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Capitalist crisis examined

posted 2 Mar 2010, 02:44 by M MacDonald   [ updated 15 Mar 2010, 16:03 by Admin uk ]
By Alan Woods

Marx explained the fundamental law of capitalist economics: namely, that the profits of the capitalist are only the unpaid labour of the working class. For this very reason, the switch from labour to machinery (although in itself progressive and necessary) eventually gives rise to the following contradiction: that the capitalist cannot squeeze an ounce of surplus-value from machinery. Only human labour power has the magical property of producing new value. For this reason, the introduction of labour-saving machinery, which logically ought to lead to a reduction of the working-day, the prior condition for the genuine emancipation of human beings from wage-slavery, in practice always leads to an increase of exploitation and specifically to an increase of the hours worked (absolute surplus value) or the intensity of work (relative surplus value), or both.

It is true that the new technology has given rise to a notable increase in productivity in the sector concerned. It could hardly be otherwise! The main purpose of all new technology is to increase productivity through an economy of labour-time. Otherwise there would be no point investing in it. In the past decade, value-added per worker in the information technology sector has gone up at an annual average of 10.4 percent: a very considerable increase. But what is not clear is that this has had an effect in boosting productivity in the US economy as a whole. The statistics rather give the opposite impression: that the last period has seen no improvement in productivity in the US economy taken as a whole. Investment in computers in the USA increased 14 times in the course of the 1990s. But other investment rose hardly at all. The boom in IT has therefore been the exception, not the rule. This fact reveals the extent to which growth in the USA is dependent on a single sector, and must stand or fall together with it.

Robert Gordon, professor of economics at Northwestern University, states:

"The productivity performance of the manufacturing sector of the US economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-99 compared to 1972-92, but productivity growth in durable manufacturing stripped of computers has decelerated even more." (The Economist, 24/9/99.)

The advocates of the New Economic Paradigm claim that the gains in productivity represent a "secular trend" in the US economy. In fact, it appears that productivity growth is now reaching its limits. This is shown by the most recent figures. After a big increase in the first quarter of 1999 (3.6 percent) it fell back sharply to a mere 0.6 percent in the second quarter. This exposes the hollowness of the assertion that the New Economic Paradigm means that productivity is set to increase almost indefinitely. In reality this assertion is based on no empirical evidence whatsoever.

In every boom we see the same irrational enthusiasm of those involved in the chase after super profits, which, for the majority, turns out to be an illusion. At a certain moment, over-investment leads to over-production. As Marx explains:

"The ultimate reason for real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Marx, Capital, vol. 3, pp. 472-3.)

This stage has already been reached in Asia which is afflicted by a general over-production of goods: computers, chips, cars, steel, textiles, videos, televisions, etc. This in turn leads to a general fall in prices, and not only in Asia. The collapse of the Asian market and a flood of cheap goods on world markets (particularly the USA) puts further pressure on prices in the USA itself, where the market is becoming increasingly crowded. It is at this stage in the cycle that the contradictions of the capitalist system of production begin to manifest themselves. The new technology has by no means abolished these contradictions.

Limits of capitalist accumulation

Despite appearances to the contrary, in the foundations of the system, the old inescapable laws are quietly but firmly asserting themselves. As capital accumulates, the proportion of constant to variable capital increases, giving rise to a change in the technical composition of capital. In absolute terms, variable capital may increase (more workers may be employed). But the proportion of living labour in relation to constant capital will decline. However, the increase in the productivity of labour is accompanied by a decline in the share of variable capital (wages). And although nominal and real wages may rise, the rate of exploitation increases.

The frantic race after profit inevitably leads to overproduction. Overproduction always makes its appearance at the peak of the boom, preceding the collapse. Firms try to get rid of their unsold stocks of goods. There is a frantic bout of price-cutting, discounting, even selling at prices below the cost of production (dumping). At the same time, production keeps expanding, driven by competition, further aggravating the problem of overproduction. This is particularly the case with the new technology, which relies heavily on the rapid production of new models, more powerful computers, etc. But in a situation where most families already possess at least one computer, this process must eventually reach its limits. The profits obtained by upgrading existing computers do not justify the high costs of research and development, new plant and so on.

There are signs that we are approaching this phase in the cycle. Already in the USA we see the existence of low capacity utilisation. It is not possible to raise prices, given the existence of huge stocks of cheap products in Asia and competition between the US manufacturers themselves. On the other hand, with near full employment and even labour shortages in some areas, wages will tend to rise. In the past few months, the price of oil and other raw materials have started to recover. On the other hand, the strong dollar which helped to keep prices down has begun to falter. Profit margins are under assault from all sides. In this context, the threat of a rise in interest rates threatens to provide the coup de grace which will puncture the boom and lead to a collapse of investment.

The new technology and new production techniques may aggravate the problem of overproduction, but they certainly cannot avoid it. The big computer producers rely heavily on a rapid turnover. And since each producer is engaged in a fierce struggle for market share, they are constantly expanding potential supply, a process which must eventually produce a glut of computers on the market and falling prices. This can already be observed in practice, and must express itself at a given moment in falling profits. On the other hand, new methods of production, such as just-in-time production, which are intended to match production and sales exactly through inventory controls, have signally failed in their objective. In theory this method avoids the building-up of stocks which leads later to a cut-back in production. In practice, however, it does not work. The level of stocks kept by a firm is lower, but stock-building turns out to be just as volatile as ever, and therefore just as capable of depressing growth as before. Swings in stockbuilding were, in fact, a major factor in the 1990-2 recession in both Britain and America, accounting for three-fifths of the drop of America's GDP. In a socialist planned economy it would be possible to ensure that supply and demand balanced out, avoiding wasteful and destructive crises of overproduction. Under the anarchy of capitalist production, such crises are a necessary and unavoidable condition of existence—the New Economic Paradigm nothwithstanding.


The rate of profit

Contrary to the grandiose claims made on its behalf by the theorists of the New Economic Paradigm, there is nothing either miraculous or even very special about information technology. Of course, it is a wonderful development of human knowledge and technique, pregnant with marvellous possibilities for a future world socialist planned economy. But for the capitalist system it is just another field of investment and a way of getting rich quick. And some have got very rich very quickly indeed. As always, those capitalists who are the first to enter a new field of investment can make super profits far above the average rate of profit, at least for a time. But after a while others follow suit. They all pile in, invest, build new plant and produce and sell until prices begin to fall and the rate of profit averages out and falls to a more normal level.

The profits of the capitalists can only come from the unpaid labour of the workers. The increased organic composition of capital inevitably leads to the tendency of the rate of profit to fall. This tendency has been observed by many bourgeois economists, who were, however, unable to explain it. Marx was the only one to provide a scientific explanation of this phenomenon. But Marx also explained that the law was by no means absolute, but only a tendency that manifested itself in the long run. There could be whole periods when the tendency might not be observed because of countervailing tendencies in the capitalist economy. As a matter of fact, the capitalists can put up with a falling rate of profit, as long as the mass of profit is maintained. But at a certain stage the mass of profit starts to fall. At this point there is a collapse of investment, and a slump commences.

The question is therefore not why there are crises in capitalism, but rather why the capitalist system is not always in crisis. There are, in fact, a series of methods whereby crises can be postponed. The whole history of capitalism is a history of attempts to overcome its fundamental contradictions. Capitalism, as Marx explained, is indeed capable of solving its contradictions in the short run—but only at the cost of reproducing them later on a far bigger and more explosive scale. This remark is very relevant to the present situation in world capitalism.

In the third volume of Capital, Marx details the various ways in which the capitalists can counteract the tendency of the rate of profit to fall. The tendency can be combatted by various means: a) the cheapening of commodities, b) increased exploitation of labour (through absolute and relative surplus value), c) increased turnover, d) world trade (especially with colonial countries). All these factors have been in play in the present boom. The application of new technology has led to a cheapening of the elements of production (e.g. computers). There has been a lengthening of the working day and a remorseless pressure on the workers through speed-ups etc. The new technology itself has greatly added to this exploitation. Things like mobile phones, pagers, laptop computers enable the boss to enslave the workers (including the white collar workers) completely and keep them at his beck and call twenty four hours a day. The working day can be increased almost without limit. Turnover has increased. The exploitation of the world market ("globalisation") permits a huge increase in production and sales. Trade with the underdeveloped countries allows the advanced capitalist countries to exchange less labour for more.


Cheapening of elements of production

First, let us consider the cheapening of the elements of production. This is related to the productivity of labour. A relatively smaller number of workers produce a bigger amount of commodities. This remains true even when the number of workers increases in absolute terms. Let us quote a specific example. NAISTAR of Indiana is a major engine producing company and one of the top 10 manufacturers in the USA. Since 1995 the company spent 285 million dollars on improvements in one plant (on computer based new equipment). The results were as follows: in 1994 900 workers produced 175 engines a day. In 1999, 1,900 workers produced 1,400 engines a day. That is to say, the workforce doubled, but production went up eight times.

The increased productivity is achieved partly—but only partly—through the use of new technology. Machinery wears out through use (or disuse), but also through what Marx called moral depreciation—that is, obsolescence. Under modern conditions, machinery and plant become obsolete even more quickly than in the past. Given the huge sums involved, the capitalists must ensure that their machines are utilised to the fullest extent. This is the objective reason for the extension of the working day and the remorseless pressure on the workers to work harder. Having once spent such huge sums, the overriding concern of the capitalist is to recover their outlay and make a profit. The ways in which this is done have not varied substantially since the days of Karl Marx. Merciless pressure is exerted on the workforce to work harder, to strain every nerve and muscle and to work long hours of overtime in the cause of surplus value. In this way, profits can be made, at least initially.

The essence of productivity is to achieve an economy of labour time—to achieve a shortening of the time needed to produce a commodity. But the increase in productivity leads to further contradictions. Marx explains:

"The productiveness of machinery is, as we saw, inversely proportional to the value transferred by it to the product. The longer the life of the machine, the greater is the mass of the products over which the value transmitted by the machine is spread, and the less is the proportion of that value added to each single commodity." (Marx, Capital, vol. 1, 15; 3b.)

New value cannot be added by machinery (constant capital), but only by the labour of the working class (variable capital). By reducing the element of living labour, the application of new machinery thus has the effect of cheapening the price of commodities. If productivity rises, a smaller amount of labour is expended on the production of an individual commodity, which thus encapsulates a smaller amount of value. Thus, its price will fall. This phenomenon can be observed in every capitalist cycle, and the present one is no exception. Incidentally, the cheapening of the price of commodities also has the effect of holding down wages, since a smaller amount is necessary for labour to reproduce itself.

For example, the continuous fall of the price of integrated circuits means that the price of a top-of-the-range mobile phone has dropped from $1,000 to $350 over the past four years. Similar examples can be cited across the entire range of new technology. The Financial Times points out that "in 1996 and 1997, the last years for which detailed data are available, falling prices in IT-producing industries lowered inflation in the US by an average 0.7 percentage points, contributing to the remarkable ability of the US economy to control inflation in a period of historically low unemployment." (The Financial Times, 1/9/99.)

This has important implications for the economy as a whole. For workers as consumers it means that a whole range of goods that were previously inaccessible because of high prices now become normal household goods. This benefits the capitalists in two senses. Firstly, the market for their products is considerably widened. Secondly, the cheapening of commodities also contributes to the cheapening of that most precious of all commodities, labour power, holding wages in check. Real wages increase to the degree that prices fall, and the illusion is created (assiduously cultivated by the defenders of the system) that workers are better off than is really the case. All this, in turn, tends to counteract the tendency of the rate of profit to fall.

At the same time, the capitalists boost their profit margins by increasing absolute and relative surplus value. One of the most crying contradictions of the present period is that the application of new technology which ought to signify a reduction of the burden of work has meant precisely the opposite. One scientist recently expressed this phenomenon in graphic terms: "There are more time-saving devices now than in the whole of history. And there is no time." Workers are working themselves to death, not only in the factories but in offices, hospitals and classrooms. All the charm has been taken out of work which everywhere is being transformed into mindless drudgery. Under capitalism, in Marx's words, the introduction of new technology becomes a recipe for "lengthening the working day beyond all bounds set by human nature".

In all capitalist countries, but especially the United States, the working day has been lengthened in the last period, with obligatory overtime, weekend working and the abolition of breaks and reduction of holidays. The result has been a colossal increase in sweated labour, stress and agony of toil. Where work at least for some was once a pleasure and a means whereby men and women realised their potential as human beings—albeit to a limited extent—it has become transformed into an absolute nightmare. The obsession with so-called productivity (i.e. profitability) has taken over not only the production belt but also the hospital, the doctors' surgery and the classroom.

From the capitalist's point of view, this is all good news, since the cheapening of the elements of production is one of the principal devices whereby the rate of profit is maintained or increased. But this also has a downside. Since the profits of the capitalist class consist of the unpaid labour of the working class, the wholesale replacement of labour by machinery must inevitably lead to a loss of surplus value, as Marx explains:

"Now however much the use of machinery may increase the surplus labour at the expense of the necessary labour by heightening the productiveness of labour, it is clear that it attains this result only by diminishing the number of workmen employed by a given amount of capital. It converts what was formerly variable capital, invested in labour power, into machinery, which, being constant capital, does not produce surplus value. It is impossible, for example, to squeeze as much surplus value out of two as out of twenty four workers. If each of these twenty four men gives only one hour of surplus value in twelve, the twenty four men give together twenty four hours of surplus value, while twenty four hours is the total labour of the two men. Hence the application of machinery to the production of surplus value implies a contradiction which is immanent in it, since, of the two factors of the surplus value created by a given amount of capital, one, the rate of surplus value cannot be increased except by diminishing the other, the number of workmen. This contradiction comes to light as soon as, by the general employment of machinery in a given industry, the value of the machine-produced commodity regulates the value of all commodities of the same sort, and it is this contradiction that in its turn drives the capitalist, without his being aware of it, to excessive lengthening of the working day, in order that he may compensate the decrease in the relative number of labourers exploited, by an increase not only of the relative but of the absolute surplus value." (Marx, Capital, vol. 1. 15; 3b.)

How well these words explain what every worker knows! That the present boom has been at the expense of the nervous systems and the muscular stress and strain of the working class. All the smart talk about the alleged "productivity explosion" ultimately boils down to this. However, this increase in productivity (which was in any case limited to just one sector of the economy) has now reached its limits. This was always a question of extracting extra surplus value out of the sweat and strain of the workers, and this has physical limits. The Economist (25/9/99) spells out the position quite blatantly:

"If companies were caught on the hop by the unexpected, and unforeseen strength of the American economy, one way to keep pace with demand (especially in a tight labour market) would be to work existing employees harder." (Our emphasis.)

Thus, the whole issue of productivity boils down, as always, to the old remorseless pressure on workers to produce more in a shorter space of time. This phenomenon can be seen everywhere. Work has become a nightmare, an agony of toil devoid of all enjoyment or human satisfaction. The greed of Capital for surplus value is insatiable. The introduction of new technology is therefore not a means to reduce the burden on working people but on the contrary, a pretext to squeeze the last ounce of unpaid labour from them. But the emergence of near full employment, and in some cases even labour shortages means that it will no longer be so easy to impose further intolerable burdens on the shoulders of the workers. Having already gone through the process of downsizing, outhousing, flexibility, just-in-time-production and the rest of it, the capitalists will find that they cannot squeeze the workforce any further without provoking massive labour unrest.


Commodity prices and the colonial revolution

Another way in which the rate of profit can be increased is through the exploitation of the ex-colonial countries. The systematic plundering of the colonial countries has always been a feature of capitalism from the sixteenth century onwards. But today this super-exploitation has reached new and unprecedented levels. The fact that the peoples of Asia, Africa and Latin America have, through their heroic struggles, attained formal independence does not signify an end to exploitation and oppression. On the contrary. On a capitalist basis these countries are more enslaved today, more dependent on imperialism, than what they were fifty years ago. The only difference is that the old direct military-bureaucratic rule has been replaced by indirect domination through the mechanism of the world market and debt.

The domination of world trade by a relatively small number of big multinational companies armed with vast resources and backed in the last analysis by the armed might of the USA and other imperialist powers, means that they can exert pressure to reduce the price of raw materials and other exports of the Third World countries. Even without this, the exchange of goods between the underdeveloped and advanced capitalist countries is always unequal. To use Marx's expression, more labour is exchanged for less. It is a game the poor countries cannot win. They are condemned to fall ever more deeply into debt. And then they are compelled to borrow from their masters, paying huge sums of interest, which guarantees that they sink ever deeper into misery. To the western capitalists, however, this is an extraordinary stroke of good luck. The low price of raw materials is just another way in which the elements of production are cheapened, and the rate of profit increased. If this means starvation and destitution for millions of human beings, so be it. That is no concern of ours. They should learn to administer their affairs better and follow the good advice of the IMF!

To a certain extent, the post-war economic upswing in the advanced capitalist countries was paid for by the former colonial countries. The imperialists derived vast super-profits from the exploitation of the poorest countries on the planet. The collapse of oil and other commodity prices in the early 1980s was one of the reasons behind the boom of the 1980s and the long-term surge in U.S. stock prices. Marx long ago explained that the development of world trade—particularly trade with the colonial countries—serves to cheapen the elements of production and thus increase the rate of profit. The decline in the cost of commodities decreased the cost of production and the cost of living in the industrialized countries, facilitating capital formation while easing pressure caused by consumer demand.

The fall in commodity prices was achieved at the expense of the poorest people on earth. Through the world market and the unequal terms of trade, the advanced capitalist countries exchanged more labour for less. This has led directly to the third-world debt crisis, which in turn subjects the colonial peoples to a new form of looting in the form of high interest rates. The blood, sweat and tears of hundreds of millions of men, women and children are coined into gold for wealthy parasites, while the substance and wealth of nations are drained away in a futile and never-ending struggle to service the debt. This is a finished recipe for a new and explosive stage in the colonial revolution in the next period. Yet it is presented as a boon by the apologists of Capital.