Marx on capitalist crisis

Submitted by martin on 28 August, 2008 - 3:08 Author: Martin Thomas

Notes from Brisbane Workers' Liberty study course (2000), edited and rearranged. Right-click here to download the notes as a Word document; or read online, below.

1. Money versus commodities.

Capital volume 1 chapter 3 section 2A, "The metamorphosis of commodities".

In chapter 1 volume 3 of Capital volume 1, Marx argues that any society where most goods and services take the form of commodities must also single out one special commodity, money, as the general social approximation of average social labour.

Money is a commodity, but it also stands apart from other commodities. This standing-apart is the reason why money is able to develop into capital - value entering a continuous process of self-expansion (Capital volume 1 chapter 4).

For the same reason that money can develop into capital, it can also develop into the cause of crisis.

The possibility of crisis exists in any money economy, though in fact it crystallises only in a special kind of money economy, a capitalist economy, where most goods and services become commodities, and where labour-power becomes a commodity. Simple circulation of money "come[s] into being long before capitalist production, while there are no crises" (TSV 2 p.512)

The "metamorphosis of commodities" - through sale and purchase, from commodity to money to commodity - implies that possibility. Those with money are under no immediate compulsion to buy. But if they don't, then those with commodities cannot sell. There is, not just mishap or miscalculation and overproduction of one particular commodity, but general overproduction of all commodities.

Marx expounds this as an expression of "the antithesis, use-value and value; the contradiction that private labour is bound to manifest itself as direct social labour; that a particularised concrete kind of labour has to pass for abstract human labour; the contradiction between the personification of objects and the representation of persons by things; all these antitheses and contradictions, which are immanent in commodities..."

Commodities are commodities only because they are equated with money. Money is money only because it is equated with commodities. Yet commodities and money are also distinct and separate entities.

In a crisis, unsold commodities pile up on one side, money remains idle on the other. The possibility of this is incipient even in the simplest money economy, because, contrary to the impression given by some simplistic accounts, money is not a simple intermediary in such an economy which vanishes once its job is done of transferring commodities from hand to hand.

Money does not vanish. It only goes from hand to hand. "Circulation sweats money at every pore". At the end of market day, the population takes away at least as much money, unspent, as it brought to that day. A money economy necessarily includes at least some "incipient" hoarding.

Nor should it be supposed that only a population of crazed old misers piling up gold coins under their beds could produce reluctance to advance money for commodities sufficient for a crisis. An example: in Britain in the early 1990s, the total stock of money in use was about 500 billion pounds. The total final output produced per week was only about 10 billion. A slight variation in the speed at which money is thrown into circulation can in principle produce a crisis.

Yet all this - Marx emphasises - implies "the possibility, and no more than the possibility, of crises. The conversion of this mere possibility into a reality is the result of a long series of relations that, from the present standpoint of simple circulation, have as yet no existence".

2. From the possibility of crisis to the fact of crisis

Theories of Surplus Value Volume 2 p.492-535. See also Grundrisse, The Chapter on Capital, p.401-447.

In these pages Marx addresses the question of how - through what "long series of relations" - the possibility of crises becomes actuality. It appears that he envisaged developing successive approximations, or successively less abstract and more complex expositions, through which the whole anatomy of crises would finally be presented. Thus, for example, when he points to the part played by the "intertwining and coalescence of the processes of reproduction or circulation of different capitals" in crises (this is essentially what Keynes would later call the "multiplier effect"), Marx comments that "the definition of the content of crises is already fuller".

In fact, however, Marx only wrote fragmentary, and often disjointed notes.

2.1. Money versus commodities: reprise

Marx polemicises repeatedly against two schools of orthodox economics. One is the followers of "Say's Law", the doctrine according to which, since every sale is a purchase, sales and purchases must balance, and general overproduction is impossible. "But... trade is not barter, and... the seller of a commodity is necessarily at the same time the buyer of another. This whole subterfuge... rests on abstracting from money..." (p.532)

It is worth noting here that as late as 1967 an academic economist, R W Clower - seeking to "rediscover" those ways in which Keynes seriously questioned orthodox neoclassical economics - could write: "What presently passes for a theory of a money economy is in truth descriptive of a barter economy".

The other school against which Marx polemicises is those who, he says, reduce the question of crises to the mere possibility inherent in the separation of sale and purchase. "How insipid the economists are who... are content to says that these forms contain the possibility of crises, that it is therefore accidental whether or not crises occur and consequently their occurrence is itself merely a matter of chance".

Marx thus sets himself the task of explaining why capitalism develops much more than the mere possibilities inherent in simple circulation of money - which "come[s] into being long before capitalist production, while there are no crises" (p.512) - and makes crises systematic. He does not complete that explanation in these pages (nor, in a connected way, anywhere else), but he gives some pointers.

2.2. Time. Capitalism is not just about "market-clearing" at this or that instant, but essentially about moving from a certain sum of value now to a greater sum of value at a future time.

Marx starts his discussion just by pointing to empirical examples where general overproduction happens (p.494-6). In doing so, however, he indicates general ideas about how capitalism generates crises.

Firstly, as Marx put it in Capital volume 1, "while the miser is merely a capitalist gone mad, the capitalist is a rational miser". "The immediate purpose of capitalist production is not 'the possession of other goods', but the appropriation of value, of money, of abstract wealth" (p.503). Under capitalist conditions, a slowness of money-holders to exchange money for commodities may have nothing to do with any "miserly" reluctance to consume.

The capitalists must at all times, with urgency, turn their commodities into money; their decisions to turn money into commodities ("to invest") are always dependent on prospects of profit. There is asymmetry.

Secondly, capitalist production necessarily has a dimension of time, time in which the future is always uncertain. "The comparison of value in one period with... value... in a later period is no scholastic illusion... but rather forms the fundamental principle of the circulation process of capital" (p.503). Thus: a) If conditions for immediate profit are poor (falling prices, for example), then: "Surplus-value amassed in the form of money... could only be transformed into capital at a loss. It therefore lies idle as a hoard..." (p.494).

Thirdly, money is not only a means of exchange, but a means of payment, i.e. for settling past transactions.

"A person [specifically, a capitalist] may sell in order to pay, and... these forced sales play a very significant role in the crises" (p.503). Prices are pushed down by these forced sales - and then despite their frenzy to sell the capitalists are still unable, or only just able, to meet the payments (supplies, debt interest and repayments, rent) they are already committed to on the basis of old prices.

Fourthly: "Since the circulation process of capital is not completed in one day but extends over a fairly long period... it is quite clear that between the starting-point.. and... the end... elements of crisis must have gathered and develop" (p.495). If all capitalist decisions to order or commission buildings, equipment, etc. had instantaneous effect and were "tested" against the market immediately, there would hardly be crises. But they are not.

Marx's point here is similar to Keynes's: "Our social and business organisation separates financial provision for the future from physical provision for the future", but with an added critical insight. The "provision for the future", financial or physical, is never correlated to future needs, but to immediate prospects of gain.

Thus, in the boom, "excessive" physical provision for the future because profits are good and every capitalist wants to get in on the game; in the slump, "excessive" financial provision for the future because capitalists want to see a recovery of markets before they will transform their wealth from the "liquid" form of cash into fixed assets, or they are tied down by debts.

2.3. "The multiplier": all general crises start with partial crises

Because of the "intertwining and coalescence of the processes of reproduction or circulation of different capitals" (p.511), a partial imbalance can quickly become general. If there is overproduction in one major branch of industry, then that industry's cutbacks - less wages paid out, hence fewer workers' purchases; fewer supplies bought; less new equipment bought - depress the level of demand for other industries, and redefine those other industries' production as "overproduction". (Keynes called this the "multiplier effect").

"For a crisis (and therefore also for overproduction) to be general, it suffices for it to affect the principal commercial goods" (p.505).

"There could be no capitalist production at all if it had to develop simultaneously and evenly in all spheres. Because absolute over-production takes place in certain spheres, relative over-production occurs also in the spheres where there has been no over-production.

"...If production were proportionate, there would be no over-production. The same could be said if demand and supply corresponded to each other, or if all spheres provided equal opportunities for capitalist production and its expansion—division of labour, machinery, export to distant markets etc., mass production, i.e., if all countries which traded with one another possessed the same capacity for production (and indeed for different and complementary production). Thus over-production takes place because all these pious wishes are not fulfilled".

2.4. The unpredictability and non-uniformity of crises

In these pages of TSV Marx repeatedly refers to the possibility of crises being triggered by such conditions as poor harvests, or other problems of nature causing a hold-up in basic supplies to industry, in other words to causes of crisis which are "accidental" relative to the basic mechanics of capitalism. Obviously he does not intend to deny or exclude such crises.

Note that on p.496 Marx denies that stock-market crashes are particularly likely to cause industrial slumps. An enlightening thought for understanding the "failure" of the huge stockmarket crash of 1987 to produce a big industrial crisis.

2.5. The general root of capitalist crises

Is there then a general driving force, or mechanism, which will persistently, repeatedly, systematically trigger the crisis possibilities?

Marx's general answer is: "The whole aim of capitalist production is appropriation of the greatest possible amount of surplus-labour, in other words, the realisation of the greatest possible amount of immediate labour-time with the given capital, be it through the prolongation of the labour-day or the reduction of the necessary labour-time, through the development of the productive power of labour by... mass production. It is thus in the nature of capitalist production to produce without regard to the limits of the market" (p.522).

Or again, what happens is that "too much has been produced for the purpose of enrichment, or that too great a part of the product is intended not for consumption as revenue, but for making more money (for accumulation); not to satisfy the personal needs of its owner, but to give him money, abstract social riches and capital, more power over the labour of others, i.e. to increase this power" (p.533-4).

This is still very abstract. Marx will fill out details.

2.6. "Permanent crises do not exist"

Marx says flatly that: "permanent crises do not exist", and that the idea of "overabundance [glut] of capital... [as] a permanent effect" is wrong - p.497. He is referring to Adam Smith's notion (shared, for example, by no less than Keynes) that capital may become no longer scarce in much the same way as potatoes may become no longer scarce, and thus may lie idle or yield little profit "permanently".

It seems plain that Marx rejects the vision of capitalism sometime entering a "final" crisis, in which it must forever wallow until released from its agony by revolution.

2.7. Crises tend to be periodic; and they cannot be rooted in production alone

Marx refers in these pages, and elsewhere, to "the almost regular periodicity of crises on the world market" (p.498). Crises are periodic. But nothing in the argument so far explains this periodicity. What does?

Marx hints at the answer when he stresses that: "The real crisis can only be educed from the real movement of capitalist production, competition, and credit" (p.512), and when he notes that crises must be analysed in the interaction between production and circulation - on the money side as well as the commodity side, so to speak - and not in production alone (p.507, 513, etc.) We shall have to look at the movements of credit, and also of fixed capital.

Marx's general argument here, however, indicates that any "theory of crisis" relying solely on "commodity-side" relations must be unsound - and this applies, for example, to the "orthodox" Tendency of the Rate of Profit to Fall theories (based on the proportions in production between capital-stock, wage-bill, and surplus value) and to the usual "underconsumption" theories (based on the proportions in production between wage-bill and total product). This is another pointer for further discussion.

3. The turnover of fixed capital

Capital volume 2 chapters 8 and 9, also chapter 16 section 3 and a short passage from chapter 20.

Capitalist production, as distinct from simple commodity production, has an irreducible dimension of time in which the future is always uncertain. "The comparison of value in one period with... value... in a later period is no scholastic illusion... but rather forms the fundamental principle of the circulation process of capital" (TSV 2 p.503). The sharpest expression of this dimension of time is through fixed capital.

By its very nature, capital seeks maximum fluidity and the quickest returns; but equally, and also by its very nature, a large, generally increasing, proportion of it must be tied up in instruments of production which transfer their value to products only piecemeal and over a length of time, i.e. in fixed capital.

In a period of strong capitalist expansion, fixed capital - new machinery and buildings, etc. - is expanded disproportionately.

"The market is... stripped of labour-power, means of subsistence for this labour-power, fixed capital in the form of instruments of labour... and of materials of production, and to replace them an equivalent in money is thrown on the market; but during the year no product is thrown on the market [by the big projects of building new factories, installing new machinery, etc.] with which to replace the material elements of productive capital withdrawn from it.

"If we conceive society as being not capitalistic but communistic, there will be no moneycapital at all in the first place, not the disguises cloaking the transactions arising on account of it. The question then comes down to the need of society to calculate beforehand how much labour, means of production, and means of subsistence it can invest, without detriment, in such lines of business as for instance the building of railways, which do not furnish any means of production or subsistence, nor produce any useful effect for a long time, a year or more, while they extract labour, means of production and means of subsistence from the total annual production.

"In capitalist society however where social reason always asserts itself only post festum great disturbances may and must constantly occur. On the one hand pressure is brought to bear on the money-market, while on the other, an easy money-market calls such enterprises into being en masse, thus creating the very circumstances which later give rise to pressure on the money-market. Pressure is brought to bear on the money-market, since large advances of money-capital are constantly needed here for long periods of time...

"The effective demand rises without itself furnishing any element of supply. Hence a rise in the prices of productive materials as well as means of subsistence... A band of speculators, contractors, engineers, lawyers, etc., enrich themselves. They create a strong demand for articles of consumption on the market, wages rising at the same time... A portion of the reserve army of labourers, which keep wages down, is absorbed. A general rise in wages ensues, even in the hitherto well employed sections of the labour-market. This lasts until the inevitable crash again releases the reserve army of labour and wages are once more depressed to their minimum, and lower". (Capital 2 chapter 16).

One element in "the inevitable crash" will be that a mass of commodities produced by the new factories and equipment comes on to the market while there can be no corresponding increase in wages, consumption by capitalists and their hangers-on, or productive-investment projects to create demand. On the contrary, as the big construction and re-equipment projects are completed, workers will be laid off, fees for engineers and lawyers will diminish, and so will demand for new construction or re-equipment.

"The cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises. During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle".

(Capital 2 chapter 9, emphasis added).

4. Credit

Capital volume 3, chapter 30. Chapters 27, 31, 32 also include some relevant comments.

Note Engels' comments in his preface on the limitations of this section of volume 3. Of the part of Capital volume 3 dealing with credit, Engels wrote in his preface: "Here... was no finished draft, not even a scheme whose outlines might have been filled out, but... often just a disorderly mass of notes, comments and extracts. I had no choice but... confining myself to as orderly an arrangement of available matter as possible".

Credit In discussing fixed capital, Marx refers to growing "pressure on the money-market" as a factor in the downfall of capitalist booms. He develops this idea in his discussion of credit in Capital volume 3.

Credit, he argues, develops necessarily within capitalism (a) to facilitate the movement of capital from one sector to another, i.e. to allow the equalisation of the rate of profit; (b) to reduce the costs of circulation; (c) to speed up the movement of capital through its different phases, and increase the scope for the expansion of capital; (d) to pool together all that would otherwise rest in individual reserve funds, and to give to money-capital "the form of social capital" concentrated in the hands of banks. (See the first pages of Capital 3 chapter 27).

Thus the credit system gives greater elasticity both to capitalist production - and to capitalist overproduction.

"The credit system appears as the main lever of over-production and over-speculation in commerce... the reproduction process, which is elastic by nature, is here forced to its extreme limits... The credit system accelerates the material development of the productive forces and the establishment of the world-market... At the same time credit accelerates the violent eruptions of this contradiction - crises - and thereby the elements of disintegration of the old mode of production". (Last page of Capital 3 chapter 27).

The discussion of these central ideas is interwoven in Capital 3 with much discussion of the technicalities of the credit and finance system of the time. Marx refers much to bills of exchange.

These were at that time, as they had been for centuries, the main way by which industrialists and merchants extended trade credit to each other. One buying from another would hand over, not cash on the nail, but a promise to pay - a bill of exchange, dated for some point in the future. The seller might then use that same bill of exchange to pay his own suppliers. Or, if he needed hard cash quickly, he would go to a money-man, a bill-broker, and hand over the bill in return for cash - which would be less than the face-value of the bill by a percentage depending on how long it was to the promised date of payment and how reliable the original buyer (the signature on the bill) was. The percentage taken off was called the discount rate, and the bill-broker's activity was called discounting bills.

As bills went from hand to hand, each successive holder of the bill would sign it on the back - called endorsing the bill - and judge the quality of the bill by the "quality" of the previous signatures on it.

With the modern expansion of the banking system and speeding-up of commerce and methods of payment, bills of exchange are no longer used. Capitalist firms send each other invoices with a set payment date, and cover any possible gaps between getting payment on their invoices to their customers, and having to make payment on their invoices from their suppliers, by obtaining bank overdrafts.

This "trade credit" is distinct from capitalist firms getting loans from banks or finance companies to expand their fixed capital. ("Bills", not strictly speaking of exchange, were used for that sort of investment credit in older times).

Marx also polemicises much against the follies of a "tight-money" school of thought influential in Britain in the mid-19th century, called the "Currency School". These people, notably Samuel Lloyd, later Lord Overstone, got a law passed in 1844 to restrict the Bank of England's issue of banknotes to a fixed proportion to its gold reserves. In 1847, recovery from a serious economic slump was made possible only by a special decision by Parliament to suspend that law and allow the Bank to issue more notes.

If we do not get too confused by dated references and polemics, however, some important ideas can be found in the chapters on credit of Capital volume 3.

In Chapter 30 Marx describes the typical pattern of the boom-slump cycle.

"After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended [i.e. trade credit between capitalist firms is easy and extensive]... The rate of interest is still low, although it rises above its minimum...

"[But] those cavaliers who work without any reserve capital or without any capital at all and thus operate completely on a money credit basis begain to appear... in considerable numbers.

To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in".

Marx has not yet indicated why, exactly, the "new crisis" sets in, but he continues: "Credit suddenly stops then... the reproduction process is paralysed, and... a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital....

"The industrial cycle is of such a nature that the same circuit must periodically reproduce itself, once the first impulse has been given. During a period of slack, production sinks below the level which it had attained in the preceding cycle and for which the technical basis has now been laid. During prosperity - the middle period - it continues to develop on this basis. In the period of over-production and exertion, it strains the productive forces to the utmost, until it exceeds the capitalistic limits of the production process".

But why do the contradictions express themselves in a sudden crisis and not in gradual corrections? Because a decline of credit is by its very nature self-multiplying - no capitalist can afford to offer easy credit when others are tightening - and comes at a point when many business failures or outright swindles have developed and remain hidden only because of easy credit.

"In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur - a tremendous rush for means of payment - when credit suddenly ceases and only cash payments have validity. At first glance... the whole crisis seems to be merely a credit and money crisis.... But the majority of these bills [bills of exchange, or invoices, which cannot be converted into cash] represent actual sales and purchases, whose extension far beyond the needs of society is... the basis of the whole crisis". [By "needs", here, Marx obviously does not mean human needs. Elsewhere he has commented that by that criterion capitalism is a system of constant underproduction. He means effective demand].

Further indications on the suddenness of crisis are given earlier in chapter 30.

"The whole process becomes so complicated [with a developed credit system]... that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash... Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place".

And then again in chapter 32: "It is a basic principle of capitalist production that money, as an independent form of value, stands in opposition to commodities, or that exchange-value must assume an independent form in money... [Thus] in times of a squeeze, when credit contracts... money suddenly stands as the only means of payment and true existence of value in absolute opposition to all other commodities....

"Secondly, however, credit-money itself is only money to the extent that it absolutely takes the place of actual money to the amount of its nominal value. With a drain on gold its convertibility, i.e. its identity with actual gold, becomes problematic. Hence coercive measures, raising the rate of interest, etc., for the purpose of safeguarding the conditions of this convertibility. This can be carried more or less to extremes by mistaken legislation [here Marx refers to the Bank Act of 1844 - he would probably have similar comments on Paul Volcker's policies at the Federal Reserve in the early 1980s, or on "monetarism" in Thatcher's Britain]...

The basis, however, is given with the basis of the mode of production itself. A depreciation of credit-money... would unsettle all existing relations. Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money... For a few millions in money, many millions in commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties".

5. "Underconsumption"

In Capital 3 chapter 30 Marx writes: "The replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist classes. The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit".

In Capital 2 chapter 20: "In proportion as the luxury part of the annual product grows, as therefore an increasing share of the labour-power is absorbed in the production of luxuries... the existence and reproduction of [a] part of the working-class... depends upon the prodigality of the capitalist class, upon the exchange of a considerable portion of their surplus-value for articles of luxury.

"Every crisis at once lessens the consumption of luxuries... thus throwing a certain number of the labourers employed in the production of luxuries out of work, while on the other hand it thus clogs the sale of consumer necessities and reduces it. And this without mentioning the unproductive labourers who are dismissed at the same time, labourers who receive for their services a portion of the capitalists' luxury expense...

"That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption).

"But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and "simple" (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis".

Both italicised passages have been much-quoted - the first to prop up theories in which workers' "underconsumption" is presented as central to crises, and the second to knock them down. Both ideas here - that the relative poverty of the working class is central to crises, and that the immediate run-up to crisis is a period of relatively high wages - are repeated by Marx in many other places.

However, the preceding argument (not so often quoted) is identical for the two "contradictory" passages. Because the workers' effective demand can vary only within narrow limits, continued capitalist expansion depends heavily on the capitalists' effective demand. When that sags - and it does sag first, before the workers' effective demand does - then it brings the whole process down with it. Crises are rooted in the general limitation of workers' effective demand, but not in a special limitation of it prior to the immediate point of crisis.

Marx's argument here is, however, I think, deficient.

Most of the capitalists' effective demand is for means of production, not for their own individual consumption. And the factual evidence is that the decisive shortfall in demand at the onset of crises is a shortfall of demand for the elements of fixed capital. The wave of new fixed-capital project decisions generated in the recovery and boom has subsided: capitalists have their projects underway, and won't start big new ones for a while yet. And credit has become more expensive.

It is the sudden changes in the credit system, due to the nature of that system, which make for a sudden downturn in demand. A downturn in capitalists' individual consumption (and in government expenditures on armaments, welfare, etc., which fall into the same category) may follow, and have repercussions, but is not the decisive first step.

A downturn in individual consumption by capitalists and their hangers-on is also possible as a result of a crisis limited to the stock markets which wipes out much of their apparent wealth and ruins many "bubble" enterprises. The evidence (from 1987, for example) is however that such effects are generally not large enough to trigger an overall crisis.

6. "Wage squeeze"

Capital volume 1 chapter 25.

Suppose capital is expanding fast on the basis of relatively unchanged technology. This will happen in many industries during a boom, because there are no dramatic new technologies available, or because the new outfits using the new technology have not yet come on stream.

"Under the conditions of accumulation supposed thus far", writes Marx, "which conditions are those most favourable to the labourers, their relation of dependence upon capital takes on a form endurable or, as Eden says: 'easy and liberal'. Instead of becoming more intensive with the growth of capital, this relation of dependence only becomes more extensive, i.e., the sphere of capital’s exploitation and rule merely extends with its own dimensions and the number of its subjects...

"They can extend the circle of their enjoyments; can make some additions to their consumption-fund of clothes, furniture, &c., and can lay by small reserve-funds of money. But just as little as better clothing, food, and treatment, and a larger peculium, do away with the exploitation of the slave, so little do they set aside that of the wage-worker. A rise in the price of labour, as a consequence of accumulation of capital, only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself, allow of a relaxation of the tension of it.

"In the controversies on this subject the chief fact has generally been overlooked, viz., the defining characteristic of capitalistic production. Labour-power is sold to-day, not with a view of satisfying, by its service or by its product, the personal needs of the buyer. His aim is augmentation of his capital, production of commodities containing more labour than he pays for, containing therefore a portion of value that costs him nothing, and that is nevertheless realised when the commodities are sold. Production of surplus-value is the absolute law of this mode of production.

"Labour-power is only saleable so far as it preserves the means of production in their capacity of capital, reproduces its own value as capital, and yields in unpaid labour a source of additional capital. The conditions of its sale, whether more or less favourable to the labourer, include therefore the necessity of its constant re-selling, and the constantly extended reproduction of all wealth in the shape of capital. Wages, as we have seen, by their very nature, always imply the performance of a certain quantity of unpaid labour on the part of the labourer. Altogether, irrespective of the case of a rise of wages with a falling price of labour, &c., such an increase only means at best a quantitative diminution of the unpaid labour that the worker has to supply. This diminution can never reach the point at which it would threaten the system itself.

"Apart from violent conflicts as to the rate of wages (and Adam Smith has already shown that in such a conflict, taken on the whole, the master is always master), a rise in the price of labour resulting from accumulation of capital implies the following alternative: Either the price of labour keeps on rising, because its rise does not interfere with the progress of accumulation. In this there is nothing wonderful, for, says Adam Smith, 'after these (profits) are diminished, stock may not only continue to increase, but to increase much faster than before.... A great stock, though with small profits, generally increases faster than a small stock with great profits.' (l. c., ii, p. 189.) In this case it is evident that a diminution in the unpaid labour in no way interferes with the extension of the domain of capital. —

"Or, on the other hand, accumulation slackens in consequence of the rise in the price of labour, because the stimulus of gain is blunted. The rate of accumulation lessens; but with its lessening, the primary cause of that lessening vanishes, i.e., the disproportion between capital and exploitable labour-power. The mechanism of the process of capitalist production removes the very obstacles that it temporarily creates. The price of labour falls again to a level corresponding with the needs of the self-expansion of capital, whether the level be below, the same as, or above the one which was normal before the rise of wages took place".

Marx here suggests "wage squeeze" not as a precipitator of crisis, but as a factor slowing down a boom. In principle, however, that slowdown could lead to a much faster drop-off in fixed-capital investment plans and thus to a crisis.

In the 1970s, some writers, notably Andrew Glyn and Bob Sutcliffe ("British Capitalism, Workers, and the Profit Squeeze") argued that in conditions of trade-union strength unexpected by Marx, such as seen in the 1960s, wage-squeeze could be a much more potent factor. It had pulled down the profit rate, and thus broken the momentum of the long expansion of the 1950s and 60s, and prepared the way for crises like that of 1973-5.

A somewhat similar argument has been developed by writers of the "regulation school" in France. They focus on the effect of union strength not so much on wage rates as on work rates and workplace organisation. Their argument is that union strength made bosses increasingly unable to speed up work and increase productivity. Thus a downward drift in the rate of profit, thus a break in the momentum of expansion, etc.

Robert Brenner ("The Economics of Global Turbulence") has examined the statistical basis of these arguments in detail, and found it wanting.

It may well be, however, that "wage squeezes" and "productivity slowdowns" in particular sectors are a chronic feature of the high points of booms and of preparation for crisis.

7. The tendency of the rate of profit to fall

Capital volume 3, chapters 13 to 15.

There was a consensus among economists in Marx's day that the rate of profit tended to decrease from one decade to the next.

Major economists had theories to explain this. Adam Smith said the decrease was due to the diminishing "scarcity of capital". As late as the 1930s, John Maynard Keynes would accept this theory of Smith's.

David Ricardo argued that there could be no such thing as an absolute abundance (non-scarcity) of capital, and that the decrease in the rate of profit was due to expanding population pushing agriculture onto less and less favourable land, thus raising the labour-time socially necessary to produce food, thus increasing money (though not real) wages and landlords' rent, at the expense of the capitalists.

Marx agreed with Ricardo's critique of Smith, but thought Ricardo was wrong too, because he had neglected the influence of capitalist improvement of agricultural land.

Marx made an off-hand remark in his 1857-8 "rough notes" (the Grundrisse) about the importance of the tendency of the rate of profit to fall, but it is doubtful whether that remark really reflected his settled opinion. He never mentioned the tendency of the rate of profit to fall in anything he readied for publication, and never mentioned it in any of his major unpublished writings on crisis.

However, he accepted the consensus of economists as to the facts about falling profit rates. He didn't have much choice, since in those days there were no reliable economic statistics susceptible to close analysis.

He offered a new explanation of the supposed tendency, one which differed significantly from his forerunners in making the tendency much less of an "iron law" and in emphasising the importance of "counter-tendencies".

The alleged tendency, as Marx expounds it, is a direct product of the structure of productive capital. The share of variable capital in productive capital tends to fall because of increasing use of machines to replace living labour (so Marx argues); but profits are always based on variable capital, representing as they do the extra hours which the capitalist can get the workers to work (up to 40-odd hours a week, or whatever has become the normal working week) above the hours in which they produce the value-equivalent of their wages (maybe only 15 or 20 hours).

If the ratio of variable capital to total productive capital declines, then the ratio of profits to total productive capital - i.e. the rate of profit - must tend to decline.

Cheapening of constant capital, and increase of the rate of exploitation, will be counter-tendencies.

Marx thought that the counter-tendencies were bound to be weaker than the tendency in the long run. There are good reasons to suppose he was wrong about that.

a. Suppose capitalist A introduces new technology to produce product B. She or he will only do it if they calculate that the new technology will enable cheaper production. They can still sell B at the prices charged by the old-technology firms, so they make super-profits.

Bit by bit, the new technology spreads. The price which can be charged for B declines.

What is the effect of that decline on other capitalists? Maybe B is a production input. Then the other capitalists get a reduction of costs. Maybe B is a wage-good. Then capitalists can reduce workers' money-wages while leaving the workers' real wages intact or even improved: either way, the other capitalists, once again, enjoy a reduction of costs.

The only case in which other capitalists do not enjoy a reduction of costs is if B is something consumed only as a luxury by capitalists (or the state).

In general, then, the bit-by-bit decline in the super-profit rate of capitalist A and the price of B is also a boost to the profits of other capitalists. Eventually the decline in A's profit rate and the rise in other capitalists' profit rates meet - but at a higher profit rate than before.

Of course it is possible for profit rates to fall at a time when new technologies are coming on stream. A dozen reasons are possible. But none of them is the technological change as such.

b. The "image" conjured up by the conventional presentation of Marx's account of the tendency of rate of profit to fall is of a constantly more gigantic mass of fixed capital. Physically, this may be true: if the factory equipment does not become bulkier, assuredly it becomes more complex and impressive.

But the mass of value embodied in the factory equipment >cannot rise so fast. Factory equipment does not last forever. In fact, in periods of capitalist boom and rapid technical change it gets scrapped faster. In any case, the fixed capital actually existing at any time, in value terms, can only be a portion of the surplus value produced in a finite range of recent years, depreciated somewhat by its wear and tear and by intervening technical changes which have made it possible to produce that equipment by less labour-time.

If the mass of surplus value tends to increase - and Marx argues it will - then the ratio of that mass of surplus value to the portion of a finite range of past years' masses of surplus value will have a tendency to rise.

But leave those objections aside. Assume for now that the tendency of the rate of profit to fall operates in its crudest, simplest, summary form, as just outlined. It does not explain crises.

What is a "low" rate of profit? Just as there is no mathematical rule stating some minimum share for workers in national income below which "underconsumption" will ruin capitalism, so also there is no mathematical rule setting a minimum rate (20%? 10%? 5%? what?) below which crisis breaks out.

If the rate of profit gradually sinks, then why shouldn't the capitalists' expectations of profit, and the rate of return they demand before making new investments, also sink, so that demand remains buoyant? A falling rate of profit can be - and Marx argues that it generally will be - accompanied by an increased mass of profit, so the falling rate of profit still yields the capitalist magnates (dwindling in number as capital is concentrated and centralised) increasing riches. "And thus the river of capital rolls on... or its accumulation does, not in proportion to the rate of profit, but in proportion to the impetus it already possesses" (Capital vol.3 p.245).

Marx did sketch an argument in unfinished notes according to which the tendency of the rate of profit to fall produced crises specifically through its effect on small capitals. "The rate of profit, i.e. the relative increment of capital, is above all important to all new offshoots of capital seeking to find an independent place for themselves... Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital and to the big, firmly-placed capitalists... The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises" (Capital vol.3 p.259, 256, 251).

This argument, at best, indicates that an analysis of speculation and credit is necessary to complete the explanation of crises. The falling rate of profit does not explain it by itself. More important, Marx's sketch is wrong. In statistical fact crises are not provoked by small capitalists speculating. And if the rate of exploitation and the productivity of labour are rising, then a small capitalist employing just three or four workers will still get much better than a workers' income, and a growing income in real terms, even as the rate of profit falls.

There is another "crisis theory" based on the tendency of the rate of profit to fall which says that the tendency operates strongly in booms, so the rate of profit falls relatively fast in booms until its fall precipitates a crisis, whereupon the counter-tendencies take over and the rate of profit is restored in the downturn, only to pave the way for a new boom.

If that were the case, then in the course of the business cycle profit rates would generally be highest at the very start of the recovery, then decline at increasing speed as the expansion proceeds. It is not so. Profit rates sometimes level off or drop slightly in the very last stages of the expansion, before the crisis, but during most of the expansion they rise.

There are other arguments according to which the tendency of the rate of profit to fall can precipitate crises without ever making the rate of profit actually fall, but we won't linger on those here.

The tendency of the rate of profit to fall was not much cited in discussion of crises in the great period of Marxist intellectual life up to 1914. It was elevated to the status of "the Marxist theory" by Stalinists in the 1930s.

The "iron law" character of such a "Marxist theory" attracted the Stalinists. Capitalism will collapse, they told the workers. It is an iron law. As inevitable as the sun setting. So you're going to have to find an alternative to capitalism. Stalinist "socialism" may not look very good, but it is all that is on offer, and it has no tendency for the rate of profit to fall. Support it, or else!

8. Crisis and depression

In Capital 3 chapter 30 Engels adds a footnote repeating an idea which he also develops at the end of his 1886 preface to the English edition of Capital 1.

"The decennial cycle of stagnation, prosperity, overproduction and crisis, ever-recurrent from 1825 to 1867, seems indeed to have run its course; but only to land us in the slough of despond of permanent and chronic depression".

In Capital 1 Engels attributes this to two things: international competition ("Foreign production, rapidly developing, stares English production in the face everywhere..."); and a supposed inbuilt tendency for production to outstrip markets long-term ("While the productive power increases in a geometric, the extension of markets proceeds at best in an arithmetic ratio").

The second argument, despite the long reach of its influence in Marxist discussion, is wrong.

Long-term, as Marx indicates in TSV 2, the increase of production and the increase of markets must be parallel. ("Permanent crises do not exist"). Increased production means more wages paid out, more orders from suppliers, more surplus-value in the hands of capitalists - i.e. increased markets, to exactly the same extent.

"Universal overproduction in the absolute sense would not be over-production, but only a greater than usual development of the productive forces in all spheres of production". Quoting this argument from capitalist "apologetics" in TSV 2, Marx agrees that "this non-existent, selfabrogating overproduction", based on a general, uniform, long-term increase of production beyond markets, cannot exist.

"Actual overproduction" does, because capitalism develops unevenly ("there could be no capitalist production at all if it had to develop simultaneously and evenly in all spheres"), the unevenness between industries and in (relatively short) time can create sectoral overproduction, and sectoral overproduction snowballs into (temporary) general overproduction.

Crises cannot be rooted in a static comparison - too much production here, too little money there. There is no ideal static balance between production and money. The relations are always dynamic.

Writing later, in Capital 3, Engels is more tentative and considers more aspects.

  • Perhaps, he writes, the cycle is still there, but has become longer, not synchronised between different industrial countries, and for the time being less marked, oscillating between "slight improvement" and "indecisive depression". (But only for the time being - maybe "a new world crash of unparalleled vehemence" is coming).
  • "The colossal expansion of the means of transportation and communication" has done away with some old causes of crisis arising from the uncertainty of distant markets (English textiles in India).
  • "Competition in the domestic market recedes before the cartels and trusts, while in the foreign market it is restricted by protective tariffs".
  • He refers again to the fact that "the monopoly of England in industry has been challenged by a number of competing industrial countries". "Infinitely greater and varied fields" have opened up for capital. The conclusion, I suppose, is that this development, combined with the cartels, trusts, and tariffs, could dampen crises by making it likely that a downturn in Britain would be offset by expansion in Germany or the USA, or vice versa.

Certainly, capitalist crises are not a mechanical pattern. And, though "permanent crises do not exist", "permanent and chronic depression" (high unemployment, etc.) can very well exist. The fruitful suggestion by Engels, I think, is that the regime of crises and depression is shaped by the way capital is organised - within countries (how the state and big capitalist cartels or trusts deal with their difficulties) and between countries (industrial supremacy of one nation or competition of several, protection or free trade, etc.)

9. The relation between economic crisis and political crisis

Trotsky. Excerpts from My Life and report to the Third Congress of the Communist International (in First Five Years of the Comintern).
Antonio Gramsci, passages from the Prison Notebooks.
Simon Clarke, Marx's Theory of Crisis.

Trotsky on economic and political crisis - from "My Life"

During the years of the reaction I studied the questions of trade and industry both on a world scale and a national scale. I was prompted by a revolutionary interest. I wanted to find out the relationship between the fluctuations of trade and industry, on the one hand, and the progressive stages of the labour movement and revolutionary struggle, on the other. In this, as in all other questions like it, I was especially on my guard to avoid establishing an automatic dependence of politics on economics. The interaction must necessarily be the result of the whole process considered in its entirety.

I was still living in the little Bohemian town of Hirschberg when the New York stock exchange suffered the "Black Friday" catastrophe. This was the harbinger of a world crisis which was bound to engulf Russia as well, shaken to her foundations as she was by the Russo-Japanese war, and by the ensuing revolution. What consequences could be expected? The point of view generally accepted in the party, without distinction of faction, was that the crisis would serve to heighten the revolutionary struggle. I took a different stand. After a period of big battles and defeats, a crisis has the effect of de pressing rather than arousing the working class. It under mines the workers' confidence in their powers and demoralises them politically. Under such conditions, only an industrial revival can close the ranks of the proletariat, pour fresh blood into its veins, restore its confidence in itself and make it capable of further struggle.

This analysis was met by criticism and incredulity. The official party economists also put forward the idea that under the counter-revolution a trade boom was impossible. In opposition, I based my argument on the inevitability of an economic revival and of the new wave of strikes it would bring in its wake, after which a new economic crisis would be likely to provide the impetus for a revolutionary struggle. This prognosis was confirmed to the letter. An industrial boom came in 1910, in spite of the counter-revolution and with it came strikes. The shooting down of the workers at the Lena gold mines in 1912 gave rise to great protests all over the country. In 1914 when the crisis was unmistakable, St. Petersburg again became an arena of workers' barricades. They were witnessed by Poincaré, who visited the Czar on the eve of the war.

This theoretical and political test was invaluable in my future activities. At the Third Congress of the Communist International, I had an overwhelming majority of the delegates against me when I insisted on the inevitability of an economic revival in post-war Europe as a condition for further revolutionary crises. And again in recent times, I had to bring against the Sixth Congress of the Communist International the charge of utter failure to understand the break in the economic and political situation in China, a failure which found expression in unwarranted hopes that the Chinese revolution, in spite of the disastrous defeats it had suffered, would continue to progress because of the country's growing economic crisis.

Postscript: a summary on "Why does capital have crises?"

(Notes written in the early 1990s, and only very slightly edited here).

The capitalist system not only exploits workers. It also ruins capitalists, through periodic crises. Why?

The driving force of capitalism is the self-expansion of capital: a spiral circuit that transforms money-wealth into labour-power and means of production, then into production, then into new commodities, then, through sale, into more money-wealth. Why should that circuit be broken, so that money-wealth, workers, factories, and unsold stocks all lie idle?

According to an old law of orthodox economics, Say's Law, such general crises are impossible in a pure free-market capitalist system. Minor excesses, maladjustments, and disproportions are certainly possible, but, given the chance, market mechanisms will restore balance before any general crisis can develop. General crises must therefore result from impurities in the system which clog up the mechanisms of the market.

For example: in a crisis, workers are unemployed. No capitalist finds sufficient profit in employing them. Say's Law backs up the commonplace argument that trade unions, or minimum-wage laws, must be "pricing the workers out of jobs", by preventing wage rates from falling low enough to make employing those workers profitable.

Say's Law

Another way to put Say's Law is this: if capitalists operate the given means of production and workforce at full capacity, then they will automatically find buyers for all they produce, minor miscalculations and maladjustments aside.

Suppose a capitalist brings goods worth £200 to sell on market-day, Saturday. The £200, the total price of output, is exactly equal to the total of incomes flowing from that business. If the wages bill is £80, say, and the capitalist pays £60 to his landlord, then the capitalist's expected profit is £200 less £80 less £60. Or, £200, the total price of output, is equal to the wages (£80), plus the rent and interest (£60), plus the profit (£60).

The capitalist will already have paid out the wages, rent, and interest - on Friday, maybe. He can also get credit from the bank to the amount of his expected profit. So, at the same time as he arrives in the market-place with supply worth £200, he, his workers, and his landlord arrive there with demand totalling £200.

Of course an individual capitalist may miscalculate and produce unwanted goods. Then he will have to sell his products at less than the expected profit, while some other capitalist, making more wanted goods, will make more than the expected profit. Capital will shift from the unwanted line of production to the wanted one, in a constantly self-correcting process.

A first objection: is there enough money?

An apparently unjustified assumption has been slipped in to the argument. Where does the capitalist get cash from to pay wages, rent and interest? Why assume that he can get credit from the bank to the amount of his expected profit? In short: there is no effective demand for any capitalist's goods unless the buyers have cash in hand, and where do they get the cash from?

In fact, however, there is plenty of cash on hand. As soon as "credit money" - bank notes and cheques - is developed, banks and governments can multiply the amount of money available very easily. In Britain in 1991, the total of money in cash and bank accounts was about £500 billion. Output was about £10 billion a week, so full-employment output might be about £12 billion. There was plenty of money to buy the output. If the money available were the only limit, demand could go up to £500 billion a week (or more: a £10 note which passes from hand to hand once a day can serve for £70 of demand in a week, not just £10).

Claims that "there is not enough money" to pay for better health care, schools, housing, or public transport are always nonsense. Under capitalism, relations between people - who produces what, how, for whom? - are always expressed through relations between things, between different commodities and money. The claim that "there is not enough money" for social purposes uses the money-expression of human realities to conceal those realities.

Some social goals, of course, cannot be afforded, because of lack of productive resources or because of their ecological cost. But there is plenty of money. There is plenty of money - only that money, or, to get to the root of it, the social power represented by the large accumulations of money, is in the hands of those who will not use it for social purposes.

A second objection: will the money be spent?

Full-employment output in Britain would be about £12 billion a week [1991 figures], and the money on hand is about £500 billion. Then why should the portion of that money which people spend each week - i.e. circulate from hand to hand - be £12 billion rather than £6 billion or £24 billion?

Say's Law assumes that the workers, the capitalists, and the landlords spend each week what they get in income that week. In other words, it assumes that money is only a means of exchange, a technical trick for making quicker and easier the barter of one bundle of commodities for another. People want money only as a means for getting the commodities they want.

In an idealised economy of independent producers in small farms and workshops, with no wage labour, that might be true. Under capitalism it is very far from true.

The drive of the capitalist is to transform money into more money. The other commodities - machines, buildings, labour-power, products - are only means to that end. Rather than wanting money as a means to get commodities, the capitalist wants commodities as a means to get money.

Money is not just a technical device. It is a store of value, a representation of command over human labour.

Money can always be transformed into commodities. Commodities cannot always be transformed into money.

Thus people may well circulate only, say, an average of £10 billion a week. If they do this at a time when production has been running at full employment (£12 billion a week), then unsold stocks will increase. After a period of increasing unsold stocks, the capitalists will cut production to £10 billion a week, restoring balance between supply and effective demand but at less than full employment.

This objection to Say's Law is fundamental. It shows that crises are rooted in the way that capitalism gives power over human relations to the alienated, mystified expression of those relations in money-relations.

Crises are generated by the whole circuit of capital, not just by capitalist production

Crises, in other words, are based on the role of money in capitalist society. They result from - indeed, they are - disturbances in the flow from money-capital to means-of-production and labour-power to products to money again.
As Marx put it: "The real crisis can only be educed from the real movement of capitalist production, competition and credit" [Theories of Surplus Value vol.2 (TSV2) p.512].

But this shows that some Marxistic theories of crises are inadequate.

One inadequate theory deduces crises directly from "underconsumption" - from the fact that workers consume relatively little of what they produce. Therefore (so it is argued) the capitalists can never have an adequate market for what they produce.

"Underconsumption" does, I think, play a part in the explanation of crises - but it does not explain them directly. It cannot. If it did, then crises would be explained directly from the structure of productive capital - i.e. from the relatively small part in it of "variable capital", capital laid out as wages - without reference to the whole circuit of capital.
Capitalists can have an adequate market for what they produce even if wages are very low. Demand by capitalists and their hangers-on for new machinery, equipment, materials, and luxuries can make up the market.

In any case, what does "under"-consumption mean here? Under what? Low living standards for workers, alongside vast luxury for capitalists, make us angry, but do they necessarily cause trouble for capitalism? How small does the workers' share in what's produced have to be in order to cause crisis? 50 per cent? 20 per cent? Why?

Marx summed up on "underconsumption" as follows: "As matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes... The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit". But: "It is pure tautology to say that crises are provoked by a lack of effective demand or effective consumption. The capitalist system does not recognise any forms of consumer other than those who can pay... The fact that commodities are unsaleable means no more than that no effective buyers have been found for them...

"If the attempt is made to give this tautology the semblance of greater profundity, by the statement that the working class receives too small a portion of its own product, and that the evil would be remedied if it received a bigger share, i.e. if its wages rose, we need only note that crises are always prepared by a period in which wages generally rise, and the working class actually does receive a greater share in the part of the annual product destined for consumption...
"It thus appears that capitalist production involves certain conditions independent of people's good or bad intentions, which permit the relative prosperity of the working class only temporarily, and moreover always as a harbinger of crisis" (Capital vol.2 p.486-7).

Key elements in crises: capital in movement, and class structure

To get a more adequate theory of crises, we have to follow the argument further.

The possibility of crisis arises from the fact that in capitalism money is not just a means to get goods and services. On the contrary, for the capitalist, money is a means to get more money. Thus money-wealth may be stacked up on one side, and unsold goods and services on the other.

This possibility, however, does not always become reality, at least not on the scale that causes crises. "It is not probable", wrote David Ricardo, "that [anyone] will continually produce a commodity for which there is no demand" (quoted, TSV2 p.493-4). There is a balancing mechanism. If supply begins to outrun demand, and unsold commodities begin to stack up, then prices will fall. Commodities become cheaper, and so more attractive. Demand increases. Balance is restored.

In the long term this is true. As Marx sarcastically commented on Ricardo's argument that "continual" overproduction was improbable, "the point in question here is not eternal life" (TSV2 p.494). "The excess of commodities is always relative; in other words it is an excess at particular prices" (TSV p.505). "When Adam Smith explains the fall in the rate of profit from an over-abundance of capital... he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist" (TSV2 p.497).

There is indeed a balancing mechanism. The problem is that it does not always restore balance smoothly, by continual tiny adjustments, like a thermostat or a governor on an engine. Balance is sometimes restored only jerkily, after convulsions. Why?

Balance could be restored smoothly if society were a single community adjusting its consumption and production against each other - so that any general unexpected "excess" of goods would quickly be cleared just by improving average living standards - and if the question were only one of balancing today's consumption and today's production. But neither assumption holds true for capitalism.

Today's wages and employment are held down - for the sake of tomorrow's profit of individual employers - when from the point of view of the capitalist class as a whole it should make sense to employ more workers, on higher wages, and thus create a market for otherwise unsold goods. And: "The circulation process of capital is not completed in one day but extends over a farily long period... and great upheavals and changes take place in the market in the course of this period" (TSV2 p.495). Prior decisions can prevent smooth balancing. The capitalists cannot reduce the cost-price of the machines they have already installed, or the amount of the debts they have already run up. Thus, they may not be able to deal with a disturbance by smoothly reducing the price of their products. They may have to go bust, or hold on to their stocks at a higher price and wait, instead.

Decisions based on future prospects can also undermine smooth balancing today. Capitalists buy new machines not on the basis of weighing their utility against their price, but on the basis of an assessment of how quickly and copiously the money put into the machines can be transformed into more money got by selling the products. If the prospects for getting more money look grim, then the capitalists may not want to buy the new machines (or may not be able to get credit from their bankers in order to buy them), however much the machines' price is reduced.

The decisions about buying new machines and materials are taken by the capitalists, by a different class. "Nothing is more absurd as a means of denying crises, than the assertion that the consumers (buyers) and producers (sellers) are identical in capitalist production. They are entirely distinct categories... [The workers] are... producers without being consumers... in relation to all articles which have to be consumed not individually but industrially... On the other hand, it is equally wrong to say that the consumers are producers. The landlord does not produce... and yet he consumes. The same applies to all moneyed interests".

To put it another way: the workers can get work and wages - i.e. they can consume - only if they produce profits, i.e. only if they produce more then they consume, and therefore only if another class or classes (the capitalists and other wealthy classes) provide demand for that surplus production. Or yet another way: "underconsumption" is significant in crises, inasmuch as it means that the burden of balancing consumption and production cannot be borne by workers' consumption but has to be borne by the altogether more erratic demand of the wealthy classes, mainly for investment goods.

A disturbance may expand before balancing out. If an excess is produced, the capitalists cut prices - but they also cut wages, slash jobs, and cancel investment plans, thus depressing demand by far more than can be compensated for by any cut in prices which is less than ruinous in relation to the capitalists' previously-fixed cost-prices and debts. Balance comes only after ruin.

The rate of interest

There is another mechanism to balance the economy through "price" movements, namely, the movements of a special "price", the rate of interest. According to some economists, an ideal free-market capitalist economy could be balanced by the rate of interest moving down when investment (capitalists' purchases of means-of-production) dropped. The fall in the rate of interest makes it cheaper for industrial capitalists to borrow and buy new machinery, and it makes it less attractive for the wealthy to hold their wealth as cash, yielding interest, rather than putting it into industry.

This might work if the movements of the rate of interest were what orthodox economics describes them as - indices of the community adjusting its balance between current consumption and provision for the future. In class-divided capitalist society, they are not that. The rate of interest reflects not some community consensus on the balance between present and future, but part of the balance of power between money-capitalists and industrialists.

In a crisis bankers are powerful. The worse-off industrialists are desperate to get credit in order to survive. The rate of interest does not fall. It rises, or remains high. "When businessmen and their bankers begin to scramble for liquidity, both trade credit and bank credit will decline... interest rates for a time rise sharply" (from A F Burns's summary, "Business Cycles", in the International Encyclopaedia of the Social Sciences). Or: "This is the period during which moneyed interest enriches itself at the cost of industrial interest" (TSV2 p.496).

One of Keynes's great contributions was to demolish the argument about the rate of interest automatically putting capitalism into balance. "Our social and business organisation", he wrote, "separates financial provision for the future from physical provision for the future". A Marxist would add: the "provision for the future", financial or physical, is never correlated to future needs, but to immediate prospects of gain.

"The multiplier"

Thus capitalism does not restore its balance automatically and smoothly after slight disturbances. On the contrary, it can magnify those disturbances.

Suppose there is a glut of cloth, for example, because of some disturbance. The cloth-producers cannot sell their wares. Then they cannot pay the suppliers from whom they got materials and equipment on credit, and they, in turn, do not pay their creditors. Workers are laid off, and so the whole market shrinks. The capitalists see this and cancel or postpone investments. The machine-making industries slump; they lay off yet more workers; and the economy spirals downwards. "On the one hand there is a superabundance of all kinds of unsold commodities on the market. On the other hand bankrupt capitalists and destitute, starving workers" (TSV2 p.511 and p.522-3). It seems that no-one has cash. The notes and coins available circulate more slowly, and are augmented by credit less.

Keynes called this process "the multiplier".

How disturbances are produced

The argument so far shows that a capitalist economy cannot balance itself automatically, and that disturbances can escalate to the point where a new balance can be reached only after widespread ruin.

Where do the disturbances come from? They may come from outside the core mechanisms of capitalism - from some natural disaster or political crisis. If that were all, capitalist crises might be severe, but they would be completely erratic. In fact, they are erratic, but not completely so. There is a definite boom/slump cycle, even though it is irregular and unpredictable in detail.

The core mechanisms of capitalism tend to produce regular major disturbances, in addition to any "external" ones. They do that because production and the market are correlated not by any deliberate plan, but by the movement of money through the circuit of capital, which has its own blind logic. The correlation regularly, chronically, lurches out of balance.

Suppose capitalism is booming. Wages will rise slowly, profits will rise faster. As they see profits rising, capitalists hurry to seize the time by expanding and buying new equipment. Credit (or, to look at the same thing from the other side, debt) expands.

"During the prosperity phase of the business cycle, debts always and necessarily grow faster than real production and income. This is partly owing to the fact that prices and rising and debts are based on monetary values, not on physical quantities. But it is also and perhaps even more importantly caused by the proliferation of debts within the financial superstructure itself. As paper values rise, they become the basis for more borrowing and more spending, which in turn induce further inflation of values, and so on. Interwoven with the process are pie-in-the-sky expectations, increasingly frenetic speculation, and outright swindling... After the havoc of the panic and the depression, real and paper values would once again be brought into a viable relationship and the basis would be established for the next upswing" (Paul Sweezy and Harry Magdoff, The Dynamics of US Capitalism, p.191-2).

After time, the rate of industrial profit sinks because of the bigger share taken by interest payments (as credit is strained), and because, once full-capacity production and full employment are reached, labour costs rise. Some of the "frenetic speculations" and "outright swindles" collapse. Other capitalists, having completed their re-equipment decisions, or seeing the boom slackening, try to slow down in a measured way, cancelling or postponing new investments. The investment-goods industries suffer a collapse in demand. Their difficulties spread to the whole economy, through the "multiplier". Credit dries up. Ruin reigns.

Wages are pushed down, but the lower wages do not - contrary to what one might think from supply-and-demand theory abstracted from the class divisions of capitalism - lead to workers being taken back off the dole queue into jobs. "The pressure of the unemployed compels those who are employed to furnish more labour, and therefore makes the supply of labour to a certain extent independent of the supply of workers. The movement of the law of supply and demand of labour on this basis completes the despotism of capital... The condemnation of one part of the working class to enforced idleness by the overwork of the other part, and vice versa, becomes a means of enriching the individual capitalists..." (Capital vol.1 p.793, 789).

All this, however, gradually restores profit-rates for the more solid capitalists who have survived. Excess stocks are cleared or written off. Credit eases. A new boom begins.

The length of the cycle is roughly equal to the average lifetime of industrial machinery. "The cycle of related turnovers, extending over a number of years, within which the capital is confined by its fixed component, is one of the material foundations for the periodic cycle in which business passes through successive periods of stagnation, moderate activity, over-excitement and crisis" (Capital vol.2 p.264).

Marx explains further. As a boom encourages capitalists to undertake big projects - railway-building is his example - "labour-power, means of subsistence for this labour-power, fixed capital.. and production materials, are all withdrawn from the market, and an equivalent in money is cast into the market to replace them with; but no product is cast into the market during the year in question to replace the material elements of productive capital withdrawn from it.

"If we were to consider a communist society in place of a capitalist one, then money capital would immediately be done away with, and so too the disguises that transactions acquire through it. The matter would simply be reduced to the fact that the society must reckon in advance how much labour, means of production and means of subsistence it can spend [on such projects]...

"In capitalist society, on the other hand, where any kind of social rationality asserts itself only post festum, major disturbances can and must occur constantly... [As big investment projects boom] the money market is under pressure... prices rise, both for the means of subsistence and for the material elements of production. During this time, too, there are regular business swindles, and great transfers of capital. A band of speculators, contractors, engineers, lawyers etc. enrich themselves. These exert a strong consumer demand on the market, and wages rise as well...

"A part of the reserve army of workers whose pressure keeps wages down is absorbed. Wages generally rise... This lasts until, with the inevitable crash, the reserve army of workers is again released and wages are pressed down once more to their minimum and below it..." (Capital vol.2 p.389-91).

Crises are unpredictable

A broad pattern exists. But in detail crises are unpredictable and erratic. They do not arise directly from capitalist production, narrowly defined, but from the whole circuit of capital, which include all the complexities of capitalist finance. They arise from the fact that "market and production are two independent factors" (TSV2 p.525) - each determined by different people, on different criteria, and on different time-scales, and determined blindly, without any concerted plan. Tiny disturbances can grow into big ones; bigger disturbances can fade away. Any one of a number of disturbances can start the "crisis" phase of a boom/slump cycle: a credit squeeze, a major bankruptcy, the collapse of a major swindle... The details are always complex and always partly accidental.

It is possible for crises to be set off by purely financial disturbances. However, financial problems alone are not generally the cause of crises. Marx roundly denied that stock market crashes would necessarily cause industrial slumps. "As regards the fall in the purely nominal capital, State bonds, shares etc. - in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities - it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply are mostly more enterprising than their former owners" (TSV2 p.496).

Marx's argument is a bit too sweeping, and wrong in detail - stock market crashes tend to ruin "parvenus" more than wealthy Establishment people - but basically he is right. Conversely, stock market booms do not - despite what is often argued, including by some Marxists - "divert" wealth from productive capitalism into "speculation". Stock market booms are favourable circumstances for productive capitalists to scoop together scattered small savings into amounts big enough to function as new productive capitals.

In populistic arguments, money-capitalists are often targetted as the evil makers of crisis, in contrast to the solid plodders of industrial capital. This is false. Crisis is a product of the whole circuit of capital.

The world market and crises

Capitalism is not a single unit, but national economies linked by a world market. This creates factors of instability in addition to those already mentioned.

In a national economy, a government or a central bank can ease crises by measures to ease credit, put more money into circulation, cut taxes, or raise public spending. "Keynesian" policy made such measures into a system: the system is criticised in the second part of these notes, but the measures, if applied intelligently and not offset by international factors, can ease crises. According to Marx, for example, the British crisis of 1847 was eased by the Government suspending the Bank Act, a law which limited the Bank of England's issue of bank notes (Capital vol.3 ch.33-34).

In the world market, there is no world market or world central bank. If, today, the people and the corporations who hold large amounts of what serves as fallback "world money" - American dollars - drastically lost confidence in the dollar and started a dollar-selling panic, then world "liquidity" would collapse. International trade and investment would be paralysed by shortage of anything to act as cash. The world would probably go back to something like the situation of the 1930s, where world trade shrank drastically and was increasingly confined to shut-off trading blocs centred round major currencies and powers (dollar, pound sterling, franc and so on).

Short of such catastrophe, and even when there is no real world crisis, the workings of the world market can also generate depression in national economies. The capitalist world economy has a tendency towards "uneven development", the weak national economies becoming weaker and the strong national economies stronger. Other tendencies partly counter this one - the very strongest national economies, for example, like the US after World War 2, tend to "overstretch" themselves and slow down - but only partly.

Weaker national economies suffer a chronic "flight of capital" to stronger economies with better infrastructure and more buoyant and secure markets. If they manage to get a boom underway, then orders for imports of investment goods expand rapidly. The underdeveloped national economy cannot produce those machines and equipment itself.
Those imports have to be paid for in dollars. US capitalists can pay for imports in their own currency, but Third World capitalists cannot pay for their imports from the US, Japan, or Germany in pesos, rupees, or dinars. The country's foreign debt spirals. The import orders have to be cancelled and the boom stalled. No boom ever acquires enough upswing to develop a strong infrastructure and buoyant markets and draw capital into the country.

Some Third World countries are chronically in this trap. Despite Marx's comment that "permanent crises do not exist", there are in more or less permanent depression.

Crises and imperialism: "underconsumptionism"

Marxist debate on imperialism has oscillated between approaches starting from the structure of the world economy, and those starting from a drive inside the typical advanced national economy. Some, though not all, of the writers with the second approach have seen imperialism as a way by which this typical advanced national economy deals with its impulses towards crisis. The theory of imperialism is thus made part of the theory of crisis.

These notes argue against doing that. On the contrary, I will argue, analysis of imperialism based on examining the structure of the world economy can help explain crises.

From as early as 1884, on and off, Karl Kautsky explained imperialism as a product of "underconsumption". The poverty of the working class restricted home markets, and thus restricted profitable openings for investment at home; therefore the capitalists were driven to invest and seek markets abroad.

In 1884, he argued that "commodity production yielded a surplus that neither the worker nor the capitalist could consume [because the worker was kept poor and the capitalist could only consume so many luxuries]... Consequently, colonial territories were important for the industrial nations as a market for surplus production" [Dick Geary, Karl Kautsky, p.48].

But "overproduction" is not a permanent condition; capitalism constantly sheds overproduction through crises and then builds it up again. The idea of a permanent glut of capital compelling a flow abroad is misleading.

A glut compelling a flow abroad would have to be not so much a glut of capital in general as a glut of capital in money-form seeking productive investment. The relation between the supply and demand for such money-capital is determined by the tempo of self-expansion of capital. It is a relation between the profits accumulated from past capitalist exploitation, and the profits available from present capitalist exploitation. The spasmodic nature of capitalist development means that this supply-and-demand relation is constantly falling out of balance.

Regularly capitalism generates "surpluses" of money-capital. But those surpluses are a function of the cycle of boom and slump, not of any absolute level at which an economy becomes "full up" of capital. Indeed, each "surplus" of capital - that is, each crisis - will, unless the working class can seize the opportunity to overthrow capitalism, create the conditions for a lively demand for capital to reappear. Poor countries are likely to have poor capital markets, but they can have surpluses of capital like rich ones.

Besides, there is no reason to suppose that British capitalists, for example, will exhaust all possibilities for investing in Britain before they start investing abroad. In the period before the First World War, British overseas investment tended to be high when domestic investment was high and low when it was low, rather than vice versa [Lance E Davis and Robert A Huttenback, Mammon and the Pursuit of Empire, Cambridge 1986, p.39].

The notion of an absolute level at which a capitalist economy will become "full up" with capital, so that thereafter it is permanently awash with surplus capital, is a recurrent theme in mainstream economics, from Adam Smith to Keynes. It has been attractive to socialists because it seems to show that capitalism must inevitably break down. It is misleading.
Rosa Luxemburg, in her book The Accumulation of Capital, developed a different picture of imperialism as driven by "underconsumption".

Luxemburg openly criticised cruder versions of underconsumptionism"; but she posed a puzzle arising from Marx's "schemes of reproduction" (input-output tables for the economy). Where, Luxemburg asked, did the money come from to enable the capitalists to sell the goods in which surplus-value was embodied? Or, rather, where did the "effective demand" come from?

The answer, in fact, is that the government prints the money and the effective demand is generated - erratically, with ups and downs of crisis - by the capitalists' drive to accumulate. But Luxemburg disagreed. Within a pure capitalist economy, she insisted, there was no answer. To survive, capitalism needed non-capitalist consumers. But, as capitalism expanded across the world, the number of non-capitalist consumers decreased. Capitalism would run into bigger and bigger problems, and eventually collapse.

This theory is untenable. Non-capitalist consumers do not help the problem. Where do they get the money from? Non-capitalist consumers do not supply liquidity for capitalism; capitalism supplies liquidity for them.

But the linking of imperialism to "underconsumptionist" crisis remained influential among Marxists, and help disorient many people when they grappled with the unexpected developments of capitalism after the Second World War. Michael Kidron and John Strachey for example saw "the end of imperialism". Since arms spending (Kidron) or welfare spending (Strachey) was draining away the glut of capital, the basic economic mechanism of imperialism no longer operated.

In more revolutionary circles, the idea of the permanent "glut of capital" led to the conclusion that decolonisation would mean metropolitan capitalism choking to death on its uninvestible riches. Even a limited setback to metropolitan capitalism's ability to drain its surplus capital into the colonies would leave it suffocating. Thus the Second World Congress of the Fourth International argued that the loss of colonies for Europe removed all chance of regaining "even the pre-war [i.e. 1930s!] economic equilibrium". Michel Pablo noted that "the colonial base of the capitalist system is in the process of being broken up". The colonial revolution had "already, for a start, brought European capitalism to its knees". "Thus American imperialism, which is now glutted with productive forces, is obliged to direct its surplus into artificial markets: arms spending, and 'overseas aid'". James P Cannon put it this way: "the world market... no longer offers an adequate outlet for America's glut of capital and surplus goods".

Crises and imperialism: rates of profit and world regimes

Another version of imperialism as by-product of tendencies to crisis was sketched by Nikolai Bukharin in his pamphlet on "Imperialism" (as, fortunately, a minor and inessential side-argument), and has also had wide influence. The tendency of the rate of profit to fall, argued Bukharin [ibid., p.45], would reduce the rate of profit in the great capitalist states, as mechanisation proceeded and more and more "dead labour" (machinery, raw materials) was combined with less and less "living labour". Surplus value is created only by living labour, so there will be a tendency for the ratio of surplus value to total capital invested - that is, the rate of profit - to fall. Capital, Bukharin concluded, would therefore seek the less-developed states, where there was a lower ratio of dead labour to living labour.

This argument is wrong. (See Harry Magdoff, Imperialism from the colonial age to the present, New York 1978, p.128.) If techniques with a lower ratio of dead labour to living labour are used in less-developed states, then - all other things being equal - that will produce a lower rate of profit than in the more developed states. Those techniques will have been superseded in the more developed states because they have higher costs of production!

The structures of imperialism cannot be deduced from the "shape" of capital in the advanced countries - monopolistic, dominated by finance capital, or whatever. The difference between the modern epoch of finance capital and the earlier one before the First World War is proof enough of that.

More generally, the structure of the world economy cannot be deduced from, or assumed to be parallel to, the structure of national economies. It is, as Trotsky put it, "a mighty and independent reality... which in our epoch imperiously dominates the national markets".

The capitalist world economy has its own laws, its own mutually contradictory tendencies. Competition between nations: the nation-state was the first framework for capitalist development. As capitalism develops, it both outgrows the nation-states and becomes more closely tied up with them. The world economy is therefore an arena not only of competition between capitalists, but also of competition between capitalist states.

Uneven development: capitalist development in a given country creates a spiral of new markets, improved infrastructure, better qualified workers, and attracts new investment there; underdevelopment means small markets, poor infrastructure, under-nourished and ill-trained workers; capitalism therefore has an inbuilt tendency to increase inequality of development between countries.

Expansion: capital has an inbuilt drive to expand, to spread out, and to spread out world-wide.

Combined development: as capitalism expands, it takes the most advanced technology to backward areas. But it also seizes on, uses, and combines itself with, pre-capitalist modes of production where it finds them.

The history of the modern capitalist world economy can be traced through a number of regimes within which those mutually contradictory tendencies have been reconciled for different periods.

There is a general law here of instability of hegemony, too. A dominant position such as that held by Britain in the 19th century or the US since 1945 tends to generate parasitism - high military expenditure; "imperial overstretch"; a slackening of the drive to expand capitalism at home because the capitalists of the dominant nation get comfortable profits from enterprises abroad or from financial operations.


Submitted by martin on Sun, 16/11/2008 - 12:59

Critical discussion of these notes can be found here.

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