No butter, just guns

US Marine

The international financial crisis is frequently interpreted as being characterised by operations of avaricious and immoral bankers, motivated purely by personal greed, acting with complete indifference to the population of this or any other country, who recklessly operated financial derivates they did not understand within a casino economy, and whose net useful contribution to society has been shown to be less than zero – all of which is true. But this is only the mechanism by which the economic crisis worked itself out – not its cause. Furthermore, if this had been the real driving force of the economic crisis it would be relatively easy to deal with – tough financial regulation and similar measures would suffice.

In reality the driving forces of the financial crisis are far more powerful and lie elsewhere. They also classically illustrate the processes analysed by Marx in Capital – which is why Marx remains the best guide to this crisis.

The most immediate cause of the economic turmoil is the relative decline of US capitalism – the force which for more than a century dominated the world economy. The means which US imperialism has utilised to attempt to avert that decline have destabilised the entire world economy. This relative decline of US imperialism and its consequences are most clearly understood against the overall long term trajectory of capitalist society.

The rising organic composition of capital

Marx noted that the driving force of the development of the productive forces was their increasing socialisation – that is their increasing socially integrated and interconnected character. That process would ultimately culminate in the creation of a socialist society to rationally organise these socialised productive forces. But this process also had far more immediate economic consequences.

The increasing social integration and interconnection of the productive forces necessarily means a rise in the proportion of indirect inputs into production compared to direct labour – or as Marx put it, an increase in the proportion of dead labour to living labour. This process, as it expresses the development of the most powerful productive force, socialised production, will operate in any society. Under capitalism, however, this rise in the proportion of indirect inputs into production necessarily takes a value form. The ratio of dead labour (investment, raw materials etc) to direct labour increases in a process Marx described as the ‘rising organic composition of capital’ – within which the decisive role is played by investment.

As part of this process the proportion of the economy devoted to investment rises historically – in turn producing more and more rapid rates of economic growth. It is the consequences of this process, both in itself and in the immense pressures created in the world economy by the unevenness of this development, that ultimately lies behind the present financial crisis. The financial and economic crisis is ultimately a result  of the rising organic composition of capital and of its uneven development.

The rise of the US economy

The US rose to world economic domination at the end of the 19th century on the basis of a rate of investment that was at that time internationally unparalleled – 18% of GDP, operating across a continental scale economy. On this basis US mass production was created which for a hundred years constituted incontestably the most efficient productive apparatus actually existing in the world.

The US thereby surpassed the former dominant economic power, Britain, which in its previous rise to world dominance had never devoted more than 7-10% of GDP to investment in its own economy. The US economy grew at around 3.5% a year for a century whereas its British rival had grown at only around 2%. The way in which the US overtook Britain illustrated that the increase in the organic composition of capital, the process Marx had analysed and foreseen, did not occur only evenly and gradually but in sudden step changes related to the development and reorganisation of the economy.

The relative decline of US imperialism

From the aftermath of World War II onwards the rate of economic growth of US imperialism was overtaken by new competitors with far higher organic compositions of capital. Germany achieved an investment rate of 25% of GDP in its post-war ‘economic miracle’, and a consequent growth rate of 5% a year. Japan achieved investment rates of 30% of GDP by the late 1960s and growth rates of 8-9% a year. South Korea achieved the same in the 1980s and India is achieving this today.

On the basis of this increase in the level of investment a qualitative re-organisation of material production also took place. ‘Post-Fordist’ production, that is the mass production of individualised products, first developed by Toyota and other Japanese companies, defeated the ‘Fordist’ economy, that is the mass production of standardised products, which had characterised the US economy in the century after 1850. Many of the US’s great corporations were completely defeated in competitive struggle – a process graphically symbolised in the current debacle of the US motor industry.

The rise of China

China has now achieved an even higher rate of investment than these previous economic challengers to the US – a fixed investment rate of more than 40% of GDP. China has no landlord class to unproductively consume part of the social surplus and the non-capitalist, state owned, core of its economy means that its bourgeoisie, which is a subordinate class within China’s economic structure, consumes a far lower proportion of the social product than in any capitalist state. These provide bases for China to achieve a higher rate of investment, and of economic growth, than any capitalist state. Such rapid economic growth in turn has allowed China to raise more than 600 million people out of poverty – the greatest contribution to social progress of any country in the world.

As a result of these developments the US productive structure, which for a hundred years, until the middle of the 20th century, was the most competitive in the world, today cannot compete successfully with the growth rate of productivity in a whole series of economies. A process of relative economic decline of the US has been underway for half a century.

The US bourgeoisie, however, naturally has no intention of losing pre-eminence peacefully and it has therefore sought by all means at its disposal to avoid the consequences of relative economic decline. The US counter-attack was possible because, notwithstanding its long term relative decline, the US remains by far the world’s largest economy, its currency is the dominant global means of exchange and it is the world’s pre-eminent military power. The means utilised by US imperialism to attempt to this counter-offensive in turn produced the international financial crisis.

Guns and butter

The turning point in the attempt by the US bourgeoisie to reverse its relative decline was the new, even more aggressive, international course launched by Reagan in 1980. As ‘Reaganism’, which in its essentials was continued under both Bushes and by Clinton, established the essential framework of the course US imperialism pursued leading to the financial crisis its chief features should be outlined, as this shows clearly the core of the present economic crisis.

Reaganism presented a perspective to the US population that a new, more aggressive course would result in a new military strength of the US coupled with economic prosperity – US imperialism would have guns and the US population would have butter. The international financial crisis, in its essential features, is the proof to the US, and to the rest of the world, that US imperialism does not have sufficient resources to deliver both goals even by draining resources from the rest of the international capitalist system. Forced to choose, US imperialism therefore intends to have guns while the population will have to forego butter.

Shifts in the US economy in the present crisis

The stark reflection of these priorities of US imperialism in economic statistics is clear. By the second quarter of 2009 US GDP had fallen by $348 billion compared to a year previously under the impact of the financial crisis. Because foreign companies and states were no longer able to finance the huge US trade deficit, US net exports, that is the difference between what it exports and what it imports, had risen by $390 billion over the same period – the US annualised trade deficit falling from $739 billion to $348 billion. The resources necessary to fund this dramatic rise of net exports, and therefore reduction of resources in the US, had to be found by US imperialism. To finance this huge trade rebalancing, combined with an domestic economic contraction, US household consumption fell by $205 billion and US private investment declined by $580 billion. But US military spending was spared the squeeze entirely – even on understated official figures it rose by $50 billion in the same period.

Forced to stop borrowing at the same level from foreign countries, US imperialism let the standard of living of its population plunge, it even allowed investment to collapse precipitately, but its military expenditure was protected.

This is the pure logic of the imperialist system. The international financial crisis means reduced living standards and social deprivation for hundreds of millions of people. In economically underdeveloped countries people will die as their already insufficient living standards are cut further, and social crisis and war grips new countries. In Britain several million people will have their lives worsened, and many have it blighted, as mass unemployment rises and social protection is cut. In the US millions of people are having their homes repossessed, and unemployment is rising rapidly. But in such a situation the absolute imperative of US imperialism has been to maintain military spending – to deal with those who revolt against the consequences of such an insane system of priorities.

The immediate cause of the economic crisis

This process also leaves no ambiguity as to the immediate cause of the current economic crisis. For the last twenty years the capitalist system has been on the offensive throughout the world. While capitalism has not succeeded in restoring itself in China, Vietnam or Cuba, and a social struggle of revolutionary dimensions is taking place in Venezuela, in most countries capitalism has imposed its solutions.

And what is the result? The greatest economic crisis since the Great Depression following 1929! If anyone wanted an illustration that the contradictions of capitalism are internal, intrinsic to its very nature, they could scarcely have had a purer test tube experiment.

The mechanisms of the economic crisis

Analysis of the detailed unfolding of the financial crisis shows these underlying mechanisms in operation.

When Reagan launched his ‘New Cold War’ in 1980, and mobilised the US for it, his administration, both explicitly and implicitly, argued that the US population would not have to make sacrifices commensurate with a war to pay for this military build-up. As the combination of guns and promises of butter exceeded the financial possibilities of US imperialism alone, therefore in order to give the illusion of the ability to achieve such a combined result the resources of the international capitalist system were mobilised to finance US military expansion while simultaneously providing resources to cushion the attack on US living standards.

George W Bush intensified this course even further to gain support for the invasion of Iraq.

The significance of the US balance of payments deficit

The economic mechanism utilised to achieve this result was the huge US balance of payments deficit – which has continued essentially uninterrupted, except for a short episode in the early 1990s, for two decades. To run a balance of payments deficit is simply to receive goods and services without equivalent payment in real resources. The US deficit is therefore not a technical economic issue but a measure of the resources that were transferred from other countries to the US. It allowed the US bourgeoisie to use more than the direct resources of US imperialism itself.

It might have been possible to describe this process as the greatest borrowing spree in history – except that US imperialism naturally had no intention of returning in full the resources it gained. As US capitalism is able to borrow internationally in its own currency it can write down the value of the ‘loans’ it has taken from other states simply by devaluing the dollar – which is what it proceeded to do.

From dollar devaluation to the financial crisis

Between 2002 and summer 2008 the dollar fell in value against the other major currencies by more than 30%. In effect over this period the US therefore appropriated 30% of the value of the loans made by other countries. Naturally private investors became more and more unwilling to suffer such losses and the US balance of payments deficit became financed essentially only by the central banks of Japan, China, the oil producers and a few Asian states.  

At the same time, despite a 30% dollar devaluation the US trade deficit failed to close. The deficit, which had reached $701 billion in 2007, that is almost $2 billion a day, was still $695 billion in 2008. Under such strain, and now essentially without support from private capitalist investors, even foreign central banks could not finance this deficit – that is supply the resources the US required for ‘guns plus butter’. Lack of sufficient resources to meet all current commitments meant that US credit conditions – that is the availability of funds to businesses and individuals – began to tighten from 2007 onwards.

The sub-prime mortgage crisis

At this point the international situation of US imperialism interacted with its internal one. Although US imperialism wished to maintain domestic political calm nevertheless, naturally, it wishes to combine that with, if possible, an increasing rate of exploitation of the working class in the US. To achieve the latter, it made use of the relative weakness of the US labour movement so that median US wages have not risen for two decades.

To maintain domestic political stability under conditions of wage stagnation the same financial mechanism used by US imperialism internationally to fund its military build-up were used. Instead of receiving wage increases the US population was given the opportunity, via low interest rates created by the influx of foreign finance, to borrow. The huge bloating of the US financial system, its ‘financialisation’ to use the term of Monthly Review, expressed the mechanism used to channel such foreign funds not simply to investment but also to US consumers. A stable short term standard of living for major sections of the population was achieved at the expense of increasing household debt.

The tightening of US credit conditions, due to the decreasing willingness of others to fund the US, then destroyed this mechanism by cutting off access to loans and forcing repayments for increasing sections of US consumers. It was no longer possible to have both guns and to borrow money to purchase butter. As US imperialism, of course, intended to have guns the population would have to lose its butter.

Faced with lack of sufficient resources to meet all existing commitments, which is what the credit crunch was reduced to essentials, the US financial system broke at its weakest link – the sub-prime mortgage market, that is the credit extended to some of the poorest groups of the US population. These sections of the population had not merely their butter taken away but also their bread – or to be more exact their houses and their ability to use their credit cards. The huge losses suffered in the housing and other consumer credit markets then destroyed the balance sheets of the US banks, bringing down Lehman Brothers and other financial institutions.

The sub-prime crisis was therefore a symptom and not the cause of the financial disaster – a product of the overstrained position of US imperialism in its failed attempt to coerce the rest of the world to continue to fund both a US military build-up and reasonably stable standard of living for its population. The operation of obscure financial derivatives, and the reckless actions by bankers, were merely the means by which the fact that US imperialism no longer had the resources to pursue its previous course exerted its force.

The choice in the US

As US imperialism remains remorselessly determined to have its military build-up the US population therefore now confronts a stark choice which will determine both its own standard of living and the conditions in many other parts of the world. The population of the US can either seek to curb the excesses of US imperialism, that is force it to cut its military spending, which means curbing US imperialism’s external aggression, or it can suffer a great decline in its own living standards.

To date even the most parasitic groups within US imperialism, for example the suppliers of its outrageously expensive and inefficient private health care services, are fighting to maintain their ground. The Obama administration has continued the essential strategic approach of US imperialism by de facto supporting the right wing coup in Honduras. Only on the issue of the anti-missile system in Europe, which was in practice aimed against Russia and was one of US imperialism’s most adventurist policies, has the US been forced to back down by the combination of expense and opposition from the Russian state. Meanwhile widespread wage cutting and rapidly rising unemployment are seriously depressing US living standards.

Worsening of the medium term prospects of the US economy

Despite the severity of this attack on the US population the deterioration of the economic position of US imperialism is sufficiently severe that so far even this transfer of wealth from the working class is insufficient to revive serious US economic growth. The fundamental outcome of this social struggle in the US is not yet decided. The consequences of this economic deadlock is therefore leading to a weakening of the medium term positions of US capitalism.

US military spending is rising as a proportion of US GDP but the US economy is contracting even more rapidly than household consumption. Therefore, as both military expenditure and household consumption are rising as a proportion of US GDP, US investment has fallen drastically – so far US private investment has declined twice as much as household consumption during this economic downturn. This undermining of US investment, that is of the process of capital accumulation itself, evidently weakens the medium term economic prospects of US imperialism and requires a further attack on the US working class in order to create the resources to restore the level of US investment and relaunch capital accumulation.

The situation in Britain

The same processes work themselves out in Britain – though naturally on a smaller scale.

British imperialism played its usual role as a junior partner of the US in the assault on Iraq, Afghanistan and all other areas. But in Britain, due to popular pressure, military spending had actually been falling as a proportion of GDP. Now both the Tories and Labour are seeking to increase it while simultaneously cutting social spending under the impact of the international financial crisis. Belt tightening for the population, increased spending for the military, is the British equivalent of the US ‘guns but no butter’. The fact that the Labour government has gone along with such a policy, endorsing all the essential policies of US imperialism, has forced it to launch such economic attacks on the population that it has destroyed its popular support.

The policy of ‘guns and no butter’ is now endorsed by all three major parties in Britain – the government now openly endorses social spending cuts, the Liberal Democrats calling for ‘savage cuts’, and the Tories are preparing for Thatcherism Mark II. To maintain the course of British imperialism the population is to be subjected to many years of economic and social attacks. To try to ensure the population does not understand the reasons for their deteriorating living standards, mainstream politicians give more and more legitimacy to racist policies which inevitably encourage the racist, far right and fascist organisations – as across the rest of Europe.

Only to the degree it is capable of breaking out of this, and redirecting resources from the requirements of British imperialism to the needs of maintaining its own living standards and economic development can the British working class avoid the malign processes that are presently ravaging the population of the US.  

The consequences of the financial crisis are therefore a remorseless drive against the standard of living of the population in the US, Britain and most other countries in order to generate the resources for imperialism to simultaneously maintain its military expenditure and rebuild its rate of private investment. Those responsible for the crisis, the capitalist class, naturally have no intention of paying for it.

The myth of overproduction

The processes taking place in the economic field are as grotesque as the social consequences of the financial crisis. In a world where the majority of the population has a totally inadequate standard of living it is now ‘discovered’ that there is ‘overcapacity’ in a large series of industries and massive reductions in production, literally destruction of the productive forces, are taking place.

The capitalist economy is behaving as if the population of the world has an overabundance of  refrigerators, cars, steel products etc so it is necessary to shut factories producing them. In reality the only actual ‘oversupply’ is in the gall of the capitalist class in shutting productive capacity, and throwing tens of millions of people into unemployment, in order to rebuild their profit rates.

The rentier on taxpayer life machine

Confronted with the financial implosion of last year capitalism has rediscovered what it has persuaded itself is Keynesianism – that is the use of budget deficits and low interest rates to attempt to avoid economic downturn. Actually, the former policy has little to do with Keynes’ fundamental ideas except as a purely tactical response. The pursuit of low interest rates was, however central to Keynes’ policies. His fundamental concept was to halt the decline in investment, which he correctly understood to be the key mechanism operating in economic downturn, by reducing the rate of interest further below the rate of profit and thereby giving the capitalist class an incentive to invest.

Keynes was the chief economist who, after Marx, grasped that the proportion of the economy devoted to investment necessarily historically rises – even if he arrived at that conclusion by quite different reasoning to Marx. As investment, in a capitalist society, is motivated by profit and not the needs of social production, in this capitalist context the rising proportion of the economy devoted to investment necessarily created an increasing source of instability. Keynes sought to prevent catastrophic collapses of production without socialisation of the productive forces, that is direct state ownership of the means of production, by means of investment sustained by low interest rates.

Keynes himself, however, understood what would be the consequences of such a permanent policy of a low rate of interest. It would lead, as he put it in a famous phrase in The General Theory of Employment, Interest and Money, to the ‘euthanasia of the rentier’. This is, the low rate of interest would destroy the returns of those who operated by lending capital. In the same way that the power of the landlord class had been drastically weakened during the 19th century, in order to transfer a greater proportion of surplus value to the productive capitalist, so the ‘euthanasia of the rentier’ would free that part of surplus value which was unproductively consumed by those living on interest and transfer it to productive capital. Keynes, therefore, sought the preservation of capitalism but his policies involved a large scale redistribution of resources within the capitalist class away from banking and rentier capital. His policies, for the same reason, were therefore resisted by rentier capital.

US and British capital

There is, indeed, considerable evidence that at present only extremely low interest rates can permit the functioning of international capital. On both occasions in the last decade when the US Federal Reserve has sought to raise interest rates it has led to financial catastrophe – the first time in the collapse of the US stock exchange after 2000, with the implosion of the dot com bubble, and the second time in the period leading to the financial crisis of September 2008. Each time the capitalist financial system has been saved only by the Federal Reserve reducing its lending rates to essentially zero. Given the record of the last decade it remains highly likely that after the present financial catastrophe any attempt to raise interest rates will again lead to financial collapse.  

However in the US and UK systems, the rentiers, that is the financial system, far from suffering ‘euthanasia’ have become the dominant part of the capitalist class. The most economically rational way for capitalism out of the present system would be to maintain the nationalisation of large parts of the banking system which has already occurred, and where bank shareholders have therefore genuinely suffered euthanasia, and to use this to lend at cheap rates to seek to expand the economy. However that would genuinely mean, if not death, then at least marginalisation for banking capital and the latter has no intention of accepting it.

Like bloodsucking leeches, the private banks, which left to their own devices would have withered away, have now secured a gigantic taxpayers’ blood transfusion. The resources being transferred from taxpayers, that is the population, to the state are being drained off by banking capital to rebuild its incomes. Instead of the state lending to productive companies at essentially zero percent interest, the state instead lends money to the private banks at zero percent interest – who then lend a part (at best) to productive capital at a far higher rate of interest and pocket the profit. Productive capital suffers a corresponding loss and the taxpayer is forced to finance banking bloodsuckers as well as attempts at economic recovery. The population is therefore forced to bear the burden not only of rebuilding the economy but of restoring the financial position of parasitic layers within it.

What is being followed at present is obviously not a socialist policy, which would involve taking direct control of investment through state ownership of the banks and decisive means of production, but it is not even a properly Keynesian policy. Far from suffering euthanasia, the rentier, hooked up to the taxpayer’s life support machine and enjoying daily financial transfusions, is regaining its strength and viciousness by the day.

As the UK government has been prepared to implement this policy, and impose the resulting burden on the population, no wonder its popularity has collapsed – confronting Britain with the threat of Thatcherism Mark II under Cameron. Cameron, in turn, is naturally now increasingly dropping the liberal mask some were gullible enough to believe in.   


That there is no necessity to follow the course being pursued in the US, Britain and other imperialist countries is shown by the most economically powerful non-capitalist economy, China.

China has met the international financial crisis by use of its state owned companies and state owned banks. Instead of investment being cut it is rising rapidly, instead of bank lending being reduced it is being increased, and in order to expand consumer demand prices are being cut of products such as cars, refrigerators and computers. Whereas in the US and UK the aim of present policies is to drive down living standards in order to reconstitute profit rates and finance military expenditure, in China the response has been to increase consumer incomes and living standards, and to increase investment, in order to raise domestic demand.

It is not necessary to believe that China is a perfect society to see that such a response is far superior to that in the US or UK. It has also brought about a major change in the international relation of economic forces. In the year between the second quarter of 2008 and the second quarter of 2009 the US economy shrank by $348 billion. In the same period the Chinese economy grew by $407 billion – i.e. the gap in size between China’s GDP and that of the US shrank by $750 billion even at official exchange rates, which understate the size of China’s GDP.

China has become the largest trading partner of Brazil and a series of other countries. This situation creates greater room for manoeuvre for countries seeking to loosen the grip of the US. Furthermore China’s economic model is not specifically Chinese – as its successful adoption by Vietnam has shown. It presents an entirely viable alternative economic model to that pursued by imperialism.

The semi-colonial countries

Within the economically underdeveloped countries dominated by imperialism the financial crisis is working out its malign consequences. With the exception of Vietnam, no other country has as well worked out an economic policy, or the means to implement it, as has China. Cuba is able to continue to project highly advanced social policies, and to act as an international political leader, but its economy is far too small to play a role as a locomotive for Latin America. Venezuela has so far shown itself stronger in showing political leadership than in defining an economic strategy that can be operated in Latin America. Given that, at least in Latin America, progressive forces have been on the offensive, their development of adequate economic policies is of increasing urgency.

In other areas of the semi-colonial world brutal and direct confrontation with the military forces of US imperialism, and its immediate proxies such as Israel, has intensified – particularly with Palestine and Iran.

A decade of economic attacks to come on the world’s population

The main alignment of social forces following the international financial crisis is therefore clear. In the imperialist countries the population faces a prolonged period of attacks designed to grind down its living standards and finance both the military policies of US imperialism and the relaunching of capital accumulation. Rising legitimacy given to racism in the mainstream of politics and the activity of far right and fascist groupings plays the objective role of attempting to divert attention from the real causes of the social suffering of the population.

Within the countries dominated by imperialism, economic and social dislocation is even greater than within the imperialist states themselves and the threat or actuality of military assault by US imperialism and its proxies continues.

The priorities flowing from the international financial crisis in Britain are therefore clear:

At a mass level to wage the defensive struggle against the prolonged attacks by capitalism which are coming – which is necessary not only to defend living standards but limit the resources available for the military build-up of imperialism.

To carry on solidarity with those in the countries dominated by imperialism who are fighting against it – in particular today, as these are the most advanced struggles in the world, in the struggle for social progress in Latin America, above all in Venezuela, and in the heroic defensive struggle of the Palestinian people against brutal Israeli aggression.

To combat the rise of racism, far right and fascist organisations such as the BNP.

To explain that an entirely coherent economic alternative to the current capitalist system exists.

Given the severity of the attacks being mounted by the imperialists this will be a prolonged struggle. But the mayhem and social oppression imperialism has brought even when its system has essentially imposed most of its own solutions, as in the last twenty years, shows it is the only course which is in the progressive interests of humanity.