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 35: The Struggle Against Revisionism in the German Social Democracy
At the time of the death of Engels in August 1895, the German Social Democratic Party (SPD) represented the highest expression of the class-conscious working class organized as a political party achieved up to that time. Not only did the SPD enjoy the support of a large and growing sector of the German working class, it was a party avowedly based on Marxist ideas. As a result, it was the leading party of the Socialist International, also known as the Second International.
Shortly after Engels’ death, Eduard Bernstein — considered (with Karl Kautsky) the SPD’s leading expert in Marxist theory in the post-Engels era — launched a major attack on Marxist theory. Bernstein saw no limit to capitalism’s ability to adapt itself to the needs of the productive forces.
Therefore, according to Bernstein and his supporters within the SPD, an epoch of social revolution did not lie ahead but rather a prolonged period of gradual reform of capitalism. Instead of “revolutionary socialism,” Bernstein and his revisionists advocated “evolutionary socialism.” The revisionists’ perspective was an indefinite struggle to improve the conditions of the working class within the framework of the existing society. The era of revolutions, the revisionists concluded, was gone for good.
As evidence for their “revised” non-Marxist views, the revisionist movement pointed to the fact that a deep economic crisis had not occurred in Germany since 1873. The revisionists held that the absence of a major economic crisis for more than 20 years meant that capitalism was developing “means of adaptation,” making major economic crises increasingly unlikely.
Events were to show that Bernstein’s conclusions about crises were a little premature, to say the least! The revisionists’ view that crises were fading away — which, by the way, was exactly the doctrine that the bourgeois economists of the time were teaching — was advanced well before the rise of modern bourgeois macroeconomics, expressed in the work of John Maynard Keynes and Milton Friedman. Both Keynes and Friedman claimed that if only the correct policies were followed — they differed on exactly what these policies should be — capitalist economic crises could be avoided without abolishing capitalism.
It seems that such claims — always duly echoed by certain forces in the workers’ and left movements beginning with Bernstein’s original revisionists — are themselves cyclical. All you need is a period of capitalist prosperity and announcements that the problem of crises has been solved for good, pop up like mushrooms after a warm spring rain. The late 1890s, when Bernstein first advanced his theories, was indeed a period of unusual capitalist prosperity, especially for rapidly industrializing Germany.
While Bernstein and like-minded forces in the old Social Democracy held that capitalist crises were fading away, revolutionists like Rosa Luxemburg, who opposed Bernstein’s revisionism, put great emphasis on the inevitability of severe capitalist economic crises. To the revolutionary wing of the Social Democracy, recurring capitalist economic crises pointed to an approaching “breakdown” of capitalism, the very breakdown that the revisionists denied.
Or, as Bernstein put it, the movement is everything, and the final goal is nothing. From the revisionist perspective, a major future capitalist economic crisis would only get in the way of the struggle for reforms. The different views among the German Social Democrats on capitalist crises and their outcomes reflected the divisions between the revolutionists on the left, the revisionists on the right, and the centrists in the middle, who wavered between the two.
In the years that followed, down to our day, the attitude toward crises and the tendency toward an economic breakdown of capitalism has continued to divide the left and right wings of the workers’ movement.
In her “Reform or Revolution,” Luxemburg could not ignore Bernstein’s claim that crises were disappearing. Luxemburg not only had to explain the fallacies of Bernstein’s theories, but she also put forward some of her own ideas on crises. These ideas shed light on the breakdown theory that Luxemburg developed later in the “Accumulation of Capital” and her “Anti-Critique.”
After brilliantly debunking Bernstein’s claim that capitalism was avoiding crises through cartels — capitalist monopolies — and the credit system, Luxemburg had to explain why Germany had not experienced a major economic crisis since the crash of 1873, more than 20 years earlier:
“But if the credit system, cartels, and the rest do not suppress the anarchy of capitalism, why have we not had a major commercial crisis for two decades, since 1873? Is this not a sign that, contrary to Marx’s analysis, the capitalist mode of production has adapted itself — at least, in a general way — to the needs of society?” (Chapter II, “Reform or Revolution”)
She continued: “The crisis of 1825 was, in effect, the result of extensive investment of capital in the construction of roads, canals, gas works, which took place during the preceding decade, particularly in England, where the crisis broke out. The following crisis of 1836-1839 was similarly the result of heavy investments in the construction of means of transportation. The crisis of 1847 was provoked by the feverish building of railroads in England (from 1844 to 1847, in three years, the British Parliament gave railway concessions to the value of $15 billion). In each of the three mentioned cases, a crisis came after new bases for capitalist development were established. In 1857, the same result was brought by the abrupt opening of new markets for European industry in America and Australia, after the discovery of the gold mines, and the extensive construction of railway lines, especially in France, where the example of England was then closely imitated. (From 1852 to 1856, new railway lines to the value of 1,250 million francs were built in France alone.) And finally we have the great crisis of 1873 — a direct consequence of the first boom of large industry in Germany and Austria, which followed the political events of 1866 and 1871.”
Here, Luxemburg explains that the concrete history of crises up to when she was writing “Reform or Revolution,” around 1898, had invariably been preceded by a major wave of investment in fixed capital and a major expansion of capitalist production. None of the capitalist crises up to that time had been preceded by a stagnation of capitalist production, but always by its vigorous expansion.
“So that up to now,” Luxemburg wrote, “the sudden extension of the domain of capitalist economy, and not its shrinking, was each time the cause of the commercial crisis. That the international crises repeated themselves precisely every ten years was a purely exterior fact, a matter of chance.”
While accidental factors certainly play a role in the exact timing of crises, Marx did not see the fact that crises came at about 10-year intervals as simply a matter of chance. He saw the need of the industrial capitalists to renew obsolete or worn-out machinery about every ten years as providing a material basis for the industrial cycle of a length — give or take a few years — of about ten years.
Notice that while Luxemburg agreed as a matter of empirical fact that upsurges of capitalist investment preceded crises, she qualified this with the phrase up to now. Luxemburg was implying that this was only a temporary feature of crises that would not necessarily hold in the future.
Luxemburg on cartels
“Generally speaking,” Luxemburg wrote, “combines treated as a manifestation of the capitalist mode of production, can only be considered a definite phase of capitalist development.” She continued: “Cartels are fundamentally nothing else than a means resorted to by the capitalist mode of production for the purpose of holding back the fatal fall of the rate of profit in certain branches of production. What method do cartels employ for this end? That of keeping inactive a part of the accumulated capital. That is, they use the same method which in another form is employed in crises. The remedy and the illness resemble each other like two drops of water.”
This is a brilliant pioneering analysis of the then-new phenomenon of capitalist monopoly. But notice, Luxemburg, writing in the late 1890s when monopoly capitalism was just emerging, saw cartels as a feature of “a definite phase of capitalist development.”
By this, Luxemburg did not mean that cartels appear once capitalism reaches its highest stage of development — such as Lenin did in his 1916 pamphlet “Imperialism,” written about 18 years after Luxemburg wrote “Reform or Revolution.” Luxemburg, in contrast, back in 1898, saw the increasingly widespread cartelization of capitalist industry as a temporary phase of capitalism that would disappear when the real decline of capitalism set in.
“When the outlets of disposal begin to shrink,” she explained, “and the world market has been extended to its limit and has become exhausted through the competition of the capitalist countries — and sooner or later that is bound to come — then the forced partial idleness of capital will reach such dimensions that the remedy will become transformed into a malady, and capital, already pretty much ‘socialized’ through regulation, will tend to revert again to the form of individual capital.”
Luxemburg foresaw not just the temporary flooding of the market, such as we see in a cyclical crisis of overproduction, but a permanent exhaustion of the world market. But what would cause such a permanent glut of the market? In “Reform or Revolution,” she assumed that the permanent exhaustion of the world market that would define the decline of capitalism would result from the “competition of the capitalist countries.”
This is a weak argument from a Marxist point of view. It is reminiscent of Adam Smith’s theory that the rate of profit tends to fall because of increasing competition among the capitalists. Marx, in contrast, always looked for the forces that were operating below the surface phenomena of competition. For example, unlike Smith, Marx didn’t attribute the tendency of the rate of profit to fall to growing competition but instead explained the tendency as arising from the rising organic composition of capital.
In her later works, Luxemburg holds to her youthful view that the exhaustion of the world market was approaching, but was not satisfied by the explanation she gave in “Reform or Revolution” — a growing competition among the various capitalist countries. Growing competition among the capitalist countries, or individual capitalists within a country, for that matter, is a sign of the increasing exhaustion — at least temporarily — of the market but never its cause.
In her mature works, “The Accumulation of Capital” and “Anti-Critique,” Luxemburg attempted to explain the basic cause behind increasing competition of what she saw as the inevitable permanent exhaustion of the world market.
Earlier, in the late 1890s, Luxemburg foresaw a coming stage of capitalism where the world market would be more or less permanently glutted, and competition would be much fiercer among both the individual capitalists and the capitalist countries than it was before the epoch of the permanent exhaustion of the world market set in.
However, when Luxemburg was writing “Reform or Revolution,” the world market, far from being exhausted, was in a stage of vigorous expansion. The revisionists saw this expansion and consequent capitalist prosperity as permanent and adopted their perspectives accordingly. Luxemburg, in contrast, saw the vigorous expansion of the world market then occurring as temporary, but she wasn’t quite able to explain why this was so.
A century later, relatively few Marxists would defend Luxemburg’s views that the world market is heading toward permanent exhaustion, and even fewer would hold that capitalist monopoly is merely a passing phase. These ideas — especially the latter — seem strange for generations of Marxists brought up on Lenin’s “Imperialism, the Highest Stage of Capitalism” or Baran and Sweezy’s “Monopoly Capital.”
Indeed, most present-day Marxists — largely because of the wide acceptance of the view that commodity money has been abolished with the end of the international gold standard — feel uncomfortable with the view of Marx and Engels that even the cyclical capitalist crises are crises of overproduction relative to the market. With the passing of the gold standard, can’t the “monetary authorities” create as much money as they wish up to “full employment,” and can’t the state, if necessary, spend this money, generating as much monetarily effective demand as is necessary to ensure “full employment,” if only they desire it?
From the viewpoint of most of our present-day Marxists, if crises occur anyway, they must involve a fall in the rate of profit rather than a general overproduction of commodities. Or they represent a lack of effective monetary demand consciously brought on by government policies aimed at helping out the capitalists in their struggle against the workers through the deliberate creation of unemployment. To these modern Marxists, the idea of a permanent exhaustion of the market seems fantastic. We have come a long way since the days of Rosa Luxemburg.
Around the turn of the 20th century, the left-wing German Social Democrats and Karl Kautsky — then considered the world’s leading living Marxist theoretician, who, like Rosa Luxemburg, opposed the revisionists — saw the cause of the continued growth of the market as the progressive expansion of capitalism into pre-capitalist agrarian regions. This wasn’t simply due to some whim but reflected what happened over the preceding decades.
During the last part of the 19th century, the leading capitalist powers — with Britain and France in the lead and Germany and the United States following — were busy dividing up the agrarian regions — what we might call today the “Third World,” or the “Global South” — among themselves.
Certainly, it was true that Britain and France — losing ground in the world market to the new and far more efficient capitalist competition from the United States and Germany — were seizing colonies in agrarian regions at least partly to guarantee these markets for their own industrial capitalists. Wasn’t the penetration of capital into the pre-capitalist agrarian markets the key to the continued growth of the world market?
But what would happen once capitalist production ran out of the remaining agrarian pre-capitalist regions? Wouldn’t the world market then reach a stage of permanent exhaustion?
At that time, it seems that few Western Social Democrats had any awareness of Marx’s mathematical demonstration of expanded capitalist reproduction. Marx’s demonstration of capitalist expanded reproduction using clumsy arithmetical values is indeed among the most difficult parts of “Capital.” It is not surprising that even the most erudite Marxists generally avoided this material.
Only the Russian Marxists showed much interest in Marx’s diagrams on capitalist reproduction, both simple and expanded. These Marxists used them to demonstrate that, contrary to the views of their populist opponents, the development of capitalism in Russia was both possible and historically progressive. But in Germany, Marxists did not have to deal with opponents who questioned the very possibility of capitalism there. In Germany, the question was how much longer capitalism could last, not whether it was possible.
When Luxemburg did become aware of Marx’s diagrams of expanded reproduction, about a decade after she wrote “Reform or Revolution,” she became alarmed. The diagrams seemed to pull the rug from under the basic economic arguments that had served the left wing so well in the struggle against the revisionists. We have already explored Marx’s diagrams of simple and expanded reproduction in dealing with the theory that the cyclical crises of capitalism arise due to disproportions among the various branches of production. But we will briefly review them here.
The basic assumptions of Marx in his diagrams of expanded reproduction
First, in dealing with simple and expanded reproduction, Marx assumed a “pure capitalist society.” The entire population is divided into industrial capitalists on one side and wage workers who produce surplus value for the industrial capitalists on the other.
Second, Marx abstracted technological progress and any change in the organic composition of capital. There is no falling tendency of the rate of profit in Volume II of “Capital.” There are also no prices of production. Just as in the much more widely read Volume I of “Capital,” all commodities are sold at prices corresponding directly to their values.
Therefore, the breakdown theory that is most popular among today’s Marxists, who support a breakdown theory — based on the tendency of the rate of profit to fall — plays no role in Marx’s diagrams of either simple or expanded reproduction.
Marx’s expanded reproduction schemes — especially his second perfected scheme — proceed smoothly from year to year. In Marx’s diagrams of expanded reproduction, there is no reason for capitalist expanded reproduction to break down, nor is there a “business cycle” — industrial cycle — of any kind. The capitalism of Marx’s expanded reproduction diagrams knows neither historical limits nor cyclical crises. It simply expands forever without crises.
Luxemburg’s mature views on her ‘breakdown’ theory
To rescue the breakdown theory that had formed the foundation of the anti-revisionist struggle, Rosa Luxemburg tried, in the “Accumulation of Capital” and “Anti-Critique,” to prove that Marx’s diagram of expanded reproduction contained a fatal flaw.
In dealing with reproduction, Marx developed the equation — IIc = Iv + Is — as the equation for simple reproduction. The industrial capitalists engaged in the production of commodities that serve as items of personal consumption must exchange a certain portion of their output, IIc, for means of production, Iv + Is.
If simple reproduction is to proceed without a hitch, not only must Department II provide all the means of personal consumption needed by capitalists and workers of Department I in terms of use values, but Department I must provide all the means of production that Department II physically requires to maintain — but not expand — its level of production.
It is worth pointing out here that in his reproduction diagrams, Marx is only interested in exchanges between the two departments of production, not within them.
Since we are dealing with capitalist (re)production — a form of commodity production — and Marx assumed that all commodities sell at their values, there is another important condition. IIc must represent the same quantity of abstract human labor measured in terms of time that Iv + Is represents.
In developing his mathematical demonstration of capitalist reproduction, Marx began with simple reproduction since simple reproduction must always be contained within expanded reproduction. Understanding the conditions of simple reproduction is, therefore, the necessary starting point for understanding expanded reproduction.
In simple reproduction, it is assumed that the capitalists of both departments consume the entire surplus value in the form of items for personal consumption. But, in expanded reproduction, it is assumed that capitalists consume only part of the surplus value in the form of items of personal consumption. The rest must be “capitalized” — transformed into new capital.
Any increase in IIc must be matched by a similar expansion of Iv — the wages paid by the industrial capitalists of Department I, plus the portion of Is — the surplus value appropriated by the capitalists of Department I — that is used for their personal consumption.
Luxemburg said that in expanded reproduction, the capitalists will consume only part of the surplus value. This is true as far as their personal consumption is concerned. But in truth, the capitalists of Department I can still consume their entire surplus value, but some of the surplus value must be consumed in productivity, not personally. If expanded reproduction is to occur — an absolute necessity if we are to have a capitalist economy — a portion of the surplus value of Department I must be converted into new capital, both constant and variable.
The capitalists of Department I productively consume a portion of the surplus value that is converted into new constant capital by expanding their scale of production through the purchase of additional machinery beyond the machines that have worn out and need replacement, plus raw and auxiliary materials beyond that necessary to maintain the existing scale of production. This, however, involves exchanges that are strictly internal to Department I.
Yet another portion of the surplus value must be transformed into additional variable capital. How do the capitalists of Department I productively consume this portion of the surplus value? They must consume this portion through the purchase of additional labor power, whether by increasing the hours worked or by hiring additional workers beyond those who simply replace the workers who have retired or died.
How is expanded reproduction financed?
Unlike the case with simple reproduction, the capitalists of Department I need increasing amounts of money to finance their increasing personal consumption and purchase additional labor power. Where does this extra money come from?
“The exchange of commodities on the market,” Luxemburg writes, “is an internal or family matter between capitalists. The required money for this process, of course, comes out of the capitalists’ pockets — as every employer must lay out the money capital in advance — and returns into the pockets of the capitalist class after the exchange on the market has taken place.” (Chapter 1, “Anti-Critique”)
Assuming that there are preexisting hoards of surplus money — the normal condition under capitalism — these hoards can be run down as expanded reproduction advances. Money that was previously “burning holes in the collective pockets” of the capitalists must be thrown into circulation as expanded reproduction proceeds.
But if expanded reproduction is to continue, these hoards will eventually be exhausted. If money comes “from the pockets of the capitalists,” won’t the whole process of expanded reproduction come to a halt at this point once all the hoards of idle money are drawn into circulation? This would indeed be the case if there were not a special industry that produces additional money material.
Marx pointed out that before gold — or whatever commodity functions as money material — can be money, it must first be a commodity. And like all commodities, money material must be produced by human labor. Many popularizations of Marx’s theory of simple and expanded capitalist reproduction simply leave out the money problem altogether. Simple and expanded reproduction can proceed if only the correct proportions are maintained between Department I and Department II.
However, when this vulgarization of Marx’s reproduction models is made, we build Say’s Law right into our models of reproduction, whether simple or expanded. This is an error that many Marxists have come to grief over when it comes to the problem of reproduction.
If you exclude money from reproduction, you end up with commodities purchasing commodities. The more commodities produced — as long as they are produced in the correct proportions — the more demand will rise. Crises of generalized overproduction of commodities are rendered impossible.
At most, you might have a partial overproduction of commodities — as allowed by Say — perhaps too many means of production in Department I backed by an underproduction of means of personal consumption in Department II, or vice versa. Many crisis theories — especially those based on disproportionate production — developed by Marxists in the years after the death of Engels stumbled exactly on this point.
Marx did not make this mistake. He built the production of money material into his models so that monetarily effective demand is accounted for. Money, of course, has certain peculiarities compared to other commodities. For example, a gold coin can be used to purchase many commodities in the course of a year. It eventually becomes lighter in circulation, so it cannot be used indefinitely.
However, if we replace the gold coins with monetary tokens — such as paper money — the gold can be withdrawn from circulation and used to “back” the circulating tokens. In that case, the gold can last indefinitely. The money commodity — gold — becomes “immortal.” All that needs to be replaced are the worn-out tokens that represent gold in circulation, and this can be done at a nominal cost in terms of human labor.
Let X represent the total value of commodities that need to be sold in the course of a year. We need only a small fraction of X in the form of bullion backing the token currency to support the circulation of the commodities. But it is still true that as expanded reproduction proceeds, more gold that functions as money material must be produced sooner or later. If it is not, expanded reproduction will grind to a halt as soon as the hoards of idle money are fully drawn into circulation, and credit, which Marx didn’t deal with in his reproduction diagrams, is expanded to its maximum limit.
In developing his diagrams of expanded reproduction, Marx had to decide where to put the gold-producing industry — mining and refining. Strictly speaking, gold, insomuch as it functions as money, is neither a means of consumption nor a means of production. To stick to his two-department diagram, Marx decided to put the gold-producing industry in Department I — the department that produces the means of production.
He did this because when gold does not function as money, it functions as a raw material, and the production of raw materials belongs in Department I. Marx was able to take full account of money and stick to his mathematically elegant two-department scheme at the price of introducing a slight inconsistency into the diagrams. The monetary gold that Marx had Department I produce is not a means of production and indeed plays no role at all in the physical reproduction process, whether simple or expanded.
Sticking with Marx’s two-department scheme, a certain number of capitalists in Department I use their newly produced gold to purchase additional labor power and additional elements of constant capital — which circulates only in Department I — and the additional means of consumption that a growing economy — expanded reproduction — makes possible for their personal delights.
This new money comes not from their pockets but from their newly produced commodity capital. The newly produced commodity capital of the industrial capitalists engaged in gold production has the peculiar quality of being in its natural form, money material. Therefore, a fraction of the capitalists of Department I — the gold producers — can buy without having first sold. This is what allows the market to expand.
The exact form of the monetary system doesn’t matter here. If we imagine that gold coins are used as currency — which was the case in early capitalism — the industrial capitalists who produce the gold simply have to bring their newly mined gold to the mint to use it as currency.
If a gold standard is in effect, the producers can exchange their gold for banknotes. Under today’s paper money system, they exchange their newly mined gold for commercial bank-created credit (checkbook) money. The increasing level of gold production enables the monetary authorities to create additional token money that swells bank reserves without the newly created token money depreciating against gold. The swelling mass of token money made possible by the growing mass of metallic money forms the basis for creating additional credit money through the “fractional reserve” commercial banking system.
So, regardless of the exact monetary system in effect, thanks to the gold mining and refining industry — assuming gold is produced in adequate quantities — there will always be enough money to finance the ever-growing scale of capitalist expanded reproduction.
Luxemburg’s ultimate argument
Coming to a blank wall in her search for a fatal flaw in Marx’s diagrams of expanded reproduction, Luxemburg reached her ultimate argument.
“In our assumed total stock of commodities in capitalist society,” Luxemburg wrote, “we must accordingly find a third portion, which is destined neither for the renewal of used means of production nor for the maintenance of workers and capitalists. It will be a portion of commodities which contains that invaluable part of the surplus value that forms capital’s real purpose of existence: the profit destined for capitalization and accumulation. What sort of commodities are they, and who in society needs them?”
In simple reproduction, Rosa Luxemburg explained, once all commodity exchanges have taken place — that is, all commodities are in the hands of their ultimate consumers — all the commodities that represent surplus value will be in the possession of the capitalist class either in the form of consumer necessaries or luxury items that only the capitalists get to consume.
When the commodities that represent surplus value are subtracted from the total mass of commodities produced in a year, that fraction of the remaining commodities whose material use values function as consumer necessaries that keep the workers alive and producing the next generation of workers is purchased with the money that the workers obtain in exchange for the labor power they sell to the capitalists. The mass of commodities representing surplus value is strictly off-bounds to the workers.
But what about the case of expanded reproduction? The capitalists “must tighten their belts” and “save,” as the bourgeois economists say, a certain portion of their profits — surplus value realized in money form — to expand the scale of their production. That is, they must transform a certain portion of their realized surplus value — profits — into new constant and variable capital.
As the capitalists of Department I transform some of their surplus value into new constant capital, they must carry out exchanges with other capitalists within their own department. Such inner-department exchanges play no role in Marx’s diagrams of expanded reproduction and are of no concern to us here.
But what about the portion of the surplus value that the capitalists of Department 1 transform into new variable capital? To do this, they must indirectly engage in an exchange with Department II with the help of their newly hired workers. They use this newly created surplus value — which has already been converted into profit that exists in money form — to hire additional workers. For their part, the capitalists of Department II engaged in their own expanded reproduction have to produce more items of personal consumption for these newly hired Department I workers to consume.
“Here we have come to the nucleus of the problem of accumulation,” Luxemburg wrote, “and we must investigate all attempts at solution. Could it really be the workers who consume the latter portion of the social stock of commodities? But the workers have no means beyond the wages covering bare necessities which they receive from their employers.”
The capitalists of Department I cannot themselves consume in the form of consumer commodities that portion of the surplus value they transform into new variable capital. And according to Luxemburg, the workers cannot, under capitalist conditions of production, ever consume an atom of surplus value. Therefore, Luxemburg argues that if capitalist production conditions are to prevail, the portion of the additional commodities that Department II produces to fulfill the needs of the expanded reproduction of Department I will not find buyers within a closed capitalist system.
The capitalists of Department I must give some of their surplus value to the newly hired workers if the extra means of personal consumption produced by Department II — necessary if expanded reproduction is to proceed in a physical sense — are to find buyers. But this will mean, Luxemburg argued, that newly hired workers of Department I will be consuming surplus value. And that can never happen under capitalist production, according to Luxemburg.
Therefore, the extra commodities produced by Department II to support the expanded production of Department I will not find buyers in a purely capitalist economy. If these commodities cannot find buyers, expanded reproduction cannot physically proceed. The whole process of expanded reproduction will grind to a halt unless buyers from outside the capitalist system — simple commodity producers — can be found in sufficient quantity.
Luxemburg had proved to her satisfaction that in a “pure” capitalist society with no simple commodity producers — capitalist expanded reproduction — and thus capitalism itself — is impossible. At the point that capitalism has conquered all spheres of production on a global scale, it has become impossible — it must break down. In Luxemburg’s mind, her belief that the world market was headed for exhaustion sooner or later, which in “Reform or Revolution” she had attributed unscientifically to increasing competition among the various capitalist countries, now had a solid scientific basis.
Or did it?
Let’s return to the Department I capitalists as they undertake expanded reproduction. These capitalists set aside a certain portion of their realized surplus value — profit — to expand their workforces and hire additional workers. Doesn’t this mean that the workers are consuming surplus value, which they are strictly prohibited from doing?
But before the newly hired workers of Department I are “allowed to consume a portion of the surplus value,” this surplus value has been converted into variable capital — in the form of the sold labor power of the newly hired workers. Indeed, assuming that the workers cannot “save” their wages but must use them entirely for personal consumption and also assuming that there are no simple commodity producers, doesn’t all the variable capital — and constant capital, as well — represent past surplus value that has been transformed into capital by the capitalists? Therefore, the newly hired workers have not violated any of the laws of capitalism when they sell their labor power in return for money wages to the capitalists of Department I.
The newly hired workers, who have not, we can assume, mastered Rosa Luxemburg, will proudly spend their first paychecks on the necessary commodities to reproduce their labor power. In doing so, they provide the answer to Luxemburg’s riddle: by spending their wages, they realize the surplus value for the capitalists of Department II.
The money capital that Department I advanced as wages flows into the cash registers of Department II, clearing the market of the very commodities that Rosa Luxemburg claimed could never find buyers. As these workers spend their first paychecks, they do not know they are carrying out what, according to Luxemburg, is an economically “illegal” operation. And capitalist expanded reproduction will roll happily onward.
The Russian Marxist N.I. Bukharin, in 1924, wrote a polemic against the then-dead Luxemburg entitled “Imperialism and the Accumulation of Capital.” He pointed out that Luxemburg built her entire argument by applying the conditions that apply to simple reproduction to expanded reproduction. Of course, if we assume in advance the conditions of simple reproduction, we can “prove” that expanded reproduction is impossible.
In the hands of the Russian Bukharin — who came from the tradition of Russian Marxism that was well-versed in the diagrams of expanded reproduction thanks to its struggle against the Russian populists — the economic theory that had formed the basis of the struggle of the entire left wing of the German Social Democracy against revisionism collapsed.
Between the time Luxemburg penned the “Anti-Critique” and Bukharin wrote “Imperialism and the Accumulation of Capital,” the Russian Revolution and the following revolutionary wave swept across Europe. For a while, it seemed that Soviet power, the power of the working class massively organized through councils — soviets in Russian — which had seized state power, would sweep across Europe and then the whole world. Under these conditions, the whole question of the “breakdown theory” seemed extremely academic.
When she was released from prison by the German revolution of November 1918, Luxemburg herself didn’t attempt to develop her breakdown theory further — she was too busy organizing the Spartacist League and then the German Communist Party. In 1919, she was murdered along with Karl Liebknecht by Freikorps thugs — forerunners of the Nazis — who were in a bloc with the ex-Marxist Social Democratic Party. The Social Democrats were upholding bourgeois parliamentary democracy against the “threat” of a “Communist Soviet dictatorship” — or what comes to the same thing, the political rule of the working class and socialist revolution.
But by 1924, the initial revolutionary wave that had followed the seizure of power by the Russian working class was ebbing. It had become clear that capitalism was still around and would be for some time.
Henryk Grossman in 1929 — the year by coincidence that the super-crisis of 1929-33 began, an event that was completely unexpected by Bukharin, who by then had become the leader of the right wing of the ruling Soviet Communist Party — asked an interesting question. (1)
Exactly what breakdown theory did Bukharin propose to replace Luxemburg’s failed attempt? Grossman initially answered that Bukharin ends up with nebulous phrasemongering about ‘contradictions.’ But if there is no economic limit to capitalism, if capitalism can expand forever as it does in Marx’s diagram of expanded reproduction in Volume II of “Capital,” doesn’t socialism cease to be a necessity and become once again a utopia?
The starting point of Grossman’s critique of Luxemburg was the diagram of expanded reproduction developed by Austrian Marxist Otto Bauer in reply to Luxemburg’s “Accumulation of Capital.” Bauer’s work was the most important contribution made by those German and Austrian Social Democrats opposed to Luxemburg’s breakdown theory as developed in her “Accumulation of Capital.” (2)
In developing his answer to Luxemburg, Bauer had improved on Marx’s diagram of expanded capitalist reproduction by taking into account the rise in the organic composition of capital and the consequent fall in the rate of profit.
Remember, Marx had left out the entire question of the rise in the organic composition of capital and the falling tendency of the rate of profit in his diagrams of expanded reproduction. As Marx would say, “these things don’t exist for us” when he wrote Volume II of “Capital.” This was characteristic of Marx’s method; Marx dealt with these questions only in Volume III.
It, therefore, fell to Otto Bauer to integrate Marx’s theory of expanded reproduction found in Volume II of “Capital” with Marx’s theory of the rising organic composition of capital and falling rate of profit developed in Volume III. Like Marx, Bauer took his enhanced diagram of expanded reproduction four years forward and showed that capitalist reproduction could proceed smoothly over the four years. But could Bauer’s model of expanded capitalist reproduction, with its assumptions of a rising organic composition of capital and a falling rate of profit, continue forever? Henryk Grossman did the math, and as a result, the whole breakdown debate entered a new stage.
Notes
(1) Law of the Accumulation and Breakdown, Henryk Grossman, 1929. https://www.marxists.org/archive/grossman/1929/breakdown/ch01.htm (back)
(2) The Accumulation of Capital, Otto Bauer, 1913, in History of Political Economy, Vol. 18, Issue 1, Spring 1986, translated by J.E. King. https://doi.org/10.1215/00182702-18-1-87 (back)
A Critique of Crisis Theory 