Human Society and Economic Development: A historical overview

David Pratt

October 2019


  1. Paleolithic
  2. Neolithic revolution
  3. Early civilizations
  4. Slavery
  5. Feudalism
  6. Rise of capitalism
  7. Capitalism and crises
  8. Evolution of capitalism
  9. State socialism
10. Human evolution
11. Sources

1. Paleolithic

According to orthodox scientists, humans descended from the apes. This theory is contradicted by abundant evidence – in the form of stone tools, incised bones and skeletal remains – indicating that humans of the modern type existed millions of years before our alleged apelike ancestors appeared. Furthermore, all our supposed ape ancestors had more specialized skeletal and muscular features than modern humans, which turns the expected evolutionary sequence on its head (see Human origins).

The mainstream view is that human civilization first arose about 6000 years ago. Theosophy, on the other hand, asserts that not just primitive societies, but also advanced civilizations, have come and gone for millions of years (see Evolution in the fourth round). Both tribal societies and technologically developed societies have coexisted in recent times, and this may also have been the case in the very distant past. In fact, some tribal societies may be the dwindling remnants of former advanced cultures, rather than in an early stage of social development. Any artefacts of very ancient technological civilizations that have survived the ravages of time, including geological convulsions, are now likely buried deep in the earth.

The earliest human tools in the archaeological record are made of stone and of organic materials such as wood and bone. The official view is that the Paleolithic, or Old Stone Age, began at least 3.4 million years ago, because there is evidence that our alleged australopithecine ancestors were then using stone tools ( The Paleolithic is said to have ended in some regions at the end of the last ice age, around 9700 BCE, when the present Holocene interglacial period began. It was followed in certain places by the Mesolithic, or Middle Stone Age, which ended with the advent of agriculture.

During the Paleolithic, humans lived as hunter-gatherers; they obtained their food by collecting wild plants and by hunting and fishing. Evidence of the habitual use of fire dates back at least 500,000 years. The earliest evidence of intentional burial of the dead dates back about 300,000 years. Sophisticated cave paintings appeared in southern Europe some 40,000 years ago. The earliest pottery so far found dates back about 30,000 years.

The study of hunter-gatherer societies that have survived into recent times provides an insight into ancient Stone Age communities. Life was often tough, a constant battle against the forces of nature. People lived in small kin-based groups, and cooperation was essential to survival. These nomadic, egalitarian communities were based on communal sharing and on collective responsibility and decision-making. There was no private ownership of land and resources, and no social classes or state authority. Hunting was done mainly by men and food gathering by women, but women were held in high esteem and were not subordinate to men. Karl Marx and Friedrich Engels referred to the hunger-gatherer stage of social development as ‘primitive communism’.

2. Neolithic revolution

The Neolithic, or New Stone Age, began with the discovery of agriculture. Current archaeological data indicates that the domestication of various types of plants and animals started around 12,000 years ago in the Fertile Crescent. Towards the end of the Neolithic, copper metallurgy was introduced, marking a transition to the Bronze Age (bronze being a mixture of copper and tin). The Bronze Age began in the Near East and Indian subcontinent around 3300 BCE, and was followed by the Iron Age, beginning in the Near East and South Asia around 1200 BCE.

The Fertile Crescent.

Agriculture laid the basis for a more settled existence, and led to the development of new technologies such as ploughs and irrigation systems. Grain can be stored for long periods, and it was now easier to produce a food surplus over and above everyday needs. This freed a section of the population from the direct burden of manual labour, so that they could devote themselves to other activities, such as administrative tasks or the arts and sciences. As the population increased, the first towns appeared, along with a more specialized division of labour.

State authorities emerged, consisting of administrators, soldiers, politicians, judges, scribes, priests, and a host of other officials. Property ownership strengthened the division of society into distinct social classes: in particular, those who worked the land or performed other productive tasks (e.g. artisans), and those who appropriated the labour of others by exercising their military, political or judicial power. Wealth and power were increasingly concentrated in the hands of a minority, and religious and political ideologies were developed to justify this as the natural order of things.

This period saw the development of writing, and of monumental (non-portable) art and architecture. Trade slowly expanded, with goods initially being exchanged by barter until money was invented. Cowrie shells were used in trade around the Indian Ocean as early as 1200 BCE, and the earliest known minted coins date to about 600 BCE in Lydia (in modern Turkey). As the productivity of labour increased, the growing surplus presented a tempting target for rival groups. The Iron Age was a time of constant feuds, raids and wars.

3. Early civilizations

In 1877 American anthropologist Lewis H. Morgan divided social development into three stages: savagery (hunter-gatherer communities), barbarism (beginning with the invention of agriculture), and civilization (more centralized, urbanized, stratified societies). The terms ‘savagery’ and ‘barbarism’ tend to be avoided nowadays due to their negative connotations. ‘Barbarian’ originates from a Greek word that was used to refer to all non-Greek-speaking peoples, who spoke what sounded like gibberish (‘bar bar bar’).

The conventional view is that civilization first emerged in the 4th millennium BCE, in Egypt, Mesopotamia, Persia, the Indus Valley and China. However, evidence of civilization thousands of years older has been found in many parts of the world (see India and the cradle of civilization; The ancient Americas; Lost civilizations of the Andes), and the origin of civilization will most likely continue to be pushed further and further back in time as more evidence is uncovered. Civilizations have undoubtedly risen and fallen many times in the ‘prehistoric’ past, just as they have in more recent times.

The first known urban civilizations were primarily agricultural societies, with common (state) ownership of the land. Large-scale public works were carried out, often associated with irrigation and canal and drainage systems. These societies had a despotic system of government, often headed by a god-king (or queen), and a large bureaucracy. People had to perform compulsory labour for the state and were also required to pay taxes (initially in kind). They tended to follow the professions of their parents, and there was little social mobility. The village communes were largely self-sufficient, and internal trade was at first weak. The towns were populated by artisans, traders, moneylenders, and local representatives of the state authorities. Such societies were for the most part socially and economically static. Apart from climatic changes and natural disasters, change was mainly the result of invasions or internal rebellions, resulting in a change of dynasty.

4. Slavery

Slavery was widespread in the ancient world, and assumed particular importance in Greece and Rome.

In the city-states of ancient Greece only male citizens – landed aristocrats, poor farmers, or artisans and traders – had the right to vote, hold public office and own property. Citizen rights were denied to women, semi-free labourers, slaves and foreigners. Free citizens did not usually pay taxes, since this was regarded as degrading, as was manual labour. People were turned into slaves mainly through war, banditry and piracy. Estimates of the number of slaves in the Greek world range from 15 to 40% of the population. They were owned by both private individuals and the state, and worked in all spheres of life, including households, agriculture, workshops, mines, transport, retail, banking, entertainment, and the armed forces.

In ancient Rome, over the course of several centuries, the smallholding peasant economy was replaced by slave labour in mining, farming and a wide range of other activities. As many as 1 in 3 of the population in Italy or 1 in 5 across the empire were slaves, and it was on this foundation of forced labour that Roman society was built. The countryside around Rome increasingly became a vast network of slave colonies residing on large plantations owned by the rich. Unemployment rose sharply as more and more slaves were used for jobs which Roman citizens used to do.

A marble relief panel from Smyrna (Turkey), 200 CE, showing collared Roman slaves being led by a helmeted man.

Slaves were not always badly treated, but skeletal remains from Pompeii show that many suffered from chronic arthritis and distorted limbs, resulting from extreme overwork and malnutrition. Skilled or educated slaves were allowed to earn their own money and some saved enough to buy their freedom. Rome differed from Greek city-states in allowing freed slaves to become citizens. Over time, slaves were granted more rights, including the right to file complaints against their masters. One reason for this was the influence among the educated elite of the Stoics, who taught that all people were manifestations of the same universal spirit, and thus by nature equal. They also held that external circumstances (such as being enslaved) did not prevent a person from pursuing the Stoic ideal of inner self-mastery. Both the Stoics and some early Christians opposed the ill-treatment of slaves, rather than slavery itself.

The most famous and successful slave rebellion was the one led by Spartacus, a Thracian gladiator, in southern Italy in 73-71 BCE. The slave army, numbering between 70,000 and 120,000 men, inflicted major defeats on the Romans, but was eventually crushed. Spartacus was slain in battle, and the 6000 survivors of his army were then crucified along the Appian Way from Rome to Capua, with their bodies being left there to rot as a warning against any future insurrections.


Because slaves breed very slowly in captivity, the only way to ensure a sufficient supply of slaves is through constant warfare, but the limits of territorial expansion are eventually reached. At its height, in the early 2nd century CE, the Roman Empire was the most extensive political and social structure in Western civilization. Its decline lasted nearly four centuries, with the Western Roman Empire ending around 480 CE. The Eastern Roman Empire continued on as the Byzantine Empire until Constantinople fell to the Ottoman Turks in 1453.

The oppressive western empire, with its brutal slave economy, bloated bureaucracy and predatory tax collectors, was slowly decaying from within, and this was aggravated by the loss of agricultural land due to deforestation and desertification. The empire was further weakened by several centuries of successive invasions by barbarian tribes from the east. The invaders were welcomed as liberators by the slaves and poorer sections of society. But they were an agricultural people, and many towns and cities were abandoned or destroyed. Although the barbarians succeeded in conquering the Romans, they themselves were fairly quickly absorbed into the local populations, and ended up speaking a dialect of Latin.

The Roman Empire left an enduring legacy. It is credited with generating, or at least improving upon, a large number of inventions and innovations, including the construction of roads and buildings, indoor plumbing, aqueducts, fast-drying cement, apartment complexes, public toilets, locks and keys, newspapers, socks and shoes, the postal system, cosmetics, and the magnifying glass. Significant advances were also made in the fields of medicine, law, government and warfare.

However, despite all the science of the Greeks and the engineering skills of the Romans, the institution of slavery prevented the development of an industrial society. This was because, since slaves were not paid for their labour, there was little incentive to use innovations to economize on labour time.

The collapse of the Roman Empire ushered in a long period of stagnation in most of Europe, known as the Dark Ages. It was not until the 10th century that Europe slowly entered a new period of ascent.

5. Feudalism

During the decline of the Roman Empire, international trade weakened, the money economy was increasingly replaced by barter, and small, isolated agricultural communities proliferated. After the empire’s collapse, Western Europe had no countries. Numerous tribes fought for domination over territories, but there were no central governments or national armies.

The feudal system flourished in Europe from the 9th to 15th centuries. At the top of the social hierarchy was the monarch, who owned all the land and whose right to rule was supposedly granted by God. The monarch granted parcels of land to nobles (barons and bishops) in return for loyalty, protection and service. Land was also granted to knights in exchange for military service. While some peasants were free, most were bound to their lord’s land as serfs; they farmed the land without pay to produce food for themselves and food and profit for their masters, while receiving nominal protection against outside attacks. The feudal system allowed large territories to be governed in a decentralized fashion. The power of the monarchy was limited by the aristocracy and the church. Since the nobles controlled the armies, they were very powerful and often warred among themselves.

By the 13th century, the increased use of money changed the way the feudal system worked. Lords were able to pay their monarch instead of performing military service. As a result, armies consisting of barons were replaced by mercenaries, thereby reducing the nobility’s military power. In addition, the monarch could now reward people by giving them money instead of land.

Other blows to the feudal system came from sudden reductions in population caused by wars, famines and plagues. The Black Death, which peaked in Europe from 1347 to 1351, killed around 25 million people in Europe and an estimated 75 to 200 million across Eurasia as a whole. Entire villages were wiped out. The colossal loss of life meant that there were not enough labourers to gather in the harvest or artisans to perform other necessary tasks, resulting in some estates being abandoned.

The peasants demanded higher wages and lower rents, and if the lord refused, they sought another master. Many flocked to the growing towns to seek their fortune, some purchased land, and some entered into favourable contracts to rent lands from lords who needed to repopulate their estates. There were widespread peasant rebellions against excessive taxation and other injustices, such as the Peasants’ Revolt in England in 1381. The late Middle Ages were characterized by constant conflicts and wars.

The steady expansion of commerce led to the rise of a wealthy class of merchants and manufacturers and a revival of the towns. Piracy, pillage and the slave trade played a major role in establishing the initial fortunes of the Arab, Italian, French, Flemish, German and English merchants of the Middle Ages. Later, the purchase of cheap merchandise on faraway markets and its sale at a higher price on the markets of the Mediterranean, Western Europe and Central Europe helped to enrich Portuguese, Spanish, Dutch, British and French merchants and bankers.

Feudalism effectively ended by about 1500, but vestiges of the old system persisted in France until the revolution of 1789, and in parts of Central and Eastern Europe until the 1850s. Russia finally abolished serfdom in 1861.

6. Rise of capitalism

From about the 5th to the 12th centuries, Europe consisted of largely isolated economies. The voyages of discovery in the 15th and 16th centuries fuelled the growth of international trade and colonial empires, and opened up vast new markets.

The rise of wealthy and enterprising townspeople (i.e. ‘burghers’, the bourgeoisie) in Italy, Holland, England and later in France was accompanied by an extraordinary flourishing of culture, art and science, known as the Renaissance. It was also accompanied by revolutionary upheavals, aimed at weakening the power of the aristocracy. Since the Roman Catholic church and its militant arm, the Inquisition, were staunch defenders of the feudal order, efforts were made to bring about religious reforms.

The Protestant Reformation initiated by Marin Luther in 1517 was part of this process. The burghers and lesser nobility were determined to break the power of the clergy, escape the clutches of Rome, and enrich themselves by confiscating church property. However, when the German Peasants’ War broke out in 1524, Luther sided with the burghers, nobility and princes, and called for the revolt to be crushed. This was done with extreme savagery, with up to 100,000 of the 300,000 poorly armed peasants and farmers being slaughtered.

Starting in 1568, the Dutch fought an 80-year war against Spanish rule, due to the desire of the Dutch Protestants to free themselves from the Catholic church. In the English Revolution (or English Civil War) between 1642 and 1660, the Crown, aristocrats and bishops, based in Oxford, were pitted against the bourgeoisie, small landowners and plebeian masses, based around London. This led to the execution of Charles I, a period of dictatorship by Oliver Cromwell, and finally the restoration of the monarchy, but with parliament (representing the propertied classes) holding political supremacy.

The French Revolution of 1789-93 – fought under the banner of ‘liberty, equality, fraternity’ – led to the abolition of the hereditary monarchy and the feudal system. Although it was followed by a period of reaction, leading to the dictatorship of Napoleon Bonaparte, the rule of the aristocracy was not restored, and the socioeconomic gains of the revolution were upheld. In Spain, on the other hand, the feudal forces held back the birth of a new society, resulting in a prolonged period of decline and decay.

Markets and trade have existed to some degree in all past societies but played only a subordinate role. Feudal manors were almost entirely self-sufficient, and the market therefore had only limited significance. Since feudal lords did not produce goods to sell on the market, they were not under any competitive pressure to invest in new productive technologies. The rise of a class of wealthy merchants and small-scale manufacturers was not in itself sufficient to lead to the development of capitalism.

The specific precondition of capitalism is a transformation of social property relations that generates capitalist ‘laws of motion’: the imperatives of competition and profit-maximization, a compulsion to reinvest surpluses, and a systematic and relentless need to improve labour-productivity and develop the forces of production. (Meiksins Wood, 2013, ch. 2)

Capitalism was not born in the successful commercial city-states of northern Italy or in the Dutch Republic, because their immense wealth was not derived from competitive production. Trade was traditionally dominated by the principle of buying cheap and selling dear, rather than by the need to produce more cost-effectively than direct competitors.

Capitalism emerged first in the English countryside. By the 16th century, England was already a highly centralized and unified state, and London was becoming the hub of a developing national market. Aristocrats had limited powers to extract wealth directly from their feudal underlings by coercive means. Since big landlords owned an unusually large proportion of the land, many English farmers were not peasants (with their own land), but tenants (who rented land). Landlords had an incentive to rent to those tenants who could pay the most, which meant that tenants had an incentive to farm as productively as possible to win leases in a competitive market. As a result, successful tenant farmers became agrarian capitalists, while unsuccessful ones became wage labourers.

A key factor in this process was the enclosure and privatization of formerly common land, motivated partly by the desire to ‘improve’ land and put it to profitable use. In the 16th and 18th centuries in particular, dispossession of the peasantry created a large population with no access to subsistence agriculture, who needed to buy basic commodities on the market. The creation of a mass consumer market encouraged mass production and innovation. Trade then acted as a key factor in transmitting competitive pressures from England to other states, thereby stimulating the wider development of capitalist economies. Capitalism also spread outward from Europe by means of colonialism.

All the major powers in 16th- and 17th-century Europe were deeply involved in colonial ventures, conquest, plunder and imperial oppression. England – the first country to undergo unambiguous capitalist development – was slow in embarking on overseas colonization or even dominating trade routes. By contrast, Spain, the dominant early colonial power, which amassed huge wealth especially from South American mines, did not initially develop in a capitalist direction. Instead, it expended its massive colonial wealth in wars and the construction of its Habsburg empire in Europe, and having overextended and overtaxed its European empire, it went into long-term decline in the 17th and 18th centuries.

During the industrial revolution in the late 18th and early 19th centuries, traditional artisans and their guilds disappeared, and industrialists replaced merchants and agrarian capitalists as the dominant players in the capitalist system. Britain became the first global economic superpower, because of superior manufacturing technology and improved global communications such as steamships and railroads. Since then the United States has become the most powerful capitalist nation, and capitalism has become the dominant economic system throughout the world.

The spinning mule, invented Samuel Crompton in 1775. This and other inventions
increased the productivity of textile workers by a factor of about 1000.

7. Capitalism and crises

Under capitalism, the means of production are mostly privately owned, most goods are produced for sale on the market, and most of the population earns a living through wage labour. Competition drives capitalists to finds ways to reduce costs and maximize profits. They can do this by cutting wages and imposing longer working hours (if the workforce is not sufficiently organized to resist), or by raising labour productivity through technological innovations and mechanized production lines, with humans increasingly being turned into the appendages of machines.

Women working machines at the American Woolen Company, Boston, c. 1912.

The logic of capitalism therefore requires a large share of profit to be reinvested in developing and expanding the means of production and raising the productivity of labour. This means that capitalist production is at the same time capital accumulation; capital is ‘self-expanding value’. Over time, there is a tendency for the average size of firms to increase (concentration of capital), since this allows cost advantages (economies of scale), and there is a tendency for many companies to be destroyed by competition and absorbed by their rivals (centralization of capital); industries are increasingly dominated by a small number of monopolies, which distort competition and stifle innovation.

Huge migrations have taken place to meet the needs of capital accumulation: of Irish to England and Scotland; of Poles to Germany; of Italians, North Africans, Spaniards and Portuguese to France; of Indians to the British colonies and later to Britain; of Chinese to all the Pacific regions; of Koreans to Japan; of successive waves of immigrants to Australia, and also to North America (English, Irish, Italians, Jews, Poles, Greeks, Mexicans, Puerto Ricans, along with the black slaves of the 17th, 18th and 19th centuries). Migrant workers are typically underpaid and treated as second-class citizens.

In addition to employing migrant workers, companies can also boost profits by seeking out cheaper sources of labour, raw materials and other resources in other countries, particularly poor, underdeveloped nations. This makes it possible for a large section of the population in the advanced capitalist countries to enjoy a higher standard of living than would otherwise be possible.

In the 19th century, it quickly became clear that a capitalist economy undergoes a succession of booms and slumps every few years. Capitalism is therefore unable to guarantee full employment. Company owners benefit from unemployment because the risk of losing one’s job helps curb wage demands and tighten labour discipline. In addition, the unemployed can be drawn on by companies wishing to expand production. Capitalism also stimulates consumerism, through extensive advertising and constant changes to product types and models.

Capitalism inevitably generates huge inequalities of income and wealth. Today, people worth more than $30 million make up only 0.003% of the world population, but hold 11.3% of total global wealth. The world’s richest 1% – those with more than $1 million – own 45% of the world’s wealth. Those owning over $100,000 in assets make up less than 10% of the global population, but own 84% of global wealth. And adults with less than $10,000 in wealth make up 64% of the world population but hold less than 2% of global wealth (

Percentage of national income owned by the wealthiest 10% of the population in various countries, from 1980 to 2016. In Russia, the percentage of national income owned by the richest 10% rises from just over 20% under socialism to nearer 50% following the restoration of capitalism in the 1990s. (

Profitability – the key to crises

According to the labour theory of value, the price of commodities fluctuates around their underlying exchange value, which is determined by the average labour time currently necessary to produce them. This theory was first developed in the late 18th and early 19th centuries by political economists like Adam Smith and David Ricardo, in an effort to understand the inner workings of the capitalist economy. It was further refined by Karl Marx (1818-83), who used it to explain why crises are endemic in capitalism (Kliman, 2007, 2012; Roberts, 2016, 2018). Because of the revolutionary political implications of this theory, mainstream economists then abandoned it altogether. Supply and demand are now regarded as the main factor determining a commodity’s price, rather than as the main factor causing prices to fluctuate around the exchange value.

According to the labour theory of value, only human labour creates new value, and profits are generated from the unpaid labour of workers. The economy consists of a productive sector (e.g. manufacturing, transport, communications) and an unproductive sector (e.g. finance, commerce, administration, security, legal services, real estate). For part of the working day, productive workers produce sufficient goods, or value, to cover the value of their labour power (i.e. their capacity to work), represented by the wages they receive to support themselves and their families. For the rest of the working day they produce surplus goods, or surplus value, which is realized as profit once the goods have been sold.

Surplus value is the source of all property incomes – industrial profit, dividends, interest and rent; the wealth of the unproductive sector is ultimately derived from the value and surplus value created in the productive sector (the ‘real economy’). Plant and machinery do not create new value but, as the product of past labour, they embody a certain value, which is gradually transferred – over their useful lifetime – to the goods produced with them (i.e. they wear out and slowly depreciate in value).

In order to maximize profits and survive in the face of competition, companies are forced to invest in labour-saving machinery. As a result, the productivity of labour increases, and since this allows commodities to be produced in less time, their value falls. If a single company introduces a technological innovation that lowers the cost of producing a particular product, it can either keep the price unchanged and pocket the difference as extra profit, or it can lower the price, undercut its competitors, increase its sales and make more profit. Eventually, however, competition will force other companies to introduce the same technology so this advantage will disappear and real prices will fall.

Over time, the productivity of labour increases across all sectors of production. However, although this means that each worker generates more profit, there are now relatively fewer workers being employed compared with the amount of machinery. This means that there’s a higher cost of machinery over which to measure the rate of profit, resulting in a long-term tendency for the rate of profit to fall. Competition tends to equalize the rate of profit across different sectors of the economy.

An economic crisis is most likely to break out when a falling rate of profit eventually leads to a fall in the mass of profit. Investment is then cut back, unemployment grows, goods and services cannot be sold, and the economy stagnates. During a crisis the least efficient firms go bankrupt, many are bought up cheaply by their competitors, and some capital is written off entirely. Higher unemployment weakens the trade unions, which usually allows living standards to be lowered. As a result, the rate of profit increases, allowing a new period of economic expansion to begin. The rate of profit can also be increased by seeking cheaper labour and raw materials and higher profits in low-wage countries.

Empirical data confirms that there has been a secular decline in the rate of profit (whatever calculation method is used) in capitalist countries over the last 150 years, and that this has been accompanied by a secular rise in the ratio between the volume of capital per person employed (Roberts, 2018; Maito, 2014; Kliman, 2012).

(Roberts, 2018, 42)

Average rate of profit of 14 major economies (profits as % of fixed assets). (Roberts, 2018, 55)

Before capitalism developed, economic crises were caused by underproduction – i.e. scarcity or famine. Capitalist crises involve an overproduction of commodities and an overaccumulation of capital in relation to the rate of profit. While Marx saw capitalist crises as essentially a crisis of profitability resulting from the contradictions inherent in the capitalist mode of production, mainstream economists attribute them to chance, bad policy, external shocks, or technical malfunctions.

In particular, there are two theories that locate the main cause of crises in the way wealth is distributed:

  1. Overconsumptionism: Workers are being too greedy; their ‘excessive’ wage demands are eating into profits and depriving capitalists of investment funds. The remedy is wage restraint, corporate tax cuts, reductions in government spending on welfare benefits and public services, and higher unemployment. This is the monetarist or neoliberal viewpoint, associated with the political right and also certain moderate social-democrats.
  2. Underconsumptionism: Capitalists are being too greedy; workers’ wages are too low to buy the goods produced. The remedy is more government spending (by running budgets deficits) to boost demand, create jobs and increase wages. This is the Keynesian viewpoint, held by many left-wingers.

Keynesians see investment as the key to explaining macroeconomic developments. John Maynard Keynes (1883-1946) attributed inadequate investment to a loss of ‘animal spirits’, i.e. a loss of confidence among entrepreneurs. But he failed to link this to a loss of faith in expected profits. Empirical data provides overwhelming evidence that profitability is the main driver of investment growth (Roberts, 2018). Moreover, there is little evidence that government spending can kick-start the economy by stimulating investment, unless the profitability of capital is restored.

Yanis Varoufakis (2011, ch. 5) sums up Marx’s message as follows:

capitalism will cause crises even if peopled by very nice human beings. It will do so even if the individuals running the banks, regulating the markets, presiding over government and its various institutions are truly good people doing their best. It is what capitalism does!

Defenders of capitalism believe that, whatever its faults, the alternatives are far worse.

8. Evolution of capitalism

Following a series of booms and slumps in the 19th century, the first truly international crisis occurred in the panic of 1873, which marked the start of a depression that lasted until 1897 – the first of three major depressions (long periods of below-average growth) that capitalism has experienced to date. It provided the impulse for the development of modern imperialism, characterized by the massive export of capital to other countries (i.e. foreign investment), the rise of monopolistic joint-stock companies, and the dominant role of finance capital. The major powers carved up the world into zones of influence, and Britain’s previous ascendancy started to decline. The ensuing rivalries led to the First World War (1914-18).

The subsequent economic recovery was followed in 1929 by a stock market crash that triggered the Great Depression (1929-39), which saw global production drop by half and global trade by two-thirds. In the United States, national wealth plummeted by 59% between 1929 and 1933. 30 million people were out of work in the major industrial nations, 6 million in Germany alone. Fascist regimes came to power in Germany and Japan, and their determination to gain a bigger share of the spoils led to the Second World War (1939-45).

The tremendous destruction of capital value caused by the two world wars and the Great Depression, together with the defeats suffered by the labour movement, paved the way for the postwar boom – the biggest boom in the history of capitalism. The United States emerged as the dominant world power. Through the Marshall Plan (1947-51) it provided $13 billion in economic aid to Western Europe, in order to boost industrial output, create demand for US exports and ensure political stability; it provided similar aid to war-torn Japan.

Under the postwar Bretton Woods system, the main economic powers pegged their currencies to the US dollar, which was in turn pegged to the gold standard. This system was bolstered by the newly formed World Bank and the International Monetary Fund, while the General Agreement on Tariffs and Trade (GATT) set the framework for increased global free trade. In 1971 the United States abandoned the gold standard, but the US dollar remained the world’s dominant reserve currency, backed by its military might.

The postwar boom saw massive increases in productivity that far outstripped increases in wages. There was also a huge expansion of credit both nationally and internationally, and growing state intervention in the economy in many countries. To maintain economic growth, the state can intervene in various ways: by nationalizing the least profitable industries, stimulating production through deficit financing and state orders, maintaining the labour force through the provision of welfare services, and guaranteeing employment. But state intervention is a contradictory process. Government expenditure on healthcare, education, social services, unemployment and social security benefits is ‘unproductive’, i.e. it does not create new wealth; it is largely financed from taxes on profits and wages. To maintain their profits, private companies are impelled to invest in more and more machinery – which ultimately further undermines the rate of profit.

Falling profitability in the 1960s paved the way for the end of the postwar boom. Recessions occurred in 1974-75 (triggered by a sharp rise in oil prices), 1980-82 (triggered by a housing bubble in Europe and a manufacturing crisis in major economies), 1990-92 (triggered by the Iraq war and oil prices), and 2001 (triggered by the bursting of the dotcom (internet company) stock market bubble). The subsequent debt-fuelled ‘boom’ was followed by the Great Recession of 2008-09, triggered by the collapse of the housing bubble in the United States and the ensuing worldwide credit crunch and contraction in consumer demand. The backdrop to all these downturns was the declining profitability of productive capital.

To compensate for a falling rate of profit in productive sectors of the economy, there is a tendency to try and make money by betting on the stock exchange and making speculative investments in stocks and bonds. When stock and other financial asset prices are rising, everybody wants to buy them, sparking off a ‘bubble’. But sooner or later investors discover that the assets are not worth what they are paying for them, and the bubble bursts. Moreover, financial speculation is not a productive but a parasitic activity; the money made does not represent newly created wealth but a redistribution of real profits.

The US housing boom in the mid-2000s – combined with near-zero interest rates – prompted many lenders to offer home loans to people with poor credit. When the real-estate bubble burst in 2007, many borrowers were unable to make payments on their subprime mortgages. The meltdown caused dozens of banks to go bankrupt and led to enormous losses for Wall Street, and also for institutions across the globe due to the vast trade in high-risk, mortgage-related securities.

Financial assets relative to disposable personal income. (

‘Stocks, bonds and real estate have all become as overvalued as we have ever seen any one of them individually in this country [the US]. The end result of all of this money printing and interest rate manipulation is the worst economic expansion since the Great Depression and the greatest wealth inequality since that period.’ – Jesse Felder

US inequality: the rich get richer and the poor get poorer. (

Traditional Keynesian policies may have prolonged the postwar boom but they failed to prevent the crises in the 1970s, when capitalist economies experienced rising inflation and unemployment at the same time (‘stagflation’) – something inexplicable to neoclassical economics and particularly to Keynesian theory, which reckoned that there was a playoff between inflation and unemployment. Governments in Europe, the US and Japan then turned increasingly to monetarist/neoliberal policies: attacks on workers’ rights and living standards, corporate tax cuts, cuts in state expenditure, privatization and market deregulation.

The rate of profit was low at the start of the 1980s and it never recovered in a sustained fashion because much less capital value was destroyed than during the Great Depression and the Second World War. To prevent a repeat of the radicalization of working people that occurred during the Depression, policymakers used debt financing and debt guarantees to retard and reduce the destruction of capital. Although these policies have artificially boosted profitability and economic growth, they have done so in an unsustainable manner that has repeatedly led to burst bubbles and debt crises.

The slowdowns in the 1990s followed a period of neoliberalism, but these policies – like the earlier Keynesian policies – did not cause the crises and could not prevent them. In the United States, workers’ incomes have grown only slowly since the 1970s, but their share of national income has not declined. This means that, contrary to what underconsumptionists argue, debt buildup was not rooted in falling pay for workers. Some economists have blamed the latest recession on ‘financialization’ – the bloated financial sector and the rise in speculative, credit-driven investments in a variety of high-risk financial instruments. However, the reason investors have poured more money into financial speculation is the low profitability in the productive sphere. In the United States, finance’s share of gross domestic product (GDP) grew from 14% to 21% between 1960 and 2017, while manufacturing’s fell from 27% to 11%, and trade’s declined from 17% to 12% (

In 2003, economics Nobel Prize winner Robert Lucas declared that the problem of preventing economic depressions had been solved. Mainstream macroeconomic models, such as the highly complex Dynamic Stochastic General Equilibrium (DSGE) models, failed to predict the 2008 crash – the biggest economic crisis since the 1930s. In fact, using DSGE models, official economics bodies like the Organisation for Economic Cooperation and Development forecast that 2008 was going to be a bumper year! The models assume that the capitalist economy is a stable system that always returns to equilibrium (supply = demand) after a shock, and they ignore the financial sector, private debt and rising inequality (Keen, 2017). Yanis Varoufakis (2013, ch. 5) characterizes such models as ‘mathematized superstition’.

Governments responded to the 2008 crash by using taxpayer money to prop up and bail out key financial institutions whose failure might cause the entire financial system to collapse. This has increased ‘moral hazard’, meaning that lenders and shareholders now have an even greater incentive to engage in reckless risk-taking, since they know that taxpayers will ultimately foot the bill for any resulting losses. There appears to be little political will to introduce regulations to curtail such practices.

Central banks usually try to encourage investment by reducing interest rates. Since 2008 the European Central Bank and the central banks of Switzerland, Denmark, Sweden and Japan have adopted the unconventional policy of negative interest rates. This means that financial institutions are charged interest for parking excess cash with them, in the hope of encouraging lending to businesses and consumers. However, negative rates have not proved a success as they also narrow the margin that financial institutions earn from lending ( After the 2008 crisis, central banks also adopted the unconventional policy of pumping extra money into the economy by buying up government, corporate and mortgage bonds from the banks. However, this policy of ‘quantitative easing’ has also failed to boost lending, investment and growth.


The first wave of globalization – involving a lowering of trade barriers and reduced restrictions on cross-border capital flows – started in the 19th century, and came to an end at the beginning of the First World War. It was characterized mainly by the rise and subsequent collapse of intra-European trade. The second wave of globalization started after the Second World War. Trade within Europe rebounded, and Western Europe also traded increasingly with Asia, the Americas, and to a lesser extent Africa and Oceania. The expansion of trade was largely made possible by reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation. A new upsurge in global free trade and capital flows began in the late 1980s. Today, about a quarter of total global production is exported, and about 30% of the value of global exports comes from foreign inputs.


Most colonies in Africa, Asia and Latin America gained their independence following the Second World War, often after prolonged and bloody struggles against the colonial powers. But their economic subordination to the richest countries continued, and many remain severely underdeveloped. Thanks to their vast pool of cheap and often nonunionized labour, the rate of return on investment in the underdeveloped countries can be twice as high as in the industrialized nations. Wage rates in China and India range from 10% to 25% of those for comparable workers in the United States and the rest of the developed world.

The following two charts show how living standards and life expectancy have changed over time in different parts of the world. Average figures naturally conceal large disparities within countries. Today, over 800 million people – about one person in 10 – are undernourished, and a child dies of hunger every 10 seconds; at the same time, 1.9 billion people are overweight or obese (


No country in the world has a lower average life expectancy today than the
countries with the highest life expectancy in 1800. (

A third world debt crisis broke out in the early 1980s because huge interest rate increases resulted in many developing countries being unable to service the loans they had received from Western banks for economic development purposes. Many were forced to call in the IMF, which provided further financial assistance only on condition that they slashed public spending on healthcare and education, introduced austerity measures, and sold off valuable public assets (water boards, telecommunications, etc.) to Western companies. This sparked off massive social unrest.

Imperialism has traditionally involved the export of capital. This can take three forms: foreign direct investment (FDI), which involves establishing or acquiring companies abroad; portfolio investment, i.e. investment in shares and foreign securities, which, unlike FDI, does not give the investor a controlling interest in foreign companies; and loans. In recent times, FDI has increased twice as fast as trade, while portfolio investment has increased even faster. But the export of capital has been outpaced by transnational corporations’ practice of outsourcing their production processes to low-wage countries (China, Bangladesh, Vietnam, Mexico, etc.), where they make increasing use of formally independent suppliers, rather than their own subsidiaries (Smith, 2016). About 80% of global trade is linked to these corporations’ international production networks (‘global value chains’) (

By 2010 the industrial workforce had shrunk to 145 million in the mature capitalist economies, but had risen to 541 million in less developed countries. Millions of manufacturing jobs have been lost in the industrialized countries, as companies go in search of super-exploitable labour in the poorer countries. Before the neoliberal era, developing countries mainly exported raw materials and imported manufactured goods. In 1970 barely 10% of rich countries’ manufactured imports came from developing countries, but by the turn of the millennium the figure had risen to 50%.

Since the early 1990s the share of domestic income that goes to labour has declined in nearly three-quarters of the 69 countries with available information, and the decline is generally greater in emerging and developing countries than in advanced ones. In Asia and Africa the share declined by 10 percentage points between 2000 and 2011 (Smith, 2016). The general picture is that workers must work longer and harder for less money and with fewer rights and a higher risk of being sacked. Even in Britain there are 2 million workers on ‘zero-hour contracts’, meaning that they agree to be available for work as and when required, usually for minimal pay. Since the 1980s, poverty has increased among the bottom 10% of households in the capitalist ‘North’, including the United States.

There is a fundamental asymmetry between global capital and global labour: capital is largely free to roam the world at will in search of cheaper labour and higher profits, whereas workers face severe restrictions on their ability to migrate to other countries in search of better jobs and pay. As a result, wage differences between poorer and richer countries are widening rather than narrowing.

The aim of globalization is to produce everything as cheaply as possible, regardless of the social consequences; it is essentially a ‘race to the bottom’. It involves a massive transfer of wealth from poorer to richer nations. Between 1980 and 2012, the net outflows of capital from developing and emerging countries being funnelled into developed capitalist nations totalled $16.3 trillion. Overall, for every $1 of aid that developing countries receive, they lose $24 in net outflows (

This transfer of wealth is not fully reflected in official statistics (Smith, 2016, ch. 9). If a transnational corporation repatriates profits from its subsidiaries in poorer nations, this shows up as such in its accounts. If, however, as is increasingly the case, the corporation buys consumer goods dirt-cheap from independent suppliers in poorer nations, and then sells them at a huge profit in the country where it is headquartered, the profit markup (‘value added’ in official jargon) is included in the GDP of the country where they are sold, not the country where they were produced. But by marketing these products, transnational corporations do not actually create any new value; they merely capture a portion of the value created by sweatshop workers abroad.

Workers in low-wage countries often work up to 60 or 70 hours a week in unsafe conditions for less than $2 a day. One of the worst workplace disasters on record was the collapse of an eight-storey building in Bangladesh in 2013, killing 1133 garment workers and wounding 2500. Outsourcing to poorer countries has boosted profits of firms across the imperialist world and helped to sustain the living standards of its inhabitants, but it has also led to deindustrialization and created global imbalances that threaten to plunge the world into destructive trade wars.

Today and beyond

Many voices across the political spectrum are being raised against the modern globalist world order. This includes political movements calling for more nationalistic and protectionist policies. Given that there are ‘good’ capitalist reasons for shifting manufacturing from richer countries to developing countries, the extent to which governments can reverse this trend and ‘correct’ trade imbalances within a capitalist framework remains to be seen.

Profitability in the advanced capitalist economies peaked by the early 2000s. And as profitability still remains low despite the major 2008 recession, most of these countries are now locked into a prolonged depression of low investment, productivity and trade, feeble growth, stagnant wages, mounting debt and rising inequalities. Rather than investing in new productivity-enhancing plant and machinery, Western companies are increasingly shifting production to low-wage countries. Annual GDP growth from 2014 to 2064 is officially projected to fall to 2.1% globally and 1.9% for developed countries.

G20 rate of profit (%). (Roberts, 2018, 121)

Both private and public debt have surged over the past decade. Global debt hit a record high of $164 trillion in 2016, equivalent to 225% of global GDP. 63% of this amount is nonfinancial private sector debt (owed by households in mortgages and companies in bonds and loans), and 37% is public sector debt. Advanced economies have the most global debt, but over the last 10 years, emerging market economies have been responsible for most of the increase.



The United States has a growing net investment liability with other world economies, standing at 9.8% of world GDP in 2018 ( This means that it is extracting net value from other economies to fund its growth (and debt), but at the expense of becoming more dependent on ‘tribute’ from countries (like China) with a balance of payments surplus, rather than on trade. It is able to get away with this because it is still the world’s largest economy, with the biggest financial sector, and with the dollar as the world reserve currency.

US global hegemony is, however, being increasingly challenged by countries like China, India, Russia, South Korea, and Brazil. The unipolar geopolitical order, dominated by the United States, that emerged after the end of the Cold War is being transformed into a bipolar system, with the rise of a second power bloc dominated by China and Russia. This is reflected in China’s Belt and Road Initiative, which involves infrastructure development and investments across Asia, Europe, Africa, the Middle East and the Americas, aimed at creating a vast trading network. It is due for completion in 2049.

In the United States, the Trump administration’s huge corporate tax cuts in 2017, funded by a massive increase in the federal budget deficit, sharply increased the after-tax profits of the largest US corporations, especially the banks and super-tech companies. But instead of the money being used mainly for extra productive investment, companies have used it to buy back their own shares at elevated prices in order to boost the share price, and to make extra dividend payments to shareholders. The US economy is now (August 2019) slowing down fast.


In 2016 the rate of profit in the US was 6 to 10% below the peak of 2006, and some 25 to 30% below what it was in the 1960s. This is the main reason why corporate investment has been so weak since 2009, and why profits have been used for mergers and acquisitions, share buybacks and dividend payouts. The Trump administration is considering more tax cuts and pressing the central bank (the Fed) to cut interest rates (even to below zero) in the hope that this will stimulate investment. It is also pursuing a protectionist crusade in the hope of boosting US manufacturing, but there are fears that a trade and technology war with China could trigger a new global recession.

In Europe, austerity measures did not substantially reduce budget deficits and debt, but reduced workers’ share of national wealth, particularly in the distressed eurozone states of Greece, Ireland, Cyprus, Spain and Portugal, where real wages fell, unemployment skyrocketed, and hundreds of thousands have left their homelands to look for work elsewhere. In countries such as Iceland where Keynesian policies of fiscal stimulus and/or devaluation were applied, households suffered a loss of real income through higher prices, a falling currency and ultimately rising interest rates (Roberts, 2016). Eurozone GDP is expected to grow by just 1.2% in 2019, and profitability in most economies is still below the peak of 2007. In the hope of delaying the next recession, the European Central Bank is continuing its negative interest rate policy, has launched a new round of quantitative easing (printing money), and is encouraging governments to run budget deficits and spend.


It is possible that a further severe slump and reduction in living standards will raise profitability for those companies that survive and initiate a new upsurge in investment and growth. The question is always how ordinary working people will respond to such a move.

In the long run, the trend towards automation and robotization is set to continue, and the overall effect is likely to be a loss of both unskilled and skilled jobs. As productivity rises, people could in theory work fewer hours and enjoy the same level of consumption. However, the benefits of a robot society are likely to be enjoyed mainly by the minority owning the means of production, resulting in even more extreme inequality.

9. State socialism

Socialists of the social-democratic variety believe in trying to manage capitalism in a way that better meets the needs of ordinary people. Socialists of the Marxist variety – i.e. communists – believe that capitalism must be overthrown and replaced with a socially owned, centrally planned economy. This sections looks at the experiences of countries that have tried this.

Marx and Engels recognized capitalism’s extraordinary ability to develop the productive forces, while severely criticizing its deficiencies and injustices, in particular its periodic crises and huge wastage. They believed that the capitalist mode of production would eventually become a fetter on the development of the productive forces and that the working class – led by a communist party – would seize power, nationalize the means of production, and replace market anarchy with rational economic planning to meet the needs of society. The building of a more equal, socialist society, based on the principle ‘from each according to ability, to each according to work’, is seen as the first step towards a future classless, communist society, where there would be an abundance of goods and the guiding principle would be ‘from each according to ability, to each according to needs’. Advanced technology is regarded as the key to ensuring a society of abundance and the final emancipation of humankind.

Marx and Engels expected a socialist revolution to occur first in the advanced capitalist countries. However, the first socialist revolution broke out in 1917 in Russia, a backward, predominantly agricultural country. The revolution was led by the Bolshevik Party (communist party), headed by Vladimir Lenin, and had widespread support among workers and peasants. It was followed by several years of civil war and foreign military intervention. After the opposition forces had been defeated, there followed a period of market-oriented reforms (the New Economic Policy). The Soviet Union (Union of Soviet Socialist Republics) was officially founded in 1922. Although it began as a state of democratically elected soviets (councils), active worker participation was increasingly replaced by a system in which the party bureaucracy took decisions on the people’s behalf.

Central economic planning began around 1928. The 1930s saw a heroic effort to rapidly industrialize the country and modernize agriculture. In just a couple of decades the Soviet Union achieved the level of industrialization that had taken a century and a half in Britain, and transformed itself into the world’s second industrial power. From 1928 to 1940 its industrial output grew by an average of 17% per year, and income grew by 15% per year – a feat ‘unparalleled in history’ (Suny, 2011, 259). This enabled it to withstand and defeat the onslaught of the Nazi war machine from 1941 to 1944. 70 to 75% of German forces were deployed on the Eastern Front, and 10 million of the 13.6 million Germans killed, wounded, missing or taken prisoner during the war met their fate there. The Soviets lost 26 to 27 million lives (19 million civilians and 7 to 8 million soldiers), compared with 405,000 for the United States and 375,000 for Great Britain.

After the war, based on the agreements made by the Allied leaders Franklin Roosevelt, Winston Churchill and Joseph Stalin, Soviet-style socialism was extended into the Baltic States (Estonia, Latvia and Lithuania) and into Eastern Europe (East Germany, Poland, Czechoslovakia, Hungary, Bulgaria and Romania). Yugoslavia and Albania took the socialist road by their own efforts. Socialist regimes were also established in North Vietnam and Soviet-occupied North Korea. A socialist revolution took place in China in 1949, and in the mid-1970s Marxist-oriented governments took power in the whole of Vietnam and in Laos and Cambodia, after the defeat of the US military intervention. In addition, People’s Republics headed by Marxist parties were established in various other Asian, African and Caribbean states.

At the height of their power and extent in the mid-1980s, socialist countries were home to a third of humanity. All these countries were essentially one-party states. A party embracing Marxist-Leninist ideology exercised undivided power, and political opposition was generally repressed, though to different degrees in different countries at different times.

The shaded countries are those where state socialist regimes existed at the end of 1987. (Kornai, 1992, 8)

Communists believe that socialism is superior to capitalism, and will ultimately bring social justice, prosperity and freedom to the working masses. They expect human nature to be transformed, as people increasingly place themselves in the service of the common good, and build a society based on mutual solidarity and cooperation instead of on individualism, selfishness and greed. They firmly expected socialist economies to catch up with and then overtake capitalist economies. In the 1960s, Soviet leader Nikita Khrushchev made the memorable boast the socialism would ‘bury’ capitalism. But in 1989-91 the state socialist system collapsed from within in all but four of the countries concerned, and capitalism was restored, along with a multiparty system. Marxists argue that this was not due to the inadequacy of socialism as such, but to the shortcomings and bureaucratic failings of the state socialism (or, according to some theorists, ‘state capitalism’) that existed in the countries concerned.

State socialist economies achieved impressive growth rates in the early stages (Suny, 2015, ch. 17). In the early 1950s, for example, the growth rate was 14% in Romania, 11% per year in Albania and Poland, 10% in East Germany, 9.5% in Czechoslovakia, and 8.5% in Hungary. In the 1950s the Soviet gross national product (GNP) grew at an annual rate of 7.1%, compared with the US growth rate of 2.9%. From 1958, the Soviet growth rate slowed to 5.3% per year, remaining there until 1964. Growth then slowed over the next several decades. The arms race with the West during the Cold War was a huge drain on resources.

Under classical Soviet-style socialism, growth in industrial output was prioritized at the expense of services, consumption, product quality, and the environment. The lack of priority for services meant chronic underdevelopment of the transport, distribution, storage, and repair (and spare parts) systems, creating serious imbalances. Per capita real consumption tended to grow substantially over time, but not as much as in some capitalist countries. For example, in the 1951-78 period it grew by 3.7% per year in the Soviet Union and 2.6% in Hungary, compared with 2.3% in the United States and 3.9% in France (Kornai, 1992, 303). The ruling elites in the socialist countries enjoyed certain privileges, but disparities in wages and access to goods were far smaller than in most capitalist countries.

A centrally planned economy is able to abolish the periodic economic crises that afflict capitalism and it can also guarantee full or nearly full employment. To justify its rule, a socialist government seeks to provide free education and healthcare, and to ensure that staple food prices, housing rents, public transport fares and the cost of other services and amenities remain low. However, the quality of social services and housing often left a lot to be desired, and the state socialist system was plagued by chronic shortages – of food, consumer goods (e.g. telephones, cars), housing, etc. Shortages had an adverse effect on workers’ morale and motivation. Soviet labour productivity was around 50% of the US level in industry and less than 20% in agriculture (Mandel, 1991). Investment efficiency was also very low: for output to rise over a long period by, say, 4-6% a year, investment had to grow by 8-11% a year (Kornai, 1992, 167).

Under the financial self-management system that developed in the Soviet Union and was then adopted by other socialist countries, although state enterprises were required to meet the targets set by the central economic plan, they still enjoyed a large degree of financial autonomy, traded commercially between themselves, operated on a profit-and-loss basis, and paid taxes like capitalist firms. Despite being owned by the state, enterprises owned their own accounts at the state bank and used them to finance their production and expansion. In addition, the state bank granted loans to the enterprises and charged them interest. Commodities were exchanged between state enterprises, collective farms (i.e. cooperatives that farmed land owned by the state) sold their commodities on the market, and the state purchased commodities on foreign markets. This meant that market mechanisms continued to play a major role.

Under capitalism, inefficiency is punished, the ultimate punishment being bankruptcy and layoffs. Under Soviet-style socialism, firms were not allowed to go bankrupt, no matter how inefficient they were, and workers could not be laid off. In fact, mature socialist economies had to contend with a shortage of labour, which was recognized as weakening labour discipline. Economic growth in the early stages was fuelled by a flood of labour from agriculture into industry, and of women from the household into employment (often out of economic necessity), but these sources eventually dried up. While guaranteeing the right to employment, it would have made more economic sense to deny workers the right to permanent employment in any particular enterprise or industry.

Under Soviet-type socialism, state enterprises had no incentive to replace obsolete equipment with modern equipment, because during the shutdown they would not be making profits, which would mean a loss of income for managers and to a lesser extent the workers, whose salaries were increasingly tied to profits. State enterprise directors and managers tended to deliberately understate productive potential and overstate input requirements, so that it would be easier to meet the output targets set by the central economic plan. They avoided penalties by fulfilling their targets, but refrained from massively exceeding the targets, since this would lead to higher targets in the next plan. They also tended to exaggerate the expected benefits of proposed investment projects. There was no incentive to innovate and take risks which were not guaranteed to lead to success. And there was no point trying to cut prices, improve quality or introduce new products in order to win buyers, because shortages meant that sales were guaranteed.

The prices of goods were set by the state, but reflected neither supply and demand nor the labour time required for their production. Since wages were kept low, subsidies were used to keep the prices of essential goods and services artificially low, but this contributed to shortages and queues. If wages (and prices) had been higher, this might have provided an incentive for labour-saving innovations.

As the Soviet economy slowed down and rigidified, the black and grey markets expanded and gave it needed flexibility. The ‘informal’ economy added around 20-25% to the official GNP (Mandel, 1991). Tens of millions of Soviet citizens engaged in activities that were technically illegal, but tolerated. State enterprises often traded with each other more or less illegally to obtain additional raw materials so they could more easily meet production targets. This created artificial scarcities and damaged the economy as a whole.

Kornai (2014, 5-10) lists 111 revolutionary innovations since 1920, all of which originated in capitalist countries, except one (synthetic rubber, 1932), which originated in the Soviet Union. The floppy disk was invented by a Hungarian engineer in 1974, but the state did not want to risk mass production and did not allow the inventor to market his own product, so it was later reinvented by the Japanese. The Soviet Union did produce innovations in the military sphere (e.g. the first intercontinental ballistic missile), and also invented the first satellite, the Sputnik (1957). However, innovations in the consumer sphere were not prioritized, and any technical progress under classical socialism consisted mainly of copying innovations introduced in capitalist countries, though often after long delays.

As the economy became more complex, the planning system’s inflexibility and lack of responsiveness became a glaring problem. Soviet economists were well aware of the deficiencies, but were unable or unwilling to rectify them. The material self-interest of the ‘managerial’ layer of the bureaucracy blocked any major progress (Mandel, 1981). Various types of reforms were attempted during the 1960s and 70s, but were basically a failure, leading to the stagnation and apathy under Leonid Brezhnev (1964-82). Poland and Hungary achieved some economic successes in the 1970s, but these were largely financed with Western loans.

Soviet economic planning would certainly have needed a complete overhaul to put in place a system of monitoring, rewards and sanctions that could have improved innovation, productivity and efficiency. Such a system would reward enterprises making particularly effective use of social labour by allocating to them more labour and means of production; this would provide an incentive to economize on labour input per unit of output and improve efficiency. However, the planning agencies were resistant to change. By the mid-1980s most Soviet economists had apparently lost their belief in the potential of efficient planning, and many had jumped onto the ‘free market’ bandwagon represented by the Reagan and Thatcher administrations in the United States and Britain.

By the 1980s it was hard to argue that Soviet-style ‘socialism’ was economically superior, given that the economic development gap between the advanced capitalist and the socialist countries had failed to narrow over a period of decades, and in some cases had widened. Efforts to combine a partially planned economy with market reforms seemed to bring out the worst features of both systems. As modern means of communication made it easier to obtain information about the West, many people became less inclined to accept the constraints on individual liberties, lack of free speech, and dishonest government propaganda.

At the same time, the ruling communist elites began to lose confidence in themselves and the legitimacy of their rule. Once they decided that mass repression would no longer be used to put down opposition, their days were numbered. Of the countries where a Marxist party still holds power, Cuba and North Korea have retained planned economies, while China and Vietnam have carried out far-reaching market reforms, beginning in 1978 in China and in 1987 in Vietnam.

The restoration of capitalism in the Soviet Union and Eastern Europe in the 1990s was a traumatic experience. Huge numbers of bankruptcies created the first shock of mass unemployment after decades of job security. Rampant inflation drove many into extreme poverty, while privatization made a tiny minority extremely rich. After the collapse of the Soviet Union, the economy shrank by 40% and life expectancy for men fell from 64.2 years in 1989 to 57.6 years in 1994. In Russia, the increase in the death rate following the transition to capitalism resulted in around 6 million excess deaths over a 10-year period. It is not surprising that a fairly large section of the population feels nostalgia for the socialist past and a strong dislike for parasitic speculators and profiteers.

Population before and after the restoration of capitalism around 1990. Dotted line: Eastern
Europe. Solid line: Eastern Europe + Russia. (


After the overthrow of the US-backed dictator Batista in 1959, the Cuban revolution – led by Fidel Castro and Che Guevara – quickly took a socialist turn, and Cuba became closely allied with the socialist countries. Since then, Cuba has faced widespread hostility from much of the ‘free world’ – a punitive US blockade, terrorist attacks (such as the Bay of Pigs invasion in 1961), and other forms of interference.

From 1959 to 1965 Che Guevara served first as president of the national bank, then as head of the Department of Industrialization and finally as Minister of Industries, and played a key role in the debate on the economic transition to socialism (Yaffe, 2009; Williams, 2015). He visited many of the socialist countries and was – privately – critical of many of the Soviet practices that had been adopted to varying degrees in other countries. As noted above, the Soviet economic management system combined predominant state ownership and central planning with capitalist mechanisms, such as the profit motive, interest, credit, individual material incentives and elements of competition. Guevara recognized that ‘sovietization’ would lead to excessive bureaucracy and the separation of the leadership from the people, and that this and the continuing role of market mechanisms could lead to the restoration of capitalism.

Guevara was struck by the backwardness of Soviet management and accounting techniques, and created a Cuban alternative: the budgetary finance system (BFS). He believed that nationalized enterprises should be managed as one big enterprise, modelled on the way giant US corporations had managed their subsidiaries in Cuba. This would include extensive use of computer systems. Under the BFS, state enterprises did not own their accounts at the state bank, and the state bank did not give them loans and charge them interest. Instead, the state allocated funds and supplies to the enterprises as part of an overall economic plan. There were no financial relations or commodity exchange between state-owned enterprises. Guevara also stressed the importance of education in cultivating social solidarity and ‘socialist consciousness’, and in overcoming selfish individualism, so that material incentives could be increasingly replaced with moral incentives. His opponents characterized his views as idealistic and utopian.

Guevara left Cuba in 1965 to foment revolution abroad. In 1967 he was captured by CIA-assisted forces in Bolivia and summarily executed. Guevara’s economic approach has never been adopted wholesale in Cuba. After the collapse of the Soviet bloc, Cuba’s GDP plummeted by 35%, creating immense hardship and leading to market-oriented reforms. Since 2000 the pendulum has swung in the opposite direction. Financial centralization has reached a level not seen since the days of the BFS, though popular participation in decision-making is far from what Guevara wished to achieve.

Trade between developed and underdeveloped countries tends to be characterized by unequal exchange: for example, one hour of labour in the developed countries may be exchanged for 10 hours of labour in the developing countries. The only example of truly fair trade between industrialized and developing nations was to be found in the economic relations between Cuba and the Soviet-bloc (Comecon) countries. To ensure the exchange of equal quantities of labour, Cuba received, for example, 40 cents for each pound of sugar exported to the Soviet Union, instead of the market price of five cents. After the collapse of the socialist countries in the early 1990s, Cuba quickly lost 85% of its foreign trade as former Comecon countries submitted to US pressure to break off trade relations with Cuba as a condition for loans and assistance with market reforms (Smith, 2016, ch. 7).


The Chinese regime describes its socioeconomic system as ‘socialism with Chinese characteristics’. It is however a very strange form of ‘socialism’ (Roberts, 2016). Although there has been a significant expansion of both domestic and foreign privately-owned companies over the last 30 years, along with the establishment of a stock market and other financial institutions, the means of production are still mainly state-owned. Collectivized agriculture, however, has been phased out. Publicly-owned companies or institutions controlled by the communist party account for the vast majority of employment and investment. There is no free flow of foreign capital into and out of China; foreign direct investment accounted for just over 1% of GDP in 2016. But although public sector assets in China are still nearly twice the size of private sector assets, the gap is narrowing.

China was barely affected by the 2008 recession because of the large-scale state-directed investment programme by state corporations funded by state-owned banks. As a result, however, Chinese debt has exploded to 250% of GDP. In addition, the global slowdown in trade has affected Chinese exports, a key driver of economic growth. The Chinese economy is still expanding at 6-7% a year, but wages are very low and there is mass unemployment. China is now the world’s second-largest economy, and the world’s largest manufacturing economy and exporter of goods. China has lifted 620 million people out of internationally defined poverty. In the early 1980s, 75% of the world population were better off than the average Chinese; nowadays only 31% are.

The communist party elite is determined to preserve its autocratic rule and associated privileges, and worker democracy is not part of the Chinese model of ‘socialism’. The regime still has huge support, but people are worried about corruption and massive inequality. There are growing numbers of billionaires, many of them associated with the communist leadership.

The Chinese rulers give a sober assessment of the trade war with the United States:

In the process of economic globalization, US multinational companies have transferred more and more industries to developing countries to achieve maximum profitability. ... At the same time, more and more capital has left the real economic sector with lower profit margins, and turned to the financial sector to engage in financial speculation, leading to the hollowing out and virtualization of the US economy. ...

The incumbent US government hopes to provoke economic and trade frictions by imposing tariffs and erecting high trade barriers. It requires US-funded multinational companies to return to the US, by using the tricks of labeling them as ‘traitors’ and threatening tax increases. These practices will not help achieve the desired results. Instead of realizing the return of manufacturing industry, it will seriously undermine the global value chain, impact global resource allocation, generate widespread negative spillover effects, and reduce the efficiency of the global economy. ...

In the era of economic globalization, trade protectionism is a poison rather than a good prescription. There is no winner in engaging in economic and trade frictions, and hurting others means also hurting yourself. An important reason for the worldwide economic depression during the 1930s was the high tariff barriers and the big trade wars in powers such as the US and Europe. (

Future prospects

Marxists argue that the collapse of bureaucratic state socialism, with its semi-planned economy, does not mean that an efficient and dynamic centrally and democratically planned economy is impossible. The number of products tracked by the Soviet planning system in the mid-1980s was around 200,000 – far short of the 24 million items produced at the time. This was connected with the primitive state of Soviet computing and telecommunications facilities at that time.

Several researchers have argued that effective, detailed central planning would be possible using modern supercomputers, with labour time – rather than money – being used as a unit of account (Cottrell & Cockshott, 1993; Cockshott & Cottrell, 1993). They argue that such a system would be able to react to changes faster than a market economy, and would therefore be responsive to changes in consumer demand. Computerized flows of information automatically accompanying flows of goods would go a long way towards ensuring correct data inputs for planning purposes (Mandel, 1986). Electronic voting could ensure that the public had a direct say in the economic policies to be followed, instead of these decisions being taken by a political elite.

Whether any countries will ever put this recipe to the test, only time will tell. Deteriorating economic conditions would first have to generate massive hardship and social unrest. It’s hard to see how private ownership of the means of production could be ended without civil war, and violent social upheaval is not conducive to building a new free and democratic society.

Some capitalist countries have at certain times made effective use of state-directed plans to promote their economic development, with Japan and South Korea being notable examples. For several decades the Japanese Ministry of International Trade and Industry provided state-funded research and development to those industries that offered the best prospect of long-term competitive growth; the success of this policy depended on the willingness of capitalist enterprises to cooperate. As shown by governments’ responses to the 2008 crash, even today free-marketeers have no objection to large-scale state bailouts and nationalizations if this is necessary to safeguard the future of capitalism.

Under capitalism, market anarchy stands in stark contrast to the increasingly planned and conscious organization of production within private companies as they gradually expand in size. With the development of transnational corporations, internal corporate planning has become international and often multi-firm in scope. Within such corporations, intermediate goods are made to order, rather than being allocated through the market. There are left-leaning political reformists who dream of returning to an earlier age when firms were smaller, monopolies had not yet arisen and competition was much freer. However, there are strict limits on what can be achieved in this regard, because it is precisely the internal logic of capitalist competition that has led to the increasing concentration and centralization of capital.

From a Marxist standpoint, the more global production becomes concentrated in the hands of a few gigantic corporations, the easier the transition to socialism would be. Ownership of those companies would simply have to be transferred from their stockholders to society as a whole, and production could then be planned to best satisfy social needs rather than private profiteering. That, at least, is the theory.

10. Human evolution

‘To understand all is to forgive all.’ (Anonymous)

‘Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like an Alp on the brains of the living.’ (Karl Marx, 1852)

Marx was a philosophical materialist, but from the standpoint of reincarnation and karma, his words taken on an additional dimension: the ‘dead generations’ include many incarnations of ourselves.

Our freedom is severely constrained by our individual abilities and personalities – which reflect partly our past efforts, our successes and failures during a long sequence of causally connected lives, and partly our efforts and actions in our present life. Our freedom and actions are also greatly affected by our family circumstances, the social and economic environment we find ourselves in, and the reigning ideologies. From the perspective of reincarnation, we are drawn to those situations that provide the most suitable challenges and opportunities to correct our flaws and further unfold our inner nature.

Within certain limits we are free to try and change our own circumstances and those of others. It is up to us to use whatever freedom we have to live our lives as altruistically, honourably and usefully as possible, whether we are prince or pauper, slave-owner or slave, lord or peasant, property owner or manual labourer, soldier or sailor, police officer or criminal, judge or executioner. Over vast expanses of time, we have incarnated as both males and females, in different social classes, among many different races, and in all manner of socioeconomic and climatic conditions.

Our actions and thoughts in past lives have therefore shaped us into what we are now and have paved the way for the events we encounter in our present life. And this applies not only to individuals, but also to families, nations, races, etc. Humanity’s past karma ‘weighs like an Alp on the brains of the living’.

From one angle, the history of humanity is a succession of bloodbaths. 40 million lives were lost in the First World War. 70 to 85 million lives were lost in the Second World War – including over 26 million in the Soviet Union, some 20 million in China, about 7 million Germans and Austrians, 5 million Poles, and 3 million Japanese. Since the end of the Second World War, US-led wars, military coups and intelligence operations have led to the deaths of over 20 million people in some 40 countries worldwide ( Since 1900, the number of deaths from wars has dwarfed the number of deaths from natural disasters.


While most people long for peace, violence has been a prominent and ineradicable feature of human history. Barbaric and inhuman practices have existed in every known period of history; indeed, the greater the degree of social development, the greater the capacity to inflict terrible suffering and misery on large numbers of people. Violence and repression are often used to acquire or maintain a position of wealth and privilege or of political and economic dominance, and to suppress individuals, groups, countries, etc. considered to be enemies or threats or sources of cheap resources. Oppression and injustice inevitably breed resistance, which may begin peacefully but often – if met with repression – turns violent. Bloodshed has been committed in the name of most major political and religious ideologies.


From another angle, we can say that the overwhelming majority of people do not die from violence or other nonnatural causes, but from ‘natural causes’, a term that includes many diseases, the two main ones today being cancer and heart disease. In 2013, 92.5% of people dying in the United States died of ‘natural’ causes (

Just as there are social, economic and political conflicts on local, regional, national and international scales, there are also conflicts within each individual, between our higher and lower natures. Humans are capable of the highest virtues, but also the basest vices. We can be swayed by noble, lofty, universal ideals and values, such as love, compassion and altruism, but also by narrow self-interest, hatred, prejudice and intolerance. There are no data available on the ratio between kind and unkind thoughts and deeds; we can only hope that kindness outweighs unkindness, and try to set a good example ourselves (see Changing the world).

The first article of the Universal Declaration of Human Rights (1948) states that ‘All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.’ Throughout history, people have waged long and courageous struggles, often involving great sacrifices and suffering, to put an end to many different types of oppression, exploitation and discrimination, and to win a wide range of basic freedoms and human rights. These include freedom of speech, freedom of association and assembly, freedom of religion and belief, the right to vote, the right to a fair trial, the right of national self-determination, and so on. Such struggles continue to this day.

We can always do something to change and improve ourselves and help those around us. A great many people also choose to engage in broader social, economic and political activities and movements, of widely differing kinds. Even intelligent and ethically minded individuals can strongly disagree about what social and economic changes are most desirable and beneficial, and how best to attain them. The most that can be hoped for is that people who join what they consider to be worthy political or other causes have good intentions and unselfish motives, and are free of discriminatory and supremacist beliefs. But even then, there is no guarantee that their actions will ultimately make things better rather than worse for the majority of people.

It would be interesting to follow the thread of karma from life to life, to see how our negative characteristics are gradually overcome by finding ourselves the victims of similar characteristics in others. While ignoble behaviour ultimately brings misfortune, virtuous behaviour sooner or later leads to good fortune. Where grudges, hatred and resentment have deep roots, they are likely to generate a vicious circle of violence and oppression, with the same individuals and groups swapping roles and taking it in turn to brutalize one another, life after life. The only way to break such vicious circles is by embracing universal brotherhood and learning the art of forgiveness.

In practice, virtually nobody has memories of their previous incarnations. This may well be a good thing, because the ability to see our own past lives and the misdeeds we still have to pay for could prove to be more of a hindrance than a help to us in our present life. Some people try to recover memories of past lives through hypnosis, but it is well established that people in a hypnotic trance have a strong tendency to confabulate, i.e. unintentionally make stuff up.

The most reliable memories of past lives are those recovered from children without hypnosis. Such children frequently report dying at a young age in their previous life, often violently – which is why they reincarnated very quickly and can still remember their previous self. In many cases their memories can be verified by living individuals who knew their previous selves and also by documentary records. Moreover, their characters in this life, their likes and dislikes, and sometimes physical birthmarks or deformities, are often found to be directly linked to events in their previous life. (See Where reincarnation and biology intersect; Life beyond death.)

Some clairvoyants have claimed to be able to see the past lives of important historical personalities. One such person was Rudolf Steiner, the founder of anthroposophy. Steiner claimed that Karl Marx, in his previous incarnation, was a wealthy landowner living in northeastern France in the 8th-9th century (; This landowner and a small troop of armed men would sometimes carry out attacks on neighbouring districts with the object of plunder. According to Steiner, the landlord once returned from an expedition to find that he himself had been robbed of his property by another man and his soldiers. The former landowner therefore became a serf on what had been his own estate. He would often hold meetings with like-minded companions in the neighbouring forests at night, voicing strong resentment against the person who had dispossessed him.

Referring to these two individuals, Steiner writes: ‘The actions which had brought them into conflict were metamorphosed in the course of the long journey between death and a new birth into an impulse and urge to balance out and set right what they had done to one another.’ The dispossessed landowner supposedly reincarnated in the 19th century as Karl Marx, while the person who had stolen his land and persecuted him supposedly reincarnated as Friedrich Engels, his lifelong friend and coworker. This curious tale is of course unverifiable.

In her article ‘Karmic visions’ (June 1888), H.P. Blavatsky implies that the same soul who incarnated in Clovis, who ruled the Franks – a confederation of Germanic tribes – in the 5th century, reincarnated as the man who became Emperor Frederick III of Prussia in the 19th century. She relates how, after a bloody battle, prisoners of a defeated German tribe are brought before Clovis – recently baptized as a Christian – so that he can decide their fate. One of them is an old pagan seeress, who fearlessly recounts the many crimes Clovis committed to become ruler. She predicts that he will be reborn among his present enemies, and suffer the torture he had inflicted on his victims. Clovis angrily hurls her to the ground and kills her by thrusting his spear through her throat, pinning her head to the ground.

Centuries later, Clovis is reborn as Frederick. His father, Wilhelm I, was the first emperor of a united Germany. Frederick later developed incurable throat cancer, which caused him immense suffering. After various unsuccessful treatments, a tracheotomy was performed, leaving him permanently speechless. Following his father’s death, Frederick became German Emperor and King of Prussia, and initiated various liberal reforms, but reigned for only 99 days before dying of his ailment in June 1888.

In Blavatsky’s dramatized account, we see Frederick being haunted in his dreams by visions of the misery he had inflicted in his previous life and also of the suffering that would be caused by future wars:

What he now sees is a throng of bayonets clashing against each other in a mist of smoke and blood; thousands of mangled corpses covering the ground, torn and cut to shreds by the murderous weapons devised by science and civilization, blessed to success by the servants of his God. What he now dreams of are bleeding, wounded and dying men, with missing limbs and matted locks, wet and soaked through with gore. …

He sees and feels the torture of the fallen millions, who die after long hours of terrible mental and physical agony; who expire in forest and plain, in stagnant ditches by the road-side; in pools of blood under a sky made black with smoke. ...

Firmer and firmer grows in the Soul-Ego the feeling of intense hatred for the terrible butchery called war ...

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Changing the world

India and the cradle of civilization

The ancient Americas

Lost civilizations of the Andes

Where reincarnation and biology intersect

Life beyond death: evidence for survival

Human origins: the ape-ancestry myth

Evolution in the fourth round