Towards an understanding of capitalist crisis
by Mick Brooks
Why do we need a theory of capitalist crisis? As Marxists we believe
we need to understand the basic laws of motion of the capitalist system.
We know that capitalism is a system that goes through periods of boom
and slump. We should be able to explain why this is the case.
This article is mainly aimed at explaining the boom slump cycle that
lasts about ten years and has been in operation for nearly two hundred
years. There is nothing definite about the span of the cycle, of course.
But in Marx’s view crises come about whatever the stage of the class
struggle. They are important to us since they may be expected to
influence the course of class struggle.
Periodic booms and slumps are not the sole or principal meaning of
capitalist crisis. The Russian revolution did not take place because
Russia went into a slump. That is elementary. It was carried out by the
revolutionary working class. When workers in their millions call the
system into question, then that surely is a crisis for capitalism, in a
different sense. But we are concentrating on periodic crises in the
sense usually used by Marx and Engels in their writings.
It is the case that capitalism goes through distinct periods. The
period of the post-War boom from the 1940s to 1974 is one example. These
longer periods all have their own characteristics. But this article is
intended to deal with the perpetual boom-slump cycle, and will only
touch on longer developments incidentally.
It is also true that each recession or slump has unique features. All
historic events are unique. “The real crisis can only be deduced from
the real movement of capitalist production, competition and credit.” (Theories of surplus value Volume II pp. 512)
What we are attempting
Marx was not able to systematically work up the theory of crisis for publication in his economic writings. Capital Volumes II and III, the Theories of Surplus Value and the Grundrisse
were not made ready for publication in his lifetime. They were all part
of a vast, unfinished project. It would be futile to deny that
inconsistencies can be found in his writing. Different academic schools
have been formed since his death to espouse monocausal theories of
crisis based on isolated quotes.
The purpose of this article is to look at Marx’s scattered writings
on crisis and to try to find out what he actually said on the subject.
It will not be possible to take up all or even many of those who have
come to the subject with their own interpretation over the past century
or more. The reader will also appreciate that looking at what Marx said
is not the same as showing that everything he said was correct.
Secondly we try to test Marx’s interpretation of how capitalism
accumulates, and how it stumbles, against the reality of the post-War
capitalist economy.
For generations of Marxists, Sweezy’s Theory of capitalist development
has proved a popular guide to Marx’s political economy. It is lively,
well written and introduces the reader to the debates and the
literature. Unfortunately we believe that his interpretation of Marx’s
crisis theory is wrong. We are following his broad categorisation of the
different interpretations as a guide to our presentation. They are:
- · Crises associated with falling tendency of the rate of profit
- · Realisation crises – crises arising from disproportionality – crises arising from under-consumption.
It is also true that crisis is an issue subject to scholarly debate
within the Marxist movement. It is not a subject where a ‘party line’
needs be laid down. Nobody proposed drumming Rosa Luxemburg out of the
brownies on account of her crisis theory. There is no one dominant view
or comprehensive analysis of the ‘cause’ of capitalist crisis among
Marxist writers.
Nevertheless I believe a consistent thread can be found in Marx’s
writings. And the attempt must be made. We cannot change the world
unless we understand it.
The reason I put ‘cause’ of capitalist crisis in inverted commas in
the previous paragraph is because much of the confusion as to the
reasons for the boom-slump cycle comes from the different levels of
causation that are at work.
To anticipate, I argue that the crisis takes the form of appearance
of a realisation crisis. That means goods produced cannot be sold. But
the cause of this crisis is neither an institutional tendency to produce
too many consumer goods relative to capital goods or any other
disproportionality inherent in the capitalist system. Notions of
over-production and under-consumption have no explanatory value for the
boom-slump cycle. They cannot tell us when, where and why the crisis
breaks out. I try to show that the fundamental cause of crisis, and the basic explanation for the cycle, are movements in the rate of profit.
These movements in turn can be analysed using Marx’s law for the
tendency for the rate of profit to fall which manifests itself as a
periodic over-accumulation of capital.
Marx’s method
Back to Marx. We have to be mindful of the method he used in his economic work. Though Capital Volume I
stands almost alone as a work prepared for publication, it is not the
last word on the subject. He outlined his method in his Introduction to A contribution to a critique of political economy. (This manuscript is also part of the Grundrisse.)
“Seventeenth century economists always took as their starting point
the living organism, the population, the nation State, several States
etc., but their analysis led them always in the end to the discovery of a
few decisive abstract general relations e.g. division of labour, money
and value. When these separate factors were more or less clearly deduced
and established, economic systems were evolved from simple concepts
such as labour, the division of labour, demand, exchange value advanced
to categories like the State, international exchange and the world
market. The latter is obviously the correct scientific method. The
concrete concept is concrete because it is a synthesis of many
developments, thus representing the unity of diverse aspects” (pp.
205-6).
Over-production
As is well known, the Communist Manifesto refers to a
capitalist crisis of over-production. Sometimes over-production is
referred to as the realisation problem. This means that the crisis
manifests itself as capitalists being unable to sell goods that have
already been produced. Over-production, in other words, is not absolute
but relative to the purchasing power of the population.
Now it is true that the Manifesto is not a major economic work of the mature Marx. In 1848 he had not yet developed the notion of labour power, for instance.
But there is absolutely nothing wrong with the formulation of the Manifesto, as long as we understand that over-production is the form of appearance
of capitalist crisis. We can and do point to the paradox of idle
workers confronting idle machines as the cause of want. This is a
distinctive feature of capitalism, an ‘achievement’ no other social
system can show.
“It is enough to mention the commercial crises that by their
periodical return put on trial, each time more threateningly, the
existence of the entire bourgeois society…In these crises there breaks
out an epidemic that in all earlier epochs would have seemed an
absurdity – the epidemic of over-production. Society suddenly finds
itself put back into a state of momentary barbarism; it appears as if a
famine, a universal war of devastation had cut off the supply of every
means of subsistence; industry and commerce seem to be destroyed; why?
Because there is too much civilisation, too much means of subsistence,
too much industry, too much commerce.”
This is all very clear. It is description, not explanation. It tells us what happened, not why it happened.
Engels has a very similar approach in Anti-Duhring. (This passage is reproduced in Socialism utopian and scientific.)
“As a matter of fact since 1825, when the first general crisis broke
out, the whole industrial and commercial world, production and exchange
among all the civilised peoples and their more or less barbaric
hangers-on, are thrown out of joint about once every ten years. Commerce
is at a standstill, markets are glutted, products accumulate as
multitudinous as they are unsaleable, hard cash disappears, credit
vanishes, factories are closed, the mass of workers are in want of means
of subsistence because they have produced too much of means of
subsistence.” (pp. 379-80)
Engels is making the point that more is produced than can be sold.
This is a contradiction. “Contradiction in the capitalist mode of
production. Workers are important in the market as buyers of
commodities. But as sellers of their commodity – labour power –
capitalist society has the tendency to restrict them to their minimum
price. Further contradiction: the periods in which capitalist production
exerts all its forces regularly show themselves to be periods of
over-production, because the limit to the application of the productive
powers is not simply the production of value, but also its realisation.
However the sale of commodities, the realisation of commodity capital
and thus of surplus value, is restricted not by the consumer needs of
society in general, but by the consumer needs of a society in which the
great majority are always poor and must always remain poor.” (Capital Volume II, p.391)
Crisis is actually the (temporary) resolution of this contradiction.
“The independence of two correlated aspects (production and realisation)
can only show itself forcibly as a destructive process. It is just the
crisis in which they assert their unity, the unity of different aspects.
The independence which these two linked and complementary phases assume
in relation to each other is forcibly destroyed. Thus the crisis
manifests the unity of these two phases that have become independent of
each other.” (Theories of surplus value Volume II, p.500)
The main quote used to show that Marx regarded over-production as the fundamental cause of crisis is the following. “The ultimate
reason for all real crises is the restricted consumption of the masses,
in the face of the drive of capitalist production to develop the
productive forces as if only the absolute consumption capacity set a
limit to them.” (Capital Volume III p. 615)
What does Marx mean by ‘ultimate reason’? ‘Reason’ is here
translated from the German word ‘grund’. Here’s Hegel on ‘grund’
(translated into English as ‘ground’ in Hegel’s Logic, from the section on Essence as ground of existence).
“Considerations of this sort led Leibniz to contrast causae efficientes
and causae finales, and to insist on the place of final causes
(‘ultimate reason’) as the conception to which efficient causes were to
lead up. If we adopt this distinction, light, heat and moisture would be
causae efficientes, not causa finalis: causa finalis is the notion of
the plant itself.” (Hegel’s Logic p. 177-8) Causa finalis is Latin for ‘final cause’ or ‘ultimate reason’. Causae efficientes is Latin for ‘efficient causes’.
Most of us brought up in the tradition of David Hume’s concept of causation would regard light, heat and moisture to be the causes of the plant’s growth (efficient causes) rather than the notion
of the plant (final cause). Ultimately this distinction comes from
Aristotle’s four levels of causation – formal cause, material cause,
efficient cause and final cause. Aristotle’s ‘final cause’ can be
interpreted as the unfolding of a thing’s essence or nature (telos).
Marx’s comment comes as an aside in Capital Volume III in Chapter 30 on Money capital and real capital: 1. Marx
wants to remind us of the fundamentals in a section dealing with the
intricacies of financial crisis. The statement does not explain to us
what causes crisis – when, where and why there’ll be a crisis.
The essence or nature of the capitalist system causes crisis. The
nature of capitalism is that it restricts the consumption of the
workers. The reason – it runs on profit.
Under-consumption
Engels, in his chapter on ‘Production’ in Anti-Duhring, is a
stern critic of Duhring’s under-consumptionist interpretation of
capitalist crisis. He points out that the restricted consumption of the
masses is a permanent feature of capitalism.
“But unfortunately the under-consumption of the masses, the
restriction of the consumption of the masses to what is necessary for
their maintenance and reproduction, is not a new phenomenon. It has
existed as long as there have been exploiting and exploited classes.
Even in those periods of history when the situation of the masses was
particularly favourable, as for example in England in the fifteenth
century, they under-consumed. They were very far from having their own
annual total product at their disposal to be consumed by them.
Therefore, while under-consumptionism has been a constant feature in
history for thousands of years, the general shrinkage of the market
which breaks out in crises as a result of a surplus of production is a
phenomenon only of the last fifty years;” (pp. 395-396).
But if under-consumption (in the sense that the workers can’t buy
back all the commodities they produce) is a permanent condition of
capitalism, then how on earth does capitalism survive, let alone
develop? What happens to this excess production (the surplus)?
It is quite true that workers can’t buy all the value they produce.
Surplus value ends up, of course, in the hands of the capitalist class.
This is just another way of saying capitalism is a system where
production is for profit.
This under-consumption, this inability to realise commodities already
produced is really only a potential problem. It would only be a real
problem if all the capitalists were to instruct their workers to make
workers’ wage goods. In that case the workers would be unable to buy
those goods.
But why should we assume that this will happen? The workers haven’t
got the money to buy the goods, because the capitalists have kept some
of it. That is their surplus value. What do the capitalists do with it?
There are two possibilities: either they consume the entire surplus
unproductively (very rare in practice). In this case the surplus is
still spent. It is spent by the capitalists on themselves. The
alternative is that the capitalists invest it. If they invest it, that
also ‘solves’ the problem of under-consumption for the time being –
because the surplus has now been spent on capital goods.
Not all capitalists oversee the production of goods they expect to be
sold to the workers. Iron and steel capitalists never sell their
products to the masses (though, of course their output enters into
consumer goods targeted at workers). They are producing capital goods
and they know it. Other capitalists specialise in the production of
‘luxury’ goods for consumption by capitalists. Marxists call the
products of this sector elements of uncapitalised surplus value. For
both these sections of the capitalist class their customers are
exclusively other capitalists.
The demand for capital goods, for workers’ consumption and for luxury
goods is provided by the incomes of the classes generated in the
production process, and by the investment decisions of the capitalist
class. Of course how much you ‘need’ is determined under capitalism by
how much money you’ve got. We expect the relevant sort of goods in
roughly the right proportions to meet this purchasing power to be
provided by the usual operation of the market. Capitalists in search of
profit try to produce commodities aimed at meeting a need. (Actually
capitalists produce nothing. Workers produce commodities under the
instruction of capitalists. Please accept this as shorthand.) If nobody
wants the good, nobody will buy it and the capitalist will make a loss.
And purchasing power is derived from the revenues from capitalist
production. (Getting the proportions of the material elements of
production right is a real problem in an unplanned system. We take it up
later.)
There is no reason at all, at this level of analysis, why all these
products cannot be sold to people (workers and capitalists) who have the
money to pay for them. We should no more automatically expect
capitalism to produce too many workers’ consumption goods than too many
luxury goods or too many capital goods.
So there is sufficient purchasing power in the economy to buy all
that is produced. And the goods should be in place to satisfy this
purchasing power. There seems to be no over-production/under-consumption
problem, since markets exist for the surplus. There is always someone
out there to buy these products and someone else to sell them. The cause
of capitalist crisis must be sought elsewhere.
If the crisis were really caused by the ‘restricted consumption of
the masses’ we would expect it to be manifested by an over-production of
consumer goods relative to capital goods. In fact this is by no means
the usual case in actual capitalist crises. Most crises have actually
begun in the capital goods sector. If the crisis were caused by
under-consumption we would expect the workers to suddenly cease
providing an adequate market for the capitalists, so triggering the
crisis.
Actually workers’ consumption usually falls as they are laid off as a
result of the crisis, further shrinking markets. Their restricted
consumption is thus a symptom of the crisis, not its cause. If
capitalists generally accumulate a great part of their surplus, then we
can expect the capital goods sector to grow relative to consumer goods
in the economy. But the effect of this accumulation of capital is to
make the workers more productive and therefore make the problem of
over-production potentially more severe in the future.
Over-production and under-consumption
Aren’t under-consumption and over-production really the same thing?
In one sense they are opposite sides of the same coin. Engels
polemicises against the concept of under-consumption because it locates
the problem with the restricted consumption of the masses, while the
notion of over-production poses it as a crisis of capitalism. We prefer
the expression ‘over-accumulation’, which was introduced by Marx in Capital Volume III.
This points to over-production in relation to the possibility of
profit-making. We shall return to this. However there seems little point
arguing over a word if we agree on the underlying processes.
We have seen earlier that Engels was quite happy to describe
capitalist crisis as one of over-production. The difference he draws
with under-consumption is that the crisis occurs because the capitalists
produce too much, not because the workers suddenly stop buying and
consuming enough. Anyway what is ‘enough’ or ‘too much’? The concept of
over-production emphasises that what has been produced cannot be sold.
This is true. But it does not explain when, where and why the realisation crisis breaks out.
The theories of under-consumption and over-production cannot be used
to predict the onset of crisis. We cannot allow ourselves to be reduced
to saying after the event, “There you are, we always said this would
happen.”
Lenin also had to argue in his early writings against the
under-consumptionist views of the Narodniks. They alleged that
capitalism couldn’t develop in Russia because it restricted the
consuming power of the masses. Without in any way denying that
capitalism kept the many poor, Lenin showed in many books, culminating
in The development of capitalism in Russia, how it was actually
creating a market there. Rather than growing and making things for
themselves, peasants and artisans were increasingly deprived of access
to the means of production and forced to use the market for their daily
needs.
In Capital Volume II, Marx pointed out that towards the end
of the boom, as it was on the point of toppling over to bust when there
was relatively full employment, was the time when workers were likely to
make gains in real wages and increase their share of national income.
“It is a pure tautology to say that crises are provoked by the lack
of effective demand or effective consumption…If an attempt is made to
give this tautology the semblance of greater profundity that the working
class receives too small a portion of its own product and that the evil
would be remedied if it received a bigger share if its wages rose, we
need only note that crises are always prepared by a period in which
wages generally increase and the working class does receive a greater
share in the part of the annual product destined for consumption.” (p.
486)
Under-consumption: Baran and Sweezy
Sweezy favoured what he calls the under-consumption school. In The theory of capitalist development (in Chapter XII, entitled Chronic depression?)
He argued, “That capitalist production normally harbours a tendency to
underconsumption (or overproduction) was demonstrated in Chapter X…” (p.
216) Chapter X is one of the chapters in his book mentioned at the
beginning of this article (see What we are attempting).
He goes on, “Since the tendency to underconsumption is inherent in
capitalism and can apparently be overcome by the partial non-utilization
of productive resources, it may be said that stagnation is the norm
towards which capitalism is always tending.” (ibid. p. 217)
Sweezy then goes on to discuss various processes in modern capitalism
which may counter the tendency to stagnation by absorbing surplus
resources that would otherwise be unuseable.
He wrote a later book jointly with Paul Baran called Monopoly capital.
Baran and Sweezy still felt in 1966 that capitalism was threatened by a
tendency towards chronic stagnation. They derived this analysis from
left Keynesians such as Kalecki, Steindl and Hansen. Such a perspective
comes naturally to those who, trained in the Keynesian tradition, see
crisis as caused by under-consumption.
Monopoly capital identifies a systematic trend for
capitalism to generate a surplus. “The economic surplus, in the briefest
possible definition, is the difference between what society produces
and the costs of producing it.” (Monopoly capital p. 23) This
surplus of saving occurred because money couldn’t all be spent. It was
vital for capitalism’s survival to find ways of investing this surplus.
Chapter 3 of Monopoly capital deals with the Tendency of the surplus to Rise and Chapters 4-7 – virtually half the book – with different ways of absorbing this surplus. For instance Chapter 7 is titled The absorption of surplus: militarism and imperialism.
Readers familiar with the theory of surplus value will realise that
this is a different concept of surplus from Marx’s. Briefly, Marx
divided the labour added in the production process in any form of class
society into necessary labour and surplus labour. Necessary labour is
that part of the work done required to feed, clothe and house the
toiling population. They will be maintained at the level of subsistence
which is usual in that form of society at that time. The toilers may be
slaves, feudal peasants or wage workers under capitalism. In every case
they produce a surplus above their own requirements. This surplus is
appropriated by the ruling class, whether the latter are slaveholders,
feudal lords or capitalists.
The index to Monopoly capital does not make reference to the
words under-consumption, over-production or crisis. The tacit
assumption was that since the Second World War the capitalist system had
overcome its earlier tendency to crisis. So we see that flirtation with
under-consumptionism as a theory of crisis led to an acceptance of the
Keynesian interpretation of capitalist crisis, and to the efficacy of
Keynesian solutions. It seems that Baran and Sweezy felt that, as long
as convinced Keynesians were at the helm of the economy, the mass
unemployment of the inter-War years would remain a thing of the past.
Yet writing in the middle of the most dynamic period of twentieth
century capitalism, the post-War boom of 1948-73, they identified the
principal problem of the capitalist system as to find ways of absorbing
(wasting) a surplus that threatened an era of chronic stagnation. This,
surely, was a fundamental misunderstanding of the nature of the era they
were writing in.
Against Keynesianism
Keynes was a subtle thinker. As an influential economist, his
writings have given rise to different interpretations and schools of
thought. This section is not intended to give a definitive critique of
Keynesianism from a Marxist point of view. It merely shows how Marxist
crisis theory engages with Keynesian analysis and solutions. Keynes was
an intelligent man. He could see that in the Great Depression of the
1930s, the central problem seemed to be a lack of effective demand, of
markets, of ‘over-production’.
The Marxist argument against Keynesianism can be derived from the
critique of over-production above, although it is slightly more complex.
The last quote in the section on Over-production and under-consumption
could certainly be used against proposals by reformists to deal with
capitalist crisis by reflating the economy. The Marxist argument against
Keynesianism is not at base political, though it is true that the
ruling class wouldn’t like to carry out expansionary measures. The
economic establishment usually urges caution upon central bankers and
fiscal probity on the government. But sometimes the ruling class may be
forced to do something it doesn’t like.
The Marxist argument against Keynesian solutions is at bottom
economic. Keynes proposed that the government should reflate the economy
by ‘priming the pump’ – by spending some money. This would have a
knock-on or multiplier effect on the rest of the economy. Prosperity
would radiate throughout society.
If need be, the government could spend money they didn’t have. In
other words they would borrow it. This is called deficit financing. Some
followers have suggested that, by giving capitalism a pick up, taxes
would increase and pump priming would eventually prove to be a ‘free
lunch.’ It would pay for itself.
Marxists believe that Keynesianism doesn’t work. It doesn’t work
because capitalism can’t be made to work. The problem of capitalism in
crisis is not just a matter of inadequate demand – of markets – it’s a
problem of profitable markets. Putting money in
workers’ pockets may create a market for capitalists but it doesn’t give
them any incentive to put their money into production. On the other
side, boosting profits must necessarily be at the expense of workers’
living standards somewhere along the line. There are no free lunches to
be had, as the capitalist world has discovered in the era of mass
unemployment since 1974. Deficit financing doesn’t do away with the
class struggle.
The dilemma of any individual capitalist is that they want to pay
their own workforce as little as possible to maximise profits; but they
want every other capitalist to pay their workers as much as possible so
they will act as a market for the goods. But any attempt to boost
profits hits the workers as a market for capitalist commodities; any
attempt at boosting markets by upping wages or the social wage is seen
as a threat to profits. This is the contradiction of capitalism in
crisis.
A contradiction, as we have seen, is a situation where either
alternative proves impossible. The contradiction is finally overcome by
preparing the way for its recurrence on a larger scale. As Marx puts it,
“World trade crises must be regarded as the real concentration and
forcible adjustment of all the contradictions of bourgeois economy.” (Theories of surplus value Volume II p. 506)
Now it is true that economics is today dominated by neoliberal
orthodoxy, hostile to Keynes and in denial that crisis is inherent in
capitalism. But this may not remain the case for ever. It can be
predicted that reformists will return to the call for Keynesian measures
in the teeth of a crisis. We need to be able to answer them and explain
the real solution to the problems facing the working class.
Say’s Law
We have attempted to refute naive over-productionist theories of
capitalist crisis. But crises happen. At some point capitalists produce
goods that can’t be sold. Nevertheless Say’s law declares that a
realisation crisis is impossible. This theory is accepted by the
dominant equilibrium school in neoclassical economics to this day.
Say’s law was developed by the French economist Jean-Baptiste Say at
the beginning of the nineteenth century. It is usually expressed as
‘supply creates its own demand’ or ‘every seller brings a buyer to
market with him’ or sales = purchases. The idea is that the seller comes
to the market also to buy. If it were an accounting identity expressed
as ‘sales = purchases’ or ‘aggregate supply = aggregate demand’ it would
be true by definition, rather than a ‘law’. In that case sales would be
equated with purchases through forcible quantity adjustments, by
painful contractions in national income, by crises.
But that is not what the capitalist apologists have in mind. Regarded
as an economic ‘law’, Say’s law is plain wrong. It was mistakenly
adopted by Ricardo. Marx made a critique of it in Theories of surplus value Volume II.
He explicitly describes this section as dealing with the possibility of
crisis, rather than a cause. Chapter XVII is subtitled Ricardo’s theory of accumulation and a critique of it. (The very nature of capital leads to crises.) It is a critique of Say’s law. Crises are not only possible, they are inevitable under capitalism.
If we lived in a barter economy, then Say’s law would be trivially
true. If I as a baker exchange loaves of bread with you as a butcher in
exchange for a piece of meat, neither good would remain without a home –
‘unsold.’ (Actually, neither would be ‘sold’ in a barter economy – just
exchanged).
We move to a money economy. As a baker I need to sell my bread, but
I’m not buying meat today. So I exchange my bread for money and then go
shopping for what I want. Marx calls this the C-M-C circuit (commodity –
money – commodity). Say says it’s the same thing as C-C. A modern
capitalist economy is just like barter. Each producer brings equivalent
purchasing power into the marketplace, so everything will be sold.
If Say’s law were right, capitalism would permanently be in full
employment equilibrium. Crisis would be absolutely impossible. Contrary
to what Say’s law suggests, in a money economy the sellers need not buy
at once. They can hang on to their money. If they do so, they are
depriving some other potential seller of a market. Economic processes
take place in real time. In a society of petty commodity producers, the
separation of sale and purchase is likely to be conceptual, not a real
problem. The artisans need to sell their products right away in order to
buy the things they need to live on. The ‘purpose’ of production is
consumption, the satisfaction of the needs of the producers.
It is otherwise under capitalism when production is conducted for
profit. Then it may be entirely rational for sellers to hang on to their
money if the alternative is making a loss. Interestingly, Marx’s
critique identifies the same points as those developed by Keynes, who
definitely had not read Marx.
Whichever way we look, it is the nature of capitalism as production for profit that is at the root of the crisis.
Disproportion
Another argument is that the crisis is caused by capitalist anarchy.
Capitalist firms are dependent on one another. How much they produce
depends on how much other firms produce. This is true of their inputs
(of raw materials etc.) and for the sale of their finished products. But
capitalist firms are unaware of their interdependence and regard
themselves as independent, free spirited buccaneering outfits. Even if
they became aware of their mutual interdependence, they would not be
able to communicate this to other firms.
So capitalists can produce commodities in the wrong proportions. Marx
investigated the problem of the reproduction of the material elements
of production in Capital Volume II. He identified the problem
of disproportion between different sectors of production, particularly
between Dept I (capital goods) and Dept II (consumer goods).
Each capitalist is producing outputs that are inputs for other
capitalists. National income consists of a circular flow of commodities,
and every capitalist has to find the material components of production
in the marketplace. Definite proportions between the different sectors
of production have to be established for this to happen. But of course
the individual capitalist just takes it for granted that this will
always happen.
To keep things as simple as possible we assume that all goods take a
year to produce. They are all swapped round at the end of the year and
production then resumes for the second year.
Marx divided the value of a commodity (or the total value produced in
any sector of production) into constant capital such as plant and raw
materials (c), variable capital which is the outlay on wages (v) and
surplus value (s). Surplus value is conventionally divided into rent,
interest and profit. Marx started off with the case of simple
reproduction, where none of the surplus value is capitalised – ploughed
back into production. All the surplus value is consumed unproductively
by the capitalists. Production in the next period is carried on
unchanged, so output continues at the same level as before.
Let us assume an economy where:
Dept I is composed of 4,000c + 1,000v + 1,000s.
Since Dept I produces all the capital goods in the economy, it is
able to replace all its constant capital ‘in house’. But it will have to
purchase the components of variable capital and surplus value from Dept
II, the sector producing consumer goods.
In the same way we have:
Dept II, consisting of 2,000c + 1,000v + 1,000s.
Dept II can supply the elements of variable capital and surplus value
from its own output, but will have to buy replacement constant capital
from Dept I.
The economy as a whole therefore consists of -
Dept I: 4,000c + 1,000v + 1,000s
Dept II: 2,000c + 1,000v + 1,000s.
The conditions for balanced reproduction are that Dept I (v + s) =
Dept II c. These are the elements of reproduction that have to be
exchanged between the two Departments. In this case Dept I is (1,000 +
1,000) = 2,000, which is equal to Dept II c.
Simple reproduction is the simplest case, showing the need for
proportionality between the different sectors of production. Marx goes
on to examine the case of expanded reproduction, where some of the
surplus value is accumulated as additional constant capital and
production in the next period takes place at an expanded level. The
reader suspects and fears (correctly) that the arithmetic is likely to
prove more difficult in this case. However, enough has been said for now
to establish the importance of proportionality between the sectors in
capitalist production.
How are these proportions established in practice? It is a central
feature of capitalism that the system is unplanned. It is actually a
permanent feature of capitalism that there is localised overproduction
of some commodities and underproduction of others at the same time.
Corrections are made after the fact, through falling prices and profits
in the case of overproduction, and rising prices and profits in the case
of scarcity. This in turn will cause capital flows into and out of
those sectors. The question is – why should this continuous process lead
to a generalised crisis?
It is true that in a horse race, if one horse trips that can bring
the others down. But why should the horse trip in the first place?
Surely the molehill (or whatever) is what we would say caused
the accident? It is not just that the horses are bunched – competing
with one another, yet dependent on the other horses keeping the right
distance. Yet disproportion between different sectors is often presented
as another cause of capitalist crisis.
In any case why ‘privilege’ the capital goods and consumer goods
sectors? In a model of the economy composed of two sectors, we are in
effect simplifying it down to two firms, one producing ‘capital goods’
and the other ‘consumer goods.’ According to Alex Nove (Economics of feasible socialism)
there were 12 million different commodities in Russia at the time he
was writing his book. Each one has a quantitative relationship to every
other one. If more ball bearings are produced, for instance, some of the
extra workers employed will buy woolly hats with pompoms. There is
therefore a coefficient between woolly hats and ball bearing production.
In principle these proportions could be worked out and set up in a
giant input-output table such as those pioneered by Leontieff. Since it
is not in the interests of individual capitalists for their system to go
into crisis, the central planning authority in a hypothetical planned
capitalist system could use a Leontieff input-output table to work out
the necessary proportions and instruct firms how much to produce. In
principle could a planned capitalism be a crisis-free capitalism? I
argue that crisis-free capitalism is impossible, since capitalist crisis
is not caused by disproportionality.
Disproportion in Rosa Luxemburg’s The accumulation of capital
So the disproportion theory of crisis is just another example of capitalist anarchy or planlessness. As we have seen in Capital Volume II
Marx looked at the problem of proportionality in terms of the relations
between Department I and Department II. The most famous attempt to turn
this analysis into a theory of crisis was made by Rosa Luxemburg in her
book The accumulation of capital. She detected a tendency for
Marx in his schema to establish proportionality between the two
departments by arbitrarily restricting the amount of surplus value that
was capitalised in the consumer goods sector. If the consumer goods
sector capitalised the same proportion of the surplus value generated as
the capital goods sector, there would be a systematic tendency for
over-production of consumer goods relative to capital goods.
Here is a sample of her reasoning. “Marx enables accumulation to
continue by broadening the basis of production in Department I.
Accumulation in Department II appears only as a condition and
consequence of accumulation in Department I, absorbing in the first
place the other’s surplus production and supplying it secondly with the
necessary surplus for its additional labour. Department I retains the
initiative all the time, Department II being merely a passive follower”
(p. 122). Was Marx cheating?
In Rosa’s view, if we correct the schema to allow Department II to
accumulate at the same rate as Department I, we would see a systematic
tendency towards a relative over-production of consumer goods. This
over-production of consumer goods relative to capital goods would then
force advanced capitalist countries to seize lands not yet in the
capitalist orbit in order to dump its excess of goods upon them. Rosa’s
‘correction’ thus yields a theory of imperialism.
There are a whole series of misunderstandings at work here. The first
pertains to Marx’s method. The reproduction schemes in Volume II are
not intended to be a description of the real world. They are used to
pose the problem of proportionality between the different sectors of
production. Marx was the first economist to see this as a problem since
the Physiocrats, who were by this time neglected and misunderstood. In
my view Marx was able to see this as a problem because he was a
socialist and perceived the problems of planning the economy. Marx’s
method, as we have seen, was one of increasing concretisation in his
analysis. The posing of the problem of proportionality was one stage in
his analysis of capitalism as a system. It was not the last word.
Secondly, note that accumulation in Volume II takes place
extensively. By that I mean the following. In the case of expanded
reproduction, if the capitalist originally lays out c400 and v100, then
he receives surplus value of s100. Deciding to capitalise half, he then
adds 40 to constant capital and 10 to variable capital in the same
proportions as at the original level of output. Production is expanded,
but there is no technical innovation. There is no tendency to increase
the organic composition of capital, as we would expect with accumulating
capital. (The organic composition of capital is discussed in more
detail in the section on the rate of profit.)
As Lenin pointed out in The characterisation of economic romanticism,
Rosa’s analysis does not hold up in her own terms. “The romanticist”
(i.e. Narodnik, who was making the same point as Luxemburg) “says:
capitalism cannot consume the surplus value and therefore must dispose
of it abroad. The question is: do the capitalists supply foreigners with
products gratis, or do they throw them into the sea? They sell them –
hence they receive an equivalent; they export certain kinds of products –
hence they import other kinds.” Commodities that are sold in
non-capitalist sectors are not thrown into the sea. They are exchanged
for money, purchasing power that re-enters the system, and so ‘dumping’
goods in non-capitalist regions does not solve the problem of the
over-production of consumer goods for capitalism.
At several points Luxemburg raises the problem of ‘where does the money come from?’ (for instance Chapter 5. The circulation of money).
Surely nobody really sees this as an issue with the credit creation
possibilities of modern capitalism. And Rosa’s marvellous historical
section on imperialism and the third world (Section 3) does not back up
her central thesis – it shows capitalism increasingly encroaching on
non-capitalist parts of the world. But we all agree that’s what
happened!
Finally, Rosa treats the two Departments as like two independent
super-tankers, set on their separate courses. In fact these Departments
are made up of firms operating within a single capitalist economy. If
there is systematic relative over-production of consumer goods, that
will cause their price to fall relative to capital goods. That in turn
will reduce profits in the consumer goods sector. Capital will flow
towards the capital goods sector till the adjustment is completed. In
marginal cases, such as a capitalist selling computers, he will just
market them as capital goods rather than consumer goods. In most cases
this adjustment is likely to be messy, wasteful and take place after the
fact. But what’s new about that under capitalism?
Disproportion: fixed capital and the cycle
As a matter of fact, investment is the most volatile component of
national income. The boom-slump cycle is thus an investment cycle. Booms
correspond to periods with high profits leading to high levels of
investment, while slump is a period when profits collapse, leading to
steep falls in investment.
“Just as the heavenly bodies always repeat a certain movement once
they have been flung into it, so also does social production, once it
has been thrown into this movement of alternate expansion and
contraction. Effects become causes in their turn, and the various
vicissitudes of the whole process, which always reproduces its own
conditions, takes on the form of periodicity.” (Capital Volume I p. 786)
Here Marx compared the economic cycle with the movements of heavenly
bodies, such as comets. Once put in orbit for any reason they continue
to circulate round their orbit with great regularity. Once a great
volume of investment comes on stream at the beginning of an upswing, we
can expect a mass of this investment to become obsolescent at about the
same time later on. This will produce an investment cycle linked to the
boom-slump cycle. We have the same problem as the astronomer who wants
to find out how Halley’s Comet got into its present orbit. We are still
not able to explain why capitalism goes into crisis when it does.
“To the same extent as the value and durability of fixed capital
applied develops with the development of the capitalist mode of
production, so also does the life of industry and industrial capital in
each particular investment develop, extending to several years, say an
average of ten years. If the development of fixed capital extends this
life on the one hand, it is cut short on the other by the constant
revolutionising of the means of production, which also increases
steadily with the development of the capitalist mode of production. This
also leads to changes in the means of production; they certainly have
to be replaced because of their moral depreciation long before they are
physically exhausted. We can assume that, for the most important
branches of large-scale industry, this life cycle is on average ten
years. The precise figure is not important here. The result is that the
cycle of related turnovers extends over a number of years, within which
capital is confined by its fixed component, is the material foundation
for the periodic cycle…But crisis is always the starting point of a
large volume of new investment. It is also therefore, if we consider the
society as a whole, more or less the new material basis for the next
turnover cycle.” (Capital Volume II p. 264) We shall try to
show later that the cycle is primarily caused by movements in the rate
of profit, and that the profit cycle produces a corresponding investment
cycle.
November 2007
To be continued…..