Karl Marx and the World Crisis

[chlamor]

Marx's theory of economic crisis

By STUART EASTERLING

CAPITALISM IS an economic system that is inherently crisis-prone. It is driven by forces which cause it to be unstable, anarchic and self-destructive. This is as true today as it was over 150 years ago, when Karl Marx and his collaborator Frederick Engels described capitalism in the Communist Manifesto as "a society that has conjured up such gigantic means of production and of exchange, [that it] is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells."1

Indeed, today’s world of wild stock market booms and slumps, recurring layoffs and long-term unemployment, corporate scandals and power blackouts, seems to fit their description better than ever before. The present economic downturn is no exception. The United States is currently in the middle of the longest period of job losses since the Great Depression of the 1930s. In fact, the U.S. economy today has 2.6 million fewer jobs that it did two years ago. Meanwhile, over two million people have lost health insurance coverage and personal bankruptcies hit a record of over 1.5 million households in 2002.2 In short, economic crises–recessions and depressions–were a part of capitalism at its birth and, despite promises to the contrary, continue to plague the system to this day.

The importance of crisis theory

Understanding the drive toward crisis is central to Marx’s analysis of capitalism and to his arguments for the possibility and necessity of revolutionary change. For Marx, the existence of inequality or poverty alone is not what turns workers against the capitalist system. These problems have always been a part of the everyday workings of any "healthy" capitalist economy. Of greater social and ideological impact is the insecurity, instability and ruin that economic crises periodically inflict on the lives of working-class people. And so in Capital, Marx argues that capitalism

dispels all fixity and security in the situation of the laborer…it constantly threatens...to snatch from his hands his means of subsistence, and...make him superfluous. We have seen... how this [class] antagonism vents its rage...in the incessant human sacrifices from among the working class, in the most reckless squandering of labor power and in the devastation caused by a social anarchy which turns every economic progress into a social calamity.3

In short, crises mean that the very functioning of the capitalist system cannot guarantee even the crumbs that are thrown to the worker.
Crises have an impact on the capitalists’ fortunes as well. They break up what Marx called the "operating fraternity of the capitalist class" and produce an all-out fight for survival between capitalists themselves, and of capital against the working class.4 Because of this, even relatively minor economic crises can lead to political instability, ideological confusion among the ruling class, an intensification of the class struggle and war. Marx argues that crises "carry the most frightful devastation in their train, and, like an earthquake, cause bourgeois society to shake to its very foundations."5 Thus it is out of the impact of capitalist crisis that the possibility of revolutionary change emerges, not as a guarantee, but as a possibility in the hands of the working class. As the Russian Marxist Vladimir Lenin once noted, "oppression alone, no matter how great, does not always give rise to a revolutionary situation in a country. In most cases it is not enough for revolution that the lower classes should not want to live in the old way. It is also necessary that the upper classes should be unable to rule and govern in the old way."6 This condition is created and furthered by economic crisis, along with the instability, polarization and conflict it generates.

Moreover, the persistence of crises under capitalism makes revolutionary change not just possible, but also an urgent necessity. As Marx and Engels argued in the Communist Manifesto, the class struggle historically was "a fight that each time ended, either in a revolutionary reconstitution of society at large, or in the common ruin of the contending classes."7 That capitalism today could produce the "common ruin" of everyone involved is a distinct reality. The "most fearful devastations" described by Marx, resulting in poverty, hunger, environmental destruction and war, have only increased since his time. Because of this, Marx and Engels argued that the crisis-prone nature of capitalism creates the need for socialism, not just to abolish poverty and inequality, but to eliminate the recurrent social and economic disasters that are endemic to the capitalist system.

This article will attempt to lay out the basic elements of the crisis theory found in Marx’s writings on economics, beginning with a review of some of the fundamentals of Marx’s analysis.

Marx’s method

Marx’s goal was to "lay bare the economic law of motion of modern society."8 What is it about his economic method that allows it to explain how capitalism works?

The 18th century bourgeois economist, Adam Smith, argued that capitalism and the free market came from a "propensity in human nature...to truck, barter and exchange one thing for another."9 Another capitalist economist, Lionel Robbins, contended that capitalism consists of "a series of interdependent...relationships between men and economic goods."10 In their view, the economic relationships between different people is not what is important–it is the relationship between people and products. In other words, your relationship to a box of Tide is more significant to understanding capitalism than your relationship to your boss.

In contrast, Marx argues in Capital that "the relation between wage-labor and capital determines the entire character of the [capitalist] mode of production."11 His goal was to go beyond just studying the process of exchange (buying and selling), which conceals what is happening under the surface. As Marx put it, "a worker who buys a loaf of bread and a millionaire who does the same appear in this act only as simple buyers, just as...the grocer appears only as a seller. All other aspects here [of the economy] are extinguished."12 By focusing only on the rules and mechanisms of exchange, bourgeois economists will claim that we all participate as equals in a capitalist economy–everyone, whether rich or poor, has the right to buy bread (or a yacht) at a certain price. However, by analyzing the sphere of production as well–"the relation between wage-labor and capital"–Marx is able to expose the underlying class contradictions within the system that are ignored by the capitalist economists.

Bourgeois economists also view capitalist relations as the natural order of things–arising from a "propensity in human nature," as Adam Smith claimed. As a result, for them, "the world-market, its conjunctures, movements of market-prices, periods of credit, industrial and commercial cycles, alternations of prosperity and crisis, appear...as overwhelming natural laws that irresistibly enforce their will over them, and confront them as blind necessity."13 Marx instead argued that "the capitalist process of production is a historically determined form of the social process of production in general."14 He sought to analyze capitalism and the market historically, not as an unchanging product of "natural laws," but as a dynamic system which, like other class societies, comes into being at a particular stage in human history, and is regularly undermined by its own internal contradictions.

According to Marx, at the heart of all human societies was production: the transformation of nature to produce the things needed to maintain the existence of that society. In class societies, the key element is that one class in society takes some of the product of the labor of another class for themselves. Under feudalism, for example, lords would take some of the product of the serfs’ labor. The serfs spent a portion of their workweek producing goods for themselves, and a portion of their labor went to producing goods for the lord. The serfs could produce more than they consumed, and the extra went to the nobles. Marx called this extra labor "surplus labor," and the extraction of it was called exploitation.15

Under capitalism, the two opposites are not lords and serfs, but capitalists and workers. A central element of Marx’s analysis of capitalism is how capitalists are able to obtain surplus labor from workers. Due to the functioning of the market, the way that exploitation takes place under capitalism is more disguised than in previous modes of production. An important tool in uncovering this process is Marx’s "law of value" or "labor theory of value."

The role of the law of value

Every system of production has to regulate how much of people’s labor is spent producing one thing versus another, so that society does not expend labor on things that are useless.16 Generally speaking, in pre-capitalist societies people produced things directly for other people, not for sale on a market–in Marx’s language, they produced for use, not exchange. So they produced for the needs and wants of themselves, their hunter-gatherer community, their family unit, their lord, their slave master and so on. They produced because "our tribe needs deer" or "the lord demands potatoes" or "our household needs firewood."

Capitalism is very different from past modes of production. Under capitalism, nearly all of the products of human labor are commodities, that is, they are produced for sale. Marx called this "generalized commodity production"–people obtain their needs and wants by purchasing them on a market, and people produce what other people need and want by selling things on a market. However, producing things for sale (for exchange) creates a new dynamic, different from societies that produce directly for use. Allocating labor in this kind of economy is regulated by the law of value. A few examples can help explain how this law works.

We can start with a simple example. One of the earliest forms of exchange is of peasant "handicraft" or household-based production. Although these households were largely self-sufficient, candles produced in one peasant family might, for example, be exchanged for a basket produced in another. Residents of different villages might also exchange these goods at a local market. One can imagine such a market where candle makers exchange goods with those who weave baskets. Given the technology of the day, let’s say it takes about eight hours worth of work to weave a basket and just an hour to make a candle. When the peasants go to market, everyone wants to get the most for their labor-time. No one in their right mind would exchange their dozen candles for a basket, because they would be trading something that took them twelve hours to produce for something that could be produced in eight. From the other side, a basket maker couldn’t get away with trying to get 12 candles for his or her basket, no matter how long it took to weave it. A buyer would get a basket from someone else (or they might just make it themselves).17

So the outcome of exchanging goods (a marketplace) is that the amount of labor-time that is necessary to produce something is enforced. Marx called this "socially necessary labor-time"–the standard amount of time deemed necessary to produce a commodity using the best methods and technology that are currently widely available. And a commodity’s "value," in Marx’s terms, was simply the amount of socially necessary labor-time needed to produce it. In this example, the value of eight candles is equal to the value of one basket.

But what if people want more of one commodity than another? We can take a more complex example. Take a community of self-employed artisans who produce for each other on a market. Hence there are tailors and shoemakers and blacksmiths and so on, but no capitalists yet. Marx referred to this semi-idealized type of society, which predates capitalism, as "simple commodity production."18 The producers exchange goods with each other through barter or using some kind of money. The use of money becomes necessary as exchange becomes more complex–when a candlemaker wants to obtain a basket, but the basket-weaver isn’t interested in candles, for example. As a result, some agreed-upon commodity (such as gold) is used as money–"as a universal measure of value," in Marx’s words.19 Thus in the marketplace, money is used to represent the amount of value of the goods you have sold, and also the amount of value of goods you can buy.

As before, each producer wants to get the most for their labor-time. Let’s say a pair of shoes is the same value as a wool sweater from the tailor (they take the same labor-time to produce). These two products will therefore exchange for each other, that is, for the same amount of money.20 However, if the demand for shoes goes up, their price will rise, and so you will get more money for selling a pair of shoes than selling a sweater. The tailors will take note of this. The key is that shoemakers now make more money than tailors do for the same labor-time. So, more current and future tailors will switch to shoemaking, which will bring the price back to the point where products that take the same labor-time to produce will sell for the same price. In this way, the law of value regulates not just exchange, but social production–what gets produced and how people’s labor is spent.21 Though prices may fluctuate with the market, the key factor in how goods are exchanged is the amount of labor-time expended on their production. As Marx writes, "supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself."22

At a certain point in history, simple commodity production (along with other types of societies) gives way to capitalism. Sweaters are produced for a market, but the production process is now controlled by capitalists. The sweaters themselves are made by workers–people who have no choice but to work for someone else in order to survive. (As part of the rise of capitalism, people who historically supported themselves with their own land or tools have to be stripped of these, in order to create a class of workers.) The capitalist does not make sweaters, but he has money, so he opens a clothing factory: he buys tools, and hires some tailors. The sweaters produced by the tailors are the capitalist’s to sell. The labor and tools bought by the capitalist are what Marx calls capital: money invested to make more money. This is different from simple commodity production, where the aim of exchange is simply to sell things you’ve made in order to get the things you need.

But why are capitalists so obsessed with making more money than they started with? This isn’t just due to their greed, but because of competition. Competition forces capitalists to "accumulate capital"–they have to buy more and more labor power and more and faster machines.23 We can use the example of the clothing factory owner to explain this process. Like all capitalists, he has an incentive to produce his goods faster than the standard socially necessary labor-time, so he can undercut his competitors and increase his share of the market. Let’s say that a new loom is invented, which allows tailors to produce a sweater faster, below its current value. The loom is a tool that increases productivity. The owner of the clothing factory starts using looms because his employees can produce more sweaters in a day.

Making the sweater now takes the labor-time of the tailor, and the labor-time of the person who made the loom. This is why Marx says that machines "pass their value" to other commodities–it’s a metaphor to describe the labor-time involved. Machines don’t do this all at once; they are used up, through wear and tear, over a longer or shorter period of time. A certain portion of the value embodied in the machine, in this case the loom, is passed on to each sweater produced, along with the labor newly added by the tailor working the loom. (The materials used to make the sweater, such as wool from the shepherd, also pass their value onto the final product. Making the sweater takes the labor of the shepherd as well.) Most importantly, with the introduction of the loom as the standard technology, the socially necessary labor-time to make a sweater is reduced to the pace of the new machine, and now every capitalist has to buy some looms just to keep up.

If capitalists do not reinvest their money in this way–and hence accumulate capital–they will not be able to produce their goods in the ever-decreasing socially necessary amount of time, and they go out of business. So according to Marx, the capitalist

shares with the miser the passion for wealth as wealth. But that which in the miser is a mere idiosyncrasy, is, in the capitalist the effect of the social mechanism of which he is but one of the wheels…. [T]he development of capitalist production makes it constantly necessary to keep increasing the amount of the capital laid out in a given industrial undertaking, and competition makes the...laws of capitalist production to be felt by each individual capitalist as external coercive laws. It compels him to keep constantly extending his capital, in order to preserve it, but extend it he cannot, except by means of progressive accumulation.24
Thus, the driving goal for the capitalist is not production for use, or production simply as a means to increase his personal consumption. It is production for the sake of money, as a means to further accumulation–every capitalist must accumulate capital or go under.25 As an executive at U.S. Steel once famously declared, "we’re not in the business of making steel. We’re in the business of making money."26

So how does the capitalist end up with more money than he started with? It’s explained by the fact that under capitalism, workers’ own ability to work becomes a commodity–something for sale.27 To explain the consequences of this, Marx makes an important distinction between the terms "labor" and "labor power." Labor power is what the worker sells on the market–his or her ability to work. Labor is the actual work done once the worker arrives on the job–the amount of socially necessary labor-time performed, that is, the value of the goods produced. Profit for the capitalist is possible when the value of the goods the worker produces with their labor in a given period of time is greater than what they are paid in wages. So to make more money than he started with, the capitalist will attempt to pay as little as possible for the worker’s labor power, and will try to get as much labor as possible out of the worker (by intensifying and speeding up work, or by extending the working day, for example). In a given workday, if a worker produces the equivalent of his or her wages in four hours, then the rest of the work performed that day is "unpaid labor," according to Marx. In other words, workers can produce more value than they consume, and the capitalists get to keep the extra.

This is how exploitation happens under capitalism–how surplus labor, what Marx called "surplus value," is extracted. Viewing the economy only in terms of exchange (buying and selling) misses this fact. After all, in the marketplace the capitalist sells his goods for the best price he can, while the worker tries to get the best price for his or her labor power. However, Marx’s analysis helps to explain the relationship between labor and capital in a capitalist economy in a way that bourgeois economics does not.28 What is evident when production is viewed in value terms is that the capitalist must always seek to maximize the surplus value created by the worker at the point of production, whatever the price might be for his goods. When a capitalist talks to his or her employee, it’s usually not about the price of their product, but about how much time it takes to make it.

Moreover, the capitalist’s machines and tools do not produce surplus value, as workers do. A hammer passes its value onto a product, but the capitalist can’t order the hammer to work harder and produce more value (labor-time) than went into making it. Workers’ labor power is the only input to the production process that can give the capitalist more than he paid for, due to the difference between the labor power paid for and the labor performed. (Put another way, a capitalist who owns a restaurant doesn’t look to the stoves and pots and pans he owns to make him money, but rather the cook who works them. This is why Marx called tools and machines "constant capital," while "variable capital" is workers’ labor power put to use for the capitalist.) Furthermore, in a competitive market economy, capitalists, generally speaking, can’t increase their wealth by simply "buying low and selling high"–this is not the way companies such as Boeing, General Electric or Microsoft generated their vast fortunes. In short, the amount of value the capitalist controls (and hence the amount of money the capitalist makes) is generated from exploitation–the extraction of surplus value from workers. This is why Marxists argue that the exploitation of workers is the source of the capitalist’s profit.29 Most importantly, without this profit and the accumulation of capital, the system grinds to a halt. This leads us to crises.

The form crises take under capitalism

At the height of every boom, the apologists for capitalism will declare that the bust will never come, and that the capitalist "business cycle" has been eliminated. So far, they have always been proven wrong. Because of exploitation, profits and capital accumulation are possible under capitalism. But it does not make them guaranteed. If there are no profits and accumulation (or even if they are squeezed) then businesses close, people lose jobs, debts are not paid, banks collapse, governments run out of money–in short, there is an economic crisis.

So what do capitalists have to do in order to turn a profit and accumulate capital? First, they have to succeed in extracting surplus value from workers–obtaining the extra labor-time. In class societies in the past, this first step was enough. Under feudalism, the lord took the grain and eggs and potatoes that the serf produced and did what he wanted with them–ate them, gave some to his hangers-on, gave some to other lords, to the church, etc. But under capitalism, there’s an extra step, because the capitalist generally doesn’t consume the products the worker makes. Rather, the commodities the worker produces have to be sold. As Marx put it in Capital:

as soon as all the surplus labor...possible to squeeze out has been embodied in commodities, surplus value has been produced. But this production of surplus value completes but the first act of the capitalist process of production–the direct production process. Capital has absorbed so and so much unpaid labor…. Now comes the second act of the process. The entire mass of commodities, i.e., the total product...must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the laborer has been indeed exploited, but his exploitation is not realized as such for the capitalist.... The conditions of direct exploitation, and those of realizing it, are not identical.30
So the form that economic crises take under capitalism generally fall under two categories: crises from the inability to extract enough surplus value, and crises from the inability to realize surplus value. Individual capitalists will often have trouble with one or both of these. However, when the economy as a whole is affected, the principal way that realization crises are triggered is due to a phenomenon called "overproduction" or "overcapacity." Crises resulting from the inability to extract enough surplus value are produced by a law Marx referred to as the "tendency of the rate of profit to fall." We will review each of these in turn, starting with a discussion of realization crises.

Crises in realizing surplus value

Surplus value has to be converted into money in order to accumulate capital–"the entire mass of commodities, i.e., the total product...must be sold." But due to the anarchy of the market, selling your product is not a given–Marx argued in Capital that "violent price fluctuations...cause interruptions, great collisions, even catastrophes, in the process."31 The main way crises of this kind develop is due to "overproduction"–too much is produced for the capitalists to sell at a profit.

At the root of this problem is the capitalist drive for accumulation at all costs. It creates an inherent tendency for capitalists to produce without concern as to who might consume. As Marx argues, "since the aim of capital is not to minister to certain wants, but to produce profit…a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier."32 This takes place during every boom: There is a conflict between the drive to generate as much surplus value as possible in order to accumulate capital, and the need to realize this surplus value through sale. In 1999, for example, half the U.S. wheat harvest went unsold, an amount equal to one billion bushels.33 More recently, according to the Wall Street Journal, "U.S. factory usage is at its lowest level in more than 20 years; hundreds of jetliners are mothballed and the rest fly more than a quarter empty; rising apartment vacancies are forcing landlords to cut rents; and unemployment is at an eight-year high. In short, too much supply is chasing too little demand."34 The same pattern has been true in other countries: China, for example, in 1997 "manufacture[d] one million men’s shirts a day, joining the glut of 1.5 billion already stashed in warehouses. There [were] also 10 million unsold watches, 20 million extra bicycles, and 100,000 stockpiled autos and other vehicles."35

Hence, under capitalism, there is a built-in tendency for production to outstrip the market. This isn’t too much production of what people need, but of what people can afford to buy.36 The system can "overproduce" clothes and wheat, yet people will still be cold and hungry because they cannot pay for them. According to Marx:

There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.... There are not too many means of production produced to employ the able-bodied portion of the population. Quite the reverse.... [N]ot enough means of production are produced to permit the employment of the entire able-bodied population under the most productive conditions, so that their absolute working period could be shortened.... On the other hand, too many means of labor and necessities of life are produced at times to permit of their serving as means for the exploitation of laborers at a certain rate of profit...i.e., too many to permit of the consummation of this process without constantly recurring explosions.... Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.37
In short, "there is a limit, not inherent to production generally, but to production founded on capital," because distributing goods is not dependent on people’s needs, but on their ability to buy–their demand.38
Many bourgeois economists still argue that in theory there will always be a demand for things produced, due to a principle called Say’s Law.39 Say’s Law states that everyone who sells something uses that money to buy something in return. So if a worker sells his or her labor, or a capitalist sells his products, they will use the money to buy. Because of this, there will always be enough demand in general.

Marx had several problems with this theory. The first is the case of a capitalist or an industry which produces too much of a particular product in a particular market. This happens all the time, simply because demand fluctuates, and every capitalist wants to corner the market for themselves. Marx argued that overproduction in certain industries could trigger a general crisis of overproduction in the rest of the economy. As he put it, "in times of general overproduction, the overproduction in some spheres is always the result, the consequence, of overproduction in the leading articles of commerce."40 In today’s economy, the "leading articles of commerce" refers to steel or cars or computers, rather than umbrellas. If there is overproduction in these leading industries, they will have to sell at a loss, if they can sell at all. They may have to stockpile products. The capital accumulation in that industry suffers, and they purchase less constant and variable capital. All the other industries that depend on supplying these leading industries are now overproduced. As a result, "the chain of payment obligations due at specific dates is broken in a hundred places."41 The crisis can then spiral from there.

There is another situation where Say’s Law breaks down, in Marx’s view. This occurs when capitalists sell their goods and then refuse to buy–they make money and don’t spend it. (Or alternately, when workers sell their labor power and refuse to consume.) One factor causing this is the role of credit, since capitalists are always in debt: The level of corporate borrowing in the year 2000 was 74 percent of GDP, a record amount.42 Capitalists borrow from the portion of society’s profits and wages that are deposited in banks, with the hope of paying for it later from their own profits, with interest. The role of credit can destabilize capitalist production, however, since it means that during economic booms, "those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers."43 As a result,

every individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund [of money] and being dependent upon his actual returns. [T]he whole process becomes so complicated...that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers [workers]. Thus business always appears almost excessively sound right on the eve of a crash.44
The best known contemporary example of this is the Enron Corporation.

An indebted capitalist can thus end up in a difficult situation. He may have produced a heap of commodities containing lots of surplus value. But the bank does not care how much surplus value or products he has–the bank wants money, and so the capitalist must sell on whatever terms to get that money, even if it means below value, and potentially at a loss.45 As Marx argued, the capitalist economy is dominated by "a whole series of payments which depend on the sale of…commodities within [a] particular period of time," because of debts, and "these compulsory sales play a significant role in crises."46 The outcome of these compulsory sales is that the capitalist doesn’t realize his full surplus value, has less money to reinvest, purchases less constant and variable capital and the crisis can spiral from there.

Another factor in capitalists’ selling and refusing to buy is the tendency of the rate of profit to fall (discussed further below). Even if profit rates decline, as long as big capitalists can expand their investments significantly, they can still maintain or increase their total profit–what Marx called the "mass of profit." For example, if a capitalist makes 10 percent profit on $1 million invested, but only 8 percent profit on $2 million invested, his mass of profit still grows from $100,000 to $160,000. But a point can be reached during a boom where a capitalist does not have an incentive to accumulate further. Imagine if the same capitalist made 10 percent profit on $1 million invested, and then only 5 percent profit on $2 million invested. His mass of profit stays the same, at $100,000, despite having invested an additional $1 million. As Marx points out, "at a point...when the increased capital produces just as much, or even less, [mass of] surplus-value than it did before its increase, there would be absolute overproduction of capital."47 Capital available in the marketplace is now overproduced, as capitalists are increasingly wary of investing their money without a guarantee of a greater return. This "overproduced" capital could thus mean medical equipment sitting idle while nurses are unemployed, simply because the equipment and nurses cannot be put to work at a profit for the capitalist.

A more basic explanation for the phenomenon of selling and not buying is that there is a general tendency for capitalists and bankers (financial capitalists) to hoard money during crises. In 2002, for example, Microsoft was sitting on as much as $5 billion in cash.48 Marx describes this phenomenon as follows: "during crises–after the moment of panic–during the standstill of industry, money is immobilized in the hands of bankers, bill-brokers [speculators], etc.; and, just as the stag cries out for fresh water, money cries out for a field of employment where it can be realized as capital."49 In other words, during periods of capitalist crisis money is tight just at the point when it is most needed. Hence capitalists refuse to invest money, and so purchase less constant and variable capital, and again, the crisis can spiral from there.

So rather than the principle of supply and demand producing a smooth course that determines prices and sales, it is one fraught with instability–"a permanently unhealthy state of affairs," as Engels described it.50 The outcome of this process is often overproduction and crisis, along with the absurdity of mountains of goods going unconsumed that people desperately need.

Crises in extracting surplus value

Marx defined the capitalist’s "rate of profit" as the amount of surplus value extracted relative to the amount of capital invested in machines and labor. According to Marx, the rate of profit gets squeezed by the process of capitalist production itself. And when the rate of profit declines for a capitalist industry or economy, crises can ensue.

How does this occur? One aspect of accumulating capital is that the capitalist has to invest more and more in machines and tools in order to raise productivity and stay ahead of the competition. So the capital they invest is composed more and more of machines ("constant capital") than labor power ("variable capital"). For example, over time, in a particular industry 50 percent then 55 percent then 60 percent of the total capital might go into machines.51 Marx called this a rise in the "organic composition of capital."

Let’s use an example from the real world to understand the consequences of this. Take the case of a commercial blood testing lab–the commodity they sell is the testing of blood. The workers at the lab combine the blood specimens they receive into "pools" of about 500 samples for testing. Everybody in the industry does this by hand, which is very slow. Therefore, there’s a lot of value (socially necessary labor-time) that goes into this commodity. Then, one lab buys a new machine called a Tecan Genesis 200, which pools the blood for you. The same number of workers can pool a much larger number of blood samples in the same amount of time. This lab produces below the socially necessary time (maintained by all its competitors), and so the owner makes a lot of money. This is why capitalists invest in constant capital like a Tecan machine. But eventually his competitors catch on and also invest in the Tecans. Soon the standard socially necessary labor-time drops to the pace set by the new machine.

For a different example, we can use the shoe industry. Let’s assume that the standard socially necessary labor-time to produce a shoe is six minutes, and so 10 shoes get made in an hour. A shoe sells for $10. If one capitalist, with an expensive new machine, can produce 20 in an hour, then he is has an advantage over his competitors. That is, until they all get the new machine, and then everyone can produce 20 shoes in an hour. The standard labor-time to make a shoe is now three minutes, so it is half the value that it was before, and the price falls to $5 a shoe.

At the end of this process the competitors are back on a level playing field. Their workers are more productive–they can make more products in the same amount of labor-time. But the capitalists are left with a much greater investment in constant capital than they had before, relative to the surplus value the workers produce. For capitalists, this is a problem. Most of them made the massive investment just to keep up with their competition–this is another reason why capitalists invest in constant capital like a Tecan machine. (In fact, a Tecan Genesis 200 costs over $100,000.) But they can’t make the Tecan machine itself produce surplus value in order to make back the money. While each worker in the industry can produce a greater number of goods each day, they still work the same amount of unpaid surplus labor-time each day. Using Marx’s formula, the capitalists’ rate of profit will suffer, because the amount of total capital invested has increased, without changing the amount of surplus value generated.52

Marx called this "the law of the tendency of the rate of profit to fall," and felt it was crucial for understanding capitalism. He argued that it was "in every respect the most fundamental law of modern economy, and the most important for understanding the most difficult relations. It is the most important law from the historical standpoint."53 The reason this analysis is important to Marx is because it establishes that "the real barrier of capitalist production is capital itself."54 That is, the inherent drive to invest and increase productivity is the same process that leads the system to crisis.

At the same time, in Marx’s view, this law wasn’t absolute. He argued in Capital that the tendency of the rate of profit to fall was "a law whose absolute enforcement is checked, retarded, weakened, by counteracting causes."55 Some of the counteracting causes Marx lists are: "increasing the intensity of exploitation" (that is, making workers work harder), "forcing wages below their value" (cutting workers’ pay and benefits), "foreign trade and investment" (seeking captive markets and cheaper labor abroad), "a lowering of taxes" and "the devaluing of constant capital" (discussed further below).56 Therefore the law doesn’t claim to be able to predict what the rate of profit for a particular capitalist or industry will be 10 or 20 years from now. In the real world, the manifestation of the law is a process where it clashes with its counteracting causes in a particular place and time. For example, capitalists are forced to fight the law by increasing the level of exploitation and forcing wages below their value. This can offset a fall in profits, if they are successful in forcing workers to work longer and harder for less. This process is the reason why introducing new technology is often coupled with making workers’ lives worse, not better–in a sense, they are made to pay for the profit squeeze the capitalist’s new investments created.

Marx did not believe that the counteracting causes made the law irrelevant, however. Despite their effects, the rate of profit can still be forced down for an industry or economy, and crises will ensue.57 Moreover, Marx saw the manifestation of the law and its counteracting causes as a source of even more instability for the system, not less. If workers fight back against increasing exploitation, it can produce an acute intensification of the class struggle, because the bosses, facing falling profits and competition, have their backs against the wall. Marx also argued that "from time to time the conflict of antagonistic agencies [the counteracting causes] find vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium."58

An example of how the action of the counteracting causes themselves can lead to crises is the process of devaluing constant capital. As already discussed, Marx pointed out that the increasing investment in tools and machines by capitalists in the drive to keep up with each other also makes it harder and harder to make profits. But in a capitalist economy, increasing investment in tools and machines also raises productivity. One effect of this is that the labor-time necessary to make the tools and machines themselves is reduced, making these investments cheaper. This is true of all machines today compared to the past. The value of computers has plummeted in the last 20 years, for example–they take a lot less labor-time to produce. If the rate of profit is the amount of surplus value extracted relative to the amount of capital invested in machines and labor, then as machines get cheaper, the rate of profit will rise. The result is a long-term counteracting force on the tendency of the rate of profit to fall.

This process is not without its consequences, however. We can use the Tecan Genesis 200 to explain this further. Let’s assume that a capitalist bought one last year for a certain amount of money. In the year that follows, increases in productivity at the Tecan factory mean that the newer Tecan model takes a lot less socially necessary labor-time to produce–and so it is cheaper. But this drop in the machine’s value doesn’t help our capitalist who bought the machine last year–it actually makes things worse for him. Doing blood tests with the newer Tecan takes less socially necessary time, because the machine itself took less socially necessary time to make. A "new" capitalist who buys the latest Tecans can take advantage of this, and charges less for the blood tests. The "old" capitalist who bought the machine last year gets squeezed. This may eventually drive the old capitalist out of business. The new capitalist can obtain the Tecan at a price that reflects the new (lower) value of the machine. This "devalues" the old capital, a good thing from the new capitalist’s perspective. (In a sense, the new capitalist tells the old one: "I’m taking your capital on the cheap, so I can put it to work at a profit, where you could not.") However, this overall process often happens at a serious cost to the economy–with companies going out of business, workers getting laid off, debts not getting paid and hence economic crisis potentially breaking out.59

Ultimately, capitalists and the capitalist state can attempt to counteract the tendency of the rate of profit to fall, even if it involves "forcible solutions of the existing contradictions." However, many of these means can trigger or exacerbate crises. And as we will discuss further below, there are limits to the manageability of crises within the context of the modern capitalist system.

Emerging from crisis

Short of capitalism being overthrown, a capitalist economy will eventually recover from crisis. As the Russian revolutionary Leon Trotsky once noted,

capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling. First there is a boom in industry, then a stoppage, next a crisis, followed by a stoppage in the crisis, then an improvement, another boom, another stoppage, and so on.... The fact that capitalism continues to oscillate cyclically...merely signifies that capitalism is not yet dead, that we are not dealing with a corpse. So long as capitalism is not overthrown by proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave.60

Cont.

https://isreview.org/issues/32/crisis_theory.shtml

[chlamor]

To escape from each crisis, however, the economy must emerge at a "starting point" that is different from the "ending point" where the crisis began.61 As Marx notes, "the...stagnation of production would have prepared–within capitalistic limits–a subsequent expansion of production. And thus the cycle would run its course anew."62 The new starting point will allow profitable capital accumulation to resume. This requires raising the rate of profit, usually accomplished when the impact of crisis sufficiently reduces (depreciates) the price of the inputs to the capitalist production process: constant and variable capital. Additionally, the crisis will intensify the competition between capitalists themselves, with each attempting to survive, and restore their accumulation, at the expense of their rivals. In the end, laying the foundation for this subsequent expansion of production usually comes at an enormous human and social cost.

One factor in restoring profitable accumulation is a depreciation in the price of variable capital (workers’ labor power)–in other words, a reduction in the wages and benefits paid to workers. Marx summarizes this process as follows: "the stagnation of production would have laid off a part of the working class, and would thereby have placed the employed part in a situation where it would have to submit to a reduction of wages even below the average. This has the very same effect on capital as an increase of...surplus value at average wages would have had."63 A contemporary example of this process involves the computer software industry. Technology workers perform an average of 50 hours of work per week, yet with recent increased layoffs, are accepting lower and lower wages and salaries for their work.64 At the same time, they are producing the same (and sometimes more) value for their employer. This fact helps restore and increase the capital accumulation of a section of the capitalist class.

Economic crisis also produces desperate attempts by capitalists to shore up their profits at the expense of each other. As Marx notes, "as soon as it is no longer a question of sharing profits, but sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another.... How much each individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers."65 For example, when facing problems in extracting surplus value from workers, or in realizing surplus value, capitalists will often prefer to use their "idle money" for purposes of speculation in things such as stocks or currencies, rather than investing in new capital.66 This occurs at the end of every business cycle as profits begin to decline; hence the "irrational exuberance" of the stock market in the late 1990s.67

However, such price speculation among capitalists does not increase the value that the capitalist class as a whole controls; it simply involves them swindling each other: "one party can win in exchange what the other loses; all they can distribute among themselves is the surplus value [produced by the working class]. But these proportions open a field for individual deception...which has nothing to do with the determination of value as such."68 In other words, buying a stock "low," and getting another capitalist to buy it "high," does not create additional wealth, it just distributes it differently among capitalists. (Stock traders will often refer to this as the "greater fool theory."69) Therefore, Marx referred to this speculative wealth as "fictitious capital."70 But if a particular capitalist is able to gain at the expense of his brothers, he might be the one most likely to survive the crisis. The most visible result of this stock speculation is the creation of "a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance and stock speculation."71 The result of such speculation can be a dramatic crash and panic when the whole process unravels, and no one is willing to buy at a higher price (that is, no one can find a "greater fool"). Those who sell at the right time will escape, those left "holding the bag" will likely be ruined.

Another factor in restoring profitable accumulation is a depreciation in the price of constant capital (tools and machines). Consider, for example, a capitalist who purchased a computer for $1,000. A couple of years later he goes out of business, and one of his competitors wants to buy up his assets. By that time the value of the machine has fallen (it can be produced much quicker) and so the price is only $750. Obtaining the computer at the new price devalues the capital, as described earlier in the case of the Tecan machine. However, let’s also assume that the bankrupted capitalist is desperate to unload his assets, in order to pay his debts. Therefore, he sells his computer for only $500. The machine has therefore also depreciated in price. Most importantly, the surviving capitalist benefits from this.

In certain circumstances, constant capital can also be depreciated through overproduction; that is, if computers are heavily overproduced, they can be purchased on the cheap by capitalists seeking to restore their accumulation. Hence, as Marx notes, during crises "part of the commodities on the market can complete their process of circulation and reproduction [purchase and sale] only through an immense contraction in their prices.... The elements of fixed capital are depreciated to a greater or lesser degree in just the same way."72 In other cases, capital that can no longer be profitably employed is simply destroyed: A bankrupt steel factory’s machines may just lay idle and rust, for example. Through this process of devaluation, depreciation and destruction, the surviving capitalists are able to renew profitable capital accumulation. But which capitalist wins or loses is again the result of "a fight among hostile brothers":

how is this conflict settled and the conditions restored which correspond to the "sound" operation of capitalist production?... It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital [that is overproduced]...or at least a part of it.... [T]he loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed...depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, a third suffers but a relative loss or is just temporarily depreciated, etc.73
The outcome of this "competitive struggle" can have severe consequences in today’s economy. This is due to what Marx referred to as the "centralization and concentration of capital"–that is, the units of capital get bigger and bigger, and become fewer and fewer, as a result of capital accumulation and mergers.74 As of 1983, for example, less than 3 percent of companies accounted for 77 percent of all sales in the United States, while Citicorp and Exxon together held more assets than all the small businesses in the country.75 All capitalist economies eventually become composed of these economic giants, as the "biggest fish" are the ones most likely to survive each successive crisis.76

It is in the context of crises, however, that the centralization and concentration of capital creates significant problems for a capitalist economy. First, the bankruptcy of a major firm, or of a major industry, becomes much more costly. There is the greater possibility that the collapse of a large corporation, or several significant players within a particular industry, will bring the rest of a national economy, if not the global economy, into severe crisis. So in today’s economy there is the potential for the busts following the booms to be much more severe, and much more difficult for the capitalist state to manage. The recent record-sized bankruptcies of Enron ($63 billion in assets), Conseco ($61 billion in assets) and WorldCom ($103 billion in assets) highlight the continued development of this process.77 Constant capital continues to be devalued through bankruptcy or mergers but at an increasing human cost, while the system more and more becomes composed of long-standing large and often inefficient corporations.78 They compete with one another, face profit squeezes and attempt to take advantage of the usual mechanisms to boost their profit: increasing the intensity of exploitation, forcing wages below their value, engaging in foreign trade and investment and demanding lower taxes from the capitalist state. In certain cases, old-fashioned shady accounting comes into play. Additionally, in times of severe crisis, capitalists will attempt to rob surplus value from another nation’s capitalists through war. According to Marx, all this is the fruit of the inner dynamics of capital accumulation itself.

Conclusion

Capitalism has not changed its crisis-prone nature since Marx’s time. It is still doomed to make the lot of the working class more unstable, insecure and miserable. Indeed, the promises made by the ideologists of capitalism have not been fulfilled for billions of people around the world. If anything, crisis has ensured that the opposite is true, as working people in countries from Argentina to Korea to the United States can attest. Marx argued in Capital over a century ago that

within the capitalist system all methods for raising the social productiveness of labor are brought about at the cost of the individual laborer; all means for the development of production transform themselves into means of domination over, and exploitation of, the producers; they mutilate the laborer into a fragment of a man, degrade him to the level of an appendage of a machine, destroy every remnant of charm in his work and turn it into a hated toil; they estrange from him the intellectual potentialities of the labor process...they distort the conditions under which he works, subject him during the labor process to a despotism the more hateful for its meanness.... It follows...that in proportion as capital accumulates, the lot of the laborer, be his payment [wage] high or low, must grow worse.... [T]his law rivets the laborer to capital more firmly than the wedges of Vulcan did Prometheus to the rock. It establishes an accumulation of misery, corresponding with accumulation of capital. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, mental degradation, at the opposite pole.79
For Marx and Engels the only solution was democratic economic planning–socialism:

If the producers as such knew how much the consumers required, if they were to organize production, if they were to share it out amongst themselves, then the fluctuations of competition and its tendency to crisis would be impossible. Carry on production consciously as human beings–not as dispersed atoms without consciousness of your species–and you have overcome all these artificial and untenable antitheses. But as long as you continue to produce in the present unconscious, thoughtless manner, at the mercy of chance...crises will remain; and each successive crisis is bound to become more universal and therefore worse than the preceding one; is bound to impoverish a larger body of small capitalists, and to augment...the numbers of the class who live by labor alone.80
Marx and Engels did not believe that capitalism would produce socialism of its own accord. If the working class accepts the consequences of every crisis, then the capitalist system will persist until it produces the "common ruin" of all. And so a revolution is not a given, or simply up to the course of history. As Marx and Engels once argued, "history does nothing...it ‘wages no battles.’ It is man, real, living man who does all that, who possesses and fights; ‘history’ is not...a person apart, using man as a means to achieve its own aims; history is nothing but the activity of man pursuing his aims."81 Our aim must be the overthrow of the crisis-ridden system of capitalism and its replacement with socialism.

Stuart Easterling is active in the International Socialist Organization in Pittsburgh

Thanks to Paul D’Amato, Phil Gasper, Joel Geier, Michal Myers, Lance Selfa and David Whitehouse for helpful feedback and debate on this article.

1 Karl Marx and Frederick Engels, Manifesto of the Communist Party, Chapter 1, ¶27. All works cited by Marx and Engels are available at www.marxists.org, and are indexed here by title, chapter and paragraph number.

2 Tom Lewis, "The growing gap between rich and poor," Socialist Worker, August 1, 2003; Administrative Office of the U.S. Courts, "Bankruptcy cases continue to break Federal Court caseload records," available online at www.uscourts.gov/nrarchive.html.

3 Karl Marx, Capital, Volume I, Chapter 16, Section 9, ¶8.

4 Capital, Volume III, Chapter 15, Section 3, ¶7.

5 Karl Marx, Wage-Labor and Capital, Chapter 2, ¶15.

6 Vladimir Lenin, "May Day action by the revolutionary proletariat," Sotsial-Demokrat, No. 31, June 15, 1913, available online at www.marxists.org/archive/lenin/works/1913/jun/15.htm.

7 Manifesto of the Communist Party, Chapter 1, ¶2.

8 Capital, Volume I, "Preface to the first German edition," ¶9.

9 Quoted in Paul Sweezy, The Theory of Capitalist Development (New York: Monthly Review Press, 1970), p. 4.

10 The Theory of Capitalist Development, p. 24.

11 Capital, Volume III, Chapter 51, ¶3.

12 Karl Marx, Outlines of the Critique of Political Economy (The Grundrisse), Chapter 5, ¶10.

13 Capital, Volume III, Chapter 48, ¶28.

14 Ibid., ¶13.

15 Marx also argued that the development of surplus labor historically created the possibility of human progress, because human beings were now able to produce more than they immediately consumed.

16 As Marx noted in his letter to Ludwig Kugelmann, "every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish. Every child knows, too, that the masses of products…require different and quantitatively determined masses of the total labor of society. That this necessity of the distribution of social labor in definite proportions cannot possibly be done away with by a particular form of social production but can only change the mode of its appearance, is self-evident. No natural laws can be done away with. What can change in historically different circumstances is only the form in which these laws assert themselves." (Marx to Kugelmann, July 11, 1868, ¶1.)

17 Engels describes this process in more detail: "The little that such a family had to obtain by barter or buy from outsiders...consisted principally of the objects of handicraft production, that is, such things the nature of whose manufacture was by no means unknown to the peasant, and which he did not produce himself only because he lacked the raw material or because the purchased article was much better or very much cheaper. Hence the peasant of the Middle Ages knew fairly accurately the labor-time required for the manufacture of the articles obtained by him in barter. The smith and the cartwright of the village worked under his eyes; likewise the tailor and shoemaker.... The peasants, as well as the people from whom they bought, were themselves workers; the exchanged articles were each one’s own products. What had they expended in making these products? Labor and labor alone: to replace tools, to produce the raw material and to process it they spent nothing but their own labor-power; how then could they exchange these products of theirs for those of other laboring producers otherwise than in the ratio of the labor expended on them? Not only was the labor-time spent on these products the only suitable measure for the quantitative determination of the values to be exchanged: no other was at all possible. Or is it believed that the peasant and the artisan were so stupid as to give up the product of ten hours’ labor of one person for that of a single hour’s labor of another?" (Frederick Engels, "Supplement to Capital Volume III," Section 1, ¶19.)

18 Engels discusses the historical scope of the law of value and the place of "simple commodity production" in more detail as follows: "In a word: The Marxian law of value holds generally, as far as economic laws are valid at all, for the whole period of simple commodity production–that is, up to the time when the latter suffers a modification through the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed according to the Marxian law and oscillate around those values, so that the more fully simple commodity production develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting from the beginning of exchange, which transforms products into commodities, down to the 15th century of the present era. But the exchange of commodities dates from a time before all written history–which in Egypt goes back to at least 2500 B.C., and perhaps 5000 B.C., and in Babylon to 4000 B.C., perhaps to 6000 B.C.; thus, the law of value has prevailed during a period of from five to seven thousand years." (Frederick Engels, "Supplement to Capital Volume III," Section 1, ¶23.)

19 Capital, Volume I, Chapter 3, Section 1, ¶2.

20 A question that often arises is how Marx compares labor of different skill. Surely an hour’s labor of a blacksmith is not the same as an hour’s labor of a gravedigger, after all. Marx measures labor-time in units of what he calls "abstract, simple labor." An hour of skilled labor consists of more abstract labor than an hour of unskilled labor. This is true because the labor of the skilled worker also includes the labor of the worker that had to train him or her in that skill.

21 According to the Bolshevik economist I.I. Rubin, "In a simple commodity economy, the exchange of 10 hours of labor in one branch of production, for example shoemaking, for the product of eight hours of labor in another branch, for example clothing production, necessarily leads (if the shoemaker and clothesmaker are equally qualified) to different advantages of production in the two branches, and to the transfer of labor from shoemaking to clothing production. Assuming complete mobility of labor in the commodity economy, every more or less significant difference in the advantage of production generates a tendency for the transfer of labor from the less advantageous branch of production to the more advantageous. This tendency remains until the less advantageous branch is confronted by a direct threat of economic collapse and finds it impossible to continue production because of unfavorable conditions for the sale of its products on the market." (I.I. Rubin, Essays on Marx’s Theory of Value (Detroit: Black and Red, 1972) p. 103.)

22 Marx, Value, Price, and Profit, Chapter 4, ¶4.

23 This drive to accumulate makes capitalists different from previous ruling classes. As Marx noted, capitalists must use their money to accumulate capital, "instead of...spending it, like, say, Egyptian kings or Etruscan priest-nobles for pyramids etc.... [W]ithout accumulation, capital cannot form the foundation of production, since it would remain stagnant, and would not be an element of progress, required already by the mere increase of population etc.… If the surplus value were simply consumed, then capital would not have realized itself as capital, and not produced itself as capital, i.e. as value which produces [greater] value." (Marx, The Grundrisse, Chapter 8, ¶56.)

24 Capital, Volume I, Chapter 24, Section 3, ¶3.

25 One recent example of this fact is a company called Exodus Communications, which owns the computer hardware to host Web sites. According to the New York Times, "from the start of this year [1999] to the end of 2000, the company expects to spend more than $750 million…on 15 more locations, the majority to be erected in this country. That is quite a feat for a company with only about $200 million in revenue this year…Adam Wegner, vice president and general counsel... says that without the heavy spending on expansion, Exodus would be profitable today. But he also points to a Catch-22: Without the expansion, competitors would push Exodus out of the business of managing Web sites." (Louis Uchitelle, "The $1.2 trillion spigot: Capital spending in the U.S. just keeps keeping on," New York Times, December 30, 1999.)

26 Quoted on the Hemp Farm Web site, available online at www.hempfarm.org/"Papers/Quotes.html#economics.

27 Marx refers to this as "the commodification of labor power." It means that as a worker under capitalism, you may have labor to perform that is needed by society (whether as a nurse, teacher, construction worker or almost any other skill). But you cannot perform that work for society unless you can convince a capitalist to pay you for it. In other words, in order to work and create use-values for other people, you must go to a capitalist and convince him that he can make money from your labor.

28 For an insightful discussion of how the law of value applies in state capitalist command economies such as the former USSR, see Derek Howl, "The law of value and the USSR," International Socialism 49, Winter 1990.

29 Marx points out that the capitalist’s money "without wage-labor, ceases to be capital." (Marx, Wage-Labor and Capital, Chapter 8, ¶11.) In other words, the money the capitalist controls does not turn into even more money without workers’ labor.

30 Capital, Volume III, Chapter 15, Section 1, ¶8.

31 Ibid., ¶29.

32 Ibid., ¶17.

33 Martin McLaughlin, "Crisis of overproduction devastating American agriculture," World Socialist Web site, August 7, 1999, available online at www.wsws.org/articles/1999/aug1999/farm-a07.shtml.

34 Quoted in Alan Maass and Joel Geier, "Is the U.S. economy headed for a crash?" Socialist Worker, May 30, 2003.

35 Quoted in Ahmed Shawki, "China: Deng’s legacy," International Socialist Review 2, Fall 1997, p. 31.

36 Note, however, that Marx and Engels did not accept the logic of the "underconsumptionist" argument, which states that crises are simply a result of the fact that workers cannot afford to consume the goods they produce. Engels notes that this is a fact of all class societies: "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 favorable, as for example in England in the 15th 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-consumption has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as the result of a surplus of production is a phenomenon only of the last 50 years.... The under-consumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which has long been recognized. But it tells us just as little why crises exist today as why they did not exist before." (Engels, Herr Eugen Dühring’s Revolution in Science [Anti-Dühring], Part III, Chapter III, ¶3.)

Moreover, Marx notes that crises of overproduction often occur when wages are at historically high levels: "It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers.... That commodities are unsaleable means only that no effective purchasers have been found for them...for productive or individual consumption. But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ‘simple’ (!) common sense, such a period should rather remove the crisis." [Capital, Volume II, Chapter 20, Section 4, ¶34.]

37 Capital, Volume III, Chapter 15, Section 3, ¶18.

38 Marx, The Grundrisse, Chapter 8, ¶17.

39 First developed by the French economist Jean-Baptiste Say (1767—1832).

40 Quoted in Thomas Sowell, Marxism: Philosophy and Economics (New York: William Morrow, 1985), p. 102. (From Karl Marx, Theories of Surplus Value.)

41 Capital, Volume III, Chapter 15, Section 3, ¶10. Marx points out that another factor exacerbating crises of overproduction is the common phenomenon of deferred payments between capitalist producers (i.e., "I will pay you Thursday for a hamburger today"). A supplier to a large company may accept a deferred payment for its goods in part or in full. If the large company is not able to sell its own goods, then the supplier can also be left unpaid (holding the bag), not just in the future, but immediately. (Capital, Volume III, Chapter 30, ¶9—14.)

42 Joel Geier and Paul D’Amato, "The end of the miracle economy," International Socialist Review 16, February—March 2001, p. 38. In Capital, Marx cites the Economist magazine, pointing out the circumstances prevailing with regards to credit: "Merchants, manufacturers, etc., carry on operations much beyond those which the use of their own capital alone would enable them to do.... Capital is...the foundation upon which a good credit is built, [rather] than the limit of the transactions of any commercial establishment." (Capital, Volume III, Chapter 27, Note 87.)

43 Capital, Volume III, Chapter 30, ¶27.

44 Ibid., ¶21. For another contemporary example of the role of corporate debt, take again the case of Exodus Communications: "Exodus has raised $1.52 billion on the bond market, through four high-yield offerings [i.e., they borrowed $1.52 billion]. These are the securities that in the 1980s were called junk bonds, a term now out of fashion even though the high risk is the same. The last and biggest offering, $1 billion, took place this month, and Exodus now faces $100 million a year in interest payments." ("The $1.2 trillion spigot.") Exodus has to sell its service at all costs, just in order to be able to pay its debts, before it can fulfill Say’s Law and go out and buy more goods (constant and variable capital). Exodus finally did go bankrupt in 2001, available online at www.bankruptcydata.com/"Research/Ch11_2001.htm.

45 Selling "below value" means less surplus value is realized–in other words, the capitalist has less money. His capital accumulation at minimum begins to slow down, if not being interrupted altogether.

46 Quoted in Sowell, Marxism, p. 101. (From Karl Marx, Theories of Surplus Value)

47 Capital, Volume III, Chapter 15, Section 3, ¶3.

48 See http://biz.yahoo.com/fin/l/m/msft_qb.html for a concise summary of Microsoft’s vast idle wealth.

49 The Grundrisse, Chapter 12, ¶26.

50 Frederick Engels, "Outline of a Critique of Political Economy," in the Deutsch-Französische Jahrbücher, ¶48.

51 Some economists argue that this process is not a necessary part of capital accumulation. For a refutation of this claim, see Chris Harman, Explaining the Crisis: A Marxist Re-Appraisal (London: Bookmarks, 1987), pp. 20—23.

52 Using Marx’s formula, where S is surplus value, C is constant capital, and V is variable capital, then the rate of profit is S / (C+V). If C grows while S remains the same, then the rate of profit falls. The capitalist reacts by doing everything possible to increase S or reduce the cost of V.

53 The Grundrisse, Chapter 15, ¶2.

54 Capital, Volume III, Chapter 15, Section 2, ¶15.

55 Ibid., Chapter 14, Section 1, ¶5.

56 Marx discusses the counteracting causes in Capital, Volume III, Chapter 14 as well as briefly in The Grundrisse, Chapter 15, ¶2, where he enumerates some additional factors: "the fall of the rate of profit can further be delayed by the omission of existing deductions from profit, e.g. by a lowering of taxes, reduction of ground rent etc...for these are themselves portions of the profit under another name, and are appropriated by persons other than the capitalists themselves [i.e., by the state or by the landlord]. The fall [of the rate of profit] likewise is delayed by creation of new branches of production in which more direct labor in relation to capital is needed." There are other counteracting causes, discussed elsewhere by Marx, which include military and other "waste" spending. If the state can divert investment into areas that do not produce more capital goods (Marx’s "Department I" and "Department II"), then it can check the rate of growth of the organic composition of capital. A full discussion of this is beyond the scope of this article; for more details, see Harman, Explaining the Crisis, pp. 38—43.

57 See Harman, Explaining the Crisis, for a more detailed historical discussion of the role of a rising organic composition of capital in the development of economic crises over the course of the twentieth century. Also see Lewis Corey, The Decline of American Capitalism (New York: Covici-Friede, 1934), pp. 113—129 for a discussion of the Great Depression.

58 Capital, Volume III, Chapter 15, Section 2, ¶10.

59 As Marx described it, "the periodical depreciation of existing capital–one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital-value through formation of new capital–disturbs the given conditions, within which the process of circulation and reproduction of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process." (Capital, Volume III, Chapter 15, Section 2, ¶12.)

60 Leon Trotsky, "The world economic crisis and the new tasks of the Communist International," from The First Five Years of the Communist International, Volume I (London: New Park, 1973) p. 252.

61 This formulation is found in Paul Mattick, Marx and Keynes: The Limits of the Mixed Economy (Boston: Porter Sargent, 1969), p. 70.

62 Capital, Volume III, Chapter 15, Section 3, ¶11—12.

63 Capital, Volume II, Chapter 15, Section 3, ¶7.

64 Steve McConnell, Rapid Development (Redmond, WA: Microsoft Press, 1996), p. xvii; Jackie Cohen, "Cutting the purse strings," Infoworld, June 22, 2001, available online at www.infoworld.com; "Tech industry’s job losses may be slowing–study," Reuters, October 10, 2002; Tischelle George, "Big bucks dry up: Shrinking bonuses send IT pay down for the first time in a decade," Information Week, April 29, 2002, available online at www.informationweek.com.

65 Capital, Volume III, Chapter 15, Section 3, ¶7.

66 Recall that a stock is simply a certificate that indicates that the stockholder is the owner of a percentage of a particular firm, and is thus entitled to a percentage of its profits. So you might pay $10 for a stock that granted you 10 percent ownership of a company. If their profits are $100 in the next year, you will be entitled to $10, and will make your money back right away. Put another way, your stock has a good "price/earnings ratio." That is, $10/$10 = 1 (the lower your price/earnings ratio, the better). However, with rampant speculation, price/earnings ratios can be in the hundreds (in other words, it would take hundreds of years to make back the money spent to buy the stock, given current earnings). In this case, stocks are purchased not for future earnings, but simply to try and sell to someone else (or occasionally on the gamble that future earnings will skyrocket).

67 This portrayal of the U.S. stock market is from Federal Reserve Chairman Alan Greenspan; for a transcript of his 1996 speech see www.geocities.com/ecocorner/intelarea/ag1.html.

68 The Grundrisse, Chapter 8, ¶57.

69 Thanks to Joel Geier for this item.

70 Capital, Volume III, Chapter 29, ¶12.

71 Ibid., Chapter 27, ¶15. Marx adds that in the end, "the little fish are swallowed by the sharks and the lambs by the stock exchange wolves." (Capital, Volume III, Chapter 27, ¶16.)

72 Capital, Volume III, Chapter 15, Section 3, ¶10.

73 Ibid., Chapter 15, Section 3, ¶8.

74 Ibid., Chapter 25, Section 5a, ¶6.

75 Robert Heilbroner and Lester Thurow, Economics Explained (New York: Simon & Schuster, 1987), pp. 42—43.

76 Marx discusses in more detail in Capital some of the reasons why the capitalist "big fish" survive while the "little fish" do not. Note that even if profit rates decline, as long as big capitalists can expand their investments significantly, they can still maintain the same amount of total profit. As noted previously, if they make 10 percent profit on $1 million invested, and only 8 percent profit on $2 million invested, they still stay well ahead of the game. As Marx points out in Capital: "a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit." (Capital, Volume III, Chapter 15, ¶1.) The large capitalists still have a growing mass of profit to engage in bigger and bigger investments in constant capital and variable capital. Smaller capitalists do not have the luxury of being able to expand at the same pace. General Electric, for example, recently made a considerable investment to establish an electronic supply-chain network for its 100,000 suppliers. (Lee Sustar, "The myth of the new economy," International Socialist Review 14, October—November 2000, p. 27.) Many of GE’s competitors do not have the mass of profit to undertake (or risk) such an investment, and so they fall behind. Moreover, "even a cursory examination of competition shows...that under certain circumstances, when the greater capitalist wishes to make room for himself on the market, and to crowd out the smaller ones, as happens in times of crises...he deliberately lowers his rate of profit in order to drive the smaller ones to the wall [into the ground].... Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the...big, firmly placed capitalists. The new...capital operating independently does not enjoy any such compensating conditions." (Capital, Volume III, Chapter 23, ¶32.)

77 See www.bankruptcydata.com/Research/Ch11_2002.htm, and www.bankruptcydata.com/Research/Ch11_2001.htm.

78 Marx notes that due to their monopolistic position, and because their mass of profit can grow even with a declining rate of profit, large units of capital lose the capitalistic drive to innovate: "As soon as formation of capital were to fall into the hands of the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out." (Capital, Volume III, Chapter 15, Section 3, ¶26.) However, as noted previously, they still maintain an advantage over their smaller, often more efficient rivals.

79 Capital, Volume I, Chapter 25, Section 4, ¶11.

80 Engels, "Outline of a Critique of Political Economy", ¶48.

81 Karl Marx and Frederick Engels, The Holy Family, Chapter 6, Section 2a, ¶7.

https://isreview.org/issues/32/crisis_theory.shtml

[chlamor]

Karl Marx and the World Crisis
The specter of economic collapse is haunting the world. Bankers, bosses, politicians and economists talk about it but none of them know what to do. Karl Marx has now been dead for 100 years; yet his ideas, and in particular his analysis of the capitalist crisis, are alive, while those of our contemporary defenders of bourgeois rule have only a zombie-like existence.

For some bourgeois spokesmen, defending their ideology is primarily a matter of public relations and “confidence.” Since the beginning of the new year. President Reagan has been happily proclaiming the coming end of the economic “recession.” His professional huckster’s optimism has been echoed by many others: right-wing economist Milton Friedman predicted that “1983 will be a year of rapid and vigorous economic growth” (Newsweek, February 7). Nevertheless, the flood of anxious reports on the state of the world economy has not ceased. The news media are justifiably shaking over the danger to the major capitalist powers posed by threatening economic collapse in several large “Third World” countries; fears of a “debtors’ cartel” surface simultaneously in several journals. One of the most optimistic bourgeois organs, Business Week magazine, illustrated its “Recovery at Last” article with a graph titled “The modest world recovery … will bolster world trade … but will not restore jobs” (February 14). A month later (March 21) it added that capital spending in 1983 will fall by 8.8 percent – hardly a portent of a serious recovery.

A significant sidelight on the bourgeoisie’s controversy has been focused on the economic condition of the West’s chief rival, the USSR. On Christmas day, a CIA report was released crediting the Soviet Union with a comfortable 4.8 percent growth rate for the past three decades. Congressman Henry Reuss, chairman of the Joint Economic Committee that commissioned the report, stressed the liberals’ conclusions: “This important study helps put into perspective for Americans the fact that the USSR, far from being on the verge of collapse, has experienced major growth.” Reuss was clearly disputing Reagan’s frequent assertions that the USSR, because of its lack of “free enterprise,” was economically doomed. A CIA official, releasing a follow-up study, underlined the point: “In fact, we do not consider an economic ‘collapse’ … even a remote possibility” (New York Times, January 9).

Why this sudden concern for Russia’s economic well-being? Reagan bases his hopes for economic recovery on his strategy of reviving the Cold War and restoring America’s world economic dominance. As well, he justifies his enormous military build-up by arguing that forcing the USSR to match the U.S. will break its weakening economy. The CIA report, in stressing Russia’s purported strength, seeks to alter not Reagan’s military strategy itself but its excessive proportions. It reflects the growing sentiment within the U.S. bourgeoisie that Reagan’s arms spending will be ineffective and too costly – trying to smash Russia might bring down the faltering U.S. as well.

All the bourgeois spokesmen, whether pessimists or optimists, agree on one thing: with the correct domestic and international policies, the Western and Eastern bloc economies will be able to emerge from the present crisis without undergoing a new great depression on the order of the 1930’s. But working-class people must be immediately suspicious of such rosy claims. The crisis has brought depression conditions, not just a mere downturn, to whole regions of the U.S., Canada and Europe – not even to speak of the poor countries. Even though Reagan has found a few positive statistics to crow over lately, the fact remains that massive unemployment, prohibitive consumer interest rates and deteriorating public services are still with us and are showing no signs of improvement.

Moreover, very few people believe in the economic wisdom of any of the official or unofficial ideologists of capitalism any more. Bourgeois economists have been at a total loss to account for the prolonged stagnation of the 1970’s – the slow growth rates, declining productivity of industry, unexpectedly accompanied by rampant inflation – that followed the prosperity of the post-World War II boom. Symmetrically, the Stalinist ideological boosters of Soviet “socialism” have been unable to explain the statified economies’ long-term decline in growth rates since World War II that have led to frequent working-class uprisings. The recent CIA reports had to acknowledge this decline while seeking to bury its significance. The decline was reconfirmed by Soviet figures in early 1983. Both industrial output and national income grew by less than 3 percent in 1982, the smallest increases since the world war and well under the targets of Moscow’s central planners – who are supposed to be able to control the USSR’s economy without being buffeted about by the economic storms that plague Western capitalism.

With open variants of bourgeois ideology floundering, it is no accident that pseudo-Marxist theories are becoming popular again. As world capitalism careens toward collapse, obviously tinkering with the external manifestations of its crisis will not suffice. With the class struggle threatening to heat up, a theory that can influence masses becomes necessary. As in the past, the system will attempt to save itself by resting on the appeal of pseudo-Marxist ideology and pseudo-Marxist political forces to masses of workers. Thus the seemingly arcane task of disassociating authentic revolutionary Marxism from its corruptions is critical.

Germany, Britain, France, Scandinavia, Spain – virtually every European country has witnessed a reform “socialist” government in recent years. Every variety of welfarism and statification is supported by both reformist and Stalinist “Marxists.” In the USSR, where “socialism” rules officially, many Stalinist theoreticians in the post-war period have tried to employ the laws of capitalist development discovered by Marx in order to manage their society. The Soviet planners overlook what Marx knew, that these laws lead inexorably to capitalism’s crises and decay. The same oversight is made by the advocates of “alternative economic Strategies” in Western Europe, leftists wishing to bring “Marxist” theory to the aid of their national capitalism. In sharp contrast to Marx, they all stand for the reform of capitalism, not its overthrow.

The only analysis that can come to grips with the world crisis is Marxism. An honest use of Marx’s work would bring out the depressions, fascism and world war that we are facing; reformism cannot deal with it. Western and Eastern social patriots alike have a vested interest in denying any inevitable revolutionary showdown in theory and in fact. They also share a common interest in treating East and West as separate, distinct systems in order to suppress their increasingly visible similarities and their symbiotic roles in the preservation of world capitalism at the expense of the working classes.

Marxist Theory of Crises
The classical epoch of industrial capitalism ended with the First World War, but this is still the period cited by all defenders of capitalism when they refer to the regenerative powers of the “business cycle” and the periodic crises that engender it. We have to review the classical cycle in order to see how the development of capitalism has compelled it to change.

For Marx, capitalist crises are crises of “overproduction”: too many commodities are produced than can be profitably sold, and too much capital has been invested in industry, in the attempt to claim a share of the available profits. This comes about because capitalism, on both the domestic and international scale, is a system of separate and independent ownerships. In prosperous times every capitalist invests as much as he can and steps up production; in particular, the periodic booms stimulate the production of “fixed capital,” the buildings and machinery which are not used up in one cycle of production and therefore do not have to be immediately replaced. When times are good, all resources are strained to bring new fixed capital into production; but once this capital starts producing, a flood of commodities is brought onto the market, and the crisis ensues. Unemployment, which falls during the boom, rises again; the high rate of profit that stimulated the boom declines, first when the low level of unemployment strengthens the bargaining power of workers, and further when the crisis forces production to slacken off.

The crisis eventually takes its toll: masses of workers are thrown out of their jobs, as a result wages are forced back down toward subsistence or below, and the weakest, smallest and least modern plants go under. But the effects of the slump enable profitability to revive: labor can be hired at low wages, factories, equipment and materials can be bought by the surviving capitalists at bargain prices. So the slump is followed by a new recovery period and in turn by a new boom.

Typically, in the course of the boom period, the competition among capitalists stimulates new productive techniques that advance the level of productivity. The temporary shortage of labor during the boom, owing to the low level of unemployment, is the key factor in convincing capitalists to find ways of increasing their use of machinery (“dead labor”) in proportion to living labor. Thus the boom period of the cycle carries out what Marx called the “concentration” of capital: its expansion and technological advance – just as the slump period already described tends to carry out the “centralization” of capital, its unification into fewer hands through takeovers and mergers.

“Overproduction” as the analysis of crises is frequently transformed by reformist theorists into “underconsumption,” the idea that the mass of workers are paid too little to buy back what they produce. This leads to the program of persuading wise managers and concerned capitalists to advance their own self-interest by paying the workers more; the workers will then be able to consume and purchase more, and thereby crises will be forestalled or dampened.

There are insoluble problems with such a theory. First of all, as Marx pointed out, crises arise in the wake of cyclically high wages for labor, not low. As well, much of what is produced and overproduced under capitalism is means of production, not simply commodities meant for working-class consumption: even the best-paid workers do not buy manufacturing equipment. Thirdly, the masses’ underconsumption – in the sense of their inability to afford the full range of commodities needed for a comfortable standard of living – is a constant of life under capitalism through both boom and bust. If underconsumption were the cause of crises, then crisis would not be cyclical but permanent.

Overproduction demonstrates the necessary contradictions of a system that has the potential to produce real abundance, yet under which that very potential causes a breakdown every time it builds up. In the classical epoch of industrial capitalism the cycle reflected the system’s initially progressive role. The class struggle compelled the capitalists to advance productivity, accumulate more and more means of production and therefore to produce useful commodities more cheaply. For the first time in history, scarcity – with all its endemic misery, starvation, wars and pestilence – was no longer an inescapable part of human life.

The Epoch of Capitalist Decay
The history of the capitalist cycles changed around the turn of the century. It was Vladimir Lenin, leader of the Russian Bolshevik party, who observed during the First World War that the imperialist policies being carried out by all the major capitalist countries were signs of a new stage of capitalism: its epoch of decay. For Lenin, the modern capitalist epoch is one of reaction, counterrevolution and world wars. At the same time it also makes possible the proletarian revolution and the transition to socialism. The contradictions of capitalism have matured to their fullest.

The imperialist stage, the new epoch, is chiefly characterized by the straitjacketing of free competition by monopoly: that is, by the domination of most spheres of industry by a few giant companies powerful enough to keep out all smaller, weaker competitors. It is the qualitative extension of the tendencies of concentration and centralization.

The hegemonic power of giant capitalists within each country is mirrored by the international hegemony of a handful of states. The result, both domestically and internationally, is that the surplus-value produced by workers everywhere is siphoned away from the weaker capitalists and disproportionately into the pockets of the dominant big capitalists in the imperialist countries. The result is that further economic growth in the non-monopoly industries and in the non-imperialist countries is severely hampered – as we can see in the present day, when none of the ex-colonial countries has been able to rise to the level of the economically advanced, despite the long boom of the post-World War II years. Brazil and Mexico, touted by many bourgeois ideologists as the beacons of capitalist progress in the “Third World,” now have proved to be the leading victims of a calamitous policy of debt expansion that is slashing the living standards of millions of workers and peasants in countries facing drastic austerity programs.

Lenin actually expected that the uneven growth characteristic of the epoch of capitalist decay would work out differently: he predicted expansion in the backward countries through the export of capital and, concomitantly, industrial decay in the imperialist countries. While both of these trends have occurred, the predominant tendency has been the opposite: “the rich got richer and the poor got poorer.” Growth is still concentrated in the advanced economies. Lenin’s erroneous prediction is to be found in his popularly written pamphlet Imperialism, the Highest Stage of Capitalism, and he does not make clear what the theoretical basis for it was. Nevertheless, his insight into the phenomena of monopoly and imperialism as signposts of capitalism’s epoch of decay was profound. In this, he was following the logic of Marx himself, who foresaw the decay and breakdown of capitalism decades before it came about. For example:

As soon as (capital) begins to sense itself and become conscious of itself as a barrier to development, it seeks refuge in forms which, by restricting free competition, seem to make the rule of capital more perfect, but are the same time the heralds of its dissolution and of the dissolution of the mode of production resting on it. (Grundrisse, page 651)

The Marx-Lenin understanding of the new epoch was that capitalism was beginning to transform itself into its opposite; it was laying the basis for the “invading socialist society.” The deepening concentration and centralization of capital made the system appear stronger. But in actuality the displacement of individual, competitive entrepreneurs in favor of national and international blocks of capital pointed to capitalism’s doom. Society-wide economic organization is a condition of socialism and working-class rule; by keeping industry out of the hands of the proletariat capitalism sought to prolong its own existence and use the new forms against the workers. On a world scale, the internationalization of economic life threatened capitalism’s national bases. And imperialism had a similar response: rule by the dominant nations over an international economy.

The Marxist-Leninist assessment of the epoch of imperialist decay was confirmed by World War I and its aftermath: The war’s immense slaughter and destruction opened up a period of social revolutions beginning in Russia and spreading to central Europe. The system defended itself by relying on the Social Democracy, the reformist parties who held their grip on sectors of the working class by means of benefits paid for out of the superprofits imperialism extracted from the colonial countries. Reformism rested on key layers of workers who felt that they had an interest in defending capitalism. It was not long, however, before the world capitalist economy collapsed in the Great Depression of the 1930’s.

In line with the new epoch, the Depression; among other things, totally altered the behavior of the business cycle. At its depths in the early 1930’s, U.S. unemployment reached 25 percent, and the average rate of profit in industry dipped below zero. There were ups and downs within the overall depression of the decade, but the normal processes of capitalist recovery never took hold: too little surplus-value was available for new investment. Not even the government “pump priming” of Franklin Roosevelt’s New Deal cured the crisis.

The Falling Rate of Profit
The chronic disease that produced such severe symptoms as world war and the Great Depression had already been analyzed by Marx. He called it the tendency of the rate of profit to fall. Bourgeois economists had previously observed this law, but Marx discovered the reasons for it. Its underlying cause is the growing concentration of capital, the need to step up productivity, that compels capital to produce with an increasing preponderance of “dead labor” (machinery, buildings, raw material) over living labor. Since surplus-value is extracted only out of the labor of current workers, (machinery in production only transfers to new commodities value that has been previously produced), the rate of profit as a proportion of capital invested necessarily declines.

Recent bourgeois economists as well as many professed Marxists have disputed this law of Marx’s. History, on the other hand, has verified it. Significant evidence is provided by statistics on capital accumulation: since new investment must come out of profits, a tendency for the profit rate to fall will naturally bring about a falling rate of growth. And while exact, reliable information on capitalist profits is impossible to find (the capitalists conceal it from the workers, from the government tax agents and from each other through innumerable maneuvers, “legal” and illegal), scholars have been able to come up with aggregate figures on accumulation for given countries. Consider the figures in the table taken from the book Capital in the American Economy, by Simon Kuznets, pages 64-65. He observes that the percentage rate of growth in capital stock for the U.S., per decade, was 60.8 in the 1869-89 period, 59.4 in 1889-1909, 43.3 in 1909-29, and 29.6 in 1929-55.

Cyclical Crises Linked to Profit Fall
The long-term decline in growth rates is striking, especially considering that the figures for the two most recent of Kuznets’ periods include the years of build-up to world wars. When Kuznets in separate calculations excludes military industries, the decline is even sharper.

The long-term fall in the rate of profit arising from the concentration of capital is not the same thing as the short-term profit fluctuations dependent on the business cycle: the latter reflect month-to-month shifts in working-class strength, largely according to the level of unemployment. But the cyclical crises and the law of the falling rate of profit are closely linked. The long-term fall is carried out, ratchet-like, by the periodic crises: overproduction forces more backward capitalists to devalue their commodities as new, cheaper production techniques are introduced. At the same time, the value of obsolescent invested capital is also forced down. At the depths of the crisis, surviving capitalists can buy up cheap equipment from those who go under, and thus the rate of profit on new investment turns up again. But the strongest capitalists, because of their near-monopoly power and their influence over the state, manage to survive even when their productivity is backward. Their overvaluation of obsolescent capital amounts to “fictitious capitalization,” a phenomenon also investigated by Marx; the build-up of fictitious capital perpetuates the falling rate of profit tendency.

The falling rate of profit tendency lies behind capitalism’s epoch of decay: it necessitates the disproportionate appropriation of surplus-value by the dominant capitalists. It made monopoly at home and imperialism abroad inexorable. The decline in profitability also prolonged and deepened the cyclical slumps, thus creating the Great Depression as a characteristic “downturn” of the epoch of decay. This interrelation of several strands of Marx’s theory of the development of capitalism is what makes possible a comprehensive explanation of modern-day crises.

Post-World War II Boom
Only when the U.S. entered the Second World War did its economy get back on its feet after the Great Depression. The government’s astronomical war budget, financed through debt, restored employment and profits. The American victory in the war made good the U.S. debt, but other capitalist powers, even those on the winning side, were crushed economically by the war.

The post-war boom began in the U.S. and spread to the other imperialist countries. As we explained in Socialist Voice No. 17 (“On the Road to Capitalist Crash”), this unprecedentedly long depression-free period was a unique occurrence. It resulted from the cataclysmic world-wide defeat suffered by the working class as a result of fascism, war and the crushing of the post-war revolutionary upheavals through the agency of Stalinist Russia (whose workers’ state had been destroyed on the eve of the war) and the Stalinized Communist Parties, with the aid of the reformists. As well, the hegemonic economic and military power of the U.S. ruling class made possible a greater concentration of resources than ever before; control over surplus-value was centralized on an international scale. Together these factors brought together sufficient amounts of surplus-value extracted from workers to re-establish the profitability of capitalist economy.

Governmental intervention policies from the 1930’s continued after the war with the effect of dampening the business cycle. There were subsidies to industry through the arms budget and other state spending and policies like unemployment insurance to prevent working class incomes from sinking as low as before the war. But all that these Keynesian measures accomplished was to sustain the prosperity bubble once it got started; they could not create it. Only the capitalist victory in the class struggle over the workers, together with the restructuring of capital through the war, managed to do that.

The boom built up a massive balloon of fictitious capital, the various capitalist claims to a share in surplus value based on waste production, overvaluation and speculation rather than productive investment. In the classical business cycles, such balloons were periodically burst by cyclical crises; in contrast, the post-war balloon has been continually inflated. The danger of a cataclysmic collapse should a severe crisis occur only encourages capitalist governments to try desperately to keep postponing the crisis – and thereby making its consequences even greater.

Ideology of the Boom
The post-war boom produced a powerful impression among people. In the imperialist countries it appeared that capitalism had solved its economic problems once and for all; so the bourgeoisie argued through its news media, schools, churches and every ideological pulpit. Professional economists were in the vanguard of the campaign to thrust memories of the 1930’s depression into the past. Indeed, the depression did seem to have been forgotten. Even today, when the slide into the next great depression is already underway, the ideologists insist that proper governmental policies will reverse it. But today the prescriptions are far from unanimous. Keynesianism is discredited, having produced in the 1970’s not stability but “stagflation.” The trickle-down conceptions of Ronald Reagan and Milton Friedman proved themselves worthless in a much shorter time. At present, no successful capitalist solutions are available, but all the pro-capitalist theorists guarantee that they exist.

The situation is little better among professed Marxists. During the 1950’s and 1960’s, many abandoned Marxism because its assertion of inevitable capitalist crises seemed unreal. Indeed, such a period of uninterrupted prosperity during the epoch of capitalist decay had never been foreseen by either Marx or Lenin. Prophetically enough, Trotsky in the 1920’s had referred to such a possibility:

If we grant – and let us grant it for the moment – that the working class fails to rise in revolutionary struggle, but allows the bourgeoisie the opportunity to rule the world’s destiny for a long number of years, say, two or three decades, then assuredly some sort of new equilibrium will be established. Europe will be thrown violently into reverse gear. Millions of European workers will die from unemployment and malnutrition. The United States will be compelled to reorient itself on the world market, reconvert its industry, and suffer curtailment for a considerable period. Afterwards, after a new world division of labor is thus established in agony for 15 or 20 or 25 years, a new epoch of capitalist upswing might perhaps ensue. (“Report on the World Economic Crisis” at the Third World Congress of the Communist International, June 1921).

But even Trotsky, noting that a prolonged boom could result from a major proletarian defeat, did not elaborate upon this conception. The post-war prosperity, unforeseen and seemingly permanent, provided the excuse as well as the material incentives for the deserters of Marxism. After all, the failure of Marx and the Marxists to understand the potential of capitalism was an error of no small significance, they claimed.

No doubt Marxists have made errors. But it is always necessary and productive to examine why they were made. Was something indeed wrong with the fundamental theory?

To our mind, no. The heart of Marxism is its partisan allegiance to the proletarian class struggle. With all the great Marxists this has been coupled to a revolutionary optimism, a profound belief in the capacity of the working class to change the world. Marxism is science with a purpose. As a theory of action, it cannot rest upon objectivist indifference or cynicism, which in the last analysis becomes a self-fulfilling prophecy. Thus Marxist predictions, while they may have an alternative character (“socialism or barbarism”), tend to be based on the presumption of proletarian struggle and victory rather than their opposite. Thus Marx made his ringing proclamation of the death knell of capitalism, knowing full well that this depended not only on economic laws but above all on the proletariat’s political deeds.

Lenin’s erroneous predictions during World War I on the future of imperialism were due in all likelihood to his revolutionary optimism. Unwilling to accept as final the degree to which the Western proletariat could be bought off by their rulers and the reformists, he imagined that capitalism would prefer to turn its new investments toward the colonies where a massive and dangerous proletariat had not yet been created. Likewise Trotsky on the eve of World War II couldn’t calculate the consequences of the Stalinist counterrevolution in the USSR that meant the restoration of capitalism; he had to operate on the assumption that the workers’ revolution would intervene.

But when the workers have suffered historic defeats, the Marxist method can still be applied. Marxists can explain both the era of prosperity and its impermanence, unlike the deserters from (and the fraudulent defenders of) Marxism who interpreted the post-war boom as denying the epoch of capitalist decay. The latter assessed capitalism as if it were again ascendant; as if there were progressive as well as reactionary wings of capital, capitalists who could be aligned within order to further radical struggles. No wonder reformist and nationalist ideologies flourished. In “the real world,” capitalism seemed to have eradicated its “final” crisis and tempered its periodic ones.

With “official” Stalinist and reformist theories this was explicit. In the advanced countries the continued existence of capitalism was the first postulate of every political program. The popular front and the “mixed economy” were accepted as obviously beneficial, with socialism relegated to the bye and bye. Likewise, in the rebelling “Third World” a whole stage of progressive capitalism and multi-class fronts was posed before the socialist revolution could be deemed timely.

Other professed Marxists went along with the political conclusions of this “progressive capitalism” approach. But not being committed to parties which had to maintain a working-class facade, they could be even more openly cynical and could question the proletarian basis of Marxism itself. Whether it was said openly or not, these people believed that capitalism had become so progressive fundamentally that its basic material problems had been solved – leaving only its cultural immiseration to be dealt with.

For example, at the height of the boom the predominant theory masquerading as up-to-date Marxism was presented in the book Monopoly Capital by Paul Baran and Paul Sweezy. They argued that in the (supposedly non-competitive) monopoly stage of capitalism, the problem was no longer insufficient profits but “the tendency of surplus to rise; hence economic crises are replaced by long-term stagnation, on the one hand, and social crises (“emptiness, degradation, … moral bankruptcy”) on the other. For this reason among others “the answer of traditional Marxian orthodoxy – that the industrial proletariat must eventually rise in revolution against its capitalist oppressors – no longer carries conviction.” Baran and Sweezy denied that capitalism generated crises so profound that capital could resolve them only through unrelenting attacks on the working class and thereby abandoned all hope of proletarian revolution.

Even today when the crisis is upon us, the memory of the post-war boom remains powerful. Radical theorists like the open defenders of capitalism, still think of the world in terms of 19th-century cycles. Take for example the recent book What’s Wrong with the U.S. Economy?, written by radical economists associated with the left-talking wing of the trade union bureaucracy. The authors lay the blame for the crisis of the 1970’s on a corporate power grab:

1) Corporations developed and abused too much supervisory control in production. 2) Corporations erected and nearly strangled us with a top-heavy corporate bureaucracy. 3) Less and less subject to market or popular discipline, corporations generated spreading waste of resources and products. 4) Underneath all these problems, problems emerged as more and more people found it necessary to rebel against corporate domination in the domestic and world economy.

The suggestion is that the capitalists took advantage of the prosperous conditions of the post-war boom in order to assert their power – and thereby brought the boom to an end. It follows that if corporate power could be imposed so quickly it can just as easily be reversed, through a political struggle for “workplace democracy,” “community enterprises,” “democratic planning” and “democratic capital controls.” These “principles for pulling ourselves out of the economic crisis” are based on the assumption that devastating crises are still reversible even under capitalism. Socialism would be better able to avoid “these recurring headaches,” but serious problems can be escaped more easily simply by democratizing capitalism.

The idea that the working class is to play not a revolutionary role but one of goosing the capitalists into running a better, more democratic society is an old one. It was originated by Eduard Bernstein, the pre-World War I Social Democrat whose “revisionist Marxism” reasoned that capitalist development was making the system evolve in a socialist direction. Workers’ cooperatives and the like were useful to keep things democratic in the meantime. Bernsteinian revisionism was based on an accommodation to the superficial material realities of the day; the catastrophes of the interwar period proved it disastrously wrong. Today such theories must also rely on a blindness of historical hindsight.

Such reformists squirm in various ways to find new schemes for restoring the old prosperity. In France, Francois Mitterrand’s popular front regime started off two-years ago with a “bold” policy of nationalizations aimed at bolstering French capitalism during the world recession. But this program and its few sops to the workers bogged down and have now been replaced with an austerity policy (as we foresaw from the start: see Socialist Voice No. 14, page 15). Mitterrand’s nationalization policies are typical of today’s reformism, and its failure was inevitable. So is the “socialist” austerity policy: it too will be vastly insufficient to overcome the crisis conditions.

For the world crisis that emerged in the early 1970’s and is now intensifying is not simply another cyclical downturn. It represents the re-emergence of the conditions of epochal decay that were suppressed by the post-World War II boom; it foreshadows the onset of a new Great Depression. In this deepest crisis since the 1930’s, the major capitalist states are trying their best to prevent big firms from going under: government bailouts, insurance schemes, guarantees of unrecoverable bank loans and nationalization are techniques that have been used. But these only inflate the crisis balloon more. In a world as unstable as this one – with imperialist rivalries, nationalist uprisings and powerful working classes increasingly frustrated at living under crisis conditions – the balloon cannot float much longer.

The Crisis of Stalinism
It is not only the West that is on the brink. The collapse of Poland’s economy, both before and after the flourishing of the Solidarity movement, should have signalled even the most abject apologists for Soviet-style “socialism” that the Stalinist countries were not immune from the world crisis. Other Stalinist states have had crises and years of negative growth before, but not like Poland’s. A leading Polish economist wrote in a Warsaw newspaper recently that “this is one of the biggest catastrophes in world economic history” (cited in the New York Times, March 24, 1983).

Our analysis that the Stalinist states are statified capitalist economies has been presented in detail before (see Socialist Voice No. 2). At first we could only point out that the crisis of Stalinism was inevitable; now the facts to prove it are overwhelming. The apologists who believed that crises were impossible in the “post-capitalist” societies have been proved wrong.

But that does not prevent them from insisting that Stalinism’s crisis has nothing to do with capitalism. Thus the pseudo-Trotskyist Ernest Mandel insists that Poland “in any case has been hit by a crisis of underproduction and not overproduction” (Intercontinental Press, June 28, 1982). Aside from the fact that for Marxists underproduction crises are characteristic of pre-capitalist, pre-industrial societies (and that “post-capitalist” economies, where “labor power is no longer a commodity,” should not be hit by production crises at all), such a statement is based on a contradictory, superficial assessment. Mandel makes similar yet even more absurd arguments in a new article on “China: the Economic Crisis” (in the 1982 Socialist Register) ; the title itself is a refutation of Mandel’s decades-long world view. While he claims that China is progressive because of the fact “that labor power is no longer a commodity, that there is no longer a labor market in China, that workers have job security and a guaranteed minimum wage,” Mandel also speaks of “the enormous extent of rural unemployment and urban unemployment” and “the rise of youth unemployment” (apparently he means job security for employed workers only), the ten percent of Chinese peasants “who do not eat enough to still their hunger,” and inflation rates of 15 to 20 percent (so much for guaranteed minimum wages). Then in a postscript he adds, “As a result of retrenchment, thousands of factories have been idled or shut down” so that urban unemployment doubled from early 1980 to late 1981; what’s more, “the threat of dismissal now hangs over the heads of 100 million wage-earners in China.” But of course this has nothing in common with capitalism and its overproduction crises!

Under Stalinism, the capitalist tendency toward periodic overproduction exists but takes on a somewhat different form. The “centrally planned” economies still represent separate capitals – both within each country, and especially across national borders. For example, each small Eastern European country demands its own steelworks. In the 1970’s Poland built the huge Huta Katowice complex, designed to produce more steel than Poland could possible export or use itself – at a time when there was already tremendous idle capacity in the steel industry of its hoped-for markets, the United States and Western Europe.

In traditional capitalism, market forces – either through falling sales or advance surveys – would pressure against such construction during slumps. But with Stalinism the construction continues, following the directives (hardly scientific plans) of the central administration. No ministry or section of the bureaucracy will cancel its plans alone for fear of getting behind in the competitive race. Under these conditions, the crisis finally occurs when a shortage of materials or capital for construction compels whole projects to be shut down or left partially completed and therefore largely useless. The underlying cause of overproduction crises is the same in the Stalinist form of statified capitalism. But Stalinism has sacrificed some of capitalism’s economic flexibility, notably the ability to close down unprofitable operations at will. It thereby delays the onset of crises and so makes them all the more devastating when they ultimately occur.

In the West, the crisis of overproduction makes itself visible as an excess of commodities (both for consumers and for industry) which fail to be sold. In the East there is hardly an excess of consumer goods; that is because Stalinist priorities inevitably downgrade consumer production, carrying out the Marxist law of the subordination of consumer goods to production goods in capitalism to its limit. But this represents no “crisis” of underproduction: under Stalinism, consumer goods are permanently underproduced. On the other hand, in the Stalinist crisis industrial inventories increase much faster than usable output; and the abandoned and partially completed projects that dot the landscape – despite decades of bureaucratic recriminations and exhortations to plan better – are testimony to the law of overproduction.

The Marxist falling rate of profit tendency also has its effect under Stalinist capitalism, although since this system has existed only for just over four decades the century-long growth figures that we have for the United States are not available. We cited Russia’s economic decline six years ago (Socialist Voice No. 4, page 22). Now the CIA report on the Soviet economy provides new evidence. For example, its measurement of annual rates of growth in the gross national product (GNP), calculated for each five-year-plan period, show a decline from 5.5 percent in 1951-55 and 5.9 percent in 1956-60, to 5.0 percent in 1961-65, 5.2 percent in 1966-70, 3.7 percent in 1971-75 and 2.7 percent in 1976-80. Likewise, the CIA’s calculation of Soviet industrial production shows a decline from an annual growth rate of 9.4 percent in the 1951-59 period to 6.3 percent in 1960-75 and 3.4 percent in 1975-80. (The USSR’s official rates for the same periods are larger but declining in parallel: 12.0 percent, 8.2 percent and 4.4 percent.)

As we argued for the U.S., declining growth rates reflect declining profit rates, since accumulation is based on investment of profits. For the USSR this connection is even more striking, since the CIA also indicates that investment rates in the USSR have sharply increased: from 14 percent of GNP in 1950 to 33 percent of GNP in 1980. That is, increasing investment produces decreasing growth, a sure sign that the rate of return on investment – the rate of profit – has been falling over the 30-year period.

The falling rate of profit tendency has helped bring the Stalinist economies from their peaks at the hour of their triumphant counterrevolutions over the proletariat in the 1930’s and 1940’s, down to the morass of capitalist decay. As with traditional capitalism, this tendency exacerbates the conditions that generate crises.

A number of leftist commentators have applauded the CIA report for demonstrating the “progressiveness” of Soviet “socialism” despite its obvious difficulties. There is considerable irony in this. Remember the old days during the boom when the Stalinists crowed about how the Russian and satellite economies were growing at a fantastic pace, how soon they would outdistance the U.S., Japan and West Europe, how hours of work were to be qualitatively reduced? Now the sycophants have to search feverishly for something positive to say. Thus the Guardian newspaper (March 23) wrote, “Clearly, the Soviet Union has major problems. It also has major economic strengths, including natural resources that are the envy of the U.S.” – as if mineral wealth is a socialist accomplishment. The Guardian also criticized the CIA for pointing to declining Soviet growth “without mentioning that even in slowing down during the 1970’s it had kept pace with the U.S.” Keeping pace with an economy undergoing depression conditions is no great achievement either. And it is a far cry from the claims of outstripping the reactionary West that used to constitute the Guardian’s “proof” that Russia was socialist.

In a similar vein, the pseudo-Trotskyist Militant (April 1) used the CIA report to proclaim that “The Soviet workers state is a dynamic and progressive society.” Likewise Frontline, a new Stalinist paper descended from the Guardian, concluded that “The fact of the matter is that the Soviet Union today is an economic powerhouse.” That’s what all the bourgeois ideologists say about the U.S. economy when they pray for profits to recover. But workers and socialists who think for themselves know better – and ought to in the case of the USSR as well.

Frontline, in defending Russia’s economic performance, is forced into the argument that “The decline in the rate of GNP is certainly troubling, although a certain leveling off from the spectacular gains of the earlier period was only to be expected.” Of course, Frontline’s progenitors in the 1950’s neither expected nor predicted anything of the kind. In fact, the Stalinists had to say the exact opposite in order to maintain some semblance of a Marxist justification for calling Russia socialist. For beneath all the Stalinists’ concern over the USSR’s growth rates lies the class question: if Russia is a workers’ state (and certainly if it is already socialist!), it must be developing towards a communist society of abundance. Such a transitional state would have to show accelerating rates of productivity, unhampered by the social relations (class barriers) of capitalism. Publishing today in the aftermath of the cynical corrosion of Marxist hopes, Frontline blithely demonstrates that Russia is no kind of transitional state at all without realizing that this is what it is saying.

As we have shown, the virtue of the crisis for a capitalist economy is that it revives profitability and enables expansion to resume. But this requires raising unemployment levels and wiping out weaker enterprises. (No wonder Stalinist planners openly wish they could fire masses of workers!) Stalinism has been deprived of these economic weapons in exchange for central administration. This trade-off enables backward countries to build up their economies slightly, starting from a point where so much basic industrial construction is needed that overproduction is not an immediate problem and huge growth rates can be recorded for a few years. But the trade-off presents a major obstacle to reaching modern levels of productivity for an industrial country operating under the economic laws of capitalism. That is why Stalinism is facing the crisis in its present form: it has been delayed for years, but is seemingly permanent once it occurs. That is, unless the Stalinists could smash the workers again, reduce their standard of living drastically and eliminate all the gains of the Bolshevik revolution which they haven’t yet been strong enough to destroy.

Crisis of Reformism
We have seen that traditional Western capitalism also has crises in a form different from the classical business cycle. It too has become hidebound, weighed down by giant firms whose collapse would be catastrophic for even the strongest countries. The rulers of both East and West are faced with an overwhelming dilemma: their economies need to undergo a full-scale crisis to wipe out capital and smash the working classes, but the size of the collapse required and of the industries affected is so great that this “cure” cannot be risked. Its effects are unpredictable, for one thing, and a revolutionary response by masses of workers is feared. Hence both Eastern and Western rulers are attempting to run business as usual, and the forces building up for a future collapse remain.

For several decades the Stalinist system and its ideology of nationalization as a solution to economic problems served capitalism well. It was a bulwark against revolution in Europe; it channeled the mass upheaval in China into a nationalist dead end; it persuaded the workers and peasants during innumerable colonial revolutions that their interests were the same as the national bourgeoisie’s; it acted as a reformist prop of imperialism in the advanced countries. But that has changed. Its economy no longer works as a model, even when seen through the rosiest glasses. The USSR can no longer bolster the collapsing satellite economies. It can no longer offer to prop up a tiny Nicaragua in its nationalist rebellion against U.S. domination the way it once took Cuba in tow.

Moreover, the original strength of the Stalinists – like the Social Democrats before them – came from the mass proletarian movements whose leadership they usurped. This too has changed. Neither brand of reformism now commands the enthusiasm of masses once the workers go into motion. But this does not mean that their futile reformist programs are harmless. In the twenties and thirties millions of people in desperate economic conditions, finding no way out on the left, turned to fascism and its proclamation of “national socialism.” The same can happen again – all the more so since the “solution” capitalism requires for another upswing is a bout of violent defeats for the working class.

Reformist statification on a “democratic” basis is useless for capital, as Mitterrand’s effort has shown. But if capitalism is to revive it needs further centralization, something now only possible through outright repression of the masses. “Liberalizing” Stalinism no longer provides the cadre to accomplish this for the sake of a promised communist future, and “democratic” reformism needs prosperity to operate. Only a new fascist movement – based on distorted hopes for a radical alternative but channeled through a program of racist and anti-communist violence – can carry out capitalism’s economic program. The reformists and Stalinists who offer the masses no revolutionary solution to the capitalist crisis will share the responsibility if fascist radicalism wins out.

Marx was often mocked both during his own lifetime and after for predicting the collapse of capitalism. Yet his description of the system that advances only through economic crisis has proved remarkably accurate, and his prediction of the epoch of capitalist decay was more than confirmed by the thirty years of unprecedented horrors from World War I to World War II. Those who regard the fundamentals of Marxism as disproven are basing their hopes for capitalism’s future on the ephemeral post-World War II boom – that is, on the unprecedented defeat of the working class that made it possible (as well as on the labor-aristocratic and middle-class perspective of the most insulated imperialist countries). Capitalism in the 1930’s already proved what brutalities it is capable of in times of desperation. One hundred years after Marx’s death, it remains true that the horrors of capitalism’s decay can be prevented only by its overthrow.

https://www.marxists.org/history/etol/n ... arx19.html