CHAPTER SIX
THE CYCLICAL NATURE OF CAPITALIST
PRODUCTION
A characteristic feature of capitalism is its trade, or business or economic, cycle. The
concepts of “Boom,” “Crisis” and “Slump,” or “Recession,” or “Depression”, have
now found their places in the academic economic literature and practical policy
measures. Economists, politicians and policy-makers have generally accepted the
view that these are identifiable phases of economic life, with slumps and recessions
seen as a "necessary pain" to be tolerated from time to time.
Repeating economic cycles of booms, crises and slumps are endemic to capitalist
production. However, economists and politicians take a superficial view of booms and
slumps, portraying capitalism as a generally stable, harmonious and self-adjusting
system. On the other hand, Karl Marx presented a clear and wide-ranging analysis of
the cause and effect of capitalist accumulation cycles in his works. According to him,
the trade cycle is an inherent feature of capitalism, an integral part of its “law of
motion”.
MARX ON THE POSSIBILITY OF CRISES
The early nineteenth century French economist Jean-Baptiste Say (1767-1832) argued
that “overproduction” was impossible because supply creates its own demand, or as
he put it in his well-known saying, “Every seller brings a buyer to market.” Actually
this saying originated in the axiom “Every sale is a purchase” put forward by Dr.
François Quesnay (1694-1774), the Physiocrat. This is only true for barter – the direct
exchange of one commodity for another – where both parties get what they want
simultaneously. Marx pointed out that where the exchange of commodities takes place
through money this is no longer the case:
“Nothing could be more childish than the dogma, that because every sale is a
purchase, and every purchase is a sale, therefore the circulation of
commodities necessarily implies an equilibrium between sales and purchases
… [I]ts real purport is to show that every seller brings his own buyer to market
with him … No one can sell unless someone else purchases. But no one is
forthwith bound to purchase because they have just sold.”1
On the other hand, if a seller cannot make a sale then he cannot make a purchase
either:
“The metaphysical equilibrium of purchases and sales is confined to the fact
that every purchase is a sale and every sale a purchase, but this gives poor
comfort to the possessors of commodities who unable to make a sale cannot
accordingly make a purchase either.”2
This makes a crisis – as the point at which the circulation of commodities is
interrupted – a theoretical possibility:
“If the interval in time between the complementary phases of complete
metamorphosis of a commodity become too great, if the split between the sale
and the purchase become too pronounced, the immediate connexion between
them, their oneness, asserts itself by producing – a crisis.”3
According to Marx, then, the division of exchange into purchase and sale contains the
general possibility of commercial crises. True, money and its circulation via trade and
commerce had come into existence long before capitalism (i.e. wage-labour/capital
relation or buying and selling of labour-power under production for profit) came into
existence. Moreover, humanity did not see any commercial crises before capitalism.
Periodic commercial crises have been a typical characteristic of the capitalist mode of
production ever since the first such crisis in 1825.
However, Marx wanted to show more than that crises were possible under capitalism
and that, if one occurred, it would just be accidental. He wanted to show how crises
were inevitable under capitalism.
MARX ON THE INEVITABILITY OF CRISES
What, for Marx, made crises inevitable under capitalism was its nature as an
economic system of the accumulation of capital out of the profits made from
“realizing”, i.e. converting into money, the surplus value extracted from the unpaid
wage-labour of the producers (the working class). Every capitalist enterprise, as an
autonomous unit of capital seeking to expand itself, was in competition with other
capitalist enterprises to realize the surplus value to do this by selling the commodities
in which it was embodied.
This anarchic, competitive struggle to realize and accumulate surplus value as new
capital inevitably resulted in a disproportionate development between the different
branches of industry. It was this inevitable disproportionality, owing to the
spontaneous nature of capitalist production, which leads to crises, with
proportionality or equilibrium in itself being accidental.4 Crises were in fact a way of
forcibly bringing about equilibrium, if only temporarily, and of allowing capital
accumulation to resume:
“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. The contradiction, to put it in a very general way,
consists in that the capitalist mode of production involves a tendency towards
absolute development of the productive forces, regardless of the value and
surplus-value it contains, and regardless of the social conditions under which
capitalist production takes place; while, on the other hand, its aim is to
preserve the value of the existing capital and promote its self-expansion to the
highest limit (i.e., to promote an ever more rapid growth of this value).”5
On a different level, crises were are a manifestation of the contradiction between the
forces of production (what can be produced) and the relations of production (which
restricted what can be sold, most consumers being exploited wageworkers):
“The conditions of direct exploitation, and those of realising it, are not
identical. They diverge not only in place and time, but also logically. The first
are only limited by the productive power of society, the latter by the
proportional relation of the various branches of production and the consumer
power of society. But this last-named is not determined either by the absolute
productive power, or by the absolute consumer power, but by the consumer
power based on antagonistic conditions of distribution, which reduce the
consumption of the bulk of society to a minimum varying within more or less
narrow limits.”6
“Since the aim of capital is not to minister to certain wants, but to produce
profit, and since it accomplishes this purpose by methods which adapt the
mass of production to the scale of production, not vice versa, a rift must
continually ensue between the limited dimensions of consumption under
capitalism and a production which forever tends to exceed this immanent
barrier.”7
“The growing incompatibility between the productive development of society
and its hitherto existing relations of production expresses itself in bitter
contradictions, crises, spasms. The violent destruction of capital not by
relations external to it, but rather as condition of its self-preservation, is the
most striking form in which advice is given it to be gone and to give room to a
higher state of social production. … These contradictions lead to explosions,
cataclysms, crises, in which by momentaneous suspension of labour and
annihilation of a great portion of capital the latter is violently reduced to the
point where it can go on.”8
The activating cause of a crisis is the disproportionate development which, due to the
inherently anarchical nature of capitalist production, inevitably occurs as the different
autonomous capitals seek to expand regardless of the overall impact of this. The
necessary condition for a crisis is “the limited dimensions of consumption under
capitalism”. Analogically, an explosion in a coalmine happens only when a spark
ignites an explosive gas pocket. Here the activating cause is the spark and the
necessary condition is the existence of the explosive gas pocket.
MARX’S DESCRIPTION OF THE ECONOMIC CYCLE
Crises, then, are no accident under capitalism; nor is the resulting interruption in
production permanent. They are the way in which capital accumulates on a societywide basis over time, not as a steady upward line but as a period of rapid growth,
followed by a sudden interruption, followed by another period of rapid growth,
followed by another interruption, in a continuing upward spiral.
As Marx described it first in 1847:
“…production is inevitably compelled to pass in continuous succession
through vicissitudes of prosperity, depression, crisis, stagnation, renewed
prosperity, and so on.”9
And, twenty years later, in his major published work, Volume I of Capital:
“The factory system’s tremendous capacity to expand with sudden immense
leaps, and its dependence on the world market, necessarily gives rise to the
following cycle: feverish production, a consequent glut on the market, then a
contraction of the market, which causes production to be crippled. The life of
industry becomes a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation.”10
In Value, Price and Profit, a lecture delivered in London to trade unionists in 1865,
Marx expressed himself directly in English:
“capitalist production moves through certain periodical cycles. It moves
through a state of quiescence, growing animation, prosperity, over trade, crisis
and stagnation.”11
In current terminology, we would use the word “boom” rather than “prosperity”, and
“recession,” “depression” or “slump” for Marx’s word “stagnation”.
Although a “crisis” leads to “stagnation” it is not the same (though frequently the two
are conflated, even by Marx himself as in some of the quotes above). Here it is the
financial crash that results when trade bills cannot be honoured and bank loans cannot
be repaid, which represents the turning point in the trade cycle that closes a phase of
prosperity or boom with high profits for the capitalists and rising wages and salaries
for the workers. A crisis is a sudden breaking point registering the end of a boom,
though signs of some slackening of production will have begun to have become
evident beforehand. After that a full-scale period of “stagnation”, or slump, sets in as
production falls and unemployment rises dramatically.
Marx’s “state of quiescence” meant a phase when a recession is ending, production
has stopped falling, unemployment has stopped rising and market tendencies take a
moderately even course from the low level. The period of “growing animation” meant
the period when industries are expanding in full swing. However, owing to the
constant improvement of technology – automation, robotics etc. – we also see “jobless
growth” whereby, with new industries coming up and replacing old ones, production
rises while unemployment also rises.
By “over-trade”, Marx meant the phase when many firms in a particular branch of
industry have produced more than they can profitably sell. This is often also called
“overproduction” but this can be misleading as it is not overproduction in relation to
needs, but only in relation to market, i.e. paying, demand, as Marx reminds us:
“The word over-production in itself leads to error. So long as the most urgent
needs of a large part of society are not satisfied, or only the most immediate
needs are satisfied, there can of course be absolutely no talk of an overproduction of products – in the sense that the amount of products is excessive
in relation to the need for them. On the contrary, it must be said that on the
basis of capitalist production, there is constant under-production in this sense.
The limits to production are set by the profit of the capitalist and in no way by
the needs of the producers. But over-production of products and overproduction of commodities are two entirely different things.”12
In a boom, when the market is hungry for more commodities and profits are rising,
enterprises go on accumulating capital. However, this situation does not last.
Enterprises constantly compete for profits, which they require so as to be able to
accumulate capital and thereby survive against their competitors.
Under capitalism, thousands of competing enterprises operating without social coordination or regulation make decisions about investment and production. The
competitive drive to accumulate capital compels enterprises to expand their
productive capabilities as if there was no limit to the available market for the
commodities they are producing. This eventually leads some enterprises – usually
those that have grown very rapidly – to over-extend their operations for the available
market. Thus, a situation of “over-trade” develops in one or more branches of
industry (but not all) during the boom.
In capitalism, growth is not, and cannot be, planned. Anarchy rules over the market.
The growth of one industry is not linked to the growth of other industries but simply
to the expectation of profits, and this gives rise to uneven accumulation and growth
between the various branches of production. The over-accumulation of capital in
some sectors of the economy soon appears as an overproduction of commodities.
Goods pile up, unable to be sold, and the enterprises that have over-extended their
operations have to cut back production.
Then competition for a larger share of the markets involves enterprises in a price war
that leads to falling profits and losses. Eventually the out-competed enterprises go
bankrupt. Others cut back or put off further expansion projects, reduce production and
sack surplus workers.
The crucial aspect of overproduction is an over-expansion and over-supply by a
particular industry or group of commodity producers. This results in an abrupt check
to the expansion of that industry, which entails a knock-on effect and chain reaction
on other industries connected to or dependent on it.
Improved communication technology and the growing importance of keeping stock
levels and non-working capital to a minimum have reduced the chance of a dramatic
oversupplying of a market. On the other hand, as Marx mentioned, there is another
factor for getting into a situation of serious oversupply:
“The credit system appears as the main lever of over-production and overspeculation in commerce solely because the reproduction process, which is
elastic by nature, is here forced to its extreme limits, and is so forced because a
large part of the social capital is employed by people who do not own it and
who consequently tackle things quite differently than the owner, who
anxiously weighs the limitations of his private capital in so far as he handles it
himself.”13
HOW A BOOM TURNS INTO A SLUMP
As commodities remain unsold, revenue and profits fall, making further investment at
the same time more difficult and less worthwhile. Accumulation stalls, saving and
hoarding increase and the unstable forces of money and credit soon transmit the
downturn to other sectors of the economy. The initially over-expanded enterprises cut
back on investment and this leads to a fall in demand for their supplier’ products, who
in turn are forced to cut back, causing difficulty for their suppliers' suppliers, and so
on. Profits fall, debts mount up and the banks push interest rates up and contract their
lending in a vicious downward spiral of economic contraction. In this way, what
started as a partial overproduction for particular markets is turned into general
overproduction with most sectors of industry affected. As Engels pointed out, with the
onset of a crisis, capitalism enters into a
“vicious circle … bankruptcy follows upon bankruptcy, execution upon
execution. ... It becomes a trot. The industrial trot breaks into a canter, the
canter grows into the headlong gallop of a perfect steeplechase of industry,
commercial credit, and speculation, which after break-neck leaps, ends where
it began - in the ditch. And so over and over again. We have now, since the
year 1825, gone through this five times, and at the present moment (1877) we
are going through it for the sixth time. And the character of these crises is so
clearly defined that Fourier hit all of them off when he described the first as
crise pléthorique, a crisis of plethora.* In these crises, the contradiction
between socialized production and capitalist appropriation ends in a violent
explosion. The circulation of commodities is, for the time being, stopped.
Money, the means of circulation, becomes a hindrance to circulation. All the
laws of production and circulation of commodities are turned upside down.
The economic collision has reached its apogee. The mode of production is
rebellion against the mode of exchange, the productive forces are in rebellion
against the mode of production which they have outgrown. ... “abundance
becomes a source of distress and want” (Fourier).”14
The result of this chain reaction throughout the economy is a slump with
consequential high unemployment. Nevertheless, while some industries have “overtraded” others may still be expanding, with the overall curve moving downwards
having small up-and-down ripples.
HOW A SLUMP TURNS INTO A BOOM
In a slump there is simultaneously a problem of falling market demand alongside
declining profits. Attempting to deal with one problem (say consumer demand) at the
expense of the other (profits) as governments have done, will not improve the
situation. A number of quite distinct and separate things need to happen before a
slump can run its course. Firstly, some capital has to be wiped out or devalued if
excessive productive capacity is to be tackled, with devalued capital being bought
cheaply by those enterprises in the best position to survive the slump. Secondly,
destocking needs to take place, with overproduced commodities bought up cheaply or
written off entirely. Investment will not resume if the market is still saturated. Thirdly,
after this has happened, there needs to be an increase in the rate of industrial profit
helped by both real wage cuts and falling interest rates (which tail off naturally as the
demand for more money capital eases off in the slump.) This will help renew
investment and increase accumulation. In addition, if recovery is to be sustained, a
large proportion of the debt built up during the boom years will need to be liquidated
if it is not to act as a drag on future accumulation. Through these mechanisms, a
slump helps build the conditions for future growth, ridding capitalism of inefficient
units of production.
During recovery from a depression, the market for each industry appears to be
expanding, and the enterprises in each industry in each country get ready to expand
again. However, none of them knows for sure how much the total demand is going to
be. As they are always involved in competition against one another, each enterprise
struggles to enter as quickly as possible and to capture as large a share as it can. As
Marx noted, they all act as if the market were unlimited. Consequently, production
eventually overexpands in one industry; and the ground is prepared for the next
slump, which prepares the ground for the next period of growth, and so on in an everrepeating cycle, even if the level of production is higher during the succeeding cycles.
Crises and slumps invariably follow this general pattern. Although endemic under
capitalism, the cycle does not occur in an identical pattern everywhere every time.
Each cycle has some peculiar features of its own. No one can forecast about where,
when and how a crisis is going to happen. No one can predict in the global economy
which industry or country will be first affected or which will remain immune
altogether or which will recover first. Sometimes the initial overproduction takes
place in consumer goods industries, as it did in 1929, and spreads from there. At other
times, as in the mid-1970s, the initial over-expansion is in the producer goods sector
where enterprises produce new means of production like industrial steel or robotics
equipment. In the slump of the early 1990s a major factor was the over-extension of
the commercial property sector and some of the high-tech 'sunrise' industries. The
present slump was triggered by overproduction in the US house-building sector.
Whatever the immediate reason, the result is always the same – falling prices and
production, increased bankruptcies, wage cuts and unemployment, with an attendant
growth in poverty and misery.
CRISES CANNOT BE FORECAST OR AVOIDED
Despite repeated occurrences of the trade cycle, many economists believe that it is
possible to overcome the anarchy of capitalist production or at least to forecast when
the next crisis will happen so that measures to avoid it can be taken. Some argue that
globalization of production, changes in finance and the nature of employment,
government policy, emerging markets and information technology have all worked to
restrict trade cycles. However, the prevailing separation between the act of selling and
the act of buying lingers, with the chance that a seller may not find a buyer when
needed. Marx’s observation that “no one can sell unless someone else purchases …
But no one is forthwith bound to purchase because he has just sold” remains valid.
These economists fail to see what Marx worked out clearly because they do not study
the Marxist analysis of trade cycles. Trade cycles have been taking place since about
1825 and all remedial economic measures have failed to stop their recurrence. Quite
evidently, the cycles have come to exist as long as capitalism exists.
Capitalists have to decide about what will be in their best interest under the coercive
laws of competition. All are in a war against all. Capitalists do not share information.
Coercive laws of competition work against any co-operative communication of
information. Information provided by the capitalist governments involves only past
experiences and has little analytical precision and implication.
Positivist economists assume that price signals are transparent and capitalists are
capable of tackling capitalism in all its contradictions and anarchic actions; that their
legendary captains of industries are wise enough to choose the best rational option in
order to maximize their profits. However, those imaginary capitalists do not share
information and are involved in internecine conflicts against one another around the
globally accumulated profit. Capitalism is a system of class conflicts, competition,
artificial scarcity, secrecy, fragmented economic knowledge and decisions in the light
of the profit motive, which is irrational and anti-social in that it thwarts the means of
production from being used to satisfy social needs. Capitalism does not work in the
interest of the whole society.
Because of uncertainty about the market situation and the inaccuracy of information
due to existence of separate capitals and anarchy, no capitalist enterprise knows if it
would find buyers for the whole of its supplies. Moreover, today’s portfolio
investment has alienated the capitalists from the productive processes. In addition,
capitalist enterprises do not know what other capitalist enterprises in their own
sectors, countries or abroad are going to do. Even then, they expect to sell off their
supplies in the market. However, forces of demand and supply do not work the way
they think. Fluctuations shatter expected equilibrium.
This problem bedevils the economists and the governments they serve. Economists
and the governments are incapable of generating computer models based on rational
agents having all the information needed for correct decision-making, because the real
process of capitalist production and exchange runs in the opposite direction. Since
enterprises do not share information, there is no harmony in production. Thus, rational
evaluation of a situation is unworkable. That government statisticians are of little help
is made evident by the continuing succession of trade cycles. Economists, statisticians
and politicians are powerless before the destructive forces unleashed by commodity
production and exchange. They are helpless against the events happening in other
countries of the world. Governments cannot administer away the periodical
occurrences of the trade cycles.
One common view of how to avert a slump once a boom has come to an end is to
increase wages as a means of preventing demand from falling. This view was
endorsed, and justified theoretically, by John Maynard Keynes (1883-1946) and his
school of economists, but as Marx pointed out:
“It is sheer tautology to say that crises are caused by the scarcity of effective
consumption, or of effective consumers. The capitalist system does not know
any other modes of consumption than effective ones, except that of sub forma
pauperis or of the swindler. That commodities are unsaleable means only that
no effective purchasers have been found for them, i.e., consumers (since
commodities are bought in the final analysis 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. It appears, then, that capitalist
production comprises conditions independent of good or bad will, conditions
which permit the working-class to enjoy that relative prosperity only
momentarily, and at that always only as the harbinger of a coming crisis.”15
You cannot avert crises by raising wages at the expense of profits, any more than by
raising profits at the expense of wages. Keynesian policies when tried have always
failed.
THE LIMITS OF CAPITALISM
As we have seen in Chapter Three, commodities came into being with the advent of
the ancient private property with its simple commodity production and exchange
before capitalist era, but “commodity production becomes generalized, becomes the
typical form of production” only in capitalism.. According to Marx:
“In themselves money and commodities are no more capital than are the
means of production and of subsistence. They want transforming into capital.
But this transformation itself can only take place under certain circumstances
that centre in this, viz., that two very different kinds of commodity-possessors
must come face to face and into contact; on the one hand, the owners of
money, means of production, means of subsistence, who are eager to increase
the sum of values they possess, by buying other people’s labour-power; on the
other hand, free labourers, the sellers of their own labour-power, and therefore
the sellers of labour. Free labourers, in the double sense that neither they
themselves form part and parcel of the means of production, as in the case of
slaves, bondsmen, &c., nor do the means of production belong to them, as in
the case of peasant-proprietors; they are, therefore, free from, unencumbered
by, any means of production of their own. With this polarization of the market
for commodities, the fundamental conditions of capitalist production are
given. The capitalist system pre-supposes the complete separation of the
labourers from all property in the means by which they can realize their
labour.”16
Capital has not invented surplus-labour. It is only by turning the pre-capitalist
producers into wage-workers and their means into capital, by transforming their
labour-powers into values and their surplus labour into surplus value, commodity
production enforces “itself upon the whole society”, to “develop all its latent
potentialities”, to become “the typical form of production”, thereby turning the law of
value into the society’s fundamental law. In the words of Engels: “The 'exchange of
labour for labour on the principle of equal valuation,' … that is to say, the mutual
exchangeability of products of equal social labour hence the law of value, is the
fundamental law of precisely commodity production, hence also lf its highest form,
capitalist production.”17 Moreover, Marx pointed out, “Production of surplus value is
the absolute law of this mode of production.”18
With the progressive conquest of the economy and society by value through
dominating over all relations, all direct patriarchal, idyllic relations were done away
with.
Marx again:
“As soon as this process of transformation has sufficiently decomposed the
old society from top to bottom, as soon as the labourers are turned into
proletarians, their means of labour into capital, as soon as the capitalist mode
of production stands on its own feet, then the further socialization of labour
and further transformation of the land and other means of production into
socially exploited and, therefore, common means of production, as well as the
further expropriation of private proprietors, takes a new form. That which is
now to be expropriated is no longer the labourer working for himself, but the
capitalist exploiting many labourers. This expropriation is accomplished by
the action of the immanent laws of capitalistic production itself, by the
centralization of capital. One capitalist always kills many. Hand in hand with
this centralization, or this expropriation of many capitalists by few, develop,
on an ever-extending scale, the co-operative form of the labor-process, the
conscious technical application of science, the methodical cultivation of the
soil, the transformation of the instruments of labour into instruments of labour
only usable in common, the economizing of all means of production by their
use as means of production of combined, socialized labour, the entanglement
of all peoples in the net of the world-market, and with this, the international
character of the capitalistic regime. Along with the constantly diminishing
number of the magnates of capital, who usurp and monopolize all advantages
of this process of transformation, grows the mass of misery, oppression,
slavery, degradation, exploitation; but with this too grows the revolt of the
working-class, a class always increasing in numbers, and disciplined, united,
organized by the very mechanism of the process of capitalist production itself.
The monopoly of capital becomes a fetter upon the mode of production, which
has sprung up and flourished along with, and under it. Centralization of the
means of production and socialization of labor at last reach a point where they
become incompatible with their capitalist integument. Thus integument is
burst asunder. The knell of capitalist private property sounds. The
expropriators are expropriated.”19
THE REAL BARRIER
“The real barrier of capitalist production is capital itself. It is that capital and
its self-expansion appear as the starting and the closing point, the motive and
the purpose of production; that production is only production for capital and
not vice versa, the means of production are not mere means for a constant
expansion of the living process of the society of producers. The limits within
which the preservation and self-expansion of the value of capital resting on
the expropriation and pauperisation of the great mass of producers can alone
move – these limits come continually into conflict with the methods of
production employed by capital for its purposes, which drive towards
unlimited extension of production, towards production as an end in itself,
towards unconditional development of the social productivity of labour. The
means – unconditional development of the productive forces of society –
comes continually into conflict with the limited purpose, the self-expansion of
the existing capital. The capitalist mode of production is, for this reason, a
historical means of developing the material forces of production and creating
an appropriate world-market and is, at the same time, a continual conflict
between this its historical task and its own corresponding relations of social
production.”20
The very process of value’s coming into being and self-assertion is itself alienating,
and hence competitive. The law of competition of alienated and self-expanding values
in order to appropriate surplus value leads to progressively higher organic
composition of the social capital, i.e. a constant increase in the constant constituent at
the expense of its variable, or reversely, a constant relative decrease in its variable visà-vis its constant (c/v), and consequently the total capital {c/(c+v)}. This causes in a
progressive development of social productivity of labour. “The immediate result of
this is that the rate of surplus-value, at the same, or even a rising, degree of labour
exploitation, is represented by a continually falling rate of profit.21
“This is in every respect the most important law of modern political economy and
most essential for understanding the most difficult relations.”22 This law, an
expression of the self-contradictions of the law of value, through throat cut
competition leads to violent destruction of capital by capital “not by relations external
to it but rather as a condition of its self-preservation”23
Then it becomes necessary that this relation be replaced with a higher form of social
production.
Taking over the great institutions of production, distribution and communication, first
by joint-stock companies, later on by trusts, then by the state, and now by the
multinationals, the capitalist class demonstrated itself to be a superfluous class.
Salaried employees now perform all its functions.
As Engels concluded:
"In proportion as anarchy in social production vanishes, the political authority
of the state dies out. Humankind, at last the master of their own form of social
organization, becomes at the same time the lord over nature, his own master –
free. To accomplish this act of universal emancipation is the historical mission
of the modern working class. To comprehend thoroughly the historical
conditions and thus the very nature of this act, to impart to the now oppressed
working class a full knowledge of the conditions and of the meaning of the
momentous act it is called upon to accomplish – this is the task of the
theoretical expression pf the working class movement, scientific socialism.”24
For today’s revolutionaries, the abolition of private property does not mean abolition
of the pre-capitalist private property, “there is no need to abolish that; the
development of industry has to a great extent already destroyed it and is still
destroying it daily,” as has been observed by Marx and Engels in the Manifesto. For
establishing socialism what is to be abolished is the property in its present form,
which is based on the antagonism of capital and wage-labour – a relation of
production, which is constantly being reproduced by wage-workers not in their own
interest but in the interest of their employers.
CAPITALISM WILL NOT COLLAPSE
In Volume II of Capital Marx outlined a reproduction schema for capitalist
production on an expanded scale assuming a two-sector economy, and in Volume III
gave his view about the tendency of the rate of profit to fall predicted by David
Ricardo (1772-1823) and others. Marx recorded many observations on these
questions, which are to be found in the relevant parts of Capital and Theories of
Surplus Value. For a comprehensive understanding of what his point of view was, one
has to study these scattered texts carefully. However, students of Marx have unduly
emphasized this or that aspects of his theory of crises leading to confusions.
While dealing with Marx’s reproduction schema, some students of Marx have made
mistakes, emphasizing this or that aspect and portraying perspectives about
capitalism’s eventual purely economic breakdown or even imminent collapse.
Rosa Luxemburg claimed in her 1912 work The Accumulation of Capital to have
found a “flaw” in Marx’s schema and that accumulation and expansion was
impossible as he assumed under “pure” capitalism, i.e., a society and economy
composed only of capitalists and workers and their hangers-on and dependants. She
envisaged that capitalism had to rely on non-capitalist areas of the world economy to
buy the part of the product in which the surplus value destined for accumulation was
embodied. According to her, as capital approaches the point where humanity only
consists of capitalists and proletarians, further accumulation would become
impossible. Thus, she envisaged a permanent crisis. Some of her followers are always
foreseeing a state of imminent collapse. This is far from adequate in that it takes little
consideration of the question of “one capital killing many capitals” whereby
capitalism always renovates itself.
In addition, overall demand is not determined only by the consumption of the workers
and the capitalists as she assumed, but by this plus the investments of the capitalists.
There is therefore no permanent surplus production in Luxemburg’s sense and no
global saturation of markets. In any case, the reason of recurring crises and
depressions cannot be found simply in the sale of commodities on the market any
more than it can be solely found in the sphere of production.
In 1929 Henryk Grossman in The Law of the Accumulation and Breakdown of the
Capitalist System examined the schema and came to the opposite conclusion – that the
capitalist system would eventually breakdown due not enough surplus value being
produced. He tied this to Marx’s explanation of the long-run tendency of the rate of
profit to fall as being due to the increasing proportion of capital invested in machinery
and equipment (constant capital, c) compared with that invested in the purchase of
productive wage-labour (variable capital, v). This is a more plausible mistake than
Luxemburg’s as it could in theory happen – but only in theory since, for it to happen,
technical progress in capitalism and the growth of constant capital would have to be
extremely fast and high so that ‘c/v’ tended to infinity.
Marx himself, however, never believed in the possibility or existence of a permanent
crisis due to some such factor as Luxemburg and Grossman claimed to have
identified. Discussing a similar view put forward by Adam Smith (1723-1790), Marx
specifically rejected there being some permanent obstacle to capital accumulation:
“When Adam Smith explains the fall in the rate of profit from an overabundance of capital, an accumulation of capital, he is speaking of a
permanent effect and this is wrong. As against this, the transitory overabundance of capital, over-production and crises are something different.
Permanent crises do not exist”25
Paul Mattick in Economic Crises and Crisis Theory (Merlin Press, 1981) attempted to
explain capitalism’s periodic crises as a check and correction to the long-term
tendency of the rate of profit to fall. However, in asserting that a falling rate of profit
makes crises inevitable from time to time as a means of countering this, Mattick was
going beyond Marx’s understanding that this was only a tendency and one which
could be checked or even overcome by countervailing tendencies and measures. Marx
listed these in Chapter 14 of Volume III of Capital as:
A.
B.
(i)
(ii)
(iii)
C.
D.
E.
F.
The increasing intensity of exploitation by raising the rate of absolute surplus
value by lengthening of the working day – through increasing the working
hours, by economically compelling almost all of a family including children to
work multiplying working time by number of hands for a single family wage,
as well as through introducing shift work.
Raising the relative rate of surplus value by:
increasing the surplus labour at the expense of the necessary labour in a
working day,
cheapening of the elements of constant capital, and
increasing productivity and intensity of work via unceasing improvement of
technology.
Depression of wages below the value of labour power.
Relative over-population.
Foreign trade.
The increase of joint-stock companies, issuing stocks and shares.
Experience has adequately proved that these have been powerful enough to prevent
any observable fall in the rate of profit in the long run, even though the short-term rate
of profit has come up or down depending on which phase of its periodic cycles
capitalism has been in. In any event, such a long-run permanent tendency, even if it
were observable, would not be able to explain the periodic cycles of crises involving
booms and slumps that are an observable feature of capitalism. This has to be sought
elsewhere – in the disproportionate development that results from the inherent
anarchic nature of capitalist production.
Capitalism will not breakdown economically. It will, as usual, pass through cycle after
cycle of booms, crises, slumps and recovery until it is replaced with socialism by the
working class.
Capitalism is a system of society containing a dynamic yet anarchic interaction
between productive forces and social relations of production. The productive forces
comprise raw and auxiliary materials, premises and machinery, and mental and
physical skills of workers to produce goods and services, which constitute the social
wealth. The social relations of production are the class relations between the capitalist
class and the working class. The capitalist class is that tiny part of the population that
owns and controls the means of production and distribution by virtue of which they
employ workers with the main object of making profit through their exploitation. This
class is parasitically unproductive. The working class is the immense majority of
people who own or control nothing but their ability to work which they sell for a wage
or a salary in order to survive under the economic compulsion of exploitation.
Thus, the principal contradiction in capitalism is the unceasing conflict between the
forces of production and the social relations of production that manifests through the
conflict between the two great opposing classes. The potential and practical ability to
produce abundantly to meet the needs of the whole society goes side by side with the
main objective of profit, which limits sales of commodities to only paying purchasers
at profitable prices.
This contradiction engenders the periodical economic cycles of boom – crisis – slump,
whereby the social relations of production restraint the forces of production within the
anti-social fetters of production for profits, causing a class struggle that gives rise to
socialist ideas as workers oppose the prison-like features of the wages-slavery. A
slavery that binds workers’ lives within narrow limits of artificial scarcity vis-à-vis
potential and even actual abundance in reality.
Socialism is different from capitalism. This will be a worldwide social system based
on production for use. Things – homes, food, clothing and all other necessaries – will
be produced not for sale on the market with a view to profit, but for direct use. There
will be no exchange or trading of things, hence no trade cycles – no booms, no
economic crises or slumps. Socialism will be a society without poverty and hunger,
and without any system of employment. Having abolished the wages system with its
consequential exploitation, people as “associated producers” will cooperate to
produce what the society needs. Competition and war will be the things of the past.
Society will write on its banner: “From each according their ability, to each according
to their needs.”
THE GREAT CRASH OF 1929
On Tuesday 29 October 1929, the boom in the price of stocks and shares on the New
York stock exchange came to an abrupt end in what has gone down in history as the
Great Crash.
Stocks and shares are titles to ownership of part of a business. They entitle their
owners to a percentage of the profits of that business in the form of dividends or, in
the case of certain kinds of shares, fixed interest payments. In theory, the price of a
share reflects the value of the firm's assets. In practice, it fluctuates with the firm's
profit-making record and expected profits. It is this latter that introduces an element of
gambling into shareholding, since the firm can never know in advance whether or not
it will in actual fact make the hoped-for profits. If it doesn't then the price of its shares
will fall and the shareholders will suffer a loss. If it does then the price of its shares
will increase and the shareholder will receive a capital gain as well as a dividend.
A stock exchange boom is essentially a period of speculation for capital gains on
rising share prices. It need have nothing whatsoever to do with the profit-making
record or prospects of the firms whose shares are traded. It is enough that there is a
sustained excess of buyers over sellers on the stock market. With prices continually
rising, capital gains can be made simply by buying shares one day and selling them
the next. A telephone call is all the effort required.
Until October 1929, there was such a boom on the New York stock exchange. Share
prices were rising, and everybody expected them to go on rising. Stories of people
'getting rich quick' from buying and selling shares encouraged others to try their luck.
Actually, as long as the boom continued it was not a question of luck at all but a
matter of having money. If you did not have ready cash, you could borrow the money
to buy the shares. Certainly, you needed some collateral, but there were cases of
shares already bought on loans – and even of the shares to be bought by that loan –
being accepted as collateral.
The trouble with a speculative boom of this sort is that it cannot go on forever. Sooner
or later the excess of buyers over sellers must disappear. Everybody knows this, but
investors cannot resist the temptation to make easy money.
The Great Crash was followed by a severe industrial depression, summarised by J.K.
Galbraith in his very readable book on the subject:
“After the Great Crash came the Great Depression which lasted, with varying
severity, for ten years. In 1933, Gross National Product (total production of the
economy) was nearly a third less than in 1929. Not until 1937 did the physical
volume of production recover to the levels of 1929, and then it promptly
slipped back again. Until 1941 the dollar value of production remained below
1929. Between 1930 and 1940 only once, in 1937, did the average number
unemployed during the year drop below eight million. In 1933 nearly thirteen
million were out of work, or about one in every four in the labour force. In
1938 one person in five was still out of work.26
One school of thought, the monetarists, sees the Great Crash and Great Depression as
the outcome of government interference in the 'natural' workings of capitalism.
According to them, the stock exchange boom and its inevitable crash were caused by
the monetary policy pursued by the US government and central bank (the Federal
Reserve Board). What gives monetarist explanations of this crisis, and of crises in
general, a semblance of plausibility, is the fact that monetary bungling can aggravate a
crisis. And there is no doubt that in the years up to 1929 the Federal Reserve Board, in
pursuing a cheap money policy with easy credit and low interest rates, did encourage
the stock exchange boom, and so helped make the crash all the greater when it came.
A stricter monetary policy might have cut short the boom at a much earlier stage and
thus prevented so great a crash, even if not a minor one, but the question is: would it
also have avoided the Great Depression?
Here the answer must be no. For a slowing down of economic activity was evident in
the summer of 1929, some months before the Crash (a knowledge of this must have
been a factor in bringing the stock exchange boom to an end). This downturn was
particularly evident in the consumer goods sector, where the firms concerned had
overestimated demand and were finding themselves lumbered with excessive stocks.
In other words, the depression was going to happen anyway, whether or not there had
been the stock exchange boom and crash. More fundamental economic factors were at
work than speculations on the stock market or the monetary bungling of the Federal
Reserve Board.
An attempt to identify these fundamental economic factors using the categories of
Marxian economics has been made by Sydney H. Coontz in Productive Labour and
Effective Demand (1965) and by Ernest Mandel.
A depression is the result of an unbalanced growth of one sector of the economy
having expanded too fast for the other sectors. Simplifying matters, the economy can
be divided into two main sectors, the one producing means of production (sometimes
called 'capital goods' or, more accurately, 'producer goods'), and the other producing
consumer goods. The conditions for steady, balanced growth under capitalism can
then be stated to be:
“The purchase of consumer goods by all the workers and capitalists engaged
in producing capital goods must be equivalent to the purchases of capital
goods by the capitalists engaged in producing consumer goods (including in
both categories the purchases needed to expand production). The constant
reproduction of these conditions of equilibrium thus requires a proportional
development of the two sectors of production. [for Marx’s analysis see the
note 4 below] The periodical occurrence of crises is to be explained only by a
periodical break in this proportionality or, in other words, by an uneven
development of these two sectors.”27
What happened in America in the 1920s was that the producer goods sector expanded
too fast for the consumer goods sector. Production and productivity increased while
wages and prices remained comparatively stable. Wages did in fact rise, but the main
benefits of the increase in productivity went to the capitalists in the form of increased
profits. Most of these additional profits were reinvested in production (though some
found their way to the New York stock exchange). It was this that led, according to
figures quoted by Galbraith, to the rapid extension of the producer sector as compared
with the consumer goods sector:
“During the twenties, the production of capital goods increased at an average
annual rate of 6.4 per cent; nondurable consumers' goods, a category which
includes such objects of mass consumption as food and clothing, increased at a
rate of only 2.8 per cent.”28
An expansion of the producer goods sector at a faster rate than the consumer goods
sector is not in itself a situation of disproportionate development. Indeed, it has been
precisely the historical role of capitalism to build up and develop the means of
production at the expense of consumption. However, so-called 'production for
production's sake' cannot in practice continue indefinitely, since it demands either a
sustained series of new inventions and innovations or a continually expanding market
for consumer goods.
The relatively full employment in America in the 1920s – unemployment was
officially only 0.9 per cent in 1929 – did mean that the market for consumer goods
expanded, but the falling share of wages and salaries in National Income meant that
this was not going to continue. The expansion of the producer goods sector levelled
off, further retracting the market for consumer goods since its workers now had less to
spend. Expressed in terms of the formula for balanced growth stated above, the
purchase of consumer goods by the workers (and capitalists) in the producer goods
sector had come to be less than the purchase of producer goods by the capitalists in
the consumer goods sector. In other words, an overcapacity had developed in the
consumer goods sector, which expressed itself in an overproduction of consumer
goods and the build-up of stocks. As Coontz puts it (using the language of academic
economics):
“. . . stagnation in the capital goods industry, the displacement of labour in this
sector, meant that worker and entrepreneurial consumption expenditures failed
to rise pari passu with investment in the consumer sector. It was this
disproportionality that generated the Great Depression.”29
The Great Depression — which occurred all over the world and not just in America
— was not an accident, but simply capitalism working in a normal way. It exposed
capitalism for the irrational, anti-social system that it is. While millions were
unemployed and reduced to bare subsistence levels, food was destroyed because it
could not be sold profitably. It was in the 1930s that the Roosevelt administration
introduced the notorious policy of paying farmers not to grow food, a policy
accurately described by a later President, Kennedy, as 'planned underproduction'.
Even in limes of boom and prosperity capitalism underproduces, but in times of
depression this is even more flagrant.
The Depression eventually came to an end — with the war and preparations war.
THE CREDIT CRUNCH
In August 2007, a new term came into the English vocabulary – “credit crunch”.
However, to describe an old phenomenon: the sort of credit crisis that used to occur at
regular intervals in the 19th century. This also had happened in 1907 and 1929. It is all
there in Marx’s description and analysis of them in Volume III of Capital. There is
the same panic, the same bank collapses, the same dash for cash, and the same
government intervention to make cash available even by breaking its own rules. And
the same downturn in economic activity.
What the existence of a credit crisis shows is that money has been unwisely lent by
banks. The loans have turned out to have been unwise because the borrowers have
found themselves unable to repay them. If these defaults are widespread and
important enough then the entire financial system can be affected.
Nevertheless, how does it come about in the first place that at the same time a large
number of borrowers become unable to repay loans?
In the 19th century, the loans that turned bad were made, for instance, typically to
cotton manufacturers to export to India or China and proved unsound when more
cotton goods were produced than could be absorbed by these markets. Panic set in
when the trade bills issued to finance these exports could not be honoured. In other
words, it was caused by some economic event: overproduction in some sector of the
real economy in relation to the market (paying demand) for its products, an
overproduction brought about by the anarchic pursuit of profits that is built-in to the
capitalist system.
This time the loans that turned bad were made, in America, to individuals to buy a
house. This stimulated, and then sustained, a boom in housing construction. In the
end, paying demand was unable to keep up with the supply of new houses for sale, as
demonstrated by the fall in house prices and the increasing number of defaults. In
other words, there was overproduction in the US housing sector.
These defaults had an impact on the whole global financial system because of the way
in which the original loans had been financed — or rather re-financed. They had been
pooled by batches into bonds by US investment banks (“securitized”, in the jargon),
and then pooled again with other loans, into other bonds, and sold by them to other
banks and other financial institutions throughout the world, but mainly in America
and Europe. So that when the borrowers of the original loans defaulted in large
numbers this had an effect on global credit markets.
Most people don't like banks, seeing them as institutions that in some mysterious way
create money and then charge interest on it, so getting money for nothing. Actually,
banks are financial intermediaries which can only lend money to people and
businesses out of money that has been deposited with them or which they have
themselves borrowed. As the US Federal Reserve put it in one of their educational
documents:
“Banks borrow funds from their depositors (those with savings) and in turn
lend those funds to the banks’ borrowers (those in need of funds). Banks make
money by charging borrowers more for a loan (a higher percentage interest
rate) than is paid to depositors for use of their money.”30
The IMF has even coined a new verb to describe what banks do: they “intermediate”.
Banks are profit-seeking capitalist enterprises in which the owners have invested
capital with a view to making a profit. A bank has to have its own capital as reserves
and to invest in the buildings and office equipment and in the wages and salaries of
bank workers. The business of a bank is to borrow and re-lend money, basically to
channel unused money to where it can be used, most of it going in the end to capitalist
enterprises to use as capital to invest in trade and industry.
Banks obtain the money to lend either (retail) from individual depositors or
(wholesale) by themselves borrowing the money on the money market. As the US
Federal Reserve has pointed out above, they make their profit out of the difference
between the rate of interest at which they borrow and the (higher) rate at which they
lend. The ultimate source of this profit is the surplus value, produced by workers in
productive activity, which capitalists who have invested borrowed capital in
production have to share, in the form of interest payments, with those who have
invested in financing.
Banks can only lend what's been deposited with them or what they themselves have
borrowed. Somewhat less in fact as they have to keep some of what has been
deposited with them as cash to deal with withdrawals. In America the official “cash
ratio”, or “fractional reserve”, of cash to loans is 10 percent. What this means is that
for every £100 deposited banks have to retain £10 as cash. The other £90 they can
lend out. Some people misunderstand a 10 percent cash ratio to mean that if £100 is
deposited with a bank, the bank can then lend out £900. This is an understandable
mistake, arising from misleading textbook explanations of “fractional reserve
banking” which attribute this power to the whole banking system (but not to
individual banks), and one which currency cranks erect into a theory, claiming that
what banks do is create money out of thin air by a mere stroke of the pen and then
charge interest on it. But no bank does or can do this; they can only lend what has
been deposited with them or what they themselves have borrowed. Even the theory of
fractional reserve banking, correctly understood, does not challenge this as it assumes
that the money banks lend eventually finds its way back to a bank as a new deposit.
Since the 1990s, banks have been involved in two other activities: “securitization” and
“derivatives”.
Securitization involves converting a future stream of income into a capital sum and
selling it as a “security”, or bond, yielding the stream of income as interest. This —
and vice versa, converting a capital sum into a stream of income — is a calculation
that insurance companies have long been doing. Marx called a capital sum calculated
in this way “fictitious capital”, though a better term might be “imaginary” or
“notional” capital since there’s nothing dishonest or dodgy about it. One example is
the price of land, which is based on the expected future rents expressed as a capital
sum. The stream of future income that banks began to turn into interest-bearing bonds
were, for instance, mortgage repayments but also the interest payable on other loans.
In fact, different interest streams from different loans came to be packaged together
into a single bond.
"Derivatives" are so-called because they are “derived” from real assets. These are
essentially bets on how the price of real assets such as commodities or shares or
government bonds or currency is going to change over time. When this are not pure
gambling, it can be considered a form of insurance against a company or a loan failing
(by betting that this will happen). Big money can be made out of derivatives if you
win the bet, but so can big losses if you get it wrong. To obviate this risk hedge funds
have come into existence to, precisely, hedge the bets.
Because both securitization and derivatives were unregulated (one reason why banks
resorted to them so much), dealings in them have become known as “the shadow
banking system”, which is also based on making a profit between borrowing at one
rate of interest and lending at a higher rate.
As we explained, what happens in a boom is that capitalist enterprises assume that it
will continue and so they all plan to expand their production, investing in new
machinery, building new factories, taking on more workers. However, when this all
comes on stream, it is found that productive capacity exceeds market demand. There
is overproduction (in relation to paying demand, not real needs of course). This has
both financial and economic consequences. Workers are laid off, orders with subcontractors are not renewed, which in turn have a knock-on effect, leading to further
lay-offs and factory closures.
This time the market that overexpanded was that for housing in America. Beginning
in 2000 there was an expansion in the construction of new houses for sale. There was
also widespread renovation for resale of existing housing. The purchase of these
houses was financed by loans from specialist mortgage lenders, which were supplied
with money “wholesale” by investment banks. A boom in house-building and housebuying developed. House prices rose but workers’ incomes did not, so, to keep up
demand, mortgage lenders lowered their standards. They began to grant more and
more "sub-prime" loans, so-called because they were given to people whose income
was below the normally accepted level and so had a higher chance of defaulting.
Eventually the inevitable happened. sub-prime borrowers did default, which
represented a fall in paying demand for houses. By early 2006, house-building
peaked. The boom came to an end and house prices began to fall. However, far from
stimulating the market, this left millions with a house worth less than their mortgage,
which meant not only that they had to cut their consumption but also that the banks
would not get all their money back even if they repossessed the houses. The housing
boom could in theory have continued if people’s incomes had gone up and at the same
rate. Nevertheless, it did not and it could not have. Once borrowers began defaulting,
the mortgage lenders suffered losses and so had less to lend. Credit tightened, which
provoked yet more defaults and which had an effect on the wider economy.
What had happened was that more houses had come to be built than people could
afford to pay for or, from another angle, than could be sold profitably. In other words,
overproduction (in relation to what people could afford, not in relation to housing
needs). A recent study by the Bank for International Settlements in Basle, entitled
“The Housing Meltdown: Why did it happen in the United States?”, uses such terms
as “an overhang of excess supply”, “overbuilding of new housing” and “a substantial
oversupply of housing”, producing figures to show
“that between 2001 and 2006, the United States built more new homes than
would have seem to been required by the growth of its population”
and
“The US housing construction sector seems to have managed to build up a
substantial oversupply of housing. The United States was therefore more likely
to experience a sharp fall in prices than some other countries, even before
credit supply tightened.”31
That this overproduction in one sector in one country provoked a world-wide financial
crisis not only shows that the cycle of “moderate activity, prosperity, overproduction,
crisis and stagnation” analyzed by Marx is still operative, but it also bears witness to
the extent of capitalist globalization.
Notes
1
2
3
4
Marx, Capital, Vol. I, Ch. 3, 1886 English translation, Moscow, 1961, p. 113
Marx, A Contribution to the Critique of Political Economy, Progress, 1978, pp.96-97
Marx, Capital, Vol. I, Ch. 3, pp.114-5
PROPORTIONALITY / DISPROPORTIONALITY
The internal metamorphosis of capital goes on as V = c + v + s, where V = value of the total global
production, c = constant capital, v = variable capital and s = surplus value.
Now suppose for simplicity that the total global production consists of two departments: Department I
that produces only means of production and Department II that produces only means of consumption.
Ic + Iv + Is
Then, V = {
IIc + IIv + IIs
Let us first analyze the simple reproduction of capital: (here we assume that the rate of surplus value or
the rate of exploitation (s/v = 100%) remains the same in both the departments, and capitalist class
consumes the whole surplus value so that only the total value of the global social production is
reproduced. Take Ic = 4000c and Iv = 1000v, hence Is = 1000s; IIc = 2000c and IIv = 500v, hence IIs =
500s)
Department I → 4000c + 1000v + 1000s
Thus,
} = V9000 (global social production)
Department II → 2000c + 500v + 500s
Now for continuation of the reproduction process the exchange between the two departments must go
on unhindered. Note that the values of the departments are reproduced in the form of commodities.
Hence, the 4000c (Instruments of Labour + Material of Labour) are used up in the Department I itself.
However, the wages of the working class (1000v) and the profits of the capitalist class (1000s) cannot
me cannot be realized in constant capital. Therefore, Department I will have to exchange 2000 output
in the form constant capital with the commodities for consumption solely produced by the Department
II. On the other hand, Department II produces 3000 value in the form of commodities for consumption
only, so it will meet its own consumption needs of the workers (500v) and the capitalists (500s) from
its own production, and offer for exchange 2000 value in the form of articles for consumption with the
Department I that produces only means of production.
Therefore, the condition of equilibrium with simple reproduction is:
Iv + Is =IIc
This abstraction gives you an idea about accumulation of capital as inherently a self-reproductive
process. The process becomes more evident through expanded reproduction of capital whereby global
social value goes on increasing itself.
Since the units of capital, i.e., self-expanding values do not grow evenly, coherently, coercive
competition among them always occurs in each striving to remove others out of the market. In so doing
they have to produce the commodity more cheaply This can be done by finding out cheaper sources of
means of production and labour-power. Labour-power is cheapened by raising the productivity of
labour that requires reinvestment of a portion of surplus value in improved machineries and work
processes. Thus, the history of capital is the history of its expanded reproduction, which, in other
words, is the expanded reproduction of wage-labour / capital relations.
At this instant, suppose a portion of surplus values of both the departments enter into the production
processes as capital. Then, surplus values of each department is divided into two parts, e.g., A – the
part that provides for the consumption of the capitalists, and B – the part that is added to the existing
capital.
Therefore,
Is = IA + IB
IIs = IIA + IIB
Again, the part B of each department will be subdivided into two: one going into the augmentation of
constant capital, IBc and IIBc; the other into the variable capital, IBv and IIBv. Thus, the formulae of
social production stand as:
I → Ic + Iv + IA + IBc + IBv
II → IIc + IIv + IIA + IIBc + IIBv
We have already considered the first three items while dealing with the simple reproduction of capital.
Therefore, here we have to consider that part of surplus value adding to the capital. Based on the same
reasoning as simple reproduction if expanded reproduction has to proceed unbroken, IBv has to be
equal to IIBc. Now by combining this necessary equation of expanded reproduction with the exchange
equation of simple reproduction we get the condition of equilibrium as follows:
(Iv + IA + IBv) = (IIc + IIBc)
In other words, the sum total of all new variable capital of Department I and the part of surplus value of
the same department that goes into the consumption has to be equal to the constant capital of
Department II.
However, since the capitalist mode of production has no a priori regulation of its reproduction process,
or in other words, its process of reproduction through coercive competition among self-expanding
values represents its inherent anarchy, the hypothetical equation as above never occurs.
Disproportionality prevails.
From this theoretical illustration of expanded reproduction, it is evident that accumulation of capital is
a self-expanding process wherein expansion of constant capital and the increase of the consumption of
the workers and the capitalists are included. Thus, commodity production can expand its own market as
far as it is able to transform surplus value into capital.
The aim of each capitalist is to maximize their profits (i.e. maximization of the surplus value
produced). However, if this effort leads to creating less profit than previously, surplus value could not
be entirely transformed into capital. Hence, there will be a rupture in the process of accumulation.
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Marx, Capital, Vol. III, Moscow 1974, p.249. Also at:
http://www.marxists.org/archive/marx/works/1894-c3/ch15.htm
Marx, Capital, Vol. III, Moscow 1974, p. 239
Ibid. p. 251
Marx, Grundrisse, Pelican, 1981, pp.749-50
Marx, Poverty of Philosophy, CW, Vol. 6, p.137
Marx, Capital, Vol. I, Ch. 15, Vintage Books, New York, p.580, a more accurate
translation than Samuel Moore’s version of 1886, cf. Vol. I, Moscow, 1974, pp. 42526
Marx, Value, Price and Profit, Ch. XIII, CW, Vol. 20, p.143
Marx, Theories of Surplus Value, Volume II, Moscow, 1968, p. 527
Marx, Capital, Volume III, Moscow, 1974, p. 441
Engels, Anti-Duhring, Moscow, 1969, p. 326-28; [*Fourier, Oeuvres complètes, Vol.
VI, Paris,1845, pp. 393-94. cited by Engels]
Marx, Capital, Vol. II, Moscow, 1974, pp.414-15 Also at:
http://www.marxists.org/archive/marx/works/1885-c2/ch20_01.htm#4
Marx, Capital, Vol. I, Moscow, 1974, p.668
Engels, Anti-Dühring, Progress, 1969, p.370, emphasis added
Marx, Capital, Vol. I, Progress, 1974, p.580, emphasis added
Ibid. pp.714-15
Marx, Capital, Vol. III, Progress, 1974, p.250
Ibid. p.213
Marx, Grundrisse, Pelican, 1981, p.48
loc.cit. p.749
Engels, Anti-Dühring, Moscow, 1969, p.338
Marx, Theories of Surplus Value, Volume II, p. 497. Marx’s emphasis
J.K. Galbraith, The Great Crash 1929, Pelican, p. 186
Mandel, Marxist Economy Theory, Vol.1, p.349
Ibid. pp. 192-3
Ibid. p. 154
http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf. P. 57
www.bis.org/publ/work259.htm