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

Marx and Crises (1978)

From the April 1978 issue of the Socialist Standard

We have been asked for the source of the quotation from Marx that "there are no permanent crises" on page 187 of the October Socialist Standard. It is from the Theories of Surplus Value. In the Lawrence and Wishart edition (Theories of Surplus Value, Part two, 1969, p. 497) the passage is translated as "permanent crises do not exist".

Further Reflections on Crises (1957)

From the April 1957 issue of the Socialist Standard

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 over-estimated 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 doing 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 over-production, which is indistinguishable from general over-production. All crises then are crises of relative over-production. An industry can only over-expand in relation to other industries although the effect which this produces is, as has been already stated, indistinguishable from general over-production.

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 corollary 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 over-production of capital which takes the form of an over-production 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 belt’s 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 Crisis. 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 ever-growing 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 33½ %

But Marx was quick to enumerate counter tendencies 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 combating the false assumptions he once held, believes he is combating 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.

Ted Wilmott

Capitalism Moves Into Recession. (1990)

From the December 1990 issue of the Socialist Standard

What the media call the "recession" in Britain today provides a classic example of a capitalist crisis. The City yuppies have been surprised by a supply that is exceeding demand to the point that it is provoking a decline in orders and cutbacks in production. The sales slump is giving the economic crisis an unstoppable momentum: reductions in production, investment and employment.

This should be no surprise. Crises of overproduction and a reserve army of the unemployed are integral to the capitalist system. They are not only the consequences but also the necessary conditions of capitalism's existence.

Think back to the early 1980s. An increased intensity of labour and new technology were easily imposed on workers severely weakened by the high unemployment levels of the previous crisis of 1980-82. We are well aware of what this meant for workers in the years of Thatcher's so-called "economic miracle". There was a general frenzy of activity for people in work as the rate of exploitation increased. This went hand-in-hand with the introduction of computers into the office and robotics into manufacturing industry.

The result of this frenzy was a marked increase in the average productivity of workers. A general rise in productivity means a fall in the unit value of all commodities: more of them can be produced in the same period of time so each is worth less. This is disguised by inflation, but a price calculation in hours of labour-time soon reveals the real fall in value.

The sharp economic downturn that we are now facing is the point of overproduction, the sudden failure in the balance of supply and demand that triggers the process in which prices are brought into line with values. In other words, the crisis is imposing the new, lower values that have resulted from rises in productivity on those commodities, particularly fixed capital, produced under previous conditions. The result is losses for the capitalists and unemployment for the workers.

Falling values and the tendency to capital losses are manifested in the unprecedented levels of bankruptcy for small and over-borrowed businesses. “More than 16,500 companies collapsed between January and the end of September 1990", a third more than the previous year (Guardian, 28 September).

Credit boom
The economists in the service of capitalism examine only the surface phenomena of economic activity in the search for explanations of the crisis. The financial pages of the press blame individuals: Nigel Lawson, for one. They blame the banks and building societies for their high levels of lending. They blame workers for pushing for higher wages. But all these things are effects not causes.

The underlying cause, the imbalance between supply and demand, came first. The current crisis, like every crisis of capitalism, is one of overproduction with regard to markets. But until recently it has been concealed by credit. As Marx put it, capitalism

  permits an actual free development only up to a certain point, so that in fact it constitutes an immanent barrier and fetter to production, which are constantly broken through by the credit system. (Capital, Vol III, chapter 27).

Despite all the talk about "tight monetary policy", the crisis has been delayed by neo-Keynsian recovery techniques: that is. by the Bank of England printing money for the clearing banks to lend. And the price of applying this technique is now, as it always was when overtly Keynsian, rising inflation.

For a while the Thatcher government managed to put off the inevitable, allowing inflation to rise. But the crunch had to come because high inflation cannot be sustained forever. For a start, when domestic demand is inflated by credit, imports rise as well, causing a trade deficit. This deficit puts downward pressure on the currency, necessitating high interest rates to hold off its complete collapse. But, on the other hand, a fall in consumer spending cannot be tolerated by industry because of its already high debt burden.

Exchange rate mechanism

Entry into the European Exchange Rate Mechanism (ERM) is an attempt to break out of this vicious circle. Thatcher hopes to give flagging businesses a quick fix before the general election without triggering a fall in the value of sterling. At the time of writing there has already been an interest rate cut.

Meanwhile, workers will pay the price of this quick fix. The ERM means that exports can no longer be protected from foreign competition by a devalued pound. John Major has already told workers to shoulder capitalism's problems by taking wage cuts if they want to keep their jobs. The President of the Bundesbank, Karl Otto Pohl, has given an ominous warning:

  A country with an inflation rate three times as high as Germany's cannot link its currency to the Deutschmark without mass unemployment and enormous payments problems . . .  It is very important, and not always understood, that monetary union means doing away with the exchange rate as a corrective to divergent economic developments. (Observer, 23 September).

Entry into the ERM is the policy of both the Tory and Labour parties. It marks a cynical attempt to squeeze more productivity out of workers. It will achieve this by throwing thousands of workers on to the dole queue. Employers will again impose an increased intensity of labour on the remaining workforce weakened by the threat of unemployment. And here we go again!

Are we going to suffer another ten year's frenzy of activity only to find that cut-backs and unemployment are the reward for higher productivity? Do we have to go through the whole predictable cycle again?

Socialists say emphatically no. Socialism offers the means of escape from the tyranny of the market. It offers a society in which all work according to our abilities for the common good. We will all take according to our needs. Goods and services will be produced solely for use, not profit. The capitalist barrier and fetter need never stand in our way again.

John Dunn

A View on the Crisis: Paul Mattick Jr interview (2011)

Paul Mattick Jnr

Interview from the October 2011 issue of the Socialist Standard

The Marxist economist and author Paul Mattick Jnr talks to Stuart Watkins about his views on Marx, the economic crisis, and the prospects for socialism

Socialist Standard: In your recently published book, Business As Usual (reviewed in the May 2011 Socialist Standard), you give an account of the causes of our present economic situation. Could you summarise the argument for our readers? In your view, just what is this crisis all about really?

Paul Mattick Jnr: This crisis, like those that have punctuated the history of capitalism since the beginning of the nineteenth century, is due to the inadequate amount of profit produced by workers in the capitalist economy, relative to the amount required for a significant expansion of investment. This problem, which first made itself known in the post-World War II period in the mid-1970s, has been hidden by the enormous expansion of debt – public, corporate, and even private – since that time, which continued the expansion of debt in all capitalist nations in response to the long-lasting deep depression of the 1930s. The credit-money created by governments and spread throughout the system by financial institutions created the basis for an apparent prosperity, though one marked by the usual cyclical pattern of ups and downs. But the underlying problem made itself visible, for those who cared to look, in many forms – the persistent inflation of the 1960s, the ‘stagflation’ of the following decade, the debt crises of Latin America and eastern Europe, the currency crises, real estate busts, stock market crashes, and massive bank failures of the last thirty years, as well as the general tendency, worldwide, to substitute speculation for real capital investment. Finally, the capacity of the system to put off dealing with its underlying problem seems to have reached its limits at the end of 2007.

Socialist Standard: According to most commentators in the mainstream press, the Great Recession, though serious, is now over. Do you agree that it is?

Paul Mattick Jnr: Between the time you asked this question and the present moment, many have become anxious about the arrival of a ‘double dip’ recession. In my opinion, the so-called second dip is merely the continuation of the crisis that began in 2007. There are of course economic fluctuations throughout periods of depression as well as periods of prosperity; in addition the government stimulus after 2008, however inadequate, had a certain effect (for instance in China, where the state promotion of an enormous real estate bubble involved the importation of machinery and other goods from Europe and elsewhere). But the fundamental problem, the low profitability of capital, has not been overcome.

Socialist Standard: And in your view, the low profitability of capital can be explained by Marx’s law of the tendency of the profit rate to fall? Can this law be demonstrated to be true empirically?

Paul Mattick Jnr: Yes to your first question; your second raises complex issues. The theory Marx worked out in Capital is an extremely abstract one: it is an attempt to analyze the dynamics of capitalism as a global system, over the long term. It is couched in terms of the quantities of ‘socially abstract labour’ – labour performed in the production process as represented by money when products are bought and sold – because Marx looks as capitalism as fundamentally, like all social systems, an organization of the process of reproducing the human population (and its social relationships). But in the world of business, money is used to symbolise more than the actual activities of social production – it represents, for instance, claims on the social product based on the control of natural resources, and also – to a large extent, in fact – promises to pay in the future, promises to pay off bets made on the way production prices will work their way through the market. And national income statistics, even ignoring the enormous inaccuracies involved in calculating them, are drawn up on the basis of business accounting systems and orthodox economic theorising, which do not distinguish between actual productive activity and speculative hopes. As a result, the data available cannot really be used to prove or disprove Marx's theory.

This is not to say that Marx's ideas can't be measured against experience. His predictions need to be compared with the history of capitalism over the last 200 years. From this perspective, Marx's ideas come off very well, as the main tendencies he predicted for capitalism – towards the supplanting of human labour by machinery, the concentration and centralisation of capital, the spread of wage labour, the tendency towards widescale unemployment, and above all the recurrence of periods of depression – have been realised. In fact, I would say that Marx's theory of the tendency of the rate of profit to fall over the long term is the only convincing account of the business cycle that there is. A particular aspect of this is of personal interest to me: in the 1960s, my father, Paul Mattick, wrote a book, Marx and Keynes, challenging the generally accepted view that Keynesian methods could control or eliminate the business cycle. He asked: if Marx is right, what will happen? And what he predicted has in general come about. This is one of the very few examples of a successful prediction in the social sciences!

Socialist Standard: Could you expand on your claim that the tendency of the rate of profit to fall is the only convincing explanation of the business cycle? Perhaps the most important new work to emerge from the Marxist tradition on crisis in recent years is that of David Harvey. He says, on the contrary, that the tendency of the rate of profit to fall cannot be made to work – it’s too compromised by the counter-tendencies identified by Marx, among other objections. He instead views all the conflicting Marxist accounts of the business cycle – profit squeeze, underconsumption, disproportionality – as possibilities that represent but don’t exhaust possible departures from balanced growth. What is your view of the competing Marxist accounts of crisis, including Harvey’s?

Paul Mattick Jnr: Many Marxist writers have taken some version of the tack Harvey follows, invoking a variety of causal factors to explain crises. The problem with this is that these disparate factors are not operating on the same analytical level. If wages would really squeeze profits, accumulation will decline, putting downward pressure on wages, so this will quickly correct itself. This is why, so far as we can tell from statistics, there have been no notable profit squeezes associated with important downward movements of the economy, despite claims sometimes made that there have been. Similar considerations hold for disproportionality explanations: capitalism in fact is always developing disproportionally, as there is no central regulating agency, but this is also constantly subject to correction by market forces. The explanation of crisis by reference to underconsumption is one of the oldest – it dates back to Sismondi and Malthus in the early 19th century – but also one of the least convincing: clearly, not all the product can ever be consumed, or else there would be no capital accumulation; as well, a constant feature of the system cannot explain the crisis cycle. As Marx points out, of course there is a lack of effective demand in a depression period. But why? His answer is that accumulation – which equals as it determines demand (for consumer goods, via wages, and production goods) – slows in response to declining profitability. And this is in accord with what statistical information we have, as was demonstrated long ago by the American economist Wesley Mitchell and has been recently shown by a number of researchers. Of course, the profits of statistics are, as I have pointed out, not the profits of Marx. But Marx's theoretical considerations provide an explanation for the fluctuations of observable business profits. What is odd is the resistance to Marx's theory when it is in such good accord with the history of capitalism. I believe this is largely due to the fact that most theorists are still in thrall to the economists' idea of capitalism as a naturally self-regulating system. Thus Harvey, for instance, needs to find a reason why it goes out of balance. In fact, however, capitalism is always in disequilibrium. On the broadest scale, it is the crisis that makes continued accumulation possible, just as it is accumulation that leads to a lowering of the rate of profit.

This highly abstract statement ignores the counteracting factors, the list of which Marx borrowed from J.S. Mill. It is not hard to show – it was done by Grossmann and others – that over the long run these factors cannot overwhelm the tendency of profits to fall. But we already know this empirically, since the history of capitalism demonstrates the effects of a periodically falling profit rate.

Socialist Standard: You say your father was proved right and Keynes wrong. But many supporters of the system would say that Keynesian methods saved capitalism from a Great Depression in the 1970s, and led to the Great Moderation – with capitalism delivering generally and gradually improving prosperity for all and monetary policy moderating the ups and downs of the business cycle. Did that not prove Keynes right? Might the same tricks not work again and pull us out of our present crisis?

Paul Mattick Jnr: I think it's fair to say that Keynesian methods saved capitalism from a deep and long depression in the 1970s. But the cost was the rising level of government debt in all capitalist countries. In the 1980s and after this was joined by an unparalleled expansion of corporate and private consumer debt. What happened around 2007 was that this expansion of debt collided with the continuing failure of the capitalist economy proper to expand at a sufficient rate. So one could say that the chickens of 1975 have come home to roost in the current depression. And since the Keynesian card has already been largely played, capitalist governments are now torn between fears of further unraveling of the private-property system and the dangers of further increasing sovereign debt.

Socialist Standard: Your father was connected with our American party, occasionally publishing in its journal. In a newly published biography of one its members (see here), we see you as a child sat at your father’s knee while political discussions raged around you. Do you have memories of these times? What is your memory and present opinion of the WSPUS and our political tradition generally? You say in your book that the heydey of the left and the trade unions is over and there's no hope of reviving them. So what can be done? What's the alternative?

Paul Mattick Jnr: My memories of the WSP are very good ones – I liked the people involved very much. I still remember going to classes in Marxian economics in Boston, taught by Rab and others, in some ways my real initiation into radical theory. I remember, with equal pleasure, the ‘socials’ – parties – when we kids moved around the legs of smoking, drinking, discussing, lovely adults. But I think these experiences, precious though they are to me as an individual, belong to the past. For most of today's young people – and most of their elders – the political ideas of the past have little meaning. And not only ideas – the political movements of the past no longer exist as serious forces. The trade unions have long been in decline world-wide, and the political parties of the left are either fully integrated into the capitalist political system or have become minute, unimportant sects. To an extent, this is good, as it seems to me that leftwing political organizations have historically stood in the way of creative responses to social crises, obsessed as they have been with their own agendas. But in any case, the response to the coming depression and the suffering to be imposed on people by the world's masters (and nature, as a result of the workings of the capitalist economy) is something people will have to work out for themselves, with little help from the past, in response to evolving conditions. To solve their problems, people will have to take direct, concrete action – occupying empty housing, seizing stocks of food and other goods, and eventually, if all goes well, occupying and beginning to operate the means of production and distribution. This lies in the future, but already one can see steps in this direction, in phenomena like the Greek cry ‘We won't pay!’ and French occupations of defunded schools. Even the action of tens of thousand of young Spaniards, simply meeting in the centre of Madrid and other cities, like the Egyptians in Tahrir Square, to discuss politics, is a step towards autonomy from the political wing of the ruling classes, a step towards an autonomous working-class control of social life.

Socialist Standard: We see your point, but we would also say that as people begin to work these things out for themselves, they will also probably be drawn to some of our conclusions: namely, that state power will have to be reckoned with in an organised way, and alternatives to the present system discussed and agreed upon. That’s at least a possibility, isn’t it?

Paul Mattick Jnr: Both of your points seem to me quite true. We can already see the state mobilising its forces in defence of capitalist social relations, even when they are barely challenged, and radical confrontation with the current social order will definitely involve finding ways to counter the military forces that will be deployed. Meanwhile, exploring alternatives to the present system, after a long period during which even the idea of an end to capitalism has been nearly unthinkable, is of great importance. This is especially true because earlier models of social change have been rendered obsolete by the development of capitalism as a system: for instance, an idea like that of the network of workers councils so important to revolutionary thought after the First World War requires thoroughgoing reformulation in a period when large numbers of workers have insecure jobs, and no longer identify themselves as workers within particular industries, not to mention workplaces, while gigantic masses of people all over the world struggle to exist without employment, and when many production processes involve workers and workplaces in different countries, as when Chinese workers assemble iPhones from parts produced in other places. Then, the developing ecological catastrophe raises novel issues which will require serious, large-scale efforts of a technological as well as a social nature. At the same time, the growing proletarianization of the world’s people and the greater level of international integration of populations and cultures, make the old slogan of “world revolution” in some ways more realistic than ever before.

Socialist Standard: Thank you, Paul, very much for talking to us.

Capitalist crises (2015)

Book Review from the August 2015 issue of the Socialist Standard

'Capitalism’s Crises: A Debate'. Contributions by Andrew Kliman, David Harvey, and Doug Lain. Marxist-Humanist Initiative. 54 pages.

Andrew Kliman wins this debate hands down.  David Harvey has tried to argue that Marx didn’t really hold or didn’t stick to the theory of ‘the law of the tendency of the rate of profit to fall’.  He did suggest that, as labour is the only source of profit and as capital accumulation tended to be labour-saving, there was a tendency for the amount of profit to grow more slowly than the amount of capital invested. So Harvey’s view is easy enough to rebut. The real debate, which Harvey does not enter into, is how this tendency might be related to financial crises and economic downturns.

Some argue that there is a direct link between the falling rate of profit theory and crises, in that, as a result of the introduction of more and more labour-saving machinery over a period, the rate of profit eventually falls so low that there is no longer an incentive to invest so much and so there’s a slump in production.

Kliman’s argument is that the link is only indirect:

‘Marx did not regard the tendency of the rate of profit to fall as an immediate cause of commercial or financial crises. He argued that a decline in the rate of profit leads to a crisis indirectly and after some delay. It promotes overproduction (by, e.g., depressing productive investment demand). It also promotes financial speculation and swindling (…) it is only when debt finally cannot be repaid that a crisis – that is, a financial crisis – erupts, and the crisis then leads to stagnation’  [Kliman’s emphasis].

He also writes of ‘the existence of many intermediate links between the fall in the rate of profit and the outbreak of crisis.’  But with all these intermediate links is this really a falling rate of profit theory of crises? Doesn’t it amount in the end to saying in effect that capitalism causes crises?

No such questions arise over the complementary view that during a slump the rate of profit rises through the devaluation of capital (capital is not a thing but a sum of values), so creating the condition for a resumption of capital accumulation. Kliman explains this well, underlining a very useful distinction between a financial crash (the actual ‘crisis’ point) and the drop in production that follows, useful because those in the Marxist tradition (including ourselves on occasion) sometimes use the word ‘crisis’ to cover both.

Adam Buick

Cooking the Books: Capitalism in Action (2012)

The Cooking the Books Column from the March 2012 issue of the Socialist Standard

In a speech in January David Cameron talked about using “this crisis in capitalism to improve markets, not undermine them”. At least he admits that capitalism does have crises, which is progress compared to the previous Prime Minister. He said he wanted “these difficult economic times” to “lead to a socially responsible and genuinely popular capitalism. One in which the power of the market and the obligations of responsibility come together. One in which we improve the market by making it fair as well as free, and in which many more people get a stake in the economy and share in the rewards of success. That’s the vision of a better, more worthwhile economy that we’re building”.

By “a socially responsible capitalism” and a “fair market” all he seems to mean is that the top executives of capitalist corporations don’t line their pockets so much, while everything else goes on as before, with profits coming before people and market forces enforcing the economic laws “no profit, no production” and “can’t pay, can’t have”. More a nightmare than a vision.

He went on:

“We are the party that understands how to make capitalism work … Because we get the free market we know its failings as well as its strengths. No true Conservative has a naïve belief that all politics has to do is step back and let capitalism rip. We know there is every difference in the world between a market that works and one that does not.”

It would be interesting to know what he thinks the market’s failings are. But he didn’t say. Nor did he elaborate on how he was going “to make capitalism work”. He can’t have been claiming like Gordon Brown to be able to make it work without it leading to other economic crises in the future. No politician dares do this now.

But, then, why does he not come out and say that there will always be crises from time to time under capitalism as that’s the way it works, as many other open supporters of capitalism have done? Such as HSBC chief economist, Stephen King, who has written of “capitalism’s inherent instability” (Times, 7 February). Or Times columnist (and former Tony Blair speechwriter) Philip Collins who has commended to Ed Miliband’s attention Marx’s “picture of capitalism as creative, destructive, radical, disruptive and prone to cycles of boom and bust” (Times, 7 January).

Or Tory grandee William Rees-Mogg stating that “no theory can stop recurrent boom and bust” (Times, 22 September 2008). Or the Times whose editorial (17 September 2008) observed after the collapse of Lehman Brothers that the “profitable parts of the business will find a new home and the weaker parts closed down. This is painful and worrying but the opposite of a disaster. It might be brutal and unforgiving but this is how capitalism works. The market ensures that those who make mistakes are accountable for them. What critics are too hasty to see as capitalism in crisis is, in fact, capitalism in action”.

Falling living standards and cuts to social amenities, needed in a crisis to help restore the profitability that drives capitalism, are equally brutal and unforgiving but that’s how capitalism works. Yes indeed, his is the “party that understands how to make capitalism work”. And, no, it doesn’t believe in just stepping back and letting capitalism rip. It believes in intervening, as at present, to help let capitalism rip.

A Free Market Guru Gone Wrong (2007)

From the January 2007 issue of the Socialist Standard

The death of the economist Milton Friedman at the age of 94 last November has robbed the free-market of perhaps its greatest advocate of modern times, but his views were wrong in theory and a failure in practice

Friedman did much to prepare the ground for the resurgence in free-market economics that occurred once capitalism had entered a new phase of economic crisis in the 1970s, and was the main driving force behind what became known as ‘monetarist’ economic theory.

Friedman was a New Yorker by birth but made his name at the University of Chicago, where he was Professor of Economics from 1948. His particular brand of free-market economics gave rise to the ‘Chicago School’ of economists who provided much of the intellectual impetus behind Mrs Thatcher’s early years as UK Prime Minister and influenced countless other governments across the world. After his retirement from Chicago, Friedman joined the Hoover Institute and spent considerable time on the lucrative US lecture circuit preaching his free-market creed.

Friedman was a prolific writer on economic matters for much of his life, but his two most well-known works were also the most transparently political: Capitalism and Freedom (1962) and Free To Choose (1980), the latter written jointly with his wife, Rose. Most of his other writings were concerned with monetary economics where he became the guru of those opposed to the dominant economic orthodoxies of the post-war period, particularly Keynesian economics.

The position of Friedman and the Chicago School can be divided into two (related) parts. Firstly, the view that markets are the most efficient way of allocating resources and that government intervention in the economy should be as limited as possible, leaving firms and individuals free to maximise their wealth in competitive markets. Secondly, the view that the massive and persistent rise in price levels across much of the world since the Second World War has been essentially a monetary phenomenon, causing dislocations in the normally efficient workings of the market mechanism, eventually leading to rising unemployment and other economic problems.

Free market voodoo

Friedman and the Chicago School viewed capitalism – if left to its own devices – as a largely unproblematic way of organising society, with its own in-built regulatory mechanisms for successful wealth generation and allocation. The key problem with society was not capitalism, but governments. Throughout the twentieth century governments had become more involved in every aspect of economic life and, in the view of Friedman, were creating problems under the guise of preventing them. State ownership, direction and fiscal policy meant that firms were unable to operate in ways that would otherwise be encouraged by free and unregulated markets, causing economic inefficiencies and blockages. The solution was to ‘free the market’ and reduce as far as practicable the interference of the state.

To this end, within a year of Mrs Thatcher’s election as Prime Minister in the UK, Friedman latched upon her government’s stated intention to ‘roll-back the state’ as the first example of his free-market solution in action in the developed world. Friedman advocated ‘the elimination of all government interference in free enterprise, from minimum wage to social welfare programmes’ and told the Washington Post in 1980 that Mrs Thatcher’s economic experiment ‘could mark the turning away from the welfare state back to the free-market economies of the nineteenth century’.

But this view was problematic for two reasons. One, that no economy, even in the nineteenth century, was a genuinely free-market one. Indeed, the free-market economy is a construct or model – a postulate of economists – and has never existed in reality. Because of the way the capitalist economy works in practice, it almost certainly never will as capitalism, a competitive and necessarily class-divided society, is dependent on state intervention and regulation as an arbiter (and enforcer) of competing interests. Indeed, ironically enough, it was brought into being in large part because of the actions of the state itself in removing feudal peasants from the land through the Enclosure Acts and other devices, so as to create a pool of available wage-workers (without which capitalism would have no producer class).

Second, while the economies of the nineteenth century (and other economies too admired by Friedman in more recent times such as South Korea and Malaysia) were closer to this model than most, there is little about their economic structure which is suggestive of a desirable environment for human beings. In fact, countries with the most rampant free-market economies tend to exhibit characteristics of mass poverty, social polarisation and raging crime above all others.

In many respects then, Friedman’s conception of the free-market was a utopian one, a notion that existed in the heads of the Chicago School economists but not in reality. It could never exist in actuality and the nearer one got to it, the less desirable it appeared anyway.

But Friedman’s resurrection of the totem of the free-market betrayed its unoriginality too. From the outset, Friedman had been a follower of some of those in the earlier ‘classical’ school of economics (such as Alfred Marshall) who thought that governments and trade unions were the economic villains preventing the effective operation of the market economy as the most efficient mechanism for allocating scarce resources. Whatever the inadequacies of the Keynesian School that had replaced their thinking as the dominant one, the very reason classical economics from Adam Smith to Marshall was overturned as the orthodoxy by Keynes was precisely because it had failed to explain – let alone provide a cure for – the most persistent and endemic problems of the capitalist system, such as poverty amidst plenty, mass unemployment and economic crises.

So Friedman’s solution to the emerging economic crises of the 1970s and 80s was an old, discredited one, resurrected for a new audience but where – as the mass unemployment record of the Thatcher government testified – the second performance was no better than the first. That right-wing US politicians such as the former President George Bush were driven to describe the Chicago School’s tax-cutting, free-market approach as ‘voodoo economics’ is in itself quite some testimony to its failure.

Monetarism

The second distinctive aspect of Friedman’s economic thinking was often – and loosely – labelled ‘monetarism’. This was the idea that inflation is a monetary phenomenon with a monetary cause, but – just like free-market economics – this was really an old idea given new life by Friedman and the Chicago School. As an attempt to explain the persistent rises in the price level that had taken place since the Second World War, together with the Keynesian failure to deal with the problem, monetarism represented an attempt to get back to economic basics.

If persistently rising prices had become a noticeable issue after the war, by the 1970s it was a serious problem across much of the world, reaching double-digit figures in most countries, including the most advanced. The explanations for it advanced by economists and politicians of every hue were many and varied. The most prominent were that it was caused by factors such as:

1 the profiteering of the big corporations

2 excess levels of overall demand in the economy

3 wage increases above rises in productivity/ coupled with trade union power

4 excessive government expenditure

5 excessive government borrowing

6 the expansion of bank deposits and credit

7 psychological ‘expectations’, i.e. that price rises are a self-fulfillingprophecy

8 low interest rates

As the problem got worse and the analysis of it more desperate, some of these explanations interlinked. The monetarists at various times indicated some agreement with all of these explanations except the first two, though it was the monetary aspect of their argument that won them most attention and separated their approach most clearly from what had become the prevailing Keynesian orthodoxy.

In essence, monetarism was based on the Quantity Theory of Money and a formula for it developed by Irving Fisher which is the notion that changes in the money supply, all other things being equal, have a direct impact on the general level of prices. Friedman even went so far as to explain that in this respect Karl Marx was one of the first monetarists, holding to an explanation of inflation that focused on the supply of money as the key variable.

Friedman’s argument was that persistent inflation caused a serious imbalance to the successful operation of the market economy, leading to market distortions and failures (which, in turn, explained high unemployment and other contemporary phenomena). Its cause was once again mistaken government interference, this time governments failing to conduct monetary policy based on the equilibrium formula identified by the Quantity Theory of Money as being essential for a stable price level.

Friedman summarised his view in the Financial Times (7 September 1970) by claiming that ‘inflation is always and everywhere a monetary phenomenon – in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output’. This indeed sounded like the analysis of Karl Marx based on his labour theory of value. Marx’s view was that the over-issue of an inconvertible (such as into gold) paper currency above and beyond that needed to carry out production and trade in an economy at any one time, would cause a commensurate rise in prices. This was because such an excess issue of paper money caused an artificial bloating of monetary demand, injecting purchasing power into the economy that was not based on the production of real value embodied in commodities. As demand increases, caused by this excess of circulating money, prices rise in response to it.

For Marx as well as many of the earlier classical economists, inflation was properly called ‘currency inflation’ as it was based on an artificial bloating of the currency leading to a diminution of its purchasing power. Individual prices of commodities could rise and fall too, of course, and the trade cycle would cause the price level as a whole to rise in booms and fall in slumps, but currency inflation was a different phenomenon, caused by governments over-issuing an inconvertible currency.

If this is what Friedman had really meant too, it would have no doubt had some effect on the conduct of monetary policy in a way that could have tackled the problem – but in the eventuality it was not quite what the monetarists meant at all. In fact, the monetarists got themselves into the ridiculous position of agreeing that inflation was caused by an excess supply of money, without being able to agree on what actually constituted ‘money’ in the first place.

Applying his labour theory of value, Marx had taken the view that ‘money’ in capitalism was really the money-commodity, typically gold, through which other commodities acquire a price, and which denotes how much of the money-commodity they will exchange for. In the situation of a currency that is not convertible into gold, this underlying relationship is merely expressed by paper token money (as today) and its purchasing power is determined solely by its quantity in relation to the amount of gold the token paper money is supposed to represent.

Lacking a labour theory of value to underpin their analysis and – just like the other conventional economists who content themselves with examining surface appearances in the capitalist economy rather than underlying relationships – the monetarists decided that things that had often been termed ‘near-money’ were so close to money as to become indistinguishable from it and should therefore be included in any definition of the money supply. This primarily included bank deposits.

This seemingly theoretical distinction had a real, practical impact. When Jim Callaghan’s Labour government from 1976-9 signalled a move towards rejecting Keynesianism in favour of monetarism – and was then followed by the more full-blooded version of monetarism from 1979 onwards when Mrs Thatcher’s Conservatives came to power – their stated aim was to ‘watch and control’ the expansion of the money supply. But the favoured money supply indicators (labelled ‘M1’ and ‘M3’ at the time) consisted primarily of bank deposits and it was no surprise that their movements bore little relationship to what was happening to the price level. Indeed, Thatcher herself was later to comment that these indicators were ‘often distorted, confusing and volatile’ (The Downing Street Years, p.688), with their control soon being abandoned as a policy instrument.

In effect, what Friedman had done was to encourage governments in the UK, US and elsewhere to resurrect what had been known decades earlier as the ‘bank deposit theory of prices’. This was a long-discredited theory that had been comprehensively demolished by (among others) one of the last of the classical economists, Professor Edwin Cannan of the London School of Economics, who, in his Modern Currency and the Regulation Of Its Value (1931) claimed with a remarkable sense of prophecy that ‘this is one of the most obstructive of all modern monetary delusions’. Like Marx, and like his fellow classical economists, Cannan adhered to a theory of value which allowed him to underpin what happened on the ‘surface’ of the economy with what was happening in the sphere of real wealth production and distribution. His argument was summarised in his Money: Its Connexion With Rising and Falling Prices (1923):

‘A[n] . . . error, which has, unfortunately, been countenanced by many high monetary authorities in recent years, is to suppose that the aggregate of deposits is a kind of money (sometimes it is called ‘bank-money’) which should be added to the actual stock of coins and notes existing at any moment. The individual, no doubt, finds ‘money in the bank’ much the same as ‘cash in the house’, but the aggregate of all the individuals’ balances at their banks is only an amount which the bankers are liable to pay, but which they could not possibly pay in cash at one moment. A liability to pay cash is certainly not cash: both debtors and creditors are painfully aware of the fact. When additional currency is put on the market by some one who has the power of issuing it, prices are raised, because the issuer’s offer of money in exchange for goods and services is additional, the power of nobody else to spend money having been reduced. When, on the other hand, a person increases his balance at his bank he increases the bank’s power to lend only at most by the amount which he forgoes, so that the aggregate money-spending is not increased’ (p.81).

An inability to recognise this fact (compounded by a general adherence to the mistaken view that banks can create vast multiples of credit from a single deposit base) meant that Friedman’s ‘monetarism’ amounted to little more than the advocacy of a discredited economic theory with predictably disastrous results.

Legacy

The modern legacy of Milton Friedman is not a strong one. Where free-market solutions to problems are not in open retreat, they are being questioned with renewed vigour and ‘monetarism’ has deservedly died something of a death, even among many of its previous adherents. And while Friedman hugely exaggerated the role governments have played in market failures such as economic slumps (his book A Monetary History of the United States 1867-1960 being something of a case in point) where he was right – with inflation being a government-promoted monetary phenomenon – it was not always for the right reasons.

In most developed countries the creeping inflation of the currency that started at the time of the Second World War is still with us, partly because Friedman’s ‘monetarism’ ended up obscuring the issue. The amount of currency in circulation in the UK in 1938 was under £600 million, now it is around £45,000 million having steadily increased year-on-year, being far in excess of what is actually required for production and trade. The result is that the price level has risen every single year since and – despite the current downward pressure on many prices caused by world competition – continues to do so. And capitalism’s other attendant social and economic problems are still with us as they always are, whether there is inflation or not.

Seen in this light, Professor Friedman’s most important interventions verged between the disastrous and the useless. In promoting a free-market dogma which refuses, against all the evidence, to countenance the fact that there is something intrinsically wrong with the capitalist system of production for profit he was seriously misguided; furthermore, in effectively resurrecting the formerly discredited ‘bank deposit theory of prices’ he did little but add further confusion on the principal issue that made his name.

In 1976 he won the Nobel Prize for Economics. Little did they probably suspect at the time that it was for breathing life into two economic corpses that would have been better left dead and buried.

DAP

Letters to the Editors: Crises and collapse (2011)

Letters to the Editors from the November 2011 issue of the Socialist Standard

Crises and collapse

Dear Editors,

As a member of the Socialist Labor Party for 43 years I'm convinced that discussion with workers about the intractable calamity global capitalist society is facing can only logically start with the Marxian Law of Value: that commodities exchange value for value in the amount of socially necessary labor time invested in their production. The corollary to this is that human labor power is the source of all value.

As every socialist knows, lurking behind burgeoning unemployment, dire poverty, and a hopeless future is the fact that workers receive in wages only a small and diminishing fraction of the values that they produce. They cannot buy back those values when they appear as commodities in the market in their real value. Global capitalism is writhing in its death throes with this fact in its craw. Every worker needs to get this message before any meaningful discussion of socialism ensues. To discuss social issues that are only subordinate to this without a basic understanding of value, I believe is futile and will never make socialists.

What approach do you encourage socialists to take in initiating discussion of capitalist collapse and the necessity of socialism with workers?

Yours for a socialist society,

Bernard Bortnick, 
United States

Reply:

We are glad to hear you are keen to make more socialists but do not agree with your view that capitalism will collapse – either on past evidence or given our understanding of Marxian economics. As long ago as 1932 we published a pamphlet called Why Capitalism Will Not Collapse which pointed out the fallacy of such predictions at the time of the Great Depression. As Marx himself said, there are no permanent crises and every economic downturn creates the conditions for the next boom.

The view you put forward that the workers can’t buy back the entire product of industry is no explanation of economic crises in itself, and certainly doesn’t point in the direction of the collapse of capitalism. It was specifically repudiated by Marx in Volume 2 of Capital in Chapter 20 where he argued that the inability of the working class to buy back the entire product of industry is a permanent condition of capitalism and of itself explains nothing. He also pointed out that if the contention is really that the restricted consumption of the workers causes crises, then this is unconvincing too. Wages as a proportion of national income usually have a tendency to rise during booms so this would otherwise indicate crises should be averted.

The working class of wage and salary earners do not need to buy back the entire product of industry incidentally. (What use would workers have for producer goods like lathes and robotics equipment?) Much of the output of industry is bought by the capitalists i.e. producer goods like those just mentioned, and also those luxury goods that the working class can’t afford to buy.

The ultimate cause of all economic crises within capitalism is the system’s tendency to grow in an anarchic, unbalanced fashion in the relentless pursuit of profit (viz. the housing and construction bubble in large parts of the developed world that laid the basis for the recent financial crisis and recession). Our approach is to point out that crises and other social and economic problems are endemic to the way the market economy works. No reform of the system can ever solve these problems – only socialism represents a positive hope for humanity. – Editors

Feasible socialism

Dear Editors

The article, 'Russia – the myth of socialism', in the October Socialist Standard, well written though it is, does raise a fundamental question. It is claimed, not unreasonably, that in the mid-nineteenth century, capitalism ''had not economically matured to the point where Marx's vision of a classless society where free access to needs (sic) would be the mode of distribution could be realised'', whereas by 1917, this economic maturity had been achieved, albeit not in Russia itself (which begs questions as to what options a bona fide socialist party operating in Russia around this time would have had, and how a world socialist revolution might have played out had it occurred in 1917).

My query is this. On what grounds can such an assertion be made? What objective criteria or economic observations can be cited in support of the proposition that world socialism was feasible in 1917 (and not feasible in 1850)? I don't think it's sufficient simply to generalise that technology had advanced over the intervening 67 years. An empirical case surely needs to be made, though. For example, it might incorporate the notion of a 'tipping point' having been arrived at.

This is not a pedantic issue. If it can be convincingly demonstrated that socialism was feasible way back in 1917, then a fortiori, it is surely the case that it is far more feasible now insofar as technology has surged ahead beyond the wildest dreams of those who were around during  those ill-fated 'ten days that shook the world'. Nevertheless, the case still needs to be made – empirically – that the world could sustain a free access society, and this must mean taking account of current technology, and indeed of a valid representation of human nature (since these aspects are respectively integral to the 'give' and 'take' sides of any economical situation).

Andy Cox (by email)

Reply:

In the 1910 edition of his Woman and Socialism the German Social Democrat August Bebel produced evidence to show that at that time the world was capable of producing enough food, clothing, shelter and otherwise provide for everybody on the planet. He saw electricity, generated by steam turbines, as being the energy source that made this possible.

“Electricity”, he wrote, “has an advantage over every other form of power in that there is an abundance of it in Nature.” His explanation has a surprisingly modern ring: “Our rivers, the tides of the sea, the wind and sunlight provide untold horse-powers, once we learn how to use them rationally and to the full.”

He summarised Sir Joseph Thompson (winner of the 1906 Nobel Prize for Physics) as saying in 1909 that “the day was not far off when the use of sun-rays would revolutionise our life, would make man independent of the energy of coal and water”  and quoted “how great is the supply the sun lavishes upon us becomes clear when we consider that the heat received by the earth under a high sun and a clear sky is equivalent … to about 7,000 horse-power per acre.” Bebel concluded that “this removes the fear that we shall ever run short of fuel” and that “there is no human activity for which, if necessary, motive power would not be available” (section 4 of chapter XXI).

With regard to food production, Bebel cited the claim of the American economist Henry Carey (who had died in 1879) that “the 360-mile long Orinoco valley alone could supply sufficient food to feed the whole human race” and commented, “Let us halve this estimate and there is still more than enough. In any case, South America alone could feed several times the present world population” (section 4 of chapter XXX).

In 1850, on the other hand, the main sources of energy were coal, coal gas, the steam-piston engine and horses. Some time between then and 1910 a qualitative change in the productive forces at the disposal of humanity occurred which meant that the problem of producing enough for all had in principle been solved. At the same time capitalism came to dominate the whole world, which Marxists and others analysed using the term “imperialism” (today we might say “globalisation”).

So, yes, the wars, famines and general deprivation of the 20th century could have been avoided had world socialism been established a hundred years ago as was technologically feasible. As you say, every new advance in technology makes socialism all the more possible – Editors.

Saying Marx Is Right, Getting Him (And Capitalism) Wrong (2011)

From the December 2011 issue of the Socialist Standard

“God save me from my friends; I can protect myself from my enemies.”

Karl Marx’s circle of friends, or at least friendly acquaintances, has grown considerably since the financial crisis broke out in the autumn of 2008. Now, three years later and with many countries facing a double-dip recession or worse, articles titled “Was Marx Right?” (or even “Marx Was Right”) are a fairly common sight in the pages of the financial press.

Twenty years ago, with the collapse of the Soviet Union, it was so obvious to most that Marx had been wrong that he was subject to more ridicule than criticism—or simply ignored altogether. Followers of Marx may find it satisfying that he is now being taken seriously, but the standard used to conclude that he is “right” in 2011 is not much different from the one employed in 1991 to prove he was “wrong.”

Then as now Marx is often treated as a nineteenth-century Nostradamus, as if his main aim had been to predict the future course of capitalism or prophesize its end. Judged on this basis, Marx has been deemed right whenever capitalism is struggling or appears to be on its last legs, only to be proved wrong again during the next economic recovery or boom. (And since many assume that Marx sketched the blueprint for state capitalism, a system still commonly referred to as communism or socialism, his critics have pointed to false predictions about a future utopia as another reason he is wrong.)

Using the word “prediction” to describe the results of Marx’s investigation of capitalism is a bit off the mark. The term is only apt in the sense that his analysis of how capitalism functions, which reveals its limits or boundaries as a profit-driven system, can serve as a basis for “predicting” what sorts of problems will arise under it. But these are more general expectations than specific predictions, and from experience we already know what sort of trouble to expect from capitalism. The significance of Marx’s analysis is that it explains why those problems – such as unemployment, war, and poverty – are permanent fixtures of the capitalist social system.

Dr. Doom digs Marx

One of the most widely-quoted “Marx was right” comments in recent months was made by the economist Nouriel Roubini, who earned fame and the nickname “Dr. Doom” for correctly predicting a messy end to the housing bubble. In a videotaped interview with the Wall Street Journal in August, Roubini said: “Karl Marx had it right. At some point capitalism can self-destroy itself. That’s because you cannot keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand.”

And Roubini repeated the same point in an article titled “Is Capitalism Doomed?” in which he wrote: “So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.”

Roubini’s praise for Marx gets his ideas on crisis wrong in two significant ways worth exploring: Marx certainly did not think that workers’ limited consumption is the real  cause of crises (or that increasing their consumption is a way out); nor did he think of a major crisis in terms of the potential “self-destruction” of capitalism.

Greedy but not stupid

The “underconsumption” theory of crisis that Roubini ascribes to Marx is in fact a position that he had harshly criticized. On just an empirical level, Marx thought it dubious to claim that “crises are caused by the scarcity of effective consumption” because experience shows that they are always directly preceded by “a period in which wages rise generally.” Thus, according to the underconsumption theory, “such a period should rather remove the crisis” (Capital vol. 2).

The more interesting rebuttal of the theory, however, can be found in Marx’s explanation of why capitalists, as Roubini laments, end up “cutting jobs [which] reduces labor income, increases inequality and reduces final demand.” Are they simply too stupid and greedy to know what’s good for them? Should they read Roubini’s latest book to figure it out?

Capitalists may indeed be greedy and short-sighted, but they are not stupid when it comes to their own interests. Unlike the advocates of the underconsumption theory, they are smart enough to remain focused on obtaining profit, knowing that to fall short of that goal can mean falling out of the capitalist class.

Raising the wages of their own workers may contribute to expanding the overall “final demand” but it cuts directly into their own individual profit. Moreover, the beneficiaries of a wage increase at one capitalist firm will be other capitalist firms, particularly those producing consumer goods. Such an act of self-sacrifice on the part of some capitalists is even less likely to occur in an economic crisis, when it is already difficult for many firms to secure a more or less average level of profit. Roubini should know that when the prospects for profit are dim, capitalists will prefer to curtail or even cease production altogether, not raise wages. He can lament the situation all he likes, but it is perfectly rational behaviour under the irrational capitalist system.

Yet the underconsumption theory of crisis, despite its inanity, has continued to seem attractive and plausible to some capitalists (and most Leftists). Marx explains how the theory reflects capitalists’ rather fond view of the workers of other capitalists: “Every capitalist knows this about his worker, that he does not relate to him as producer to consumer, and [he therefore] wishes to restrict his consumption, i.e. . . . his wage, as much as possible. Of course he would like the workers of other capitalists to be the greatest consumers possible of his own commodity” (Grundrisse).

Roubini sees that restricted consumption limits final demand, and fancies that the solution can be found in simply reversing the situation by increasing consumption to expand final demand. He never stops to think about why consumption must be limited in the first place. Roubini views restricted consumption as the cause of crisis when in fact it is the natural outcome and also the basis of a system designed to squeeze profit from workers’ labor.

Ignoring the profit motive and its relation to workers’ wages, Roubini feels free to dispense his wisdom on how the current crisis can be overcome by means of a “return to the right balance between markets and provision of public goods” in order to “enable market-oriented economies to operate as they should and can.” Instead of imagining the “should and can,” however, Roubini would be better advised to consider the “how and why.”

A forcible solution

The other way Roubini gets Marx wrong is by saying that he envisaged the possibility that capitalism could “self-destruct” in a crisis. Alarming capitalists by pointing to this dire prediction may be part of Roubini’s shtick as Dr. Doom, but at the same time it is a fairly widespread assumption regarding what Marx thought.

Marx does describe the occurrence of a world crisis as an “explosion” or “eruption” of capitalist contradictions and antagonisms, or even as a “destructive process.” But far from viewing crisis as the potential end of capitalism, Marx describes it as a “forcible solution” or “forcible adjustment” that temporarily restores the disturbed equilibrium, and as a violent process involving the “real concentration and forcible adjustment of all the contradictions of bourgeois economy” (Theories of Surplus Value).

The capitalist contradictions or antagonisms Marx is alluding to concern things that are linked to, yet independent of, each other – such as the relation between sale and purchase, or between the production process and circulation process. These things are clearly connected and interrelated, yet they can diverge from each other. The potential for sale and purchase to diverge, for instance, is magnified greatly under our modern credit system, where an inability to conclude one transaction can unleash a chain reaction that disrupts other transactions.  

Crises according to Marx are a forcible means of bringing such contradictory (semi-independent) elements back into some sort of alignment with each other so that the system can better function. This view of crises as a solution, albeit a crude and violent one, contrasts with the outlook of Roubini, who sees the destruction of a crisis as an avoidable problem rather than an unfolding solution.

Marx seemed to have economists like Roubini in mind when he wrote: “Instead of investigating the nature of the conflicting elements which erupt in the catastrophe, the apologists content themselves with denying the catastrophe itself and insisting, in the face of their regular and periodic recurrence, that if production were carried on according to the textbooks, crises would never occur” (Theories of Surplus Value).

The entire focus for an economist like Roubini is on coming up with practical solutions to crisis, not understanding why crisis occurs or what it tells us about the contradictions and limitations of capitalism. Marx thought of crisis as a phenomenon to be understood, not as a problem that could be solved. Even if we can manage to understand the exact causes of a specific crisis and fully examine all of the contradictions and antagonisms that are “strikingly revealed” (Theories of Surplus Value) in it, we are still not in a position to solve or prevent future crises. This is because the contradictions that explode in a crisis are all an integral part of the capitalist system.

What is clear from reading Marx is that the only way to get rid of crisis is to replace capitalism with a new system, free of capitalist barriers and antagonisms. This is not a “prediction” of the end of capitalism, but an explanation why workers must bring about its end.

In his analysis of crisis and other phenomena, Marx always seeks to understand why things are the way they are, not to predict when they might disappear or how the system might “self-destruct.” The defenders of capitalism are less interested in the why of things, than in making suggestions for how they should be, as if problems like crisis could be avoided if only capitalists followed the recommendations of economics textbooks. And this fosters the misguided hope that capitalism can (some day) be reformed. It’s natural for these economists to misinterpret Marx, even when praising him: they take capitalism completely for granted, and Marx didn’t.

Michael Schauerte