Why do we need a theory of capitalist crisis? As Marxists we believe we need to understand the basic laws of motion of the capitalist system. We know that capitalism is a system that goes through periods of boom and slump. We should be able to explain why this is the case.

This article is mainly aimed at explaining the boom slump cycle that lasts about ten years and has been in operation for nearly two hundred years. There is nothing definite about the span of the cycle, of course. But in Marx's view crises come about whatever the stage of the class struggle. They are important to us since they may be expected to influence the course of class struggle.

Periodic booms and slumps are not the sole or principal meaning of capitalist crisis. The Russian revolution did not take place because Russia went into a slump. That is elementary. It was carried out by the revolutionary working class. When workers in their millions call the system into question, then that surely is a crisis for capitalism, in a different sense. But we are concentrating on periodic crises in the sense usually used by Marx and Engels in their writings.

It is the case that capitalism goes through distinct periods. The period of the post-War boom from the 1940s to 1974 is one example. These longer periods all have their own characteristics. But this article is intended to deal with the perpetual boom-slump cycle, and will only touch on longer developments incidentally.

It is also true that each recession or slump has unique features. All historic events are unique. "The real crisis can only be deduced from the real movement of capitalist production, competition and credit." (Theories of surplus value Volume II pp. 512)

What we are attempting

Marx was not able to systematically work up the theory of crisis for publication in his economic writings. Capital Volumes II and III, the Theories of Surplus Value and the Grundrisse were not made ready for publication in his lifetime. They were all part of a vast, unfinished project. It would be futile to deny that inconsistencies can be found in his writing. Different academic schools have been formed since his death to espouse monocausal theories of crisis based on isolated quotes.

The purpose of this article is to look at Marx's scattered writings on crisis and to try to find out what he actually said on the subject. It will not be possible to take up all or even many of those who have come to the subject with their own interpretation over the past century or more. The reader will also appreciate that looking at what Marx said is not the same as showing that everything he said was correct.

Secondly we try to test Marx's interpretation of how capitalism accumulates, and how it stumbles, against the reality of the post-War capitalist economy.

For generations of Marxists, Sweezy's Theory of capitalist development has proved a popular guide to Marx's political economy. It is lively, well written and introduces the reader to the debates and the literature. Unfortunately we believe that his interpretation of Marx's crisis theory is wrong. We are following his broad categorisation of the different interpretations as a guide to our presentation. They are:

·        Crises associated with falling tendency of the rate of profit

·        Realisation crises - crises arising from disproportionality

                                         - crises arising from under-consumption.

It is also true that crisis is an issue subject to scholarly debate within the Marxist movement. It is not a subject where a ‘party line' needs be laid down.  Nobody proposed drumming Rosa Luxemburg out of the brownies on account of her crisis theory. There is no one dominant view or comprehensive analysis of the ‘cause' of capitalist crisis among Marxist writers.

Nevertheless I believe a consistent thread can be found in Marx's writings. And the attempt must be made. We cannot change the world unless we understand it.

The reason I put ‘cause' of capitalist crisis in inverted commas in the previous paragraph is because much of the confusion as to the reasons for the boom-slump cycle comes from the different levels of causation that are at work.

To anticipate, I argue that the crisis takes the form of appearance of a realisation crisis. That means goods produced cannot be sold. But the cause of this crisis is neither an institutional tendency to produce too many consumer goods relative to capital goods or any other disproportionality inherent in the capitalist system. Notions of over-production and under-consumption have no explanatory value for the boom-slump cycle. They cannot tell us when, where and why the crisis breaks out. I try to show that the fundamental cause of crisis, and the basic explanation for the cycle, are movements in the rate of profit. These movements in turn can be analysed using Marx's law for the tendency for the rate of profit to fall which manifests itself as a periodic over-accumulation of capital.

Marx's method

Back to Marx. We have to be mindful of the method he used in his economic work. Though Capital Volume I stands almost alone as a work prepared for publication, it is not the last word on the subject. He outlined his method in his Introduction to A contribution to a critique of political economy. (This manuscript is also part of the Grundrisse.)

"Seventeenth century economists always took as their starting point the living organism, the population, the nation State, several States etc., but their analysis led them always in the end to the discovery of a few decisive abstract general relations e.g. division of labour, money and value. When these separate factors were more or less clearly deduced and established, economic systems were evolved from simple concepts such as labour, the division of labour, demand, exchange value advanced to categories like the State, international exchange and the world market. The latter is obviously the correct scientific method. The concrete concept is concrete because it is a synthesis of many developments, thus representing the unity of diverse aspects" (pp. 205-6).

Over-production

As is well known, the Communist Manifesto refers to a capitalist crisis of over-production. Sometimes over-production is referred to as the realisation problem. This means that the crisis manifests itself as capitalists being unable to sell goods that have already been produced. Over-production, in other words, is not absolute but relative to the purchasing power of the population.

Now it is true that the Manifesto is not a major economic work of the mature Marx. In 1848 he had not yet developed the notion of labour power, for instance.

But there is absolutely nothing wrong with the formulation of the Manifesto, as long as we understand that over-production is the form of appearance of capitalist crisis. We can and do point to the paradox of idle workers confronting idle machines as the cause of want. This is a distinctive feature of capitalism, an ‘achievement' no other social system can show.

"It is enough to mention the commercial crises that by their periodical return put on trial, each time more threateningly, the existence of the entire bourgeois society...In these crises there breaks out an epidemic that in all earlier epochs would have seemed an absurdity - the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce."

This is all very clear. It is description, not explanation. It tells us what happened, not why it happened.

Engels has a very similar approach in Anti-Duhring. (This passage is reproduced in Socialism utopian and scientific.) "As a matter of fact since 1825, when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all the civilised peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. Commerce is at a standstill, markets are glutted, products accumulate as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of workers are in want of means of subsistence because they have produced too much of means of subsistence." (pp. 379-80)

Engels is making the point that more is produced than can be sold. This is a contradiction. "Contradiction in the capitalist mode of production. Workers are important in the market as buyers of commodities. But as sellers of their commodity - labour power - capitalist society has the tendency to restrict them to their minimum price. Further contradiction: the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production, because the limit to the application of the productive powers is not simply the production of value, but also its realisation. However the sale of commodities, the realisation of commodity capital and thus of surplus value, is restricted not by the consumer needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor." (Capital Volume II, p.391)

Crisis is actually the (temporary) resolution of this contradiction. "The independence of two correlated aspects (production and realisation) can only show itself forcibly as a destructive process. It is just the crisis in which they assert their unity, the unity of different aspects. The independence which these two linked and complementary phases assume in relation to each other is forcibly destroyed. Thus the crisis manifests the unity of these two phases that have become independent of each other." (Theories of surplus value Volume II, p.500)

The main quote used to show that Marx regarded over-production as the fundamental cause of crisis is the following. "The ultimate reason for all real crises is the restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity set a limit to them." (Capital Volume III p. 615)

What does Marx mean by ‘ultimate reason'?  ‘Reason' is here translated from the German word ‘grund'. Here's Hegel on ‘grund' (translated into English as ‘ground' in Hegel's Logic, from the section on Essence as ground of existence). "Considerations of this sort led Leibniz to contrast causae efficientes and causae finales, and to insist on the place of final causes (‘ultimate reason') as the conception to which efficient causes were to lead up. If we adopt this distinction, light, heat and moisture would be causae efficientes, not causa finalis: causa finalis is the notion of the plant itself." (Hegel's Logic p. 177-8) Causa finalis is Latin for ‘final cause' or ‘ultimate reason'. Causae efficientes is Latin for ‘efficient causes'.

Most of us brought up in the tradition of David Hume's concept of causation would regard light, heat and moisture to be the causes of the plant's growth (efficient causes) rather than the notion of the plant (final cause). Ultimately this distinction comes from Aristotle's four levels of causation - formal cause, material cause, efficient cause and final cause. Aristotle's ‘final cause' can be interpreted as the unfolding of a thing's essence or nature (telos).

Marx's comment comes as an aside in Capital Volume III in Chapter 30 on Money capital and real capital: 1. Marx wants to remind us of the fundamentals in a section dealing with the intricacies of financial crisis. The statement does not explain to us what causes crisis - when, where and why there'll be a crisis.

The essence or nature of the capitalist system causes crisis. The nature of capitalism is that it restricts the consumption of the workers. The reason - it runs on profit.

Under-consumption

Engels, in his chapter on ‘Production' in Anti-Duhring, is a stern critic of Duhring's under-consumptionist interpretation of capitalist crisis. He points out that the restricted consumption of the masses is a permanent feature of capitalism.

"But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they under-consumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while under-consumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;" (pp. 395-396).

But if under-consumption (in the sense that the workers can't buy back all the commodities they produce) is a permanent condition of capitalism, then how on earth does capitalism survive, let alone develop? What happens to this excess production (the surplus)?

It is quite true that workers can't buy all the value they produce. Surplus value ends up, of course, in the hands of the capitalist class. This is just another way of saying capitalism is a system where production is for profit.

This under-consumption, this inability to realise commodities already produced is really only a potential problem. It would only be a real problem if all the capitalists were to instruct their workers to make workers' wage goods. In that case the workers would be unable to buy those goods.

But why should we assume that this will happen? The workers haven't got the money to buy the goods, because the capitalists have kept some of it. That is their surplus value. What do the capitalists do with it? There are two possibilities: either they consume the entire surplus unproductively (very rare in practice). In this case the surplus is still spent. It is spent by the capitalists on themselves. The alternative is that the capitalists invest it. If they invest it, that also ‘solves' the problem of under-consumption for the time being - because the surplus has now been spent on capital goods.

Not all capitalists oversee the production of goods they expect to be sold to the workers. Iron and steel capitalists never sell their products to the masses (though, of course their output enters into consumer goods targeted at workers). They are producing capital goods and they know it. Other capitalists specialise in the production of ‘luxury' goods for consumption by capitalists. Marxists call the products of this sector elements of uncapitalised surplus value. For both these sections of the capitalist class their customers are exclusively other capitalists.

The demand for capital goods, for workers' consumption and for luxury goods is provided by the incomes of the classes generated in the production process, and by the investment decisions of the capitalist class. Of course how much you ‘need' is determined under capitalism by how much money you've got. We expect the relevant sort of goods in roughly the right proportions to meet this purchasing power to be provided by the usual operation of the market. Capitalists in search of profit try to produce commodities aimed at meeting a need. (Actually capitalists produce nothing. Workers produce commodities under the instruction of capitalists. Please accept this as shorthand.) If nobody wants the good, nobody will buy it and the capitalist will make a loss. And purchasing power is derived from the revenues from capitalist production. (Getting the proportions of the material elements of production right is a real problem in an unplanned system. We take it up later.)

There is no reason at all, at this level of analysis, why all these products cannot be sold to people (workers and capitalists) who have the money to pay for them. We should no more automatically expect capitalism to produce too many workers' consumption goods than too many luxury goods or too many capital goods.

So there is sufficient purchasing power in the economy to buy all that is produced. And the goods should be in place to satisfy this purchasing power. There seems to be no over-production/under-consumption problem, since markets exist for the surplus. There is always someone out there to buy these products and someone else to sell them. The cause of capitalist crisis must be sought elsewhere.

If the crisis were really caused by the ‘restricted consumption of the masses' we would expect it to be manifested by an over-production of consumer goods relative to capital goods. In fact this is by no means the usual case in actual capitalist crises. Most crises have actually begun in the capital goods sector. If the crisis were caused by under-consumption we would expect the workers to suddenly cease providing an adequate market for the capitalists, so triggering the crisis.

Actually workers' consumption usually falls as they are laid off as a result of the crisis, further shrinking markets. Their restricted consumption is thus a symptom of the crisis, not its cause. If capitalists generally accumulate a great part of their surplus, then we can expect the capital goods sector to grow relative to consumer goods in the economy. But the effect of this accumulation of capital is to make the workers more productive and therefore make the problem of over-production potentially more severe in the future.

Over-production and under-consumption

Aren't under-consumption and over-production really the same thing? In one sense they are opposite sides of the same coin. Engels polemicises against the concept of under-consumption because it locates the problem with the restricted consumption of the masses, while the notion of over-production poses it as a crisis of capitalism. We prefer the expression ‘over-accumulation', which was introduced by Marx in Capital Volume III. This points to over-production in relation to the possibility of profit-making. We shall return to this. However there seems little point arguing over a word if we agree on the underlying processes.

We have seen earlier that Engels was quite happy to describe capitalist crisis as one of over-production. The difference he draws with under-consumption is that the crisis occurs because the capitalists produce too much, not because the workers suddenly stop buying and consuming enough. Anyway what is ‘enough' or ‘too much'? The concept of over-production emphasises that what has been produced cannot be sold. This is true. But it does not explain when, where and why the realisation crisis breaks out.

The theories of under-consumption and over-production cannot be used to predict the onset of crisis. We cannot allow ourselves to be reduced to saying after the event, "There you are, we always said this would happen."

Lenin also had to argue in his early writings against the under-consumptionist views of the Narodniks. They alleged that capitalism couldn't develop in Russia because it restricted the consuming power of the masses. Without in any way denying that capitalism kept the many poor, Lenin showed in many books, culminating in The development of capitalism in Russia, how it was actually creating a market there. Rather than growing and making things for themselves, peasants and artisans were increasingly deprived of access to the means of production and forced to use the market for their daily needs.

In Capital Volume II, Marx pointed out that towards the end of the boom, as it was on the point of toppling over to bust when there was relatively full employment, was the time when workers were likely to make gains in real wages and increase their share of national income.

"It is a pure tautology to say that crises are provoked by the lack of effective demand or effective consumption...If an attempt is made to give this tautology the semblance of greater profundity 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 if its wages rose, we need only note that crises are always prepared by a period in which wages generally increase and the working class does receive a greater share in the part of the annual product  destined for consumption." (p. 486)

Under-consumption: Baran and Sweezy

Sweezy favoured what he calls the under-consumption school. In The theory of capitalist development (in Chapter XII, entitled Chronic depression?) He argued, "That capitalist production normally harbours a tendency to underconsumption (or overproduction) was demonstrated in Chapter X..." (p. 216) Chapter X is one of the chapters in his book mentioned at the beginning of this article (see What we are attempting). He goes on, "Since the tendency to underconsumption is inherent in capitalism and can apparently be overcome by the partial non-utilization of productive resources, it may be said that stagnation is the norm towards which capitalism is always tending." (ibid.  p. 217) Sweezy then goes on to discuss various processes in modern capitalism which may counter the tendency to stagnation by absorbing surplus resources that would otherwise be unuseable.

He wrote a later book jointly with Paul Baran called Monopoly capital. Baran and Sweezy still felt in 1966 that capitalism was threatened by a tendency towards chronic stagnation. They derived this analysis from left Keynesians such as Kalecki, Steindl and Hansen. Such a perspective comes naturally to those who, trained in the Keynesian tradition, see crisis as caused by under-consumption.

Monopoly capital identifies a systematic trend for capitalism to generate a surplus. "The economic surplus, in the briefest possible definition, is the difference between what society produces and the costs of producing it." (Monopoly capital p. 23) This surplus of saving occurred because money couldn't all be spent. It was vital for capitalism's survival to find ways of investing this surplus. Chapter 3 of Monopoly capital deals with the Tendency of the surplus to Rise and Chapters 4-7 - virtually half the book - with different ways of absorbing this surplus. For instance Chapter 7 is titled The absorption of surplus: militarism and imperialism.

Readers familiar with the theory of surplus value will realise that this is a different concept of surplus from Marx's. Briefly, Marx divided the labour added in the production process in any form of class society into necessary labour and surplus labour. Necessary labour is that part of the work done required to feed, clothe and house the toiling population. They will be maintained at the level of subsistence which is usual in that form of society at that time. The toilers may be slaves, feudal peasants or wage workers under capitalism. In every case they produce a surplus above their own requirements. This surplus is appropriated by the ruling class, whether the latter are slaveholders, feudal lords or capitalists.

The index to Monopoly capital does not make reference to the words under-consumption, over-production or crisis. The tacit assumption was that since the Second World War the capitalist system had overcome its earlier tendency to crisis. So we see that flirtation with under-consumptionism as a theory of crisis led to an acceptance of the Keynesian interpretation of capitalist crisis, and to the efficacy of Keynesian solutions. It seems that Baran and Sweezy felt that, as long as convinced Keynesians were at the helm of the economy, the mass unemployment of the inter-War years would remain a thing of the past.

Yet writing in the middle of the most dynamic period of twentieth century capitalism, the post-War boom of 1948-73, they identified the principal problem of the capitalist system as to find ways of absorbing (wasting) a surplus that threatened an era of chronic stagnation. This, surely, was a fundamental misunderstanding of the nature of the era they were writing in.

Against Keynesianism

Keynes was a subtle thinker. As an influential economist, his writings have given rise to different interpretations and schools of thought. This section is not intended to give a definitive critique of Keynesianism from a Marxist point of view. It merely shows how Marxist crisis theory engages with Keynesian analysis and solutions. Keynes was an intelligent man. He could see that in the Great Depression of the 1930s, the central problem seemed to be a lack of effective demand, of markets, of ‘over-production'.

The Marxist argument against Keynesianism can be derived from the critique of over-production above, although it is slightly more complex. The last quote in the section on Over-production and under-consumption could certainly be used against proposals by reformists to deal with capitalist crisis by reflating the economy. The Marxist argument against Keynesianism is not at base political, though it is true that the ruling class wouldn't like to carry out expansionary measures. The economic establishment usually urges caution upon central bankers and fiscal probity on the government. But sometimes the ruling class may be forced to do something it doesn't like.

The Marxist argument against Keynesian solutions is at bottom economic. Keynes proposed that the government should reflate the economy by ‘priming the pump' - by spending some money. This would have a knock-on or multiplier effect on the rest of the economy. Prosperity would radiate throughout society.

If need be, the government could spend money they didn't have. In other words they would borrow it. This is called deficit financing. Some followers have suggested that, by giving capitalism a pick up, taxes would increase and pump priming would eventually prove to be a ‘free lunch.' It would pay for itself.

Marxists believe that Keynesianism doesn't work. It doesn't work because capitalism can't be made to work. The problem of capitalism in crisis is not just a matter of inadequate demand - of markets - it's a problem of profitable markets. Putting money in workers' pockets may create a market for capitalists but it doesn't give them any incentive to put their money into production. On the other side, boosting profits must necessarily be at the expense of workers' living standards somewhere along the line. There are no free lunches to be had, as the capitalist world has discovered in the era of mass unemployment since 1974. Deficit financing doesn't do away with the class struggle.

The dilemma of any individual capitalist is that they want to pay their own workforce as little as possible to maximise profits; but they want every other capitalist to pay their workers as much as possible so they will act as a market for the goods. But any attempt to boost profits hits the workers as a market for capitalist commodities; any attempt at boosting markets by upping wages or the social wage is seen as a threat to profits. This is the contradiction of capitalism in crisis.

A contradiction, as we have seen, is a situation where either alternative proves impossible. The contradiction is finally overcome by preparing the way for its recurrence on a larger scale. As Marx puts it, "World trade crises must be regarded as the real concentration and forcible adjustment of all the contradictions of bourgeois economy." (Theories of surplus value Volume II p. 506)

Now it is true that economics is today dominated by neoliberal orthodoxy, hostile to Keynes and in denial that crisis is inherent in capitalism. But this may not remain the case for ever. It can be predicted that reformists will return to the call for Keynesian measures in the teeth of a crisis. We need to be able to answer them and explain the real solution to the problems facing the working class.

Say's Law

We have attempted to refute naive over-productionist theories of capitalist crisis. But crises happen. At some point capitalists produce goods that can't be sold. Nevertheless Say's law declares that a realisation crisis is impossible. This theory is accepted by the dominant equilibrium school in neoclassical economics to this day.

Say's law was developed by the French economist Jean-Baptiste Say at the beginning of the nineteenth century. It is usually expressed as ‘supply creates its own demand' or ‘every seller brings a buyer to market with him' or sales = purchases. The idea is that the seller comes to the market also to buy. If it were an accounting identity expressed as ‘sales = purchases' or ‘aggregate supply = aggregate demand' it would be true by definition, rather than a ‘law'. In that case sales would be equated with purchases through forcible quantity adjustments, by painful contractions in national income, by crises.

But that is not what the capitalist apologists have in mind. Regarded as an economic ‘law', Say's law is plain wrong. It was mistakenly adopted by Ricardo. Marx made a critique of it in Theories of surplus value Volume II. He explicitly describes this section as dealing with the possibility of crisis, rather than a cause. Chapter XVII is subtitled Ricardo's theory of accumulation and a critique of it. (The very nature of capital leads to crises.) It is a critique of Say's law. Crises are not only possible, they are inevitable under capitalism.

If we lived in a barter economy, then Say's law would be trivially true. If I as a baker exchange loaves of bread with you as a butcher in exchange for a piece of meat, neither good would remain without a home - ‘unsold.' (Actually, neither would be ‘sold' in a barter economy - just exchanged).

We move to a money economy. As a baker I need to sell my bread, but I'm not buying meat today. So I exchange my bread for money and then go shopping for what I want. Marx calls this the C-M-C circuit (commodity - money - commodity). Say says it's the same thing as C-C. A modern capitalist economy is just like barter. Each producer brings equivalent purchasing power into the marketplace, so everything will be sold.

If Say's law were right, capitalism would permanently be in full employment equilibrium. Crisis would be absolutely impossible. Contrary to what Say's law suggests, in a money economy the sellers need not buy at once. They can hang on to their money. If they do so, they are depriving some other potential seller of a market. Economic processes take place in real time. In a society of petty commodity producers, the separation of sale and purchase is likely to be conceptual, not a real problem. The artisans need to sell their products right away in order to buy the things they need to live on. The ‘purpose' of production is consumption, the satisfaction of the needs of the producers.

It is otherwise under capitalism when production is conducted for profit. Then it may be entirely rational for sellers to hang on to their money if the alternative is making a loss. Interestingly, Marx's critique identifies the same points as those developed by Keynes, who definitely had not read Marx.

Whichever way we look, it is the nature of capitalism as production for profit that is at the root of the crisis.

Disproportion

Another argument is that the crisis is caused by capitalist anarchy. Capitalist firms are dependent on one another. How much they produce depends on how much other firms produce. This is true of their inputs (of raw materials etc.) and for the sale of their finished products. But capitalist firms are unaware of their interdependence and regard themselves as independent, free spirited buccaneering outfits. Even if they became aware of their mutual interdependence, they would not be able to communicate this to other firms.

So capitalists can produce commodities in the wrong proportions. Marx investigated the problem of the reproduction of the material elements of production in Capital Volume II. He identified the problem of disproportion between different sectors of production, particularly between Dept I (capital goods) and Dept II (consumer goods).

Each capitalist is producing outputs that are inputs for other capitalists. National income consists of a circular flow of commodities, and every capitalist has to find the material components of production in the marketplace. Definite proportions between the different sectors of production have to be established for this to happen. But of course the individual capitalist just takes it for granted that this will always happen.

To keep things as simple as possible we assume that all goods take a year to produce. They are all swapped round at the end of the year and production then resumes for the second year.

Marx divided the value of a commodity (or the total value produced in any sector of production) into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value (s). Surplus value is conventionally divided into rent, interest and profit. Marx started off with the case of simple reproduction, where none of the surplus value is capitalised - ploughed back into production. All the surplus value is consumed unproductively by the capitalists. Production in the next period is carried on unchanged, so output continues at the same level as before.

Let us assume an economy where:

Dept I is composed of 4,000c + 1,000v + 1,000s.

Since Dept I produces all the capital goods in the economy, it is able to replace all its constant capital ‘in house'. But it will have to purchase the components of variable capital and surplus value from Dept II, the sector producing consumer goods.

In the same way we have:

Dept II, consisting of 2,000c + 1,000v + 1,000s.

Dept II can supply the elements of variable capital and surplus value from its own output, but will have to buy replacement constant capital from Dept I.

The economy as a whole therefore consists of -

Dept I: 4,000c + 1,000v + 1,000s

Dept II: 2,000c + 1,000v + 1,000s.

The conditions for balanced reproduction are that Dept I (v + s) = Dept II c. These are the elements of reproduction that have to be exchanged between the two Departments. In this case Dept I is (1,000 + 1,000) = 2,000, which is equal to Dept II c.

Simple reproduction is the simplest case, showing the need for proportionality between the different sectors of production. Marx goes on to examine the case of expanded reproduction, where some of the surplus value is accumulated as additional constant capital and production in the next period takes place at an expanded level. The reader suspects and fears (correctly) that the arithmetic is likely to prove more difficult in this case. However, enough has been said for now to establish the importance of proportionality between the sectors in capitalist production.

How are these proportions established in practice? It is a central feature of capitalism that the system is unplanned. It is actually a permanent feature of capitalism that there is localised overproduction of some commodities and underproduction of others at the same time. Corrections are made after the fact, through falling prices and profits in the case of overproduction, and rising prices and profits in the case of scarcity. This in turn will cause capital flows into and out of those sectors. The question is - why should this continuous process lead to a generalised crisis?

It is true that in a horse race, if one horse trips that can bring the others down. But why should the horse trip in the first place? Surely the molehill (or whatever) is what we would say caused the accident? It is not just that the horses are bunched - competing with one another, yet dependent on the other horses keeping the right distance. Yet disproportion between different sectors is often presented as another cause of capitalist crisis.

In any case why ‘privilege' the capital goods and consumer goods sectors? In a model of the economy composed of two sectors, we are in effect simplifying it down to two firms, one producing ‘capital goods' and the other ‘consumer goods.'  According to Alex Nove (Economics of feasible socialism) there were 12 million different commodities in Russia at the time he was writing his book. Each one has a quantitative relationship to every other one. If more ball bearings are produced, for instance, some of the extra workers employed will buy woolly hats with pompoms. There is therefore a coefficient between woolly hats and ball bearing production.

 In principle these proportions could be worked out and set up in a giant input-output table such as those pioneered by Leontieff. Since it is not in the interests of individual capitalists for their system to go into crisis, the central planning authority in a hypothetical planned capitalist system could use a Leontieff input-output table to work out the necessary proportions and instruct firms how much to produce. In principle could a planned capitalism be a crisis-free capitalism? I argue that crisis-free capitalism is impossible, since capitalist crisis is not caused by disproportionality.

Disproportion in Rosa Luxemburg's The accumulation of capital

So the disproportion theory of crisis is just another example of capitalist anarchy or planlessness. As we have seen in Capital Volume II Marx looked at the problem of proportionality in terms of the relations between Department I and Department II. The most famous attempt to turn this analysis into a theory of crisis was made by Rosa Luxemburg in her book The accumulation of capital. She detected a tendency for Marx in his schema to establish proportionality between the two departments by arbitrarily restricting the amount of surplus value that was capitalised in the consumer goods sector. If the consumer goods sector capitalised the same proportion of the surplus value generated as the capital goods sector, there would be a systematic tendency for over-production of consumer goods relative to capital goods.

Here is a sample of her reasoning. "Marx enables accumulation to continue by broadening the basis of production in Department I. Accumulation in Department II appears only as a condition and consequence of accumulation in Department I, absorbing in the first place the other's surplus production and supplying it secondly with the necessary surplus for its additional labour. Department I retains the initiative all the time, Department II being merely a passive follower" (p. 122). Was Marx cheating?

In Rosa's view, if we correct the schema to allow Department II to accumulate at the same rate as Department I, we would see a systematic tendency towards a relative over-production of consumer goods. This over-production of consumer goods relative to capital goods would then force advanced capitalist countries to seize lands not yet in the capitalist orbit in order to dump its excess of goods upon them. Rosa's ‘correction' thus yields a theory of imperialism.

There are a whole series of misunderstandings at work here. The first pertains to Marx's method. The reproduction schemes in Volume II are not intended to be a description of the real world. They are used to pose the problem of proportionality between the different sectors of production. Marx was the first economist to see this as a problem since the Physiocrats, who were by this time neglected and misunderstood. In my view Marx was able to see this as a problem because he was a socialist and perceived the problems of planning the economy. Marx's method, as we have seen, was one of increasing concretisation in his analysis. The posing of the problem of proportionality was one stage in his analysis of capitalism as a system. It was not the last word.

Secondly, note that accumulation in Volume II takes place extensively. By that I mean the following. In the case of expanded reproduction, if the capitalist originally lays out c400 and v100, then he receives surplus value of s100. Deciding to capitalise half, he then adds 40 to constant capital and 10 to variable capital in the same proportions as at the original level of output. Production is expanded, but there is no technical innovation. There is no tendency to increase the organic composition of capital, as we would expect with accumulating capital. (The organic composition of capital is discussed in more detail in the section on the rate of profit.)

As Lenin pointed out in The characterisation of economic romanticism, Rosa's analysis does not hold up in her own terms. "The romanticist" (i.e. Narodnik, who was making the same point as Luxemburg) "says: capitalism cannot consume the surplus value and therefore must dispose of it abroad. The question is: do the capitalists supply foreigners with products gratis, or do they throw them into the sea? They sell them - hence they receive an equivalent; they export certain kinds of products - hence they import other kinds." Commodities that are sold in non-capitalist sectors are not thrown into the sea. They are exchanged for money, purchasing power that re-enters the system, and so ‘dumping' goods in non-capitalist regions does not solve the problem of the over-production of consumer goods  for capitalism.

At several points Luxemburg raises the problem of ‘where does the money come from?' (for instance Chapter 5. The circulation of money). Surely nobody really sees this as an issue with the credit creation possibilities of modern capitalism. And Rosa's marvellous historical section on imperialism and the third world (Section 3) does not back up her central thesis - it shows capitalism increasingly encroaching on non-capitalist parts of the world. But we all agree that's what happened!

Finally, Rosa treats the two Departments as like two independent super-tankers, set on their separate courses. In fact these Departments are made up of firms operating within a single capitalist economy. If there is systematic relative over-production of consumer goods, that will cause their price to fall relative to capital goods. That in turn will reduce profits in the consumer goods sector. Capital will flow towards the capital goods sector till the adjustment is completed. In marginal cases, such as a capitalist selling computers, he will just market them as capital goods rather than consumer goods. In most cases this adjustment is likely to be messy, wasteful and take place after the fact. But what's new about that under capitalism?

Disproportion: fixed capital and the cycle

As a matter of fact, investment is the most volatile component of national income. The boom-slump cycle is thus an investment cycle. Booms correspond to periods with high profits leading to high levels of investment, while slump is a period when profits collapse, leading to steep falls in investment.

"Just as the heavenly bodies always repeat a certain movement once they have been flung into it, so also does social production, once it has been thrown into this movement of alternate expansion and contraction. Effects become causes in their turn, and the various vicissitudes of the whole process, which always reproduces its own conditions, takes on the form of periodicity." (Capital Volume I p. 786)

Here Marx compared the economic cycle with the movements of heavenly bodies, such as comets. Once put in orbit for any reason they continue to circulate round their orbit with great regularity. Once a great volume of investment comes on stream at the beginning of an upswing, we can expect a mass of this investment to become obsolescent at about the same time later on. This will produce an investment cycle linked to the boom-slump cycle. We have the same problem as the astronomer who wants to find out how Halley's Comet got into its present orbit. We are still not able to explain why capitalism goes into crisis when it does.

"To the same extent as the value and durability of fixed capital applied develops with the development of the capitalist mode of production, so also does the life of industry and industrial capital in each particular investment develop, extending to several years, say an average of ten years. If the development of fixed capital extends this life on the one hand, it is cut short on the other by the constant revolutionising of the means of production, which also increases steadily with the development of the capitalist mode of production. This also leads to changes in the means of production; they certainly have to be replaced because of their moral depreciation long before they are physically exhausted. We can assume that, for the most important branches of large-scale industry, this life cycle is on average ten years. The precise figure is not important here. The result is that the cycle of related turnovers extends over a number of years, within which capital is confined by its fixed component, is the material foundation for the periodic cycle...But crisis is always the starting point of a large volume of new investment. It is also therefore, if we consider the society as a whole, more or less the new material basis for the next turnover cycle." (Capital Volume II  p. 264) We shall try to show later that the cycle is primarily caused by movements in the rate of profit, and that the profit cycle produces a corresponding investment cycle.

The dynamics of capitalism

The foundation of the capitalist system is the exploitation of the working class. The workers produce more value than what they are paid for. They are paid not for the labour they put in, but for their labour power. This is their keep, though as Marx says there is a ‘historical and moral element' in it. The prevailing level of wages is determined by class struggle, and the subsistence of a worker in an advanced capitalist country today is much higher than it was two hundred years ago, or remains for a worker in a third world country today. Nevertheless it is still a subsistence in the sense that the worker has no alternative way of making a living other than working for a boss. The boss class collectively own the means of production, the means of making a living.

The working class are exploited in the strictly scientific sense that they produce more than they are paid. So the working day, the working hour or any piece of value added at work can be divided into paid labour and unpaid labour. Marx calls this unpaid labour surplus value, and it is divided into rent, interest and profit by the different fractions of the ruling class. To get more surplus value, the capitalist has to raise the rate of exploitation.

The first decision taken by the industrial capitalist is what proportion of the surplus value to consume unproductively on his own upkeep and what proportion to capitalise, invest back into expanded production. We have presented this as an individual decision, but in fact there are pressures upon the individual capitalist. He is competing with other capitalists, so he must either compete with them on price or go to the wall. In Marx's view it was the progressive nature of the capitalist system that it developed the productive forces, thus preparing the way for a classless communist society of abundance. The productive forces were developed because individual capitalists were forced to plough back a great part of the surplus value rather than just consuming it unproductively. The mechanism that produced this result is the production of relative surplus value.

Absolute and relative surplus value

There is an imperative upon the capitalist to raise the rate of exploitation. As Marx explains in Capital Volume I, the rate of surplus value is the rate of exploitation, or s/v (surplus value divided by the value of variable capital laid out on labour power by the capitalist in the production process). There are two ways for the capitalist to raise the rate of exploitation. They are by increasing the production of absolute surplus value and the production of more relative surplus value.

It may be useful to look first at absolute surplus value. If the rate of surplus value = 4 hours unpaid labour divided by 4 hours paid labour = 100% then, if the capitalist can force the worker to work 10 hours for the same daily wage, the rate of surplus value will rise to 150%. So far, so easy.

The reader may well find this example extremely unrealistic. How can the bosses push the workers around in this way? In fact the long Chapter 10 in Capital Volume I The working day is about how they tried to do precisely this in the nineteenth century, and how the workers fought back. In the twenty-first century there are other ways of achieving exactly the same result. We all know occupations (such as security guard) where workers cannot live on the basic rate for a standard working day and will be forced to take all the overtime available to make up a living wage. This section, however, is not concerned to show the continuing ingenuity of modern capitalists in coining absolute surplus value from their workers - important though this is - but to contrast it to the production of relative surplus value.

There are obviously limits to this continued extension of absolute surplus value, which basically consists of exploiting weaknesses in the working class movement. Increasingly capitalism has historically sought the path of extracting more and more relative surplus value. If the minimum acceptable wage and the maximum hours in the working day are set by working class struggle, then capitalists must seek to get more out of ‘their' workers in a given time. They must raise the productivity of labour. If the capitalist can get his work force to produce double the quantity of products in a given time, then each commodity will contain less labour and will tend to cost less. If these commodities are part of the basket of goods the workers take as part of their standard of living (‘wage goods') then the workers will need to spend less time on producing the elements of their own wage and more time will be ‘freed' up to produce relative surplus value.

This is an unconscious result on the part of the capitalist, a result from the process of capitalist competition. What are the mechanisms of this process? What is the capitalist trying to do? He wants to know how he can undercut his competitors. The best way to sell cheaper is by producing cheaper. The way to do this is by being the first to introduce new machinery that enables the workers to produce the same quantity of products in less time - and thus make things cheaper. In doing so the capitalist is, of course, exploiting the workers more - they are producing more commodities in their working time.

The first capitalist in a sector of production to innovate is likely to make a super-profit by pricing the commodity above its individual value (the labour time required to produce it under the new technology) but below the socially necessary labour time determined by the old level of technology.

Let us assume that the value of the commodity under existing production conditions is £10. The innovating capitalist can produce it for £8, including the same profit rate as his rivals. He can sell the commodity at any price between £8 and £10. Above £8 he will make a super-profit. He may choose to sell it below £10 since the new technique probably means he is producing on a larger scale than before and wants to get rid of all his finished goods. In any case choice will go out of the window as his competitors start to retool and bid the price down to its new value.

So his super-profit will not survive. The other capitalists will either have to retool with the new technology or go to the wall. The overall result will be the establishment of a new, lower, amount of socially necessary labour time to make the product and a new average rate of profit within the industry.

This is the dynamic for capitalism as a whole. Increased productivity and the accumulation of capital are the result and the eternal impulse of this process. Later we will see how these cheaper prices can act as countervailing tendencies to Marx's tendency for the rate of profit to fall.

See:

The Marxist theory of Crisis - part 2