Transitions in Latin America and in Poland

LIST OF CONTRIBUTORS
Jane Hardy
Centre for Research in European Business

and Economy, Business School, University
of Hertfordshire, UK
Jerome Joffe
Division of Social Science, St. Johns

University, NY, USA
Angela Joya
Department of Political Science, York

University, Toronto, Canada
Samezo Kuruma
Now deceased: translation by

E. Michael Schauerte
Terrence McDonough
Department of Economics, National

University of Ireland, Galway, Ireland
Administrator of the Japanese Section of

the Marxist Internet Archive at
marxists.org; Freelance Translator, Tokyo,
Japan
Curtis Skinner
Pelliparius Consulting, Brooklyn, NY,

USA
Oliver Villar
Department of Politics, University of

Western Sydney, Australia
Gregory Wilpert
Venezuelanalysis.com, Editor; Freelance

Writer, Caracas, Venezuela
vii
FOREWORD
With a world balance of forces in tension, this volume slices the political
map in two dimensions, the geographical dimension and the imperialism
socialism dimension (socialism, of course, having widely varying meanings). As a region, Latin America is in the forefront of resistance to imperial
schemes, particularly those by the United States. Venezuela and Cuba represent leading edges of resistance, and Colombia, a leading edge of U.S.
hegemony. Chapters addressing the political economies of these countries
form the rst part of the volume.
Poland has led the anti-Soviet transition into a pro-market realignment, a
realignment of this country which is particularly oriented toward the United
States. Syria, on the other hand and even as it moves into a pro-market
orientation, is subject to particular U.S. hostility. Both cases are analyzed in
Part II, with the chapter on Poland having considerably broader applicability. Also included here is the continued deeper penetration of capitalist
relations within the United States, represented by analysis of the transition
of its medical sector.
For almost a century, stages of capitalism has been an important theme
within Marxism. The theme is analyzed at the beginning of Part III, and
connects to the more empirical work represented by the prior six chapters.
The volume concludes with translation from Japanese of an important critique of the classical political economy of Adam Smith and David Ricardo,
who, in a certain sense, were the leading proponents, historically, of the
market, of capitalism. Most poignantly, this chapter argues that Ricardian
value theory opens the door to a vulgar system of economic thought.
ix
CHAVEZS VENEZUELA AND 21ST

CENTURY SOCIALISM
Gregory Wilpert
ABSTRACT
This paper explores the sociological, economic, and political reasons for
the collapse of Venezuelas 40-year pacted democracy, the eight-year
conflict between the countrys new president and the opposition, where this
conflict has led Venezuela, and what its prospects are for the near future.
It proposes that the collapse of Venezuelas ancien regime can best be
understood by an examination of the impact the rise and fall of oil prices
had on its economy, society, and polity. A 20-year economic decline led to
the election of Hugo Chavez, a radical outsider, who refused to play along
with the countrys old political class. This class, in turn, refused to accept
Chavez as the legitimately elected president and launched the country on
an eight-year roller-coaster ride of counter-revolution and radicalization,
which recently ended with the reelection of Chavez and a massive popular endorsement for the establishment of 21st century socialism in
Venezuela. Exactly what such a project means is still unclear, but it so far
involves state support for self-managed workplaces and an anti-capitalist
and participatory democratic state in the midst of a still functioning capitalist economy. With the apparent defeat of obstacles that are external to
the Bolivarian movement, as the pro-Chavez movement is called, such as
the domestic opposition and U.S. intervention, the movement is now
forced to confront its internal obstacles, such as clientelism, corruption,
and personalism, if it is to succeed in the long run.
Transitions in Latin America and in Poland and Syria
Research in Political Economy, Volume 24, 342
Copyright r 2007 by Elsevier Ltd.
All rights of reproduction in any form reserved
ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24001-5
GREGORY WILPERT
The perhaps two most common questions about Venezuela over the
past eight years have been, rst, is President Hugo Chavez a typical Latin
American autocrat? And, second, just how revolutionary or transformative
are the policies of the Chavez government? The present paper proposes to
examine the second question and, in the process, answers the question of
what Chavezs proposal to build 21st century socialism means for
Venezuela. Indirectly, this paper will also answer the rst question of
whether this is an autocratic or a democratic government because, if it is
indeed pursuing some form of socialism, then it must be profoundly democratic because socialism, in my conception, is at heart democracy in its
truest sense a point that Chavez emphasized immediately following his
recent reelection.1
Chavez himself was a relatively late convert to socialism. It was not until
six years into his presidency that he announced that he was planning to
pursue 21st century socialism. Before that point he had always only
talked about bringing about a Bolivarian Revolution, so named after
Venezuelas 19th century independence hero, Simon Bolivar. As Bolivars
history and Chavezs own statements suggest, the Bolivarian project was,
at rst, fundamentally a nationalist project, which sought to defend
Venezuela against the powers of neo-liberal globalization and against U.S.
domination. Certainly, the project had, from the start, progressive social
justice impulses, but it was not socialist, in the sense that it opposed capitalism in favor of a new and more just and more democratic economic
system.
It was not until January 30, 2005, in a speech to the 5th World Social
Forum, that Chavez announced that he supported the creation of a socialism of the 21st century in Venezuela. According to Chavez, this socialism
would be different from the socialism of the 20th century. While Chavez
was vague about exactly how this new socialism would be different, he
implied it would not be a state socialism as was practiced in the Soviet
Union and Eastern Europe or as is practiced in Cuba today. Rather,
it would be a socialism that would be more pluralistic and less statecentered.
But what does this new policy focus mean for Venezuela? Is Venezuela
indeed moving away from capitalism and towards some form of socialism?
Before we can answer these questions, though, it makes sense to nd out
how and why Chavez shifted from a third way Bolivarian nationalism
towards 21st century socialism. That is, how did it become possible that a
radical socialism was placed once again on the agenda in a Latin American
country and what lessons might be learnt from this for other movements
that seek radical change?
Chavezs Venezuela and 21st Century Socialism
1. CAPITALIST DEMOCRACY WITH REPRESSION

AND PATRONAGE (19581978)
The perhaps most important reason Venezuela was open to a radical transformation, at rst in favor of replacing representative democracy with participatory democracy and later of replacing capitalism with socialism, was
Venezuelas rather disappointing experience with both capitalism and representative democracy in the last two decades of the 20th century. That is,
while the period from the end of Venezuelas last dictatorship in 1958 to the
end of its oil boom days in 1978 caused Venezuelans to believe that their
country would soon join the developed world, the period from 1979 to 1999
proved to be two decades of bitter disappointment. In order to understand
where this disappointment came from, we need to rst examine what made
Venezuelan democracy so unusually stable and apparently solid, at a time
when most of the rest of Latin America was governed by brutal dictatorships.
Venezuelan democracy during the 1960s and 1970s and beyond tended to
revolve around two diametrically opposed images. In the positive image of
Venezuelan democracy, Venezuela was blessed with one of the very few
functioning democracies of Latin America (with Costa Rica being the other),
ever since the defeat of the Marcos Perez Jimenez dictatorship in 1958.2 In
this view, while most other countries in Latin America, especially in the 1970s,
were struggling with dictatorships of varying degrees of brutality, Venezuelan
citizens enjoyed full civil rights, universal suffrage, and regular free and fair
elections. According to the more negative image, Venezuela between 1958 and
1998 was a phony or limited democracy, where citizens enjoyed limited civil
rights and restricted choices for regularly occurring elections.3
Recently, though, a consensus has been emerging, rst, that in the 40-year
period of 19581998 Venezuela was indeed a democracy of sorts, but a
signicantly awed one.4 Second, despite the fact that it was a limited or
restricted democracy, it was still almost unique in the Latin American
context, at least during the rst half of this period (19581978), because
nearly all other countries were governed by dictatorships.5 There are at least
ve factors that explain why Venezuela was signicantly different from most
other Latin American countries: economic, political, social, cultural, and
military.6 Let us examine each in turn.
1.1. Economic Factors for Stability

The economic factor has to do with the ways in which Venezuelas vast oil
wealth allowed the state to purchase the loyalty of large sectors of society,
GREGORY WILPERT
such as the labor movement, the party members of the two dominant political parties, and of civil society in general. However, so as to make sure
that other sectors, which were not beneting from the oil wealth, did not
challenge the countrys political class, this class devised a restricted representative democracy, in which only the two governing parties (Accion
Democratica (AD) and Comite de Organizacion Pol tica Electoral Independiente (Copei)) were allowed to compete in the political arena.7 Partly
this was achieved through restrictive electoral rules, partly through limiting
campaign nancing and access to the media to the two dominant parties,
and partly though outright repression and human rights violations. The
resulting system, known as the Punto Fijo pact8 and designated as a pacted
democracy by some analysts,9 was almost completely dependent on the
countrys oil wealth for it to work.
However, the dominance of the oil industry provoked what among economists is known as the Dutch disease. This economic disease, named after
the effect the discovery of North Sea gas had on Hollands economy, refers
to the problems that are associated with the rapid growth in one sector of
the economy will produce problems in other sectors. Applied to Venezuelas
oil industry, this meant that domestic industry and agriculture could not
keep up with the rapid rise in oil income and so both industrial and agricultural goods were imported. Hellinger (2000) takes issue with the argument that the Dutch disease is a serious issue for Venezuela, dismissing it as
a neo-liberal analysis and adding that if it does apply then it would have to
be applicable to all Third World societies, since they all have imbalances in
their economic activity. While it might very well be true that many Third
World societies suffer from this problem, countries suffer far more from it
the more one sector predominates. Since Venezuela is exceptionally dependent on oil, it is particularly applicable to Venezuela. Karls (1997)
comparative analysis of oil producing countries and of other countries in
which oil is dominant shows very well how the Dutch disease affects all of
these countries.
Compounding the problem of the Dutch disease, Venezuela had a xed
exchange rate in the 1970s and early 1980s. As a result, the currency was
persistently overvalued and so it was much cheaper to import goods than to
produce them domestically. This meant that industrialization in Venezuela
never really caught on and agriculture was effectively killed off. Instead, the
service sector, whose products cannot be imported as easily, grew dramatically, while agriculture and industry shrank. Agricultural production thus
declined from one-third of GNP in the 1920s to less than one-tenth in the
1950s. As a result of the declining agricultural activity, a massive land ight
and urbanization process set in, so that Venezuela rapidly became the second most urbanized country of Latin America10 and the only one to be a net
food importer.
The economic factor also had a tremendous impact on the countrys
culture. That is, since there was little non-oil related productive activity, the
vast majority of Venezuelas entrepreneurs tried to associate themselves with
either the state or the oil industry because these were the two sectors that
were the most lucrative. The state also engaged in this type of rentier behavior in that it neglected to enforce its own tax laws, since oil revenues
seemed to provide sufcient resources to nance the state apparatus.
Finally, the oil state generated the expectation that Venezuela was one of
the richest countries in the world and the state could, using this wealth, do
practically anything. In Venezuelas political culture it came to be taken for
granted, across the political spectrum, that the Venezuelan state would play
a very active role in the countrys economy.
1.2. Political Factors for Stability

The political factors for maintaining Venezuelan representative democracy
have to do with the countrys institutions, especially its political parties, and
how these were able to manage the demands coming from Venezuelan society (Coppedge, 1994; Roberts, 2003, 2001; Buxton, 2001). That is, the
center parties of Venezuela, the social democratic AD, and the Christiandemocratic Copei, formed the Punto Fijo pact, which was designed to exclude radical tendencies of both the left and the right.
The pact of Punto Fijo was the result of hard political learning from past
experiences, particularly the trienio period, which was the three-year democratic period of 19451948 between dictatorships. During that time AD
dominated Venezuelan political life almost totally. Other parties resented
this domination and ended up supporting the military coup against AD
President Romulo Gallegos. Later, the parties regretted their support for the
coup because it resulted in one of Venezuelas most brutal dictatorships. The
lesson that the political class learned from this experience was that if democracy is to survive in Venezuela, then power must be shared among the
dominant groups of the time, which, in the case of the immediate post-1958
period were AD, Copei, and the smaller left of center URD (which later
became defunct). Also, important decisions were to involve not just the
pact parties, but also the main employer associations and the main union
federation (which the parties dominated via patronage and clientelism).
GREGORY WILPERT
As mentioned earlier, another important element in this arrangement was

the political repression of dissent and of groups that were interested in
participating in the countrys political life.
According to some, Venezuelan democracy in the 19581993 period
should be called a partyarchy rather than a democracy because the parties
controlled all political life in Venezuela (Coppedge, 1994). All decisions
were made in the parties or in their subordinate civil society organizations.
What this also meant is that political participation had to go through the
parties. Citizens tend to participate either within the parties or not at all
(Coppedge, 1994, p. 15).
Another part of the reason for this strong party orientation was that
Venezuelan political parties are the oldest organizations of civil society and
could thus dominate all other forms of organizations that came later. Elections in non-party organizations, such as professional associations, unions,
and student organizations were dominated by the existing political parties,
principally AD and Copei, where each party would present its slate of candidates for the organization and the members would choose only amongst
these. Also, both the relative number of AD party members in Venezuela
and even the absolute number exceeded that of nearly all other parties in all
of Latin America (with the exception of Costa Rica) (Coppedge, 1994, p. 30).
1.3. Social Factors for Stability

The social factors for Venezuelan stability have to do with the relative size
and strength of different social classes and of civil society. Contrary to some
Marxist theories, which argue that liberal democracy is a bourgeois form of
socio-political organization, an examination of this factor calls attention to
the nding that liberal democracy is generally the result of a strong working
class, a strong civil society, a strong state that follows the rule of law, and a
weak upper class that is forced to give in to the demands of civil society.11
Capitalist development thus contributes to democratization because it
tends to reduce the power of the landed elite and increases the power of the
urban working class, which is one of the main advocates for democracy
within a society. This trend holds true, though, only if the state is not at the
mercy of a strong urban upper class. That is, the state has to be relatively
independent but civil society must still be able to inuence it. Finally, one
other important factor for the success of democratization is the constellation
of international conditions, such as foreign interventions and economic
pressure (Huber et al., 1999).
Examining this factor in Latin America as a whole, one can see that
mobilizations to oppose dictatorship generally resulted in a weak civil society because once a country adopted liberal democracy, the mobilization of
civil society subsided because its goal had been reached. Also, political parties, whose ability to articulate the demands of lower classes are crucial, play
an important role in maintaining democracy. However, in most of Latin
America, most parties did not maintain close ties with the lower classes.
Rather, instead of articulating demands and acting on them in the political
arena, parties built clientelistic networks, which produced cynicism towards
democracy and thus generally weakened it. In the case of Venezuela, AD
started out as a party with strong ties to the urban working class, but
eventually transformed itself into a multiclass patronage-based party.
Similarly, the international context, while favorable for establishing formal democracy, is not helpful for solidifying democracy and for engaging
the populations participation. That is, international pressures for countries
to adopt neo-liberal economic policies often cause governments to adopt
these policies even when voters thought they were voting for a completely
different policy orientation. This could be seen quite clearly in Venezuela,
for example, when both President Carlos Andres Perez (19891994) and
President Rafael Caldera (19941999) adopted neo-liberal economic policies, even though their campaigns had promised something completely
different. Again, such contravening of voters intent results in cynicism,
apathy, and a weakened democracy.
When we compare different Latin American countries, though, in order
to make sense of what makes Venezuela different and in which ways it is
similar to the rest of Latin America, one can see that certain structuralsocial arrangements in the different countries have produced different political results.
At rst, it would appear that within Latin America the thesis that capitalist development produces stronger trends towards democracy is contradicted because those countries that were more industrially developed, such
as Chile, Argentina, Uruguay, and Brazil, tended to experience some of
the most brutal dictatorships. Less developed countries, such as Bolivia,
Venezuela, and Colombia, have longer histories of democratic government.
However, other factors appear to play a stronger role than economic development when one takes a closer look at the factors that contribute to the
development of a stable representative democracy (Mainwaring, 1999).
A more important factor than the size of the industrial working class or
the degree of capitalist development for the development of democracy is
the relative strength of the upper class, which generally seeks to prevent
10
GREGORY WILPERT
democratization (Anderson, 1988). For example, Venezuela, which has had

one of the longest lasting liberal democratic governments of Latin America,
also has one of the weakest landed elites. First, Venezuela went through a
series of civil wars and a brutal dictatorship that ended up decimating the
countrys landed elite. Second, Venezuelas large oil reserves, which were
discovered relatively early in the 20th century (well before it was discovered
in the Middle East) meant that oil became the principal means of accumulation, instead of land, as was the case in the rest of Latin America, and this
oil income was quickly directed by the state rather than by a national business elite.
Another factor that helps explain the prevalence of liberal democracy in
Venezuela, when dictatorship was the norm in the rest of Latin America, is
that Venezuelas working class was relatively weak and unorganized. While
normally a strong working class is a predictor for the development of liberal
democracy, it can also work against it, because a strong working class represents a threat to the countrys elites, making them more willing to support
a dictatorship in order to control the working class. The reason Venezuelas
working class is relatively weak and unorganized again has to do with oil.
The countrys sudden inux of oil revenues caused massive and rapid urbanization, as was explained earlier. What this rapid urbanization meant
was that there was insufcient time for the working class to organize and to
pose a threat to the countrys elites. Democracy, thus, turned out to be a
relatively safe bet for the elites (who were probably too weak to prevent
democratization anyway).
In contrast to Venezuela, countries such as Argentina, Brazil, Uruguay,
and Chile, had working classes that did present a real threat to the elites of
their respective countries. Plus, these elites were relatively strong and conservative landed elites, who provided the support base for a dictatorship in
these countries.
Despite these country-by-country differences, the ultimate result of dictatorship or democracy across Latin America appears to have been the
defanging of the working class, of rendering it harmless. Another term
that has been used is the padlocking of democracy, which prevents radical
leftist movements from taking power, much as happened in Venezuela (Alan
Knight, 2001; Anderson, 1988). History repeated itself in nearly all countries
of Latin America, so that an early foray into democracy ended in dictatorship shortly after radical left movements either won the presidency or
threatened to do so. Then, following the decimation of the radical movement and the institution of mechanisms, such as the Venezuelan pact of
Punto Fijo, democracy returned, but without the radical movements having
11
a real possibility of gaining power again. This pattern repeated itself various
forms in numerous countries, but especially in Brazil, Chile, Guatemala, and
Argentina. Also, by the 1980s the international context of neo-liberal globalization and of the IMF ensured that radical experiments would be practically impossible. However, the pad-lock that kept leftist parties out of
power for so long in Latin America is gradually falling apart, as can be seen
by the recent leftward shift in the continent.
1.4. Cultural Factors for Stability

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

commitment is stronger than in most other countries of Latin America.14
This hypothesis is supported by the Latin America-wide survey of political
culture, Latinobarometro, which nds that support for democracy in
Venezuela has been among the highest of Latin America, at least for the
period in which the surveys were conducted, 19962004.15
1.5. The Military as a Factor for Stability

Something that most analysts of Venezuela oddly enough leave out is the
role of the military in both supporting Venezuelas liberal or pacted democracy and in changing it under Chavez.16 Traditionally, in most of Latin
America, the military has been a very conservative force. Largely, with U.S.
encouragement, the armed forces were set up to stie domestic dissent rather
than to protect the respective countries from foreign attack or to protect the
democratic system (if there was one). Training in the U.S. and an elite
education in domestic military ofcers schools, with ofcers drawn from the
upper class, ensured that the military would share the ideology of the domestic upper class and of U.S. foreign policy circles. As a result, whenever
radical movements threatened to take power in Latin America, the U.S.
government and the countrys domestic elites could count on the military to
be on their side in suppressing these movements.
However, this strategy did not always work, most notably, in Peru under
General Juan Velasco (19681976) and in Panama under General Omar
Torrijos (19681981), where Generals took a populist and nationalistic approach to their dictatorships, in opposition to the U.S. This small countertradition in Latin American military forces has also existed in Venezuela.
That is, prior to the 1970s, Venezuelas military was very much like the
conservative military forces in the rest of Latin America. Several factors
changed Venezuelas military in the 1970s, though. First, Venezuelan ofcer
training was decentralized, which meant that ofcers began to take courses
at regular public universities, thus strengthening their exposure to civilians
and to a wide variety of viewpoints. In some cases, such as with Chavez and
his friends, they became particularly interested in leftist ideas and ideology.
Another factor that distinguished the Venezuelan military was that ofcers
were not recruited principally from the upper class, but often came from
lower middle-class backgrounds (such as Chavez) and rose up through the
ranks. This tied the Venezuelan military leadership much less to upper class
concerns and ideology than was the case in most other Latin American
13
countries. Thus, by 1989, when the military was ordered to repress the riots
of the February 27 caracazo, the disgust that many soldiers and ofcers
felt for this mission was great. Human rights violations were still the rule,
but the action planted the seeds and the legitimacy for two left-oriented
coup attempts in 1992.
1.6. Venezuelas Uniqueness and Ordinariness in Latin America

The main debate that emerges among Venezuela analysts is about the relative importance of Venezuelas oil wealth in shaping the countrys economy, polity, and culture. There is little dispute that the oil wealth
fundamentally shaped Venezuelas economy, but there is some dispute
about whether this wealth shaped the polity and culture or if, instead, it was
the countrys culture and political institutions that shaped how the oil
wealth was used, which then, in turn, shaped the economy. Given the controversy over this issue, it makes sense to say that both sides of this debate
make valid points and that, rather than to take sides, a combination of the
two approaches is probably the most fruitful interpretation of Venezuelas
reality. That is, this controversy boils down to the age-old debate within the
social sciences and social theory as to whether it is culture and the actors
world view that shape social, economic, and political structures or whether
it is social, economic, and political structures that shape the culture and the
actors world view. By now most social scientists and theorists will admit,
though, that there is a dialectic between the two and that it might not make
too much sense to favor one or the other side in terms of original causality.17
In addition to the culture-structure debate, there is also a sub-debate about
whether it is the countrys economy, its political institutions, or its social
structure and civil society that are most important in shaping Venezuelas
destiny. Here too, I propose that we examine each of these factors or social
sub-systems as having more or less equal weight. However, there is a fundamental difference between structural factors of economy, polity, and society
and cultural factors. If we subdivide the cultural factor into one that focuses
on political culture, one that focuses on economic culture, and one that focuses on civic culture, we can see more easily how the different factors might
t together and complement each other. That is, the economic structure operates under a specic economic culture, the political structure under a specic
political culture, and civil society under a specic civic culture. The following
section suggests how the different elements of Venezuelan social structure and
culture relate to each other, according to the factors presented above.
14
GREGORY WILPERT
1.7. Bringing the Factors Together

Applied to Venezuela between 1958 and 1978 then (the years in which
Venezuelas democratic system was consolidated and maintained), one can
say that there was dialectic between Venezuelas oil-based economy and an
economic culture that favored rentierism. On the one hand, oil income
tended to drown out all other economic activity and, on the other, the oil
economy was maintained as the dominant form of economic activity because this is what rentierism and the Dutch disease kept everyone focused
upon.
The countrys economic structure, in turn, shaped its social structure, to
produce a weak working class because of the slow industrialization process.
Also, it produced a weak landed elite, at least partly because of a rapid
urbanization process (due to the decline of agriculture) that did not give
much time for such an elite to develop. A weak working class, in turn, meant
a relatively demobilized and apathetic civil society, whose support for democracy was based on the benets of a relatively high standard of living.
The weak landed elite meant that even if representative democracy threatened their interests, there was not too much this elite could do about it to
turn Venezuela towards dictatorship, as had happened in most other countries of Latin America at the time.
Another consequence of the oil-oriented economy was that wealth was
accumulated and directed by the state, rather than through an economic
elite. This meant that it was the political parties that had control over
the countrys oil wealth and these kept challengers at bay via a corporatist
and clientelist culture, which, in turn, reinforced the strength of the state and
of the parties. In addition, this arrangement made the state, due to its
power, appear to be magical (Coronil, 1997). This political culture and
political structure also contributed further towards the weakening of
civil society (of the classes) and the creation of a pragmatic democratic
culture.
While I place oil income as one of the main drivers of this socio-cultural
system, one must keep in mind that Venezuela did not always have oil and
that the decisions that were made once were based on its history and its
learning from past experiences. That is, if Venezuela had had a different
history in the 19th century, it might very well have pursued a different set of
policies once it exploited its oil wealth. Crucial in this regard are the experiences of the numerous civil wars of the 19th century and the very repressive dictatorships of the early 20th century.18
15
2. THE DECLINE OF VENEZUELAN

REPRESENTATIVE DEMOCRACY AND STABILITY
(19781998)
How and why did this relatively stable system come apart? Also, why did
this collapse lead to the election of a radical outsider, such as Hugo Chavez?
As we will see, since most of the above outline of Venezuelan economic,
political, social, and cultural dynamics were the result of the countrys oil
industry, the decline of the political system was also directly related to the
decline of the oil industry.
The end of Venezuelas golden years came with the presidencies of Copeis
Luis Herrera Campins (19791984) and of ADs Jaime Lusinchi (19841989),
which were quite unremarkable except for the fact that this was when
Venezuela entered a steady 20-year decline. There were occasional oil booms
in this period, such as during the Iranian revolution (1980) and the Gulf War
(1991), but by then the booms could not make up for the lost ground that
had already taken place due to heavy indebtedness, increasing oil production
costs, declining oil price, and population growth. The decline of per capita oil
income and thus also of per capita GDP was steady and unprecedented in the
world during this period, dropping by 35% between 1970 and 1998.19
Key to the downfall of Venezuelas political system was the steady 20-year
decline in oil revenues, from 1981 to 1998, which dropped from $32 per
barrel to $12.28.20 However, while per-capita oil revenues declined fairly
steadily, nominal oil revenues declined in more of a roller-coaster manner,
thus periodically giving policy makers the illusion that the Venezuelan
economy might still recover from the decline, which then lowered the incentives to fundamentally overhaul the countrys economic base or its political institutions. Eventually, not enough resources were available to
maintain the clientelistic-corporatistic political culture, which then dealt a
deadly blow to the two main political parties and enabled the rise and
election of a political outsider.
A combination of factors thus came together in Venezuela over the course
of the last 20 years or so:
1. Declining per capita oil revenue (47% drop from 1963 to 1997).
2. Doubling of the population (from 12 million in 1975 to 24 million in
2000).
3. Continuing Dutch disease (declining industrial and agricultural sectors).
4. Increasing state indebtedness (from 9% of GNP in 1970 to 53% in 1994).
16
GREGORY WILPERT
These four factors together combined to produce two key consequences

that are very important for understanding todays Venezuela.
First, the declining per capita state oil revenues and growing population
meant a smaller redistribution of Venezuelas mineral wealth. That is, although per capita Gross National Income (GNI) remained relatively stable
($5,845 in 1984 and $6,012 in 1998, uctuating above and below these gures between these two periods),21 poverty increased dramatically, from
18% of the population in 1980 to over 65% in 1996.22 This is the greatest
increase in poverty of any country in Latin America during the 16-year
period. What this combination of increased poverty and stagnant per capita
income means is that inequality increased tremendously in Venezuela, between 1984 and 1998.23
Second, declining agricultural production, as a result of the Dutch disease and perceived oil wealth, produced a massive exodus from the countryside to the cities. The new immigrants to the cities, of course, formed the
bulk of the countrys poor, residing in barrios of self-built homes on
occupied land. Anyone visiting Venezuela cannot help but be impressed by
the hills upon hills lled with these barrios, lining the road from the airport
to the countrys capital.
The economic crisis pushed the government to turn to the IMF for loans,
which required the introduction of neo-liberal structural-adjustment reforms in early 1989 and again in 1996. These reforms further reinforced the
decline in social spending and of corporatism and clientelism. Also, the fact
that the presidents that introduced these reforms, Carlos Andres Perez and
Rafael Caldera, instituted these reforms despite their promise to do the
opposite, added to the delegitimation of and disgust for politics and the
countrys political class. In effect, loyalty to the system had been bought
with hard cash rather than earned through persuasion, so when the money
ran out, so did the loyalty.24 This then led to one political crisis after another, culminating in riots and massacres in 1989, two coup attempts in
1992, and the election of a leftist populist president in 1998.
Another political factor in the fall of Venezuelas Punto Fijo political
system (besides the economic crisis) was that the parties lacked any kind of
innovative capacity.25 Ossied political structures, a focus on personalism
rather than political program, and a general cross-party ideological consensus, made an innovative approach to politics and to the economic crisis
practically impossible. Faced with a rapidly changing society and circumstances, the pressure for change grew while an appropriate response to the
pressure remained absent.
17
3. THE CHAVEZ PRESIDENCY: DIALECTIC

BETWEEN COUNTER-REVOLUTION AND
RADICALIZATION
Given the foregoing explanations for the decline of Venezuelan pacted democracy, it should have been no surprise that in 1998 a complete outsider,
promising to totally overhaul Venezuelas corrupt political system, was
elected by an overwhelming margin. However, even though Chavez had a
clear mandate for the task of completely reforming the political system, the
countrys old political class, once it realized that Chavez could not be coopted, rejected Chavez as the legitimately elected president. At rst, there
was not much this old elite could do, except to denounce the new president
in the private mass media outlets that it controlled. Eventually, though, the
old elite gained momentum and managed to severely destabilize the country
in their all-out effort to oust Chavez. Why and how they did this and what
the consequences of this battle between Chavez and the old elite were is the
topic of this section. One can divide this battle into four distinct phases: new
constitution and consolidation of power, coup attempt and Chavezs retreat,
oil industry shutdown and Chavezs comeback, and recall referendum and
radicalization.
3.1. 1999 Constitution and Consolidation of Power
Chavezs landslide election, with 56% of the vote,26 which a large segment
of Venezuelas middle and political classes initially supported, gave him a
mandate to convoke a constitutional assembly and to introduce far-reaching
changes to Venezuelas political system. Chavez immediately set to work,
organizing a referendum on whether to hold a constitutional assembly.
Voters easily approved the project and, next, a vote was held for who should
constitute this assembly. Again, Chavez won this vote in that 95% of the
assembly members who were elected were Chavez supporters. Following a
relatively accelerated discussion process, the new constitution was put to a
vote in December 1999, when it passed with 72% voting in its favor. With
the new constitution in place, all elected ofces were renewed in 2000. Legislative elections were held, in which the pro-Chavez coalition won twothirds of the seats. Also, in the regional elections for state governors and city
mayors Chavez supporters won a majority of these. Finally, Chavez was
also re-elected, this time to a six-year term, winning 59% of the vote.
18
GREGORY WILPERT
At the time, the Chavez coalition included not just Chavezs own party,
the Fifth Republic Movement (Movimiento Quinta Republica, MVR), but
the Movement towards Socialism (Movimiento al Socialismo, MAS),
Fatherland for All (Patria Para Todos, PPT), the Communist Party of
Venezuela (Partido Comunista de Venezuela, PCV), Red Flag (Bandera
Roja, BR), and a few other small parties. By the end of 2000, Chavez had
consolidated his control over the countrys executive, with his supporters
controlling the other four branches of government: the judiciary, the legislature, the electoral power, and the moral power (Attorney General,
Comptroller General, and Human Rights Defender).
Meanwhile, the opposition, since it was locked out of the center of political power for the rst time in 40 years, could not accept Chavez as the
legitimately elected president. At rst, given Chavezs political momentum,
there was little the opposition could do to stop him. However, as Chavezs
honeymoon began to wear off and his approval ratings started to go down
as they had to from the unheard of heights of 90% approval, the former
political class managed to re-gain its foothold in Venezuelas middle class.
Chavez, though, ignored this development, which occurred in the second
half of 2001, and forged ahead with his program, presenting a set of 49 laws
that were supposed to bring Venezuelas legal framework up to date with the
new constitution and introduced far-reaching reforms, particularly in terms
of a land reform and in the oil industry.
3.2. Heightened Resistance, Coup Attempt, and Retreat: November 2001 to

December 2002
The outcry against these laws was immediate. Fedecamaras, the countrys
largest and most important chamber of commerce, which unites most of
Venezuelas big businesses, complained that these laws were anti-business,
undermined private property rights, and were passed without consulting
them or anyone outside government circles. Venezuelas main union federation, the Confederation of Venezuelan Workers (CTV) quickly joined the
fray. Ironically, their main argument against the laws was that they were
harmful to Venezuelas business community and therefore harmful to
Venezuelan workers. A more likely explanation for the CTVs support of the
employer federation, aside from their ties to the former governing party AD,
was that the CTV had just gone through a pitched battle with the government over who would control the organization. A month earlier Chavez had
forced the CTV leadership to submit itself to a grassroots vote, which the
19
federations old established leadership won amid the governments claims of

fraud, resulting in the governments non-recognition of that leadership to
this day.
The result of this vehement CTV/Fedecamaras opposition to the government was that the two organizations called for a general strike on
December 10, 2001. The strike met with moderate success, but the media
and the private sectors lockout of their employees for a day gave the
strike a heightened visible effect.
But it was not only the package of 49 laws that added re to Venezuelas
conict. Another crucial factor was that the economy suddenly slowed down
in the wake of the September 11 terrorist attack on the U.S. The attack had
sparked a worldwide recession and, with it, a decline in the price of oil. This
double-blow low oil prices and a global economic slowdown forced the
government to adjust its budget and cut back spending in all areas by at least
10%. The impact was almost immediately noticeable, as unemployment
began inching upwards again, after it had steadily declined in 2000 and 2001.
Meanwhile, an escalation in verbal attacks between Chavez and his opposition began reaching new heights. The economic downturn, the 49 laws,
and Chavezs strong discourse against the squalid opposition and the
rancid oligarchy, all made it relatively easy for the opposition to chip
away at Chavezs popularity, along with substantial help from the private
mass media. Opinion polls which can show some trends, but which are not
necessarily reliable because their ability to reach into the hearts of the poor
neighborhoods is doubtful indicate that Chavez went from a popularity
rating of around 6070% to 3040% between June 2001 and January 2002.
This was the context in which the opposition became convinced that it
could oust Chavez, whose legitimacy they never truly accepted, before the
end of his presidency. Three concrete attempts thus took place between
January 2002 and August 2004. The rst was the April 2002 coup attempt,27
whose apparent detonator was the oil industry managements resistance to
Chavezs efforts to gain control over the state-owned oil industry. Crucial to
this attempt, however, was a disgruntled sector of the military that, for a
variety of ideological and opportunistic reasons, believed that it could and
should get rid of Chavez. The failure of the coup, a mere 47 h after Chavez
was removed from ofce, was emblematic of all subsequent opposition failures to oust Chavez from the presidency. The opposition consistently underestimated the presidents popularity, believing instead the mass medias
constant claim that Chavez was highly unpopular and incapable as president. Instead, it was Chavezs popularity amongst the countrys poor and
the military that swept him back into the presidency.
20
GREGORY WILPERT
For the opposition, this was a bitter defeat because it lost an important
base of its power, in the military. Previously, with Chavezs election, the
countrys old elite had already lost the presidency, which in Venezuela, as a
very presidentialist society, is perhaps the most important base of power.
Each subsequent effort to oust Chavez, the oil industry shutdown and the
recall referendum, represented the loss of another base of opposition power.
Chavezs reaction to the coup attempt, after his return, was to moderate
his tone and to play it safe. He put a new economic team in charge that
appeared to be more mainstream and promised to include the opposition
more in his policy deliberations. Also, he reinstated the old board of directors and former managers of the state oil company PDVSA, whose replacement had been one of the reasons for the coup.
3.3. Oil Industry Shutdown and Chavezs Comeback: December 2002 to

March 2003
Following a brief period of uncertain calm, the opposition interpreted
Chavezs retreat as an opportunity for another offensive against him, this
time by organizing an indenite shutdown of the countrys all-important oil
industry in early December 2002. While the opposition labeled this action a
general strike, it actually was a combination of management lockout,
administrative and professional employee strike, and general sabotage of the
oil industry. Also, it was mostly the U.S. fast food franchises and the upscale
shopping malls that were closed for about two months. The rest of the
country operated more or less normally during this time, except for food
and gasoline shortages throughout the country, mostly because many distribution centers were shutdown. Eventually, though, the oil industry shutdown was defeated, once again due to the oppositions underestimation of
Chavezs support. That is, while about 19,000 or half of the oil companys
employees were eventually red for abandoning their workplaces, the government managed nonetheless to re-start the oil company with the help of
retired workers, foreign contractors, and the military. According to government gures, the industry is now operating at normal levels, producing
over 3.1 million barrels of oil per day. The opposition, however, claims, to
this day, that production has not exceeded 2.6 million bpd since the end of
the shutdown. The opposition thus tried to nd solace in another failure. As
such, it lost another crucial base of power, this time in the oil industry,
whose managers were practically all opposition supporters and were all
replaced.
21
The oil industrys recovery, along with a dramatically increasing price of

oil and thus of oil revenues, meant that Chavez now had the resources to
introduce new social programs, known as missions, to address the
desperate needs of the countrys poor. The rst missions Chavez introduced between late 2003 and early 2004 were for literacy training (Mission
Robinson), high school completion (Mission Ribas), university scholarships
(Mission Sucre), community health care (Mission Barrio Adentro), and
subsidized food markets (Mission Mercal).
3.4. Recall Referendum and Radicalization: April 2003 to December 2006

The third and presumably last attempt to oust Chavez during his rst full
term was the August 2004 recall referendum. After having suffered defeat in
two consecutive illegal attempts, the opposition was forced to follow the
democratic and constitutional route for getting rid of Chavez. At the end of
the oil-industry shutdown, on February 2, 2003, the opposition had initiated
a process for organizing a wide variety of referenda against Chavez, but
these were subsequently dismissed by the Supreme Court or dropped by the
opposition itself, mostly due to the incorrect manner in which the referendum petitions were formulated or due to the timing of the signature collection process.28 The agreement to follow a strictly constitutional route for
resolving Venezuelas political crisis was formalized in a signed agreement
between opposition and government that the Organization of American
States and the Carter Center facilitated in May 2003.
Eventually, once the CNE and the rules governing recall referenda were in
place, which took until the end of 2003, the opposition collected 3.1 million
signatures in December. Of these, following much political debate, 2.5
million signatures were validated and a referendum was convoked for
August 15, 2004, only four days before another constitutional deadline
(August 19, 2004) that would have led to the vice-president lling the rest of
the presidents term, should the presidents mandate be revoked.
Shortly after 4 am on August 16, CNE president Francisco Carrasquero
announced the rst preliminary results of the referendum, giving Chavez a
58%-to-42% victory.29 Immediately after Carrasqueros announcement,
opposition leaders held a press conference in which they stated unequivocally that fraud had been perpetrated. They offered no evidence for this
claim except to say that they were convinced of it. Despite this claim, the
election observer mission of the Organization of American States and of the
Carter Center ratied the ofcial result.
22
GREGORY WILPERT
For the opposition, this was perhaps the most bitter defeat of all the
defeats it had to suffer. Not only did it no longer have a base of power in the
executive, in the military, or in the oil industry, it now lost its perhaps most
important base of power, in the middle class. That is, following three years
of continuous battle with Chavez, promising its supporters that he was on
his way out any day and that Chavez was illegitimate because they represented the majority, opposition supporters saw just how hollow and incompetent the opposition leaders were. Polls shortly after the recall
referendum documented a dramatic loss of support for the opposition, so
that only 15% of Venezuelans said they identied with the opposition.
Chavez, realizing this near total loss of opposition power, announced in
his victory speech that now would begin a new phase of his government.
From today until December 2006 begins a new phase of the Bolivarian
revolution, to give continuity to the social missions, to the struggle against
injustice, exclusion, and poverty. I invite all, including the opposition, to
join in the work to make Venezuela a country of justice, with the rule of law
and with social justice. Later, in January 2005, Chavez took this call for a
new phase even further, by announcing that from now on his government
would seek to build a socialism of the 21st century in Venezuela. Thus,
the continuous efforts of the opposition to oust Chavez, based on its
non-recognition of his legitimacy, led to a continuous weakening of this
opposition and the concomitant opportunity for Chavez to radicalize his
program.
Chavezs call to build 21st century socialism received another boost on
December 3, 2006, when he decisively won a second six-year term in the
presidency. Chavez beat the opposition candidate, Manuel Rosales, with
62.8 to 36.9%. As such, Chavezs 26-percentage point margin of victory was
the largest in Venezuelan history. Also, Chavez managed to double his
support from an initial 3.7 million votes in 1998 (56.2% of the total votes
cast) to 7.3 million in 2006.
More signicant than the increase in support, though, was that the opposition candidate, Manuel Rosales, admitted that he was defeated by
Chavez. This is the rst time since Chavezs initial election that an opposition leader conceded defeat in a confrontation with Chavez since he was
rst elected in 1998. In none of the oppositions confrontations with Chavez,
whether following the 2002 coup attempt, the 2003 oil industry shutdown,
or the 2004 recall referendum, did the opposition take responsibility for its
actions. This implies that this is the rst time in Chavezs presidency that the
opposition recognizes Chavez as the legitimately elected president and thus
opens the path towards the normalization of Venezuelan politics in the
23
Chavez era. As such, the election further smoothes the path for Chavez to
lead Venezuela towards 21st century socialism.30
4. THE IDEAL OF 21ST CENTURY SOCIALISM

What, though, does Chavez mean by 21st century socialism? After his
initial announcement, at the January 2005 World Social Forum in Porto
Alegre, Chavez often repeated the call, but did not provide much more
details, other than a list of values upon which this new socialism would be
based. These values can be characterized as involving the ideals of the
French Revolution, of utopian socialism, and of Christianity.
We have assumed the commitment to direct the Bolivarian Revolution
towards socialism and to contribute to the socialist path, with a new socialism, a socialism of the 21st century, which is based in solidarity, in
fraternity, in love, in justice, in liberty, and in equality, said Chavez in a
speech in mid-2006.31 Also, this socialism is not pre-dened. Rather, said
Chavez, we must, transform the mode of capital and move towards socialism, towards a new socialism that must be constructed every day.32
Chavez often mentions that one of his most important ideological inuences, Simon Bolivars teacher Simon Rodriguez was an early socialist, a
utopian socialist in the tradition of Robert Owen and Charles Fourier. If
Simon Bolivar had lived like Simon Rodriguez, for 30 years more, y [he]
would have been one of the precursors of utopian socialism, here in the
lands of the Americas y.33
At other times Chavez makes a strong connection between the values of
Christianity and socialism, saying that Christ was the worlds rst socialist:
The symbol of capitalism is Judas and of socialism it is Christ.34
With regard to concrete institutions, Chavez has stated that 21st century
socialism would involve, the transformation of the economic model, increasing cooperativism, collective property, the submission of private property to the social interest and to the general interest y.35 Further, such a
socialism is community-based, stressing that the center-piece of the project,
the new communal system of production and consumption must be created from the popular bases, with the participation of the communities,
through the community organizations, the cooperatives, self-management,
and different ways to create this system.36
Also, on various occasions Chavez mentioned that this socialism is not
just economic, but also political, saying, Socialism of the political: this has
a combination of elements, but one is central: participatory and protagonist
24
GREGORY WILPERT
democracy. This is the central axis of socialism in the political [realm],

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

A relatively simple denition of capitalism identies at least three key institutions for us to call their combination capitalist. First, capitalism involves the institution of private control and ownership of the means of
production, that is, of land, factories, and other forms of capital that allow
the production of sellable goods and services.
The second crucial institution of capitalism in its pure form is that
distribution and exchange are regulated via competitive markets. Competitive markets are an essential and integral institution of capitalism, which
helps regulate not only distribution, but also prices and thereby guide what
things are or are not produced. As long as owners are interested in making
sure that they do not lose their investment to competitors who try to maximize their prot and who reinvest this prot in their business, all owners
must aim to maximize prots. That is, private ownership/control of production, combined with competitive markets also necessarily implies the
pursuit of prot maximization.
Finally, the third essential institution of capitalism is a regulatory system,
a state, which facilitate the functioning of the other two institutions. That is,
25
a capitalist state not only helps correct capitalisms frequent dysfunctions

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

CENTURY SOCIALISM?
With this general denition of capitalism and of 21st century socialism, we
can now examine how the policies of the Chavez government compare. I will
begin the analysis with the ways in which Chavez is moving to transform the
institutions of capitalism into what might be called socialist institutions,
beginning with the one that has been transformed the most.
26
GREGORY WILPERT
6.1. Transformation of the Capitalist State into a Socialist State

With regard breaking away from the institution of the capitalist state a
system of governance that is under the sway, if not control, of powerful
private interests Venezuela has advanced the most. There are at least three
ways in which the Chavez government has done this over the last few years.
First, it has had the opportunity to break free from the sway of private
capital, due to the combination of massive oil revenues and the nearly
complete loss of power of the countrys old (mostly capitalist) elite. Second,
it has instituted forms of direct democracy and increased citizen participation in the state. Third, it has weakened the possibility that the military
could be used to repress the civilian population, via what it calls civilmilitary union.
The rst aspect is perhaps the most important because it has enabled
practically all other anti-capitalist measures of the Chavez government.
That is, Venezuelas oil revenues, which increased, on an annual per-capita
basis, from $226 in 1998 to $728 in 2005,39 has been a bonanza that has
given the Chavez government a tremendous amount of freedom from private capitals ability to threaten with investment strikes. Also, the institution
of capital controls in early 2003 further expanded the governments independence from private capital. While most leftist governments, such as that
of President Lula of Brazil, are constantly faced with the choice of pursuing
progressive policies and thus alienating capital and thereby endangering
economic well-being or abandoning progressive policies and encouraging
private investment, the Chavez government is by and large freed from this
dilemma. Enormous oil revenues allow the government to invest, to pursue
progressive tax policies and regulations, and to spend freely, without having
to worry much about capital ight or disinvestment.
This freedom, combined with the oppositions progressive self-destruction
(via the coup attempt, the oil industry shutdown, the failed recall referendum, and the boycott of the December 2005 National Assembly elections) is
the main reason why the Chavez government has been free to pursue increasingly more anti-capitalist policies with every passing year in ofce. This
stands in stark contrast to the history of most progressive governments,
which time and again start out with radical rhetoric, only to rapidly succumb to the demands of private capital.
The second way in which the government is shaking loose the inuence of
private capital is by introducing participatory democracy in numerous areas
of the state. This is happening in a variety of spheres. For example, one of
the most important forms of citizen participation are the local planning
27
councils, which were launched in Venezuela in 2001, but were at rst stillborn due to a variety of limitations in the local planning council law, such as
creating councils that were too large to be manageable or participatory. A
new effort was launched in early 2006 with the communal council law, which
bases councils on units of 200400 families and which practice direct democracy in their communities, allocating nancial resources and creating
local ordinances.
Participatory democracy in Venezuela also takes the form of citizen participation in the recently created missions, which provide education,
health care, subsidized food, social services, land reform, and environmental
protection. These missions, rather than being just imposed from above are
largely directed by the citizens in any given community, in the form of health
committees, land committees, and educational task forces.
Also, there are the constitutionally guaranteed rights to participatory
democracy, in the form of four different types of citizen-initiated referenda
(recall, approbatory, abrogatory, and consultative), the right to conduct
citizen-initiated audits of state institutions (contraloria social), and the right
of civil society organizations to co-nominate candidates to the Supreme
Court, the National Electoral Council, and the Moral Republican Council
(consisting of Attorney General, Comptroller General, and Human Rights
Defender).
Citizen involvement in all levels of government like this increases accountability and weakens the sway of powerful private interests. While citizens might still succumb to threats of disinvestment from private capital, at
least they have more inuence over decision-making than when elected representatives decide matters mainly under the inuence of powerful private
groups that are constantly lobbying them and paying for their electoral
campaigns.
The third area where the Chavez government has made a conscious effort
to enable a more direct democracy has to do with transforming one of the
traditional means for suppressing citizen involvement and discontent: the
military. Historically, the military in Latin America was used to repress the
citizenry and to keep it from resisting the imposition of government policies
it did not like. For Chavez and for most poor Venezuelans, the 1989 riots
against IMF-imposed economic policies, which dramatically increased the
price for public transportation and for many food staples, was an expression
of discontent with the relatively undemocratic government of Carlos Andres
Perez. This outburst of discontent was immediately suppressed with massive
military force, which ended up killing anywhere between 300 and 3,000 poor
Venezuelans.
28
GREGORY WILPERT
According to Chavez, the reason Venezuelas and Latin Americas military forces were able to repress their own populace so often and so easily
was because the military was always kept separate from the population. That
is, their lack of contact with civilians, their sequestration, made it easier for
them to act without sympathy or remorse against their own people. In contrast, Chavez, following a Maoist maxim, argues that, the military should
be to the people like the sh is to water. The application of this principle is
called civil-military union, and means, in practice, that the military should
be as integrated as possible with the civilian population, being in constant
contact with them and even taking on civilian tasks in the process. The
military has thus become heavily involved in the various missions, often
providing services such as food distribution, construction help, and transportation, for example. Furthermore, the civilian population is being asked
to sign up for Venezuelas military reserves, to learn to ght a guerilla war,
should an outside force such as the U.S. ever invade. This, according to
Chavez, is supposed to further strengthen the civil-military union.
Critics of this re-conceptualization of Venezuelas military argue that it
has militarized civilian society and could become a means for doing precisely
what Chavez says it is supposed to ward against, of repressing the population. However, there is no concrete evidence for this. As any visitor to
Venezuela can attest, the military in Venezuela has a far less militaristic
presence in the general population than it did in countries where the military
was indeed used for repression, such as in Argentina in the 1970s or in
El Salvador in the 1980s. No one in Venezuela fears the military and its
activity in the general population is limited to fullling the civilian functions
mentioned above, but not to repress. Human rights groups such as Human
Rights Watch do not cite the military as being perpetrators of human rights
violations. Rather, in Venezuela, the main culprit in this regard remains
(since long before Chavezs coming into ofce) the notoriously corrupt and
local government controlled police force. In other words, it would appear
that rather than militarizing civil society, the civil-military union has served
to civilize the military.
These three factors, the tremendous oil revenues, the creation of a more
participatory democracy, and the civilizing of the military, have meant
that the Chavez government is far freer to pursue policies that are independent of the powerful private interests that normally shape government
policy in capitalist countries. The freedom the Chavez government enjoys to
pursue leftist policies is unique in comparison to most of the rest of world in
many ways. While there are other countries that enjoy such a freedom due
to their wealth in natural resources (such as a state-owned national oil
29
industry), these other countries tend to be in the hands of extremely conservative authoritarian regimes (such as in the Middle East) and have no
interest in pursuing progressive policies.
This freedom has allowed the Chavez government to pursue policies that
clearly move away from private ownership and control over the means of
production, away from market-determined allocation and distribution, and
towards what could be called more socialist economic and governance
forms. However, this is clearly not the state-socialism of the 20th century, as
was practiced in Eastern Europe and China and still is in Cuba. Rather, it is
a more libertarian form of socialism, in that it actively seeks citizen participation and even forms of direct democracy.
6.2. Transforming Private Ownership/Control of Production into

Collective Ownership/Control
While the vast majority of Venezuelas productive capacity is still either
privately or publicly owned and controlled, one of the governments main
areas of emphasis has been to expand collective and self-managed forms of
ownership and control, such as via cooperatives, co-management, and expanded state management/ownership.
For example, during the Chavez presidency the number of cooperatives in
Venezuela has increased from about 800 in 1998 to over 100,000 in 2006 an
over 100-fold increase in seven years. Over 1.5 million Venezuelans are thus
now involved in cooperatives, which represents about 10% of the countrys
adult population.40 The government has been actively supporting the creation of cooperatives in all sectors, mostly via credit, preferential purchasing
from cooperatives, and training programs.
With regard to co-management, the government has been experimenting
with several state-owned enterprises in this regard, such as the electricity
company CADAFE and the aluminum production plant Alcasa. Depending
on how these experiments go, the government is considering turning over
more state-owned enterprises to co-management. These businesses will not be
turned over to complete worker control, however, because, according to the
government, they are too important for Venezuela to be governed only by the
people that work there. That is, they have an impact on the entire society and
thus, according to the principle of subsidiarity, the society, through its representatives in the state, should also have a say in how the enterprise is run.
Another strategy for changing the ownership and control over the means
of production has been the expropriation of idle factories. Currently about a
30
GREGORY WILPERT
dozen production plants, which produce paper, valves, and agricultural

products, have been expropriated and turned over to worker control.
Working together with the national union federation UNT, the government
is evaluating 700 other idle production facilities that could also be expropriated and turned over to former workers of these plants.
Finally, with regard to expanding state management, the Chavez government has created several new state-owned enterprises, such as in the
areas of telecommunications, air travel, and petrochemicals. Also, it reinedin the previously semi-autonomous state oil company PDVSA and brought
it under tighter government control.
Of course, just because there are more enterprises that go against the
logic of capitalism and that are in essence anti-capitalist endeavors, such
as cooperatives, co-managed enterprises, and state-owned enterprises, does
not mean that Venezuela is now a post-capitalist society with regard to
the ownership of the means of production. However, there is a denite
movement in this direction. Whether such forms of ownership will become
predominant within the Venezuelan economy, it is too early to tell. The real
test of the extent to which the government is willing to go in this direction
will come if and when private capital is forced to become marginal in the
overall economy. Whether such a direct confrontation will take place and
how it will play out is impossible to say at this point. An unpublicized draft
of Chavezs 20072013 government program does state, though, that the
government plans to expand the self-managed business sector, so that it
becomes just as large as the other two sectors, the private and the publicly
owned/managed.
However, creating a sphere of collectively owned and self-managed production by itself is not much of a change if such ownership and control
follows the same principles as private ownership does, of maximizing prot
above all else and of funneling non-reinvested prots towards elite consumption. Thus, so as to ensure that the cooperative, co-managed, and state
managed enterprises follow a new set of principles, the Chavez government
has created a new type of economic production unit, which is known as
social production enterprise (EPS, in Spanish).
Social production enterprises are, economic entities dedicated to the
production of goods or services in which work has its own meaning, without
social discrimination nor privileges associated with ones position in a hierarchy, in which there is substantive equality between its members, planning is participatory and operate under either state, collective, or mixed
ownership.41 In order to qualify as an EPS and thus for preferential treatment for low-interest credits and state contracts, companies must fulll a list
31
of requirements, such as to, privilege the values of solidarity, cooperation,

complementarity, reciprocity, equity, and sustainability, ahead of the value
of protability.42 To provide companies with an incentive to fulll the
criteria of the EPS, the government has promised to make these eligible for
government subsidized loans and for preferential contracting with the government. If these values are indeed fullled, then one can say that with
regard to ownership and control over the means of production Venezuela is
moving away from capitalist institutions of ownership and towards 21st
century socialist ownership.
6.3. Moves Away from Market Exchange

With regard to moving beyond market exchange for regulating production
and distribution of goods and services, the Chavez government has so far
mainly focused on using the state as a non-market based mechanism. That
is, the state has been very active in redistributing wealth during the Chavez
presidency, whether through its rural and urban land reform program, its oil
revenue-funded social programs for free health care, education, and subsidized food markets, or the provision of subsidies and other support for key
sectors, such as cooperatives and endogenous development nucleuses. Of
course, while state redistribution mechanisms go against a basic principle of
capitalism, these do not break the logic of capital as long as most exchange
still occurs in a free market context, as is still the case in Venezuela. As such,
such policies are more social democratic than socialist.
Another area where the government has been moving away from marketbased distribution has been in international trade. Not only has the Chavez
government vehemently opposed the free trade agreements the U.S. has
been promoting, but it is also involved in a large number of trade deals that
are based on principles of solidarity instead of competition. For example,
the Petrocaribe agreement provides for discounted nancing of Venezuelan
oil for Caribbean nations and also allows them to pay for oil with in-kind
payments. In the most prominent case Cuba has been providing Venezuela
with 20,000 doctors and medical assistants in exchange for Venezuelan oil
shipments. Similar agreements exist with Argentina, Uruguay, and Ecuador.
Again, this kind of non-market based trade, which emphasizes cooperation, complementarity, and solidarity over competition, is still far smaller
than traditional market exchange. How and if the Chavez government can
nd ways to increase non-market and non-state based exchange mechanisms
remains to be seen, especially since exactly how cooperative (instead of
32
GREGORY WILPERT
competitive) exchange could function on a large scale is still quite unclear in

Venezuela.
Chavez, though, has hinted at one possible a model for such a non-market
and non-state based exchange, which is inspired by the Marxist theorist
Meszaros (1995), who has proposed communities of production and consumption. While it is not clear exactly what is meant by this, it could
represent a bringing together of Venezuelas participatory democracy, such
as the communal councils, with the self-managed economy, so that consumers and producers democratically plan their consumption needs and
production capabilities together, without mediating these via the market.43
7. OBSTACLES FOR 21ST CENTURY SOCIALISM IN

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

The opposition includes practically all sectors that used to have a determining role in Venezuelan society, such as the former governing parties, the
old union federation, the church hierarchy, big business, and almost all the
private mass media. The key problem for the Chavez government with this
opposition is not so much its power, which it has lost steadily largely due to
its own disorganization and failures, but its unwillingness to play the democratic game, as it did during the April 2002 coup attempt, the December
2003 oil industry shutdown, and the December 2005 boycott of the National
Assembly elections. Rarely during the Chavez presidency has this opposition come forward with concrete proposals about how it would govern
33
Venezuela differently. Only with the 2004 recall referendum and the 2006
presidential election did it agree to participate in the political process.
The second external obstacle to creating 21st century socialism is the Bush
administration. From documents that have become available in the past few
years, it is clear that the Bush administration knew about the 2002 coup
attempt in advance, but instead of opposing it beforehand or while it was in
progress, Bush gave it support by denying that it was a coup and by blaming
Chavez for his own downfall. Also, via the National Endowment for Democracy and the U.S. Agency for International Development (USAID) the
Bush administration has been funneling several million dollars per year to
opposition groups in Venezuela, in an effort to create an opposition in its
own image. And, in terms of applying overt measures against the Chavez
government, the Bush administration has been applying a variety of minor
economic sanctions44 and has been conducting a campaign to isolate
Venezuela internationally. All in all, each one of these measures has been a
relative failure. For example, the opposition, despite its receiving funds and
advice from the U.S., is hopelessly disorganized and of little consequence in
Venezuela, following its many failures during the Chavez presidency. The
economic sanctions have little effect, given that Venezuelas foreign currency
income comes almost entirely from oil revenues, which the U.S. will not cut
off. Last, the efforts to isolate Venezuela have met with little approval
elsewhere in the world.
Finally, the third external obstacle is for many countries the most serious
obstacle to progressive governing because of its ability to initiate an investment strike if a government initiates too many policies against its interests.
Venezuela, though, with the recent boom in oil revenues (essentially since
mid 2003) remains a lucrative place for investment, despite the governments
anti-capitalist rhetoric and policies and its frequent tax increases for the oil
industry. Also, capital ight has been held in check via a restrictive exchange
rate policy. As a result, domestic and international capital is not that much
of an obstacle now as it was earlier in Chavezs presidency.
7.2. Internal Obstacles

The much more serious obstacles to instituting 21st century socialism in
Venezuela thus are the internal obstacles. The most serious of these is
probably the persistence of a culture of clientelism-patronage. That is, there
is much anecdotal evidence that despite Chavezs criticism that previous
governments were riddled with patronage systems, new forms of patronage
34
GREGORY WILPERT
have taken their place. While previously it was practically impossible for
people who were not members of one of the ruling parties to get government
jobs or services, evidence has emerged that although party membership is
not an issue now, ofcials in the Chavez government are often preventing
anti-Chavistas, as Chavez opponents are known, from acquiring government
jobs and some kinds of services.
The most notorious example of this practice has been the so-called
Tascon List, which pro-Chavez National Assembly deputy Luis Tascon
set up, which lists all Venezuelans who signed the petition in favor of a recall
referendum against President Chavez.45 The original purpose of the list was
to allow Chavez supporters to make sure that they did not appear on the list
because they were concerned that the list fraudulently included many who
did not intend to be on it.
Patronage that gives government jobs and services mainly to Chavistas
not only counteracts Chavezs campaign promise of creating a government
that will not exclude anyone, but it also undermines the rule of law, thus
providing an opening for corruption and the delegitimization of the government and it counters the principle of formal equality. More than that,
patronage systems encourage a limited form of solidarity, which extends
only to ones own group (in this case ones political group) and is fundamentally at odds with an effort to create a society in which solidarity includes all people, regardless of nationality or political beliefs.
The second internal obstacle is the latent personality cult around Chavez
and the tendency towards personalistic politics in Venezuela in general.
On the one hand, Chavezs ability to bring people together in a large
Bolivarian movement for radical change in Venezuela is practically unparalleled in recent Venezuela history. On the other, this ability has resulted
in an extreme dependency of the movement on Chavez, to the exclusion of a
clearly dened political program or political organization. Thus, if Chavez
were to disappear from one day to the next, the entire movement would fall
into a thousand pieces because it would have lost it unifying glue. This
extreme dependence on Chavez also means that it is very difcult for Chavez
supporters to criticize Chavez because every criticism threatens to undermine
the project because it gives rhetorical ammunition to the opposition. A further consequence is that the lack of criticism insulates Chavez and makes it
very difcult for him to test his ideas and policies against reality. Criticism
from within the ranks is rarely present and criticism from outside the ranks is
easily dismissed. The result is a strong potential for wrong-headed policies.46
Chavez has recently suggested that he might seek to amend the constitution, sometime between 2007 and 2009, so that a president could be
35
reelected more than once, perhaps an indenite number of times. Such a

change to the constitution would only deepen the problem of making the
Bolivarian socialist project dependent on Chavez and it would postpone
efforts to overcome this dependency.
The third internal obstacle is a strong tendency towards top-down leadership, not only by Chavez, but also by everyone in the public administration. Despite the very real pursuit of participatory democracy at local levels,
the government bureaucracy is still by and large a top-down operation,
which Chavezs military instincts have reinforced. Such leadership in the
public administration further exacerbates the problems mentioned of a personalistic political culture, so that questioning of ones superiors and correcting errors in the administration of public policies is extremely difcult.
8. PROSPECTS
It is very probable that the Chavez government will continue on its course of
increasing radicalization because it has managed to either defeat or avoid
nearly all of the obstacles to governing that progressive governments normally face. That is, most governments face what some political scientists
have called, the contradictions of the welfare state, whereby democratically elected governments in capitalist countries have to answer to two
contradictory masters.47 On the one hand, governments have to fulll the
wishes of the population that elected them, lest they be removed from power
in the next electoral cycle. On the other, they have to fulll the wishes of
capital, lest they face a capital strike and economic crisis. These two pulls on
governments are a serious problem because they tend to pull in diametrically
opposite directions. Citizens generally want the government to protect them
from the ravages of capitalism (advocating for regulations on businesses,
environmental protection, workplace safety, protection from economic crisis, etc.), while capital wants to be as free of government regulations and
taxes as possible and wants the government to protect their interests.
From the 1970s to the 1990s, governments around the world tended to try
to resolve the contradiction between spending but not taxing via debt
spending. Governments in both the First and Third World borrowed heavily, so that they could fulll the nancial needs of the welfare state, without
having to tax either capital or the general population. However, once the
debt crisis became too much of a drain on the economy, governments cut
back debt spending and by and large adopted neo-liberal economic policies,
thus resolving the contradiction in favor of capital.
36
GREGORY WILPERT
Recently, though, with the failure of neo-liberalism to provide for any

meaningful increase in peoples standard of living and with a dramatic increase in inequality, the peoples of Latin America have been voting against
neo-liberalism and in favor of a wide variety of leftist governments. The
contradiction between the pulls of capitalism and of the general population
remains in nearly all of these countries. The only exception seems to be
Venezuela, which, by virtue of its oil wealth, is far less dependent on private
capital and thus on its demands. Added to this economic independence
comes the Venezuelan old elites repeated failures to topple Chavez. Chavez,
who started out as a fairly moderate politician in 1998, increasingly saw the
representatives of capital as being irreconcilable with social justice and also
could easily afford to become increasingly more radical with each subsequent defeat and loss of power of the opposition. Also, as someone who was
not formed politically by a political party or ideology, but more as a result
of his confrontations with state power, Chavez steers a path that is pragmatic and free from orthodoxies of any kind, thus opening him up to a
more radical path, should opportunity and his perceived analysis of what
Venezuela needs lead him in that direction. The lack of a clearly dened
ideology within the Bolivarian movement further allows this movement (not
necessarily Chavezs MVR party) to also steer such a path and to push the
government in increasingly more radical directions.
In other words, while further advances in dening and applying 21st
century socialism in Venezuela are very possible, due to the relative lack of
external obstacles, it is the internal obstacles of the cultures of patronage
and personalism that are most likely to threaten to derail the project. Figuring out how to overcome these obstacles, which would require a re-building of the state, in order to overcome patronage structures, and the creation
of an effective political movement that does not depend on Chavez, in order
to overcome personalism, remain the greatest challenges for 21st century
socialism in Venezuela.
NOTES
1. Chavez said in the press conference following his reelection on December 3,
2006, Socialism is the path towards a true democracy, socialism is democracy, in
capitalism democracy is impossible (December 5, 2006). To answer in detail, the
question about autocracy or democracy in Venezuela would require a careful rebuttal of all of the accusations that opponents of the Chavez government have raised
over the past few years. While this is important, it is not the main topic of this paper.
37
Those interested in exploring this issue should read the reports of Venezuelas most
important human rights group Provea (www.derechos.org.ve), which generally does
a good job of discussing human rights in Venezuela. Their reports, though, leave out
historical and geographic comparisons, which thus tend to give the impression that
the human rights situation is worse under Chavez than under other governments,
while, in actuality, the opposite is the case.
2. Levine (1977), Na m and Pinango (1984), and Martz (1984), among others
represent the academic expressions of this view.
3. Crisp (2000), Derham (2002a, 2002b), Ellner and Hellinger (2003), Vilas (2001),
and McCoy (2004), among others, present this view.
4. The more recent writings of Venezuela analysts that had a positive image of
Venezuelan democracy (Such as Levine and Na m) now say that electoral laws during this period made it difcult for other (non-established) kinds of groups to
compete (Levine, 2002, p. 249) and that It is true that Venezuela y was governed
for decades by inept and corrupt politicians who looted the countrys riches in
cahoots with greedy and equally corrupt economic elites (Na m 2001, p. 20. Na m
relativizes this statement, though, by adding, But this is not the whole story.).
5. The notion of Venezuelan exceptionalism that has undergone some recent serious revision is its strong version, that Venezuela is a country that has more in
common with North America and Europe than with South America. This notion,
especially ever since poverty has been growing steadily in the early 1980s, the International Monetary Fund (IMF) riots of 1989, the coup attempts of 1992, and the
election of Hugo Chavez in 1998, has been thoroughly discredited. These events and
processes have brought home how similar Venezuela is to other countries in Latin
America. However, a weaker version of the exceptionalism thesis, which tries to
make sense of why Venezuela was a limited representative democracy in the 1960s
and 1970s, when most Latin American countries were dictatorships, still has some
validity. One must be careful, though, as Steve Ellner and Miguel Tinker Salas point
out, not to conate Venezuelas exceptional aspects, such as its ability to manage
conicts via pacts and political exclusion with its more typical Latin American aspects of human rights violations, electoral fraud, and corruption (Ellner & Tinker
Salas, 2005, p. 7). The theorists of Venezuelan exceptionalism, failed, however, to
draw the connection between political exclusion and the related phenomena of
clientelism, on the one hand, and the violation of human rights, electoral manipulation, and corruption, on the other.
6. The debate among Venezuela analysts typically revolves around which, if any,
of these factors is more important than the others. I propose that these factors or
explanations are complementary and not mutually exclusive.
7. Karl (1997), Coronil (1997), and Romero (1997) emphasize this approach to
Venezuela.
8. So named after the Venezuelan city in which it was signed.
9. A term coined by Karl (1997), but used by many others.
10. With Uruguay being the most urbanized, which has most of its population in
Montevideo.
11. It is interesting to note that none of the Venezuela specialists seem to take this
factor into account for their analysis of Venezuela. Perhaps, part of the reason for
this has to do with the fact that almost all of the Venezuela specialists reviewed so far
38
GREGORY WILPERT
are political scientists and the social-structural analysis of Venezuela is more typical
of sociologists than of political scientists. Since there seem to be very few sociologists
specializing in Venezuelan society, most of the social-structural analysis comes from
analysts who examine the democratization processes of the entire Latin American
region or of the entire world. The literature on democratization that emphasizes the
structural-social perspective is large, but work I refer to here includes: Huber,
Rueschemeyer, and Stephens (1999), Rueschemeyer, Stephens, and Stephens (1992),
Anderson (1988), and Therborn (1979).
12. Important proponents of this approach include Mainwaring (1999), Ingelhart
(2000), and Hillman (1994).
13. Mainwaring (1999) makes a similar argument in that he focuses on Latin
Americans commitment to democracy. The Latin American evidence y suggests
that changes in political attitudes have been important in sustaining democracy in
the post-1980 period. Structural changes have been consequential, but they have
been overshadowed by a new valuing of political democracy, says Mainwaring
(p. 60).
14. However, rather than focusing on commitment to democracy, recent studies of
Venezuela have been more negative, arguing more along the lines that Venezuelan
political culture is committed to corporatism and to clientelism and that this is what
has maintained Venezuelas light democracy. This argument is made by Hillman
(1994), for example.
15. www.latinobarometro.org is a project, based in Chile, of annual surveys that is
funded by the European Union, Swedish International Development Agency
(SIDA), the United Nations Development Program (UNDP) and the Inter American Development Bank (IDB), ILO, local governments, private enterprises, and
scholars around the world.
16. Notable exceptions to this are Trinkunas (2004), Harnecker (2003), and
Norden (2003).
17. Often this debate is one that is said to have begun with Karl Marx and Max
Weber over whether consciousness that shape social conditions or social conditions
that shape consciousness. While it is true that Marx tended to prioritize social conditions and Weber prioritized consciousness, both did recognize the existence of a
dialectic between the two. The works of Jurgen Habermas (1985), Anthony Giddens
(1984), and Pierre Bourdieu (1984) have probably contributed the most towards
unifying these initially opposing approaches in the social sciences.
18. McCoy and Meyers (2004) highlight the importance that learning from past
experience has had for Venezuelas leaders and their more recent decision-making.
19. Per capita GDP fell from $10,528 in 1970 to $6,863 in 1998, Penn World
Tables, Table 6.1, http://pwt.econ.upenn.edu/php_site/pwt61_retrieve.php
20. In nominal terms. In real terms the drop was far more dramatic. Adjusting for
exchange rates and for ination, the price dropped from $15.55 in 1981 to $3.20 in
1998 (in 1970 dollars) (OPEC Annual Statistical Bulletin, 2005).
21. Ministerio de Finanzas, Los numeros no mienten. Source: Central Bank of
Venezuela.
22. Universidad Catolica Andres Bello, Instituto de Investigaciones Economicas y
Sociales, www.ucab.edu/investigacion/iies/pobreza.htm
39
23. See Francisco Rodr guez, Understanding the Determinants of Venezuelan

Inequality (http://www.bsos.umd.edu/econ/Rodriguez/Venezuela.pdf) for a detailed explanation of how and why Venezuelas inequality increased.
24. Those who emphasize the structural-political factor, though, argue that the
downfall of the Punto Fijo system had its roots more in the rejection of the partyarchy than of the steadily worsening economy. Roberts (2001) places much
stronger emphasis on the economic argument than Coppedge, Crisp, or Buxton do.
Coppedge, p. 4: People who turned to extra-constitutional solutions, as in the 1989
riots and the 1992 coup attempts, did so out of frustration with the functioning of
democratic institutions and the blockage of formal channels of representation
(Roberts, 2003).
25. Buxton (2001) and Crisp (2000) both make this argument.
26. This is one of the highest percentages of any president in Venezuelan history
and nearly double that of the previous president, Rafael Caldera, who garnered only
30% when he was elected in 1993.
27. For more information on the coup, see: http://www.zmag.org/
venezuela_watch.cfm
28. The president may only be recalled once half of his term has expired. The
Supreme Court thus ruled that recall referendum petition signatures that are collected before the halfway point, such as the ones collected on February 2, 2003, are
invalid.
29. The nal ofcial result would increase the margin of Chavezs victory slightly,
with 59% for no and 41% for yes many of the additional no votes came from
the countryside, which had to be counted manually and which went 7030 in favor of
Chavez.
30. The reason for the shift within the opposition has to do with more moderate
factions within the opposition gaining an upper hand, which is directly related to the
discrediting of the more radical factions in the opposition, due to their long string of
failures in the previous eight years.
31. Chavez (2006), Linking Alternatives II Conference, Vienna, May 13, 2006
(www.gobiernoenlinea.gob.ve).
32. Ibid.
33. Ibid.
34. Groundbreaking ceremony for the Renery of Pernambuco, in Brazil,
December 16, 2005.
35. Ibid.
36. Alo Presidente, No. 229, July 17, 2005.
37. Swearing in ceremony of pro-Chavez candidates for the National Assembly,
September 13, 2005.
38. Op. Cit., Swearing-in ceremony of candidates.
39. Authors own calculation, based on data from Venezuelas nance ministry,
the national statistics institute, and the Central Bank of Venezuela.
40. SUNACOOP (National Superintendence of Cooperatives), www.sunacoop.
gob.ve.
41. Empresas de Produccion Social, article in PDVSAs corporate magazine,
Siembra Petrolera, Issue, No. 1, JanuaryMarch, 2006, pp. 55.
40
GREGORY WILPERT
42. Article 3 of Decree No. 3,895, of September 13, 2005, published in Gaceta
Ocial No. 38,271.
43. An example of how this might work in practice is proposed by Participatory
Economics, as developed by MichaAlbert (2003) and Robin Hahnel (2005).
44. These sanctions are the result of putting Venezuela on a variety of lists, such as
one of the countries that are not doing enough in ghting terrorism, ghting drug
trafcking, and in ghting human trafcking.
45. There are probably nearly as many accounts of opposition employers using
this list to weed out Chavez supporters. However, this does not excuse the practice,
especially not for a government that originally campaigned against patronage systems.
46. An example of such a wrong-headed policy is the recent passage of changes to
the penal code, which slightly broadened penalties for insulting government ofcials.
The law has been on the books for decades, but an increase of the maximum penalty
for such offenses is anti-civil rights and did not serve any useful purpose.
47. One of the main theorists of this thesis was Claus Offe, in his book, The
Contradictions of the Welfare State, 1984, MIT Press.
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AGAINST THE CURRENT:

ECONOMIC POLICY AND
SOCIALIST DEVELOPMENT
IN CUBA
Curtis Skinner
ABSTRACT
This article evaluates contemporary Cuban economic policy and development prospects after a decade of market experimentation in a socialist
context. An introductory historical review assesses the successes and
failures of Cuban development policy in the 1970s and 1980s and
describes the staggering dimensions of the economic crisis triggered by the
abrupt disruption of Cubas relations with the Soviet bloc in 19891991.
The next section, To the market in the 1990s, examines Cuban efforts
to stabilize the economy in the early 1990s while maintaining a strong
social safety net. The historic policy shift toward limited market liberalization within a state-dominated economy is analyzed and the key
market concessions described. The economic turnaround of the late 1990s
and Cuban macroeconomic and industrial performance over the past
decade are then examined. The final part of the article evaluates the
coherence and sustainability of Cubas emerging economic model and
assesses prospects for the survival of some form of Cuban socialism.

ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24002-7
43
44
CURTIS SKINNER
To struggle for a utopia is, in part, to build it. Fidel Castro:
They say that there is a way out of purgatory, but theres never any way out of hell. If
were in purgatory, we are not going back to hell. At least we have escaped from Satan
and are patiently waiting for the moment of reaching heaven. Fidel Castro
When I rst visited Havana in 1999, I took a photograph of an ancient

Chevrolet with its engine hood propped open parked neatly beside a freshly
painted Socialismo o Muerte! slogan emblazoned on a wall. Lonely,
deant, absurd, fatigued, resourceful the moods and meanings in the image seemed to summarize the contradictions of the great Cuban revolution
at the cusp of the 21st century. Astonishing the world, the government of
Fidel Castro has survived the collapse of international socialism and weathered the worst depression in modern Cuban history, radically restructuring
the economy while preserving a strong social safety net for the population.
Buoyed by booming growth in international tourism and nickel exports,
Cuban economic growth outstripped the Latin American average during the
past decade and recovered the islands pre-crisis volume of production in
2005. Yet, this extraordinary feat of economic management has come at
high cost as the unavoidable rapprochement with the capitalist world
market undermines the revolutionary achievements of social equity and
solidarity, still striking to the visitor familiar with the squalid extremes of
poverty and wealth elsewhere in Latin America. Does Cuban socialism have
a future? How do the economic successes and failures of the islands socialist
past shape its present development prospects? As Cuba completes a remarkable decade of market experimentation in a socialist context, the hour
appears ripe to attempt a brief historical evaluation of the islands economic
policy and development prospects.
This article begins by reviewing the immediate causes and staggering dimensions of the economic crisis triggered by the abrupt disruption of Cubas
economic relations with the Soviet bloc in 19891991. The next two sections
offer some historical context toward understanding this crisis. The successes
and failures of Cuban economic development policy in the 1970s and 1980s
based on large social investments, capital-intensive agricultural and industrial production, and export specialization to the Soviet bloc are evaluated
and the islands deepening economic dependence on the Soviet Union discussed. The mounting problems of hard currency shortage, trade decit and
slowing economic growth in the 1980s are examined. This is followed by an
analysis of possible reasons for Cubas failure to diversify export markets
and products as intended and a discussion of policy efforts late in the decade
Economic Policy and Socialist Development in Cuba
45
to raise state farm efciency and labor productivity with new moral and
material incentives.
The next section, To the market in the 1990s, examines Cuban efforts
to stabilize the economy in the early 1990s while maintaining a strong social
safety net. The historic policy shift toward limited market liberalization
within a state-dominated economy is analyzed and the key market concessions described. The economic turnaround of the late 1990s and Cuban
macroeconomic and industrial performance over the past decade are then
examined, with a discussion of economic growth, the problem of monetary
dualism, the limitations of tourism and other natural resource-based production, the radical downsizing of the sugar industry, new success in laborintensive agriculture and the continuing deep depression in manufacturing.
The nal part of the article examines the coherence and sustainability of
Cubas emerging economic model and assesses prospects for the survival of
some form of Cuban socialism. Among the important economic problems
discussed are the sharp increase in income and consumption inequality
consequent to the market liberalization, the continuing hard currency
shortage, prospects for export diversication and Cubas important but
limited success in attracting direct foreign investment. The complex and
evolving consumer product pricing and distribution system is described
along with the rapid growth in private output and employment and the
governments efforts to restrict their scale and scope. New efforts to improve
state rm performance by means of managerial and nancial decentralization are critically assessed and compared to similar policies in other postcapitalist societies. A brief conclusion evaluates the social, economic and
political institutions supporting and undermining socialist values in contemporary Cuba.
1. TRADE SHOCK AND ECONOMIC COLLAPSE

The worst economic crisis in modern Cuban history drove the Castro government, holding its collective nose, to an arms-length embrace of the
market. A punishing external shock the sharp decline in Cubas terms of
trade and nancing with its trading partners in the Council of Mutual Economic Assistance (CMEA) in 19891991 sent an open and vulnerable
economy into collapse. Pushed by the stubborn United States trade embargo and pulled by the CMEAs favorable trade and nancing terms, Cuba
conducted about 80% of its foreign trade in goods with the Soviet Union
and Eastern Europe during the late 1980s, essentially exporting sugar, nickel
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CURTIS SKINNER
and citrus for petroleum and capital goods (Comite Estatal de Estad sticas
(CEE), 1990, Tables XI.2, XI.910; CEE, 1989, Tables XI.1718). The terms
of trade in this socialist-bloc exchange were generally far better for Cuba
than those prevailing in the capitalist world market, and the value of Cuban
trade exploded after the island joined the CMEA in 1972, rising more than
ve-fold in nominal peso terms from 2.4 billion pesos in 1970 to 12.9 billion
in 1986 (CEE, 1987, Tables XI.1314). Most importantly, Cuba sold its
sugar to the Soviet Union in multiyear contracts at a price typically two to
four times as high as the residual (free) world market price and also
usually signicantly higher than the bilateral trade preferential prices paid
by the major capitalist country buyers (Pollitt, 1985, pp. 79; Blasier, 1993,
p. 81). In turn, Cuba bought Soviet petroleum priced as a ve-year
moving average of the world price to smooth volatility and was permitted
to re-export a share of this petroleum to earn convertible foreign currency. Perhaps most importantly, this trade with the USSR and bilateral
commerce with the Eastern European CMEA members (usually exchanging sugar for manufactures) was conducted in non-convertible currency
(the so-called transferable ruble), with bilateral trade decits more or
less automatically nanced with lending by the surplus country. Cuba ran
large and growing trade decits with its major CMEA partners during
the late 1980s even as the value of trade approached 70% of gross
domestic product (GDP), resulting in a large, accumulated debt to the
Soviet Union along with smaller ones to East Germany, Czechoslovakia and
other partners (Comision Economica para America Latina y el Caribe
(Cepal), 2000, Table A1; CEE, 1990, Table III.1; Linden, 1993; Mesa-Lago,
1993a).
The stunningly swift collapse of the socialist regimes in Eastern Europe in
late 1989, accompanied by deepening economic crisis and political ferment
in the Soviet Union, brought an abrupt end to these comradely trading and
nancing arrangements. Politically hostile to Havana and eager to reintegrate their economies with the capitalist West, the center-right governments
restoring capitalism in Czechoslovakia, Hungary and East Germany in 1990
quickly reduced trade and aid ties with Cuba, which reciprocated by reducing its exports. By 1991, when the CMEA was formally dissolved, Cuban
trade with Eastern Europe had plummeted 78%, with a growing share of
this residual trade denominated at market prices and in convertible currencies (Cepal, 2000, Tables A3334; Linden, 1993; Mesa-Lago, 1993a). At the
same time, the disintegrating Soviet Union far and away Cubas most
important economic partner, accounting for 65% of Cuban trade in 1989,
including virtually all of the islands oil needs and more than half of its sugar
47
exports staggered the island economy by sharply reducing its own economic support (CEE, 1990, Table XI.2; CEE, 1989, Tables XI.1718). An
onerous new one-year trade pact signed in December 1990 cut Soviet oil
deliveries by almost a quarter (ending Cuban re-exports) and reduced the
price paid for Cuban sugar by 38%; all other exchanges were denominated
at world market prices, with the Cubans instructed to negotiate directly with
thousands of Soviet enterprises, greatly complicating commerce (Castro,
1992; Blasier, 1993). The dissolution of the Soviet Union and ascendance of
Boris Yeltsin to power in late 1991 brought a complete end to the sugar
price subsidy and to the billions of dollars in repayable trade credits and
project-based development aid that had contributed mightily to the Cuban
economy for decades (Mesa-Lago, 1993a).
The results for Cuba were catastrophic. Confronting abysmally low world
sugar and high petroleum prices and blacklisted from the hard currency
market after defaulting on its Club of Paris debt in 1986, Cuba held only a
fraction of the convertible foreign exchange it needed to keep its importintensive economy running at the 1989 level of production. The volume and
value of trade fell precipitously, dragging the broader economy down with
it. By 1993, when the free fall touched bottom, the real volume of trade had
fallen by more than half (with imports declining by more than two-thirds)
and real GDP per capita had declined by 34% (Cepal, 2000, Tables A1,
A10, A31). A few grim statistics reveal the staggering dimensions of the
crisis. From 1989 to 1993, as Cubas terms of trade (the ratio of export to
import prices) fell 46% and the purchasing power of exports (the price of
exports multiplied by the volume of exports) declined 74%, the island was
forced to cut petroleum and derivative imports by 58%, fertilizer chemicals
87%, fodder meal 98%, laminated steel 94% and sawn lumber 99% (Cepal,
2000, Tables A31, A40). The scarcity of these and other critical inputs
contributed to a 61% decline in industrial physical output during those
terrible four years, with consumer goods production falling 58% and capital
goods 90% (Ocina Nacional de Estad sticas (ONE), 2000, Table VIII.2).
The foreign exchange and import crisis had a comparable devastating effect
on Cuban crops, livestock and sheries, grown highly dependent on mechanical and chemical inputs. Liquid milk production fell 57%, chicken
53%, sh 53% and rice 63%. In the critical sugar sector, output fell from
7.9 million tons in 1989 to 4.2 million in 1993, while cane production per
hectare declined 40% (Cepal, 2000, Tables A86, A92).
Even today more than a decade after the CMEA implosion and long
after Cuba has resumed economic growth under a very different production
and trade model key Cuban indicators remain appallingly depressed
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relative to their 1989 performance. The most recent ofcial statistics, for
2002, show that consumer goods output stood at 60% of 1989 output,
capital goods at 12% and intermediate goods at 48% (ONE, 2003, Table
VIII.2). Deeply depressed manufacturing industries in 2005 include textiles
(8% of 1989 output), garments (17%), paper (6%), fertilizers (7%), construction materials (24%) and petroleum and other non-metal mineral
processsing (13%). The only broad-category manufacturing industries to
reach even 80% of 1989 output in 2005 were food products, beverages,
tobacco products, chemicals, common metals and radio, television and
communication equipment (ONE, 2006, Table IX.1). Crude sugar production, meanwhile, has stagnated since 1993 at half or less of pre-crisis output,
reaching a 100-year low of 1.2 million tons in 20052006, less than one-fth
of 1989 production (CEE, 1990, Table VI.3; ONE, 2000, 2003, Table VIII.3;
Focal, 2006). The evident loss of the many millions of pesos and labor hours
invested in these industries represents a huge economic burden for Cuba
even as the country successfully reorients production to tourism services and
other sectors, as discussed below.
2. CUBA AND THE SOCIALIST DIVISION OF LABOR

The depth and breadth of the crisis invites retrospective debate about the
wisdom of the Cuban development strategy of the 1970s and 1980s based on
primary commodity production for the CMEA market. Despite the presumed developmental advantages accruing over three decades of socialist
endeavor and consisting of a stable political regime, economic planning with
centralized control of productive resources, a well-educated and healthy
population and quite favorable foreign trade and nancing agreements, the
Cuban economy in 1989 displayed many of the classic distortions of
underdevelopment that left the island quite vulnerable to an external shock.
On the trade ledger, unrened sugar accounted for 72% of the value of
goods exports and manufacturing products for a mere two percent; furthermore, as noted, the market for Cuban exports was highly concentrated
in the CMEA bloc (Cepal, 2000, Table A38). (It should be noted, however,
that the large sugar share partly reects the preferential prices Cuba received
for this commodity.) Capital goods and other manufactures, meanwhile,
accounted for 45% of imported goods and Cuba also became increasingly
dependent on fuel and food imports (CEE, 1987, Table XI.14; Cepal, 2000,
Table A37). Although the manufacturing share of GDP grew to comprise
about a quarter of Cuban GDP by 1985, this industry displayed many of the
49
weaknesses of rst-stage import substitution: import dependence, export

non-competitiveness, a dearth of backward and forward linkages and sectoral imbalances (Cepal, 2000, p. 391; Cepal, 2004b, Table 179). Added to
these problems were some uniquely Cuban industrial distortions arising
from the U.S. trade embargo and the islands participation in the CMEA
division of labor, including high transportation costs and replication of the
highly capitalized, over-scaled and resource-intensive production methods
characteristic of the industrialized CMEA nations.
It seems evident in retrospect that life in the CMEA cocoon helped
prolong 200 years of much-despised sugar monoculture in Cuba and contributed to industrial distortions and inefciencies that perpetuated serious
external imbalances for the island economy. Yet, paradoxically, it is hard to
argue against the overall development strategy Cuban policymakers chose.
In the rst place, of course, Cuban policy options were constrained by the
unrelenting U.S. hostility that ended strong traditional trade and investment
relations with that country, inhibited political and economic relations with
many other Latin American and Caribbean nations, and encouraged the
Castro government to strengthen ties with the rival superpower and its
economic bloc. Second, there was a persuasive economic case to be made for
exploiting Cuban comparative advantage in sugar production and favorable
CMEA trade terms to build the investment resources needed to gradually
diversify the national industrial and export base. Weaning the economy
from sugar a notoriously price volatile, easily substitutable, lowvalue-added product subject to world overproduction and industrializing
were essential revolutionary goals from the beginning, but an early effort at
crash industrialization in the early 1960s quickly ran up against investment
and balance of payments constraints (Boorstein, 1968). A gradual approach
toward transition from the sugar-export economy seemed indicated.
Cuban efforts along these lines were impressive, if ultimately unsuccessful
in easing dependence on sugar and other primary commodity exports. First
and foremost, the socialist government undertook a radical wealth and income redistribution and large public investments to improve popular health,
nutrition and education, with strong results that are universally recognized
and elevated Cuba to the front ranks of Latin America with respect to these
vital social indicators by the late 1960s (Huberman & Sweezy, 1969). The
Castro government showed its commitment to improving living standards
even at the risk of slower economic growth than otherwise attainable by
consistently spending about a quarter of GDP on social services (education,
health, housing and community services and social security) from the 1970s
through even the worst years of the 1990s collapse. An electrication
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CURTIS SKINNER
campaign brought household power to 85% of the Cuban population by

1984 (Castro, 1985, p. 39). The government also spent large sums to maintain full employment (often at the cost of over-stafng public enterprises)
and to subsidize prices for a wide range of basic goods and services (food,
transportation, household appliances, etc.). Finally, the revolution and the
participatory political and social institutions it created gave a genuine new
voice to millions of workers and farmers in workplace and community
affairs (Roman, 1999). The result is a relatively high-skilled, well-educated
and self-condent workforce that is undoubtedly one of Cubas greatest
economic assets.
A second major achievement of the socialist system in the 1970s and 1980s
was development of a sophisticated domestic industrial base in the sugar
industry. Recognizing the indispensable need to raise labor productivity in
sugar production, the government committed a large investment to mechanizing cane cutting and loading, arduous tasks performed entirely with
manual labor in the early 1960s. The comparatively simple process of
mechanizing the loading of cut cane onto carts and railroad cars for transportation to the mills was fully achieved by the mid-1970s (Feuer, 1987,
p. 71). Mechanizing cane cutting was a much more difcult challenge,
requiring development of new, indigenous technology. Remarkably, Cuban
engineers in the early 1970s succeeded in designing and patenting a successful harvester, the Libertadora, that was subsequently manufactured in
West Germany and exported all over the world; a CubanSoviet collaboration later designed an improved harvester, the KTP-1, that was manufactured in Cuba beginning in 1973 (Mesa-Lago, 1974; Brundenius, 1987).
By the late 1980s, Cuba was building 600 combines a year and more than
two-third of the sugar harvest was cut by machine (CEE, 1987, Table VI.34;
Feuer, 1987, p. 71). Successful mechanization increased harvest labor
productivity dramatically and contributed to a 30% increase in the average
annual cane harvest during the late 1980s compared to the early 1970s
(Pollitt, 1985; Pollitt & Hagelburg, 1994; CEE, 1987, Table VIII.13; CEE,
1990, Table VIII.10).
Cuban planners also successfully developed backward and forward linkages to the sugar industry. Relying on assured and growing CMEA export
markets, economic policymakers quite logically put sugar at the center of
their industrial development strategy. Such sugar industry inputs as harvesters, cane carts, syrup boilers and cane grinding machinery dominated
the Cuban capital goods sector and the metallurgy industry. Large investments in mill modernization and capacity during the 1980s raised annual
grinding capacity to ten million tons by the end of the decade,
51
accommodating the growth in milled output to the 7.58 million range

(Cepal, 2000, pp. 306307; CEE, 1990, Table VI.3). By 1989, Cuba manufactured most of its mill machinery and equipment domestically and was
close to achieving energy self-sufciency in milling by burning bagasse (cane
pulp after sugar extraction) (Cepal, 2000, pp. 307, 379). Downstream, Cuba
produced bagasse paper and particleboard, molasses, ethanol, rum and
high-protein animal feeds, among other sugar-based products. The price
paid for this substantial success in sugar sector industrialization was increasing dependence on imported fertilizers, pesticides and fuel to maintain
yields in depleted soils and run the machines to plant, cultivate, irrigate and
harvest the cane.
Beyond the sugar-linked sectors, Cuba succeeded in developing a relatively
broad range of import substituting heavy and light industries during the
1970s and 1980s, although many of these remained highly dependent on
imported inputs and fuel, as the industrial collapse of the 1990s very painfully
demonstrated. Equally importantly, the Castro government undertook large
investments to develop the transportation and utilities infrastructure needed
to support the islands industrial development and accommodate the rapid
growth of merchandise trade, with impressive results. Gross electrical power
generation (primarily from oil-burning plants) more than quintupled from
2,550 GW h in 1958 to 5,020 GW h in 1971 and 13,167 GW h in 1986 (CEE,
1987, Table VI.40; ONE, 2003, Table VII.11). The state extended the islands
rail and highway networks to serve all of Cubas major cities and ports and
modernized the countrys deep-water port facilities, building a super-tanker
terminal in Matanzas. Cubas merchant eet grew 22-fold from 38,200 tons
gross register in 1958 to 881,500 tons in 1986 (CEE, 1987, Table IX.36).
Telecommunications development lagged, however, with only six xed-line
telephones per 100 people as late as 2002 (ONE, 2003, Table XI.12).
In value terms, non-sugar industrial output measured in 1981 prices grew
86% from 1975 to 1986 (CEE, 1987, Table VI.2). Measured in physical units
during the 19751986 period, Cuban output rose substantially in products
typically targeted for import substitution, including radio and television
assembly, steel castings, gray cement, electrical wire, storage batteries,
toothpaste, processed food and beverages, printing, paper and selected
chemicals. But domestic output lagged behind in other important light consumer industries, such as soap, shoes, clothing and textiles (CEE, 1987,
Table VI.34). Despite this diversication effort, moreover, industrial investment during the 1980s remained heavily concentrated in sugar and electrical
power generation and the share of industrial means of production devoted to
sugar mills and harvesting equipment dwarfed all other sectors in 1985
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CURTIS SKINNER
(CEE, 1987, Table VI.13). Although Cuba succeeded in developing a very

modest volume of new manufactured exports fruit preserves, gray cement,
steel bars and wire, ethyl alcohol, frozen sh to supplement its traditional
cigars and rum, a substantial share of these new exports were the product of
non-competitive barter deals with CMEA partners. The structure of Cuban
exports in 1986 looked remarkably similar to that of 1958: in both years, the
food, beverage, tobacco and non-fuel raw materials (mainly nickel) sectors
accounted for 92% of the value of exports (CEE, 1987, Table XI.13).
In the early 1980s, Cuban planners launched a serious effort to develop an
indigenous biotechnology/pharmaceutical industry with import substitution
and, ultimately, export substitution goals. The initiative counts some striking technical successes, among, them, successful import substitution of
about 90% of Cubas medicine and veterinary product needs, representing
signicant savings (although about 90% of the value of the inputs required
to produce these products is imported) (Cepal, 2000, pp. 451452). Among
other very impressive achievements, Cuban medical research centers have
developed an epidermal growth factor, a hepatitis-B vaccine (exported to
more than 30 countries), the worlds rst and only meningitis-B vaccine, and
some experimental cancer treatment drugs (Cepal, 2000, pp. 453454; Focal,
2003). The Cuban advances have attracted research and licensing collaborations with Canadian, German, British and Indian biotech and pharmaceutical rms, and even the Americans are getting involved, despite the
embargo. In July 2004, the San Diego-based rm CancerVax won unprecedented U.S. Treasury approval to license two experimental cancer vaccines
developed by Cubas Center for Molecular Immunology and originally
licensed to Canadas YM Biosciences (YM Biosciences, 2004). Although
Cuban exports of 40.6 million pesos of medical products and pharmaceuticals (mostly to Latin America) represented just two percent of the value of
total exports in 2001, the potential payoff from a breakthrough product
could be substantial even in a world market dominated by powerful transnationals (ONE, 2002, Table VI.12). The development of the Cuban
biotech/pharmaceutical industry appears to be a successful case of investing
earnings from traditional commodity exports to build a high-value-added
potential export industry that makes effective use of Cubas high-skilled
workforce. Recognizing the achievements and potential of this high-tech
industry, the government made a determined and successful effort to maintain investment in the sector through the worst of the 1990s crisis years.
As in the case of manufacturing, Cuban agricultural development policy
fostered centralized, large-scale and import-intensive industrial farming
methods that yielded some impressive results at considerable resource cost.
53
Radical agrarian reforms in 1959 and 1963 and subsequent policy measures
concentrated 80% of agricultural land into large state farms by 1985, with
remaining holdings operated as multi-owner cooperatives (12%) and small,
individual private holdings (8%) (Rodr guez, 1987, p. 29). Development
policy goals emphasized diversication from sugar monoculture toward
production of non-traditional export crops, raw material inputs for industry
and food for domestic consumption. For most of the post-revolutionary
period until 1993, the state monopolized agricultural trade, buying xed
quotas of cooperative and private output at xed prices and selling the
product (along with state farm output) to Cuban consumers and foreign
buyers. In the early 1970s, however, the government introduced a parallel
market to distribute a share of state farm and co-op output above the
quota price and from 1980 to 1986, the regime permitted free agricultural
markets to distribute private output above quotas for a limited range of
products (Brundenius, 1984; Zimbalist & Eckstein, 1987). Large state agroindustrial complexes dominated sugar, citrus, rice and livestock production
in the mid-1980s, but non-state farmers produced most of Cubas tobacco,
cacao and selected staple vegetable crops (tomatoes, onions, sweet peppers
and beans) and substantial shares of coffee, plantains and tubers and roots
(CEE, 1987, Tables VIII.2325).
The Castro government directed about 15% of gross annual state investment to the non-sugar agriculture and livestock sectors from the mid-1970s
to the mid-1980s and achieved some remarkable output gains, especially in
the state-dominated livestock and animal products sectors (CEE, 1987,
Table V.8). The state swineherd quadrupled and the chicken ock doubled
in size from 1970 to 1986, while egg production rose 70% during that
period. An innovative breeding program and the use of supplementary feeds
contributed to a 233% increase in annual milk production per cow from
1966 to 1986 (CEE, 1987, Tables VIII.36, 43, 47, 49). Per capita production
of some important domestic food crops tomatoes, potatoes and other root
crops, melons, oranges and grapefruit compared favorably to output in
Costa Rica, the Dominican Republic and Mexico in 1985 (Food and Agriculture Organization of the United Nations (FAO), 1987, Tables 3, 25, 26,
52, 64, 71, 72). Substantial investments in the state shing eet and aquaculture brought large output gains of sh for domestic consumption and
lobster and shrimp for export. Citrus fruit production almost quadrupled in
volume terms from 1970 to 1986 and exports rose 17-fold, most going to the
Soviet Union and East Germany (CEE, 1987, Tables VIII.23, XI.17).
Despite these substantial achievements, Cuba generally fell short of its
agricultural development goals. Food imports as a share of total goods
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CURTIS SKINNER
imports fell from 20% in 1958 to 9% in 1986, but imports per capita tripled
in nominal terms during these years (CEE, 1987, Tables II.1, XI.14). The
import share of total food consumption rose from one-third to one-half
during this period, and in 1989 Cuba ran a large overall trade decit in
agriculturally related goods (including machinery and other inputs) and food
decits in cereals, meat, dairy products and eggs (Cepal, 2000, p. 337; CEE,
1990, Tables XI.910). Production of rice, a staple of the Cuban diet, was
particularly disappointing, with state farms managing only a 16% increase in
output during the 19751986 period even as the yield per hectare grew 54%
(CEE, 1987, Tables VIII.24, 29). Other major food crops generally showed
respectable increase in overall output, land productivity and labor productivity as land and chemical/mechanical inputs were increased, but production of henequen and agricultural fodder crops lagged. Little progress was
made in developing other non-sugar agricultural/forestry inputs for industry;
production of hides and sawn wood stagnated during the 1980s and ber
production was essentially limited to henequen and kenaf, each with a
narrow range of industrial uses, primarily in cordage and sacking.
3. PROBLEMS IN THE CUBAN DEVELOPMENT

MODEL
Evaluating industrial, agricultural and trade performance in the 1970s and
1980s, a case can be made that the Castro government failed to take full
advantage of a 20-year window of favorable trade terms to build a sounder
commercial basis for Cuban development. Even with the Soviet sugar
subsidy, the unsustainability of Cubas unbalanced, resource-intensive and
import-intensive growth model became increasingly clear as balance of
payments problems worsened and the economy slowed in the latter 1980s. In
1985, the price of sugar in the world residual market an important source
of Cuban foreign exchange fell to its lowest level since the 1930s and the
Soviet Union modestly cut its price subsidy in the latter years of the decade
(Eckstein, 2003, p. 72; Mesa-Lago, 1993a). A weakening dollar in the late
1980s hurt Cuba because sugar is sold in dollars but Cuban hard currency
imports and debt were paid in other currencies. Declining oil prices also
affected Cuba adversely in the late 1980s, as it paid a higher-than-world
price to the Soviet Union under the bilateral moving average pricing system
and earned less foreign exchange from its petroleum re-exports. The
declining terms of trade contributed to rapid growth in Cubas current
55
account decit (trade and non-capital nancial ows), peaking at $3 billion

in 1989 (Cepal, 2000, Tables A1, A32). Convertible currency imports plummeted, seriously compromising production (Castro, 1989). In 1986, Cuba
suspended servicing its hard currency debt of about $4 billion, much of it
incurred to help nance the rapid growth of the 1970s; the default closed
lending markets to Cuba for all but short-term, high-interest trading credits,
a costly nancial quarantine that persists to this day (Mesa-Lago, 2000,
p. 258). The growing foreign trade and nancing decits helped stie the
economy at zero real growth during the 19861989 period compared to
5.2% average annual growth from 1979 to 1986 (CEE, 1987, Table III.1;
CEE, 1990, Table III.1). (Following Cuban and CMEA practice at the time,
the Global Social Product (GSP) measure of output is used for these
years; this metric differs from the standard GDP measure, which Cuba
adopted in 1996. The Cubans and others (e.g., Brundenius, 1984) have
estimated GDP for some earlier years).
Could sounder policy in the 1970s and 1980s have better armored the
Cuban economy against these external shocks and against the ultimate
shock the catastrophic collapse of the socialist bloc? As an island economy
with a relatively small domestic market and a limited natural resource base,
Cuba should benet from a high volume of trade relative to domestic production. The wisdom of hindsight might counsel more determined efforts to
re-direct investment from the sugar sector to more effective import substitution, especially in food, and to the production of high-value-added goods
and services exports for hard currency. Yet Cuban leaders were hardly blind
to the desirability of diversifying export markets, generating more hard
currency and reducing the chronic trade decit. The 19811985 ve year
plan set import substitution and export growth as major goals and in an
important economic policy speech in December 1984, Fidel Castro trenchantly criticized a wasteful mentality, a mentality of little thrift y more of a
consumption than a production mentality, more of an import than an
export mentality (Castro, 1985, p. 107). Besides building the biotechnology/pharmaceutical sector, the government sought direct foreign investment
under a 1982 law permitting minority stakeholding in selected sectors
(targeting hard currency import substitution and export earnings) and began
seriously promoting foreign tourism in the latter 1980s. Despite some
success and much promise, however, these initiatives did not signicantly
reduce Cuban dependence on sugar exports to the Soviet Union by decades
end. On the contrary, the ratio of the value of sugar exports to the USSR to
total goods exports rose from 51% in 1980 to 57% in 1988 (CEE, 1989,
Tables XI.1, XI.17).
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Even as they recognized the risks and limitations of Cubas trade structure, policymakers encountered powerful disincentives and obstacles to
reform. The Soviet sugar price subsidy and Cubas long-term supply contracts were strong sources of inertia, raising the opportunity cost of shifting
productive resources to develop riskier non-traditional exports. Assured
Soviet nancing of the ballooning bilateral trade decit of the late 1980s
permitted year-by-year postponement of the painful day of reckoning. Any
ambition to export non-traditional manufactures and services to the world
capitalist market a demanding enterprise in the best of circumstances
encountered the hulking obstacle of the U.S. trade embargo, cutting off the
worlds largest market 90 miles away and raising general Cuban trade costs
by blacklisting ships servicing Cuban ports from access to U.S. ports. Added
to the Cuban investment controls and the visceral suspicion felt by the
capitalist entrepreneur toward the socialist state, the embargo contributed
to Cubas failure to attract signicant foreign investment in the 1980s,
denying the island a potential source of technology transfer and commercial
expertise to support world market exports. As of 1989, Cuba boasted
exactly two equity investments by capitalist rms, a Spanish stake in a
Varadero tourist hotel and a Latin American investment in telecommunications (Cepal, 2000, Tables A42; Mesa-Lago, 2000, p. 274).
Still more fundamental obstacles to change were rooted in domestic
political economy. The pursuit of social equity and political unity and
stability were higher priorities for the socialist government than maximizing
economic growth and accumulating national wealth from world market
exports. Generally lacking the technical wherewithal to take the high road
of world market competition on the basis of high productivity, quality and
innovation (the biotech sector excepted), Cuba declined to take the low
road of sweated labor and rapacious price competition pursued by China
and much of the rest of the industrializing Third World, not excluding the
Asian NICs in their time. This effectively closed the extra-U.S. capitalist
market to Cuban manufactures and other non-traditional exports, with few
exceptions. Unquestionably, much of Cuban industry and agriculture was
and remains inefcient compared to world capitalist standards, requiring
a larger volume of inputs to produce a given quantity and quality of output.
Technologies and intermediate inputs were primarily imported from the
Soviet Union, were of mixed quality, and were designed according to Soviet
not Cuban productive conditions; for example, abundant energy
resources and a relative scarcity of labor. As in other centrally planned
economies, Cuban planners showed a predilection for very large, vertically
and horizontally integrated enterprises (gigantism), a bias arising from a
57
sometimes misplaced condence in economies of scale and scope, optimistic

expectations of CMEA exports, and the imperative to simplify the planning
process by reducing the number of productive units. The socialist commitment to full employment meant state industrial rms were used to absorb
the labor surplus produced by agricultural mechanization and migration to
the major cities, resulting in overstafng and low labor productivity. Even at
its most liberal and decentralized, under the System of Economic Management and Planning (SDPE) in effect from 1976 to 1986, the Cuban
economic system offered but a very narrow range of individual material
incentives and penalties to encourage productive efciency. Wage differentials were small, productivity norms low and employment effectively guaranteed. Enterprise managers received modest rewards for achieving
protability under centrally administered prices, but their primary success criterion was meeting their centrally planned output target (Zimbalist,
1987; Collins, 1993). Private production and free-market sale of agricultural
and artisanal products and a limited range of services was strictly controlled
and comprised less than 10% of national output (Programa de las Naciones
Unidas para el Desarrollo (PNUD), 2000, p. 55). The government subsidized money-losing enterprises with state budgetary nancing (the soft
budget constraint).
Responding partly to Cubas deteriorating trade and hard currency position, the Castro government launched a very interesting drive for socialist
efciency beginning in 1986, the so-called campaign to rectify errors and
negative tendencies. In a series of public speeches, Fidel Castro denounced
chronic problems of high production costs, poor labor and managerial
discipline and work effort, low labor and capital productivity, shortages of
important industrial inputs and consumption goods and unnished construction projects, problems that he attributed to inexible bureaucratic
planning, a weakening link between work and reward, the diversion of effort
and resources toward individual prot-seeking in the free markets and in
state enterprise activities yielding high returns, and most importantly, the
Cuban Communist Partys failure to engage in the ongoing, mass political
work required to motivate Cubans morally to work hard for socialist
construction (Castro, 1989). The regime sought to attack these problems by
replacing technocrats with top politicians as the nations economic planners
and general managers, repressing extra-state production and distribution
(suspending the free farmers market and suppressing private commerce and
transportation), and launching an energetic political campaign to resuscitate
a socialist esprit. At the same time, policymakers sought to increase efciency in the state sector by raising worker output norms, creating a new
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wage scale to better reect relative productivity, improving the link between
pay and performance, broadening occupational titles, and gradually reducing enterprise personnel (Castro, 1989; Mesa-Lago, 1993a).
Yet even as he acknowledged the need to improve material incentives,
Castro insisted on the primacy of the political in the drive for socialist
efciency:
Are we going to compete with the United States in material goods or material incentives?
Are we going to compete with highly developed consumer societies? Can socialism in this
country be built on material incentives alone? thats the question we must ask. I think
we have to use both forms of incentives, we have to use them, we cant fall back into the
egalitarianism we had before, we have to apply the socialist formula [to each according
to his work], completely agreed, but we have to discover the secret of efciency. And it
lies in a combination of technical and economic factors and of moral factors, political
factors, consciousness; and Im not speculating here or making up a pretty story, Im
speaking from fact. (p. 285)
Perfect as the [economic] mechanisms may be that man invents in the quest for socialist
efciency, these mechanisms will never have the efciency that they have under capitalism, where everything moves on these springs: market forces, competition, free prices
and the total absence of planning. (p. 259)
The mistake lies in believing that man is moved only by material incentives and that the
great works of history are made only with material incentives, or that socialism can be
built with these incentives with material incentives you only build capitalism. No,
money isnt the basis. It is ideas, principles, certain moral convictions that people value
I wont say just above money, vile money, but even much more than their own lives
(p. 35) (Castro, 1989; authors translation).
The political campaign for rectication included broadening Communist

Party membership, enlisting the countrys mass organizations (the ofcial
labor union and womens, youth, campesino (private farmer) and co-op
groups) and media to very actively promote the campaign, and encouraging
socialist emulation through voluntary work (usually in construction and
agriculture) and participation in special construction work teams (the
microbrigades and construction contingents).
Quite independently of, but concurrently with, the rectication campaign,
the Castro government also began to experiment with innovative new forms
of decentralized rm management in the late 1980s. Originally developed by
one of the armys industrial enterprises in 1986, the so-called Sistema de
Perfeccionamiento Empresarial (SPE) freed rms from central plan output
quotas, strengthened managerial controls over the labor force (including job
design and the wage paid), linked remuneration closely to performance,
required the enterprise to become self-nancing within a stipulated time
interval, and allowed greater managerial discretion over the disposition of
59
enterprise prots as bonus or reinvestment funds. This early version of the

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

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

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

Cuban efforts to stabilize the economy and blaze a new development path in
the 1990s were guided by two interrelated political imperatives that continue
to shape economic policy today: rst, maintain a basic social safety net for
all Cubans and second, introduce market mechanisms slowly, sparingly and
strategically while keeping rm state control and direction over the economy. During the early years of the crisis the terrible period from 1990 to
1993 the Cuban leadership concentrated on basic economic survival:
securing and distributing food to the population and amassing the foreign
exchange needed to pay for the most essential imports and gradually restore
industrial and agricultural production. The government retained rm central control of the economy while cautiously introducing selective liberalizations. The Cuban Communist Partys fourth congress, held in October
1991, reafrmed a strong commitment to planning and to the rectication
processs attempts to raise efciency through enterprise reforms (including
enterprise self-nancing) and labor discipline. The congresss economic
resolution also emphasized the import-substituting Food Program and
efforts to strengthen the dynamic new export industries (tourism, biotech,
health services). At the same time, the resolution acknowledged the
contributions of private and cooperative farmers and the self-employed
cuentapropistas, intimating the market reforms to follow. Marking a signicant policy shift, the document also advocated an end to the states
foreign trade monopoly in order to further encourage foreign investment
and exports, a liberalization codied in the constitutional reform the
following year along with the explicit recognition of private production in
the socialist economy. While recognizing the need to gradually raise prices
and gain control over a yawning scal decit, policymakers intentionally
61
subordinated this adjustment to the goal of preserving social services and

living standards to the extent possible during the early years of intensifying
crisis (Reed, 1992; Mesa-Lago, 2000; Collins, 1993; Gonzalez Gutierrez,
2000).
In this, the Cubans were remarkably successful, aided immeasurably by
state control over almost all of production and long experience in mass
distribution through rationing. In glaring contrast to the impoverishing
stabilization strategies pursued elsewhere in Latin America and in many of
the formerly socialist countries during the 1980s and 1990s, the Cubans
managed to weather the worst years of the depression under great hardship
but with universal access to low-cost food, clothing and shelter and free
health and education services (Monreal, 2002). The government placed all
major consumption goods under rationing to share the burden of scarcity
and austerity equitably. Impressively, real public social spending rose as a
percentage of GDP every year from 1990 through 1993 and was kept
roughly constant in absolute terms through 1992 (Cepal, 2000, Table A55).
At the same time, the defense and internal security spending share declined
as the government undertook a drastic paring of the Revolutionary Armed
Forces (FAR), cutting its troop strength by half early in the decade (Cepal,
2000, Table A14; Walker, 2002, p. 285). Even as growing shortages of fuel,
raw materials, intermediate inputs and spare parts reduced industrial and
agricultural output to a fraction of capacity, the Castro government kept
redundant workers on state factory and farm payrolls in order to maintain
employment and wage incomes. Laid-off workers received 60% of their
salaries until they were relocated in new jobs. Remarkably, the number of
ofcially unemployed fell from 1989 to 1993 as labor force participation
rates declined; at the same time, underemployment rose and labor productivity plummeted by about a third during that period, according to one
estimate (Cepal, 2000, Tables V.1, A46). The governments protective measures effectively buffered Cubans from the mass unemployment, hunger and
homelessness characteristic of economic depression in the capitalist Third
World, but the hardships attendant on losing a third of domestic production
and two-thirds of imports were, of course, unavoidable and many. The
reduction or total suspension of a wide range of imports from the Soviet
Union used to manufacture basic consumer products (caustic soda and tallow for soap, for example) produced numerous serious and very irritating
shortages. The fuel crisis compelled daily scheduled electrical power outages
to households and industries and forced the government to suspend much
urban and inter-city transportation, partially substituting for the former
with one million bicycles imported from China and distributed at low cost to
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the population (Eckstein, 2003, p. 112). Most seriously, average caloric

intake fell an estimated 2030% and protein consumption about 30% during the 19891993 period as consumption shifted from pork, chicken, rice
and beans to the more abundant, carbohydrate-heavy yucca, sweet potatoes
and plantains (Zabala Arguelles, 1999, pp. 147148; United Nations World
Food Program (UNWFP), 2004). Dietary vitamin B-12 deciency was
blamed for thousands of cases of temporary blindness reported in 1992
1993 that were suppressed with an emergency vitamin distribution program
(Nova Gonzalez, 2003, p. 156; D az-Briquets, 2002, p. 150).
The Cuban leadership moved energetically to mobilize productive resources to priority sectors, exploiting a strength of centralized economic
planning. Scarce investment funds were allocated to tourism, domestic
petroleum production and nickel mining, the only major industries to
achieve output growth during the early nineties. Raising or even maintaining food production proved more difcult, despite mobilization of
large urban and military labor reserves, major investments in irrigation and
efcient pasturing systems, and deployment of 100,000 oxen as draft
animals to substitute for the missing mechanical and chemical inputs (Reed,
1992). Plantain and potato production rose but output of all other major
domestic food crops declined, with a particularly steep decline in rice.
Despite efforts to increase fodder crops and substitute a high-protein canebased feed for imported feed, the average weight of slaughtered cattle fell by
one quarter and that of hogs by 38% from 1989 to 1993 (Cepal, 2000,
Tables A75, A79, A80).
The sharp contraction of imports quickly corrected Cubas international
transactions imbalance, reducing the trade decit from $2.6 billion in 1989
(12.6% of GDP) to $371 million in 1993 (2.2% of GDP) (Cepal, 2000, Table
A1). Reecting the food emergency, the composition of imports shifted
rapidly from capital goods to consumption goods as the Cubans diverted
purchases from the Soviet Union/Russian Federation to Spain, France,
Italy, China, Mexico and Venezuela, all requiring hard currency. Cuban
exports by volume declined across the board during 19891993, excepting
only nickel sinter and cement, and market shifts mirrored those of imports,
moving from the Soviet Union to hard currency buyers in Canada and
Europe (Cepal, 2000, Tables A3335). The painful contraction in the trade
decit and a gradual increase in direct foreign investment helped reduce
Cuban foreign borrowing needs during the early crisis years. The so-called
Cuban Democracy Act (Torricelli law) signed into law by U.S. President
George H. W. Bush in October 1992 sought to tighten the screws by
extending the U.S. trade embargo to U.S. subsidiaries operating in third
63
countries, but Canada, Argentina, Mexico and the European Union effectively blocked its enforcement and limited its effects (Dom nguez, 2002).
4.2. Market Concessions

By 1993, the fourth consecutive year of steep declines in GDP and trade, the
Cuban leadership was ready to launch a bold program of economic reform.
The early commitment to keeping redundant workers on the payroll at state
enterprises and farms resulted in rapidly mounting enterprise nancial losses
and huge scal decits peaking at 30% of GDP in 1993 which were
covered by printing money (Cepal, 2000, Table A1). While price controls
restrained open ination, the excess purchasing power relative to supply had
other nefarious effects, stimulating a booming, high-priced underground
economy, appreciating the black market value of the United States dollar
from seven Cuban pesos in 1990 to 150 pesos in 1993 (even as the ofcial
exchange rate remained at parity) and discouraging foreign investment
because of devaluation fears (Cepal, 2000, Table A1; Castro, 1996, p. 162).
This monetary overhang also reduced the incentive to work and respond
to productivity-linked wage incentives since peso earnings found little to buy
(Castro, 1996). Fiscal and monetary policy was clearly unsustainable and
state enterprises were starved of the convertible currency needed to restore
production. Although the tourism industry and joint ventures with foreign
investors (mostly in tourism, mining, petroleum and light manufacturing)
grew steadily, this activity produced but a small fraction of the output,
productive jobs and foreign exchange needed to lift the economy out of
depression.
Once convinced of the need for a decisive policy shift, the Castro government responded with a well-managed stabilization program and a series of
initiatives to stimulate sustainable new production by increasing state
enterprise autonomy and opening carefully delimited industries and markets
to non-state producers: self-employed workers, private farmers, agricultural
cooperatives and foreign investors. As Fidel Castro put it in a 1995 speech at
the closing ceremony of a youth festival in Havana, [I]f we have to
introduce a specic amount of capitalism, well introduce it; we are introducing it, with all its inconveniences (Castro, 1996, p. 81). A scal austerity
program launched in 1994 sharply cut subsidies to insolvent state companies, compelling additional layoffs in manufacturing rms, froze salaries and
raised prices on alcohol, tobacco, gasoline and a host of services, from
public transportation and utilities to theater tickets (Cepal, 2000; Hamilton,
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2002; Mesa-Lago, 2000). Meanwhile, the government began a momentous

structural transformation of the Cuban economy by relinquishing the states
near-total control of productive activity. The key concessions were introduced in 19931994 and included both new initiatives and the restoration
and expansion of the markets suppressed during the rectication period.
Two subsequent measures, a liberalized foreign investment law in 1995 and
a banking reform in 1997, completed Cubas market opening. The most
important new laws (conveniently compiled by Dirmoser & Estay, 1997,
pp. 377538 and Cepal, 2000, pp. 574575) and their objectives may be
briey summarized as follows:
Liberalization of self-employment. A 1993 law recognized selfemployment (trabajo por cuenta propia) in 117 occupations (later increased
to 161), primarily in repairs, domestic and personal services, transportation, retail sales and artisanal production; the right to operate a small,
family-run restaurant (paladar) was recognized shortly thereafter. Clearly
fearful of spawning a proto-capitalist class and mindful of the abuses of
self-employment during the 1980s, the government imposed many restrictions on self-employment, prohibiting the hiring of extra-family labor,
preventing professionals from engaging in the private practice of their
professions and imposing strict paperwork requirements and high rates of
taxation on earnings. Encouraging self-employment was intended to
stimulate production of important services poorly supplied by the state
(i.e., to complement, not compete with, state enterprise) and, secondarily,
to provide new sources of work for redundant state workers. The initiative
was successful as far as it went, but the tight governmental controls acted
as a check on participation, limiting self-employment to little more than
3% of total employment during the 1990s (Cepal, 2000, Table A48).
Conversion of state farms to cooperatives. A 1993 law established a new
form of agricultural production cooperative called the Basic Unit of
Cooperative Production (UBPC) and composed of working sub-units of
Cubas huge state farms. Under this scheme, state farm workers were
given the land to work cooperatively in usufruct (the state retaining
formal ownership) and received low-interest loans on easy terms from the
Banco Nacional de Cuba to purchase their equipment and installations
from the state. The UBPCs were given managerial autonomy and were
expected to become self-nancing but also received some state direction
on crop mix and, like other producers in Cuba, were required to sell a
portion of output to the state procurement agency (acopio). Beginning
with the sugarcane plantations and continuing with dairy farms and rice,
65
citrus, coffee and tobacco farms, the government undertook the conversion with great speed: by the end of the year a majority of state farms had
been converted and as of end-2000, the UBPCs controlled about 46%
of Cubas cultivated land (Mesa-Lago, 2000, p. 297; ONE, 2003,
Table IX.2).
Responding to the deep crisis in state farm production, the UBPC
initiative sought to raise production by substituting cooperative labor for
scarce fuel and chemical inputs, with self-nancing providing a prot
incentive. The state was relieved of its increasingly unsustainable obligation
to pay farmworker wages and additional acreage was devoted to food crops
for consumption by UBPC members and market sale to help relieve the
domestic food shortage. Interestingly, the Cubans eschewed Chinese-style
family usufruct productive units on a mass scale, although the government
did distribute small parcels of unused state land to about 75,000 individuals
(parceleros) between 1993 and 1998 to use in usufruct to produce vegetables,
tobacco and coffee (Cepal, 2000, pp. 315316).
Legalization of private holdings of convertible foreign exchange. This law,
again passed in 1993, had several objectives: to help the state capture a
share of the large number of United States dollars hoarded and circulating
in the underground economy, many of them remittances to relatives from
Cuban-Americans; to encourage more remittances of this desperately
needed foreign exchange; and to strengthen the exchange value of the
Cuban peso. To capture the foreign exchange (and reduce the money
supply), the government set up a network of retail stores (the tiendas de
recuperacion de divisas, TRDs) selling dollar-priced imports and highquality Cuban products to tourists and dollar-bearing Cubans. In 1995,
the Cubans introduced the convertible peso, convertible on demand at
par with the U.S. dollar, intending for it to gradually supplant the use of
the dollar in the domestic economy, restore greater governmental control
of the money supply, and contribute toward the longer-term goal of a
unied exchange rate.
Establishment of free farmers and industrial/artisanal markets. Two
decrees in late 1994 restored these markets, which had been suppressed
entirely (the farmers market) or curtailed (the industrial/artisanal market)
under rectication. Restoring the farmers market was clearly a bitter pill
for Fidel Castro to swallow, having excoriated the market a few years
earlier as a strange experiment that never should have been introduced
here, responsible for price gouging, enrichment of private middlemen
and the wealthier campesinos, diversion of food from the state
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procurement agency and hindering the growth of producer cooperatives

(Castro, 1989, p. 56). But the Cuban president appeared resigned to risking these problems again for the sake of stimulating more food production, noting that the government lacked the capital to re-establish the
parallel market active during rectication, wherein the state bought
produce from co-ops and campesinos at a higher price than acopio and
sold it at a price between the rationed and free market prices (Castro,
1996). The markets were also intended to soak up some of the excess
money in circulation, undercut the black market, relieve the government
of some of its distributional burden, and, in the case of the industrial/
artisanal market, provide a distributional outlet at market prices for both
self-employed production and state-supplied commodities, such as imported used clothing. In 1999, the government nally re-established the
parallel agricultural market, supplied primarily by state farms.
Promotion of state enterprise self-nancing and managerial autonomy. In
a bid to increase rm efciency and reduce state subsidies, the Cubans
began a serious effort in 19941995 to require rms to cover their costs
from their sales. Beginning with joint ventures with foreign investors and
Cuban rms earning foreign exchange, rm managers were given increased control over input sourcing, foreign trade, investment, output mix
and pricing and the size and remuneration of the labor force. A particularly effective innovation required all rms to achieve a balanced budget
in foreign exchange and permitted Cuban rms to trade inputs priced in
foreign exchange directly with one another. A Foreign Exchange Control
Commission, established in the mid-1980s, received and distributed
foreign exchange to rms according to their approved annual budgets.
Self-nancing in hard currency was intended to act as a hard budget
constraint, encouraging enterprises to innovate to reduce hard currency
costs and increase hard currency earnings. Competing with imports to
source domestic rms promised to raise Cuban efciency (Cepal, 2000;
Gonzalez Gutierrez, 2000).
Combined with the new markets, the move toward decentralized decision
making and nancial controls acted to substantially reduce the scope of
traditional central planning based on material balances, the economywide, quantitatively based administration of rm inputs, output targets and
prices. With multiple actors making investment, import and export,
domestic sourcing, output mix and pricing decisions, central control over
the scope and scale of detailed production is obviously impossible. In 1994,
the government dissolved Juceplan, the central planning agency established
67
in 1960, whose operations had already been curtailed during rectication,

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

import-, capital- and technology-intensive industries as nickel mining and
petroleum production. All foreign investment furnished critically needed
hard currency.
The immediate results of the 1994 stabilization program and the complementary structural reforms were spectacular. Largely as a result of the
UBPC saving in state farm subsidies, but also helped by substantial revenue
gains, the scal decit was cut from 30.4% of GDP in 1993 to only 7% the
following year. The dramatic cut in the decit slowed the rate of growth of
the money supply and some of the monetary overhang was absorbed in
higher state-set prices and, beginning in late 1994, the new supply of products in the free farmers and industrial/artisanal markets. Monetary liquidity
declined rapidly from 66.5% of GDP in 1993 to 48.8% the following year.
The contrary movements in the relative supply of and demand for the peso
and the legalized dollar acted to quickly stabilize the exchange rate, which
rose to an annual average of 32:1 in 1995 and 19:1 in 1996, with minor peso
depreciation since then. Consumer prices fell sharply in 1995 as the new
markets and the legalized dollar undercut the underground economy.
Remarkably, the Cuban economy eased back toward growth in 1994, despite the scal and monetary tightening, as the new hard currency supply
helped boost retail sales and nance the petroleum imports to increase
power generation and manufacturing output Cepal, 2000, Table A1).
By 1996, the third consecutive year of growth, a solid economic recovery
appeared to be underway. Led by a good sugar harvest, robust tourism
growth and strong investment in construction and mining (including crude
oil production), Cuban GDP soared 7.8% that year as the scal decit
declined to 2.5% of GDP and consumer prices fell ve percent (ONE, 2000,
Tables III.1, IV.4; Cepal, 2000, Table A1). The open unemployment rate
began a decline from its 1995 peak of 7.9% that continued through the
remainder of the decade (Cepal, 2002, p. 159). Growing nickel, cement and
cigar exports helped pay for vital fuel, machinery and agricultural imports
and a surge of remittances from Cuban expatriates netted hundreds of
millions of additional dollars annually. Direct foreign investment in tourism, nickel mining, petroleum, power generation and consumer goods manufacturing helped nance the relatively small but persistent current account
decit. [W]e have managed to halt the abrupt and severe economic decline
and have even initiated a growth dynamic under the most difcult imaginable conditions, the Cuban Communist Partys fth congress economic
resolution declared with justiable pride in late 1997 (Partido Comunista de
69
Cuba (PCC), 1997, p. 13; authors translation). The resolution strongly

endorsed the liberalizing measures undertaken without signicantly extending them, stressing the importance of achieving state rm solvency and
efciency and gradually removing wage and price subsidies.
5. THE NEW CUBAN ECONOMIC MODEL:

PROBLEMS AND PROSPECTS
Is the new Cuban economic model viable? In the decade since the Castro
government swallowed its limited dose of capitalism, the economy has performed adequately, though hardly spectacularly, by conventional macroeconomic measures. From 1994 to 2003, real GDP grew at an annual rate of
3.4%, higher than the Latin American and Caribbean weighted average of
2.3% (Cepal, 2004b, p. 530). (Cuban growth also exceeded average regional
growth during the seven years through 2000, before Argentinas economic
collapse drove the regional average down in 20012002.) Reecting Cubas
greater vulnerability to external shocks (principally, weather, commodity
prices, tourism ows and U.S. policy), growth is more volatile year-to-year
than it was in the days of central planning and Soviet aid. Weather shocks,
for example, explain much of the difference between rapid growth in 1996
and static output in 1998, while a sharp drop in international tourism and
three powerful hurricanes in 20012002 contributed to the sluggish growth
rate of 1.2% in 2002 (Cepal, 2004b, p. 530). (The Cepal gures are based on
1995 prices and differ somewhat from the ofcial Cuban gures.) Growth
accelerated to 5.4% and an extraordinary 11.8% in 2005, stimulated by
booming exports to Venezuela, robust social spending, and vigorous activity
in the construction, hospitality, transportation, warehousing and communications industries (ONE, 2006, Table IV.2). (Cuba changed its method of
calculating GDP in 2004 in an effort to better account for the value of free
and subsidized goods and services provided by the state, so the 2004 and
2005 GDP gures are not comparable to previous years.)
Other macroeconomic indicators are mixed. From 1996 to 2004, the
unemployment rate declined steadily to a low of 1.9% as state employment
grew modestly (shifting from manufacturing to tourism-related services) and
the private sector created hundreds of thousands of new jobs (ONE, 2002,
2003, 2006, Tables V.1, V.2; Cepal, 2004a, Cuba Table 1). Selective price
controls combined with a sustained rise in the supply of consumer basics
succeeded in keeping consumer price ination at modest rates during this
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period. The Castro government also undertook the scal reorganization

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

The Castro government has also made little progress toward ending monetary and exchange rate dualism. Permitting Cubans to freely hold and
exchange dollars worked very well to stabilize the peso, encourage remittances, stimulate production and replenish the governments foreign
exchange reserves, as noted above. The principal cost usually associated
with dollarization losing national control of the money supply is less
weighty in contemporary Cuba than are the social and political costs.
Monetary policy as practiced by central banks in capitalist countries
encouraging changes in private investment and consumption by manipulating the money supply to raise or lower the interest rate or market price of
money plays no role in the Cuban economy. The government sets the
interest rates banks charge rms administratively and uses direct controls
over prices, output, investment and foreign exchange to guide domestic
production. Although the peso exchange rate and dollar-priced consumer
and producer goods are vulnerable to some price volatility with the ebb and
ow of dollars into Cuba, this problem is minor compared to the economic
benets of Cubas dollarization policy. A more serious cost is diversion of
resources toward dollar-generating activities as, for example, when highly
skilled teachers or doctors abandon their professions to take low-skilled jobs
earning dollar tips in the tourism industry (PNUD, 2000). These deskilling
71
employment shifts squander human capital just as Cubas rusting manufacturing plant destroys physical capital.
The dual monetary system has also contributed to undermining Cubas
celebrated social egalitarianism. Cubans with access to dollars or convertible
pesos from work or remittances (estimated at 62% of the population in
1999, including those with only marginal dollar incomes) may purchase a
wide variety of products and services from TRD stores, self-employed
cuentapropistas and black market vendors that are not available in pesos
(Koont, 2004, p. 19). The government has worked to bridge the consumption gap for priority sector state workers (in sugar, petroleum and nickel, for
example) by paying bonuses in dollars or convertible pesos and goods in
kind, but many workers and pensioners must still try to subsist primarily in
the peso economy (PNUD, 2000). Although the Cuban peso goes a long
way in making rationed and price-controlled purchases, the national
currency is valued at only four U.S. cents for public exchanges at the
government-run exchange houses (Cadecas), effectively barring purchases of
dollars or convertible pesos for Cubans with access only to ordinary pesos.
Responding partly to new U.S. efforts to restrict dollar ows to and from
the island, the government has recently moved to tighten central control of
convertible currencies by substituting the convertible peso for the dollar in
consumer and producer transactions on national territory. Beginning in
November 2004, Cubans and foreigners patronizing the TRDs, hotels,
restaurants, taxis and other businesses that formerly took payment in
dollars must pay in convertible pesos, which are sold for hard currencies at
Cadecas and banks. The government also revalued the ordinary peso and
the convertible peso against the dollar by 10% for cash conversions (to
23.4 ordinary pesos and 0.90 convertible pesos). Other hard currencies
retain their values against both forms of peso and the euro will continue to
circulate directly in the tourist zones where it is now accepted. Dollar bank
holdings remain fully guaranteed and dollar cash holdings legal (Resolucion
No. 80/2004, 2004).
Restoring a nationally issued currency in consumer transactions follows a
similar policy shift in the producer markets. A July 2003 Central Bank
resolution now requires Cuban rms (but not joint ventures with foreign
investors) to sell all of their foreign exchange earnings to their depository
bank for convertible pesos and to substitute these pesos for dollars in
domestic inter-rm transactions (the so-called exports within borders).
Firms must buy foreign exchange (subject to Central Bank approval) from
the bank to nance imported inputs instead of importing directly with their
foreign exchange earnings, as before (Resolucion No. 65/2003, 2003).
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Subsequent measures prohibit rms from demanding payment in convertible pesos for services not related to their primary activity and require
Central Bank authorization in advance of other inter-rm transactions in
convertible pesos (Resolucion Conjunta MEP-MFP, 2004; Resolucion
No. 92/2004, 2004). These measures are intended to reduce dollarization,
discourage non-essential use of foreign exchange and orient production
closer to plan. They also reduce enterprise nancial autonomy, slow international transactions and dampen the potential efciency gains from competing with foreign suppliers.
Replacing dollars with convertible pesos as a medium of exchange retains
the inefciencies and inequities of the dual monetary system. The ability to
buy convertible pesos is effectively restricted to a privileged group of
Cubans with access to hard currencies through work or remittances. Yet, the
system seems a necessary evil under the continuing conditions of acute hard
currency shortage that compels the government to maximize its foreign
exchange collections. Pricing in convertible pesos obliges even Cubans with
high ordinary peso earnings to surrender hard currency in order to make
their purchases, as ordinary peso pricing would not. A unied, market-set
exchange rate somewhere between the overvalued ofcial rate of P1 $1
and the undervalued Cadeca rate of P23 $1 and free peso convertibility
may be desirable for accurate cost accounting and more efcient input
sourcing but must await sustained improvement in foreign exchange earnings. Domestic incomes and output must also strengthen to better absorb
the price increases resulting when the ofcial rate for imports is devalued.
The hard currency constraint remains a heavy fetter on Cuban economic
development. Despite tful bilateral negotiations and some very limited
creditor concessions, Cuba has not yet managed to restructure its accumulated hard currency debt of about $11 billion and still has little access to the
long-term bank loans essential for nancing investment (ONE, 2003, Table
VI.2). Citing the economic damage done to the island by the former Soviet
Unions abrupt termination of trade and aid arrangements, Cuba has also
refused to service its multi-billion-dollar debt (now claimed in hard currency) to the Soviet successor states. Foreign direct investment in Cuba
remains modest and has declined in recent years, leaving the island highly
dependent on trade (principally tourism) and remittances to balance its
international payments. Cubas wobbly nances are also sustained by an oil
import arrangement struck with Venezuela in 2000 permitting Cuba to
nance 20% of its purchases with concessionary long-term credits and by
Operacion Milagro, a Venezuelan-nanced program that sends thousands
of Venezuelans and other Latin Americans to Cuba for eye operations
73
(Rodr guez, 2005; Focal, 2005; Grogg, 2002). The foreign exchange shortage
prevents the island from modernizing its shattered industrial plant and
contributes to many of the hardships and indignities of Cuban daily life,
from shortages of cooking fuel to electric power rationing and grossly
inadequate public transportation.
5.2. Natural Resource Dependence

Fatefully, natural resource exploitation continues to drive the Cuban economy. Policymakers bet well on tourism as a major growth industry early in
the Special Period; aided by Cubas extraordinary natural beauty, comparatively low costs, competent state industrial planning, and foreign direct
investment and facilities management, Cuban tourism grew at a blistering
average annual rate exceeding 15% for both number of visitors and gross
revenue during the 19902000 decade (Gutierrez Castillo & Gancedo
Gaspar, 2002, p.74). After dipping in 2002, the industry set new records of
1.9 million visitors and more than $2 billion in gross revenue the following
year and continues to grow robustly (Rodr guez, 2003b; ONE, 2006, Tables
XIII.1, XIII.11). Surpassing sugar as Cubas leading export by value in
1994, tourism has emerged as an important new source of demand for the
islands depressed food processing, construction, electrical equipment and
wiring, furniture and textile industries (Cuba Industria, 2004; Cepal, 2000,
Tables A38, A107). Tourism now sources an estimated 68% of its inputs
domestically compared to only 18% in 1990 and employs an estimated
300,000 Cubans directly or indirectly (Gutierrez Castillo & Gancedo
Gaspar, 2002, pp. 75, 77; Rodr guez, 2003a, p. 220).
Nickel and petroleum production round out Cubas dynamic, natural
resource-based industrial troika. Buoyed by Canadian conglomerate
Sherritt International Corporations large investments in a nickel-cobalt
mining, processing and marketing joint venture with the Cuban state, nickel
and cobalt output jumped almost 80% from 1995 to 2001 and the metal
dethroned sugar as Cubas leading export good by value in 2000, ending a
reign of more than two centuries (ONE, 2002, Table VIII.4). As a low-cost
producer with ample reserves, Cuba is well positioned to continue to benet
in the near term from the high world prices driven by Chinese demand and
China herself recently announced plans to invest directly in Cuban nickel
production. Meanwhile, Canadian and European oil companies operating
under risk and production-sharing contracts have led a spectacular quintupling of Cuban oil and gas production since 1989 (ONE, 2003, Table VIII.1).
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Domestic petroleum of about 68,000 barrels per day now meets about onethird of total national demand for crude, saving Cuba hundreds of millions
of dollars annually in hard currency imports (Cepal, 2003, Cuba, pp. 12;
Romero, 2004; Focal, 2006). Large public and foreign investments are converting power plants and some factories to burn Cubas heavy, high-sulfur
(and, unfortunately, highly polluting) crude and the island achieved 83%
energy self-sufciency in electrical power production in 2003 (Rodr guez,
2003b). With potentially ample deep-water reserves of high-quality petroleum in the Gulf of Mexico now under exploration, Cuban oil has substantially eased the islands foreign energy dependence.
The petroleum and nickel booms are helping to compensate for some of
the export losses resulting from the vertiginous and almost certainly irreversible decline in Cuban sugar production since the early 1990s. As late as
the fth party congress in 1997, Cuban policymakers envisioned restoring
sugars strategic role in the Cuban economy with minimum annual production of 7 million tons, even as the dearth of mechanical and chemical
inputs held crude sugar output to 4.1 million tons that year (PCC, 1997,
pp. 16, 44; ONE, 2002, Table VIII.3). Only in June 2002, after continued
declines in Cuban harvests and milling productivity, ruinously low world
prices and heavy nancial losses among the sugar-producing UBPCs, did
the Cubans decide to radically downsize and restructure the storied industry. The new plan targets annual production at about 4 million tons to be
produced at an efcient average cost of 3.5 cents per pound by concentrating production in the most efcient lands and mills. Methods include converting about half of total sugarcane acreage to other uses (cattle ranching,
orchards, lumber plantations and vegetable crops), closing 70 inefcient
mills (almost half of the total), and reducing the workforce by about 100,000
workers, all to be offered government retraining and job relocation assistance (Rodr guez, 2003a, p. 219; Focal, 2003; Pollitt, 2004, pp. 97100). The
Cubans also hope to increase ethanol production to take advantage of
growing demand for this sugar derivative. But the disastrously poor production of the last two harvest years 1.3 million tons in 20042005
and 1.2 million in 20052006, partly affected by drought and hurricanes
suggests Cuba may have difculty achieving its relatively modest new output
target with the reduced land, labor and milling inputs the plan envisions
(Perez, 2004; Rodr guez, 2003b; Focal, 2004, 2006).
Just as the sustained favorable trade terms for Cuban sugar in the 1970s
and 1980s justied a strong productive commitment to the commodity, so
the present grim prospects for Cuban exports validate the Castro governments historic (if somewhat belated) disinvestment from sugar. Booming
75
world production, led by Brazil, and stable per-capita consumption have

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

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

It is difcult to nd positive news in Cuban manufacturing. The sector
remains deeply depressed, with overall output of manufactured goods
(excluding the sugar industry) at just over half the 1989 volume. Devastated
industries run the gamut of vital capital, intermediate and consumer products, including agricultural machinery, transportation equipment, construction materials, basic steel, fertilizers, paper, glass bottles, textiles, garments
and footwear (CEE, 1990, Table VI.21; ONE, 2006, Tables IX.1, IX.4). As
policymakers continue to channel very scarce investment funds to tourism,
energy production, housing and transportation, manufacturing is starved of
the capital needed to offset depreciation, much less nance the plant
redimensioning and equipment upgrading required for efcient import and
export substitution. Tellingly, Cuban xed capital formation is heavily
concentrated in construction, with machinery and equipment accounting for
77
a mere 6% of new xed capital in 2002 compared to a Latin American

average of 35% (Cepal, 2004b, Table 78). At around 10% of GDP, Cuban
gross capital formation is still little more than one-third of its 1989 ratio and
far below what is needed to industrialize (ONE, 2006, Tables IV.1, IV.5;
Cepal, 2000, Tables A2, A6).
Much of Cubas installed heavy industrial plant in steel, machinery,
tires, paper and industrial plastics, for example is probably permanently
lost given the huge capital injections required to raise efciency and convert
sugar industry product lines (such as cane combines and mill boilers) to
other outputs. In a world market awash with low-priced product, Cuba may
also nd it uneconomical to resuscitate its import-intensive and all but
moribund textile, garment and footwear light industries. Dynamism in
contemporary Cuban manufacturing is found primarily in tourist industry
inputs, as shown by output gains relative to 1989 in telephone cables,
assembled color televisions, bathroom soap and selected processed foods.
Reecting their priority status for investment funds, the Cuban pharmaceutical and veterinary drug industries have also done well, more than
tripling output measured in nominal peso value terms from 1989 to 2005
(CEE, 1990, Table VI.21; ONE, 2006, Table IX.4).
In sum, with important exceptions in addition to pharmaceuticals, the
chemical industry (with many forward linkages) has held its own the nearterm future of Cuban manufacturing appears to lie in comparatively low
value-added, low-tech consumer goods typical of rst-stage import substitution. The Castro government continues to ght a rear-guard action to save
its plant developing modest new export markets in the Caribbean and
Central America for steel, cement, agricultural and medical equipment,
electrical cable, water pumps and gas stoves, and actively seeking foreign
investment in a broad range of heavy and light industries but seems to
harbor few illusions about Cuban prospects as a manufacturer of standardized products in the contemporary world market.
Indeed, Cuban economic policy documents seldom mention manufacturing and policymakers have yet to publicly articulate any global plan to
reorganize and develop goods-producing industries. We have moved from
a sugar-based economy to one based on tourism and other services,
declared Minister of Economy and Planning Jose Luis Rodr guez with some
hyperbole in his annual address to the National Assembly in 2003 (Focal,
2003). Given the countrys continuing serious nancial bind, of course, the
Castro government has little choice in the near term but to continue its
present strategy prioritizing tourism, traditional primary sector exports and
food and energy import substitution. Nevertheless, it is surprising that a
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regime still formally committed to economic planning has not elaborated a

broader-based, more ambitious plan for long-term development, identifying
possible comparative advantages in manufacturing and advanced services.
The economic cost of overdependence on sugar and nickel exports subject to
vertiginous price oscillations and declining terms of trade against imported
manufactures and services is certainly familiar to Cubans. Tourism, Cubas
lifeline during the Special Period has its own limitations as a national
economic engine. The spectacular growth in foreign visitors is likely to slow
as Cubas primary Canadian and European markets mature. Hotel and
restaurant employment is predominantly low skilled, although these and
other tourism-related industries do support a modest number of higher
skilled jobs both directly and indirectly.
6. WHITHER CUBAN SOCIALISM?

While still beset by daunting problems, the Cuban economy has stabilized
and there is no reason to believe that output and living standards will not
continue to grow modestly under present macroeconomic policies. The
economy passed a much-anticipated milestone in 2005, nally recovering
and surpassing its pre-crisis output. The island remains vulnerable to
external political and economic shocks; U.S. President George W. Bushs
recent restrictions on remittances and visits to Cuba by Cuban-Americans is
a relatively minor nuisance, but the removal of President Hugo Chavez
Fr as and suspension of concessionary Venezuelan oil exports and imports
of Cuban professional services would have serious repercussions for the
island. However, the much-anticipated easing of the U.S. economic
embargo increasingly favored across the U.S. political spectrum would
be an enormous boon to the islands tourism, trade and direct foreign
investment, substantially relieving Cubas foreign exchange constraint.
A deeper question is whether the Castro governments carefully circumscribed policies to decentralize economic decision making through markets
and other means offer a coherent, sustainable and reasonably efcient
solution to the microeconomic problem of production and distribution.
Furthermore, the government still insists that Cuban society is socialist,
with a centrally planned socialist economy that uses regulated markets and
money-mercantile relations along with a progressively decentralized system
of rm management (Cepal, 2000, p. 97). Is this system identiably socialist in any meaningful sense? Are there viable socialist solutions to the
islands economic problems? The rich history of market socialist theory
79
and practice, from the early Soviet Unions New Economic Policy (NEP)
to Chinas experiments in the 1990s, offers an interesting context for
assessing the Cuban model.
6.1. Market and State Distribution

Cuban producers (workers, farmers and state enterprise managers) have
generally responded to the incentives introduced in the mid-1990s much as
policymakers had anticipated. The complex and evolving system of regulated
and free markets exchanging in pesos and dollars (now convertible pesos) has
raised legal prices, reduced black market prices and stimulated new supply
from independent producers (campesinos and the self-employed), agricultural cooperatives and state enterprises. A Cuban consumer can now legally
purchase goods and services in six different venues: (i) the state stores and
other distribution points for rationed basic necessities (essential foods
covering about half of requirements, natural gas for cooking) and priceregulated, government-supplied services (utilities, personal and repair services, entertainment, etc.), all sold in ordinary pesos; (ii) the price-regulated,
parallel farmers markets (including the local urban agriculture stalls and the
larger state markets or placitas) exchanging in pesos; (iii) the free farmers
market (mercado agropecuario) exchanging in pesos at market prices; (iv) the
free industrial, artisanal and service market (MAIS), selling a wide variety of
mostly Cuban-made products and services (used clothing, manufactures and
services from self-employment, state enterprise consumer durables and nondurables) at market prices in pesos; (v) the tiendas de recuperacion de divisas,
selling a diverse range of better-quality Cuban and imported goods (shoes,
clothing, food, toys, domestic appliances, furniture, hygienic products,
cosmetics) in convertible pesos at regulated but essentially market prices
(plus a large sales tax); (vi) direct sales from self-employed artisans and
service providers (including the paladar restaurateurs) in pesos or convertible
pesos at market prices. In addition, schoolchildren, pensioners and some
workers receive free or nominally priced meals at schools, health centers and
workplaces and certain workers receive incentives in the form of products
distributed free or at subsidized prices at the workplace. Finally, Cubans can
and do purchase a wide variety of goods (usually stolen from state enterprises
or cooperatives) and unlicensed services on the black market (Barreiro
Pousa, 2001; Cepal, 2000).
Consequently, non-market and regulated market nal-product distribution in contemporary Cuba is now effectively restricted to part of the
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islands food and service output (including free education and health
services, of course) while most consumer goods and an important share of
services exchange at essentially free market prices. The TRDs and free
farmers markets have been particularly dynamic in recent years, accounting
for rapidly growing shares of household consumption during the 19962001
period. But even as market distribution expands, the state retains its dominant position as supplier (producer and importer) of goods and services to
Cuban households. In 2005, the state market (including all governmentsupplied services) supplied 77% of the value of nal household consumption, the free farmers market 8.4%, the self-employed 6.3% and other
sources (including the TRDs and household self-supply of agricultural
products) 8.3% (ONE, 2006, Table IV.4). The state is the sole supplier to the
TRDs and the dominant supplier to the MAIS and the parallel farmers
markets. It has steadily increased its presence in the free farmers market,
now contributing more than 50% of sales (compared to 11% in 1995) as
cash-strapped state farms seek to compensate for subsidy cuts with highpriced sales (ONE, 2003; Cepal, 2003, p. 349; Marrero Prieto, 2002; Cepal,
2000).
6.2. Private Production and Rising Inequality

Income, employment and sales trends suggest the new free markets are
stimulating private production. Private national employment comprising
landowning farmers, individual usufruct farmers, self-employed workers
and employees of non-governmental associations and foreign rm branch
ofces more than doubled from 1996 to 2005 to comprise 14% of total
Cuban employment (ONE, 2002, Table V.1; ONE, 2006, Table VI.2).
Meanwhile, income accruing to independent campesinos a group whose
numbers have remained stable in recent years rose at an astonishing
average annual rate of almost 26% from 1995 to 2001 in nominal peso terms
while that received by the non-agricultural private sector increased at a
blistering 16% average annual rate over the same period, according to
government statistics. These gures compare to 5% average annual growth
in salary and other remuneration accruing to salaried workers during
these six years (ONE, 2002, Table IV.1). In constant prices, household
purchases in the free farmers market doubled from 1996 to 2001 (ONE,
2002, Table III.5).
The reintroduction of the farmers market, expansion of self-employment
and growth in the share of dollar-priced consumer goods distribution has
81
sharply worsened income and consumption inequality in Cuba. One

researcher estimated that Cubas peso income Gini coefcient (a commonly
used measure of income inequality where 0 represents perfect equality, i.e.,
all households receive the same income, and 1 perfect inequality, i.e., one
household receives all of national income) fell from 0.55 in 1953 to 0.22 in
1986 and then rose back to 0.55 in 1995 (Fabienke, 2001, pp. 103104).
Some of the greatest income disparities are between successful private producers (cuentapropistas and private farmers) and low-paid state rm
employees in non-export activities, such as education and health services.
Income inequality is also growing within the state sector as an inevitable
consequence of the new efforts to raise productivity (especially in priority
industries) by linking a higher share of wages directly to output. In 2002,
79% of Cuban workers were reported to receive some productivity-based
pay and almost a third received bonuses in foreign exchange (Cepal, 2003,
Cuba p. 5).
While offering market incentives to private producers, the Castro government has done its utmost to control the scale and scope of this production
and check rising income inequality with strict regulations that are vigorously
enforced. Private campesinos are still required to sell a quota of their production at relatively low, xed prices to the state collection agency and their
free market sales exclude important products in short supply or with high
export value, among them, beef, milk, potatoes, eggs, coffee, tobacco and
cacao (Cepal, 2000; Marrero Prieto, 2002). Local government representatives at the markets collect a sales tax of up to 15% of the anticipated value
of sales from retailers, paid in advance, and campesinos also pay personal
income tax. The government has also sought to undercut high free market
prices and proteering by operating the parallel markets, with only modest
success, so far.
The Castro government has also kept a tight rein on the self-employed
cuentapropistas, restricting licenses to about 170,000 workers nationwide
(ONE, 2006, Table VI.2). The number of paladares, which can be quite
lucrative and are taxed especially heavily, is reported to have declined in
recent years (Batista, 2003; Cepal, 2000). Rejecting proposals to permit
small private businesses to hire non-family wage labor, the government has
recently imposed additional restrictions on self-employment, suspending the
granting of new licenses for forty occupations effective October 2004,
including paladar restaurateurs, ambulatory food and drink vendors and
fabricators of common household hardware and other goods (Resolucion
No. 11/2004, 2004). Cuban policymakers reluctance to permit the sort of
small businesses allowed (subject to limits on total employment or capital
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assets) in some other erstwhile centrally planned economies (Poland,

Hungary and the German Democratic Republic, among them) might be
attributable to a reluctance to worsen social inequality and engender a class
base for additional market liberalization. ([S]mall-scale production engenders capitalism and the bourgeoisie continuously, daily, hourly, spontaneously and on a mass scale, Lenin famously warned (Lenin, 1977, p. 293).)
In sharp contrast to the government-directed, progressive restoration of
capitalism underway in China and Vietnam, Cubas top leadership seems
determined to demonstrate that a state-run economy with a strictly subordinated private sector is viable.
Foreign direct investment, the third major source of private production in
Cuba, has responded to the new market incentives in important but limited
ways. The island presently benets greatly from FDI in the all-important
natural resource industries generating or saving convertible currency
tourism, nickel and petroleum. But in 2002, seven years after investment
liberalization, cumulative FDI stood at a relatively modest $2.6 billion
(compared to $6.3 in Costa Rica and $7.2 billion in the Dominican
Republic, both with much smaller populations and economies) and foreign
capital has little presence in manufacturing despite standing Cuban joint
venture bid solicitations in a wide range of important industries, including
sugar derivatives (Cuba Industria, 2004; United Nations Conference on
Trade and Development (UNCTAD), 2004, Annex Table B.3; U.S.-Cuba
Trade and Economic Council, 2004b, p. 1). Employment in joint ventures
totaled only 27,100 in 2002, less than 1% of total Cuban employment, and
has been roughly stagnant since 1999 (ONE, 2003, Table V.1). Cuba is not
regionally competitive nor does it aspire to be in low-wage, laborintensive manufacturing, and the U.S. embargo remains a huge barrier to
export-oriented FDI. The Torricelli law and the 1996 HelmsBurton law
(Cuban Liberty and Democratic Solidarity Act of 1996, permitting U.S.
citizens with claims to Cuban property nationalized by the revolution to
pursue U.S. lawsuits against investors who trafc in this property and
subjecting violators to exclusion from the United States) have also raised the
cost of investment despite blocking legislation in the major investor countries to protect their rms. The U.S. State department has sanctioned
Canadas Sherritt International and a Panamanian company under Title IV
of the act (excluding senior executives, substantial shareholders and their
families from the U.S.) and the law has succeeded in discouraging some
potential investors and obliging others to negotiate settlements with claimants under the act (in 1997, the Netherlands STET International agreed to
pay ITT Corporation $25 million to use telecommunications assets
83
nationalized in 1960). A Cuban-American-owned company claiming beachfront property in Holgu n province is presently pursuing claims against
Spains Sol Melia and Jamaicas SuperClubs (U.S.-Cuba Trade and
Economic Council, 2004a).
Until U.S.-Cuban relations thaw, foreign investment is likely to continue to
ow at modest rates primarily into the natural resource sectors. Along with its
attractions a well-educated labor force, political and macroeconomic stability and low corruption Cuba has a number of market and institutional
liabilities from an investors viewpoint, including low domestic purchasing
power, high labor costs, a state-dominated economy and continued governmental and popular commitment to socialism. The number of Cuban-foreign
joint ventures has in fact fallen in recent years from 403 at end-2002 to 258 at
end-2005 as the rebounding economy encourages the government to drive
harder bargains with investors in non-priority sectors (Focal, 2003, 2006).
Cuba must nd ways to break the foreign exchange stranglehold and
obtain the nancing indispensable to recovering production in manufacturing and agriculture, increasing the energy supply and improving the
material standard of living. Barring a great stroke of luck a breakthrough
biotech product or discovery of large offshore petroleum reserves, for
example the solution must lie in gradually increasing and diversifying
manufacturing and service exports. For reasons discussed, Cuban cannot
rely on substantial increases in foreign direct investment or bank lending to
meet its nancing needs. The rub, of course, lies in the great difculty in
identifying and developing high-value-added goods and services in which
Cuba might have comparative advantage and gain access to world markets.
Cheap mass production, desirable as it may be, is clearly not the way forward for Cuba. But Cubans are nothing if not innovative, recently developing new, potentially exportable products ranging from medical services,
sugar derivatives and hotel management software to the decidedly low-tech
but efcient Cocomovil cargo tricycle. In an historical irony, intellectual
property may prove a rampart of Cuban socialism.
Cubas difculty is greatly compounded by its isolation and weak bargaining position for winning access to technology and markets. The privileged access to major export markets and negotiation of domestic sourcing
technology transfer agreements with foreign investors that helped such
countries as South Korea and Brazil industrialize are obsolete today for all
but the strongest, namely China and India, whose leverage is their enormous
domestic markets. Progress in Cuba can only be gradual and will require
continued active and exible deal making with foreign industrial and
commercial capital.
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6.3. Market Incentives for State Enterprise

The Cuban initiatives to improve state enterprise efciency, output quality
and product mix by increasing rm-level managerial autonomy and deepening market incentives recall other famous historical efforts to revitalize
post-capitalist economies, among them, Hungarys post-1968 New Economic
Model (goulash socialism), the NEP and perestroika bookends to six
decades of highly centralized Soviet planning, and Chinas ongoing campaign to build a socialist market economy with Chinese characteristics.
Since the onset of the 1990s crisis, Cubas pressing need was and is to stanch
the scal drain caused by insolvent state rms and free scarce resources to
maintain the popular safety net of basic goods and services. To this end, the
Cuban leadership has made rm self-nancing and protability a priority
objective, at the cost of diluting central control over investment and output
and countenancing new managerial and labor controls and incentives characteristic of capitalist production. Although a decentralized system of planning remains in effect, requiring enterprises to strike annual output contracts
with industrial branch ministries or provincial administrative councils, the
locus of Cuban economic decision making has clearly shifted toward the
individual rm director (Comite Ejecutivo del Consejo de Ministros,
Republica de Cuba (CECM), 1998).
In the vanguard of this movement are the gradually growing number of
rms operating under the Sistema de Perfeccionamiento Empresarial developed experimentally in the late 1980s and reafrmed at the 1997 Fifth Party
Congress as the managerial model for Cuban state enterprises. The Cuban
leadership has moved deliberately to bring rms into the SPE system
about 600 so far, including those in the strategic petroleum, nickel and
electricity industries requiring candidates to demonstrate a sound accounting system, promising output markets and the capacity to self-nance
through retained earnings or bank credit (Cepal, 2004a, Cuba p. 4). Though
subject to the state output contract specifying minimum targets for selected
goods and services, the SPE rms appear to operate in important ways like
capitalist enterprises. The rm director exercises top decision-making authority, strives to maximize prot, freely sources inputs (fuel and foreign
exchange are allocated centrally), is primarily responsible for determining
output price, quantity and mix, sets performance-based pay incentives and
productivity norms, and determines the overall size and occupational structure of the enterprise workforce. Worker and managerial bonus pay is
linked to rm protability and the director is responsible for deciding the
rms investments, which are typically nanced by retained earnings or bank
85
credit and are subject to higher-level government approval. Although

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

overvalued ofcial exchange rate used in Cuban cost accounting. Using
shadow prices to estimate market prices does not solve the informational
problem since the world market prices used to calculate the shadow prices
may not reect local resource conditions. The technical skills and mindset to
run an enterprise like a capitalist rm tend to be in short supply in formerly
centrally planned economies, and this is certainly the case in Cuba; moreover, government appointment of rm managers may not select well for
those qualities (Del Monte y Navarro, 2001). Hardening the rms budget
constraint to permit bankruptcy, liquidation and mass layoffs can be
politically costly, encouraging market socialist governments to retain
direct or indirect subsidies to inefcient rms and diverting managerial
energy from cost cutting to subsidy-seeking. Despite the reductions in recent
years, 3.6 billion pesos in transfers to rms still accounted for 30% of total
spending in the 2004 budget, although much of this went to state farms, the
UBPCs and other producers of basic necessities to offset below-cost consumer prices (Millares, 2003; Ley No. 98, 2003). Lacking an ownership stake
in the enterprise and usually subject to little competition, managers are
prone to over-price output, maximize short-term prots, under-invest in the
enterprise and distribute an excessive share of residual income to themselves
and their workers as bonuses. Their independent output choices may also
diverge from the social interest. In addition, greater autonomy also brings
greater opportunity for managers to engage in fraud and illicit selfenrichment, although the absence of state rm privatizations and severe
restrictions on private enterprise in Cuba remove a major incentive for the
sort of asset stripping of state enterprises observed in China, for example
(Hart-Landsberg & Burkett, 2004). A hybrid system may thus compound
inefciency, responding neither to the discipline of the plan nor the discipline of the market.
Inequality of power at the workplace is also growing as the SPE model
strengthens managerial power at the rm level over hiring and dismissal,
job content and work rules, and wages and bonuses. The Cuban economic
literature is awash with discussion of capitalist-world managerial and
human resource theory, seeking to motivate workers without empowering them (see, for example, recent articles in Economa y Desarrollo, a leading journal published by the University of Havanas economics department).
The emphasis on authoritarian management may well deliver better immediate results in Cubas determined bid to improve output and efciency compared to a managerial model with greater worker control.
(E. A. Preobrazhenskys summary of the Soviet NEP of the 1920s may be
87
apropos: The slogan of this period was: expand production at all costs, at
the least possible expense. (Preobrazhensky, 1973, p. 44)). But the power
disparity may also foster the perception of class difference and antagonistic
interests between workers and managers and discourage worker loyalty to
the rm and commitment to its social contribution.
In sum, rm management decentralization and market incentives introduce a host of potential new obstacles to socially efcient production. Data
have not been made available on the performance of the SPE rms
compared to traditionally managed state rms. The exibility and incentives
given to the SPE rms are likely to lower costs, but there are limits to the
efciency gains achievable in an economy deprived of both modern capital
equipment and the cudgels used to discipline labor in capitalist low-income
countries (dismissal, unemployment, hunger and homelessness). Government auditors reportedly discovered nancial irregularities in a full third of
the state rms examined in 2003, including enterprises owned by Cubanacan, Cubas leading sociedad anonima in the tourism industry (Focal,
2004). Acknowledging the difculties, the Cuban authorities have proceeded
cautiously with the SPE program which still covers fewer than 15% of
domestic rms and recently tightened control of rm output mix and
access to foreign exchange, as noted above (Del Monte y Navarro, 2001,
p. 38; Cepal, 2004a, Cuba p. 4).
As these developments show, Cuban policymakers are still struggling to
nd the right balance between centralism and decentralism, market and
plan, efciency and equity consistent with their vision of socialism and the
islands brutally circumscribed resources. The present model is rife with
tensions and shortcomings but appears to be working according to some
important socialist criteria of success. Enough value is being created, under
humane and dignied working conditions, and equitably distributed to
secure basic necessities for all Cubans and a gradually rising (though still
inadequate) material standard of living compared to the crisis years of the
early nineties. The constitutionally guaranteed rights to employment, education and health care are still honored. Despite decentralization, strategic
productive decisions, including investment in new and existing enterprises,
are determined politically, or planned. Markets play a subordinate role in
allocating resources, and the waste and duplication of unplanned production responding to market signals is attenuated. It is not possible to get rich
by owning productive resources worked by others. The present Cuban
leadership is committed to these pillars of socialism, which enjoy broad
popular support, even as it continues to experiment with improved systems
of state rm management and market distribution of consumer goods.
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Cubas determination and success in preserving some fundamentals of a

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

Cubas socialist development confronts staggering ideological and material
obstacles. Fidel Castros consummate leadership and prestige and the deep
well of Cuban pride in their nations revolutionary achievements and success
in standing up to the U.S. empire have played an incalculably important role
in preserving the system through all the hardships of the Special Period. It
may well be wondered whether Cuban socialism will survive the loss of the
revolutionary leadership, especially Fidel Castro. Capable as it is, the
younger generation of Cuban leaders (including National Assembly
89
President Ricardo Alarcon Quesada, Foreign Minister Felipe Perez Roque

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

assemblies charged with local social, economic, judicial and political administration are non-partisan and competitive, with candidacy open to any
adult local resident nominated in open assembly by another resident.
Unpaid delegates (representing about 1,000 voters) serve part-time during
their two-and-a-half year terms and are subject to recall election at any time
if demanded by 20% of district voters or 20% of their fellow delegates.
(A paid administrative council, nominated externally by the local mass
organization leadership and ratied by the assembly delegates, conducts
assembly business between sessions, about six per year.) Each delegate
holds semi-annual public accountability sessions to report on his or her
efforts on behalf of the district and to take specic proposals and complaints
(planteamientos y quejas) from constituents, which must be specically
addressed in the next assembly session. Public participation in elections and
accountability sessions tends to be very high, and the system seems to work
well in voicing and addressing community needs (Roman, 1999).
But paternalism and restricted civil liberties also characterize the Cuban
system. Direct democracy ends with the municipal assembly delegate.
Elections to the provincial and national assemblies are direct but noncompetitive, featuring single candidates selected by the central leadership
(government, party and mass organizations) with municipal assembly participation and vetting. The National Assembly has nominal legislative power
but meets only twice a year for a few days at a time; it elects the Council of
State, given lawmaking power by decree when the assembly is out of session,
and the Council of Ministers, the top executive body. Fidel Castro is president of both the councils (the head of state and the head of government, as
required by Cuban law) and rst secretary of the Cuban Communist Party,
Cubas sole legal political party and the primary formative organ for the
islands political leadership. There is substantial freedom of expression and
debate in Cuba at the grassroots level, and citizens do not hesitate to
criticize their leaders, from Fidel Castro down. Cubans are not a fearful,
repressed people. Yet, the regime monopolizes the institutional instruments
for political expression and organization (media, political parties, trade unions and other mass organizations) and permits only limited debate and no
formal opposition within these institutions. It is indeed difcult to imagine
Cubas survival as a post-capitalist state through 45 years of unremitting
U.S. aggression without Fidel Castros extraordinarily able leadership in a
unied and disciplined central government and wartime restrictions on civil
liberties. Nevertheless, paternalistic government stulties the active working
class empowerment and agency essential to the socialist project.
91
In the nal analysis, the fate of Cuban socialism will be decided by popular
commitment to socialist values and how these are realized in practice. Cubans must have condence that their system is capable of material, social and
political progress has a future and must consciously choose socialist
values over the dream of getting personally rich, capitalisms lure. They need
a clear understanding of how capitalism works in Latin America and how it
is likely to work in Cuba should it be reinstated. In the present historical
period, it will be very difcult for socialism to prevail in the battle with
capitalist values, especially should the U.S. move (intelligently) toward dollar
diplomacy in the post-Castro period. Continuing material hardship, rising
inequality, examples of lucrative private production, the presence of comparatively well-off foreign tourists, strong U.S. ties and a natural predilection
perhaps especially strong among the young and within the professional/
managerial strata to be fully part of the world community and participate
in the dominant system create grounds for tacit or active support for a
program of market deepening and eventual capitalist restoration. It is patently unrealistic to expect a small, modestly endowed island nation to carry
the ame of socialism alone. Yet, from the hour Fidel Castros tiny force of
rebel exiles beached their boat in Oriente province in early December 1956,
the Cuban revolution has challenged the odds and won. Confronting an
immensely challenging future, Cubas intrepid example of socially centered
development stands as a monumental historical achievement.
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U.S. NARCOCOLONIALISM?
COLOMBIAN COCAINE AND
TWENTY-FIRST CENTURY
IMPERIALISM
Oliver Villar
ABSTRACT
For Colombia, cocaine is a product that is sold for profit in the United
States. Mainstream political economy, let alone the other social sciences,
has little to say about the process of extraction of surplus value in the
production and distribution of cocaine, in other words, how cocaine is
exploited for profit. The paper argues that the conventional framework,
which locates profits generated from the cocaine trade in an economic
model of crime shields a much deeper reality than simply money laundering as a legal problem. The central argument is that the cocaine trade in
general, and the cocaine economy in particular, are a vital aspect of U.S.
imperialism in the Colombian economic system. The paper tackles a critical
problem: the place of cocaine in the re-colonization of Colombia defined
as narcocolonialism and the implications of the cocaine trade generally
for U.S. imperialism in this context. The paper evaluates selected literature
on the Colombian cocaine trade and offers an alternative framework underpinned by a political economy analysis drawn from Marx and Lenin
showing that cocaine functions as an imperial commodity a commodity
ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24003-9
97
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for which there exists a lucrative market and profit-making opportunity.

It is also a means of capital accumulation by what could be termed,
Colombias comprador narcobourgeoisie; dependent on U.S. imperialism.
It is hoped that by analyzing cocaine with a Marxist interpretation and
political economy approach, then future developments in understanding
drugs in Colombias complex political economy may be anticipated.
1. INTRODUCTION
For Colombia, cocaine is a product that is sold for prot in the United
States. Mainstream political economy, let alone the other social sciences, has
little to say about the process of extraction of surplus value in the production and distribution of cocaine, in other words, how cocaine is exploited for
prot. Rather its surplus value is analyzed as money laundering,1 a process associated with globalization, market integration, and technological
innovation that have reshaped both the formal and informal economies
(or illegal, underground economies) of developed and developing countries and of the international economy itself (Hinterseer, 2002). Investigative
journalists draw attention to the global rise of organized crime and the
Maa. In a nutshell, the prots generated from the cocaine trade are seen
as criminal nance derived from money laundering the nancial side of
virtually all crime for prot. But Colombian cocaine is a much more complicated process.
The drug trade, in general, is as old as the Great Powers of Spain and
Britain. Long before processed cocaine, the Great Power of Spain made
great fortunes from the commercial exploitation of the coca plant. Spanish
chronicler, Pedro Cieza de Leon, wrote: There has never been in the whole
world a plant or root or any growing thing that bears and yields every year
as this does y or that is so highly valued (Hargreaves, 1992, p. 42). The
advantages of preserving coca were realized in 1573 when the colonizers
taxed the sinful commodity. Another chronicler, Hernando de Santillan
wrote: Down there [in the coca plantations] there is one disease worse than
all the rest: the unrestrained greed of the Spaniards (ibid ).
In the late 1800s, North American missionaries on the other corner of the
globe lamented the moral and social degeneration wrought by the British
colonial opium trade (Bertram, Blachman, Sharpe, & Andreas, 1996). One
Chinaman was both producer and consumer, and worth two Indians and
four Malays, in value to the state (Turnbull, 1975, pp. 109110). Sir Cecil
Beadon (1872, p. 10), commenting on Indian nances in 1871 when the
U.S. Narcocolonialism ?
99
Indian government was making 9,000,000 annually from opium, pointedly

observed:
Indian nances are in this position that, in a majority of years, you have very serious
decits, and you are constantly borrowing y . Shall we sacrice the whole or any portion of the opium duty? And it seems to me that the present state of the Indian nances is
such as to prevent us giving any answer but one to that question-that we cannot give up
any of the opium revenue; we cannot afford to do so.
Carl Trocki (1990) argues that the decline of the British Empire might have
even begun when the British left the opium business. Like nineteenth
century British imperialism in China, India, and Singapore with opium, is
cocaine today a vital aspect of twenty-rst century U.S. imperialism in the
Colombian economic system in its capitalist form?
Since the Spanish conquistadores, the regions economies have been
shaped by the demands of foreign markets. From silver and gold in the
Spanish era, to the rubber, cotton, tin, and sugar booms of the past century,
the rise and fall of world demand for primary commodities has determined
the fate of the Colombian people (Mintz, 1989; Kawell, 1989). Cocaine has
resulted in a greater degree of regional market integration and incorporation
of Colombia into the world market economy than for any previous export
commodity (Rabine, 1989).2 Cocaine is the latest manifestation of a
centuries-old phenomenon of Colombian dependence on the production of
export commodities for foreign consumption and imperialist conquest for
prot (see Gibson, 2001; Hargreaves, 1992; Mortimer, 1974).
Too much literature on Colombias political economy has neglected this
historical aspect of cocaine. That is not to say cocaine is at the center of
everything in Colombia, only that the political economy of cocaine, within
Colombias political economy, has been important to the social, economic,
political, even cultural, development of the country. Like the nineteenth
century British colonies linked to the opium trade, it is impossible to read
Colombian archival records of twentieth century U.S. imperialism without
encountering coca and cocaine over and over. The statistics and facts show it
to have been ubiquitous at least since the cocaine decade between 1980 and
1989. Such a factor cannot be ignored or denied if we are to advance our
understanding of class and imperialism, as a force in history, that has shaped
the social, political, and economic order of the present unipolar world.
For centuries, the peculiar economic activities of the worlds ruling classes
using underhand methods were understood or dismissed as simply bootlegging. Can the process of extracting the surplus value of cocaine be understood
entirely on the basis of money laundering? As the point of analysis, money
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laundering addresses illegal money generated from the cocaine trade as living
in one world only, an area of the capitalist economy where unlawful economic activity occurs, and what stands between society and this underworld,
is the law, which divides economic activity into acceptable (legal) and unacceptable (illegal) forms of conduct. With increasing globalization, $2 trillion
a day is being laundered through capitalisms international mode of circulation, according to a United Nations report (The Internal Auditor, 1998). Are
members of the underworld truly the sole beneciaries?
Marxs method of analysis the concrete analysis of concrete situations in
their historical context and from a class perspective combined with Lenins
analysis in Imperialism: The Highest Stage of Capitalism (1917) are imperative for understanding Colombian cocaine as a commodity. Lenin showed
how the law of capitalist development manifests itself, and how advanced
capitalist countries draw the rest of the world into their orbit through the
mechanism of imperialism. Capitalism creates rich and poor nations just as
it creates rich and poor within each nation by, (1) increasing the concentration of production and creating monopolies, (2) raising the importance of
the export of capital above the export of goods, (3) dividing the world
among associations of capitalist rms, and (4) dividing the world between
the great capitalist powers.
Similar to the colonial opium trade of imperial Britain as documented by
historians, the Colombian cocaine trade sustains dominant political and
economic interests through imperialism. Throughout the cocaine decade
(using the time frame 19801989), the global drug trade centered on the
United States drew Colombia towards production as an economic relation.
The cocaine trade created rich and poor Colombians, as well as rich and
poor North Americans (Inter-American Development Bank (IADB), 2001;
Knoester, 1998).3 The increasing concentration of production, which saw
the creation (and later destruction) of Colombian drug cartels, abetted the
rise of corporate nance capital. The growth of the cocaine trade made
cocaine Colombias premier illicit export commodity. However, most of
the prots went to the USA, not Colombia. The income divided among the
capitalist enterprises involved favored the United States.
As real, although tenuous, as the link between U.S. imperialism and the
Colombian cocaine trade may be, proving this is not the intention of the
paper. The intention is to move discussion on the subject beyond its
conventional understanding. The paper argues that the conventional
framework, which locates prots generated from the cocaine trade in an
economic model of crime shields a much deeper reality than simply money
laundering as a legal problem, where professional criminals outsmart
101
resource-superior authorities and the law. The paper also argues that in
order to understand this phenomenon, it is necessary to apply Marxs argument that economic activity is social and the economic base of the capitalist system is the means of production, and further, those production
relations, depend upon the stage of development of the material productive
forces of society. From this perspective, bourgeois law is part of the capitalist superstructure (the legal institutions and its drug policies, for example) reecting its economic base (allowing the cocaine means of production
to thrive in both the legal and illegal world). Moreover, the use of various
methods and instruments to shield drug trafcking activities are common
practice. The central argument will be that the cocaine trade in general, and
the cocaine economy in particular, are a vital aspect of U.S. imperialism in
the Colombian economic system.
The paper tackles a critical problem: the place of cocaine in the recolonization of Colombia dened here as narcocolonialism and the
implications of the cocaine trade generally for U.S. imperialism in this
context. As an unexplained and difcult phenomena to examine and with
increasingly outdated empirical evidence available, re-colonization and
imperialism is, therefore, used interchangeably to ll the gap. The paper
evaluates selected literature on the Colombian cocaine trade and offers an
alternative framework underpinned by a political economy analysis drawn
from Marx and Lenin showing that cocaine functions as an imperial commodity a commodity for which there exists a lucrative market and protmaking opportunity. It is also a means of capital accumulation by what
could be termed, Colombias comprador narcobourgeoisie; dependent on
U.S. imperialism.
The sections which follow, show how the economic development of
cocaine production and distribution in Colombia drew the country into the
orbit of imperialism and, consequently, towards re-colonization by the
United States, through a narcoeconomy, and a Colombian dependency
on U.S. capital and the export of cocaine. It is hoped that by analyzing
cocaine with a Marxist interpretation and political economy approach, future developments in understanding drugs in Colombias complex political
economy may then be anticipated.
2. TOWARDS COCAINE PRODUCTION

Mainstream economic discussions of illegal drug production are based almost entirely on crime, and, consequently, money laundering. It is not that
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the existing economic literature ignores drug production. It ignores class as

the point of analyzing drug production as an economic activity that, in
Colombias case, is also social whether an economic class exploits cocaine
for prot. In the interest of political economy, one thing is generally acknowledged, however. Among Bolivia, Peru, and Colombia of the Andean
coca-growing zone Crystal Triangle, only Colombia, has succeeded in developing very sophisticated drug cartels and international marketing networks (Thoumi, 2003). How did this develop?
The debt crisis of the 1970s and 1980s in Latin America involved a drastic
balance of payments and external crises, a sharp increase in unemployment,
and a decline in national incomes. For Colombia, what became known as
the cocaine decade of the 1980s (ofcially termed the lost decade), was the
beginning of stable economic performance with an increase of drug trafcking activity, despite a history of civil war in the country.4
An ambitious young Colombian from the outskirts of Medellin named
Pablo Escobar Gaviria, became the most successful of the narcotics entrepreneurs. Prior to venturing into the commercialization of cocaine, he was a
tombstone thief and dealer in stolen vehicles. While other trafckers remained immersed in the coastal marijuana trade, Escobar with his associates
established contacts with coca producers in Bolivia and Peru. Escobar was
uniquely positioned to substitute cocaine for marijuana as Colombias
growing premier illicit export commodity (Salazar & Jaramillo, 1992).
The Colombian cocaine trade expanded rapidly. The capos (the heads of
large drug-trafcking clans) began to organize meetings to centralize production, distribution, and commercialization of the drug, and to establish
large-scale transportation systems and routes. Those who secured control of
trade routes to the Untied States became cocaines monopolists (ibid ).
Escobar perfected the cocaine-rening technology and developed expertize
in cocaine distribution.
A former U.S. Central Intelligence Agency (CIA) operative named Trenton Parker has alleged that the CIA set up two preliminary meetings during
which various Colombian drug dealers organized into a drug trafcking
cartel. The rst occurred with twenty of the biggest cocaine dealers in
Colombia present. The second meeting was held at the Hotel International
Medellin attended by two hundred drug dealers. The Medellin Cartel was
established in December 1981 (Stich, 2001). A paramilitary organization
called Muerte a los Secuestradores (Death to Kidnappers or MAS) was
established to assassinate leftists, trade unionists, civil rights activists, peasants collaborating with left-wing guerrillas and members of the Union
Patriotica (UP) the civilian arm of Colombias largest Marxist rebel
103
organization, Fuerzas Armadas Revolucionarias de Colombia (Revolutionary

Armed Forces of Colombia or FARC). MAS members in the Colombian
military liaised with the drug maa and the army (Lee, 1998; Scott &
Marshall, 1998). Israeli and British mercenaries, paid with drug money,
organized a death squad paramilitary school. Carlos Castano, the future
leader of MASs successor, Autodefensas Unidas de Colombia (United Self
Defence Forces of Colombia or AUC), was an early trainee (Scott, 2003).
Another former CIA operative, Gunther Russbacher, has made similar
allegations concerning the CIAs role in establishing the Medellin Cartel.
Russbacher attended the CIA initiated 1981 meetings (Stich, 2001).
According to Russbacher, At least half a dozen former CIA, Ofce of
Strategic Services (OSS), and Drug Enforcement Administration (DEA)
personnel gave me many hours of statements over a three year period concerning Central and South America drug operations in which U.S. intelligence agencies and the [Israeli] Mossad participated (ibid; The Telegraph,
1990; Contreras & Gavarito, 2002).
Recent allegations published by former CIA operatives, Kenneth
C. Bucchi and Al Martin, detail covert drug trafcking operations involving the CIA. Bucchi tells of a third meeting in Zurich, Switzerland in August
1984, linked to a covert operation named Pseudo Miranda (Bucchi, 2000;
Martin, 2002).5 According to Bucchi, Vice-President George Bush and CIA
Director William Casey were behind Operation Pseudo Miranda (OPM)
(Bucchi, 2000). The aim was to centralize the cocaine trade in Colombia by
neutralizing Bolivia and Peru as rivals (ibid ). Bucchi attended the Zurich
meeting and was tactical commander of OPM. In an interview on CNN (see
The Drug War: Where Should the Battle Lines Be Drawn?, 2001), he
stated:
We could save a lot of money if the government just went to Colombia and asked, How
much for all the cocaine? Its not that farcical. The cost would be tremendous, but it
would still be less than what we are spending now for the Drug War. But then we would
not be able to justify giving weapons to governments. If we bought it all, the drug dealers
would have the same amount of money as the people in power. The CIA doesnt want
leftist guerrillas or Pablo Escobars having the same power as the people they help put in
power.6
The Medellin Cartel systematically outmaneuvered its competitors, particularly the Florida based Cuban maa and others involved in the trade
(Bagley, 1988). By eliminating these middlemen and installing their own, the
Colombians not only improved their prot margins, but also disposed of
many Cuban-American informants working with the CIA and other U.S.
law enforcement agencies, thereby lowering the risk (ibid ).
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The Medellins cocaine traders gained a reputation as violent thugs,

whose leader, Pablo Escobar, would stop at nothing to maintain control of
the market, including mounting a military campaign against the Colombian
State. For the urban poor, El Patron, as Escobar became known, had
popular appeal with his deant Robin Hood image (Frontline, 1997).7 In
contrast, rival narcotics trafckers from Cali, consolidated their share of
the market through a management and marketing strategy (Salazar &
Jaramillo, 1992).
As the United States government pursued the Medellin Cartel, the primary source of raw coca and cocaine paste was Bolivian. Bolivia enjoyed
a near monopoly in coca production 80 percent of the worlds cocaine
came from this Andean nation in the early half of the 1980s (Cockburn &
St. Clair, 1998). Stephen Crittenden, a CIA veteran of Southeast Asia and
Latin America, has alleged that the Bolivian Air Force ew numerous CIA
ights destined for the United States. According to Crittenden, the CIAs
airlines, Southern Air Transport and Evergreen, distributed cocaine for the
DEA as well. In the U.S., Colombian and Bolivian drug cartel gures
landed their Cessna Citations and Lear jets at Marana airport, Arizona
(ibid; Stich, 2001; Robbins, 1988).8
Salomon Kalmonovitz, an economist from Colombias Central Bank,
observed that, cocaine stopped the balance of payments from collapsing,
which would have pushed us into the spiral of hyper-devaluation and hyperination that shook most of the rest of the continent, for which the 1980s
were a lost decade (Strong, 1995, p. 184). The cocaine decade demonstrated the dynamic and imperialistic nature of the drug trade driven by
apparently ruling class interests in the USA. With the establishment of the
drug cartels, coca was exploited, reinforcing existing economic trends generated by the capitalist system with repercussions reaching beyond the
Crystal Triangle to the whole of South America and indeed the entire
Western Hemisphere (Smith & Thongtham, 1992). Colombia became
dependent on the export of cocaine.
3. TOWARDS RE-COLONIZATION
The cocaine decade drew Colombia into the orbit of the global drug
trade, and in particular, towards cocaine production. According to a United
Nations report, the global drug trade is a self-generating engine of economic growth shaping the international economy despite drug seizures and
interdiction measures. The report states: Drug trafckers introduce new
105
products into an untapped market, buyers are found, and once users become
addicted, a minimum level of demand is virtually guaranteed (United
Nations Ofce for Drug Control and Crime Prevention (UNDCEP), 1994).
The UNDCEP notes the drug trade has been characterized by a trend
towards globalization and proliferation of trafcking routes (ibid ). The
trends, associated with globalization and market integration noted above,
indicate that by entering the global drug trade with cocaine, Colombia was
effectively driven into the orbit of imperialism.
The self-generating engine of the global drug trade, as described by the
UN, traces back to the United States. Involved in this economic relation are
two main classes in Colombia. The poor campesino (peasant) and the
wealthy compradore landlord, our main focus. The compradore is directly
involved through ownership of the cocaine means of production (farms on
which cocaine is grown, cocaine processing plants), exchange (safe houses,
travel agencies, contraband, real estate, front companies), and distribution
(routes and networks, and conveyances used to transport narcotics)
(Woods, 1998).9 The poor campesino has no choice but to grow coca in
order to survive but is indirectly involved. The process of extraction in the
surplus value of cocaine begins with the exploitation of the campesino.
Specically, a powerful strata of the comprador class is the narcobourgeoisie. Nazih Richani describes this class as an emerging social group of
drug trafckers who not only managed to accumulate vast economic resources by investing in the legal economy, but who struggled to legitimate
themselves politically moving from being a class in itself to a class for
itself, that is, conscious of its common class and political interests (Richani,
2002). The narcobourgeoisie are owners of economically signicant means
of production and the extractors of considerable surplus from the peasantry
and wageworkers including those working in their processing plants. They
occupy the commanding economic position in the illicit drug industry (ibid,
p. 181, n. 54) and arguably in the whole Colombian economy.
The secretive and dangerous nature of the cocaine trade makes it difcult
to accurately calculate the size of the industry and its economy. The existing
available data derives from secondary sources that only provide approximations and not exact gures making any evaluation on the size of the
cocaine economy a debatable topic. This is due to the conventional framework, which identies cocaine, not with imperialism, but with organized
crime, with the Maa (which according to former agents of the imperial
State were organized by U.S. imperialism), or, to use the ofcial-diplomatic
terminology properly, with narcoterrorists. Putting an end to the productive forces of the drug trade has never been the goal of imperialism (see, e.g.,
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McCoy, 2003; Valentine, 2004; Scott, 2003). If material productive forces

for cocaine production exist, one can see how ghting crime at the superstructural level is not enough to deter the narcobourgeoisie, its lucrative
cocaine market in the United States, and its prot-making opportunities
globally.
Francisco Thoumi (1995, p. 95) argues that Colombia has an underground economy where differences between legal and illegal income appear not to result in a black and white division, but rather in a continuum of
gray. Hernando De Soto (1986) (once an advisor to former President of
Peru Alberto Fujimori), in his well known study of Perus underground
economy, argues that there are good and bad laws that regulate and
control economic activity. From this underground-informal economic
perspective, individuals who break bad laws in their economic endeavors
may nevertheless generate good illegal income. Economic activity that
breaks good laws creates bad income. This illegal economy is dened as
part of the legal ones legitimate economic activities, but where activity is
performed illegally because of bad laws and government regulations that
make legal activity nonviable because of the expense and regulatory burden
incurred by many low-income entrepreneurs. De Soto (1989, pp. xviixxi)
explains low-income entrepreneurs lose out in this process because they
are excluded by the legal system.
The conventional framework ignores the class basis of the cocaine trade
but suggests quite sympathetically that low-income entrepreneurs should
be legally included in the process of extraction in the surplus value of
cocaine. From a Marxist perspective, laws are made by the ruling class for
the ruling class and individuals from this class go largely unpunished if they
generate any type of revenue for their economy. Low-income entrepreneurs
must be punished if the ruling classes wish to remain the main beneciaries
of the cocaine trade. In a cocaine economy, they are above concerns about
good or bad laws or sources of income. Colombian democracy is clearly
an unusual process and does not constitute normal liberal economic
development. The striking continuity of economic performance by the
Colombian ruling class demonstrates a considerable amount of good but
illegitimate capital for corrupt individuals to accumulate in an apparent
liberal democracy. It also demonstrates how economic activity is social and
the economic base of Colombia is its means of production where cocaine
plays a vital part in the process. Many liberal economists like Thoumi and
De Soto agree, the underground economy is very important in Latin
America, but what it ultimately achieves politically; it does so economically
through capitalist growth namely the cocaine trade.
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There is a serious methodological problem when a quantitative assessment of cocaine in Colombian economics or nance is attempted. The
illegality of the drug business means that the collection of data may be
speculative and politically motivated. RAND Corporation economist Peter
Reuter (1985) notes:
Ofcials often use the drug issue to build public support for their own agendas. Every
statistic on drugs-prices, volume, earnings, arrests, numbers of users and addicts must be
interpreted in this light. But although drug statistics are imprecise, they can point toward
reasonable generalizations.
Annual prots from the drug trade are estimated to be $500 billion; $250
billion (50 percent) is estimated to go to U.S. banks and is not hard to
monitor. The U.S. Federal Reserve System registers any deposit over $10,000
(U.S. Department of Treasury, 2000). Colombias Central Bank estimates
only $76 billion (15 percent) goes to Colombia; less than half of U.S.
annual prots from the drug trade and 30 percent of Colombias total
wealth (see http://www.unam.mx/cronica/1996/a8096/int006.html).10 Conservatively, the total revenue for the commercial export of cocaine for
Colombia is estimated to be $3.5 billion (close to $3.75 billion made from oil
and more than two and a half times the earnings made from coffee), while
North Americas gross revenue from sales to consumers is $11 billion
(Livingstone, 2003; Anonymous, 2002).11 By any standard, Colombias
premier illicit export commodity is pivotal to the business partnership of
the comprador and his associates in the United States. Cocaine has created
wealth and jobs, It has provided the vital capital for economic expansion
and in that sense has been an undeniable boon for Colombia (Strong,
1995, p. 185).
There is conclusive evidence that Latin America exported large quantities of illegal drugs to the United States, Canada, and Europe over the
past 25 years, creating a massive cocaine economy in the West. Cocaine
production has increased so much that it has become the most important
economic activity in the Crystal Triangle (Henman, 1990). With its revelations of CIA drug trafcking, the Iran-Contra scandal partially exposed
the economic interests of the imperialcomprador relationship being
discussed here (Scott & Marshall, 1998; The Kerry Report, 1989).
Colombian dependency on cocaine was a turning point for Colombian
capitalist development. It has implications for U.S. imperialism generally
because it makes economic development rather unique if compared with a
normal Latin American country. It has a narcoimperialist qualitative
feature that could be dened as narcocolonialism. It aims to foster a deeper
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Latin American dependency through a re-colonization process of traditionally imperialist illegal means. This merits a closer look.
4. TOWARDS A NARCOECONOMY
The place of cocaine in the re-colonization process carries with it new
or unusual qualitative features of U.S. imperialism in Colombia. With
Colombias move towards cocaine production, the imperialcomprador
partnership made profound changes in the structure of the Colombian
economy, which is why the cocaine decade must be seen as a historically
signicant event. The structure of Colombian capital generated from cocaine (or narco-capital) established a narcoeconomy. The Colombian
narcoeconomy differs from the illegal-informal-or-underground economies
described by liberal economists because cocaine is pervasive and institutionalized into almost every aspect of Colombian life (U.S. General Accounting
Ofce (USGPO), 1999, p. 15).12 Colombia does not have two-economies
but a narcoeconomy shaped by U.S. imperialism. The narcoeconomy may
not be shaping the countrys political economy, but all economic life in
Colombia, both legal (oil, coal, coffee) and illegal (drugs, arms, contraband),
is dependent on cocaine, allowing that commodity to shape Colombias
political economy socially and politically as no other commodity before it.
The Colombian narcoeconomy is an imperialist-generated engine of the
Crystal Triangle, not a self-generating one, and it supplies 100 percent of
the cocaine consumed on North American streets (Lee III, 2002).
Surging U.S. demand for cocaine in the 1980s saw the opening of Colombia
to a cartel-system narcoeconomy. From 1970 to 1987, Peruvian coca production rose from 15,000 to 191,000 tons while Bolivias production rate kept
pace. Indicative of the rapid economic impact of processed cocaine in
Colombia, the number of seized laboratories recorded by the U.S. government rose from 275 in 1984 to 725 the following year (McCoy, 2003, p. 443).
By the late 1980s, cocaine grew into a major export commodity organized by
drug cartels and institutionalized into the Colombian economy, and hence,
into legitimate Inter-American economic relations (Lee & Clawson, 1998).
The cartel system was a regionally based grouping of different trafcking
organizations that coalesced to rationalize the system of production, smuggling, and marketing of cocaine (Lee, 2002). Management was left to contacts in the national military intelligence network, or, according to former
DEA and CIA operatives, to advisors of the CIA (see Stich, 1999; Stich,
2001; Levine & Kavanau-Levine, 1993; Levine, 1990; Bucchi, 2000;
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Valentine, 2004; Castillo & Harmon, 1994; Cockburn, 1987; Collins, 1993),
depending on the importance of matters, such as details on transportation,
exchange, distribution, and policy issues. The aim was to maximize export
volumes and prots while reducing risk to each participant. This included
various co-nancing and co-insurance schemes, as well as the pooling of
certain business services for instance, nancial advisors, lawyers, counterintelligence and security operatives, and assassins. The major participating organizations either owned trafcking assets such as planes, cocaine
laboratories, shipping companies, even submarines, or enjoyed exclusive
access to them (see Lee & Clawson, 1998; The Drug Trade in Colombia:
A Threat Assessment, 2002).
The principal coalitions centered in Medellin and Cali at one time controlled 80 percent or more of the cocaine exported from Colombia. (Other
quasi-independent groupings centered in Bogota or the Atlantic Coast
maintained loose associations with Medellin and Cali and tended to follow
their lead on policy issues). At their zenith around the late 1980s, the cartels
earned combined annual revenues of at least $6 billion, of which $34 billion
was prot, and coordinated a trafcking infrastructure of 8,00010,000
skilled workers and professionals (Lee & Clawson, 1998; Castillo, 1996;
Zabludoff, 1997). This represented an enormous concentration of economic
power in this sector of the narcobourgeoisie. To some extent this was
directed power; a leadership structure of sorts existed within Colombias
cartel-system narcoeconomy, exercised by the heads of the dominant trafcking organizations in each coalition. This included Pablo Escobar Gaviria in
Medellin and the RodriguezOrejuela brothers (Gilberto and Miguel) in Cali.
Cartel leaders played a vital role in the national strategy of Colombias
narcoeconomy and its representation in mainstream politics. The cartel system, in other words, was not simply a group of gangsters who ran around
shooting people; it was a system of organization for Colombian cocaine,
crucial for the economic stability of the nation dependent on its export.
For the cartel system, Colombias ongoing civil war between the state and
the FARC, Latin Americas longest running Marxist insurgency, represented and represents an economic disaster, a threat to the smooth functioning of Colombian capitalism and foreign investment. FARC is largely a
peasant army and in areas where the guerrillas exercise political and military
control, all capitalist life is hijacked and exploited for their revolutionary
campaign. All businesses in the liberated zones, including cocaine, are taxed
accordingly (Goff, 2002).13
The narcobourgeoise capitalized on Colombias long tradition of smuggling and trading in contraband goods dating back to Spanish colonial rule.
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It industrialized the trafcking process to include large-scale smuggling by

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

cocaine industry was decentralized into as many as 80300 (according to
widely varying ofcial estimates) distinct private enterprises (Los Nuevos
Narcos, 2001). Its restructure did not hurt cocaine exports (see Lee, 2002)
but enabled businesses including corporations to nd their place in the sun
without taking too many risks, by adopting a management strategy of
moving into legal business activities, even negotiating with Mexican organizations to hand over parts of their export networks to the United States.
One such organization that emerged from this arrangement is the Henao
Montoya organization, with which the AUC, an umbrella right-wing
paramilitary network, is afliated (see DEA, Trafckers from Colombia
http://www.usdoj.gov/dea/trafckers/colombia/htm; Ricardo Rocha http://
www.odccp.org:80/colombia/rocha.html).15
From an imperialist perspective, Colombia is the most advanced cocaine
producing country in the Crystal Triangle with the best opportunities. Two
factors made this possible, (1) the institutionalization of the cocaine trade in
Colombia, and (2) Colombias proximity to neighboring Crystal Triangle
countries Peru and Bolivia; service country Panama; transit countries
Mexico and the Caribbean (Jamaica and the Dominican Republic); and
consumer and distribution countries the U.S. and Spain (as a gateway for
smuggling operations in Europe).
The Medellin Cartel failed to take advantage of the imperialcomprador
partnership. It attempted to establish monopoly control over the cocaine
trade without taking U.S. imperialism into consideration.16 The idea that
the Cali Cartel posed a threat to the Colombian State is an ofcial myth.17
The Cali Cartel assisted State efforts to liquidate the Medellin Cartel from
the cocaine trade (Carrigan, 2002; Lee & Clawson, 1998; Bowden, 2000; The
Washington Post, 1996). The various components of the industry were then
left for the Cali Cartel to link together as a corporate style transnational
trafcking organization with opportunities to branch out into other markets
such as heroin and amphetamines.18
According to a United Nations report in 1994 (a year after Pablo
Escobars death and the end to the cartel system of cocaine production),
In spite of the rise of licit transnational corporations in developing countries, the
Cali Cartel remains, in effect, the developing countries most successful transnational
corporation. That is not only a comment about the importance of the drug-trafcking
industry, but is also a reection of the continued economic problems that face developing countries. In that connection, some researchers credit the Colombian cartels and
their huge monetary base with providing much of the economic stability and even prosperity that Colombia enjoyed throughout the 1980s and early 1990s. (Williams, 1994)
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The post-cartel narcoeconomy (1994 to the present) system involves a

complex network of banks, corporations and professionals, with ofces in
New York, Miami, the Caribbean, and throughout Latin America. This rise
of licit transnational corporations coincided with the rise of a new kind of
drug trafcker, the white collar trafcker in the era of globalization,
market integration, and technological innovation. Colombian dependence
on cocaine for export was intimately linked with the export of capital, which
dictated close contact with the United States. The U.S. and Colombia now
shared a mutual-dependency on the export of cocaine and an interest in
preserving the existing status quo of class structure and economic relations.
Narco-capital acquired continually greater proportions and assumed greater
signicance. As is well documented, most of the prots went to the United
States as illegal money to be laundered in CIA-linked banks. These banks
include the Bank of Credit and Commerce International (BCCI); Nugan
Hand Bank; J. P. Morgan; Chase Manhattan; World Finance Corporation;
Castle Bank of the Bahamas; Citibank; Citicorp; Bank of America; and the
Federal Reserve Bank (Stich, 2001; Scott, 2003; Grosse, 2001; Ehlers, 1998;
Petras, 2001; Dwyer, 1998).
Christian de Brie describes the complex network of banks, corporations
and professionals as a service industry in which the Americans have a
considerable lead over their competitors, not only in know-how, but also in
the vast nancial and logistical resources they are able to make available to
their multinationals; these include the secret services of the worlds most
powerful state apparatus (i.e. the CIA and other U.S. intelligence services),
which, with the Cold War over, have moved into economic warfare.
De Brie lists a number of U.S. corporations from the Fortune 500 he
considers experts in the matter: Lockheed Martin, Boeing, IBM, General
Motors, Exxon, General Electric, and Texaco (De Brie, 2001; De Brie &
de Maillard, 2000). Michael Ruppert concludes that there is an inextricable
relationship between the CIA and Wall Street in this arrangement. Since
Clark Clifford (who wrote the U.S. National Security Act in 1947, which
established the CIA), a number of senior CIA ofcials have sat on the
boards of the largest, richest and most powerful corporations in the United
States (Ruppert, 2001; Citigroup, 2001; The Narco News Bulletin, 2000;
Federation of American Scientists, 1992). Criminologists William J. Chambliss
and Gary W. Potter describe this imperial phenonema as state-organized
crime. (Chambliss, 1988; Potter, Eastern Kentucky University).
As noted earlier, the annual prots from the drug trade are estimated to
be $500 billion; U.S. banks handle half. Stanley Morris, Director of the
Financial Crimes Enforcement Network suggests that the smart thing to do,
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the smart business decision with drug money, is to put it in New York
(Sabbag, 1997). Catherine Austin Fitts (http://www.solari.com) concludes
that $250 to $300 billion from the importation of drugs goes to Florida,
New York, Texas, and California. These money-laundering states are
those which provide 80 percent of all presidential campaign funds (Ruppert,
1999).19 Fitts states that corporations trading on Wall Street have stock
values that are based upon annual net prots. Known as price earnings or
the pop, Fitts explains that it is a word used in Wall Street to describe the
multiple of income at which a stock trades (stock value). The multiplier
effect in stock values can be a factor of thirty. She gives the gure (x6) of
$250 billion laundered resulting in an estimated $1.5 trillion dollars per year
in U.S. cash transactions from the drug trade (http://www.solari.com; Fitts,
2001; Fitts, 1999).
Capital accumulated from the drug trade is almost too high and ongoing
to control. The cocaine decade saw a ooding of the crystalline white
powder onto American streets (known as the cocaine epidemic). Cartels
accumulated huge sums of money in a short period of time. Although politically necessary to begin the re-colonization process, the early cartel system was not economically viable for a more competitive post-cartel system,
where the surplus value of cocaine could be invested into international
markets, principally the U.S. market, its banks, and corporations. U.S.
banks came into close contact with the cocaine industry and became intermediaries for the narcobourgeoisie by turning narco-capital into legitimate
bank capital. Money laundering schemes involving the CIA and Cali
Cartel included the purchase of real estate and corporations and loans
amongst other schemes (Stich, 2001; MacGregor, 1993; Richani, 2002).20
Narco-capital fused together with bank capital (industrial capital) is called
nance capital, and therefore, the amalgamation of bank capital with the drug
trade became a distinctive economic feature of U.S. imperialism in Colombia.21
The U.S. Fortune 500 benets from narcocolonialism. The black market peso exchange of Colombias narcoeconomy eliminates the trade decit
with Colombia (see U.S. Companies Tangle in Web of Drug Dollars, 2000;
Zill & Bergman, 2000; Reason, 2001).22 Raymond W. Kelly, a U.S. customs
commissioner, suggests the market is the ultimate nexus between crime and
commerce, using global trade to mask global money laundering. The
narcobourgeoisie can exchange U.S. dollars for Colombian pesos, buy
American goods for sale back at home which according to U.S. federal
ofcials is worth approximately $5 billion a year, and can direct billions of
dollars in narco-capital into legitimate commerce and trade (U.S. Companies Tangle in Web of Drug Dollars, 2000). According to Mike Wald,
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who runs a consortium of law enforcement agencies in Florida, This is

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

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

imperialist development.
The key to the narcobourgeoisie is not whether they are involved in megaprojects associated with cocaine, but their access to and involvement in the
global market which tie them to international capital ows, and, principally,
to U.S. capital (for comparative analyses, see Lenin, 1917; Naylor, 1987).
U.S. investment in Colombia and its economic growth depends on this. It is
the comprador who organizes cocaine production locally and is nancially
linked to U.S. capital. However, the compradors relationship with the imperialists is not merely economic but also political.
The historical events in Latin America that facilitated the growth
and reproduction of the cocaine trade were the ascendancy of a series of
military and civilian regimes committed to free-market policies (to name
a few examples; Argentinas military junta of 1976; Bolivias Cocaine
Revolution of 1980; the Nicaraguan Contras; Manuel Noriega in Panama;
the Honduran military; Alberto Fujimori in Peru; Costa Rica; and the
ARENA party of Col. Roberto dAubuisson in El Salvador) (see Petras &
Morley, 1990; Gugliotta & Leen, 1989; Bagley, 1988; Association dEtudes
Geopolitques des Drogues, 2000; The Kerry Report, 1989). The institutionalization of the cocaine trade in Colombia had a profound impact on the
Colombian economy and the social structure of its society creating a powerful transnational class of businessmen and investors (Andreas & Youngers,
1989). As Alfredo Rangel (1998, p. 189) notes, The notorious frequency
with which the [paramilitaries] situate themselves where drug dealers are
active or where there are mega-projects such as hydroelectric dams or new
highways pushing up land values indicates that behind paramilitarism
there is something other than an altruistic interest in counterinsurgency.
To protect and secure operations of U.S. capital in Colombia, U.S. imperialism must promote and protect agents of economic operations inside
Colombia, one of which is capital accumulation and prot making via drug
money laundering banks and U.S. nance capital. But to secure cocaine for
American markets, the narcobourgeoisie must rely on large sums of U.S.
capital for a counterinsurgency effort under the guise of drugs, terrorism,
or any other pretext, to serve as a justication to secure U.S. imperialisms
own ruling class interests.
Behind the rhetoric of ghting drugs and post-September 11th terrorism
in Colombia there is a hidden agenda: to secure military victory over FARC
and eliminate obstacles to massive U.S. and international investment in
mega-projects including mines, dams, roads, and canals for efcient exploitation of Colombias rich natural resources (Gedicks, 2002). Automated
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factories with no need for unskilled labor, many of them multinational,

relocate to state-declared tax-free zones called industrial parks. These developments include several mega-projects that plunder natural and genetic
resources: gold, platinum, silver, bauxite, manganese, radioactive cobalt,
zinc, chrome, nickel, copper, exotic wood, and large shing resources (Megaprojects and Neocolonialism in Colombia, 2001; Colombia-Country Prole http://www.nadir.org/nadir/initiativ/agp/free/colombia/colombia.htm).
Oil resources in Colombia are as enormous as cocaine. Colombian compradors pronounce: We want to turn this region into a giant enterprise!
(Colombia-Monthly Report, 1997, p. 4).
To secure Colombias resources for American markets, the police, military,
and paramilitary forces carry out a U.S. led counter-insurgency. The narcobourgeoisies interests coincide with those of the rest of the bourgeoisie as a
whole, to exploit for prot in a united class front. The counterinsurgent
incumbent Colombian State relies upon the support given to it by the exploiting classes: cattlemen, businessmen, agricultural exporters, industrialists,
traditional large landowners, the military, and particularly U.S. multinationals. A strategy to take control of territory strategically valuable to economic
interests of the imperialcomprador partnership is imperative (Reyes, 1989).
Rebel strongholds of the FARC and Colombias second largest Marxist
insurgency, the National Liberation Army (ELN) contest the counterinsurgency (Murrillo, 2004). One displaced activist from the department of
Choco explains, its simply a war about land and resources, and the people
living in these lands happen to be in the way. Right-wing paramilitaries
target not only guerrillas but also social, labor, popular, or peasant movements that happen to question the development of mega-projects and the
consolidation of economic interests (Corporacion Colectivo de Abogados
Jose Alvear Restrepo [Collective Corporation of Lawyers Jose Alvear
Restrepo], 2001). A prime objective of the counterinsurgency is establishing
and consolidating citadels of capital derived from the cocaine trade.
Colombias role as the leading supplier of cocaine to the United States
and the presence of U.S. multinational investors in the country are important factors in the build-up of U.S. capital in Colombia. AUC paramilitaries
serve as U.S. proxies to protect tons of cocaine manufactured and transported off the Pacic coast of southwest Colombia to Mexico for distribution in the United States (Silvestrini, 2004).
Technological innovation makes surplus value extraction possible (see, for
example, Kaihla, 2002; IT Myths, 2003). The process of exploiting coca for
cocaine prots generally involves two main steps. The narcotic must be extracted from the coca leaves. Initially the leaves are dried then soaked in a
117
solution of sulfuric acid and water. The liquid is drained off from large soaking
vats and mixed with an alkaline solution of calcium oxide or sodium carbonate. A thick, alkaloid, whitish uid is the result. This uid is mixed with
kerosene to take out impurities, and as it settles, the kerosene separates from
the top of the mixture. The second stage of processing the mixture is placed
into another solution of water and sulfuric acid, producing a clear liquid.
Sodium carbonate is again added to the liquid, and a dirty white substance
settles from this process-coca paste (Grosse, 2001). The paste is then placed on
a ne cloth mesh to allow the liquid to drain off. The coca leaves are run
through this process two or three times to ensure that the maximum amount of
coca paste is produced. This is the raw material from which cocaine is subsequently distilled and on which campesinos survive.24
The second step is dominated by agents of economic operations who are
also connected to the counterinsurgency campaign. In areas under state
control, particularly in the north of Colombia, AUC paramilitaries operate
freely, in conjunction with the nation-wide intelligence network. They collect the coca paste and deliver it to the facilities, protected by the police or
military. In what is known as the shell game strategy, sectors of the business elite from the chemical industry provide essential chemicals for
processing cocaine through third or fourth level distributors (see The Drug
Trade in Colombia, 2002; Flounders & Gutierrez, 2003). In areas under
guerrilla control, the paramilitaries, like the army and their U.S. advisors,
are military targets. Trafckers themselves must approach the campesino
and pay the price that is demanded. The guerrillas provide the security and
enforce a handsome tax.
Professional chemists turn the coca paste into cocaine hydrochloride. This
requires sophisticated laboratory techniques and industrial volumes of
ether, acetone, and hydrochloric acid. According to DEA intelligence, while
typically not manufactured in Colombia, essential chemicals required for
cocaine processing have become available in vast quantities throughout
South America. In Colombia alone, about 4,500 companies are registered to
handle these essential chemicals. Colombian chemical companies that have
lost their chemical permits for trafcking controlled chemicals have been
involved in their purchase and distribution, such as potassium permanganate and n-propyl acetate, diverted for use in cocaine processing (The Drug
Trade in Colombia, 2002).25
This nal process of rening is extremely corrosive. High-quality containers and expensive processing equipment are needed. Glass or porcelain
containers are commonly used to process the coca paste but the latest technology and equipment for the sheer volume of cocaine that is actually
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exported must be anticipated. The paste is rst dissolved in acetone and then
heated to evaporate the acetone, and hydrochloric acid. From this process a
whitish sludge appears. It is then heated by placing light bulbs or other heatgenerating devices above the mixture (Smith & Thongtham, 1992). When it
dries, the semi-processed material becomes the crystalline white salt necessary for inhaling-cocaine hydrochloride, ready for packaging and transport
for the American market.
Cocaine is exported to the United States by air from remote airstrips
or by sea from Colombias northern and western coasts. Paramilitary helicopters y to army garrisons to collect the cocaine to be transported to
Antioquia and then exported. In the areas to the south of Bolivar and
Catatumbo, the helicopters that load the cocaine come from the military
bases (Flounders & Gutierrez, 2003, pp. 13233). Transporting routes
change often and are kept secret.
In 2000 U.S. President Bill Clinton authorized Plan Colombia, a $1.3
billion U.S. package of mostly military assistance (helicopters, planes, and
training, a massive chemical and biological warfare effort, as well as electronic surveillance technology) (Storrs & Serano, 2002; Villar, Cottle, Keys,
2003). Under the legal banner and drug policies of the Colombian plan,
Clinton militarized the nation and nanced the counterinsurgency (Livingstone, 2003). In 2001 U.S. President George Bush added $550 million renaming it the Andean Initiative (Giordano, 2001). Between 1996 and 2001,
U.S. military aid to Colombia increased fteen-fold, from $67 million to $1
billion (see U.S. Military and Police Aid http://www.ciponline.org/colombia/
aidprop.htm). During this same period raw coca cultivation grew 150 percent, from 67,200 to 169,800 hectares (1 hectare 2.471 acres) (Tickner,
2003). A leaked Colombian government document in 2000 estimated
that Colombia produced 800900 tons of cocaine annually, not the 580
tons announced by the U.S. State Department and the DEA (Revista Cambio.com, 2001; Web, 2001). Colombian President Alvaro Uribe Velez and
the Bush administration are now working out details for a Plan Colombia
II that would last until 2009. Uribe has talked up advances in the War on
Drugs plus War on terror, claiming that U.S. capital injected into Colombia
has succeeded in making Colombia a safer country (Anonymous, 2004).
For comprador dependence on U.S. imperialism, he is correct, as bourgeois
law (particularly U.S.) allows cocaine to be produced in the narcoeconomy
with the complicity of Colombias legal institutions and fraudulent drug
policies.
The imperialcomprador relationship has established citadels of capital by
developing mega-projects, industrial parks, and clandestine infrastructure to
119
protect its cocaine means of production, exchange, and distribution. In the

countryside land is cleared and oil, wood, water, and cash crops are extracted. Communities and neighborhood beaches are replaced with large
hotels. In major cities a disciplined, desperate, repressed working class, and
peasantry live off starvation wages, without protections or services (Podur &
Rozental, 2002). Uribes Law 50 has dismantled labor laws and protections
of workers rights. Law 100 has privatized social security.
According to conservative estimates, in centers of coca crop production like Guaviare, Putumayo, and Caqueta, as much as 50 percent of
Colombias work force are employed in the cocaine industry (Anonymous,
2002). The Drug Trade (1988) magazine has described it as probably the
fastest growing and unquestionably the most protable industry in the
world.
Ordinary Colombians know where the narcobourgeoisie live, in Bogota,
Medellin, Cali, and Barranquilla, protected by the Colombian State (Leech,
2000). The Colombian ruling class is dependent on U.S. capital for the
economic war but also for the political war with which the counterinsurgency is associated, with International Monetary Fund (IMF) structural
adjustments, privatization, and the Free Trade Area of the Americas
(FTAA) supported by President Uribe. A high level of U.S. capital for the
export of cocaine strives to meet its imperial objectives for re-colonization.
Meanwhile, the process of imperialism drives workers and peasants into the
FARC and the ELN.
6. CONCLUSION: COCAINE AS
IMPERIAL COMMODITY
Will U.S. imperialisms current need for oil mean an intensication of the
imperialcomprador partnership in Colombia and their mutual dependency
on cocaine and other drugs like heroin and amphetamines? Will similar
patterns manifest in opium rich Afghanistan where U.S. capital, let alone
capitalism, has yet to fully take hold? Cocaine is an imperial commodity that
relies on legitimate nancial institutions for its production and sale, regardless of the bourgeois legislature in place. Commodication makes a
lucrative market and prot-making opportunity possible for the narcobourgeoisie. The dominant conventional framework says a lot about the
legal and nancial problems associated with the investment of drug prots
outside of Colombia but says little about the class relationship between the
compradors and U.S. imperialism in Colombia.
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Honore de Balzacs famous quote that behind every great fortune there
lay a great crime is probably an accurate assessment of the political economy of contemporary Colombia. It is true that both capital and drugs were
exported even before the epoch of imperialism. But then it was the practice
of mainly one country England and it proceeded on a relatively small
scale in its colonies.
We say that Colombian dependency on U.S. capital and the export of
cocaine is typical of narcocolonialism, rst, because it has now come to
play a much more important role than any other export commodity, and,
second, because the export of cocaine and narco-capital to the U.S. is both a
result and a manifestation of the power of the comprador narcobourgeoisie.
Apart from the main purpose of obtaining prots via drug money laundering banks and U.S. nance capital, however, the export of capital is an
important instrument for expanding and controlling marketing outlets; exploiting a country through a process of re-colonization; and of course, to
ght a revolutionary movement. Let us recall the loans throughout history
in which many regimes around the world (particularly comprador ones in
similar circumstances) were given to suppress social insurrections and national liberation struggles.
Throughout the cocaine decade, the imperial commodity penetrated
Colombias political economy, intensifying the struggle between the monopoly absentee landlords and landless peasants (the FARCs main support
base). Like the nineteenth century British colonies, Latin America suffered
not only from the development of capitalist production, but also from the
incompleteness of that development due to a new form of re-colonization.
Within this free economy, cocaine lent itself to monopoly control. The
institutionalization of cocaine into the Colombian social order revealed the
drug to be truly an imperial commodity, generating a lucrative market for
huge prots in a class system driven by imperialism.
The development of the cocaine trade and role of U.S. imperialism in this
process has been almost totally neglected. Understandably, American historians have not been eager to probe deeply into what must now seem an
entirely shameful aspect of the imperial adventure. For similar reasons,
mainstream political economy has failed to approach this subject as well.
Applying class and imperialism in its historical context to a specic item of
private property offers new ways through which to learn about the economic development of Colombia and its premier illegal export cocaine; the
nature and formation of the Colombian ruling class and State; and their
relationship with U.S. imperialism.
121
The international bourgeoisie and its organizations seek to disguise the

illicit nature of cocaine revenues by introducing them into the stream of
state-monopoly capitalism through legitimate commerce and nance with
their dominant neoliberal free trade policy. From a Marxist perspective,
imperialism prots from criminal nance the nancial side of virtually all
bourgeois crime for prot, where new qualitative features sometimes
unique, even unusual, have taken form throughout moments in imperial
history. The cocaine trade in general, and the cocaine economy in particular,
is a vital aspect of U.S. imperialism in the Colombian economic system. This
may well be a new brand of U.S. imperialism for the twenty-rst century,
but one with old shades of neo-colonial nostalgia.
NOTES
1. The United States Financial Crimes Enforcement Network (FINCEN, 2000,
p. 2) describes money laundering as the process by which criminals or criminal
organizations seek to disguise the illicit nature of their proceeds by introducing them
into the stream of legitimate commerce and nance.
2. As Perus current president Alan Garcia admitted during his rst term in ofce
between 1985 and 1990: The only successful transnational enterprise originating
in our countries is narcotics trafcking. The most successful effort to achieve
Andean integration has been made by the drug trafckers y . Quoted in Rabine
(1989, p. 94).
3. According to the IADB, 48 percent of Colombian land is owned by wealthy
absentee landlords who comprise 1.3 percent of the population. Poor peasants, accounting for 63 percent of the population, own less than 5 percent of the land.
Wealth and inuence are concentrated in the hands of those with land in Colombia,
42 percent of the arable land is owned by the drug Maa allowing drug trafckers
to buy social acceptance in Colombian agribusiness, military defence, and politics.
See IADB website http://www.iadb.org/.
4. For analyses of the continuity and success of Colombian macroeconomic policies and the relative economic stability they produced, see Reveiz and Perez (1986)
and Garcia (1991).
5. According to Bucchis book, in attendance was Bucchi, John Hull (a CIA asset
in Costa Rica), a Peruvian drug lord named Luis Porto, and representatives from the
Medellin Cartel and La Corporacion organization of Bolivia. Bucchis book tells
of secret meetings with George Bush, William Casey, Medellin Cartel leaders
Pablo Escobar, and Fabio Ochoa, Panamas Manuel Noriega, a CIA agent named
Claire George, and mid-level ofcials from different government agencies that included the DEA, Defense Intelligence Agency (DIA), Federal Bureau of Investigation (FBI), and Department of Defense (DOD). Bucchi claims he spent three years in
OPM where the CIA negotiated with the heads of the dominant cartels. This deal
would allow the cartels to operate under the condition they gave up half of their
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cocaine exports to the Agency. Al Martin writes of rst hand knowledge of covert
drug trafcking operations by the CIA.
6. Bucchi has said his task was to fund the drug lords and provide cover for their
distribution routes where one operation ew drugs from Colombia to a CIA airstrip
in Texas.
7. Escobars image as a modern Robin Hood was born in the slums that surround
Medellin. In a place known as Barrio Pablo Escobar, it is believed that masses have
gathered to pray for his soul in a church he built where music from the steeple drifts
over 200 homes where he also built for the poor. People in Barrio Pablo Escobar
prefer to forget Escobars violent reputation. His brother, Roberto Escobar, says
they called him El Patron, the boss, because in Colombia, people who own a
company are called Patrones. The poor people began to call him El Patron because
he would bring two or three trucks to the poor barrios and he would distribute food
to people who did not have any.
8. Crittenden described how CIA money was own from CIA headquarters at
McLean, Virginia to the heavily guarded Marana airport, sometimes using a Boeing
707 aircraft with NASA markings own by CIA pilots including him. Crittenden
alleges that part of this money paid for drug shipments arriving from South and
Central America. The cocaine ights came from a network of private airstrips in
Bolivia via Colombia. Robbins argues after the January 1973 ceasere in Vietnam,
the U.S. engaged in what was described as the biggest rummage sale of spy equipment in history. By February 1975, the CIAs proprietary airline Air America allegedly involved in drug smuggling in Southeast Asia, held meetings over ten days in
Hong Kong with ofcials and senior representatives of South American republics.
Top-secret deals were made when a large number of transport and semi-military
aircraft were sold to these countries ofcials. Robbins writes that the pilots who ew
for the [Air America] underworld left Southeast Asia as millionaires, smuggling
gold, heroin, even human beings.
9. In a list of AZ case studies featuring countries involved in money laundering,
the United States is not included in this source.
10. Cited in Richani (2002, p. 181, n. 54). This web page has been taken down.
11. Colombias National Association of Financial Institutions (ANIF) estimated
the nations total 1999 income from the illegal drug trade to be $3.5 billion. The
ANIF estimate was based on an assumption that somewhat less than 10 percent of
total earnings from illicit drug sales are repatriated to Colombia each year, and on
reported total world retail level sales of Colombian cocaine, heroin, and marijuana
of $46 billion. The gures are based on a 1999 study. Based on these estimates,
Colombian drug earnings would be considerably higher today if we consider current
productive forces and relations of production.
12. A major DEA report in 1999, reported heavy involvement in pervasive drugrelated corruption in all branches of the [Colombian] government including the
military.
13. According to U.S. intelligence estimates, the FARC tax on agricultural production which includes coca (not cocaine) is $30 million a year.
14. In Marx to Joseph Weydemeyer in Frankfurt Am Main, June 27, 1851, Marx
points out that long before him bourgeois historians had described the historical
development of class struggle and bourgeois economists the economic anatomy of
123
the classes; what he did was demonstrate: (1) that the existence of classes is merely
linked to particular historical phases in the development of production, (2) that class
struggle necessarily leads to the dictatorship of the proletariat, and (3) that this
dictatorship itself only constitutes the transition to the abolition of all classes and to
a classless society.
15. The HenaoMontoya organization is also known as the Norte de Valle cartel
located in Cali. See also http://www.usdoj.gov/dea/briengbook/page3448.htm
16. This had to do with their class origins and Pablo Escobars own left-wing
populism, which greatly inuenced the Medellin Cartels politics. A study of 20 middle
and top-ranking drug trafckers from Antioquia in 1988 revealed: 70 percent were of
peasant origin (40 percent from the rural middle and lower classes) and 30 percent
from the urban lower class. Fifty-ve percent had only primary education, 35 percent
secondary, and 10 percent had been to university. The study was cited in Jenny Pearce
(1990, p. 114).
17. Other myths include: (1) cocaine is not important to Colombia, (2) the importance of cocaine to Colombia is often exaggerated, (3) the killing or imprisonment of cartel leaders makes a difference, (4) the cocaine trade exists because of
corruption and criminal organizations which outsmart resource-superior authorities and the law, and (5) the CIA has never (or hardly ever) trafcked in drugs and
drugs are not important to U.S. political economy.
18. Heroin is not a new industry to Colombia, small-scale opium cultivation and
heroin processing has existed for approximately 30 years. Most recently, a similar
process has developed, paving the way for new drug markets in amphetamines such as
speed and ecstasy. Cocaine, however, remains to be Colombias premier illicit export.
19. Fitts is a former Managing Director of the Wall Street investment bank Dillon
Read before becoming Assistant Secretary of Housing under George Bush Sr.
20. Grosse (2001) describes this process in Colombia as the forex black market.
21. This is why imperialism is called the epoch of nance capital. In the interest of
the imperialcomprador partnership, these magnates of capital are currently bringing about a great conict in Colombia, inciting war, suppressing unions and the
labor movement, and attempting to crush the popular insurgency.
22. Only two companies have turned up in U.S. government anti-laundering
efforts. One is Phillip Morris for laundering $40 million in Colombian black market
pesos in 1995, case closed without prosecution three years later, and again in 2000 for
smuggling Marlboro cigarettes into Colombia purchased with black market pesos.
The other company is Bell Helicopter Textron. In August 2000, Panamanian ofcials
seized a Bell Helicopter belonging to Victor Carranza, a Colombian property owner
and paramilitary leader of the narcobourgeoisie. The helicopter was purchased from
Bell Helicopter Textron with the proceeds from a massive cocaine and heroin operation. Bell Helicopter has been a contractor for Plan Colombia. Only $300,000 was
seized from its accounts. The bank was Chase Manhattan.
23. These gures are from Ana Carrigans (2002) article. See also, United Nations
Drug Control Program (UNDCP) (2002) survey Global Illicit Drugs Trends. The
survey estimates the average price of cocaine in 2000: Wholesale (per kg): United
States U.S.$20,500/Europe U.S.$38,000. Retail (per gram): United States U.S.$80/
Europe U.S.$70. These are average prices that remain steady. Prices are lower in
some major cities. The quality of cocaine will also affect the price.
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24. The laboratories owned by campesinos in guerrilla-controlled areas are no

more than tin sheds, sometimes described as kitchens. This is what is shown in
media documentaries. They are located in the rainforest with portable diesel power
generators and plastic sheeting. The National Coordinating Committee of Coca and
Poppy Growers (COCCA) describes this exploitation by imperialism as the fascist
project of the ultra-right tied with paramilitarism and with transnational groups
linked to both war and megaprojects exploiting national resources and labor.
25. According to the DEA, most chemicals enter Colombia by sea from the United
States, Europe (particularly Germany and the Netherlands) or China. Most chemicals destined for drug laboratories enter legally through seaports in Barranquilla,
Cartagena, and Buenaventura. The chemicals also enter from Ecuador, Venezuela,
and Brazil. The highway between San Antonio (Venezuela) and Cucuta (Colombia)
is a major chemical transportation route into Colombia. They also enter Colombia
from Venezuela via the Orinoco River and Brazil via Amazon River tributaries.
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United Nations Drug Control Program (UNDCP) survey (2002). Global Illicit Drugs Trends.
U.S. Companies Tangle in Web of Drug Dollars. (2000). The New York Times, October 10.
USGPO (U.S. General Accounting Ofce) (1999). US General Accounting Office, drug control:
Narcotics threat from Colombia continues to grow. Washington, DC: USGPO.
U.S. military and Police Aid, in The Center for International Policys Colombia Program, at
http://www.ciponline.org/colombia/aidprop.htm
Valentine, D. (2004). The strength of the Wolf: The secret history of Americas war on drugs.
New York: Verso.
Villar, O., Cottle, D., & Keys, A. (2003). The kill for drugs policy? Ecocide in rural Colombia.
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Australasia. Conference paper November 28.
Web, J. (2001). Colombia produces more cocaine than thought-source. Reuters, May 15.
Williams, P. (1998). The nature of drug-trafcking networks. Current History, April.
Williams, F. C. (1994). Transnational criminal organizations and drug trafcking. UNODC
Bulletin on Narcotics, Issue 2.
Woods, B. F. (1998). The art & science of money laundering: Inside the commerce of the
international narcotics traffickers. Boulder, CO: Paladin Press.
Zabludoff, S. J. (1997). Colombian narcotics organizations as business enterprises. Transnational Organized Crime, Summer.
Zill, O., & Bergman, L. (2000). US business and money laundering and the Bell Helicopter case.
Frontline, October.
THE TRANSFORMATION OF
POST-COMMUNIST ECONOMIES
IN A GLOBALISED ECONOMY:
THE CASE OF POLAND
Jane Hardy
ABSTRACT
This article argues that the transformation of the economies of Central and
Eastern Europe (CEE) has to be understood in the context of the dynamics
and development of the global economy. The analysis draws on the notion of
combined and uneven development in which there has recently been renewed
interest. Too often this notion has been a slogan that lacks substance, but
the article elaborates how change is a dynamic process of interaction between economic change and political and social forces. The neoliberal
analysis, as well as some Marxist accounts, are criticised for being deterministic, linear and prescriptive. This account emphasises the institutional
dimension and role of the state as being critical to understanding the varied
outcomes between and within economies in CEE in terms of the way that it
has mediated the reinsertion of these countries into the global economy. The
story focuses on agency, a neglected aspect of analysis, in emphasising the
ideological and discursive aspects of transformation, which attempt to justify and reinforce economic and material changes and to close down debate
about alternatives. Crucially, the form and content of development, in its
ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24004-0
131
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JANE HARDY
widest sense, cannot be known or predicted because the process of transformation has been contested by different factions of the ruling class and by
workers. Despite the marginalisation of organised labour in mainstream
and many radical accounts, it is argued that trade unions and workers have
been central to the process and outcomes of transformation.
In the early 1990s, there appeared to be two mutually hostile camps in the
policy and academic communities. In one camp were those who saw Central
and Eastern Europe (CEE) as a laboratory in which they could experiment
with the implantation of capitalism in the raw through neoliberal policies.
In the other camp were those who could be broadly described as institutionalist in that they understood the importance of history, politics and
institutions in explaining economic change. They envisaged a more inclusive
and social democratic variant of capitalism. In addition, there is a stream of
radical and Marxist thinking on transformation, which is highly critical of
mainstream analyses and neoliberal theories in particular, both for their
erroneous reasoning, but also for the detrimental impacts of their policies on
the lives of ordinary people.
This article begins by looking at the dominant prescriptions that were put
forward to transform the economies and societies of CEE. It is tempting to
omit reviewing these academic debates, because the ground has been well
covered and neoliberalism can appear to be something of a straw target.
However, these ideas need to be laid bare and the arguments against them
rehearsed, because their deployment has not been conned to the transformation of post-communist economies. They are continually recycled to justify a particular set of neoliberal policies in both advanced and developing
economies by right wing and social democratic governments alike. The main
part of the article puts forward a Marxist framework of analysis, which
offers an alternative way in which we can understand transformation in the
context of restructuring the global economy, and which informs a different
way of thinking about economic and social organisation.
1. MAINSTREAM PRESCRIPTIONS
1.1. Neoliberal Fantasies
Lipton and Sachs (1990) wrote the seminal article summarising the neoliberal1 position on Poland, which argued that the goal of reforms was to
The Transformation of Post-Communist Economies
133
produce an economic system comparable to the capitalist economies of

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

and the nomenklatura (Lipton & Sachs, 1990; Frydman & Rapaczynski,
1994). The role of the government was to be conned to that of providing
the physical and institutional infrastructure of a market economy. According to Kornai (1990, p. 38) unambiguous and emphatic statutory force
should be given to the principle that the private sector has unrestricted scope
in the economy.
There is a strong class element to neoliberalism. Specically these new rules
governing the functioning of capitalism include a new discipline for labour
and management to the benet of lenders and shareholders (Dumenil &
Levy, 2005). In the case of CEE, this involved consolidating a class through
privatisation that would become the new owners and beneciaries of transformation, while workers faced unemployment and cuts in welfare. In Poland
workers in the public sector were immediately faced with a fall in living
standards as their wages were restricted (popiwek) in the face of high ination. The role of state as provider of welfare was diminished, but it still
remained a staunch defender of capital with regard to its domestic and international rms. There was a dramatic growth of nancial institutions in
their own right as well as a new relationship between nancial and nonnancial institutions; and legal frameworks to facilitate the free ow of capital, such as mergers and acquisitions.
With hindsight it appears even more risible that these neoliberal economists and policy makers thought that the new capitalism could be instituted according to some textbook blueprint, or sophisticated mathematical
model, particularly popular in economics departments. Anyone who has
had the merest irtation with economics will know that its predictive and
prescriptive capacity is completely reliant on a set of theoretical propositions
known to be true only under highly stylised circumstances (Murrell, 1993).
This perspective is in complete denial about the role played by the state
historically in economic development, and its continued crucial role in capital accumulation. The mantra of competitive markets demonstrates complete blindness to a central feature of contemporary capitalism, i.e., its
domination by a small number of large rms (oligopolies). Further, the
rhetoric of the market as an impartial adjudicator was quickly exposed as
privatisation got underway. The selling off of vast swathes of assets was
not a technical issue, but again an issue of class, which involved squabbling between different sections of the ruling class as to whether their interests lay with domestic or foreign capital and a deepening anger from
working class people as they were excluded from the division of the spoils
(Kowalik, 2001).
135
1.2. The Rediscovery of Institutions

From 1990 transformation in Poland unfolded in ways that were unexpected
in that State Owned Enterprises (SOEs) did not suddenly become competitive, unintended with high and persistent levels of unemployment and uneven
in the misery that was experienced by large sections of working class people
while others enriched themselves (Gora, Kotowska, Porek, & Podgorski,
1993; Gomulka, 1993; Paci, Sasin, & Verbeek, 2004). This left the door open
for accounts of social change which drew on evolutionary thinking and
those that were based on the rediscovery of institutions (Jackson, 1992;
Tsang, 1996; Van Ees Garretsen, 1994).2
This broadly institutionalist perspective has several strands.3 One school
of thought argued that the institutions of the state could be used to encourage the development of a Western-style corporatist social order
(Amsden, Kochanwicz, & Taylor, 1994), where planning had to reinvented
and capitalism embedded into societies in which, it is argued, for decades it
had been unable to t. Further, it was argued that the lessons of late industrialization in the Newly Industrialised Countries of South East Asia
could be transferred to CEE (Lo, 1995; Chang, 1995; Henderson, 1998;
Kozul-Wright & Rayment, 1997). The clearest expression of this position is
in the work of Amsden et al. (1994) where it is argued that the activities and
prescriptions of the Bretton Woods institutions, such as the World Bank
and the IMF, allied to a mistaken commitment to the free market based on
simplistic eighteenth century liberalism have been little short of disastrous in
places such as Poland. They conclude that this was quite simply the wrong
capitalist model (Amsden et al., 1994).
A second perspective drew on the old institutionalists4 to argue that
markets are socially embedded and politically constructed (Polanyi, 1944;
Granovetter, 1985; Smelser & Swedberg, 1994). This view was succinctly put
by Myrdal (1957):
The market does not just happen. It is not a natural phenomenon. The market is a set of
instituted social relations, a set of rules determining what things can be exchanged, who
can exchange them, who will benet from the exchange, and whom will bear the burden
of the exchange. (p. 8)
This emphasised that there was no such thing as a pure market, because any
functioning economy puts in place rules to regulate the behaviour of rms,
and the relationship between capital and the state. Chang (2002) exposes the
way in which what is considered the free market and what comprises intervention is politically driven and socially constructed. For example,
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JANE HARDY
environmental regulations in advanced countries are now rarely regarded as

intervention in that there is a degree of consensus about the desirability of
having a clean environment. However, foreign investors from advanced
economies operating in developing countries protest against the same legislation as market distorting as it interferes with their protable activities in
exploiting natural resources.
A third institutionalist strand of thought draws on evolutionary approaches and centres on the behaviour of economic agents as a product of
both present and historical social processes (Murrell, 1993; Pickel, 1992;
Stark, 1990, 1996a, 1996b; Grabher & Stark, 1997; Chavance & Magnin,
1997). In arguing that past behaviours have shaped economic institutions
and the response of economic agents, neoliberal zealots are criticised for their
contempt of historical processes. One illustration of this was that reforming
economists believed that, when the hard budget constraint was imposed
(a technical term for the end of subsidies), then rms would lay off workers,
innovate new products and become efcient, in the way that textbooks predicted (Winieckie, 1992). However, conditioned by their past behaviour and
based on strong informal networks, a system on interrm debt evolved to
deal with the lack of subsidies and many rms carried on operating in much
the same way as before. UK consultants that I interviewed at the Nowa Huta
steelworks in Krakow in the mid-1990s expressed their frustration at the
incumbent management who had to be sent off to team meetings in an upmarket hotel three times before they were prepared to delete the goal of
providing employment for the community from their mission statement. For
all the faults of the previous regime, the idea of removing peoples livelihood
and access to the welfare benets of SOSs was an anathema.
Therefore, evolutionary thinking is highly critical of any notion of a
blueprint of a market economy or of the market institutions which comprise
it. They point to the irrelevance of textbook economic theory when compared to the vividness and variety of arrangements present in past and
present capitalist economies (Murrell, 1993; Hodgson, 1996).
A fourth strand of thinking came from those who had originally invoked
the use of unbridled market forces to restructure the economies of CEE, but
abandoned this red in tooth and claw approach to capitalism. References to
notions such as governance, transparency and institutions began to creep into
the vocabulary of the World Bank (1996, 2002). The nonsense of pumping
money into these economies and then expecting the market to arise like a
phoenix from the ashes became embarrassingly and abundantly clear in the
debacle of the IMF in Russia. The millions of dollars of aid which had been
poured into assisting with building markets and competitive structures had
137
actually lined the pockets of a small group of people who managed to turn
themselves into even more wealthy oligarchs (Florio, 2002). Although less
spectacular, the showering of aid to facilitate the move to democracy in
Poland, beneted sections of the nomenklatura and fed the material ambitions
of an emerging ruling class. This approach is evident in the criticisms of
dissenters from within the camp of those who were latterly regarded as
mainstream economists such as Stiglitz (2002, 2006) and Krugman (2003)
who are argued that the market needed to be reined in and embedded in
transparent and accountable institutions and structures of governance.
1.3. Different Visions of Capitalism

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

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

Capitalism has to be understood as unifying the world into a single interactive productive system under the dominance of capital. If one single law
expresses the capitalist form of combined and uneven development it is the
139
law of value. This law has two main aspects. First, competition means that
all producers have to produce with the minimum input of labour time and,
second, it forces a tendency towards a normal rate of prot in all industries.
The transformation of CEE is, therefore, combined in the sense that the
growth, stagnation and eventual disintegration of these communist economies has to be understood in the context of the dynamics of the global
economy.
The 1950s and 1960s were regarded as the golden years of world capitalism. Rates of unprecedented growth and consumption were not only
conned to the U.S., Western Europe and Japan, but were also extended to
the communist economies in the East. The retrospective brush with which
neoliberals paint a picture of uniform inefciency does not accord with the
fact that these regimes were, until the late 1960s at least, able to deliver
rising standards of living. Although their development took place behind
closed doors, the logic of world capitalism nevertheless impinged on the
nature and form of their development as they were forced to compete militarily with the West (Haynes, 1987). Production was distorted towards
heavy industry at the expense of the production of consumption goods. In
other words, they were not immune from the rhythms of the global economy.
By the late 1960s the long boom was ending and this was not only clearly
evident in the advanced economies, but was also reected in a slow down in
the growth rates and prot levels of countries in the Communist bloc
(Maddison, 1991, 2001). However, while the advanced economies had wellhoned tools for disciplining capital in the face of a crisis, the option of
mergers, takeovers, bankruptcy and liquidation were missing from the repertoire of communist economies such as Poland. As Haynes and Hasan
(2002) point out:
The slow integration with the global economy [through the reforms of the 1970s and
1980s] potentially offered economic advancement, but they also created rising debt trade
imbalances, and the international transmission of inationary pressures which out a
severe burden on the domestic planning mechanism (270).
In Poland the period of 19481989 demonstrated the process of the development and subsequent disintegration of an extreme form of socioeconomic formation, that of state led industrialisation, within a world
economy that was increasingly integrated and crisis ridden (Slay, 1994;
Simatupang, 1994). State-led industrialisation of one variety or another was
the dominant form of organising capitalism during the long boom of the
1950s and 1960s. However, it held within it the seeds of its own destruction.
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JANE HARDY
As the depth and breadth of linkages in the global economy became greater
national development behind trade barriers became increasingly impossible.
Successful and expanding rms, initially from the U.S., needed to move
outside their national boundaries into new territories in order to accumulate. However, this expansion of capital and internationalisation of circuits
of capital (Palloix, 1977) required a number of institutional developments
including the liberalisation of trade and investment, privatisation to free up
the assets of other economies and the deregulation of nance. The latter was
necessary to sell nancial services but also to recycle prots to provide the
funds for further expansion. Together these interrelated trends and developments have been termed as globalisation.
The opening up of CEE after 1990 exposed these countries to a process
where economic linkages in the global economy were undergoing profound
changes through trade, investment and nance. Therefore, the increasing
integration of post-communist economies into the global economy has
deepened the combined nature of capitalist development and at the same
shaped the context in which transformation has unfolded.
The uneven development of capitalism with concentrations of wealth on
the one hand and poverty and oppression on the other is ubiquitous and the
evidence uncontestable. However, according to neoliberal economics this is
a necessary, but transitional stage in the workings of the market in reallocating factors of production and bringing about a convergence of income
and rates of growth. Other economists see this as the outcomes of the wrong
policies in a banana skin version of economics, where domestic or trade
policy needs to be tweaked by a technocratic state, usually informed by
Keynesian thinking. However, this unevenness is neither an accident of
economic change and development, nor a shortcoming of policy, rather it is
a necessary and central aspect of capitalism. There is much debate surrounding the origins and socioeconomic mechanism of unevenness (Mandel,
1968; Smith, 1990; Lowy, 1981; Radice & , 2006) but simply put, geographical unevenness is the diverging returns on investment reected in
different opportunities for prot. The result of competition is the creation
and/or destruction of entire built (and natural) environments, as well as the
social structures that accompany them. Capitalism perpetually seeks to create a geographical landscape to facilitate its activities at one point in time
only to destroy it and build a wholly different landscape at a later point in
time to accommodate its perpetual thirst for endless capital accumulation
(Harvey, 1996). The exposure of Poland to the vagaries of global competition through shock therapy unleashed a process of creative destruction.
However, there was much more destruction than creation as large sections
141
of industry and rms were uncompetitive in comparison to their Western

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

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

Although the world is increasingly integrated into a unied single world
market it is not a homogenous capitalist milieu and the strong institutional
foundations that underpin uneven development have been a neglected part
of the analysis. Here we mean institutions in the widest sense, including not
simply the different relations among local states, local capitals and local
labour forces, but also the whole political and cultural web of social relations in which these are embedded and the corresponding local forms of civil
society (Barker, 2006).
Myrdal (1957) argued that a backward country must have sufcient
institutional and cultural capacities to appropriate advanced technology.
Davidson (2006) drawing on Veblen, argues that even though technologies
could arrive ready made, this would not overcome the legacy of old ways of
thinking, with which they could coexist for a period of time at least. This is
well illustrated by Van Zon (1998) in his study of the Zaporizhzhya area of
the Ukraine, where he observes that the habits and norms that persisted
from the previous regime, in terms of a climate of kleptocracy and corruption by the ruling class in an atmosphere of general distrust, led to low levels
of foreign investment. Despite the introduction of both formal and informal
institutional change through foreign investment and Western management
143
techniques, deep structural characteristics in the economy and business such

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

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

Neoliberal accounts suggest that the state needs to be dethroned as the
owner of assets and stripped of it role in the organisation of economic
activity. Lipton and Sachs (1990) suggested that the legacy of the communist
bureaucracy made it incapable of intervening even in cases of market failure.
However, the state has not withdrawn nor have its activities been diminished, rather the nature and form of state intervention has changed (Shields,
2004). A dramatic reorganisation of institutions was necessary in order for
the economies of CEE to integrate with the global economy and the state
was central to authoring and instilling new structures consistent with and
necessary for neoliberalism. For example, a number of tasks such as the
145
regulation of competition, arbitrating between foreign and domestic capital,

reassigning property rights and contract law needed to be accomplished.
New government departments and quangos were elevated in prestige and
importance. The Ministry of Privatisation was central to the transformation
project as the department charged with divesting public assets and selling
individual SOEs as well as whole sectors of industry. The newly established
foreign investment department (PAIZ) was pivotal in taking part in the
locational tournaments which characterised the strategies of other European
countries in their bid to win a slice of global capital and capture, at least part
of, the value chains of large transnational rms.
Changes in the organisation of nance and banking were of paramount
importance and were a condition of existence for the market economy itself
(Grahl, 2005, p. 293). Moves towards establishing a Central Independent
Bank, which had started before 1990, underpinned the macroeconomic
framework necessary for the neoliberal project (Grabel, 2003) to ensure
sound money and disentangle nance from domestic capital and the political inuence of the nomenklatura. Europe and the U.S. needed new markets
in which some of their largest and most protable nancial rms could
operate, and this was particularly true of the UK and the U.S. who dominate
global nancial services (WTO, 2006). The outcome of this scramble for
assets is reected in a high degree of foreign ownership with foreign banks
controlling about 70 per cent of domestic banking assets (Weill, 2003). Ten
out of the twelve large commercial banks in Poland are owned by foreign
institutions, with the State Treasury owning the remaining two. There has
been a tendency to focus on the speculative, destabilising and parasitic effect
of the deregulation of nance rather than its critical role in recycling the
prots to lubricate the restructuring of the productive sector of economies.
This adjustment of domestic policies and organisations was not a
straightforward process whereby the nation state transmitted or refracted
the needs of global capitalism. The competing interests of different sections
of the ruling class, and struggles of organised labour made the processes
protracted and the outcomes a political compromise, particularly regarding
privatisation. Therefore, the restructuring of the state was much more complex than simply guaranteeing the conditions for the operation of transnational capital.
If the rst stage of transformation can be seen as a rather chaotic and
contested attempt to integrate with an increasingly liberalised global economy, then European integration can be seen as a more systematic consolidation of that direction. The aim of the EUs strategy has been to promote
neoliberal reform and the inuence of European transnational capital
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JANE HARDY
through the liberalisation and deregulation of CEE (Holman, 2001; Bieler,

2002; Smith, 2002; Shields, 2004). Dangling the carrot of membership, the
EU managed to push the CEEs towards adopting a specic neoliberal reform model, which was a much more radical variant than the one operated
in the economies of existing members. Having to conform to EU norms,
regarding state aid and rules on competition policy in particular, wedded
these countries to the liberalisation of trade and investment in a way that
made it difcult to accede to any demands by members of the ruling class for
protection or retreat (Bieler, 2002). New regional structures were demanded
in line with EU policy even if they did not t in order to establish administrative units through which to implement structural funds (Smith &
Hardy, 2002).
Two projects which consolidated the neoliberal project in Europe were
extended to Poland and the other accession countries. The rst was the
European Single Market, a popular symbol used to relaunch European
integration in the mid-1980s and implemented in 1992, the aim of which was
to restore Europes global competitiveness with Japan and the U.S. This
opened up all economies and prised open previously protected sectors
(e.g., services, utilities and telecommunication) to trade and investment.
While the rhetoric was of innovation and economies of scale the reality was
that it allowed the reorganisation of European capital over a wider territory,
which was manifest in an unprecedented wave of mergers and acquisitions.
The aims of the legislation regarding monetary union with a central bank
and single currency were threefold. First, it was the nal consolidation of the
single market as it removed barriers and reduced costs for large rms in
providing an undifferentiated terrain on which capital could operate. The
second effect was that it disciplined capital (Gill & Law, 1993) and particularly public spending through the restrictive monetary policy in the
convergence criteria of the Maastricht Treaty and Stability and Growth
Pact. This depoliticised central policy elds and left little room for manoeuvre for wage increases (for working class people at least) and social
policies. The role of monetary policy was therefore to exert a disciplinary
neoliberalism, particularly on weaker economies which would face the
highest costs in terms of unemployment (Carchedi, 2001). Third, monetary
integration in the EU was driven by a need to overcome the fractured and
idiosyncratic nance systems of individual European countries to build a
huge liquid market in Euro-dominated securities arising from the material
necessity to compete with the U.S. with the self proclaimed aim of the EU
becoming the cheapest and easiest place to do business in the world (Grahl,
2005, p. 293).
147
While the needs of different sections of capital have not been homogenous, the push for enlargement has broadly reected the interests of both
European and U.S. capital and their ruling classes. However, the global
economy does not sit above the Polish state, but is inextricably linked with
its internal changes impacting on the structure and activities of other states
in a dialectical process. Therefore, the reconguration of the Polish state has
not been the result of genuecting to the needs of international capital, it has
been the outcome of wider struggles between different sections of the domestic ruling class and labour.
2.4. Ideological Dimensions

It is important not only to analyse how the countries of CEE and their
regions are tting into the emerging international division of labour, but
also to understand the important ideological dimension to globalisation and
the rise of neoliberalism. Notions of private property, competition for scarce
resources and the assumption of individuals motivated by self-interest are
presented as unchallengeable assumptions of economic life in neoliberal
analysis. This extends to ingraining a particular set of ideas and beliefs in
habits of heart (Harvey, 2005) and the commodication of everything has
to become an ethic in itself, capable of acting as a guide to all human
action, and substituting for all previously held beliefs (Treanor, 2005).
Dugger (2000) calls these ideas and discourses enabling myths and argues that they amount to a ction, which plays down differences in institutional conditions to create a deceptive clarity that a specic ways of
organising things is self-evident. In the context of the transformation of
CEE in general, and Poland in particular, the market, for example, has been
a pivotal enabling myth. The notion of the invisible hand is invoked to
suggest that the market will produce economic outcomes that are both efcient and equitable, and that will produce economic growth. However, the
market and associated enabling myths have not appeared spontaneously but
are promulgated by inuential agents who have attempted to shift understandings about economic behaviour, both deliberately and unconsciously.
From the national level to the workplace those in privileged situations have
attempted to marginalise old legacies and engender what are regarded as
new and appropriate understandings that are compatible with the market
and neoliberalism.
There is a long lineage of those who have tried to explain the way in which
those with power and wealth have convinced those who have not that this
148
JANE HARDY
state of affairs is a self evident fact and part of the natural order of things.
Every established order tends to reproduce, in different ways and to different degrees, the naturalisation of its own arbitrariness (Bourdieu, 1972/
1977, p. 164). It was Gramsci (in Hoare & Nowell-Smith, 19717) who elaborated this idea by suggesting that the ruling class achieved hegemony
through their control of the ideological apparatus of the state, and pointed
to the existence of organic intellectuals whose role was to justify the
status quo.
Creating hegemony is important at all levels of analysis and neoGramscians have been concerned with developing this notion in the context
of international relations and identifying a transnational capitalist class who
perpetuate and spread these ideas (Cox, 1993; Gill & Law, 1993; Sklair,
1997; Shields, 2003, 2004). Globalising bureaucrats are viewed as important
for laying the conditions for the internationalisation of capital. The instruments of rational, Western modernisation operating in CEE include some
of the most perfectly honed weapons of global governance that have evolved
in the post war period (Baker & Welsh, 1999); most notably these include
the World Bank, IMF, G7 and the EU. Within certain limits powerful
countries try to create international regimes that favour particular rms and
sectors by setting the rules of engagement (Hollingsworth & Boyer, 1997).
Powerful nations and the supranational organisations they dominate may
seek to alter productive systems in their own image and establish some sort
of ideological hegemony. This is established through coercion and conditionality on the one hand, and equally important from their point of view
the winning hearts and minds through replacing old habits and norms with
new discourses.
Less attention has been paid to the role of foreign investment, transnational corporations (TNCs) and their executives who have played a very
important part in establishing new material and discursive practices through
the deep restructuring of workplaces and workplace behaviour. Different
corporate strategies for instilling these new discourses include increasing the
rewards of incumbent managers in terms of their position, incomes and
wealth, as well as socialising local executives into the corporate culture of
the company (Hardy, 2006).
The activities of consultants have been neglected and it is difcult to
overstate the role they have played in the transformation of CEE. Erecting
the new institutional architecture, privatisation and the restructuring rms
are activities that have been central to their lucrative portfolios. They lubricate circuits of intellectual capital which are crucial to rms in crossing
national boundaries, not only necessary to smooth the path of circuits of
149
productive and nancial capital, but also to effect rapid change in situations
where managers have to react swiftly and turn businesses around in even
shorter time frames in a more competitive environment.
The role of international organisations and advisors are important but
should not be privileged in the analysis. Gowans (1995) account of transformation emphasises the role of institutions such as the IMF and World
Bank. However, this focus on actors that are external to the process, neglects the importance of domestic agents and classes in collaborating with,
acquiescing or resisting these ideas and practices. It is to this we turn in the
next section.
2.5. The Primacy of Class

Neoliberals have a very monochromatic view of class in Poland, and CEE
generally. According to this view, the old nomenklatura had to be disarmed
in terms of their political and economic power and the working class were
viewed as a stage army who had been usefully deployed in bringing about
the downfall of the old regime, but who then needed re-education (literally)
in the ways of the market economy. Lipton and Sachs (1990) bristle with
palpable irritation at the failure of politicians and workers to understand
that they needed to take a back seat so that the technocrats could implement
the project of the market unimpeded. The notion of class has been eviscerated from most accounts of transformation; in institutional accounts it
has been replaced by obliquely subsuming it in references to social groups
and elites whose interests are mediated by a neutral state.
Neo-Gramscians and other radicals, however, have reinserted class analysis into the transformation agenda, but in arguing that there was a bourgeois revolution without the bourgeoisie suggest the absence of a capitalist
class in Poland (and the rest of CEE) before 1990 (Bohle, 2006; Kowalik,
2001). The analysis presented here departs from the capitalism without
capitalists (Eyal, Szelenyi, & Townsley, 1998) account by arguing that a
ruling class did exist in the communist period, who, even though not having
formal ownership of assets had control over them and reaped the benets of
their privileged position in accessing wide ranging advantages from housing,
education to the consumption of material goods.
The emergence of a new ruling class, or some parts of it at least, has to be
understood in the context of the reforms in the two decades preceding
transformation. In the 1970s import-led growth, which involved buying
technology from the West in order to try and raise productivity, was the
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JANE HARDY
policy adopted to try and resolve the economic crisis. In addition, the limited establishment of small rms called Polonia was permitted. These policies gave some sections of the nomenklatura exposure to and experience in
dealing with Western rms as well as all-important access to foreign networks and business opportunities, some of which were capitalised on by the
new entrepreneurs in the small-rm sector. However, it was during the 1980s
that opportunities for large-scale kleptocracy opened up. The State Enterprise Act (1986) relaxed the stringent controls on the activities of State
Owned Enterprises (SOEs), and enabled managers and well placed bureaucrats to siphon off the most protable activities into new rms of which they
became the owners. They were able to obtain inputs cheaply or for nothing,
and use their contacts to establish lucrative markets and contracts. In the
post-1990 period they were able to consolidate these gains in what is euphemistically called spontaneous privatisation when they simply declared
themselves the owners of these new rms (Schoenman, 2005).
By the mid-1980s the nature of the crisis facing Russia, and therefore
Poland by extension, was that the system was no longer able to reproduce
the conditions of their own ruling class (Clarke et al., 1993). Their interests
therefore no longer lay in preserving a stagnating and uncompetitive economy, but lay in integrating with the global economy. Debates about privatisation have reected different factions of the ruling class, with a schism
between those who perceived their interests in lying with a domestic capitalism and those who had more to gain through international alliances and
further integration with the global economy.
After 1990 in Poland, established groups and more often than not the
nomenklatura served as gatekeepers for aid from the West as they were
already part of networks in government, business and politics. Many astute
individuals from the intelligentsia carved out a triad of business foundations
and scholarly activities, as well as serving as consultants, brokers and
partners. These opportunities were often eeting, but their ambitions and
activities were not curbed by rules and regulations, which were often nonexistent or not enforced.
The anthropologist Janine Wedel (2001) gives some fascinating insights
into the emergence of this new class and the way in which the nomenklatura
managed to manipulate and take advantage of this new orbit of opportunity
offered by western assistance after 1989. The money that ooded in to
support the market and democracy built on the backbone of these energised elites who cultivated international contacts and set up NGOs and
foundations to receive western aid. Registering as a foundation typically
provided favourable legal and tax advantages and, by 2000, 5,000
151
foundations and 21,000 associations had been established, which made it

legally possible for private groups and institutions to appropriate public
resources (Wedel, 2001).
Some have suggested the existence of a social vacuum and atomised behaviour in Poland, but in fact there was a complex system of informal
relationships, such as patron-client or horizontal networks, which pervaded
the economy and bureaucracy. Cliques of the old nomenklatura and Solidarnosc were therefore able to thrive and survive in a period of uncertainty;
prior hierarchies where everything depended on patronage and personal
connections were accentuated and consolidated.
However, as Shields (2004) rightly argues, Party membership is a poor
predictor of the elite after communism; in other words, the nomenklatura
were not able to simply convert themselves into the new capitalist class.
Some Solidarnosc activists were able to capitalise on this gravy train because
in the 1980s they:
Had redened reform by redirecting their efforts from political to economic activity and
preaching a new philosophy; form a club or lobby to do what needs doing and nance it
through entrepreneurial activities. Some people who had previously exchanged underground leaets at private gatherings turned to trading software and nancial schemes.
(Shields, 2004, p. 88)
The strand of the new ruling class, which emerged from the ranks of Solidarnosc was also facilitated by the privatisation process which enabled some
individuals at least to obtain assets and enrich themselves. Although vigorously opposed by those that had promoted the neoliberal agenda, one of
the main forms of privatisation for small and medium sized rms were
worker-manager buyouts. However, these were something of a misnomer as
it was usually the managers, often members of Solidarnosc, who became the
owners with token shares going to the workforce. Tittenbrun (1995) looks at
the methods used to acquire companies cheaply, either by undervaluing
them or borrowing the funds to buy them at low rates of interest. After
having tracked companies over a ten-year period, Tittenbrun (2005) documents the way in which workers ownership of rms, measured in terms of
shares, has dwindled to a tiny percentage of rms stocks and ownership,
with the result that it is concentrated in the hands of managers of Polish or
international rms.
Transformation also created a new layer of managers whose interests were
not those of ordinary people because their function was a staging post
and direct intermediary for the implantation and reproduction of foreign
capital. Therefore, although not a strictly part of the ruling class,
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JANE HARDY
transformation and opportunities offered by foreign companies and consultancies created a well-paid and highly rewarded group of people whose
interests lay with the new transnational capitalist class.
With a few notable exceptions, the role of organised labour is either
missing from or marginalised by accounts of transformation. Evolutionary
and institutional accounts see economic agents in general as cultural dupes
(Jessop, 2001, p. 1228), the passive bearers of a set of habits, norms and
routines from which they are unable to make a radical break. Other accounts see workers as victims of transformation, the object rather than the
subject of history and peripheral to the massive restructuring that was
happening. While neo-Gramscians acknowledge the importance of class in
theory, they are very pessimistic about the role of organised labour, seeing it
as either passive or actively acquiescing to the neoliberal project.
The view that organised labour was only briey centre stage in 1981
amounts to a dismissive account of history and, by treating the decades of
communism as an homogenous and undifferentiated epoch, fails to take
full acknowledge the rich tradition of organised workers in Poland in the
post-war period. This period was characterised by a sequence of revolt,
reform and repression. Workers rebellions, usually triggered by an increase
in prices, were followed by a two pronged approach from the ruling class,
which were reforms aimed at pacication alongside brutal repression, purges
and imprisonment. This pattern was evident in 1956, 1970, 1976, 1980 (see
Barker, 1986; Harman, 1988).
The working class, organised or otherwise, has had a central role to the
pattern of economic change in general, and the pace and form of transformation in particular (Thirkell & Vickerstaff, 1995; Clarke et al., 1993).
Further, post-1990 the role of working class resistance has been pivotal in
patterning the dialectic of change in Poland (Hardy & Rainnie, 1996). Many
accounts of trade unions in Poland have cited declining membership because
of restructuring and entrenched ideological differences as sufcient evidence
to condemn them to the margins. Although this may amount to wishful
thinking in some quarters, it does not accord either with the role that trade
unions played either in the early days of transformation or their recent
responses to the challenges of the new economy. Organised labour as a
force for change has largely been written off or dismissed as either impotent or active supporters of the market (Cox & Mason, 2000; Martin &
Critescu-Martin, 2004; Gardawski, Ga ciarz, Mokrzyszewski, & Pankow,
1999; Gardawski, 2003; Ost, 2002) and it is claimed that their frustration has
been channelled into nationalism and xenophobia.
153
Undoubtedly the Polish labour movement has faced major challenges

since 1990. The traditional bases of Solidarnosc in large SOEs have disappeared or at best been severely contracted, while employment has opened up
in new sectors with no tradition of trade union organisation. To compound
these problems, foreign investors in many workplaces have been overtly
hostile to the formation of trade unions, in some cases sacking workers who
tried to initiate organisation. Without fully debating issues related to labour
organisations, there are two important counter arguments to the pervasive
pessimistic view. First, claims of acquiescence to the market and neoliberal
ideas have been exaggerated and treated simplistically. In the early 1990s,
while some workers were convinced by the rhetoric of the market, at the
level of workplace there were numerous struggles over privatisation, the
reduction in welfare provision and job loss. These were not always reected
in strike gures, but were clearly evident in case studies of workplaces
(Hardy & Rainnie, 1996).
The second argument is that, since the late 1990s, there has been something of a revival, albeit modest, in workplace organisation and rebuilding
unions. There has been a reinvigoration of public sector unionism, particularly evident among teachers and nurses. The Union of Polish Teachers
(Zwiazek Nauczycielow Polskich (ZNP)) was involved in two phases of industrial action in 1997 and 1998 against government reforms. This signalled
the transformation of the ZNP from being a passive organisation to being a
proper union focused on defending working conditions and wages of its
members and prepared to use industrial action. Further, they have reinterpreted the meaning of political trade unionism by being prepared to criticise
all governments8 as well as consistently opposing the war in Iraq. In response to draconian reforms in the health service, nurses formed a completely new union, recruiting women who had not previously been members
of any of the main labour organisations. The All-Poland Union of Nurses
and Midwives (OZZPiP, Ogolnopolski Zwiazek Zawadowy Pielegniarek i
Po!oznych) emerged in 1995 and has grown through the course of reforms to
count 100,000 members (approximately half of all nurses). They mounted a
high prole campaign, which involved blocking railways lines and major
roads and occupying the ofces of the Minister of Health in 1999. The ZNP
transformed itself from an ofcial organ of the Communist Party limited to
a social role to a campaigning organisation with grassroots participation,
which has contested the reforms. Whereas the ZNP underwent a process of
gaining independence and behaving like a real trade union, the nurses, in
the OZZPiP, bypassed existing structures to form a new and completely
154
JANE HARDY
independent organisation which was at the forefront of militant and high

prole action (Stenning & Hardy, 2005).
By 1998 Solidarity took stock of a dismal situation where haemorrhaging
members threatened the existence of the union in workplaces and adopted a
strategy of very active recruitment. In general, although not exclusively, this
was aimed primarily at new sectors of employment and particularly focused
on supermarkets, truck drivers and security guards, although there were
different regional priorities. This recruitment initiative demanded a fundamentally different strategy which has had to be much more energetic in
identifying workplaces, imaginative in establishing contact with workers and
persuasive in recruiting employees in the face of a poor media image. In the
case of Solidarity, its new initiatives have extended across national boundaries as they have cooperated with the British TUC in trying to organise
some of the 700,000 Poles who have come to work in the UK since May
20049(Hardy & Clark, 2007).
A reluctance to recruit during most of the 1990s and lingering optimism
that rising poverty and unemployment would be stemmed and reversed led
to organisational stagnation. Workers had been told that the sacrices and
nasty medicine of shock therapy would institute a Polish capitalism that
would bring rising living standards and increased opportunities. From the
late 1990s, Solidarity turned away from parliamentary politics and their
main vehicle for redressing the grievances of members and has gone back to
the basics of workplace organisation. This has meant rebuilding the membership by recruiting aggressively in new sectors, private companies and
foreign investments. Achievements have been modest and mixed but represent a decisive turn in organisational thinking. A second aspect of this
modest revival in the fortunes of Polish trade unions is the extension of their
community unionism role to active intervention in the international and
domestic labour market. The role played in the 1990s was a defensive social
role in attempting to mitigate the worst effects of transformation. Rather
than passively accepting new developments they are attempting to engage
with and shape them, particularly by trying to protect their members from
exploitation in international labour markets.
3. CONCLUSION
The analysis presented here sees the development, collapse and subsequent
transformation of the Polish economy (as well as other post-communist
economies) both in the context of and contributing to changes in the global
155
economy. Not only should we understand transformation as being combined,

it is also inherently uneven. The location of economic activity in terms of the
production of infrastructure, goods and services are subject to competitive
pressures in the global economy, which are the result of and have intensied
neoliberal policies. However, outcomes and endpoints are not predetermined.
The state, the institutional architecture of individual capitalist economies and
the balance of class forces have been critical in shaping the content and
processes of transformation. Further, this account has also emphasised the
ideological onslaught that was deemed to be necessary by powerful interests
to try and secure compliance for the restructuring of these economies.
The law of uneven and combined development can only serve as a guide
to an investigation and analysis of the processes at work in a given social
environment. It can help to understand the peculiarities of past history and
aid an analysis of unfolding social processes. The importance of the concept
is that it allows the exploration of systematic unevenness in spheres such as
production, social reproduction and human domination along lines of
class, gender and ethnicity which stresses the social damage associated with
uneven capitalist development. Bond (1999) suggests that an analysis of
uneven development can inform activists who are focused on reversing
unevenness, to escape from production and social relationships driven by
the logic of capital and replaced by those which are the outcome of debate
and collective and individual choice.
NOTES
1. Neoliberalism is an alliance between neoclassical economics and the political
and moral philosophy of the Austrian libertarian tradition. See Chang (reference) for
a good critique.
2. Some schools of thought would see evolutionary thinking as a sub set of institutionalist thinking. Indeed, one of Veblens (1898) major contributions is an essay on
Why Is Economics Not An Evolutionary Science. As Hodgson (1998) points out,
evolutionary economics is a vague and ill-dened term, which does not necessarily
imply drawing directly on biology. Evolutionary theory in this section should be understood as those theorists who lean more heavily on the use of biological metaphors.
3. A detailed history of institutionalist thought and a taxonomy of the various
strands have been done extensively elsewhere (see e.g., Mayhew, 1988; Samuels,
1995; Hall & Taylor, 1996; DiMaggio, 1998; Hodgson, 2001, 2004; Nielsen, 2001).
4. The old institutionalism (Veblen) belongs to that social science tradition based
on a strategy of seeing people as a product of culture, whereas the new institutionalism
(Williamson, 1975; North, 1990) favours a view of people as rational choosers
(Mayhew, 1988).
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JANE HARDY
5. For a further discussion and critique of combined and uneven development, see
Elster (1986).
6. See Aglietta (1979) for the fullest and original synthesis and Glick and Brenner
(1991) for a critique.
7. Hoare and Nowell-Smith (1971) assembled and translated Gramscis writings
from 1917 to 1923, which are collectively known as the Prison Notebooks.
8. Traditionally, the ZNP has been allied to post-communist parties, but was
prepared to criticise them over their educational policies.
9. After Poland and other post-communist economies were admitted to the
European Union, only the UK, Ireland and Sweden opened their labour markets.
The number of Poles coming to the UK has far exceeded expectations and is now the
biggest post-war migration to Britain.
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SYRIAS TRANSITION, 19702005:

FROM CENTRALIZATION OF THE
STATE TO MARKET ECONOMY$
Angela Joya
ABSTRACT
This paper examines the transformation of Syrian political economy from
1970 until 2005. I argue that Syria has undergone two important phases
of political and economic transformation, from building a centralized
state and economy in the early 1970s to embarking on the path of market
economy in the early 1990s. With the logic of competitiveness guiding the
direction of economic development, the socio-economic changes of the
mid-1980s and after have corresponded with an important process of class
and state formation. After a brief discussion of the current transition in
Syria, the following sections of the paper attempt to provide a critical
study of the different strategies for economic development. Section two
examines the process of state and economic centralization of the 1970s
and 1980s and highlights the contradictions of this period. Section three
assesses the impact of economic liberalization through a study of competitiveness in the economic policies of the 1990s and 2000. The final
$
A different version of this paper was presented at the Historical Materialism conference, held
in London, UK, December 810, 2006. I would like to thank Geoff Kennedy for his thoughtful
comments on an earlier draft of this paper.

ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24005-2
163
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ANGELA JOYA
section examines the economic and political impasse that Syria has been
faced with. In conclusion, I argue that the current path of market economy as the strategy for capital accumulation has not resolved the socioeconomic problems that Syria has faced in the last two decades. This
strategy will continue to face contestation by marginalized groups such as
factions of the Baath Party, landless peasants, workers and small producers as Syria becomes even more integrated into the regional and global
economy.
After the collapse of the East Bloc in the early 1990s, Syria was faced with a
new world order. This new world order has inuenced Syrian development
in such a way that the Syrian state and society have seen a decisive shift
towards a capitalist market economy. More recently, however, Syria has
been entangled in the United States global war on terror (US Congress
Syria Accountability Act, 2003)1 and has been subjected to US and UN
sanctions because of allegations of murder of former Lebanese Prime
Minister, Rak Harriri and its link to Syrian security forces.2 Thus,
predominant views have portrayed Syria as a closed economy with heavy
state involvement in the economy and restrictions on the private sector,
factors, which make Syria appear to be an economic laggard in the eyes of
economic liberals.
International nancial institutions (IFIs) have, nevertheless, maintained a
close relationship with Syria, despite the political disconnect between the
West and Syria. And, surprisingly, the Economist Intelligence Units 2006
country report and the 2005 International Monetary Fund (IMF) report
praised Syria for its slow but signicant economic reforms that have set the
country on the path to a market economy. With a prevalence of international relations in studies of the Middle East, including that of Syria, discussion of the domestic struggles over the state and the economy in the
context of the current economic liberalization has often been left out. It is
the goal of this paper to shed light on the domestic political economy of
Syria to uncover these struggles and to discuss in detail the policies that have
resulted in a radical transformation of state and society in Syria since 1970.3
I argue that Syria has been experiencing a rapid process of transformation
towards capitalism over the last three decades. The early 1970s marked the
decade when, for the rst time a strong, centralized state-building project
began under Haz al-Assad, whereas the 1990s marked a decisive transition
towards a capitalist state and economy. In order to appreciate this dynamic
Syrias Transition, 19702005
165
history of socio-economic and political changes that have shaped Syrias

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

What is signicant about the last three decades of economic development in
Syria is the changing nature of the state and the economy, reecting the
impact of the global capitalist market on individual national economies.4
Although Syria appears to be one of the most closed economies with very
low levels of external debt to the IMF and the World Bank, as well as a very
low volume of trade (Library of Congress, 2005), a closer study of the Syrian
state and economy reveals a process of slow, but signicant economic integration since the 1970s. The Syrian state and economy still represents
some aspects of a planned economy in that the ruling party which has
become synonymous with the state has been deeply involved in shaping
and organizing the economy. According to IFIs, what Syria needs to do is to
establish a separation between the ruling party and the state on the one
hand, and between the state and the economy on the other. In short, it is
argued that Syria needs a modern state, with liberal democratic elements,
such as competing parties, free elections, a free media, as well as civil liberties, all of which would create a stable society that could facilitate capital
166
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accumulation in the capitalist world market. While efforts are being made to
achieve Syrias integration into the global economy, the outcome has been
contradictory and uneven. This process of global economic integration is
not free of conict as external capitalist forces collide with domestic forces;
i.e., factions of the elite whose interests do not require a larger market and
who in fact rely on the protectionist measures of the state.
The 1990s marked the beginning of a radical shift in the Syrian state and
economy. In response to the failures of the public sector, the regimes of
Haz al-Assad (19702000) and Bashar al-Assad (2000-present) implemented a gradual yet decisive shift towards the market economy. This shift
has corresponded to a parallel transformation of the state, reecting a
changing balance of power in Syrian society. The transformation of the state
carries serious implications for the various factions of the ruling class. The
traditional industrial bourgeoisie who has been associated with the military
and security wings of the Baath Party is doomed to lose since state restructuring has also meant a gradual purging of the latter two groups that dominated the state for over three decades. The other factions of the ruling class
that have gained their power through different periods of liberalization
(infitah) have managed to establish a political alliance with the bureaucratic
factions of the ruling class comprised of the sons of the Baath Party ofcials
(Perthes, 1993, p. 45). Many observers have argued that the Syrian ruling
class, which has traditionally been very divided, is about to establish a broad
class alliance with the various factions of the elite; namely the nouveaux
riches, petite bourgeoisie and the state elite.
The emerging ruling class factions do not accumulate their wealth
through industrial investment or manufacturing; rather, they are interested
in the quick turnover of their capital through speculative activities in the
stock exchange, the real estate sector and the land market. In the meantime,
economic decisions are being de-politicized, with the state transferring its
responsibilities of policy making to the ministry of nance and the central
bank. This would negatively impact the poor and the majority of Syrians
who have come to depend on state subsidies for their daily commodities.
The lack of legitimacy of the regime and the growing gap in wealth in Syrian
society has made the regime and its recent economic development model
quite unpopular. In the absence of any viable alternatives and political will,
the regime of Bashar al-Assad has pursued the unpopular development
project of market economy, albeit with a lot of caution.
Any change in the nature of the state is not merely a technical change
in response to global economic and political pressures; rather, changes in
the state also have socio-economic dimensions. Each phase of change in the
167
Syrian state has corresponded to a new balance of class forces and their
inuence in shaping the development project. The period of infitah, which
was initially undertaken to bring Syria into the capitalist world market, has
produced unpredictable negative effects for the Syrian economy and society.
Whether the Syrian state and economy can survive yet another period of
infitah will be determined by how the citizens of Syria respond to further
austerity measures as the new ruling class attempts to form a more coherent
alliance in order to successfully continue on a neoliberal path of economic
development (Bahout, 1993, p. 77). The next section examines the rise of
Haz al-Assad to power and the rst phase of building a centralized state in
Syria.
2. THE HISTORICAL PATH TO CAPITALIST

DEVELOPMENT IN SYRIA
2.1. The Demise of Radical Baath and Hafiz Al-Assads Project of State
Building: 19691977
Prior to 1958, Syrias economy was dependent on cotton as the main cash
crop, organized by independent urban notables who owned major tracts of
land (Ahsan, 1984, p. 301). During Egypts union with Syria (which was
known as the United Arab Republic (UAR)), radical reforms such as land
redistribution and bank nationalizations were undertaken. These reforms
aimed to break the monopoly of the landlords and industrial bourgeoisie
over the economy. The state aimed to restructure the economy in the
framework of Pan Arabism. These policies proved unpopular among the
bourgeoisie who felt threatened and the UAR came to an end with a coup in
1961.
The 1960s marked the beginning of various attempts at centralizing the
state power and organizing the economy. The state building project in the
late 1960s proceeded with a series of nationalizations of private rms and
expropriation of large landholdings. Close to 106 private rms including oil
distribution companies, cotton ginning companies and 70 per cent of export
and import trade were brought under the control of the state. Fiscal policy
and tax laws were modied in the interests of more egalitarian revenue
generation and redistribution by the state. Rent reductions also served
the interests of the working class and the poor (Ahsan, 1984, p. 306;
Petran,1972, p. 183). Clearly, the regime sought to have the state as the
guide for economic development of Syria. At the end of 1965, the regime
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was pressured by the landlords and the private sector and, as a result, a
compromise was reached. The government halted its nationalization policies
and allowed the private sector a free hand in real estate and construction.
The most radical phase of Baath rule was from 19661969. The military
wing of Baath Party, which ruled in this period, had their social base among
the peasantry and the poor and their policies mostly served the interests of
their constituency.5 The reforms of this period included a bigger role for the
state in production, redistribution and consumption decisions. At the same
time, popular representation was facilitated through independent workers
and peasants unions. Substantial changes in the industrial and commercial
sectors resembled that of state-led industrialization in the USSR, although
with a large degree of autonomy for the workers and peasants (Ahsan, 1984,
p. 307).
The Baath Party in its most radical phase (called as the neo-Baath) in the
1960s introduced a series of reforms and policies that inadvertently tilted the
balance of social forces in the interest of the poor, the workers and the small
farmers. Attempts were made to organize the economy by limiting the reach
of the urban landed notables and monopoly merchants and by integrating
the peasantry and minority rural groups (Olson, 1982). However, the radical
regimes attempts at creating an integrated domestic market and economy
were faced with capital strikes of the worst kind. Left cash strapped and
open to criticism from the moderate and liberal factions of the Baath Party,
the radical regimes could not pursue their policies and nally fell victim to
crisis of stagnating growth and increasing foreign debt. By 1969, the regime
had succumbed to demands of liberal elements within the party. As a result,
a series of reforms were implemented in the interest of the private sector.
Having taken over important seats in the cabinet, conditions were provided
for a shift to liberalized economy (Perthes, 1993, p. 45). Thus ended the rst
highly contested phase of state-building, which triggered thirteen coups
detat in seventeen years (Petran, 1972).
Hafez al-Assads rule, which began with a bloodless coup on November
14th, 1970, marked the beginning of a period of centralization of the state
and economy with the institutional backing of the Baath Party. Al-Assad
consolidated his power by appealing to the old bourgeoisie (the merchants
and landlords) as a way of securing both the regime and consolidating the
state. His economic policies which reected the political shift in Syria came
to be known as relaxation (Infiraj) or opening up to the people (al-infitah ala
ash-shab). Thus, the corrective movement that began under Haz al Assad
signied a radical shift towards building a national economy. This shift
entailed the uniting of all social forces to generate economic growth.6
169
Al-Assads path of development, which began in 1969, was a response to the

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

(ibid., 1999, p. 44).
In short, economic liberalization in the 1970s was accompanied by a series
of political reforms that facilitated the integration of conservative as well
progressive forces into the structures of the state. However, political reforms
aimed at isolating and controlling the progressive forces that posed threat to
the regime of al-Assad. By establishing a parliament and the NPF and by
passing a new constitution, al-Assad tried both to broaden his base of support and to institutionalize and stabilize his regime y . For the most part
[the independents in the parliament] represented the middle classes and in
some cases Syrias pre-Baathi urban and tribal aristocracy y . There was no
legal basis for parties to act outside the front (Perthes, 1993, p. 50; Olson,
1982). This was a very successful method of paralyzing the left in Syria and
limiting its role in Syrian society, as they were not allowed to be active
among students or become active in the military. All of this led to the
centralization of the state power. The period of al-Assads rule can be divided into ve periods: 19701977, 19771982, 19831985, 19851990,
19902000, each one corresponding to a new phase of economic liberalization or marking the unfolding of contradictions of market economy and
the states response to them.
Effective social control under al-Assad necessitated a series of compromises by the elite and the state which facilitated upward social mobility.
Redistributive policies, which helped al-Assad maintain his power base, included government housing projects, state-run health-care and public
school systems, and vastly expanded employment opportunities in nationalized industrial, nancial, commercial [sectors] and y expanded civil administration. y Both in rural and urban areas, the state emerged as a new
class in coordinating socioeconomic activities of the different classes and
status groups and replacing or at least reducing the inuence of the old elite
(Ahsan, 1984, p. 320). Neil Quilliam has dened al-Assads strategy of
state management as populist corporatism which includes the incorporation of political elite groups, popular organizations and organised business (Quilliam, 1999, p. 78).
As a sincere gesture to the private sector, al-Assad radically increased the
role of the private sector in the commercial and industrial sectors of the
economy while reducing the role of the public sector by reorganizing it. As a
result of the economic reforms, in a short period of one year, more than 100
licenses were issued to individuals or private companies to set up industrial
ventures (Lawson, 1989, pp. 2223). Low-interest loans and subsidies
were made available to small private workshops (Perthes, 1993, p. 46).
171
Deregulation of the commercial and then industrial sector began as early as

1969. Free trading zones were set up in Aleppo and Tartus in the same year
(Petran, 1972, p. 251). The public sector monopoly was removed through
the break up of state-run import-export control agencies (Lawson, 1989,
pp. 2324). Finally, the country was opened to foreign direct investment in
both trade and manufacturing, giving amnesty to Syrian capital ight
(Quilliam, 1999, p. 86). Other reforms included removal of restrictions on
import and expanding the range of manufactured goods. As of 1972, imports without foreign exchange transfers were allowed in order to enable
merchants and other persons who had part of their wealth abroad to repatriate some of it back to Syria (Perthes, 1993, p. 46). In addition, as a concession to Arab regional interests, duties on 191 products imported from the
region were lifted completely. In a sense, the 1970s were the testing ground for
the ruling class in Syria to take on the role of organizing production. This had
occurred after the defeat of the progressive forces within the Baath Party.
However, the return of the state as the organizer of the economy in late 1970s
clearly points to the failure of Syrian ruling classes and the private sector to
independently take on the task of organizing the economy.
This said, the private sector made a series of signicant gains during
different phases of economic liberalization. The autonomy and freedom that
was awarded to private sector went hand in hand with its newly established
role in overall economic development of Syria. Al-Assad mobilized private
resources through the March 1974 decree, which allowed the private sector
to sign off loans from private investors for developing private enterprise.7
From 197175, private sector accumulation strategies occurred within small
industry and real estate sector, a risk free protable sector. By 1973, the
private sector controlled 32 per cent of foreign trade and in 1981, 40 per cent
of all export and 35 per cent of all imports (Ahsan, 1984, p. 311). By 1979,
private banking began with the establishment of a SyrianJordanian bank
marking the end of bank nationalizations of the 1960s. Petran argues that
liberalization policies of al-Assad regime only succeeded in evoking a cautious response from the private sector. Investment levels remained low although three major sectors of the economy, construction, tourism and
transport had been opened up to private investors (Petran,1972, p. 252).
Liberalization policies also delivered heavy blows to workers in the public
sector and in heavy industry. As stated by Lawson, In 1971, almost
60 percent of workers were employed in agriculture, approximately 5 percent in construction, almost 10 percent in commerce, and 12 percent in
services; eight years later, the proportion employed in agriculture had fallen
to around 33 percent, while those for construction, commerce and services
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ANGELA JOYA
had risen to approximately 14, 10 and 20 percent respectively (1989, p. 26).

Another blow of the liberalization policies entailed the relaxation of labour
laws as a way of enticing private investors to Syria(Perthes, 1993, p. 46;
Quilliam, 1999, p. 69).
While the private sector failed to undertake viable economic development,
heavy state intervention produced a number of positive results that beneted
the private sector and the Syrian society as a whole. As Quilliam writes as a
result of the states role in economic planning:
Per capita income was rising, albeit unequally, throughout all classes, development in
the form of electricity, roads and schools was noticeable in all parts of the country, and
the expansion of education and of public sector employment allowed a high degree of
upward social mobility. (1999, p. 54)
As we will see in the next section, the popular forces as well as factions of the
traditional Sunni merchant groups did not quietly accept such experimentations of the private sector with the Syrian economy. We thus look into the
crisis that engulfed Syria, so that, for the rst time, Haz al-Assads state
building project was seriously challenged by various groups within Syria.
2.2. Popular Protest and the Contestation of State Power: 19771982

The rst crisis of the centralized economy became apparent in 1977 when the
private sector left the mass of Syrian population disillusioned and living
standards stagnated. Private sector activities in the unproductive sectors of
the economy negatively impacted consumption levels of ordinary Syrians.
Aziz al-Ahsan has noted that production of items such as matches, rubber
boots mostly worn by the poor radically decreased. Instead, salons and
luxury shops opened by 1978 appealing to the rising middle classes and the
elite (Ahsan, 1984, pp. 309310). As active opposition to the regime
mounted, the state was forced to intervene in order to restore social order
and protect the state.
The state responded by active intervention, both by crushing dissent and
limiting the private sectors sphere of activity. This active intervention by the
state was possible precisely because al-Assad had not abdicated his political
powers in the course of limited economic liberalization (ibid., 1984, p. 318).
At the same time, he did not want to alienate his newly established broad
political base that included groups such as landlords, merchants, peasants
and workers. The corporatist state re-emerged once again as the private
sector had failed to carry on the task of economic development successfully.
173
The crisis took the form of organized opposition to the regime signied in the
Hamah rebellion of 1982.8 In the absence of any effective political outlet,
opposition movements were forced to hit the streets. The discontent emerged
from stagnant living standards, the dominance of the private sector over the
public sector, a polarization of land ownership and the alienation of the
Sunni-based middle class, muslim brotherhood from the state and inability
for social mobility due to dominance of Baath Party in the state.9 In short,
there was an overall discontent with al-Assads development strategy.10
The state responded to these oppositions by imposing regulations on
merchants, and private manufacturing rms.11 Taxes were increased on
private sector activities and raw materials were directed towards public sector enterprises. Furthermore, tax evasions were punished by the state, and
state-run nancial institutions became the central credit offering bodies
(Lawson, 1989, p. 27). In the meantime, as Perthes argues, the measures
taken by the state in no way represented a serious restriction on the private
sector as the private sector was assured that no return to socialism and no
expropriations would take place. The measures then were more corrective
aiming at further facilitating the development of the private sector with the
help of the state. Through the establishment of the Committee for the
Guidance of Imports, Exports and Consumption in 1981, the state clearly
deferred to the private sector for economic development and planning
(Perthes, 1993, p. 54). The state indeed played an important role at this
point, forcing the private sector to learn to survive, through encouraging
competition and overlooking the activities of the private sector.12
2.3. Crisis of the Planned Economy: 19831985

Until the early 1980s only limited liberalization had occurred. Liberalization
measures of the 1970s had not corresponded to structural changes, as the
state was still heavily involved in the economy delivering social policies with
the help of oil revenues. The failure of the private sector to invest in the
manufacturing or industrial sectors denitely made it necessary for the state
to keep a central role in the economy (Ahsan, 1984, p. 312). Another reason
for the strong role of the state in the economy and a check on the private
sector was the high level of resistance from 19771982 to liberalization
policies.
During the rst half of the 1980s, the crisis of centrally planned economy
became unmanageable by the state. In response, the state actively encouraged the private sector to play a more central role in the economic
174
ANGELA JOYA
development of Syria. Faced with a foreign exchange crisis and an unfriendly international climate for loans and economic aid, al-Assad saw
private investment as the only way to deal with the crisis. To this end, he
introduced a series of radical reforms in the interest of expanding the role of
the private sector in the economy. Richards writes that the structural weakness of ISI became apparent in the late 1970s and early 1980s. Due to
spiraling down oil prices, the states revenue shrank. As a result, the expenditure of the state led to ination and a growing external debt, which
grew ten fold between 1970 and 1983. The $2.3 billion debt plagued the
economy (Richards, 2001, p. 47). Faced with the option of going to the IMF
and World Bank and subjecting the state to the conditionalities of these
institutions, on the one hand, or allowing a bigger role for the private sector,
on the other, al-Assads regime opted for the latter option.
Some form of export-oriented development strategy came to determine
the goals of economic development in mid-1980s. However, this did not
mean an overnight disappearance of state planning. Clearly, state planning
had come to a crisis from which it could not escape without rearticulating
the role of the state. This crisis reached its peak point after efforts of the
1980s did not lead to high growth and social problems persisted, while the
international political landscape underwent radical change as the USSR
faced its collapse. Perthes has argued that the second phase of liberalization
in 1983 was qualitatively different from the earlier intah of the 1970. This
qualitative shift was seen in an overall shift in the governments development strategy. Liberalization was not simply encouraging the private sector
to participate in the economy; at this point, it meant the private sector was
to be the main agent of economic development (ibid., 1993, p. 55). With the
support of the emerging private sector, al-Assad attempted to adopt an
independent development policy and reducing the reliance of Syrian development on the ofcial development aid and geopolitical rents (Sukkar, 1993,
p. 39).
Raymond Hinnebusch (1993) and Nabil Sukkar (1993) have argued that
the Syrian state posed a serious threat to successful liberalization. This
threat no longer remained strong in the face of crisis of ISI with growth
levels dropping to 1 per cent per annum. Building a national power base
through state-supported consumption became unsustainable as the revenue
sources of the state began spiraling downwards. As Hinnebusch (1993)
writes, the Syrian state had overdeveloped with the help of rents and as
soon as rents disappeared, it became impossible to support the large public
sector. Austerity measures and cutbacks in public spending were pursued
as a way of resolving the foreign exchange crisis. Economic reforms
175
included a reversal of the role of the private and public sectors in

accumulation and redistribution policies. As the government withdrew
from planning and industrialization, state revenues and employment
generation became dependent on the private sector. The government
relaxed regulations and introduced incentives in order to encourage the
private sectors involvement in the economy (Hinnebusch, 1993, p. 101).
Contradictory attempts by al-Assad with the goal of extending the life of
the planned economy was a sign of the failure of the planned economy to
generate growth and meet social needs without facing macroeconomic
imbalances in the context of increasingly neoliberal global economy.
Policies such as increasing wages and removing import restrictions
unmasked the desperate struggle of al-Assads regime to revive a failing
economy (Perthes, 1993, p. 55).
The economic reforms of this period aimed at increasing the sphere of
activity of the private sector while at the same time limiting the role of the
public sector in the economy. The socio-economic impact of the reforms fell
unevenly on the shoulders of that portion of the working class who worked
in the public sector and those who depended on state subsidies for reproducing themselves (small farmers, peasants, workers and the unemployed).
First, the shift towards an export-oriented economy led to the concentration
of private property in land in the hands of few (Quilliam, 1999, pp. 4849).
In the manufacturing and industrial sectors, the private sector was allowed
to keep 50 per cent of their hard currency export earnings for their own
imports. Another main element of the second phase of intah was the
phased devaluation of Syrian currency in the interest of expanding Syrian
exports (Perthes, 1993, pp. 5658). This currency devaluation was coupled
with high levels of ination and price explosions during 19861987. Consumer prices rose by 36 per cent in 1986 and 60 per cent in 1987, but true
ination rates were believed to have increased by more than 100 per cent in
each of these two years (Sukkar, 1993, p. 28).
Next, in order to facilitate private sector activity, the reform of the
regulatory framework was undertaken. At the same time, the monopoly of
the public sector in basic consumer items such as rice, sugar, tea, coffee and
cooking fat was broken with an eye to encouraging the private sector
activity. Abandonment of state control over trade, investment and scal
policies announced the end of states central role in determining production
and consumption (Perthes, 1993, p. 59). More and more, the Central Bank
of Syria had gained power in determining not only monetary and scal
policies, but also making decisions about the overall economic development
of Syria (Sukkar, 1993, p. 28).
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ANGELA JOYA
The economic reforms unevenly affected the different social groups and
classes. If we look at who gained and who lost, we will notice that at a
general level the private sector clearly gained. However, scratching below
the surface, we will notice that not everyone within the private sector gained.
Those aspects of the private sector, which relied on state protectionism for
reproducing themselves lost to a newer private sector whose interests were
more directly linked to external markets than to the domestic market. In a
sense, the self-imposed Syrian reforms resembled the structural adjustment
policies that were often imposed by the IMF on many other economies in
the same period or earlier (Perthes, 1993, p. 56).
The intah of the 1980s impacted the public sector unfavorably, exposing
the sector to intense competition with the private sector. This often took the
form of mixed sector or joint ventures, which was the outcome of legislation
passed in the late 1970s and 1980s. The state was a silent partner holding a
minimum of 25% share (Polling, 1993, p. 15). As Perthes has pointed out
in this period, Public sector enterprises would not receive foreign exchange
for their imports beyond what they obtained for their exports or, if foreign
markets were inaccessible to them, from exports to the local market, that
is, local sales of their products against hard currency (Perthes, 1993, p. 57).
Despite these reforms, the state avoided a complete erosion of its fragile
legitimacy by maintaining a degree of social policy and redistributive mechanisms. This took the form of subsidies and public services, which was
supported by the elite for fear of social disorder. The Syrian state at the time
was actively engaged in convincing every interest group of its good intentions. On the one hand, it convinced the private sector of its commitment to
reform, on the other it continued subsidizing basic commodities through
heavy subsidies in order to maintain its base of support (Heydemann, Steve
cited in Quilliam, 1999, p. 92).
In sum, the burden of state expenditure in the absence of revenues led to a
serious economic crisis, which took the form of lack of foreign exchange.
State planned economy had reached its logical end and could not go on any
longer without falling apart. The alternative path pursued by the state at
this point was simultaneous encouragement of mixed sectors, on the one
hand, and export led growth, on the other. In short, the state began heavy
mobilization of private resources and capital for the purpose of economic
development. This shift in economic development project was accompanied
by a series of serious reforms, which many argue marked the rst phase
of non-reversible economic liberalization in Syria. This included measures
for liberalizing trade and investment through expanding the reach of the
private sector.
177
2.4. Market Economy and Competitive Austerity: 19851990

This 19851990 period marked the beginning of increased competition between the public and the private sectors, which was reective of the shift in
global development strategy whereby private investors gained a dominant
role in guiding economic policies of nation states. Rather than privatizing
state corporations, the Syrian state imposed the logic of competition on state
rms forcing them to sink or swim. While the private sector was offered
numerous incentives, including tax breaks and tax holidays, the public
sector was constantly scrambling to meet the social needs of the domestic
population and keep up with protability levels (Perthes, 1992). The emerging weakness of the USSR and the East Bloc further strengthened the
shift to market economy and the Syrian state preemptively sought a
re-orientation in its economic policy through a self-imposed austerity measures and reforms. The state in Syria had been remade time and again, but it
had not lost its relevance as a social force and its role as the means for
capital accumulation. As we will see in the next section, while the economic
role of the state is left for the private sector in many sectors, the state still
exerts its power in implementing political changes that would guarantee
accumulation as well as survival of the state. Hence, the state has been
engaged in performing two tasks: increasing the inuence of the private
sector, and restructuring the political landscape to reect the changed
balance of social forces. This is a very sensitive task, which is reected in the
gradual and uneven nature of liberalization in Syria.
This phase of reforms aimed at liberalizing investment, trade and prices,
as a strong policy shift in favour of the private sector (Perthes, 1993, p. 59).
As a result, the private sector made many signicant gains during this
period. For instance, while in 1983 private manufacturers were able to keep
50 per cent of their hard currency earnings from exports, by 1987 this
percentage had increased to 75 per cent and the range of goods covered
under this law had also broadened (Richards, 2001, p. 48). Richards referred
to the new gains of the private sector as a blurring between Mafya
Kapitalism and Arab Socialism as power became more and more concentrated in the private sector through its access to the state bureaucracy.
In the agricultural sector, reforms beneted the bigger landlords and improving farmers. As early as 1980s, the private sector had gained entry into
the agricultural sector, and, except for cotton, wheat and sugar beets, they
had access to all other goods. Private sector farming has remained a dominant force in agricultural production, and between 1987 and 1991 it accounted for two-thirds of the cultivable land (Quilliam, 1999, pp. 4849).
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ANGELA JOYA
In response to the protable terms for exports, agricultural production became more and more specialized and geared towards the external markets.
Richards argues that such changes strengthened the relationship between
the merchants and the military leading to a soldier-merchant alliance
(Richards, 2001, p. 49). The second foreign exchange crisis in 1986
prompted the Syrian state to engage in generating foreign exchange resources through encouraging export led growth and a bigger role for the
private sector. As Sukkar has noted, The new strategy calls for exporting
whatever can be exported, and the policy has been pursued even at the
expense of fullling domestic needs (Sukkar, 1993, p. 34). Pointing to the
same phenomenon Perthes writes:
Apart from foreign trade and currency regulations, this initial phase of the second intah
involved a substantial liberalization of Syrias agricultural economyy . Beneciaries of
the new regulation were mainly new class businessmen or crony-capitalists whose economic success depended heavily on their relationship with members of the regime elite.
(Perthes, 1993, p. 57)
Liberalization measures of the late 1980s involved a move away from social
pricing towards economic pricing, reduced subsidies on farm products,
leaving farmers on a level ground with the private sector, reduced quantities
of rationed food items, which removed the guaranteed market for the
farmers, and an increased base for taxation (15 per cent sales tax imposed on
luxury items. As a result, competitiveness has come to determine the survival
of different sectors of the economy. The distributive effects of the reforms
have often meant that the income gap has widened within Syrian society,
with a minority accumulating most of the wealth. While the diminishing of
the public sector has led to massive unemployment, the managers and controllers of the public sector will denitely lose, unless they succeed at competing with the private sector (Sukkar, 1993, p. 38).
During the decade of the 1980s, the state implemented a number of political reforms to facilitate the involvement of the private sector in the
economy. For instance, independent decision-making bodies such as the
Prime Ministers Committee for the Guidance of Imports, Exports and
Consumption with a heavy inuence and presence from the private sector
were constituted to deliver policy decisions. In addition, the peoples council
was altered to increase the number of independent candidates by bringing in
members of the chambers of commerce of different cities. In 1990, one-third
of the seats in the Peoples Council were indeed reserved for the private
sector, highlighting the radical transformation of the Syrian state over the
course of the twenty years (19701990). This was also a sign that the Baath
179
Party, though still a patronage-generating entity, was beginning to lose its

ideological leadership and its pivotal role in the policy process (Quilliam,
1999, pp. 9192).
3. THE TRIUMPH OF GLOBAL CAPITALISM AND

THE END OF STATE PLANNING: 19902000
The new world order ushered in a new phase of substantive intah in Syria.
The Syrian state did not completely abandon its policies of central planning
until 1990. It was in 1991 that with the introduction of its Investment Law
No. 10, Syria attempted to make a radical break with import substitution
through liberalizing investment and banking.13 This break in economic
policy corresponded with signicant political reforms at the state level. The
decade of the 1990s posed serious challenges to the Syrian regime. With the
collapse of the East bloc and the dominance of the capitalist economy, and
the failing public sector performance, the Syrian regime attempted to reorient its policy direction (Polling, 1993, p. 19; Sukkar, 1993, p. 31; Kienle,
1993, p. 1). This reorientation entailed the introduction of important economic policies that reected the dominance of the global economy. As Owen
and Pamuk have noted, majority of the elite in Middle East have been
convinced that except for economic liberalization, there is no other way
forward (Owen & Pamuk, 1999, p. 242). In the process, the state underwent
a process of restructuring, albeit slow and uneven. New forces, which had
gained power during the previous phases of intah had come to the forefront and they exerted a lot of power in determining economic policy.
Thus, Syria began the pursuit of market economy in more pronounced ways
than during the previous decade. This section will discuss the important
policy shifts of the 1990s and the uneven impact of this policy on different
social groups in Syria. It is noteworthy that the policy changes required a
radical restructuring of the Syrian state, a project that has continued under
Bashar al-Assad.
Alan Richards (2001) discusses the period from 1985 crisis till 2000 and
how policies have been formed in the period. The rst measure of economic
development shift was captured in Investment Law No. 10, which aimed to
attract Syrian, Kuwaiti and other Arab investors who ed Kuwait during
the Iraqi invasion to invest in Syria. The signicance of this law lies in the
fact that it marks a radical break from the hesitant investment reforms of
the 1980s. By introducing this law, the state bestowed full freedom and
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ANGELA JOYA
guarntee to investors under very favourable conditions. It also meant that

private investors could now engage in any sector of the economy as the
public sector become more and more limited in its sphere of activity. As
Fida Nasrallah writes, Investment Law No. 10 not only expanded the general sphere of activity and political power of the private sector, it also made
ample room for foreign capital, which strategically aimed to encourage
Lebanese capital in Syria (Nasrallah, 1993, p. 137).
It should not be overlooked that laws that expanded the total share of
private sector in the economy had been introduced as early as 1988 when the
Ministry of Industry affected a reversal in the role of the public and private
sectors in terms of freedom of production and investment. A list of
30 industries was to remain the exclusive domain of the public sector, and
the rest was left free for mixed sector and the private sector. Previously the
government had identied the industries that the private and mixed sectors
were allowed to enter and everything else was the special domain of the
public sector (Sukkar, 1993, p. 33).
Richards has highlighted important aspects of Investment Law No. 10,
which reects on a new balance of power in favour of the private sector:
Under this law, which covered investments of over 10 million LS
($240,000), investors could propose projects in any economic sector. Approved projects are given a 7 years tax holiday, are largely exempt from
customs duties and import restrictions and are granted generous prot and
foreign exchange repatriation (Richards, 2001, p. 49). In an attempt to
boost export led development, companies that exported over 50 per cent of
their production, received an extra two years of tax holiday (Sukkar, 1993,
p. 35; Perthes, 1993, p. 60). Beside tax holidays, companies were offered
exemptions from customs duties and import restrictions. This law also allowed the formation of joint stock companies and, for the rst time, private
banks in Syria (Sukkar, 1993, p. 33). Parallel to the Investment Law No. 10,
a new tax law was introduced, which reduced corporate and business tax
substantially.
While the stated goal of government for this law was enticing investors,
the law clearly points to the heightened importance of the private investors
in Syrian economy, allowing the private sector to engage in sectors that were
previously reserved only for the public sector. As Kienle has pointed out, the
liberalization of 1990 marked a break from the discreet nature of transitions
of the past decades (Kienle, 1993, p. 1). Taking advantage of the failing state
of the public sector and of a state without a vision for economic development, the private sector successfully exploited these weaknesses
and strengthened its structural position within the Syrian economy.
181
By the 1990s, for the rst time since 1963, the private sector had a bigger
share of the Syrian economy in terms of investments in comparison to the
public sector (Perthes, 1993, p. 60; Hinnebusch, 1993, p. 106). As Patrick
Seale writes, this law served as a landmark on the path towards capitalist
development in Syria (Seale, 1993, p. x).
The dominance of the private sector was coined in the term economic
pluralism which came to characterize Syrian economy during the 1990s and
onwards. Although misleading, the term was still signicant in that it suggested the end of the public sector dominance in the economy. While during
the 1970s and early 1980s, the public sector, the private sector and the mixed
sector were said to compliment each other, by late 1980s and in 1990s it was
argued that the three sectors must compete with each other (Sukkar, 1993,
p. 33).14 In the agriculture for instance, the private sector gained control
over production, pricing and marketing during the liberalization of the
1990s. Despite the dominance of the private sector, the public sector still
remained in control of food, sugar, textiles, chemicals, engineering, cement
and building materials (Quilliam, 1999, pp. 4950).
Commenting on the pace of reforms and obstacles to reform, Sukkar
writes that due to the fragile balance of power in Syrian society and the
negative social effects of economic liberalization, it is very possible that
reforms will follow a slow and gradual pace. Sukkar argues that, in the
course of the 1990s, two opposing views have emerged on the particular
path of reform:
The rst deals with the transformation of public enterprises into joint stock companies,
grouping them according to their functions under a number of holding companies as, for
instance, in Egypt and Algeria, as a prelude to reforming and rehabilitating individual
enterprises on a case-by-case basis. This approach leaves the door open for the introduction of necessary new laws and regulations that could convert these enterprises into
market-oriented prot-making entities. The other view involves amending existing laws,
rules and regulations governing public enterprise operations to make enterprises more
autonomous. It suggests that enterprises should be given more say in purchasing inputs,
marketing outputs and price xing, and should retain all the surpluses they generate,
only handing over taxes to the central government. This view still holds, however, that
price xing should remain centrally determined, and should be guided by economic and
social considerations. (Sukkar, 1993, p. 41)
From the excerpt above, it is clear that the logic of capitalist development,
competition and prot seeking have become the uncontested path of economic development. The only difference between these views tends to be on
how fast reforms should be implemented and whether the poor and workers
need to be protected against the side effects of such reforms or not.
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Maintaining the public sector as the producer of basic commodities

speaks more to the socio-economic realities of the Syrian society than to its
lack of commitment to economic liberalization. Close to two million of the
total eighteen million Syrians live below the poverty line according to UN
report of 2005 on Syria. The ofcial 14 per cent unemployment rate does not
include those who have precarious and insecure jobs. As long as the public
sector remains in control of production of basic commodities, there will be a
certain guarantee for political stability and social order, something that the
fractured, but newly emerging elite seeks (Perthes, 1993, p. 63). Richards has
also offered similar explanations for the slow pace of reform. Beside the fear
of social disorder, the vested interests of the old bourgeoisie and state elite
are other factors that has put a break on the pace of reforms in Syria, which
Richards has called Syrian reforms as dilatory (Richards, 2001, p. 46).
Another reason for the public sectors involvement has been the inability
of the private sector to take on the task of national economic development
through reviving the productive sectors of the economy; this will continue to
prevent Syrian economy from abandoning its public sector support
(Hinnebusch, 1993, pp. 101102; Hinnebusch, 1990). Given the interdependence of the global economy with its global division of labour, it is
highly unlikely that the Syrian ruling class will ever achieve this goal, when it
can nd alternative ways for accumulating capital.
The economic reforms have denitely led to a polarization of wealth and
marginalization of the majority of the Syrian population. There has been a
concentration of property in the hands of a minority while the petty bourgeoisies share of the national income has shrunk radically in the wake of the
Investment Law No. 10. In 1991, the average capital of newly established
private industrial projects amounted to only US $25,000 whereas the average capital invested in new industrial and service companies established
according to Investment Law No. 10 of 1991 exceeded $4 million (Perthes,
1993, p. 62). As the state expands the role of the private sector, it has
abandoned its active role in sustaining social policies and redistributive
measures. Social policies and state expenditure are often supported, not by
taxes, but through sales of oil, which according to the IMF, will be gone by
2020. At the same time, the performance of the private sector has been
marginal in terms of the positive growth and redistributive measures. The
rate of job creation has declined from 4.8 per cent in 1990 to 2.9 per cent in
2000. According to Arab Human Development Report 2005, unemployment has increased from 912 per cent in 2000 to 14 per cent in 2004. Other
reports state unemployment at 20 per cent (United Nations Arab Human
Development Report (AHDR), 2005).
183
While liberalization will continue, it is not certain that it will pick up pace
without requiring serious political reforms as well as political risks for the
regime. Perthes has pointed to the establishment of a Syrian stock exchange
along with private insurance companies and foreign private banks as part of
the package of reform that was underway throughout the 1990s (Perthes,
1993, pp. 634). The political risks mentioned earlier indeed forced the
regime to opt in favour of selective liberalization, something that the IMF
(2005b) report has pointed out.
The Syrian regime was faced with a number of social problems and economic imbalances by 2000. These included a 4 per cent labour force growth
with a 1 per cent growth in the economy (Richards, 2001, p. 46). In order to
deal with these problems, the Syrian regime has continued on the path of
economic integration through signing bilateral free trade deals, such as
GAFTA, WTO, EU-Mediterranean (Economist Intelligence Unit (EIU),
2005). Hence, liberalization of trade and investment has come to dominate
the economic policy dimension of the Syrian regime over the course of
20002005.
Ever since Bashar al-Assad took power in 2000, different views have
emerged as to what his rule might mean for the Syrian state and economy.
While the media in the region suspect any substantive change in the Syrian
economy and state, evidence suggests otherwise. Bashar al-Assads rule indeed represents a crucial breaking point from his fathers era. This shift is
reective of a larger shift in the nature of ruling class interests. In order to
successfully integrate into the global economy, the Syrian ruling elites have
come to a crucial realization. The framework of Baath Party and its way of
organizing the state no longer represents the interests of the newly emerged
factions of the ruling class. Although the military and security forces have
been resisting any radical change in the nature of the state and Baath Party,
a gradual process of de-Baathication has been occurring since the beginning of 1970s as part and parcel of economic liberalization and development
of capitalism in Syria.
3.1. Neoliberal Economic Development and

Bashar Al-Assads Regime: 20002005
With the end of Haz al -Assad, his son Bashar al-Assad has had to deal
with the legacy that his father left behind. Despite various expectations from
the era of Bashar al-Assad, his regime continued the path of economic
development that was put in place by his father. The developments that the
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Syrian state and economy have undergone under Bashar al-Assads regime
are evidence of a qualitative transformation of the Syrian state. The rising
inuence of the pro-reform factions of the ruling class and their participation in the political decision-making process since 1990s, has come to determine the course of economic development and state reform under Bashar
al-Assad. While the old guard, embodied in the Baath Party members, have
resisted a fast pace of reform, it is a fact that a neoliberal logic of economic
reform has been dominant in shaping a wide range of political, legal and
institutional reforms. Despite this strong tendency towards market reform,
there are serious obstacles to the neoliberal project. These obstacles can be
summed up as the remnants of a traditional society such as the persistence
of a moral economy and of customs. Other obstacles are structural weaknesses of the Syrian economy and legal framework that are not conducive to
a competitive global economy where investors seek guarantee of private
property. The results so far has been the formation of crony capitalism
where old ties between the ruling classes have led to new opportunities for a
transformed ruling class that is more attuned to the global economic logic.
This said the concept of a national economy has been withering away in the
face of the decline of the public sector.
This section will discuss the coming to power of Bashar Al-Assad, the
economic and political reforms under him, what these reforms mean in
terms of balance of class forces and transformation of the state, and nally
the impact of these reforms. In a newspaper article published in 2005 about
the nature of Bashar al-Assads rule, Sami Moubayed pointed out that the
Syrian parliament is adorned by portraits of conservative speakers from as
far back as 1919 up to the present day. Ten years ago, these portraits did not
exist as part of Syrias history. While the conservative past has been restored, there still exist pictures of socialist leaders of the 1960s in the current
parliament (Moubayed, 2005). This attests to the current conjuncture where
conservative forces have come to hold the balance of power. As mentioned
earlier, economic pluralism is reected in the various elements that are
depicted in the parliament of Syria, although it is very clear and acknowledged by many that the inuence of Baath Party has been on a decline for a
long time now. Bringing together the emerging factions of the ruling class
along with the pro-reform Baathists, Bashar al-Assad has been engaged in
the remaking of the Syrian state and economy. Unlike his father, Bashar
al-Assad did not hesitate to get help from the IMF and the World Bank.15
In fact, his minister of nance who was appointed in 2005 is an ex-World
Bank economist. From this point of view, the period of his rule is quite
signicant, especially in terms of the impacts of the new path of economic
185
development on the process of class formation and socio-economic problems that might accompany it.
Adopting a neoliberal economic development agenda, Bashar al-Assad
has pursued a series of economic and political reforms, which have further
expanded the realm of activity and freedom of the private sector. The economic reforms include further liberalization of trade, investment and other
capital ows, all of which transfer political decision making to the hands of
a minority in the Central Bank of Syria and ministry of nance. An assessment of the liberalization period from 19902005 by IMF tends to praise
the series of reforms undertaken by the Syrian regime. According to the
report, under Bashar al-Assads rule, Prices have been largely liberalized,
trade and foreign exchange regimes have been simplied and liberalized, the
tax system has been streamlined, and the private sectors eld of activity has
been broadened to virtually all sectors of the economy, including banking
and insurance (IMF, 2005a, p. 25).
Political reforms under Bashar al-Assad have been all geared towards
facilitating the transition to a market economy. These reforms entail a
qualitative shift in the nature of state that reect structural gains of the
emerging elite and are more in tune with the demands of a global capitalist
world market (i.e., needs of private investors for regulatory framework and
legal protections). Institutions of a modern state are being implemented as
economic pressures are mounted against the regime. The failure of the
public sector justied the regimes accommodation with the private sector.
The institutions of a modern state, as supported by the IMF and World
Bank and making resonance among Syrian reformers, essentially entail a
liberal democratic framework whereby rights of private property are guaranteed while market forces are unleashed. Bashar al-Assads reforms have
led to a reorganization of social forces, although it is too early to determine
the nal outcome of his reforms as the process is still undergoing. Nonetheless, at this stage, it is still possible to sketch out the general impact of his
reforms. An important reform under Bashar al-Assad, has been the grand
project of building a modern state. This has entailed the removal of political
barriers to such a project. In Syria, this obstacle is identied as the Baath
Partys relation to the Syrian state as well as the role of the executive. The
shift in economic policies in the 1980s and onwards has slowly dismantled
the power base of the Baath Party.
The Baath Party traditionally represented class mobility; however, under
Bashar al-Assad more independents and representatives of the private sector
have penetrated the state and other positions of power within society. At the
same time, Bashar al-Assad has imposed mandatory retirements of the
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security and military forces.16 While the political economy of Baathism is

facing a serious threat by rapid liberalization of the economy, the relevance
of the military and security forces might not come to an end as easily. As
Quilliam has noted, The armed forces and the security services have remained the most durable repositories of state power. y Their access to the
state and the regime is underwritten by their indispensability to state and
regime security. y Unlike the Peoples Council, and the NPF, the military
centres of power are not subordinate to the president (Quilliam, 1999,
p. 81). The destruction of the power of military and security forces within the
Baath (either through purges or cooptation) represents a nal blow to the
structures of the old state that Baathists had built in the 1950s and 1960s.
It was not until Bashar al-Assads rule that the power of the executive
became subjected to change. Prior to Bashar al-Assad, the executive power
represented almost the absolute power of the person of the president. The
President appoints the prime minister, appoints the speaker of the Peoples
Council, makes laws when the Council is not in session, legislates without the
Councils consent, vetoes the parliamentary laws, and, nally, dismisses the
Peoples Council (ibid., 1999, p. 72). The transformation of the executive has
been triggered by demands from both the domestic elite as well as IFIs.
Despite economic liberalization policies of the last thirty-ve years, Syrian and
Arab investors do not feel protected enough by the state through rule of law,
suggests Quilliam (ibid., 1999, p. 89). This has been one major reason behind
the reform project of Bashar al-Assad since he took power in 2000. These
demands nd support within the IFIs, such as IMF and the World Bank.
The IMF report of 2005 on Syria, for instance, has identied the declining
oil prospects as a serious worry for the Syrian economy. The report argues
that by 2020 Syria would have exhausted its oil resources. The only way that
the Syrian economy could sustain the burden of reduced oil revenues is to
pursue a rapid process of market economy. The report further argues that
Syria has failed to solve the unemployment and poverty problems because of
its failure to provide an investment friendly environment for investors. The
suggested reforms to help the Syrian economy and society would entail a
radical shift away from state planning to free market enterprise. This argument is premised on the lack of efciency of the public sector enterprises.
According to the report, the state-owned enterprises are irrationally organized, over-staffed under-paid employees and cumbersome.17 It is suggested
that Syria needs to diversify its economy through expanding the export base
of the economy before the oil runs out.
Other reforms that are prescribed entail expanding the range of activities
of the private sector, and scal reforms, which would lead to an overhaul of
187
the subsidy system and reduced public expenditure. The report also offers
the following recommendations and policy suggestions: make the Central
Bank act as the scal agent and move the bulk of assets from the commercial
bank of Syria to the Central Bank of Syria, unify the exchange rate, liberalize trade, reduce tariffs and the number of banned products radically,
maintain efciency of the public sector by creating competition between
public and private sector (impose market imperatives and let the public
sector sink or swim). The target industries and rms are pharmaceuticals,
textiles, engineering and assembling of durables.
In order to implement these economic reforms, however, it is necessary
that the Syrian regime implement a series of institutional reforms. The
stated goals of institutional reforms according to IMF report are the following: Institutional reforms aim at strengthening competition, good governance, property rights and the rule of law. Judiciary reform would aim at
strengthening the independence of the judiciary branch and at updating
legislation and improving the process and effectiveness of business related
penal cases (IMF, 2005a, 2005b). These reforms will increase investment
ows to Syria, argues the report. Although most of these reforms have been
implemented by Bashar al-Assads regime, IMF argues that the reforms
have not been fast enough to meet the challenges of Syrian society. There is
a further need for comprehensive restructuring of the public enterprises,
which could be achieved if the public enterprises are exposed to market logic
of competition.
According to the IMF, for successful integration into the global economy,
Syria needs to modernize its state and economy. Modernization of state has
meant the need to separate the ruling or governing party from the state,
whereas modernization of the economy has entailed a break away from
centralized planning by the Baath Party as well as a separation of the
economy from political interests, something that is hoped to render the
economy more rational and efcient. In short, it is argued that Syria needs a
modern state, with liberal democratic elements, such as competing parties,
free elections, free media as well as a set of civil liberties, all of which would
create a stable society that could function within the capitalist world market.
The obstacles to reform mainly come from the military and security forces
along with remnants of the old industrial bourgeoisie who demand slower
pace of reform. The old bourgeoisie still requires a certain measure of protectionism due to a lack of competitive edge. All of this suggests that all
factions of the elite agree on one point and that is the need for political
stability alongside economic freedom. So far, it seems that the need for the
rst has led to a slower and uneven pace of economic reforms, exposing the
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compromises that the elite are willing to make. Quilliam attests that since
1990, the Baath Party has been losing to the private sector and new classes
of intah elite (1999, p. 87).
The public sector has deteriorated over the last twenty years, while the
private sector has come to dominate the economy. By the 1990s, the ills of
the private sector covered: the multiplicity of supervisory organizations,
centralized regulations for the purchasing of inputs and the marketing of
outputs, poor management, old equipment, excessive employment and undercapitalization. In proposing solutions, comments focused on the need for
decentralization and true autonomy, separation of ownership from management, application of economic criteria in assessing performance, differentiating between economic and social objectives and giving the public sector the
same incentives as those given to the private and mixed sectors (Sukkar,
1993, pp. 3132). It is important to note that both Assads regimes maintained the public sector, not through active investment and industrial policies, but rather through exposing it to competition with the private sector.
The United Nations report on Syria sounded the alarm about the socioeconomic effects of market reforms in that society. The report based its
conclusions on the dismal record of the private sector over the past twenty
years. As it stands, Syria is gripped with massive unemployment and poverty, an expanding labour force and an incapable private sector that has
failed to invest in sectors that could absorb this level of growth of the labour
force.18 In the face of this reality, the report strongly advocates the Syrian
state to take an active and interventionist role in the economy. In order to
expand its revenues, the state must reform the current taxation structures so
that taxation becomes more equitable in terms of distributing the costs. The
report also warns against liberalization due to the negative effect of the
global economy on the smaller industries and on the tariff-protected industries such as consumer durables industries, pharmaceuticals, textiles and
clothing industries. In spite of these warnings, the Syrian state under Bashar
al-Assad has been transferring economic decision-making powers to a
greater degree to the private sector.
Later on, economic prices replaced social prices, which could no longer be
sustained by a state that had abdicated its sources of revenue as it gave major
tax breaks and tax holidays for private sector. Further reforms were paralleled by a process of separation of economic from political over-sight,
relegating economic decisions to the forces of the market (represented in the
state by the Central Bank and ministry of Finance). The role of technocrats
has increased in economic decision making and determining production and
consumption options. Experts from the IMF and the World Bank have lled
189
in different ministries, lling in the gap that the bankrupt regime of al-Assad
has left in place. Institution building also falls within the broader project of
introducing a market economy in Syria. The main goal of these institutions is
to achieve efciency while rationalizing bureaucracy. In other words, the
state has to shed its heavy bureaucracy and reduce the costs of running a
state. At the same time, a series of legal and institutional reforms are aimed
at securing the rights of private property and contract. As the private sectors
reach has expanded, the state has begun a process of heavy taxation of the
population. While, at the moment, this process has many aws, it is expected
that in the near future taxation would be made more rational and effective.
The three phases of intah rst aimed at fostering a capitalist class under
state direction and guidance; then, in the 1980s, the private sectors sphere of
activity was expanded and its role in the economy became more dominant as
opposed to the public sector; and, in the late 1980s and early 1990s, the
private sector gained freedom to make decisions on nance and investment,
as a way of entering the global economy. By 2000, the role of the private
sector further expanded in foreign trade and investment as well as nance.
This attests to the dominant role of the private sector in the economy and its
power in determining not only scal and monetary policy, but shaping the
overall development agenda in its own interest. It might be appropriate
to end this discussion with the quote by Bashar al-Assads deputy Prime
Minister for economic affairs, as this statement clearly highlights the
dominant trend for economic policy under Bashar al-Assad: In an October
interview with Arabian Business, a Dubai-based magazine, Mr. Dardari
[deputy prime minister for economic affairs] claimed: We are adopting fully
free trade, free investment, an open investment climate, we are liberalizing
our monetary and scal policies, and we are liberalizing and deregulating
our banking sector and nancial system (EIU, 2005, p. 22).
3.2. Obstacles to a Neoliberal Market Economy

There are different obstacles in the path of developing a market economy, the
most important ones are the structural constraints imposed by the global
division of labour and the increased integration of the global economy. At the
same time, Syrian economy lacks both institutions and a skilled labour force
in order to compete in the global economy. In the absence of protection for
property rights and the persistence of large state bureaucracy, foreign investment would be discouraged from entering the Syrian economy, a reality that
cannot be overlooked (Richards, 2001, p. 51; Karshenas, 2001, pp. 5979).
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The fear of the elite for political instability also prevents a fast pace of
economic reform. This would prevent a full-scale implementation of neoliberal economic development agenda. As Quilliam notes:
The state cannot afford to alienate its public sector support for the latter credits the state
with legitimacy. Extensive economic liberalization would create widespread dissatisfaction among the Syrian population. The states ability to insulate itself form unpopular
sentiment would be severely restricted as unemployment, the removal of basic food
subsidies, and a diminution of welfare services would erode legitimacy. On the other
hand, comprehensive economic liberalization would not benet the bourgeoisie as it
would expose it to intense competition. (1999, pp. 9495)
Polling points out that the slow pace of liberalization is due to Baaths fear
of regime collapse and the end of its power (1993, p. 15). Thus, with sufcient support against liberalization, the regime would follow a gradual pace
of reforms rather than a fast paced one that is recommended by the IMF
and World Bank.
Furthermore, the experience of the last two decades of reforms suggests
that the process of integration into the world market by attrition of the
public sector is a messy process with undetermined outcomes. For a start,
there is no guarantee that the private sector is capable of taking on the
responsibilities for generating growth that would contribute to a better
standard of living for Syrian population. The nature of economic activities
that the Syrian elites pursue fall within speculative activities that only benets a few at the expense of many. The productive sector of the economy
would stagnate and the brunt of this economic crisis would easily fall on the
workers and the poor. This would carry negative implications for the elite as
the legitimacy of the regimes erodes with increasing social inequalities. This
explains the caution that is displayed in implementing liberalization reforms
by the regime and the complicity of the Syrian ruling classes.
The polarization of wealth in Syria has led to social inequalities. The main
source of state revenue has been oil rents, which according to IMF predictions will completely disappear by 2020. This prevents the state from
continuing on its ISI path and, in the absence of an industrial policy; it has
turned to the private sector for policy formation. While it is true that the
effects of declining oil has not yet been felt and the state still experiences a
degree of autonomy in social policy due to oil exports and new gas ndings,
Syrian Scholar, Bassam Haddad highlights a set of socio-economic problems in Syria. He writes that:
An all-time high unemployment rate (between 20 and 25 percent depending on the
source) only reinforces these expectations. The entire middle class, shrunken as it may
191
be, and the disenfranchised Syrian working classes outside the public sector, including
peasants, are feeling the strain of the current economic and political circumstances.
(Haddad, 2001)
Government investments in the public sector represent a precautionary

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

writes:
The economic situation in the country has alarmingly declined. Complaints about price
hikes and low salaries are voiced everywhere. Syria, according to the Arab Human
Development Report, has the lowest level salaries in the Arab world. With an economic
growth rate set at 3.7 per cent and a poverty-line population estimated, according to
ofcial gures, at 1.5 million out of Syrias 18 million total population, many Syrians are
struggling to make ends meet. (Abdel Latif, 2006)
4. CONCLUSION
The history of class struggle in Syria in the post-war period has entailed a
gradual liberation of economic forces from political constraints and social
regulations. In Syria, it is clear that pre-capitalist social relations determined
the nature of state and economic development until the late 1960s when
Hafez al-Assad used the state to fundamentally reorganize production and
social relations in Syria. The state in Syria under Haz al-Assad became a
class in itself that directly organized the Syrian economy. This was achieved
precisely because the old landed ruling class had failed to organize the
economy and respond to the socio-economic crisis that had engulfed Syria.
Such fusion of economic and political powers within the state continued
until the early 1990s when the crisis of state planned economy unfolded.
State planning had empowered a new class of private interests who begin
seeking partial autonomy in organizing production.19 Thus, it was in the
1990s that a crucial phase of state formation led to the beginning of a formal
separation of the economic from the political, a process that is still on going
and has not been completed.
This uneven pace of market reform (intah or liberalization) can be understood as the complex process of transition to capitalism and integration
into the capitalist world market. The difculty of achieving this task lies in
the specic balance of power, the nature of ruling class interests and the
degree of their connectedness to the world market. It also depends on the
ability of the ruling classes to reproduce themselves within the existing social
relations whereby traditional ties (kinship, tribal identities and relations of
clientelism) persist within a pre-capitalist system.
The process of transition in Syria, as in a number of other developing
countries, is important in the larger historical development of global capitalism.20 In order to reproduce the system, all parts need to be integrated
and the responsibility for reproducing the system as a whole is divided
193
among all member states. While efforts are made to achieve this goal, the
outcome has been contradictory and uneven.21 The project of building capitalism in the Middle East has been complicated by the resilience and persistence of non-capitalist social relations. Thus, among other factors such as
colonialism that have led to the uneven process of transition and integration
into the global economy, in Syria the persistence of non-capitalist social
relations has been quite signicant. Indeed, the persistence of non-capitalist
social relations is a characteristic shared by many Arab states and societies,
which has denitely complicated the process of transition to a market
economy.
In Syria, it can be argued that the transition to capitalism has not occurred as a clean break from a previous mode of production. Transitions
can be better understood as processes that are slow, but more importantly
dialectical, depending on the particular balance of social forces at the particular historical period. Thus, there is no guarantee that the old ruling class
would not return to power, especially in the context of a radical change in
the balance of social forces.22 The institutions of the Syrian state are also
reective of the complex interaction between a pre-capitalist set of social
relations and a modern, yet centralized state with hierarchically organized
institutions.
With the takeover of power under Haz al-Assad in 1970, a conscious
process of capitalist development was launched under the auspices of the
state. This project entailed the balancing of different social forces in Syrian
society and at the same time gave rise to new classes who beneted from stateled industrialization in agriculture and industry. The contradictions of stateled planning, however, forced the state to encourage the private sector to take
a more central role in mobilizing economic resources and managing growth.
The inability of the private sector to perform the task of economic growth
and management ensured a continuation of the role of the state in the economy throughout the 1980s. It was not until the 1990s that the private sector
began to demand more autonomy in organizing the economy (Wood, 1995,
p. 25). Emerging private-sector forces demanded a transformation of state
institutions with the goal of de-politicizing economic decisions. While these
demands did not face serious opposition, the Baath Party and the regime
emphasized caution and a gradual transformation in the interest of maintaining and defending the state itself. The Baathists fear that a rapid transition to a market economy and a dramatic transformation of state
institutions would destabilize the state altogether (Richards, 2001, pp. 5051).
In 2005, Syrias state and economy retained some aspects of a planned
economy in that the ruling Party has been deeply involved in shaping and
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organizing the economy. IFIs argue that a close relationship between the
state and the ruling party does not provide a proper framework for the
development and success of a market economy. It is also argued that this
deep involvement of the ruling party in the economy and within the state
represents a weak state, which could crumble once the ruling party loses
power. In order to remove these uncertainties, Syria needs to modernize its
state and economy. The prospect of reduced oil production in the coming
decade has been used as a pretext to warn Syria to diversify its export base.
The process of global economic integration and capitalist restructuring in
Syria has corresponded with the dismantling of the socialist and progressive
aspects of the Baathist Party.
Although these suggestions have only been issued in 2005, Syria has already embarked on a series of reforms of both its economy and state since
the 1970s. The difference between Syria and other Middle Eastern states is
that liberalization has resulted from pressures by the domestic forces in
response to Syrias socio-economic crisis since the 1970s.
By 1991, a serious shift in the Syrian economy had occurred. This shift
towards a market economy reected a larger shift in the nature of ruling
class interests and their reorientation towards the global economy in the
1990s. At this point the ruling classes in Syria consisted of four different
groups. The divided interests within the ruling class factions, as well as the
need for regime and state stability, are the main factors that have stalled the
liberalization process of Syrias economy. Liberalization has been resisted
by both the public sector employees and the military wing of Baath, whose
power would crumble if the Syrian economy were fully liberalized (Sayyigh,
2005). This process is further complicated by the close relationship between
the Baath Party and the military. The path of modernization and the shift
towards a market economy has entailed a process of self-destruction of the
Baath Party. State restructuring has not reduced the role of the state, but
has rather shifted the role of the state in serving the interests of the private
sector (e.g., implementation of new laws, removing Baathists and replacing
them by technocrats and representatives of the private sector).
The political economy of state building under Hafez al-Assad depended
upon maintaining a delicate balance between all social forces, at least during
the rst phase of intah. Faced with the crisis of the ISI and a hostile
international environment in terms of nancial aid and support in the 1980s,
Assad chose the side of the merchants and the landlords, while crushing any
dissent against his policies. Despite small steps to join the global economy,
Assad continued to keep a balance between the different social forces and
especially among the different faction of the elite and nouveaux riches.
195
This style of political leadership became the legacy of al-Assad and was
abandoned or was no longer sustainable under his son Bashar.
Over the past thirty-ve years, the balance of forces has come to favour
the liberal reformers who have established their dominance over economic
policy. At the same time, the remnants of the statist regime, i.e., the traditional industrial bourgeoisie, the military and security forces have been
isolated from the state through the withering away of the Baath Party and
the restructuring of the state. Under Haz al Assads regime, the military
and the security forces had gained power through their association to the
state and their economic links to the merchant classes, to whom they extended their services and provided protection. This relationship was viable
as long as Syria maintained a protectionist economic policy while also
keeping a central role for the Baath Party within the state. With the liberalization of the economy and the transformation of the state, this traditional role of the military can no longer exist, as the material base for its
existence would disappear. The old bourgeoisie has two options: reorient
itself and reform to adjust to world market demands and shed its old ties
with the military or go under. It is still too early to determine which path it
will opt for. As for the military, the lack of legitimacy of the regime is the
last remaining reason for its existence. This explains the clamp down on civil
society by the military at end of the Spring of 2001; it represented a struggle
for power and survival on the part of the Baathist regime and its military
apparatuses.
The drive to become competitive has led the Syrian state to remove all
sorts of barriers to capital ows and investments. At the same time, the state
has reduced or eliminated social policies, exposing insecure workers and
peasants to market forces. The maintenance of a certain degree of public
sector involvement will rescue the state from full collapse by cushioning
society from the activities of the private sector. Nonetheless, even the
Baathists have all come to an agreement about the need to reform; the
disagreement tends to be more on the pace and nature of reform and not
necessarily about the shift to a market economy.
NOTES
1. The US has embarked on an unprecedented project of remaking the Middle
East. Prior to the invasion of Iraq and even after, regime change was identied as the
tool of achieving this goal, at least in 2003, this was very clear. The US Congresss
Syria Accountability Act (April 2003) was prepared as a preamble to justify regime
change in Syria, with the hope that the invasion of Iraq (March 2003) would go
196
ANGELA JOYA
smoothly and then the next stage of remaking the Middle East would be Syria. There
is clearly a link between the US war on terror and the expansion of capitalism
especially in the case of the Middle East. As stated by the current US president, The
advance of freedom is the calling of our time; it is the calling of our country. George
W. Bush, November 6th, 2003. See bibliographical entry below. As this citation
conveys it well, the United States has assumed an important historical role as the
facilitator of capitalist system through distributing risks and integrating different
societies into the system. Individual states are being disciplined by the American
police state along with international nancial institutions, so that these states would
accept the capitalist hierarchical and uneven global division of labour and contribute
actively in reproducing the system. For a discussion of the signicance of The US
Congresss Syria Accountability Act (2003), see Stephen Zunes, 2004 (US policy
towards Syria and the triumph of neo-conservatism (2004). Middle East Policy,
11(1), Spring).
2. Although the conicts between Syria and Lebanon could be traced back to their
historical division in the aftermath of the fall of the Ottoman Empire, it was in mid1970s when Syria and Lebanons relations became entangled. Syrian aid was requested by the Christian Lebanese president in 1976 to deal with the civil war and the
in ow of Palestinians into Lebanon. Syrian forces remained in Lebanon until 2005
when the US and Israel forced their withdrawal. Currently there are over one million
Syrian workers in Lebanon, whose remittances are important to the Syrian economy.
As well, there is a strong link between Syrian ruling classes and Lebanese bankers.
The conict between Syria and Lebanon could not understood without a study of the
role of Israel in the occupation of Palestine and its aggressive interventions and
attacks in Lebanon. Scholars have argued that Syria and Israel could be considered
as two competitors who struggle for regional inuence. In the current situation when
the US is in Iraq, Syria is seen as a source of instability in Iraq and therefore the US
has been pressuring Bashar al-Assad to control the borders between Syria and Iraq.
There are a number of excellent accounts of Syrias regional foreign relations (see
Volker Perthes, 2004). Another excellent scholar of Syria is Bassam Haddad. His
articles often appear on Middle East Report online. Haddad (2005) has produced
critical and insightful commentary on Syrias current situation especially in the context of Americas war on terror in the Middle East, available at: (http://www.
merip.org/mer/mer236/haddad.html). For voices from an American think-tank that
regularly study Middle East policies, see Claude Salhani (2003) (Syria At The Cross
Roads. Middle East Policy. 10(3), Fall, 2003).
3. For a useful source that provides a rich study of different angles of Syrian
domestic and foreign policies under Haz al-Assad until the mid-1980s (see Maoz
and Yaniv (1986)).
4. In the absence of a better term that could describe the Syrian state in the 1970s
and 1980s, I have used the commonly used term planned economy. Owing to the
confusion this might cause, it is important to qualify the use of this term in the case
Syria where it does not imply the same thing as scholars attributed to the economies
of the East Bloc. Given the predominance of pre-capitalist social relations, the Syrian
state played an important role in the economy, albeit this was not a conscious and
coordinated role, but one that was constantly contested by various interests in Syrian
society. In fact, in the history of modern Syria (since WWI), this was the rst instant
197
that the centralization of state and economy were taken up in such a decisive manner.
Thus, we could conclude that while the Syrian economy was planned by the state, the
scope of planning and the incoherence of it along with an undeveloped state, made
the Syrian planned economy qualitatively different from the traditionally planned
economies of the East Bloc.
5. It is argued that these policies were the effect of Nassers inuence in the same
period in Egypt, when very radical social policies were implemented under Nasser,
with an eye to achieving Arab socialism. Petran (1972) has argued that despite their
commitment to socialism, the radicals were inadvertently promoting agrarian capitalism in Syria. The policies of this regime although aimed at building socialism led
to the development of capitalism.
6. As Olson has noted, al-Assads institutional innovations and political appointments were all aimed at striking a balance in the power among various factions of the
ruling class. Although he reduced the power of the urban landed classes, nonetheless
he integrated them into the state alongside other minorities and groups from rural
Syria (Olson, 1982, pp. 132133).
7. Similar to Sadat in Egypt, winning the 1973 war with Israel gave currency and
legitimacy to Assads unpopular economic policies and rallied Syrians behind his
state building project See Perthes, 1993, p. 54; Quilliam, 1999, p. 54; Petran, 1972.
8. The conict between the state and the contending Sunni groups lasted for two
weeks in the course of which the state coercive apparatus destroyed large portions of
the City of Hamah and killed at least 10,000 civilians (Cleveland, 2000, p. 394).
9. Early 1976 marked a high point in the development of overt, organized opposition to the Baath regime in Syrias north central provinces. During February,
rioting occurred in several north central cities following the death of a widely respected leader of the Islamic movement in a government prison. The most serious of
these disorders took place in Hamah, where local merchants and students clashed
with police and army units. This marked the beginning of the Islamic struggle against
the Syrian regime (Lawson, 1989, pp. 24-5).
10. In the autumn of 1978, a number of leftists and Nasserists opposed to the
regime were elected to [local union committees] from unofcial lists, competing with
those prepared by the party hierarchy. These candidates ran on platforms sharply
critical of the emphasis being accorded to private enterprise in the countrys development program (Lawson, 1989, p. 27).
11. The Islamic opposition to the regime in this period was the combined protest
of the Sunni merchant class and its ideological wing, the muslim brotherhood as well
as a popular protest against the rising prices of daily food items. In a sense, the main
opposition to the regime came from the traditional ruling class constituting the
merchants, urban notables and old landlords as well as the Islamic ulama or religious leaders (Olson, 1982, pp. 63164). The failure of the Islamic opposition to
seriously challenge the regime was due to a crucial absence of a broad base of
support for the Sunni majority in the rural areas. In other words, Sunni merchants
and landlords, who have traditionally been based in the cities, cannot claim support
among the peasants. The Baath Party, however, nds mass support among the rural
peasantry as well as the minorities whom it effectively integrated into the institutions
of the state. Although this was the nature of the struggles in the late 1970s, the
current struggles are radically different. These struggles are taking place between a
198
ANGELA JOYA
reformist, newly constituted ruling class and the classes that gained their power
through running state corporations and cooperatives.
12. The unintended outcome was a fragmented bourgeoisie who could not act as a
collective negotiator on behalf of capital. This is a unique feature of Syrian bourgeoisie and merchant classes, who are still struggling to form a coherent class alliance
(Perthes, 1993, p. 49).
13. Syrias Investment Law No. 10 can be compared to Egypts Investment Law
No. 43 of 1974. It has been argued that while Egypt implemented investment and
trade liberalizations, Syria lagged behind in these two areas and it was not until 1991,
when the Syrian state embarked on such high scale of liberalizing the economy by
extending freedom of investment, exchange and trade to the private sector.
14. Sukkar further adds, The public sector is dominant in oil, banking, construction and, until recently, foreign trade, while the private sector has been dominant in agriculture, tourism and domestic trade (Sukkar, 1993, p. 26).
15. Under Haz al Assad, the revenues from oil exports, workers remittances and
other strategic rents helped Syria avoid dealing with the IMF and the World Bank
(Richards, 2001, p. 49).
16. The Baath Party has penetrated the Syrian society in every way and
their inuence within the public sector has mass support among Syrians who depend on subsidies. The destruction of Baathists is not an easy ght for the reformers
to win.
17. In 2005, the state-owned enterprises ranged from oil sector, telecommunications, ports, power generation and distribution, water, air transfer, prices of key
commodities.
18. Child labour constitutes 18 per cent of the total labour force in Syria. Close to
70 per cent of Syrians earn less than $100 a month. Slum dwellers constitute two
millions out of the total 18 million population of Syria (UNDP, 2005).
19. It is noteworthy that the global environment also served such private interests
very well as the US pursued its project of democratization in the Middle East. The
fall of the East Bloc had delivered a blow to state planned economies that now had to
learn to adapt to a global capitalist environment by learning the tools of capitalist
accumulation.
20. Capitalist expansion has entailed the integration of non-integrated spaces and
social relations under the dominant capitalist social relations. According to the IMF
and the World Bank, Syria represents a closed economy given its low level of international trade links. Its lack of integration into the capitalist world market is also
reected in the low level of debt that it carries, according to the World Bank and
IMF. Syrias debt has remained at very manageable levels and its foreign reserves can
support it for up to 212 years. Although the argument for economic reform uses the
declining oil prospects as its main reason, oil constitutes only 15 per cent of the
Syrias GDP and Syrian economy represents one of the most diversied economies in
the whole Arab world. Syrian economy is divided into agriculture, industry (food,
olive oil), textile, pharmaceuticals, engineering, consumer durables and over time,
with the closer integration into the global world market, the share of work force in
the agriculture has declined dramatically, while the ratio of labour force in services
and construction has increased. (IMF, 2005a, 2005b; UN report on Syria, 2005).
United States Library of Congress Report on Syria.
199
21. Here I am referring to the democratization project of the United States in the
global south since the end of the Cold War as a process of transplanting liberal
democratic institutions.
22. While here I am thinking of the return of the old conservative ruling class in
Syria under Haz al Assad, a similar situation occurred in France in the nineteenth
century when the old ruling class power was restored under the Second Empire of
Louis Napoleon Bonaparte right when the progressive forces had their high hopes
and expected a radical social transformation (see Karl Marx, 1963).
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Journal of Middle East Studies, 16, 301323.
Bahout, J. (1993). The Syrian business community, its politics and prospects. In: E. Kienle
(Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London:
British Academic Press in association with Center of Near and Middle Eastern Studies,
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Bush, G. W. (2003). Freedom in Iraq and the Middle East. (Speech calling for the establishment
of democracy in the Middle East), November 6th, 2003. Available at: http://
www.state.gov/p/nea/rls/rm/26019.htm
Cleveland, W. L. (2000). History of the modern Middle East (2nd ed.). Colorado: Westview.
Hinnebusch, R. (1990). Authoritarian power and state formation in Bathist Syria: Army, party,
and peasant. Boulder, Colo.: Westview.
Hinnebusch, R. (1993). Liberalization in Syria: The struggle of economic and political Rationality. In: K. Eberhard (Ed.), Contemporary Syria: Liberalization between Cold War
and Cold Peace. London: British Academic Press in association with Center of Near and
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Kienle, E. (1993). Introduction: Liberalization between Cold War and the Cold Peace. In:
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Lawson, F. (1989). History of liberalization in Syria. In: B. Berch (Ed.), Power and stability in
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Maoz, M., & Yaniv, A. (Eds) (1986). Syria under Assad: Domestic constraints and regional
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Olson, R. W. (1982). The Bath and Syria, 1947 to 1982: The evolution of ideology, party, and
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Perthes, V. (2004). Syria under Bashar al-Assad: Modernization and the limits of change. New
York: Oxford University Press.
Petran, T. (1972). Syria. New York: Praeger.
Polling, S. (1993). Investment Law No. 10: Which future for the private sector? In: E. Kienle
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Quilliam, N. (1999). Syria and the new world order. UK: Ithaca.
Richards, A. (2001). The political economy of economic reform in the Middle East: The challenge to governance. RAND project.
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Sukkar, N. (1993). The crisis of 1986 and Syrias plan for reform. In: E. Kienle (Ed.), Contemporary Syria: Liberalization between Cold War and Cold Peace. London: British
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Abdel Latif, O. (2006). What now for Syria? Available: http://weekly.ahram.org.eg/2006/783/
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mero/mero090701.html
Haddad, B. (2005). Syrias curious dilemma. MERIP (236). Fall. Available: www.merip.org/
mer/mer236/haddad.html
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United States Congress. (2003). Syria Accountability Act. Available at http://www.whitehouse.
gov/news/releases/2004/05/20040511-7.html
THE EVOLUTION OF CAPITALIST

RELATIONS OF PRODUCTION
IN U.S. MEDICAL PRACTICE:
AN OUTLINE
Jerome Joffe, Ph.D
ABSTRACT
This paper examines how medical practice, like all other productive activities, has been subject to the transformative elements of the forces and
the relations of production involving class struggle and intra-class conflict.
It will explore changes in the relations of production of medical practice
which have been catalyzed by powerful productive forces. The current
period of medical production involves the transformation of simple commodity production into a transitional stage of capitalist production with
the seemingly unbounded growth of the medical productive forces. This
development was precipitated by the intervention of capital as a whole, to
restrict the drain on their variable capital through the placement of units
of financial capital into the management of medical production, using the
leverage of access to patients. In response, physicians have consolidated
and centralized their practices to create enterprises with market power to
limit the extraction of surplus by financial capital, and by their own
employment of productive labor to extract surplus from hired physician
labor and other clinical workers. Rationalization of the production of
ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24006-4
203
204
JEROME JOFFE
medical service commodities, and the sharing of surplus generated from

exploitation of an expanded labor force by managed care financial capital
and their capitalist partners owning medical enterprises, constitutes the
contemporary relations of production. The contradictions of this mode of
medical production and the potential for its reproduction will be analyzed.
1. INTRODUCTION
The relations of production in physician practice, a key component of the U.S.
medical care system1 is being transformed from simple or independent commodity production (ICP) to capitalist production. The non-correspondence
between the forces and the traditional relations of production in the medical
sector explains the emergence of the new relations of production. The forces of
production embodied in contemporary medical technology are no longer
manageable by simple commodity production.
This transformation is the result of two developments. The rst development begun in the last quarter of the 20th century emerged from the health
insurance purchase policy of large corporate enterprises in all economic
sectors responding to increased costs of medical benets for their employees,
resulting mainly from the growth of the productive forces in the medical
sector. Their policy was to collaborate with insurance units of nancial capital
to convert these units to managers of medical production. This enabled these
units to directly appropriate value from the producers of medical service.
The second development arose from the response of physicians to this
corporate policy. Their reaction was to concentrate and centralize their petty
enterprises, to gain sufcient market power to limit the extraction of surplus
by nancial capital, and further to extract surplus from hired physician labor
and other clinical workers in their expanded practices. Contestation over
sharing the surplus between managed care nancial capital and their capitalist
partners in medical practice caused instability and subsequent restructuring of
the relationship of these two forms of capitalist production.
This paper will examine in the context of developing forces of production,
the structural dynamics of the new relations of production, its contradictions
and its potential for reproduction. The focus of the analysis will be on two
forms of surplus value appropriation; the appropriation by managed care
capital of part of the value produced by the physician practice and the appropriation by the owners of the physician practice of surplus value produced
by salaried physicians and other clinical workers. Trends in accounting prots
The Evolution of Capitalist Relations of Production
205
for enterprises presented in the paper are to be understood as rough

approximations of surplus value.
2. THE DEVELOPMENT OF THE FORCES OF

PRODUCTION IN MEDICAL CARE
This section describes the dynamic nature of the medical sector forces of
production and its twofold relationship with the forces of production of the
economy as a whole.
First, the medical instruments of production rapidly developed because
they originated in the technological core of advanced capitalism and not
in the ICP sector where they were used. The reciprocal interaction of the
medical equipment and pharmaceutical manufacturing units with physician
specialists and other clinical personnel especially in large teaching hospitals
was an especially powerful catalyst for expansion. The forces of production in
medical care include highly skilled scientically trained labor and pharmaceuticals, supplies and equipment acquired by the health care delivery
system1, primarily through its backward linkage to manufacturing and supply
rms and to medical, nursing and allied health educational institutions.
Second, the rapid growth of the forces of production in medical care is, to
a signicant extent, a response to the disease externalities of production and
the culture of consumerism of contemporary capitalism. These two themes
will be briey developed in turn.
The growth of the forces of production can be inferred by the growth in
the level of health care expenditures. Expenditures reached $27 billion, 5.1%
of GDP in 1960. Over the next 40 years, expenditures increased to $1.3
trillion and almost tripled to 14% of GDP.2 The health care labor force of
over 10 million in 2002 more than doubled from 1970, a signicantly greater
growth than the total labor force.
The total health care and especially the hospital labor force, its major
component, is a highly scientic and technical labor force using constantly
innovative instruments of production. The proportions of Professionals
(40%) and Technologists and Technicians (17%) in the health care sector
are signicantly higher than the proportions in the rest of the economy; 14%
and 2%, respectively.3
Another measure of the ongoing intensication of technology in medical
care is the continuing increase of expenditures for medical equipment as a
percentage of total medical care expenditures.4 For most of the 20th century,
diagnostic and treatment effectiveness rather than cost performance
206
JEROME JOFFE
motivated the use of technology when introduced for clinical rather than for
administrative purposes (Geligns & Rosenberg, 1994, p. 32). Diagnostic and
treatment technology responds to the character of disease whether of a degenerative, chronic, traumatic, infectious, congenital or psychological nature
and the genesis of disease. The latter is linked to the evolving nature of the
social structure.
The great expansion of the medical system was enabled by the immense
surplus generated by the expansion of the productive forces of the post-war
Golden Age. But motivating the expansion was the transformation of the
nature of disease and the need of the capitalist order to respond to this
transformation.5 The pattern of disease was reshaped with the decline
of infectious and the rise of degenerative chronic disease,6 which brought in
its wake huge investments in diagnostic and treatment technology to treat
circulatory, cancer and other systemic diseases. There is overwhelming
evidence that the physical and social environment and personal behavior are
the leading factors in the determination of health and susceptibility to premature death, a perspective endorsed by the Centers for Disease Control,
the epidemiological agency of the U.S. Government.7
However, only critical sociologists using Marxist and Neo-Marxist methodology8 trace these factors systematically to processes of the capitalist
order rather than attribute decisive causality to industrial society per se and
either multi-causal or autonomous destructive behavior. Only the former
theorize, hypothesize and provide evidence that these diseases are signicantly produced by the technologies, work hierarchies, inequalities and
health adverse behaviors of the population, the latter an expression of the
culture of consumerism, itself a product of contemporary capitalism.
Even without resolving the question whether it is the capitalist order
or industrial society as such which is responsible for much of disease and
premature death, (a question beyond the scope of this study), social determination of disease can cast light on the relationship of the development of
the forces and relations of production in the economy as a whole to the
development of the forces of medical production. This is crucial to the dialectic of the emerging capitalist relations of production in medical practice
and its inherent limitation in accomplishing the tasks set for it by aggregate
capital of restraining the medical forces of production.
Because disease emerges as an externality to the mode of production9 its
prevention would require restructuring the processes for the accumulation
of capital in the interest of the health of population. This is strongly resisted
and the social order responds only minimally to change the conditions that
generate disease. Only with intense class and popular struggle were public
207
health measures though often with weak implementation such as

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

relations of production of health care discussed in this paper pertain to
developments in the U.S. alone. The contrasting health system roles of the
state in the U.S. and other nations are briey discussed in Section 5.
3. THE PHYSICIAN PRACTICE IN SIMPLE

COMMODITY PRODUCTION
The physician practice in simple commodity production is a solo or small
group physician owned enterprise in which medical services are sold directly
to patients with or without a passive insurance intermediary. The enterprise
has few if any salaried workers. The ofce practice directly owns its own
equipment, but has free access to hospital owned means of production.14
The physician practice in this mode of production can be distinguished
from physicians directly employed and salaried by hospitals or public health
departments and from employed physicians in large group owned medical
practices employing physician and other clinical labor.
In the independent mode of production medical service commodities are
sold at a price determined by market forces uctuating around value serving
as a center of gravity. By contrast, in large physician owned group practices
organized on a capitalist basis, employed physicians and other clinical workers sell their medical services at a salary determined by market forces uctuating around the value of their labor power. The relations of production of
the two types of medical practice disregarding the level of remuneration
are analogous respectively to that of the family farmer and the capitalist farm
employing farm labor.15
The remainder of this section will explore how simple or ICP in medicine
was sustained though articulated within a fully developed capitalist economy. The sources of its dynamic growth and the development of the crisis of
this mode of medical production will then be examined.
3.1. Sustainability within a Developed Capitalist System
Large corporate units pharmaceutical, equipment and medical supply
manufacturers and construction contractors being prime examples are
commodity vendors to physicians and hospitals without being directly
involved in the production of medical services. The physician practice has
thus been long subject to capitalist market forces involving signicant inputs
209
to their production process. The practices were also involved with insurance
capital, which nanced medical (commodity) service realization.
But analogous to the pre-industrial capitalist period where merchant
capital governed the circulation process between different modes of production, or the period of the dual relations of production of slavery and
industrial capitalism in the U.S. in the 19th century, physician exchange
relations with the producers of medical inputs and the nancial intermediaries necessary for the sale of their medical services did not lead to the
assimilation of one mode of production to the other. The producers of
medical inputs and their employees related to the medical providers through
the circulation of their respective commodities.
The dynamics of industrial capitalism did not directly affect the ICP
process. The design of the medical instruments of production, for example,
was not motivated by physician concern for labor substitution or their need
to accumulate capital in a price competitive market environment. However,
the expanding or declining state of accumulation of the capitalist economy
in which the independent mode of production was integrated did affect the
latter through the expansion or contraction of demand for their services.
The key characteristic of the ICP is that the product of medical labor was
sold at value and not at the value of labor power as would be the case if
a signicant number of physicians were employed by capital and only
a minority had independent practices.16 In addition, rents could be gained as
price competition in the market for physician services was restrained
by various guild-like practices. Professional conduct as dened by the
American Medical Association (AMA) precluded physician advertising and
dulled price competition. Limits set on the number of entrants to medical
school and limiting capacity expansion of the latter also increased income.17
In addition, asymmetry of information between physicians and patients
enabled the former to induce additional demand to increase their income.18
3.2. Growth and Crisis of the Independent Medical Mode of Production

From the beginning of the scientic era of medicine at the end of the 19th
century, medical technology has been largely accumulated by and concentrated in hospitals. Private practice physicians owned minimal means of
production until the rapid growth of substantial group practices in the last
decades of the 20th century. Physicians could sustain their small scale enterprises because of their access to hospital owned means of production as well as
to the latters employed labor force. Most hospitals were philanthropically
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capitalized as not for prot facilities and were regarded as a necessary part of
the social infrastructure for stable capital accumulation. They offered their
facilities as a free workshop to private practice physicians as the latter held
sway over patients. The historic accord that was struck was that of community
self-employed physicians gaining access and control of hospital resources
for diagnosis and treatment when admitting their patients and in return the
hospital as well as the physician would receive payments from these patients.
Medical service market growth was furthered by the health insurance
system begun in the 1930s, which indemnied covered patients for their
payments to medical providers or directly paid physicians and other
providers. Employers purchased insurance for their employees and premium
costs became part of employers variable capital. Except for auditing
submitted claims for payment, insurance companies had no authority over
providers or patients.19
The initial strategy of capital, in the early 1970s, in response to the rapid
growth of the forces of medical production, was to constrain medical service
demand by increasing out of pocket payments by patients and to require
workers to pay part of the insurance premium. The conict of interest
between capitalist employers wanting to restrain their variable capital costs
and physicians as simple commodity producers having no interest in limiting
their source of revenue, led to more drastic changes.
4. INTRODUCTION OF CAPITALIST RELATIONS

OF PRODUCTION
An external intervention of capital into the medical production process
began in the early 1970s. Insurance units renamed Health Maintenance
Organizations (HMOs) initially employed physicians, but later in the decade
forced the afliation of physician practices through market coercive power.
More recently, public nanced programs for the elderly and the poor
(Medicare and Medicaid, respectively) have enabled HMOs and other managed care plans to initiate, in these programs, a similar physician afliation
process.
This shift transferred the mechanism of restriction of utilization from
employee patients on the demand side to providers of care on the supply
side. Managed Care by the HMO was ideologically justied as a mechanism
for eliminating what was described as the perverse incentives associated with
physician professional dominance and autonomy which created inefcient
market processes on which rising health costs were blamed.20
211
HMO insurance units differ from indemnity insurers in their relationship

to physicians by usurping prerogatives of particular property rights from the
physician. When an employer purchaser enters into a group contract with an
HMO, physicians have access to members of this group only by a contract
afliation with the HMO. The HMO as a condition of afliation, compels
physicians to surrender these property rights.
The restriction on the ability of the physician to market their commodity
without contractual afliation provided the HMO with the leverage to both
intervene in the medical production process and to extract surplus value
equivalent to part of what was totally self appropriated by the physician in
simple commodity production.
Revenue per patient of contract-afliated physicians was reduced with the
provision of fewer units of services and lower payment per unit of service.
Fewer units of service reduce the exchange value of the medical commodity,
which benets the employer purchaser through a lower insurance premium.
The gain from lower payment per unit of service accrues to the HMO as
a lower production cost. Redistribution may occur with shifts in relative
power in the insurance market as well as by reduction in premium pricing
by an HMO to further market penetration. Above average reduction in
physician payment generates transient monopoly prots for the low cost
HMOs, which could further abet their insurance market penetration by
charging premiums below the social average.21
HMO management of care involved expenditure control through the following historical sequence of production controls: (1) reduction of hospital
admissions and average length of stay; (2) reductions of tests, treatments and
number of visits to specialists although offset in some managed care
arrangements by more visits for disease prevention (immunization and
screening tests) than under the indemnity system; (3) reduction of payment
per unit of service to physicians and increase in the number of patients
treated per physician. The latter modied physician revenue decline while the
reduced demand for physicians additionally beneted the HMO by lowering
their transaction costs. Techniques employed by HMO to achieve (1)(3)
above range from monetary rewards and penalties to physicians, threat
of termination (delisting), and use of physician practice guidelines to
reduce services.
The basis for HMO exploitation of physicians through surplus value
extraction is the inability of the physician to freely market her service commodity, an important element of property ownership. Though continuing to
capitalize and maintain ownership of the ofce practice she has less control
over its means of production and the production process. As especially
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specialist and surgeon physicians lose their control over patient access, their
autonomy with regard to hospitals, which provide them with their principal
means of production is also reduced. As hospitals depend on physicians for
the admission and treatment of patients and they too are forced into contractual relations with HMOs, their inuence over the production process is
also compromised.22
HMO power grows to the extent of its penetration of the physician service
market, i.e. to the extent of the non-availability of any alternative means
of access for physicians to patients. Even if many HMOs are competing in
this market, physicians would still be subject to an alienated property
relationship and to exploitation.
Control over access to patients is therefore a separate issue from market
power in the physician service market. If either an HMO or a group
of HMOs on the buyers side or physician practices on the seller side of
the physician service market exercise concentrated market power, only the
extent of surplus appropriation would be affected.23 Even when a single
bargaining agent collectively represents all workers (or by extension of this
market logic to the physician service market, all community physician
practices), surplus value extraction would arise from HMO control of the
product and the production process as well as of patient access.
Such extraction is also expressed through the shifting of underwriting risk
to physicians. Primary care physicians receive a xed payment per time
period (capitation) for each assigned enrollee regardless of the number
of visits to and treatment by that physician necessitated by the (enrollee)
patients medical condition.
An extension of risk shifting is the requirement that physicians share the
cost with the HMO above a specied ceiling for tests, prescription drugs and
even hospitalizations for their patients. This additionally imposed risk,
however, may be eliminated by the HMO for a price a reduced capitation
payment to the physician. This is an alternative form of surplus extraction.
While underwriting risk is intrinsic to the insurance function for which the
insurer obtains a return, the HMO has the ability to shift part of this risk to
the physician without cost. Conversely, when alternative access to patients
exists, risk arrangements may continue but higher physician payments are
obtained (Draper, Hurley, Lesser, & Strunk, 2002).
The reduction of physician economic status could be likened to the
transformation undergone by pre-factory spinner and weaver cottagers
whose independent producer status via a product exchange relationship with
the merchant is gradually transformed into that of a dependent worker so
that they produce only for and through the merchant, who has converted
213
into a capitalist. As Marx describes the process, He bought their labor

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

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

Government plays a signicant and growing role in funding health care
service. In 1999, a study by Woolhandler and Himmelstein (2002, pp. 56)
estimated such funding at 59.8% of national health expenditures. Government nancing has two basic channels. (1) Federal and state governments
offer managed care insurance to their employees the same policy as private
employers. Their coverage is indeed often more generous than private
employers but the impact of their coverage on relations of medical production is no different. (2) Federal nancing for the Medicare program for
the elderly and disabled and federal and state nancing of the Medicaid
program for the indigent and other low-income populations to an increasing degree use private managed care companies to deliver services. In the
Medicaid program states can obtain waivers from the federal government
requiring beneciaries to enroll in managed care plans.
Medicare uses the Prospective Payment System and the Resource Based
Relative Value Scale (see Shi & Singh, 2001, p. 211 and p. 215 for details) for
paying hospitals and physicians respectively for treatment of non-managed
care enrollees. These are administrative mechanisms which Medicare, as a
monopsonistic buyer uses to limit the revenue of providers. This is done to
lessen the federal governments tax revenue derived expenditures for health
care. However in both the Medicare and Medicaid programs, the managed
care companies are appropriating value as they do in the private sector.
Where government uses administrative mechanisms to control costs, it
increases the already existing tendency to provider consolidation. Providers
are motivated both to lower costs through economies of scale and to exercise
leverage in the private market to offset the nancial impact of monopsony in
the government sector.
Whatever its impact on access, quality and effectiveness of care, governments role has been to reinforce changes in the relations of production
within physician practices. And this is surely in harmony with the prevailing
neo-liberal ideology regarding the role of the state in promoting private
capital accumulation through the market in every socioeconomic sphere.
5.2. The Role of Government in Other National Economies

Historically, social democratic movements based on the strength of an
organized working class in other advanced capitalist societies succeeded in
creating National Health Insurance (NHI) and National Health Service
215
(NHS) programs, using public nancing, planning and regulatory bodies in

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

HMOs succeeded in controlling health care costs from the early 1990s to
1996. Prots were high and premiums continuously declined, though the
downturn of the insurance premium underwriting cycle during the period
also contributed to price stability. However, premiums paid by employer
group purchasers since then have sharply risen with double digit premium
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increases from 2000 to 2004 (Kaiser Family Foundation Health Research

and Education Trust, 2004).
These cost increases were built upon an already existing level of costs,
which are signicantly higher in the U.S. than in other advanced capitalist
nations. This is predominantly due to the use of private insurance with its
administrative and marketing waste built into this method of nancing
personal health care (Woolhandler & Himmelstein, 1991, pp. 12531258).
There are two structural causes underlying the sharp continuous upward
climb of premiums. The rst is the near exhaustion of the clinical means
to maintain the heretofore rapid pace of reduction of the quantity of services
provided; the second is the growth of alternative channels of access to
patients for physicians and hospitals which curtailed the ability of the HMO
to both manage the production process and to extract surplus. The widening
of access is the consequence of the growth of oppositional currents to HMO
power. The resulting conict has been expressed both in the political realm
and in the market place. Each source of restraint of HMO dominance will be
examined in turn.
6.1. Clinical Limits to the Further Reduction of Medical Care Services

By the late 1990s, gains from the management of care drastically slowed.
The current stage of development of the forces of production affecting
clinical capability limit further extensive shifts from inpatient to less costly
outpatient care (especially ambulatory surgery), and further reductions
of the length of the hospital inpatient stay.25 Also, the rapid pace of test
reduction, specialist referral and shortening of patient contact time could
not continue without obviously endangering effectiveness of care.
Some technological changes have indeed recently made care less costly
and also improved outcomes. Replacement technology such as less
invasive microsurgery, e.g. laparoscopy, stone crushing lithotripsy replacing
kidney surgery and gamma knife (laser) surgery replacing invasive brain
surgery have expanded opportunities for same day surgery and shorter
lengths of inpatient stay. (Patel & Rashevsky, 1999, p. 234).26 In addition,
new drug regimens for circulatory disease, cancer treatment, asthma, etc.
often replace or signicantly delay a hospital stay. Computerized technology
in nancial and medical record keeping through labor displacement has also
reduced costs. However, most clinical technology is labor using and more
expensive than the technology it superseded. And these advances are
continuous.
217
Barriers to cost control arise only in part from the limits of scientic
knowledge. They also result from excess equipment capacity built into hospital
cost structure. This excess originated in the indemnity insurance period when
all costs were automatically covered, but also sprang from the environment
shaped by managed care. One of the contentions of managed care advocates
was its ability to reduce the rapid spread of new technology by enforcing
competition among hospitals. However, the intense competition among hospitals for HMO selective contracting27 has led to continued rapid diffusion of
the most advanced forces of production as hospitals vie for any potential
source of revenue.28 The diffusion of technology within local markets
suggests that services are not being concentrated in a few hospitals y hospitals
have been adding services (with technology) to be attractive providers of the
range of services sought by managed care plans (Morrisey, 2001, p. 9). These
factors, abetted by growing hospital concentration have increased hospital
costs, which have been passed through to insurance premiums.
6.2. New Forms of Physician Access to Patients and the Reduction

of Surplus Appropriation
The second critical cause of declining managed care effectiveness in cost
control is the result of the intense antagonism and resistance of both
physicians and patients to HMO managed care practices (Tselikis, 2000,
pp. 16). This has been manifested both politically and in the insurance and
medical service markets. Politically, opposition has been incorporated into
legislation in numerous states, constraining numerous HMO managed care
practices such as setting limits on the number of community physicians who
could join the HMO network, or requiring exclusive contracts for those
permitting to join. A proposed federal Patient Bill of Rights which would
federalize constraints on HMO was blocked at the congressional joint
committee level reecting the intense conict over the powers of the HMO.
On the economic front, demands by workers and by employers reacting to
worker hostility were accelerated in the tight labor markets of the late 1990s
for less restrictive managed care and for broader and more stable provider
networks.
These challenges to the managing authority of insurance capital and their
ability to extract surplus (1) generated new forms of patient access and
(2) forced changes in HMO practices:
(1) Two new forms of insurance, point of service (POS) plans and preferred provider organizations (PPO) were introduced. The POS, offered
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JEROME JOFFE
under duress by a large number of HMOs, allows enrollees for an incremental premium and larger out of pocket payments at the POS, to receive
reimbursed services from non-contracted specialist physicians. This arrangement expands the possibilities for physicians to obtain patient access
without a contractual relationship to an insurance unit.
The PPO arrangement allows an extensive network of physicians to have
access to patients with minimal managed care controls by agreeing to accept
a discounted fee for service arrangement (Kongsvedt, 1997, pp. 3839).
PPOs may be organized by insurance companies, large employers, hospitals,
physicians or a hospital in conjunction with their afliated physicians. The
ultimate payers for their services are primarily employer groups whether
through an insurance intermediary or directly when self-insured. A PPO
often involves a much broader network of physicians than that afliated
with an HMO.
The level of the PPO contract fee schedule reects the payment level
needed to compete with the HMO. However as access to patients was now
more accessible without the constraints of the HMO, and as many physicians can migrate between these modes of patient access within the same
local physician service market, incomes of all physicians whether HMO,
PPO or POS, tended to rise and thus reduce surplus appropriation by the
insurance unit.
The POS option was the response by many HMOs to patient hostility to
access barriers to specialists, and a means to retain enrollment in the face
of the growing competitiveness of the PPO. The latters expansion is the
antagonistic expression of physicians and hospitals to the intensive managed
care controls of HMOs.
In 1998, more than half of all those covered by employer group insurance
were members of PPO or POS plans. Traditional HMOs covered 27% while
indemnity insurance (which covered 71% of employees with job based
coverage in 1978) covered only 14% in 1998.
(2) Even traditional HMOs were forced to respond to this hostile environment by modifying some of their basic techniques of control. This
included eliminating or modifying closed provider networks, primary care
gate keeping (requiring enrollees to get specialist referral from their primary
care physician and often requiring these physicians to obtain HMO approval for such referral). Other elements of control included HMO medical
necessity authorizations for tests and hospital admissions, and even provider risk sharing for excessive expenditures resulting from their referrals
and hospitalization. Concessions were necessary to prevent further declines
in enrollment size required for economies of scale (Draper et al., 2002).
219
HMO control over physicians which depends on the threat of exclusion,

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

sharp prot dips and even losses. Exacerbating these losses was the bursting
of the stock market bubble with the accompanying steep losses on their
premium oat.30 To meet these challenges, premiums were sharply hiked
to group as well as to individual purchasers, a move enabled by insurance
industry consolidation. This in turn provoked large employer group
purchasers to increase their employees share of the insurance premium as
well as their out of pocket costs for medical treatment. Termination and
reduction of insurance coverage by some employers then followed.
7. INTERNAL CAPITALIST TRANSFORMATION

OF THE PHYSICIAN PRACTICE
Alongside and in part stimulated by the growth of the HMO, capitalist
relations of production have developed rapidly within the physician practice.31 Such enterprises have become increasingly group-owned and employ
physicians and other clinical labor. The increasing size of the production
unit (dened by the number of physicians in the practice) has developed as
a countervailing power to managed care organizations and growth of many
group practices beyond what appears to be the optimum size for economies
of scale and scope implies the desire for increased market power (Pope &
Burge, 1992, pp. 129164).
In addition, the large group practice has the potential to achieve greater
efciency via the division of clinical labor and economies of scale in technology, marketing and administration. The centralization of capital in the
large group practice also expands revenue with a much wider array of services including advanced diagnostic services, chemotherapy and radiation
treatment. Some practices have also incorporated laboratory services and
ambulatory surgery both in the ofce and in free-standing surgical centers
owned in part or whole by the practice. These expanded product lines and
facilities are in direct competition with hospital ambulatory surgical units.
The group practices besides being nanced by investment of owner surplus
also gained access to private investment. Venture capital rms, large
institutional investors, the equity market and banking consortia joined
in nancing physician practices either directly or through investor owned
entities called Physician Practice Management companies (PPMs). These
units strategized that prots could be generated through uniting many group
practices in common ownership and providing the management to increase
productivity and gain even greater economies of scale and market power.
221
Many physician groups sold their practice in exchange for equity in the PPMs
permitting a broader base for outside capital in practice ownership.
Conglomeration of group practices by the merger of two large PPMs
in the hyper speculative market of the late 1990s brought over 32,000
employed and contracted physicians together under one corporate roof
(Pope & Burge, op. cit. pp. 129164). However, the merger was soon undone
by over-expansion, debt and internal dissension as were many of the other
physician management corporations. This form of capitalist penetration in
medical practice had, at this moment in time, failed to become dominant.
The advance of centralization which has eroded the dominance of solo
physicians (single owner, mostly single physician) practices has been dramatic. From 1965 to 1996, the number of physicians in group practice rose
from 11% to almost a third of all non-federal physicians. During the same
period the number of groups increased by 362% while the number
of physicians within these groups increased by 628%, 73% more rapidly,
as an expression of the emergence of very large groups (Havlicek, 1999,
Table 55). Twenty nine percent of all group physicians were in practices of
over 100 physicians. While 70% of all groups are single specialty and relatively small, those with 16 physicians and more are only 10% of all groups
but include 54% of all group physicians (Havlicek, op. cit, Table 55).
7.1. Physician Segmentation within the Group Practice

The proportion of physicians working as employees as opposed to being self
employed has dramatically increased. While owners of the corporate group
practice may also take an employee status, the proportion of employed
physicians without any or with minimal equity has increased with the
growth in the size of group practices.32 In a nationwide 1998 survey of
physicians, 36% did not reply afrmatively to the question Are you full
or part owner of your main practice. Employees so dened also included
those working in private and state and local government hospitals and
medical schools. However, the largest category was in group practice. Fifty
percent of all physicians in group practice are employees (Baker, Cantor,
Long, & Marquis, 2000, Tables 6164).
Between 1983 and 1994 the percentage of patient care physicians practicing as employees rose from 24.2% to 42.3%. Of those in practice for ve
years or less, 65% were employed in 1997 compared to 37% in 1983. While
some solo practitioners joined group practices as owners, most joined as
salaried employees (Havlicek, 1999).
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With income level of solo physicians declining relative to employed physicians, and practice entry cost rising, fewer physicians wanted to remain in
or enter solo practice. Young physicians especially, were joining group
practices, largely as employees (Kletke, Eammons, & Gillis, 1996, p. 557).
Eighty percent of recent medical school graduates are taking salaried jobs
with HMOs, clinics or hospitals (Greenhouse, 1999, p. A1).
While there had been, over a long time period, an inverse relationship
between the percent of physicians in salaried status and years of experience
which describes the typical career path, a substantial increase occurred in
salaried status for all years of experience between 1988 and 1994 (Kletke et al.,
1996, p. 559). This increase in employment status occurred in all specialties,
in all parts of the country, and both for males and females.
HMO pressure for cost control serves as a catalyst for shaping the group
practice in a hierarchical labor process with a commensurate labor discipline. Distinctions between senior partners, junior partners and non-partner
physicians have become even more important, creating stresses on
one-doctor, one-vote governance mechanisms (Robinson, 1999, p. 121).
As the worker cooperative is transformed into a capitalist rm, the group
practice gradually perceives the HMO as a business partner, with the latters
function being patient enrollment for shared generation and realization of
surplus value, though the division of the surplus is contested. The segmentation of the physician profession with the transformation of some physicians into the capitalist class has been further accelerated through physician
practice joint ownership of laboratories, surgical centers and even specialty
hospitals with private investors (Health Care Review, 2002, pp. 14).
7.2. Non-Physician Clinical Labor in Group Practice

Large practices extensively employ non-physician clinical labor (NPCLs),
either in the groups ofce practice or in other facilities, under their own
or joint ownership. Physician assistants and nurse practitioners (because of
their advanced training are identied as physician extenders) and to a lesser
extent registered nurses also perform the less complex tasks traditionally
assigned to physicians. Laboratory and technical workers produce an
extended array of services, such as diagnostic scanning and complex blood
tests, not traditional to the physician practice.33 The practice extracts
surplus value from these productive workers.
The number of NPCLs employed in hospitals and group practices are increasing even more rapidly than physician employment.34 In
223
addition, physician extender expansion as substitute labor for the less skilled
tasks of the physician has two signicant affects on the rate of surplus value
extracted from physician employees. First, it reduces the demand for their
labor and secondly over the long run, it increases the pool of employable
physicians as it accelerates the decline of solo practice. Such physicians lack
the patient visit volume to economically bring NPCLs into their practice.
The gender dimension of the segmentation of physicians and other clinical
workers should also be emphasized. Women are now approximately 50% of
all medical school graduates and for the period 1983 to 2002 there was a
doubling of the percent of female physicians (Statistical Abstract, 2003,
Table 615). Though as noted above, the shift to salaried status has been
occurring about equally for male and female physicians, because of the
recent disproportionate entry of females into the physician labor force,
a higher percent of female than male physicians are salaried. Also, women
are more than 80% of both health assessment and treatment professionals
(a category which includes nurses, therapists and physician assistants) and
health technologists and technicians, the occupational categories which are
the preponderance of NPCLs in physician practices.
A new structure of commodity value emerges in the group practice which
reects the new relations of production. Commodity value shifts signicantly
from owner-labor to variable capital with nurses, nurse practitioners and
physician assistants increasingly employed especially in the largest group
practices alongside physician employees in new combinations of clinical labor.
Least cost variable capital becomes a larger proportion of the value of the
medical service commodity as physician-owner activity shifts to a greater
supervisory role for cost saving management of care including the intensication of the labor of the employed physicians and NPCL employees. The
salary equivalent value of this unproductive supervisory labor constitutes an
expense of management and is paid from the surplus value appropriated by
the enterprise from the employed workers.35
The medical group practice structure of value corresponds to that of the structure of commodity value produced in other capitalist enterprises with similar relations of production in which owners combine productive work and management.
8. PHYSICIAN INCOME TRENDS

Though difcult to sort out with statistical precision, physician income
trends reect developments in managed care, group practice, physician
segmentation and NPCL developments.
224
JEROME JOFFE
The dominance of the HMO from the late 1980s to the late 1990s, though
subsequently reduced, had a depressive affect on physician income.
Corrected for ination, income for all physicians increased by less than
1% from 1987 to l997 and declined by 5.3% for the period from 1992 to
1997. Both private and public sector nancing (Medicare accounts for
nearly one-third of physician revenue), contributed to these trends. Income
decline was especially notable for those practices heavily dependent
on HMOs (Moser, 1999, pp. 16). The fewer the alternative sources for
patients in the physician service market, the greater the decline in income.
A doubling of HMO market penetration was associated with a 69%
reduction of income (Hadley & Mitchell, 1999, pp. 11161127).
The self-employed (in all size practices) had median income 43% higher
than physician employees (Moser, 1999, p. 8, Table 2). Part of the difference
has been attributed to longer hours (13% greater number of ofce visits per
week) more years of experience, a higher percent of board certied physicians and a larger proportion in higher paid specialties (a 50% greater
number of surgical procedures (Moser, 1999, p. 54, Table 13 and Table 19,
p. 60). But the part of the difference attributed to entrepreneurial risk and
return on invested capital can in large part be attributed to surplus
expropriation.
A more recent study covering the period from 1998 to 2000 indicates a rise
in median nominal income of 4.6%, though a much smaller increase in real
income, following a two year decline of 1.8% (Kane & Loeblich, 2003,
pp. 511). Another current study forecasts a rise in physician income as
the contemporary shift among insurers away from capitation for physician
organizations and back to fee for service, (will be) stimulating more billable claims, more revenues for the physician organizations, and higher
expenses for insurers. (Robinson, Shortell, Li, & Casolino, 2004, pp. 1122).
This change in method of reimbursement is consistent with the growth of
PPO and POS plans noted in Section 6.2 above.
9. UNIONIZATION OF PHYSICIANS
An increasing proportion of salaried physicians have been attracted to unionization with the rapid increase in size and capitalization of the physician
production unit. Self-employed physicians too, both in solo and small group
practices are attempting to use collective bargaining to offset HMO power
with its encroachment on physician autonomy and assault on their real
income. Approximately, 42,000 physicians, 5.5% of 756,000 practicing
225
physicians in 2,000, are union members. A surge in physician unionization

occurred in the late 1990s, the likes of which has not been seen since the
1970s as varying forms of unionism reect the unsettled state of relations of
medical production (Phan, 1999, pp. 125).
Guadagnino (1997, pp. 19) describes the complex environment, which
is producing a wide variety of forms of collective bargaining, as self
employed solo and group owned practices of various sizes as well as salaried
physicians organize. When salaried physicians organize, a major choice of
afliation is the numerous medical specialty societies, the prime professional
organization for many physicians. Alternatives include The Ofce and Professional Employees International Union, a union of professionals, implying
common status with highly educated and professional workers in many
industries, or the American Nurses Association, an organization concerned
with professional issues as well as being a union of nurses. Choosing the
latter would imply physician common interests with an often antagonistic
and almost entirely salaried profession in the medical production process.
The AMA, a bastion of physician conservative professionalism has
proposed itself as a collective bargaining agent, though excluding salaried
physicians in group practices, as an alternative to joining unions for the self
employed, salaried hospital or government employed physicians. AMA
collective bargaining for self-employed physicians would use their local
units, the state and county medical societies, as their vehicle. The Federation
of Physicians and Dentists afliated with American Federation of State
County and Municipal Workers, AFL-CIO with 8,500 members is also
targeting physicians who own their own practices.
Non-prot independent practice organizations (IPAs), which are integrative units for both solo practice physicians and small physician group practices contracting with HMOs, are in some areas, using a messenger model
of unionism which presently is not held to be in violation of anti-trust law.
The messenger model may in the future involve a union to collect information on what each of the physician members of the IPA want in terms of
compensation or other aspects of their contractual relationship with the
HMO and present it to the latter. However, neither the union nor the IPA
can bargain these issues with the HMO.
The move towards collective bargaining through union representation of
self-employed physicians has been hindered by anti-trust charges of collusion to raise prices. When orthopedic physicians failed to renew their
individual contracts with Blue Cross Blue Shield of Delaware, they were
charged by the Justice department with an illegal boycott and conspiracy
to raise prices (Greenhouse, 1999). A bill to allow self-employed physicians
226
JEROME JOFFE
to engage in collective bargaining with health plans, passed the House of

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

Contemporary relations of production in medicine are not irrevocably
established. Though a signicant fraction of physicians patients are enrollees of HMOs enabling leverage for surplus extraction, HMO dominance is
not complete as the PPO and the POS forms of managed care are now
substantial.36
Large medical group practices have become rmly established, incorporating a salaried labor force and offering an expanded scope of services.
Some have replaced the insurance unit as the care manager even accepting
global capitation (nancial responsibility for all treatment costs including
hospitalization and home heath care) in their HMO contracts.
However, despite some direct contracting with self insured purchasers of
care37 the practices are unlikely for reasons of insufcient capitalization and
diseconomies of scale to signicantly supplant HMOs in the overall responsibility of administering medical care for the corporate and government
purchasers of care. To do so would require greater marketing capacity than
they possess and the undertaking of the insurance underwriting function,
and of course competition from well established insurance corporations.38
Also, to directly manage the care for the many geographically dispersed
employees of large self-insured corporations, would require such practices to
227
be multisited which could produce diseconomies of scale. The emerging

relations of production in medical practice implies a restructuring of the
relationship of HMOs and large group practices (often in alliance with
hospitals), with the sharing of the surplus generated from the expanded
productive work force in the medical delivery units.39 The HMOs initial
staff model of directly employing physicians was impractical because it did
not permit efcient capacity creation. The contracting model that followed
of management and oversight of the production of medical services at many
distant practice sites by resistant physicians socialized to professional
independence generated high costs and also provoked a pervasive public
antagonism which led to constraining legislation and a political atmosphere
inimical to the reproduction of private health insurance.
The current HMO strategy of diluting their role in the direct management
of care while extending risk to physician practices with more inclusive (global)
capitation, marks a new stage of the relationship between insurers and providers. Physicians organized in large groups are progressively becoming the
managers of care whereas the insurers are concentrating on marketing policies
and purchasing medical services from providers through global capitation.
The scope of utilization review currently developed by physicians in their
own medical groups often exceeds that imposed by insurance groups.
(Robinson, 1999, p. 108). A recent HMO industry survey found that 40% of
enrollees are in plans that delegate utilization and network management
to physician groups paid by capitation (Newhouse, 2002, p. 15).
Utilization review can be performed on a more intensive basis by large
medical groups than by an insurance plan and group owners have greater
knowledge of and can exercise greater control over their physicians than an
antagonistic external organization. And as the group practice is delegated
authority for utilization management they move from a professional
fraternity to a business like rm (Robinson, 1999, p. 91). Moreover the
increased risks to the physician group with global capitation require their
acquisition of additional capital and the furtherance of a capitalist work
discipline within the practice.
Control over access to patients will still provide the insurers with leverage
for surplus appropriation, which they will share with the provider capitals.
However, conict will continue with ongoing attempts by both to consolidate market power against their competitors and against each other.
With this strategy, the HMO, the group practices and the employer group
purchasers hope to resolve the internecine conicts between insurers
and providers and lessen the estrangement of the population to a system
implying prot motivated limits on health care.
228
JEROME JOFFE
However, new sources of disaffection will likely develop when physician

practices in alliance with hospitals take a more active role in managing care
for the purchasers, as the perceived physician principal-agent buffer role
between patients on the one hand and purchasers and their HMO agents
on the other will be undermined. This role which did provide some measure
of defense of access and quality will be reduced, and trust between patient
and physician will be further strained.
Managed care conicts between insurers and the provider practices will be
displaced in part to the labor process of the corporate medical group practice. This displacement in turn can reshape class conict in medicine creating
possibilities for stronger ties between the non-proprietary physicians and
other strata of the medical sector working class.
A greater difculty for development of capitalist relations of production in
medicine is the contradiction between the drive to accumulation immanent in
capitalist enterprise in medicine as in all capitalist enterprises and the need
for capital in general to restrain the forces of production in the personal
health care system. As the corporate medical delivery system expands, its
own accumulative dynamic is to expand the market for personal medical
services though unevenly in the population, having at its command nancial
and marketing resources comparable to other capitalist enterprises.
Not only the upstream pharmaceutical, biotechnology and equipment
supply rms but also the health care delivery units now organized on
a capitalist basis will be accumulation driven. Competitive fragmentation
and duplication will continue as will the waste inherent in the competitive
process, itself a component of the drive to expand and accumulate. As there
is no reason to assume any reduction in the disease externalities of production and consumption of the capitalist (or as it is conventionally dened,
industrial) mode of production the market potential would be present.
Micro efciency and productivity enhancement of the capitalist enterprise
which will include reduced contact time with patients and the impact of cost
saving clinical guidelines reducing unnecessary medical treatment will be
hailed as improving consumer welfare. Unavailability and inadequacy
of care will worsen with the proportion of the underinsured growing.
The attempt to stabilize and legitimize the system by having the corporate
medical practice directly manage the care will produce greater distrust of
physicians and the consequence of such alienation will increase poorer
health outcomes.
Concurrent with the restructuring of the relations of production within a
capitalist framework, the current health care expenditure crisis has also altered
the character of insurance coverage. Health Savings Accounts (HSAs)
229
ideologically dened as consumer driven plans shift nancial risk to workers

with rewards to the healthier and higher income employees and increased costs
and risks to others.40 The HSAs offered by employers offer tax-free accounts
for enrolled workers purchasing a large deductible insurance policy. The logic
behind this coverage is to require workers to evaluate their own symptoms to
determine if they are serious enough to warrant the opportunity cost of a visit.
Such decisions during the deductible period are able to avoid the moral
hazard of insurance. If they do not reach their deductible during the year,
employees will be able to roll over the balance to the next year.
Health care insurance is also being re-shaped as pensions have been, from
dened benet to dened contribution contracts.41 A form of this shift is the
use of health care vouchers which can be adjusted periodically by an ination index or by a more arbitrary technique (Cohn & Eliopoulos, 2000,
p. 152). Employees would use the voucher which they could supplement
with own after tax income to purchase an individual insurance benet
package. Insurance units would continue to compete through benet design
differentials and aggressive marketing. But the cost of maintaining the same
level of benets from one year to the next would be shifted from employers
to workers.
Access to care would be even more uneven than currently as the single
benet package now generally offered to all eligible employees (generally
not including temporary or part time workers) within the enterprise could be
replaced by the offer and purchase of many packages, now varying on the
basis of employee income and perceived health status.
Finally, enabled by a loose labor market, more employers are dropping
coverage entirely. These developments which increase the number of uninsured and underinsured also offset their rising variable costs, resulting from
the continued rise of heath care expenditures.
Capital dominance will not end the multiple dimensions of the crisis of the
evolving capitalist health care system. If not politically challenged, the system will continue to reproduce itself to the detriment of the health and well
being of the majority of the population.
NOTES
1. Health Care Delivery system will be used alternatively with medical care
and medical care delivery system. It includes all the economic units for the
provision of care; physician practices, hospitals, nursing homes, home health care
agencies, the retail sale of pharmaceuticals and the insurance system which links
the purchasers of care with the aforementioned producers of care.
230
JEROME JOFFE
2. U.S. Bureau of the Census (2003), Statistical Abstract of the United States,
Table 119.
3. U.S. Bureau of the Census (2001), Statistical Abstract of the United States,
derived from Tables 593 and 151 for the year 2000. Calculations excluded management as a category and in calculations of percentages of the noted occupational
categories because many health care administrators are not counted as such
but are listed separately as nancial managers, personnel and labor relations managers, etc.
4. Statistics from Health Care Financing agency and U.S. Department of
Commerce reprinted in Shi and Singh (2001, p. 167).
5. While the argument is here conceptualized as part of an evolving socioeconomic
formation, it is derived from the theory of the mode of production. Therefore,
the great expansion of the medical forces of production initiated and rapidly
developing specically during the Golden Age can be regarded as contingent.
The potentiating of the productive forces would have occurred whatever the
temporal path of capitalist growth because the motivating forces were present
(see Laibman, 1992, chapter 13 for a discussion of modes of production, socioeconomic formations and contingency).
6. The causes and consequences of this epidemiological revolution are discussed in
Waitzkin (2000).
7. A large number of such studies are to be found in Conrad (2004) in each of such
categories as The Social Nature of Disease, Who Gets Sick: The Unequal Social
Distribution of Disease and Our Sickening Social and Physical Environment.
Other studies are cited in Shi and Singh, 2001, chapter two.
8. Studies in Materialist Epidemiology are described by Navarro (2002)
(see also Waitzkin, 2000; Eyer, 1977; Powels, 1973).
9. The immense growth of the forces of production of the health care system from
mid-century therefore was a response to the rapid emergence of degenerative disease,
especially cancer caused by the growth of the petrochemical, plastic, food processing
and other industries that create disease as an externality to its workers, the
surrounding community where production is sited and to consumers. Also contributing to circulatory and respiratory disease is an intensifying pattern of hierarchical
and deskilled alienating work and employment insecurity with its stress inducing
illnesses. The culture of mass consumption which Critical Sociology argues
characterizes advanced capitalism arises from alienation, and is reinforced
by commodication of desire. Mainstream sociology identies the culture of
consumerism, variously theorized, as adverse to healthy life styles. The culture inculcates habits of immediate gratication such as smoking, fast food consumption,
excess eating, drinking and sedentary behavior with little regard for future health
consequences.
Because of the uneven incidence of alienation, stress and social capital and risk
factors from productive processes, statistics clearly reveal that the impact of
morbidity and mortality for degenerative, trauma and infectious disease falls
unevenly on the working class Kawachi, Kennedy, and Wilkinson (1999) and racial
and certain non European ethnic minorities; the latter, because they are disproportionately members of the working class and because of the caste like circumstances to
which they are subject Kawachi, Daniels, and Robinson (2005).
231
10. Prevention activities in the personal care system other than immunization for
infectious disease and counseling regarding risk factors involve early detection of
chronic degenerative disease for more effective treatment.
11. The inuence of the upstream agencies on the health care delivery units to
adopt new and expensive technologies is described by Waitzkin (2000, pp. 7496).
12. Corresponding to Mezaros (1998) discussion of the dialectic of the productive
and destructive aspects of the forces of production, both the forces of production
that create and those which diagnose and treat disease are ideologically perceived as
achievements of science. This perception furthers growth of both and accelerates the
contradictions of the personal health care system.
13. Vlachou (2002) takes a similar approach in analyzing medical problems
caused by pollution.
14. Simple commodity production in medicine was itself transformed from the
state of unproductive labor. Marx refers to physician services as being purchased
from revenue which denes the category of unproductive labor when he quotes
approvingly from Adam Smith that the labor of some of the most respectable orders
in society such as physicians, churchman and lawyers, as the labor of menial servants
are unproductive of any value (Marx, 1952, p. 156). Payment for the services of
physicians was then overwhelmingly from the revenues of the business class and
other elements of the bourgeoisie who personally beneted from these services. In
contrast, early 20th century physicians were exchanging their services with the population at large and appropriated the equivalent of a self produced surplus with the
sale of their commodity. It was the development of medical science in the mid- and
late 19th century based on the revolution in biology (e.g. germ theory of disease)
chemistry (e.g. anesthesia and anesthetics) and physics (e.g. the X-ray) that led to the
development of the forces of medical production and the transformation of the social
role of the physician from servant of the upper classes in Marxs time to producers of
medical services for the broad mass of the population in the 20th century. This
together with the rise of purchasing power for this population with the development
of the general forces of production was the basis of the conversion of the physician
from unproductive worker to simple commodity producer.
15. Holland and Carvalho (1985, pp. 127) describe how family farming proceeded from independent production of use values to independent commodity
production to integration into the capitalist mode of production.
16. Few early 20th century physicians were directly employed by capital both
because of the relatively low start up costs of solo practice and because physicians
through their professional organizations vehemently and successfully politically
opposed such employment.
17. Graduation from medical school and a subsequent one-year internship is required for taking the medical licensing examination in all states. The American
Medical Association directly representing physicians holds six of the 17 seats on the
board of the medical school accreditation agency with the majority of the seats being
held by organizations in which physicians play a commanding role. Graduates from
schools without accreditation are not eligible to take the medical licensing examination (see also Wilson & Neuhauser, 1987, chapter 4).
18. Hirth and Chernew (1999, pp. 282294) cite several sources for mixed evidence
of supplier induced demand in the physician service market.
232
JEROME JOFFE
19. For the history of the largely employment based nancing of the delivery of
health care in the U.S., see Starr (1982). As opposed to tax based nancing, this system
directly locates health care as a cost of production to capitals, specically as a fringe
benet of the wage contract with their workers. The labor market option as opposed
to a politically determined tax incidence for nancing health care provides some exibility in shifting health costs to workers. It also satises an ideological and political
objection to state managed social consumption inclusive of the entire population.
20. The Managed Care model was sold to national health insurance systems in
developed industrial countries with these justications in the same period of national
slowdown and neo-liberal retrenchment and deregulation but was later modied as
in the U.S. system with perceived cost control failure and the hostile response by
broad sectors of the population (Light, 2001, pp. 681708).
21. Aglietta (1979, pp. 681708) analyzes the strategic pricing decision, which the
most productive capitalists in a branch of production use to increase market share.
22. This is more signicant for specialist physicians whose practice is more
hospital based than generalist primary care physicians. Because hospital expenditure
is the major channel for aggregate medical expenditure, the HMO especially limits
activities by specialist physicians, the majority of physicians. Specialists have experienced a corresponding decline in relative and a slowdown in rise of absolute
income.
23. A form of market power exercised by some HMOs though now banned in
several states are exclusive contracts prohibiting physicians from any other HMO
afliation. These contracts tend to increase surplus appropriation.
24. Salaried HMO physician income determination in the 1970s was conditioned
by the predominance of physicians in private practice who had direct access to
patients while the contemporary contract physician who is now predominant does
not. Therefore, the movement from salaried to contract status over a period of some
thirty years can mean even a higher rate of surplus value in the current period and is
consistent with a reversal of the traditional development sequence. Only some three
million workers are currently enrolled in the staff model HMO, which directly
employs physicians. This represents about 4% of all workers enrolled in HMOs in
1998 (see Shi & Singh, 2001, pp. 312361 for data on the different HMO models and
managed care enrollment).
25. For data on changes in recent rates of change of hospital outpatient surgeries
and inpatient length of stay, see Shi and Singh, ibid, Fig. 72 on p. 243 and Fig. 86,
p. 284.
26. Strategies of cost control have had via market feedback a signicant impact on
the direction of research and development and therefore the technological breakthroughs from the medical equipment supply companies (Geligns & Rosenberg,
1994, p. 36).
27. HMO strategy to minimize payments to hospitals through their control of
patient access is to contract with only a select number of hospitals in a community.
This serves both to foster hospital competition and to obtain a quantity discount for
purchase of services.
28. Technology diffusion also occurs in enlarged physician ofce practices in
competition with hospitals.
233
29. Insurance companies which sell both forms of insurance are shifting their
product mix to favor PPOs as the surplus declines and as demand for this form
increases. Insurance companies which are less HMO oriented are achieving greater
market success (Cunningham & Sherlock, 2002).
30. Speculative gains in a booming equity market can be even greater than the
prots generated from insurance products. Premiums are lowered so that it may only
cover insurance commitments to maximize access to investable funds, with all gains
coming from investment speculation.
31. Capitalist development began even earlier in the solo practice era with the
linkage of physicians as limited partners to clinical laboratories and other health
service sectors. Corporate owners in these sectors sought out physicians for joint
ventures when the latter were only part of a referral network. Perception of the
growth of these type linkages including pharmaceutical companies offering stock
ownership and other nancial inducements to physicians to inuence their prescribing power as a novel phenomenon led the editor of the New England Journal Of
Medicine to term it The New Medical-Industrial Complex (Relman, 1980,
pp. 963970). Such relationships continue to exist today alongside total clinical
integration into the enlarged physician practice (Rodwin, 1993, chapter 2)
32. Physicians, often senior members with unequal claims to residual income are
also salaried in group practices with an incremental return based on equity holding
and productivity i.e. revenue producing differentials. In a multi specialty group,
known specialty income differentials can be incorporated into a base income
mitigating physician specialty heterogeneity as a source of discord.
33. When physician practices employ purely administrative labor, for example, to
process insurance claims, they are employing unproductive labor and making wage
payments from revenue to these workers. However, when the same receptionist
schedules a patient, the use value involving a temporal dimension of the future visit is
incorporating productive labor into the exchange value of the service. By contrast,
the employment of a medical clinician, for example, a nurse practitioner involves
labor only involved in creating use value and fully generates surplus value for the
physician employer.
34. The aggregate number of a dened group of non-physician clinicians (NPCs)
graduated annually from professional schools in ten disciplines doubled between
1992 and 1997 and a further increment of 20% is expected by 2001. These ten
disciplines include nurse practitioners, physician assistants, nurse midwives, chiropractors, acupuncturists, naturopaths, optometrists, podiatrists, nurse anesthetists and
clinical nurse specialists (Cooper, Laud, & Dietrich, 1998, pp. 788794). Though
some NPCs are self employed and directly compete with physicians, others are self
employed in primary (basic) care often with state required physician oversight, and
still others are mostly salaried either in group practices or as paid hospital employees.
Some NPCs like nurse anesthetists are often employed by group practice
anesthesiologists who contract with hospitals and perform their services at this site.
Analogous to the conict over property rights between the HMO and physicians is
the conict between physicians and NPCs over the property rights of the latter in the
physician practice. Key questions regarding future demand and integration into
medical practice relate to scope of practice, prescription privileges and autonomy,
234
JEROME JOFFE
dened by state licensure and practice acts as well as assigned roles and responsibilities in clinical practice (Cooper, Richard, Laud, & Dietrich, 1998).
35. Change in the relations of production is often accompanied by changes in the
labor process and the means of payment. This is emphasized by Aglietta (1979,
p. 138) when discussing the emergence of Neo-Fordism.
36. Physician independence from both HMO and PPO restraints has been aided
by the existence of a large fee for service Medicare population. However, the tying of
Medicare pharmaceutical coverage to HMO enrollment and the growth of Medicare
managed care intermediation will reduce this source of independence.
37. A large company may act as its own insurer. Such businesses most often
purchase reinsurance against unusually large claims.
38. Robinson (1999, chapter 4) describes in detail the disadvantages of vertical
integration between insurers and medical providers.
39. An historical example of a transitional relation of production where part if not
all of the surplus is shared by different units of capital as described by Marx (1959,
pp. 782783) relates to a transitional form of capital dominance in agriculture. The
metayer is a sharecropping system under which the (manager) farmer furnishes his
labor (his own or anothers) and also a portion of the working capital, and
the landlord furnishes aside from the land, another portion of working capital,
e.g. cattle, and the product are divided between tenant and landlord in denite
proportions y . [T]he share being appropriated by the landlord does not bear the
pure form of rent. It may actually include interest on the capital advanced by him
and an excess rent. It may also absorb practically the entire surplus labor of the
farmer or leave him a greater or smaller portion of this surplus labor On the one
hand the sharecropper whether he employs his own or anothers labor, is to lay claim
of a portion of the product not in his capacity as laborer but as possessor of part of
the instruments of labor as his own capitalist. On the other hand the landlord claims
his share not exclusively on the basis of landownership, but also as lender of capital.
40. Lower income workers would tend to reduce their utilization and sicker
patients would incur signicantly higher costs.
41. More companies will adopt dened contribution plans in which they set aside
a xed amount of money that each employee can use to purchase his or her own
medical care. Several large insurers such as Aetna and Humana are helping
companies develop such programs (Weintraub, 2003, p. 134).
ACKNOWLEDGMENTS
I wish to thank the two anonymous referees for their many helpful suggestions and Paul Zarembka for his guidance and encouragement through
several revisions of the paper.
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getting it. Health Affairs, 21(4), 8898.
THE MARXIAN THEORY

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

ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24007-6
241
242
TERRENCE MCDONOUGH
seen a substantial convergence in the three perspectives. In general, this

convergence has reaffirmed the importance of Hilferdings, Bukarins and
Lenins (HBLs) initial contributions to the stage theoretic tradition. The
article concludes with some thoughts on the necessity of stage theory for
understanding of the current period of globalization.
This article will argue that there exists a fundamentally continuous tradition
of Marxian stage theory from the beginning of the twentieth century until
the present day. This tradition is intimately linked to turning points in the
historical process of capital accumulation. These turning points mark the
inauguration of a period of relatively unproblematic reproduction of capitalist social relations or, symmetrically, the beginning of a period of stagnation and crisis. Simply put the alternating periods of growth and crisis
which describe the transition from one capitalist stage to another have left a
strong imprint on the history of the Marxian theory of capitalist stages.
This history begins with the rst crisis of Marxism. This crisis was precipitated by the recovery of the capitalist economy from the rst Great
Depression at the end of the nineteenth century. Seeing capitalism recover
from what was thought to be its nal crisis, Marxist activists searched for a
way of explaining this recovery without abandoning the revolutionary implications of Marxs analysis of the contradictory character of capitalist
social relations. This explanation was to be found in the pioneering work of
Rudolf Hilferding on nance capital, Nicolai Bukharin on the world economy and V.I. Lenin on imperialism. All three argued that the capitalist
economy had, with the advent of monopoly capitalism, entered into a new
and higher stage of capitalism. This new stage underlay the recovery but it
had not transcended the basic Marxian dynamics of capital accumulation.
Hilferdings, Bukarins and Lenins (HBL) analysis would be carried into
the postWorld War II era through the work of Paul Sweezy and Ernest
Mandel. In their inuential expositions of Marxian economics, the HBL
analysis of monopoly capitalism was treated by each as essentially a fourth
volume of capital. Their descriptions of the transition to monopoly capital
consolidated stage theory as an accepted component of Marxian theoretical
practice. Both would be inuential in forming the basis for the second wave
of Marxian stage theory.
The second wave of Marxian stage theorizing emerged with the end of
the postWorld War II expansion. Ernest Mandels long wave theory
(LWT), the Social Structure of Accumulation Framework (SSAF), and the
The Marxian Theory of Capitalist Stages
243
Regulation Approach (RA) analyzed the stagationary crises of most of the

advanced capitalist countries as the end of a long wave of growth following
the end of the war. This long wave of accumulation1 was underpinned by the
emergence of a new stage of capitalism which was analogous to the reorganization brought about by monopoly capital at the turn of the century.
Since this new stage was the resolution of the crisis of the monopoly stage,
these new schools were reluctant to predict the non-resolution of the current
crisis, thus opening up the possibility of further stages of capitalism in
the future. This identication of a new stage following on from HBLs
monopoly stage and the possibility of subsequent stages in the future
elevated Lenins theory of the highest stage to a general theory of stages of
capitalism.
The SSAF built on Sweezys contribution and that of the American Monopoly Capital School. Mandels LWT, not surprisingly, was founded on
his earlier analysis of monopoly capital. The RA claimed no precursors
apart from Althusser, though Althussers admiration for Lenin and specically his Imperialism is well known. Each of these perspectives differed in
some concepts and emphasis and initially formed three separate schools.
However, the last decade or so has seen a substantial convergence in their
perspectives. In general, this convergence has reafrmed the importance of
HBLs initial contributions to the stage theoretic tradition.
This tradition has contended that a full analysis of capitalism cannot be
satised with an understanding of the general transhistorical dynamics of
capitalism as a mode of production nor with the analysis of particular
historical conjunctures. Stage theory undertakes an intermediate level of
analysis in the sense that it identies periods intermediate in length between
the conjuncture and overall capitalist history. This intermediate period of
analysis is founded on the observation that while all economies are embedded in the broader array of social institutions, this is especially important in
the capitalist era because of the conictual foundations of capitalism in class
division and capitalist competition. For accumulation to proceed relatively
smoothly, these sources of instability must be countered through the construction of a set of stable institutions at not only the economic but also the
political and ideological levels.
The construction of such a social structure underpins the prot rate and
creates the secure expectations that make long-term investment possible.
Nevertheless as accumulation proceeds the institutions are undermined by
class conict, capitalist competition and accumulation itself. These forces
and the interdependence of the institutions lead to a breakdown of
the institutions, a fall in the prot rate, and the collapse of accumulation,
244
TERRENCE MCDONOUGH
initiating a period of crisis and stagnation which is only overcome with the
construction of a new set of institutions. Thus capitalist stages are constituted by the sets of interdependent economic, political and ideological
institutions which underpin relatively successful accumulation separated by
intervening periods of crisis.
The remainder of this paper will trace the history of the Marxian theory
of capitalist stages and conclude with some thoughts on the necessity of
stage theory for the understanding of the current period of globalization.
1. CAPITALIST RECOVERY AND THE CRISIS

OF MARXISM
At the turn of the twentieth century, Marxists were wrestling with the
question of explaining a change in the trajectory of accumulation. They did
so with great urgency, as the early twentieth century improvement in capitalist growth posed a much greater challenge to the Marxist worldview than
any transition to stagnation could have done. Marxism had rst obtained
prominence in the context of the Great Depression of the late nineteenth
century. Dobb (1947, p. 310) sums up the period as essentially a depression
of cut-throat competition and cut prices of the classic textbook type. He
quotes Walt Rostow to the effect that capitalists began to search for an
escape (from narrower prot-margins) in the insured foreign markets of
positive imperialism, in tariffs, monopolies, employers associations (Dobb,
1947, p. 312). Geary (1987, p. 2) sums up the views of contemporary
Marxist observers:
The extent to which there really was a great depression between 1873 and 1896 is of
course a source of dispute amongst economic historians but there is no doubt that many
contemporaries, amongst them August Bebel and Eduard Bernstein (initially), saw the
recession as nothing less than the nal crisis of capitalism.
The nal crisis of capitalism notwithstanding, in the last years of the nineteenth century and persisting into the early years of the twentieth, capitalism
was showing denite signs of recovery. These were all the more dramatic in
contrast with the previous long years of stagnation and instability. Geary
(1987, p. 36) sums up the developments in the German economy, while
indicating their signicance in the inauguration of the theoretical debate:
Revisionism was not spawned ex nihilo but was the fruit of the economic recovery which
took place after 1896 (not only in Germany) and of a change in the political situation of
the Second Reich. From 1896 until the First World War the German economy enjoyed
245
almost uninterrupted growth and low levels of unemployment, even in the relatively bad
years such as 19081909. Between 1870 and 1913 weekly real earnings increased by thirty
ve per cent, with a really signicant rise between 1880 and 1900y Increased earnings
were reected in increased living standards.2
The Marxists of the Second International had no concepts with which to

handle the phoenix-ight of capitalism which they were witnessing. The
Second International had developed a somewhat mechanical view of Marxism and the world. All phenomena were seen as an expression of certain laws
inherent in the nature of matter. This notion was transferred to the analysis
of the capitalist economy. Marxs tendencies became laws analogous to the
laws of physics. This included Marxs observations about capitalisms
tendency toward crisis (Colletti, 1972, Morgan, 1984, pp. 48, Hansen, 1985,
p. 46). Such a view was unable to explain capitalist recovery from long-term
crisis. Capitalisms recovery from the crisis of the late nineteenth century
thus precipitated a crisis in Marxism at the beginning of the twentieth.3
The immediate evidence for the crisis is to be found in a largely unconstructive debate over the signicance of the recovery for the strategy of the
socialist movement. Marxists had looked for a swift, worldwide proletarian
revolution produced by the worsening of the capitalist crisis. When recovery
instead of revolution materialized, a debate began concerning the role of
economic crisis in revolutionary theory.4
This breakdown controversy was an argument between orthodox Marxists, who claimed that capitalist crisis would continue to worsen, thereby
producing a revolutionary conjuncture, and Bernsteins followers, who participated in the controversy in order to reject revolutionary tactics. The latter
argued that revolution is only required if capitalism breaks down. For if the
system will not fail of its own accord, then the class struggle can be ameliorated within the existing political framework, and men will be able to realize
the continuance of free development (Bernstein, 1961, p. 8287).
Bernsteins argument5 was based on three contentions. First, he argued
that growing nancial knowledge dampened speculation and, therefore, crisis
tendencies. Secondly, Bernstein contended that as communication and transportation developed, rms would have increasingly accurate foreknowledge
as to what and how much to produce, eliminating disproportionalities. The
third of Bernsteins arguments was based on the trust as rationalizer of the
market (Bernstein, 1961, pp. 8287).
I have recognized its capacity to inuence the relation of productive activity to the
condition of the market so far as to diminish the danger of crisis (Bernstein, 1961, p. 87).
246
TERRENCE MCDONOUGH
Bernstein attempted to demonstrate that the economy was not conictridden and consequently that the class struggle would assume less and less
importance within the capitalist mode of production. He wished to show
that liberal democracy and the capitalist economy were harmoniously linked
in a tendency to end class antagonisms. The state was essentially an
apparatus, which could be instrumentally used to the benet of society as
ethical values came to the fore in human development.
Bernsteins attempt to solve the crisis facing Marxist theory succeeded
only in deepening it. Bernstein sought the solution to Marxisms problems
by introducing concepts from outside the Marxist paradigm. These included
the notion of class harmony in advanced capitalist society, an idealist concept of ethics borrowed from Kant6 and a liberal, classless theory of the
state. This introduction of concepts from outside of Marxism has been
classically described as a revisionist intellectual strategy.
Conversely, the distinguishing characteristic of Kautskys participation in
the debate is his adherence to orthodoxy.7 Kautsky demonstrated the
smashing of the petit bourgeoisie, the continuing centralization and concentration of capital (Goode, 1983, pp. 1617, see also Howard & King,
1989, p. 81) and the lack of political rapprochement between capital and
labor.8
Kautsky argued that crises were indeed worsening. He posited that the
productive forces must expand more quickly than the market in the long
run, though short-run ups and downs would continue. Thus, Kautsky arrived at a theory of chronic depression, where the continued existence of
capitalist production remains possible y but it becomes completely intolerable for the masses (Sweezy, 1968, p. 198).9
Kautskys response to Bernstein is also unconstructive. Kautskys basic
stance in the debate was the denial of the existence of any crisis within
Marxism. Kautsky refused to recognize the creation of a new terrain in the
accumulation process in the context of the capitalist recovery which
was under way. Since the objective conditions facing Marxism were still the
same, no conceptual additions were called for. Although capable of theoretical innovation,10 Kautsky and his allies in the debate contented themselves with the reassertion of the old formulas. Kautskys position on the
occasion of the revisionism debate can be characterized as dogmatic.11
The breakdown controversy left several important theoretical tasks unaccomplished. The most pressing of these was the development of a consistent Marxist explanation of the end of the Great Depression and the
renewal of capitalist growth. This explanation would, on the one hand, have
to go beyond the assertion that nothing had really changed. On the other
247
hand, it would have to avoid the revisionist trap of seeing the recovery as
evidence of the basically harmonious character of future capitalist economic
and social development. Such a theoretical advance would have to analyze
the contradictory nature of capitalist class society while simultaneously
explaining a period of relatively unproblematic capitalist accumulation.
2. FINANCE CAPITAL, THE WORLD ECONOMY AND

IMPERIALISM
The contemporary Marxist response to this theoretical task can be found in
the contributions of Rudolf Hilferding (1980) in his Finance Capital, Nicolai
Bukharin (1973) in Imperialism and World Economy, and Lenin in Imperialism, the Highest Stage of Capitalism. It is these three works which taken
together form the structure of the early twentieth century Marxist theory of
both imperialism and stages of capitalism.
2.1. Hilferding and Finance Capital
The rst major attempt to explain the resurgence of capital accumulation at
the beginning of the twentieth century, using concepts which were consistent
with Marxist analysis, appeared in 1910 with the publication of Hilferdings
Finance Capital. Its reception in Marxist circles as virtually a further
volume of Capital (Hilferding, 1980, p. 1) reected not only the impressive
quality of the work, but also the increasing urgency of the task which it
addressed.12 A casual perusal of the works makes it clear that Finance
Capital was the foundation for both Bukharins and Lenins later volumes.
2.1.1. The Emergence of Finance Capital
Hilferding clearly saw his task as closely related to the one undertaken by
Marx. Just as Marx had analyzed the emergence and dynamic growth of
industrial capital in contrast to the previously dominant merchant capital in
Das Kapital, Hilferding set out in Das Finanzkapital to analyze the emergence from industrial capital of the new form of nance capital. Such a
study, Hilferding writes, is essential to achieving a scientic understanding
of the economic characteristics of the latest phase of capitalist development
(Hilferding, 1980, p. 21).
Hilferdings view of the origins of nance capital and the ramications of
its appearance for all levels of society determines the organization of the
248
TERRENCE MCDONOUGH
volume. Hilferding begins with a lengthy consideration of the role of money

in capitalist economies. This leads to an analysis of the increasing importance of the role of credit in the reproduction of the capitalist valorization
process. Banks begin to concern themselves with the long-range prospects
of the enterprise and the future state of the market (p. 95). With the advent
of the joint-stock company, banks become involved in the raising of industrial capital through the promotion of stock issues.
The creation of joint-stock companies has several important consequences
for the structure of the capitalist economy. The capitalist can now invest in
industrial activity without having to undertake the function of the industrial
entrepreneur. The organization of a stock exchange makes possible the
pooling of capitals and opens the way for an enormous expansion of
the scale of capitalist enterprise. The existence of promoters prot in the
issuance of stock creates large new reservoirs of concentrated bank capital.
Since considerably less than one hundred percent of the stock is necessary to
exercise control, the organizing reach of an individual capital is greatly
extended. A common ownership interest is created among various companies which is reinforced by interlocking boards of directors. Where banks
retain stock in corporations, they impose their own personnel on corporate
boards of directors.
The corporation has numerous competitive advantages over the individually owned enterprise. It has a much greater capacity for growth, drawing
as it does upon the whole supply of free money capital. This ability to raise
capital grants greater access to credit. The ability to retain prots gives the
corporation an advantage in price competition and in surviving business
downturns.
Increasing bank involvement with industrial production creates a change
in business principles:
The professional banking principle of maximum security makes the banks inherently
averse to competition and predisposed in favour of the elimination of competition in
industry through cartels, and its replacement by a steady prot. (p.179)
Bank capital, increasingly concentrated itself, begins to promote combination rather than competition in industry. Integration raises the prot rate
through decreasing competition, greater economies of scale and technical
innovation, and greater stability over the business cycle. Concentration
is achieved through the formation of cartels and trusts. The necessity of
dealing with cartels and trusts encourages the trustication of further
industries. Increasingly, these combinations take over the merchandising of
their own products.
249
Industrial prot incorporates commercial prot, is itself capitalized as promoters prot,

and becomes the booty of the trinity which has attained the highest form of capital as
nance capital. For industrial capital is God the Father, who sent forth commercial and
bank capital as God the Son, and money capital is the Holy Ghost. They are three
persons united in one, in nance capital. (p.220)
Thus, nance capital is the unication of bank capital and industrial capital.
In Hilferdings analysis, there is an intimate relationship between the growth
of the corporate form of ownership, the increasing concentration and centralization of industry and the merging of previously separate spheres of
capital activity into nance capital under the control of the banks.
While the basic capitalist tendencies toward crises still exist, the concentration of industries tends to mitigate the negative affects for capital.
Hilferding observes that the ability of an enterprise to survive increases with
its size (p. 289). Joint stock companies can attract additional capital and
accumulate reserves in good years. The diversication of business activity on
the part of banks and industries, but especially banks, allows for the
spreading of risk. Concentrated banking is also in a position to conne
speculative movements within certain limits. The ability of cartels to maintain prices means that they can divert the main burden of a crisis to the noncartelized industries. The existence of capitalist crisis then accelerates the
process of concentration.
2.1.2. The State and Imperialism
Having undertaken the comprehensive description of transformations at
the economic level of society, Hilferding makes the transition to political
analysis in the following passage:
Finance capital signies the unication of capital. The previously separate spheres of
industrial, commercial and bank capital are now brought under the common direction of
high nance, in which the masters of industry and of the banks are united in a close
personal association. The basis of this association is the elimination of free competition
among individual capitalists by the large monopolistic combines. This naturally involves
at the same time a change in the relation of the capitalist class to state power. (p. 301)
It is with this transition that Hilferding lays the foundations for analyzing
the close relationships among the economic, political and cultural levels of
society.
Hilferding develops this point about the changing relation of class and
state power through a discussion of the tariff. Tariffs maintain a high price
regime which exacts enormous payments from domestic consumers and
transfers them to industrialists and landowners (p. 303). The tariff directly
supports cartelization by reducing the number of foreign competitors and
250
TERRENCE MCDONOUGH
indirectly by providing increased revenue, which can then be invested in

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

investment at the same time as the monopolization of markets restricts
domestic investment opportunities, thus increasing the importance of foreign
activity. Investment in transportation opens up the possibility of further
investment in vast new areas. Overseas investment develops important
sources of raw materials necessary for the expansion of cartelized production
at home.
This overseas expansion of economic activity can only be accomplished
through the threat or actual use of military force. Military force is necessary
to pacify native populations and to expropriate them in order to create a
free labor force in the colonies. Military force is also necessary to successfully compete against other national capitals for the control of territories
and resources. The commitment of resources involved in the creation of an
infrastructure and the opening of production facilities increases the need for
direct political control of the newly exploited area. As the world is increasingly divided up between the major economic powers, the political and
military conict between them becomes increasingly bitter. Owing to uneven
development, newly industrializing powers may nd themselves without a
proportionate share of colonial possessions. The redistribution of territory
can only be accomplished by force and war becomes likely.13
2.1.3. Ideology and Labor Relations
Hilferding also seeks to understand the ideological changes which accompany the economic and political transformations associated with nance
capital. The new ideology abandons liberalism, demanding organization
251
rather than the freedom of the individual capitalist. Finance capital demands a politically powerful state which can protect its interests both at
home and abroad. The new ideology ceases to emphasize the harmony
of interests in the free market and instead supports the states open pursuit
of particular national interest in the international arena. Nationalism in the
hands of nance capital ceases to be a defense of the right of nations to selfdetermination and becomes the right of ones own nation to dominate all
others. This new nationalism inevitably takes on racialist overtones:
Since the subjection of foreign nations takes place by force that is, in a perfectly natural
way it appears to the ruling nation that this domination is due to some special natural
qualities, in short to its racial characteristics. Thus there emerges in racist ideology,
cloaked in the garb of natural science, a justication for nance capitals lust for power,
which is thus shown to have the specity and necessity of a natural phenomenon. An
oligarchic ideal of domination has replaced the democratic ideal of equality. (p. 335)
Hilferding also examines the changes in the relation of the various classes to
one another in the era of nance capital. Support for the tariff, a strong
state, and opposition to the working class increasingly unites capital and
large landowners. Small business is increasingly subordinated to big capital
and also shares its opposition to labor. A new middle strata arises, consisting of the salaried managerial and technical employees in commerce and
industry. This rapidly growing stratum is still politically aligned with big
capital and the policy of imperialism.
In the eld of labor relations, unions nd themselves facing a capitalist
class increasingly united in employers organizations. Hilferding observes
that, it is obvious that the rise of employers organizations involves a
change in the balance of power between capital and labor (p. 356). Previously, unions could strike individual employers while the majority of their
members remained employed in competing rms. Faced with the loss of
business to competing rms, employers were divided and frequently forced
to capitulate. This situation is completely changed with the concentration of
industry. A large rm has considerably more resources to invest in resisting
an organized workforce. Employers are now backed by associations which
can temporarily ll orders, compensate losses and prevent strikers from
nding alternate employment. These associations can control the timing of
conict and lock out non-striking members of the union. Monopoly corporations are also in a position to claw back wage rises through price
increases and to make up for losses incurred during a strike.
Hilferding begins his analysis by closely examining the interconnections
between changes at the level of the economy. But he does not end his
analysis there. He nds that nance capital is associated with changes in the
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class structure, the character of class alliances and the balance of class forces
in the conict over the labor contract. The changing interests of capital lead
to changes at the political level. Capital becomes more closely associated
with a strong state, which can protect its monopoly position at home while
pursuing an aggressive policy of imperialism abroad. At the ideological
level, these changes are justied by the abandonment of liberalism and the
adoption of a reactionary nationalism and racism. Thus as well as economic
changes, the dominance of nance capital brings with it political and ideological transformations. This multilevel analysis and the role of political
and social institutions lay the intellectual basis for later multifactoral analysis of capitalist stages.
2.2. Bukharin and the World Economy
According to his biographer, Finance Capital was the starting point and
essential inspiration (Cohen, 1980, p. 25) of Bukharins (1973 (1915)) contribution, The World Economy and Imperialism.14 The major difference between Bukharins treatment and that of Hilferding was that Bukharin
reversed the order of Hilferdings presentation. Hilferding had argued from
nance capital to concentration to the world economy and imperialism.
Bukharin started with the world economy:
Thus the problem of studying imperialism, its economic characteristics, and its future,
reduces itself to the problem of analysing the tendencies in the development of the world
economy, and of the probable changes in its inner structure. (Bukharin, 1973, pp. 1819)
He then set about drawing the connections between the world economy,
state policy, class relations, concentration and nance capital.15 In the midst
of World War I, it would ill behoove Bukharin to start at the abstract level
of the development of credit relations. Nevertheless, this reversal of order
amounts at least to a difference of emphasis and beyond this, does lay
more causal stress on the development of the world economy than does
Hilferdings analysis. It is easy, however, to overestimate the signicance of
this difference. Hilferding is very careful throughout his analysis to maintain
the reciprocal character of the inuences of the various institutions which
make up his portrait of nance capital as a phase of capitalist development.
The nature of these connections are in general not signicantly revised in
Bukharins treatment. Bukharins reversal of Hilferdings line of argument
primarily empasizes the interrelated nature of the economic, political
and ideological changes which make up the new era of capitalism being
described.
253
From the point of view of stages theory, Bukharins volume serves to

reafrm, further document, and update Hilferdings analysis. In one crucial
area, Bukharin carries the Marxist theory of capitalist stages forward.
Bukharin emphasizes both the integral nature and the historically limited
character of this new period of capitalist development. In dening imperialism as a denite historical entity he contends that nance capital is
an historically limited epoch (pp. 114115). Moreover, the other characteristics associated with imperialism and nance capital also manifest
themselves in the context of this delimited time period:
y when we speak of imperialism as the policy of nance capital, its conquest character is
self-understood; at the same time, however, we point out what production relations are
being reproduced by this policy of conquest. Moreover, this denition also includes a
whole series of other historic trends and characteristics. Indeed, when we speak of
nance capital, we imply highly developed economic organisms and, consequently, a
certain scope and intensity of world relations; in a word, we imply the existence of a
developed world economy; by the same token we imply a certain state of production
relations, of organisational forms of the economic life, a certain interrelation of classes,
and also a certain future of economic relations, etc., etc. Even the form and the means of
struggle, the organisation of the state power, the military technique, etc., are taken to be
a more or less denite entity y (pp. 114115)
2.3. Lenin and the Monopoly Stage

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

of imperialism as due to an effort to circumvent czarist censorship (p. 169).
The principle economic features identied by Lenin are a subset of those
discussed by Hilferding and Bukharin. His discussion of the relationship of
these features to each other generally follows the lines initially laid out by
Hilferding.
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TERRENCE MCDONOUGH
Given these limitations of the work, it is tempting to view Lenins role as

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

embodies its ve basic features:
Imperialism is capitalism at that stage of development at which the dominance of monopolies and nance capital is established; in which the export of capital has acquired
pronounced importance; in which the division of the world among the international
trusts has begun, in which the division of all territories of the globe among the biggest
capitalist powers has been completed. (p. 232)
These ve characteristics form the basis of the organization of much of the

pamphlet.17 Lenin is concerned to locate the turning point at which each of
these characteristics of imperialism can be said to have been established.
255
In discussing the dominance of monopolies, Lenin argues that cartels

were a transitory phenomenon until:
y the boom at the end of the nineteenth century and the crisis of 190003. Cartels
become one of the foundations of the whole of economic life. Capitalism has been
transformed into imperialism. (p. 181)
Later he says more narrowly, the crisis of 1900 marked the turning-point in
the history of modern monopoly (p. 187). Regarding the importance of
nance capital, Lenin quotes Jeidels to the effect that the crisis of 1900
enormously accelerated and intensied the process of concentration of
industry and of banking, consolidated that process, for the rst time transformed the connection with industry into the actual monopoly of the big
banks, and made this connection much closer and more active (p. 200).
From this Lenin concludes that, the twentieth century marks the turningpoint from the old capitalism to the new, from the domination of capital in
general to the domination of nance capital (p. 200).
In connection with the export of capital, Lenin quotes statistics which he
contends show that the export of capital reached enormous dimensions only
at the beginning of the twentieth century (p. 213). Regarding the division of
the world among capitalist associations, he cites agreement between the
German and American electrical trusts in 1907, the division of the world oil
market by 1905, an agreement concerning merchant shipping in 1903, the
International Rail Cartel formed in 1904 and the International Zinc Syndicate established in 1909. He concludes by citing Liefmanns calculations
that in 1897 there were altogether about forty international cartels in which
Germany had a share, while in 1910 there were about a hundred (p. 221).
Lenin is concerned to locate the time in which the division of the globe
among the major powers is completed. He cites Hobson marking the years
1884 to 1900 as the epoch of intensied expansion of the chief European
states (p. 224). Lenin then constructs a table of areas and populations
controlled by the major powers which he sums up in the following manner:
We clearly see from these gures how complete was the partition of the world at the
turn of the twentieth century. (p. 226)
This concern with the identication of the turning point which marks the
transition from one stage of capitalism to another cannot be found in either
Hilferdings or Bukharins treatments. The location of the point of transition from the previous stage of capitalism to the new stage of imperialism
emphasizes the qualitative rather than the quantitative nature of the transition. This contribution is specically Lenins. It is this difference which
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lends a different content to Lenins change in terminology in designating

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

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

character of the new stage would have a profound inuence on subsequent
generations of Marxist stage theorists. This is perhaps most dramatic in the
case of Baran and Sweezys (1968) monopoly capital school. This inuence
is also very apparent in Ernest Mandels work (see below).
257
Finally, Lenin takes explicit note of the effect of the monopoly regime on
the rate of growth in the capitalist countries. Bukharin and especially Hilferding had done this implicitly in emphasizing the positive impact of the
various aspects of nance capital on the conditions of the prot rate.
In emphasizing the uneven character of capitalist growth, Lenin points out
that on the whole, capitalism is growing far more rapidly than before y.
(p. 259)
3. A GENEALOGICAL RELATIONSHIP
3.1. The Monopoly Capital School
The HBL theory of monopoly capital as the motive force of a new era in
capitalism forms one of the important bases of Paul Sweezys (1968) work in
The Theory of Capitalist Development. Sweezys strategy in constructing a
Marxist account of capitalist development is essentially to treat the HBL
account as equivalent to the fourth volume of capital. Parts one and two of
The Theory explicate Marx on value and surplus value, and the accumulation process. Part four is entitled Imperialism and is largely an explication of Hilferdings Finance Capital and Lenins Imperialism.
Sweezys account differs from Hilferdings and Lenins primarily in that
Sweezy argues the dominance of bank capital is a passing phase of
capitalist development which roughly coincides with the transition from
competitive to monopoly capitalism (p. 268). Sweezy notes that Lenins
treatment of the relationship between manufacturing and nance capital
was more balanced and concludes:
Lenins theory is thus certainly not open to the criticisms which have been directed at
Hilferdings. Nevertheless it is doubtful whether the term nance capital can be divested
of the connotation of banker dominance which Hilferding gave it. This being the case, it
seems preferable to drop it altogether and substitute the term monopoly capital, which
clearly indicates what is essential to Lenins concept of nance capital and yet is not so
likely as the latter to mislead the unwary reader. (p. 269)
Thus, Hilferdings and Lenins concept of nance capital enters U.S. Marxism
as monopoly capital.
Sweezys next major work on Monopoly Capital, done jointly with
Paul Baran, seeks to develop the dynamics of the monopoly accumulation
process. It does so chiey by arguing the case for a strong tendency toward
underconsumption crises in the monopoly stage of capitalism. Baran and
Sweezys argument is well known and need not be rehearsed here. Barans
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TERRENCE MCDONOUGH
inuence is strong. The work owes more to Kalecki and Steindl18 than it
does to Hilferding. Though Monopoly Capital contains a wide-ranging
analysis of American society, Hilferdings close analysis of the connections
between monopoly capital and the other levels of the social formation is
partially lost. This is due to some measure to the space devoted to underconsumption19 and also to a very broad conception of the time period
within which monopoly capital is dominant in America. Baran and Sweezy
date this period from the end of the Civil War to the present. Thus, all
connection of monopoly with specic institutions other than market structure tends to be undermined.
The two major works of the Monopoly Capital School which followed
Monopoly Capital were Harry Magdoffs (1969) The Age of Imperialism and
Harry Bravermans (1974) Labor and Monopoly Capital. Both works rely
much more closely on Lenins Imperialism as the basis for analyzing the
monopoly stage of capitalism. They also restore Lenins dating of the beginning of the monopoly stage to around the turn of the century. Importantly, both works also extend the range of the monopoly capitalism
analysis. Magdoff is concerned with the economics of U.S. foreign policy.
Braverman sets out to close the gap noted by Sweezy and Magdoff themselves in studying the relationship between monopoly capital and the labor
process. In pursuing this task, he analyzes the relationship between
monopoly capital and shopoor control, labor relations, technology and
changes in the composition and structure of the working class. These
additional studies are important in that they restore to the American
Monopoly Capital School the multilevel analysis of capitalist stages pioneered by Hilferding and carried forward by Bukharin and Lenin.
At roughly the same time as Braverman was writing, a new generation of
Marxist economists was participating in the attempt to address the relationship between labor and monopoly capital. In 1973, Reich, Gordon, and
Edwards (1973) published an article connecting labor market segmentation
to the emergence of monopoly capital. They argued that the advent of
monopoly capital led to a division in the economy between the monopoly
sector and the competitive sector. As a result, along with the dualism in the
industrial structure, there developed a corresponding dualism of working
environments, wages and mobility patterns (p. 363). In addition:
Monopoly capitalist corporations devised deliberate strategies to resolve the contradictions between the increased proletarianization of the work force and the growth and
consolidation of concentrated corporate power. The central thrust of the new strategies
was to break down the increasingly unied worker interests that grew out of the proletarianization of work and the concentration of workers in urban areas. As exhibited in
259
several aspects of these large rms operations, this effort aimed to divide the labor force
into various segments so that the actual experiences of workers were different and the
basis of their common opposition to capitalists undermined. (p. 361)
3.2. Ernest Mandel

Mandels (1970) early expositions of the twentieth century economy owe a
great deal to the HBL analysis. Chapters 12, 13 and 14 of Marxist Economic
Theory are entitled respectively Monopoly Capitalism, Imperialism
and The Epoch of Capitalist Decline. These chapters reproduce and update much of the HBL explanation of the era of nance capital. Mandel
parallels Sweezy in emphasizing the importance of monopoly self-nancing
and in substituting the term monopoly capitalism for Hilferdings nance
capital and Lenins imperialism.
4. THE SECOND WAVE

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

In his monumental Late Capitalism, Mandel develops a theory of long
waves of capitalist development. These long waves form the basis for periodizing capitalism into stages:
The long waves y do not simply represent statistical averages for given time spans y.
They represent historical realities, segments of the overall history of the capitalist mode
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TERRENCE MCDONOUGH
of production that have denitely distinguishable features. For that very same reason
they are of irregular duration. The Marxist explanation of these long waves, with its
peculiar interweaving of internal economic factors, exogenous environmental changes,
and their mediation through sociopolitical developments (i.e., periodic changes in the
overall balance of class forces and intercapitalist relationship of forces, the outcomes of
momentous class struggles and of wars) gives this historical reality of the long wave an
integrated total character. (Mandel, 1980, p. 97)
Mandel identies three successive stages in capitalist history, competitive

capitalism, classical imperialism and late capitalism. As indicated by the
choice of appellation, Mandel is indebted to Lenins analysis as the basis for
his second stage of classical imperialism as described by Lenin (p. 82).
As do both HBL and Gordon, Mandel emphasizes the key roles of
extra economic factors (Mandel, 1980, p. 20). The increase in the prot rate
which inaugurates a long wave upturn (and hence a new period in the
history of capitalism) can be understood:
Only if all the concrete forms of capitalist development in a given environment y are
brought into play. And these imply a whole series of noneconomic factors like wars of
conquest, extensions and contractions of the area of capitalist operation, intercapitalist
competition, class struggle, revolutions and counterrevolutions, etc. These radical
changes in the overall social and geographic environment in which the capitalist mode of
production operates in turn detonate, so to speak, radical upheavals in the basic variables of capitalist growth y (pp. 2122)
In connection with the era of classical imperialism, Mandel discusses the

concentration and centralization of capital, the export of capital, colonialism, militarism, imperialist competition and unequal exchange, the growing
importance of the state, the introduction of welfare measures and changing
technology. This multifactoral discussion is also applied to the analysis of
late capitalism. In this connection, Mandel discusses changes in technology,
the weakening of labor organization, long-term collective bargaining, shopoor control of the labor process, multinational corporations, the new international division of labor, the international monetary system, the
Marshall Plan, the state guarantee of prots through military contracts
and other means, decit nance and ination, the growth of marketing and
customer manipulation, the extension of consumer credit, mass communications and technocratic ideology.
4.2. The Social Structure of Accumulation Framework
At the end of the 1970s, David Gordon (1978, 1980) published two articles
linking long cycle theory with the concept of stages of capitalism. In this
261
context, the advent of monopoly capital at the turn of the century coincides
with the completion of the long wave trough at the end of the nineteenth
century and the inauguration of the long wave expansion which ended with
the Great Depression of the 1930s. The new question which the adoption of
a long wave perspective posed to the monopoly stage of capitalism tradition
was whether the postwar expansion was associated with a similar set
of multidimensional institutional changes. Gordon (1978) answers this
question by proposing a set of postwar institutions whose establishment
accounted for the long period of postwar prosperity. These institutions included among others multinational corporate structures, dual labor markets
associated with a bread-and-butter industrial unionism, American international economic and military hegemony, easy credit, conservative Keynesian
state policy and bureaucratic control of workers.
In this way, Gordon established the possibility of articulating a postwar
set of institutions which conditioned the subsequent expansion of the economy in a way similar to the manner in which the set of institutions analyzed
by Hilferding, Bukharin and Lenin accounted for the turn of the century
expansion. Thus, the multi-institutional analysis of monopoly capital is implicitly used by Gordon as a model for explaining the postwar expansion.
The repetitive use of this kind of explanation raised the question of
whether the assembling of such sets of institutions could be generalized as
the basis of a comprehensive theory of stages of capitalism. Gordon (1978,
1980) answers this question by proposing that both the institutions comprising monopoly capital and those making up the postwar social order
constituted examples of SSAs. The construction of a new SSA provided the
basis for a new stage of capitalism. The disintegration of this set of institutions marks the end of each stage.
The SSA approach achieved its denitive form shortly thereafter with the
publication of Gordon, Edwards and Reichs Segmented Work, Divided
Workers (1982).20 This volume used Gordons SSA approach to capitalist
stages to reformulate these authors earlier analysis of the history of capitallabor relations in the U.S. The authors exposition of the SSA which dominated the capitalist world at the beginning of the twentieth century, clearly
owes a great deal to HBLs original description of the era of imperialism.
Developments within the SSA school have brought the SSA framework
closer to the HBL position. The notion of long cycles or long waves has been
deemphasized in favor of a conception of periods of alternating growth and
stagnation in capitalist history. The length of these periods is not determined
in advance. They do not follow on from one another with the strict logic
which a cycle theory would demand. The eclipse of the long cycle argument
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TERRENCE MCDONOUGH
refocuses attention on Lenins concept of stages of capitalism (see

McDonough, 1994a).
In our own work examining the construction of the monopoly capitalist
SSA in the United States, we have found some of Lenins formulations
concerning the transition from the competitive stage to the monopoly stage
to be closer to events than Gordon et al.s reading of this transition. While
Gordon et al. emphasize the diversity of institutional change involved in this
transition period, we have argued (McDonough, 1994b) that the organizing
principle of the SSA put into place at the turn of the century in the United
States can be found in the monopoly market structure established in the
merger wave of 18981902. Each of the other core institutions21 in the SSA
was constructed around the emergence of the new monopoly structure of
capital (see McDonough, 1994b). Thus as Lenin argued in Imperialism,
monopoly capital can be regarded as the lynchpin of the new stage of capitalism. Gordon et al. tend to see the important institutions of the monopoly
SSA in the United States as achieving consolidation during the First World
War years. I have argued (McDonough, 1994b), in agreement with Lenins
dating of the monopoly stage of capital to the turn of the century, that the
core institutions had achieved their basic shapes in the six-year period between 1898 and 1904.
4.3. The Regulation Approach
Though the term regulation had earlier been borrowed from systems theory
by French Marxist scholars, the RA effectively begins with Michel Agliettas
A Theory of Capitalist Regulation: The U.S. Experience published in 1976. In
this work Aglietta put forward an analysis of the institutional framework of
accumulation cast in Althusserian structuralist terms. Aglietta begins the
book with an extended critique of neoclassical general equilibrium theory.
While rejecting the notion of equilibrium, Aglietta recognizes the necessity of
analyzing the preconditions of the reproduction of the wage relation over
time. Hence, he argues that the study of economics must replace the theory
of general equilibrium with a theory of capitalist regulation. In his introduction, Aglietta denes part of his project as seeking to show that the
institutionalization of social relations under the effect of class struggles is the
central process of their reproduction (Aglietta, 1979, p. 29). He applies this
understanding to capitalist regulation and crises in the following way:
This theoretical position will enable us to conceive crises as ruptures in the continuous
reproduction of social relations, to see why periods of crisis are periods of intense social
263
creation, and to understand why the resolution of a crisis always involves an irreversible
transformation of the mode of production. (1979, p. 19)
Agliettas book stimulated a great deal of subsequent work in France much

of it involved with applying the framework to understanding historical
movements in the French economy. This work was accompanied by considerable conceptual innovation. During this period Robert Boyer emerged
as the leading gure of what was referred to as the Parisian school of
regulation theory. In 1986 Boyer set out to sum up this work in a concise
introduction. Boyer does not minimize existing differences, but nevertheless
does seek to represent a rough consensus. Despite his success, this consensus
would soon be superseded (see below).
After discussing the mode of production Boyer then introduces a number
of intermediate concepts. The rst is the regime of accumulation. This set
of economic elements includes rst the organization of production, then the
distribution of the value produced and a related composition of social demand which is consistent with production potentialities. These regimes of
accumulation vary over time and space within the overall framework of the
capitalist mode of production. In conclusion, the imperatives and logic of
accumulation can take on distinctly different forms whose consequences are
by no means identical in terms of the economic dynamics and types of social
organization they engender (Boyer, 1990, pp. 3637).
The regime of accumulation is conditioned and reproduced by further
intermediate institutional forms. These institutional forms are collected under ve headings; forms of monetary constraint, congurations of the wage
relation, forms of competition, position within the international regime and
forms of the state. These institutional forms together constitute the mode of
regulation. The combination of the regime of accumulation and a type
of regulation is the mode of development. The objective of the regulation
school is too explain the rise and subsequent crises of modes of development (1990, p. 48).
5. THE CONVERGENCE OF THE SECOND WAVE

The purpose of this section is two-fold. I will argue rst that the main
strands of Marxian LWT have theoretically converged over roughly the last
decade to the point were they are no longer conceptually distinct. As this is
the case, they no longer constitute distinct schools, though they continue to
be self-referential in identifying intellectual pedigrees. Secondly, I wish to
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TERRENCE MCDONOUGH
argue that none of the three main traditions is dominant within the specically Marxian discussion and thus able to simply absorb the others for
the purpose of further identication, discussion and development. Further,
each of the three current monikers (the RA, the SSAF and Mandels LWT)
suffers from serious conceptual inadequacies. Fortunately, terminological
creativity is unnecessary. The theoretical convergence of the schools within
an overall Marxian framework allows and to a certain extent demands
recovery of the concept of stage theories of capitalist history pioneered
early in the twentieth century by HBL in addressing capitalist structural
reorganization.
5.1. Regulation and Social Structures of Accumulation: Divergence

and Convergence
The relationship between the RA and the SSAF was recognized early. This
led to joint work by Samuel Bowles and Robert Boyer (1988, 1990a, 1990b).
Bob Jessop lists the SSAF as one of his seven schools of the RA (Jessop,
1990). Still the most widely cited source for social structure of accumulation
(SSA) theory, the 1994 Social Structures of Accumulation:The Political
Economy of Growth and Crisis (Kotz et al., 1994a) prominently featured a
comparison between the SSA approach and regulation theory authored by
one of the editors (Kotz, 1994).22
Kotz rst sets out to identify the similarities between the two approaches.
He argues that both the theories set out to explain long-run patterns of
capital accumulation by analyzing the relationship between that process and
sets of social institutions which condition or regulate it. The dynamic of
the accumulation process over relatively long periods of time depends on the
success or failure of these institutions in creating the conditions for protability, reinvestment and growth. Kotz observes that the SSA is roughly
analogous to some combination of the regulation theory terms regime of
accumulation and mode of regulation. Both schools view capitalism as
moving through a series of stages, each characterized by a specic form of
the accumulation process embedded in a particular set of institutions
(p. 86). Stages end in a long-term structural crisis which involves a signicant reduction in the rate of accumulation over a prolonged period of time.
These structural crises result from a failure of the institutions to continue to
successfully secure the conditions of accumulation. The crisis ends when a
new more successful set of institutions is put in place. Finally according to
Kotz, both theories offer an intermediate level of analysis, more general
265
and abstract than a detailed historical account of capitalist development

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

requirements.
Kotzs characterization of the two schools in the mid-nineties is broadly
accurate. It must be recognized, however, that the initial publication of
much of the regulation literature in French creates a several year delay
before the important works nd their way into English translation. In addition, of course, both schools have undergone considerable change in the
last decade. Interestingly, for the purposes of this article many of these
changes undermine the distinctions identied by Kotz while potentially
opening up other divisions.
The major differences identied by Kotz consist of the following contrasts. The RA had maintained a closer delity to the Marxian approach
through an emphasis on production relations and the class distribution of
income within the regime of accumulation while the SSAF had emphasized
a more Keynesian concern with the determinants of the capitalist investment
decision. The RA located the origin of long-term crises within the regime of
accumulation whereas the SSAF located the origin of the crisis in the
breakdown of the institutions of the SSA (closer to the mode of regulation
in the RA). Consistent with its Althusserian roots, the RA emphasized
structure while the SSAF placed more emphasis on agency and class struggle. Finally, the RA emphasized the qualitative character of change from
one period to another while the SSAF lay emphasis on changes in the rate of
accumulation. We will consider the fate of each of these differences in turn
in light of developments within both schools over the past ten years.
A concern with class relations rooted in the production process has never
been alien to the SSAF. Segmented Work, Divided Workers (Gordon,
Edwards, & Reich, 1982) concerned itself primarily with the historical
development of capitalist strategies of controlling workers within the labor
process. This emphasis has been carried forward in more recent work on the
emergence of spatialization as a new form of labor control which it is
argued is one of the important underlying institutional factors conditioning
the construction of a new SSA in the United States. Working from Gordon,
Edwards and Reichs identication of three historical periods in the structure of work and the organization of labor markets as proletarianization,
homogenization and segmentation, Grant and Wallace (1994) identify a
fourth period as spatialization.
This process of spatialization centers on employers use of threats of
relocation and actual relocations as a key form of labor control strategy
from the 1970s. This observation immediately links the mobility of capital to
the question of labor control in a restructured capitalism. This new stategy
267
of labor discipline became viable at this time due to the increased fragmentation of work tasks into simpler components and a highly integrated
division of labour that allows different work tasks to be performed in
different locations. This is also made possible by advances in telecommunications and transportation which allow capitalists to coordinate and
control diverse pools of labour in far-ung corners of the US and the world
(Grant & Wallace, 1994, p. 37). To these factors Brady and Wallace (2000,
p. 95) add geopolitical arrangements which facilitate economic liberalization
and globalization like NAFTA and the WTO. In effect corporations are
reorganizing the labor process at least partially by changing the labor,
moving from markets with high-cost inexible and militant labor to locations with low-cost, exible and acquiescent labor.
Kotz et al. (1994b) in 1994 identied several related theories evolving in
parallel and exercising an inuence on SSA theory. These included a number
of developments within broadly orthodox microeconomic theory. These
tendencies would have supported Kotzs thesis that the SSAF had strayed
farther from its Marxian roots. By 1997, Reich (1997) was arguing that the
wing of the theory most concerned with these issues had departed from
the original intent of the theory. Reich sought to reemphasize the qualitative and institutional nature of SSA theory. He contends strongly that,
hypotheses concerning periodization or the relative causal or the endogenous character that we attach to various political and economic forces
should emerge from the institutional analysis, not simply from econometric
inquiries (p. 2). Subsequent work within SSA theory has generally taken
this position as its starting point.
There are several somewhat overlapping reasons for this development. It
appears that Gordons death has had the indirect effect of distancing both
Weisskopf and Bowles from the mainstream of the subsequent development
of the SSA framework. These two scholars were the most interested in
introducing concepts from outside the initial Marxian and Keynesian inspiration. Weisskopf has concentrated his work on studying the transition
process in the former Soviet Union. Contrary to Cobans (2002 [1995])
prediction, Samuel Bowles interest in alternative microeconomic theories
has become increasingly divorced from the SSA framework.
The fact that the majority of work within the framework is now being
done within disciplines other than economics is also important. While still
concerned with agency, sociology is much less obsessed with micro founding
macro- and meso-level behavior than economics. While American sociology
is hardly a bastion of progressive thinking, it is far less conservative than the
often openly reactionary political character of that nations economics
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TERRENCE MCDONOUGH
profession. Pressures to disguise or dilute the Marxian character of the

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

trend was perhaps most dramatically conrmed when in an afterword to the
republication of A Theory of Capitalist Regulation, Aglietta (1998) discussed
the issues involved in a distinctly un-Marxian manner. In the Boyer and
Saillard volume, Olivier Favereau (2002, p. 315) draws a straightforward
and helpful distinction between Regulation Theory 1 (RT1) as similar to
the Marxist analysis of the capitalist mode of production and RT2 as
separate from this analysis and based on dynamic aspects of institutional
forms. Among the Parisians, Lipietz is the only major adherent of RT1
while on the other hand this Marxian strand still dominants Anglophone
adherents working within radical sociology and geography. The renunciation of Marxism within some branches of the RA opens up a new (and
according to Kotz opposite) contrast with the SSAF regarding Marxian
theoretical foundations.
Interestingly, the movement toward institutionalism has, at the same time,
lessened some of the other differences identied by Kotz. A greater emphasis
269
has been placed on the role of institutions (found predominantly within the
mode of regulation) both in constituting the period of successful regulation
and in the emergence of crisis. Aglietta (1998, p. 56) summarizes these
developments:
y the various mediation mechanisms are dovetailed to form the framework of a mode
of regulation. This dovetailing does not happen automatically, because each of these
organizations has its own rationale, the integrity of its own structures that makes it
persevere in its perceived social role. That is why the coherence of a mode of regulation
does not conform to any pre-established general law. It is a historically unique entity
that may be called a growth regime. By contrast, the symptoms of exhaustion of a
growth regime, heralding a period of uncertainty, crisis and change, must be sought in
malfunctions of the interaction between mediation mechanisms.
This formulation shifts the dynamics of the formation of the growth regime
into the realm of the dynamic interaction of the institutions. The general
laws of accumulation no longer dominate, but each growth regime is historically unique, constituted by the coherence of the institutions which make
it up. Similarly, it is the malfunctioning interaction of the institutions or
mediation mechanisms which inaugurate the crisis of the growth regime. In
this way the description of the constitution and decay of capitalist social
structures and the resulting alternating periods of expansion and crisis converges to the contingent description developed within the SSAF.
The RA has become much more concerned with the question of the relationship of agency to structure. The Parisian school has recognized that in
the transition from one mode of regulation to another conicts, strategic
behaviour and political intervention play a crucial role (Boyer, 2002,
p. 322). This is reected more broadly in the search by the adherents of the
broadly institutionalist RA approach (Favereaus RT2) for a non-orthodox
form of microeconomics. For Lipietz (1993), a recognition of the importance of social actors represented an early break from an excessive structuralism in the legacy of Althusser. In the Anglophone RA tradition, this
trend is represented by Jessops (2002, pp. 3436) advocacy of a strategicrelational approach which includes the capacity of actors to engage in
struggles which overow structural forms.
The remaining area of difference identied by Kotz involves an overemphasis by the SSAF (as compared to the RA) on differential rates of accumulation as opposed to more qualitative differences between capitalist
stages. This gap has been partially closed, this time from the SSAF side. In a
pair of articles Kotz (2003) and Wolfson (2003) argue that the current institutional structure will not lead to a new period of expansion. Wolfson
(2003, p. 260) argues that neoliberalism is neither a crisis of the old SSA
270
TERRENCE MCDONOUGH
nor a new SSA. y the old SSA is gone. The key problem with neoliberalism according to both Wolfson and Kotz is that it is unlikely to lead to a
period of stable growth because of anarchic competition and problems of
demand and realization.
Nevertheless, according to Kotz (2003, p. 263) neoliberalism is a new,
coherent set of institutions that impinge on the process of capital acccumulation. It cannot be an SSA, however, because it has not yet promoted
sufcient growth, nor is it likely to. Kotz resolves the problem of the
existence of a coherent set of institutions in the absence of strong growth by
postulating the existence of two kinds of Institutional Structure (IS).
A Liberal Institutional Structure (LIS) is characterized by limited state regulation, aggressive dominance of capital over labor, high levels of competition and liberal, free market ideology. A Regulationist Institution
Structure (RIS) is characterized, by contrast, by an interventionist state, an
element of cooperation and compromise between capital and labor, corespective behavior by corporations, and a recognition of the positive role of
government and other non-market institutions. While both institutional
structures foster the effective appropriation of surplus value, only an RIS
promotes accumulation and growth. Thus only an RIS can lay claim to
being a true SSA. Kotz further hypothesizes that there is a tendency for
Liberal Institutional Structures to alternate with Regulated Institutional
Structures because the crises created by the one type can be partially resolved through the construction and introduction of the other type of institutional structure. Thus the existence of a coherent capitalist stage and
successful capitalist extraction of surplus value is not necessarily associated
with high rates of capitalist growth. On all of the fronts identied by Kotz,
the Marxian variant of the RA (what we might call the RA1) has converged
with the SSAF (or vice versa).
5.2. The Long Wave of Ernest Mandel

The return to Marx on the part of the RA1 and the SSAF should immediately raise the question of the relationship of these theoretical trends to
Ernest Mandels LWT. Mandel has never been equivocal about his theoretical commitment to Marxism and his version of LWT has always been
carefully consistent with a Marxian approach. This is also by and large true
of those writers who have followed Mandel in long wave theorizing. Has the
past openness of the RA1 and the SSAF to inuences outside the Marxian
tradition distanced these perspectives from Mandels LWT?
271
Mandel grounds his theory in the movements of the rate of prot over
time. The long-run tendency of the rate of prot is to decline due to the
tendency of the organic composition of capital to rise. In the absence of
counteracting forces this conditions the emergence of a period of crisis and
stagnation. In a generic way the tendency of the rate of prot to fall can be
counteracted by certain contrary developments as identied by Marx: an
increase in the rate of surplus value, a sharp slowdown in the rate of increase
(or even a fall) in the organic composition of capital, a sudden quickening in
the turnover of capital or by the ow of capital into countries and sectors
where the average organic composition of capital is lower that that in the
basic industry of the core capitalist countries. Long wave expansions are
initiated during periods in which the forces counteracting the tendency
of the average rate of prot to decline operate in a strong and synchronized way.
The areas of possible difference with the other traditions concern the
nature of the turning points which mark the beginning and end of the long
wave. Mandel makes much of the lack of an endogenous mechanism which
accounts for the inauguration of the upturn. Instead he identies his
explanation as exogenous to the dynamic of the long wave itself. In this way
Mandel makes sure that his theory is not one which sees potential capitalist
success on into the indenite future. Upturns depend on a fortuitous (for
capital) combination of factors which are not guaranteed and may in fact be
unlikely. This distinction was always more denite between Mandel and
Schumpeterian versions of the long wave rather than with the RA1 or the
SSAF. Initially the RA was strongly functionalist in its vision of capitalist
reorganization, hypothesizing that the needed institutional restructurings
would somehow emerge. By 1990, Boyer (1990) was emphasizing both the
role of social conict and the lack of any agency which ensures that a viable
overall restructuring will inevitably ensue. Within the SSAF, McDonough
(1994a, 1994b) has argued that the principles of organization of SSAs when
investigated concretely turn out to be historically contingent, differing in
character from one period of SSA construction to another. This is not very
far from Mandels notion of exogeneity.
Mandels theory of the end of long wave rests on the negative impact of
the expansion on the organic composition of capital and hence on the rate of
prot. To critics from the other Marxian traditions this is too monocausal.
The other schools are willing to recognize that a rising cost of capital relative
to the labor employed may well be a factor in the end of particular long
waves. Nevertheless, the complex character of the institutional conditions of
accumulation as well as the multiple ramications of class struggle and
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TERRENCE MCDONOUGH
capitalist competition create a range of possibilities for the breakdown of the

accumulation process in these models. Went (2002, p. 85) writing in the
Mandelian tradition recognizes this in arguing that periods of structural
stagnation occur when previous constellations of processes of accumulation
and institutions that once positively reinforced each other become incompatible. Not incidentally, Went also argues that there exists a substantial
similarity between the three schools.
We may conclude that the long wave theoretical tradition instituted by
Ernest Mandel has converged with the RA1 and the SSAF. Or if we privilege the Marxian theoretical foundations, perhaps the RA1 and SSAF have
converged with Mandelian LWT.
6. TERMINOLOGICAL PROBLEMS
True theoretical convergence rather than a series of parallel similarities demands terminological convergence. What shall we call the Marxian RA1/
SSAF/LWT? Ignoring proprietorial and ego considerations, the obvious
course is to adopt the designation of the school which is dominant in the
literature. According to this criterion the RA would at one time have been
the hands down choice. However, the departure of the majority of the
Parisian school from the Marxian tradition leaves the remaining RA1 considerably less robust. Having two different theoretical perspectives (RA1
and RA2) sharing a single designation is unnecessarily confusing and also
unstable. This is so even if the perspectives are joined archaeologically
beside the Seine.
The current period of neoliberal globalization has created a serious problem for the SSAF. As observed earlier Kotz had criticized the framework for
being overly focussed specically on the rate of accumulation. This had
created a problem early on in that the late nineteenth century crisis in the
United States was characterized by wild swings in the business cycle rather
than overall low rates of accumulation. This was historically far enough
away, however, to be safely downplayed. The current period poses the opposite problem an emerging institutional structure which appears increasingly internally coherent but which has not resulted in a rapid pace of
accumulation (Kotz, 2003; Wolfson, 2003; Went, 2005). A specically social
structure of accumulation does not allow for the possibility of merely secure
reproduction of capitalist social relations but demands an extended reproduction which it appears may or may not eventuate.
273
The absence of rapid accumulation poses similar problems for LWT as it

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

OF CAPITALISM?
Though Marxian stage theory carries no guarantee that a period of crisis
will be resolved by the construction of a new stage of capitalism, the key
question it inevitably poses is whether the current period is one of stage
construction. This in turn raises the issue of whether or not globalization
can be analyzed in light of stage theory. I argue that stage theory is in fact
essential to answering one of the main concerns presented by the globalization thesis.
Criticism of the globalization thesis has emerged on a number of bases.
One is that globalization is being used as a facile journalistic shorthand.
A related but more serious objection is that globalization constitutes a
dangerous ideology that seeks to demobilize opposition to neoliberal reforms on the grounds that capital has been able to escape the bounds of
regulation by nation states. (Hirst & Thompson, 1999, p. xii) This article will
examine whether the concept has a legitimate social scientic meaning despite this critique. If it does not it may perhaps be better abandoned.
274
TERRENCE MCDONOUGH
The critics of globalization have mounted two historical attacks. One argues that the period before the First World War saw the creation of a global
capitalist system. This global regime was interrupted after World War I, but
has now been re-established. Hence globalization is nothing new. A second
argument contends that recent internationalization is just the continuation
of a longstanding trend emanating from the end of the Second World War.
The rst of these arguments can be easily conceded. The interruption of
globalization was substantial and the institutional basis of the current period differs signicantly from that of the earlier period. The second argument that the globalization theorists have mistaken a quantitative change
for a qualitative one is the heart of the controversy. The rst question that
the globalization thesis must answer is whether or not a qualitative change
has occurred.
Long wave or stage theories of capitalism can provide criteria for identifying qualitative institutional change from one historical period to the
next. The possible resolution of the late twentieth century crisis of the
Fordist stage will be the ground upon which we can look for the qualitative
change in the capitalist order that might mark the emergence of globalization. According to stage theory the current period is one of either continuing
crisis or the consolidation of a new institutional framework seeking to resolve this crisis. If such a new institutional framework is forming then by the
standards of LWT we are witnessing a qualitative change in the workings of
the capitalist economy.
The rst area to consider is capital/labor relations and the organization of
production. Union membership has declined. Many companies are introducing a regime of lean production based on Japanese techniques (Parker &
Slaughter, 1994). The use of computerized production technology has led to
the replacement of Fordist mass production with specialized batch production. While some corporations are pursuing this high road of increasing
productivity, others are pursuing the low road of cheap labor and
casualization deepening the dual labor market.
In the area of capital/capital relations increases in both physical and
nancial capital mobility have been driven by technological developments
and deregulation. This has led to the interpenetration of the capitalist class
in North America, Western Europe and Japan. Increased trade liberalization has had contradictory results, leading at the same time to increased
competition on the product market and increased cooperation through reciprocal share ownership, joint ventures, tight subcontracting arrange
ments and the like (Castells, 2000, pp. 77215). These developments have
275
contributed to the creation of global norms of protability. All decisions

about economic activities, even those carried out entirely within national
boundaries, are increasingly taken in light of international norms and
standards (Bryan, 1995).
Political changes involve both a reorientation of domestic state policy and
the creation of increasingly powerful international regulatory institutions.
Fiscal policy has placed an overwhelming emphasis on price stability and
there has been a relative reduction in the size of the non-military sectors of
the state. States have pursued a policy of deregulation and privatization.
The reinforcement of competitiveness, has become the touchstone of domestic policy.
There has been a dramatic geographical extension of market relations of
production in Eastern Europe and post-Mao China. There has been a reinstatement and extension of U.S. hegemony. All of the forgoing changes
demand ideological legitimation, found in the intensive promotion of neoliberalism.
It is difcult to dene precise criteria for identifying when an institutional
reorganization constitutes a fundamental change in the environment of accumulation. The extensive range and depth of institutional transformations
since the mid-1970s, however, may absolve us of this task. There exists a
prima facie case for the qualitative transformation of the conditions of
capitalist growth and expansion. Thus, courtesy of Marxian stage theory the
globalization thesis passes its rst hurdle.
NOTES
1. Within a Marxian framework, accumulation is not simply the accumulation of
physical capital but the extension of capitalist social relations involving the extension
of wage relations. Nevertheless, the term is often used synonymously with reinvestment and growth.
2. Gneuss (1962, pp. 3638) also discusses the inuence of the economic recovery
on Bernsteins thinking.
3. Following Althusser, a crisis of Marxism occurs when history poses Marxism a
challenge which it cannot explain within its existing problematic (Althusser, 1978).
Thus such a crisis has two conditions. The rst is a novel and signicant problem.
The second is an inadequacy within the Marxist paradigm itself. Such inadequacies
will frequently take the form of conceptual rigidities. Both of these conditions were
met at the turn of the century.
4. Useful summaries of the revisionist or breakdown controversy can be found in
Sweezy (1968 [1942] pp.190213); Lichtheim (1961, pp. 272300); Howard and King
276
TERRENCE MCDONOUGH
(1989, pp. 6589); McLellan (1979, pp. 2049); Geary (1987, pp. 4659); Hansen
(1985, pp. 3249); Salvadori (1979, pp. 4890).
5. Bernsteins book length version of the case for revisionism was published in
1899 as The Assumptions of Socialism and the Tasks of Social Democracy. It is more
generally translated into English under the title, Evolutionary Socialism (Bernstein,
1961).
6. For a discussion of the role of a revival of interest in Kants philosophy see
Lichtheim (1961, pp. 290300).
7. Kautskys (1899, 1902(1916)) two major works during this period were
Bernstein und das sozialdeokratische Programm and The Social Revolution. While
The Social Revolution has been translated into English, Kautskys prior work on
Bernstein has not. Excerpts can be found in Goode (1983, pp. 1531). A concise
summary can be found in Howard and King (1989, pp. 8082). A biographical
account of this period from Kautskys point of view is contained in Steenson (1978,
pp. 116131). See also the other sources in note 3.
8. Rosa Luxemburg (2006) also addressed many of these issues in a series of
articles which emphasized the need for maintaining a revolutionary socialist strategy.
These were later published as Reform or Revolution.
9. For a more detailed discussion of Kautskys views see Howard and King (1989,
pp. 8284).
10. See Gearys (1987, p. vii) judgment.
11. See McDonough and Drago (1989).
12. Tom Bottomores introduction to the translation of Finance Capital (Hilferding,
1980, pp. 117) provides a good overview of Hilferdings theoretical and political
career. Useful summaries of the argument in Finance Capital can be found in Brewer
(1990, pp. 88108) and in Howard and King (1989, pp. 94105).
13. In making this argument, Hilferding is effectively contending that capitalist
crises can arise from political factors as well as economic.
14. The title of Bukharins work is unaccountably translated into English as Imperialism and the World Economy. Since the order of the title has some small bearing
on the argument which follows, I have rendered the title in its original order.
15. Other evaluations of the nature of Bukharins contribution in this work have
approached it from differing perspectives and have emphasized different aspects of
the work. Cohens (1980, pp. 2536) biography contains a useful discussion of
The World Economy and Imperialism. Other useful treatments can be found in
Kiernan (1974, pp. 2736), Barone (1985, pp. 3545), Brewer (1990, pp. 109116)
and Howard and King (pp. 245248).
16. There is no shortage of material on Lenin in general and Imperialism in particular. One of the best treatments is in Harding (1978, pp.170). See also White
(2001, pp. 100128) especially for the wider context of socialist debate during the
First World War.
17. In a much quoted passage just prior to the above denition Lenin argues that:
ywe must give a denition of imperialism that will include the following ve of its basic
features: (1) the concentration of production and capital has developed to such a high
stage that it has created monopolies which play a decisive role in economic life; (2) the
merging of bank capital with industrial capital, and the creation, on the basis of this
277
nance capital, of a nancial oligarchy; (3) the export of capital as distinguished from
the export of commodities acquires exceptional importance; (4) the formation of international monopolist capitalist associations which share the world among themselves,
and (5) the territorial division of the whole world among the biggest capitalist powers is
completed. (p. 232)
18. See especially Kalecki (1954) and Steindl (1952).

19. Baran and Sweezy write in their Introduction that we are particularly conscious of the fact that this approach, as we have used it, has resulted in almost total
neglect of a subject which occupies a central place in Marxs study of capitalism: the
labor process (pp. 89).
20. For a useful collection of articles explaining, reviewing and applying the SSA
approach see Kotz, McDonough, and Reich (1994a). This volume also contains a
bibliography of the SSA approach (see also McDonough (1990, pp. 129183)).
21. The distinction between the core institutions which inaugurate an SSA and
those institutions which may be put into place later as accumulation proceeds is
developed in Kotz (1994).
22. For another comparison from the same time period see OHara (1994).
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TERRENCE MCDONOUGH
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Radical Political Economics, 35(3), 255262.
KURUMAS LIFE
SAMEZO
AS A MARXIST ECONOMIST
This prefaces A Critique of Classical Political Economy by the Japanese Marxist
Samezo Kuruma (18931982), which is a translation of the key third chapter of his book
Keizaigaku shi (History of Political Economy). An overview of Kurumas career as a
Marxist economist in Japan is provided, with particular attention paid to the approach
of Kuruma to the study of Marxs thought and the characteristics of his study of the
history of political economy.
1. A RESEARCHER AT THE OHARA INSTITUTE

Samezo Kurumas career as a Marxist economist spans a period of roughly
six decades, stretching from the beginning of the 1920s, when Marxism was
quickly taking root in Japan, up to the early 1980s, when the nearly
hegemonic inuence Marxist scholars had enjoyed in the postwar period
was on the wane.1 Kuruma was born in 1893 in Okayama prefecture, west of
Osaka. As the eldest son of a prosperous paper merchant, Kuruma was
expected to take over the business one day, which did not interest him.
Although not eager to become a capitalist, the study of capitalism attracted
Kuruma early on, spurred by reading The Wealth of Nations at the age of
seventeen. In 1914, Kuruma entered prestigious Tokyo Imperial University
(now Tokyo University), where he had intended to study economics but
switched to political science after nding the economics courses
ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24008-8
281
282
E. MICHAEL SCHAUERTE
uninteresting.2 Graduating in the spring of 1918, he found a job working for

Sumitomo Bank in Osaka. Kuruma had been assured that the job would
afford him an opportunity to pursue economic research, perhaps related to
China, but his duties turned out to be far more mundane. He soon realized
that he was not at all suited to a career in banking.
That summer in Osaka, as the disgruntled Kuruma was beginning to
question capitalism, he witnessed rst-hand the explosive riots over the high
price of rice that were sweeping the nation. This historic event starkly
exposed the existence of class conict in Japan and the contradictions of its
rapidly developing capitalist system. Kuruma saw the powerful police force
temporarily helpless in the face of the rebellion and shop owners handing
out free rice to placate the angry crowds. This experience left a deep
impression on Kuruma, and he soon turned his back on a banking career,
taking his rst steps toward socialism like many others of his generation. In
October, he quit his job and returned to Tokyo without any clear plan in
mind. Fortunately for Kuruma, the Rice Riots helped bring into existence
an organization that would offer him a far more intellectually stimulating
career.
The social uprising prompted the wealthy industrialist Magosaburo
Ohara (18781943), who had already been alarmed by increasing class
polarization, to create in February 1919 the Osaka-based Ohara Institute
for Social Research, dedicated to the investigation of the root causes of the
social problem. Kuruma heard through a friend about plans for the
Institute and persuaded its Director, Iwasaburo Takano, a former professor
of economics at Tokyo Imperial University, to hire him as a researcher. The
following summer, the Ohara Institute dispatched Kuruma to Europe to
purchase books for its library, along with his colleague Tamizo Kushida
(18851934) who was making a name for himself as a Marxist economist.
The young men spent nearly two years in Europe with Kuruma based in
England and Kushida in Germany where they took advantage of the
strong yen to buy books related to the social sciences. The European stay
proved a pivotal experience for Kuruma, who quickly accumulated a broad
familiarity with modern European social history and thought. His eyes were
also opened to the profundity of Karl Marxs ideas during this time abroad.
Prior to the trip Kuruma had read an English translation of Das Kapital, but
he had found Marxs labor theory of value presented in the initial chapters
difcult to understand and was more convinced by the marginal utility
explanation of value. Kurumas view of Marx changed dramatically upon
reading Theorien uber den Mehrwert (Theories of Surplus Value) during
an idyllic summer spent in Heidelberg in 1921 to recuperate from his
Samezo Kurumas Life as a Marxist Economist
283
book-buying efforts. The clarity of Marxs criticism of the Classical school

amazed Kuruma, dissolving many of his doubts regarding Capital. His
conversion paralleled what was happening back home in Japan, where
leftists in the early twenties were turning away from anarcho-syndicalism
en masse to embrace Marxism (in some form or another). And in July 1922,
just weeks prior to Kurumas return to Japan, the Japanese Communist
Party (JCP) was established.
Upon returning to Japan, Kuruma settled into his life as a researcher at
the Ohara Institute, which was establishing itself as a center of leftwing
thought, particularly for research on trade union movements and Marxist
political economy. Over the course of 1920s, Kuruma regularly contributed
articles and translations to the Journal of the Ohara Institute for Social
Research, which was created in 1923, and he assisted in research for the
Japan Labor Yearbook, the Institutes annual publication on the labor force.
As for his own research, in addition to an interest in crisis theory, Kuruma
concentrated on the history of political economy, particularly the Physiocratic and Classical schools. In 1923, he began teaching a course on the
history of political economy at Doshisha University in Kyoto, which had
been arranged by Kushida and Hajime Kawakami (18791946).3 Kurumas
earliest articles for the Institutes theoretical journal also dealt with the
history of political economy, including a 1923 article commemorating the
bicentennial of Adam Smiths birth and a 1924 article entitled He geru no
tetsugaku shi to marukusu no keizaigaku shi (Hegels History of Philosophy and Marxs History of Political Economy). This period of research
culminated in a series of articles on the history of political economy
published in Kawakamis journal Shakai mondai koza from 1926 to 1927.
During his early years at the Ohara Institute, Kuruma devoted a considerable amount of energy to translation work. In addition to translating
various parts of Theories of Surplus Value in connection to his study of
Quesnay, Smith, and Ricardo, Kuruma co-translated Marxs On the Jewish
Question and translated works by a number of Marxists, including Rosa
Luxemburg, Rudolf Hilferding, Karl Kautsky, and August Thalheimer.
To aid his research, he began jotting down important passages from the
writings of Marx and others on note cards, organized under different topics.
This collection quickly expanded, and Kuruma kept the note cards at the
Ohara Institute for his own use and that of his colleagues. It was during his
early years at the Institute that Kuruma married Kikuyo Miyake, another
native of Okayama. A few years after their marriage, the couple experienced
tragedy when their nearly one-year-old son and two-year-old daughter both
died of illness in 1927.
284
With the approach of the new decade, Kuruma began to devote more time
to the study of crisis. This issue was already taking on practical signicance
in Japan following the outbreak of a major economic crisis in 1927. In his
rst article on the subject, Kyo ko kenkyu% joron (An Introduction to the
Study of Crisis), published just one month before the 1929 Wall Street
Crash, Kuruma expresses a keen awareness of the gravity of the upcoming
global crisis. He provides an overview of various theories of crisis, from
Sismondi to Rosa Luxemburg and Lenin, stressing the need to prepare
theoretically for the upcoming global crisis and clearly noting that this new
period of crisis will probably once again take the form of a world war; but
even prior to this it will likely assume the form of an economic crisis.4
Understanding the phenomenon of crisis is no easy task, according to
Kuruma, as it requires the deepest understanding of capitalism itself. He
repeatedly emphasized Marxs view of crisis as the collective or concentrated
explosion of all the contradictions inherent to capitalist production. To
concretely grasp crisis, therefore, it is necessary to uncover these contradictions and the relations between them, clarify each as a moment within
a totality, and nally elucidate the processes leading up to their explosion as
an actual crisis. He felt that crisis theory, as the clarication of capitalisms
essential contradictions, is central to Marxs overall investigation of
capitalism (his critique of political economy). Kuruma sought to understand how the theory of crisis ts into Marxs overall plan for his critique of
political economy, and he discusses this in the 1930 article Marukusu no
kyo ko ron no kakunin no tame ni (An Inquiry into Marxs Theory of
Crisis). Kuruma considers how, if at all, Marxs plan changed over the years
through an examination of his discussion of the plan in correspondence and
other writings, while also considering the views of Henryk Grossman,
Robert Wilbrandt, and others on this issue.5
In the rst half of the 1930s, Kuruma continued to publish articles on
crisis theory in the Ohara Institutes journal. In 1936, Kuruma and his wife
were dealt another blow when their eldest son died just before his sixth
birthday. That same year, Kuruma and his family moved from Osaka to
Tokyo when the Ohara Institute transferred its ofces there. The move
coincided with a signicant curtailment of the Institutes activities for both
nancial and political reasons. In the late thirties, there was a marked drop
in the number of Kurumas articles and translations, reecting the increased
restrictions placed on leftwing thought in Japan. The state had given Marxist intellectuals relatively free reign throughout the twenties at least
compared to the draconian tactics applied to deal with trade-union leaders
and leftwing political activists but by the end of the 1930s dissent in any
285
form was no longer tolerated. The Ohara Institute did manage to continue
its activities, even under the authoritarian wartime government, but it was
no longer possible for researchers to openly discuss the ideas of Marx.
During the war years, Kuruma spent much of his time studying the theory
of money, particularly the phenomenon of ination, based on an awareness
that Japans defeat would inevitably usher in a period of rampant ination.
He compiled notebook after notebook on the topic of ination, lled with
passages from various authors and his own margin notes and analysis.
Kurumas wife Kikuyo did not survive these grim war years. She died in
December 1944, at the age of forty-two. The war had a major impact on the
Ohara Institute, quite literally, when a U.S. air raid on May 24, 1945
destroyed its ofces. Along with many of the Institutes books, the note
cards Kuruma had been compiling for nearly a quarter of a century went up
in smoke. Characteristically, though, he started over from scratch, once
again patiently writing down useful passages.
ZO
UNO
2. POSTWAR DEBATE WITH KO
The end of the war lifted a tremendous weight from the shoulders of Marxist
scholars, and despite the dire economic situation, the immediate postwar
period was characterized by a dynamic optimism, with the explosive growth
of the trade union movement and expanding inuence of the JCP among
students and intellectuals. Kuruma himself supported the JCP after the war,
although he was never a Party ideologue or activist.6 In this period, Kuruma
found himself quite busy as the new Director of the Ohara Institute, which
proved a difcult task when the rampant ination he had anticipated
became a reality. The nancial problems of the Institute were eventually
overcome in 1949 when it became a part of Hosei University, a move
facilitated by Kuruma, who had joined the universitys faculty three years
earlier.
Despite his responsibilities as Director, Kuruma continued his own
research, including the study of ination. In 1946, he published an inuential article on this topic in the journal Kaizo, entitled Chingin neage to
infure shon (Rise in Wages and Ination), refuting the idea being propagated at the time that ination in Japan was the result of wage rises. During
this postwar period, Kuruma taught courses on the history of political
economy at Hosei and a number of other universities, and he revised his
prewar articles on the subject, which resulted in the book Keizaigaku shi
(History of Political Economy), published in 1948. The following year his
286
prewar articles on crisis were collected in a book entitled Kyoko ron (Theory
of Crisis).
Kuruma is perhaps best known, however, for the book Kachi keitai ron to
kokan katei ron (Theory of the Value-Form and Theory of the Exchange
Process).7 Published in 1957, it is a collection of four articles in a series of
the same title, three of which appeared at the beginning of the 1950s. As the
title suggests, Kuruma examines Marxs theory of the value-form in Capital
(Section three of Chapter one) and his theory of the exchange process
(Chapter two), and the relation between them. The idea for the articles
emerged from Kurumas participation, along with a dozen or so other
Marxist scholars, in a series of monthly seminars in 1947 on Marxs Capital.
During one seminar, a debate arose regarding whether Marx had been
correct to abstract from the existence of the commodity owner when
discussing the value-form. Ko zo Uno (18971977) sparked this debate when
he insisted that the theory of the value-form cannot be understood without
taking into consideration the commodity owner who decides which
commodity will be in the equivalent form. Most of the seminar participants disagreed with Unos view, and Kuruma took the lead in criticizing it.
He pointed out that the theoretical question pertaining to the value-form is
the mechanism of value-expression, where the commodity in the relative form
expresses its value in the use-value of the commodity in the equivalent form.
Understanding this expression of value is a separate issue from considering
how a given value-equation is created through the desire of a commodity
owner for a particular commodity. Kuruma emphasized that the theory of
the value-form can only be understood when the value-equation is taken as
a given and then analyzed, which means abstracting from the question of the
commodity owners existence.
Kuruma reached a clearer understanding of how the various theoretical
tasks in Part one of Capital t together by carefully reading the transcript of
the seminar discussions, which was published in the journal Hyoron and
later as a book, and by critically examining the views expressed by Uno
during the seminars and in his subsequently published books. In 1950 and
the following year, Kuruma presented a series of three articles in the Hosei
University journal Keizai shinrin, entitled Theory of the Value-form and
Theory of the Exchange Process. In the articles, he criticizes Unos idea
that Marx had abstracted too far in his theory of the value-form, and
Kuruma dissects the three main grounds of Unos argument. After a period
of illness, he wrote a nal article in 1956 that summarized his views on the
relation between Section three (value-form) and Chapter two (exchange
process) of Capital. Kuruma notes in the article that Marx provides an
287
important hint regarding the theoretical tasks of Part one of Capital when
he writes, in Chapter two: The difculty lies not in comprehending that
money is a commodity, but in discovering how, why, and through what a
commodity is money.8 For Kuruma the how concerns how the value of one
commodity is expressed in the use-value of another commodity (Section
three), why concerns the reason why value must be expressed in this roundabout way rather than directly as labor-time (Section four), and through
what concerns what it is that generates money as the real resolution of the
contradiction inherent to the commodity as a unity of use-value and value
(Chapter two). Kuruma discusses each of these three theoretical questions,
devoting most of his attention to the how and through what questions,
and the relation between them. Uno, for his part, quickly responded to this
criticism in a 1958 article entitled Marukusu no kachi shakudo ron
(Marxs Theory of the Measure of Value). Kuruma eventually offered a
counter-criticism in 1963, in a discussion that was later published in the
journal Shiso under the same title as Unos article.
3. MARX-LEXIKON AND KURUMAS

THEORETICAL APPROACH
In the late fties, Kuruma collaborated on a number of projects, including
the editing of a Das Kapital dictionary published in 1957 and the founding
of the Japan Society of Political Economy the following year. He retired
from his position at Hosei University in 1964 at the age of seventy-one,
although he remained Director of the Ohara Institute for a few more years.
His retirement years proved to be perhaps the most productive of his
entire life.
The year after leaving Hosei University, Naoe Kobayashi, head of the
leftwing publishing house Otsuki Shoten, proposed the idea of publishing a
series of books incorporating the content of Kurumas vast collection of
note cards, which numbered around 10,000 at the time. This proposal would
eventually result in the 15-volume Marx-Lexikon zur Politischen Okonomie,
published by Otsuki Shoten in collaboration with the Ohara Institute for
Social Research, beginning in 1968. Each volume is a collection of passages
from Marx, and to a lesser extent Engels, on a particular theoretical topic,
with the original German on one page and the Japanese translation on the
opposite page. The topics, in the order in which they appeared, are: Competition (1 vol.), Method (2 vols.), Materialist Conception of History
288
(2 vols.), Crisis (4 vols.), and Money (5 vols.) along with a one-volume

Index.
Kuruma organized the passages under headings and subheadings according to his understanding of the various levels of determinations and
categories within Marxs thought, underlining particularly important
sections or terms to emphasize them. Included in each volume was a
fteen to twenty page booklet with a discussion between the editors
regarding the given topic or their editorial approach to it, usually centering
on questions directed to Kuruma.9 He worked tirelessly at the task of
editing the Marx-Lexikon during the last twenty years of his life. Kuruma
had just completed three of the volumes on money in September of 1982
when he was hospitalized for lung cancer. On October 20 of that year, he
died at the age of 89.
Marx-Lexikon characterizes Kurumas approach to the study of capitalism, and here I would like to say a word about that approach. One point
that he repeatedly emphasized, in his writings and conversations, is the
importance of correctly posing a problem. Solving any theoretical problem,
he noted, requires uncovering its essential determinations or essence. To do
this the tool of abstraction must be employed, which involves setting aside
those elements not directly related to the theoretical task at hand. For
example, in Theory of the Value-form and Theory of the Exchange Process, as
noted already, Kuruma indicates how Marx abstracts from the commodity
owners existence to consider the mechanism of value-expression within an
equation between two commodities, thus setting aside one element that is
irrelevant to the task at hand. Kuruma believed that posing a theoretical
question is more than half the battle, since the answer is nearly self-evident if
this has been done correctly. Conversely, it is like casting pearls before
swine, he would say on occasion, to provide an answer to someone who
has not even grasped the question. In Marx-Lexikon, instead of simply
being provided the answers or denitions, as in a dictionary, the reader can
see how Marx posed theoretical questions and grasp the relation between
various concepts and levels of abstraction and determination.
Critics of Kuruma, however, most notably Uno and his followers, labeled
his work a mere interpretation or explanation of Marx, which they
felt was a far more pedestrian undertaking than their own creative or
critical work. This criticism aimed at Kuruma is wrong, I believe, in two
respects. First, although Kuruma made the utmost effort to correctly
understand what Marx had written, he did not engage in the study of Marx
for its own sake, but rather as a means of better understanding capitalism.
He stated this view of Marx and Marxism all the way back in 1925, in the
289
preface to his translation On the Jewish Question, where he wrote: Marxism

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

The same simple goal of better understanding capitalism guided Kurumas
investigation of the history of political economy. And to conclude, I would
like to say a word about his approach to this eld of study and briey
introduce his paper on Ricardo and Smith, which is my translation of the
third chapter of his book Keizaigaku shi (History of Political Economy). In
the preface to the book, Kuruma notes that his aim is not to provide an
exhaustive study of the history of political economy, but rather to focus on
the development of political economy as a science, setting aside whatever is
not essential, He limits his discussion to the doctrines of the Physiocratic
school (Franc- ois Quesnay) and the Classical school (Adam Smith and
290
David Ricardo), viewing the earlier economic doctrines as forming the

prehistory of political economy because they had not yet broken free of
the realm directly pertaining to policy, and even when sharp theoretical
analysis was attempted it did extend beyond a partial analysis. In
approaching his history of political economy as a science, Kuruma is not
interested in merely pointing out that this or that theory was correct or
incorrect, viewing such a descriptive approach as a mere accumulation of
facts, not living knowledge. Instead, he is careful to grasp the development
of economic thought, and the relation of theoretical development to the real
development of capitalism. As he notes in his preface: Political economy
itself is the theoretical understanding of the economy of bourgeois society,
which, far from existing outside of history, is both historical and developmental; it is generated, unfolds, and is transformed. Therefore, to properly
evaluate past economists and more importantly, to learn from them
Kuruma believes it is necessary to bear in mind the developmental stage of
capitalism at the time the economists lived and their general view of
capitalism.
In the rst chapter of his book, Kuruma broadly divides the history of
political economy into three stages in relation to the development of capitalism. The rst stage corresponds to the emergence of capitalism from out
of feudalism, and is represented by the Physiocrats, who viewed capitalism
as a natural order that should replace an articial one (feudalism) that
had become a fetter. Adam Smith belongs to this period to some extent,
but he also has one foot in the next stage. In this second stage, Kuruma says,
the capitalist mode of production had more or less come into existence, but
the contradictions particular to it had yet to be revealed. Ricardo, who is
characterized by a faith in capitalism and an earnest desire to uncover its
laws, is the representative theorist of this stage. Ricardo brings bourgeois
political economy to its highest point, after which it reaches a crossroads at
the third stage, when periodic economic crises and a rising workers movement expose the limitations of capitalism, so that there is a choice, according
to Kuruma, between discarding a capitalist standpoint so that political
economy could become thoroughly scientic or maintaining this standpoint at the expense of science. The former path, needless to say, leads to
Marx, while the latter path leads to the vulgar school of economics.
Kuruma, however, did not have a simplistic or mechanical view of the
relation between the development of capitalism and political economy. He
illustrates the nature of this relation in the rst chapter of his book, offering
the example of Smiths general concept of labor. Kuruma points out that
291
such an abstraction was only possible once labor has actually developed
and differentiated itself so that it exists as a rich totality of diverse types of
labor.10 Smith was thus able to arrive at this concept thanks to capitalism
having developed the social division of labor to a certain level, but this does
not at all diminish his accomplishment. Indeed, Kuruma uses the term
genius to refer to Adam Smith, describing this as the quality of being able
to grasp something that has not developed to the point where the public
has become aware of it. Thus, instead of merely describing the theories of
Smith and Ricardo, or pointing out the degree of their correctness, Kuruma
explains the historical and logical reasons underlying their theoretical
achievements as well as their errors and contradictions. And based on this,
we can better appreciate how Marx moved political economy forward
overcoming the impasse the Classical economists eventually reached.
Kurumas criticism of the Classical school of political economy, in addition
to bringing the key ideas of Smith and Ricardo into focus, contributes to an
understanding of the fundamental concepts of Marx. In particular, Kuruma
touches on how concepts developed by Marx, such as value, surplus-value,
prot, and production price, differ from similar conceptions of Smith
and Ricardo. In comparing Marx to his predecessors, Kuruma repeatedly
emphasizes that whereas Smith and Ricardo were able, on occasion, to uncover the essence of things, they had difculty explaining complex phenomena
on the basis of this essential understanding. In the thought of Smith and
Ricardo, many of the mediating points between an abstract concept and
concrete reality are missing, resulting in the tendency to either mechanically
apply the essential concept to directly explain concrete reality, or abandon the
essential theory altogether to merely describe phenomena as they appear.
Ricardo, for instance, was unable to ll in the mediating points between the
concept of value and the concrete phenomenon of production price, often
treating the two as synonymous. Smith, similarly, uses the term prot to
refer to both surplus-value (which he occasionally grasps, albeit hazily)
and average prot. This absence of developmental links between the core
concept and its concrete manifestations is both a reection and an outcome of
their imprecise use of terminology. Kuruma, in the process of criticizing the
Classical school, notes how Marx carefully distinguishes between levels of
abstraction, using different terms in line with these different levels, thus lling
in all of the mediating points between an abstract concept and the concrete
reality which seems at rst glance to contradict it.
Thus, in addition to examining in detail the doctrines of the Classical
school and introducing some of Marxs fundamental concepts, Kurumas
292
paper outlines the main characteristics of Marxs scientic method. For

these reasons, Kurumas study of the Classical school although written
over fty years ago remains valuable today.
5. NOTE ON THE TRANSLATION

This paper is a translation of the third and nal chapter of Kurumas book
Keizaigaku shi (History of Political Economy), rst published in 1948
by Kawade Shobo . Iwanami Shoten published an expanded edition in 1954
under the same title, which included Kurumas original book (with additional endnotes) as Part one and a Part one by the economist Yoshiro
Tamano i (19181985) dealing with the period from the disintegration of the
Ricardian school and emergence of vulgar political economy up to the
appearance of Marx. Iwanami Shoten released a new edition of the book in
1977, but the only changes made were the use of newer Japanese translations
of passages quoted from the works of Smith, Ricardo, and Marx, and
simplied Kanji characters. My translation is based on this 1977 edition.
The English translation differs somewhat from Chapter three of
Kurumas book (Classical Political Economy: Smith and Ricardo). In
addition to minor changes, such as merging or dividing paragraphs, the
following modications have been made. Section four (Value and Production Price) has been divided into three subsections and a new fth section
entitled Impasse of the Classical School. The opening paragraph in
Section one has been slightly reworded and an additional sentence added to
the nal paragraph of the same section, in order for Kurumas third chapter
to better stand on its own as an independent paper. A number of quotations
from Smith included in the Notes were replaced by a page number reference
in brackets, and in one case a quotation has been moved to the endnotes
from the main text (Note 7). Some quotations from Smith in the main body
that were repeated by Kuruma have been deleted, which made it possible to
trim a long quotation from Chapter ve of The Wealth of Nations (beginning with Every man is rich or poor) in Section 2.1. (It may be benecial,
however, to examine the rst seven paragraphs of Chapter ve of Smiths
work, originally quoted, when reading this part of Kurumas paper.)
Finally, some less essential Notes have been deleted, including those offering
commonly available biographical information on Smith and Ricardo. I trust
that the changes made have resulted in an easier to read text or at least
have not altered the meaning in any signicant way.
293
NOTES
1. To avoid possible confusion, Japanese names are written with the surname last.
2. At the time Kuruma was a student, economics courses were taught in the
faculty of law because an independent faculty of economics had yet to be established.
3. Kushida was Kawakamis student at Kyoto Imperial University, but he converted to Marxism before Kawakami did. Kushidas criticism of his former teacher
was instrumental in Kawakamis own conversion from bourgeois economics to
Marxism. A short biographical sketch I wrote on Kawakami is available on the
Marxism in Japan page of the Marxist Internet Archive (http://marxists.org/
subject/japan/index.htm) along with a translation of one of his articles. Interested
readers can also consult the English biography on Kawakami by Gail Lee Bernstein:
Japanese Marxist: A Portrait of Kawakami Hajime, 18791946.
4. My translation of Kyo ko kenkyu% joron is available on the Marxism in
Japan page of the Marxist Internet Archive.
5. In investigating Marxs plan for a critique of political economy, Kuruma was
operating under the handicap that Grundrisse, which was not published until 1941,
was unavailable to scholars at the time. It was not until Dietz Verlag published a new
edition in 1953 that the book was widely available in Japan.
6. Situating Kuruma politically is somewhat difcult. In the prewar period,
Kuruma had closer personal relations with scholars in and around the Ohara Institute who can broadly be classied within the Ro no school. This tendency was
opposed to the JCP-aligned Ko za school and many of its members went on to
support the leftwing of the Socialist Party after the war. Kuruma does not t
squarely within the Ro no school, however, because he did not participate in the
prewar debate between the two schools of thought, which centered on the developmental history of capitalism in Japan and the nature of the upcoming revolution. (For more on this debate, readers can consult Marxism and the Crisis of
Development in Prewar Japan by Germaine A. Hoston.) After the war, Kuruma seems
to have remained indifferent to the lines dividing Marxist intellectuals in Japan. In
editing Marx-Lexikon zur Politischen Okonomie, for instance, two of Kurumas
main collaborators were the Ko za school economist Seijiro Usami (19151997) and
shima (19131984). The impression some have of
Ro no school economist Kiyoshi O
Kuruma as a JCP scholar is reinforced by the fact that he was opposed to the
ideas of Ko zo Uno (18971977), who was embraced in the late fties and sixties by
the anti-JCP New Left. But even in this case, Kuruma maintained cordial relations
with Uno who was another native of Okayama and had been connected to the
Ohara Institute and he did not criticize Uno from the standpoint of defending
the JCP.
7. I have translated Kurumas Kachi keitai ron to kokan katei ron into English and
hope to eventually have it published (in some form or another).
8. The original German wie, warum, wodurch Ware Geld ist is mistranslated in
the English editions of Capital. In the Penguin Classics edition, for example, this is
translated as, how, why and by what means a commodity becomes money.
9. For a better idea of what these conversations were like, readers can consult
the translations of the discussions for the two volumes on Method, available on
the Marxism in Japan page of the Marxist Internet Archive.
294
10. Kuruma adds, in this rst chapter of History of Political Economy, that this is
the case for any abstract concept, which can only be established once a given thing
has developed and differentiated itself so that it exists as a rich totality with manifold
aspects.
ACKNOWLEDGMENTS
In translating this and other works by Samezo Kuruma, I have enjoyed the
kind assistance of his son, Dr. Ken Kuruma. As a Marxist economist
himself, who taught at Rikkyo University until his recent retirement,
Dr. Kuruma was able to patiently explain many passages in his fathers book
that I found difcult to understand. Thanks to our frequent discussions,
stimulated by the delicious Japanese sweets he provided, I was able to gain a
clearer image of his father as a person and better understand his scholarly
approach. Dr. Kuruma also introduced me to his friend Dr. Teinosuke Otani,
who recently retired from the Faculty of Economics at Hosei University
and continues his work as an editor of the Marx-Engels-Gesamtausgabe
(MEGA). Dr. Otani provided me with invaluable advice from his standpoint as an economic theorist, translator, and editor of Samezo Kurumas
Marx-Lexikon zur Politischen Okonomie. I must note, of course, that
neither is responsible for whatever errors may remain in my translation.
Finally, I would like to express my sincere gratitude to Dr. Paul Zarembka
for publishing this paper by Samezo Kuruma and for his help in preparing
the manuscript. I hope that the publication will encourage a greater
interest in Kurumas work outside of Japan, and perhaps inside the country as well.
A CRITIQUE OF CLASSICAL
POLITICAL ECONOMY
Samezo Kurumay (Translator: E. Michael Schauerte)
ABSTRACT
This paper is a translation of the third and most important chapter of
Keizaigaku shi (History of Political Economy) by the Japanese Marxist
economist Samezo Kuruma (18931982), first published in 1948. Kuruma
discusses in detail the achievements and limitations of the Classical school
of political economy. He examines the fundamental ideas of Adam Smith
and David Ricardo regarding the determination of commodity value and
the source of surplus-value, and then looks at how these ideas are connected to production price and profit. Kuruma notes that Smith and
Ricardo managed to arrive at the essential labor theory of value, but that
neither could correctly apply this theory to adequately explain phenomena
in the realm of competition either abandoning the labor theory of value
altogether to embrace a composition theory of value (Smith) or directly
applying the theory to explain phenomena without grasping the intermediary processes of development (Ricardo). Kurumas critique of Smith
and Ricardo highlights the achievement of Marx in overcoming the limitations that ultimately led to the breakdown of the Classical school of
political economy.

ISSN: 0161-7230/doi:10.1016/S0161-7230(07)24009-X
295
296
KURUMA (TRANSLATOR: E. MICHAEL SCHAUERTE)

SAMEZO
1. INTRODUCTION
If we consider what sets the Classical school of political economy apart from
preceding economic doctrines, we nd that, just as the Physiocrats went
beyond Mercantilism by shifting the investigation of surplus-value from the
realm of circulation to that of direct production, thereby putting in place a
foundation to analyze capitalist production, the Classical economists went
beyond Physiocracy by adding to this foundation the concept of labor in
general. The foundation grasped by the Physiocrats was thus freed of its
agriculture-centered limitations, making it possible to analyze capitalist relations of production to the greatest extent possible from a bourgeois perspective. This achievement corresponds to a period in which the basic
relations of capitalist production had already been established, but the
contradictions inherent to these relations had yet to be exposed.
The most striking characteristics of the Classical school are a rm belief in
the methods of capitalist production, an earnest desire to clarify the laws of
capitalism, a scientic attempt to analyze phenomenal forms and reduce
them to their internal unied relations, and an effort to posit these internal
relations as natural universal principles from which deductions can be made.
Given this approach, and the conditions of the time, the Classical economists were able to develop the science of political economy to the highest
level attainable from a capitalist outlook. The outstanding representatives of
Classical political economy, needless to say, are Adam Smith (The Wealth of
Nations) and David Ricardo (On the Principles of Political Economy and
Taxation). In the case of Smith, who was the rst to systematize Classical
political economy, this school of thought had yet to appear in its pure form.
Alongside the Classical form there exists the approach of directly observing
phenomena, which characterized the previous stage of political economy.
Marx notes, for instance:
Political economy had achieved a certain comprehensiveness with Adam Smith; to a certain
extent he had covered the whole of its territory y Smith himself moves with great naivete
in a perpetual contradiction. On the one hand he traces the intrinsic connection existing
between economic categories or the obscure structure of the bourgeois economic system.
On the other, he simultaneously sets forth the connection as it appears in the phenomena of
competition and thus as it presents itself to the unscientic observer just as to him who is
actually involved and interested in the process of bourgeois production. One of these
conceptions fathoms the inner connection, the physiology, so to speak, of the bourgeois
system, whereas the other takes the external phenomena of life, as they seem and appear
and merely describes, catalogues, recounts and arranges them under formal denitions.
With Smith both these methods of approach not only merrily run alongside one another,
but also intermingle and constantly contradict one another. (Marx, 1989, pp. 390391)
A Critique of Classical Political Economy
297
Here we have the reason why later generations of economists have universally praised Smith and subsequent schools of political economy can all be
traced back to him. The system of vulgar political economy was established by severing the phenomenon-centered approach of Smith from his
scientic approach turning what had been naivete in the case of Smith into
an intentional papering over of the contradictions of capitalist production.
Meanwhile, there were those, most notably Ricardo, who puried Smiths
scientic aspects, separating these aspects from the observation of phenomena and making them as rigorous and complete as is possible from a capitalist perspective. Marx describes the task carried out by Ricardo as
follows:
The basis, the starting-point for the physiology of the bourgeois system for the understanding of its internal organic coherence and life process is the determination of
value by labor-time. Ricardo starts with this and forces science to get out of the rut, to
render an account of the extent to which the other categories the relations of production and commerce evolved and described by it, correspond to or contradict this
basis, this starting-point; to elucidate how far a science which in fact only reects and
reproduces the manifest forms of the process, and therefore also how far these manifestations themselves, correspond to the basis on which the inner coherence, the actual
physiology of bourgeois society rests or the basis which forms its starting-point; and in
general, to examine how matters stand with the contradiction between the apparent and
the actual movement of the system. This then is Ricardos great historical signicance for
science. (Marx, 1989, p. 391)
In this paper, which traces the process of theoretical developmental within

Classical political economy, I will consider two main problems: (1) value
and surplus-value, and (2) average prot and production price. The rst is
directly connected to the Classical schools theoretical foundation, while the
second is the most important application of this fundamental theory to
explain concrete reality. The views of Smith and Ricardo regarding these
two sets of problems will be examined, clarifying the similarities and differences in their positions as well as the theoretical contradictions that neither
was able to overcome.
2. VALUE AND SURPLUS-VALUE

2.1. Determination of Value by Labor
The Wealth of Nations begins with an explanation of the benets of the
division of labor as the fundamental source of improvements in the productive power of labor. In the mind of Smith, who believed that private
298

SAMEZO
ownership is a natural, supra-historical system based upon human nature, a

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

where every man lives by exchanging, and the most fundamental law of
such a society is the law that governs exchange. Therefore, after discussing
the inconvenience of barter and the need for money to mediate exchange,
and noting the historical development of various types of money, Smith
concludes Chapter four by stating the next problem to consider:
What are the rules which men naturally observe in exchanging [goods] either for money
or for one another, I shall now proceed to examine. These rules determine what may be
called the relative or exchangeable value of goods. (Smith, 1970, p. 131)
Smith, in order to investigate the principles which regulate the exchangeable value of commodities, says that he will rst seek to explain what is
the real measure of this exchangeable value; or, wherein consists the real
price of all commodities (Smith, 1970, p. 132). This he sets out to accomplish in Chapter ve, where he writes:
299
Every man is rich or poor according to the degree in which he can afford to enjoy the
necessaries, conveniences, and amusements of human life. But after the division of
labour has once thoroughly taken place, it is but a very small part of these with which a
mans own labour can supply him. The far greater part of them he must derive from the
labour of other people, and he must be rich or poor according to the quantity of that
labour which he can command, or which he can afford to purchase. The value of any
commodity, therefore, to the person who possesses it, and who means not to use or
consume it himself, but to exchange it for other commodities, is equal to the quantity of
labour which it enables him to purchase or command. Labour, therefore, is the real
measure of the exchangeable value of all commodities.
The real price of everything, what every thing really costs to the man who wants to
acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the
man who has acquired it, and who wants to dispose of it or exchange it for something
else, is the toil and trouble which it can save to himself, and which it can impose upon
other people. What is bought with money or with goods is purchased by labour as much
as what we acquire by the toil of our own body. That money or those goods indeed save
us this toil. They contain the value of a certain quantity of labour which we exchange for
what is supposed at the time to contain the value of an equal quantity. Labour was the
rst price, the original purchase-money that was paid for all things. It was not by gold or
by silver, but by labour, that all the wealth of the world was originally purchased; and its
value, to those who possess it, is precisely equal to the quantity of labour which it can
enable them to purchase or command. (Smith, 1970, p. 133)
At the beginning of this passage, Smith expresses his views on the fundamental problem regarding the value of a commodity. He discusses how, with
the development of commodity production, wealth and the labor that produces it undergo a revolutionary change so that everyones needs are satised through the products of other peoples labor, rather than directly
through the products of their own labor. With this change, labor is no
longer performed to create use-values for oneself, and the products of a
persons own labor only compose that persons wealth to the extent that
they are exchanged for products of another persons labor, i.e. only as
something that creates exchange-value. Smith thus argues that wealth is
made up of exchange-values, and that wealth-creating labor is labor that
creates exchange-values. He then goes on to discuss what determines and
measures exchange-value.
Smiths discussion of these problems not only lacks a penetrating logic,
which results in confusion, but also clearly entails a confusion of concepts,
so that he slips into a serious contradiction. This is not the simple outcome
of some illogical tendency within his thought. Rather, it stems from an
attempt to understand the internal relations of commodity production from
the outlook of capitalists; so in a sense, the contradiction that he slips into is
a testament to his outstanding talents. The ultimate source of Smiths error
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SAMEZO
is the view of commodity production as the sole form of social production.

From the outset, he does not consider the possibility that a form other than
commodity production might exist, nding it perfectly natural that, when
the division of labour has been once thoroughly established y every man
thus lives by exchanging, or becomes in some measure a merchant, and the
society itself grows to be what is properly a commercial society (Smith,
1970, p. 126). Smith views commodity production as the sole form of social
production, and is thus unable to grasp its particular character as one type
of social production.
Commodity production is social production carried out under a system of
private ownership by private producers who are independent of each other.
The labor of the producers, which is private labor, directly speaking, only
rst takes on an independent social form in the relation of productexchange. In exchange, the products of the producers labor are mutually
equated as value, regardless of their manifold shapes as use-values. The
various real differences between types of labor as use-value-producing labor
are abstracted from when considered as value-forming labor. In the case of
value-forming labor, we are only dealing with a certain quantity of the
simple expenditure of indiscriminate human labor, or general human labor
in abstraction from concrete differences. And it is in the form of value as
the crystallization of this general human labor, i.e. in the material form of
the value of a product, that a commodity producers labor rst acquires
signicance as a certain quantity of the total labor-time expended by society
to satisfy its needs.2
Bourgeois economists, however, starting with Smith, failed to grasp the
character of value as the specic social form of labor particular to commodity production. Economists were aware that the value of a commodity is
in fact labor, but they did not understand why labor, instead of appearing as
such, manifests itself in the form of the value of the product; in the peculiar
form of being an attribute of a thing, which is an upside-down form that
requires scholars to uncover and demonstrate the substance of value. Not
only did they fail to understand this pivotal point, it was not even posed as
a problem to begin with. This was the inevitable outcome of viewing commodity production as the natural form of social production, equating it with
social production itself. As Marx notes:
Political economy has indeed analyzed value and its magnitude, however incompletely,
and has uncovered the content concealed beneath these forms. But it has never once
asked the question why this content has assumed that particular form, that is to say, why
labor is expressed in value, and why the measurement of labor by its duration is expressed in the magnitude of the value of the product. These formulas, which bear the
301
unmistakable stamp of belonging to a social formation in which the process of production has mastery over man, instead of the opposite, appear to the political economists bourgeois consciousness to be as much a self-evident and nature-imposed
necessity as productive labor itself. (Marx, 1976, pp. 173175)
Bearing in mind this character of value as the specic social form of commodity-producing labor, which was overlooked by Smith (and every other
bourgeois economist), I want to further consider Adam Smiths theory of
value presented in Chapter ve of his book. Smith, as we have seen, views
wealth and the labor that produces it as undergoing an essential change with
the development of commodity production (although he uses the expression:
development of the division of labor). It is immediately apparent, however, that he sees no difference between the command or purchase of the
product of another persons labor, and the command or purchase of the
labor of another person. For instance, Smith clearly asserts that:
The power which that possession immediately and directly conveys to him, is the power
of purchasing; a certain command over all the labour, or over all the produce of labour,
which is then in the market. His fortune is greater or less, precisely in proportion to the
extent of this power; or to the quantity either of other mens labour, or, what is the same
thing, of the produce of other mens labour, which it enables him to purchase or command. (Smith, 1970, p. 134)
In one respect, Smiths confusion regarding the two ideas is a manifestation

of his insight, insofar as it stems from the fundamental conviction that the
relation of commodity exchange is ultimately a relation of labor-exchange.
Indeed, in claiming that a commodity producers wealth depends on the
quantity y of the produce of other mens labour, which it enables him
to purchase or command, or a certain command over all of the labour y which is then in the market, Smith not only distinguishes between
living labor and the labor objectied in a product but also asserts that the
labor of a commodity producer only forms that producers wealth and
constitutes exchange-value when it can be substituted for the labor of every
other person. (And Smith seems to be saying this from the perspective that
an exchange for the product of another persons labor is ultimately an
exchange for that persons labor.) He argues that a producers labor must be
capable of being substituted for social labor in general; not in its specic
concrete shape of producing a use-value, but in terms of the general quality
it has in common with every other sort of labor.3 Of course, Smith did not
fully realize the signicance of this view.
Despite clarifying that the commodity-exchange relation comes down to
an exchange of labor, Smith is unaware of the particularity of commodity
production where the relation of labor-exchange is constituted through the
302

SAMEZO
exchange of products of labor. At the same time, even though he perceives

that a commodity producers labor only forms the value of the commodity
(thereby creating the producers wealth) to the extent that it is equal to the
labor of other people, Smith overlooks the particular manner in which labor
is equated. He thus mistakes an objective equalization of different types of
labor, forcefully carried out in a social process that takes place apart from
human consciousness, as a subjective act based on a certain degree of toil
and trouble that equates the labor of different people. Moreover, Smith
fails to understand that it is an inevitable outcome of the nature of value
itself that the magnitude of a commoditys value is measured in the quantity
of another commodity (and ultimately in the money-commodity gold or
silver), rather than by the labor-time actually necessary for its production.
Smith instead assumes that this is just a practical custom carried out for the
sake of expediency because of the difculty of actually ascertaining the
proportion between different types of labor, or because the greater part of
people too understand better what is meant by a quantity of a particular
commodity, than by a quantity of labour as one is a plain palpable object and the other an abstract notion, which, though it can be made
sufciently intelligible, is not altogether so natural and obvious (Smith,
1970, p. 135).
Smith thus completely fails to grasp the connection between a commoditys value, which is the quantity of labor necessary for its production, and
its exchange-value (or value-form, to use Marxs more precise terminology).
In the case of the value-form, a commoditys value is expressed in the
quantity of another commodity, and this develops into the money-form or
price-form where value is expressed as such-and-such yen. In other words,
Smith does not understand why despite the fact that value consists of the
quantity of labor necessary for a commoditys production the value of a
commodity is expressed in the quantity of another commodity rather than
being expressed as labor-time. As a result, he also fails to grasp the necessity
of money. This is the source of Smiths inability to understand the relation
between value and the value-form, his confusion of the two, as well as his
delusional search for an invariable measure of value that stems from this
confusion.
Here, we also have the basis for Smith overlooking the object-like [taishoteki] character of value4 and the source of his confusion between objectied
labor and living labor, as well as his mistake of viewing the commonality of
value-forming labor in terms of an individualistic, subjective quality. These
points are related to the decisively mistaken doctrine, later inherited and
developed by the vulgar school of economics (particularly Malthus), that
303
value is determined by the value of labor; i.e. the idea that labor is an
invariable measure of value because its own value does not change.
All of the defects in Smiths grasp of value are on display in the following
paragraph from Chapter ve, where, after having discussed how money is
generally used as the measure of value, he asserts:
Gold and silver, however, like every other commodity, vary in their value y . But as a
measure of quantity, such as the natural foot, fathom, or handful, which is continually
varying in its own quantity, can never be an accurate measure of the quantity of other
things; so a commodity which is itself continually varying in its own value, can never be
an accurate measure of the value of other commodities. Equal quantities of labour, at all
times and places, may be said to be of equal value to the labourer. In his ordinary state of
health, strength and spirits; in the ordinary degree of his skill and dexterity, he must
always laydown the same portion of his ease, his liberty, and his happiness. The price
which he pays must always be the same, whatever may be the quantity of goods which he
receives in return for it. Of these, indeed, it may sometimes purchase a greater and
sometimes a smaller quantity; but it is their value which varies, not that of the labour
which purchases them. At all times and places that is dear which it is difcult to come at,
or which it costs much labour to acquire; and that cheap which is to be had easily, or
with very little labour. Labour alone, therefore, never varying in its own value, is alone
the ultimate and real standard by which the value of all commodities can at all times and
places be estimated and compared. It is their real price; money is their nominal price
only. (Smith, 1970, pp. 135136)
We can see how Smiths ideas result in the mistake of regarding labor as a
real measure of value, rather than grasping the labor objectied in a commodity as the measure of value. Instead of labor being the substance of
value, Smith has in mind the labor that a commodity can command or
purchase. The error of this conclusion is immediately apparent. Saying that
a certain quantity of labor is purchased by a given commodity means that
both have been exchanged as equivalents. And the fact that the two are
exchanged as such is naturally premised on the existence of an equal quantity of value in each prior to exchange. Thus, to state that the magnitude of a
commoditys value is determined by the quantity of labor that it can purchase is ultimately the determination of value by value: a circular argument.
Smith would not be subject to this criticism of slipping into a circular
argument if he were saying that the magnitude of a commodity can be
measured by the quantity of gold or silver for which it is exchanged.
His view, however, ultimately comes down to the assertion that labor can
perform the same money-function as gold or silver as a measure of value, so
the question simply becomes whether labor or gold/silver can perform this
function more appropriately. Smith says that labor, in this function, is not
necessarily superior to gold or silver. What he calls the value of labor
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(labor-power) is also determined by the social labor necessary for its production, as in the case of the value of commodities in general. This is the
labor-time necessary for the production of the materials of subsistence for
the worker and his family, which will naturally be inuenced by an increase
or decrease in productive power within the production sphere that produces
these materials. It is only in this sense that labor is able to be a measure of
value, gauging the magnitude of the value of other commodities; that is, to
the extent it is one type of commodity itself whose value uctuates. There is
thus clear conceptual confusion when Smith says that labor in this function labor which is itself a thing of value is the ultimate and real
standard by which the value of all commodities can at all times and places
be estimated and compared5 (Smith, 1970, p. 136). As Marx writes:
What is true of labor itself and consequently of its measure, labor-time i.e. that the
value of commodities is always proportionate to the labor-time realized in them, no
matter how the value of labor may change is here claimed for this changing value of
labor itself. (Marx, 1988, p. 383)
Ricardo had already perceived the error in Smiths conclusion, and his
criticism was the rst theoretical step beyond Smith as well as the starting
point of On the Principles of Political Economy and Taxation. At the beginning of his book Ricardo says that, The value of a commodity, or the
quantity of any other commodity for which it will exchange, depends on the
relative quantity of labour which is necessary for its production, and not on
the greater or lesser compensation which is paid for that labour (Ricardo,
1996, p. 17). He then goes on to criticize Smith:
Adam Smith, who so accurately dened the original source of exchangeable value, and
who was bound in consistency to maintain, that all things became more or less valuable
in proportion as more or less labour was bestowed on their production, has himself
erected another standard measure of value, and speaks of things being more or less
valuable, in proportion as they will exchange for more or less of this standard measure.
Sometimes he speaks of corn, at other times of labour, as a standard measure; not the
quantity of labour bestowed on the production of any object, but the quantity which it
can command in the market: as if these were two equivalent expressions, and as if
because a mans labour had become doubly efcient, and he could therefore produce
twice the quantity of a commodity, he would necessarily receive twice the former quantity in exchange for it.
If this indeed were true, if the reward of the labourer were always in proportion to what
he produced, the quantity of labour bestowed on a commodity, and the quantity of
labour which that commodity would purchase, would be equal, and either might accurately measure the variations of other things: but they are not equal; the rst is under
many circumstances an invariable standard, indicating correctly the variations of other
things; the latter is subject to as many uctuations as the commodities compared with it.
305
Adam Smith, after most ably showing the insufciency of a variable medium, such as
gold and silver, for the purpose of determining the varying value of other things, has
himself, by xing on corn or labour, chosen a medium no less variable. (Ricardo, 1996,
p. 19)
Ricardos correct assertion that the value of every thing increases or decreases in proportion to the quantity of labor expended on its production
freed political economy from the confusion of Smith, thus establishing the
fundamental principle of political economy. This is the great historical
achievement of Ricardo. However, the confusion within Smiths thought is
rooted in a misconception far more fundamental than Ricardo had imagined. Granted, there is clear confusion in the case of Smith, and by pointing
it out Ricardo took a major step forward. But in thinking that he
could criticize Smith by merely indicating this confusion, Ricardo ends
up exposing the narrowness of his own perspective and the defects in his
understanding of value. He criticizes Smith, saying that if it were indeed true
that the reward of the labourer were always in proportion to what he
produced, then the quantity of labour bestowed on a commodity, and the
quantity of labour which that commodity would purchase, would be equal,
and either might accurately measure the variations of other things, whereas
in fact they are not equal. This simple declaration does not amount to a
critique of Smiths view, however.
Certainly, the reward of the labourer under relations of capitalist production is not in proportion to what he produced, nor is there equality
between the quantity of labour bestowed on a commodity, and the quantity of labour which that commodity would purchase. Thus, if one takes
the relations of capitalist production for granted from the outset, as Ricardo
does, Smiths view must seem thoroughly mistaken. But Smith was not
necessarily concerned with the same thing Ricardo has in mind. In fact,
Smith is superior to Ricardo in terms of correctly being aware that capitalist
production is the outcome of the development of commodity production, so
that an analysis of the relations of capitalist production needs to set out
from an examination of the relations of simple commodity production. It is
for this reason that Smith, in Chapter ve, mainly considers these relations
of simple commodity production. He assumes that the laborer is at the same
time the owner of the conditions of his labor. Based on this assumption, the
laborer is naturally the owner of the products of his labor and the seller of
these products, so that as long as the products are sold at their value, the
reward of the labourer [is] always in proportion to what he produced.
Therefore, under the assumption above, the proposition Ricardo considers
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impossible is not only possible, but in fact a principle, so that his refutation
of Smith loses its basis.
2.2. Exchange of Unequal Quantities of Labor

In the relations of simple commodity production, products of labor belong
in their entirety to the laborer, so that his reward [is] always in proportion
to what he produced and there is quantitative agreement between the
quantity of labour bestowed on a commodity and the quantity of labour
which that commodity would purchase, with either indicating correctly
the variations of other things (Ricardo, 1996, p. 19). Even so, a clear
distinction needs to be made between labor in each of these two cases
because the function performed as a measure of value differs completely in
nature.6 Smith, having failed to clarify the inherent relation between the two
cases, shifts from the relations of simple commodity production to consider
capitalist relations of production, where he perceives that the entire product
of the laborer no longer belongs to him and therefore the quantity of labor
necessary for the production of a commodity and the quantity of labor that
it can purchase are no longer in agreement. Smith thus imagines that the
original determination of value itself the principle that a commoditys
value is determined by the quantity of labor necessary for its production is
no longer valid. In Chapter six, for instance, Smith argues:
In that early and rude state of society which precedes both the accumulation of stock and
the appropriation of land, the proportion between the quantities of labour necessary for
acquiring different objects seems to be the only circumstance which can afford any rule
for exchanging them for one another. If among a nation of hunters, for example, it
usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver
should naturally be worth two deer. It is natural that what is usually the produce of two
days or two hours labour, should be worth double of what is usually the produce of one
days or one hours labour. (Smith, 1970, p. 150)
In other words, despite having asserted that a commoditys value is determined by the labor-time embodied within it, Smith says (as Marx noted with
skillful irony) that the validity of this proposition is limited to a period that
precedes his own, an Eden where, because human beings had yet to consume
the forbidden fruit of prot and rent, the value of a commodity is still
determined by the quantity of labor it contains. Smith notes that, In this
state of things, the whole produce of labour belongs to the labourer; and the
quantity of labour commonly employed in acquiring or producing any
307
commodity, is the only circumstance which can regulate the quantity of

labour which it ought to purchase, command, or exchange for (Smith,
1970, p. 151). And he goes on to write:
As soon as stock has accumulated in the hands of particular persons, some of them will
naturally employ it in setting to work industrious people, whom they will supply with
materials and subsistence, in order to make a prot by the sale of their work, or by what
their labour adds to the value of the materials. In exchanging the complete manufacture
either for money, for labour, or for other goods, over and above what may be sufcient
to pay the price of the materials, and the wages of the workmen, something must be
given for the prots of the undertaker of the work who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in
this case into two parts, of which the one pays their wages, the other the prots of their
employer upon the whole stock of materials and wages which he advanced y .
In this state of things, the whole produce of labour does not always belong to the
labourer. He must in most cases share it with the owner of the stock which employs him.
Neither is the quantity of labour commonly employed in acquiring or producing any
commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, or exchange for. An additional quantity, it is evident, must be due
for the prots of the stock which advanced the wages and furnished the materials of that
labour. (Smith, 1970, pp. 151152)
In short, Smith says that with the accumulation of capital, workers no

longer obtain the entire product of their labor, so the quantity of labor
necessary for production and the quantity of labor that can be commanded (or purchased) no longer coincide. From this fact he concludes
that once capital has been accumulated the quantities of labor necessary for
the production of commodities no longer determine their exchange. This
conclusion, however, is clearly mistaken. Smith should have concluded, like
Ricardo, that because the quantity of labor necessary for production and
the quantity of labor that can be commanded no longer coincide under such
circumstances, the latter is no longer the correct measure of value. The
changed state of circumstances has an impact on the latter, not the former,
because the determination of the magnitude of value is completely separate
from the question of how this magnitude is then divided. Ricardos tremendous achievement was to have consistently maintained the fundamental
proposition that a commoditys value is determined by the labor-time necessary for its production, without becoming confused by the situation
encountered in the case of production prices under capitalism.
Still, it should be noted, the confusion and contradiction within Smiths
thought has deeper roots than Ricardo had imagined. Certainly when two
normal commodities are exchanged there is nothing at all problematic about
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Ricardos position, but what had bafed Smith is the exchange between
capital and labor particular to bourgeois society. A capitalist hires workers
and provides them with wages (money) in return for the labor they provide
him. In this case, however, the value that the workers create for the capitalist
through their labor, as Smith emphasizes and Ricardo also recognizes, is
resolved into two parts, of which the one pays their wages, the other the
prots of their employer upon the whole stock of materials and wages which
he advanced. In other words, the time that exceeds the labor-time included
in the money wage received by the workers is labor performed for the
capitalist, constituting the prot component. Therefore, we ultimately have
an exchange of more living labor for less objectied labor. Does this fact
contradict the original law of value? This doubt was the fundamental cause
of Smiths confusion. But Ricardo is quite unaware of this. He does not even
notice that it represents an important question. With his attention focused
solely on the exchange between two regular commodities, Ricardo is satised to be aware that the distribution of a commoditys value between
worker and capitalist is not related to the determination of this value.
This question, which had confused Smith and was later overlooked by
Ricardo, ultimately became the basis for a major deadlock within Classical
political economy. This was the most important factor along with the
problem of the average rate of prot and production price determining the
theoretical collapse of this school of thought. The subsequent vulgar school
of political economy, needless to say, was also unable to solve this problem
that had perplexed the Classical economists. In fact, the inability of the
Classical school to solve this problem was a major turning point that led
bourgeois political economy to reject the original theory of value, replacing
it with a completely vulgar system where phenomena are supercially explained. The problem was only solved with the arrival of Marx, who uncovered that it is labor-power not labor that the capitalist purchases.
Labor-power, like any other type of commodity, has a use-value and value,
and Marx has the following to say about its value:
In so far as it has value, [labor-power] represents no more than a denite quantity of the
average social labor objectied in it. Labor-power exists only as a capacity of the living
individual. Its production consequently presupposes his existence. Given the existence of
the individual, the production of labor-power consists in his reproduction of himself or
his maintenance. For his maintenance he requires a certain quantity of the means of
subsistence. Therefore the labor-time necessary for the reproduction of labor-power is
the same as that necessary for the production of those means of subsistence; in other
words, the value of labor-power is the value of the means of subsistence necessary for the
maintenance of its owner. (Marx, 1976, p. 174)
309
What, then, is the use-value of labor-power? Labor-power, as its name suggests, is the capacity to labor, so its use-value is the actualization of this
capacity, which is to say, labor itself. At the same time, the labor that
produces a commodity involves the operation of creating both use-value and
value, so the labor-power commodity, along with its own value, has the
special use-value of being able to create new value totally unrelated to its
own inherent value. Here we have the fundamental secret of capitalist production. The fact that a capitalist receives a prot does not run counter to
the law of value, but rather occurs in line with this law. The capitalist buys
labor-power at its value, and then, like the purchaser of a normal commodity, comes into possession of its use-value. As Marx writes:
The use-value of labor-power, in other words labor, belongs just as little to its seller as
the use-value of the oil after it has been sold belongs to the dealer who sold it. The owner
of the money has paid the value of a days labor-power; he therefore has the use of it for
a day, a days labor belongs to him. On the one hand the daily sustenance of labor-power
costs only half a days labor, while on the other hand the very same labor-power can
remain effective, can work, during a whole day, and consequently the value which its use
during one day creates is double what the capitalist pays for that use; this circumstance is
a piece of good luck for the buyer, but by no means an injustice towards the seller.
(Marx, 1976, p. 301)
2.3. The Source of Surplus-value (and the Concept of Productive Labor)

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

formation of surplus-value. They had a de facto awareness of the exchange
of more labor for less labor, and reduced prot and rent to unpaid labor. It
is here that a contradiction arose within Classical political economy as a
doctrine. This contradiction is manifested in a defective understanding of
surplus-value, which inevitably accompanied their bourgeois perspective,
but at the same time the contradiction is a testament to their greatness
compared to vulgar political economy. This applies in particular to Adam
Smith, who perceived this contradiction and for this precise reason fell
into serious confusion. In many parts of The Wealth of Nations, alongside
completely supercial views, Smith clearly reduces prot and rent to unpaid
labor, reaching the point where, by taking one step further, he could have
established the general category of surplus-labor based on surplus labor.
For instance, in the passage quoted earlier from Chapter six, Smith says
that, The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the
other the prots of their employer upon the whole stock of materials and
wages which he advanced (Smith, 1970, p. 151). Here prot is clearly said
to be one part of the value workers add to the materials. In other words,
workers labor for more than their compensation in wages. And the value
created by this surplus labor forms the employers prot. This same view is
expressed regarding rent:
As soon as the land of any country has all become private property, the landlords, like
all other men, love to reap where they never sowed, and demand a rent even for its
natural produce y . [The labourer] must then pay for the licence to gather [this natural
produce]; and must give up to the landlord a portion of what his labour either collects or
produces. This portion, or, what comes to the same thing, the price of this portion,
constitutes the rent of land. (Smith, 1970, pp. 152153)
Rent, in other words, is just one part of the labor of workers; a part of their
labor that is delivered to the landowner without any compensation.7
Smith clearly states that rent as well as prot are deductions made from the
product of the workers, taken from the value that they have added to the
materials. He views these deducted parts as being made up of the quantity of
surplus-labor performed by the workers over and above their compensation
in wages.
Thus, to follow Smiths line of thinking, the source of both prot and rent
is the surplus labor of workers. The two are deducted parts of surplus-value,
which is itself the concretization of surplus labor. Although not stated explicitly, here we have arrived at a general theory of surplus-value as distinct
from but fundamental to both prot and rent. The next step would be to
311
clearly distinguish this general concept of surplus-value from prot and rent
in order to establish it as a separate category. If Smith had been able to do
this, he at the same time would have better elucidated the nature of prot and
rent, and probably would not have fallen into the fatal contradiction that can
be seen in his subsequent arguments. Setting aside this point for a moment,
however, it must be said that Smiths reduction of prot and rent to surplusvalue (at least in fact), and his reduction in turn of surplus-value to surplus
labor, were tremendous achievements within the history of political economy.
The delusions of the Mercantilists and Physiocrats were completely dissolved.
Smith nally achieved, at least to the extent possible from a bourgeois perspective, what they had searched for but had been unable to attain.
There is no need for a product to be sold above its value because it already
contains a surplus of value that is the outcome of workers surplus labor.8
This surplus-value, moreover, is not limited by any means to agriculture.
Value is the crystallization of indiscriminate average human labor, while
surplus-value is nothing more than one part of this labor that can be obtained anywhere the owner of the conditions of labor exchanges wages
(objectied labor) for living labor.9 This correct understanding of the source
of surplus-value, and as a natural result the understanding that surplusvalue can potentially be generated in any sphere of production, led Smith to
a correct understanding of productive labor. Rather than viewing productive labor as limited to agricultural labor, or as labor that produces export
products, he views it as labor in general that produces surplus-value, with
surplus-value ultimately generated by labor being directly exchanged with
capital. Smith notes:
There is one sort of labour which adds to the value of the subject upon which it is
bestowed: there is another which has no such effect. The former, as it produces a value,
may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his
own maintenance, and of his masters prot. The labour of a menial servant, on the
contrary, adds to the value of nothing. Though the manufacturer has his wages advanced
to him by his master, he, in reality, costs him no expense, the value of those wages being
generally restored, together with a prot, in the improved value of the subject upon
which his labour is bestowed. But the maintenance of a menial servant never is restored.
A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants. (Smith, 1970, pp. 429430)
Smith goes on to write:

But if the quantity of food and clothing, which were thus consumed by unproductive,
had been distributed among productive hands, they would have reproduced, together
with a prot, the full value of their consumption. (Smith, 1970, p. 439)
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We can see that Smith, in dening the concept of productive labor, views it
as either the labor a worker adds, generally, to the value of the materials
which he works upon, that of his own maintenance, and of his masters
prot, as labor through which [an employer] grows rich, or as labor that
reproduce[s], together with a prot, the full value of their consumption.
Particularly in the second passage just cited, productive labor is clearly
described as labor10 that creates value over and above wages, value over
and above the value of the materials of subsistence consumed by the worker,
i.e. a surplus in value (which Smith refers to as prot). Only through
exchange with such labor can a certain value become self-valorizing value
becoming capital. The concept of productive labor thus corresponds to
the concept of capital, and could be referred to as labor that causes value to
become capital, or (from a different aspect) as labor that is directly
exchanged with capital. For Smith, the primary form of surplus-value is
prot, not rent. Unlike the Physiocrats, who said that prot is paid from
rent, Smith says that rent is paid from prot. This is because the capitalist
entrepreneur, whether in the sector of industry or agriculture, directly employs the productive worker and exploits his labor, thereby being the rst to
come into possession of surplus-value. In this sense, and only in this sense,
Smith is justied in referring to surplus-value in the passages above as
prot.
3. SURPLUS-VALUE AND PROFIT

In the discussion of Smiths concept of productive labor, I mentioned that
prot is the primary form of the surplus-value obtained, and that in this
sense we would have to accept his denition of productive labor as labor
that generates prot. But even in this case we must note that prot in the
general sense (i.e. prot as basically equivalent in content to surplus-value)
needs to be distinguished, in terms of form, from surplus-value. Prot is
only a phenomenal form in which surplus-value is manifested, albeit the
primary one. First we must establish the category of surplus-value, and
then we can begin to unfold the category of prot. At the same time, it is
important to remember that prot in the general sense is completely different in substance from prot in the proper sense of the term. Indeed, according to Smiths own theory, prot in the broader or general sense is
subsequently divided into prot and rent. We thus need to clarify the distinction between the following three categories: (1) surplus-value, (2) prot
in the broad sense, and (3) prot in the narrow sense.
313
We have already seen that, despite creating a de facto concept of surplusvalue, Smith was unable to establish it as a single independent concept (as
the natural result of not clarifying the concept of labor-power). He confused
surplus-value with prot in the broad sense, drawn in by their identity of
content, while confusing prot in the broad sense with prot in the narrow
sense, befuddled by their identity of form. As a result, Smith fell into a fatal
contradiction.
According to Smiths fundamental view, looked at earlier, the sole source
of surplus-value is the surplus-labor of productive workers. This means that
the quantity of surplus-value appropriated by a given capital, assuming
other circumstances to be the same, will naturally be proportional to the
number of workers hired and utilized by the capital, or the quantity of
labor-power purchased and utilized. But capital is not solely expended on
the purchase of labor-power. There is a need for a part of it to be expended
on the purchase of material elements, such as machinery and raw materials.
These material elements are an indispensable condition for the formation of
use-values, and thus for the production of the commodity and they consequently are indispensable to the production of value and surplus-value.
The monopoly of one class over these material elements transforms laborers
into wageworkers, and is without question a vital premise for the creation of
surplus-value by these workers for capitalists. However, surplus-value itself
does not arise directly from these material elements. This is a natural conclusion, as value in general is solely created by labor. Surplus-value only
arises from the part of capital expended on the purchase of labor-power,
whereas the other parts of capital bear no direct relation to the generation of
surplus-value. One signicant problem arises from this, which I would like
to consider while tracing Smiths own argument. In relation to this, we can
nd the following description in Chapter six:
The value which the workmen add to the materials, therefore, resolves itself in this case
[i.e. under capitalist production] into two parts, of which the one pays their wages, the
other the prots of their employer upon the whole stock of materials and wages which
he advanced. He could have no interest to employ them, unless he expected that from
the sale of their work something more than what was sufcient to replace his stock to
him; and he could have no interest to employ a great stock rather than a small
one, unless his prots were to bear some proportion to the extent of his stock. (Smith,
1970, p. 151)
The rst part of this passage is the core of Smiths theory of surplus-value
examined earlier, where he clearly states that the value which workers add to
the materials is divided into two parts. It is not the value of the materials
that is divided into two parts, but rather the newly created value that
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workers add to these materials. The value of the materials simply reappears
temporarily, as is, as one part of the products value. Therefore, the part of
value corresponding to these materials is merely compensation for the original value, and cannot be further divided into two parts. This is the natural
conclusion according to Smiths fundamental thinking on value.11 However,
although Smith proposes a concept of surplus-value based in actual fact on
surplus labor, in the same sentence he uses the term prots to refer to the
surplus of value that was just dened as the value created by workers in
excess of the wage compensation received. Smith also clearly states that
prot is the employers compensation for the total capital advanced, and he
is very careful to emphasize that this total capital encompasses the value of
not only wages but the materials as well.
A surprising confusion of concepts accompanies the failure to establish a
category of surplus-value (and to distinguish between constant and variable
capital). Smith rst speaks plainly about the value added by workers above
the wages they receive. Accordingly, this value-component would naturally
be thought to correspond directly to the part of capital expended on wages,
not to the total capital. If the term prot is used in relation to the total
capital, then some other term needs to be added (such as surplus-value) in
relation to the part of capital expended on wages. Smith did not create such
a term, however, and was unable to establish the category of surplus-value.
Instead of unfolding prot from the category of surplus-value, Smith confuses the two, generating the rst aw in his theory of prot.
At rst glance, drawing a line between surplus-value and prot may seem
a scholastic or formalistic distinction. But we need to be aware of the great
signicance the clarication of this difference of form has for the elucidation
of the inner relations of capitalist production. The concept of surplusvalue is directly related to its source, so the term immediately calls to mind
surplus-labor. In the case of prot, by contrast, its true source is completely buried, so it appears to stem from the total capital, as if arising from
the character of accumulated value itself. For this reason, what is directly
reected in our everyday consciousness is not the truth of the matter, but its
phenomenal form. We need to start from this distorted, upside-down phenomenal form to seek out the underlying internal relations this is the
signicance of science.
We have seen that Smith did in fact start from the phenomenal forms
of prot and rent, ultimately reducing them to the surplus of value over
and above the wages paid to workers, which was a tremendous scientic
achievement. He should have then established a category of surplus-value,
315
clarifying how and why surplus-value becomes prot and rent. This requires,
rst of all, clarifying the process of the transformation of surplus-value into
prot in the broad sense. Yet, not only did Smith fail to do this, he ends up
confusing the two concepts. Having confused surplus-value with its primary
phenomenal form (prot in the broad sense), Smith goes on, as the natural
outcome of the same mistaken method, to confuse prot in the broad sense
with prot in the narrow sense (average prot). His confusion is manifested
above all in the following passage, cited earlier: He could have no interest
to employ them, unless he expected that from the sale of their work something more than what was sufcient to replace his stock to him; and he could
have no interest to employ a great stock rather than a small one, unless his
prots were to bear some proportion to the extent of his stock (Smith, 1970,
p. 151).
We need to recall the explanation provided by Smith just prior to this
argument, where he does not subjectively explain prot from the interests of capitalists, but rather in a purely objective manner as arising entirely
from the surplus labor of wageworkers. The natural corollary of that view is
that the quantity of prot generated by a given capital will differ, regardless of the wishes of the capitalist, depending on the quantity of capital
directed to the purchase of labor-power (all other conditions being the same).
This cannot correspond to the total capital, as Smith had insisted. But Smith
seems quite unaware of the contradiction between these two views. Smith, in
refuting the vulgar view that prot is compensation for the capitalists labor
of direction, goes on to address this in more concrete terms:
The prots of stock, it may perhaps be thought, are only a different name for the wages
of a particular sort of labour, the labour of inspection and direction. They are, however,
altogether different, are regulated by quite different principles, and bear no proportion
to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and
direction. They are regulated altogether by the value of the stock employed, and are
greater or smaller in proportion to the extent of this stock. Let us suppose, for example,
that in some particular place, where the common annual prots of manufacturing stock
are ten per cent, there are two different manufactures, in each of which twenty workmen
are employed at the rate of fteen pounds a year each, or at the expense of three hundred
a year in each manufactory. Let us suppose too, that the coarse materials annually
wrought up in the one cost only seven hundred pounds, while the ner materials in the
other cost seven thousand. The capital annually employed in the one will in this case
amount only to one thousand pounds; whereas that employed in the other will amount
to seven thousand three hundred pounds. At the rate of ten per cent therefore, the
undertaker of the one will expect a yearly prot of about one hundred pounds only;
while that of the other will expect about seven hundred and thirty pounds. (Smith, 1970,
pp. 151152)
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In a case where different factories employ the same number of workers for
the same wages (assuming no difference in labor-time between them), how
could one factory have seven-times more prot than the other one? If we
follow Smiths earlier explanation of prot, such a situation would be
completely impossible. And if, in the real world, prot tends to be obtained
in proportion to the total amount of capital i.e. the tendency of an average
rate of prot this fact clearly runs counter to Smiths explanation of
prot above. Here a contradiction clearly exists. The fundamental cause
of this contradiction is that Smith confuses surplus-value and prot, and
also confuses surplus-value and average prot. Average prot is prot that
has been socially averaged out, and prot itself is nothing more than transformed surplus-value. Therefore, average prot is premised on prot, while
prot is premised on surplus-value. Average prot is certainly not the original prot or surplus-value. The task for science in this case is to elucidate
how surplus-value becomes prot and how prot becomes average prot.
Yet Smith, instead of clarifying this development, makes no formal distinction at all between them from the outset. Far from being able to solve
the problem, he does not even pose it as such to begin with. All that remains
within Smiths system of thought, which lacks all of the developmental links,
are mutually contradictory outcomes. Instead of understanding the relation
between the law of surplus-value (an outcome of scientic analysis) and the
law of average prot (a demand based on capitalists interests) in terms of
being a connection between the internal relations and the necessary phenomenal form within the sphere of capitalist competition, Smith simply
treats each as an undeniable truth. Moreover, he is completely unaware of
the obvious contradiction between them. He simplistically positions two
different assertions, from two separate viewpoints, without giving any
thought to the relation between them.
Ricardo, likewise, along with every other bourgeois economist, could not
take one step beyond Smiths grasp of the problem. In Ricardos case,
moreover, the general concept of surplus-value, which Smith had occasionally glimpsed (albeit vaguely), is increasingly relegated to the shadows, while
the concept of general prot and the corresponding concept of average
prot are premised from the outset in a more thorough and uniform manner. Thus, within the thought of Ricardo, the inevitable outcome of incorrectly grasping the problem is revealed in an ultimate and fatal form as
hopeless confusion within his theory of value. This was the result, at the
same time, of Ricardo grasping the fundamental law of value in a more
thorough and uniform manner than Smith had done.
317
4. VALUE AND PRODUCTION PRICE

4.1. Smiths View
We are now in a position to comment on the contradiction within Ricardos
theory of value, which was the ultimate deadlock of the Classical school.
This concerns the relation between value and production price. Before doing
so, however, it seems worthwhile to rst consider the view held by Smith.
I noted in the previous section that Smith was content to mix together a
scientic viewpoint and the everyday consciousness of capitalists, carelessly
juxtaposing the internal relations of a thing and its phenomenal forms.
Smith did not perceive the difference between surplus-value and prot, so it
is no surprise that he treated the relation between value and production
price in a similar manner. According to his fundamental view, the value of a
commodity depends on the amount of labor expended on its production. Of
this labor, one part is the previous concrete labor from the used-up portion
of the means of production, while the other part is the labor newly added in
the nal production process. If we set aside the former, the labor expended
on the production of a capitalist product can be further divided into two
parts: paid labor and unpaid labor. Paid labor is compensation for wages,
whereas unpaid labor forms surplus-value.12
In other words, according to Smiths fundamental view, the value of a
capitalist commodity, setting aside the value of the means of production, is
broken down into three parts: wages, prot, and rent. This value is thus the
source of the revenue of social classes, rather than the value of a commodity
being made up of wages, rent, and prot. What is posited initially is a given
quantity of value, with this value broken down into wages, prot, and rent
according to certain laws. It is not the case that these three components are
posited from the outset, and then determine the magnitude of value. Imagine, for example, that a single apple is cut into three pieces, which are then
handed out to three people. The part belonging to each person would depend on the size of the apple and the proportion at which it was distributed.
It would be incorrect, clearly, to say instead that the overall size of the apple
is composed of the three quantities that belong to these three people.
Smith, though, seems quite unaware of the difference between these two
propositions. He mainly presents his arguments on the source of surplusvalue and on the deduction of commodity value in Chapter six of The
Wealth of Nations, even though it is entitled On the Component Parts of the
Price of Commodities. When addressing the issue of the deduction of
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commodity value, Smith often switches over to a discussion of the component parts of value. Ultimately, he asserts that, Wages, prot, and rent,
are the three original sources of all revenue as well as of all exchangeable
value (Smith, 1970, p. 155), as if this were the natural conclusion to be
drawn from his discussion of the deduction of commodity value.
Wages, prot, and rent are suddenly transformed from the deducted parts
of exchange-value into its fundamental source. No longer is human labor
the fundamental source, with the magnitude of exchange-value determined
by the labor expended on a commoditys production. This is determined
instead by the wages and rent a capitalist must pay, and the prot that he
can normally expect for the total capital advanced. Instead of the value of
the commodity being a given, determined by the duration of labor-time
and then divided into three parts, Smith premises the three component parts
and says that the commoditys value is made up of their totality. Having
completely overturned his original theory in this manner, he writes at the
beginning of Chapter seven:
There is in every society or neighbourhood an ordinary or average rate both of wages
and prot in every different employment of labour and stock y . There is likewise in
every society or neighbourhood an ordinary or average rate of rent y . These ordinary
or average rates may be called the natural rates of wages, prot, and rent, at the time and
place when they prevail.
When the price of any commodity is neither more nor less than what is sufcient to pay
the rent of the land, the wages of the labour, and the prots of the stock employed in
raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. (Smith, 1970, pp. 157158)
The internal relations have now been completely overturned, with the concept of value replaced by natural price. In some cases Smith seems to lack
the slightest awareness of the fundamental difference between these two
concepts. He quite simplistically jumps from a scientic standpoint to the
perspective of capitalists within the sphere of actual competition. In the
everyday consciousness of capitalists, there is no awareness of the determination of value by labor, the proportion between the paid and unpaid part
of wage labor, the formation of surplus-value through unpaid labor, or the
transformation of surplus-value into prot and rent. These are processes
that take place behind their backs, outside the realm of their awareness.
Reected in their consciousness, at best, is the nal outcome of these processes, as given facts, such as the natural rates of wages, prot, and rent.
The internal relations inevitably present themselves in an upside-down
319
manner. To those who do not see the intrinsic developmental processes,

results appear to be causes. Instead of value being a given, and the natural
rate of wages, prot, and rent developing from it, the rates of wages, prot,
and rent are taken as given that determine value (a term basically understood as the natural price that is the center or standard around which
market prices uctuate). Smith suddenly turns a theory of value deduction
into a theory of value composition, directly replacing the concept of value
with natural price. This is a precipitous shift from the standpoint of
science to a vulgar consciousness, slipping from the sphere of internal
relations into the world of phenomena.
4.2. Ricardos View

The characteristic of Ricardo, compared to Smith, is that he always adheres
to the standpoint of scientic analysis and seeks everywhere to defend the
original determination of value. This is the basis of his contribution to the
development of political economy. If one says (like Smith) that wages,
prot, and rent are all components of a commoditys value, their uctuation
would then be independent of the quantity of labor necessary for the commoditys production, and the components themselves would be thought to
raise or lower its value. This is precisely the view that Ricardo does his
utmost to drive out. He says that, as a principle, the value of a commodity is
consistently determined by the labor necessary to produce it, so uctuations
in wages, prot, and rent are certainly not the source of uctuations in
value. Wages, prot, and rent are not the components of a commoditys
value, but the divided-up parts of value. Ricardo asserts, therefore, that a
change in wages naturally brings about a change in prot but does not alter
the value of a product:
The proportion which might be paid for wages is of the utmost importance in the
question of prots; for it must at once be seen that prots would be high or low exactly
in proportion as wages were low or high; but it could not in the least affect the relative
value of sh and game y .
No alteration in the wages of labour could produce any alteration in the relative value of
these commodities; for suppose them to rise, no greater quantity of labour would be
required in any of these occupations but it would be paid for at a higher price y . Wages
might rise twenty percent, and prots consequently fall in greater or less proportion,
without occasioning the least alteration in the relative value of these commodities.
(Ricardo, 1996, pp. 2729)
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Before I quit this subject, it may be proper to observe that Adam Smith, and all the
writers who have followed him, have, without one exception that I know of, maintained
that a rise in the price of labor would be uniformly followed by a rise in the price of
commodities. I hope I have succeeded in showing that there are no grounds for such an
opinion. (Ricardo, 1996, p. 40)
Ricardo, who thus establishes a principled relation between value, wages,

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

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

capitalists engaged in production on the more favorable land will naturally
obtain a sort of super-prot, which in certain cases will be transformed into
rent. He notes, for example, that land constitutes the most important condition for agricultural production, but there are differences in land fertility
and convenience of location, and when land is intensively used the law of
diminishing returns dictates that a super-prot will naturally arise. Because
the super-prot in this case solely depends on the natural conditions of the
limited superior land, as long as certain individuals monopolize such land,
competition among agricultural capital will drive this prot into the pockets
of these landowners, which is precisely what rent is:
The reason then, why raw produce rises in comparative value is because more labour is
employed in the production of the last portion obtained, and not because a rent is paid
to a landlord. The value of corn is regulated by the quantity of labour betowed on its
production on that quality of land, or with that portion of capital, which pays not rent.
Corn is not high because a rent is paid, but a rent is paid because corn is high. (Ricardo,
1996, p. 50)
321
This also implies that Smith is thoroughly mistaken to view rent as one
component of value (or of price which is the money expression of value).
If the high price of corn were the effect, and not the cause of rent, price would be
proportionally inuenced as rents were high or low, and rent would be a component part
of price. But that corn which is produced by the greatest quantity of labour is the
regulator of the price of corn; and rent does not and cannot enter in the least degree as a
component part of its price. Adam Smith, therefore, cannot be correct in supposing that
the original rule which regulated the exchangeable value of commodities, namely, the
comparative quantity of labour by which they were produced, can be at all altered by the
appropriation of land and the payment of rent. Raw material enters into the composition
of most commodities, but the value of that raw material, as well as corn, is regulated by
the productiveness of the portion of capital last employed on the land and paying no
rent; and therefore rent is not a component part of the price of commodities. (Ricardo,
1996, pp. 5253)
There are many points to note regarding Ricardos theory of rent, but we
cannot deal with them at this level of discussion. Here it is sufcient to
simply note his view that rent is not a component element of value.
From the passages cited above, we can see the effort Ricardo made to
thoroughly apply the original determination of value and to refute Smiths
upside-down composition theory of value. Ricardo opposed the composition theory of value in a very conscious manner, but he was unable to adopt
any sort of critical stance toward the fundamental misconceptions at the
basis of this upside-down view, such as the failure to distinguish between
constant and variable capital, the confusion between surplus-value and
prot, and the positing of a general rate of prot from the outset. Ricardo
also fully accepts the concept of natural price which is the inevitable
outcome of Smiths upside-down view. As a result, a contradiction naturally
arises within Ricardos theory of value, which is manifested in a more acute
and fatal form than had been the case for Smith.
The contradiction within Smiths thought is the coexistence of two completely different standpoints, with no awareness of the relation between
them. Smith simply juxtaposes two different views, from two different
standpoints. In contrast, Ricardo endeavors to consistently adhere to a scientic analysis, but he accepts Smiths points of departure and arrival,
which are based on the direct observation of phenomena in the sphere of
competition and thus completely incompatible with science. This means that
the contradiction for Ricardo, unlike the case of Adam Smith, is inherent to
the theory of value itself, appearing as something fatal to this theory. This
breakdown in the theory of value, which the entire system of Classical
political economy had been based upon, inevitably led to the systems
collapse, bringing this school of thought to an end.
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4.3. Formation of a General Rate of Profit

Lets consider this matter a bit further. In the earlier criticism of Smiths
theory of surplus-value and prot, we saw how prot rates can differ even
when the rate of surplus-value is xed, because surplus-value arises directly
from the capital expended on the purchase of labor power, which Marx calls
variable capital. The greater or lesser magnitude of surplus-value, when the
rate of surplus-value is xed, will thus exclusively correspond to the greater
or lesser amount of variable capital. Therefore, even with the same rate of
surplus-value, capitals of the same magnitude will naturally have different
quantities of surplus-value if they have a different ratio of variable to constant capital so that their magnitudes of variable capital are different. The
rate of prot is the ratio of surplus-value to total capital. This means that if
the total amount of capital is equal but the quantity of surplus-value differs,
the prot rate will naturally differ because of this different ratio.
Assume, for example, that there is capital A and capital B, each with a
value of 100. The constant capital of A is 80 and its variable capital 20, while
B has a constant capital of 60 and variable capital of 40. If the rate of
surplus-value for both is 100 percent, surplus-value would therefore be 20
for capital A and 40 for capital B (100 percent of 20 and 40, respectively),
while the prot rate would be 20 percent for the former and 40 percent for
the latter (surplus-value of 20 and 40, respectively, vis-a`-vis a total capital of
100). In other words, we are clearly dealing with unequal gures.
The difference in the proportion of capital divided into constant and
variable capital (i.e. the value composition of capital) is obviously at the
root of the difference in the rate of prot. But what fundamentally determines this proportion is the manner in which the means of production and
labor-power are combined (i.e. the technical composition), which is determined by the developmental level of productive power. This technical
combination, however, will clearly differ in many cases between spheres of
production that produce different types of products, and thus have different
labor processes and production techniques. As a rule, therefore, the proportion at which capital is divided into constant and variable capital will
differ between production spheres that produce different types of products.
We know that the use of machinery is comparatively advanced in the sector
of industry, for example, so that a greater proportion of capital is expended
on machines and raw materials as opposed to wages, whereas in the sector
of agriculture this proportion is smaller. It is also clear that similar differences exist between the various production spheres within the industrial and
agricultural sectors.
323
Not only is it possible, then, to suppose a difference in prot rates between different types of capitals, it must be considered inevitable. This
conclusion is premised on commodities being sold at their values, so that
their surplus-value is fully realized as prot in their sales prices. In other
words, it is assumed that no substantial difference exists between value and
price, and therefore between surplus-value and prot. Thus, as long as
commodities are sold at their values, there would be a difference in prot
rates between each sphere in which capitals are invested, according to the
organic composition13 of each capital.
However, the reason prot rates would differ between spheres of production (on the basis of the above premise) is not limited to the organic
composition alone. There are also disparities in the turnover times of capitals in different production spheres. This naturally results in a difference in
the quantity of surplus-value that can be obtained in a certain period of
time, bringing about differences in the rate of prot which is the rate of
capital augmentation during a given time period. In terms of the problem at
hand, however, there is no particular need to further examine turnover time;
it is sufcient here to clarify that a difference in the rate of prot would
necessarily exist between production spheres if commodities were sold at
their values.
A difference in the rate of prot obtained by capitalists in different
spheres, however, clearly does not correspond to actual phenomena, not to
mention that it is intolerable from the perspective of the capitalists own
notion of fairness. Capitalists invest capital and engage in production to
generate a prot. The capital investment is a sacrice made in order
to obtain prot, and everyone hopes to obtain the greatest benet from the
smallest sacrice. A capitalist invests capital in a given sphere, not because
the particular products have piqued his interest, but because he believes a
high rate of prot can be obtained. If substantial differences in prot rates
exist among production spheres, capital is naturally drawn from production
spheres with a low rate of prot and concentrated in those where the rate is
high. This shifting of capital, and the accompanying increase or decrease in
the supply of products, as well as the increase or decrease in sales prices as
the natural outcome, does not cease until the rate of prot is ultimately
averaged out among production spheres. We know from reality that apart
from temporary differences, or those based on special circumstances, prot
rates in all production spheres will at least display a tendency toward this
equalization.
Here we have two things that are ultimately incompatible. If commodities
are sold at their values, so that the surplus-value contained in them is fully
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SAMEZO
realized as prot in their sales prices, a difference in prot rates would inevitably exist among the capitals invested in different production spheres.
Yet, the capitalists notion of freedom and equality, and the incessant competition among them based upon this awareness, does not tolerate the
continued existence of differences in prot rates among production spheres.
This means that commodities must somehow be sold at a special price that
differs from value in order for an equal prot to be attained in different
spheres. In other words, commodities must be sold at a price that corresponds
to the price of the labor-power and means of production expended on production (the cost of production for a capitalist or the cost price of a capitalistic commodity), to which is added a special type of prot with an average
general proportion to the amount of capital advanced (average prot) so
that the determination of the price is independent of the particular surplusvalue contained in the commodity. This special price is the commoditys
production price. The sale of commodities at this special price, thus constituted, secures the equalization of the prot rate in each sphere of production.
It is necessary to consider what signicance this divergence of commodity
price from value has for the general determination of value (determination
of value by labor), while also taking into consideration the fact that this is not
a mere exception but a principled and inevitable phenomenon.
5. IMPASSE OF THE CLASSICAL SCHOOL

The Classical economists, however, were unable to properly account for the
fact that price diverges from value, which is not surprising since they did not
properly pose the problem to begin with. These economists, under the sway
of a bourgeois outlook, were above all incapable of considering how a
general rate of prot, common to each sphere of production, comes into
existence. Instead of developing the concept of general prot from the law of
value and surplus-value, and on the basis of the concept of value, they
premised a general rate of prot. Once a general rate of prot has been
premised, the natural conclusion is production price that differs from value.
And the Classical economists thus naturally posited production price from
the beginning. Instead of developing the concept of production price from
value, they either juxtaposed it with value, as something that bears no
relation to it, or directly equated the two. This means they grasped the
problem in a form that was unsolvable from the outset.
We have seen that Smith starts from the determination of value by labor
(albeit in a confused form), to arrive at surplus-value based on unpaid labor,
325
which was a tremendous advance for political economy. But the thread of
his argument breaks down as soon as he reaches this point. Smith, in a
manner totally unrelated to the prior discussion, then leaps into all of the
processes of development. Once a general prot rate has been premised, the
natural conclusion is a composition theory of price, and Smith lines up a
composition theory of price next to a deduction theory of value, placing a
composed price14 next to intrinsic value in a parallel, rather than developmental, relationship. He treats the composition theory as having independent, inherent signicance rather than being a particular manifestation,
within the world of competition, of the internal relations. He thus poses the
problem in an upside-down and vulgar manner, rather than in an understood and scientic form.
Turning to Ricardo, the case is somewhat different. He consistently abstracts from the external appearance within the realm of competition, vehemently refuting Smiths composition theory of price. In one sense, this is
Ricardos strength compared to Smith, as noted already. Still, despite being
opposed to Smiths composition theory, Ricardo does not take a critical
stance toward the idea of a general prot rate that underlies this theory.
Like Smith, Ricardo premises a general rate of prot rather than developing
it from value and surplus-value. Once a general rate of prot has been
premised, a composition theory of price is the natural conclusion. But
Ricardo accepts the premise, while trying to drive out its inevitable conclusion. This attempt is clearly doomed from the start. Ricardo rejects the
composition theory of price, while inheriting from Smith the idea of natural
price, which is itself a composed price. Ricardo treats this natural price,
which is premised on a general rate of prot and therefore has as one of its
component elements general prot calculated on the basis of this rate,15 as
the fundamental source that is then broken down into wages and prot.
Instead of consistently viewing natural price as something composed in the
manner of Smith, Ricardo views it as intrinsic value not as price grasped
separately from value. The contradiction in Ricardos case thus takes on a
more fatal form than it had with Smith. This is natural given Ricardos
claim that production price is equal to value, which is not in fact the case.
Smiths error had simply been to leap over the mediating processes between surplus-value and the formation of the general prot rate. Instead of
trying to develop the general rate of prot from surplus-value, Smith treats
it as something that bears no relation to surplus-value. Once the developmental links between surplus-value and the general prot rate are correctly
established, a composition theory of price is certainly not a mistaken line of
thought. Indeed, the process of price composition must inevitably occur
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SAMEZO
when the law of value actually unfolds within the sphere of competition.
However, because Smiths argument is constructed on a mistaken basis, it
inevitably assumes an upside-down and contradictory form.16
Yet, Ricardo fails to understand the intrinsic meaning of Smiths upsidedown view. Instead of positing the composition theory of price upon a
correct foundation, Ricardo rejects it entirely. He thus compounds Smiths
error, in a sense. That is to say, like Smith, Ricardo is unable to developmentally grasp the movement of actual price within the world of competition on the basis of the movement of intrinsic value. But by rmly rejecting
the process of price composition, which he does not understand, Ricardo
forcefully identies it with the process of value deduction, thereby intentionally confusing production price and value. As a result, Ricardos
advance beyond Smith at the same time reveals his weaknesses. Still, this
does not mean that Ricardo fell below the level of Smith. Rather, we are
dealing with the logical penetration of a fundamental error common to both
men: the lack of developmental links within their thought.17 The characteristic lack of development within Ricardos thought arose inevitably from
the delusion that the capitalist mode of production is a natural, eternal
mode of production. His system, founded upon this view, naturally reaches
an impasse. And this impasse is manifested in the most thorough form, just
spoken of, where production price is closely equated to value.
The inevitability of the collapse of Ricardos concept of value which
also signies production price should be clear from our explanation
thus far. As long as the term value refers to intrinsic value determined by the
quantity of labor necessary for production, prot rates will inevitably vary
depending on differences in the spheres of production, and therefore depending on differences in the organic composition of capital and turnover
times. As long as value for Ricardo in fact signies production price,
however, it is naturally assumed that an equal prot rate is generated in
every sphere. Here we have the problematic nature of Ricardos concept of
value.18 The determination of value by labor is the fundamental principle
that underlies his entire system, and the abandonment of it would signify the
systems immediate collapse. At the same time, his notion of value needs
to address the natural and self-evident fact that an equal prot is generated
in every production sphere, for to deny this fact would be a denial of reality
itself.
All of the difculties Ricardo faced from falling into this dilemma are
manifested, in an extremely confused form, in Sections four and ve of
Chapter one in Principles of Political Economy and Taxation.19 One fundamental reason Ricardo is unable to clearly pose the problem, even
327
according to his own mistaken method, is that (1) he fails to clarify the
distinction between constant and variable capital, or clarify the concept of
the turnover of capital and (2) he confuses the problem of a uctuation in
production price through a general uctuation in wages20 with the particular
problem that arises from a disagreement between value and production
price.
If we bring some order to Ricardos confused argument by drawing on
the ideas of Marx regarding the distinction between constant and variable
capital and his concept of the turnover of capital, while detaching the
problem arising from a disagreement between value and production price
from the problem concerning the inuence a general uctuation in wages
has on production price what Ricardo is basically attempting to say is as
outlined in the following paragraph.
The magnitude of the value of a commodity, or the purchasing power it
has over another commodity (which is the same thing),21 Ricardo argues, is
in principle determined by the quantity of labor necessary to produce the
commodity. However, this undergoes a revision when there are differences
in the organic compositions or turnover times of capitals. Indeed, if the
value of each of the products of capitals with such differences is determined
solely by the quantity of labor necessary for their production, and the
products are exchanged precisely in proportion to this quantity of labor, the
rates of prot obtained by each capital would inevitably differ. However,
this situation does not occur in reality. The sale of products must generate a
uniform rate of prot for all capitals. Thus, products of capitals with a
relatively greater amount of constant capital or longer turnover times will be
sold at prices that are higher than the quantities of labor necessary for their
production. This, Ricardo reasons, is only possible because these commodities are more valuable. He says that being more valuable is the normal
compensation for prots being accumulated as capital or a just compensation for the time the prots were withheld (Ricardo, 1996, p. 35). In
Ricardos mind, the fact that the price of a commodity (or what he calls its
value) diverges from the quantity of labor necessary for its production
does not negate the validity of the law of value determination according to
the quantity of necessary labor. He argues, rst of all, that this divergence
only arises in the exceptional cases just mentioned; and second, that even in
such cases the quantity of labor for production remains the primary factor
of value determination, with a change in this quantity immediately bringing
about a uctuation in the magnitude of value.
I think that this is the gist of Ricardos argument. Here we encounter the
fatal self-contradiction brought about by confusing value and production
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SAMEZO
price, and Ricardos completely ineffective attempt to shake free of this

contradiction. The weakness of his argument was already partially exposed
by Thomas Malthus, who wrote:
[Ricardo] has not conned himself to the assertion of what he calls the value of a
commodity is determined by the quantity of labour worked up in it; but he states, in
substance y that commodities exchange with each other according to the quantity of
manual labour worked up in them y . Now this proposition is contradicted by universal
experience. The slightest observation will serve to convince us, that after making all the
required allowances for temporary deviations from the natural and ordinary course of
things, the class of commodities subject to this law of exchange is most extremely conned, while the classes, not subject to it, embrace the great mass of commodities.
Mr. Ricardo, indeed, himself admits of considerable exceptions to his rule; but if we
examine the classes which come under his exceptions, that is, where the quantities of
xed capital employed are different and of different degrees of duration, and where the
periods of the returns of the circulating capital employed are not the same, we shall nd
that they are so numerous, that the rule may be considered as the exception, and the
exception the rule. (Malthus, 1963, pp. 2627)
Malthus, instead of developing a correct theory of value from his criticism

of Ricardo, ends up constructing a vulgar system of thought. And this was
natural considering his standpoint. Still, this does not alter the fact that this
criticism struck a fatal blow to Ricardos theory. We have seen how the
production prices of commodities in different production spheres diverge
from their intrinsic values. It is a rare exception, and completely random, for
a commoditys production price and its value to be identical. Nevertheless,
Ricardo seeks to defend his theory of value by premising, as a principle, this
exceptional correspondence between production price and value. The inappropriateness of this goes without saying, and Malthus exposed this weak
point.
Ricardos defense of his theory does not consist solely of the argument
addressed by Malthus above. Ricardo adds that even when value diverges
from the quantity of necessary labor, the quantity of necessary labor does
not cease to be the primary factor in value determination, as can be perceived from the fact that a change in this quantity of labor will usually result
in an immediate uctuation in the magnitude of value. For Ricardo, therefore, the divergence merely signies an additional factor mixed in with
the primary one. Moreover, he argues that there is simply no comparison
between the importance of the two factors in terms of their inuence on the
magnitude of value. This claim, however, does not effectively defend the
labor theory of value. Only by claiming that human labor is the sole source
of value can the labor theory of value claim a reason to exist. The recognition of sources of value other than human labor itself signies a rejection
329
of the labor theory of value and a capitulation to vulgar political economy.

Ricardo argues that a product of capital with a relatively high organic
composition has greater value than that determined by the quantity of labor
necessary for its production as a just compensation for the time the prots
were withheld or as a result of prots being accumulated as capital. But
if such an explanation were valid, it would be more logically consistent to
say that the same holds true for prot in general, rather than there being
more value in this one case alone.
Ricardos line of thought ultimately leads to the Trinity Formula, where
prot is said to arise from capital, rent from land, and wages from labor.
The only escape for Ricardo from his contradictions, therefore, is through a
door leading to a vulgar system of thought. It was thus unavoidable, for
both social and logical reasons, that Classical political economy after
Ricardo was transformed into vulgar economics.
NOTES
1. In the second chapter of The Wealth of Nations [Smith, 1970, pp. 117119],
there is a direct expression of Smiths view that the system of private property and
the individualism particular to it are natural and founded upon human nature, which
results in his mistaken idea that commodity production which is merely one of the
particular forms of the division of labor, where this division of labor is achieved
through product exchange is the only form of the social division of labor. It is true,
as Smith writes in Chapter two, that the social division of labor was not originally
the effect of any human wisdom, which foresees and intends that general opulence
(Smith, 1970, p. 117), and it was spontaneously generated rather than carried out in a
consciously planned way. And it is not necessarily mistaken to say that this arises
from a tendency within the character of human beings, in the sense that we are social
animals, always engaged in social production.
But it is clearly mistaken for Smith to speak of the human tendency that generates
this division of labor as the propensity to truck, barter, and exchange one thing for
another or as the same trucking disposition which originally gives occasion to the
division of labour, or to say that without the disposition to truck, barter, and
exchange, every man must have procured to himself every necessary and conveniency
of life which he wanted (Smith, 1970, pp. 117, 119). The research of Georg Ludwig
von Maurer and Lewis Henry Morgan, as well as many other scholars, has shown in
the case of various cultures that the most ancient human societies engaged in communal production. But we do not need to go that far back into the past. Even todays
family provides an example, albeit in an innitesimal and distorted form, of a
division of labor based upon the same basic principle as those ancient societies. For
instance, when a mother mends clothing or a son prepares food for a meal, this is not
carried out through the actions of truck, barter, and exchange where it is said,
this is mine and that is yours and Ill give you this for that. This is certainly not
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SAMEZO
made possible by the products being brought into a common stock by means of
the general disposition to truck, barter, and exchange. Instead, this labor-power
exists to begin with as one part of the familys communal labor-power, operating as
one of its organs. The products of their labor, likewise, do not pass through the
process of exchange, but directly and literally (rather than guratively) become the
familys common stock.
Smith himself says at the beginning of The Wealth of Nations, where he raises his
famous example of pinmaking, that the individual workers products are not mutually exchanged as commodities. The link between each of the workers in this case is
established through the mediation of a capitalist purchasing the labor-power of
multiple workers, and these workers gathered together then being distributed to the
various sections of the pin factory in a planned manner. Smith does not overlook the
essential differences in the way the division of labor is formed, writing the following
just before raising the example of pinmaking:
[In] those triing manufactures which are destined to supply the small wants of
but a small number of people, the whole number of workmen must necessarily be
small; and those employed in every different branch of the work can often be collected into the same workhouse, and placed at once under the view of the spectator.
In those great manufactures, on the contrary, which are destined to supply the great
wants of the great body of the people, every different branch of the work employs so
great a number of workmen, that it is impossible to collect them all into the same
workhouse. We can seldom see more, at one time, than those employed in one single
branch. Though in some manufactures, therefore, the work may really be divided
into a much greater number of parts, than in those of a more triing nature, the
division is not near so obvious, and has accordingly been much less observed
(Smith, 1970, p. 109).
The great manufactures refers to the system of the social division of labor
formed through the links between products (commodities), and Smith above all can
be thought to have in mind the totality of all of the industries that participated in the
preceding production for a completed item (for example, at the end of the same
chapter Smith discusses how in civilized and thriving countries the production of
even the coarse clothing of the day-labourer is the result of cooperation between a
variety of industries). Of course, it could be said that he is using the term great
manufactures to describe the overall system of the social division of labor in a
relative sense, or that this is somewhat tongue-in-cheek, but considering the aim of
this section, his focus seems to be on identity at the expense of emphasizing distinction. He does not clarify the essential difference between the two elsewhere in his
book, however. Even when he has the best opportunity to do so, at the beginning of
Part two where he addresses the relation between capital accumulation and the
division of labor, Smith seems quite unaware of the issue itself. Marx was the rst to
thoroughly examine the essential difference and reciprocal relation between the social division of labor and the division of labor within manufacturing. In Chapter
fourteen of Capital, particularly Section four, this problem is thoroughly elucidated.
I should note, nally, that saying commodity production is not the sole form of the
social division of labor (and that therefore capitalist production is not the only
means of dividing labor among the various production processes) certainly does not
negate the fact that this form and method have historical necessity within the
331
development of social production. The error made by Smith was to view this historical necessity as a natural or universal necessity.
2. My explanation of the particularity of commodity production and the essence
of value in the main body of this paper is quite simple, which conversely may make it
difcult for many readers to understand, so I would like to offer an additional
explanation here. I have placed the explanation in the Note because it pertains to the
principles of political economy, not its history, but I want to underscore the fundamental importance of this issue.
Commodity production, needless to say, is also a type of social production,
wherein commodity producers do not produce the objects they themselves need
through their own labor. If that were the case, it would be possible for them to
remain unrelated to each other; but in fact a social division of labor is carried out.
Commodity producers, instead of producing the objects they need through their own
labor, engage in the production of a particular item that is provided for the use of
other commodity producers, and in return have their own needs met by the labor of
these other commodity producers. In order for this to take place, there is a need, rst
of all, for the total labor of the commodity producers engaged in the specialized
production of various things to compose an organic system as the social division of
labor, thereby integrally responding to the needs of society as a whole. That is to say,
in order to comprehensively respond to the various needs of the entire society, the
total labor-time of society must be distributed to the various spheres of production.
Unless this is achieved, in some manner or form, it is impossible for the various
things that society requires to be produced in line with necessity; in that case not only
would the social division of labor not be carried out in an ideal manner, it could not
be carried out at all. Secondly, in order for a social division of labor to be feasible,
wherein a person produces a particular use-value for other members of society rather
than producing by himself all of the things he requires, and then has his own needs
met by the products of the labor of other members of society, it is necessary for
distribution to be decided upon in some manner or form so that the producers are
able to receive a certain portion of the total product of society. Unless this is determined, social production is not feasible. These two points are the general conditions for social production, and without them being realized in some form or
another social production cannot occur. Commodity production is no exception. But
the manner in which it is realized under commodity production is fundamentally
different from other cases. In other forms of social production, even if there are
differences in the manner of determining how to allocate the total labor-time of
society to the various production spheres and distribute the total product of society
to the various members of society whether based on the will of a dictatorial
individual (or group of individuals) or on a democratic consensus; and whether done
in a basically arbitrary manner or instead based on tradition or carried out in a
planned fashion this is always carried out according to some decision based on
human will.
Things are different in the case of commodity production, where there is no person
who makes such decisions. A commodity producer does not engage in the production of a particular thing according to someone elses direction, but rather completely
in line with his own free will and decisions, according to his own responsibility and
calculations. The labor-power of the producers is their own private capability as
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SAMEZO
autonomous personalities who constitute the subject of private property, and therefore the labor that they expend is carried out as a private matter. Since the laborpower itself is not social, labor also does not directly have a social character. It
remains individual labor. The products produced do not belong to society, therefore,
but rather come into the producers individual possession, so they cannot be freely
disposed of by society. In order for society to decide on the distribution of products,
it would have to possess them, just as one cannot freely dispose of something without
possessing it.
If there is no one to determine the method of organizing the division of labor and
of carrying out distribution, how exactly is commodity production feasible as a
system of social production? Production relations between commodity producers are
not formed as direct relations between human beings, but rather are established
through the detour of exchanging their products as commodities. We need to consider how the production relations between commodity producers are established
through the exchange of their products as commodities, and how the exchangerelation between the commodity producers products as commodities mediates the
relations of production between them.
We know from the discussion thus far that the most fundamental condition for
social production to be carried out is the social integration, in some manner, of the
labor of individuals so that it becomes one part of societys total labor. The labor of
commodity producers, however, is carried out as private labor, not socially integrated labor. Still, labor must come to have the substance of being one part of the
total labor of society, as something that constitutes the overall system of the social
division of labor. This represents a fundamental contradiction unique to commodity
production. The problem comes down to identifying how this contradiction is mediated via the relation of exchanging products of labor, or locating the moment
within the exchange of commodity producers labor-products through which private
labor acquires Determinate Being (Dasein) as social labor.
Commodities come in many varieties and are diverse as use-values, which is precisely why they can be exchanged for each other. This exchange presupposes that the
use-values of commodities are different, but on the basis of this alone exchange will
not be carried out. It is also premised that the thing possessed by person A must be
superuous for him while being useful to person B, and vice-versa for person B. In
this way they are rst able to exchange their products. There is no question that this
is a condition for any sort of exchange to take place, but on the basis of this alone the
exchange of products as commodities will not necessarily immediately occur. For
instance, if a child with an extra spinning top and another child with extra playing
cards exchange these items, we are not dealing with commodity exchange. The childrens exchange does not mediate the establishment of a system of social production
between them. What characterizes the exchange of commodities, to repeat, is not
merely the mutual difference between things possessed by people as use-values, or the
relation between these things and the needs of human beings, but rather a relation
whereby commodities are equal as value despite being different as use-values. Commodities as use-values come in an innite variety, but as value they are indistinguishable. This is why commodities all have the form of being worth such-and-such
yen in gold (i.e. price). And the indication of value in price is the moment whereby
the labor of the commodity producers rst comes to obtain unity.
333
The labor of commodity producers does not directly have social unity, nor does it
have a social character. This is the inevitable outcome of labor-power itself not being
social. As long as labor-power is private, rather than social, labor as the functioning
of this labor-power also remains private and cannot be social. In the case of commodity production, labor-power is not socialized to begin with, nor does it exist as
societys total labor-power that is expended for various production purposes (as
tailoring labor or weaving labor, for example). If that were the case, labor in an active
state, from the moment it is carried out, would have a social character in its natural
form, i.e. directly as labor itself or as specic concrete labor. The labor of commodity
producers, however, is objectied in products, forming their value. As value, all labor
is indiscriminate, differing only quantitatively not qualitatively. In this form, the
different types of labor of commodity producers rst gain unity, thus becoming social
labor; i.e. in the form, rst of all, of the character of the product of labor, rather than
the character of the labor itself, and secondly, not as use-values for some particular
purpose, but in the form of the indiscriminate quality of value. Labor thus comes to
have Determinate Being as one part of the total labor-time society expends to satisfy
its aggregate needs; as one part of the total labor-power expended by society.
The social relations between producers in the case of commodity production are
thus established in a manner completely contrary to that of a planned economy, with
everything appearing upside-down. Instead of there rst being relations between human beings, followed by the carrying out of social production, there rst is the
independently carried out exchange of products of private labor, which are equated as
value in this exchange, through which the labor of commodity producers becomes
identical in terms of producing value and is reduced to indiscriminate abstract human
labor. This is how the labor of commodity producers obtains unity in a specic form,
becoming one part of the total labor-power expended by society. Value, in other
words, is the independent form assumed by the private labor of commodity producers
in order to become social labor, forming a moment that mediates the fundamental
contradiction of commodity production noted above. Commodity production develops along with this moment (value), developing at precisely the same pace as it
does, while on the other hand the development of value means that products have
become commodities; i.e. they exist not merely as use-values but at the same time as
value. This means that the contradiction particular to commodity production is resolved in the form of the commodity as the direct unity of use-value and value, so that
the contradiction is manifested in the more concrete form of being a contradiction
that pertains to the commodity.
The question then becomes how the commodity unfolds and resolves this contradiction, and to clarify this we above all need to elucidate the necessity for the commodity of an independent form for it to express its own value. If we say that a
commodity is both use-value and value, this is something that can rst be perceived
through theoretical consideration, and the inherent value of a commodity the fact
that there are ten hours of social labor included within it, for example cannot be
expressed as is. This is natural from the perspective of the formation of value just
explained. Precisely because the labor of commodity producers does not exist as a
certain quantity of social labor, it only rst obtains unity in terms of being abstract
general labor that produces value (common to the producers products), thus becoming social labor. This occurs through the exchange of the products of the
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SAMEZO
producers labor and the relation whereby their products are mutually equated within
exchange. This means that social labor-time does not exist from the outset. Not only
does it not exist within labor in an active state, it does not directly exist in an
objectied state. If it did, it could be indicated as is, as labor-time. But in that case
labor would not be objectied to become value and products would not become
commodities. The value of a commodity is not indicated as labor-time because the
labor of the commodity producer is not directly social labor, and therefore the labor
included in the product is not directly social labor, so that the product of this labor
cannot be grasped as the product of directly social labor.
How, exactly, is the value of a commodity indicated? As long as a commodity
cannot indicate this itself, it is indicated by the other commodity with which it is in a
relation of exchange. But in the case of this other commodity as well, its natural form
is its use-value not value so it does not have a form of value in addition to its
natural form. The natural form of this other commodity must therefore become the
form of value. This is indeed what happens, as should be clear from the fact that
today the value of every sort of commodity is indicated in the form of a certain
quantity of gold. But whether gold, or something else, how is it possible for the
natural body of a commodity (its material form) to express the value of another
commodity, thus becoming the form of value? This is the crux of the problem regarding the value-form, which Marx elucidates in Section 3a of the rst chapter of
Capital, where he traces back the development of the form itself, and by doing so
thoroughly solves the riddle of money. But here we will have to omit this explanation,
as well as the explanation of the development of the contradiction of the commodity
within the real process of exchange, the necessity of the formation of money, and the
manner in which money mediates the contradiction of the exchange process.
3. Smith mistakenly grasps this quality in the individualistic and subjective form
of the toil and trouble required to obtain a thing.
4. Here object-like character refers to the fact that labor only rst becomes
value through objectication in a crystallized form in a product because living labor,
despite forming value, is not value itself nor does it have value.
5. My criticism of Smith is based on the fact his argument is premised on the
commodication of labor-power. Smith says that the labor qua commodity
( labor-power) of the wageworker, which is exchanged for wages, is unchanging in
value and therefore an invariable measure of value. This is a view that has generally
been offered since the time of Ricardo, and at the same time seems the most reasonable (or only possible) argument from the common viewpoint of economists. It
is clear from the context that Smith is saying that labor is an invariable measure of
value in the sense of an external measure like gold or silver. But since a thing can
only function as an external measure if it is a commodity itself, for Smith the labor
that is an invariable measure of value must naturally be the labor (-power) of
wageworkers. The same conclusion could be reached if he were speaking of the value
of labor. The labor of independent commodity producers is objectied in products to
form value, but this labor itself is not a commodity, and therefore is not value nor
does it have value. What Smith calls labor is labor that itself is sold as a commodity, i.e. the labor (-power) of wageworkers. As long as it is understood in this
manner, Smiths error is thinking that what pertains solely to labor as the substance
of value can also pertain to labor as a commodity.
335
It can be said that labor forms the substance of value, so that the magnitude of
value is determined by the quantity of labor that forms its substance. If there is a
change in productive power, the given quantity of labor to produce a commodity will
change, and therefore its per-unit magnitude of value will also change, but there is no
change in the magnitude of value formed by a given quantity of labor. The magnitude of value is determined by the quantity of labor necessary for production. In
this sense (and only in this sense), equal quantities of labour, at all times and places,
may be said to be of equal value. Smith, however, does not say that an equal
quantity of labor will always form an equal quantity of value, but that equal quantities of labor always have equal quantities of value. He also does not say that the
quantities of products created with equal amounts of labor will increase or decrease
depending on changes in productive power whereas what changes as a result is
merely the per-unit value of the product not the magnitude of the value formed by a
given quantity of labor; Smith says rather that the amount of commodities that can
be purchased with the same amount of labor will at times increase or decrease, but
that what changes is not the value of the labor that purchases the commodities.
Ultimately, instead of saying that the labor necessary for production forms the
substance of value, so that it is the intrinsic measure of value, Smith says that labor is
the sole commodity whose value does not change, so that it is an invariable measure
in the sense of being an external measure whose own quantity is used to indicate the
value magnitudes of other commodities. He has thus clearly confused two different
things.
Smith confuses labor as a commodity that is exchanged for wages with the labor
necessary for production (which forms the substance of value and is the intrinsic
measure of value). He thinks that what is actually only true of the latter, can also be
said of the former. This is obviously a mistake, but if we consider his view further, we
can see that even prior to this he had grasped the production process in a distorted
form by comparing it to a relation of exchange between wage-labor and wages. That
is, he grasps the production process as a process of exchange between man and
nature, and labor as the rst price that each person pays in this exchange
(the primary sacrice each person must make to obtain goods), while products are
grasped as the natural compensation or wage given for this labor. All products are
evaluated according to the rst price paid by each person in this exchange
(in terms of labor as the amount of a persons ease, liberty, and happiness that
must be sacriced and the toil and trouble of acquiring it), and what is exchanged
in proportion to this is said to be nature. Thus, labor as the real price of
commodities is said to be precisely the real measure of the exchangeable value of all
commodities and therefore the invariable measure of value as well.
As long as the fundamental relation between value and labor is grasped in this
individualistic and subjective manner, it is not necessarily unnatural for Smith to
think that once the accumulation of stock has been achieved, so that labor is
carried out by wageworkers, the real and thus invariable measure of value is labor as
wage-labor, not the labor necessary for production. This is because, from the outset,
Smith understands the labor necessary for production as the primary sacrice made
by a person in exchange for the product, and the product as the quantity of goods
which he receives in return for it, so that ultimately the labor necessary for production is considered as a sort of wage-labor. It is not unreasonable, then, for Smith
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SAMEZO
to think that, with the accumulation of capital, wages in the proper sense of the term
are the real and invariable measure of value. In this case, the person who directly
makes the sacrice of labor for the product is the wageworker, not the independent
producer, and the exchange is made with a capitalist, not with nature. At the same
time, instead of the worker receiving the entire product of his labor as a quantity of
goods which he receives in return for his labor, he simply receives part of this from
the capitalist. As for how much is received from whom, Smith says (based on his
individualistic, subjective view of value) that the worker must always laydown the
same portion of his ease, his liberty, and his happiness for the same amount of
labor, and that labor only has value itself in the sense of this sacrice, so that value is
created through the sacrice made to receive the good. Therefore, Smith writes: The
price which he pays must always be the same, whatever may be the quantity of goods
which he receives in return for it. Of these, indeed, it may sometimes purchase a
greater and sometimes a smaller quantity; but it is their value which varies, not that
of the labour which purchases them y . Labour alone, therefore, never varying in its
own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price;
money is their nominal price only (Smith, 1970, p. 136).
These arguments are from Chapter ve of The Wealth of Nations, where Smith is
dealing with the situation prior to the accumulation of capital, but at rst glance his
arguments seem to be particular to wage-labor, and this has sometimes confused
scholars. The reason it appears as such is that when initially considering the determination of value by the labor necessary for production, Smith was unable to critically abstract from the new relation that accompanies the transformation of labor
into wage-labor and its phenomenal form, and instead of developing the wage-labor/
capital relation based on the determination of value by the labor necessary for
production, he ends up with a distorted grasp of the latter by inferring it from the
former, and thus, despite intentionally not discussing the circumstances particular to
wage-labor, he ends up appearing to do so; even though his actual aim is merely to
elucidate the general, fundamental principles of the value of a commodity and the
measure of value. This is precisely why in Chapter ve, even though Smith speaks of
wages, neither capital nor prot are dealt with. It is in Chapter six that he rst
discusses the accumulation of capital and generation of prot.
6. When Ricardo criticized Smith he should have focused on and elucidated this
point. If he had done so, he at the same time would have been able to reach a deeper
understanding of value, and with this, a grasp of the essence of money. But this was
impossible given the limitations from his bourgeois perspective.
7. We can nd similar views on rent expressed in many parts of The Wealth of
Nations, including Chapter eight [Smith, 1970, p. 168].
8. We have already seen that Smith thought the law of value no longer regulates
the exchange of products when the entire product of the worker no longer belongs to
him, but his fundamental view on the source of prot and rent refutes his own
mistaken view. His fundamental view clearly premises that products are exchanged
according to their value.
9. In terms of this point as well, Smiths correct view is not always consistently
stated, and at times he reverts to the position of the Physiocrats, as in Chapter ve of
Book Two [Smith, 1970, pp. 462463].
337
10. In the denition of productive labor, Smith at times falls into remarkable
confusion. His views in the passages I quoted present the most appropriate denition
from the perspective of capitalist production, and therefore from the perspective of
the tradition of political economy. And based on his groundbreaking discovery of
the source of surplus-value, he was the rst to pose, in a correct form, a problem
that had been incorrectly and one-dimensionally grasped by previous economists
(Mercantilists and Physiocrats). But Smith, in a completely careless fashion, juxtaposes this denition with other denitions in The Wealth of Nations, paying little
attention to the existence or non-existence of a relation between them. For example,
he denes productive labor simply as labor that produces a value, but immediately
after this says that a characteristic of productive labor is that it xes and realizes
itself in some particular subject or vendible commodity and that it is necessary for
the commodity to last for some time at least after that labour is past (Smith, 1970,
p. 430). There are various factors that might explain why Smith fell into such confusion, but we do not have space to discuss this in detail here. For more on this, and
on the concept of productive labor in general, readers can consult the rst volume of
Marxs Theories of Surplus-value.
11. Smith says here, value added to the materials, but as long as we are dealing
with the topic at hand, it is clear that the machinery, tools, and the other means of
labor should be grouped together with the materials. However, the following
differences between them exist. Whereas the raw materials are completely used up in
the labor process, the means of labor continue to maintain their original shape and
are able to carry out their function repeatedly rather than only one time, so the value
of the means of labor are transferred to the products over the entire period that the
means are of use, so that in each product only one part of the value of these means is
transferred. This difference bears an important relation to the problem we are considering, but at this stage this particular issue can be set aside. What needs to be
emphasized here is that, (1) the value of the used-up means of production both the
raw materials and means of labor is merely transferred to the product, as is, and is
certainly not the source of new value, and (2) the value-component of the capital
invested in the means of production is not itself value that augments and bears no
direct relation to the production of surplus-value. From this perspective, capital
needs to be clearly divided into two parts: the part expended to purchase the means
of production, and the part expended to purchase labor-power. The value of the
former does not change in the production process, so it is ttingly called constant
capital, whereas the value amount of the latter does change (augment) and is thus
called variable capital. This is the most essential distinction as far as capital is concerned, and this awareness is indispensable to an understanding of capitalist production, although no one prior to Marx had clearly grasped this. Smith implicitly
makes this distinction when he clearly states that the value which the workmen add
to the materials y resolves itself in this case into two parts, but he was not aware of
the great signicance of his own statement. At any rate, Smith did not establish
a distinction between constant and variable capital. This corresponds to how he
arrived at a de facto understanding of surplus-value but was incapable of consciously
establishing the concept itself, which ultimately stemmed from an inadequate
understanding of the source of surplus-value based on a failure to grasp the concept
of labor-power.
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12. We have seen that Smith calls surplus-value prot, which is further divided
into prot in the narrow sense and rent.
13. Marx uses the term organic composition of capital to refer to the value
composition from the perspective of it being determined by, and reecting, the
technical composition of capital.
14. Smith understands this composed price as the natural price, but natural
price is nothing more than the production price grasped in a mistaken form; understood in terms of having intrinsic signicance itself and bearing no relation to
value, rather than being the developed form or particular manifestation of value.
15. It should be noted that general prot also differs, quantitatively, from surplusvalue.
16. The upside-down nature of all ideology has this same basis; namely, the
separation of a things internal relations so that they take on their own inherent
signicance.
17. When a phenomenon is not unfolded from the internal relations, the only
method left, in order to be logically consistent, is to view both phenomenon and
internal relations as identical.
18. In Section six of the rst chapter of On the Principles of Political Economy and
Taxation, Ricardo discusses the invariable measure of value. He was disquieted by
this problem to the end, which was a manifestation of his difculties outlined in this
paper. We have seen that Ricardo not only opposed Smiths position of making
commanded labor the invariable measure of value, he was also clearly aware that it
is impossible for there to be an invariable measure in this sense of an external measure, and that an invariable measure of value in that sense would have to be a commodity with an invariable value, which is impossible. So Ricardo did not struggle to
discover an actual commodity that would be of real use as an invariable measure of
value, thinking it a fruitless endeavor. He raised the issue of an invariable measure
of value because he found it convenient to advance his study by supposing the value
of money to be invariable, making it an invariable measure of value. Ricardo said this
made it possible to speak of the variations of other things without embarrassing
myself on every occasion with the consideration of the possible alteration in the value
of the medium in which price and value are estimated (Ricardo, 1996, p. 40).
If this were the extent of the matter, however, it would not be that complicated.
Other scholars have naturally established this sort of assumption when necessary. For
Ricardo the problematic point regarding the invariable measure of value is not the
matter of nding a commodity that is actually of use as an invariable measure of
value, or the rights and wrongs of supposing (counter to reality) that the value of
money is invariable. Rather, the problem concerns the elucidation of the conditions
for a commoditys value to be invariable. Of course, for those who recognize that the
value of a commodity is exclusively determined by the labor necessary for its production, this is not particularly problematic. The commodity with an invariable
quantity of labor necessary to produce it would have a value that is invariable, so that
it could be an invariable measure of value. But for Ricardo this was not the case,
because value for him at the same time signies production price. He must therefore
think along the following lines.
If we suppose this cause of variation [i.e. the uctuation in the quantity of labor
necessary for its production], and the same quantity of labor to be always required to
339
obtain the same quantity of gold, still gold would not be the perfect measure of value,
by which we could accurately ascertain the variations of all other things; nor with
xed capital of the same durability; nor would it require precisely the same length of
time before it could be brought to market. It would be a perfect measure of value
for all things produced under the same circumstances precisely as itself, but for no
others (Ricardo, 1996, p. 39).
But for Ricardo it was not sufcient to say this alone. This is because, as he himself
says, [it is] clear then that as soon as we are in possession of the knowledge of the
circumstances which determine the value of commodities, we are enabled to say what
is necessary to give us an invariable measure of value (Ricardo, 1952, p. 358), and
that, if we were in possession of the knowledge of the law which regulates the
exchangeable value of commodities, we should only be one step from the discovery of
a measure of absolute value (Ricardo, 1952, p. 377). This means that Ricardo was
unable to suppose an invariable measure in theory because he did not fully clarify
what determines value itself. Ricardo argues:
I have already remarked that the effect on the relative prices of things, from a
variation of prots, is comparatively slight; that by far the most important effects are
produced by the varying quantities of labor required for production; and therefore, if
we suppose this important cause of variation removed from the production of gold,
we shall probably possess as near an approximation to a standard measure of value as
can be theoretically conceived. May not gold be considered as a commodity produced
with such proportions of the two kinds of capital as approach nearest to the average
quantity employed in the production of most commodities? May not these proportions be so nearly equally distant from the two extremes, the one where little xed
capital is used, and the other where little labor is employed, as to form a just mean
between them? (Ricardo, 1996, p. 40).
Immediately after saying this, Ricardo, who fails to hold fast to the principle of the
determination of labor by value, claims that prot has little inuence on what he calls
value, thus attempting to defend the validity of the labor theory of value. And the
rst half of the passage just quoted is an application of his own fundamental thoughts
to the theory of invariable value. In contrast, the latter half concerns the separate
issue that stems from the inuence of the prot rate on value, and he displays his
views on what conditions must be in place for the most ideal measure of value other
than an unchanging quantity of labor necessary for its production. His opinion on the
problem is stated in detail in his letters and manuscripts (such as his article Absolute
Value and Exchangeable Value), but to summarize, Ricardo is basically saying that
the ideal measure of value would be a commodity with a medium-range organic
composition of capital and average turnover time. This sort of commodity would
have a production price that matches its value, so that even if wages were to rise,
causing the general prot rate to uctuate, it would not be inuenced by this. Thus, if
the quantity of labor necessary to produce this type of commodity is assumed to be
invariable, seen from the perspective of Ricardo, who conates value and production
price, its value would be said to be invariable. This is precisely the sort of commodity that Ricardo attempts to suppose in his theory of an invariable measure of
value, and he suffered to the end because of the difculty of dening such a commodity, and because he thought that this sort of commodity could not be an ideal
measure to correctly gauge the value of all other commodities as the other types of
340

SAMEZO
commodities measured by it would not have values that match their production
prices. Ricardos difculties from supposing an invariable measure of value were his
unavoidable fate for having confused value and production price while trying at the
same time to determine value as precisely as possible.
19. Ricardo attaches the heading The principle that the quantity of labour bestowed on the production of commodities regulates their relative value, considerably
modied by the employment of machinery and other xed and durable capital to
Section four, and the heading The principle that value does not vary with the rise or
fall of wages, modied also by the unequal durability of capital, and by the unequal
rapidity with which it is returned to its employer to Section ve, even though the
content discussed does not always correspond to these headings, which reects a
further degree of confusion.
20. For more on the inuence a general uctuation in wages has on production
price see Chapter eleven of the third volume of Capital.
21. Ricardo treating the two as identical is at the basis of his mistaken view.
REFERENCES
Malthus, T. (1963). Definitions of political economy. New York: Augustus M. Kelley.
Marx, K. (1976). Capital (Vol. 1). London: Penguin Books.
Marx, K. (1988). Karl Marx, Frederick Engels: Collected works (Vol. 30). New York:
International Publishers.
Marx, K. (1989). Karl Marx, Frederick Engels: Collected works (Vol. 31). New York:
International Publishers.
Ricardo, D. (1952). The works and correspondence of David Ricardo (Vol. 9) Cambridge:
Cambridge University Press.
Ricardo, D. (1996). On the principles of political economy and taxation. Amherst: Prometheus
Books.
Smith, A. (1970). The wealth of nations (Books IIII). Middlesex: Penguin Books.
AUTHOR INDEX
Abdel Latif, O. 192
Aglietta, M. 156, 232, 234, 262,
268269
Ahsan, S.A. 167173
Albert, M. 40
Albritton, R. 254
Althusser, L. 275
Altvater, E. 144
Amsden, A. 135
Anderson, P. 10, 38
Andreas, P. 98, 115
Azicri, M. 60
Boyer, R. 143, 148, 263264, 268269,

271
Brada, J.C. 133
Brady, D. 267
Braverman, H. 258
Brenner, R. 156
Brewer, A. 276
Brundenius, C. 50, 53, 55
Brus, W. 85
Bryan, D. 275
Bucchi, K.C. 103, 108
Bukharin, N. 247, 252
Burawoy, M. 138, 150, 152
Burge, R.T. 220
Burkett, P. 86
Bush, G.W. 196
Buxton, J. 7, 39
Bagley, B.M. 103, 115

Bahout, J. 167
Baker, L. 221
Baker, S. 148
Baran, P.A. 256
Barker, C. 142143, 152
Barone, C.A. 276
Barreiro Pousa, L.A. 79
Beadon, Sir, C. 98
Bergman, L. 113
Bernstein, E. 245, 276
Bertram, E. 98
Bieler, A. 138, 146
Blachman, M. 98
Blanchard, O. 133
Blasier, C. 4647
Bohle, D. 138, 149
Bond, P. 155
Boorstein, E. 49
Bourdieu, P. 38, 148
Bowden, M. 111
Bowles, S. 264
Cantor, J.C. 221

Carchedi, G. 146
Carranza Valdes, J. 59, 85
Carrigan, A. 111, 123
Carvalho, J. 231
Casolino, T. 224
Castells, M. 274
Castillo, F. 109
Castillo, III, C. 109
Castro, F. 47, 50, 55, 5758, 60, 63, 66
Chambliss, W.J. 112
Chang, H.-J. 135
Chavance, B. 136
Chavez, H. 39
Chaviano Saldana, N. 59, 85
Chernew, M. 231
Clark, N. 154
341
342
AUTHOR INDEX
Clarke, S. 138, 150, 152

Clawson, P.L. 108109, 111
Cleveland, W.L. 197
Coban, A. 267
Cockburn, A. 104
Cockburn, L. 109
Cohen, S.F. 252, 276
Cohn, L. 229
Colletti, L. 245
Collins, L. 109
Collins, P. 57, 61
Contreras, J. 103
Cooper, R. 233234
Coppedge, M. 78
Coronil, F. 14, 37
Cottle, D. 118
Cox, R. 148
Cox, T. 152
Crisp, B. 37, 39
Cristescu-Martin, A. 152
Cullenberg, S. 137
Cunningham, R. 233
Czaban, L. 143
Dunn, B. 138, 140

Dwyer, P. 112
Daniels, N. 230
Davidson, N. 142
De Brie, C. 112
De Soto, H. 106
Del Monte y Navarro, A.
8587
Derham, M. 37
D az-Briquets, S. 62
Dietrich, P. 233234
DiMaggio, P.J. 155
Dirmoser, D. 64
Dobb, M. 244
Domenech, S.M. 59, 85
Dom nguez, J.I. 63
Dornbusch, R. 133
Drago, R. 276
Draper, D. 212, 218
Dugger, W.M. 147
Dumenil, G. 134
Ga ciarz, B. 152
Gancedo Gaspar, N. 73
Garavito, F. 103
Garcia, J.G. 121
Gardawski, J. 152
Garretsen, H. 135
Geary, D. 244, 276
Gedicks, A. 115
Geligns, A. 206, 232
Gibson, A.C. 99
Giddens, A. 38
Gill, S. 146, 148
Gillis, K. 222
Giordano, A. 118
Glick, M. 156
Gneuss, C. 275
Goff, S. 109
Gomulka, S. 135
Gonzalez Gutierrez, A. 61, 66
Eammons, D. 222
Eckstein, S. 43, 5354, 62
Edwards, R.C. 258, 266
Ehlers, S. 112
Eliopoulos, P. 229
Ellner, S., 37
Elster, J. 156
Estay, J. 64
Eyal, G. 149
Eyer, J. 230
Fabienke, R. 81
Fairbrother, P. 138, 150, 152
Favereau, O. 268
Feuer, C.H. 50
Fitts, C.A. 113
Florio, M. 133, 137
Flounders, S. 117118
Forrester, J. 259
Frydman, R. 134
Author Index
Goode, P. 246, 276
Gora, M. 135
Gordon, D.M. 258, 260261, 266
Gowan, P. 133, 149
Grabel, I. 145
Grabher, G. 136
Grahl, J. 145146
Granovetter, M. 135
Grant, D.S. 266267
Greenhouse, S. 222, 225
Grosse, R.E. 110, 112, 117, 123
Guadagnino, C. 225
Gugliotta, G. 115
Gutierrez, T. 117118
Gutierrez Castillo, O. 73
Gutierrez Urdaneta, L. 85
Habermas, J. 38
Haddad, B. 191, 196
Hadley, J. 224
Hagelburg, G.B. 50
Hahnel, R. 40
Hall, P.A. 155
Hamilton, D. 64
Hansen, F.R. 245, 276
Harding, N. 276
Hardy, J. 131, 138, 144, 146, 148,
152154
Hargreaves, C. 9899
Harman, C. 152
Harmon, D. 109
Harnecker, M. 38
Hart-Landsberg, M. 86
Harvey, D. 140, 147
Hasan, R. 139
Havlicek, P. 221
Haynes, M. 139
Hellinger, D. 6
Henderson, J. 143
Henman, A. 107
Hilferding, R. 247, 276
Hillman, R.S. 38
Himmelstein, D. 203, 214, 216
343
Hinnebusch, R. 174175, 181182
Hinterseer, K. 98
Hirst, P. 273
Hirth, R. 231
Hoare, Q. 148, 156
Hodgson, G.M. 136, 155
Holland, D. 231
Hollingsworth, J.R. 148
Holman, O. 138, 146
Howard, M.C. 246, 276
Huber, E. 8, 38
Huberman, L. 49
Hurley, R. 212, 218
Ingelhart, R. 11, 38
Jackson, M. 135
Jaramillo, A.M. 102, 104
Jessop, B. 152, 264, 269
Joffe, J. 203
Joya, A. 163
Kaihla, P. 116
Kalecki, M. 277
Kane, C. 224
Karl, T.L. 6, 37
Karshenas, M. 189
Kautsky, K. 276
Kavanau-Levine, L. 108
Kawachi, I. 230
Kawell, J.A. 99
Keys, A. 118
Kienle, E. 179180
Kiernan, V.G. 276
King, J.E. 246, 276
Klein, P.A. 137
Klein, S. 226
Kletke, P. 222
Knight, A. 10
Knoester, M. 100
Kochanwicz, J. 135
Kongsvedt, P.R. 218
Koont, S. 71, 76
344
Kornai, J. 85, 134
Kotowska, I. 135
Kotz, D.M. 264, 267, 269270,
272, 277
Kowalik, T. 134, 149
Kozul-Wright, R. 133, 135
Krotov, P. 138, 150, 152
Krugman, P. 133, 137
Kuruma, S. 295
AUTHOR INDEX
Laibman, D. 230
Laski, K. 85
Laud, P. 233234
Law, D. 146, 148
Lawson, F. 170171, 173, 197
Layard, R. 133
Lee, III, R.W. 103, 108109,
111
Leech, G.M. 119
Leen, J. 115
Lenin, V.I. 115, 253
Lesser, C. 212, 218
Levine, D.H. 37
Levine, M. 108
Levy, D. 134
Li, R. 224
Lichtheim, G. 275276
Light, D. 215, 232
Linden, R.H. 46
Lipietz, A. 269
Lipton, D. 132, 134, 144, 149
Livingstone, G. 107, 118
Lo, D. 135, 137
Loeblich, H. 224
Long, S.H. 221
Los Nuevos Narcos, 111
Lowy, M. 140
Luxemburg, R. 276
de Maillard, J. 112
Mainwaring, S. 9, 11, 38
Malthus, T. 328
Mandel, E. 140, 259260
Marquis, M.S. 221
Marrero Prieto, F. 8081
Marshall, J. 103, 107
Martin, R. 152
Martz, J.D. 37
Marx, K. 199, 213, 231, 234, 296297,
301, 304, 308309
Mason, B. 152
Mayhew, A. 155
McCoy, A.W. 106, 108
McCoy, J. 37
McDonough, T. 241, 262, 267268, 271,
276277
McLellan, D. 276
Meiksins Wood, E. 143
Mesa-Lago, C. 4647, 50, 5456, 5859,
61, 6465, 67
Meszaros, I. 32
Mezaros, I. 231
Millares, M. 86
Mintz, S.W. 99
Mitchell, J. 224
Mokrzyszewski, A. 152
Monreal Gonzalez, P. 85
Monreal, P. 61
Morgan, D.W. 245
Morley, M. 115
Morrisey, M.R. 217
Mortimer, G.W. 99
Moser, J. 224
Moubayed, S. 184, 191
Murrell, P. 134, 136137
Murrillo, M.A. 116
Myrdal, G. 135, 142
MacGregor, F.E. 113

Maddison, A. 139, 144
Magdoff, H. 258
Magnin, E. 136
Nadel, H. 268
Na m, M. 37
Nasrallah, F. 180
Navarro, V. 230
Author Index
Naylor, T.R. 115
Neuhaser, D. 231
Neunhoffer, G. 138
Newhouse, J. 227
Nielsen, K. 155
Norden, D. 38
North, D. 155
Nova Gonzalez, A. 60, 62
Novack, G. 141, 144
Nove, A. 85
Nowell Smith, G. 148, 156
OHara, P.A. 277
Olson, R.W. 168170, 197
Ost, D. 144, 152
Owen, R. 179
Paci, P. 135
Pankow, 152
Palloix, C. 140
Pamuk, S- . 179
Parker, M. 274
Patel, K. 216
Pearce, J. 123
Perez, M.J. 121
Perthes, V. 166, 168173, 175178,
180183, 196198
Petran, T. 167169, 171, 197
Petras, J. 115
Petras, P. 112
Phan, C. 225
Pickel, A. 133, 136
Podgorski, J. 135
Podur, J. 119
Polanyi, K. 135
Polling, S. 176, 179
Pollitt, B.H. 50, 74
Pope, G.C. 220
Porek, T. 135
Potter, G.W. 112
Powels, J. 230
Preobrazhensky, E.A. 87
Quilliam, N. 169172, 175177, 179,
181, 186, 197
345
Rabine, M. 99, 121
Radice, H. 138, 140
Rainnie, A. 138, 144,
152153
Rapaczynski, A. 134
Rayment, P. 133, 135
Reason, T. 113
Reed, G. 6062
Reich, M. 258, 266268, 277
Relman, A.S.M.D. 233
Reuter, P. 107
Reveiz, E. 121
Reyes, A. 116
Ricardo, D. 304306, 319321, 327,
338339
Richani, N. 105, 113, 122
Richards, A. 174, 177180, 182183,
189, 193, 198
Robbins, C. 104
Roberts, K. 7, 39
Robinson, D. 230
Robinson, J.C. 222, 224, 227,
234
Rodr guez, J.L. 53
Rodwin, M.A. 233
Roman, P. 50, 90
Romero, A. 37
Rosenberg, N.S. 206, 232
Rostow, W. 259
Rozental, M. 119
Rueschemeyer, D. 8, 38
Ruppert, M.C. 112113
Rushevsky, M. 216
Sabbag, R. 113
Sachs, J. 132, 134, 144, 149
Saillard, Y. 268
Salas, M.T. 37
Salazar, A. 102, 104
Salhani, C. 196
Salvadori, M. 276
Sasin, M.J. 135
Sayyigh, Y. 194
346
Schauerte, M. 281
Schoenman, R. 150
Scott, P.D. 103, 106107, 112
Screpanti, E. 143
Seale, P. 181
Serano, N.M. 118
Sharpe, K. 98
Sherlock, D.B. 233
Shi, L. 214, 230, 232
Shields, S. 138, 144, 146, 148, 151
Shortell, S. 224
Silvestrini, E. 116
Simatupang, B. 139
Singh, D.A. 214, 230, 232
Skinner, C. 43
Sklair, L. 148
Slaughter, J. 274
Slay, B. 139
Smith, A. 138, 146, 298304,
306307, 310311, 313, 315,
318, 329330, 336337
Smith, M.L. 104, 118
Smith, N. 140
St. Clair, J. 104
Stark, D. 136, 143
Starr, P. 232
Steenson, G. 276
Steindl, J. 277
Stenning, A. 154
Stephens, E.H. 38
Stephens, J.D. 8, 38
Stich, R. 102104, 108, 112113
Stiglitz, J.E. 85, 137
Storrs, K.L. 118
Strong, S. 104, 107
Strunk, B. 212, 218
Sukkar, N. 174175, 178181, 188,
198
Summers, L. 133
Swain, A. 138
Sweezy, P.M. 49, 246, 256257,
275
Szelenyi, I. 149
AUTHOR INDEX
Taylor, C.R. 155
Taylor, L. 135
Therborn, G. 38
Thompson, G. 273
Thongtham, N. 104, 118
Thoumi, F. 106
Thoumi, F.E. 102
Tickner, A.B. 118
Tittenbrun, J. 151
Townsley, E.R. 149
Treanor, P. 147
Trinkunas, H.A. 38
Trista Arbesu, G. 59, 85
Trocki, C.A. 99
Trotsky, L. 138
Tsang, S.-k. 135
Tselikis, P. 217
Turnbull, C.M. 98
Valentine, D. 106, 109
van Duijn, J.J. 259
Van Ees, H. 135
Van Zon, H. 142
Verbeek, J. 135
Vilas, C. 37
Villar, O. 97, 118
Vlachou, A. 231
Waitzkin, H. 230231
Walker, P.G. 61
Wallace, M. 266267
Web, J. 118
Wedel, J.R. 150151
Weintraub, A. 234
Welsh, I. 148
Went, R. 272
White, G. 85
White, J.D. 276
Whitley, R. 143
Williams, F.C. 111
Williams, P. 110
Wilpert, G. 3
Wilson, F.A. 231
Author Index
Winieckie, J. 136
Wolfson, M.H. 269, 272
Wood, E.M. 193
Woods, B.F. 105
Woolhandler, S. 214, 216
Youngers, C. 115
347
Zabala Arguelles, M.del C.
62
Zabludoff, S.J. 109
Zill, O. 113
Zimbalist, A. 53, 57
Zunes, S. 196
Zysman, J. 143

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LIST OF CONTRIBUTORS

Centre for Research in European Business

Division of Social Science, St. Johns

Department of Political Science, York

Now deceased: translation by

Department of Economics, National

Administrator of the Japanese Section of

Pelliparius Consulting, Brooklyn, NY,

Department of Politics, University of

Venezuelanalysis.com, Editor; Freelance

CHAVEZS VENEZUELA AND 21ST

Chavezs Venezuela and 21st Century Socialism

1. CAPITALIST DEMOCRACY WITH REPRESSION

1.1. Economic Factors for Stability

Chavezs Venezuela and 21st Century Socialism

1.2. Political Factors for Stability

As mentioned earlier, another important element in this arrangement was

1.3. Social Factors for Stability

Chavezs Venezuela and 21st Century Socialism

democratization (Anderson, 1988). For example, Venezuela, which has had

Chavezs Venezuela and 21st Century Socialism

1.4. Cultural Factors for Stability

Accordingly, Venezuela must have a political culture in which democratic

1.5. The Military as a Factor for Stability

Chavezs Venezuela and 21st Century Socialism

1.6. Venezuelas Uniqueness and Ordinariness in Latin America

1.7. Bringing the Factors Together

Chavezs Venezuela and 21st Century Socialism

2. THE DECLINE OF VENEZUELAN

These four factors together combined to produce two key consequences

Chavezs Venezuela and 21st Century Socialism

3. THE CHAVEZ PRESIDENCY: DIALECTIC

3.2. Heightened Resistance, Coup Attempt, and Retreat: November 2001 to

Chavezs Venezuela and 21st Century Socialism

federations old established leadership won amid the governments claims of

3.3. Oil Industry Shutdown and Chavezs Comeback: December 2002 to

Chavezs Venezuela and 21st Century Socialism

The oil industrys recovery, along with a dramatically increasing price of

3.4. Recall Referendum and Radicalization: April 2003 to December 2006

Chavezs Venezuela and 21st Century Socialism

4. THE IDEAL OF 21ST CENTURY SOCIALISM

democracy. This is the central axis of socialism in the political [realm],

5. THE INSTITUTIONS OF CAPITALISM

Chavezs Venezuela and 21st Century Socialism

a capitalist state not only helps correct capitalisms frequent dysfunctions

6. IS VENEZUELA MOVING TOWARDS 21ST

6.1. Transformation of the Capitalist State into a Socialist State

Chavezs Venezuela and 21st Century Socialism

Chavezs Venezuela and 21st Century Socialism

6.2. Transforming Private Ownership/Control of Production into

dozen production plants, which produce paper, valves, and agricultural

Chavezs Venezuela and 21st Century Socialism

of requirements, such as to, privilege the values of solidarity, cooperation,

6.3. Moves Away from Market Exchange

competitive) exchange could function on a large scale is still quite unclear in

7. OBSTACLES FOR 21ST CENTURY SOCIALISM IN

7.1. External Obstacles

Chavezs Venezuela and 21st Century Socialism

7.2. Internal Obstacles

Chavezs Venezuela and 21st Century Socialism

reelected more than once, perhaps an indenite number of times. Such a

Recently, though, with the failure of neo-liberalism to provide for any

Chavezs Venezuela and 21st Century Socialism

Chavezs Venezuela and 21st Century Socialism