Capitalist restoration in Central and East Europe
[Fourth Congress of the LRCI, August 1997]
1. In Central Europe and Yugoslavia successive waves of market reforms between 1965 and 1988 introduced a degree of enterprise autonomy from central plan directives. The USSR itself finally took the road of “market socialism” after 1985. In China sweeping market reforms were introduced in agriculture after 1978 followed by massive foreign capitalist investment in coastal enclaves and the widespread formation of market oriented co-operatives in the interior (TSVs). Vietnam after 1986 undertook changes in agriculture. Up to 1989 only Cuba and North Korea resisted significant reform.
2. These measures were not subjectively an attempt to destroy the planned property relations; rather, it was an attempt to restore dynamism and ease the contradictions of bureaucratic planning. However, the measures only succeeded in destablising the economies, injecting disequilbrium, inequality and unrest. Fatally, they opened up the DWS to growing imperialist influence (debt, trade) and introduced growing divisions within the ruling bureaucracies. In 1989-91 in the old degenerate workers’ states (DWS) in Eastern Europe and the former Soviet Union these fractures led to the collapse or overthrow of these ruling Stalinist parties. In Cuba, the consequences of the end of Soviet economic aid led to slump and a series of belated market reforms being adopted by the Castro bureaucracy. The Chinese CP, having crushed an incipient popular movement in 1989 was able to keep a tight rein on power, suppress factional differences and continue its specific version of market socialism. Vietnam suffered a loss of Soviet aid and lacking the savings/investment possibilities open to China added to its Chinese-style agrarian reform a post-1990 eastern European-type macro-economic stabilisation programme in the years 1988-92. North Korean Stalinism retreated further into autarky and command planning in the 1990s with resulting economic stagnation and even widespread famine.
The economic and political essence of capitalist restoration
3. Capitalism is a system of generalised commodity production. It is a system in which all the material prerequisites of production and distribution, including labour itself, take the form of exchange values. Capitalism is a system in which the means of production are privately owned. The commodities that are produced are produced for sale on an unknown and unlimited market, regulated by competition in an attempt to capture market share. The driving force behind this phenomenon is the urge to maximise profit, which is the aim of capitalist production. Capitalism is a system in which production is geared towards the accumulation of capital (i.e. growing net investment). The surplus is not, in the main, unproductively consumed but ploughed back into production as more capital, thus enlarging the sphere of production and exploitation. Under capitalism investment must be undertaken in general into the industries and services that offer the most profitable returns. This process first of all requires that profits from individual firms or sectors are aggregated and centralised, together with savings of the working class, into a relatively autonomous financial sector (banks, pension funds, equity and bond markets). In the form of money capital all trace of the specific origin or concrete use to which the capital is put, is obliterated. It is then recycled to those sectors likely to earn the biggest return. This process of capital circulation ensures the fluid movement of capital to the most productive uses, and ensures the formation of an average rate of profit. The law that regulates this system of production is the law of value which states that the exchange of commodities takes place according the amount of socially necessary labour time contained within them. Unlike a system of petty commodity production the law of value operates under capitalism through the formation of prices of production by competing capitals, the movement of capital between sectors with different levels of productivity and, through this, the equalisation of the rate of profit between sectors and the destruction of unproductive capital.
4. In understanding the process of transition it is necessary to have a conception of capitalism towards which this process is headed; the final destination which signals the completion of the restoration process. In defining the “essence” of capitalism it is crucial to abstract from specific institutional forms in which capital operates (e.g. worker-managed firms, multi-national corporations, banks, pension funds, capital markets) in order to arrive at a definition that gives full weight to the essential functions of different forms of capital (e.g. industrial-financial, commodity-money, wage labour-capital) in the total process of the formation, reproduction and destruction of competing capitals.
5. The definition of capitalism that guides the analysis must not only accord with the logic of Marxist political economy but also with the history of the states undertaking the transition. We do not speak here of countries in transition from feudalism and mercantilism to free competition capitalism but from degenerate workers’ states to highly statised semi-colonial capitalism. Hence the concrete tasks of the restoration process are effected by the historical point of departure of the transition. Specifically, if the objective mission of early capitalism was the creation of a class of free wage labourers and the formation of industrial capital out of merchant capital, then the key tasks of the new transition are to construct a class of private capitalist owners/managers, to transform money from a passive instrument of accounting into profit-oriented investment capital and the creation of a proletarian class with no access to ownership of the means of production.
6. Nevertheless we have to take into account that no concrete capitalist state fits completely into the text book model of capitalism. In the imperialist epoch the development of monopolies and the intervention of the capitalist state partially negate the law of value. During WWI the German state organised a high degree of centralisation and even planification of production in order to guarantee the necessary inputs for the war machine. In the 1930s the state influence into the economies of the West increased again under the influence both of fascism and the New Deal. And after WWII a high degree of political manipulation of the law of value took place not only in the Keynesian oriented imperialist economies but even more in those semi-colonies that embarked on an import-substitutionist course. Important factories and raw material producers were nationalised, whereas money and credits were politically channelled into those branches that were thought to allow for an increasing independence in relation to the imperialist countries. In other cases, as in South Korea or Taiwan, money capital was specifically used to bolster the anti-communist projects of these regimes. Again, the law of value suffered from considerable distortions. In Eastern Europe first waves of nationalisation took place still under the bourgeois regimes. In many cases the most important banks were statified before 1948. For example, the structural reforms of March 1946 in the Czechoslovak Republic put 65% of indusrial production under state control. In Hungary the seven biggest banks were nationalised in July 1947. From 1946 onwards, most East Eulopean countries had “bourgeois plans” investment plans by the popular front governments, that directed a large amount of overall investment. And did they recycle the money to those sectors likely to earn the biggest return? No, not necessarily. In many cases the state industries were privileged in relation to private firms because the labour movement (and to be sure, the Red Army) was in a position to put enormous pressure onto the governments. This means that the point of departure for the emerging degenerate workers’ states was the existence of already “deformed bourgeois states'', as the IV. International correctly put it in the first years after the war. Rewinding the film backwards is likely to produce similarly deformed bourgeois states. The first phases after the definitive destruction of the (moribund) workers’ states will show an emerging capitalism that is not yet working in a rounded fashion. We can expect a situation in which actual production is already governed by the law of value whereas the investment process is still distorted similarly to other capitalist states in extreme situations. The lack of an autonomous finance sector is an important defect that will not allow such a system to develop beyond a certain stage. It is a deformation of capitalism but one that is not absolutely unique in the history of capitalism.
7. We can summarise the core economic tasks of the restoration process and at the same time set out a minimally acceptable functional definition of Newly Restored Capitalism (NRC) thus:
(i) a system whereby both owners of capital and the managing agents of capital in the enterprises and banks are enforcing profit-oriented production in the bulk of the economy.
(ii) the centralisation of the financial reserves and current operating profits of these enterprises into institutions of finance capital that in turn recycles these savings into investment in the most profitable industrial enterprises.
(iii) a situation where the great majority of the mass of producers (outside of agriculture) are obliged to sell their labour power to the means of the production. In short, the working class is expropriated.
In the case of (i) if capital is to emerge in those minority of enterprises which were already “commercially viable” in the DWS then their surplus product must be turned into surplus value. Secondly, value-destroying production must be stopped and, thirdly, potentially productive output must be restructured to survive in open competition on the world market.
8. The massive privatisation programmes that are undertaken in the transition aim to create capitalist owners and managers able to accomplish these three tasks. But despite the changes in the form of ownership that the privatisation process represents, privatisation does not succeed immediately or directly in creating agents of capital. The new private owners are either “insiders” (workers and managers of the privatised enterprise) or “outsiders” (citizens holding vouchers or investment funds which have bought them up). Each type of owner is born with a set of social interests which contradict their role as agents of capital. In the case of “insiders” some of the owners are also directly agents of labour not capital (i.e. workers). This means they actively resist the imposition of pro-capitalist measures (sackings, closures). In the case of enterprise managers they too continue to operate according to other criteria than profitability at the outset, such as revenue or output maximisation; they may also be forced to concede to the interests of their co-owners (workers). Breaking this cycle requires a whole period of sale, purchase of shares and the concentration of capital, together with change in behaviour of managers. This can only be done by the creation of market competition, retraining and sacking managers and commercial pressure from external owners.
9. However, in the case where privatisation leads predominantly to “outsider” ownership this external pressure does not result immediately either. Only in the case of foreign multi-national ownership does profit-oriented corporate behaviour quickly occur. But this is always a minority form of ownership and generally very small. In the case of domestic “outside” private ownership most shares are owned by banks (either directly or indirectly via their ownership of the investment funds). In extremis (e.g. Czech and Slovak republics) the governance and ownership of the main banks by the government which in turn own the investment funds may even further render privatisation a matter of form rather than content). Where the new enterprise owners are also owners of banking capital then the protection of their interests at the outset of the transition process contradicts their interests as owners of industrial capital. As bankers they need to maximise the asset valuation of firms to which they are creditors in order to protect their balance sheets as well as maximise the short-term returns on their new bank lending. The former interest leads to extending bad loans, the second leads to a pattern of new bank lending that is almost completely geared to financing government deficits (at fixed guaranteed high interest) and not to industry for restructuring. Yet as owners of industrial capital the banks need to restructure the industry towards profitable production which will involve first the devaluation of enterprise assets and then the search for sources of long term credits for fixed investment. Hence the restoration process begins mired in a real social contradiction, one that reflects the difficulty of creating social classes where none exist and creating fractions of a capitalist class that, while functionally interlinked, have distinct interests. Privatisation itself thus does not alone create sufficient conditions for enterprises to become profitable, although the form it takes (insider/outsider, foreign/domestic) has consequences for the nature of the relationship between industrial and financial capital.
10. In the case of 6 (ii) above the banks play a critical, even decisive role, in the economics of transition to capitalism. In the market socialist forms of DWS banks have no independence from the state but by controlling the supply of investment credit to industry they are the key agencies of central planning. The goal of the transition for banks is clear: extend commercial-based investment credit to industry and where they are owners of industrial capital, enforce profit-maximisation behaviour. To realise this goal is fraught with difficulty.
11. First, they have to gain their independence from the state so that lending is not politically directed. Secondly, they have to gain their freedom from their ties to any one firm or sector of industry with which they have a privileged or unique relationship, so that they can carry out their function of aggregating and recycling total social capital to wherever it is most profitable. Thirdly, it must take a lead in the process of destruction of unprofitable output in conditions where much of the firms responsible for this output are assets on the banks balance sheets. To complete these tasks the following measures are essential:
(i) nationalisation of bad debts held by banks. This takes the form of siphoning off these debts by the government and pouring in new capital to bring their reserves up to internally acceptable levels. Without this the banks cannot act against the ailing and failing firms they own or are creditors of, nor can banks attract foreign partners or be privatised.
(ii) the state must legislate and enforce the autonomy of the banks from the state. Whether this takes the form of allowing a massive growth in new banks (e.g. Russia), the commercialisation of state-owned banks (e.g. Poland), the foreign takeover of domestic banks (e.g. Hungary) or the extensive privatisation of banks to domestic owners, is not decisive.
(iii) the banks must take advantage of their new asset structure and autonomy to enforce profit-maximising behaviour of firms it owns or lends to. It can do this through direct participation in the management of the enterprise, selling off shares, varying the terms of loans or petitioning for bankruptcy.
(iv) the banks must become in the short-term (until capital markets grow) the main source of new long-term investment finance for industry.
The role of the state in the transition process
12. The restoration of capitalism is not a blind, spontaneous economic process. The state is the forcing house of transition. The state has to establish the social relations of capital. The tasks of the state machine here are twofold:
(i) the state must destroy the old institutions of the DWS and impose the costs of capitalist restoration upon the working class (the class function of the new state);
(ii) the state must act as a general executive of the capitalist class, raise itself above and over the competing capitalists and enforcing the general logic/law of capitalist accumulation against individual capitalists and state capital itself capital (the capitalist form of the state).
In (i) we can bracket all those functions that destroy or subordinate the institutions and rules of the old workers’ state :
(a) end of planning institutions;
(b) transformation of labour into a commodity (i.e. destruction of welfare function of the enterprises, turning non-wage benefits into commodities, creation of a reserve army of labour)
(c) change in the structure of taxation (i.e. the new state’s revenues) from primarily a charge on the enterprise to a charge on the working class.
(d) privatisation of state assets (i.e. creation of a class of capitalists out of old managers)
In (ii) are bracketed all those all those institutions and laws that regulate competition between sectors of capital. Among the specific capitalist institutions of the state are to be found;
(a) separate executive, legislative, judicial branches of the state machine and rules governing the resolution of conflicts within the capitalist class and between that class and its state.
(b) arbitration and decision in clash of interests between foreign and domestic capital; between restitution claims of former owners and those that now possess them; between rival claims of banks and enterprises for the same assets;
(c) nationalisation of banking debts; legislation on property and contract law, an administration of bourgeois justice and its effective implementation, an internationally recognised system of accounting—all these have to be constructed and enforced.
13. These social relations of capital, notwithstanding the political will of the transition governments, take time to create since they require the gathering of information (e.g. accounting data on sales, asset structure of firms and banks) and the building of institutions (which embody training, expertise, authority). The process of transition is also long and drawn out for the following reasons:
(i) the process of creating new social classes is a process of class struggle. Most importantly the struggle of the working class to defend its real wage levels, the value of its savings and jobs. Secondly, the struggle between fractions of the old ruling caste and between them and petit-bourgeois layers from outside it who aspire to be part of the new bourgeoisie. All these have different policies for restoration and obstruct each other in the battle for power and wealth. In addition, the predominantly bourgeois democratic form of the political regimes means that obstructions in the path of restoration have to be exhausted and derailed rather than crushed. This adds to the delay.
(ii) the transition process is drawn out because the capital requirements needed to train new personnel, build new market institutions, inject capital into the banking system or privatise many state enterprises has to come from imperialism (world capitalism). At the end of the 1980s and early 1990 imperialism was in a weakened position (recession) and was slow to provide it. The major EU imperialist power (Germany) had to devote most of its resources to capitalist restoration in the ex-DDR. Finally, while some MWS opened themselves up in an unrestricted way to imperialist capital (e.g. Hungary) many others refused to sell their most productive assets to foreign multi-national capital.
The moribund workers’ state (MWS)
14. In Eastern Europe and the USSR the loss of power by a monolithic Stalinist bureaucracy in the years 1989-91 signaled the end of “market socialism” in the DWS and propelled these countries onto the path of capitalist restoration. This course was usually initiated by a leading faction of the ex-ruling Stalinists but in most cases was decisively accelerated only when anti-Stalinist bourgeois forces came to power. The DWS were thereby turned into moribund workers’ states (MWS). A MWS can be defined as a degenerate workers’ state in which a bourgeois restorationist government has come to power, and actively undertakes the restoration of capitalism. The objective of all governments inside a MWS is clear: the destruction of those institutions of command planning left untouched by “market socialist” reforms, the dismantling of the state machine of the Stalinists and the first stages of the transformation of the economy into a fully capitalist one. The countries of Eastern Europe and the Baltics all elected such governments in 1989-91; in the CIS such government were elected or took power in 1991-92.
15. One of the main tasks of the transition to capitalism is to break the resistance of the working class to the restoration process. The policies of macro-economic stabilisation, involving as they do, the destruction of savings, mass sackings, savage reductions in real wage levels, non-payment of wages and loss of job-related welfare entitlements naturally provoke strikes or demonstrations. Some of these attacks have taken place under the regime of a DWS (eg Vietnam). More often they have occurred in the MWS phase. Only occasionally however, has this resistance reached industry-wide strike level. Nowhere has it reached civil war proportions in any MWS. While the actual completion of the restoration process (FRC) amounts to a historic defeat for the working class, posing once again the overthrow of capitalism, political strategic defeat is inflicted on the working class during the MWS stage. This is reflected in the fact that the break up of the central institutions of planning necessitates the reformulation of the programme for power from one simply of political revolution to a combined programme of political and social revolution. In Central Europe these defeats were inflicted during the period 1990-92. In Russia the defeat of the strike wave of 1993 and the effect of the October 1993 events had the same result by 1995. This defeat leaves the working class divided and qualitatively weaker than its class enemies and ensures that the decisive remaining obstacles to the completion of the restoration process are in creating a stable bourgeois state apparatus and a functioning finance capital.
The reasons for the limited scale and nature of the working class resistance to restoration include;
(i) the dissolution of the agencies of direct central planning are met with little or no resistance from the working class since these agencies are not seen as instruments for creating socialism. Rather they are experienced as instruments of its oppression and alienation, the reason for its depressed consumption levels and endless shortages.
(ii) in some cases (e.g. Poland and Hungary) the main trade unions (Stalinist or oppositional) from the DWS are key components of the restorationist project; in others (e.g. Czech and Slovak republics) the trade union federation is a creation of the MWS period and places its newly acquired authority at the service of the restorationist bourgeoisie. In. Russia we find another varient; the main independent trade unions are created in a struggle with Stalinism in the DWS but become co-opted into the new state apparatus of the post 1991 pro-capitalists. The old official trade unions meanwhile were transformed from instruments of Stalinist oppression into "survival" organisations during shock therapy and weapons in the resistance to the effects of restorationist policies. (iii) given the inherited atomisation of working class consciousness from the DWS the first effect of the economic slump in the MWS period was to paralyse the trade unions rather than provoke a response. Later some revivial in activity occurred. The response to mass sackings is highly sectional where it occurs at all; real wage cuts or non-payment of wages (eg Poland 1992-93, CSSR 1994, Russia 1995) has provoked the most generalised response. Only in Russia were unions involved at any level in protests against privatisations (1992/93)
16. While these states were DWS revolutionaries defended them from external social counter-revolution in any conflict with imperialism; this was not defence of the bureaucracy but defence of those elements of socialism that needed to be preserved and purged to reopen the transition to socialism. In DWS the bureaucracy was forced to defend the state in order to defend the source of its privileges. But with the overthrow or suicide of the ruling Stalinist caste the ruling layer actively seek to destroy the social basis of the workers’ state. Hence the conditions for the united front with the ruling caste, that is at the heart of defencism, are removed. There can be no policy of revolutionary defencism as a principle. Nonetheless, we would always defend a MWS against imperialism. There can also be situations where it is necessary to defend a MWS even against a DWS. The totality of a war—its principled class character and the concrete issue of the war—has to be taken into account. In a MWS revolutionaries are thus defeatist in the case of war. Inside such MWS however the struggle against social counter-revolution necessitates the defence of all and any elements of planning, wage and employment levels and welfare provision that remain.
17. Before 1989 the ruling Stalinist regimes inside the DWS had already (to differing degrees) transformed the nature of economic direction from command planning and direct physical resource allocation to indirect planning via a series of closely connected monetary and fiscal mechanisms —direct subsidies, controlled prices, investment credits, negative interest rates. Hence, indirect planning was still central planning, in which planning agencies set definite targets for the pace and content of economic development. The restorationists in the MWS bring even this degree of direction to an end with the destruction of the centralised planning and supply structure. Henceforth, the economy is no longer actively organised by the institutions of bureaucratic planning. This effect of this dismantling, in the absence of a new dominant bourgeoisie, is enough to ensure a fall in material production and investment. The curve of production and investment is down during the MWS period.
18. However, the process of transformation of this (reduced) production has a contradictory dynamic as expressed in the following terms:
(i) a series of measures are introduced so that the yardstick of the internationally operating law of value can be used to evaluate the worth of productive assets and labour power.
Specifically, the key measures that promote the law of value at this stage of the restoration process are:
(a) the liberalisation of prices and trade (stabilisation programmes) to convert money from a passive instrument into active agent in establishing the relative exchange ratio of commodities in the market. This liberalisation leads to widespread devalorisation of enterprise assets.
(b) the adoption of a series of laws that recognise the right to own means of production and the unrestricted right to enjoy profits.
(c) the formation of new enterprises, privatisation programmes (beginning with small-scale enterprises) to create a class of competitive capitalists;
(d) surplus labour is legally freed from its attachment to the enterprises and a reserve army of labour is created. The value of real wages is lowered to reflect the true nature of value added as measured in international market. While government spending on social welfare increases it fails to keep up with needs of the population suffering mass unemployment, collapse of real wages and the destruction of savings;
(e) the government ends direct budget subsidies to enterprises (hard budget constraint).
19. (ii) set against these a series of measures are taken to preserve as much existing economic activity from the operation of the law of value as possible. The bulk of material production in the MWS can become surplus value-generating production only on condition that its present unprofitable character is sustained and reproduced for some time in the transformation process. A generalised and immediate imposition of the law of value on the labour process in the MWS would destroy the possibility of future surplus value creation. The limits of the law of value at this stage can be observed in the following features of the MWS:
(a) the gradual increase in number of loss-making enterprises as real worth of assets is revealed during process of liberalisation. In addition, during the MWS stage the preparation of the privatisation process leads managers who think they could become owners through privatisation increase enterprise debt and thereby reduce the value of its assets so that at the time of purchase asset prices are as low as possible. Inter-enterprise debt (IED) also mushrooms in a MWS as traditional supply lines between similarly afflicted enterprises are maintained; this amounts to the extended reproduction of loss-making production in the old state sector. IED is accompanied by systemic use of non-commercial bank-lending to replace missing government subsidies and the government itself tolerates generalised non-payment of enterprise taxes to ease their financial crisis..
(b) in MWS the banks and enterprises are mutually dependent on each other. The sheer size and weight of bad debts on the banks balance sheets ensure that it is easier to continue to expand these debts than call them in. Debts held by a bank are an asset and if these were accepted as irrecoverable then the banks’ assets would collapse.
(c) The use of bankruptcy laws that exist are used to protect illiquid enterprises from being destroyed, that is, it they are used by debtors to gain protection from creditors’ claims. No bankruptcy laws in the MWS allow for creditors to initiate bankruptcy. In this way the state machine acts to prevent the law of value being imposed, so blocking the transition to capitalism.
(d) any reorganisation of production takes place on the old technical foundation; passive restructuring of enterprises (wage cuts and/or mass sackings, new markets) Labour productivity falls at first as the old disciplining factors decline in their effectiveness; any productivity gains are due to mass sackings rather than investment.
(e) the old bureaucracy fragments as it ceases to be a ruling party but retrenches within the industrial enterprises and banks actively obstructing market discipline
(f)Despite the new system of property rights, the state ineffectually enforces them. The legal system and administration of justice remains based as much on corruption or privileged access than impartially enforced rules.
20. The economy of a MWS is structurally dislocated. There is a growing profit-oriented private sector (a system of “many capitals”), which consists of newly founded private enterprises in the hands of domestic owners, joint ventures with foreign multi-nationals, branches of foreign capital, as well as commercially restructured former state enterprises. In addition, there is a sizeable grey sector of the economy which delivers informal goods or activities but does not appear in official statistics. The non-state sector are strongly represented in retail and wholesale trade, personal and business services and light industry oriented to consumer goods. The non-capitalist state sector, on the other hand, dominates large-scale industry together with the energy and transport sectors. Many of these enterprises not only operate at a loss but they are not even geared to the goal of profit-making. Some of them retain their monopoly power and are therefore not forced to change under the impact of competition. Others are so big that the state protects their unprofitable existence in order to prevent social unrest. Still more are protected because ways may be found to make then commercially viable in the future or simply because a sector of the old bureaucracy successfully obstructs their overdue liquidation. As long as the old state sector is dominating the whole economy, that is, as long as the non-capitalist laws of this sector regulate the accumulation process of the bigger part of the economy and hold the other sector in dependence and subordination, so long the character of the system remains that of a MWS. Russia remains the classic example as of the end of 1996.
The Rubicon crossed: capitalism in its earliest phase; the Emerging Capitalist Economy and Embryonic Capitalist State
21. The next stage in the restoration process is marked out by important changes in the function of the state and the dynamic of the economy. It is the decisive stage in terms of the class character of the whole state. It contains thc point of the qualitative leap back from the post-capitalist social formation to the capitalist historic formation. This does not mean that expanded capitalist reproduction already takes place in its full sense. But it does mean. that all the gains of the workers’ state are destroyed, that there is nothing left to be defended. Therefore it is clear. that we apply the usual war tactics, developed for capitalist countries in these embryonic capitalist states. Of course, we defend nationalist property against privatisation just as in all other capitalist countries. But in terms of the overall svstem there are no post-capitalist structures that systematically subjugate the law of value. Therefore, the historic place of this phase is to be found in the world of capitalism. It is distinguished from the MWS by the reversal of the process of protection of loss-making enterprises and is distinguished from Fully Restored capitalism by the lack of a sector of financial capital autonomous from both industry and the state which distorts the process of investment. It is positively characterised by the resumption of growth in output and by the predominance of industrial enterprises making operating profits. The major advances in the operation of the law of value can be seen in the following features of ECE/ECS presently operating in the Visegrad countries, Slovenia and the Baltic states:
(i) no new loans are issued to defaulting enterprises and there is a partial repayment of enterprise debt to the banks;
(ii) the retirement and commodification of bad debt held by the enterprises and by the banks. This process of recapitalisation of the banks is effectively a tax on the future profits of the capitalist class. This is an important measure since it enables the process of new production to be separated off from burden and legacy of old production. It allows for commercially-driven bank lending to predominate.
(iii) active restructuring of industry through new investment in fixed capital; productivity gains are in this stage generally due to new fixed investment not sackings;
(iv) a genuine and flexible labour market emerges with differential pay reflecting skills and shortage structures in the economy; average real wages for those in work rise again as prices stabilise and productivity increases.
(v) laws are enforced impartially by the state in disputes between private capitalists
22. Nevertheless, important structural weaknesses remain in the application of the law of value to the whole circuit of capitalist accumulation. It is not enough for current production to operate according to profit-maximization criteria: the investment process must be governed by this same logic. But in ECE/ECS there remain key defects:
(i) investment of enterprises is funded from cash reserves within the enterprises which reflects past favourable revenues gained during the MWS rather than reflecting current or future profitability;
(ii) bank lending is overwhelmingly to the government to purchase bonds to allow the government to finance its budget deficit. What lending there is to industry is mainly to new small enterprises (not SOEs or privatised) and very short-term (to cover inventories not fixed capital);
(iii) there is a high level of product markets but low level of market institutions to mediate between enterprises and between industry and finance capital;
(iv) lack of bankruptcies due to the lack of creditor incentives with the result that capital is frozen in non-performing assets;
(v) the residual state ownership of banks and/or investment funds prevents effective commercially based lending from taking place; or, where banks are autonomous from the state they cannot exert profit-maximising behaviour over firms dominated by “insider ownership”;
(vi) the state legal administration still does not generally enforce claims by private capital against the state.
Fully Restored capitalism (FRC)
23. The restoration process is completed when the state detaches itself from political direction over the financial sector and hence raises itself above the different sectors of the capitalist class; at the same moment the now autonomous finance sector (in effect banking) enters into an independent but at the same time fully integrated relationship with industrial capital, providing for the bulk of its investment needs on a commercial basis. In this sense the decisive transition measures are simultaneously political and economic. The state as capitalist becomes one among equals capable of applying its own laws equally to itself and the rival capitalists in the regulation of competition. This regulation demands not just product markets but a system of easily available, consistent and readily understood state enforced rules for effective competition; that is, regulated markets in securities and equities and effective registers for property claims. In the economic sphere financial capital finally emerges fully from its dependent relationship with industry and comes to predominate over it.
24. This new relationship can be seen in the consolidation of an effective and routine system of bankruptcy to allow failed capital to exit; assets are released to provide capital for new cycle of investment. The simply spontaneous, purely economic, movement of capital is insufficient to ensure the destruction of capital since bankruptcy is a conflict between capitals, between creditor and debtor. Hence, the state must assert this aspect of the law of value from outside the circuit of capital to resolve this conflict in favour of the imminent economic logic. Once the state relinquishes its privileged claims on the assets of bankrupt firms typical of MWS and even ECE stages then the system of bankruptcy becomes normalised.
25. As of the start of 1997 it is possible to confirm that the transition process is complete in Poland and Hungary and that Fully Restored capitalism (FRC) has been built out of the debris of the DWS. Although qualitatively a capitalist system, FRC is quite different in appearance from what we know as modern capitalism. The share of state ownership in industry (typically over 30%) is higher even than in the most “state-capitalist” counties in Europe (e.g. Austria, Sweden). State responsibility for big loss-making enterprises far outstrips everything that is usual in OECD countries. The labour markets remain distorted and rigid in important ways. In all these respects FRC shows features of capitalism both in embryo and in extremis. Similar degrees in state ownership can be found in backward third world countries, sub-standard bank guarantees and high levels of non-performing loans usually are found during periods of deep capitalist recession and depression. Extensive state interventionism can be observed during periods of war or war-oriented regimes even in imperialist countries. FRC represents a particular combination of “modified” capitalism as it emerges not from feudalism but from a post-capitalist social formation. This means necessarily that FRC is crises-ridden, backward and “overregulated”. However, these features of FRC must not blind us to the qualitative fact of capitalist restoration.
