Economic Thought (1967)

Book Review from the October 1967 issue of the Socialist Standard

A History of Economic Thought by William J. Barber, Pelican. 5s.

Socialists, who have all at least had a go at reading Marx, are familiar with big names in economic thought—Sir William Petty, the Physiocrats, Adam Smith, Ricardo—and even with lesser names now long forgotten like Nassau Senior and his last hour. Marx saw his work as in the tradition of the classical economists like Smith and Ricardo who had set out to study the processes of economic growth and the distribution of income among social classes. Later economic writers turned to the study of prices and the market. Marx called them ‘vulgar’ economists as they tended to take a businessman’s view of economic life. In his discussion of Adam Smith. Barber brings out the different approaches of classical and modern economics:

Smith’s analytical categories contrast sharply with those widely used in much current economic analysis. A prevalent modern approach to income distribution is entirely ‘functional’ in orientation; that is to say, various income payments are treated as rewards to the ‘factors’ contributing to production… In such a ‘functional’ system all class lines are hidden. Smith, on the other hand, began with a social class division and built the greater part of his analytical structure around it.

Barber briefly surveys the contribution to economic thought of Adam Smith, Malthus, Ricardo, John Stuart Mill, Marx, Alfred Marshall and Keynes. Malthus is obviously out of place since his contribution was next to nothing. He did open a discussion on population, it is true, but, and Barber notices this too, he contradicted himself in different editions of his main work. He was also a shameless defender of an idle and wealthy leisure class.

Barber’s treatment of Marx is reasonably intelligent though marred by a number of mistakes. He claims that Marx assumed that the rate of exploitation (the ratio of profits to wages) would remain constant over time. Yet Marx devoted much space to describing the means capitalists used to increase it like the lengthening of the working day and the intensification of work. Barber also states that Marx “eliminated the classical concept of rent from his analysis”. Yet Marx discusses this too in some detail. Marx is often wrongly seen as an underconsumptionist so it is odd to read that Marx

was too closely wedded to the classical tradition of Say’s Law to provide a systematic demonstration of cyclical fluctuations. Within his system there could be no deficiency in total demand; only capitalists were in a position to save; and what they saved went into investment expenditure.

Say, a minor French economist, argued that general overproduction or underconsumption was impossible as supply created its own demand; what was not spent was all invested. ‘This conclusion’, as Barber points out, ‘rested on an important, though implicit, assumption: that all income was spent and none hoarded’. Marx never held this view. In fact he was one of the first to see through Say’s Law. He explicitly rejected Say’s views, arguing that the possibility of a crisis arises if the capitalists hoard and don’t re-invest their profits, which they will do if they think there’s no prospect of making any more.

Barber would seem to be taking on the whole of sociology in his criticism of Marx’s ‘social determinism’. To suggest that human action in society can be explained in a scientific way, i.e. in terms of cause and effect, does not commit you to a fatalist view of human behaviour.

Despite these limitations A History of Economic Thought is a useful guide and introduction to the theories of both pre-and post-Marxian economists.

Adam Buick

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

Surplus and Exports: An explanation (1975)

From the December 1975 issue of the Socialist Standard

It is said that accidents will happen in the best-regulated homes; and it can occasionally happen that a writer and the Editorial Committee have both sat up too late and a mis-statement appears in the Socialist Standard.

In the October issue, in the article “The Crisis: Wilson’s Lame Explanation”, the following appeared (page 184, para. 3):

  It follows therefore that the working class as a whole are not paid enough to buy back the goods they have produced. The “export drives” typical of all industrialized countries are evidence of this need to sell abroad the surplus which workers in the country of origin cannot afford to purchase . . . But, like taking in each other’s washing, it is a futile endeavour when all countries are trying to do the same thing.

This, we are afraid, is thoroughly incorrect. It resembles a theory held at the beginning of this century, that capitalism would eventually collapse because all countries had unsaleable surpluses on their hands. (This is the economic argument of Jack London’s The Iron Heel, published in 1907.) The SPGB never subscribed to that theory, and we hasten now to put matters straight.

It is true that the workers cannot buy back all they produce, but this does not explain economic crises; if it did, there would be no such thing as a boom, and crisis would be continuous. The surplus is used largely by the capitalists themselves for reinvestment in industry, when conditions are favourable.
When (as now) the conditions are unfavourable, workers are laid off — not because the surplus is an embarrassment but because goods produced cannot be sold.

As the article said, British manufacturers have to compete in foreign markets. However, this reflects not the need to dispose of a surplus but the normal working of capitalism in which all production takes place for sale at a profit: indeed, under-cutting of prices is sometimes achieved by investment in new machinery. The reason why trade often has the anomalous appearance of “taking in each other’s washing” is that commodities are produced more cheaply in some countries than in others. In a period of trade depression this is observed and commented on — e.g. that foreign cars are widely sold in Britain — but it goes on all the time.

Cooking the Books: Overproduction (2012)

The Cooking the Books column from the August 2012 issue of the Socialist Standard

According to Stuart Jeffries in the Guardian (5 July), “Marxism is on the rise again”. One of the reasons he gives for this is “its analysis of economic crises”. But what is this analysis?

The problem with trying to describe Marx’s own theory is that he never published a final, worked-out version. In Volume 1 of Capital there are some passing references to capitalist production going in cycles “of average activity, production at high pressure, crisis and stagnation”. Apart from that, all we have are drafts and notes on the subject which Engels, Kautsky and Moscow later published as Volumes 2 and 3 of Capital, Theories of Surplus Value and the Grundrisse, but these drafts are not always entirely consistent with each other.

This has led to a number of different Marxist theories. The explanation we have favoured is that crises are caused during the phase of “production at high pressure” by one key industry (it could be any).  This industry, in its anarchic pursuit of profits, comes to overproduce in the market for its products, and this partial overproduction then has a knock-on effect on the rest of the economy.   

Others interpret “overproduction”in a different sense, to mean that capitalism has a tendency for total capitalist production to outstrip total market demand. An example can be found in the January-February issue of Lalkar (a publication of the Communist Party of Great Britain (Marxist-Leninist), but it’s a theory put forward by others who don’t share this party’s policy). The present crisis, it claims:

  “is at heart a classic crisis of overproduction, this being the design fault that is built into the capitalist system. As the masses of workers –who make up the bulk of consumers –are, in the interests of profit, paid as little as possible, they are increasingly unable to buy all the increasing mass of commodities that the capitalist enterprises bring to market. This in turn bankrupts the least ‘efficient’ of the capitalist enterprises, causing further job losses and downward pressure on wages caused by an excess of the supply of labour power over the demand for the same. Bankruptcies start to escalate, while economic activity stagnates.”

This is a theory of “underconsumption” rather than of “overproduction”. It ignores the fact that the total capitalist market is not made up just of what workers can afford to buy, not even if capitalist spending on consumer luxuries is added; it also includes what capitalist enterprises re-invest in production, i.e. spend on producer goods.

Lalkar offers the following explanation as to why the present crisis didn’t break out earlier:

  “However, this process can be, and is, retarded by the simple expedient of the capitalists, who would otherwise find it difficult in the circumstances to invest profitably, lending money to workers to enable them to continue as consumers despite their relative poverty.”

This doesn’t make sense. The capitalist class lend the working class money to buy their goods, but how would they make a profit out of doing this? They would only get their money back.

Working-class borrowing did increase in the period up to the present crisis but this wasn’t done deliberately to prevent production spiralling downwards. It was the other way round: because production was expanding, banks and other lenders made loans to workers on the assumption that production would continue to expand and so workers would be able to repay out of their future wages both what they had borrowed and the added interest.

A crisis is not caused by working-class consumption going down but by capitalists cutting back their investment in production.  It is investment, not consumption, that drives the capitalist economy.  This is the essence of Marx’s theory of capitalism, whatever might have been his considered theory of crises had he got round to formulating it.

Letter: BBC reply on Marx (2013)

Letter to the Editors from the January 2013 issue of the Socialist Standard

We wrote to Stephanie Flanders about her programme about Marx but received no reply. A Socialist Party member did, however, receive this reply to an individual letter

Dear Mr Maratty

Thank you for contacting us about Masters of Money and please accept our apologies for the delay in responding. I discussed your letter with the production team and the Executive Producer has requested that I forward you his response [below]. 

As you say, exploring Marx’s ideas within an hour is a huge challenge for television aimed at the uninitiated. This is especially the case when the programme is made with reference to the recent financial crisis, itself a very complex issue. I am very sorry that you didn’t enjoy this particular compression of the relevance of Marx’s thinking, and hope this letter explains some of the thinking behind the programme to your satisfaction.

The reason why we concentrated so heavily on the ‘can’t buy back’ idea is that the programme and series was framed around explaining the recent global financial crisis. The thinkers featured in the programme who spoke in support of Marx in some shape or form –Joseph Stiglitz, Nouriel Roubini, George Magnus, Raghuram Rajan, Tariq Ali, David Harvey and Martin Jacques –all highlighted this particular reading of Marx’s ideas as being the one most pertinent today, as did our academic advisors at the Open University. I am aware that there are many other Marxist or Marxian readings of our current situation, but given the constraints, this seemed the best one to focus on.

You object to our description of Marx having ‘next to no alternative laid out’. We believe this description to be fair and it is supported by a number of commentators and academics. As you say, not having a ‘blueprint’ and not having an ‘alternative’ are not one and the same, but if one asserts the existence of an alternative without describing in any great detail what that alternative might be and how it might work, it seems reasonable to say there is ‘next to no alternative laid out.’ We also explained in commentary and through interviews with Tariq Ali and Slavoj Zizek, why logically Marx might not have felt able to give a very detailed description of an alternative.

You write that there was no critical examination of ‘Marx and the so-called ‘Communist’ countries, the link between the two being taken pretty much for granted, with a couple of very minor caveats.’ We did make clear that Marx’s lack of a detailed blueprint should lead us to question his association with 20th century Communism, and we asserted that the ‘Communist countries…left Marx far behind’. That said, it was necessary to mention them as they were real world attempts to find an alternative to capitalism constructed by people who claimed to be following Marx’s thinking, and – as a result – audiences would expect any discussion of Marx, and any discussion of alternatives to capitalism, to mention them. We felt the overall direction of the programme – advancing Marx’s theories as being useful today and exploring some surprising aspects of his writings about capitalism –would have helped uninitiated audiences learn that there is far more to Marx than his association with 20th century Communism. Indeed this was a major thrust of the opening sequence.

You take issue with the use of the word ‘collapse’ to describe Marx’s descriptions of the end of capitalism. I hope I understand what you mean here. I think you are suggesting that capitalism does not end because it is inherently unworkable, but because through its development it inevitably creates the political and social conditions that lead to its overthrow, and that by using the word ‘collapse’ we underplay the importance and role of the proletariat. We did explain also the end of capitalism by saying: ‘He thought it would all get so bad that the workers would overthrow the system’, also in the opening titles we say ‘Karl Marx had the most radical advice of all: get rid of [capitalism]’, and we do discuss Marx’s thinking on the revolution that ends capitalism. Either way, Marx certainly did envisage a time when capitalism would no longer be and ‘collapse’ is a reasonable shorthand for Marx’s best known description of the end of the system in Capital.

Finally, you ask us why we didn’t consult your organisation. We contacted a wide range of commentators – both pro and anti-Marx but because of the constraints of time, we are not always able to contact everyone. We believe the people we spoke to enabled us to produce a good overview of the issues surrounding Marxian economics. 

Thank you again for taking the time to write and I hope you would agree that while not offering anywhere near a complete appraisal of Marx’s ideas, it might have served as an engaging introduction.

I hope this addresses the points you raised and explains the production’s view. We’re grateful to you for watching and for taking the time to contact us. 

Yours sincerely, 

Paul Kettle, 

BBC Audience Services

Reply: 

We can only speculate why Ms Flanders feels unable to respond to a direct invitation to discuss the statements made in her programme, while the Executive Producer on the contrary has supplied an interesting and considered response to one individual’s letter. Paul Kettle argues quite reasonably that one can’t really do justice to Marx in an hour, and it is true that one can find Marxist academics who still argue for underconsumptionist theory, even though it doesn’t make much sense. Nevertheless we have to object that the defence of the word ‘collapse’ borders on sophistry. The meaning of the word ‘collapse’ is pretty straightforward, and if one claims that Marx believed that capitalism would ‘collapse’ one is saying that Marx did not really believe that revolution was necessary to end it. Which is the precise opposite of the truth.– Editors.

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

Cooking the Books: How much are you worth? (2019)

The Cooking the Books column from the May 2019 issue of the Socialist Standard

Alexandria Ocasio-Cortez, the Democrat member of the US House of Representatives who calls herself a socialist, tweeted in February:

 ‘Workers are often paid for less than the value they create.’

The American financial magazine, Business Insider, picked this up, commenting ‘this is essentially a restatement of Karl Marx’s “Labour Theory of Value”’. But was it?

Ocasio-Cortez doesn’t claim to be a Marxist – claiming to be a socialist is shocking enough for mainstream America – but her tweet is in the language of Marxian economics: workers create value and are paid less than the value they create. However, a further tweet suggested that she has a different theory of worker exploitation:

 ‘In fact, wages are so low today compared to actual worker productivity that they are no longer the reflection of worker value as they used to be. Productivity has grown has grown 62x more than wages.’

Since productivity is output per worker measured in money, ‘output’ can be very crudely – very crudely – interpreted as ‘value’, so what she is saying is that value created has increased faster than the value of what workers have been paid as wages.

Her beef is not that workers are paid less than the value of what they produce, but that they are not being paid enough of this value. On this theory, workers exploitation ‘in the economic sense’ is, as Paul Johnson put it in the Times (18 March), ‘being paid less than their productivity would warrant’. This was not Marx’s theory. He regarded all workers who produced value (and, for him, not all workers did) as being exploited in the sense that they always created a greater value than they were paid.

In its attempt to explain Marx’s theory, the Business Insider wrote:

  ‘Workers in a shoe factory are paid far less than the value they create. They have to be. If 100% of the money from shoe sales were paid directly to the workers then the factory would go out of business … But that raises a contradiction. If all workers are paid less than the value they create, then there will never be enough workers to buy the things they make.’

This is obviously true, but the article went on to misinterpret Marx:

  ‘Marx thought capitalism was inherently unstable precisely because workers are not paid the full value of their labour, and precisely because it is impossible for capitalists to pay them the full value without going bankrupt. It’s one of the internal contradictions that capitalism cannot resolve.’

There is a whole school of economics which argues this. But not Marx. The obvious flaw in this ‘underconsumption’ argument is that the part of the newly created value that the workers can’t buy back can be bought by the capitalists out of the ‘surplus value’ they receive. Not so much to buy shoes and other consumer goods but producer goods like factories, machines, parts, materials and power. However, they will only re-invest profits in expanding production if they judge there is a prospect of making further profits by doing so. It is this that makes capitalism ‘inherently instable’ as this condition is regularly not met, meaning that capitalism continuously lurches from boom to slump and back again.

Rate of profit: up or down? (2014)

Book Review from the December 2014 issue of the Socialist Standard

‘The Failure of Capitalist Production: Underlying Causes of the Great Recession’. By Andrew Kliman. Pluto Press. 2012.

What happened to the rate of profit in the decades leading up to the crash of 2008 and the slump that followed? Some say it went up. Others say it didn’t.

Those who say that it went up say it did so as a result of the ‘neo-liberal’ policies implemented from the 1980s onwards as typified by Reagan and Thatcher but continued by their successors. They argue that this reduced consumer demand and would have led to a slump earlier had demand not been sustained by workers borrowing to spend. Eventually the burden of debt proved too much and the bubble burst in 2008. This, essentially, is an underconsumptionist theory of the crisis.

Kliman denies that there was a rise in the rate of profit or that there was a fall in workers’ standard of living in this period. His explanation of what happened is that when the post-war boom came to an end in the 1970s governments were afraid to let the economic laws of capitalism take their course and devalue existing capital as a way of restoring the rate of profit and capital accumulation. Instead, they resorted to borrowing. The result was that the rate of profit did not recover enough. Eventually, as in the other explanation, the debt-fuelled bubble burst. This is a falling (or not rising) rate of profit explanation of the crisis.

How come that theorists using the same data (US government statistics) can reach different conclusions as to how the rate of profit moved?

Most of Kliman’s book is taken up with defending his method of calculating the rate of profit. The rate of profit is profit as a percentage of capital invested. The two sides more or less agree on how to calculate profit. The disagreement is over how to calculate capital. Kliman argues for using the original value (‘historic cost’) rather than the current replacement cost used by the others. As the latter is generally less than the former it gives a higher rate of profit.

The same argument has gone on between capitalist accountants and it’s a highly technical argument that won’t be easy to follow for those not interested in this sort of thing.

The book’s last two chapters, on the other hand – on the implications of the rising rate of profit theory – are clear. Kliman writes as someone who favours a ‘communal economy’ oriented to the satisfaction of people’s needs which, he says, means that ‘finance, money, exchange, and value would have to be eliminated’, i.e. as a socialist. He points out that the rival theory leads to the view that capitalism can be reformed to work in the interests of the workers.

As its proponents blame ‘neo-liberalism’ rather than capitalism as such the implication is that if this policy was abandoned and state intervention resorted to on a wide scale again then things would get better for workers. And if working class underconsumption caused the problem this can be rectified by increasing wages and benefits. This in fact is what they do advocate on the ground in their reformist campaigns (one of those Kliman criticises is the French Trotskyist Michel Husson).

But let Kliman put it in his own words:

  ‘ … the notion of state-controlled capital is an oxymoron, like jumbo shrimp. As long as there is capital, what are actually in control are the economic laws of capitalism. Individual capitalists, including individual state capitals and worker-run enterprises, must submit to these laws.’
  ‘When all is said and done, accumulation and economic growth under capitalism depend upon the extraction of ever-greater amounts of unpaid labor, not reforms that limit that extraction.’

In fact, such reforms could make things worse:

   ‘… under capitalism, a new economic boom requires the restoration of profitability, but downward redistribution of income will reduce profitability … [B]y causing investment to fall, downward redistribution could lead to a deep recession, even a depression.’

Nothing to add.

Adam Buick

Letter: A Writer Writes . . . (2019)

Letter to the Editors from the March 2019 issue of the Socialist Standard

1. First, I never argue (book review of Cleaver’s Rupturing the Dialectic – the Struggle Against Work, Money and Financialization in January Socialist Standard) that capitalists are not interested in profits, on the contrary precisely because I argue their system is based on putting people to work, profits are essential to maintaining and expanding the imposition of work. Second, writing ‘It’s a point of view but not that of Marx’ is simple assertion but makes no argument to convince the reader. It also smacks of sectarianism: all Marxists whose interpretations differ from mine are not Marxists at all.

2. First, the superficiality of the reading is apparent in ascribing to me the ‘classic error’ of underconsumptionism (i.e., ‘workers not being able to buy back all they produce as the cause of crises’) given that the inadequacy of consumption demand is clearly treated as only one of many causes of ruptures in the circuits of capital, not ‘the’ cause of crises. Second, saying that I make the mistake of seeing taxes as simply a burden on workers, while ignoring the discussion in the book of how some of what taxes pay for is not only of use to workers but are programs and services we have fought for, is another misrepresentation.

3. First, it’s odd that you seem to accept the idea that getting rid of money and markets are essential elements in getting rid of capitalism, but dismiss efforts to marginalize money. In the absence of an actual argument against ‘marginalizing money’ I’m left with the impression that the dismissal is based on the oh-so-revolutionary rejection of ‘reformism’. Second, leaving aside evaluation of your list of reforms as accurate representation of the struggles I discuss in the book, I must say that simply dismissing struggles for reforms of use to workers with no rationale hardly constitutes an argument. At least Weston – mentioned on page 235 of the book, in the section on ‘Reform or Revolution’, made a case for dismissing struggles for higher wages – a case that Marx refuted with counterarguments as to why such struggles were important. Arguments with which I agree in the book – one of those many moments that you would have to counter to make a convincing argument that what I have written is ‘not Marx’. Third, there’s no ‘paradox’ in supporting both lower costs of living and higher wages, they are complementary and both buy time (and energy) for struggle.

4. First, the assertion that success in lowering consumer prices or making some goods and services free automatically implies that wages will fall just doesn’t hold water. This assertion ignores how both the value of labor power and the level of wages/income are determined by struggle. I do not ‘assume’ workers ‘could successfully resist’ efforts to lower wages, only that they generally try to resist. There are plenty of historical examples in the book of workers failing to resist as well as of successful resistance. Second, the last line about one idea of autonomist Marxists contains, once again, only pure assertions with no demonstration or argument that might lead the reader to take them seriously, ie, the assertion about what they think/imagine and the assertion about the idea being a  ‘mistake’.

Had I been editor of your newsletter, I would have sent the published text back when still a draft along with comments like the above – and suggestions about how to do the job in a more convincing manner.

Harry Cleaver

Reply:

1. We never said you argued that the capitalists weren’t interested in profits, only that you said that they were more interested in controlling workers and that making profits was a means towards this end. The particular passages we had in mind were these: ‘… socially and politically speaking, profit making is merely the capitalist means to its social aim of controlling us by forcing us to work’ (p. 83) and ‘Marx focussed on the dialectical character of the struggle within capitalism between those who impose work and those who resist’ (p. 72). There is no evidence that this was Marx’s view on what the struggle was and who it was between, and there is nothing ‘sectarian’ about pointing this out. It’s a question of fact, not opinion.

2. On p.55 you do indeed use the workers-can’t-buy-back argument, which can’t be an explanation of crises since it is the case that the workers cannot buy back out of their wages what they produce all the time, even during a boom. And how can it be ‘misrepresentation’ when we didn’t represent anything about the conclusion you draw from the notion you accept that taxes are a burden on workers as well as on capitalists? We willingly grant though that you draw the logical conclusion from this mistaken premise that workers should get involved in disputes within the capitalist class over which section of them should bear more or less the burden of taxation.

3. You seem to have missed our point completely. While free services and free access to use-values even under capitalism show that people adapt to this by only taking what they need (rather than grabbing and hoarding), under capitalism these measures have the economic effect of reducing the cost of reproducing labour-power and so exercise a downward pressure on money wages. Our view is that the best way to combat this is the trade-union struggle. We don’t accept the view of ‘Citizen Weston’, which Marx refuted in his talk to British trade unionists in 1865 later published as Value, Price and Profit, that struggles to increase wages are pointless as they merely lead to a rise in prices leaving workers no better off. That is a fallacy. For us, the struggle to get the highest price possible (what the labour market will bear) while not revolutionary is not ‘reformist’. We say workers should wage this struggle and our members take part in it, even if it is purely defensive and never-ending.

4. We always thought that so-called ‘autonomist Marxists’ criticised what they imagined was the ‘economic determinist’ position of those who argue that there are narrow limits to what workers can achieve under capitalism by their struggles. Are we wrong about their/your ‘voluntarist’ position on this question, not dissimilar to that of common or garden reformists, that this is not the case and that your disagreement with them is instead only over method (direct action rather than parliamentary action)?

– Editors

No Room for Dissent (2016)

Journal Review from the April 2016 issue of the Socialist Standard

Marxist World Issue 1 – Spring 2016. £3.50 inc.

This is the first issue journal of the small split from the Trotskyist so-called ‘Socialist Party of England and Wales’ (known as SPEW and not part of the World Socialist Movement) ostensibly over the causes of economic crisis. The journal carries articles on the character of China’s economy, experiences in the Labour Party, Marx’s Capital, Bernie Sanders, a reprint of an article by Peter Taaffe, ‘The Greek Road to Socialism’, Electronic Voting in the Trade Unions and a book review.

Marxist World claims SPEW hold an underconsumptionist view of economic crisis; that there is not enough purchasing power to buy back commodities produced, whereas they claim the ‘tendency of the rate of profit to fall’ since the 1970s has caused the current economic crisis. This did not sit well with SPEW leader Peter Taaffe, and after some debate two critics were ‘indefinitely suspended’ and eleven ended up leaving.

The Labour Party account included here is one of left-wing Labour members’ disagreements with right-wing Labour members (business as usual in the Labour Party) and the left-wing author concludes by seeming happy to remain on this merry-go-round. The Peter Taaffe reprint argues the old Communist Party was reformist, Marxist World use this to argue SPEW are reformist. The Bernie Sanders article is a good exposé of Sanders, but boils down the problem to the wrong leader, never considering that leaders are unnecessary if not harmful.

In fact this goes to the heart of the problem of Marxist World, who welcome only activists adhering to general ideas of ‘Marx, Engels, Lenin and Trotsky’. They claim willingness to ‘join any revolutionary organisation’ that ‘guarantees genuine democratic centralist rights and faction rights based on open discussion.’ But where has ‘democratic centralism’ ever allowed factions for long? Where has ‘democratic centralism’ allowed challenging incumbent leaderships? Where has ‘democratic centralism’ allowed public dissent?

Trotsky answered at a Bolshevik party congress in 1924 ‘Comrades, none of us wants to be or can be right against the party. In the last analysis, the party is always right, because the party is the sole historical instrument that the working class possesses for the solution of its fundamental tasks. I have already said that nothing would be simpler than to say before the party that all these criticisms, all these declarations, warnings, and protests – all were mistaken from beginning to end. I cannot say so, however, comrades, because I do not think it. I know that no one can be right against the party. It is only possible to be right with the party and through it since history has not created any other way to determine the correct position.’ And ‘We can only be right with and by the Party, for history has provided no other way of being in the right’.

The lesson here we should conclude is: don’t swap leaders, especially not living ones for dead ones.

DJW

‘Imperialism’: Where Lenin Went Wrong (2017)

From the May 2017 issue of the Socialist Standard

A hundred years ago last month Lenin’s pamphlet ‘Imperialism, The Highest Stage of Capitalism’ was published. We take another look at its defects.

In his introduction Lenin wrote that the pamphlet was based on the views of the English non-Marxist writer J. A. Hobson in his book Imperialism (1902) and those of the Austrian Social Democrat Rudolf Hilferding in his Finance Capital (1910). Hilferding, basing himself mainly on German experience, described how banks, through what would now be called their investment banking side, had come to merge with industrial capital, raising capital for them and not only charging for this but retaining a share for themselves. Hobson, who was an underconsumptionist, argued that what had led to imperialism, as investment and territorial expansion abroad, was a surplus of capital that could not find a profitable outlet in the home country.

Lenin combined these views to come up with a definition of imperialism as ‘the monopoly stage of capitalism’ where ‘finance capital’ as the ‘bank capital of a very few big monopolist banks’ had ‘merged with the capital of the monopolist combines of industrialists’. Accepting Hobson’s surplus capital theory, Lenin said that ‘monopoly capitalism’ led to the formation of ‘international monopolist capitalist combines which share the world amongst themselves’ and to the ‘territorial division of the whole world among the biggest capitalist powers’.

This was a passable description of some aspects of capitalism at the time, especially in Germany, and Lenin’s was correct in seeing the First World War as a war over the division of the world amongst the biggest capitalist powers. On the other hand, his acceptance of Hobson’s theory of surplus capital as an explanation for the ‘export of capital’. ie overseas investment, was dubious. A more straightforward explanation for the capital being invested abroad would be that it was more profitable to invest it there rather than at home.

Lenin was also mistaken to see the German-style merger of bank and industrial capital as ‘the highest stage of capitalism’. It was a common view amongst the Social Democratic parties at the time that capitalist competition would lead to monopoly and that what socialists had to do was to take these into common ownership and re-orient production to satisfying people’s needs rather than for profit. Karl Kautsky had speculated that the process of monopolisation could lead to a single world trust and a non-aggression arrangement between the imperialist powers, which he called ‘ultra-imperialism’. Lenin had a point when he said that this was impossible as the powers would never agree on a permanent carve-up of the world but would seek to change this as their respective strengths changed. But he failed to see that this applied to ‘monopolies’ in his ‘imperialist’ countries. The capitalist class there was not a monolithic bloc but different sections had different interests and none wanted to be held to ransom by some monopoly. Hence ‘trust-busting’ legislation in the US and nationalisation and the threat of nationalisation in Britain.

True to his polemical style, Lenin attributed a motive to Kautsky, accusing him of advocating a peaceful, united world capitalism even though Kautsky had only envisaged ‘ultra-imperialism’ as a theoretical possibility. Lenin posited a link between the ‘opportunism’ of which he accused Kautsky and ‘imperialism’, arguing that the reformism of the Social Democratic and Labour parties of Europe was due to the ‘imperialist’ powers using a part of their ‘high monopoly profits’ to bribe ‘certain sections of the workers’ into supporting both reformism and the state in which they lived. After the Bolshevik coup d'état this was developed into a full-blown theory that the top layer of workers in the countries with colonies had been bribed to support capitalism out of the super-profits of colonial exploitation and that the independence of colonial territories would undermine this, with the result that, deprived of their share of the super-profits, the workers there would abandon reformism and become revolutionary.

This was mistaken on a number of counts. First, it goes against the Marxian theory of wages that wages are the price of what workers sell and that higher wages reflect higher training and skills, not any share of surplus value as Lenin implied. Second, it led to supporting the creation of new capitalist states to the benefit of a local capitalist class. Third, it assumes that workers would become less reformist if their standard of living fell.

Lenin himself mentioned an objection, which he attributed to the anti-war Menshevik Martov, that the situation for socialists would be pretty hopeless ‘if it were precisely the best paid workers who were inclined towards opportunism’, e.g. skilled engineering workers. Lenin’s reply was, typically, to accuse Martov too of defending opportunism and reformism.

If the Bolsheviks had not retained power in Russia this work would have remained an obscure, dated pamphlet. However, due to Lenin’s position and later quasi-deification, it became inflated into a serious work of research and theory. The result was that its mistaken ideas – especially about some workers sharing in colonial exploitation and that socialists should support the ‘anti-imperialism’ of rising capitalist classes – became more widely accepted than they otherwise would have.

Adam Buick

Marx and Under-Consumption (1959)

From the April 1959 issue of the Socialist Standard

Link to Part 1.

The Affluent Society -  Part 2

A Reply to Professor Galbraith

It often happens that when people look for a criticism of Marx, not being sure where to look, they look in the wrong places. Professor Galbraith, for instance, looked to Moscow, to Mr. Strachey and even to Mrs. Joan Robinson.

Poverty, Crises and Catastrophe

He gathered from some of these sources that Marx had formulated an absolute law of poverty and that the system’s chief defect was acute and chronic under-consumption. Along with the ever greater ability to turn out wealth the workers’ living standards would decline, capitalism would choke under the weight of its unsold commodities and collapse. As if “all this—and purgatory, too,” was not enough. Professor Galbraith adds another alleged Marxian theory of crises, of a continuous fall in the rate of profit and hence capital investment, with slumps of ever greater magnitude and final breakdown. Which one Marx was really supposed to hold we are not informed. Our view is that he held neither. However, let our motto be one crisis one article, and it is the under-consumptionist variety which will be its subject.

Marx not an under-consumptionist

In view of all that has been said of Marx as an “under-consumptionist” theorist, the only statement which has any bearing on the matter is in Vol. 3 of Capital, where he says,

“The last cause of all real crises, always remains the poverty and unrestricted consumption of the masses as compared with the impulse of capitalist production to develop the productive forces as if only the absolute powers of consumption of society were their limit.”

This statement is merely an interpolation by Marx when he is discussing at length the view that shortage of capital is a cause of crises. This statement seems out of context with the passage, but even so, it is obvious that Marx was drawing attention to the contradiction between the tendency of capital to expand in an absolute way the powers of production, and the limits imposed upon it by the antagonistic income distribution inherent in capitalist society. This has nothing to do with under-consumption theories as understood, but implies the conflict between productive powers and productive relations.

To put it simply, capital accumulation logically leads to a demand for labour power and hence to a rise in real wages. It is true that wages are part of the consumption fund of capitalist society and an increase in real wages means increased consumption for workers. But wages are also the purchase price of labour-power and if as a consequence of increased capital investment, wages rise, this means for capitalists an increase in costs and a lowering of the rate of profit. Should wage earnings reach a level which threatens the customary rate of profit yield, then capital investment may sharply recoil.

It is the essence of this society that wage advances can never wholly absorb capitalist profits. The ceiling of wages and hence consumption cannot extend beyond the point where additional wage advances annul profit returns on capital outlay. Even an approximation to such a state of affairs will suffice to induce a downward trend in capital accumulation. The impulse then of capitalist production to expand the forces of production in such a way that only the entire satisfaction of social needs is its ultimate limit is inhibited and finally checked by the antagonistic class income distribution of capitalist society—wages and profits. The forces of production come into conflict with the social relations of production.

The fact that extant society is not one of conscious motivation, directed towards social ends, but of profit motivation, places grave restrictions on its productive powers and hence consuming powers. As Marx points out : —

  ". . .  It is not a fact that too much wealth is produced. But it is true that there is a periodical over- production of wealth in its capitalistic and self-contradictory form. . . . The capitalist mode of production for this reason meets with barriers at a certain scale of production which would be inadequate under different conditions. It comes to a standstill at a point determined by the production and realisation of profit, not by the satisfaction of social needs.” Vol 3 (p. 303).

This is why Marx indicted capitalism as a system of organised scarcity. In this sense and only in this sense can there be a Marxist view of under-consumption.

Marx and Rodbertus

How little Marx had in common with the underconsumption theory of crises which Professor Galbraith thrusts upon him, along with so many others, can be seen by his criticism of the economist Rodbertus, who formulated in essentials the generally accepted under-consumption theory of crises. It holds that crises are the result of a deficit of purchasing power of the mass of people and would be remedied by raising wages. Marx himself emphatically repudiated such a view, thus:—

  “It is purely a tautology to say that crises are caused by the scarcity of solvent consumers or paying consumption. The capitalist mode of production does not know of any other mode of consumption but a paying one, except that of the pauper or of the thief . . . But if one were to clothe this tautology with a semblance of profounder justification by saying that the working class receive too small a portion of their own product and the evil could be remedied by giving them a larger share of it or by raising wages; we should reply that crises are always preceded by a period in which wages rise generally and the working class get a larger share of the annual product intended for consumption. From the advocates of simple common sense such a period should remove a crisis. It seems then that capitalist production comprises certain conditions which are independent of good or bad will and permit the working class to enjoy that relative prosperity only momentarily and, at that, always as a harbinger of a coming crisis.” Vol. 2 (pp. 475/6.)

There is also a footnote to this passage by Engels which says, “advocates of the theory of crises of Rodbertus are requested to make a note of this.”

Is there a defective monetary mechanism?

The under-consumptionist theory of crises always depicts capitalist society as what it is not and cannot be; a system serving the needs of the community. For them crises are not the outcome of capitalist relations of production, but a defect in the monetary mechanism which can be regulated via banks and state action. This comprises the essentials of Keynes’ theory.

Under-consumptionists hold that the cause of crises is due to deficit purchasing power, i.e., the inability to buy back the ever-increasing amount of commodities thrown on the market. But as we have already noted, before the boom breaks, the workers’ purchasing power is at its height. It is not then lack of purchasing power which causes a cut back in investment by capitalists and unsold stocks to appear on the market, but because from the capitalist standpoint wages are too high and profit margins too low. It is this which can give rise to a crisis (a sharp break in price equilibrium) and if big enough brings about depression.

If this happens there will be a falling spiral of wages and profits and unsold stocks will pile up. This is not a cause, but an effect of certain conditions and has nothing to do with a defect in the monetary mechanism or some absolute deficit in purchasing power. What actually takes place is that a number of capitalists—members of the ruling social group—take decisions as to the future trend of capital investment and, of course, production. If they decide not to invest at the existing profit level or cut back, it is because from the capitalist standpoint the existing income distribution is an unsatisfactory one for them. Profit margins are too small and wage bills too big. As has been already stated it is not a question of workers having too little purchasing power (wages), but from the capitalist view too much. But supposing a crisis does break out. It does not follow there is an overall lack of purchasing power. There is plenty of available purchasing power in banks, holdings, reserves, and the pockets of capitalists to buy up surplus stock for needy workers. But capitalists do not choose to spend their money that way.

There are good reasons why they should not redistribute purchasing power this way. As Marx pointed out, the capitalist, if not a miser by nature, is one by necessity. Being realists they know in any depression period they must husband their resources—even seek to increase them, conditions permitting, if they are to successfully ride the next wave boom.

Capitalism knows of only one form of consumption and that is paying consumption, and as we have seen the system operates in such a way as to impose in relation to the ability to produce wealth, a restrictive consumption on the working class. To say this is due to a lack of purchasing power is the merest tautology. Actually capitalist society generates the purchasing power necessary for the realisation in terms of money, of the wealth it produces. For instance, suppose a boom starts in the capital goods industry (it could, of course, start elsewhere), increased production of the means of production will by employing more and more labour-power, generate increased purchasing power among workers which will be transmitted to the industries producing consumption goods. These industries will expand and order further machines and auxiliaries for this purpose and so a continuous process will go on in the generating of purchasing power. Under the stimulus of demand, prices will rise and the purchase price of labour-power will rise also. In fact, generally speaking, labour-power during the later stages of the boom tends to rise faster than other commodities. Increased purchasing power is synchronised with increased production.

What causes a crisis?

Capitalism, however, is based on anarchy of production. Capitalists do not meet beforehand to harmonise production in accordance with social aims and ends. Capitalists for that reason, invest with little regard and knowledge of other capital investments being carried out at the same time. As a result different industries expand at a different rate and disproportionality of production, as Marx calls it, takes place. If then one industry—say the one producing capital goods—over-expands in relation to the industry producing consumption goods, it means they have over estimated demand and if on a big enough scale, the realisation price of their products will be unremunerative. This disproportional development relative to other industries will, however, have cumulative effects. Not only will the industry affected by over-expansion cut back investment, but as a consequence reduce orders to other concerns linked with them. In turn, these other concerns will do likewise and so on from trade to trade. As a result of cancellation of orders and contracts, unsold stocks will pile up. Relative over-production, which started in one industry, then assumes the proportion of general over-production—but, it must be stressed, not absolute over-production.

In such a situation production and employment will fall sharply and so, of course, will purchasing power. To say that if the workers’ wages were higher, all this could have been avoided is to utterly misunderstand the nature of capitalism. In the first place the cut back in investment by the industry that had over expanded its demand was not a question of purchasing power, but profit margins due to unremunerative prices. What is more, workers do not spend their money in the capital goods industry. Again, from the standpoint of the employers in the capital goods industry, wages are too high and a factor in helping to reduce profit margins.

It is not then a question of too much wealth being produced and too little purchasing power to buy it back which brings a crisis, but simply that an over-expansion in one sphere of industry has been big enough to start a downward spiral of investment and profits. Thus there comes into existence a volume of capital investment too great to be consistent with former profit earnings. As Marx points out, “Since production depends on investment [such a situation] constitutes an over production of capital which takes the form of an over production of commodities” (italics ours).

It might be argued that increased taxation of capitalists might be a means of disbursing extra purchasing power among workers in times of a crisis to prevent a slump. Increased taxation at such a time would, however, be most inappropriate and meet with strong resistance from capitalists. Not only would increased taxation deplete capital funds necessary for future expansion, but the purchasing power generated via taxation at one phase of the cycle, will as the result of restricted expansion, not be available at another phase of the cycle (the boom). But this in no way supports some under-consumptionist view of a total deficit of purchasing power being the cause of crises. It merely means a redistribution of purchasing power via a redistribution of income. Neither Keynes nor the Labour Party have made such proposals.

If Marx had believed in a law of absolute poverty based on absolute under-consumption, why he took such pains to analyse the trade cycle of capitalism—Boom— crises—depression, must for ever remain a mystery. For on the premise of absolute under-consumption, it is not a question of how slumps come to start, but how under such conditions a boom can ever begin.

Some Labour economic theorists have claimed to have gone beyond Keynes by advocating a further period of extensive investment just prior to the boom breaking. (Planned Capitalism). It is, however, at the top of the boom that demand for labour-power is greatest and its purchase price highest. To maintain investment at a high level would deplete the existing labour reserves, cause increased competition among employers for labour-power, and so enhance its price. Along with increased labour costs would go the increase of the supply price of the various factors in production and repeat the process of mounting costs and the narrowing of profit margins to the point where the volume of capital investment would yield too small a profit margin at the existing level. Such theorists seem to forget that capitalism is and always must be a profit motivated society. A profitless capitalism is a contradiction in terms.

We have, of course, dealt with much of this in past issues. We believe, however, it might still be of some benefit to readers, even Professor Galbraith, if he should by any chance read it.

Ted Wilmott

Link to Part 3

Economics of unemployment (1980)

From the September 1980 issue of the Socialist Standard

With the experience of two centuries of capitalism to go on, it might be expected that by now everything about the causes of unemployment and its fluctuations would be known. In fact, most economists and politicians are as confused about it as were their predecessors. They go on propounding old discredited theories, or the new absurdities that have emerged in the last half century. The TUC and the various wings of the Labour Party are as much in the dark as are the Tories. In defiance of the evidence, they all have a childlike faith that there must exist somewhere a magic formula that would enable them to run capitalism without unemployment—if only they and their computers could find it.

Although Karl Marx was derided for saying that capitalism inevitably goes through successive phases of expansion, boom, crisis and depression, it has continued to follow that course. Marx’s view has been challenged from two directions. In each longish period of low unemployment (as in the years 1895-1900, and again after World War II), it was claimed that the way to permanent boom had been discovered. In each long period of heavy unemployment (as in the very long depression in the last quarter of the 19th century, and again between the wars) it was expected that capitalism would never expand again and that depression had become permanent. This theory is being revived again now.

Past experience in Britain gives no support to the idea that unemployment consistently tends to become heavier. Unemployment now (August 1980) is 1,897,000, or 7.8 per cent. As a percentage it was often higher than this in the 19th century, and for the whole of the years between the wars it averaged 12 per cent. At its peak in 1932 it was 22 per cent, which would mean over 5 million unemployed at the present time.

Nor, of course, does experience support the belief of the Labour and Tory governments from 1945 to 1970 that they could “manage” affairs in such a way as to keep unemployment down to about 2 per cent. That long period of low unemployment was partly due to replacement of war damage, and partly to the fact that it took years of reconstruction in Germany and Japan before their modernised and highly competitive industries came back into the world market to the detriment of British capitalism.

The Tories have now reverted to an earlier myth which held that if capitalist is left to its own devices without government intervention it will create full employment. Their argument is that if inflation is stopped and if the government spends less and therefore reduces taxation, employers will retain more of their profits and will invest that extra money to provide more jobs. (“If the government cuts expenditure by £4,000 million a year, unemployment will fall.” Sir Keith Joseph). This argument is easily answered. There was no inflation from 1820 to 1913, and government expenditure (measured against total national income) was less than a quarter of what it is now: but it did not prevent continuous unemployment or the Great Depression. The argument overlooks that employers are not in the business of creating jobs but of making profits. “Companies invest when they think they can make a profit” (Financial Times 21 March 1978). When they see no prospect of making a profit, they do not invest.

While Sir Keith Joseph says that the way to reduce unemployment is to reduce government expenditure, the TUC and Labour Party say that the way to reduce unemployment is to increase government expenditure. A pamphlet published by the trade union NALGO claims that if government expenditure is increased by £7,000 million a year, unemployment will fall by 600,000. And Labour MP Michael Meacher says that each additional £1,000 million a year spent by the government creates an additional 235,000 new jobs (Sunday Times 20 July 1980).

What actually happens in practice? The Labour Government did increase government expenditure, from £20,000 million in 1973 to £44,000 million in 1977. But unemployment went up from 629,000 to 1,600,000. Both the Tory and Labour governments overlook that if a government collects more taxes and spends more, or collects less taxes and spends less, these are mere transfer operations; the combined buying power of the government and the rest of the population altogether is not altered.

But, say the advocates of increased government expenditure, it also leads to an expansion of production generally, and thus increases the total number of jobs. Again the facts say otherwise. When the 1974 Labour government vastly increased government expenditure, the Index of Production did not show a rise but a fall. In 1976 it was nine per cent below 1973, and in 1977 it was still below the 1973 level.

Post-war governments, Tory as well as Labour, operated on the principle adopted in 1944 by the Labour Party Conference “If bad trade and general unemployment threaten . . .  we should give people more money, not less to spend.” The only way in which a government can “give everybody more money” to spend is by printing more notes, each of which buys less and less. While Denis Healey was Chancellor of the Exchequer, his government printed and spent an additional £4,500 million; to which the Thatcher government has added another £1,200 million. This has had no effect on unemployment. Its only achievement is to put up prices. Sir Keith Joseph recently resurrected another old but plausible fallacy: “Just as you can price yourself out of a job, so you can price yourself into one, by taking lower wages.” There might be some employers who would take on more workers if wages were reduced from, say £100 a week to £80, to employ ten workers at £80 instead of eight workers at £100, but as a remedy for unemployment it is a non-starter. The ten workers would produce more than the eight workers, so their employer would have to sell more. If he succeeded in capturing a larger share of the market, it would be at the expense of rival employers, who would employ fewer workers in consequence.

Sir Keith’s non-solution for unemployment prompted an opposite solution from the unions. A union official put it like this: “Workers are unemployed because wages are too low to buy all the factories produce. If wages were raised, workers would buy more and more workers would be employed”.

This too is a plausible argument. If wages went up more than prices, workers could buy more. But, as profits would be correspondingly reduced, the profit-receivers would have to spend or invest less than before. As profit margins would be reduced, it would also discourage investment. In the period 1973 to 1977 wages did rise more than prices but, as already mentioned, unemployment more than doubled.

Marx met and dealt with a similar argument. It was put to him that if wages were raised it would enable workers to buy more and would prevent a crisis occurring. Marx pointed out in reply that “crises are precisely always preceded by a period in which wages rise generally and the working class actually gets a larger share of the annual product intended for consumption”. Far from preventing a crisis this phase of higher real wages is always “harbinger of a coming crisis” (Capital Vol. II, Kerr edition, page 476).

Marx dealt with unemployment from two aspects. First, there is the displacement of labour by machinery. This increases unemployment, but if the investment of capital grows fast enough (as it does when sales and profits are rising) it “absorbs not only the men thrown out of work but also fresh contingents” (Capital, Vol. I, Kerr edition, p.496). So in that phase total unemployment falls.

But in the competitive struggle which gives markets to the cheaper producer, each capitalist is trying to accumulate capital and expand his scale of operations, not just to meet a known demand, but as an end in itself. Inevitably “overproduction” develops in some big markets, as for example motor cars, shipbuilding and steel in 1974, and a crisis occurs. Sales in those markets decline, investment ceases to be profitable, production is cut and workers are stood off. The declining industries and falling wage totals drag down other industries and there is depression, with unemployment at peak levels. This continues until such time as conditions develop which make investment profitable again.

This is the course capitalism follows, paying no heed whatever to ministerial vapourings about full employment, whether Tory or Labour.

Edgar Hardcastle