capital, while Steuart certainly confused them. 14. The contrast between the two approaches played an important role in the early development of U.S. banking, as is shown by Redlich (1951).

ACKNOWLEDGMENTS
Thanks are due to B. Fine, A. Saad-Filho, J. Toporowski, K. Miyazawa, R. Werner and S. Aybar for comments on the manuscript. All errors are the authors responsibility.

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REFERENCES
Brewer, A. (1997). An eighteenth century view of economic development: Hume and Steuart. European Journal of the History of Economic Thought, 4(1), 122. Cameron, R. (Ed.) (1967). Banking in the early stages of industrialisation: A study in comparative economic history. New York: Oxford University Press. Cameron, R., & Bovykin, V. I. (Eds) (1991). International banking. New York: Oxford University Press. Checkland, S. G. (1975). Adam Smith and the bankers. In: A. Skinner & T. Wilson (Eds), Essays on Adam Smith. Oxford: Clarendon. Corbett, J., & Jenkinson, T. (1997). How is investment nanced? A study of Germany, Japan, the U.K. and the U.S. Papers in Money, Macroeconomics and Finance, The Manchester School Supplement, LXV, 6993. Demirguc-Kunt, A., & Levine, R. (1999). Bank based and market based nancial systems: Cross country comparisons. World Bank Policy Research Working Paper No. 2143. Washington, DC. Demirguc-Kunt, A., & Maksimovic (1996). Stock market development and nancing choices of rms. The World Bank Economic Review, 10(2), 341370. Dome, T. (2001). Sir James Steuart and a general sales tax. History of Political Economy, 33(2), 345367. Doujon, R. (1994). Steuarts position on economic progress. European Journal of the History of Economic Thought, 1, 495518. Gerschenrkron, A. (1962). Economic backwardness in historical perspective. Cambridge, MA: Harvard University Press. Gherity, J. (1994). The evolution of Adam Smiths theory of banking. History of Political Economy, 26(3), 423441. Glen, J., & Pinto, B. (1994). Debt or equity? How rms in developing countries choose. IFC Discussion Paper 22. Washington, DC. Heckscher, E. ([1935] 1994). Mercantilism. London/New York: Routledge. Hilferding, R. ([1910] 1981). Finance capital. London: Routledge & Kegan Paul. Horwitz, S. (1994). Complementary non-quantity theory approaches to money: Hilferdings Finance Capital and free-banking theory. History of Political Economy, 26(2), 221238. Itoh, M., & Lapavitsas, C. (1999). Political economy of money and nance. London: Macmillan. Laidler, D. (1981). Adam Smith as a monetary economist. Canadian Journal of Economics, 14(2), 185200. Lapavitsas, C. (1994). The banking school and the monetary thought of Karl Marx. Cambridge Journal of Economics, 18(5), 447461. Lapavitsas, C. (1997). The political economy of central banks: Agents of stability or source of instability? International Papers in Political Economy, 4(3), 152, reprinted in Money, Finance and Capitalist Development, P. Arestis & M. Sawyer (Eds) (2001). London: Edward Elgar. Lapavitsas, C. (2000). On Marxs analysis of money hoarding in the turnover of capital. Review of Political Economy, 12(2), 219235. Law, J. ([1705] 1720). Money and trade considerd. London: W. Lewis. Lenin, V. ([1916] 1978). Imperialism, the highest stage of capitalism. Moscow: Progress Publishers. Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic development. American Economic Review, 88, 537588. Marx, K. ([1894] 1981). Capital, Part III. London: Penguin/NLR. Marx, K. (1969). Theories of surplus value, Part I. Moscow: Progress Publishers.

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Mayer, C. (1987). The assessment: Financial systems and corporate investment. Oxford Review of Economic Policy, 3(4), ixvi. Mints, L. (1945). A history of banking theory. Chicago: University of Chicago Press. Murphy, A. (1997). John Law. Oxford: Clarendon Press. Redlich, F. ([1951] 1968). The molding of American banking. New York/London: Johnson Reprint Corporation. Santiago-Valliente, W. (1988). Historical background of the classical monetary theory and the real bills banking tradition. History of Political Economy, 20(1), 4363. Schumpeter, J. A. (1954). History of economic analysis. London: Routledge. Singh, A. (1995). Corporate nancial patterns in industrializing countries: A comparative international studies. IFC Technical Paper 2. Washington, DC. Singh, A., & Hamid, J. (1992). Corporate nancial structures in developing countries. IFC Technical Paper 1. Washington, DC. Smith, A. ([1776] 1950). The wealth of nations (6th ed.). London: Methuen. Steuart, J. (1767). Principles of Political Economy in Collected Works of James Steuart (1995). London: Routledge/Thoemmes. Stiglitz, J. (1985). Credit markets and the control of capital. Journal of Money, Credit and Banking, 17(2), 133152. Stiglitz, J. (1994). The role of the state in nancial markets. Proceedings of the World Bank Annual Conference on Development Economics 1993 (pp. 1952). Wade, R., & Veneroso, F. (1998). The Asian crisis: The high debt model vs. the Wall-Street-TreasuryIMF complex. New Left Review, 228 (March/April). Yang, H. S. (1994). The political economy of trade and growth: An analytical interpretation of Sir James Steuarts inquiry. Aldershot, UK: Edward Elgar.

ECONOMIC CRISIS AND SOCIALIST REVOLUTION: HENRYK GROSSMANS LAW OF ACCUMULATION, ITS FIRST CRITICS AND HIS RESPONSES
Rick Kuhn
ABSTRACT
Henryk Grossman was the rst person to systematically explore Marxs explanation of capitalist crises in terms of the tendency for the rate of prot to fall and to place it in the context of the distinction between use and exchange value. His The Law of Accumulation and Breakdown of the Capitalist System remains an important reference point in the Marxist literature on economic crises. That literature has been plagued by distortions of Grossmans position which derive from early hostile reviews of his book. These accused Grossman of a mechanical approach to the end of capitalism and of neglecting factors which boost prot rates. Grossman, in fact, contributed a complementary economic element to the recovery of Marxism undertaken by Lenin (particularly in the area of Marxist politics) and Luk cs (in a philosophy). In both published and unpublished work, Grossman also dealt with and even anticipated criticisms of his methodology and treatment of countertendencies to the tendency for the rate of prot to fall. Far from being mechanical, his economic analysis can still assist the struggle for working class self-emancipation.

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 181221 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21008-2

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INTRODUCTION
In 1929, Henryk Grossman1 sought to provide an economic analysis of the conditions under which the struggle for socialism could be successful. His book, The Law of Accumulation and Breakdown of the Capitalist System, Being Also a Theory of Crises, contrasted what he regarded as fundamental aspects of Marxs theory with the ideas of other interpreters of Marxism. They included reformists, like Rudolph Hilferding and Otto Bauer, who held that capitalism could avoid economic crises and be peacefully transformed into socialism, as well as voluntarists, like Fritz Sternberg, for whom the lack of sufcient working class will and consciousness was the only serious obstacle to socialist revolution. Contradictions at the heart of the capitalist production process itself, Grossman insisted, give rise to economic crises. This he identied as the law of capitalist breakdown. In his book and an essay published before it appeared, Grossman anticipated his critics main objection, that he was guilty of a mechanical, purely economic theory of the demise of capitalism. He carefully situated his argument in the context of Lenins work on the politics of revolution and the perspectives which informed the foundation of the Communist International (Comintern) in 1919, contending that crises can be a crucial objective condition for workers revolution. The orthodoxy of the Second International in the period before the First World War, particularly as expounded by its leading theoretician, Karl Kautsky, had emphasized the importance of organization and ideas. But is was much less clear about the role of revolutionary working class action (as opposed to the consequences of inexorable historical forces or the deeds of social democratic parliamentarians, trade union ofcials and party leaders) in simultaneously transforming workers consciousness, overturning the capitalist state and establishing new relations of production. Most of the parties of the International paid lip-service to the principal of independent working class politics. But on the outbreak of the World War, a large majority of them supported the ruling classes of their own countries in a conict between rival imperialist blocks. Kautsky had come to regard wars under capitalism as avoidable. Even after the killing machines had started to grind the bodies of millions of workers and peasants, he still insisted that the interests of the modern imperialist bourgeoisie were incompatible with war (Haupt, 1972; Kautsky, 1909, 1915; Salvadori, 1979; Schorske, 1983). Eduard Bernsteins revisionist argument in 1899, that capitalism need not suffer from general and severe economic crises, was rejected by mainstream Marxists at the time (Bernstein, 1899; Kautsky, 1899). After the War, this idea was incorporated into the orthodoxy of social democracy from which most radicals had split to establish Communist parties.

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Lenin, especially in State and Revolution, reasserted the active role of the working class in Marxist politics. For millions of working class militants, the Bolshevik revolution demonstrated the proletariats capacity to make revolution. Gy rgy Luk cs, whose History and Class Consciousness Grossman regarded o a very highly (Grossmann, 1932a, p. 316), reinstated the working class at the core of Marxist philosophy, in his analysis of reication and of the working class as both the object and (potentially) the subject of history. Grossman made a parallel contribution to the recovery of Marxism, in the eld of economics, conditioned by the intense class struggles in Europe from 1916 to 1923 and his own experiences as a revolutionary leader in Galicia from the turn of the 20th century until 1908 (Kuhn, 2000, 2001). Drawing attention to the importance of the use value side of commodities and hence the labor process aspect of production, he was the rst Marxist to systematically explore the tendency for the organic composition of capital to rise and hence for the rate of prot to fall as a fundamental feature of Marxs explanation of economic crises in Capital. The current period is one of profound political and economic instability at a global level. Henryk Grossmans work can help us explain why the new economy of sustained economic growth, proclaimed during the 1990s (Greenspan, 1997; Shepard, 1997), came unstuck, the relationships between economic crisis, imperialism and war, and to identify the potential for radical social change opened up by economic crises. Paul Mattick, David Yaffe and Chris Harman recognised the importance of Grossmans contribution to Marxist economic theory (e.g. Harman, 1984, 1993; Mattick, 1934b, 1974; Yaffe, 1973). But the most widespread interpretations of his work still reproduce objections in the earliest reviews, which ignored his careful specication of the task he had set himself, as well as his preceding and subsequent publications (e.g. Hansen, 1985, pp. 65, 142; Howard & King, 1989, pp. 316336). In these, Grossman dealt with many of their arguments. He also addressed them, even more explicitly, in correspondence and unpublished manuscripts (Grossmann, 1969; Scheele, 1999, pp. 6370). Instead of relying on a few passages selected from The Law of Accumulation, the following discussion seeks to understand Grossmans breakdown theory in the context of his work as a whole. The section below sketches Grossmans critique of Fritz Sternbergs Imperialism, which foreshadowed the case made in his own book. It is followed by a brief account of key elements of the theory of economic crisis and breakdown in The Law of Accumulation. They include important steps in Grossmans argument that have consistently been ignored by those who reject his approach. The fourth section deals with the generally hostile reception the book received during the years immediately after its publication. The preoccupations of his rst critics and Grossmans responses to them are discussed in the following two sections. One is devoted to his unpublished replies. The

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next examines responses in his publications. Some implications of this attempt to recover Grossmans analysis are considered in the conclusion.

PREPARING THE WAY

After arriving at the Institute of Social Research in Frankfurt, on 4 November 19252 until late 1927, Grossman spent most of his time writing a large manuscript on Marxist economics, The Laws of Development of Pure and Empirical Capitalism. He had begun the study in 1922 or 1923. But it encompassed the preparations he had made for a 1919 lecture on economic crises and even, perhaps, research on economic theory before the War.3 The rst published fruit of this major project was a substantial article criticising Sternbergs Imperialism. This book, published in 1926, was an account of contemporary capitalism, which the Institute for Social Research had supported nancially (Gangl, 1987, p. 91). Sternberg made a living as a publicist in the extensive socialist space between the Sozialdemokratische Partei Deutschlands (Social Democratic Party of Germany, SPD) and Kommunistische Partei Deutschlands (German Communist Party, KPD). Like Rosa Luxemburg, he thought that Marxs analysis was awed by the assumption that non-capitalist consumers did not exist. To overcome this problem, Sternberg offered his own theories of the accumulation of capital, economic crises, the reserve army of labor, wages, the labor movement and revolution (Grebing, 1977, pp. 121136; Sternberg, 1926, pp. 710). Imperialism had attracted considerable attention on the left and its subject matter intersected with the issues in the major study Grossman was working on. The most important areas of overlap were economic crises (the longest chapter in Sternbergs book) and Marxs method. So Grossman took a break from the tasks directly associated with his own book to clear the way for it, by taking Imperialism apart in a long article. Grossman maintained that there was no connection between the economic analysis in Imperialism and its political stance. Sternberg did not see beyond Bernsteins horizon, accepting his critique of Marxs economics. Bernstein had argued that the severity of economic crises had diminished for generations; that the distribution of property had been decentralized rather than centralized; that class contradictions had declined, as workers conditions improved; and particularly that the size of the capitalist and middle classes had increased absolutely and in proportion to the whole population. Sternberg agreed. But, as Sternberg justied socialism in essentially ethical terms, rather than as a consequence of economic development, he could still hold to a revolutionary standpoint in politics:

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More than anything else, his book supports a particular political tendency. It places the necessity of revolution to the fore. Not, however, revolution understood as a necessary result of an historical process dominated by class struggle, but revolution understood as a categorical ethical postulate, the sole means to save humanity from falling into ahistoricity (Grossmann, 1928, p. 142).

Sternberg had no conception of Marxs method in Capital or his political outlook. Grossmans manuscript on The Laws of Development of Pure and Empirical Capitalism, his monograph on Sismondi and even his 1919 lecture on economic crisis had already explained Marxs method. Capital was far from being a study of pure capitalism, whose conclusions did not apply to capitalism as it really existed. Marx, Grossman explained, progressively lifted the simplifying assumptions he made early in this work, in order to grasp fundamental processes, as he introduced complicating factors, step by step, and the analysis came closer and closer to empirical capitalism (Grossmann, 1928, pp. 145, 149150, 183). Contrary to Sternbergs assertions, Marx, in his political writings, seriously considered the importance of the relationship between the proletariat and middle classes and the way that intermediate social groups might be won to the side of the revolution (Grossmann, 1928, p. 155). Working class consciousness, according to Sternberg, had to be created by a socialist party and intellectuals, notwithstanding economic circumstances and outside day to day politics. He saw himself as rounding out Luxemburgs work. This was a wicked misuse of the great ghters name, Grossman wrote, as she, like Marx, had argued that socialism was the product of capitalist development (Grossmann, 1928, pp. 158160). Behind this critique of Sternbergs position was irritation at a perversion of Marxism and Grossmans awareness, based on his own experience in building a socialist organization, that class consciousness and revolution can only grow out of the experience of struggle. For Sternbergs argument was not an academic matter. Both the German and Polish Communist Parties had engaged in voluntarist policies in the period following the First World War. The German March Action of 1921 was one of the most serious of these adventures. In criticising Sternbergs position, Grossman drew on the arguments Lenin had made about the nature of revolutionary situations in 1915. The Russian revolutionary had reiterated these in his 1920 polemic against ultra-left currents in the Communist International, Leftwing CommunismAn Infantile Disorder (Lenin, 1920b, pp. 8485, 94). This intervention and debates in the International briey had a salutary effect on the Communist movement. But, in the course of the factional conict in the Russian Party that characterized the degeneration of the Russian revolution, the Comintern line lurched leftwards again in 19241925. Communist Parties in several countries, including Poland and Germany engaged in ultra-left rhetoric and activity. The results were declines in their memberships and credibility. The Comintern leadership in 1928 declared

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the opening of a new Third Period since the War and imposed a similar policy, even less in touch with reality, on the movement. Against Sternbergs conception of revolution, Grossman quoted a specialist in revolutionary matters and at the same time a Marxist,
Marxists, said Lenin in 1915, know perfectly well that a revolution cannot be made, that revolutions develop from crises and turns in history, which have matured objectively (independently of the will of parties and classes) . . . Marxism appraises interests on the basis of the class antagonisms and the class struggle which nd expression in millions of facts of daily life . . . To the Marxist it is indisputable that a revolution is impossible without a revolutionary situation . . . For a revolution to break out, it is usually insufcient for the lower classes not to want [to live in the old way]; it is also necessary that the upper classes should be unable [to live in the old way], that is, that it becomes objectively impossible for the ruling classes to maintain their domination in an unchanged form. Secondly, that the suffering and want of the oppressed classes have grown more acute than usual. Without these objective changes, which are independent of the will, not only of individual groups and parties, but even of individual classes, a revolution, as a general rule, is impossible. The totality of these objective changes is called a revolutionary situation. Only then is a further subjective condition of signicance. This is not simply revolutionary consciousness (that cannot be created, moreover, simply by hammering the nal goal into peoples heads, in the absence of a revolutionary situation). It is, on the contrary, something quite different, the capacity of the revolutionary class for mass revolutionary action, which presupposes an organization of the unied will of the masses and long experience in everyday class struggles (Grossmann, 1928, pp. 161162).4

Like Luk cs, in his 1924 essay on the leader of the Russian revolution, Grossman a endorsed Lenins account of the circumstances under which a socialist revolution can take place (Luk cs, 1924, pp. 3134). Grossman counterposed Lenins a position to both Sternbergs voluntarist argument that revolution was an act of the will and his mistaken view that Marx believed revolution would be the automatic consequence of entirely economic forces (Grossmann, 1928, p. 156). In fact, Marxs conception of the revolutionary process was a dialectical one, which Lenin, Luk cs and Grossman recovered and developed in complementary a ways. Capitalism created the working class, forced it to defend its interests, and generated the circumstances under which it struggled against the capitalist class. In the course of its struggle, the proletariat could become aware that the destruction of capitalism was a necessary prelude to the full realization of its interests. A revolutionary party was necessary to sustain and generalize working class consciousness, gained through class struggle, and, under the right conditions, to coordinate revolution. Luk cs used Hegelian language to express their common a position: the working class was both the object and the subject of history. Having dealt with Sternbergs politics, Grossman turned to the more strictly economic analysis in Imperialism, which suffered from two layers of misunderstanding. Sternberg grasped neither the content of Marxs arguments nor real economic processes.

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According to Sternberg, the existence of surplus population (a reserve army of unemployed workers) is a precondition for the production of surplus value and imperialism facilitates improved conditions for workers. Marx, however, had identied the fact that workers do not own means of production and so have to work for the capitalist class as the basic condition for the production of surplus value. He had also pointed out that, in the longer term, the absolute level of wages tends to rise, while they decline as a proportion of total output (Grossmann, 1928, pp. 164168, 180). Sternbergs explanation of the determination of wages under capitalism was a confused amalgam of Marxist and bourgeois economic theories, especially Franz Oppenheimers.5 It did not allow for increases in the productivity of labor and hence increased exploitation alongside increases in real wages. Marx had dealt extensively with the factors which inuenced the level of wages. So, to Sternbergs account, Grossman counterposed a basic lesson in Marxist economics (Grossmann, 1928, pp. 169179). The lesson extended to the questions of imperialism and foreign trade. Sternberg (following Luxemburg) regarded non-capitalist markets as essential for the realization of surplus value. Without them, he maintained, some commodities would remain unsold, as a purely capitalist economic system cannot provide a market for the whole of its own output. Marx had, however, introduced foreign trade into his analysis after showing how realization is not a problem for a closed capitalist system. The fundamental cause of economic crises, Grossman argued, is that capital accumulation itself undermines the valorization of capital. Foreign trade is only one of a series of factors which can, for a time, blunt this contradiction (Grossmann, 1928, p. 185). Grossmans explanation of the difference between Luxemburgs and Marxs accounts of imperialism provided an overview of the central theme of the book he was working on.
Only the methodological connection between the tendency [for capitalism] to collapse and factors deriving from the world market which weaken it indicates what an important role, though a different one from that assumed by Rosa Luxemburg, Marx saw foreign trade playing. A role he described to the last detail. It only testies to the unbelievably low level of research on Marx that this central issue in the Marxist system has remained unnoticed until now (Grossmann, 1928, pp. 185186).

THE LAW OF ACCUMULATION AND COLLAPSE OF THE CAPITALIST SYSTEM

The Law of Accumulation appeared in 1929 (Grossmann, 1929a, b).6 In it, Grossman still maintained, as he had a decade before, that a theory of economic

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crisis and collapse was not just some added optional extra in the socialist critique of capitalism. Bernstein had correctly regarded the argument that capitalism was inherently prone to crisis and collapse as central to the logic of Marxism: If the triumph of socialism were truly an immanent economic necessity, then it would have to be grounded in a proof of the inevitable economic breakdown of the present order of society. Denial that such a proof was possible constituted an important part of Bernsteins case against classical Marxism (Grossmann, 1929b, p. 39). If capitalism can go on forever, increasing the production of wealth all the time, then economic problems, at least, could either be overcome through working class action to reallocate wealth or ameliorated into unpleasant but bearable irritants. In these circumstances, Grossman pointed out, the working class could just as easily reconcile itself with capitalism as voluntaristically attempt to realize socialism (Grossmann, 1929b, pp. 5657). Although his preface made it clear that he intended to focus on economic questions, Grossman did not regard politics as unimportant or as an automatic reex of economics. On the contrary, he guarded against such an interpretation of his work.
Because I deliberately conne myself to describing only the economic presuppositions of the breakdown of capitalism in this study, let me dispel any suspicion of pure economism from the start. It is unnecessary to waste paper over the connection between economics and politics; that there is a connection is obvious. However, while Marxists have written extensively on the political revolution, they have neglected to deal theoretically with the economic aspect of the question and have failed to appreciate the true content of Marxs theory of breakdown. My sole concern is to ll this gap in the Marxist tradition (Grossmann, 1929b, p. 33).

Grossmans political activities since the early 1920s make it clear that, for him, Lenin was the preeminent gure amongst Marxists who have written extensively on the political revolution. Grossman had embraced Lenins renovation of Marxs politics and Luk css recovery of Marxist philosophy. He argued that Marxist a theory was now in greatest need of repair in the area of economics. As in his rst publication on the proletariat and the Jewish question and his major study of Austrian trade policy, the deciencies of previous understandings of the issues required a somewhat one-sided attention to specic topics and arguments, the procedure Lenin called bending the stick (Grossman, 1905, p. 42; Grossmann, 1914, pp. ixx; Cliff, 1975, pp. 235236). In this sense, Grossmans book, by emphasising the importance of economic circumstances for a successful revolution, was a critique of left-wing putschism (Grossmann, 1932a, p. 336). Yet the fundamental argument of The Law of Accumulation was also directed against social democratic theorists, neo-harmonists such as Karl Kautsky, Rudolf Hilferding and Otto Bauer, who believed that state action could eliminate economic crises, which were the consequence of disproportion in investments in different industries. In their pre-War economic studies, they had refuted

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Bernstein by asserting there was no theory of collapse in Marxs account of capitalism (Grossmann, 1929b, pp. 4041, 51). The political implications of Bauers rejection of Luxemburgs argument that imperialism, war and crises were necessary features of capitalism complemented his earlier theoretical capitulation to the German-Austrian ruling class over the national question (Bauer, 1907). During the 1920s, Hilferding and Bauer were leaders of the largest parties of the German speaking working class. They provided justications for reformist economic policies. Hilferding was an SPD member of the German parliament from 1924 until 1933 and German Finance Minister in 1923 and 19281929. Bauer was the most important gure in Austrian Social Democracy after the War. Despite their formal adherence to Marxist orthodoxies, therefore, they drew the same practical conclusions as Bernstein and the top ofcials and ideologists of labour and social democratic parties into the 21st century. Luxemburg had identied the centrality of a theory of economic breakdown to Marxism and the implication of Bernsteins position in both her critique of reformism, Social Reform and Revolution and her major economic work, The Accumulation of Capital (Luxemburg, 18981899, pp. 2627, 1913, p. 325). Grossmans book was designed, in the same spirit, to offer a coherent Marxist account of capitalisms vulnerability to crisis and collapse as a basis for revolutionary politics. Why then did he engage in extensive polemics against Luxemburgs economic analysis? The reason is given early in The Law of Accumulation:
It was a great historical contribution of Rosa Luxemburg that she, in a conscious opposition to the distortions of the neo-harmonists adhered to the basic lesson of Capital and sought to reinforce it with the proof that the continued development of capitalism encounters absolute limits. Frankly Luxemburgs efforts failed . . . . . . Her own deduction of the necessary downfall of capitalism is not rooted in the immanent laws of the accumulation process, but in the transcendental fact of an absence of non-capitalist markets. Luxemburg shifts the crucial problem of capitalism from the sphere of production to that of circulation. Hence the form in which she conducts her proof of the absolute economic limits to capitalism comes close to the idea that the end of capitalism is a distant prospect because the capitalization of the non-capitalist countries is the task of centuries (Grossmann, 1929b, pp. 4142, 125126).

For all the aws in her economic analysis, Grossman regarded her grasp of the signicance of capitalist collapse as correct. He sought to expose her mistaken arguments, the most inuential and systematic account of capitalist breakdown to date, in order to replace them with a more solid foundation for her conclusions. In 1919, Grossman had identied the difculty of maintaining simultaneously proportional output of use and exchange values as a source of economic crisis, even in a very abstract model of simple reproduction, where the scale of investment does not expand. He still adhered to this position. But The Law of Accumulation spelt

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out a new economic argument for Luxemburgs political conclusions, within the framework of his thoroughly Leninist conception of working class revolution. The book developed and was structured by the understanding of Marxs method which Grossman had outlined in earlier publications (Grossman, 1922, 1924, pp. 910, 13, 1517; Grossmann, 1929b, pp. 2933, 6367, 8386, 130). After surveying previous Marxist discussions of the question of capitalist collapse, the book moved from an abstract to progressively more concrete levels of analysis. The second chapter examined the law of collapse when a number of simplifying assumptions were made. The third dealt with counter-tendencies to the law, as these simplifying assumptions were lifted. The conclusion7 took this further by considering the relationship between the law, the class struggle and the concentration of capital.

The Logic of Capital Accumulation In his 1919 lecture and the study of Sismondis economic theory, Grossman had maintained that the contradiction between use value and exchange value is vital to Marxs theory of crisis, a point neglected by earlier Marxists (Grossman, 1922, 1924, p. 59).8 A presentation of capitalist production as the contradictory unity of a labor process and a valorization process also lay at the heart of the different, but complementary argument that was the core of The Law of Accumulation (Grossmann, 1929b, pp. 61, 144147). Commodities, as use values, satisfy human needs. The process of capitalist development involves the potentially unrestricted growth of the production of use values, given the capacity of human needs to expand and change. Production, however, is not undertaken to satisfy human needs, but to produce prots, that is additional exchange value for capitalists.
From a purely technological aspect, as a labor process for the production of use values, nothing could impede the expansion of the forces of production. This expansion encounters a barrier in the shape of the valorization process, the fact that the elements of production gure as capital which must be valorized. If prot disappears the labor process is interrupted (Grossmann, 1929b, pp. 119, 123124).

Grossman demonstrated how this happens by using a reproduction scheme based on one elaborated by Bauer (1913), who in turn drew on Marxs model in the second volume of Capital. This model involves assumptions about the combination of constant capital and variable capital and generates a specic pattern of growth. As a rst stage in the analysis of the tendency to capitalist collapse, Grossman used the model because it abstracted from less fundamental aspects of the system such as momentary uctuations in prices, deviations of prices from values, unevenness in

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the development of productivity. These considerations were reintroduced at a later stage, as in Marxs analysis, once the basic features of capitalism had been exposed. The choice of Bauers model was, in part, a political one, designed to discredit Bauers conclusions on the basis of his own assumptions. Bauers model realistically assumed a higher rate of accumulation of constant than variable capital. Capitalists will try to reduce the value of the commodities they produced so that they can undercut their rivals. Increasing the productivity of their workers by introducing new and more expensive machinery and technology is an effective way of doing this. As total output grows, constant capital will tend to expand more rapidly than variable capital. So there will be a rise in the relative weight of constant capital in capitalists total outlays, known as the organic composition of capital. It is the variable capital alone, however, that produces new value. As prots are measured against total outlays, a decline in the weight of value-creating variable capital will mean a fall in the rate of prot, if the rate of surplus value (the ratio of new value to the value of the labor power which created it) is held constant. To the extent that capitalism increases the productivity of human labor and accelerates the production of use values, it is therefore also characterized by a tendency for the rate of prot to fall. For Grossman, this tendency was the key to capitalist breakdown. The rate of prot declined in Bauers model. But he and his fellow neoharmonists thought that the rate of prot could tend downwards, indenitely getting closer and closer to zero without ever disappearing entirely. Grossman demonstrated why this is not the case and his explanation remains important. Bauer had let his model run for seven years and argued that it demonstrated that capitalism could go on forever, without crises so long as the output of exchange values from different industries (simplied in the model to two departments of production, producing means of production and means of consumption) was kept in the correct ratios. Grossman simplied the model even further, eliminating distinct departments of production, and let the model go on for 36 years. He found that it ran into difculties after year 34 and collapsed entirely in year 36 (Grossmann, 1929b, pp. 7477, 168). Beyond a certain point in the accumulation process, although the mass of prot continues to rise, it is insufcient to sustain production. In the Bauer/Grossman model, the incentive for capitalist investment already begins to decline after 20 years when the absolute amount of surplus value available for the private consumption of the capitalists has to fall, if the rate of accumulation of constant and variable capital is to be maintained. At this stage, capitalists will start seeking other outlets for protable investment, outside production, notably in speculative activity and the export of loan capital (Grossmann, 1929b, pp. 189, 191192). In year 35, no surplus value is available for capitalists private consumption

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and surplus value is insufcient to cover investment in additional constant and variable capital, as specied in the assumptions of the model.
So either working class wages have to be reduced or previous assumptions [of the model] must be broken. In particular the assumption that, with a 5% annual increase in population, constant capital must accumulate at 10% a year if technological progress is to match population growth has to be lifted . . . The tempo of accumulation must decline from now on and indeed slow down continuously and progressively. Accumulation cannot keep up with population growth. Fewer and fewer machines etc than are really required can be put in place, which means nothing else than that the development of the productive forces is constrained. As a consequence, from this year on an increasingly large reserve army [of unemployed workers] emerges. The slowing of the tempo of accumulation and the emergence of a reserve army occur, not as Bauer thinks, because wages have risen, but despite the fact that, in accord with our assumption, wages have been constant for the whole time! (Grossmann, 1929a, pp. 136137.)

Not only does the rate of prot in the Bauer/Grossman model fall but the rate of growth of the mass of prot (which remains constant at 5% per annum, reecting the rate of growth of variable capital) also falls behind the rate of growth of the total value of production, (which asymptotically approaches 10% per annum). So a point is eventually reached when the increase in the mass of prot is not large enough to cover the projected increase in investment, which is growing at a higher rate. The rate of prot cannot, therefore, fall indenitely. Whatever the rate of accumulation assumed in the model, the rate of prot eventually declines to a level at which the mass of surplus value is not great enough to sustain that rate of accumulation (Grossmann, 1929b, p. 103, 1932a, pp. 331332). It was this mechanism, which he saw as intrinsic to the process of capital accumulation, that Grossman regarded as the decisively important factor in Marxs theory of economic crisis and breakdown (Grossmann, 1929b, p. 183). What is more,
The limits to accumulation are specically capitalist limits and not limits in general. Social needs remain massively unsatised. Yet from the standpoint of capital there is superuous capital because it cannot be valorized (Grossmann, 1929b, pp. 189190).

Grossman developed a formula for calculating when this point is reached, in order to highlight the factors which slow down or accelerate the collapse. The crisis is accelerated by a higher organic composition of capital and a faster rate of accumulation of constant capital. The effect of a rise in the rate of accumulation of variable capital is ambiguous, while a higher rate of surplus value slows down the tendency for capitalism to break down (Grossmann, 1929b, pp. 96101).9 The onset of a crisis, as a consequence of capitalisms tendency to break down, does not mean, Grossman insisted, that capitalism is doomed.
Obviously, as Lenin correctly remarks, there are no absolutely hopeless situations. In the description I have proposed the breakdown does not necessarily have to work itself out directly. Its absolute realization may be interrupted by counteracting tendencies. In that case the absolute breakdown would be converted into a temporary crisis, after which the accumulation process

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picks up again on a new basis. In other words the valorization of the overaccumulated capital can be met through capital exports to countries at a lower stage of accumulation. Or a sharp devaluation of the constant capital during the crisis might improve the prospects for valorization. Or wage cuts could have the same effects in terms of warding off the catastrophe. But quite apart from the fact that all these situations violate the assumptions postulated in Bauers scheme, these solutions would have a purely temporary impact. Restored accumulation will again generate the very same phenomena of overaccumulation and imperfect valorization (Grossmann, 1929b, pp. 9596).

Before, in and after The Law of Accumulation, the purpose of Grossmans argument about capitalisms tendency to break down was to clarify the necessity for revolutionary practice and the context in which it could take place: the relationship between objective and subjective factors in the revolution. Lenins (and Grossmans) point about the mistake of identifying even deep crises as insoluble was that [t]he revolutionary parties must now prove in practice that they have sufcient understanding and organization, contact with the exploited masses, and determination and skill to utilize this crisis for a successful and victorious revolution (Lenin, 1920a, pp. 226227). By following Marx in progressively dropping the simplifying assumptions of his initial model, Grossman brought his analysis closer to concrete reality. With the introduction of offsetting mechanisms, capitalisms tendency to break down will take the form of recurring crises, rather than an uninterrupted collapse. In this way the breakdown tendency, as the fundamental tendency of capitalism, splits up into a series of apparently independent cycles which are only the form of its constant periodic assertion (Grossmann, 1929b, p. 85). A crisis is itself, what is more, from the standpoint of capitalist production, a healing process through which the valorization of capital is restored (Grossmann, 1929b, p. 99). As part of the process of approaching the real world step by step, after using a simple model to identify fundamental features of capitalism, now labelled Marxs Ann herungsverfahren a (Grossmann, 1929a, p. vi), Grossman also brought the credit system into the discussion. This enabled him to identify the characteristic lower interest rates in the early stages of a recovery and, subsequently, rising levels of interest, as the pace of accumulation increased (Grossmann, 1929b, pp. 112117).

Countertendencies The third chapter in The Law of Accumulation examined modifying countertendencies to the tendency for the rate of prot to fall.
The capitalists continual efforts to restore protability might take the form of reorganising the mechanism of capital internally (for instance, by cutting costs of production, or effecting economies in the use of energy, raw materials and labor power) or of recasting trade relations

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on the world market (international cartels, cheaper sources of raw material supply and so on). This involves groping attempts at a complete rationalization of all spheres of economic life (Grossmann, 1929b, p. 133).

The process of capital accumulation itself lowers the value of both variable and constant capital. A consequence of the introduction of new technology and superior means of production is that commodities can be produced with the expenditure of less labor. This applies to both means of production, equipment, machinery etc., and to the means of consumption that workers require to reproduce their labor power. If means of production are produced at a lower cost, the organic composition of capital will decline and the rate of prot will rise. Nevertheless,
the factors which bring about the tendency for the rate of prot to fall indeed win the upper hand in the long run, because in the end there really is an increase in the productive forces of all branches of industry. Temporarily, in specic branches of a particular industry, the tendency for the rate of prot to fall can, however, be checked and indeed because the elements of constant and variable capital are cheapened (Grossmann, 1929a, pp. 311, 329, 1929b, pp. 137138).

In the short term, random improvements in the productivity of labor may reduce the value of the constant capital more than that of the variable capital in a branch of industry, lowering the organic composition of capital and raising the rate of prot. But in the longer term, declines in the value of constant and variable capital balance out. What remains is the incentive, outlined by Marx at the end of the chapter on The law itself in the third volume of Capital, to increase the productivity of human labor (and the protability of the rst capitalists to innovate) by raising the organic composition of capital (Marx, 1894, p. 338). Cheapening the cost of variable capital increases the rate of surplus value, by reducing the proportion of the working day workers have to spend reproducing their labor power. The depression of wages below the value of labor power has a similar effect. Both raise the rate of surplus value, increasing the rate of prot and postponing the onset of crises. What is more, according to Marx [t]he tendency for the rate of prot to fall is tied up with a tendency for the rate of surplus value, that is the rate at which labor is exploited, to rise (Grossmann, 1929b, p. 316). Desirable as the defence of working class living standards is for its own sake, Grossman pointed out that
Once this connection is clear, we have a means of gauging the complete superciality of those theoreticians in the trade unions who argue for wage increases as a means of surmounting the crisis by expanding the internal market. As if the capitalist class is mainly interested in selling its commodities rather than the valorization of its capital (Grossmann, 1929b, p. 140).

Workers are, of course, entirely right to struggle for higher wages or against wage cuts. But, to the extent that they are successful, their actions will prevent

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employers from increasing the rate of prot or will reduce it. Wage increases intensify rather than alleviate crises deriving from the tendency for the rate of prot to fall. Grossman identied a series of other factors which affect the rate of prot. Decreasing the turnover time of capital means that it can give rise to more surplus value. This can also free a portion of money capital for productive investment. New commodities may emerge whose organic composition of capital is lower than the average, giving rise to a higher average rate of prot (Grossmann, 1929b, pp. 147149). The extension of capitalist production on the basis of existing technology simple accumulation will slow the tendency for the rate of prot to fall (Grossmann, 1929b, pp. 154155). As the ability of productive capitalists to dominate the whole of the circuit of capital grows, they are in a better position to reduce deductions from surplus value, in the form of the claims of landowners (groundrent), commercial capitalists (commercial prot) and banks (interest) (Grossmann, pp. 149152, 199200). Decreasing the income of intermediate social strata, bureaucrats and professionals, who are not involved in production has a similar effect (Grossmann, 1929b, pp. 153154). From the Marxist theory of accumulation it follows that war and the destruction of capital values bound up with it weaken the breakdown and necessarily provide a new impetus to the accumulation of capital. Militarism pulverizes values instead of saving them and slows down the rate of accumulation (Grossmann, 1929b, p. 158). For Grossman, as for Luxemburg, the growing tendency to break down and the strengthening of imperialism are merely two sides of the same empirical complex. He expanded the argument, previewed in his critique of Sternberg, that imperialism was a means of securing the ow of additional surplus value from outside a country (Grossmann, 1929a, pp. 296297, 300). Just as the diversication of domestic economies into new areas of production expands the scope for creating surplus value by making different use values, so foreign trade slows the breakdown tendency by increasing the variety of use values. Foreign trade also raises prot rates by allowing greater economies in the scale of production and distribution (Grossmann, 1929b, pp. 166168). The formation of a world rate of prot means that trade involves the transfer of surplus value from less to more developed countries. Commodities produced with a lower organic composition of capital sell below their value, while those produced with a higher organic composition sell above theirs. This was a rigorous formulation of a theory of unequal exchange, a term Grossman used, long before the idea became fashionable in the 1970s (Grossmann, 1929b, p. 172, 1929c, pp. 305338.10 At advanced stages of accumulation, when it becomes more and more difcult to valorize the enormously accumulated capital, such

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transfers [from underdeveloped to developed countries] become a matter of life and death for capitalism. This explains the virulence of imperialist expansion in the late stage of capital accumulation (Grossmann, 1929b, p. 172). Other aspects of imperialism, the pursuit of cheap raw materials and efforts to achieve monopoly control over them, at the expense of competitors, can help overcome falling prot rates in particular enterprises, industries or countries (Grossmann, 1929b, pp. 174179).11 The export of capital, in the form of loans, credits and speculative investments, is also driven by concern over the rate of prot (Grossmann, 1929a, pp. 498499, 1929b, pp. 180181, 193). At best, previous Marxist treatments of the subject, after Marx, had only provided empirical descriptions. Although he makes many acute observations, Grossman wrote that this was true of Lenins treatment of capital export (Grossmann, 1929a, pp. 519520).12 Rather than being directly related to the level of monopolization of industry, as Lenin suggested, capital export is a consequence of the lack of opportunities for adequate returns on investments of liquid funds, due to low prot rates, and the inability of productive investments at home to increase the mass of surplus value, that is, of capitalisms tendency to break down (Grossmann, 1929a, pp. 527529, 1929b, pp. 180, 187188). Gambling on the stock exchange has a similar logic (Grossmann, 1929b, p. 192). Today, Grossman argued, because of the advanced stage of accumulation and obstacles to protable new investment, capital export is an ongoing phenomenon (Grossmann, 1929b, p. 194).
It is also, therefore, clear that the struggle for spheres for investment is also the greatest danger to world peace. That this does not involve prediction of the future should be clear to anyone who studies the methods of Dollar Diplomacy with the appropriate attention (Grossmann, 1929a, p. 572, 1929b, p. 197).

Breakdown and Revolution The nal chapter of The Law of Accumulation was designed to demonstrate the relationship between capitalisms tendency to break down, the class struggle and revolution. It completed the transition from studying capitalisms breakdown tendency at a highly abstract, simplied level of analysis to a concrete account of its operation in the real world of contending classes. On the basis of the preceding discussions of the logic of capital accumulation, the argument returned to the books fundamental concern, announced in its preface, the economic aspect of political revolution: the implications of the breakdown tendency for the working classs seizure of political power.

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At the heart of the relationship between accumulation and class struggle is the question of workers conditions of life. In his version of Bauers model, Grossman demonstrated how real wages rise for a period but then run into an obstacle.
Here is the objective limit of trade union action. Beyond a certain point in accumulation, the surplus value available does not sufce to maintain accumulation at a given level of wages. Either wages must be depressed below their previous level or accumulation must come to a halt, the breakdown of the capitalist mechanism. The development thus presses on, unfolding and sharpening the inner contradictions between capital and labor, until a resolution can only be achieved through struggle (Grossmann, 1929a, pp. 590591, 595599).13

Under these circumstances, capitals success in the struggle means that wages are pushed down below the value of labor power and labor power cannot be fully renewed.
If the largest and most important force of production, human labor power, is thus excluded from the fruits of civilized progress, it is at the same time demonstrated that we are approaching ever closer to the situation which Marx and Engels already foresaw in the Communist Manifesto: the bourgeoisie is unt to rule because it is incompetent to assure an existence to its slaves within their slavery. This is also the reason why wage slaves must necessarily rise against the system of wage slavery (Grossmann, 1929a, p. 600).

Hilferding and other reformist economists argued that the theory of breakdown should be rejected because it led to the conclusion that the working class should fatalistically await the mechanical demise of capitalism. The relationship between capitalisms breakdown tendency and the class struggle is, according to Grossman, a more complicated and dialectical one. Class struggles over the level of exploitation shape the actual course of the systems tendency to break down. Which side, bosses or workers, wins in confrontations over wages and conditions has important implications for capitalisms ability to survive. If workers are successful in such conicts,
a decline in the rate of surplus value and consequently an accelerated breakdown of the capitalist system will occur . . . It is thus apparent that the idea of breakdown, necessary on objective grounds, denitely does not contradict the class struggle. Rather, the breakdown, despite its objectively given necessity, can be inuenced by the living forces of the struggling classes to a large extent and leaves a certain scope for active class intervention. Only on the basis of our description of capital accumulation is it possible to understand the fact that, at higher levels of accumulation, the struggle over the division of revenue is not merely a struggle over the living standards of the classes involved. It is also a struggle over the existence of the capitalist mechanism itself. Only now is it possible to understand why, at a high level of capital accumulation, every serious rise in wages encounters greater and greater difculties, why every major economic struggle necessarily becomes a question of the existence of capitalism, a question of political power. (Note the English miners struggle, 1926.)

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The struggle of the working class over everyday demands is thus bound up with its struggle over the nal goal. The nal goal for which the working class ghts is not an ideal brought into the workers movement from outside by speculative means, whose realization, independent of the struggles of the present, is reserved for the distant future. It is, on the contrary, as the law of capitalisms breakdown presented here shows, a result of immediate everyday struggles and its realization can be accelerated by these struggles (Grossmann, 1929a, pp. 601603).

Grossmans argument about the relationship between immediate struggles and revolution recalled that against the opportunism of the Polish Social Democratic Party in his Bundism in Galicia. There he not only rejected the reformist separation of the socialist goal from day to day struggles, but afrmed the role of the working class as both a product and a creator of history (Grossman, 1907, pp. 35, 41, 4546). Later, these were precisely two of Luk cs main arguments in History a and Class Consciousness. Giacomo Marramao was spot on in pointing out that [i]t is no accident that it is precisely in Luk cs History and Class Consciousness a that one nds the philosophical equivalent of Grossmanns great attempt at a critical-revolutionary re-appropriation of Marxian categories (Marramao, 1975, p. 64, also Luk cs, 1923, pp. 30, 40, 70; Marramao, 19751976, pp. 162163). a Just as Luk cs restored contradictory class interests and perspectives to the centre a of Marxist philosophy, Grossman restated the way they had been at the centre of Marxs economic theory. Both drew on Lenin; something that neither Marramao nor Grossmans Council Communist supporter, Paul Mattick, acknowledged. Luk cs and Grossman endorsed Lenins reappropriation of Marxs argument that a the capitalist state had to be smashed through conscious working class action, and the lessons of his work in building a political party that grew out of and sustained working class struggles.14 At the end of his book, Grossman sought to inuence the shape of working class consciousness which he (and Lenin and Luk cs) regarded as so crucial for a the success of the socialist revolution. He did so by demolishing the economic foundations for the most inuential reformist argument in the labor movement. As both an economic theorist and parliamentary leader, Hilferding was a particularly prominent contemporary advocate of a peaceful road to socialism. He maintained that there was a spontaneous evolution towards organized capitalism with the concentration of capital and establishment of trusts and cartels. Such a development increased the scope for planning under capitalism, as opposed to competition, and the possibility of avoiding economic crises due to the anarchy of production. It was therefore possible for the working class to take state power, by parliamentary means, and thus take control of the economy which was being more and more centrally organized and directed by the capitalists. From this perspective, the transition to socialism was already underway (Hilferding, 1982, pp. 214236).

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Hilferding, Grossman pointed out, had a restricted understanding of competition:

The more free competition is replaced by monopoly organization on the domestic market, the more competition sharpens on the world market. If a rivers ow is articially blocked with a dam on one side of the stream, it presses on with even less restraint on the side that is still open. Whether accumulation of capital within the capitalist mechanism occurs on the basis of competition amongst individual entrepreneurs or a series of cartelized, capitalist production associations struggling against each other is irrelevant for the emergence of the tendency to break down or crisis (Grossmann, 1929a, p. 606).

Capitalism is a global system that makes effective planning in individual countries impossible. If, as Grossman had argued in the previous six hundred pages, capitalisms crisis tendency does not arise directly from competition and the anarchy of production but rather from the overaccumulation of capital and its effects on the rate of prot, then organized capitalism will not resolve the underlying problem (Grossmann, 1929a, pp. 610619). Grossman ultimately attributed capitalisms breakdown tendency to the contradiction between capitalist production as both a labor process and a process driven by the creation of value through the exploitation of wage labor:
As a consequence of this fundamentally dualist structure, capitalist production is characterized by insoluble conicts. Irremediable systemic convulsions necessarily arise from this dual character, from the immanent contradiction between value and use value, between protability and productivity, between limited possibilities for valorization and the unlimited development of the productive forces. This necessarily leads to overaccumulation and insufcient valorization, therefore to breakdown, to a nal catastrophe for the entire system (Grossmann, 1929a, pp. 619620).15

The capitalist valorization process also conceals the labor process. Both the fetishism of commodities and capitalisms tendency to break down therefore have their roots in the double nature of production under capitalism. Freed of the valorization process, Grossman argued, production could be organized on a social basis and become a technical labor process, without crises and without the mystication that arises from the commodity form:
Where the social interrelations of individual production processes are directly determined and planned, there is no room for the law of value, whose most important task consists in the production of these social interrelations. Social equilibrium, calculated in advance, no longer has to be restored subsequently by means of the mystical veil of value (Grossmann, 1929a, pp. 621, 622).

Capitalisms crisis-prone logic and its mystication of that logic were core features of Grossmans and Luk css understanding of Marxism, as both a critique of the a established order and a practical theory of socialist revolution. History and Class

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Consciousness, however, focused on the ideological problems of capitalism and its downfall and did not discuss the central importance of this problem for economics itself (Luk cs, 1923, pp. 8384). The Law of Accumulation therefore a directly complemented Luk css analysis, by exploring the economic roots and a implications of commodity fetishism and their relationship to capitalist crises and revolution.

AN ECONOMIC THEORY WITHOUT A POLITICAL HOME: THE RECEPTION OF GROSSMANS ARGUMENTS

Grossmans book quickly attracted widespread attention in the German speaking world. Reviews appeared in at least ve mainstream journals and the liberal daily Frankfurter Zeitung. The ofcial theoretical journals of the German speaking social democratic parties reviewed The Law of Accumulation, the German Partys organ, Die Gesellschaft, twice. It was also discussed in the long established journal of the German Partys right and a publication of its left. Sternberg devoted a whole book to refuting Grossmans work and vindicating his own Imperialism. Not only did the KPDs most serious journal carry a long review, two substantial assessments appeared in the Cominterns German language theoretical organ. A little later, anti-Leninist Council Communists also debated the signicance of Grossmans work (bourgeois reviews: Brauer, 1929; Caspary, 1930; Miksch, 1930; Muhs, 1931; Oppenheimer, 19301931; Vogel, 1931; social democratic reviews: Braunthal, 1929; Gurland, 1930; Helene Bauer, 1929; Neisser, 1931; Otto, 1929; Schmidt, 1929; Sternberg, 1930; communist reviews: Benedikt, 1929; Kraus, 1930; Varga, 1930; council communist reviews and debates: Grundlagen, 1933; Korsch, 1933; Pannekoek, 1934).16 The book soon had an impact on audiences who could not read German. Paul Mattick embraced Grossmans approach in 1931 and expounded it in the United States, in German and then in English (Mattick, 1933, 1934a, b).17 An extremely favorable French review appeared in 1932. In it Mohan Tazerout mentioned that a French translation was underway in Brussels (Tazerout, 1932a, p. 308, also Tazerout, 1932b). The following year, Jean Duret also offered an account and a supercial critique of Grossmans theory (Duret, 1933). Japanese Marxists were the rst to benet from a translation of the book, organized by the Marxist scholar Professor Yoshitaro Hirano and published in 1932 (Grossman, 1932). A few exceptions aside, The Law of Accumulation received a hostile reception. The judgments of the rst reviews have been regurgitated ever since.

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A brief description of Grossmans relationships with and comments, in his book, on eight of the people who subsequently reviewed it helps to explain their hostility. Helene Landau had been a supporter of the Polish Social Democratic Party when the Jewish Social Democratic Party of Galicia, under Grossmans leadership, split from it (Kuhn, 2000, 2001). Later she married Otto Bauer. Grossman used Otto Bauers own reproduction model to refute his economic and political conclusions. The efforts of Professor Karl Muhs to refute Marx were given ungentle treatment in The Law of Accumulation, with its accessible and very aggressive polemical style (Grossmann, 1929b, pp. 9394).18 Sternbergs views came in for a further drubbing in the book, on top Grossmans essay razing his Imperialism. By comparison, Grossmans criticism of Alfred Braunthal, who worked for the social democratic Research Center for Economic Policy in Berlin, was mild. Emanuel Hugo Vogel was dismissed as a typical bourgeois economist who denied the periodicity of crises and the possibility of determining the length of their phases. Grossman briey paraded the early work of the grand old man of German social democratic economics, Conrad Schmidt, as an example of the impoverished state of the Marxist theory of wages. Much more space was devoted to attacking the arguments of his colleague at the University of Frankfurt, Oppenheimer, though Grossman acknowledged him as a sharp thinker (Grossmann, 1929a, pp. 48, 88, 127, 165, 1993, pp. 200201, 500, 583). On the other hand, there was no qualication of the identication, in The Law of Accumulation, of the Communist Jen Varga as an epigone of Marx, whose arguments were self-contradictory o (Grossmann, 1929a, p. 517).19 Broader political considerations, however, underpinned the way Grossmans book was received. It is easy to understand the hostile responses of bourgeois critics: Leonhard Miksch, in the daily organ of the Frankfurt bourgeoisie, Adolf Caspary and Emanuel Vogel, a reactionary like Karl Muhs (who was soon praising the National Socialist revolution (Muhs, 1934, p. 2)), social reformers like Franz Oppenheimer or, for that matter, the social democrats. The contention that capitalism entails periodic and profound periods of economic crisis which generate revolutionary situations was bound to antagonize supporters of the existing order and advocates, even Marxist ones, of reforming capitalism into socialism. Communist attitudes were conditioned by the emergence of an orthodoxy in economic theory, based on Stalins unchallengeable utterances and paralleling developments in many other areas, as his dictatorial, state capitalist regime in Russia consolidated its power. In 1930, Stalin anointed Varga as the high priest of this economic orthodoxy. Many of the criticisms made of Grossmans book were based on politically expedient (deliberate or unintended) misrepresentations of his position. One,

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from social democrats and Communists, that he had a mechanical conception of capitalist breakdown and the transition to socialism, became the standard case for dismissing his analysis. There was an important exception to the hostile Communist response to The Law of Accumulation. At the end of the 1920s, many Soviet economists were becoming alarmed at the tendency, particularly by Varga, to encourage revolutionary expectations by compromising Marxist theory, that is, by subordinating economic analysis to the immediate political priorities of the Russian state. Spektator (Miron Isaakovich Nakhimson), who explained crises in terms of disproportion between spheres of production, was one of those who attacked Vargas analysis. He also respected Grossmans analysis. In The Law of Accumulation, Grossman had endorsed some of Nakhimsons positions and criticised others (Grossmann, 1970, pp. 309, 437438, 576).20 Spektator and his intellectual allies in the Soviet Union were no doubt happy to read Grossmans book. Their comrade in Frankfurt not only rejected Luxemburgs approach, which underpinned Vargas (Day, 1981, pp. 148151, 187, 202211), and made sharp criticisms of Varga himself, but did so in a very prominent publication, from a standpoint which was not only Marxist but obviously sympathetic to Communism. In November 1930, Grossman was made a member of the International Agrarian Institute in Moscow, in recognition of the value of his book.21 Nakhimson also invited his colleague in Frankfurt to visit the Soviet Union.22 Grossman received the award just in time. After 1931 Soviet writers would disagree with one another within the bounds of discourse established by Stalin and Varga, but rarely would they overstep them (Day, 1981, p. 221).

UNPUBLISHED RESPONSES TO CRITICS

The Law of Accumulation anticipated the two main criticisms made of it. One was that the book expounded a theory of automatic breakdown. The other, that there were countervailing mechanisms to the tendency for the rate of prot to fall, Grossman not only recognized but made a cornerstone of the structure of his book and of his discussion of Marxs method. While his critics focused on the cheapening of constant and variable capital as mechanisms which offset falls in the average rate of prot, Grossman identied not only these but numerous other processes which served to sustain or increase protability. In articles published during the 1930s and 1940s Grossman tacitly replied to accusations he had a mechanical theory of capitalist collapse which neglected the class struggle (by Braunthal, the Council Communist Pannekoek and the

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Communists Kraus, Otto Bendikt and Varga) and that there were aws in Bauers original scheme (by the social democrats Arkadij Gurland, Sternberg and Hans Neisser). These responses are considered below. In correspondence during the early 1930s and unpublished notes Grossman also replied to criticisms of his book. He drafted rebuttals of Braunthal and Helene Bauer, in particular, refuting their assertions that his model was arbitrary, that it neglected the effects of the devaluation of constant and variable capital (as Braunthal, Helene Bauer, Vogel, Miksch, Muhs and Neisser had claimed) and that it predicted capitalism would break down solely because of low prot rates. Grossman addressed the relationship between his analysis of the class struggle and commented on the positions of Varga, Pannekoek and Korsch, in letters to Paul Mattick. He saw no point in replying to objections to his analysis (by Schmidt, Vogel, Oppenheimer, Caspary, Miksch and Muhs), based on the rejection of Marxs labor theory of value. In notes on the reviews by Helene Bauer and Alfred Braunthal, Grossman wrote that their
proposition that devaluation of capital neutralizes the tendency to break down, necessarily entails the proposition that there is no development of an ever higher organic composition of capital in contemporary capitalist society! The Marxist concept of a progressively higher organic composition of capital entails 2 different conclusions. First, the development of the productivity of labor means that the same mass of living labor (L) can set in motion an ever larger mass of means of production, that, as a consequence, the progress of the human economy is expressed in a progressively higher technical composition [of capital], in the relative increase of MP [means of production] in relation to L. Second, with this technical progress, which is just another expression for the increase in the productivity of labor, the products of human labor (means of production and consumption) are devalued, that is cheapened. So we have two counterposed movements. On the one hand an ever greater mass of MP, on the other hand a cheapening of this mass of products. Considered abstractly, one can imagine that the devaluation is greater than the increase in the mass of means of production. In that case, despite the ever larger mass of MP per worker, there would be a progressively declining value of this larger mass. Then it would be possible to speak not of a progressively higher organic composition, but merely a higher technical and a declining value composition [of capital]. A higher organic composition of capital implies that the means of production grow in both their mass and their value compared with living labor. Both will move in the same direction (even if not at the same rate). The question arises, how do things develop in reality? Is the pace of these two counterposed movements, growth in mass and decline in value, equal so that they paralyse each other? Or does the movement of one or the other predominate? Now the question of which of the two tendencies, growth in the mass or devaluation is stronger, that is, the question of whether devaluation occurs to the same extent as the growth in the mass of the MP and thus the growth in mass is paralysed by the decline in value, or rather whether devaluation is not as great and consequently that despite the devaluation of the MP,

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its value in relation to v grows, cannot be abstractly, deductively decided and has to be decided through empirical observation. Experience, indeed the experience of more than one hundred years, teaches that the value of constant capital, thus also of the total capital, in relation to variable capital grows more quickly than variable, that is, in the relationship c: v, c [constant capital] grows faster than v [variable capital].23

Grossman illustrated his case with U.S. statistics for the period 18491919, which he had already cited, in part, in The Law of Accumulation (Grossmann, 1929a, pp. 289, 453). He also drew on Otto Bauers observations about the relationship between the organic composition of capital and the ratio of the amount of new value created in a period (variable capital plus surplus value, V) to the total value of production (the sum of constant and variable capital and surplus value, P). From this empirical demonstration, Grossman moved on to reassert the connection between the tendency for the organic composition of capital to rise and capitalisms proneness to break down.
If, then, Helene Bauer wants to contradict the tendency to collapse and show that, through the devaluation of capital the mass of surplus value in relation to this total capital is not exhausted, does not decline, she has to demonstrate the incorrectness of the empirical fact of the progressively higher organic composition of capital or, to speak with Otto Bauer, she has to demonstrate that the law of the decline of V/P is incorrect. It is an impermissible contradictionthoughtlessness[]to talk about the fact of the progressively higher organic composition of capital and at the same time to assert that devaluations neutralize the tendency to break down, i.e. to deny the fact of the higher organic composition of capital . . . But if the tendency to a higher organic composition of capital, that is to a relative decline in living labor, exists then the tendency to break down results from the progress of capital accumulation and at a certain level a continuously larger part of the newly created value product will be accumulated as additional capital.24

The portion of surplus value that has to be invested to sustain the accumulation process
grows relative to the total mass of living labor and, with a correspondingly large growth of constant capital, entirely swallows the mass of value created by living labor, surplus value and the wage fund.25

Beyond this point, accumulation cannot continue. Having used Otto against Helene Bauer, Grossman restated the importance of taking the use value side of the process of accumulation into account. When commodities are treated as use values as well as exchange values, Ottos utopia of proportional accumulation falls apart.
In addition, when one does not start with the individual commodity but considers the total mass of commodities, devaluation has indifferent consequences. The 100,000 workers in the scheme indeed produce a tremendously greater mass of use values with the same amount of labor, as the total outlay on labor has not changed. The total mass of value is unchanged even

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if the individual commodity is cheaper. There are now more things that the value (v + s) represents, but the amount of new value v + s produced by the same number of workers has not changed. And the same is the case with the c part in Department II [producing means of consumption]. It incorporates more commodities, useful things. Each individual commodity is cheaper, but the size of the total mass of commodities has, nevertheless, the same value which is consumed and carried over to the annual product. If the objection that devaluation is not considered has any meaning at all, then it is only that ones starting point is useful things. Let us assume that the entire rural economy uses 1,000 electric ploughs (each with a value of 80 = 80,000) which are sufcient to work the available land. If productivity now doubles, so that with the same labor 2,000 electric ploughs can be produced, then the rural economy will not be able to buy them, as they are superuous. Devaluation must have the consequence that the rural economy now only buys 1,000 ploughs, each with a value of 40 = 4,000. Consideration of devaluation shows the unsaleability of the product, the disruption of all the proportions worked out so arduously by Otto Bauer.26

In response to Braunthals assertion that the devaluation of variable capital and a higher rate of surplus value would counteract the long term tendency for the rate of prot to fall, Grossman, in another manuscript, asked for references and evidence. Braunthal had provided neither.27 Elsewhere, he dealt with Braunthals joke about impoverished capitalists (also told by Helene Bauer and retold by Muhs), the role of the class struggle and the place of Otto Bauers reproduction scheme in his own work.
Br referred, with a comic smile, to the fact that Marx predicted an intensication of proletarian poverty, whereas I, on the other hand, deduce the breakdown of capitalism from a kind of impoverishment of the capitalists. From Otto Bauers numerical example, I deduce the amazing result that the entrepreneurs revenue not only declines relatively, but after the 21st year declines absolutely and nally in the 35th year disappears entirely. That is, supposedly, in brief the idea underlying my theory of so-called overaccumulation (p. 294). There is not a trace of this in my work. Nowhere have I said that capitalism will go under due to the impoverishment of the capitalists. I showed, rather, that an increasingly large part of surplus value (Ac ) is, under the assumptions of Bauers scheme, devoted to accumulation. The remainder, available for the consumption of the capitalists and workers, does not sufce. As a consequence an increasingly sharp struggle between workers and entrepreneurs over the level of wages necessarily ares up. If workers continue to receive the same wage, then nothing remains for the entrepreneurs. If, however, entrepreneurs maintain and where possible even increase their living standard, then they force down the level of wages, i.e. from this point on the impoverishment of the workers necessarily sets in. That, however, drives the workers to revolution . . . Admittedly, nothing has yet been said about the length of time over which this tendency becomes apparent. The critique of Otto Bauers equilibrium theory was made using his example and this showed that the tendency to break down emerged in 35 years. But the length of this period in itself has nothing to do with the idea I demonstrated and is a coincidental result of Bauers concrete numerical example. This should go down on Otto Bauers debit account, not mine. For, if Bauers scheme is intended to illustrate contemporary capitalism, it shows an entirely insufcient organic composition of capital. It assumes as the social average a composition of 200,000c: 100,000v; constant capital comprising only twice the value of

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yearly wages. Now Engels already gave an example of the actual composition of capital in large modern industries, from a cotton spinning factory in 1871 where a total capital of 12,500 was divided into 12,182 constant and 318 variable capital. In percentage terms the 1 1 organic composition was 97 2 c + 2 2 v = 100C. The constant capital is 39 times larger than the variable. It is clear that today there is an even higher organic composition in large industries. For precisely this reason, Bauers numerical example, with its unusually low organic composition is not a reection of contemporary capitalism but expresses the low organic composition under capitalism in its early phases. And the long cycles of Bauers scheme are precisely a consequence of this low composition, hence the necessity of calculations over 35 years. This is because the tendency to break down only takes effect in the late phase of accumulation when the organic composition is high. As a consequence long periods are necessary before Bauers scheme, with its slow rate of accumulation, develops a high organic composition. With a higher organic composition assumed as a basis for the enquiry from the start, which would express reality, the cycles and with them the need for mathematical persistence would be reduced. For this too O. Bauer is responsible, not I. I demonstrated my proof under conditions dictated by O. Bauer. Let us assume that Br. does not hide behind the hardly valid proposition that Bauers scheme is calculated indeed only for a short period, namely a period of 4 years (p. 300). In my critique of Bauers equilibrium scheme, I give a variation of Bauers scheme (on p. 225 of my book). It shows that with a higher organic composition of capital the reproduction process wont survive even for this short period.28

In The Law of Accumulation, Grossmans starting point was a variant of Bauers scheme. As he now reiterated, he used this starting point precisely in order to refute Bauers conclusions on the basis of Bauers own assumptions. But Grossman proceeded by lifting Bauers assumptions in order to generalize the argument and to indicate the consequences of the counter-tendencies to the tendency for the rate of prot to fall. In his correspondence with Paul Mattick, Grossman repeated this point, linking it to his conception of the relationship between capitalisms tendency to break down and revolutionary class struggles, and refuting the accusation that his account of capitalist collapse was mechanical.
But I did not want to give the impression that I derive the breakdown tendency from Bauers scheme. Indeed, I emphasized in the book that Bauers scheme is unrealistic. That position is a direct implication of my methodological piece on the Plan for Capital; Bauer makes unrealistic, false assumptions and I just wanted to pursue his argument ad absurdam. Someone ironically said against me that in my book capitalism breaks down not as a result of the suffering of the workers but the suffering of the capitalists. This objection does not touch me but Bauer. That is a result of his scheme, as he assumes that capitalism at best accumulates at a rate of 10% a year and that workers, at best, receive a [total] wage that grows by 5% a year. In reality these assumptions do not apply. There are precisely struggles between workers and capitalists over the distribution of surplus value. It is insufcient for both an adequate level of wages and the required rate of accumulation. One can only be achieved at the expense of the other. Hence the intensication of class struggles. The development of the situation in the United States, England and Germany over the past two years conrms this diagnosis 100%. I do not maintain

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that surplus value declines. It can grow. And nevertheless it is insufcient because accumulation (as it requires an ever greater organic composition) swallows a continuously larger part of the surplus value.29

If capitalists secure their income, then wages are insufcient and

an objectively revolutionary situation arises: the system shows that it cannot secure the living conditions of the population. From this objective situation and through it the class struggle intensies. That is, the subjective factor, whether the working class through its struggles is capable of overturning the system, only becomes signicant with the objective situation in this phase of development. Obviously the idea that capitalism must break down of itself or automatically, which Hilferding and other socialists (Braunthal) assert against my book, is far from being my position. It can only be overturned through the struggles of the working class. But I wanted to show that the class struggle alone is not sufcient. The will to overturn capitalism is not enough. Such a will cannot even arise in the early phases of capitalism. It would also be [in]effective without a revolutionary situation.30 Only in the nal phases of development do the objective conditions arise which bring about the preconditions for the successful, victorious intervention of the working class. Obviously, as a dialectical Marxist, I understand that both sides of the process, the objective and subjective elements inuence each other reciprocally. In the class struggle these factors fuse. One cannot wait until the objective conditions are there and only then allow the subjective factors to come into play. That would be an inadequate, mechanical view, which is alien to me. But, for the purposes of the analysis, I had to use the process of abstract isolation of individual elements in order to show the essential function of each element. Lenin often talks of the revolutionary situation which has to be objectively given, as the precondition for the active, victorious intervention of the proletariat. The purpose of my breakdown theory was not to exclude this active intervention, but rather to show when and under what circumstances such an objectively given revolutionary situation can and does arise. Bauers scheme is insufcient on many grounds . . . I wanted to demonstrate that the result of even this, his mistaken scheme is breakdown and not equilibrium. I do not want, however, to identify myself with Bauers scheme under any circumstances.31

The objections to The Law of Accumulation advanced by the social democrats Helene Bauer and Alfred Braunthal were more serious and thorough than those in reviews by Communists and Council Communists. A Council Communist critique, which Mattick had forwarded, Grossman dismissed, with justice, as thoughtless playing with words and repetition of his own observations about the counter-tendencies to capitalist breakdown.32 Mattick also arranged for the rst issue of the Council Communist Proletarier to be sent to Grossman in 1933. It included a discussion of crisis theory by Ko (Karl Korsch). To Kos suggestion that crisis theory amounted to a Sorelian myth which gave heart to the proletariat, Grossman responded that the bourgeoisie will always remain the superior masters of this territory.
Hitler showed exactly how far one can go with myths alone and what one can achieve with them . . . We, however, do not want to deceive ourselves or others. As a consequence, our activity has to be based on a theoretical understanding of the tendencies of development i.e. on the objective course of events.33

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Grossman used a long essay in Elsters Dictionary, to restate and clarify his innovations in Marxist economics. The essay was initially published as a pamphlet, in 1932, and is discussed below. In it and other, subsequent publications, Grossman emphasized that his analysis, far from denying the signicance of the class struggle provided a context in which it could be understood and hence made more effective. But, in an unpublished note he made this point most concretely,
What was the year 1929 in the USA and the year 1931 in Germany and England if not a giant breakdown? The working class was not prepared for this. It did not have a Lenin, who awaited and worked towards such a moment. Rather, for decades it heard from Hilferding and Helene Bauer that a breakdown was impossible. Only such a disorientation of the working class made it possible for the ruling class to overcome the panic and to survive the breakdown.34

Grossmans personal situation gave him space to publicly advocate economic theories which did not accord with Stalinist orthodoxies and to articulate the kind of criticism of the Communist movement implied in this note. Thanks to the policies of the German and especially the Polish authorities, Grossman, unlike Luk cs who was still an important leader of the Hungarian Party (Arato & a Breines, 1979, pp. 190200; L wy, 1979, pp. 193205), was no longer a member o of a Communist Party from about 1925. Although he was politically close to the KPD until 1933 and from the mid 1930s again an ardent supporter of the Soviet Union, he was therefore not exposed to the full blast of Communist discipline which suppressed all serious and open political discussion and debate in the ranks of the movement. Membership of the Institute, an apparently secure academic post in Germany and his certainly well-paid job insulated him from pressures to swallow Stalinist or social democratic orthodoxies in economics. In The Law of Accumulation, Grossman disparaged Marxs epigones of all colors, from the reformists to the Communists (Grossmann, 1929a, p. 326). But he did not use his considerable capacity for polemic and vituperation to respond to Varga in public. This was not out of sympathy for the newly anointed Tsar of Russian economics. In a letter to Mattick in mid-1931, the victim of Vargas onslaught explained that, incapable of responding to the criticisms of his own position in The Law of Accumulation, Varga had preferred to abuse me in a Communist journal. He hasnt gone into my argumentation and objections with a single word. As soon as I have the time, I will write a critique of Varga and illuminate this puffed up statistician from closer up.35 The illumination never came. It was not difcult for Grossman to see that its publication would probably lead Communist ofcials to brand him as an enemy of the Soviet Union and the Communist movement, cut him off entirely from the political current with which

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he then sympathized and the largest audience of people who might be open to his ideas.36 The reason why Grossman did not respond to the criticisms Paul Sweezy made in 1942 were different. In the longer term, Sweezys The Theory of Capitalist Development did more than any other publication to popularize Grossmans work in English. It praised his treatment of nance capital and imperialism, but was very dismissive of his explanation of capitalisms breakdown tendency. Grossman did not think any of Sweezys criticisms, some of which he had already dealt with in manuscript comments on Helene Bauers and Braunthals objections, undermined the argument in The Law of Accumulation. Bill Blake, a close friend, suggested that Grossman should publish a short reply. There wasnt much point, Grossman believed.
It is not so important for me to write a letter against the distortions of Mr Sweezy. If I will not be able to publish an English book on Marx, such a letter will not help. If I will publish a book, then I will crush him all bones and the reader will be able to judge himself which book give really superior interpretation of Marx theory.37

Unfortunately, a further forty ve years elapsed before the appearance of an English translation The Law of Accumulation, with its refutations of underconsumptionist accounts of economic crises, like Sweezys (Grossmann, 1929b, pp. 4546, 105, 111, 132133, 140).

PUBLISHED RESPONSES
The Transformation Problem In a letter to Paul Mattick in 1931 and in notes on criticisms of his book, Grossman identied the question of the relationship between values and prices as an important issue in the theory of economic crises. During the summer semester of 1932, he pursued this issue in a course on The problem of the average rate of prot and modern economics. Some of the results of this inquiry appeared in Grossmans essay in the rst issue of the Institutes new journal, others remained unpublished.38 The article, The Value-Price Transformation was, in part, a response to critics of The Law of Accumulation. In the essay Grossman again insisted that Marxs reproduction scheme served
not to provide an image of concrete capitalist reality, but is only a link in Marxs process of approaching it step by step which, together with the simplifying assumptions underpinning the scheme and the subsequent modications in the sense of a progressive concretization, form an inseparable whole (Grossmann, 1932b, p. 58).

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Grossmans own treatment of the scheme had fully accorded with this conception. Its use by other Marxist economists had not. The scheme assumed that commodities exchange between different departments of production (those producing means of production and means of consumption) at their value and, as a consequence, that there are different rates of prot in different departments, on the assumption that the rate of exploitation is the same in each. Thus the rate of prot will be lower in the more capital intensive department. In reality prot rates tend to equalize, around a general, average rate of prot, across industries and departments. As a consequence, commodities do not exchange at their values. In the third volume of Capital, Marx accounted for this. He showed that market prices uctuate around commodities prices of production and that these in turn can only be understood on the basis of the formation of the general rate of prot, which is underpinned by the value embodied in commodities. In other words, prices deviate from values, though in a systematic way. As a consequence, the process of reproduction and the proportions in which commodities are produced are governed by the general rate of prot and prices of production, and hence, indirectly, by their value. The formation of the average rate of prot also has implications for the nature of the common interests of the capitalist class. Individual capitalists have an interest in the exploitation of the working class as a whole, as the prot they make is determined by the average rate of prot, not solely by the amount of surplus value extracted in their own enterprise (Grossmann, 1932b, pp. 5963). The general rate of prot is established through competition. Capitalists in capital intensive industries, that therefore have lower rates of prot if commodities are sold at their value, will tend to shift their capital and curtail their production. Shortages of the commodities they produce will lead to a deviation between these commodities values and prices of production, which are bid up. As a consequence more surplus value is realized in such industries than was produced there and their protability improves. The opposite process takes place in labor intensive industries. Overall, prices of production tend to deviate from values to the extent necessary to equalize the rate of prot. Grossman pointed out that, in thirty years of discussion of the problems of accumulation and crisis, no-one had taken account of this role of competition in Marxs theory. Here was a persuasive response to Sternbergs contention that Grossman had overlooked the importance of competition. The efforts to account for economic crises in terms of disproportion between spheres of production, from Mikhail Tugan-Barnovskys early discussion through to Nikolai Bukharin and Sternberg, Grossman noted, were all couched in terms of a reproduction scheme in which commodities exchanged at their values before the introduction of the general rate of prot. Yet the proportionality necessary to

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sustain capital accumulation is a proportionality established on the basis of prices of production/market prices.
It is different in my book, which is concerned with explaining the primary, general crises of overaccumulation that embrace all spheres of production at the same time. For society as a whole the distinction between values and prices of production loses all signicance . . . as in this case they are of the same magnitude (Grossmann, 1932b, pp. 6364).39

Grossman now pointed out that he had demonstrated that the tendency to collapse was a feature of capitalism at a high level of abstraction, that of capital in general. His most abstract model incorporated the fundamental consequences of competition as the drive to accumulate in order to sustain the production of surplus value. But it abstracted from competition in the sense of market uctuations in prices and, more profoundly, the mechanism of competition which establishes the average rate of prot and hence the deviation of prices of production from values. This was a tacit response to Gurland and Neisser, who had objected that Grossman had based his argument on Bauers faulty reproduction scheme and failed to take the equalization of prot rates and hence the transformation of values into prices of production into account (Gurland, 1930, p. 79; Neisser, 1931, p. 74). Theirs was a valid criticism of Bauers original schemes. But, Grossman noted in The Value-Price Transformation, his own, modied version of Bauers scheme did not include separate departments of production (Grossmann, 1932b, pp. 6364). The different rates of prot in the two departments of Bauers original meant that it was only applicable at the value level of analysis. Grossmans more abstract scheme, in contrast, was capable of representing developments in value or price of production terms.

Marxism After Marx One of Grossmans contributions to Ludwig Elsters Dictionary of Economics was a survey of Marxism after Marx. The sections of Further developments in Marxism to the present which dealt with The problems of imperialism and war and The end of capitalism included recapitulations and elaborations of Grossmans arguments in The Law of Accumulation. He again acknowledged the importance of Luxemburgs insistence, against the revisionists, that there were limits to capitalisms capacity to grow, while criticising her specic explanation of capitalisms breakdown tendency. Lenins study of imperialism and critique of underconsumptionism, Grossman asserted, refuted her analysis. The pursuit of monopoly prots rather than markets explained imperialism (Grossmann, 1932a, pp. 318322).

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In the concluding section of his survey, Grossman counterposed his own account of capitalist crises and breakdown, deriving from the tendency for the rate of prot to fall, to Bukharins general comments, the focus on problems of realization by Luxemburg and others, and the disproportionality school, deriving from TuganBaranovsky. At high levels of capital accumulation, Grossman pointed out, even if the absolute mass of surplus value was still rising, the decline in the relative mass of surplus value would eventually reach a point where, if the accumulation of constant capital was to be maintained, capitalists would have to try to reduce their outlays on variable capital or their own consumption. This would provoke sharp class struggles. If bosses were generally successful in these, labor power would not be fully reproduced, i.e. the working class would be paid less than the value of its labor power. If workers maintained their living standards, then the rate of accumulation would slow and technological change would stagnate. Because accumulation takes the form of investment in concrete use values, it will also ultimately become impossible to invest the arbitrarily small fragment of additional surplus value produced as the rate of prot declines (Grossmann, 1932a, pp. 328333). Counter-tendencies, Grossman explained, can temporarily off-set the decline in the rate of prot and moderate crises so that they do not result in total economic collapse. But the counter-tendencies become progressively weaker. If crisis, for him [Grossman], is a tendency to break down that has not fully unfolded, then the breakdown of capitalism is nothing but a crisis that has not been limited by counter-tendencies (Grossmann, 1932a, pp. 332335). He went on to emphasize, in what was clearly a response to critics of his book, that
for the proletariat, it can never be a matter of a fatalistic policy of waiting, that is, without actively intervening, for the automatic collapse. Old regimes never fall by themselves, even during periods of crisis, if they are not, precisely, overturned (Lenin). The point of a Marxist theory of breakdown, according to Grossmann, consists only in the need to reject voluntarism and putschism, which regard revolution as possible at any time, dependent only on the subjective desire of revolutionaries, without considering whether the situation is objectively revolutionary. The meaning of a Marxist theory of breakdown is that the revolutionary action of the proletariat receives its strongest impulse only when the existing system is objectively shaken. This, at the same time, creates the conditions for successfully overcoming the resistance of the ruling classes (Grossmann, 1932a, pp. 335336).

The Evolutionist Revolt Several of Grossmans later works claried the originality of Marxs contribution to social theory. In The Evolutionist Revolt Against Classical Economics, published in 1943, he argued that one of Marxs most important contributions was his demonstration that capitalism necessarily declines and disintegrates

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(Grossman, 1943a, b).40 This Grossman identied with his account of Marxs theory of economic crisis. Recapitulating his Leninist analysis, he maintained
that no economic system, no matter how weakened collapses by itself in automatic fashion. It must be overthrown . . . Historical necessity does not operate automatically but requires the active participation of the working class in the historical process. The main result of Marxs doctrine is the clarication of the historical role of the proletariat as the carrier of the transformative principle and the creator of the socialist society . . . In changing the historical object, the subject changes himself. Thus the education of the working class to its historical mission must be achieved not by theories brought from outside but by the everyday practice of the class struggle (Grossman, 1943b, pp. 520521).

As a young revolutionary leader, almost four decades earlier, Grossman had emphasized the centrality of class struggle to both the formation of working class consciousness and revolution (Grossman, 1907, p. 45). Here, however, the relationship was formulated in particularly clear, Luk csian/Hegelian terms. In his a dialectical concept of history, Marx, Grossman insisted, follows Hegel, for whom history has both an objective and a subjective meaning, the history of human activity (historia rerum gestarum) and human activity itself (res gestas) (Grossman, 1943b, p. 521).

GROSSMAN RECOVERED
From 1927, at the latest, until the end of his life, Grossman regarded Marxs analysis of the relationship between the rate of prot and capitalist crises, to which he drew attention, as corollaries of and tools for understanding the working classs condition and promoting its struggle for human emancipation. He attributed capitalisms tendency to break down to the contradiction between the use value and exchange value aspects of commodities and capitalist production, ultimately to capitalisms creation of wealth in order to make prots rather than to satisfy human needs. Unlike underconsumptionist theories, this explanation also located the mechanisms responsible for crises in the production process itself. It was also compatible with a different obstacle to crisis-free accumulation, that Grossman identied: the importance of simultaneously maintaining proportional investment and output in both use value and exchange value terms. For polemical purposes, Grossman used a version of Bauers model of capital accumulation which had originally been developed to show that crisis-free growth was possible under capitalism, to demonstrate the opposite. His own version was specied so that it, unlike Bauers original, would not be disturbed by the transformation of values into prices of production.

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Bauers assumptions were unrealistic and Grossman knew it. For this reason, he progressively relaxed them to make his analysis more concrete, applying the method Marx had employed in Capital. Far from neglecting countertendencies to the tendency for the rate of prot to fall, Grossman provided a far more systematic account of them than any of his critics. He discussed the impact of different rates of accumulation; cheapening of constant and variable capital; increases in the rate of surplus value; raising the turnover time of capital; lower deductions (in the form of commercial prot, groundrent and interest) from the prots of productive capital; and reduced outlays on unproductive services needed by capital. In his notes on Helene Bauers and Braunthals criticisms, he again addressed the question of the devaluation of constant capital, arguing that, despite the fact that it undoubtedly occurred, it had proved insufcient to prevent the organic composition of capital from rising in the longer run. Grossman highlighted the various mechanisms through which imperialist policies, in particular, could bolster the rate of prot in developed capitalist countries. They included the destruction of value through war; access to cheaper raw materials; monopolizing resources; and unequal exchange. There will, no doubt, be further debate about the validity and applicability of Marxs and Grossmans theory of capitalist crises. But a serious appreciation of Grossmans work is incompatible the argument that his approach neglected or forgot the devaluation of constant capital in the course of the accumulation process and a range of other mechanisms which may offset the tendency for the rate of prot to fall. There is no room for debate about a different aspect of Grossmans theory. Grossman consistently emphasized that his economic analysis should be understood in the context of the Marxist theory of working class struggle and organization, revived and developed by Lenin. The work of Lenin, Luk cs and a Grossman were complementary efforts to recover Marxism from the orthodoxies of the Second International. Grossman sought to elucidate the conditions under which a revolutionary working class challenge to capitalist power could arise and be successful, so long as the movement was effectively organized and led. He regarded the Depression as a capitalist breakdown and therefore an opportunity for socialist revolution. The opportunity was missed because the working class lacked an effective revolutionary leadership. The defenders of social democratic parties and union movements accommodation to capitalism and Stalinist apologists for counter-revolution in Russia who rst reviewed Grossmans book had material interests in distorting his position. It is time to bury their spurious criticism that there was no place for the class struggle in his analysis.

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NOTES
1. He generally signed himself Henryk Grossman. This was how his name appeared in Polish publications and those of his works whose appearance in English he oversaw himself. Henryk Grossmann was the most common German rendition of his name and the one used in most of his own publications in German. In what follows the name under which each publication originally appeared is used. 2. Arbeitsgemeinschaft zum Studium sowjet-russischer Planwirtschaft (Arplan) 194243, IV A 1 b 4764/42 Berlin 30.12.42, Reichssicherheitshauptamt, R59 St 3443 I, Bundesarchiv, Berlin. 3. See Grossman (1922) and Henryk Grossman Die Entwicklungstendenzen des reinen und des empirischen Kapitalismus, in original Folder 41 Alte Manuskripte, Henryk Grossman, III-155, Archiwum Polskiej Akademii Nauk (APAN), with a preface dated 1926. 4. Here and elsewhere in this article the emphasis is in the original; in this case only the ellipses are also in the original. The Lenin quotations are from Lenin (1915, pp. 213214, 228, 240); Grossman used the version in Against the Stream, a collection of Lenins writing in 19151916. 5. On Oppenheimers ideas see Preiser (1964, pp. 1125). 6. Henryk Grossman Curriculum vitae, January 1927, Heinrich Grossmann, Akten der WiSo Fakult t, Sig 452 Abt 150 Nr 376, Archiv der Johann Wolfgang Goethe a Universit t, Frankfurt am Main (UFM), p. 198; Carl Gr nberg Gutachtlicher Bericht. a u Betr. Habilitation des Dr. Heinrich Grossman. 27 Januar 1927, UFM, pp. 212215. 7. The nal chapter of Grossmans book is missing from the English edition, which is in any case a (generally good) condensation rather than a full translation. 8. Grossmans critique of the neglect of the use value side of the organic composition of capital by the epigones of Marx, in a page long footnote, is missing from the English translation, see Grossmann (1929a, pp. 326327, 330). 9. Sam Pietsch pointed out to me that two steps in the derivation of Grossmans formula are misspecied in the translation of his book, Grossmann (1929b, p. 97); cf. Grossmann (1929a, pp. 184185). 10. Henryk Grossmann, Das Problem der Durchschnittsprotrate in der modernen volkswirtschaftlichen Theorie von: Professor Henryk Grossmann, original Folder 37, in 1997 Folder 62, APAN, pp. 3435. 11. Most of the empirical material is not in the English translation, see Grossmann (1929a, pp. 450470, 527528). 12. A compressed version of Grossmans critique of the literature is in Grossmann (1929b, pp. 179185). 13. For an illuminating account of Grossmans position that includes a translation of a section not included in Grossmann (1929b), see Lapides (1994). 14. Lenins recovery of Marxist politics was assisted by his engagement with Hegel (Lenin, 1922, pp. 233234, 1981, pp. 114, 130, 180, 182, 208; Rees, 1998, pp. 184194). An interpretation of Grossmans work, originating with Martin Jay, has entirely misunderstood his perspective. Jay argued, in his inuential and path-breaking account of the Frankfurt School, that Grossman had, however, absorbed his Marxism in the years when Engelss and Kautskys monistic materialistic views prevailed. He remained

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rmly committed to this interpretation and thus largely unsympathetic to the dialectical, neo-Hegelian materialism of the younger Institut members (Jay, 1973, p. 17). 15. Grossman foreshadowed this synthesis in the previous chapter of his book, The fundamental idea underlying Marxs scheme is the immanent contradiction between the drive towards an unlimited expansion of the forces of production and the limited valorization possibilities of accumulated capital (Grossmann, 1929a, p. 190). 16. In addition to repeating Korschs quotations and arguments about Grossmans position on class struggle, Pannekoek reiterated, also without acknowledgement, Vargas arguments and quotations from Grossman and Marx on imperialism. 17. Paul Matticks review of Das Akkumulations- und Zusammenbruchsgetz des kapitalistischen Systems in Chicagoer Arbeiter Zeitung 5 1931, which I have not been able to read, was mentioned in a letter from Grossman to Mattick, 21 June 1931 (Grossmann, 1969, p. 89). Mattick soon reviewed Grossmans essays on Marxs plan for Capital (Mattick, 1931), then Grossmans 1932 essay on Marxs and Luxemburgs different accounts of the signicance of gold production (Mattick, 1932). Grossman mentioned a favorable article in Modern Monthly which Mattick had sent (and either written or inspired), letter from Grossman to Mattick, 7 May 1933 (Grossmann, 1969, p. 98). 18. This method of criticising Marx only shows the unparalleled thoughtlessness and superciality of Muhs himself (Grossmann, 1929a, p. 158); There is not the least trace of any theory in Muhs (Grossmann, 1929b, p. 94). 19. Grossman also mocked Varga for reproducing B hm-Bawerks fable that Marx o skipped over the inuence of competition on prices (Grossmann, 1929a, p. 438). 20. Only one, favorable, reference to Nakhimson remains in the English translation of Grossmanns book (Grossmann, 1929b, pp. 199200). 21. Henryk Grossman Lebenslauf, Henryk Grossmann, Universit tsarchiv Leipzig, a PA 40, pp. 6466; letters from Grossman to Walter Braeuer 13 January 1948 and 25 June 1948, Braeuer Nachla, Johann-Heinrich von Th nen Museum, Tellow (Braeuer Collecu tion). Grossmans correspondence with Braeuer is published in Scheele (1999, pp. 244265). 22. Christina Stead notes, Box 6 Folder 45, Christina Stead Collection MS4967, National Library of Australia (Stead Collection). 23. Henryk Grossman, manuscript starting Die Entwertung sollen die Zusammenbruchstendenz aufheben. . . in original Folder 45 Steliungnahme zur Kritik am Hauptwerk, APAN (Entwertung). The emphasis is Grossmans rather than Bauers. 24. Entwertung. 25. Entwertung. 26. Entwertung, cf. Grossman (1922, 1924). 27. Henryk Grossman, manuscript starting Nach Braunthal, ging Marx von der Beobachtung aus . . ., in original Folder 45 Stellungnahme zur Kritik am Hauptwerk. APAN. 28. Henryk Grossman, manscript starting Br. verweist . . ., in original Folder 45 Stellungnahme zur Kritik am Hauptwerk. APAN. 29. Letter from Grossman to Mattick, 21 June 1931 (Grossmann, 1969, pp. 8687). 30. From the sense of this paragraph (and consistency with his argument elsewhere), Grossman seems to have left out a negative particle from this sentence. 31. Letter from Grossman to Mattick, 21 June 1931 (Grossmann, 1969, p. 88). 32. Letter from Grossman to Mattick, 7 May 1933 (Grossmann, 1969, pp. 9899). Grossman was commenting on Grundlagen (1973).

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33. Letter from Grossman to Mattick, 1 November 1933 (Grossmann, 1969, pp. 105106). 34. Manuscript fragment, Original Folder 32. APAN, cited Scheele (1999, pp. 6667). 35. Letter from Grossman to Mattick, 21 June 1931 (Grossmann, 1969, p. 92). 36. For recognition of the dangers of being identied as a heretic by the Communist movement, see letter from Grossman to Blake 10 July 1947, Box 17 Folder 125, Stead Collection. 37. Letter from Grossman to Bill Blake, 10 July 1947, Box 17 Folder 125, Stead Collection. 38. Letter from Grossman to Mattick, 16 September 1931 (Grossmann, 1969, pp. 9395). For Grossmans work on the transformation problem, also see Universit t a Frankfurt am Main (1932, p. 56), Grossmann (1932b), Henryk Grossmann Das Problem der Durchschnittsprotrate in der modernen volkswirtschaftlichen Theorie von: Professor Henryk Grossmann original Folder 37, in 1997 Folder 62, APAN. There is also a manuscript presentation of the content of Grossmans course. The style, the way Grossman is referred to in the title and text, the presentation of Marxs arguments as Grossmans and the translation of Latin phrases, all indicate that the manuscript was a typed-up version of a students notes, Henryk Grossman Zum Abschluss des Streites um die Wert-Preisrechnung im Marxschen System original Folder 40, in 1997 Folder 63, pp. 3644, APAN. Longer summaries of Zum Abschluss des Streites um die Wert-Preisrechnung and Das Problem der Durchschnittsprotrate can be found in Scheele (1999, pp. 8596). 39. The rst location Grossman refers to in Das Akkumulations- und Zusammenbruchsgesetz is missing from the English translation, the second has been edited down (Grossmann, 1929b, p. 129; Grossmann, 1929a, pp. 107, 211). Howard and King apparently overlooked or did not understand the signicance of this argument both in Grossmans book and this essay when, following Neisser (1931), they suggested that he should have conducted his own analysis of crises in terms of prices of production (1989, p. 330). 40. This study was reprinted in Jessop (1990, pp. 253274) and Blaug (1991, pp. 116).

ACKNOWLEDGMENTS
I am grateful to Sam Pietsch, Rakesh Bhandari and Paul Zarembka for their insightful advice and comments on drafts of this article. Gerda and Kurt Kuhn, Mary Gorman and Alex Kuhn-Gorman have supported and tolerated my work on Grossman for a decade.

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Grossmann, H. (1932a). Die Fortentwicklung des Marxismus bis zur Gegenwart. In: H. Grossmann & C. Gr nberg (Eds), Anarchismus, Bolschewismus, Sozialismus (pp. 281336). Europ ische u a Verlaganstalt, Frankfurt am Main, 1971. Grossmann, H. (1932b). Die Wert-Preis-Transformation bei Marx und das Krisenproblem. Zeitschrift f r Sozialforschung, 1(1), 5584. u Grossmann, H. (1969). Briefe Henryk Grossmanns an Paul Mattick uber Akkumulation. In: H. Grossmann (Ed.), Marx, die klassische National konomie und das Problem der Dynamik o (pp. 85113). Frankfurt am Main: Europ ische Verlaganstalt. a Grundlagen (1933). Die Grundlagen einer revolution ren Krisentheorie. In: K. Korsch, P. Mattick & a A. Pannekoek (Eds), Zusammenbruchstheorie des Kapitalismus oder revolution res Subjekt a (pp. 7190). Berlin: Karin Kramer Verlag, 1973. Gurland, A. (1930). Absatz und Verwertung im Kapitalismus: Zur neueren Diskussion des Zusammenbruchsproblems. Der Klassenkampf, 4(3) (1 February), 7583. Hansen, F. R. (1985). The breakdown of capitalism: A history of the idea in Western Marxism, 18831983. London: Routledge and Kegan Paul. Harman, C. (1984). Explaining the crisis. London: Bookmarks. Harman, C. (1993). Where is capitalism going? Part II. International Socialism, 58(Spring), 357. Haupt, G. (1972). Socialism and the great war: The collapse of the second international. Oxford: Clarendon Press. Hilferding, R. (1927). Die Aufgaben der Sozialdemokratie in der Republik. In: R. Hilferding (Ed.), Zwischen den St hlen oder uber die Unvereinbarkeit von Theorie und Praxis: Schriften Rudolf u Hilferdings 1904 bis 1940 (pp. 214236). Bonn: J. H. W. Dietz, 1982. Howard, M. C., & King, J. E. (1989). A history of Marxian economics: Vol. 1. 18831929. London: Macmillan. Jay, M. (1973). The dialectical imagination. Berkeley: University of California Press, 1996. Jessop, B. (Ed.) (1990). Karl Marxs social and political thought: Critical assessments (Vol. 1). London and New York: Routledge. Kautsky. K. (1899). Bernstein und das sozialdemokratische Programm: Eine Antikritik. Berlin: J. H. W. Dietz, 1976. Kautsky, K. (1909). The road to power. Chicago: Bloch. Kautsky, K. (1915). Ultra-imperialism. New Left Review, 59 (JanuaryFebruary, 1970), 4146. Korsch, K. (1933). Uber einige grunds tzliche Voraussetzungen f r eine materialistische Diskussion a u der Krisentheorie. In: K. Korsch, P. Mattick & A. Pannekoek (Eds), Zusammenbruchstheorie des Kapitalismus oder Revolution res Subjekt (pp. 9198). Berlin: Karin Kramer Verlag, a 1973. Kraus (1930). Die marxistische Zusammenbruchstheorie. Die Internationale, 13(1/2), 5359, 13(3), 8996, 13(4), 122125. Kuhn, R. (2000). Henryk Grossman, a Marxist activist and theorist: On the 50th anniversary of his death. Research in Political Economy, 18, 111170. Kuhn, R. (2001). The Jewish Social Democratic Party of Galicia and the Bund. In: J. Jacobs (Ed.), Jewish Politics in Eastern Europe: The Bund at 100 (pp. 133154). Basingstoke: Palgrave. Lapides, K. (1994). Henryk Grossmann on Marxs wage theory and the increasing misery controversy. History of Political Economy, 26(2) (Summer), 239266. Lenin, V. I. (1915). The collapse of the second international. In: Collected Works (Vol. 21, pp. 205251). Moscow: Progress Publishers, 1980. Lenin, V. I. (1920a). Report on the international situation and the fundamental tasks of the Communist International. In: Collected Works (Vol. 31, pp. 215234). Moscow: Progress Publishers, 1982.

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Lenin, V. I. (1920b). Leftwing communism an infantile disorder. In: Collected Works (Vol. 31, pp. 13118). Moscow: Progress Publishers, 1966. Lenin, V. I. (1922). On the signicance of militant materialism. In: Collected Works (Vol. 33, pp. 227236). Moscow: Progress Publishers, 1980. Lenin, V. I. (1981). Conspectus of Hegels book The science of logic. In: Collected Works (Vol. 38, pp. 85241). Moscow: Progress Publishers. L wy, M. (1979). Georg Luk cs: From Romanticism to Bolshevism. London: NLB. o a Luk cs, G. (1923). History and class consciousness. London: Merlin, 1971. a Luk cs, G. (1924). Lenin. London: NLB, 1970. a Luxemburg, R. (18981899). Reform or revolution. London: Bookmarks, 1989. Luxemburg, R. (1913). The accumulation of capital. London: Routledge, 1963. Marramao, G. (1975). Political economy and critical theory. Telos, 24(Summer), 5680. Marramao, G. (19751976). Theory of the crisis and the problem of constitution. Telos, 26(Winter), 143164. Marx, K. (1894). Capital (Vol. 3). Harmondsworth: Penguin, 1981. Mattick, P. (1931). Review of Henryk Grossman Anderung der urspr nglichen Aufbauplans. u Chicagoer Arbeiter-Zeitung, 1(10), 3. Mattick, P. (1932). Review of Henryk Grossmann Die Goldproduktion im Reproduktionsschema von Marx und Rosa Luxemburg. Der Freidenker, 62(24), 5. Mattick, P. (1933). Die Todeskrise des Kapitalismus. In: K. Korsch, P. Mattick & A. Pannekoek (Eds), Zusammenbruchstheorie des Kapitalismus oder Revolution res Subjekt (pp. 100112). Berlin: a Karin Kramer Verlag, 1973. Mattick, P. (1934a). The permanent crisis: Henryk Grossmanns interpretation of Marx theory of capitalist accumulation. International Council Correspondence, 1(2), 120. Mattick, P. (1934b). Zur Marx schen Akkumulations- und Zusammenbruchstheorie. In: K. Korsch, P. Mattick & A. Pannekoek (Eds), Zusammenbruchstheorie des Kapitalismus oder Revolution res a Subjekt (pp. 4770). Berlin: Karin Kramer Verlag, 1973. Mattick, P. (1974). Marx and Keynes. London: Merlin. Miksch, L. (1930). Zusammenbruch des kapitalistischen Systems? Frankfurter Zeitung, 75(610), 7. Muhs, K. (1931). Das Gesetz der fallenden Protrate und die Zusammenbruchstendenz des Kapitalismus. Jahrbuch f r National konomie und Statistik, 135(1), 1314. u o Muhs, K. (1934). Spengler und der wirtschaftliche Untergang Europas. Berlin: Junker und Dunnhaupt. Neisser, H. (1931). Das Gesetz der fallenden Protrate als Krisen- und Zusammenbruchsgesetz. Die Gesellschaft, 8(1), 7285. Oppenheimer, F. (19301931). Review of Das Akkumulations- und Zusammenbruchsgetz. Archiv f r u Rechts- und Wirtschaftsphilosophie, 24, 402406. Otto, H. (1929). Zusammenbruch des Kapitalismus? Rote Revue: Sozialistische Monatsschrift, 8(12), 388392. Pannekoek, A. (1934). The theory of the collapse of capitalism. Capital and Class, 1, 1977, 5981. Preiser, E. (1964). Franz Oppenheimer: Gedenkrede zur 100. Wiederkehr seines Geburtstages. In: Franz Oppenheimer zum Ged chtnis. Frankfurt am Main 1125: Frankfurter Universit tsreden 35. a a Rees, J. (1998). The Algebra of revolution: The dialectic and the classical Marxist tradition. London: Routledge. Salvadori, M. (1979). Karl Kautsky and the socialist revolution 18801938. London: New Left Books. Scheele, J. (1999). Zwischen Zusammenbruchsprognose und Positivismusverdikt: Studien zur politischen und intellektuellen Biographie Henryk Grossmanns (18811950). Frankfurt am Main: Lang.

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Schmidt, C. (1929). Zusammenbruchstheorie. Sozialistische Monatshefte, 35, 638641. Schorske, C. (1983). German social democracy, 19051917: The development of the great schism. Harvard: Harvard University Press. Shepard, S. B. (1997). The new economy: What it really means. BusinessWeek, 17 (November), http://www.businessweek.com/1997/46/b3553084.htm. Sternberg, F. (1926). Der Imperialismus. Frankfurt: Verlag Neue Kritik, 1971. Sternberg, F. (1930). Eine Unw ltzung der Wissenschaft? Kritik des Buches von Henryk Grossmann a Das Akkumulations- und Zusammenbruchsgesetz des kapitalistischen System. Zugleich eine positive Analyse des Imperialismus. Berlin: Prager. Tazerout, M. (1932a). Th orie economique et sociologie economique. Revue Internationale de e Sociologie, 40(56), 303320. Tazerout, M. (1932b). Politique ou economique. Revue Internationale de Sociologie, 40(1112), 613619. Universit t Frankfurt am Main (1932). Verzeichnis der Vorlesungen Sommer-Halbjahr 1932 und Pera sonalverzeichnis. Frankfurt am Main: Verlag Universit tsbuchhandlung Blazek u. Bergmann. a Varga, E. (1930). Akkumulation und Zusammenbruch des Kapitalismus. Unter dem Banner des Marxismus, 4(1), 6095. Vogel, E. H. (1931). Review of Das Akkumulations- und Zusammenbruchsgetz. Vierteljahresschrift f r Sozial und Wirtschaftschaftsgeschichte, 23, 389391. u Yaffe, D. (1973). The Marxian theory of crisis, capital and the state. Economy and Society, 2, 186232.

SPURIOUS VALUE-PRICE CORRELATIONS: SOME ADDITIONAL EVIDENCE AND ARGUMENTS

Andrew J. Kliman
ABSTRACT
During the last two decades, many Marxian economists have brought forth empirical evidence that supposedly supports a version of the labor theory of value that Marx rejected, namely the theory that individual commodities prices tend to equal their values. However, recent studies have challenged this conclusion. The present paper offers additional evidence and arguments against it. Firstly, the theory in question implies that prices will be higher, ceteris paribus, in industries in which variable capital is a relatively large component of total cost, but regression analysis of U.S. data compels us to reject this hypothesis. Secondly, although sectoral values and prices are very strongly correlated, simulation results indicate that the observed correlations are no higher than the correlations that can be obtained by aggregation, even if the disaggregated values and prices are uncorrelated and extremely far apart. Finally, many studies have found that average price-value deviations are small, but it is shown here that this nding is meaningless, since aggregation of the data tends systematically to reduce measures of average deviation.

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 223238 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21009-4

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THE LABOR THEORY OF RELATIVE PRICES: WHAT IS AT STAKE?

Opponents of the so-called labor theory of value have often attacked a straw man they themselves invented. Adam Smith, David Ricardo, and Karl Marx all recognized that commodities relative prices under capitalism will tend to deviate from their relative labor contents, and they emphasized that the deviations are systematic and necessary ones, resulting from the tendencies for prot rates to equalize and for owners of scare land to receive rent. In fact, it was only two decades ago that some theorists rst put forth the theory that inter-industry differences in values are the dominant determinant of inter-industry differences in prices. Since that time, this theory which I will call the labor theory of relative prices (LTRP) has seemingly been conrmed decisively by a large and still-growing body of research. Numerous studies have found that cross-sectional correlations between values and prices exceed 0.95, and that average deviations between values and prices are small sometimes about 20%, sometimes much less (see, e.g. Cockshott & Cottrell, 1997, 1998; Petrovic, 1987; Tsouldis & Maniatis, 2002). These results have largely convinced scholars who have reviewed the literature recently. Foley (2000, p. 19) writes: Since replicable empirical regularities are rather rare in economics, the strong evidence these studies offer for a widespread coherence between embodied labor coefcients, prices of production and market prices is of indubitable scientic interest. Similarly, Desai (2002, p. 64) characterizes the evidence that prices and values are highly correlated as a surprising yet robust empirical result . . . rst established by Professor Anwar Shaikh. Yet a few recent works, discussed below, have challenged the validity of such evidence and have brought forth contrary evidence. The present paper contributes to this critical reappraisal in two ways. First, employing a new and more stringent empirical test, it shows that the evidence for the U.S. economy between 1977 and 1997 contradicts a key implication of the LTRP. Second, by showing that aggregation of industries can greatly increase the measured price-value correlation and reduce the measured average deviation, it provides additional reasons to question the validity of the evidence that apparently supports the theory. Before turning to these statistical issues, I wish to clarify what is at stake theoretically in this dispute and what is not. One thing that is not at stake is the validity of Marxs own value theory. As proponents of the LTRP have recognized, he never embraced their theory (see, e.g. Cockshott & Cottrell, 1998, pp. 7071; Shaikh, 1984, p. 64; Tsouldis & Maniatis, 2002, p. 360). Indeed, he explicitly rejected it. When he rst invoked the assumption in Capital that prices equal values, Marx (1977, p. 269 n24) cautioned that, in reality, even average prices do

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not directly coincide with the values of commodities, as Adam Smith, Ricardo, and others believe. Later in the work, he argued that industries which employ a relatively large number of workers, and thus produce relatively large amounts of surplus-value, do not tend to reap relatively high prots (Marx, 1977, p. 421). Hence, although some commentators have used the evidence which seemingly supports the LTRP to argue that the empirical results support Marx (Desai, 2002, p. 64), this judgment is clearly incorrect. Likewise, evidence that disconrms the LTRP does not disconrm Marxs theory. In response to Adolph Wagners critique, Marx acknowledged that demand inuences commodities relative prices but he emphatically denied that this counts as evidence against his theory of value:
What has this to do with my theory of value? To the degree that corn is sold above its value, other commodities, whether in their natural form or in their money-form, are, to the same degree, sold below their value, and, to be sure, even if their own money price does not fall. The sum of values remains the same . . .. [I]t even remains the same in monetary expression, if money is reckoned among the commodities.1

Marx thus defended the idea that value is determined by labor-time, not by arguing that prices of individual commodities tend to equal their values, but by reference to the social totality. However surplus labor may be distributed in exchange, it remains the exclusive source of prot (Marx, 1981, p. 270), and the production of surplus-value therefore constrains price and prot in the aggregate. The sum of prices equals the sum of values and the sum of prots equals the sum of surplusvalues. Much of Volume III of Capital is a detailed defense of these propositions. That Marx afrmed these propositions is uncontroversial. What have been and continue to be very controversial, even among Marxist economists, are the propositions themselves. It is this controversy that gave rise to the LTRP two decades ago. To understand what genuinely is at stake in the current empirical dispute, it is therefore necessary to consider the broader theoretical controversy. Although Marx showed (in Chapter 9 of Capital, Vol. III) that a uniform rate of prot is compatible with the aggregate price-value and prot-surplus value equalities, Bortkiewicz (1952, pp. 69) claimed to prove that this demonstration was internally contradictory.2 In a subsequent essay, Bortkiewicz (1984) corrected Marxs alleged error, i.e. offered a revised theory of price determination, and found that the two aggregate equalities no longer held simultaneously. This result, which became known as the transformation problem, seemed to show that Marxs theories of value and surplus-value could not possibly be correct. Later authors including Shaikh (1977), who went on to become a key proponent of the LTRP proposed somewhat different corrections, yet they, too, were unable to preserve both aggregate equalities simultaneously.

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The situation changed somewhat when various theorists began to question the standard way of interpreting the terms of Marxs demonstration. Some proposed new interpretations under which both equalities were preserved (e.g. Lee, 1993; Moseley, 1993; Wolff, Callari & Roberts, 1984). Although it seemed at rst that this result vindicated the logical coherence of Marxs value theory, it actually did not. Like the Bortkiewiczian corrections, these reinterpretations imply that surplus labor is not the exclusive source of monetary prot total prot could be positive even if total surplus labor were zero or negative, and total prot could be zero or negative even though total surplus labor is positive (Kliman, 2001).3 The reason these corrections and interpretations are incompatible with Marxs theory is that they are simultaneist: they all maintain that inputs and outputs are valued simultaneously, and therefore that input prices (or values) are necessarily equal to output prices (or values). In contrast, the temporal single-system interpretation (TSSI) of Marxs value theory not only preserves the aggregate equalities, but also replicates his conclusion that surplus labor is the exclusive source of prot, precisely because it maintains that he regarded inputs and outputs as being valued temporally i.e. non-simultaneously (Kliman, 2001).4 Various other theoretical results of Marxs, the most important being that rising productivity tends to lower the rate of prot, are likewise replicated under the TSSI, but not under any simultaniest interpretation (Kliman, 2004). The LTRP arose at the peak of, and was a response to, the value theory controversy. Although its proponents were unable to understand Marxs concepts in a manner such that prot and surplus-value are equal in the aggregate, they wished to afrm the labor theory of value nonetheless. They did so, it seems to me, by attempting to evade the difcult theoretical and interpretive questions. They suggest that, since prices of individual commodities do in fact tend to equal their values, the theoretical and interpretive inadequacies of the received version of Marxian value theory can be safely dismissed as much ado about very little.5 Empirically oriented, scientic Marxist economists can thus proceed with business as usual. The theoretical and interpretive problems still remain, of course, and in principle they need to be confronted squarely. Yet if the evidence that seems to support the LTRP is valid, it is perhaps reasonable to argue that other problems are more pressing, and thus that scarce research time is better allocated elsewhere. What is therefore at stake in the current dispute over the empirical evidence, I believe, is whether it is tenable to evade the theoretical and interpretive inadequacies of simultaneist interpretations of Marxs value theory by appealing to the data. If the evidence that apparently supports the LTRP is shown to be invalid, it can no longer be construed as an adequate proxy for Marxs actual theory. Its erstwhile proponents then have but two viable options. They can either embrace the interpretation

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of Marxs theory that succeeds in replicating its conclusions in an internally consistent manner, or abandon the idea that value is determined by labor-time.

PRIOR CRITIQUES OF THE LTRP

Although many researchers have claimed to conrm the LTRP, and recent reviewers of the literature have been persuaded by their evidence, some works published within the last few years have challenged its validity. Steedman and Tomkins (1998) obtained quite large price-value deviations from a new data set, and also showed that the size of the average deviation can be very sensitive to the method used to normalize prices. By altering the standard assumption made in the literature that the ratio of surplus-value (in money terms) to the wage bill the usual measure of the rate of surplus-value is uniform across sectors, Trigg (2002) also obtained large price-value deviations as well as a relatively small correlation coefcient. Freeman (1998) drew attention to the fact that the prices and values that have been found to be highly correlated are not prices and values in the usual sense prices and values per unit of output but sectoral aggregate prices and values. The distinction is important because differences in output levels across industries will produce a high correlation between the aggregates even if per-unit prices and values are uncorrelated. Aggregate prices and values will both be large in large industries and small in small industries. Freeman thus suggested that the high correlations found by prior researchers are spurious. The question that arises from this discovery is: How closely are values and prices correlated once one controls for variations in industry size? It might seem that the obvious way to answer this question is to compute the correlation between the per-unit gures. This is impossible, however, because data on sectoral outputs which would be needed in order to transform the aggregate gures into per-unit ones do not exist. It is also doubtful whether industries relative sizes could meaningfully be measured in physical terms, as Ochoa (1984, pp. 128130) noted, because of the arbitrariness involved in selecting the unit of physical output (pints, liters, barrels, etc.), and because of aggregation problems. In Kliman (2002), I therefore addressed the question in a somewhat different way, by using sectoral costs to measure industry size. Instead of considering the relationship between values and prices per unit of output, I considered the relationship between values and prices per dollar of cost. After removing the source of spurious correlation in this manner, I found that the LTRP must be rejected. Although division of aggregate values and prices by costs would not alter the value-price relationship if the LTRP were correct I demonstrated this analytically, and by means of a simulation exercise the remaining correlation

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between values and prices was in fact always exceedingly small, often negative, and never statistically signicant. I also found that, even though my prices and values were close measures of average deviation were quite small they were not close in the sense that the LTRP requires. Once I controlled for variations in industry size, an average industrys price was not signicantly closer to its own value than it was to other industries values. In a new study of Spains economy, Osuna (2003) has found additional evidence that price-value correlations are spurious. He used a method quite similar to that discussed above to eliminate the effect of industry size. Although aggregate prices and values were very closely correlated in all years (19861994) under investigation, Osuna found no statistically signicant correlations between the size-adjusted variables. The measured correlations were uniformly small, and they were negative in 8 out of the 9 cases. No critiques of these studies have yet been published. However, their methodology has been questioned in private correspondence. Critics have argued, rst, that it is not appropriate to control for variations in costs, because costs are derived from values they are essentially the paid component of values and it is through their inuence on costs that values determine prices. Second, critics have argued that sectoral aggregate prices and values are themselves measures of industry size, and therefore that the very point of measuring their correlation is to assess the degree of correspondence between different measures of industry size. Hence, correlations between the aggregate gures are not spurious, and it is illegitimate to control for variations in industry size. I respond to these objections below. In response to the rst, I argue that there is a distinction between the claim that prices are principally determined by values i.e. the LTRP and the claim that prices are principally determined by costs. By means of a new empirical test that distinguishes between these claims, I show that the evidence compels rejection of the former. In response to the second objection, I show that the aggregation of industries into sectors of unequal size gives rise to spurious correlation. Hence, even those who deny that variations in output levels and costs are sources of spurious correlation must recognize the need to control for variations in industry size. Finally, I argue that aggregation tends to reduce average value-price deviations, and therefore that the evidence that prices and values are close lacks credibility.

VALUES VS. COSTS AS DETERMINANTS OF PRICES

No one doubts that costs are the principal component of prices. It is thus possible to argue that values inuence prices through their inuence on costs.6 Yet

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proponents of the LTRP have until now asserted something much stronger than this. What their stochastic law that value is conserved in each particular act of exchange of commodities (Cockshott & Cottrell, 1997, p. 546) means is that prices do not deviate systematically from values. Now assume, as is standard in the empirical literature, that the rate of surplusvalue (surplus-value divided by variable capital) is uniform. Then industries in which the ratio of variable capital (v) to total cost (C) is high produce more surplus-value, ceteris paribus, than industries with low v/C ratios.7 Values are consequently higher in the former industries than in the latter. If prices do not deviate systematically from values, then they too will be higher, ceteris paribus, in the former industries than in the latter. Thus the LTRP is not reducible to the notion that prices depend principally upon costs. It implicitly claims, in addition, that prices vary directly with v/C ratios. It is clear that Marx (1977, p. 421) rejected this notion:
Everyone knows that a cotton spinner, who, if we consider the percentage over the whole of his applied capital, employs much constant capital and little variable capital, does not, on account of this, pocket less prot or surplus-value than a baker, who sets in motion relatively much variable capital and little constant capital.

By rejecting the notion that prots depend upon the ratio of variable capital to total capital, Marx is implicitly rejecting the notion that prices depend upon the ratio of variable capital to total cost. But was he right to reject it, or is the LTRP correct? We can test for the inuence of v/C ratios on prices in the following way. Proponents of the LTRP (see, e.g. Cockshott & Cottrell, 1997; Shaikh, 1984) assert that the relationship between sector js aggregate price (Pj ) and aggregate value (Vj ) is log P j = log V j +
j

(1)

where is a random disturbance term with a mean value of zero. Vj is by denition equal to total cost plus surplus-value, C j + s j . We can decompose this relationship into Vj Cj + sj vj vj Cj Cj Cj 1 + sj vj vj Cj Cj Fj (2)

where Fj is a shorthand expression for the term in square brackets. Substituting (2) into (1), we obtain an equivalent way of expressing the LTRP, log P j = log C j + log F j +
j

(1 )

By virtue of the standard assumption that the rate of surplus-value (s/v) is uniform, cross-industry differences in F are a function of differences in v/C ratios alone.

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So if the v/C ratio is higher in sector j than in sector k, Fj is necessarily greater than Fk . Consequently, the LTRP holds, sector js aggregate price will be greater than sector ks, ceteris paribus. If we estimate the following regression equation log P j = + (log C j ) + (log F j ) +
j

(3)

it is clear from (1 ) that the LTRP predicts that will equal 1. Marx predicts that will equal 0. The Appendix to this paper describes my data and the procedures I used to construct the data of Eq. (3). Regression results for the 21 years under study are reported in Table 1. In 5 of those years, the estimated value of is negative. In the remaining years, too, is very far below the value of 1 predicted by the LTRP. Employing one-tailed tests of statistical signicance, we can reject the hypothesis that = 1 at the 5% level in every year, and at the 2% level in all years except 1978. Table 1. Log-log Regression Coefcients.a
Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Avg.
a In

0.06 (0.29) 0.12 (0.63) 0.13 (0.75) 0.13 (0.65) 0.03 (0.13) 0.14 (0.75) 0.11 (0.62) 0.05 (0.28) 0.06 (0.30) 0.14 (0.75) 0.20 (1.12) 0.27 (1.55) 0.25 (1.41) 0.21 (1.14) 0.22 (1.18) 0.21 (1.14) 0.12 (0.70) 0.17 (0.94) 0.21 (1.13) 0.13 (0.68) 0.17 (0.89) 0.11
2

1.01 (58.6) 1.00 (59.3) 1.00 (64.3) 1.00 (60.6) 1.01 (57.7) 1.02 (63.8) 1.02 (66.5) 1.02 (70.5) 1.02 (61.9) 1.00 (62.0) 0.99 (65.5) 0.99 (66.5) 0.99 (66.0) 1.00 (62.7) 0.99 (63.3) 0.99 (63.9) 1.00 (66.7) 1.00 (64.0) 0.99 (64.0) 1.00 (63.0) 1.00 (62.3) 1.00

0.17 (0.44) 0.24 (0.63) 0.16 (0.46) 0.06 (0.16) 0.14 (0.34) 0.06 (0.15) 0.01 (0.04) 0.01 (0.03) 0.07 (0.19) 0.12 (0.29) 0.06 (0.16) 0.07 (0.18) 0.05 (0.15) 0.08 (0.21) 0.03 (0.09) 0.17 (0.46) 0.10 (0.27) 0.14 (0.38) 0.20 (0.55) 0.07 (0.20) 0.20 (0.55) 0.07

all years, N = 42 and Adj. R = 0.99. Figures in parentheses are t statistics.

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The t statistics associated with are very small, which means that we cannot say with a reasonable degree of condence that the v/C ratio has any inuence on price whatsoever. In no year is signicantly greater than 0 at the 25% level, and in 12 years (those with the lowest t values), it is not signicantly greater than 0 even at the 40% level. Because these t statistics are all are less than 1, inclusion of F (and thus the v/C ratio) in the regressions actually reduces their explanatory power. We would obtain a better t (a larger adjusted R2 ) in every year by accounting for variations in price on the basis of costs alone, rather than on the basis of values. In sum, the empirical results compel us to reject the LTRP. It seems that Marx was right and that what everyone knows, at least what everyone knew up until 20 years ago, is indeed the case.

AGGREGATION AND SPURIOUS CORRELATION

Aggregation of industries into sectors of unequal size can produce high price-value correlations even if the original variables are uncorrelated. Imagine that industries A1 through A10 each have a value of 9 and a price of 9; industries B1 through B10 each have a value of 10 and a price of 12; and industries C1 through C10 each have a value of 11 and a price of 9. Regression of prices on values yields a zero r2 . If we combine industries A2 A10 into a single sector, and do the same for industries B2 B10 and C2 C10 , we then have the following six-sector economy (Table 2 ). Values and prices are now highly correlated; both are small in the rst three sectors and large in the latter three. The r2 is 0.935, or 0.980 if we use a log-log specication. This example shows that aggregation may induce spurious correlation. The more salient question is: How likely is it that very high r2 coefcients will result from the aggregation of otherwise uncorrelated values and prices? To answer this question, I investigated the likelihood that aggregation alone would produce an r2 close to the one Ochoa (1984) obtained for 1972. I rst constructed 7,000 disaggregated industries by assigning to each a value and a price. Each of the 14,000 gures was selected randomly and independently from a uniform distribution ranging from $0 to $489.454 million. (I chose this range in Table 2.
Sector Value Price A1 9 9 B1 10 12 C1 11 9 A2 A10 81 81 B2 B10 90 108 C2 C10 99 81

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Table 3. Spurious Correlation Induced by Aggregation.

7000 Original Industries Median Figure, 500 Simulations 0.0006 4.76 Median Figure, 500 Simulationsa Ochoas 1972 Data

Price-value correlation Mean absolute deviation 71 Aggregated Sectors

Distribution of prices Meanb Standard deviationb Skewness Kurtosis r2 , log-log price-value regression
a Figures

24.14 38.41 3.43 14.10 0.979

24.13 38.39 3.44 14.13 0.979

at the 25th and 75th percentiles differ from the median by less than the following: mean, 0.14; standard deviation, 0.32; skewness, 0.05; kurtosis, 0.44; r2 , 0.006. b Billions of 1972 dollars.

order to obtain an economy-wide total price close to Ochoas.) As expected, the simulated values and prices were essentially uncorrelated, and the mean absolute deviation (MAD) between them was always extremely large (see Table 3). The median value of the MAD was 45 times as great as the gure Ochoa computed from the aggregate data (0.106). I then aggregated the 7,000 industries into 71 sectors, the same number as in his study, without regard to their particular prices and values. In order to obtain a distribution of sectoral prices close to his, sectors were purposely assigned unequal numbers of industries. I performed this simulation 500 times. The r2 coefcients resulting from this exercise were very high and typically very close to Ochoas. My median r2 was almost identical to his. It thus seems very likely that aggregation of industries into sectors of unequal size will induce a tight t between values and prices, even if they are uncorrelated and extremely far apart from one another at a lower level of aggregation. Little if any meaning can be attached to Ochoas and similar results, since they might be mere artifacts of aggregation. Even if that is not the case, they should not be construed as good results, since they are no better than the results that aggregation alone could produce. To obtain meaningful results, it is necessary to control for variations in industry size and thereby ensure that any spurious correlation produced by aggregation is removed. I believe that even researchers who deny that variations in output levels and costs are sources of spurious correlation must recognize that aggregation is such a source.

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AGGREGATION AND SPURIOUSLY SMALL PRICE-VALUE DEVIATIONS

There is another way in which aggregation produces a tight t between prices and values it reduces average price-value deviations. Table 4 provides an example of how aggregation affects ve common measures of deviation. When the 9 original industries are aggregated into 3 sectors, the average deviations decline by 4051%. The reason this occurs is that both positive and negative deviations need to count as deviations, and therefore either the squares of the deviations or their absolute values are used to compute the measures in question. But when industries in which prices exceed values are combined with industries in which values exceed prices, positive and negative deviations tend to cancel out, and the sum of absolute or squared deviations is systematically reduced. The problem is illustrated most easily by considering the mean absolute weighted deviation (MAWD), the numerator of which is the sum of the absolute deviations between values and prices, and the denominator of which is the sum of the prices. Aggregation does not alter the denominator, nor does it alter the numerator when only positive-deviation or negative-deviation industries are added together. For instance, industries 1 through 3 are all negative-deviation industries their prices are less than their values and so the sum of their absolute Table 4. Small Price-Value Deviations Induced by Aggregation.
Industry Value Price Sector Value Price Measure of Deviationa CV MAD MAWD NVD RMS%E 1 31 25 1+2+3 142 115 Disaggregated 0.289 0.279 0.300 0.330 0.292 2 49 40 4+5+6 82 100 Aggregated 0.175 0.159 0.150 0.160 0.175 3 62 50 7+8+9 136 145 4 33 45 5 23 20 6 26 35 7 21 30 8 79 55 9 36 60

a Value/price ratios were used to compute the coefcient of variation (CV), the MAD, and the root mean

squared percentage error (RMS%E). Prices appear in the denominator of the mean absolute weighted deviation (MAWD) and normalized vector distance (NVD).

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deviations, 27, equals the absolute deviation of the aggregated sector 1 + 2 + 3. When positive- and negative-deviation industries are combined, however, a portion of the total absolute deviation is destroyed. In industries 7 through 9, for instance, the sum of absolute deviations is |9| + | 24| + |24| = 57, but the absolute deviation of sector 7 + 8 + 9 is only |9 + (24) + 24| = 9. Aggregation affects the other measures of deviation in similar, though more complex, ways. An important ramication of the fact that aggregation tends systematically to reduce average price-value deviations is that researchers have consistently drawn impermissible inferences from the data. They almost always report that average price-value deviations are small, although they do not know this to be the case. What they know is not the magnitude of the average deviation per se, but only its magnitude given a particular level of aggregation. At a lower level of aggregation, average deviations are almost certainly larger. Deviations will be only modestly larger at a lower level of aggregation if the industries that have been grouped together have similar value/price ratios. Industrial classication systems do group similar industries together, yet industries that produce similar physical outputs might nonetheless have quite dissimilar value/price ratios. The latter depend complexly upon a host of factors technology, demand, input prices, etc. that bear no necessary relationship to the characteristics of the things produced. So we simply do not know whether aggregation reduces the measures of average deviation by a large amount or not, and I cannot think of any feasible method of ascertaining the answer. In light of our ignorance, we cannot have much if any condence in the claims that prices and values are close.

SUMMARY
Continuing a line of investigation initiated by Freeman (1998) and followed up in Kliman (2002) and Osuna (2003), this paper has provided new evidence and arguments which refute the theory that relative values are the principal determinants of relative prices and which challenge the evidence that apparently supports that theory. My regression results showed that, contrary to what the theory implies, prices are not higher in sectors in which variable capital is a relatively large component of total cost. Although correlations between sectoral values and prices are high, my simulation results show them to be no higher than the correlation that can be obtained by aggregation, even if the disaggregated values and prices are uncorrelated and extremely far apart. Finally, I showed that we lack credible evidence that prices and values are close in any meaningful sense, since aggregation tends systematically to reduce average price-value deviations.

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NOTES
1. Marx (1975, pp. 187188, emphases in original). The word corn is used in place of the original manuscripts corn-price. 2. Bortkiewicz tried to prove that Marxs demonstration leads to a spurious breakdown of social reproduction. The proof has itself been disproved, in Kliman and McGlone (1988) and subsequent publications by the same authors. Although the myth that Bortkiewicz proved Marxs demonstration to be internally inconsistent persists to this day, these counter-demonstrations have never been refuted. 3. This nding does not contradict the so-called Fundamental Marxian Theorem, because the theorem does not show that surplus labor is necessary and sufcient for prot to exist. It shows only that surplus labor and prot both happen to be positive under certain conditions. See Kliman (2001). 4. Works that explicate or otherwise employ the TSSI include, among others, Ernst (1982), Giussani (19911992), Maldonado-Filho (1997), Kliman and McGlone (1999), and Ramos (2004). See also the contributions of Carchedi, de Haan, Freeman, Kliman, and McGlone in Freeman and Carchedi (1996), a work that referred to the TSSI as the sequential and nondualist interpretation. The TSSI, like the interpretations of Wolff-Callari-Roberts, Lee, and Moseley, preserves the two aggregate equalities because all are single-system interpretations they hold that, in Marxs theory, the sum of value that used-up means of production transfer to the product is the sum of value needed to acquire them. The sum of value transferred thus depends upon the prices, not the values, of the means of production. Consequently there are not two separate and unrelated systems of value and price determination in Marxs original theory, as there are under Bortkiewiczs (1984) revision. Formally, the sole difference between the TSSI and the other single-system interpretations is that valuation is regarded as temporal by the former and simultaneous by the latter. It is because of this difference that surplus labor is the exclusive source of prot under the former but not under the latter. 5. See especially Cockshott and Cottrell (1998, pp. 7071), who appeal to the empirical evidence to deny the practical importance of theoretical inquiries into the relationship of prices to values. They suggest that Marx was concerned with this relationship because he believed that seriously incorrect predictions would result if one assumed that prices of individual commodities equal their values, but that he was mistaken. 6. Implicit in this argument is the claim that causation runs from values to costs. I think this claim is an article of faith, not something that can be tested empirically. Scientic empiricists might thus wish to reconsider the argument. I should also note that empirical studies of value-price relationships all derive values from cost data, not costs from value data, so we certainly have no evidence as yet that values inuence costs and thereby inuence prices. 7. By cost, I mean the same thing that Marx meant by cost price in Capital, Vol. III, namely the sum of used-up constant capital and variable capital. As I discuss in the Appendix to this paper, I have used the actual costs incurred to measure these parts of commodities values. Most researchers have instead computed what inputs would have cost had they been purchased at their values. Because my procedure eliminates deviations between the value and the price of constant capital, it improves the t between prices and values it results in higher correlation coefcients and smaller average deviations (see Kliman, 2002). Cockshott and Cottrell (2003) agree that the difference between

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[t]he denition of value used by Kliman [. . . and] the one used by us and most of the contributors to the empirical literature . . . is a secondary matter in the present context . . ..

ACKNOWLEDGMENTS
I wish to thank Paul Zarembka and three anonymous reviewers for their very helpful comments. Any errors are my own responsibility.

REFERENCES
von Bortkiewicz, L. (1952). Value and price in the Marxian system. International Economic Papers, 2, 560. von Bortkiewicz, L. (1984). On the correction of Marxs fundamental theoretical construction in the third volume of capital. In: E. von B hm-Bawerk (Ed.), Karl Marx and the Close of his System. o Philadelphia: Orion Editions. Cockshott, W. P., & Cottrell, A. F. (1997). Labour time vs. alternative value bases: A research note. Cambridge Journal of Economics, 21, 545549. Cockshott, P., & Cottrell, A. (1998). Does Marx need to transform? In: R. Belloore (Ed.), Marxian Economics: A Reappraisal (Vol. 2, pp. 7085). Houndmills: Macmillan. Cockshott, W. P., & Cottrell, A. (2003). Robust correlations between sectoral prices and labour values: A comment. Cambridge Journal of Economics (forthcoming). Desai, M. (2002). Marxs revenge: The resurgence of capitalism and the death of statist socialism. London and New York: Verso. Ernst, J. R. (1982). Simultaneous valuation extirpated: A contribution to the critique of the neo-Ricardian concept of value. Review of Radical Political Economics, 14. Foley, D. K. (2000). Recent developments in the labor theory of value. Review of Radical Political Economics, 32, 139. Freeman, A. (1998). The transformation of prices into values: Comment on the chapters by Simon Mohun and Anwar M. Shaikh. In: R. Belloore (Ed.), Marxian Economics: A Reappraisal (Vol. 2, pp. 270275). Houndmills: Macmillan. Freeman, A., & Carchedi, G. (Eds) (1996). Marx and non-equilibrium economics. Cheltenham: Edward Elgar. Giussani, P. (19911992). The determination of prices of production. International Journal of Political Economy, 21. Kliman, A. J. (2001). Simultaneous valuation vs. the exploitation theory of prot. Capital and Class, No. 73, 97112. Kliman, A. J. (2002). The law of value and laws of statistics: Sectoral values and prices in the U.S. economy, 197797. Cambridge Journal of Economics, 26, 299311. Kliman, A. J. (2004). Marx versus the 20th-century Marxists: A reply to Laibman. In: A. Freeman, A. Kliman & J. Wells (Eds), The New Value Controversy and the Foundations of Economics. Chelternham, UK: Edward Elgar. Kliman, A. J., & McGlone, T. (1988). The transformation non-problem and the non-transformation problem. Capital and Class, No. 35.

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Kliman, A. J., & McGlone, T. (1999). A temporal single-system interpretation of Marxs value theory. Review of Political Economy, 11, 3359. Lee, C.-O. (1993). Marxs labour theory of value revisited. Cambridge Journal of Economics, 17. Maldonado-Filho, E. (1997). Release and tying up of productive capital and the transformation problem. Presented at the International Working Group on Value Theory mini-conference, Eastern Economics Association conference. Washington, DC (April). Marx, K. (1975). Notes on Adolph Wagner. In: T. Carver (Ed.), Karl Marx: Texts on Method. Oxford: Basil Blackwell. Marx, K. (1977). Capital: A critique of political economy, 1. New York: Vintage. Marx, K. (1981). Capital: A critique of political economy, 3. New York: Vintage. Moseley, F. (1993). Marxs logical method and the transformation problem. In: F. Moseley (Ed.), Marxs Method in Capital: A Reexamination. Atlantic Highlands, NJ: Humanities Press. Ochoa, E. M. (1984). Labor-values and prices of production: An interindustry study of the U.S. economy, 19471972. Ph.D. dissertation. New School for Social Research (March). Osuna Guerrero, R. (2003). Un Modelo Secuencial para el C lculo de Precios. El Caso Espa ol a n 19861994. Ph.D. dissertation. Departamento de An lisis Econ mico I, Facultad de Ciencias a o Econ micas y Empresariales. Universidad Nacional de Educaci n a Distancia (UNED), o o Spain. Petrovic, P. (1987). The deviation of production prices from labour values: Some methodology and empirical evidence. Cambridge Journal of Economics, 11, 197210. Ramos Martinez, A. (2004). Labour, money, labour-saving innovation, and the falling rate of prot. In: A. Freeman & J. Wells (Eds), The New Value Controversy and the Foundations of Economics. Chelternham, UK: Edward Elgar. Shaikh, A. (1977). Marxs theory of value and the transformation problem. In: J. Schwartz (Ed.), The Subtle Anatomy of Capitalism. Santa Monica, CA: Goodyear Publishers. Shaikh, A. (1984). The transformation from Marx to Sraffa. In: E. Mandel & A. Freeman (Eds), Ricardo, Marx, Sraffa: The Langston Memorial Volume (pp. 4384). London: Verso. Steedman, I., & Tomkins, J. (1998). On measuring the deviation of prices from values. Cambridge Journal of Economics, 22, 379385. Trigg, A. B. (2002). Using micro data to test the divergence between prices and labour values. International Review of Applied Economics, 16, 169186. Tsouldis, L., & Maniatis, T. (2002). Value, prices of production and market prices: Some more evidence from the Greek economy. Cambridge Journal of Economics, 26, 359369. Wolff, R., Callari, A., & Roberts, B. (1984). A Marxian alternative to the traditional transformation problem. Review of Radical Political Economics, 16.

APPENDIX
To estimate Eq. (3), I used annual industry-level national income data for the United States, published by the Bureau of Economic Analysis (BEA). The period under study begins in 1977, the rst year for which the BEA provides industry-level data on intermediate input purchases, and goes through 1997. The BEA data set contains 66 two- and three-digit SIC industries, but mine contains only 42, because I excluded some industries in order to replicate Ochoas (1984) methodology, and because missing data made it necessary to aggregate others. The BEA does not

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report intermediate input data for four of the industry groups in my data set, so I used BEA benchmark input-output coefcients to estimate their intermediate input purchases. When constructing my measures of prices, costs, etc., I generally tried to follow Ochoas procedures as closely as possible. Thus, I measured both value and price gures in money terms, assumed that total price equals (the monetary expression of) total value, made no distinction between productive and unproductive labor, and assumed a uniform rate of surplus-value. (Here, and in the following paragraph, the word total is used to denote economy-wide sums.) A variety of criticisms can be lodged against some of these procedures on theoretical and interpretive grounds. Yet because my purpose in estimating Eq. (3) was to test the LTRP, not to obtain a good estimate of the true relationship between values and prices (as I myself interpret these concepts of Marxs), I thought it best to follow the methodology of the LTRPs proponents. I used the BEAs gures for gross output (the sum of intermediate input purchases and the sectors contribution to gross domestic product) as my measure of sectoral aggregate price. My cost gures are the sum of used-up constant capital and variable capital, which I estimated as follows. Used-up constant capital is the sum of intermediate input purchases and the BEA estimates of xed capital depreciation. Variable capital was computed by adding employees compensation and the compensation of self-employed persons. (The latter series is not published by the BEA; I estimated it by assuming that, in each sector, average compensation of self-employed persons equals that of employees.) Total surplus-value was computed by subtracting total cost from total value (= total price). The uniform rate of surplus-value is total surplus-value divided by total variable capital. The only signicant respect in which Ochoas procedures differed from mine was that he used input values rather than input prices to compute used-up constant capital. That is, rather than directly using the BEA gures for intermediate input purchases, as I did, he in effect estimated what the inputs would have cost had they been bought at their values (as expressed in money). Although my alternative procedure can be justied as the theoretically appropriate one, since it accords with the temporal single-system interpretation of Marxs value theory, I employed it mostly as a matter of convenience. It simplied computations and allowed me to compute value and price measures for all years, not only years for which the BEA publishes benchmark input-output data.

THE COHERENCE OF LUXEMBURGS THEORIES AND LIFE

Estrella Trincado Aznar
ABSTRACT
This paper analyses luxemburgian political and economic thought and tries to associate its importance with Luxemburgs role as a socialist and as an activist in the womens liberation movement. Luxemburgs feminism, Marxism, anti-authoritarianism and independent thinking make her a gure of continuing importance within both Marxism and feminism. At the same time, she was part of a changing political and social reality and not only passed on an important legacy to economics, but also through her political activism alerted us to the dangers of anti-democratic behaviour. Similarly, her defence of internationalism and denunciation of economically motivated imperialist wars was equally original. Summing up, it is Luxemburg who originated new ways of thinking, which go beyond simple representational thought.

INTRODUCTION
Time is space for human development. Karl Marx

In the orthodox British history of economic thought, female economists have usually been referred to as the wife-of another economist. That, obviously,
Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 241277 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21010-0

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was not the case with Rosa Luxemburg, a non-British and non-orthodox female thinker whose philosophy of life has carved out, on its own, a worldwide reputation. In spite of her sex, Luxemburg does not need any introduction: she is probably the only woman economist whose name rings a bell with everyone, even non-economists. However, it cannot be doubted that her sex has been a brake on the spread of Luxemburgs ideas even in the socialist world. It is true that her ideas were the basis of an important political debate and in the 1930s Kalecki (1939), also Polish, linked Luxemburgs economic theories to the lack of effective demand.1 But it took another woman, Joan Robinson, who in 1951 wrote a 15 page introduction to the English translation of The Accumulation of Capital, to link Luxemburg with the Keynesian academic orthodoxy of the moment and to recognise, and make known world-wide, that Rosa Luxemburg had been the rst to explore with sufcient clarity such important economic questions as the inducement-to-invest problem. Nevertheless, this book had waited 38 years to be translated into English, and the subtitle Contribution to an Economic Explanation of Imperialism and the preface written by Luxemburg relating it to imperialism, were omitted. Luxemburg obtained her doctorate in economics from the University of Zurich in the year 1897. How was she able at that early date to avoid academic chauvinism? It was probably because she took upon herself the authority to speak for both women and men, which made observers forget, in some way, her sex. Andrea Nye (1994, pp. 225226) says Luxemburg neglected gender issues to make it possible for her to address the deepest of human concerns. Nevertheless, as we shall see, Luxemburgs interest in incipient feminist claims of equality and emancipation was not unimportant in spite of the sexist attitudes of her political confederates. Nye also argues that Luxemburgs work was based on a supposed typical female avoidance of the detachment of knowledge from the senses and practical life.2 But, although it is true that Luxemburgs thinking differs from the style of most Western philosophy written by men and based on a dualistic metaphysics, there is no such thing as male philosophy or female philosophy: there are only free philosophers and philosophers tied down to a scholastic traditions or to self interest. The fact that other female economists, such as Jane Marcet, Harriet Martineau and Millicent Fawcett, based their ideology on methodological individualism and, like Adam Smith, considered economics to be a science close to the moral philosophy from which it was derived, demonstrates that philosophy has nothing to do with the sex of the philosopher. These three British economists conveyed their ideas and rened passions through literature when capitalism was developing. Three later authors, Beatrice Webb, Rosa Luxemburg and Joan Robinson, were all collectivists to a certain degree. The semantics of the paths to freedom

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had changed. In this period, industrialisation had led to workers having longer working days and being packed into factories. Many studies demonstrate, with hindsight, that wages were increasing and that those who seemed to be exploited industrial workers were, in many cases, former country folk who had escaped from the isolation of the village and whose only possibility for bettering their condition seemed to be working in the new industrial towns. But, of course, it is clear that this form of developed capitalism was guilty of more and more excesses in its labour practices. So, at the same time that traditional orthodox economics expressed itself through the writings of moderate British authors, heterodox social, economic and political thought, critical of capitalism, was developing. Curiously enough, in those days the end of the nineteenth century criticism of capitalism came both from conservatism and from socialism.3 The socialist criticism reached its dening moment in Marxs writings. In Marxs system, individual rationality led capitalists to reinvest their surplus simply to increase their prots, but social rationality generated values consumed by no one, only by capital itself.4 As labour is the sole source of value in a capitalist system, and capitalism is not capable of providing employment for the workers, this system is necessarily doomed to failure. The ever-worsening economic capitalist crises would lead to revolution, and afterwards . . . to a communist and more humanized stage of society itself a utopian vision, despite Marxs criticism of the so-called Utopian Socialists.5 Nevertheless, the question Marx left unanswered was when capitalism would come to an end. Rosa Luxemburg (1871, Zamosc, Russian Poland 1919, Berlin) began her intellectual life, precisely, trying to answer the question why the revolution did not seem to be any closer in the twentieth century than it had seemed to be in the nineteenth. Her answer to the possibility of the arrival of socialism through reform instead of the revolution was a conclusive no. The reform of capitalism would only change it but would not bring about the democratic socialism she desired. The ends and beginnings of centuries have proved to be productive periods for the birth of critical ideas. As we shall see, although Luxemburgs criticism focused on the nineteenth century, reading it today, it appears contemporary. For those not familiar with Luxemburgs thought, we will rst make a survey of her life and work, as the unity between her theory and practice requires a simultaneous description of her activities and her thought (Cliff, 1960). Later, we will defend the point that Luxemburgs feminism is related to her anti-authoritarianism and to a new way of free, independent thinking. Probably, she would not have held positions that we nowadays identify as feminist: but this is precisely because, even in feminist demands, female authoritarianism is sometimes exerted.

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EARLY LIFE
In 1772, Poland fell under Russian domination, leading to it being divided up between Austria, Prussia and Russia. Two Polish insurrections resulted in two new divisions (1793 and 1795). Several Polish revolts were bloodily crushed. Rosa Luxemburg was born in the small Polish city of Zamosc, in Russian Poland.6 Her father was a prosperous Jewish merchant. Her well-educated family moved to Warsaw when she was two. On her arrival, she fell ill. Doctors thought it was tuberculosis, but it turned out to be an inammation of the hip, which was not treated properly. As a result, the joint was permanently misaligned and Luxemburg walked with a slight limp for the rest of her life, which she believed made it easier for the police to identify her. Luxemburg won admission to the Second Gymnasium High School in Warsaw. It was there that she began to react to the world around her and to dream about complete, revolutionary social change.
My ideal is a world where I would be able to love everybody in peace. To achieve this end, I shall perhaps one day learn to hate (Seidemann, 2002, p. 9).

This was the odd inscription she was 17 at the time Rosa wrote on the back of a photograph she gave to a classmate when they nished their secondary studies.7 Luxemburg obtained the highest mark on all her nal examinations but was denied the medal for her achievements on account of her rebellious attitude towards authorities. In fact, when the local authorities knew of Luxemburgs views and revolutionary activities, she feared that she would soon be arrested. In 1889 she went to Zurich as she was aware that there were many political exiles there and the University of Zurich was one of the few institutions of the time that admitted men and women on an equal basis (Merrick, 1998). In Zurich, she began a new life as an emigr e and University student, at a time when socialist and e revolutionary ideas were at a crucial stage. There she also met Leo Jogiches, a political organiser whose professional and personal life would be intertwined with Luxemburgs, although they were to separate when she nished the Accumulation of Capital.

THE NATIONAL QUESTION: FIRST STRUGGLE AGAINST CORPORATISM

Rosa Luxemburg nished her doctorate in Philosophy and Law in 1897 with the thesis, The Industrial Development of Poland, her rst contribution to economics. Published immediately, it was widely reviewed in Germany, Poland and Russia.

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In this work, she analysed Polish industrial growth during the nineteenth century, trying to prove that Russian Poland had been made so dependent on the Russian market that their political demands for independence were unrealistic. Her opposition to Polish independence became very unpopular among the nationalistic socialists of Poland, although with time her position attracted many Polish workers. Today, the nationalist interpretation of her thought tries to portray her as holding some sort of absurd position on the national question (see Kowalik, 1979, p. 19), but this was not so. We must remember Luxemburg was confronting the nationalist members of the right wing of the Polish Socialist Party (PSP), led by Pilsudski (the future military dictator of Poland). This wing even defended a future World War to obtain national independence, and condemned mass strikes on the part of Polish workers because they tended to identify their struggle with that of Russian workers, therefore undermining Polish national unity. What is more important, as Cliff (1960, Chap. VI) argues, by not supporting Polish independence Luxemburg was ultimately continuing the spirit of Marxs and Engels writings. It is true that Marx and Engels defended Polish independence, but internationalism was their objective, the same as for Luxemburg. Luxemburg only differed in the means to obtain internationalism. Like Marx and Engels, Luxemburg refused to accept any absolute criterion to judge struggles for national independence. In 1848, Marx and Engels thought that the enemies of democratic revolutions were Tsarist Russia and the Austria of the Habsburg dynasty. Therefore, they supported all those national movements directed against the Tsar and the Habsburg dynasty. Poland was such a case: its independence could create a wall between, on the one hand, Western and Central democratic Europe and, on the other hand, the Gendarme of Europe. The resulting national movements in other countries would also make the Habsburg Empire fall.8 As time passed, though, the situation in Europe had changed. Tsarist Russia was already tottering, and, in fact, a socialist revolution was taking place there. As Cliff points out, according to Luxemburg, at that moment there were no inuential social forces in Poland interested in seeking national independence. The recognisable direction of social development has made it clear to me that there is no social class in Poland that has at one and the same time both an interest in and ability to achieve the restoration of Poland.9 She concluded that, as Polish internal forces could not attain independence, the support of an imperialist power would be necessary. Besides, neither Poles nor Russians alone could overthrow the czar, so the only way forward for Luxemburg was the unity of Polish and Russian workers. Consequently, at that historical moment, Polish independence did not have progressive value.10

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Lenin (1914) wrote The Right of Nations to Self-determination in order to criticise Luxemburgs defence of Polish submission to Russia. Certainly, on the matter of nationalism, Luxemburg diverged from Lenin: she thought national self-determination to be a legacy of the bourgeois revolution, not a socialist claim. Under socialism, national independence will be useless, as national oppression will have disappeared. Besides, she believed that economically non-viable nations should not be allowed to self-destruct in pursuit of independence; and that, in any case, after much suffering, they would be absorbed into a larger state (Davis, 1976). In fact, Luxemburgs thought diverged systematically from that of Lenin, the ideologue who would soon obtain power.11 Luxemburgian thought was specically renounced by Bolshevism. The III International Executive Plenum of the Russian Communist Party of 1925 condemned Luxemburgs thought as heresy. Likewise, Luxemburgs ideas have not been accepted either by those who have tended towards a social-democratic view of power social democracy would be responsible for her assassination or by East European communist rulers, whose concept of socialist planning she criticised from the very beginning of the Russian revolution. Obviously, authoritarian politicians and political parties and bureaucracies have feared Luxemburgs ideas. During her life she tried to set herself free from those groups endogamy, from the corporatism tendencies which try to dene group boundaries and establish clear elements to discriminate the outsider. In fact, she always found that endogamy obstructed her way, as it seems in some way connatural to the idea of group: she found it, as we have just seen, in nationalism; but also in the Party, in trade-unionism, in knowledge which she looked for in Political Economy and, even in the feminist world.

AGAINST THE CONCEPT OF A SUBJECTIVE ISOLATED EGO

The Creative Power of Spontaneity When Luxemburg nished her studies, she moved to Berlin, the centre of the socialist movement. In 1900, she wrote Reform or Revolution, a brief pamphlet condemning Marxist revisionism, which was the theory defended by contemporary authors such as Eduard Bernstein, Marxs executor. According to Rosa Luxemburg, Bernstein (1899) presented two heretical ideas. The rst was his criticism of the dialectic structure of Marxs theories, the methodology of opposites that produce a liberation movement, a method

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that Luxemburg at the time thought fundamental to the Marxian revolution in thought.12 The other idea was that socialism could be attained through a reform of capitalism. The followers of revisionist theories thought that capitalism had greater potential for survival than Marx had assumed; and that capitalism could be modied through a convenient redistribution of wealth and income. They defended reform by constant trade union and co-operative pressure, and they preferred the avoidance of the revolution that orthodox Marxists thought necessary. Rosa Luxemburg, however, criticised these revisionist ideas. She afrmed that a possible evolutionary path to socialism would be in fact a renunciation of it since the wage system and the class struggle would continue to exist. Besides, Luxemburg continued, to afrm that capitalism will not collapse is to afrm that socialism is not historically necessary, frustrating Marxist hopes and considering possible a permanently alienated reality, without salvation. Finally, and what seems more important, classical economists had demonstrated that laws involving the redistribution of wealth could not achieve social improvement: low wages depended on unavoidable economic factors, not on human laws and the trade-unions might even create an immobility that could damage the whole of the workers, although in the short run they might benet particular workers. Luxemburg thought trade unions a conservative power and preferred the substitution of trade-union bureaucracy by the revolutionary power of spontaneity. Revolutionary action must be a real mass movement and not be limited to the framework of the Party. As she afrms in The Mass Strike, in 1906, a rigid, mechanical and bureaucratic concept of the class struggle will only accept a certain level of organisation. But, dialectical developments in real life give rise to organisations as the product of the struggle. Trade unions should aim only at the raising of the revolutionary conscience of workers. Revolutions make it impossible for anybody to be their schoolmaster. They can only be achieved in the struggle, in the process of revolution itself, through the actual school of experience, in collision with the proletariat as well as with one another, in incessant mutual friction (Luxemburg, 1925, online version). Luxemburg opposed union leadership not only because she thought them intrinsically conservative and interested in maintaining the capitalist system, but also because they were only interested in organised workers and not the non-organised, which included the so-called lumpen proletariat (the urban poorer layer excluded from direct productive process, today the marginal and worst paid workers) or, for example, artists who, according to Luxemburg were as revolutionary as the proletariat (and we should also include the inhabitants of non capitalist underdeveloped countries). With her very unique spontaneity

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theory, Luxemburg was, in fact, denouncing the lack of that creative behaviour associated precisely with artists and Bohemians. Luk cs (1968, pp. 2745) pointed out that Luxemburgs conception allowed a a greater opening and receptiveness to the non-organised masses and to new ways of spontaneous organization. This Hungarian Marxist, who explores problems of consciousness and organization, draws attention to Luxemburg in his 1968 book13 (in The Marxism of Rosa Luxemburg or in Critical Observations on Rosa Luxemburgs Critique of the Russian Revolution ) showing that, to her, participation and the masses own initiative is the irreplaceable source of new ways of struggle against power and the bureaucratisation of political movements. Only experience is capable of correcting and opening new paths. Only unobstructed, effervescing life falls into a thousand new forms and improvisations, brings to light creative force, itself corrects all mistaken attempts, says Luxemburg (1904, p. 246) in The Problem of Dictatorship. In this sense, masses alone can provide new organisational and representative methods, which could not be foreseen by a central bureau understood as a separate corps distinguished from the unorganised mass. This undemocratic organisational conception, given the intellectuals thirst for power, was for Luxemburg the greatest danger for Russian Social Democracy (see Organizational Questions of Russian Social Democracy) and for Lenins theory, as the phantom which is haunting Lenin today can very easily become a concrete reality tomorrow (Luxemburg, 1971, p. 302). For her, the arrival of communism had to be based on a historical necessity, not on the voluntary action of social democracy. Conversely, Lenins organisation was based on a subjective theory where the Socialist Party was to play the decisive role, and opportunism will emerge. Although she created and participated in various socialist parties, Luxemburg thought that an education of class consciousness imposed by the Party was to be an enlightened, not a Marxist, theory. Party is an internal movement of proletariat (Valdes, 2001, pp. 4042). For Luxemburg, Lenin demanded an ultra-centralism not at all positive or creative, being rather essentially sterile and domineering (Luxemburg, 1971, p. 295). In The Role of Organization in Revolutionary activity Luxemburg explains,
Saying all this, Lenin seems to demonstrate again that his conception of socialist organization is quite mechanistic. The discipline Lenin has in mind is being implanted in the working class not only by the factory but also by the military and the existing State bureaucracy by the entire mechanism of the centralized bourgeois State. We misuse words and we practice self-deception when we apply the same term discipline to such dissimilar notions as: 1, The absence of thought and will in a body with a thousand automatically moving hands and legs, and 2, the spontaneous co-ordination of the conscious, political acts of a body of men. (. . .) In general, the tactical policy of the Social Democracy

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is not something that may be invented. It is the product of a series of great creative acts of the often spontaneous class struggle seeking its way forward (Luxemburg, 1971, p. 100102).

So, although mass action is associated normally with the lack of control over ones actions, as Basso (1967) afrms, for Luxemburg the masses spontaneity is not a state of anarchy. It is just a undirected, undisciplined and, in this sense, self-aware response of the masses to social tensions. The concept of mass in Luxemburg refers to a collection of classes or fractions of society with a common interest in changing the prevalent order. Class conscience is the effect of the revolutionary praxis. Luxemburg arrived at the conclusion that the interaction between strikes as political public demonstrations was the correct method for the movement of the proletarian masses, a pre-revolutionary situation that she wanted to extend to Germany, for which she demanded a Republic. The General Strike should be the last resort in the struggles for electoral rights. In brief, the working class must be free to learn the historical dialectic by themselves. Public life, not a few outstanding leaders, should be the active element of the organization. Luxemburg struggles against the dictatorship of a handful of politicians, that is a dictatorship in the bourgeois sense, where an elite of the working class is invited from time to time to meetings where they are to applaud the speeches of the leaders, and to approve proposed resolutions unanimously . . . (Luxemburg, 1904, p. 247).14 Freedom only for government elite and his supporters is not freedom at all, Luxemburg afrms. Freedom is always, and exclusively, freedom for the one who thinks differently (Luxemburg, 1904, p. 244), as the dialogue with her/him opens the world to uncertainty. Dialogue is not only a medium for making human desires known, but also an end in itself, as it develops a free-based communication ability. As Geras (1976, pp. 133193) points out, the basic idea of this political conception is the interiority of a self-transformation and the openness of the revolutionary horizon, always willing to learn new things even from simple, sometimes cruel, events. That does not mean that Luxemburg believed in the contingency of individual freedom: she was, without doubt, not an orthodox spontaneity thinker but a historical materialist. She was not protesting from a liberal or anarchical stance against the dictatorship of the proletariat, but warning party intellectuals against the temptation of relying on a rigid organization to the point of nding it indispensable. In fact, she continues, The unconscious comes before the conscious. The logic of the historical process comes before the subjective logic of the human beings who participate in the historical process (Luxemburg, 1904, p. 102). Nevertheless, Luxemburg even mocks the materialists who consider history to be a Benthams Panopticon prison, a mechanical superstructure that will lead us passively.15

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Creativity vs. Subjectivity: Luxemburgs Taste for Art In this sense, it is important to stress the fact that, as pointed out above, Luxemburg did not believe in the contingency of individual freedom. In her thought, the search for real freedom was related to the idea of the whole. She based this idea on Hegels philosophy. The true subject to whom this role of director falls is the collective ego of the working class, which insists on its right to make its own mistakes and to learn the historical dialectic by itself (Luxemburg, 1904, p. 306). Luxemburg fought in her theory and in her life against the idea of an isolated subjective ego. The subjectivists themselves described this ego as reactive or passive, in the sense that it opposes the reality beyond itself instead of acting freely in a communicative unity or totality. For Luxemburg, the seeking of mass liberation under conditions of Marxian historical necessity is an expression of the negation of personalisation and hero worship as defended in the nineteenth century by Carlyle and, therefore, it tries to amplify the scope of the ego and of the conception of time. As demonstrates Marxian historical thesis, the ego itself is developed in time.16 As Haug (1992) states, Luxemburgs vocabulary always refers to movement, to masses in perpetual change, gathering together and moving forward, active and hopeful, creators and victims of their own history. In her writings, she wanted to ght sterile habit and inertia. Writing itself has to emerge every day from the present feelings, just to nd the proper words to touch others heart and to be yourself at every moment lled with enthusiasm (Seidemann, 2002, p. 75). That applies also to political writings: as Nettl points out, the gutless state of Party journalism had been obvious to Rosa Luxemburg. I do not like the way party affairs are written up . . . everything so conventional, so wooden, so repetitive (Nettl, 1966, p. 147).17 She promised herself not to forget that, in political writing, it is absolutely necessary to perceive the importance and truth of the whole of your text. But also literature should be read in a true-life predisposition, in order to arrive at every conclusion through a personal path. Art completely captivated Luxemburg: she worked as literary columnist and even painted. With regard to painting, she thought that depth and perspective were the most difcult things to express.18 In literature she had a taste for classical art but also loved the popular, realist, anti-utopian authors engaged with the problems of society. To Luxemburg, they showed reality with simplicity and elegance and caused feelings of indignation, compassion or affection to emerge in the process of reading.19 For Luxemburg, literature must be, and is, an expression of the philosophy of history and, in this way, could inspire revolutionary feelings to well up from the depths of memory, and encourage the liberation of proletarian aesthetic sensibility, worn down by work. Quoting Tolstoy, she applauds the idea that work is not

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virtuous: it is a necessity. The ant does not have to be proud of his work as, in capitalist society, work is a way of destroying moral sensibility. Even artists, who offer images hoping for the publics acclaim, support themselves, as Luxemburg quotes from Tolstoy, thanks to the system of oppression of the masses (Luxemburg, 1981, p. 43). Only in freedom are true-life experiences not transformed into mere image, appearance and pretence, as Luxemburg says.20 Luxemburgs letters show a warm woman, passionate for life, who found pleasure in looking at a ower, who described with tenderness a ock of birds in the park, or who was fascinated by geology and poetry, by light and shadows, even when she was in prison.21 Her experiences could be cruel or joyful, but Rosa continued to be fearless, not even fearing death. Do you have enough now for a New Years greeting? Then see that you remain a Mensch!22 Being a Mensch is the main thing! And that means to be rm, lucid, and cheerful. Yes, cheerful despite everything and anything since whining is the business of the weak. Being a Mensch means happily throwing ones life on fates great scale if necessary, but, at the same time, enjoying every bright day and every beautiful cloud. Oh, I cant write out a prescription for being a Mensch. I only know how one is a Mensch, and you used to know it too when we went walking for a few hours in the Suedende elds with the sunsets red light falling on the wheat.23 Perhaps nally she could answer her own literary question about a story of Tolstoy. It was one where Ivan Ilich achieved, at last, a luminous consciousness before his death, something that let him conquer the fear of death and all his pains: Is it not possible to dene that more accurately? How have you interpreted it?,24 she asked in a letter to Konstantin Zetkin.25 In brief, the liberation of masses Luxemburg defended was, in some way, the basis of a new path to freedom, bright thinking in a luminous existence, where bureaucracy, fear or power did not extinguish life in all its forms and where our worlds were not reduced to seeking the property of our home as we will feel the whole of the world as our home (Luxemburg, 1914, pp. 45).26 Against Bolsheviks . . . and Mensheviks Bolsheviks thought that the genuine revolutionary force should be the proletariat. Lenin called the soviets the seeds of revolutionary power. The Party was meant to be the tool of the working class and without it, the masses could not go beyond the trade unionist stage. A central Party should impose the dictatorship of the proletariat. The minority Mensheviks, on the contrary, thought that the Party

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should accept the progressive elements of bourgeoisie in order to obtain a political democracy, through parliamentarianism. With respect to this division between Mensheviks and Bolsheviks over the philosophy of the revolution, Rosa Luxemburg criticised both parties. The proletariat should be supported by the peasantry, although afterwards private property of land should be abolished; but the bourgeoisie should not be the leader of the proletarian movement. The relation between the three classes, proletariat, peasantry and the bourgeoisie, must be dened not according to the isolated intentions and desires of those classes, but in terms of their objective situation. Like Marx, and Lenin himself, Luxemburg thought it important that revolution should be seen as a historical class struggle in which the individual became unimportant. Persons must not be simply individuals that suffer: they must be revolutionaries or proletariat, as the historical necessity implied in those words create in the proletariat, apart from the class-consciousness, a class condence. As we have seen, Rosa Luxemburg questioned, not only the trade-union leadership, but also the relation between Leninist leadership and spontaneity. As early as 1905 or 1907, she abandoned Kautskys political ideas (Basso, 1967), although they maintained similar economic conclusions about the accumulation of capital. The 1905 Revolution had demonstrated that the proletariat of an underdeveloped country was more developed than the workers of some technically advanced countries. The element of spontaneity was a motive force or a moderating inuence. The 1905 Revolution had demonstrated denitely the end of capitalist anarchism and the unity of economics and politics. Now workers should do the politics. Luxemburg thought this was the correct revolutionary strategy, and she emphasised the unlimited possibilities of the proletariats intellectual development, which she described as sediment underneath the waves.

THE ACCUMULATION OF CAPITAL

The present piece of work is inspired by the Introduction to Political Economy, a book of popularization which I have been long working, constantly interrupted by my tasks at the Party School and my activities of political agitation. In January of the present year, after Parliamentary elections, in undertaking again my task of popularizing Marxist economic theory, I have found an unexpected difculty. I did not have success in describing clearly enough the total process of capitalist production, nor its objective historical limitations. In examining the problem in depth, I came to the conclusion that it was not simply a question of exposition, but also that it hid a problem theoretically related to Marxs Capital volume II doctrine that went beyond the practice of present imperialist politics and their economic roots. I have tried to formulate this problem scientically accurately. If I have had success, my work would not only have

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had a pure theoretical interest, but also it would involve, I believe, some importance for our practical struggle against imperialism (Preface to The Accumulation of Capital. Contribution to an Economic Explanation of Imperialism, Rosa Luxemburg, December, 1912).

An Open-Ended Knowledge: The Departure from Marxian Orthodoxy Luxemburg became one of the acknowledged leaders of the left wing of the German socialists, participating in every undertaking that she believed would advance the revolution of the proletariat. She acted as organiser of mass activities, and as speaker at Socialist meetings and writer for journals. In 1907, the German Social Democratic Party (the SPD) founded a school in Berlin and, after the refusal of the government to permit Hilferding to teach there because of his Austrian nationality, Luxemburg became professor of political economy. Rosa Luxemburg enjoyed the subject so much that she began to write a book based on her lessons, Introduction to Political Economy and, although the book is incomplete since many of her chapters were lost, it was published posthumously in 1925.27 It was during the elaboration of this elementary Marxian text that Luxemburg found real difculties in Marxs works that she could not solve. As Luxemburg says, she was not successful in describing the total process of capitalist production with all its practical relations nor its historical limitations clearly enough. For Luxemburg, Marx (1867) did not prove satisfactorily that pure capitalism could continue growing in a totally capitalist world. In particular, the problem she encountered was that of incentives for investment (in Luxemburgs words, the accumulation of capital or the increase of the domination of dead labour over living labour in contexts of overproduction or under-consumption). How will capitalists continue to accumulate capital if they cannot nd protable markets for their goods? These questions were answered in the best-known book by Rosa Luxemburg, The Accumulation of Capital: Contribution to an Economic Explanation of Imperialism (1913). Luxemburg believed this book to be a continuation of Capital book 2, which Marx had left unnished and which, as nished by Engels, suffered from engelianisms. The greatest part of The Accumulation of Capital consists of studies of debates between economists with regard to the issues surrounding social reproduction: from Quesnay to Marx, including Smith, Ricardo, Malthus, Say, MacCulloch, Sismondi, Rodbertus von Kirchsmann and others. Like Marx, Luxemburg criticised the classical economists and afrmed that there was no direct relationship between production and consumption, the famous Says Law. Marxs work was centred on the accumulation of capital and intended to demonstrate quantitatively the possibility of a continual process of the economic

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expansion of the capitalist economy, in spite of continual crises. But, according to Luxemburg, in Marxs arithmetic model, we have to make very special assumptions. If we use more probable assumptions, our conclusion will be different. Besides, Marxs conclusion of the law of the falling tendency of the rate of prot is not consistent, according to Luxemburg, with Marxs schemes of extended reproduction. For that reason, in her attempt to understand problems of realization in Marxs schemes, Luxemburg didnt focus attention on that discussion of falling prot rates, which was to be a later obsession among marxist economists (Zarembka, 2002, p. 22). Finally, Marx left unsolved the question of the increased effective demand for goods resulting from increased productive capacity. Some scholars have afrmed that there is an ambiguity in Luxemburgs criticism of the lack of reality in Marxs extended reproduction schemes and that she rejected them because she did not like Marxs conclusions. But, as Nye (1994, p. 228) points out, what Luxemburgs criticism of Marxs framework for capital accumulation shows is a specic understanding of the problem of knowledge. For Luxemburg, only human commitment permits a coherent grasp of social reality. Frameworks can be written down, but there is no reason to think that they represent reality unless formulas are constantly referred back to experience. Knowledge may be stored in the form of representations, but to retain relevance involves active and continuing engagement with the changing physical and social reality. In this sense, the process is open-ended, giving rise to a not yet completed universal system or immutable truths. Furthermore, for Luxemburg experience did not support Marxs conclusions. Standing beside workers in 1914 and 1919, it was clear to Luxemburg that the world no longer made sense in orthodox Marxist terms.

The Exportation of Exploitation In particular, in the Marxian model, the massive quantity of goods produced will not nd purchasers because capitalists do not focus so much on their personal consumption, but rather reinvest their surplus to increase their prots and maintain the accumulation of capital. That is to say, value produced by capitalist society is not used mainly for worker or capitalist consumption, but for capital itself. But in a society continually accumulating capital, demand is only guaranteed if a continually expanding consumer market exists for the goods produced: capitalists will not continue producing if they can not sell their commodities protably. Luxemburg tried to lead her readers to the conclusion that the maintenance of the

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capitalist model can not only be explained by the conviction that some output is not destined for human consumption but rather it is production of the means of production which in turn produces the means of production . . . That is to say, she denied that capitalists are sufcient mutual customers for each others products to avoid a production problem and concluded that to attain a process of continual capital accumulation there must exist a stratum of buyers outside of capitalist society maintained through imperialism and the exploitation of non-capitalist countries, or more precisely, pre-capitalist countries (colonies or independent countries), which, in the long run, will be transformed to capitalism. Rosa Luxemburg described imperialism as competition amongst capitalist countries to conquer non-capitalist countries and new market opportunities by means of tariffs and monopolies in international trade, especially through international loans. She considered the 1895 Japanese attack on China, which extended imperialist power into Asia and Africa, fundamental for the beginning of a new period of capitalist development.28 Her answer was that capitalism could only survive thanks to its invasion of primitive economies, which consist basically of small uncompetitive producers. Through commerce and conquest, capitalist countries export their own crises, and non-capitalist countries provide markets for the surplus produced in developed countries, while the production of underdeveloped countries is displaced. Only the continual and progressive disintegration of non-capitalist organisations makes the accumulation of capital possible. Besides, colonies provide the metropolis with goods that they could not have obtained any other way, such as intermediate goods. This increases prots and domestic employment in capitalist countries, as exploitation is exported to the rest of the world. Economic crises will be reduced in these capitalist countries and capitalism will seem to be benecial to employers and to workers in developed countries but not for those in underdeveloped countries. Luxemburg concluded that we could wait forever for capitalism to collapse. Besides, the search for protable markets will lead to conicts between capitalist countries. War is more protable if it takes place between colonies: it increases prots and absorbs production; it eliminates the market surplus of capitalist countries, but does not destroy accumulated capital. Capitalism uses ever more militaristic ways to control the means of production and labour-power in non-capitalist countries.29 After the First World War had begun, in prison, and now certain of having been right about the distribution and subordination of some countries to others, Rosa Luxemburg answered criticisms of her rst work in a short pamphlet, The Accumulation of Capital or what the Epigones have done to Marxian Theory. An Anti-critique (1915).

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The Return to Marxian Orthodoxy Implies a Further Departure from Classical Orthodoxy According to Luxemburg, at all stages of social development the process of production is based on the continuation of technical and social conditions, on the relationship between humanity and nature and that between humans themselves. But in a capitalist system, the only goods produced are those that can be expected with certainty to be sold at the customary prot. Prot becomes an end in itself that determines not only production, but also reproduction. On the basis of price uctuations, the experiences of the preceding labour period indicate whether the aggregate of produced commodities falls short of the effective demand or exceeds it. As nearly all individual branches of production are technically interdependent and, at the same time, they develop independently, the general supply of products may alternate periodically between shortage and surplus relative to the social demand resulting in a general interruption of reproduction. Furthermore, capitalism requires the conversion of capital into means of production; its further conversion into commodities by a labour process; and its nal reconversion into money. These conversions are made for a surplus value ever growing into larger quantities, ad innitum as there is not a stop to this increase that could have been established by the social needs for consumer goods. Expansion becomes, even for the individual capitalist, a condition of existence. Luxemburg, however, says that the postponement of economic crises cannot go on indenitely. Unless markets and protable wars expand indenitely, global overproduction will nally take place. Capitalism needs other economic systems and, although the tendency is to expand worldwide, or precisely because of this expansion, it carries the seeds of its own destruction because of its internal contradictions, as Marx after all had predicted. In fact, for Luxemburg the idea of the necessary collapse of capitalist production was an unavoidable prediction.30 It was this conclusion that made Luxemburgs theory different from others of her time, including Bukharins more classical position. As we can see, Luxemburgs theory was based on the assumption that markets do not work, and that we need an external factor to make the current maintenance of capitalism possible. But, for instance, Bukharin afrmed that markets do work, so, if we need an external factor, it is in order to prove and describe the natural equilibrium of capitalism. Imperialist expansion aids the accumulation of capital in capitalism but is not necessary for creating continuously increasing surplus value.31 Bukharin (1925) criticized Luxemburg saying that she dened the accumulation of capital as the accumulation of money capital but this critique did not accurately present Luxemburgs ideas. Although Luxemburg emphasises the fact that money is essential in extended reproduction, she was perfectly aware

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of the instrumentality of money, that is something linking two commodities.32 In reality, Bukharin tried to undermine the inuence of Luxemburgism because, as Mattick (1981, p. 92) afrms, the Bolsheviks made it their task to whitewash the tradition linked to her (see Rodolsky, 1968, p. 450; Zarembka, 2002, p. 11).

Further Analysis of the Accumulation of Capital It falls beyond the aim of this paper to present an extended analysis of Luxemburgian theory on the Accumulation of Capital.33 We just want to analyse three interesting conclusions (or criticisms) drawn from Luxemburgs masterpiece; three criticisms that, as we shall see, Luxemburg herself had already foreseen and solved within her theory. One conclusion, drawn by Dunayevskaya (1982), is that, for Luxemburg, accumulation is no longer an internal relation between capital and labour, but between the capitalist and non-capitalist environment. The accumulation of capital for Luxemburg had become a relationship whose principal support is an external factor: the non-capitalist environment. As non-capitalist societies are the labourpower stock, Dunayevskaya afrms that, in Luxemburgs theory, the antithesis colonial masses does not seem revolutionary, and, in its political basis, dialectical methodology disappears.34 The value producing element in the system, the proletariat for Marx, in Luxemburgs system is not located within capitalism, but outside of capitalism, in non-capitalist stratums.35 Moreover, the market is what determines production. Dunayevskaya points out that this could debunk the meaning of the class struggle in the Marxian production expansion model. So Luxemburgs model is alleged to be based on an idea closer to bourgeois, maybe marginal or Keynesian, economy: on that of effective demand, necessary for production. This similarity with ofcial bourgeois economy, which could be taken as praise (Kalecki, 1939, p. 46) was criticised by some Marxists that defended themselves by saying that what Marx intended to say by production for productions sake was that, even though constant capital is not personally consumed, it is productively consumed, that is to say, consumed by producing machines or means of production. For them, what Marx describes is what has been called the general contradiction of capitalism, in which we see a degradation of the worker until he is merely an appendage to a machine, although labour is the only element that produces surplus value. Since labour power is the only source of surplus value, capitalisms incapacity to reproduce labour condemns the capitalist system (Dunayevskaya, 1982, p. 43). But this criticism of Luxemburg is not completely based on Marxs ideas. As Zarembka (2002, p. 35) points out, Marx himself refuses to reduce realization

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in capitalism simply to a problem in the sphere of production, although it is undeniable that alienation of labour is in production. In fact, Luxemburgs conclusions were the same class-struggle-based conclusions of Marx. For Luxemburg, workers are only a labour force, and technical progress simply increases the rate of exploitation of the workers paid the minimum society allows.36 Another conclusion we can draw from Luxemburgs writings is that her search for ex ante accumulation motives could have introduced subjectivism into Luxemburgs theory. Imagine, as an anti-Says-Law hypothesis, that anarchist demands place some prices permanently over the costs of production (for example, if it were possible for the demand for luxury products of Department II, engaged in the production of consumer goods, to be greater than the supply). Then, as Dunayevskaya points out, the importance Luxemburg attaches to consumption for the maintenance of capitalist production could lead to the need to incorporate a utility value theory in place of Marxian labour value theory, something Luxemburg absolutely rejected.37 But neither is this criticism completely based on Luxemburgs ideas. Luxemburg accepted the quicker growth of Department I, engaged in the production of means of production, as compared with Department II, wherever technical progress plays a decisive part in production.38 Nevertheless, it is true that if we were talking about the production of a non-capitalist economy (the system that supports the system but is outside the system), the Marxian hypotheses that both departments work according to capitalist methods and that they are interdependent and based on socially necessary labour would be made more unlikely. Besides, only if the capitalist prot motive is abolished and a social organisation of labour introduced, as Luxemburg says, will the limits to technical progress which capitalist production sets be avoided. Then, the marginal use of the machine by the whole extent of the capitalist surplus value could increase.39 The third conclusion drawn is that Luxemburg had simply introduced one more stage, imperialism, before the necessary arrival of Marxian socialism. But in Luxemburgs theory we have to rely on the hypothesis of the extension of the capitalist system world wide to demonstrate the historical necessity of the collapse of capitalism by the capitalist gravedigger, the proletariat. For her, this hypothesis is indeed evident as it becomes necessary for capital to progressively have the whole globe at its disposal so as to nd productive employment for the surplus value it has realised. The absorption of labour power from primitive social conditions by the capitalist wage system is one of the indispensable historical bases of capitalism (Luxemburg, 1913, p. 36).40 But, if, for instance, the non-capitalist countries were doomed to remain in their degraded condition of underdevelopment and misery, as Baran and Sweezy (1968, p. 12) afrmed, for them the only road forward leads

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straight out of the capitalist system. Baran (1957, Chaps 6 and 7) even tried to demonstrate the virtual impossibility of capitalist development of underdeveloped countries in the present world context. In this case, politics, not economics, is supposed to develop a major role in history. Resistance due to the indignation that imperialist violence creates in non-capitalist economies (expressed nowadays in possible terrorist or nuclear dangers) and the political force of competitive capitalists (expressed, for instance, in protectionism), could hinder the expansion of capitalism. Luxemburg (1913, pp. 446, 452), in fact, was aware that imperialism could make full capitalist development impossible, because the mere tendency towards imperialism intrinsically takes forms which make the nal phase of capitalism a period of catastrophe. But, for her, political power is nothing but a vehicle for the economic process.

AGAINST WAR, THEN HER ASSASSINATION

It was, however, Luxemburgs political activity, not her writings on economics, which landed her in jail. She thought that the First World War could have been prevented by a massive refusal on the part of workers to ght in support of imperialist aims. When the German government asked for war credits in 1914, Luxemburg thought that German socialists in the Reichstag would vote against them: but all but one voted for the credits. At rst, fteen MPs seemed to want to vote against the credits. Finally, they bowed to Party discipline and, on the 4th August, Social-Democratic MPs voted unanimously for the credits. Some months later, on the 3rd December, Karl Liebknecht preferred to take no notice of Party discipline, and voted according to his conscience. He was the only one to vote against the credits. In spite of her disenchantment, Luxemburg continued to preach revolt and international socialism. She became known to detractors as the Red Prima Donna or The Jewish Rose. Rosa Luxemburg and Karl Liebknecht, who disagreed with the German Social-Democratic position on the vote for war credits, founded the Spartakusbund, whose principal aim was to ght against the imperialist war. In early 1914, arrest came after a speech in which she was accused of inciting soldiers to mutiny and workers to break with capitalism. In prison she wrote a pamphlet defending internationalism and attacking bourgeois national selfdetermination. She used a pseudonym: Junius. The Juniusbroch re concludes u that if the world is divided into capitalist nations and worldwide imperialist politics regulate the internal and external life of a country, national self-determination is pointless.

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In spite of her criticisms of the 1905 Revolution, she was glad that the 1917 Revolution had taken place. Nonetheless, she also complained about the oligarchic tendencies of the Party leadership, which obstructed the practice and knowledge of revolutionary technique. As we have pointed out, in spite of her spontaneity thesis, Luxemburg did not deny the need for centralism or underestimate the organisational difculties of a revolution against Absolutism. She only objected to making virtue of necessity and transforming it in a permanent principle. She called this concept of organisation ultra-centralist and thought it necessary to rethink the concept of permanent revolution, linking it to the independent and direct action of masses, without renouncing the necessary organisation for the success of revolution, which would lead to the liquidation for all time of historical anarchism. Luxemburg was not released until October 1918, when, after revolutionary riots at the naval base of Kiel, Chancellor Max von Baden, pressed by the masses of Breslau who were forcing the gates of the prison, granted an amnesty to all political prisoners in the Breslau Polish prison (Luxemburg, 1976, p. 219).41 After abandoning prison, she wrote a pamphlet condemning capital punishment,42 and against the oppression and inhumane situation of German prisoners, who were to be sanctioned more severely if they were poor and powerless and were not card-carrying members of the Social Democratic Party. She then played an important role outside the Polish movement: some members of the Spartacus League, including Rosa Luxemburg, Karl Liebknecht, Leo Jogiches and Clara Zetkin, created in a meeting between December 30, 1918, and January 1, 1919 the German Communist Party (KPD), which, a week later, would organise the armed insurrection in Berlin. At the same meeting, Luxemburg lost a vote to have the party participate in the constituent Assembly elections. So, although she opposed the idea of an immediate uprising and knew that many revolutionaries were being arrested by supporters and police of the old regime, Luxemburg led the Spartakus uprising in 1919. She claimed power for the Soviets and warned workers that capitalists would ght to protect their property and politicians to preserve their power. Finally, the Social Democrat ministers, especially the Home Secretary, Noske, crushed the revolution, sending the army against the insurgents, among them Karl Liebknecht and Rosa Luxemburg. They were assassinated. It was January 15, 1919. The day before Rosa had written Order Prevails in Berlin, once again calling for revolution. While hiding in the apartment of a friend, she was arrested by a local paramilitary group and taken to the hotel that served as its headquarters. She was interrogated roughly and the order was given to take her by car to a civil prison nearby. As she was led to the car, one of the soldiers smashed her skull with two blows of his rie butt. She was then dragged

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off to the waiting car, hit again and nished off with a shot to the head. Her corpse was thrown into a canal, where it was nally discovered months later, so mutilated that it was impossible to recognize her. Leo Jogiches, shocked by the murder, investigated the crime. He managed to publish accounts of eyewitnesses and a photograph of the soldiers who committed the crime; they were said to be celebrating her death at the hotel where she had been questioned and abused. The revelation resulted in his own arrest. He was shot dead on March 10.

INFLUENCE IN ECONOMICS
In some sense, the signicance of Luxemburgs work was far greater than she could have imagined. In the rst place, she made people aware of the danger of a revolution that would lead to State terror. Whats more, she passed on an important legacy to economics. For Marxist economics, she highlighted some of the weaknesses of Marxs capital accumulation model; she claried the relationship between capitalism and colonial expansion; and she demonstrated that capitalism could only survive through the disintegration of pre-capitalist economies. Contrary to Marx, she succeeded in identifying individual capitalists reasoning and capitalisms social rationality in the Marxian model. Luxemburg clearly showed that capitalists must sell their production, and buyers from outside the capitalist society were therefore needed. Only the exploitation of pre-capitalist countries and the displacement of their internal production could provide this market. Nevertheless, as capitalism has a tendency to become global, and it needs other systems to maintain itself, postponement of the nal crisis will not be indenite. Internal contradictions will nally doom capitalism to its destruction. Rosa Luxemburg also has inuenced orthodox economics. She was the rst to explore the inducement-to-invest problem. In her introduction to the English translation of The Accumulation of Capital, Joan Robinson (1956) explained the thesis presented by Luxemburg as a Keynesian effective demand problem. A continually accumulative stock of capital can only generate investment if we guarantee an ever-expanding consumer market for the ever-growing capitalist production. Although, as Robinson says, Luxemburg does not formulate the problem of inducement to invest in modern terminology,43 she created a theory of dynamic capitalist development, giving special importance to the growth of effective demand, and thus anticipating twentieth century growth models and introducing growth in Marxian models. For Marx, as Nettl (1966, p. 839) afrms, investment was a function of the needs of technology and size that would enable a

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producer to remain viable, that is to say, to stay in the game: and, certainly, that is not growth. But, although Luxemburg does not suggest that genuine growth in the modern sense is possible in capitalist economies, just from the two limitations of her model44 it is possible to gather that the whole analysis of cumulative growth of investing savings in conditions of technical progress and of a rising rate of capital exploitation provide the basis for a modern growth model. In fact, Kaleckis (1939) business cycle theory is a revised exposition, using the interpretations of Rosa Luxemburg and Mikhail Tugan-Baranovsky, of Marxs theory of crisis. According to Kalecki (1967), Luxemburg correctly stressed the role of exports and public expenditures (especially militarism and imperialism) and the transfer of purchasing power to the hands of the state to aid the production of surplus value, the same as modern Keynesians attempt to reach full employment by means of decit-nancing and monetary manipulations. For Kalecki, the Principle of Effective Demand, the central doctrine of what was to be Keyness macroeconomics, which he explained independently, was the determinant of economic activity, and the determination of savings by investment and under-investment was the cause of economic depression (see Toporowski, 2003). But, based also on Tugan-Baranovsky, and now contrary to Luxemburg, according to Kalecki government could guarantee full employment, so the nal crisis of the bourgeois economy is not necessary in his theory.

THE OPPRESSION OF WOMEN AND THE PERMANENT REVOLUTION

A New Concept of Alienation Luxemburgs interest in womens issues had been neglected in both Marxist and non-Marxist studies. It took the modern womens movement to discover Luxemburgs feminist dimension, term used by Dunayevskaya in her 1982 book, which traced the feminist nature of her life.45 Luxemburgs earlier male biographers never considered the subject. It is true that, in her thought, we must extend the female question to that of human spontaneity in general. It is in general that Rosa Luxemburg thought we must ght against totalitarianism, be it a capitalist one or a totalitarianism claiming Marxism, through a process of permanent revolution and a praxis that would break with human alienation even after the conquest of power by the proletariat a conquest that Luxemburg wished for. Although some philosophers have stated that the consideration of a tendency for alienation disappeared as Marx matured intellectually (Althusser, 1972, p. 67), alienation is without doubt a critical word used by Marx and other authors, and

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a term that continues to be used in the twenty-rst century social sciences. When talking about different thinkers, a historian of economic thought has an obligation to avoid the isms. Marx may have been mistaken about many things, but we must remember that he himself uttered that famous sentence Im not a Marxist when he felt his name was being used in certain contexts not in agreement with his own ideas. Before rethinking his legal ideas, Marx decided to study philosophy. He took the concept of alienation the detached product of an activity that ends up controlling the very same activity from Hegels and Feuerbachs theories. In the Economic and Philosophical Manuscripts of 1844, that concept gains a social and economic dimension. But Marx also points out the importance of political alienation, in which the State, as a product of society and national interest, is by obligation alienating. He concluded that the reversal of political alienation, emancipation from the bourgeois State, left social alienation intact. Social alienation was a result of private property, so it was essential for him to establish communism and argued for the abolition of the existing property relations. In the Communist Manifesto, Marx afrmed that the existence of the proletarian State would develop at a specic moment, it would centralize and redistribute goods, and afterwards it would disappear.46 He, and especially Lenin, thought the dictatorship of the proletariat a necessary intermediate step to reach that perfect society.47 But for Luxemburg, as we saw, the order created by an external system as defended by Lenin must also be alienating. In fact, Luxemburg found a new source of alienation, different from Marxs. An external organisational conception supposes a past and future conception of time, in constant movement, not internal intuitive time (like that of Husserl or Bergson) (Ripalda, 1996). Luxemburg sought a new way of thinking beyond purely representational thought that could break with this type alienation.

Beyond Representational Thought The twentieth century, the realm of science, can also be explained in terms of alienation, in which science itself risks becoming the eventual cause of the end of the human race. Modern society has been portrayed as based on technology and machines, on the consideration of art as a static representation of human life. Reality becomes image and knowledge ction. We live in a world full of images where a context-non-free code or language has replaced experience. Philosophy has tried to explain a new way of thinking beyond this alienated world;48 a way of thinking that opposes the oblivion of Being49 and that

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perhaps has something to do with poetry or art. This Art would not, however, be an image, but a coherent creation, where mind returns to an initial memory, to an archaic speech that arises in the present. A gift that man can reject from the narrow-mindedness or the construct of an isolated ego, or accept with open gratitude. So, in brief, we are talking about a lucid absorbed activity always willing to discover, to step forward in order to bring things out of concealment into the open. There is a brilliant space, a shared non-anxious true-life world in which things and persons can be encountered, capable of having perspective and depth.50 Nevertheless, Power takes possession of material things and, in that way, extending national control, it expropriates men of any possibility of opening to this new way of thinking. The struggle must necessarily be worldwide. This idea is very much related to Luxemburgs theory: Rosa Luxemburg sought this open clarity. For her Socialism in life demands a complete spiritual transformation in the masses degraded by centuries of bourgeois class rule. Social instincts in place of egotistical ones, mass initiative in place of inertia, idealism which conquers all suffering, etc. (. . .) The only way to a rebirth is the school of public life itself, the most unlimited, the broadest democracy and public opinion. It is rule by terror that demoralizes. (. . .) without a free struggle of opinion, life dies out in every public institution, becomes a mere semblance of life, in which only the bureaucracy remains as the active element.51 Government must be understood as participation, not as a Hobbesian repression.

The Female Question To explain this idea, we will set the example of the female question. Rosa Luxemburg tried to co-operate with feminist movements. But when the members of Socialist Party tried to limit her role to what was then called the female question, Rosa atly refused to let them pigeonhole her. The fact is not that she had forgotten about the female question, she was perfectly aware of it. We even know that she was the object of domestic violence, as the jealous Leo Jogiches threatened to kill her when she made him aware of the fact that she had a lover (Seidemann, 2002, pp. 126127). But, she never mixed politics with her personal problems. Luxemburgs concept of freedom was the same as Hegels: a relationship based on the independence and equal treatment is the only way of obtaining a mental rebirth, breaking the former master-slave condition. For that reason, she said, Monarchy and womens lack of rights have become the most important tools of the ruling capitalist class (Luxemburg, 1971, p. 219). She opposed the antagonism characteristic of female/male social division of labour criticising

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repeatedly the conventionalism of the institution of marriage in its current form.52 Writing in support of womens right to the vote, Luxemburg identied the failure to count womens work in the home as productive with the brutality and insanity of the present capitalist economy (Nye, 1994, p. 43).53 But her concerns were not centred only on women, but on Humanity. Being a woman did not prevent her from getting involved and concerned about more profound social changes. So, she tried to trust men, probably more than she should have done, and never wanted to be seen as a men hater: when the members of the Socialist Party voted for the concession of war credits for the First World War, something she thought to be treason, she was even brought to the verge of insanity and, as she herself admitted, contemplated suicide.54 Probably, at heart, she felt guilty and had foreseen that human beings in power tend to commit that kind of treason and that all organisations tend to create routines and to become bureaucratic. Possibly, her idealism or ingenuousness prevented her from rejecting Bolshevik revolutions, which, in the end, would become dictatorships. Rosa Luxemburg, however, never considered herself either Bolshevik or Menshevik and, even in that sense, she was critical. When she became aware of the opportunism and authoritarianism of socialist revolutions, she constantly pointed out the dangers of an excess faith in a selfimposed system. The fact that, as a young woman of 27, only a year after arriving in Germany, she began her intellectual life with the challenge of facing no less than Edward Bernstein, Marxs literary executor, shows what type of activist she was and the condence she had in her own ideas. The immediate acceptance she had as a theorist was not due solely to having shown her acuteness as a Marxian economist in her doctoral thesis on the Polish economy, although this work was considered an important contribution considering that it was written by a Pole. In fact, her opposition to Polish self-determination especially because that meant opposing Marxs attitude toward Poland could only lead her to isolation from other socialist members. It became clear that this was what they had wanted to do from the rst when they tried to limit her role to the female question. For feminists, in fact, nationality has been a difcult issue. As Nye argues, feminism in Western countries has seemed tainted with white middle class women with little appreciation for ways of life different from their own. But it cannot be doubted that legal guarantees for women may have come at the expense of traditional ways of life and of the disappearance of conventional antagonisms, which reinforce archaic patterns of male chauvinism (Nye, 1994, p. 23). So, as considered to be consequence and cause of tradition, Luxemburg did not value national autonomy at all, although the specics of each historical situation have to be understood. As Nye (1994, pp. 227228) points out, Luxemburg assumed that

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all humans share a common material world and that all thinking begins from that shared condition that make others thoughts never completely alien; being human, they can be understood. The female question is also disregarded in Luxemburg studies when it is afrmed that her friendship with Clara Zetkin, a well-known founder of feminism as a mass movement of the working class, as well as theorist and editor of the most widely read feminist journal, was a burden for Rosa Luxemburg. This was not true. The question is much more simple: Clara decided to centre herself on the question of organising working class women, while Rosa had a wider range of political concerns. Luxemburg, in fact, assisted the movement of autonomous women co-operating with the journal Equality (Die Gleichheit) edited by Zetkin, a journal that pursued an aggressively anti-militarist line, and which by 1914 enjoyed a circulation of 125,000 copies. Although Rosa Luxemburg was already the editor of the Social Democrat Journal, when she arrived in Germany in 1898, she had to face the fact that the male members of the journal would not give her the same powers as her male predecessor. The complaints she presented to Bebel did not improve the situation and a short time afterwards she resigned. She never made this fact a part of the female question, taking advantage of the situation. Indeed, for Luxemburg, getting rid of antagonism means precisely that: not blaming someone for a historical injustice, but only for his own injustices. For her, we can only arrive to freedom through freedom: a dictatorship cannot be the intermediate path . . . When the 1905 Russian Revolution took place, Rosa Luxemburg wished to join the Polish proletariat, but Jogiches, who was already in Poland, and her German comrades, dissuaded her from returning to Poland in that tumultuous period. The so-called female question was then not some generalisation, but something that irritated her in a personal way. Her comrades often said to her that for her, as a woman, risks were greater than for male revolutionary emigr s that e were returning. Although she delayed her return to Poland, these arguments only conrmed her decision to return. She arrived in Poland on December 30, 1905 and got involved in all kinds of activities, from writing to holding a revolver on a publisher to compel him to publish manifestos, articles and pamphlets. She took part in strikes and public demonstrations and made speeches at factory gates proclaiming the need for a general uprising. Rosa saw that her theory of the liberation of the masses was being enacted before her own eyes. In fact, it was during the 1905 Revolution that the differences of opinion between Luxemburg and Jogiches began to become evident. Until then, she was persuaded that the Party organisation was necessary: from here on, she was convinced people could change the world on their own, a soil of unlimited possibilities according to her. The organisational

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experience of Jogiches was not so sacred now, although the dispute between the couple in relation to the necessary opening up of the revolution has not been recorded. Rosa in 1907 thought it necessary to be independent from Jogiches to feel free: Im only I once more since I have become free of Leo, she would say (Nettl, 1966, p. 383). Due to his incapacity to communicate his feelings, Jogiches had forgotten and neglected Luxemburgs intellectual development, so, as she said, she was for him just one woman more, with the only difference, perhaps, that I write articles (Seidemann, 2002, p. 64). Possibly, she felt their relationship was suffering from embourgeoisement and apathy. The search for her own autonomy made her feel she needed a decentralised existence.55 In 1907, Rosa Luxemburg also took part in the International Conference of Socialist Women, reporting on the work of the International Socialist Ofce, of which she was member, and emphasizing the importance of womens opinion in society. She was determined to form a womens movement that would concentrate not only on female workers, but also on training women leaders, capable of taking decisions. The break of Rosa Luxemburg with Bebel and Kautsky, who conducted the leadership of the Party as if they were government leaders (although they did not have State power), made the Party members, now that she was in disagreement with the orthodox leadership, especially sarcastic towards her, something that no male opponent had to put up with. Besides, Luxemburgs attempt to criticise, and understand, Marx (especially because she was pointing out real problems of his system), worried her critics, who used her gender as an easy target. Luxemburg comments that, during disagreements with her own Party comrades, they said, according to her wording, that the natural place of women is in the home. But she became accustomed to this male chauvinism, and she turned a deaf ear to it, although it affected her leadership position. She had on principle to remain indifferent to any signs of male chauvinism. Probably, as she hated the endless political arguments,56 she was unable to continually criticise others (I myself prefer to praise everything other people do rather than criticise everything and yet do nothing myself (Nettl, 1966, p. 263)57 ). August Bebel (1904), author of Women Under Socialism, who had become famous for supposedly being a real feminist,58 after the Party controversies wrote to Kautsky about Luxemburgs condition:
It is an odd thing about women. If their partialities or passions or vanities come anywhere into question and are not given consideration, or, let alone, are injured, then even the most intelligent of them ies off the handle and becomes hostile to the point of absurdity. Love and hate lie side by side, a regulating reason does not exist (in Dunayevskaya, 1982, p. 27; Nettl, 1966, p. 432).

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This did not alter the text of Women Under Socialism, which had had undergone many editions at the moment that Bebel began his campaign against Rosa Luxemburg.59 In 19101911, Gleichheit was the channel for the revolutionary opinions of Rosa Luxemburg, and when the First World War broke out, it became an antiwar instrument. The general revolutionary struggle and the setting-up of the rst International Day of Women (10 March 1911, proposed by Clara Zetkin) made 1911 a fundamental year for womens liberation and for Rosa Luxemburg. Nonetheless, she continued to consider the female question separate from the controversies with Kautsky and Bebel, evading the problem of male chauvinism. In a speech made in 1912, Rosa demanded female suffrage, as always relating it to the far-reaching goal of the proletarian revolution. On the February 18, 1915, Rosa Luxemburg went to prison. In August, Zetkin also went into prison, and she was afterwards red as editor of Gleichheit. In time, the character and name of the journal changed. The Russian Revolution of 1917 began precisely on the International Day of Women, on which there was a strike. On the fth day of violent strikes, the prisons were thrown open and political prisoners were freed. In November, Kerenskys government also was brought down, and Bolsheviks came to power on November 9. Involved in these events, Rosa Luxemburg continued to be, until her death, an activist of socialist feminism.

CONCLUSION
And you ask whats the use of all this? What for is not, in fact, a concept for the whole of life and its forms. To what purpose are there blue titmice? I really dont know, but I am happy that they exist and I feel a sweet comfort when suddenly, from beyond the walls, there resounds a quick Tsi-tsi ba from afar (Luxemburg, 1969b, p. 31; 1978, p. 209).60

It cannot be doubted that Luxemburg had a ash of genius at the outbreak of the Russian Revolution. With her socialist ideas, she was present at the embryonic stage of a revolution she wished for yet, from the very beginning, she criticized that path to socialism and felt indignant about the way in which it was taking place. In this sense, she cannot be blamed for the way Revolution and Communism developed. Her criticisms, in fact, were put forward at a moment in which Russia had not yet been transformed into the dictatorship it later became. It should be pointed out that Luxemburgs unique spontaneity theory foresaw a new form of alienation, different from Marxs, which consists of the death of creative action due to bureaucratic organization. For her, creative action can only take place in a present understood as a gift, in which you rejoice at every sunny

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day, to quote Luxemburg. Praxis is, according to her, the way to the beginning of this free thought. It is true that oblivion of reality and the lack of control over ones actions are at the base of mass action Luxemburg defended. But, as we have said, the seeking of mass liberation under conditions of Marxian historical necessity leads to the negation of personalization and hero worship and, so, it amplies the scope of the ego. Luxemburg defended a process of social transformation from the bottom up, not imposed by elites. In her thought, the search for real freedom was related to the idea of the whole, something that indeed develops from the bottom up and in the course of time. Luxemburg fought in her theory and in her life against the idea of an isolatedreactive-subjective ego and tried to nd a world where Mensch could act freely in a communicative unity or totality in perpetual change. In her writings, she wanted to ght sterile habit and inertia and, so, she always refers to movement, to masses gathering together and moving forward, active and hopeful. Besides, she was never led by the voluble ideas of the masses: she sought the shared condition of human beings and tried to free herself of the prejudices even women have with relation to the female question. Throughout her life, she sought the open breaking down of a corporatism that, as we have seen, she always found obstructing her way: she found it in nationalism, in trade-unionism, in the Party, in knowledge and, even, in the feminist world. In this way, it is true, she continued along Marxs philosophical path: individuals have no objective essence, as their ideas are interwoven with material activity. Luxemburg showed herself to be interwoven with reality. It is not that she had a typical female way of thinking: as we have said, differences between philosophers have nothing to do with sex. In general, there are only free philosophers and philosophers tied down to a scholastic tradition or personal interests.61 Let the reader decide to which group of philosophers Luxemburg belonged.

NOTES
1. He himself was at rst unrecognised, as he published in Polish, instead of English. It was only when he began to publish in English in the early 1930s when his claims to have anticipated The General Theory were heard. 2. According to Nye, male philosophers, on the contrary, are supposed to project present reality into a transcendent realm of the spirit or of logical, scientic, mathematical techniques. She also points out that, probably, women have had little inuence in economic science because it is expressed in schematic mathematical formulas, resolutely scientic. But that psychological theory of Nye misrepresents reality: sexual discrimination spreads throughout all the spheres of philosophy, and the cause of it is not some feminine way of thinking, but rather the institutions men have created through history.

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3. From the party of conservatism, for example, Carlyle feared the transition to a new system and, at the same time, he talked about economics as a dismal science in contrast to the arts, a gay science. After this famous criticism, he praised social and economic elites and added a defence of slavery and genocide in Jamaica. See Carlyle (1956, 1971). Dickens, in Hard times, joined in Carlyles criticism asserting that economics was a dismal science as opposed to literature, the gay science. At the same time he also defended slavery and genocide. See Levy (1999, 2000). 4. For the contradiction between capitalists individual and capitalisms social rationality, see Simon Clark (1994, Chap. 2). 5. In fact, later in his life Marx probably rejected the existence of necessary stages previous to socialism. 6. A short account of Luxemburgs life can be found in Polkinghorn and Thomson (1973, pp. 3949). 7. It was signed Rozalia Luksenburg (1887). 8. However, Cliff says that, at the same time, and using the same criterion, Marx and Engels opposed national movements that could assist Tsarism or the Habsburg dynasty: they condemned Southern Slav independence, for example, as they thought they would support Absolutism and would be, in that sense, reactionary. At rst, they did not support either the independence of the subject countries of Asia, Africa or South America, populated by indigenous peoples, as they thought they had not yet passed through the necessary socio-economic stages previous to socialism. Nevertheless, as we have pointed out, later in his life Marx probably rejected the existence of necessary stages previous to socialism. That evolution of Marxs ideas does not mean that there is a radical break, between a young and an old Marx, as Louis Althusser argued in the 1960s (see Althusser, 1970; Kolakowski, 1971; or ONeill, 1982). Martin Nicolaus (1968) points out the difculties that the Grundrisse raises for Althussers thesis of a break. Nevertheless, a convincing case of Marx changing opinions can be seen in White (1996), where the author tries to argue the existence of a split with Hegels philosophy before the rst edition of Capital, and to demonstrate that Marx came closer to a socialism based in Russian Mir or Communities instead of Hegels concept of Totality, in opposition to Engels. According to White, Plekhanov tried to obliterate this change and he himself established philosophy as the basis of socialism, with the subsequent misunderstanding of Marxs intentions of nally rethinking his work. 9. Quoted in Cliff (1960, Chap. VI) from Die Neue Zeit, 18951896, p. 466. 10. Nevertheles, it seems that Luxemburg always preferred Polish to German, although her family spoke in German at home (while her instruction was in Russian and she was acquainted with Yiddish). Maybe this detail is signicant and indicative of her feel for her native culture. 11. As we can see in a short list of the subjects Luxemburg dealt with in her works: Against Polish independence or internationalism: Against Lenin The Industrial Development of Poland: 1897; The Junius Pamphlet: 1915 Against Marxist Revisionism: With Lenin Reform or Revolution?: 1900 Spontaneism: Against Lenin The Revolution in Russia 1905; The Mass Strike: 1906

The Coherence of Luxemburgs Theories and Life The lack of effective demand and imperialism: Against Lenin The Accumulation of Capital: 1913.

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Zarembka (2003a or b) argues that, in fact, Lenins economics seems not to be Marxist and that there is an afnity between Lenins economics and Adam Smiths. Besides, Lenin did not have a theory of technical change so he does not use Marxs argument that technical change is focused on cheapening labour power. Apart from that, he did not take the Russian Commune seriously. His state capitalism included the open admission of using capitalistic methods in the factory, e.g. adopting Taylorism to promote Soviet industrial development, disregarding the active role of workers in technology or the consequences for workers of an increased separation between mental and manual labor or of the bureaucratization of the workplace. Linhart (1976) offers full discussion of Lenin and Taylorism. 12. A Hegelian methodology she, nevertheless, did not use in her works; just as Marx himself, as Zarembka (2000) argues, became more agnostic with regard to the importance for his theory of Hegelian method. Luxemburg even criticized Marxs Hegelian language in Capital, Volume 1, when referring to her Anti-Critique: this is a work which I am pretty proud of, and which will certainly outlive me. It is much more mature than the Accumulation itself: . . . In theoretical work as in art, I value only the simple, the tranquil and the bold. That is why, for example, the famous rst volume of Marxs Kapital, which its profuse rococo ornamentation in the Hegelian style, now seems an abomination to me (for which, from the Party standpoint, I must get 5 years hard labor and 10 years loss of civil rights) (Luxemburg, 1993, p. 185), Letter to Hans Diefenbach, March 8, 1917). 13. As for Luxemburg, for Luk cs orthodox Marxism refers to method (see Luk cs, a a 1923, 19781980). 14. Extracted from The problem of Dictatorship, Chapter VI from The Russian Revolution. 15. See, for instance, her correspondence with Robert Seidel, Berlin, 15-VIII-1898 in Luxemburg (1981, p. 134). 16. The West European literati, dedicating themselves to the cult of their alleged ego and to the morality of the superior man, spread even into the world of socialist thought and struggle. These literati are not typical of the bourgeois intelligentsia in general but only of a certain phase of its existence namely, they are a product of a decadent, putrescent bourgeoisie caught up in the vicious circle of its class domination (Luxemburg, 1971, p. 300). Extracted from Organizational Questions of Russian Social Democracy. 17. Seidel letters, No. 1 (15), Berlin, 23-VI-1898. 18. Letter to Gertrud Zlottko, 2551915, Luxemburg (1981, p. 202). 19. See, for instance, her criticism of Mickiewicz or Uspenski in Luxemburg (1981, pp. 923). 20. See Waters (1970, pp. 390391). 21. See, for instance, Letters 7 July 1916; 2 May 1917; last May 1917; 24 November 1917; middle November 1917 in Luxemburg (1969b). 22. Mensch is a German word, which cannot really be translated in its full meaning. It refers to something like a real person, a genuine person, a truly humane being . . . 23. Luxemburg was in prison when writing this, in 1916. Rosa Luxemburg to Emanuel and Mathilde Wurm, 12/28/16, in Luxemburg (1993, p. 173), and in Dunayevskaya (1982, p. 7). 24. Letter to Konstantin Zetkin, 681909 in Luxemburg (1981, p. 175).

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25. Another fragment of a Letter from prison to Sophie Liechknecht could explain further this idea: I had such an experience yesterday! I must tell you what happened. In that bathroom, before dinner, I found a great peacock buttery on the window. It must have been shut up for two of three days, for it had almost worn itself out uttering against the hard windowpane, so that there was now nothing more than a slight movement of the wings to show it was still alive. Directly I noticed it, I dressed myself, trembling with impatience, climbed to the window and took it cautiously in my hand. It had now ceased to move, and I thought it must be dead. But I took it to my own room and put it on the outside windowsill, to see if it would revive. There was again a gentle uttering for a little, but after that the insect did not move. I laid a few owers in front of its antennae, so that it might have something to eat. At that moment the black cap sang in front of the window so lustily that the echoes rang. Involuntarily, I spoke out loud to the buttery, saying, Just listen how merrily the bird is singing; you must take heart, too, and come to life again! I could not help laughing at myself for speaking like this to a half-dead buttery, and I thought: You are wasting your breath! But I wasnt, for in about half an hour the little creature really revived; after moving about for a while, it was able to utter slowly away. I was so delighted at this rescue! (Wroncke, last May 1917; Luxemburg, 1969b, pp. 3334; or Beer, Max, 1928, forward in Letters from Prison, by Rosa Luxemburg, New York: R. M. Mc Bride and Co., p. 24). 26. Extracted from The proletarian woman. 27. Nettl says that the publication of this book was delayed owing to litigation with Paul Levi, who rst published it in 1925 (Nettl, 1966, p. 796). 28. Hilferding, too, afrmed that expansionist nance capital was the last stage of capitalism. 29. Contrary to Luxemburg, Otto Bauer (1913), basing his ideas on the Malthusian principle, said that capital accumulation adapts itself to increasing population (as he expressed in 1913 in Die Neue Zeit, p. 871). 30. Conversely, Sweezy (1970) afrms that Marx contrary to Engels was prudent enough to neglect the idea of the necessary collapse of capitalist production. For an opposite opinion, see M rz (1976). a 31. I am grateful to Alan Freeman for having suggested this point to me. 32. Although it is true, as Zarembka (2000) argues, that Luxemburgs denition of Accumulation of Capital is no clearer than progressive capitalisation of surplus value. 33. For this analysis, see Zarembka (2000, 2002). 34. Possibly, Dunayevskayas interpretation of Marx in terms of Hegelian humanist inuences her criticism of Luxemburg. 35. Sweezy and Baran afrmed that the revolutionary initiative against capitalism, which in Marxs day belonged to the proletariat in the advanced countries, has passed into the hands of the impoverished masses in the underdeveloped countries who are struggling to free themselves from imperialist domination and exploitation (Baran; Sweezy, 1968, p. 9). 36. Sweezy criticises that Luxemburg retains the assumptions of simple reproduction while the consumption of workers do not realize any surplus value and, therefore, the total amount of variable capital must remain xed. As Zarembka (2002, p. 23) asserts, this criticism also fails to understand that this assumption was the class-struggle-based conclusion of Marx. 37. As expressed in this text: That is, to Bernstein, Marxs social labour and Mengers abstract utility are quite similar pure abstractions. (. . .) Hugging their brainchild, Bernstein, Boehm and Jevons, and the entire subjective fraternity, can remain twenty years

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or more before the mystery of money, without arriving at a solution that is any different from the one reached by any cobbler, namely that money is also a useful thing. (. . .) Anybody with a small understanding of Marxian economics can see that without the law of value, Marxs doctrine is incomprehensible. (. . .) What precisely was the key which enabled Marx to open the door to the secrets of capitalist phenomena and solve, as if in play, problems that were not even suspected by the greatest minds of classic bourgeois political economy? It was his conception of capitalist economy as an historic phenomenon not merely in the sense recognized in the best of cases by the classic economists, that is, when it concerns the feudal past of capitalism but also in so far as it concerns the socialist future of the world (Luxemburg, 1899, pp. 3334). 38. For Luxemburg, this means the law, which can be universally accepted, that the higher the productivity of human labour, the shorter the time needed to change a given quantity of means of production into nished goods. As Luxemburg says, this law is in accordance with classical fundamental law that the rate of prot tends to fall (Luxemburg, 1913, p. 320). 39. So, in fact, the production of producer goods must increase even more rapidly in a socialist society, with a view to human needs, than it does in a capitalist one (Luxemburg, 1913, p. 323). Lenin also disagreed with Luxemburgs ideas on this topic since, as Rodrguez Braun (1989, pp. 193205) says, he thought that Says Law did work (production creates its own demand) but that overproduction was not caused by lack of demand, but by unplanned anarchy. Under-consumption was just a subordinate element. 40. This contradicts Tugan Baranovskis thesis, based on Say and Ricardo. Baranovski afrmed that capitalist accumulation is unlimited as all newly produced goods represent a newly created purchasing power for the acquisition of other goods and, so, as in Hilferdings, the capacity to absorb its products has no limits. If the proportions of the enlarged reproduction scheme were maintained, there would be no crises. So, the machines and means of production increase in importance as compared to living labour and the demand resultant from the consumption of the workers. Capital accumulation take on the character of a mechanism existing on its own, without relation to the social needs (Tugan Baranovski, 1894). But, Luxemburg said that in a capitalist society surplus value does not simply transform itself into new means of production or variable capital. Capitalists must realise the surplus value selling it for money. 41. In Contra la pena capital, originally in English (Waters, 1970). 42. She quoted the aristocrat Beccaria as a predecessor of the idea. 43. Robinson says that her examples deal with ex ante prospects of increased demand for commodities instead of ex post quantities and that she takes for granted that savings (surplus) equals real investment. 44. Luxemburg made two very special limitations: the lack of an adequate banking system to channel one persons savings to another persons physical investment, and the fact that the effective demand cannot come from a rise in workers real wages. 45. Indeed, much of the description of Luxemburgs life presented in this section will be taken from Dunayevskayas book (Dunayevskaya, 1982). 46. When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organized power of one class for oppressing another (Marx & Engels, 1848, Chap. 2). 47. Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition

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period in which the State can be nothing but the revolutionary dictatorship of the proletariat (Marx, 1875, part IV). Dictatorship as a transition period between rebellion and a communist democracy had already been proposed by Graco Babeuf (17601797). 48. From Nietzsche to postmodernism, with Gadamer or Ricoeur, but also in anti-subjectivists, in the Frankfurt School, in the Critical tendencies, etc. 49. Represented by nihilism and technology. 50. To explain this idea more fully, see, for instance, Trincado (2003). 51. Luxemburg, Rosa (1904), The problem of Dictatorship, pp. 244247, pp. 246247 (Chapter VI from The Russian Revolution). 52. Marx himself dealt with male/female relationships in the essay Private property and communism and stated that the rst social division of labour, that which characterizes classist societies, is the sexual one, followed by the division between the country and the town. He opposed patriarchy on the basis that the family contains in miniature all the antagonisms that afterwards are developed on a large scale in society. 53. Luxemburg, as Clara Zetkin, stressed the importance of achieving women independence and suffrage. Womens suffrage is the goal . . . But as long as capitalism and the wage system rule, only that kind of work is considered productive which produces surplus value, which creates capitalist prot. From this point of view, the music-hall dancer whose legs sweep prot into her employers pocket is a productive worker, whereas all the toil of the proletarian women and mothers in the four walls of their homes is considered unproductive. This sounds brutal and insane, but corresponds exactly to the brutality and insanity of our present capitalist economy (Luxemburg, 1971, pp. 218, 220221), from the Speech at the Second Social Democratic Womens Rally, Stuttgart, May 12, 1912. 54. Although she, and her friend Clara Zetkin, immediately banished the thought: If we commit suicide, who will carry on? (see Kautsky, 1975; online version 2002: http://www.marxists.org/subject/women/authors/kautsky-luise/works/intro.htm). 55. Although her many lovers (normally much younger than her) suggest she needed a masculine presence. 56. For example, a letter, from prison! to Sophie Liebknecht says: I feel so much more at home even in a scarp of garden like the one here, and still more in the meadows when the grass is humming with bees that at one of our party congresses . . . You know that I really do hope to die at my post, in a street-ght or in prison. But my innermost personality belongs more to my tom-tits than to my comrades (Wroncke, 2 May 1917 (Luxemburg, 1969b, p. 25); in Beer, Max, 1928, forward in Letters from Prison, by Rosa Luxemburg, New York: R. M. Mc Bride and Co, p. vi. 57. Jogiches letters, 15 January 1899. 58. Because he defended the position that the social emancipation of women is an integral part of transforming social relations and overthrowing capitalism. 59. Another example of the correspondence between Bebel and Adler is his description of Luxemburg: The rabid dog is causing yet much harm, all the more because she is as smart as a monkey (blitzgescheit), while, on the other hand, she lacks any sense of responsibility and her own motive is an almost perverse desire of self justication (Victor Adler to August Bebel, 5 August 1910, in Nettl, 1966, p. 432). 60. Letter to Sophie Liebknecht, Wroncke, 23 May 1917. 61. And here, as we have stressed, we talk in general. We do not mean at all to establish a comparison between Rosa Luxemburgs thought and that of other major Marxian thinkers.

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ACKNOWLEDGMENTS
I wish to thank Carlos Rodriguez Braun, John Reeder, Paul Zarembka and the two referees of the paper for their help and suggestions. I wish to thank also for their invaluable comments all the persons attending the 4th Annual Conference 2002 of the Association for Heterodox Economics (AHE), held at Dublin the 910 July, DCU Business School; and the meeting of the Taller de mujeres economistas, siglos XIX y XX organized by Elena Gallego, held at UCM the 442001 and sponsored by the U.C.M.s Instituto de Investigaciones feministas, where a rst draft of this paper was presented.

REFERENCES
Althusser, L. (1970). For Marx. New York: Vintage. Althusser, L. (1972). Reply to John Lewis, as revised in 1973. In: G. Lock (Trans.), Essays in Self-Criticism (pp. 3399). London: New Left Books (1976). Baran, P. A. (1957). The political economy of growth. New York: Monthly Review Press. Baran, P. A., & Sweezy, P. M. (1968). Monopoly capital. An essay on the American economic and social order. New York and London: Monthly Review Press. Basso, L. (1967). Rosa Luxemburg, A reappraisal D. Parm e (Trans.). New York: Praeger Publishers e (1975). Bauer, O. (1913). The accumulation of capital. J. E. King (Trans.). History of Political Economy, 18(1), 87110. Bebel, A. (1904). Woman under socialism. New York: Labour News Press. Bernstein, E. (1899). Evolutionary socialism. New York: Schocken. Bukharin, N. (1925). Imperialism and the accumulation of capital. Kenneth Tarbuck (Ed. and introd.), R. Wichmann (Trans.). New York: Monthly Review Press (1972). Carlyle, T. (1956). The French revolution. New York: Heritage Press. Carlyle, T. (1971). The Nigger question. E. R. August (Ed.). New York: Appleton Century Crofts. Clark, S. (1994). Marx theory of crisis. London: Macmillan. Cliff, T. (1960). Rosa Luxemburg: A study. Harrow Weald, Middlesex: International Socialism. Davis, H. B. (Ed.) (1976). The national question: Selected writings by Rosa Luxemburg. New York: Monthly Review Press. Dunayevskaya, R. (1982). Rosa Luxemburg, womens liberation, and Marxs philosophy of revolution (2nd ed.). Urbana and Chicago: University of Illinois Press (1991). Geras, N. (1976). The legacy of Rosa Luxemburg. London: New Left Books. Haug, F. (1992). Beyond female masochism. London: Verso. Kalecki, M. (1939). Essays on the theory of economic uctuations. New York: Russell & Russell. Kalecki, M. (1967). The problem of effective demand with Tugan-Baranovski and Rosa Luxemburg. Reprinted in: M. Kalecki (Ed.) (1971), Selected Essays on the Dynamics of Capitalist Economy, 19331970 (pp. 146155). Cambridge: Cambridge University Press. Kolakowski, L. (1971). Althussers Marx. The Socialist Register, 8, 1128.

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Kowalik, T. (1979). Teora de la acumulaci n y del imperialismo en Rosa Luxemburgo. Ediciones Era, o M xico [rst edition in Polish: Kowalik, Tadeusz, 1971, R za Luksemburg. Teoria akumulacji e o i imperializmu, Ossilineum, Varsovia]. Lenin, V. I. (1914). The right of nations to self-determination. Moscow: Foreign Publishing House (1950). Levy, D. M. (1999). Economic texts as apocrypha. George Mason University: Center for Study of Public Choice. Levy, D. M. (2000). Hard times and the moral equivalence of markets and slavery. George Mason University: Center for Study of Public Choice. Linhart, R. (1976). L nine, les paysans, Taylor: Essai danalyse mat rialiste historique de la naissance e e du syst` me productif sovi tique. Paris: Seuil. e e Luk cs, G. (1923). History and class consciousness. London: Merlin (1971). a Luk cs, G. (1968). The Marxism of Rosa Luxemburg. In: History and class consciousness (pp. 2745). a R. Livingstone (Trans). London: Merlin. Luk cs, G. (19781980). The ontology of social being, 3 vols. London: Merlin. a Luxemburg, R. (1899). Reform or revolution. United States: Three Arrow Press (1937). Luxemburg, R. (1904). Rosa Luxemburg. Selected political writings. London: Chaucer Press (1972). Luxemburg, R. (1913). The accumulation of capital. A. Schwarzschild (introd.) & J. Robinson (Trans.). London: Routledge and Kegan Paul, GB; New Haven, USA: Yale University Press (1951). Luxemburg, R. (1914). The proletarian woman. Sozialdemokratische Korrespondenz (5 March), No. 27, 45. Luxemburg, R. (1916). The crisis in German social democracy. New York: Howard Fertig (1969a). Luxemburg, R. (1921, written 1915). The accumulation of capital an anti-critique. New York and London: Monthly Review Press (1972). Luxemburg, R. (1925). The mass strike, the political party and the trade unions. P. Lavin (Trans). Marxist Educational Society of Detroit, Detroit [1906], online Version: Rosa Luxemburg Internet Archive (marxists.org) 1999, http://www.marxists.org/archive/luxembur/works/1906/massstr/ch03.htm. Luxemburg, R. (1969b). Lettres de prison. B libaste: Paris; Translation from German by Eden and e Cedar Paul in Beer, Max (1928), Letters from Prison, by Rosa Luxemburg. New York: R. M. Mc Bride & Co. Luxemburg, R. (1971). Selected political writings. Rosa Luxemburg. D. Howard (Ed. ad Intro.). New York and London: Monthly Review Press. Luxemburg, R. (1976). Obras Escogidas, Tomo II. Editorial pluma Ltda, Bogot . [originally in English a Waters, 1970, Rosa Luxemburg Speaks, Pathnder Press, New York]. Luxemburg, R. (1978). The letters of Rosa Luxemburg. S. E. Bronner (Ed., Trans.). Atlantic Highlands, NJ: Humanities Press International (1993). Luxemburg, R. (1981). Escritos sobre arte y literatura. Editorial Arte y Literatura, Ciudad de la Habana; originally in German in 1972, Shriften uber Kunstund. Literatur, Dresden. Luxemburg, R. (1993). The letters of Rosa Luxemburg. S. E. Bronner (Ed., Intro.). New Paperback Edition, New York: Humanities Press. Marx, K. (1867). Capital: A critique of political economy. B. Fowkes (Trans.). USA: Penguin (1992). Marx, K. (1875). The civil war in France: The Paris commune. New York: International Publishers (1984). Marx, K., & Engels, F. (1848). Manifesto of the Communist Party. Online version: http://www. marxists.org/archive/marx/works/1848/communist-manifesto/. M rz, E. (1976). Introducci n a la teora marxista del desarrollo econ mico. Viena. a o o

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Mattick, P. (1981). Economic crisis and crisis theory. P. Mattick, Jr. (Trans.). New York: Sharpe, White Pains (1974). Merrick, B. G. (1998). Rosa Luxemburg: A socialist with a human face. http://www.cddc.vt. edu/Feminism/Luxemburg.html. Nettl, J. P. (1966). Rosa Luxemburg, in 2 vols. London: Oxford University Press. Nicolaus, M. (1968). The unknown Marx. New Left Review, 48(MarchApril), 4161. Nye, A. (1994). Philosophia: The thought of Rosa Luxemburg, Simone Weil, and Hannah Arendt. London: Routledge. ONeill, J. (1982). For Marx, against Althusser and other essays. Washington, DC: Center for Advanced Research in Phenomenology and University Press of America. Polkinghorn, B., & Lampen Thomson, D. (1973). Adam Smiths daughters, eight prominent women economists from the eighteenth century to the present. Cheltenham, UK: Edward Elgar; Northampton, MA, USA (1999). Ripalda, J. M. (1996). De Angelis. Filosofa, mercado y postmodernidad. Madrid: Editorial Trotta. Robinson, J. M. (1956). The accumulation of capital: With a note on the value of invested capital by D. G. Campernowne and R. F. Kahn. London: Macmillan. Rodolsky, R. (1968). The making of Marxs capital, in 2 vols. P. Burgess (Trans.). London: Pluto Press (1989). Rodrguez Braun, C. (1989). La cuesti n colonial y la economa cl sica. Madrid: Alianza. o a Seidemann, M. (2002). Rosa Luxemburgo y Leo Jogiches. Muchnik Editores: Barcelona; originally edited in 1998, Rosa Luxemburg & Leo Jogiches, Berlin Verlag GmbH, Rowohlt. Sweezy, P. M. (1970). The theory of capitalist development: Principles of Marxian political economy. New York: Monthly Review Press. Toporowski, J. (2003). Kaleckis arguments for socialism. http://www.gre.ac.uk/fa03/cpe/les/ Toporowski.doc. Trincado Aznar, E. (2003). Crtica a la doctrina de la utilidad y revisi n de las teoras de Hume, o Smith y Bentham. Tesis doctoral in dita, Universidad Complutense de Madrid. e Tugan Baranovski, M. (1894). Studies on the theory and history of commercial crises in England. Jena (1901). Valdes Paz, J. (2001). Rosa Luxemburgo. Actualidad de su teora poltica. In: J. Tras & M. Monereo (Eds), Rosa Luxemburg. Actualidad y clasicismo (pp. 3144). Spain: El Viejo Topo. Waters, M.-A. (1970). Rosa Luxemburg speaks. New York: Pathnder Press. White, J. D. (1996). Karl Marx and the intellectual origins of dialectical materialism. London: Macmillan. Zarembka, P. (2000). Accumulation of capital, its denition: A century after Lenin and Luxemburg. In: Value, Capitalist Dynamics and Money. Research in Political Economy (Vol. 18, pp. 183241). Stamford, CT and Amsterdam: JAI Press/Elsevier. Zarembka, P. (2002). Rosa Luxemburgs accumulation of capital: Critics try to bury the message. In: Bringing Capitalism Back for Critique by Social Theory (Vol. 21, pp. 345). Stamford, CT and Amsterdam: JAI Press/Elsevier. Zarembka, P. (2003a). Lenin as economist of production, A Ricardian step backwards. Science & Society, 67(3), 276302. Zarembka, P. (2003b). La r volution marxiste na pas eu lieu. La pens e de Marx, Le nouvel e e observateur (Hors-S rie No. 52), OctoberNovember, 2427. e

LIKE A CANDLE BURNING AT BOTH ENDS: ROSA LUXEMBURG AND THE CRITIQUE OF POLITICAL ECONOMY
Riccardo Belloore
ABSTRACT
Luxemburgs legacy is customarily reduced to two errors: crude economic determinism, blind belief in the spontaneity of the masses. The paper reconstructs Luxemburgs arguments about the tendency to the nal breakdown of capitalism and her criticism of Lenin, and shows how her economic theory and political perspective are different and much richer than usually recognized. Building not only on the Accumulation of Capital but also on the Introduction to Political Economy, the paper shows that: (i) Luxemburg saw the internal link between value, abstract labour and money; (ii) she emphasized the connection between dynamic competition, relative surplus value extraction, and the law of the falling tendency of the relative wage; (iii) her theory of the crisis is not underconsumptionist. The shortage of effective demand is seen as ultimately due to a fall of autonomous investment caused by inter-sectoral disequilibria springing from the revolution in the methods of production and the consequent relative reduction of workers consumption. Disproportionalities, as soon as they affect important branches of production, end up in a general glut of commodities. The paper also assesses Luxemburg political views. Her theory of the party was very different than the one held by the Bolsheviks, but it was a view in which the

Neoliberalism in Crisis, Accumulation, and Rosa Luxemburgs Legacy Research in Political Economy, Volume 21, 279298 Copyright 2004 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 0161-7230/doi:10.1016/S0161-7230(04)21011-2

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organization was essential for building class consciousness from below. Thus, in the end, Luxemburgs questions seems to be more interesting than her critics answers, her defeats more fruitful than her opponents victories. The paper also considers the relationship between the personal and the political in Luxemburg.
We can no longer share Rosas blind condence in the spontaneity of the working class, and its organizations have collapsed. But Rosas joy and love of life and of the world were founded not in misleading hopes, but in her spirit and moral strength. This is why even now everyone can follow her example. Simone Weil (1933, p. 302)

INTRODUCTION
More than eighty years have now passed since, in January 1919, Rosa Luxemburg was murdered.1 The image of her that adversaries had and still have can be simply and effectively synthetized in expressions such as bloody Rosa. But, unfortunately, the images of her that still dominate among those who should hold her memory most dear Marxists and feminists2 of this century are, in their unilateral opposition, still less than acceptable caricatures: images so commonplace as to be taken almost for granted. One may take, for example, an article in the Italian newspaper LUnit` written a many years ago by Margarethe von Trotta, the director of a good movie on Rosa Luxemburg (Von Trotta, 1989). The German lm-maker sees Luxemburgs legacy in love, in her inability to hate and in her refusal of violence. It would not be possible to imagine anything further from bloody Rosa. In the lm, Luxemburg appears as a pacist, a lover of nature, suffering the division between politics and feelings, prematurely beyond feminism in her belief in the greater positivity of feminine relations. All traits truly exemplify moments and aspects of this woman who happened to be a revolutionary. Yet, if one places too much emphasis on these aspects and brackets her whole lifes work within theoretical and practical Marxism, divided between her analysis of accumulation and political action, and if one passes over her lucid awareness of the bitterness of the laws of history and of the need to ght against them, one ends up despite all good intentions, as von Trotta by reproducing the divorce of reason from passion. What was useful and provocative in the lm Rosa L. becomes in the article a generic appeal to emotion: love was her guide. In the last resort, this is far from an innocent distortion of Luxemburgs heritage because it reproduces the divide between thought (a revolutionary thought, replete with all the dirt that adjective invokes) and feeling (an emotion characterized by the radical affection and intransigence

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that was Luxemburgs nature). It is exactly the divide that Rosa Luxemburg wanted to ght. In one of her last articles on Rote Fahne, December 1918, Luxemburg wrote: A world must be turned upside down, But each tear that ows, when it could have been spared is an accusation (Waters, 1970, p. 399). Of this person one cannot, must not, lose the tension between the moment of struggle and the moment of compassion. This tension cannot, must not, be lost because what is most intriguing and innovative in Luxemburg, and still alive, is precisely this connection between the power of social transformation and the weakness she recognized in herself and tried to maintain as a positive element in revolutionary practice. Things are still worse when it comes to the way in which the Marxist tradition has treated Luxemburg. Here we nd ourselves on familiar territory. Her feminine characteristics are displaced as something marginal in her Marxist thinking, a clear sign of her peculiar humanity. Her economic analysis and her theory of the party are easily passed over, the former being judged full of contradictions and the latter a kind of wishful thinking, too generous and too idealist. As a revolutionary, Rosa Luxemburg is then considered to be less lucid because of this attitude, and because of this attitude destined to defeat and irrelevance. This, too, was after all the dominant representation of Rosa Luxemburg also for the short period between the sixties and seventies when the resumption of anti-capitalist radical struggles posed, once again, the twin issues of crisis and consequently of revolutionary politics which most mattered in her thought. Dened and trapped in her opposition to Lenin, Luxemburg was again repudiated or accepted as a determinist and spontaneist.

A DETERMINIST THEORY OF COLLAPSE?

It is worth taking up these dusty old texts so as to rediscover what it was that Luxemburg actually said, and what has been said contrary to her. I believe, in fact, that one may nd in her writings an original perspective, a different image of a Marxist whose errors and defeats continue to offer a fertile alternative to old and new fancies, to Leninism and feminism. Lets begin with the accusation of determinism in her economic analysis. According to her critics, Luxemburgs Accumulation of Capital constructed a theory of collapse repeating the classic errors of underconsumptionism. On this reading she reasons as follows.3 In capitalism, production is production for money, for an ever-increasing monetary prot. But where does money come from to realize the ever greater surplus that is produced and reproduced thanks to recurrent technical innovations? It cannot by denition be acquired from the workers whose

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consumption buys back only a part of the commodity product. So, surplus money must necessarily come from a source external to the capitalist mode of production. This external source provides the required additional demand that manifests in the exports of advanced capitalist areas to backward non-capitalist areas. However, struggle to partition pre-capitalist zones and the necessity to integrate these into the circuit of monetary circulation leads to their inclusion in the capitalist world. Once the possibilities for markets external to capitalism are exhausted, capitalism actually exists on a world scale in its pure form and collapse will follow. The traditional reading of the Luxemburgian theory of organization can also be summarised very briey. An objective tendency to collapse renders the constitution of a party separated from the masses insignicant. Indeed, such a party would quickly degenerate into a dictatorship of organisations over the real movement of the masses.4 Economic crisis generalizes into a spontaneous social conict leading to a revolutionary outcome. Criticism of this position is easy enough. On the terrain of economic analysis it is enough to cite Lenin, Bukharin and Sweezy, who found that Rosa Luxemburg confused the problem of where demand comes from to realise surplus value with the problem of where money comes from to monetize prots.5 On this understanding of Luxemburgs theory, the second issue is simply technical and easily solved (it is enough, for example, to imagine an increase in the velocity of the circulation of money, or an increase in the quantity of gold that ows to capitalist areas). As for the rst issue, Luxemburg is accused, like all underconsumptionists, of believing that internal demand in the capitalist area is generated by workers consumption alone and not also and primarily by capitalists themselves through investments. If this latter happens, the buying of production goods compensates a fall in the consumption of workers. Certainly in this way the economic process becomes, at the limit, a production of means of production by means of production. Capitalism is a system in which production does not have the aim of consumption in sight. Its aim is abstract wealth as such: capitalism is production for productions sake. So, there is not any automatic tendency to collapse that spontaneously induces class consciousness in the masses. Crisis must be political because it is the end-product of the action of a party of external vanguards. This picture cannot be taken for granted. Rosa Luxemburg believed in the inevitability of collapse,6 but her reasoning departed from this picture on essential points. As I will show, the theoretical problems that she faced remain today the crucial problems of critical political economy, while the easy answers of her critics have proven to be nearer to the orthodox formulations of bourgeois economics. Far from being a spontaneist, Rosa Luxemburg always thought that organizations

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were necessary but that their legitimacy was to be found in the real movement: politics as a separate activity must be fought against. Instead, the goal must be that of a democratic society grounded in workers self-government and escape from the primacy of the economic. In fact, she was everything but a determinist: for Luxemburg, communism was not a necessity but a real possibility, without any nal guarantee. In what follows, I will try to provide support for such an interpretation.

VALUE AS ABSTRACT LABOUR REPRESENTED IN MONEY

In order to really understand Rosa Luxemburg one must rediscover a fundamental (although very rarely read) work, her Introduction to Political Economy. Published posthumously,7 it collects the remaining chapters of a book that took its inspiration from her teaching work in the party school. She began the volume in jail, probably in 1912, subsequently revising it in 1916. It was never published in her life, and Paul Levi edited a version in 1925. To my knowledge, only the rst chapter is available in English.8 The book is important for three reasons: (i) its interpretation of the theory of value; (ii) its theory of the falling tendency of the relative wage; (iii) its denition of the precise meaning to be given to a critique of political economy. As to the theory of the value, Luxemburg anticipated a position later expressed with particular force by Isaak I. Rubin (1928). According to Rubin, Marxs theory of value does not so much represent a theory of equilibrium relative prices objectively anchored to some physiological expenditure of human labour in production, rather it is a theory of the peculiar and contradictory form in which the social nature of labour comes into being in an essentially monetary economy like capitalism.
To discover that in the exchange-value of every commodity, in money itself, there is only human labour and that the value of every commodity increases with the amount of labour required for its production, and vice versa, is to recognize only half of the truth. The other half consists in explaining how and why labour takes on the estranged form of exchange-value and the mysterious form of money (Luxemburg, 1925, p. 221; translated from the Italian, my Italics).

In a society of generalized commodity exchange, such as capitalism, [. . .] exchange is the only means for associating atomistic individuals and their activity in a coherent social economy (ibid., p. 222; translated from the Italian, my Italics): In other words, exchange is the indirect social nexus of an asocial society founded on separation between producers.

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Concrete, individual labour extracted by single capitals in mutual competition is immediately private labour commanded by capitalists in the expectation that it will be validated by the market, ex post, as socially undifferentiated labour. In such a society the economy produces results which are mysterious and unpredictable to the people involved (ibid., p. 65; translated from the Italian). Society becomes for them something estranged, alienated, independent, the laws of which we must nd in the same manner in which we analyse the phenomena of external nature, the same manner in which we have to attempt to comprehend the laws governing the life of the plant and animal kingdom, the geological formations on the earths surface and the movements of the heavenly bodies (ibid., my Italics). Capitalism gave birth to political economy as an autonomous discipline because the economic was isolated from all other moments of the social nexus. In this novel mode of production, economic life found in itself its own end and justication: scientic analysis must discover post factum the meaning and the regularity governing social economic life which no conscious plan imposed on it beforehand (ibid., p. 65). It is not difcult, today, to discover behind Luxemburgs words the central role played by the category of abstract labour. Capitalist labour is not immediately social labour in its useful and natural shape, rather it is labour which must become social through abstraction from the concrete determinations of its performance and its eventual validation on the commodity market. That abstract labour is a real abstraction specic to capitalism and not a mental generalization of the researcher and that the other side of the coin of abstract labour is none other than money itself as the true outcome of the capitalist process is already clearly anticipated by Rosa Luxemburg in a prior text, in Social Reform and Revolution:
Marxs abstraction is not an invention but a discovery. It exists not in Marxs head but in the market economy. It has not an imaginary existence, but a real and social existence: so real that it can be cut and hammered, weighed and minted. The abstract human labour discovered by Marx is, in its developed form, nothing but money (the English translations, from Waters, 1970, p. 67 and Howard, 1971, p. 100, have been adapted,9 my Italics).

Already in Luxemburg it is possible to see the tight connection that this problematic has with the theory of alienation and fetishism, and also with the thesis that the primacy of the economic had a historical birth, hence possibly an end. To this I will return. It is enough for now to stress the distance between this approach and perspectives which see the labour theory of value as based on the primacy of production reduced to its technical-material dimension. It is also clearly distant from positions that collapse Marxian theory to some conictualist view about

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distribution of the net product between social classes. What is emphasized here is that value is created or better still, it comes into being at the intersection between production and circulation. Commodities are the outcome of dissociated valorization processes in competition, and the struggle against capitalism is a struggle against the commodity-form, since this latter has created a divide between individual and society. Certainly, this was a minority view in the period of the Second International and even more so in the Third International. Only in the last thirty years has something akin to Luxemburgs position been systematically taken up in Marxian research.10

THE LAW OF FALLING TENDENCY OF THE RELATIVE WAGE

Lets go to the second reason why the Introduction to Political Economy is relevant, the falling tendency of the relative wage. The generalization of the commodity-form involves a reduction of labour-power to a commodity. The peculiarity of labour-power as a commodity consists in the fact that its use-value, living labour, is not separable from the seller. This has two consequences. First, given the length of the working day and the intensity of labour, capitalists obtain a share of surplus labour within the whole of the labour time pumped out from workers (and therefore a share of surplus value) only to the extent that more advanced techniques of production diminish the exchange-value of labour-power, which is regulated by the real subsistence wage. Though this latter is conictually determined by class confrontation, for Marx it was a known datum at a given time and in a given place. Second, this extraction of surplus labour depends on the ability to impose an effective expenditure of labour tout court. It depends therefore on class struggle within production. This antagonism has deep roots in the control which workers may sometimes exercise over the expenditure of living labour, the objectication of which makes up the substance of value.11 Luxemburgs discussion of the wage in her Introduction goes back to this dialectic between endogenous technical change in capitalism that is, the incessant revolution of the mode of production necessary for capitals valorization and the possibility that crises may erupt, not only due to objective (mechanical) reasons but also due to contradictions within capitalist social relations of production. Indeed, Rosa Luxemburg puts forward what she denes as a law distinctive of the mode of production founded on labour-power as a commodity, the law of a falling tendency of the relative wage. To start, Luxemburg lucidly depicts the

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radical difference that the wage-form introduces with respect to pre-capitalist conditions of labour:
In the wage system there are neither legal nor customary rules, neither coercive nor arbitrary determinations of the workers share of their product. Rather, this share is determined by the degree of the productive-power of labour, then by the state of techniques. It is not any arbitrary will of exploiters but technical change that causes the inexorable and relentless pressure on workers (Luxemburg, 1925, p. 257; translated from Italian, my Italics).

On the other hand Luxemburg continues to emphasise that:

[F]or capitalism, continuous and ceaseless technical change is a necessity, a vital condition. The competition between individual entrepreneurs compels each one of them to produce, as cheaply as possible. That is, with the highest possible saving of human labour (Luxemburg, 1925, p. 255; translated from Italian, my Italics).

The conclusion is that:

[E]ach advance in the productive-power of labour manifests itself in a contraction of the necessary labour to reproduce the worker. That is to say: capitalist production cannot take a single step without limiting the participation of workers in the social product (ibid., my Italics).

That is, Luxemburg argues that an increase in the productive-power of labour, driven by individual capitals competitive hunt for extra-prots, necessarily leads to a decrease in the labour time socially necessary to produce wage-goods. This comes down to an economic corollary and a political thesis. Against any theory that would impute to Marx the idea of an increasing absolute impoverishment of the working class, Luxemburgs economic corollary is that innovations may allow at one and the same time an increase in the share of surplus value and an increase in workers material (so-called) well-being. The latter may be realised either as higher real wages or in reductions in working time, or both. It is possible, that is, to produce more wage goods in less time, in spite of a division of the social working day more advantageous to the capitalist class. Contrary to the determinist reading of class struggle typically imputed to Luxemburg, she opens up to Marxian theory the possibility to forecast some reformist collusion between capitalists and workers. The possible convergence of interests between the two classes is meaningful, however, only so long as it pertains to the use-value dimension. In the value dimension things are not this way and necessarily so since value inescapably implies an antagonistic partition of the working day. Here at the heart of valorization, resisting the fall in the relative wage means opening the way to capitalist crisis, a social and political crisis because it is a crisis in the fundamental social relations of production posing the problem of some political outlet beyond capitalism.

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Thus the struggle against a fall in the relative wage also implies a struggle against the commodity character of labour-power, i.e. against capitalist production as a whole. Thus the struggle against a fall in the relative wage is no longer a struggle on the basis of the commodity economy, but a revolutionary, subversive attack on the existence of this economy; it is the socialist movement of the proletariat (Luxemburg, 1925, p. 257; English translation in Rosdolsky, 1968, p. 295, my Italics).

It is now clear why the Introduction presents a way of doing critical political economy where the inquiry into economic mechanisms is linked to the hidden social relationships that produce them. This approach was innovative within the Marxism of Luxemburgs day, and may be so even more today. It is also clear why it is an original perspective on Marxian theory as critique of political economy. Political economy was born out of the separation and isolation of the economy as an autonomous dimension. To struggle against the commodity-form of labour-power is, then, nothing but to make transparent the social process and win control over it. This struggle is, in practice, nothing less than a ght against the separation and primacy of the economy over human beings. Luxemburg writes:
If political economy is a science dealing with the particular laws of the capitalist mode of production, then its reason for existence and its function are bound to the life span of the latter and political economy will lose its base as soon as that mode of production will have ceased to exist (Luxemburg, 1925, p. 73 [English transl. in Waters, 1970, p. 244] my Italics).

And again:
The problem faced by scientic investigation becomes dened as the discovery of the lack of consciousness infecting the economic life of society, and here we have reached the roots of political economy (Luxemburg, 1925, p. 63 [English transl. in Waters, 1970, p. 236], my Italics).

Consequently: the end of political economy as a science constitutes a worldhistoric task (Luxemburg, 1925, p. 78 [English transl. in Waters, 1970, p. 248], my Italics). It is the fruit of a political activity uprooting the material and social objective bases of the opacity of the capitalist mode of production, and the scandal of exploitation. Beyond capitalism, economic phenomena and their investigation will not, of course, disappear. No longer maintaining dissociation and autonomy, they will however become subordinated to other forms of human agency and to other scientic discourses.

THE THEORY OF CRISIS

Thus, the Introduction to Political Economy clearly shows that Rosa Luxemburg saw in the theory of value not so much a theory of equilibrium prices as will be

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done both by traditional Marxism and neo-Ricardians, whatever their differences as a theory of the laws of motion of the capitalist mode of production. From value as a particular social nexus Luxemburg derives both the dynamic tendencies of capital namely, the law of the falling relative wage and the centrality of money. I have already claried how her reading of the theory of value as a theory of the particular form of socialization in capitalism anticipated Rubins views. Her reading of the theory of value as unbalanced accumulation is in a line of continuity with Henryk Grossmanns Marx, the Classical Economists and the Problem of Dynamics (Grossmann, 1941). And her reading of the theory of value as essentially monetary can now be better appreciated, because of the diffusion of new monetary readings of the labour theory of value.12 From this perspective I will argue that the critiques of determinism and spontaneity directed against Luxemburg do not stand up. Let us return then to her theory of crisis and her theory of organization. As to the theory of crisis, the arguments in the previous sections have claried what is already obvious from a careful reading of the Accumulation of Capital namely, that Luxemburg is not, rigorously speaking, an underconsumptionist.13 Her thesis is rather that the incessant activity of innovation, which translates into massive but unplanned investment, determines the reasons for its own interruption. The point can be put simply enough. An increase in investment is accompanied by an increase in new industries and new branches of production, along with change in old industries and old branches of production. This involves a modication of the conditions of equilibrium between sectors (which in the following may be reduced to two: means of production, wage consumption goods). In an unplanned economy this makes a disproportionality crisis ever more likely, with excess demand in some sectors and excess supply in others. The excess of production over money demand gives way to a fall in prices resulting in losses and even bankruptcies, which in time involve lay-offs and unemployment. Thus, rms demand for means of production collapses together with workers demand for wage goods. When this negative multiplier chain affects important sectors of the economy, the downfall in investment and consumption demand transmits excess supply to other industries, a sequence eventually leading to general overproduction (a line of reasoning not far from some hints by Marx in the Grundrisse). This dispenses with the thesis that Luxemburgs analysis of crisis pays insufcient attention to investment as a component of effective demand, as traditionally underconsumptionists do. Rather, Luxemburg commits a different kind of error. She is convincing in showing the systematic tendency to crisis in capitalism, due to the impossibility of having an unlimited increase in the share of investment the root of the crisis being the uncertainty surrounding this latter in a changing environment in the course of unbalanced accumulation. But she reads

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this tendency as leading, sooner or later, to automatic collapse, once capitalism has become puried from all non-capitalist elements. This is an idea foreign to Marx, who wrote that permanent crises do not exist, and who saw them as not only a temporary breakdown of the system but also as purging this latter from its contradictions for a while. The other charge directed against Luxemburg concerns her question: where does the money come from to realise surplus value? Critics argue that the point is wrongly put. Once again this criticism goes more against her opponents. For Luxemburg, capitalist production, as the production of value and surplus value, is nothing other than the production of money and more money. In her constant return to the question of money in the Accumulation of Capital, we have an indication of Luxemburgs appreciation of the intrinsically monetary nature of the capitalist process, underplayed by much of the Marxism of the time. In fact, her reasoning is always framed in terms of some kind of a model of the monetary circuit, where production must be nanced by money capital and must give rise to an increase in value. On this terrain, to be sure, Rosa Luxemburg moves in an exploratory and tentative way. She does, however, pick out the importance of two points entirely overlooked by her critics. While the latter are prisoners of an image of the economic process that nds no place for money except as an inessential veil over real phenomena (hence, an image of the capitalist economy as a great barter economy), Luxemburg constantly asks how money enters the economic system and how higher monetary receipts can actually been recovered from the process, what is the source of this extra money. Her answers are defective, in that, on the one hand, she sees money as the outcome of a process of production quite analogous to all other manufacturing processes (see her model of the gold producer), and on the other she argues that the greater quantity of money can only derive from gross exports. But this in no way detracts from the fact that she was among the few authors who took up this particular problematic after Marx, and at least posed the right questions. Indeed, more recent theoretical developments have shown how much her intuitions were sound. Michal Kalecki (1967), taking Luxemburg rather than Marshall or Wicksell as his point of departure, arrived at results similar to Keynes. He has shown how positive net of exports push up effective demand and therefore allow for a partial or total monetary realization of the net product something which is impossible in the pure and most rigorous macro model of the monetary circuit where money is completely endogenous because of bank nance to production. Luxemburg here is inaccurate, since she gives the impression that it is export as such, i.e. total exports, that are an addition to effective demand and an inow of new money into the monetary circuit for that whole amount,

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thus neglecting the outow of demand and money due to imports. Nevertheless, Kalecki points out that she correctly identied the relation between net exports and the monetary circuit. Kalecki was also able to show that an analogous inow of new money and partial or total monetary realization of the surplus product in a macroeconomic perspective can be obtained from a State budget decit nanced by the banking system. With all its limits, Luxemburgs economic analysis amounted to nothing less than a revival of the theory of value reread as a theory of exploitation in a monetary economy characterised by dynamic competition among rms. Her originality was in taking up again Marxs perspective in a framework which has been further developed by old (Wicksell, Schumpeter, Keynes) and new (Schmitt, Parguez, Graziani) theories of the monetary circuit.14 Exactly what Kautsky or Lenin, Bauer or Bukharin dubbed as her errors now appear as what make Luxemburg a forerunner of a macro-monetary theory of exploitation, accumulation and crisis.

STRUGGLE AND ORGANIZATION: THE POLITICAL WRITINGS

The preceding reappraisal of Luxemburgs economic theory reveals that the accusation of spontaneism is without foundation, nothing but the other face of the accusation of determinism, which is equally devoid of any ground. However, this latter view is at least better than the view according to which her supposed spontaneism would be nothing but the by product of her feminine nature leading her to think of conscious control as a threat to spontaneous behaviour. Though it may appear paradoxical, for Luxemburg the tendency to collapse justies neither a wait-and-see policy, nor an evolutionary attitude of calm condence in the course of things anything but. The same conclusion can be reached by taking account of other parts of Luxemburgs thought. In her later writings, the Polish revolutionary develops an original position (indeed unique within the Marxism of her time), whereby socialism may come about not as the outcome of natural necessity but only as a result of historical necessity. Not as a certain outcome or nal moment within history, but as the only way to escape the barbarism into which capitalist development drags the working class and humanity generally. Here also, of course, one may impute to Luxemburg, an excessively dark vision of social dynamics. But it is difcult to deny that a formulation of this sort allows her to avoid the sandbanks of evolutionism that stranded the Second and Third Internationals. More than that we are compelled to ask: is Luxemburgs pessimism really a

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limit? To answer, it is enough to recall the years that followed her death: the interlude between the First and Second World Wars; the true, deep material (and psychological) degradation of civilization and of the quality of life in the years of neo-capitalism and the so-called golden age; the present devastation of nature, widespread mass unemployment and yawning inequality on a world scale in the era of globalization and post-Fordism. Once again, we must consider whether reason is more on Luxemburgs side. Perhaps she was more farsighted than her critics.15 The accusation of spontaneism is often leveled against Luxemburg by the followers of Lenins theory of organization. However, notwithstanding the clear cut difference between the two (especially if one looks at What is to be Done? rather than State and Revolution) and notwithstanding Lenins many criticisms of Luxemburg, the fact remains that the accusation in question cannot be found in the writings of the Russian revolutionary. Indeed, Lenin saw quite clearly that Luxemburg (while evidently formulating a theory of organization very different from his own), did not in any way deny the (inevitable) need for an organized vanguard. The nature of the contrast is well expressed in an old article of Rossana Rossanda, Class and Party, which appeared in September 1969 in the monthly magazine il manifesto, and it was translated in English in a shortened version the next year (Rossanda, 1969). For Lenin workers struggles cannot go beyond the purely economic conict, beyond the ght for a more favourable distribution of income. The social struggle can only become a political struggle if the party, the only authentic revolutionary subject, is in a position to bring consciousness to the proletariat as the object of revolutionary activity. Employing the later terminology of Panzieri and Tronti, workers as such are always labour-power and never working class without the party as an external agent, without the party they are always and completely internal to the capitalist horizon. The party is what infuses class consciousness in workers from outside. Rossanda cites some of Lenins more explicit passage from What is to be Done?, and the conclusions according to which: [t]he vehicles of science are not the proletariat, but the bourgeois intelligentsia: it was out of the heads of members of this stratum that modern Socialism originated, and it was they who communicated it to the more intellectually developed proletarians who, in their turn, introduce it into the proletarian class struggle where conditions allow that to be done (Lenin, cited by Rossanda, 1969, p. 223). So, the task of social democracy is to imbue the proletariat with the consciousness of its position and the consciousness of its tasks (Rossanda, 1969, p. 223). Rossanda is right in saying that in this reasoning the idealist root is obvious. While it is true that one must guard against a mechanical application of Marxs thought, the question remains how it is

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possible to think in Marxist terms and yet maintain that consciousness has an origin other than social being it is not the consciousness of men that determines their being, but, on the contrary, their social being determines their consciousness and if the passage from social being to consciousness in the proletariat presents a theoretical difculty, that problem becomes quite insoluble, if at the risk of falling back into Hegelianism, one deduces consciousness from consciousness (Rossanda, 1969, p. 224, my Italics). Luxemburg, continues Rossanda, sought a solution to the problem of organization in accordance with the Marxian conception of class consciousness and not according to the Leninist thesis of an external vanguard (ibid., p. 224). For Luxemburg, to be sure, the role of the vanguard is central in transforming objective social contradictions through a revolutionary break. Certainly not because of any absence of a political dimension of working class struggles as such, but from the objective fragmentation of these struggles, which a unifying strategy could alone overcome (Rossanda, 1969, p. 224, my Italics). What must be clearly understood is that the relation between organization and spontaneity for Luxemburg is such that the party nds its legitimacy not in itself but in the working class. Its effectiveness grows and is veried only through mass struggle that erupts periodically and in an unexpected way. Luxemburg writes in Organizational Questions of Russian Social Democracy: the unconscious precedes the conscious. The logic of the historic process comes before the subjective logic of the human beings who participate in the historic process (Looker, 1972, p. 102). But, in these struggles, there is always a risk of disintegration and atomization in the absence of constant reunication. The action of the party arises historically out of the elementary class struggle. It spreads and develops in accordance with the following dialectical contradiction. The proletarian army is recruited and becomes aware of its objectives in the course of the struggle itself. The activity of the party organization, the growth of the proletarians awareness of the objectives of the struggle and the struggle itself, are not different things separated chronologically and mechanically. They are only different aspects of the same process (Looker, 1972, p. 98). In the nal analysis, the liberation of the working class will be the work of the working class itself.
Finally, we must frankly admit to ourselves that errors made by a truly revolutionary labor movement are historically innitely more fruitful and more valuable than the infallibility of the best of all possible central committees (Howard, 1971, p. 306).

And in her last article of January 1919, Order Reigns in Berlin, written a few days before her death: But the revolution is the sole form of war and this is also

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its most vital law in which the nal victory can be prepared only by a series of defeats (Looker, 1972, p. 304). It is therefore because of the social (and not merely political) nature of the proletarian revolution that Luxemburg denes mass strikes as the general form of the proletarian class struggle, and the party as the specic movement of the working class. In organization one must constantly combat a separation of politicians from militants, of leaders from workers. Luxemburgs discourse on organization is, obviously, inseparable from the class composition she faced, the problems she confronted; in effect, these different concrete situations partially explain the contrast with Lenin. This notwithstanding, I believe that her limitations, viewed from the perspective of today, lie not so much in an overvaluation but rather in an undervaluation of the political nature of workers autonomous struggles during the rising tide when the movement is on the offensive, and in the difculty of elaborating the relationship between party and masses in the phases of defeat. It is true that these limits reveal a contradiction, yet it would be well to remember that it is a contradiction not in theory but in reality: a contradiction that is still in front of us and not behind us. Once again, Luxemburgs thought reveals itself not as a solution, but as an arsenal of problems. Recently, in the same vein, Edoarda Masi has written:
Rosa is on the side of the masses because they are oppressed. For her, the educational function of elites must have as its aim mass revolt, mass revolution that is, their aim is not winning power for those same elites. Otherwise, revolution would merely create a mirror of the bourgeois power they should upset. Luxemburgs is a vision until this day deprived of a political victorious outlet, but the only one where revolution is not destined to devour itself (Masi, 1986, p. 95; translated from the Italian).

And again:
If the mole of history is the truth that, hidden in the present, will reveal itself in the changed conditions of the future, it is in our time that Rosas ideas and fate, apparently fruitless, shows their positive legacy. To bet on the masses: when the October revolution, the only victorious one, had followed another path. To opt for peace: when Social Democracy had chosen war; and war had come; followed by another war, still more terrible and universal. To side with the defeated: the worst possible errors from the point of view of political reason. Yet the victories of her day, even if authentic, mean nothing to us, when all is changed and dragged along by time [. . .]. Still with us, living and invincible, are the ideas of the defeated because they answer to a fundamental need of human beings in this century, a need which cannot be suppressed. These ideas represent the nobility of the defeated. Independently of if and when they can be made real (Masi, 1986, p. 98; translated from the Italian. Italics in the original).

I would not know how to say it better.

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THE MEASURE OF THINGS

In conclusion, I would also like for a moment to indulge the temptation to go from Luxemburg the revolutionary to Luxemburg the woman. In a letter to Sonja Liebknecht from prison on May 2, 1917 she writes:
Inwardly, I feel so much more at home in a plot of garden, like the one here, and still more in the meadows, when the grass is humming with bees, than at one of our party congresses. Surely I can tell you this, since you will not immediately suspect me of betraying socialism. You know that, in spite of it all, I really hope to die at my post, in a street ght or in prison. But my innermost self belongs more to my titmice than to the comrades. And not because I nd a restful refuge in nature, like so many morally bankrupt politicians. On the contrary, in nature too, with every step, I nd so much that is cruel that I suffer very much (Bronner, 1978, p. 203).

And again in a letter of July 3, 1900, to her comrade and lover, Leo Jogiches, we read this passage:
The two of us constantly live an inner life. It means we keep changing and growing, and this creates an inner dissociation, an imbalance, a disharmony between some parts of our souls and others. Therefore, the inner self must be constantly reexamined, readjusted, harmonized. One must constantly work on oneself to avoid sinking into spiritual consuming and digesting. But in order not to lose the overall sense of existence that I believe is a life committed to outward, constructive action, creative work, one needs the control of another human being. That human being must be close, understanding and yet separate from the I that seeks harmony (Ettinger, 1979, p. 105, italics in original text).

Perhaps I am mistaken, but I see a nexus between the writing of this woman in love and the thinking of the Marxist and the revolutionary. It seems to me that the Rosa of whom Rossana Rossanda recently wrote in her introduction to the reprint in Italian of Fr lichs biography namely, the Luxemburg who o speaks to our need for personal unity in the tortured fabric of pain and hope, of intelligence and feeling, of the self and the world, reunited (Rossanda, 1986, p. 16; translated from the Italian) is the same Luxemburg who wants to overcome the separation of individual and society, and who writes to Luise Kautsky on September 18, 1915:
So, I must always have something that totally devours me, though this is not very good for a person from whom to her misfortune people always expect something clever. Also, dearest, you do not want to hear about my happiness in a corner and will take me only in jest. But I need above all someone who believes me when I say that only by chance have I been caught up in the turbulence of world history when, in truth, I was born to be the custodian of geese (Basso ed.: 236; translated from the Italian, italics in original text).

I recognize in these lines the same woman who, in her scientic writings, speaks about the possibility of a world beyond the primacy of the economic. This

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woman who subjects the I that seeks harmony to the risk of the relation with the other, and to the challenge of change is, outside any empty rhetoric, the combatant that her work and her struggle have bequeathed us.

NOTES
1. Like a candle burning at both ends is the way Luxemburg is dened by Paul Fr lich (1939) in chapter 10 of his biography. o 2. A good example of this reading is Nye (1994). 3. Cfr. Luxemburg (1913, 1915). 4. As an aside, it is important to stress that though, of course, there is no strict continuity line from Lenin to Leninism to Stalin Stalinism could arise only because of original errors embedded within the Bolshevik tradition. The present writer cannot but agree with the criticism of really existing socialism coming from people like Koestler or Merleau-Ponty, Orwell or Silone. If that is socialism, it cannot be a means for the liberation either of human beings or of the working class and the oppressed. But, as I will show in Sect. 5, there was an alternative libertarian line directly descending from Marx. Rosa Luxemburg was very farsighted in seeing all these problems well in advance in 1917, in her pamphlet on the Russian Revolution and of course, this goes in fact back to her polemic with Lenin in Organizational Questions of Russian Social Democracy. Indeed, her phrases have lost nothing of their stringency. To quote only few: with the repression of political life in the land as a whole, life in the soviets must also become more and more crippled. Without general elections, without unrestricted freedom of press and assembly, without a free struggle of opinion, life dies out in every public institution, becomes a mere semblance of life, in which only the bureaucracy remains as the active element. Public life gradually falls asleep, a few dozen party leaders of inexhaustible energy and boundless experience direct and rule. Among them, in reality only a dozen outstanding heads do the leading and an elite of the working class is invited from time to time to meetings where they are to applaud the speeches of the leaders, and to approve proposed resolutions unanimously at bottom, then, a clique affair a dictatorship, to be sure, not the dictatorship of the proletariat, however, but only the dictatorship of a handful of politicians, that is a dictatorship in the bourgeois sense, in the sense of the rule of the Jacobins . . . But socialist democracy is not something which begins only in the promised land after the foundations of socialist economy are created; it does not come as some sort of Christmas present for the worthy people who, in the interim, have loyally supported a handful of socialist dictatorship. Socialist democracy . . . is the same thing as the dictatorship of the proletariat. Yes, dictatorship! But this dictatorship consists in the manner of applying democracy, not in its elimination, in energetic, resolute attacks upon the well entrenched rights and the economic relationships of bourgeois society, without which a socialist transformation cannot be accomplished. But this dictatorship must be the work of the class that is, it must proceed step by step out of the active participation of the masses; it must be under their direct inuence, subjected to the control of complete public activity; it must arise out of the growing political training of the masses (Waters, 1970, pp. 391, 393394, the Italics are by Luxemburg). 5. Cfr. especially Bukharin (1924) and Sweezy (1942). Sweezy wrote also an Introduction for the Italian translation of Luxemburg (1913, 1915) published by Einaudi in 1960. A more balanced perspective in Robinson (1951). On all this, see also Zarembka (2002).

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6. Though the point is contested by some: Zarembka, for example, argues that this statement is excessive, because breakdown only comes at the very last paragraph of the Accumulation of Capital. 7. The book title in the original edition is Einf hrung in die National konomie. I used u o the Italian translation. There exists also a translation in French. Another economic text by Luxemburg which may be of interest here is chapter 12 of Franz Mehrings biography of Marx, about his economic theory, which was actually written by Rosa. 8. It is included in Waters (1970). Substantial new extracts are promised in HudisAnderson (2004), to be published soon (at the time of my writing). 9. Here as elsewhere in this paper I have always checked the English translations with the Italian translations in the collections edited by Luciano Amodio (Scritti scelti, Einaudi, 1975) and Lelio Basso (Scritti politici, Editori Riuniti, 1970). 10. For two general surveys of the contemporary readings of Marx stressing the monetary and macroeconomic nature of Marxs labour theory of value, see Belloore (1989) and Belloore (2004a). My perspective originates from the Italian debate, surveyed in Belloore (1999, 1997). 11. That Luxemburgs reading is faithful to Marx, and more accurate than most of the new interpretations fashionable today, is documented with ample textual evidence, in Belloore (2004b). 12. I refer here mainly to the contributions made by Foley, Moseley and Reuten. For more bibliographical details, cfr. my papers quoted in Notes 10 and 11. 13. The charge of underconsumptionism levelled against Luxemburg has been dismantled by Meghnad Desai in many writings, on lines which are partly different but complementary to mine. Cfr., for example, Desai (1974, 1979, 1991). 14. For a recent and complete exposition of the contemporary versions of the monetary circuit approach, cfr. the book by Graziani (2003) and its bibliography. The theoretical origins of this heterodox line in Wicksell, Schumpeter and Keynes are traced in Belloore (1992). Belloore (2004c) re-reads explicitly Marx along this lines. 15. On all this, I agree with Norman Geras (1976) and Lelio Basso (1975). This latter book was originally published in Italian as his long introduction to a collection of Luxemburgs political writings.

REFERENCES
Belloore, R. (1989). A monetary labour theory of value. Review of Radical Political Economics, 21(12), 125. Belloore, R. (1992). Monetary macroeconomics before the General Theory. The circuit theory of money in Wicksell, Schumpeter and Keynes. Social Concept (2), 4789. Belloore, R. (1999). The value of labour value. The debate on Marx in Italy: 19681976. In: R. Belloore & M. Baldassarri (Eds), Classical and Marxian Political Economy: A Debate on Claudio Napoleonis Views. Special issue of Rivista di Politica Economica (AprilMay), 3169. Belloore, R. (2004a). As if its body were by love possessed. Abstract labour and the monetary circuit: A macro-social reading of Marxs labour theory of value. In: R. Arena & N. Salvadori (Eds), Money, Credit and the Role of the State. Essays in Honour of Augusto Graziani. Ashgate: Aldershot.

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