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 24: The Place of the Great Depression in History
The Great Depression, which began in 1929 and lasted until World War II, holds a unique place in world economic history. “The Great Depression,” wrote bourgeois economist J. Bradford DeLong, “has a central place in 20th century economic history.”
He explained: “In its shadow, all other depressions are insignificant. Whether assessed by the relative shortfall of production from trend, by the duration of slack production, or by the product — depth times duration — of these two measures, the Great Depression is an order of magnitude larger than other depressions: it is off the scale. All other depressions and recessions are from an aggregate perspective (although not from the perspective of those left unemployed or bankrupt) little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt.”
The economic crisis of 1929-33, though it was in some ways just another cyclical crisis of overproduction, clearly involved some other factor or factors that converted a “normal” cyclical economic crisis into something quite different. But what were they? To distinguish the crisis of 1929-33 from usual capitalist cyclical crises, I will call it the super-crisis.
The Depression was far from the only capitalist disaster of the first half of the 20th century. It was preceded by World War I, the bloodiest war in world history up to that time. According to Wikipedia, the total number killed in World War I is between nine and 16 million. During World War II, the estimates for the total number of dead ranged from 50 million at the low end to more than 70 million at the high end, an order of magnitude greater than that of the preceding world war.
However, the Depression forms the centerpiece of the era that began in August 1914, when World War I began in Europe with the guns of August, and ended in August 1945 with the dropping of atomic bombs by the United States on the Japanese cities of Hiroshima and Nagasaki. During these 31 years, the entire capitalist “order” appeared to be hanging by a thread.
Three years after World War I broke out, the Russian Revolution occurred, which brought the working class to power in the former Russian Empire. This revolution, the greatest revolution in world history up to the time these words are being written, was to be the dominating event of the rest of the 20th century.
But the Russian Revolution was not the only significant event between August 1914 and August 1945. The 31 years saw the definite eclipse of the British Empire as the world’s leading power. In its place, there arose a far more powerful world empire centered on a former British white colony, the United States.
The replacement of the British Empire and the lesser empires of Russia, France, Belgium, and Japan by the U.S. world empire was no peaceful affair. It took two world wars before Yankee domination was definitely established over the capitalist world. After that, it took the so-called Cold War from 1945 to 1989 — which became quite hot in Korea and Vietnam, causing millions of additional deaths — before “the Empire” was able to wear down the resistance of the Soviet Union and its Eastern European allies.
When this is being written, “the Empire” is still working on breaking the resistance of China, Vietnam, North Korea, Cuba, many Latin American countries, Syria, Yemen, Palestine, and Iran. While the list of countries resisting the Empire or that are in its crosshairs at any given time will change, one thing will remain unchanged until the U.S. empire finally falls. The U.S. empire will not be, and by the very nature of the monopoly capitalism it is based on, cannot be, satisfied until every country on earth is stripped of any meaningful independence and reduced to either a satellite imperialist country or a neo-colony. If another world empire based on monopoly capitalism replaces the U.S. empire, the same will apply to that empire in the future.
The bloody rise of the U.S. world empire
The years between 1914 and 1945 also saw the rise and fall of European fascism. Though it lasted only 12 years, the German fascist dictatorship of Adolf Hitler spread unprecedented destruction across Europe. In the USSR alone, at least 20 to 27 million people died. Under the fascist dictatorships, all forms of working-class organization, from the most revolutionary Communist parties, the Social Democratic parties, and trade unions to the Catholic trade-union movement, were brutally crushed.
Fascism achieved this by creating mass organizations, including armed militias recruited mainly from the middle classes, that waged civil war on all working-class organizations. The fascist dictatorships were quite different from traditional military dictatorships and other forms of capitalist reaction. The traditional reaction uses the military and the police to repress working-class organizations, but does not create mass organizations and militias somewhat independent of the traditional army and the police to wage war on working-class organizations. However, creating mass, mostly middle-class organizations to wage war on all workers’ organizations is precisely the essence of fascism.
One consequence of fascism was the decision of the German government to kill every Jew it could get its hands on, including not only men but also adults, older people and infants. It is important to understand that the Nazis did not define Jews as followers of the Jewish religion but as members of the alleged “Jewish race.” Among the “Jews” exterminated by the Nazis for no crime other than being Jews by the Nazi racial definition were Christian and atheist Jews.
The Nazis also killed many Roma people. Apparently, the Nazi “racial experts” couldn’t determine whether the Roma, whose ancestors are believed to come from India, were “Aryans” or not. So to be on the safe side, they decided to kill them, too. The Nazis also clarified that they intended to reduce all the Slavic peoples — Russians, Poles, Ukrainians, Belorussians, Czechs, and Serbians — to what the Nazis called “slavery,” when they did not exterminate them outright.
The Hitler tyranny proved a godsend for the leaders of U.S. imperialism. This was perhaps the only war in world history where the leaders of one side did not have to exaggerate monstrously the crimes of the other side.. If anything, the leaders of the United States and Britain played down the extermination of the European Jews — after all, anti-Semitic sentiments were not precisely absent in the United States or Britain — and it goes without saying that the U.S. and British leaders were not exactly champions of the rights of Communists.
Economically, the years between 1914 and 1945 were marked by one economic disaster after another. First, the economic disaster on the European continent was caused by the destruction of a significant part of a whole generation of young people, not to speak of the physical destruction of World War I itself. In Germany, the economic crisis directly caused by the war and the consequent blockade far exceeded in scope any of the pre-World War I cyclical crises of overproduction.
After the war ended, a hyperinflation crisis hit Germany and many other central and eastern European countries. And then, just as the world economy seemed to be returning to normal, there came the super-crisis of 1929-33, followed by years of lingering Depression and mass unemployment until World War II began.
The standard process of expanded reproduction suspended
But it is the Depression itself as an economic event that we will be examining in this and the coming chapters. For 15 years, the normal process of expanded capitalist reproduction in the most powerful capitalist country on earth — the United States — was suspended. First, by the super-crisis of 1929-33 and the Depression that followed, and then by World War II, which grew out of the Depression. And interestingly enough, it was this same country that was least affected by the destruction of World War I — and was the only real winner in that war — that was hardest hit by the Depression. To examine why this was so, we will have to penetrate deeply into the nature of capitalist production, its contradictions.
In its wake, it became almost an article of faith among many, perhaps most, Marxists of the era that capitalist expanded reproduction — capitalist economic prosperity — could never return. Either there would be the “prosperity” of the war economy, such as experienced in the United States during World War II, which is actually a form of contracted reproduction, or Depression with a capital “D” — not the depressions of the pre-World War I kind — would reign until the victory of the world socialist revolution.
Since World War I had been followed by the Depression, it was assumed that a proportionally greater Depression would follow the much “greater” World War II — if not right away, then surely after the process of postwar reconstruction had been completed. In the years after World War II, Marxists eagerly looked for signs of a “new 1929.” Every recession, even every sharp sell-off in the stock market, raised a wave of speculation that the Depression was returning.
But despite all these expectations, shared not only by Marxists eager for a socialist revolution — but fearfully by many bourgeois economists as well — capitalist expanded reproduction resumed with great power shortly after the war. A great new period of capitalist prosperity set in.
In some ways, this resembled the period that followed the 1848 revolutions we examined in the last chapter, dashing the hopes of a whole revolutionary generation for a victorious global socialist revolution within their lifetimes. As would be expected, many bourgeois ideologues and economists proclaimed that this largely unexpected new era of economic prosperity had finally “refuted” Marx.
Even many Marxists saw the post-World War II economic upswing as bringing Marxism into doubt. “Since 1945 there has been a period of unprecedented prosperity and growth within the capitalist world,” Kenneth J. Tarbuck wrote in the early 1970s at the very end of the long prosperity, “which would seem to cast doubt on the Marxist theories of development and crisis.” (Introduction to “The Accumulation of Capital — An Anti-critique” by Rosa Luxemburg, and “Imperialism and the Accumulation of Capital,” by Nikolai I. Bukharin, Monthly Review Press, 1972). Tarbuck wasn’t the only Marxist who expressed such thoughts during the “Long Boom” that followed the 31 years between August 1914 and August 1945.
Did the ‘Long Boom’ refute Marx?
It was Marx who had done what none of the bourgeois economists had been able to do. He actually explained the process of expanded capitalist reproduction. He stressed that the capitalist mode of production could exist only in this form of expanded reproduction. In volume II of “Capital,” Marx developed his famous diagrams of expanded reproduction, which indeed form the basis — if often unacknowledged — of all modern capitalist “growth theories.”
How exactly did the resumption of capitalist expanded reproduction that Marx considered normal and indeed inseparable from capitalism “cast doubt on Marxist theories of development”? Wasn’t capitalism after 1945 behaving just as it was supposed to, according to volume II of “Capital” and indeed Marx’s other mature writings? What cries out for an explanation is not the process of expanded capitalist production after World War II — that is, capitalism behaving “normally” — but rather the near collapse of capitalist expanded reproduction between 1914 and 1945 — especially during its centerpiece, the Great Depression of 1929-1940.
The Depression and the industrial cycle
We have seen that expanded capitalist reproduction cannot proceed smoothly year by year as it does in Marx’s Volume II diagrams. Inevitably, expanded capitalist reproduction is and must be broken up into a series of industrial cycles once capitalism has reached a certain level of development. Each industrial cycle is crowned by a crisis of overproduction that momentarily disrupts the process of expanded reproduction. Each crisis marks the end of one industrial cycle and the beginning of the next one.
However, since the overall process across the industrial cycles is one of expanded reproduction, this implies that each successive industrial cycle will exceed its predecessor in terms of output and the number of workers exploited by capital before it ends in a crisis.
In the earlier chapters, we examined an “ideal economic cycle” to show how the contradictions of capitalism in the course of the industrial cycle make inevitable a crisis that momentarily interrupts the process of expanded reproduction. However, it is precisely the crisis that allows capitalist expanded reproduction to then resume its normal course.
How exactly did the industrial cycle of 1920-1929 deviate from the “ideal industrial cycle” so that it ended not in a “normal crisis” but rather the super-crisis of 1929-33, which pretty much sank capitalist expanded reproduction altogether for the next 15 years?
Some popular theories of the Depression
Let’s review some of the theories of the causes of the Great Depression advanced by both economists and Marxists. Perhaps the most superficial is Milton Friedman and Anna J. Schwartz’s claim that the Depression was caused by the failure of the U.S. Federal Reserve System to expand the U.S. money supply adequately during the 1920s and then allowed — or in some versions even caused — the U.S. “money supply” to contract by one-third between 1928 and 1933.
According to Friedman, Schwartz and their supporters, the mistakes of the U.S. Federal Reserve System caused the otherwise “very healthy and stable U.S. economy” and, thus, the world economy of the late 1920s to collapse. Superficial though this explanation is, it has dominated university economics departments for a generation.
Another theory put forward by the supporters of the Austrian school — who share the “neoliberalism” of the Friedman school but in an even more extreme and dogmatic form, if that is possible — claims that, on the contrary, the Depression was not caused by the “deflationary” policies of the U.S. Federal Reserve System but rather by the “inflationary policies” of the same Federal Reserve System. According to the Austrians, it was the “inflationary policies” followed by the Fed during the decade of the 1920s that made the Depression inevitable. Therefore, the two leading “neoliberal” schools of modern political economy, the Austrian school and the Friedman school, advance exactly opposite explanations of the causes of the Depression.
Some other Depression theories
Another theory of the Depression was proposed by the bourgeois economist Joseph Schumpeter. He explained the Depression as, at least in part, due to mutually reinforcing downturns in the three innovation-driven economic cycles that, according to Schumpeter, characterize capitalist production. According to this theory, these economic cycles are the industrial cycle, called by Schumpeter the Juglar cycle, the three-year inventory or Kitchin cycle, and the alleged 50- to 60-year Kondratiev cycle.
An explanation for the Depression that is far more popular among non-economists, political progressives, and trade unionists is that the Depression was the result of the “underconsumption of the masses” caused by the failure of wages to keep up with the unusually rapid growth in the productivity of labor that occurred during the 1920s. This led the supporters of this theory to see the problem as the centralization of much of the purchasing power of society in the hands of a few extremely rich capitalists.
Since this theory holds that these capitalists could not find ways to spend all their vast incomes on high living—despite their best efforts—there were simply too few people both willing and able to buy more than a fraction of the vast number of commodities that capitalist industry was able to produce. This ended with a massive crisis of underconsumption that we call the Depression.
The Depression and the tendency of the rate of profit to fall
Opposite to the view supported by some Marxists based on Marx’s famous law of the tendency of the rate of profit to fall is the view that the rate of surplus value was too low in the 1920s to maintain an adequate rate of profit in the face of a rising organic composition of capital. The rate of profit fell so much that the capitalist investment that drives both simple and expanded reproduction ground to a virtual halt.
This theory finds support from the followers Henryk Grossman and Paul Mattick, and to some extent Ernest Mandel in his final years and Anwar Shaikh. Mandel, at least in part, saw the Depression as a downturn in one of the “semi-cycles” that he believed characterize capitalist production. (See the previous chapter.)
John Maynard Keynes’s views on the causes of the Depression
Returning to the views of the (bourgeois) economists proper, John Maynard Keynes believed that the Depression was caused by a slowdown in the growth of the population and a consequent slowdown in the growth of the demand for material use values. This led to a considerable fall in the rate of profit — or the marginal efficiency of capital.
According to Keynes, this would not have, in and of itself, caused the Depression. If the long-term rate of interest had fallen sufficiently, the Depression would have been avoided. Instead, society would have devoted more productive capacity and labor time to producing consumer goods relative to capital goods. Economic growth would have slowed as the day approached when all the material needs of all members of society would be fully met. But for various reasons, such as the operation of the international gold and gold-exchange standards and the power of the money capitalists over the policies of the Bank of England, the long-term rate of interest failed to fall sufficiently to offset the decline in the rate of profit. This led to an economic equilibrium of mass unemployment that has gone down in history as “the Depression.”
An obvious problem with the Keynesian view is that while the material needs of the wealthy — Keynes and his well-to-do friends’ needs were certainly being fully met — this was hardly true of the needs of most of the people of the world as a whole — certainly not the vast majority of the residents of India and China, nor Africa! If a glut of material use values relative to absolute human needs were the cause of the Depression, it is hard to see why there was any Depression at all in the 1930s, let alone the Depression that actually occurred.
Fluctuations in capitalist expanded reproduction throughout the history of capitalism
It seems clear that the pace of capitalist expanded reproduction has experienced major fluctuations that exceed the span of a single industrial cycle. For example, capitalist growth stumbled severely during the 1830s and 1840s, the formative years of Marx and Engels, making it appear to those then alive that the whole process was grinding to a halt. This, indeed, was the view of the youthful Marx and Engels.
It then suddenly accelerated during the 1850s, sinking the hopes of Marx and Engels for a socialist revolution within their lifetimes. Perhaps it began to lose some of its momentum during the 1860s and slowed much more after the crash of 1873. It picked up again around 1896, gaining astounding momentum around the turn of the 20th century.
Capitalist expanded reproduction began to slow a bit after the brief but violent crisis of 1907. Then came World War I with its nine to 16 million dead, the postwar economic chaos accompanied by revolutions — including the revolution of October 1917 in Russia — and the fascist and other counterrevolutions. And then, just as the process of expanded capitalist reproduction seemed to be resuming its normal course, it collapsed into the super-crisis of 1929-33.
Since 1945, we can also trace several long-term fluctuations in the pace of capitalist economic growth. Capitalist expanded reproduction proceeded lustily from the late 1940s until about 1967-68. It then went through a period of extreme instability and crisis until around the end of 1982. Between 1983 and 2007, it entered a new period of relative stabilization, though it did not regain its pre-1968 momentum. Then came the crash of 2007-09, which led to a new slowdown in the pace of capitalist expanded reproduction that lasted down to the COVID shutdowns of 2020.
But up to the time of this writing, the Great Depression remains unique. Is a similar collapse lurking in the future? Or perhaps it has already occurred by the time you, the reader, are reading these lines. If it has, what are the chances of capitalist expanded reproduction resuming with renewed vigor for a period of decades in the future and then collapsing yet again?
A test for crisis theories
We can’t even begin to answer these questions if we don’t understand the 31-year period between August 1914 and August 1945, and especially its centerpiece, the Depression of 1929-40. Is there any more important question than this in crisis theory? No crisis theory can be considered adequate, in my opinion, if it can’t explain the Depression. That is why I am devoting a whole section of this work to examining this one past — but no ordinary — episode in economic history.
The Depression and monopoly capital
In my opinion, another theory that has been put forward that deserves special attention is the “stagnation theory” of the Monthly Review school, which is associated with the work of the U.S. Marxist economist Paul Sweezy. This theory puts the question of monopoly — the inevitable result of “free competition” and the centralization of capital — at the center of its explanation of the Depression. It is precisely because the stagnation theory of Sweezy combines the question of monopoly and stagnation that it deserves special attention.
Paul Sweezy’s theory of stagnation
Through many years of research and study, Paul Sweezy concluded that economic growth — expanded capitalist reproduction — was the natural state of pre-monopoly competitive industrial capitalism. In contrast, the normal condition for monopoly capitalism is economic stagnation — or Depression-like conditions.
The question then becomes not what caused the Depression — which is actually the normal condition of monopoly capitalism, according to Sweezy — but rather why expanded capitalist reproduction — the Depression era aside — dominated monopoly capitalism just like it dominated the capitalism of the era of free competition.
Paul Sweezy’s theory of stagnation and the Depression
Paul Sweezy studied economics at the London School of Economics and Harvard during the 1930s. He received a thoroughgoing education in neoclassical marginalist economics. Disgusted by the gap between the economic theory that he was learning, which claimed that “full employment” was the only stable equilibrium of capitalism, and what was happening in the real world, he fell under the influence of John Maynard Keynes after a brief flirtation with the Austrian school, just like many other young economists of his generation.
But unlike most young U.S. economists of the time, Sweezy didn’t confine himself to Keynes. Radicalized by the Depression, he also became a student of Marx and came to consider himself a Marxist. Therefore, Sweezy was influenced by three quite different schools of thought: traditional neoclassical marginalism, Keynes’s modified marginalism, and Marxism.
In addition, he was influenced to a certain extent by his friend at Harvard, Joseph Schumpeter — yes, Sweezy and Schumpeter were friends — who we have seen had his own ideas of the causes of the Depression, though Sweezy and Schumpeter were at opposite ends of the political spectrum. As a professionally trained economist, Sweezy, in his person, bridged the worlds of university economists and Marxists.
Beginning in the 1930s, some young economists influenced by Keynes, and sometimes by Marx as well, modified traditional marginalist theory, which supposedly described the operation of a capitalist economy under conditions of “perfect competition,” to take account of a capitalist economy with a “considerable degree of monopoly.” In his book “Monopoly Capital,” which he co-authored with his fellow socialist economist Paul Baran, Sweezy presented his developed theory of monopoly capitalist stagnation.
Baran and Sweezy held that the laws of motion of capital analyzed by Marx in “Capital” apply only to an economy based on free competition. They held that quite different laws of motion apply to monopoly capitalism.
“The Marxist analysis,” Baran and Sweezy wrote, “still rests in the final analysis on an assumption of a competitive capitalist economy.” They went on to observe: “Neither Lenin nor any of his followers attempted to explore the consequences of the predominance of monopoly for the working principles and ‘laws of motion’ of the underlying capitalist economy. There Marx’s ‘Capital’ continued to reign supreme.”
Under the influence of his London School of Economics and Harvard education — or rather miseducation — Sweezy continued to believe that under free competition, the natural state of the capitalist economy is growth and full employment — though, in practice, interrupted from time to time by economic crises and unemployment. In contrast, monopoly is characterized by stagnation. According to this school, neoclassical marginalism emphasizes that competition is responsible for full employment and the near-ideal satisfaction of consumer wants that characterize the capitalist system. But what happens when free competition gives way to monopoly?
As the centralization of capital proceeds, according to Sweezy, more and more branches of industry become dominated by a few gigantic corporations. Price competition dies out as corporations find it in their interests to divide up the market or compete with one another through methods other than price competition, such as through advertising. As a result, monopoly prices swell the mass of profit appropriated by these monopoly corporations.
But this, Sweezy and his supporters in the Monthly Review school argued, creates another problem. What do the monopoly corporations do with this swollen mass of profit? Under free competition, the surplus value is consumed—or “absorbed,” using the terminology of Baran and Sweezy, through either unproductive capitalist consumption or productive capitalist consumption—the process described by Marx in Volume II of “Capital.” Remember, by the productive consumption of surplus value, Marx meant the transformation of realized surplus value into new capital.
But under monopoly capitalism, according to Sweezy and his school, this process is blocked in two ways. First, the swollen mass of monopoly profits is so great that the capitalists can consume only a small part of it in personal consumption, no matter how extravagant their standard of living is. Second, the monopoly profits cannot be fully reinvested, because this would cause the collapse of the monopoly profits, in effect killing the monopolistic goose that lays the golden eggs. Therefore, the monopolistic corporations are transformed into gigantic sinks of purchasing power, leading to economic stagnation—unless some outside force intervenes.
Sweezy claimed that Marx’s famous tendency of the rate of profit to fall is either no longer valid or is of little importance under monopoly capitalism. Instead, it is the tendency for what Sweezy (and Baran) called “the surplus” to rise that replaces the “tendency of the rate of profit to fall” as the most important economic law. However, whether or not “the surplus” actually leads to greater masses and rates of profit depends on the extent to which “the surplus” is “absorbed.” If “the surplus” is not absorbed—that is, if the swollen profits that have already been realized in money form are hoarded—the rate and mass of profit will collapse as the economy descends into depression.
While many Marxists, such as Ernest Mandel, for example, saw only the redistribution of a given mass of surplus value in favor of the branches of capitalist industry dominated by monopoly at the expense of other branches where free competition still reigned, Sweezy (and Baran) saw an actual increase in the mass of surplus value, arising from the monopoly pricing power of the corporations. Sweezy (and Baran) believed that the monopoly capitalists could sell consumer goods to the workers at monopoly prices, thereby increasing the rate of surplus value in the process of circulation. In this way, the ability of the masses of people to purchase the commodities that the monopoly capitalist corporations churn out is undermined, breeding either crises of underconsumption or stagnation.
Under the influence of Schumpeter, Sweezy saw great technological innovations as periodically leading to periods of capitalist growth and prosperity. Unlike Schumpeter, however, he didn’t see anything cyclical about these periodic waves of innovation-driven investment. He saw them instead as accidental incursions on the operation of the monopoly capitalist economy from the sphere of science and technology. Historically, Sweezy believed these influences from the world of science and technology were at first a powerful counterforce against the stagnation-Depression, which, according to Sweezy, was the natural state of monopoly capitalism.
At the beginning of the monopoly capitalist era, the railroad industry could absorb “the surplus” generated by the rising power of the monopolies. After the crisis of 1907, this “railroadization” process, as Sweezy called it, began to slow down. Indeed, though the 1907 crisis was not immediately followed by anything like the 1930s Depression, the unemployment rate rose, and the economic growth rate slowed in the years between the crisis of 1907 and 1915, when the rising demand for weapons from war-torn Europe stimulated U.S. industry.
Sweezy explained this pronounced slowing of growth and the resulting rise in unemployment by a dramatic decline in railroad construction in the wake of the 1907 crisis. Railroads were no longer fully “absorbing the surplus,” and symptoms of stagnation began to appear in the form of lower economic growth and higher unemployment.
Borrowing from Schumpeter, a full-scale Depression could still be staved off even in the face of the growing power of monopoly if a new technology replaced the railroad. This, according to Sweezy, is exactly what happened. The rapidly developing automobile industry provided a huge field for investment since the automobile led to the rise of a whole range of secondary industries.
For example, auto parts, tires, rubber, gasoline stations, and building a system of roads and highways. Eventually, “automobilizaton” made the whole phenomenon of suburbanization possible. According to Baran and Sweezy, huge amounts of “surplus” were absorbed by this process during the 1920s, staving off depression even after the stimulative effects of World War I had run their course.
The Depression as the perfect economic storm
However, by the end of the 1920s, “the economic surplus” generated by the ever-more-powerful monopolies had become so huge that not even the automobilization process could fully absorb it. The capitalist economy abruptly collapsed into its natural state of stagnation — the Depression was on. The increased government spending by the federal government under Franklin Roosevelt’s New Deal, according to Sweezy, was far too little to end the Depression, though a much bolder program of government spending would have succeeded.
The New Deal spending actually only replaced the spending that had previously been carried out by cash-strapped state and local governments. Overall, government — federal plus state and local — spending was virtually unchanged. This came nowhere near the level that would have absorbed enough of the “economic surplus” to solve the 1930s mass unemployment crisis. However, where the New Deal failed, the World War II war economy succeeded, and the Depression ended.
Two schools of Marxist thought on the Depression’s origins
Among Marxists, we generally see two schools of thought on the Depression’s origins. One school implies that there wasn’t enough surplus value produced to maintain the level of investment necessary to avoid the Depression. If the capitalists had been more successful in driving up the rate of surplus value, the Depression would not have occurred. Henryk Grossman, Paul Mattick, Ernest Mandel of “Long Waves” theory and Anwar Shaikh are examples of this viewpoint.
Other Marxists, most notably Paul Sweezy, held the exact opposite viewpoint, supporting various versions of the underconsumption theory. According to these Marxists, if only the rate of surplus value had been lower, the Depression would have been avoided.
James Devine’s Goldilocks theory
The Marxist economist James Devine has tried to reconcile these two views. He assumes that a kind of Goldilocks rate of surplus value is necessary for capitalist prosperity. If the rate of surplus value is too low — for capitalism, that is — there is an insufficient rate of profit, leading to stagnation or depression. If, on the other hand, the rate of surplus value is too high, there is a crisis of underconsumption, also leading to stagnation and depression.
Two schools of neoliberal thought on the Depression’s origins
Curiously enough, as we have seen above, the phenomenon of explaining the Depression by two opposite causes is also found among neoliberal economists at the right end of the political spectrum. The neoliberals are divided between the views of the Austrian school, which blames the Depression on the “inflationary” policies of the U.S. Federal Reserve System, and the supporters of the Milton Friedman school, who claim that the Depression was caused by the Federal Reserve System’s “deflationary” policies.
These conflicting views on the Depression’s origins should leave the reader uneasy. Something very fundamental appears to be missing in all these theories. We must continue our search to find exactly what it is.
A Critique of Crisis Theory 