Further Reflections on Crises

BECAUSE the pattern of a particular crisis is influenced by the concrete circumstances of the time no crisis is merely a repetition of those which have preceded it. While there are elements common to all crises we cannot say in advance how these elements will interact in a specific situation or what is the relative strength of other factors associated with it. Consequently to understand all the relevant details of a particular crisis, we can only be wise after the event.

Nevertheless we can say that all crises are intimately connected with two fundamental features of the system, viz., " anarchy of production " and " disproportional industrial development." These two features are again intimately bound up with each other.

By anarchy of production we do not infer economic chaos, on the contrary capitalism is a system ruled by laws and compulsions of its own. What is meant is that Capitalism is not a system consciously regulated by social aims. Capitalists do not meet beforehand to harmonise production in accordance with social ends. Capitalism being profit motivated production, capitalists invest in industry for no other motive and without regard for and little knowledge of other investments being carried out at the same time. But capitalist production is social production and the different branches of industry form an interlocking whole. It can be seen then that the different yet integrated industrial spheres, governed as they are by autonomous decisions being made simultaneously, there exists in the system an inherent bias towards uneven development between the various branches of industry. When this disproportionality reaches a certain level the possibility of a crisis emerges.

To put the matter concretely we can begin by saying that the market for any product is dependent on the volume of production in other spheres and therefore cannot be accurately gauged. Now if we assume that Capitalists in a particular industry have overestimated the demands for their product and so produced more than the market can absorb at a remunerative price and if we take it that other industries have not similarly expanded, then it can be said that this particular industry has over-expanded relative to other industries, i.e. a disproportionality of industrial development has taken place.

This relative over-expansion of industry will, however, generate cumulative effects. Not only will the industry affected cut investment and hence production but in doin'g so it reduces its demands for commodities, including labour-power, to those industries linked to it. They in turn will cut their orders to other concerns and so on. As a result a widespread decline in production will occur.

If the initial over-expansion is big enough it may permeate the entire economy and precipitate a crisis. Large scale unemployment will appear, purchasing power suffer a sharp decline and surplus products will then begin to appear on the market as a matter of course.

It can be seen then that over-production in one branch of industry brings elements of over-production in other branches of industry, and by rupturing the conditions of equilibrium, initiates relative overproduction, which is indistinguishable from general overproduction. All crises then are crises of relative overproduction. An industry can only overexpand in relation to other industries although the effect which this produces is, as has been already stated, indistinquishable from general overproduction.

Crises, as Marx pointed out, do not arise through a lack of paying consumption of the mass of the population. They arise because disproportional development in one industrial sector leads to a curtailment of investment (and so production) which by upsetting the balance of the different industrial branches brings about a general slowing down of production. It is this disproportional development which starts the downward spiral of wages and employment with its corallary of shrinking purchasing power. The lack of paying consumption is then a consequence not a.cause of crises.

To elucidate the point further we might add that the effect of a boom is to generate rising levels of purchasing power, and further that wage payments seem to increase more rapidly in the latter stages of the boom than at the beginning. But rising wages tend to reduce profit margins. Further, when an over expansion of one industrial sphere has been big enough to start a downward spiral of investment, and profits, there comes into existence a volume of capital investment too great to be consistent with former profit levels. As Marx says, " Since production depends on investment [such a situation] constitutes an overproduction of capital which takes the form of an overproduction of commodities."

From the standpoint of the employers one of the prime factors for ending boom conditions is that wages are too high to make increasing investment desirable. Any return to a new stage of profitable investment depends then on labour-power becoming cheap enough to increase profit margins to the point which makes an expansion of production worthwhile.

A crisis is made possible in Capitalism not because the workers have too little purchasing power — in fact as already stated their purchasing power is at its height prior to the boom breaking — but because of the antagonistic class distribution of income inherent in a system of antagonistic class relations of production. Capitalists cut back investment because there is an unsatisfactory income distribution for them, in that profit margins are too small and wage levels too high. They are not concerned with some abstract purchasing power but in the concrete fact that the purchasing power in the form of wages is too high for the existing volume of capital to earn a given return.

To say, as under-consumptionists say, that crises are caused by too much of everything being produced is not in accordance with the facts. A crisis does not mean there is a total deficit of purchasing power unable to buy back an absolute over-production of consumers goods. The decline in purchasing power of the workers in a crisis situation is the outcome of an unfavourable distribution of income as the result of the system failing to expand proportionally and so bringing about elements of over-production in the various sectors of industry whose net effect is general over-production. It is this that originates a falling spiral of wages and employment and makes inevitable the appearance of market " surplus stock '' in the shape of articles consumed by the working class. There is still, nevertheless, plenty of purchasing power in the pockets, holdings, banks, etc of the Capitalists, to buy this surplus stock but of course they do not choose to spend their money that way.

Muddle-headed theorists have argued that crises could be assuaged and even cured, if at the first sign of a slump, the Capitalists went in for increased personal consumption, buying more Rolls Royces presumably and having nightly champagne parties. But it is forgotten, or is not known by these theorists, that boom or slump, the accumulation of capital i.e. the self-expansion of capital is still the basic urge of the Capitalists. At least the Capitalists are realists who know that they must husband their resources and even increase them as far as conditions permit, if they are to successfully ride the crest of the next boom wave. Like the workers they tighten their belts even though the belts are larger and the stomach more capacious. In more theoretical language it can be said that the primary motive of Capitalists is the expansion of exchange value not the production of immediate articles of consumption.

Marx himself took the view that the system in relation to human needs does not produce too much but too little. He held it to be a system of organised scarcity. In Vol. 3 of " Capital " he states, " It is not a fact that too much wealth is produced. But it is a fact that there is periodical over-production in its capitalistic and contradictory form."

Which brings us to Mr. Strachey again. In the 1930's he wrote a much hailed book, " The Nature of Capitalist Crises." Nowhere in it did he provide any coherent account of crises. One could detect, however, the over-tones of an under-consumptionist view of crises. Thus on (p. 248) we are told " that the essence of every capitalist crisis is that the population is unable to purchase the evergrowing quantity of consumers commodities which come pouring on to the market." One page 289 he adds, " the under-consumptionists were not wrong in one sense but they were wrong in thinking that the payment of high wages was the solution to crises." All of which shows the confused nature of Mr. Strachey's thinking on the subject of crises.

What was more serious was his attempt to link what Marx termed the tendency of the law of the falling rate of profit to crises and to establish it as the crucial cause. It is true that Marx had listed a number of tendencies which worked in an opposite direction and Mr. Strachey dutifully enumerated them. But in " The Nature of Capitalist Crisis " he contended that " they can check but not overcome the main downward tendency of the rate of profit." P. 264).

This view that the tendency of the law of the falling rate of profit is the main agency for encompassing the downfall of capitalism can be briefly stated. It is held that the rate of profit falls in a continuous downward curve and finally reaches a point which provides no further impetus for capital accumulation, just as the steady drop in potential of a power source would reach a point where it could no longer supply a. driving force to machinery.

Not only would the falling rate of profit as it reached a new low level precipitate a crisis but as a result each crisis would become more catastrophic. Bound up with this view is the belief of some ultimate breakdown of the system. This mechanistic and fatalistic view of capitalism was fashionable for years among Communist theorists and Mr. Strachey fashionably followed it.
Marx's own formulation of the tendency of the falling rate of profit can be briefly enumerated. Marx divided capital outlay into two parts, one part he called constant capital, which consists of tools, machinery, etc. The other part he termed variable capital constitutes wage payments in order to buy labour-power and set it to productive activity. It is this active labour power which alone produces value and a value greater than its upkeep. It is thus the sole source of surplus value and hence profits.

Nevertheless, a marked trend of capitalism is the increasing mechanisation of the process of production. This means that as capital outlay grows, a proportionally greater amount will be spent on means of production than on wage bills. But as we have seen, variable capital provides the sole source of value and hence profit. It follows then that as capital grows and with it the ratio of constant capital to variable capital, then less value and profit is produced in a given unit of capital. And the rate of profit which is computed on the total capital outlay must fall.

We can illustrate this by assuming that a given capital outlay of £10,000 is divided into £5,000 constant and £5,000 variable and that the rate of exploitation is 100%. In that case the profit will be £5,000 and the rate of profit 50%. If, however, the capital grows to £30,000, of which £20,000 is laid out in constant capital and £10,000 in variable capital and the rate of exploitation is 100%, then the profit will be £10,000. Thus proportionately less value and profit has been produced on the larger capital and the rate of profit has fallen from 50% to 33 1/2 %.

But Marx was quick to enumerate counter teadences for keeping the rate of profit up. The main ones being, increasing productivity of labour due to the increasing efficiency of mechanisation. The cheapening of the elements of constant capital, resulting from increased productivity, which means that although the physical volume of constant capital increases, the value composition does not increase at the same rate. Then there is the existence of an industrial reserve army which acts as a reservoir of cheap labour-power and stimulates the setting up of new industries with a low ratio of constant to variable capital and hence a high rate of profit. The averaging-in these higher profit rates with the lower profit rate of the older industries raises the overall rate of profit.

Thus the tendency of the rate of profit to fall is merely a tendency among counter tendencies. Marx's own analysis of the matter gave no grounds for supposing which, if any, tendencies would prevail. Indeed for Marx to have advanced some economic law in abstraction to which capitalism must conform would have been contrary to his empirical method. For him such tendencies or counter tendencies could only be relevant to the concrete circumstances of any given stage of capitalism. It was left to Communist theorists and the facile Mr. Strachey to elevate this mere tendency to some law of social gravity.

In actual fact there is no direct evidence of some steady decline in the rate of profit over a long period. There are, of course, several profit rates in capitalism and a decline or drop in one of them is not necessarily a cause or even a factor for precipitating a crisis. And even if there did exist a tendency for the rate of profit to fall due to growth of the ratio of constant to variable capital, over a long period, it would be very slow and could not account for the sharp decline in profit levels and the widespread curtailment of investment associated with crises. Again the idea of what constitutes a profit norm for capitalists can undergo change and the norm of one period might be lower than the preceding one. Thus a lower rate of profit would constitute no disincentive for investment which is characteristic of a crisis situation. There is not the slightest reason for supposing that some alleged long term tendency of a falling rate of profit is organically connected with crises and ultimately the demise of capitalism. Such views are not propositions of Marx but projections of Communist politics.

Mr. Strachey in combatting the false assumptions he once held, believes he is combatting Marxism whereas it is the present Mr. Strachey quarrelling with the past Mr. Strachey without understanding what the quarrel is really all about.

We might add Mr. Strachey makes no reference in his latest book to his past errors. To these "errors" it seems we must also add, sins of commission and omission.

E.W., Socialist Standard April 1957

Crises, Catastrophy and Mr. Strachey

DID Marx really believe that crises would be so catastrophic in their effects as to ensure the economic collapse of Capitalism? It is a convention of many of his critics and the so-called Marxist revisionists to say he did. None of them have ever given substance to their assertions with any worth while evidence.

It is true that the young Marx in Wage Labour and Capital (p. 45), spoke of " crises becoming more frequent and violent." And again in the Communist Manifesto (p. 18), we are told —" Crises by their periodical return put the existence of bourgeois society on its trial and each time more threateningly." But it is to Marx's detailed and mature economic investigation to which we must turn in order to estimate what he thought was the nature and role of Capitalist crises. And here we find no specific reference or concrete indication of a view that some mounting crescendo of crises will ultimately crash to economic ruin.

In point of fact, Marx never formulated a theory of crises, at least not in any systematic or cohesive form. Instead we get a treatment of the different aspects of crises, scattered through the 2nd and 3rd volumes of Capital and Theories of Surplus Value. So far from Marx laying down any hard and fast rules on the subject of crises, we get instead an analysis of a number of tendencies which are bound up with the production of crisis situations.

It seems fairly safe to assume then that Marx in his later and mature investigation of the actual trends in Capitalism, never regarded crises as the agent of the final destruction of extant society. On the contrary there is no little evidence to indicate that he saw crises as a normal but essential phase of the trade cycle which, he said, was peculiar to the Capitalist mode of production.

Indeed it was no other than Marx who pioneered the investigation into the nature of the antithetical yet mutually reciprocal trade cycle. It was Marx who showed one phase of the trade cycle is characterised by an acceleration of capital investment and as a corollary to this an increased tempo of industrial activity, rising employment, rising wages and increasing profits.

Because the different branches of industry are atomistically controlled or to state it alternatively because "anarchy of production," prevails in Capitalism, decisions for capital investment are carried out by Capitalists without knowledge or regard for investment decisions being made at the same time by other Capitalists elsewhere.

As a result of these autonomous and unrelated decisions to invest in a period of expansion, it is hardly surprising that overexpansion of a particular line of industry takes place or what comes to the same thing disproportionality of industrial development between the various branches of production. Thus one industrial sphere may have overexpanded relatively to other spheres and as a result it will be unable to sell its goods at a remunerative price. Consequently there will be in this particular sphere a contraction of investment and hence production. This action will have cumulative effects by leading to a reduction of demand of products and services of those industries which are linked with this particular industrial branch and which in turn will reduce their orders to other concerns likewise linked with them. If the initial overexpansion or disproportionality of industrial development is big enough a general fall in the demand for goods and services will spread from point to point and a general relative over-production will ensue.
Thus the phase of the business cycle associated with accelerating investment, rising wages, rising employment and increasing profits, will come to an end and be replaced by the antithetical phase of reduced investment, falling employment and declining wages and profits.

The orthodox economists also treat of what is termed in modern economic usage the business cycle theory. For them a period of brisk trade activity is linked with a high return on invested capital. While the antithetical phase i.e. a recession, is associated with a decline in the rate of profit below the normal range for investment purposes. Thus for them crises are analysed from the formal level of the supply and demand of investment funds. Marx, however, probed deeper and showed that the behaviour of the Capitalist class springs from the basic features of Capitalist society which constitute a particular set of antagonistic class relations of production and gives rise to an antagonistic form of income distribution. From the general standpoint of the Capitalist class a "recession" is the outcome of an unfavourable distribution of income in that the form of income going to the working class as wages, is too high and that part of income going to them as profits is too low, to make it worth their while to maintain a high level of investment.

If Capitalism could operate on some master plan then the correct proportional expansion between the different branches of industry might be attempted and investment decisions synchronised in respect of the entire economy. But Capitalism does not work like that. Each Capitalist or group of Capitalists produce for a market of whose size they have only an imperfect knowledge, let alone the entire network of markets operating in Capitalism. Hence whether too little or too much is produced cannot be known until after the event and it is only a major upset in the price mechanism which reveals that a number of unrelated and separate investment. decisions have brought about a rupture of equilibrium conditions.

Crises are not as some theorists of under-consumption imagine the outcome of expanded production, outstripping total consumption, demand, and so bringing about some permanent market decline.

It was never Marx's view that crises arise as the result of a chronic bias towards overproduction and an ever-increasing inability of the Capitalists to dispose of their products in a perpetually shrinking market. In Capital, Vol. 3 (p. 299), Marx, commenting on the upward swing of the trade cycle ends thus: " And in this way the cycle would run once more. One portion of capital which had been depreciated by the stagnation of its function would recover its old value. For the rest the same vicious cycle would be described once more in an expanded market and with increased productive forces."

From what has been said it is evident that Marx never viewed crises as an ineluctable agent for the ultimate destruction of existing society but as an antithetical but inseperable phase of the trade cycle.

In the light of the foregoing it would seem that periods of prosperity for the Capitalists i.e., periods of accelerating capital investment bring nemesis in the way of rising wages, rising costs, etc., which sooner or later tend to appreciably diminish profit margins. Crises would then seem the specific remedy for the evils arising from " prosperity." Stated from the more fundamental standpoint of Marx's analysis these evils are, "a production of too many means of production and necessities of life to serve as a means.of exploitation of the labourer at a certain rate of profit."

Nevertheless if crises can be looked upon from one point of view as a retribution for prosperity they can also be regarded as acting as a purgative to the body-economic, allowing it to be. restored to the healthier state of equilibrium. To put the matter specifically, crises contain the germ of a trade recovery. In the first place the existence of a large industrial reserve army will serve to cheapen the price of labour-power and so raise the rate of profit and because of the cheapness of labour-power, tend to retard the introduction of machinery and new methods and so make possible the more primitive technical concerns to become profitable once more. At the same time the sharp depreciation of capital values will lower the organic composition of capital, i.e. lower the ratio of constant capital (means of production) to variable capital (wage payments) and so assist in raising the rate of profit. Again during a crisis there are cheap and abundant resources available, including large reserves of labour-power. Thus the conditions are prepared in a shorter or longer period, for a resumption of increased investment and rising profit margins.
Crises are not then incidental interludes between periods of high trade activity but an essential corrective for the uninhibited self-expansion of capital. As Marx states it: " Periodically the conflict of antagonistic agencies seek vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions, violent eruptions which restore the disturbed equilibrium for a while." (Capital, Vol. 3, p. 292).

To say then that Marx tied up his views on crises with an automatic breakdown theory is either to misunderstand or misrepresent him. While it is true that crises subject Capitalism to stresses and strains, to suggest that they will bring about the social and physical collapse of the system is something quite different. Marx so far as the present writer is aware never used the term " economic collapse of Capitalism."

For Marx, however, crises were a significant part of the dynamics of Capitalism and he regarded his own treatment of them as an important contribution to the understanding of the system. He saw them as not only an outcome of antagonistic agencies but as a means of resolving the conflict in a new equilibrium. The crisis plays then a definite role in influencing the long term trends of the system.

Capitalism may thus be described as a system of unstable equilibrium. Which brings us to Mr. Strachey. who states in Contemporary Capitalism (p. 218) that " Marx regarded the instabilities of Capitalism as a secondary matter and did not expect them to prove fatal to the system." But in that case the economic collapse theory which Mr. Strachey accuses Marx of holding, cannot be explained from Marx's theory of the production cycle of Capitalism. Marx, says Mr. Strachey, formulated something different. Marx's view of economic collapse is deduced from Marx's contention, according to Mr. Strachey, that Capitalism undergoes a continuous process of mass underconsumption and thus an ever-increasing inability of Capitalists to dispose of their products in an ever-decreasing market. Intense mass poverty would result, the workers would revolt and Capitalism would perish.

We are asked to believe, minus any evidence, that Marx gave up his formulation of the trade cycle concept and substituted a view of permanent stagnation, i.e. of falling wages, profits and investment, and ever increasing massive unemployment. Thus the system would run down like a clock. Crises would no longer play an active part; no new equilibrium could be established; capital accumulation would go on contracting and the basic feature of Capitalism, the self-expansion of capital would atrophy. Both employers and workers would become ever poorer, even if at different levels. Mr. Strachey consistent in his confusion, would have us believe nevertheless that Marx thought that in all this process the Capitalists would in some way grow ever richer.

Mr. Strachey, however, flatly contradicts himself in the same paragraph by stating that the instabilities of the system and Marx's alleged underconsumption views of crises are in some way clearly related. He adds lamely " but Marx never fully elucidated the connection between them." Marx did, of course, fully elucidate the connection between the instabilities of Capitalism and the emergence of crises. Mr. Strachey has never fully understood this connection, even though he wrote a book called The Nature of Capitalist Crisis. When Marx in the preface of Capital presupposed a reader willing to think for himself, he was perhaps a little optimistic. But a person who can state on one page that Marx regarded the instabilities of the system as secondary and then on the previous page aver that " Marx and Engels lived in the confident expectation that each crisis would be the system's last" i.e. fatal, is incorrigible.

Marx never constructed a catastrophic theory of crises. Nor did he say, as Mr. Strachey avers, that crises are due to the inability of the workers to buy back what they have produced. Although Mr. Stratchey was posing as a Marxist, he put this view forward in the name of Marx. Nevertheless Marx repudiated Rodbertus' view that crises were caused by a lack of paying consumption and could be remedied by highering wages. Marx also showed that it was " high wages " which constituted a factor for producing a crisis and a plentiful supply of cheap labour-power as a factor for initiating a boom.

Mr. Strachey, however, is not really an economist. He is a politician trying to explain the errors and illusions of the past but in fact only explaining them away. It becomes necessary therefore to set up a lot of false assumptions and with great gusto, knock 'em down. Like most politicians, he has a favourite aunt called Sally.

E.W , Socialist Standard March 1957