The theory of capitalist crises (1979)

From the October 1979 issue of the Socialist Standard

In the long run, production under capitalism expands. The accumulation of capital, the self-expansion of value, is, after all, the economic logic of capitalism. The expansion of production, however, does not proceed smoothly at a steady rate but is interrupted from time to time, so that the graph of production under capitalism has the appearance of a series of peaks, each generally higher than the previous one (see graph). The troughs in between represent periods variously described as crises, depressions, recessions.

World capitalism is now in one of these troughs, and has been since 1974. But sooner or later it will recover from this depression, just as it has from all previous ones. This is because a depression itself creates the conditions for a re-expansion of production.

In a depression, three things occur which tend to raise the rate of industrial profit. First, a number of capitalist enterprises go bankrupt and their assets are sold off cheaply to their rivals. The result is a fall in their capital value, or a depreciation of the capital invested in them, so that less profits are needed to maintain the same rate of profit. Secondly, the increased unemployment tends to depress wages, and this once again tends to raise profits. Thirdly, the cutback in productive investment means that the demand for money-capital is reduced while at the same time the supply (from capitalist enterprises who are not re-investing) is increased, resulting in a fall in the rate of interest and so to a rise in the proportion of surplus value going to industrial profits.

These — depreciation of capital, lower wages, lower interest rates — eventually raise the prospects of making profits high enough to encourage those capitalists who have not been re-investing to begin investing again. Business confidence returns. Production begins to pick up and, through the chain reaction effect of more money being spent both by capitalists investing in new means of production and by workers now earning wages again, at an increasing rate.

So begins the process of economic recovery which develops into a boom . . . and eventually ends in a crisis and another depression. This is because boom conditions lead to ‘over-investment’, to too much wealth being devoted to expanding the means of production. This is inevitable due to the anarchy of production under capitalism, to the fact that production is not socially controlled and planned but is decided by hundreds of competing enterprises — and, on the world scale, states also — acting independently and in isolation.

When business is booming, capitalist enterprises assume that this will continue and so plan to expand their productive capacity. The demand for labour power increases, unemployment falls as the ‘reserve army of labour’ is drawn into production; wages, under the pull of enterprises competing among themselves for scarce labour power and the push of trade union action from the workers, rise. This in itself tends to reduce the rate of profit.

But what generally sparks off a crisis is one key industry over-expanding in relation to its particular market. The competing enterprises in that industry will all have assumed that they would be the beneficiaries of the expanding market and all of them will have expanded their productive capacity. The result is that the market for their particular product becomes saturated; they have over-expanded their productive capacity in relation to their industry’s market. Unsold goods pile up, the expected profits are not realised, the industry in question is forced to cut back its production. Now the chain reaction which encourages the recovery of production after a depression works in the opposite direction. Other industries are affected by the cut-back in the industry, which has over-expanded and, if this is a key industry, the end result is a generalised depression.

So the cycle — depression, recovery, boom, crisis, depression — has been completed and is ready to begin again. Governments try to intervene to stop this cycle, and occasionally make matters worse by their mistaken monetary policies, but there is essentially nothing they can do about it. This — boom, slump, boom, slump, boom, slump — is the way capitalism works.

It is important to realise that crises are not caused by overall production having expanded beyond overall market demand, as is suggested by one theory which was once popular in social democratic circles, and echoes of which are still to be found in the writings of some calling themselves Marxists. Such ‘under-consumptionist’ theories argue that crises are caused — and, in an extreme form, that capitalism will eventually collapse — through total social production coming to exceed total social purchasing power, or what amounts to the same thing, through total purchasing power coming to be insufficient to buy the total social product.

Crises under capitalism are not caused by a lack of purchasing power. They are caused by the anarchy of production under capitalism leading to an overexpansion in relation to a particular market, or, from the point of view of production, over-expanding disproportionately in relation to other industries. When this happens, the purchasing power to buy the over-produced commodities is there but it is not used because the commodities in question are not what those who have the money want to spend it on.

To be more specific, what happens in a depression, as far as overall market demand is concerned, is that some capitalists choose (because of low or nil profit prospects) not to spend their money on buying machinery, raw materials and labour power. This non-spending, or hoarding of money, interrupts the circulation of capital. Which is precisely what a depression is: an interruption in the circulation of capital. It is also why depressions are never permanent. Sooner or later, in one way or another, the conditions will arise which will encourage those capitalists who have been hoarding their money-capital to re-invest, so restoring the circuit.

Those who hold the under-consumptionist view that crises are caused by capitalism’s tendency to produce more than it can sell have got it wrong. If it were indeed the case that built in to capitalism was a chronic tendency for market demand to fall short of production, then how could capitalism have continued for so long? It should have long ago foundered in a glut of unsaleable goods. The fact that capitalism still exists, and still manages to expand production in the long run, is a living, if unpleasant, proof of the falsity of all under-consumptionist theories.

The fact is that there is no flaw in the economic mechanism of capitalism that is going to cause it permanently to break down or clog up. Capitalism will continue going through its cycle of depression, recovery, boom, crisis, depression until the working class consciously decide and act to end it by bringing production under the conscious democratic control of society on the basis of the common ownership of the means of production.

Adam Buick