Marxist Theory of Crisis

posted 25 Jan 2013, 10:30 by Admin uk   [ updated 27 Feb 2013, 10:35 ]

  by Mick Brooks

 Part One

 Towards an understanding of capitalist crisis

 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, aremovements 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).


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.


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 capitalistdevelopment (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.


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 whycapitalism 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.

Marxist Theory of Crisis: Part 2

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.

The rate of profit since the Second World War

We are going to try to test the theories against ‘the facts’. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don’t think in Marxist categories. For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms, as we find out later.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs – together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx’s categories just disappear from the statistical record. They can be quite difficult to recover.

The profit share can be measured as a proportion of national income. National income is a flow of revenues usually measured over a year. For our purposes Gross National Product and Gross Domestic Product can be regarded as the same thing as National Income (though there are some differences).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Andrew Glyn and his fellow authors first made their name by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income.

Let us look first at the evidence from Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze(Glyn and Sutcliffe). This team of authors were the first to identify the centrality of the profit rate in the evolution of global capitalism since the Second World War.

Armstrong et al. also deal with the profit share (which is easier to measure). There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down – so there is also a connection. Armstrong’s central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the breakdown of the ‘golden years’ after World War II. Our historic critique of their position can be found at The tendency for the rate of profit to fall and post-war capitalism - AG and MB.

On page 8, Armstrong et al. deal with the increase of investment as a result of the War. “In Japan throughout the period 1939-44 private industrial investment ran at around the rate of the mid-thirties. In Germany between 1936 and 1943 the volume of investment in industry grew continuously to an unprecedented level….In the United States investment grew rapidly during the early years of the war. The peak in 1941, however, still represented a lower level than that achieved in 1929, and it then declined and stayed at a rather low level (less than half the 1929 peak) for the remainder of the war. Investment in plant and machinery in the United Kingdom rose by nearly one-half between 1938 and 1940, but then declined to well below half the previous rate for the last three years of the war.”

So far, then, investment was recovering from the Great Depression as a result of the open-handed arms spending by the warring states. Rates of profit were extremely high throughout the War in the fascist countries, as the authors point out, because of the repression of the labour movement.

Post-War chaos and devastation at first held the economies back. Despite the ‘advantages’ of fascism in Italy, “the low level of capacity utilisation, especially in 1946, substantially increased overheads, such as depreciation. Overall the share of profits in industrial output in 1947 can hardly have been much below that in 1938.” (ibid. p.53).

In Japan the profit share rose year on year from 1947-1951 from 8%, to 9%, to 15% to 22%, to 26% (ibid p. 91). In Germany “profits were high” (ibid p. 97). A graph shows industrial production, industrial employment and industrial productivity increasing by leaps and bounds after the War.

The authors sum up the causes of the post-War recovery. “The balance between wages and productivity was extremely favourable to the employers. Profits were comparable to prewar levels even in the countries then under fascism” (p. 105). The revival of the possibility of profitable production was a precondition of the great post-War boom.

Throughout what the authors call the ‘golden years’, the rate of profit was in gentle decline. This was not a straight-line movement, of course. The rate of profit went down in years of downturn and revived in the upturn. There continued to be a cycle of boom and slump, but it was much more moderate over this period. The rate of profit did revive after each downswing, but did not generally recover its previous peak. So the graph lines for Europe, the United States, Japan and the advanced capitalist countries as a whole show profit rates dipping as we approach 1974, the year of the first generalised post-War crisis of capitalism. Diagrammatically, the movement in the rate of profit resembles the teeth of a saw that tapers downwards.

At bottom, as we show later, the 1974 crisis was not an oil crisis, or an inflation crisis: it was a crisis of profitability. In a diagram on p. 251 Armstrong shows manufacturing profit rates in Europe, Japan and the USA recovering after 1974, but never returning to the levels seen in the ‘golden years’.

We will now pass the torch to Robert Brenner. Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book, The boom and the bubble, published in 2002. We have criticisms of Brenner’s analysis, as we have of Glyn and his colleagues. Our critique of Brenner is atRate of profit and capitalist crisis. Brenner’s writings are undoubtedly the most authoritative on the world economy within the Marxist tradition over the last ten years, as Armstrong, Glyn and Harrison’s were for the earlier period. The statistical analysis of both sets of writing is usually unassailable – but see the Appendix.

In his earlier work Brenner begins, “Between 1970 and 1990, the manufacturing rate of profit for the G-7 economies taken together (the biggest capitalist economies) was on average about 40% lower than between 1950 and 1970…the radical decline in the profit rate has been the basic cause of the parallel, major decline in the growth of investment and with it the growth of output, especially in manufacturing over the same period. The sharp decline in the rate of growth of investment – along with that of output itself is – I shall argue, the primary source of the decline in the rate of growth of productivity, as well as the major determinant of the increase of unemployment. The reductions in the rate of profit and of the growth of productivity are at the root of the sharp slowdown in the growth of real wages.” (p. 7-8). This is Brenner’s central thesis. And we agree with him. What we need to find out is why this happened.

On page 8 of The boom and the bubble Brenner has a diagram showing the fall in average profits in the 1970-1993 period compared with the golden years of 1950 – 1970. The US sees falls from 24.3% to 14.5%, Germany 23.1% to 10.9%, Japan 40.4% to 20.4% and the G-7 as a whole from 26.2% to 15.7%. Moreover output, net capital stock, gross capital stock, labour productivity and the real wage all follow the trend set by the net profit rate. It is clear that profit determines the whole rhythm of capital accumulation.

How Glyn explains the falling profit rate

Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! For a time their explanation seemed to fit the facts, but the Marxists remained unconvinced. After all, the 1970s was a period of sharply fought class struggle. Here is Brenner’s criticism of the profits squeeze thesis. (These points are taken unchanged from our critique of Brenner, Rate of profit and capitalist crisis.)

First ‘the universality of the long downturn’. “…none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (1998 p.22)

Second ‘the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91.” (ibid. p.22) How is it possible, Brenner asks, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”…”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (ibid. p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, “To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” (Capital Volume I p. 770)

Marx realized that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

Marx and the tendency for the rate of profit to fall

In Capital Volume III Marx wrote three chapters on The law of the tendential fall in the rate of profit. They are The law in itself (ch. 13), Counteracting factors (ch. 14) and Development of the laws’s internal contradictions (ch 15). This law is also referred to in the Grundrisse, where Marx describes it as “in every respect the most important law of modern economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated” (p. 748). We shall argue that Marx was right and that crisis in the post-War capitalist economy can be explained in terms of Marx’s theory.

We are assuming here that the reader has a basic grasp of the process of extraction of surplus value (exploitation), at least in outline, as explained in Capital Volume I and in pamphlets such as Wage labour and capital and Wages, price and profit. Why, in view of its importance, does Marx wait till Volume III (which was not published in his lifetime) to explain this law? The answer lies in Marx’s method. Rosdolsky, in The making of Marx’s Capital, gives what we believe to be a definitive account of Marx’s plan for his work on Capital. In 1865-66 he came up with a four volume project:

  • Book I      Production process of capital
  • Book II     Circulation process of capital
  • Book III   Forms of the process as a whole
  • Book IV   The history of theory (This became the three volumes of Theories of surplus value)

(Rosdolsky p. 13)

So before he can explain the tendency for the rate of profit to fall, Marx has to show how the drive by individual capitalists to maximise their own profits leads to the emergence of a general rate of profit. We shall do the same. These issues are to be dealt with in the discussion of capitalist production as a whole.

The formation of a general rate of profit

Marx divides the value of a commodity into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value, conventionally divided into rent, interest and profit (s). The capitalist doesn’t care about all this stuff about c + v + s. All he knows is that he lays out a sum of money at the start of the production process and ends up with more (this circuit of capital is money – commodity – more money or M – C – M’). So he calculates his total capital  regardless as to whether it is spent on constant or variable capital. (We shall call total capital C in accordance with Marx’s usage. Note that we earlier symbolised it as K, as is usual in national income accounting.)

The capitalist works out his rate of profit based on total capital. The individual capitalist is not interested in the origins of surplus value. Indeed in his account books, and in the consciousness of the capitalist class, surplus value disappears as a separate category altogether.

One important observation from this is that the capitalists can sell their commodities below their value and still make a profit. Capitalists are continually trying to undercut one another, concerned as they are with market share and trying to win the war of competition. This still further pushes the origins of surplus value out of vision.

We have to be careful here. When we dealt with the value of a commodity, we resolved it into c + v + s. Now c (constant capital) consisted of two parts: fixed and circulating capital. The capitalist keeps separate records of the two, for they have consequences as to how he spends his precious money. This distinction between fixed and circulating capital (with wages seen as just another part of circulating capital) is another reason why the origins of surplus value are obscured. Circulating constant capital passes its entire value to the final product. An example would be the chocolate sprayed on to a Mars bar. We are mainly talking about raw materials here. It is fairly obvious that the chocolate is constant capital in the sense that it only passes its own value to the chocolate bar. It does not magically add value to the final product.

Then there is fixed constant capital, such as plant and machinery. When we examine the value of a commodity, we realised that a machine may help to produce millions of commodities and does not pass all its value to each one. The value it passes on can be explained by the notion of depreciation. The machine costs £1 million and produces a million commodities and is then worn out. We can assume that it passes value of £1 to each commodity it helps us produce. If the capitalist charges £1 depreciation in calculating the costs of each commodity, and puts £1 aside every time one is sold, he will have enough money to buy a new machine when it wears out. It is quite likely that the ‘straight line’ depreciation we have suggested is simplistic. The machine may become out of date before it wears out. Like buying a new car, its resale value may decline sharply as soon as the workers start using it. For now all we need to establish is that it is the depreciation of fixed constant capital that contributes to the value of the commodity.

But it is a different matter when the capitalist comes to think about his profits, which he calculates against his total capital (C). The whole point about the investment in fixed constant capital is that it locks away his money for years. So the rate of profit is calculated on the total capital advanced, whether used up or not.

The rate of profit is therefore s/C – surplus value divided by total capital. We are still assuming that all the surplus value is taken by the manufacturing capitalist at this stage. But remember that rent and interest, incomes which go to other sections of the ruling class, all come from the unpaid labour of the working class.

How is the rate of profit determined within an industry? An industry standard of technology is established by competition among the existing firms. Firms either keep up by producing commodities at the socially necessary labour time prevailing at the time, or they go to the wall. Occasionally laggard firms can maintain a fly-by-night existence if they have access to cheaper labour or some other advantage to compensate for their lack of productivity. But generally you don’t have farming with ploughs and oxen competing with farming conducted with combine harvesters. We may regard the achievement of higher productivity by accumulating capital and applying relatively more fixed capital in the form of machinery etc. to the production process as a basic tendency of capitalism.

Though technology and productivity may be standardised within an industry, it is obvious that different industries have very different levels of technology from one another. What is important from the Marxist point of view is that they therefore have very different organic compositions of capital.

The organic composition of capital measures the ratio of constant to variable capital in the production process or the proportion of dead to living labour. It is often presented symbolically as c/v. Now let’s look at an apparent problem when we have capitals of different organic compositions in different industries.

To keep things as simple as possible we will assume that the rate of exploitation is the same in both industries. We will also assume that all the fixed constant capital is used up over the production period we are studying, one year. There are only two industries in our simplified model:
I c350 + v50 +s50.  Profit rate = 50/400 = 12½%

II c50 + v50 + s50. Profit rate = 50/100 = 50%

So the same rate of surplus value produces a very different rate of profit depending on the different organic composition of capital in different industries. But this contradicts everything we know about the nature of capitalism. Capitalism is production for profit. The rate of profit is the central determinant of capital flows. Marx was well aware of this when he outlined the labour theory of value in Capital Volume I. In Volume III he explained that the consequence of the formation of an economy-wide rate of profit was that surplus value was redistributed between the different industrial sectors. As a result commodities are sold at money prices tending to their prices of production, a modified value.

“The whole difficulty arises from the fact that commodities are not exchanged simply as commoditiesbut as products of capitals, which claim shares in the total mass of surplus value according to their size, equal shares for equal size” (Capital Volume III p. 275)

In our simplified economy, equalisation of the rate of profit, through the flow of capital from the sector with the lower rate of profit to the sector with a higher rate, would produce the following result:

I c350 + v50 + p80 (profit rate = 80/400 = 20%)                             (where p is profit)

II c50 + v50 + p20 (profit rate = 20/100 = 20%)

So in industry I, output of 450 in values has been transformed into 480 in prices of production. In industry II, output of 150 in values has been transformed into 120 in prices of production. Surplus value has been transferred from industry II with a lower organic composition of capital to industry I with a higher organic composition.

One way Marx explains this is by asking us to think of a workplace with two departments, both necessary to produce the commodity. The capitalist who owns them doesn’t actually care where the surplus comes from as long as he gets his hands on it.

Marx concludes therefore that commodities are not actually sold at prices corresponding to their values, but tend to their prices of production, a modified value. In the example above, commodities in industry I are sold above their value and commodities in II below their value. But total values are equal to total prices of production and total surplus value is equal to total profit.

Does this contradict the law of value? Marx presents the process as a historical development. “The exchange of commodities at their values, or at approximately these values, thus corresponds to a much lower stage of development than exchange at prices of production, for which a definite degree of capitalist development is needed” (ibid. p. 277). In the same way, when we look at the labour theory of value, we start off with simple commodity production, and then move on to look at wage labour and capital.

The increasing organic composition of capital

The organic composition of capital measures the ratio of living to dead labour in the production process. To remind ourselves, “By the composition of capital we mean…the ratio between its active and passive component, between variable and constant capital.” (Capital Volume III p. 244) Marx adds, “The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it.” (ibid. p. 245).

We have seen how there is a tendency for a uniform rate of profit to be established throughout the economy, despite the differing organic compositions of capital within different branches of industry. This tendency, like any other tendency under capitalism, emerges precisely through individual capitalists searching for a higher rate of profit than the rest.

We have also seen (in the section on Absolute and relative surplus value) that there is an impulsion on every capitalist to raise the productivity of labour. Though there are other ways he can do this, historically and in practice it has been crucial to put more and more machinery (fixed capital) behind the elbow of each worker in order that they can produce faster and cheaper.

There is therefore a tendency for the organic composition of capital to rise over time in those branches of industry where labour saving equipment can be applied, and therefore in the economy as a whole.

Here is an illustration of the capital intensity of modern capitalist production, taken from a newspaper article (Mark Milner, Guardian April 17th 2007). The General Motors plant producing Astra cars at Ellesmere Port is to be revamped:

  • The plant will employ 2,200 workers
  • Productivity is likely to rise by 30%
  • The plant will produce 180,000 cars a year
  • Investment will be 3.1 billion Euros (round about £2 billion)

So each worker will produce nearly 90 cars a year on average. (Of course no worker produces a car single-handed. It is a team effort.) The machinery behind the elbow of each worker is getting on for £1,000,000!

This is casual and empirical but powerful evidence as to the correctness of Marx’s analysis of the dynamics of capitalism – the connection between rising productivity and a higher level of exploitation, the increasing scale of production and the greater mass of dead labour relative to living labour applied in the production process as the system develops.

Marx goes on to specifically link this rising organic composition with the tendency for the rate of profit to fall. “With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a rising organic composition of the total capital, and the direct result of this is that the rate of surplus value, with the level of exploitation of labour remaining the same or even rising, is expressed in a steadily falling general rate of profit. (We shall show later on why this fall does not present itself in such an absolute form but rather more in the tendency to a progressive fall.) The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour.” (ibid. pp. 318-9)

Explaining the tendency for the rate of profit to fall

Marx presents this tendency as a law. Different people use the word ‘law’ in different senses. Some scientific writers quite legitimately use the term to mean a statistical regularity. In this case there would be a law for the rate of profit to fall if we could observe the rate of profit falling continuously.

We can’t. And Marx is quite clear that is not how the tendency for the rate of profit to fall operates in practice. For him a tendency is a force operating in a certain direction. We shall present the law in Marx’s own words.

“Once wages and the working day are given, a variable capital which we can take as 100, represents a definite number of workers set in motion: it is an index of this number. Say that £100 provides the wages of 100 workers for one week. It these 100 workers perform as much surplus labour as necessary labour, they work as much time for the capitalist each day, for the production of surplus value, as they do for themselves, for the reproduction of their wages, and their total value product would then be £200, the surplus value they produce amounting to £100. The rate of surplus value s/v would be 100%. Yet, as we have seen, this rate of surplus value will be expressed in very different rates of profit, according to the differing scale of the constant capital c and hence the total capital C, since the rate of profit is s/C. If the rate of surplus value is 100%, we have:

if c = 50 and v = 100, then p’ = 100/150 = 66 2/3 %;

if c = 100 and v = 100, then p’ = 100/200 = 50%;

if c = 200 and v = 100, then p’ = 100/300 = 33 1/3 %;

if c = 300 and v = 100, then p’ = 100/400 = 25%;

if c = 400 and v = 100, then p’ = 100/500 = 20%.

“The same rate of surplus value, therefore, and an unchanged level of exploitation of labour, is expressed in a falling rate of profit, as the value of the constant capital and hence the total capital grows with the constant capital’s material volume.

“If we further assume now that this gradual change in the composition of capital does not just characterise certain individual spheres of production, but occurs in more or less all spheres, or at least the decisive ones, and that it therefore involves changes in the average organic composition of the total capital belonging, then this gradual growth in the constant capital, in relation to the variable, must necessarily result in a gradual fall in the general rate of profit, given that the rate of surplus value, or the level of exploitation of labour by capital, remains the same” (Capital Volume III pp. 317-8,The law itself).

Countervailing factors

Marx deals with the counteracting forces on the tendency for the rate of profit to fall in Part Three ofCapital Vol. III. Chapter 13 is ‘The law itself.‘ Chapter 14 is entitled ‘Counteracting factors’. Chapter 15 is ‘Development of the law’s internal contradictions.‘ We can see at once that the ‘law’ does not mean that the rate of profit will always fall. It is not a prediction. The tendency for the rate of profit to fall is aforce operating on the capitalist system, as we have seen. This force, in a dialectical way, actually unleashes contradictory forces that may tend to drag the rate of profit up.

Marx mentions six counteracting factors to the underlying tendency for the rate of profit to fall:

  • More intense exploitation of labour
  • Reduction of wages below their value
  • Cheapening of the elements of constant capital
  • The relative surplus population
  • Foreign trade
  • The increase in share capital

Increasing the intensity of exploitation

How can the bosses exploit the workers more? Apart from making workers more productive so as to increase the extraction of relative surplus, Marx realised that they could get exactly the same result without investing in more machinery. Through an offensive on the shop floor they could increase what he called the intensity of labour. In effect workers would be made to do ten hours’ work in eight hours. The main two ways of increasing the intensity of labour is by speeding up the assembly line and by making workers mind more machines.

Generally raising the intensity of labour and increasing its productivity have the same effect. They both raise the rate of exploitation by increased the production of relative surplus value. They both tend to make goods cheaper. We shall therefore consider them together.

Let us begin by assuming that the goods made cheaper are the ones workers buy with their wages, for instance KitKats. Obviously if the price of KitKats fall you don’t feel materially much better off, but this raising of productivity is assumed to be going on all over in the economy. As we discussed earlier (Absolute and relative surplus value), we can assume to start with that the worker works four hours to earn enough wages to buy the elements of her subsistence and four hours making surplus value for the boss class. If productivity for all the items going to make up the wage bundle doubles, then the worker need only work two hours for herself and six hours for the capitalists. Marx is assuming that workers’ real wages (in terms of purchasing power) will remain unchanged. The end result of raising the productivity of labour is thus to increase the rate of surplus value (rate of exploitation) by increasing relative surplus value

Reduction of wages below their value

Second Marx assumes that on average commodities are sold at their value (or rather price of production) for the purposes of his analysis. He was well aware that this is not always the case. In fact, he was by far the finest and most systematic chronicler of his time of the abuses of the capitalist system. He knew that the value of labour power was established by class struggle and had ‘a historical and moral element’. Therefore in practice depression of wages below the value of labour-power is important in practice in raising the rate of profit, not this time by making workers produce more but by paying them less.

Cheapening of elements of constant capital.

Just as the elements of variable capital can be made cheaper through raising the productivity of labour, so can the elements of constant capital. So, though there may be a much greater mass of machinery behind the elbow of each worker, each unit of capital may cost less and the organic composition of capital could be lower. “Also related to what has been said is the devaluation of existing capital (i.e. of its material elements) that goes hand in hand with the development of industry. This too is a factor that steadily operates to check the fall in the rate of profit, even though in some circumstances it may reduce the mass of profit by detracting from the mass of capital that produces profit. We see here once again that the same factors that produce the tendency for the rate of profit fall, also moderate the realisation of this tendency.” (ibid. p. 236)

Though the labourer is working up more and more raw materials over a given period of time, each piece costs less because it takes less time to produce those raw materials. “For example, the quantity of cotton that a single European spinning operative works up in a modern factory had grown to a most colossal extent in comparison with that a European spinner used to process with the spinning wheel. But the value of the cotton processed has not grown in the same proportion as its mass. It is the same with machines and other fixed capital. In other words the same development that raises the mass of constant capital in comparison with variable reduces the value of its elements as a result of the higher productivity of labour, and hence prevents the value of the constant capital, even though this grows steadily, from growing in the same degree as its material volume. i.e. the material volume of the means of production that are set in motion by the same amount of labour power.” (ibid. p. 343)

The relative surplus population

The unemployed can be used as a whip against the demands of employed workers. Then as now the discovery of pockets of workers who will work for wages below the average can be a Klondike for individual sectors of capitalists, and serve to raise the overall rate of profit for the system as a whole.

Foreign trade

Foreign trade enables capitalists to buy commodities from the cheapest sources in the world and so lowers their costs. It produces a global division of labour and enables national economies to reap the advantages of scale economies within world trade, further cutting costs all round.

Marx also introduces some important concepts that can serve as the base for a theory of imperialism. We cannot pursue these here. Note that Marx is dealing with the formation of national rates of profit, and how they are influenced by cheap imports. Realistic as this was for his time, we might consider whether the twenty-first century, with its vast capital flows, has produced a tendency for a global rate of profit to emerge. In any case we cannot treat foreign trade as a rabbit out of a hat, negating the basic tendencies of capitalist accumulation.

The increase in share capital

Finally Marx points to a tendency then in its infancy. It is now fully realised – a stratum of the capitalist class has become purely parasitic, and lives off the income of shares that their brokers, not they themselves, select. In this case surplus value undergoes a further division, with share dividends approximating to interest-bearing capital.

We have to say that some of Marx’s countervailing tendencies are mentioned very briefly, sometimes in a single paragraph. Fascinating though they are, they are not fully explored in the text. They almost come across as a sort of checklist for further research.

We regard the two most important counter-tendencies as raising the rate of exploitation andcheapening the elements of constant capital. They are the most important because they both explore how the central tendency to raise the productivity of labour that causes the tendency for the rate of profit to fall actually produces its own counter-tendencies.

In the case of raising the rate of exploitation, wage goods are produced faster and therefore cheaper, thus enabling the worker to spend more of her time producing surplus value and less in producing the elements of her own subsistence.

In the second case capital goods are produced faster and therefore cheaper. In this case while the mass of constant capital (what Marx called the technical composition of capital) may rise, the price of those material elements of constant capital (for the organic composition of capital is expressed in money prices) could fall.

Could these counter-tendencies indefinitely offset the tendency for the rate of profit to fall?

Increasing the rate of exploitation. In the example we used earlier, the worker works four hours to produce the elements of her own subsistence and four hours producing surplus value. As a result of new techniques, productivity doubles and the worker is now only working two hours for herself and six hours for the bosses. Her standard of living is unaffected – she can still buy the same bundle of wage goods as before. But there are limits to this process in increasing the rate of exploitation. In mathematical terms the rate of exploitation is bounded by the new value added by the worker (v + s). In mathematical terms, as productivity continues to rise in the wage goods sector, s tends to increase towards (v + s), while v tends to zero. As long as constant capital continues to increase (c tends to infinity), the rate of profit must eventually fall.

Cheapening the elements of constant capital. The cheapening of elements of constant capital through rising productivity tends to reduce the organic composition of capital expressed in market prices. The question is: can this indefinitely offset the tendency for the rate of profit to fall? Marx believed it could not. We agree.

Since this issue has been in contention for more than a century, we cannot treat it fully here. We would refer the reader to the historic debate Tendency for the rate of profit to fall and post-war capitalism – AG and MB. We have included further material on this question in the Appendix.

More recently, Kliman’s Reclaiming Marx’s ‘Capital’: A refutation of the myth of inconsistency has, we believe, definitively rebutted those who argue that ‘Marx got it wrong’ and that by implication there is no long term tendency for the tendency for the rate of profit to fall.

How the tendency manifests itself in practice

Marx’s analysis is actually subtler than many give it credit for.  “There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time…We have seen how it is that the same reasons that produce a tendential fall in the profit rate also bring about an accelerated accumulation of capital and, hence, a growth in the absolute magnitude or total mass of the surplus labour (surplus value, profit) appropriated by it.” (ibid. p. 331)  In Capital Volume III, Marx even referred to the law as a “double-edged law of a decline in profit rate coupled with a simultaneous increase in the absolute mass of profit, arising from the same reasons.” (ibid. p. 326)

So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth’), each of which involves less and less labour time to produce, and so each has less value congealed within itself.

Secondly, the reader should bear in mind that, “we are deliberately putting forward this law before depicting the decomposition of profit into various categories, which have become mutually autonomous.” (ibid. p. 320) Rent, interest and profit, conventionally presented as the components of surplus value, all vary against one another and all follow their own economic laws. This is very important when we consider the actual onset of crisis.

Marxist Theory of Crisis Part 3

Development of the law’s internal contradictions

The three chapters on the Law of the tendential fall in the rate of profit, and particularly Chapter 15 (The development of the law’s internal contradictions), provide the only complete explanation provided by Marx of boom and slump as part of a cycle and not, as over-production theorists would have it, as a crash coming out of a clear blue sky. Bearing in mind Rosdolsky’s outline of Marx’s 1865-66 economic ‘project’ referred to earlier, we find it exactly where we would expect it to be in his writings. After dealing with the production and circulation of capital he turns in Capital Volume III toThe process of capitalist production as a whole. Crisis theory deals with all the contradictions of capitalist society.

Marx appears to raise the realisation problem in Chapter 15. “The conditions for the immediate exploitation and for the realisation of that exploitation are not identical. Not only are they separate in time and space, they are also separate in theory. The former is restricted only by society’s productive forces, the latter by the proportionality between the different branches of production and by society’s power of consumption.” (Capital Volume III, p. 352)

It is precisely at this stage in his analysis that Marx introduces the concept of over-accumulation. “Over-production of capital and not of individual commodities – though this over-production of capital always involves over-production of commodities – is nothing more than over-accumulation of capital.” (ibid. p. 359)

He goes on, “There would be an absolute over-production of capital as soon as no further additional capital could be employed for the purpose of capitalist production. But the purpose of capitalist production is the valorisation of capital, i.e. appropriation of surplus labour, production of surplus value, of profit.” (ibid. p. 360)

So over-accumulation is over-production of capital, which manifests itself as over-production of commodities. But too much capital is produced only in relation to profit-making potential. And this tendency produces an unseemly scramble among the capitalists for their chance to grab what profit there is.

“Concentration grows…since beyond certain limits a large capital with a lower rate of profit accumulates more quickly than a small capital with a higher rate of profit. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The so-called plethora of capital is always basically reducible to a plethora of that capital for which the fall in the rate of profit is not outweighed by its mass.” (ibid. p. 359)

So Marx sees no contradiction in raising the so-called realisation problem in the middle of a chapter dealing with the falling rate of profit as the fundamental cause of capitalist crisis. It is precisely the fall in the profit rate that produces the crisis, and over-production (over-accumulation) is its form of appearance. To put it another way, the fact of over-producing firms may be regarded as the trigger, while the fall in the rate of profit is the cause of the crisis.

Moreover viewing the crisis as a crisis of profitability enables us to understand how the downturn prepares the basis for a later upswing. The essential mechanism is through the destruction of capital in a recession.

“The periodic devaluation of existing capital, which is a means immanent to the capitalist mode of production for delaying the fall in the profit rate and accelerating the accumulation of capital value by the formation of new capital, disturbs the given conditions in which the circulation and reproduction process of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process” (ibid. p. 262).

This destruction of capital is not mainly physical destruction and obsolescence. The destruction of capital values in a crisis actually prepares the way for a reduction in the organic composition of capital, and a revival in the rate of profit. In this way we can explain the entire boom-slump cycle.

In a slump unwanted stocks and unused machinery are sold in fire sales of the assets of bankrupt firms. “Secondly, however, the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use values…A large part of the nominal capital of the society i.e. of the exchange value of the existing capital is once for all destroyed, although this destruction, since it does not affect the use value, may very much expedite the new reproduction.” (Theories of surplus value Volume II p. 496)

The crisis therefore prepares the way for a new upturn in the same way as naturalists explain that forest fires can actually prepare the woodland for a new period of growth.

Once Marx has explained how the movement in the rate of profit is the mainspring of economic crisis, he can introduce the ancillary factors that play their role in preparing for the individuality and complexity of any particular capitalist crisis.

Ancillary factors

Now we introduce those economic factors that give each specific historic period its own colour and character. They interact with the general movement of the capitalist economy, based as it is on movements in the rate of profit, accelerating its upswings and deepening its downward drops. The items below are just an indicative list of these epiphenomena.

Wages: One important economic effect of the crisis, of course, is that, by creating mass unemployment, the boss class has the whip hand in trying to drive down the wages of the employed workers. “Stagnation in production makes part of the working class idle and hence places the employed workers in conditions where they have to accept a fall in wages, even beneath the average; an operation that has exactly the same effect for capital as if relative or absolute surplus value had been increased while wages remained at the average.” (Capital Volume III p. 363) The point is that movements in wage levels are based on the bargaining power of the contending classes, which is determined by the level of unemployment – itself dependent on the stage reached in the economic cycle.

Competition: Marx is also aware of the competitive struggle between individual capitalists, and its deleterious effect on their system as a whole, in the teeth of a crisis. Unlike Adam Smith, he does not see competition as the driving force of the falling rate of profit. “Competition, generally this essential locomotive force of the bourgeois economy, does not establish its laws, but is rather their executor. Unlimited competition is therefore not the presupposition for the truth of the economic laws but rather the consequence – the form of appearance in which their necessity reveals itself.” (Grundrisse p. 552)

For Marx the fall in the rate of profit intensifies the pressure on individual capitalists to compete with one another. “(T)he fall in the profit rate that is bound up with accumulation necessarily gives rise to a competitive struggle. Compensation for the fall in the profit rate by an increase in the mass of profit is possible only for the total social capital and for big capitalists who are already established. New and independently operating additional capital finds no compensatory conditions of this kind ready made; it must first acquire them, and so it is the fall in the profit rate that provokes the competitive struggle between capitals and not the reverse”(Capital Volume III p. 365)

Raw material prices: Typically a prolonged upswing will produce a boom in the price of raw materials. We suppose in theory that an increase in the demand for an industrial product is likely to call forth an instant increase in its supply as its price goes up and capitalists, mindful of the profit motive, respond by boosting production. But there are biological and geological limits in the responsiveness of organic and mineral materials’ production to demand conditions. As a result commodity prices are likely to respond spasmodically to changes in demand, with soaring peaks and dizzying drops.

This was most noticeable in the case of oil, which was actually the major basic cheap resource that fuelled capitalism in the ‘golden years’ after the Second World War. Our ‘rigorous’ neoclassical economists descend to the most casual empiricism when they characterise the 1974 crisis as an ‘oil crisis.’ They are incapable of noticing that oil prices generally are determined by the demand for oil, given the supply constraints, and that the demand is provided by capital accumulation in the industrial countries.

Of course, since oil is an important resource for capitalism, if the price of oil rises towards the end of an upswing, that is going to cut into manufacturing costs and therefore profits. And because the rate of profit is likely to be falling by this stage, it is theoretically possible that the oil price hike could help push them over the edge. The important point is to see how commodity prices are located in the cycle of accumulation.

Stocks (Inventories): In a boom the capitalists exude confidence. They develop the belief that ‘this time it’s different’ – this time the boom will last forever. As a result they build up stocks of raw materials, confident in the good times to come. In doing so, of course, they act as excellent customers to the capitalists responsible for producing raw materials. They may also allow stocks of finished goods to accumulate in the warehouses, sure that they will be sold in the fullness of time.

It’s a different story in a slump. Unsold stocks of finished goods are a millstone around their necks. They may well reduce output below what is actually required so as to realise the values of their unsold stocks first. They may be forced to do this because their profits have disappeared and that is the only way to escape bankruptcy. The niggardly approach they develop in the slump to husbanding raw materials hits the capitalists producing these raw materials, for whom this market is the only way they have of making a living.

Expectations: Capitalists have no way of knowing what the future will hold for them. Yet they have to develop a view as to how markets are likely to evolve. Under these conditions capitalists’ expectations can acquire the power of a material force in the economy. Marx gleefully chronicles the swindles carried out by capitalists upon one another. Yet these swindles were indicative of a certain mentality – the belief that anyone with money could make more money. This outlook becomes dominant after a long period of boom because it reflects a certain reality.

On the other hand a crash caused by failed capitalist projects can drag quite reputable and viable capitalist firms and individuals down with it. That is the price capitalists pay for their system. Really the market division of labour makes them all interdependent upon each other and dependent upon the operation of the law of value. But they do not realise this. “(I)n the midst of accidental and ever-fluctuating exchange relations between the products, the labour time socially necessary to produce them asserts itself as a regulative law of nature. In the same way the law of gravity asserts itself when a person’s house collapses on top of him.” (Capital Volume I p.168) After the crash, caution becomes the dominant mood. And of course that caution makes recovery slower.

Finance: When we discussed the tendency for the rate of profit to fall, we made it clear that by ‘profit’ we meant surplus value as a whole and that the rate of profit is calculated as total surplus value divided by total capital invested. Yet surplus value is usually divided into rent, interest and profit (actually there are others who share in this surplus). All three factors can vary against one another.

Traditionally, the share of surplus value going to finance capital is called interest. Interest rates are connected to the boom-slump cycle in a complex way, analysed by Marx in Capital Volume III. We cannot treat the subject fully here.

“If we consider the turnover cycles in which modern industry moves – inactivity, growing animation, prosperity, over-production, crash, stagnation, inactivity, etc.,.. – we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis.” (Capital Volume III p. 482)

After a recession, interest rates are generally low. Manufacturing capitalists are not making much profit, so they cannot afford to pay the banks much interest. They are not investing in new plant. They are certainly not investing with borrowed money, but gradually trying to cover their losses and restart production on a modest scale with the resources available to them. As production picks up, the demand for loan-capital from manufacturing capitalists rises.

When a crash is looming, “In times of pressure, the demand for loan capital is a demand for means of payment and nothing more than this; in no way is it a demand for money as means of purchase. The interest rate can then rise very high”…just when the industrial capitalists can least afford it. (Capital Volume III p. 647) In a crash everybody needs hard cash. The whole crazy process is about to begin again.

Trade: We would expect that, as profit-making opportunities re-emerge, capitalists would exploit the division of labour to introduce more economies of scale and divide the world ‘rationally’ into areas that can produce goods at the lowest possible cost. This division of labour between capitalist firms is not organised but governed by market forces. We would therefore expect to see trade, including international trade, advance during the upswing and contribute to the strength of that upswing. We would also expect to see trade shrink in the downturn as each capitalist, and each capitalist nation-state, turns on the others, determined to load the burdens of the crisis on anyone but themselves.

As Armstrong (Capitalism since 1945) shows, trade liberalisation did not kick-start

the revival of the European and Japanese economies in the years right after the Second World War. The reason for this was the enormous imbalances in the world economy – in particular the complete dominance of the USA over the capitalist world. All the other advanced countries had massive deficits with America.

“Nor was continued European expansion based on massive import growth from the United States or elsewhere…Indeed, imports fell in 1948 and only regained 1947 levels in 1951. Meanwhile exports steamed ahead and by 1950 had regained prewar levels, with imports still some 10% below.” (pp. 82-3) In other words the increased exports were not a sign of reviving economic health, but served just to repay accumulated debts.

When the road was clear, trade interacted dialectically with profit-making potential in production to push the upswing higher. “The years of the boom saw a phenomenal explosion of trade. Between 1951-3 and 1969-71 the volume of world trade in manufactures grew by 349% whereas the volume of output grew by 194%” (ibid. p. 153).

The slowdown hit trade as well as production. The slowdown in trade made the slowdown in production worse. “The growth of world trade slowed down sharply after 1973, growing at an average 3.8% a year over the period 1973-88, compared to 8.7% per year during the previous decade” (ibid. p. 296). As we shall see later, world trade actually fell in volume terms in the wake of the 1974 crash.

The crash of 1974

The 1974 recession was the first generalised recession of global capitalism since the Second World War. It marked the end of the ‘golden years’. We look briefly at this event as an example of the processes we have been analysing.

In the first instance bourgeois economists, desperate to show that crisis is not inherent in their system, assert that the 1974 crash was ‘all about inflation.’ Certainly inflation was very high in 1974. In the US it was 11%, in Japan 21%, in Britain, 16%, in Germany 7%, and in Italy 19%.

World capitalism had actually thrived on the more moderate inflation, which had become a feature of the whole post-War era, gradually and insidiously increasing over the years. The causes of inflation are complex and cannot be dealt with here. But in Britain, for instance, the government budget deficit was 10% of GDP in 1975. Such deficits have to be paid for, and can contribute to the inflationary spiral.

The main point is that in 1974 inflation ceased to be a stimulant and started to become a major obstacle to economic growth, reflecting imbalances that were making the recession worse. Before 1974 Keynesian economists had perceived inflation as a sign that the economy was growing too fast, while unemployment was evidence that it was going too slow. Now the economy was simultaneously sending out messages that it was running too fast and too slow! The alternative, of course, was that Keynesianism had failed as an explanatory tool and as a remedy for economic problems. Economists started to mutter about ‘stagflation’ and ‘slumpflation’ and to develop alternative theories.

The second illusion spread about 1974 was that it was an ‘oil crisis’. It is true that the price of oil, the basic feedstock of post-War capitalism, quadrupled in less than a year. The oil price hike was not a result of sober economic calculation. After the 1973 Arab-Israeli War, oil producing Arab nations boycotted western countries because of their perceived pro-Israeli bias. Both they and their customers were then astonished at the economic power they had accumulated.

Itoh and Lapavitsas (Political economy of money and finance) put the oil shock in context. “The world market prices of primary products such as corn, wood, cotton, wool and minerals also began to rise rapidly in the later 1960s, reflecting the relative shortage of these products. The quadrupling of the price of crude oil within a few months in 1973-4 owed much to the fourth Arab-Israeli War, but was also integral to the general shortage of primary products due to the over-accumulation of capital in the advanced countries. The terms of trade relative to manufactures were raised by more than 10 per cent in 1970-3 and by nearly 70 per cent in 1970-4. The price of raw materials for manufacturing nearly doubled within the year prior to the first oil shock.” (p. 193)

All the other epiphenomena mentioned in the abstract in the section above (Ancillary factors) came into play in a concrete and painful manner. At the end of the boom speculation and swindling were rife. More and more resources were devoted to the acquisition of raw materials and of land, the price of which was soaring. This feverish speculation was a product of the mentality that the good times would never end.

Banks had been lending more and more to speculators to buy land, thus creating the perfect bubble. The bubble duly burst at the end of 1974, threatening to take the banks with it.

In Britain a dodgy bunch called secondary banks (really property speculators) had to be saved by a rescue operation launched by the Bank of England. The alternative was that, as they sank beneath the waves, they would take large chunks of the financial establishment with them.

The overheated stock exchanges all over the world had the opportunity to chill out. In London share prices went from a high of 339 to a low of 150 in 1974.

Commodity prices, with the exception of oil, also collapsed. By December 1974 copper had lost 60% of its value, posted in April of the same year. Other commodities recorded similar losses. These dry statistics are actually a trail of tears for the poor people totally dependent on their sale on the world market.

World trade, which had actually grown faster than the national economies throughout the post-War period and was regarded as an ‘engine of growth’ took a hit and fell in absolute terms in 1975. It fell because of a recession located in production and the profit-making engine of the capitalist economy.

The crash actually started in the car industry, and spread and spread.  Production fell sharply. From peak to trough over two years industrial production fell 14.4% in the USA, 19.8% in Japan, 11.8% in Germany, 10.1% in Britain, and 15.5% in Italy.

Naturally unemployment soared. By the trough it was 7.9 million in the US, 1.1 million in Japan, 1.1 million in Germany, 1.3 million in Britain and 1.1 million in Italy. The ‘full employment’ era was over.

Capacity utilisation fell in the US from 83% in 1973 to 65% (less than two thirds) in 1975. 1973 was a peak year. But in the 1966 peak 92% of manufacturing capacity was in use. In 1969 it was 86.5%. Measured from peak to peak or from trough to trough capacity utilisation had been falling over the whole post-War period.

Why? Capacity utilisation, investment, output and employment were all falling in line with the rate of profit. Capitalists use manufacturing capacity to the maximum if they think they can make profits. They invest if they think they can make profits. They produce if they think they can make profits. They employ workers if they think they can make profits.

In the USA industrial (pre-tax) profits were 16.2% in the years 1948-50, 12.9% in 1966-70, and 10.5% in 1973. Then they crashed, and so did the economy.

In Britain our figures are taken from Glyn and Sutcliffe - British capitalism, workers and the profits squeeze. In 1950-54 the rate of pre-tax profit was 16.5%, in 1955-59 14.7%, in 1960-64 13%, in 1965-69 11.7% in 1968 11.6%, in 1969 11.1%, and in 1970 9.7%. As we have seen from Capitalism since 1945 quoted earlier, profits then recovered after the 1974-75 recession, but never regained the levels they achieved in the ‘golden years’.

Brenner’s works confirm that, since the 1974 crash, the good times have gone for good. The rate of profit has been consistently lower in the 1970-1990 (or 1993) period than it was from 1950 to 1970. Within the later period, the rate of profit rose in times of boom and fell as the economy entered a recession, as it did in the 1950 – 1970 period.

More recently Andrew Glyn’s most recent book Capitalism unleashed is mainly concerned with other matters. On page 136 he does briefly suggest that the American capitalist class has achieved a clawback of the rate of profit up to the level of the early 1970s. But for Europe (pp. 145-6) and Japan (p. 141) the picture we have painted remains the same. Likewise Brenner’s 2006 book The economics of global turbulence (an update of his previous work) is subtitled The advanced capitalisteconomies from long boom to long downturn. It does not challenge the link between movements in the rate of profit and the health of the capitalist economy. The fit is almost perfect.

We conclude that the tendency for the rate of profit to fall as explained by Marx is the key to understanding the cycle of boom and slump in the capitalist economy.


Countervailing tendencies to the tendency for the rate of profit to fall. Cheapening the elements of constant capital.

The same process of rising productivity that cheapens wage goods can also cheapen capital goods and so reduce the organic composition of capital. Certainly this can happen in practice. But those who have argued that this process can indefinitely offset the tendency for the rate of profit to fall have all too often adopted a false method. The following quotes are taken from a historic debate (The tendency for the rate of profit to fall and post-war capitalism - AG and MB)

“The typical figures used to back up the LTRPF (law for the tendency of the rate of profit to fall) are the huge increase of fixed capital per worker, such as these shown in columns 1-3 below.” (AG)

The author’s Table 1 covers industry for the years 1953-72 and deals in percentage growth rates per year. Column 3 details Capital/Worker and shows the ratio rising by 8.8% (per year over the twenty year period) in the case of Japan, 4.8% for France, 6.0% for Germany, 4.8% for Italy, 4.2% for the UK and 2.2% for the USA.

This would appear fairly clear evidence to most people that the organic composition of capital did indeed rise over that period. But AG goes on to argue that, “These statistics for the capital stock at constant prices are attempts to measure the volume of the capital stock (i.e. number of machines before taking account of their cheapening due to productivity growth). They do not simply get rid of the effect of inflation, but they also ignore productivity growth – the devaluation of capital, which cheapens machines. We want to get at the value composition, i.e. what is relevant for the rate of profit which is calculated on the value of capital – not its physical volume – we have to account for this devaluation of capital. This I have done in a simple way by subtracting the growth of productivity (Column 4) from the growth of the volume of capital per worker to give the growth in the value of capital per worker.” He is introducing the method pioneered by neoclassical equilibrium theorists in treating Marx’s economic system as a set of simultaneous equations.
So AG introduces a Column 4, which measures Productivity (Devaluation of Capital), again measured as an annual rate. The figures for Japan are 8.9%, 5.4% for France, 5.0% for Germany, 5.0% for Italy, 3.0% for the UK and 2.7% for the USA.

He then proceeds to subtract the results of the percentage figures of Column 4 from the results in Column 3. A quick glance at the figures for Capital Growth per Worker in Column 3 will show that they show very similar national trends to the Productivity increase in Column 4.

In fact, using this technique, Column 5 (which AG asserts shows the Ratio of Dead to Living Labour) records, in what AG regards as the ‘proper’ measure of the organic composition of capital, that it actually falls over the period in Japan, France, Italy and the USA. Rises in Germany and the UK are insignificant and it seems from Column 5 that overall movements in the organic composition of capital are indeterminate. AG is treating the increase in productivity as causing an instant and equivalent fall in the price of capital goods.

To many readers who have followed this discussion so far, it is probably not surprising to find that productivity rises as capital per worker increases – as the reason for increasing the organic composition of capital is usually to raise the productivity of labour. But do input prices fall instantly and at the same rate?

AG’s method in ‘depreciating’ the rise in capital per worker by using productivity increases was criticised at the time in the course of the debate. AG is a scrupulous economic statistician. But this method is one that generations of conventional economists have used to try to assimilate Marx into neoclassical economic theory.

They in effect regard the economy as a set of simultaneous equations and Marx as an equilibrium theorist like them.

Marx on the other hand regarded accumulation as a process that takes place in real time. Marx was well aware that rises in productivity in the industries producing the elements of constant capital could lead to a fall in their unit price. But he regarded this adjustment of relative prices to be a messy and protracted result of competition between individual capitalists, not as an instantaneous outcome.

Marx also knew that what are outputs for one capitalist are inputs for another. He raised precisely that issue in his reproduction tables in Capital Volume II. The fall in the prices of these inputs through rising productivity will eventually be reflected throughout the economic system. But these commodity prices are devalorised (depreciated) in real time. This is not the same as the way a mathematician ‘solves’ a set of simultaneous equations, a method applied by neoclassical economists to their ‘model’ of the economy.

More recently, Andrew Kliman has trenchantly denounced this tendency to turn Marx into an equilibrium theorist (Reclaiming Marx’s Capital). Neoclassical economists have for a century accused Marx of ‘inconsistency’, beginning with von Bohm Bawerk’s Karl Marx and the close of his system in 1896. In Capital Volume I, they say, Marx deals in values. In Volume III he introduces prices of production as modified values. Von Bohm Bawerk regarded this as a ‘contradiction.’

As we have indicated earlier Marx uses this procedure because after dealing with the production of capital in Volume I and its circulation in Volume II, he comes to The process of capitalist production as a whole in Volume III. This is where the formation of a general rate of profit is properly dealt with. Until he has derived the general rate of profit, Marx cannot move on to the formation of prices of production from values, so this too belongs in Volume III.

Following von Bortkiewicz’s 1906-07 papers, neoclassical economists have dealt with what they call the contradiction in Marx by using simultaneous equations to transform an economic ‘system’ made up of values into a system of prices. Not surprisingly, they arrive at different results from Marx in the process.

Kliman is an advocate of what is called the temporal single system interpretation (TSSI) of Marx’s economics. By ‘temporal,’ TSSI theorists mean that economic processes take place in real time, unlike the simultaneous equations that instantly devalue output prices as input prices for other capitalists.

The ‘single system’ is contrasted to a dual system, where values have to be transformed into prices in the manner suggested by von Bortkiewicz. In fact prices and values are interdependent. As Kliman explains (p. 33), “First, prices of production and average depend on the general (value) rate of profit s/C, so there is no distinct price system. Second, prices influence value magnitudes, so there is no distinct value system either. The constant capital advanced and the value transferred depend upon the prices, not the values, of means of production.”

When capitalists consider the costs of inputs in calculating their profits, there are three possibilities. (Kliman Chapter 6):

  • They can use historical cost – costs they incurred at the time of purchasing the elements of production in the marketplace.
  • They can use pre-production reproduction cost – costs of the commodities at the time of production
  • They can use post-production replacement costs – costs of the constant capital at the time of sale and after production.

The example Kliman uses is that of apples used to make apple sauce – costing $0.60 when the apple is picked, falling to $0.50 when the apple sauce is made and $0.45 when the apple sauce is cooked and available for sale. It is unfortunate for the capitalist that the price of his input is continually falling in this way, but he can’t buy apples as the cost of an input at 2pm ($0.45) when he actually starts making the sauce at 1pm – when apples cost $0.50. Yet that is the miracle that simultaneous equations perform when they turn output prices instantaneously into input prices!

Is it not obvious that the relevant cost of inputs is this pre-production reproduction cost? This remains the case even if the value of that constant capital later depreciates, and replacement costs therefore fall, as a result of technical progress in the production of means of production.

AG is therefore entirely wrong when he uses increases in productivity to instantaneously depreciate capital values, and thus produce a corresponding fall in the organic composition of capital and increase in the rate of profit, in his Column 5. Yet this procedure is at the heart of his ‘rebuttal’ of Marx’s tendency for the rate of profit to fall, as it has been for generations of neoclassically trained economists.

by Mick Brooks, November 2007


Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Baran and Sweezy-Monopoly capitalism, Penguin Books 1966

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, Verso Books 2006

Engels-Anti-Duhring, Foreign Languages Publishing House, Moscow 1959

Glyn and Sutcliffe-British capitalism, workers and the profits squeeze, Penguin Books 1972

Glyn-Capitalism unleashed, Oxford University Press 2006

Hegel-Hegel’s Logic, Oxford University Press 1975

Itoh and Lapavitsas-Political economy of money and finance, Macmillan 1999

Kliman-Reclaiming Marx’s ‘Capital,’ Lexington Books 2007

Lenin-A characterisation of economic romanticism, Progress Publishers, Moscow 1967

Luxemburg-The accumulation of capital, Routledge and Kegan Paul 1951

Marx-A contribution to the critique of political economy, Lawrence and Wishart 1971

Marx-Grundrisse, Penguin Books 1973

Marx-Capital Volume I, Penguin Books 1976

Marx-Capital Volume II, Penguin Books 1978

Marx-Capital Volume III, Penguin Books 1981

Marx-Theories of surplus value Volume II, Lawrence and Wishart 1969

Nove-The economics of feasible socialism, Allen and Unwin 1983

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Sweezy-The theory of capitalist development, Monthly Review Press 1956

Capitalist crisis theory and practice

A Marxist analysis of the Great Recession
By Mick Brooks           

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