A Marxist Guide to Capitalist Crises
“A Marxist Guide to Capitalist Crises,” an eBook created from the key posts on the Critique of Crisis Theory blog, is currently in production. We’ll be sharing the completed chapters between our regular postings.
Chapter 12: Value, Price and Crisis
Marx noted that in the boom phase of the industrial cycle — the introduction of technical advances — state-of-the-art machinery will reduce the price of production while the general price remains stable or even rises. So prices tend to rise. (1)
As a rule, a crisis follows a long period of rising prices. At the end of such a period, the general price level has risen above the prices of production of commodities. As we have seen, this will depress the level of gold production — or the production of whatever commodity functions as money. Declining gold production progressively undermines the ability of the market to expand.
The higher the general price level and the longer it remains above the prices of production, the more the market’s ability to expand will be undermined. Without an expanding market, the capitalist system cannot exist.
For some time, however, the market keeps expanding due to the mobilization of idle hoards of money that had accumulated in the banks after the outbreak of the preceding crisis. At first, the velocity of circulation of the currency rises. Individual banknotes move from pocket to pocket at an ever faster clip rather than stagnating in the banking system. The development of clearing agreements — here the banking system plays an especially important role — greatly reduces the need for banknotes since banknotes are only needed to pay off balances.
Credit money — checkbook money — the quantity of which is multiplied many times over the number of banknotes that back them up — can be used in place of banknotes to make payments and purchases. Credit can also replace banknotes and credit money as a means of purchase. As a result, a huge expansion of payments and trade develops on an increasingly stagnant quantity of hard cash — banknotes and gold bullion.
This is what Marx called “over-trading.” (2) The more over-trading develops, the greater is the overproduction of commodities. As the industrial cycle peaks, we have a relatively tiny mass of hard cash leveraged to support a huge mass of business transactions, including all sorts of speculation. Marx calls this phase of the industrial cycle “fictitious prosperity.”
But why is this prosperity fictitious? Why can’t the central bank increase the quantity of banknotes and thus increase the mass of hard cash? Here, remember, we are assuming a gold bullion standard. The high level of commodity prices relative to their prices of production — ultimately determined by their labor values relative to the labor value of the money commodity — means that less and less newly produced gold bullion is flowing into the vaults of the central bank. The ability of the central bank to issue additional banknotes is thus progressively undermined by the declining level of gold production. (What happens when the need for the central bank to redeem its banknotes in gold is eliminated in an attempt to escape from what Marx calls the “metal barrier” (3) is the subject of other chapters and does not belong here.)
The boom continues as long as debts can still be “rolled over” rather than paid, and terms of payment can be further extended. Later, after the boom’s inevitable collapse, the recriminations will fly. Why was “regulation” so lax? Why were so many complex credit instruments created? Why was there so much swindling? Whatever happened to the “ethics” of the business world? How could so many loans have been extended to people and companies who couldn’t possibly repay them? And what reforms can be passed to prevent this from ever happening again?
From regulation to deregulation
But those questions will be asked later. Early in the expansionary phase of the industrial cycle, hard cash was still plentiful, and regulations that discouraged the reckless inflation of credit were an irritation. During the phase of fictitious prosperity, the only way that prosperity can be maintained — if only momentarily — is by progressively eliminating the regulations. The illusion always arises at this stage of the industrial cycle that this time things are different. We are in a “new era” and the “genius” of the “free enterprise system” will somehow keep the boom going forever on a relatively ever smaller quantity of “hard cash” through the development of “financial engineering.”
Production expands beyond the limits of capital
During the phase of fictitious prosperity, what we have is the overstepping of the limits of capitalist production within the framework of capitalist production. Production expands beyond the limits of profit — profit defined as surplus value realized in the use value of the money commodity. The crisis, however, brings this overstepping of capitalist relations of production to a screeching halt. The job of the crisis is to bring capitalist production back within its capitalistic, production-only-for-profit limits.
The crisis breaks out
At a certain point, the inflation of credit reaches its limit if only because one piece of money cannot settle more than one debt at a time. Credit seizes up as debtors, who are owed, demand immediate repayment before they are dragged down by their creditors. The chain of credit breaks first at its weakest link, and begins to break at what were apparently much stronger links. Creditors drag down debtors in a chain reaction.
Since banks form the pivot of the credit system, the banks appear to be at the center of and indeed the cause of the crisis. This gives rise to the illusion that it was poor regulation of the banking system or the greed and stupidity of individual bankers that was to blame for the crisis. If only the correct banking legislation were put into effect, crises would be avoided. Various reforms of the banking system are proposed, and their advocates claim that they will guarantee that a crisis will never happen again. We will examine these reforms in the coming chapters.
As soon as one or two major market operators are unable to meet a debt coming due, the crisis is on. In the period leading up to the crisis, increasingly the industrial capitalists have been able to maintain sales only by granting credit at very generous terms to the wholesalers, many of whom have no possibility of keeping up with their debt payments. From the 1920s onward, the same process has occurred for retailers and the ultimate consumers when it comes to durable consumer commodities such as automobiles and electrical appliances. Only the extension of credit on more and more generous terms can maintain the rise in sales.
As the boom approaches its end, payments on the loans to wholesalers — and once consumer credit develops on a large scale, ultimate consumers — become slower and slower. More and more industrial capitalists, wholesalers, and retailers must therefore round up more and more short-term credit in order to hold at bay their own bankruptcy. As commercial capitalists have greater and greater problems meeting their debts, industrial capitalists are threatened. Industrial capitalists are in trouble if they cannot collect on the debts owed to them by commercial capitalists. Bankers are threatened by the bankruptcies of both industrial and commercial capitalists, and, in these days of consumer credit, the ultimate consumers as well.
As demand for short-term credit soars, so does its price in the form of soaring short-term interest rates, both absolutely and relative to long-term rates. This is why the relative levels of yields on long-term versus short-term debt often become “inverted” just before the outbreak of the crisis.
As the bloated credit system is stretched to the limit, long-term interest rates rise more and more rapidly, putting downward pressure on the profit of enterprise. But short-term interest rates rise even faster. In order to cover the commercial and consumer credit they are granting to keep up sales, industrial, commercial, and financial companies take on an ever-greater burden of short-term debt and cover this by lining up short-term lines of credit. Any unfavorable movement in the prices of commodities or securities could wipe out the entire capital of many financial and trading companies. Indeed, many of these firms can remain “solvent” only by making absurdly unrealistic assumptions on their books about the ability of their debtors to actually meet their debts.
Realizing they are about to lose much, perhaps all, of their capital, capitalists will make desperate gambles that they would never consider under other circumstances. Perhaps a capitalist figures they can still save this situation if they can make huge amounts of money on the stock, real estate, commodity, or other speculative markets. If he can, he might still be able to hold on and even increase his capital. Any risk is worth it if the alternative is certain ruin. Speculation is therefore whipped up into a final frenzy leading up to the crash.
Capitalists transformed into misers
Once the crisis breaks out, the central bank — remember, here we are assuming a gold bullion standard — finds that it can issue more banknotes beyond its gold reserve than it can under normal conditions without a run on its gold reserve. The reason for this is that now there is an additional demand for banknotes as a means of payment. The increased demand for payment also forces individual capitalists to hoard banknotes to meet any sudden demand for payment by their creditors. Therefore, the role of money as a means of payment and as a means of hoarding, though not identical, are closely linked. With the outbreak of the crisis, the capitalists seem to be transformed into misers.
This transformation is most obvious in the banking system. The banks have to maintain a reserve of banknotes to meet demands for withdrawals on the part of depositors. The banks maintain some of this reserve in the form of vault cash to meet immediate demands for cash payment on the part of their depositors and another part of it in the form of deposits at the central bank payable on the demand of the banks in banknotes. Smaller commercial banks, as well as savings banks and credit unions, maintain a part of their reserves in the form of deposits at the larger commercial banks.
Normally, the fewer cash reserves the banks maintain behind each deposit the greater the profit they will make. Therefore, as long as the boom continues and confidence in the banking system remains high, they will continue to run down the quantity of cash that lies behind each deposit. But when the crisis breaks out, the banks are threatened by bank runs. Depositors lose faith in the banks and demand repayment in banknotes. Now the banks are obliged to maintain much larger deposits of cash behind each deposit under pain of losing all their capital and going under. Therefore, during the crisis, the banks build huge hoards of idle cash. This leads to widespread complaints that the banks are sitting on large amounts of money rather than lending it out.
There are really two reasons why huge amounts of cash build up in the banking system after the crisis breaks out. One is the need for banks to maintain larger than normal quantities of cash behind their deposit liabilities under crisis conditions. However, it isn’t only banks that build large cash reserves after the crisis breaks out. Industrial and commercial capitalists do so as well. Instead of borrowing large amounts of money to finance major capital expansion projects — transforming money capital into fixed capital — and building up inventories — commodity capital — they slash their own spending, run down inventories, and pay off their existing debts. Therefore, a lot of the accumulation of idle cash in the hands of bankers following the outbreak of the crisis is involuntary accumulation on the bankers’ part, just like the accumulation of inventories — commodity capital — in the hands of industrial and commercial capitalists is involuntary on their part.
Later, this growing hoard of idle cash in the hands of the banking system will be used to finance the next “sudden expansion” of the market — the next “great boom.” The longer the crisis and the post-crisis stagnation last, the more the huge idle mass of cash — gold bullion and banknotes — builds up. All else remaining equal, the stronger will be the sudden expansion of the market, which will make the next leap forward of capitalist production possible.
The labor market and the transition from boom to crisis
On the eve of the crisis, the economy is going gangbusters, the rate of profit appears to be high, and the mass of profit keeps growing. Unemployment compared to all other phases of the industrial cycle is very low and falling. At long last, the balance of forces in the labor market is beginning to tilt in favor of the working class. The workers can now win a greater share of the national income, that is, the workers can finally reduce the ratio of unpaid labor to paid labor.
But such a favorable situation — for the workers — is actually a symptom of massive ongoing overproduction momentarily hidden by the accompanying over-trading. The working class will not enjoy these favorable conditions for very long, and therefore should not waste any time taking full advantage of them while they last. It is true, however, that if the workers win a larger share of the national income — reduce the rate of surplus value — this will not prevent the crisis, as the underconsumptionists hope.
However, it is also true that workers cannot prevent crises by exercising moderation. At the peak of the industrial cycle, there is simply no right rate of surplus value that can keep the boom that is about to collapse alive. The problem is that production of commodities has exceeded the levels capitalists — and their hangers-on such as the government — plus the workers can purchase. No redistribution of the national income can therefore prevent the crisis.
The crisis arrives
We can now understand why a crisis of overproduction appears to the agents of capitalist production and their vulgar economists to arise within the sphere of credit. Indeed, in the 19th century, the name for crises of overproduction was “commercial crisis,” a term that is no longer employed except in historical accounts. This was because back then a crisis first manifested itself as a wave of bankruptcies affecting large wholesale trading companies. Though the wholesale trading companies were engaged in “over-trading,” it was actually the industrial capitalists who carried out the overproduction that led to the crisis.
Today, when banking capital towers over the rest of the economy — especially in times of crisis — when the crisis breaks out, it appears even more than was the case in the 19th century as a crisis of the banking system. Instead of calling the crisis a “commercial crisis” as it did in the 19th century, the press now calls it a “financial crisis.” Ultimately, it is the large industrial corporations — collective industrial capitalists — that carry out the overproduction that lies behind the “financial crisis.”
As far as actual production and employment are concerned, the arrival of the cyclical crisis usually becomes apparent first in the sphere of durable consumer commodities. In the 19th century, this mostly meant the residential construction industry. From the 1920s onward, other durable consumer commodities appeared, such as automobiles and electricity-powered home appliances such as washing machines, clothes dryers, and refrigerators.
As the supply of credit begins to dry up, mortgage loans become harder to get. Therefore, housing construction begins to decline. Construction jobs in residential construction become harder to get as housing starts head downward. The same is true of other durable consumer commodities such as automobiles and electric appliances, which are often bought on credit, though residential construction continues to play the central role.
For example, when people purchase a new home, they often have to purchase new furniture and appliances such as a refrigerator, an oven, and washing and drying machines. The weakness in residential construction, therefore, begins to react to many other industries that manufacture these durable consumer commodities.
Indeed, housing industries often begin to turn downward as soon as there is a sharp rise in capital spending by industrial capitalists. The reason is that buyers of durable goods find themselves in competition for a limited quantity of credit based on a limited quantity of hard cash — ultimately gold — as soon as the boom in capital spending sets in. Therefore, the more industrial capitalists borrow money to expand their ability to produce commodities, the more the demand for durable goods commodities that are generally purchased on credit is undermined.
Initially, therefore, the downturn seems to be largely confined to housing and other durable consumer industries. Some Department I industries, especially those involved in producing raw materials for the housing and auto industries, are also affected during the initial stage of the downturn. For example, the demand for lumber begins to weaken as soon as the sales of new houses turn down. The growth in employment that marked the boom levels out, and unemployment begins to rise. But at this stage, the total number of jobs does not decline by much, and might even rise slightly for a while. How does this slowdown develop into a full-scale recession?
How the media covers a developing crisis
During this initial stage of the downturn, discussion develops in the press on whether what they call a “slowdown” will develop into a full-scale “recession.” Business reporters interview professional economists, some working for brokerage houses and others who are employed as professors by university economics departments.
The economists who work for brokerage houses are actually involved in a conflict of interest because their job is to “sell” the economy as a whole. They do this by predicting continuing prosperity that will lead to higher profits, dividends, and thus stock market prices. Somehow, the media overlook this obvious conflict of interest. The university economists are not much better, however, since they specialize in denying the existence of the very contradictions of capitalist production that lead to crises in the first place.
The overwhelming consensus is that this time, unlike in the past, the “slowdown” will not develop into a full-scale “recession.” The consensus forecast — it is remarkably consistent from cycle to cycle — is that in about six months business will be recovering from the slowdown without passing through a real recession. Even if the slowdown turns into a “technical” recession, both brokerage houses and academic economists predict it will be “extraordinarily mild.”
At this point, I must warn my readers that the arrival of a crisis cannot be predicted by simply saying the opposite of what the (bourgeois) economists predict, because the bourgeois economists are always predicting — with few exceptions — continuing prosperity, right up until the crisis arrives with full force.
We can actually deepen our understanding of the capitalist industrial cycle further by examining the reasons the (bourgeois) economic weather forecasters give for these optimistic predictions. With the widespread use of computers in controlling inventories, economists explain that, unlike in the past, corporations have acquired the tools to prevent excess accumulation of inventories, which led to recessions. The government indeed is duly reporting that the overall ratio of inventory to sales is at “record lows.” Obviously, it seems that there is no crisis of overproduction.
This, however, is an elementary error. What our economists always forget is that overproduction of commodities cannot develop on a large scale without credit-financed over-trading. In fact, while the inventory-to-sales ratio is at “record lows,” the absolute amount of inventory — unsold commodities — is at all-time highs.
On the eve of the crisis, growing overproduction is not reflected in a rising inventory-to-sales ratio but rather in the rising ratio of credit and credit money to “hard cash” — banknotes, deposits of the commercial banks payable in banknotes on demand at the central bank, and ultimately the gold bullion that backs the banknotes. This is the real indicator of overproduction of commodities and is always ignored by our optimistic forecasters. A rising inventory-to-sales ratio does not predict the approach of a crisis. It only confirms the arrival of the crisis once it breaks out.
An equally elementary error that our always optimistic bourgeois economists make on the eve of the crisis involves capital spending — expanded reproduction. As the industrial cycle peaks, the (bourgeois) economists always point to the strong capital spending plans of business as a sign that this time recession will be avoided. With investment strong and surveys showing that business plans to increase their level of capital spending even further in the coming months, our forecasters — nowadays armed with their computer models — determine that a recession is “extremely unlikely.”
During recessions, the capitalist economists point out that capital spending declines, sometimes dramatically. Leaving aside the “tight money” situation, the economists point out that the “real economy” is “extremely healthy.” The “extreme health” of the economy that our economists point to is actually the overproduction that is the cause of the crisis that is about to break out!
In reality, capital spending is a lagging indicator. High levels of capital spending and surveys that show business plans to increase capital spending even further are no indication that the boom will continue and recession will be avoided. On the contrary, the increased level of capital spending and capital spending plans increase the likelihood of a recession in the near future.
Once the recession breaks out, usually in the residential construction industry, “excess capacity” develops first in Department II but then increasingly and at an accelerated pace spreads to Department I. Unlike the purchases of consumer necessaries, investment in new factories, mines, and buildings of all kinds can be postponed indefinitely if such investment appears to have no prospect of yielding a profit. This is why — as Keynes was intensely aware — fluctuations in business investment are much sharper than the fluctuations in consumer spending.
How much “excess capacity” develops depends on the depth and the duration of the crisis. This is something that is difficult for industrial capitalists to predict at the beginning of a downward movement in the industrial cycle. For example, the recession that began in 1929 and eventually turned into the Great Depression began as what, to all appearances was a quite ordinary “slowdown.”
After the stock market crash of October-November 1929, President Hoover got all the top corporate chiefs of the time together in the White House. The president had them agree to maintain and indeed accelerate their capital spending. The vast majority of the (bourgeois) economists of the day claimed these agreements had prevented a serious economic crisis.
However, as the slump rapidly snowballed and the economy plunged into the Great Depression, these capital-spending plans were progressively scrapped. Whatever the corporations say about their capital spending plans, these plans are always conditioned on these projected expenditures being profitable.
During the boom, industrial capitalists face the problem of “too little” excess capacity. As the boom gives way to recession, they have the opposite problem — too much excess capacity. Therefore, even if they can continue to finance the building of new factories and enlarge existing ones, something that “tight” credit markets and rising long-term interest rates make difficult at the peak of the industrial cycle, such investments will only lead to more excess capacity, not greater profits.
The downturn, which was initially confined to consumer durables and those branches of Department I that produce raw materials and other means of production for the consumer durable industries, now spreads to the rest of Department I, especially those sectors that produce means of production for industries that produce for other Department I industries. The downturn, which at first affected only a few industries, now engulfs virtually the entire economy with the exception of the gold mining and refining industry, which moves counter-cyclically to the rest of the economy.
It hits the sectors of industry that produce the means of production, especially the sectors that produce means of production for the consumer — Department II — hardest, and the sectors that produce perishable consumer commodities such as food the least. This is because spending on capital goods can be postponed for years if necessary, as can purchasing of new houses and in a pinch purchasing of automobiles, but it is necessary to eat every day.
But the error bourgeois economic experts always make when they point to strong capital spending by business at the peak of the industrial cycle as a sign that a recession this time will be avoided is even more fundamental. Bourgeois economists—especially those of the Keynes school — see the maintenance of high levels of capital spending as the key to avoiding recession.
For example, in his “General Theory” — the bible of Keynesian economics — Keynes advocated that the central banks cut interest rates before a crisis breaks out. This, he believed, would avoid the crisis by increasing, or at least preventing a fall in, the profit of enterprise. The problem is that if the central bank expands the number of banknotes it is creating (to effect a fall in interest rates) at the very moment when the growth in the quantity of gold bullion is declining, the demand for gold will soar, which will cause the collapse of the gold bullion standard.
The central bank is not permitted to follow Keynes’s advice under our assumptions. But what will happen if the central bank is relieved of the necessity to redeem its banknotes in gold bullion? Why under a system of paper money do the central banks always make the “mistake” of ignoring Keynes’s advice and raising interest rates even though they no longer have to redeem their notes in either bullion or coin? These are questions that we can only examine in later chapters.
What we can say here is that the crisis is caused by the overproduction of commodities relative to the ability of the market to absorb commodities at profitable prices. However, there is no way that the generalized overproduction of commodities can take place without developing at the same time overproduction of the means for producing them.
Indeed, the surplus means of production are themselves produced in the form of commodities. For example, before a factory machine becomes fixed capital for the industrial capitalist who productively consumes the machine, it exists in the form of commodity capital in the hands of the industrial capitalist who produces the machine as a commodity.
Today, many Marxists — especially those who are employed in university economics departments — are reluctant to speak about the “overproduction of commodities.” Our academic Marxists generally prefer to refer to the “over-accumulation of capital” — a far more respectable expression. But the “over-accumulation of capital” is in reality inseparable from the overproduction of commodities.
Overproduction simply cannot develop without “over-investment” or “over-accumulation.” Therefore, any momentary success in maintaining and increasing over-investment will only make the inevitable crisis all the worse. As a boom begins to give way to recession, the fact that the high level of capital spending is actually fueling the crisis by making overproduction worse becomes obvious to the industrial capitalists themselves. They react by slashing capital spending.
While this deepens the crisis in the short run, it is the only way for them to get out of the crisis in the long run. The period of “over-investment” must be followed by a period of “under-investment.”
Can the government prevent the crisis by increasing its own borrowing and spending?
The shortage of credit usually manifests itself first in the consumer durable sector, as I explained above. Sales of new homes and cars decline, not because of the perceived need for homes and cars but because of the increased difficulty of obtaining the credit that is needed to purchase them. As the industrial cycle peaks, competition for the remaining supply of credit intensifies between industrial capitalists, local and state (or provincial) governments, and the central government — here, remember, we are assuming a world government — and consumers. Since consumers are the weakest party, they are the first to be cut off as the supply of credit starts to get scarce.
Under a situation where the demand for credit at prevailing interest rates exceeds the supply of credit, the more bonds that are floated on the market by the industrial capitalists to finance high levels of capital spending, the less credit will be available for home and automobile buyers.
The competition for what is left of credit doesn’t only affect the capitalists of various types plus the would-be purchasers of durable consumer goods. It also affects the government. The central government can as a rule always borrow, even when credit is at its tightest at the peak of the industrial cycle. But it can only do so at an ever higher rate of interest. This will increase the costs of servicing the national debt in the years that follow. Since the overall supply of credit is less than the demand for credit at the already existing high rate of interest, government borrowing at the peak of the industrial cycle simply crowds out other borrowers.
Therefore, unlike at the trough of the recession or the depression-stagnation phase of the industrial cycle, deficit spending by the central government cannot increase overall monetarily effective demand. It can only redirect it towards industries that produce either for the needs of the government or its dependents. This is why the hopes of Keynesians that government deficit spending can avoid crises cannot be realized.
The correct crisis theory
As we saw in the first section where we examined popular crisis theories, a popular explanation is that crises are caused by the conflict between socialized production on the one hand and the private appropriation of the product on the other. This is actually the correct crisis theory. Now we can understand why this is so. On the one hand, socialized production — the increasingly socialized character of labor used in industrial production — means the development of the productive powers of human labor on an extraordinary scale.
However, the private appropriation of the product means that private ownership of the means of production still prevails and with it the necessity for the products to take the form of commodities, each of which must have both a use value and an exchange value. This, for all the reasons we have been examining, must at a certain stage in the development of capitalism lead to the periodic appearance of crises of the generalized overproduction of commodities.
As long as the conflict continues to exist between the ever more socialized nature of production combined with the continued private appropriation of the product, the product must continue to take the form of commodities produced by private labor that is not directly social. Under these conditions, the overproduction of commodities takes on a periodic — or cyclical — form. Contrary to the hopes of some well-meaning underconsumptionists, crises cannot be abolished by increasing the purchasing power of the workers by raising wages. To get rid of crises, the contradiction between socialized production and private appropriation must be resolved. Capitalist production must be transformed into socialist production.
Once the private appropriation of the products produced by socialized labor is abolished and labor is directly social — the commodity character of production, the division of society into classes, and the periodic crises of generalized overproduction disappear. This was shown in life by the evolution of the economy of the Soviet Union. The big problem that the Soviet economy faced was a shortage of material use values, or a “goods famine,” as it was sometimes called.
Some bourgeois economists referring to reports of unwanted products accumulating in Soviet warehouses claimed that this showed that “overproduction” occurred in the Soviet Union as well. But here our (bourgeois) economists show how complete their lack of understanding really is.
In the Soviet case, the problem was that some products were produced that nobody really wanted. This can occur on occasion under capitalism as well, though under capitalism the industrial capitalists who produce products that nobody needs soon go bankrupt and the workers who were producing them face the misery of unemployment.
In fact in the Soviet Union, the production of products that nobody really wanted was a secondary problem. The primary problem that the Soviet economy faced was a shortage of products relative to human needs. Unlike in a capitalist economy, in the Soviet case, there was no difference between human needs and the demand for the product. People wanted Soviet products, but Soviet industry, since it was forced by imperialist military threats and economic boycotts to allocate huge amounts of labor to defense and socialist construction, producing for human needs and not profit, could not produce the products in sufficient quantity to fully meet these human needs.
The central bank and the crisis
Just like the commercial banks, the central bank under our assumed gold bullion standard system has to maintain a certain cash reserve — cash being, for the central bank, bars of gold bullion. Commercial banks maintain their reserves in the form of promissory notes on the central bank — banknotes — or deposits at the central bank — promises to pay the depositing bank in central bank banknotes on demand.
As soon as the crisis breaks out, the demand for money as a means of payment soars. Since under our assumption, the main means of payment consist of the banknotes issued by the central bank, the central bank can, once the crisis breaks out, issue more banknotes than it could before the crisis breaks out.
Therefore, unless its hands are tied by unwise banking legislation such as the English Bank Act of 1844 — which we will examine in a later chapter — our central bank will proceed to issue additional banknotes beyond its reserves of gold bullion. It will in this way ease the crisis — not prevent it — as long as its banknotes maintain their credit. More strictly speaking, it will be able to prevent the crisis from becoming worse than it has to be, considering the extent of the preceding overproduction.
What it won’t be able to do — remember, we are assuming the central bank has to maintain the convertibility of its banknotes into gold bullion — is to issue additional banknotes in such quantity that a fall in the general price level will be prevented once the crisis breaks out. If it attempted to do this, the central bank would face a run on its reserves of gold bullion by the owners of banknotes that would end in the collapse of the gold bullion standard and the devaluation of its banknotes—that is, a fall in the quantity of gold that each banknote represented. Under the assumptions we are making in this chapter, we would not allow the central bank to do this. What happens when central banks are allowed to do this — as is the case under a so-called fiat monetary standard — will be examined in the coming chapters.
Falling prices and credit
When credit is extended, it assumes a certain level of price. If these prices fall—which they do during a crisis — the fall in prices will mean that many debtors who would be able to meet their contracted debts at the old price levels will not be able to meet their debts at the new lower levels. The stronger capitalist enterprises will be able to survive the fall in prices by losing only a part of their capital — that will be more than made up for when prosperity returns — but many of the weaker enterprises will go out of business.
Different fates await the forces of production of the failed industrial enterprises. Some of their forces of production will be sold off to stronger industrial capitalists. These stronger capitalists will be able to buy these productive forces at prices far below their original labor values, or prices of production.
This, in part reflects the devaluation of the commodities that make up these productive forces due to the rise in the productivity of labor that has occurred since they were produced. In part, it also reflects the fact that prices of commodities in general have temporarily fallen below their labor values — or prices of production — since the crisis broke out. In this case, the commodities that enter into the forces of production that produce additional commodities have depreciated.
To say that a commodity has depreciated means that its market price has fallen temporarily below its production price. There are many “distress” sales where failing capitalists are forced to sell off their productive forces at prices that are below their prices of production — minus the wear and tear that they have already been subjected to while functioning as means of production.
But at the new lower level of prices, it is impossible to utilize profitably many of the older productive forces even if their prices fall all the way to zero. Such productive forces, though they can still be made to produce material use values that meet human needs, can no longer function as capital — as a means of exploiting wage labor. These productive forces are therefore destroyed and their remains sold off for scrap. In a severe crisis, the whole process of expanded reproduction goes into reverse and gives way to contracted reproduction. Therefore, in terms of value, market prices, and use values, society’s means of producing wealth contracts.
In contrast, the production of wealth in the form of money material expands at an accelerated pace both in terms of value — the amount of abstract human labor necessary to produce a given weight of gold — and in terms of use value — the total weight of the mass of gold bullion that represents that social relation of production called money. This is necessary to restore once again the conditions that will make possible the full realization of the value, including the part of the value of commodities that represent surplus value, once expanded capitalist reproduction resumes.
At the beginning of the crisis, capitalist society faces a great shortage of money. But at the end of the crisis, the capitalist class as a whole has a mass of idle money available that was burning a huge hole in its collective pocket. The glut of idle money develops because the fall in the general price level increases the purchasing power of the existing mass of money, the production of money material rises because of the increased profitability both relatively and absolutely of producing money material, and the real wealth of society in both value and use value terms contracts relative to the quantity of money in existence.
Sooner or later the capitalists will move to convert their huge surplus hoard of money M into real capital—constant plus variable capital—and expanded capitalist reproduction will resume and continue with increasing vigor until once again a new crisis of overproduction breaks out.
Crisis, the organic composition of capital, the rate of surplus value, and the rate of profit
The crisis swells the reserve army of labor and turns the balance of forces in the labor market strongly against the working class. Competition between the buyers of the commodity labor power — the industrial and other capitalists — declines while competition among the sellers of labor power — the workers — sharply increases. As the price of the commodity labor power drops, the ratio of paid to unpaid labor rises, i.e., the rate of surplus value rises.
Under the conditions of a crisis, the rise in the rate of surplus value does not immediately lead to higher profits. It is not enough to produce surplus value; you must also be able to realize it in terms of the use value of the money commodity. Therefore, profits — realized surplus value — cannot rise until the crisis reestablishes the conditions that enable the values of commodities that contain the surplus value to be realized once again.
This last point is denied by Marxists of the Grossman-Mattick school. These Marxists assume that if the rate of surplus value rises sufficiently, the problem of realizing the surplus value is automatically solved. The Grossman-Mattick school considers a “Keynesian” error any acknowledgment that the realization of the value and surplus value of commodities is a problem separate from the production of surplus value.
The supporters of the Grossman-Mattick school are correct when they explain that many Marxists who emphasize the problems of realizing the value of commodities are indeed influenced by Keynes — for example, the Sweezy-Monthly Review school, the other main school among contemporary Marxists.
Other Marxists influenced by the contrary arguments of the Grossman-Mattick school, on one side, and the Sweezy-Monthly Review school, on the other, try to reconcile them by arguing that there is some “optimum rate of surplus value” high enough to produce an adequate rate of profit for the capitalists but low enough make the realization of the value of commodities possible.
At worst, the supporters of Grossman-Mattick point out, the “Keynesian-Marxists” flirt with the claim that “the surplus” (as Sweezy-influenced Marxists sometimes call it) arises not in the sphere of production but in the sphere of circulation. This would be true of Keynes himself insomuch as he can be said to have had any theory of surplus value at all.
The Grossman-Mattick Marxists for all their mistakes are quite correct in criticizing these views. Before surplus value can be realized, it must be produced. If surplus value is not produced, there can be no profit.
However, this in no way changes the fact that surplus value once it has been produced must be realized in terms of the use value of the money commodity. Surplus value that is not realized in terms of the use value of the money commodity is not profit. It is therefore quite possible to produce surplus value and still make no profit. Indeed, every practical business person is all too well aware of this.
To reestablish the conditions of realizing value and surplus value of the commodities that they are capable of producing, the capitalists must do two things. First, they must produce fewer commodities while selling off the commodities they have already overproduced more or less below value, while at the same time destroying their “surplus” forces of production.
Second, they must increase the production of money material — the special commodity that functions as the universal measure of value. No rise in the rate of surplus value can substitute for these measures.
This has an important political implication. The capitalists and their hired economic guns explain that “we” must sacrifice to get out of the crisis. However, the sacrifices that the two classes are asked to make are quite different. The workers are supposed to sacrifice by spending an even greater part of the working day toiling for the capitalists than before.
What sacrifice are the capitalists asked to make? Their “sacrifice” consists of appropriating an even larger amount of unpaid labor than before. In the name of getting out of the crisis, the capitalists are to “sacrifice” by getting even richer than they were before.
Naturally, the workers consider this unfair. The Grossman-Mattick school, however, agrees with the bosses on this one. To be fair, unlike the bosses and their economists the Grossman-Mattick school explains that if the workers resist, the crisis continues until either the workers are forced to accept a higher rate of exploitation and prosperity returns, or until the workers, unwilling to accept still more capitalist exploitation, finally overthrow the capitalists and embark on the construction of socialism. It is the latter outcome that the supporters of the Grossman-Mattick school work for.
However, unless we are in an immediately revolutionary situation, the workers will tend to draw the conclusion that if the only effect of their resistance is to extend the duration and worsen the crisis, resistance is both fruitless and unwise.
Therefore, though the supporters of the Grossman-Mattick school have the most revolutionary of intentions, they are in danger of unwittingly playing into the hands of the bosses. As a rule, the workers become radicalized not simply through the effects of economic crises but through the struggle against their effects. When the struggle ebbs, the workers do not become radicalized, no matter how bad the economic situation becomes. This is the lesson of several centuries of class struggle.
If the workers fight back during the crisis, they will be in a far better position to take advantage of the inevitable upswing that follows. But if the workers give in during the crisis, the slavish habits of subservience to the bosses will tend to prevent them from taking advantage of the inevitable upturn in the industrial cycle. A working-class that does not know how to struggle against the effects of capitalist crisis will never make a socialist revolution.
In the name of combating Keynes-inspired reformist illusions about preventing crises through government policies that increase “effective demand,” the “ultra-left” Grossman-Mattick school runs the risk of demoralizing the workers altogether. It is no accident that the mass workers’ organizations are much more attracted to Keynesian-Marxists than they are to the Grossman-Mattick-type Marxists, whose influence is largely limited to academic circles or to small groupings that are detached from the actual workers’ movement.
However, despite their serious theoretical and political errors, we shouldn’t forget the strong element of truth in the Grossman-Mattick analysis. In the course of the crisis, the obstacles to the realization of the value, including the surplus value contained in commodities, are eliminated. Once the crisis has run its course, the more the capitalists have succeeded in increasing the rate of surplus value the higher their profits will be when prosperity returns.
There are actually two interrelated reasons why this is true.
All things remaining equal, the higher the rate of surplus value the higher will be the rate as well as the mass of profit. In addition, the higher the ratio of unpaid labor to paid labor the more the industrial capitalists will employ living labor—variable capital — as opposed to dead labor — constant capital.
On average, industrial capitalists have to pay for the full value of constant capital, but they pay for only part of the value created by living labor. The higher the rate of surplus value — the less they pay for the new value created by living labor — the more they will use living labor and the less they will use dead labor — machines and other forms of constant capital. And the more the industrial capitalists use living labor as opposed to dead labor the lower the organic composition of capital will be and the higher, everything else remaining equal, will be the rate of profit.
Here we see the vampire essence of capitalism, dead labor living on living labor. If you deny the vampire its source of living blood, it perishes.
But this situation contains the seeds of its own reversal. The more the capitalists use living labor the greater the likelihood that the balance of forces on the labor market will once again swing in favor of the sellers of labor power—the workers. A new generation of workers will have learned the hard way that the “no struggle” approach only brings disaster for the workers and the working population in general.
How capitalism avoids the absolute overproduction of capital
If there were no crises of relative overproduction, capitalism would face crises of what Marx called the absolute overproduction of capital. (4) Suppose capitalists having successfully converted the value, including the surplus value, of their commodities into money find that they cannot take the next step and transform any of the surplus value that they have realized in money form — profit — into variable capital — purchased labor power — due to the absence of workers who are offering to sell their labor power. The bosses find that they cannot increase their production of surplus value. Instead of workers ready to go to work producing surplus value, they simply have a sum of money. Money cannot produce an atom of additional value, let alone surplus value. Nor can money be converted into constant capital to produce surplus value. At this point, the whole process of expanded capitalist reproduction halts.
If such a situation becomes general, the competition among the buyers of labor power — combined with the reduction of the competition among the sellers of labor power — would reach such levels that the rate of surplus value would plunge to zero. The result would be an absolute overproduction of capital where the additional investment of capital leads to a smaller mass of profit, not a larger mass of profit. At this point, the entire process of the expanded reproduction of capital comes to a stop. How does capital avoid such a disastrous situation?
In the real world, crises of the absolute overproduction of capital are avoided by crises of the relative overproduction of commodities — which includes the elements of real capital. Real capital consists of factories, buildings, mines, machinery, raw and auxiliary materials, and, last and most important of all, additional labor power.
Overall, the effects of crises of general overproduction are to increase the rate of surplus value, slow down the growth in the organic composition of capital, and thus counteract the fall in the rate of profit. Crises, therefore, play a crucial role in converting the fall in the rate of profit due to a rise in the organic composition of capital into a mere tendency, a point correctly stressed by the Grossman-Mattick school.
Crises and the centralization of capital
There is another way that crises counteract the effects of the fall in the rate of profit. During crises, it becomes obvious that there are “too many” industrial capitalists competing with one another for market share. The market is simply not large enough to accommodate all the industrial capitalists. The only solution is to reduce the number of independent industrial capitalists engaged in mutual competition among themselves. This can occur through bankruptcies that transfer some of the existing productive forces from the hands of relatively small capitalists into the hands of much larger capitalists, through capitalists simply going out of business and selling off some of their forces of production to stronger capitalists, as well as forced mergers where the productive forces of small capitalists are joined up with the productive forces of much larger capitalists; or through the outright destruction of surplus productive forces.
The crucial result is the growth of monopolies. In the middle of the nineteenth century light industry predominated. The transition to monopoly capitalism began around 1873, based on the new industries of the 19th century, such as railroads, the petroleum industry and the iron and steel industries.
Whether in the form of cartel agreements among a relatively few number of independent capitalists or in the form of trusts — a single capitalist or collective capitalists in the form of a corporation — monopolies end up owning productive forces that were previously owned by many independent capitalists and are therefore in a position to impose monopoly prices. That is, once the crisis has passed, they are able to maintain market prices in excess of the prices of production for a prolonged period.
These surplus profits, however, do not arise in the sphere of circulation, but are ultimately taken out of the pockets of the capitalists that operate in sections of production where capital is less centralized. The overall effect is that individual capitals become both fewer — centralization of capital — and larger —concentration of capital.
As individual capitals swell to monstrous size, a huge mass of profit is made even when the rate of profit is low. The more capital is centralized in the hands of a few very large capitalists, the more capital as a whole is “reconciled” to a low rate of profit. Here the low rate of profit is compensated for by a huge absolute mass of profit.
At a certain point, the centralization of the forces of production will become so great that it will no longer be compatible with the capitalist mode of production, which requires that capital exists in the form of “many capitals.” The discussion of this belongs not here but in the chapters on the breakdown theory. However, we can say, along with Engels in Socialism: Utopian and Scientific, that the industrial cycle is not so much a circle that always returns to its starting point but a tightening spiral that must end sooner or later with the transformation of capitalism into socialism. (5)
Some additional observations
We have seen how the periodic disproportion between the branch of industry that produces money material and all other branches of commodity production is not an accident but must be reproduced on an expanded scale during successive industrial cycles. If permanent prosperity could be achieved, prices would then rise forever and would lose all connection to their underlying labor values. But this would eventually cause the production of money material to cease. And without the production of a money commodity, capitalism cannot exist.
But this does not mean that accidental disproportions among the various branches of production, made inevitable by the anarchy of capitalist production, do not occur as well. In practice, these purely accidental disproportions do profoundly affect the development of individual industrial cycles.
In Chapter 5 on the disproportionality theory of crises, I noted that disproportionate production has a particular tendency to develop between the branches of industry that produce primary commodities and the branches that produce the final product. The increase in production of primary commodities such as industrial metals, petroleum and natural gas often involves the search for new mineral deposits, oil fields and so on. Such exploration projects are unlikely to be undertaken except during periods of high profits in the primary commodity industries.
Since such exploration can take considerable periods of time, the rise of raw material production has a tendency to lag behind demand during the upward phases of the industrial cycle. Very often by the time new mines, oil wells and so on are ready for production, the crisis has arrived and the demand for raw materials suddenly slumps. Not until the next boom, or sometimes several booms later, will prices and profits rise to levels that cause new exploration to be undertaken.
This plays an important role in real-world crises. This is especially true because at the peak of the boom and the beginning of the recession, the ability to further expand credit — and for the moment the market — is exhausted.
Therefore, the industrial capitalists are far less likely to be able to pass on any increase in cost prices than they were earlier in the industrial cycle. Growing shortages of raw materials are indeed one of the best indicators of an approaching crisis.
This analysis can also be applied to the gold and gold refining industries, the industries that produce money material.
Remember, for the counter-cyclical gold industry, the boom means tough times. The gold industry has been forced to slash its exploration budgets during the preceding boom when other primary commodity industries are experiencing rising profits and are therefore increasing theirs. If the existing mines are badly depleted, it might be difficult for the gold mining industry to rapidly increase gold production even if the profitability of the existing mines is increasing rapidly due to falling commodity prices. If gold production cannot be quickly increased, the recession-depression phases of the cycle will last longer than would otherwise be the case.
True, falling commodity prices in terms of gold at a certain point make the gold mining industry profitable once again, and the gold mining industry will certainly progressively increase its exploration budgets. But even if the gold mining capitalists are successful in finding more gold deposits, the exploration process can take a considerable period of time. In addition, the new gold deposits must then be developed into actual mines, which takes additional time. I examine this more closely in Section 6 where I take up the whole controversial question of whether there are “long cycles” in capitalist production.
New industries and overproduction
Overproduction tends to be most pronounced in the new rapidly developing branches of production. In old established industries such as residential construction, the industrial capitalists have at least an approximate idea of the size of the market and how rapidly it is likely to grow over time. But in new industries, this is much harder to gauge.
For example, when the personal computer industry began to develop in the last part of the 20th century, it was not at all clear how many “consumers” there would be for the new devices. Up to then, people had done just fine without a home computer. Today, however, the majority of humanity — except for the very poor — most people cannot do without some type of computer, whether it is a smart phone, tablet computer, laptop or desktop.
As is always true in new branches of production, the pioneering capitalists have to create a need for the new type of use value. This is what the late Steve Jobs was so great at. When a new industry is born, it is is not at all clear how successful they will be.
Suppose they are very successful in creating the need for the new type of use value, and a rapidly developing industry is born. The market for the new type of commodity is expanding a lot faster than the growth of the world market as a whole. During this stage, the industrial capitalists who are engaged in the production of the new product must struggle to keep up with the surging demand, and the rate of profit in the new industry is far above the average rate of profit.
Capital flows into the new industry as great numbers of would-be entrepreneurs try their luck, lured by the expectation of making huge super-profits. This ends with massive overproduction, or as the business press puts it, there is a shakeout in the new industry as it approaches maturity.
At the beginning of the new industry, there are usually only a few pioneering small-time industrial capitalists operating with their small capitals. Then, as the industry develops, demand increases sharply and super-profits abound. As more capitalists enter the sector, capital in the new branch of production goes through a phase of decentralization, though production is already becoming more concentrated.
Sooner or later, the ability to produce the new type of commodity will inevitably exceed the monetarily-effective demand for it. The decentralization of capital is replaced by centralization of capital as many of the pioneers lose their shirts or withdraw from the market in defeat.
For example, at the very beginning of the personal computer industry in 1975, the industry consisted of one small-time industrial capitalist named Ed Roberts. Roberts owned a company that produced the Altair personal computer. This machine had to be assembled from a kit, had no software available for it — it had to be programmed in machine language — and had no output device beyond a series of lights.
Its only use value was that it enabled a “geek” to own his or her own computer — something not possible before 1975. If things had remained at this stage, the market for personal computers would have remained tiny. At this stage in the personal computer industry though, there was little concentration of capital. Roberts’ operation was quite small and the centralization of capital was absolute — there was only one industrial capitalist in the entire industry.
Almost at once, however, personal computers were rapidly improved and were on their way to becoming devices that many of us cannot live without today. The market for personal computers expanded dramatically, and many more industrial and would-be industrial capitalists tried their luck. Capital in the new-born PC industry was growing more concentrated but less centralized. The rate of profit in the PC industry rose far above the average rate of profit for capitalist industry as a whole, and soon the new industry was spawning a growing share of multimillionaires and then billionaires.
However, many of these capitalists either failed, or like Roberts — who rapidly realized he couldn’t possibly keep up with “competition” and sold his business to a larger company in 1976 just a year after he introduced the Altair — voluntarily withdrew from the industry.
As the industry matured — that is, as the rate of growth of the PC market sank toward the rate of growth of the market as a whole — capital continued to grow more concentrated and became more centralized as more and more capitalists involved in the production of personal computers either failed or withdrew as the easy profits disappeared. Along the way, the PC industry passed through a series of violent crises — for example, the crisis of 1985, which not only coincided with a “slowdown” in the general economy but severely shook the PC industry.
The microchip spawned not only the PC industry but a whole series of related industries that have now completely revolutionized communications and are called “high tech.” During the “Clinton boom” years of the 1990s, capital flowed into high-tech as though there were no limits to the demand for these commodities and related services. This ended with the “high tech” meltdown in 2001, which killed off all illusions that this new complex of industries was immune to the laws that govern capitalist production.
Indeed, new industries, where new needs for new use values are being established and where therefore the rate of growth of the market is much more uncertain than is the case with old established industries, are much more prone to violent cyclical fluctuations than are the old established industries. For example, the economy of California’s Silicon Valley is extremely cyclical.
Accidental disproportions
Finally, we should take a look at accidental disproportions that inevitably occur in all industrial cycles as industries successively overproduce and underproduce. As long as industry operates at a low level of capacity utilization, this will not result in widespread bottlenecks and shortages. For example, at the low point of the Great Recession of 2007-09, the U.S. capacity utilization was just under 70%, according to the Federal Reserve. Suppose for the sake of argument that the Federal Reserve figures are accurate; this was only the average level of utilization.
Some industries, let’s say the shoelace-producing industry, is operating at 85%, but the shoe manufacturing industry is operating at only 40%. Perhaps before the crisis broke out the high cost of shoelaces was dramatically reducing the profits of the shoe-manufacturing industry. With the outbreak of the crisis, only the most productive shoe factories remain in production. However, during the next period of prosperity, capacity utilization of the shoe-making industry will rise as people replace their worn-out shoes.
During the previous boom, let’s assume the shoelace industry was working all out and making exceptional profits, while many shoes produced by the shoe-producing industry couldn’t be sold due to a lack of shoelaces. Nobody wants to buy a pair of shoes if shoelaces are not included.
However, a period of bad business will allow such disproportions to be ironed out. The shoe-producing industry is forced to curtail production during the recession not because of a lack of shoelaces but because so many people facing either partial or full unemployment are cutting back on their shoe purchases. The shoe industry that was operating at 40% of capacity consequently reduces its capital spending, which perhaps had already been declining before the general crisis broke out, to virtually nothing. Idle shoe factories are ruthlessly closed down and society’s capacity to produce shoes shrinks.
However, the shoelace industry, which is at the relatively high level of operating capacity at 85%, will largely maintain its capital spending. Even during this time of terrible business, it is still using most of its productive forces. As soon as business picks up again, it will find itself again operating at 100% unless it continues to expand its productive capacity. So capital flows into the shoelace industry. New shoelace factories are being built and will come online as prosperity returns.
As a result, by the time the next boom arrives, it is shoelaces that are overproduced relative to shoes. It is the shoe industry that can now make super-profits, since shoelaces are dirt cheap. Therefore, one of the functions of general crises of overproduction under capitalism is to iron out the bottlenecks in production that inevitably develop during the boom.
The stock market and the crisis phase of the industrial cycle
The stock market boom comes to an end usually due to the combination of rising long-term interest rates — remember, in the long run the prices of corporate stock are the stream of dividends capitalized at the long-term rate of interest — and the prospect of sharply lower profits and thus lower dividend payments once the crisis breaks out. Sometimes rising long-term interest rates cause the stock market to anticipate the crisis and the bull market ends many months before the industrial cycle peaks.
Other times, the momentum of the “bull market” lasts right up until the cyclical peak and sometimes even slightly beyond. But once the crisis becomes unmistakable, the market will almost always sell off sharply in anticipation of the suddenly darkened prospect for corporate profits.
However, not every sharp drop in stock market prices indicates the arrival or imminent outbreak of a crisis. The stock market has its own internal cycles and can crash at any stage of the industrial cycle.
Sometimes the “bear market” once it starts will last until the end of the crisis. But usually the stock market turns up while the crisis of industrial production and employment is still in full swing. Why is this?
First, the crisis by brutally eliminating the preceding overproduction is greatly improving the prospect for future profits. The rate of surplus value is soaring, and even though this higher rate of surplus value does not translate into higher profits immediately due to realization problems, it inevitably will once the crisis has eliminated the surplus commodities and means of production. Higher profits — both in terms of rate and mass — mean more dividends and hence higher stock market prices at a given rate of interest. But during the industrial crisis, interest rates are not “given” but are falling.
The ratio of real wealth — wealth in non-money form — to wealth in money material drops. This occurs for three reasons. First, the prices of commodities drop; second, the quantity of commodities measured in terms of use values declines; and third, the production of money material is stimulated, causing the quantity of money material to expand.
All three factors work in the direction of lowering interest rates. Since the prices of corporate stocks — abstracting the inevitable swings of speculation — are simply the capitalization of the flow of dividends at the long-term rate of interest, lower interest rates tend to raise the prices of corporate stock. Once recovery begins, the rate of profit will recover rapidly while the long-term interest rates will rise very little or not at all for quite some time due to the accumulation of idle money capital during the crisis.
Finally, the large capitalists have learned from long experience that the best time to buy stocks is when their price has been severely depreciated as a result of a crisis. They hope to buy the stocks near the bottom of the market. Very often bear markets end when a massive “selling climax” has driven the price of stocks down to levels that inspire the big capitalists to engage in a stock-buying frenzy.
Needless to say, these facts provide no foolproof way of making lots of money in the stock market. For example, after the stock market collapsed by 40% within three weeks in late October and early November 1929, it seemed to many capitalists at the time that a historic stock market buying opportunity had opened up. The economy was obviously in recession but in the normal course of things the recession would be expected to bottom out sometime in 1930. Long-term interest rates had already fallen considerably. And the mounting wave of layoffs was driving down wages promising much higher profits once recovery set in, which many capitalists confidently expected to occur in the course of the year 1930. Anticipating this development, many investors rushed into the market at the end of 1929 and the early months of 1930.
Unfortunately for them, this proved no ordinary recession and the stock market slump soon resumed. By the time stock prices finally hit bottom in July 1932, they had fallen far below the levels of November 1929. It turned out the stock market in the wake of the crash of 1929 was no bargain at all.
(1) Marx, Capital, Volume III, Part III. The Law of the Tendency of the Rate of Profit to Fall. Chapter 15. Exposition of the Internal Contradictions of the Law. IV. Supplementary Remarks https://www.marxists.org/archive/marx/works/1894-c3/ch15.htm (back)
(2) Marx, Grundrisse, Notebook IV – The Chapter on Capital https://www.marxists.org/archive/marx/works/1857/grundrisse/ch08.htm (back)
(3) Marx, Capital, Volume III, Part V. Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital. Chapter 35. Precious Metal and Rate of Exchange. I. Movement of the gold reserve https://www.marxists.org/archive/marx/works/1894-c3/ch35.htm (back)
(4) Marx, Capital, Volume III, Part III. The Law of the Tendency of the Rate of Profit to Fall. Chapter 15. Exposition of the Internal Contradictions of the Law. III. Excess Capital And Excess Population https://www.marxists.org/archive/marx/works/1894-c3/ch15.htm (back)
(5) Engels, Socialism: Utopian and Scientific, III. Historical Materialism https://www.marxists.org/archive/marx/works/1880/soc-utop/ch03.htm
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A Critique of Crisis Theory 