Chapter 36: Otto Bauer’s Critique of Rosa Luxemburg’s ‘Accumulation of Capital’

A Marxist Guide to Capitalist Crises

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Chapter 36: Otto Bauer’s Critique of Rosa Luxemburg’s “Accumulation of Capital”

Of all the Social Democrats who criticized Rosa Luxemburg’s Accumulation of Capital, the most important contribution was Otto Bauer’s. Bauer was a leader of the Austrian Social Democratic Party and became the party’s top leader in 1918.

To refute the breakdown theory that Rosa Luxemburg presented in her Accumulation of Capital, Bauer developed a diagram of expanded capitalist reproduction that, unlike Marx’s, included a rising organic composition of capital, an unchanged rate of surplus value, and, consequently, a falling rate of profit.

Bauer set himself the task of proving that even in the face of a falling rate of profit, expanded reproduction could not only proceed smoothly, but it could do so at an accelerating pace. Given Bauer’s assumptions, an accelerating rate of accumulation — a rising rate of economic growth — is necessary if full employment is to be maintained in the face of the rising organic composition of capital assumed in Bauer’s diagram.

Since Bauer assumed growth in the working population of 5 percent a year and assumed wages remained unchanged in value terms, variable capital also had to grow at 5 percent. Therefore, Bauer assumed that the rate of growth of the social capital as a whole — constant plus variable capital — had to accelerate steadily.

Bauer’s diagram of expanded reproduction did illustrate some of the fundamental laws of motion of the capitalist system that Marx’s diagram did not. Unlike Marx’s diagram, Bauer’s diagram included the rising organic composition of capital, a falling rate of profit, and the faster development of Department I — which produces the means of production — relative to Department II, which produces the means of personal consumption.

Bauer’s diagram, therefore, illustrated the basic laws of motion of the capitalist system that Marx developed only in Volume III of Capital and, therefore, according to Marx’s method of presentation, were not taken up in Volume II. Bauer’s diagram of expanded capitalist reproduction illustrates both the quantitative growth of the productive forces and their qualitative growth.

Bauer’s economic harmonies

To construct his model of harmonious growth, Bauer established a specific set of baseline assumptions intended to mirror the conditions of a developing capitalist economy:

Constant capital accumulation grows at a rate of 10 percent per year.
Variable capital accumulation grows at a rate of 5 percent per year.
The working population grows at 5 percent per year.
The rate of surplus value remains unchanged at 100 percent.

Because Bauer assumed the working population grows at 5 percent annually, a corresponding 5 percent accumulation rate for variable capital was strictly necessary to maintain full employment.

As Henryk Grossman explained in The Law of Accumulation and Breakdown of the Capitalist System, his 1929 critique of Bauer:

“We can see that after ten years the original capital expands from a value of 300,000 to 681,243, or by 227 percent, despite a continuous fall in the rate of profit.”

He continued:

“In the second decade, the rate of expansion of capital amounts to 236 percent, although the rate of profit falls even further from 24.7 to 16.4 percent. Finally in the third decade the accumulation of capital proceeds still faster, with a decennial increase of 243 percent, when the rate of profit is even lower. So Bauer’s scheme is a case of a declining rate of profit coupled with accelerated accumulation.”

Grossman explained that Bauer assumed a productive mechanism in which constant capital amounts to 200,000 and variable capital to 100,000. He continued:

“The other assumptions are that 120,000 of this constant capital is apportioned to Department I (means of production) and 80,000 to Department II (means of consumption); that the variable capital is equally divided between both spheres; that the constant capital expands by 10 percent a year and the variable capital by 5 percent; that the rate of surplus value is 100 percent; and that in any given year the rate of accumulation is equal in the two departments.”

But how can the rate of capitalist expanded reproduction — capital accumulation — be maintained, and indeed increased sufficiently to maintain full employment, in the face of growing automation while the rate of profit is progressively declining? Shouldn’t the rate of accumulation fall with the rate of profit? And if it does, won’t the rate of accumulation of variable capital fall below the rate of growth of the working population? And won’t this lead to rising unemployment, not full employment?

Like Marx, Bauer brought his diagrams forward only four years. During those four years, Bauer’s calculations show that if the capitalists consume a smaller percentage of the total surplus value unproductively — spending relatively less on items of personal consumption — they can not only maintain a rate of accumulation sufficient to maintain full employment, but they also get to consume, as a class, more items of personal consumption in terms of value. Since labor productivity is rising rapidly, this will translate into a still greater quantity of use values consumed by the capitalists.

As for the workers’ standard of living, the rate of surplus value is held at 100 percent throughout the four years that Bauer extends his diagram. In terms of value, the wages of the workers remain constant. But in terms of use values, a steady rise in real wages is implied. In other words, the workers get to consume an unchanging amount of value every year, but with a higher productivity of labor, the same amount of value means a rise in the real wages of the workers.

In Bauer’s diagram, just as capitalist economic journalists and economists like to explain, the workers’ real wages rise as labor productivity rises. The faster the productivity of labor grows, the faster the growth in real wages will be.

So, despite the fall in the rate of profit, the standards of living of both the capitalists and the workers keep rising. The only difference implied between the growth of the living standards of the two classes is that while the living standard of the workers increases in proportion to labor productivity, the living standard of the individual capitalist will grow at a somewhat slower rate, assuming the population of the capitalists grows at the same rate as the workers. The difference between the living standards of the workers and those of the capitalists will, therefore, gradually narrow over time.

Therefore, Bauer’s model implies that class antagonisms should gradually soften as capitalism develops. This is the same conclusion that the bourgeois marginalist economists, including Keynes, arrived at. The difference is that Bauer drew these conclusions on the basis not of marginalism but of Marx’s critique of classical political economy.

Henryk Grossman described Bauer as a neo-harmonist, since both capitalists and workers benefit from capitalist development, with the workers benefiting even more than the capitalists in terms of the growth in the standard of living.

Rosa Luxemburg’s reaction to Bauer’s diagram

“If capitalist production can act limitlessly as its own consumer, i.e. production and market are identical,” Luxemburg explained in her Anti-Critique, “it becomes totally impossible to explain the periodic appearance of crises.”

She continued:

“This would mean rejecting Marx and finally ending up with the man whom Marx ridiculed so thoroughly — the wretched man Say, who in 1803 propounded the dogma: ‘It is absurd to say that too much of all commodities can be produced; there can only be partial crises, but no general ones; if for this reason a country has too much of one kind of product, that only proves that it has produced too little of some other kind.’”

Luxemburg is right here. The spirit of Say’s Law does indeed completely saturate Bauer’s diagram. Of course, Bauer might have claimed that his diagram abstracts crises and that the whole problem of crises must be examined at a lower level of abstraction. This is no doubt what Marx would have said about his own diagram of expanded reproduction, which, unlike Bauer’s, abstracts both the rising organic composition of capital and the falling rate of profit.

However, Bauer implicitly accepted Say’s Law in a much more fundamental way. By constructing a model where accumulation adjusts seamlessly to population growth, Bauer assumes that supply creates its own demand, ignoring the realization problem entirely.

Capitalist accumulation in Bauer’s diagram, Rosa Luxemburg claimed, becomes objectively limitless once capitalist production has built a sufficient market for itself. As production will still grow, i.e. the productive forces will develop without limit — emphasis added — even when all mankind is divided into capitalists and proletarians, and as there is no end to the economic development of capitalism, “the one specifically Marxist foundation crumbles.”

Luxemburg continued: “According to Marx, the rebellion of the workers, the class struggle, is only the ideological reflection of the objective historical necessity of socialism, resulting from the objective impossibility of capitalism at a certain economic stage.”

Luxemburg appealed here to the basic principles of historical materialism against Bauer. If capitalism in no way limits the development of the forces of production — and this is indeed what Bauer’s diagram of expanded reproduction appears to demonstrate — then the capitalist mode of production is, in Marxist terms, an absolute mode of production. It will last as long as human society lasts.

If we accept these conclusions, any idea of a society beyond capitalism, any idea of socialism, is a utopia. Remember, in Bauer, there is neither an absolute nor a relative impoverishment of the workers. If Bauer’s diagram presents an accurate picture of real-life capitalism, and we assume that the basic principles of historical materialism of Marx and Engels are also true, we can expect an endless and fruitful struggle for reforms as capitalist development proceeds, but hardly a socialist revolution. As Bernstein put it, “the movement is everything and the goal nothing.”¹

Or as Samuel Gompers, the founder of the American Federation of Labor, put it even more crudely, the slogan of the workers’ movement is reduced to “More!” — ever higher real wages that buy ever more use values.²

The only task left to the organized workers’ movement — both party and labor union — will be to ensure the surplus value rate does not rise above 100 percent. And considering capitalism’s powerful tendency toward full employment that Bauer’s diagrams seem to demonstrate, this task should be well within the power of the labor unions.

Bauer’s diagrams seemed to present a picture of complete capitalist harmony, both between the classes and between the growing forces of production and the capitalist relations of production, that rivaled the harmonies of bourgeois marginalism. This is why Henryk Grossman described Bauer’s model as neo-harmonist.

Bauer on cyclical crises

But even Bauer could not deny that cyclical crises occur. What was Bauer’s theory of cyclical crises? His theory fit right in with his overall picture of capitalist harmony. According to Bauer, the accumulation rate adjusts itself to population growth through the movements of the industrial cycle.

Therefore, the tendency towards full employment in Bauer is built right into his model, just like it is built into the foundations of the marginalist model, though the model allows cyclical deviations from full employment.

Bauer wrote in his Accumulation of Capital:

“Like underaccumulation, overaccumulation is also generated again and again by the mechanism of the capitalist mode of production itself. There exists in the capitalist mode of production a tendency for the adjustment of capital accumulation to the growth of population. This adjustment has occurred as soon as variable capital grows at the same rate as the work force, but constant capital grows faster, to an extent required by the development of productivity. In a socialist society, the social organs responsible for the control of production would ensure, consciously and according to a plan, that the growth of population is provided for. This adjustment must also occur in capitalist society, but here it can take place only by means of great crises, with unemployment, wage reductions, and increasing exploitation on the one hand, and unemployment of capital, destruction of values, and a declining rate of profit on the other.”

“The tendency for accumulation to adjust to population growth also dominates international relations. Each year, countries with continuous overaccumulation invest a large and growing part of their accumulated surplus value overseas. Examples: France and England. Countries with continuous underaccumulation attract capital from abroad and send labour overseas. Examples: the agrarian countries of Eastern Europe. The expansion of productive capital within a country itself is always restricted by the available workforce. In the long run, variable capital can grow no faster than the population, while constant capital always grows faster than variable to a degree determined by the stage of development of the forces of production. Thus, one can appreciate the anxiety of the capitalists over the declining birth rate; decelerating population growth narrows the limits to the growth of their capital.”

“Viewing the capitalist world economy as a whole, the tendency for accumulation to adjust to population growth is apparent in the industrial cycle. Prosperity is overaccumulation, which destroys itself in the crisis. The ensuing depression is a time of underaccumulation which also brings itself to an end, inasmuch as the depression itself produces the conditions for renewed prosperity. The periodic alternation of prosperity, crisis, and depression is the empirical expression of the fact that the mechanism of the capitalist mode of production automatically generates overaccumulation and underaccumulation, with the accumulation of capital adjusting again and again to the growth of population.”

If Bauer is correct, cyclical crises don’t break out because the market is glutted — commodities cannot find buyers — but rather because the capitalist system periodically demands more of the commodity labor power — the commodity that alone produces surplus value — than is available on the labor market. This, and not the need to sell the commodities — “find markets for them at a profit,” as Engels put it in Socialism: Utopian and Scientific — is the barrier that capitalism periodically runs into.

According to Bauer’s theory, during the boom, the process of expanded reproduction develops with a vigor greater than can be sustained in the long run by the given rate of growth of the working population. Every industrial cycle ends with what Marx called in Volume III of Capital an absolute overproduction of capital, not a relative overproduction of commodities.

During the cyclical crisis, reproduction falls below the level that the growth in population will allow over the long run. This compensates for the boom when expanded reproduction proceeds temporarily faster than the population growth will allow over the long run. Averaging out the faster-than-sustainable growth of the boom with the slower-than-sustainable growth of the depression, you get exactly the rate of economic growth that the growth of the population will allow over each industrial cycle.

If the rate of growth of the working population accelerates, capitalist economic growth will duly accommodate it, and enough extra jobs will always be created to maintain full employment in the long run. If the rate of growth of the working population slows down, so will the rate of economic growth. But in all cases, the rate of economic growth under capitalism will always be — leaving aside short-term cyclical deviations — adequate to maintain full employment. Milton Friedman himself couldn’t have provided a prettier picture of capitalist harmony.

The difference between absolute and relative overproduction

What did Marx mean when he referred to the relative overproduction of commodities in cyclical crises, as opposed to absolute overproduction in a hypothetical situation he examined in Volume III of Capital? In a relative overproduction, the production of commodities does not exceed the need for material use values of the total population. On the contrary, Marx emphasized that, in terms of the needs of the great mass of the population, there is always underproduction under capitalism, never overproduction. The result is mass poverty as basic human needs go unmet.

If, during a crisis of overproduction, capitalism were overthrown and replaced by socialist production, it would immediately become apparent that there is a shortage of material use values, not an overproduction of them. Indeed, the planned economies of the Soviet Union and its allies were plagued not by crises of overproduction but by a chronic goods famine, a shortage of material use values.

But, according to Bauer, in contrast to Marx and Engels, a cyclical crisis develops not because there is a relative overproduction of commodities but when the demand for the commodity labor power exceeds the supply. In plain language, a cyclical crisis erupts because of a labor shortage. The industrial capitalists cannot find additional labor power to increase production further.

Let’s imagine an economy plagued by just such a labor shortage and therefore on the eve of a cyclical crisis if we follow Bauer’s theory. Let’s assume, as a thought experiment, that a socialist revolution occurs and capitalist production is replaced by socialist production. Would the labor shortage disappear? Assuming the forces of production remain unchanged — which would have to be the case in the short run — the answer will be no.

In Marx, during a cyclical crisis, capitalism runs into a barrier peculiar to the capitalist mode of production, but not to production in general: the relative overproduction of commodities. In Bauer, by contrast, during a cyclical crisis capitalism runs into a barrier that would be a barrier to any economy, especially a socialist economy that aims to satisfy the material needs of all members of society.

In contrast to Bauer, Rosa Luxemburg understood correctly that capitalism has a built-in tendency toward the relative — not absolute — overproduction of commodities and, therefore, toward the relative — not absolute — overproduction of real capital. Luxemburg’s mistake was that she couldn’t explain why a relative overproduction must appear periodically once capitalism has developed to a certain point. She was led down the wrong path when she tried to explain capitalism’s tendency toward relative overproduction of both real capital and commodities by an inherent inability to fully realize the entire surplus value in a pure capitalist economy consisting only of capitalists and workers.

Grossman on the contradictions of Bauer’s diagram

In the following paragraphs, I only examine Grossman’s theories in his 1929 work Law of the Accumulation and Breakdown and not in any of his other works.

In his diagram of expanded capitalist reproduction, Marx only extended his model for four years. In reality, Marx only needed to extend his diagram to the second year. Marx’s model runs forever, quantitatively increasing while remaining qualitatively unchanging. This is a basic mathematical attribute of Marx’s diagrams of expanded capitalist reproduction that arises from Marx’s basic assumptions and abstractions when he designed his diagrams.

But is this the case with Bauer’s diagram? Not at all. Bauer perhaps thought it was, since he brought his model forward for only four years, like Marx. But four years aren’t forever. How long could Bauer’s model run if we used the assumptions Bauer used when he designed the model? It fell to Henryk Grossman to do the math. He demonstrated that by the 36th year, Bauer’s model breaks down mathematically. This is true even if, with Bauer, we tactically accept Say’s Law, as Grossman indeed did.

Because of his basic assumptions, Bauer’s model has very different mathematical attributes than Marx’s model of expanded capitalist reproduction. Bauer had the rate of profit decline steadily, though the absolute mass of profit rose. The capitalists, therefore, have to invest more and more of their profits productively to maintain the accumulation rate necessary to maintain full employment. In other words, they must consume relatively an ever-lower percentage of the surplus value in the form of items of personal consumption.

The core problem Grossman exposed is this: the cost of the new machines required to employ the growing population eventually exceeds the total profit produced by that population.

The capitalists can never invest — consume productively — more than 100 percent of the total surplus value. If the rate of profit is 30 percent, the rate of accumulation cannot be higher than 30 percent, even if the capitalists live on air and capitalize their entire surplus value. If the rate of profit falls to 20 percent, the maximum accumulation rate can be at most 20 percent. If the rate of profit falls to 10 percent, then the maximum possible rate of accumulation falls to 10 percent, assuming the capitalists direct none of the surplus value to personal consumption. In reality, even thrifty capitalists have to eat now and then.

Therefore, the rate of investment and thus full employment can be maintained in the face of a fall in the overall rate of profit only for a limited time. Eventually, the fall in the rate of profit must lead to a fall in the rate of investment and, assuming an unchanged rate of population growth, the appearance of unemployment. The harmonies of Bauer’s diagram come to an end — or, to use Grossman’s favored expression, result in a breakdown.

Using Bauer’s assumptions, Grossman showed that by the 36th year, the rate of profit fell to 8.7 percent. There is simply not enough total surplus value — profit — even if the personal consumption of the capitalists has fallen below zero, if that were possible, to maintain full employment without increasing the rate of surplus value.

Indeed, in terms of value — hours of abstract human labor — capitalist consumption cannot increase after the 20th year. It might continue to increase in terms of use values for some time beyond that due to the rise in labor productivity. But eventually, to maintain full employment, it must drop to zero in terms of hours of abstract human labor.

And no matter how much the productivity of labor increases — unless the productive forces grow to such an extent that no labor is needed at all, but then how are we going to produce surplus value, which is the only aim of the system? — zero hours of abstract human labor translate into zero material use values. By year 35, the capitalists must learn how to live on air to maintain Bauer’s harmonies. After that, even if the capitalists have learned how to live on air, it will be impossible to maintain full employment and keep the rate of surplus value at only 100 percent.

Either unemployment keeps growing progressively, or the rate of surplus value must rise. This will be all the more so if we assume that the capitalists must spend some of their profits on personal consumption if they are to live.

Some common objections to Grossman’s demonstration

Naturally, Grossman’s model of capitalist breakdown — actually Bauer’s model extended to the 36th year — brought a wave of objections, just like Luxemburg’s earlier work had.

One objection was that Grossman made completely unrealistic assumptions about the rise in the organic composition of capital. For example, Grossman has the constant capital grow twice as fast as the variable capital to have the model break down as early as year 36. But in the real world, constant capital doesn’t grow at anywhere near that rate. But the figures are Bauer’s, not Grossman’s. This criticism should be addressed to Bauer, not Grossman.

Another objection is that Grossman has the capitalists starve to death beginning in the 35th year. The absolute impoverishment of the capitalist class, not the working class, causes capitalism to collapse. Logically, then, it should be the capitalist class that rises in revolution against capitalism, not the working class, which is doing quite well up to this point.

But again, the fault for this lies with Bauer, not Grossman; he is only following the logic of Bauer’s diagram. Grossman has simply carried out Bauer’s assumption that the difference in consumption levels between capitalists and workers narrows as capitalism develops to its logical mathematical limit. In the end, if we follow Bauer’s assumptions, the workers get to consume all the items of personal consumption produced, and the capitalists get to consume none.

What Grossman demonstrated was that in Bauer’s neo-harmonist model, it is the capitalists who will suffer absolute impoverishment and eventually face starvation and death. Presumably, then, it will be the capitalists who turn against the capitalist system. The natural political conclusion would be that it is the capitalists who support a transition toward socialism.

If Bauer’s model reflected even remotely capitalist reality, the way to socialism would lie not through class struggle but through class collaboration. The actual class-collaborationist practice of Bauer’s Austrian Social Democratic Party was indeed in accord with his economic model. Unfortunately for Bauer and his Social Democrats, the Austrian capitalist class failed to grasp the conclusions that flow from Bauer’s neo-harmonist model.

In the real world, the capitalist class will never allow itself to starve to death. Long before the capitalists starve, they will reduce the level of accumulation and use the resulting unemployment to raise the rate of surplus value far above 100 percent. Unlike Bauer, Marx believed that the rate of surplus value would rise over time and that no action of the trade unions could prevent it. This was one law of motion discovered by Marx that Bauer did not build into his model. The result was the absurdities that Grossman unearthed simply by extending Bauer’s model to the 36th year.

Nor is there any need to assume full employment in analyzing the laws of the capitalist system unless we are trying to picture capitalism as a system of harmony in the manner of the vulgar bourgeois economists. Bauer and the bourgeois economists notwithstanding, under capitalism unemployment is an absolute necessity, even if the extent of unemployment fluctuates with the successive phases of the industrial cycle.

What Grossman proved was that, unwittingly, Bauer built a model that is not harmonious at all. Economists and vulgar socialists like Otto Bauer may lie — or perhaps deceive themselves — but mathematics does not. Once Grossman brought out its real implications, Bauer’s model proved the exact opposite of what its creator intended.

Did Grossman prove that capitalism must collapse at a certain point?

But does Grossman demonstrate that capitalism will become economically impossible at a certain point? Did Grossman — or, more properly, Bauer — build a mathematical model of the final breakdown of capitalist production beyond which its continued existence becomes mathematically impossible? Or did Grossman simply demonstrate the absurdities of Bauer’s neo-harmonist claims?

After all, didn’t Grossman show that even accepting Bauer’s claims, capitalism tends not toward full employment but toward a rise in the unemployed and must, in the long run, increase the rate of surplus value if it is to survive? But is this a final breakdown of capitalism? Doesn’t unemployment — the reserve industrial army — and a rising rate of surplus value, with some fluctuations, mark the entire history of capitalism?

Before examining this question, it is worth noting some genuine weaknesses in Grossman’s 1929 Law of the Accumulation and Breakdown.

Grossman’s mistakes in method

While Rosa Luxemburg made the mistake of claiming it would be impossible, even in theory, to fully realize the surplus value needed for expanded reproduction in a pure capitalist economy, Grossman made the bigger mistake of not seeing the realization of surplus value — and value in general — as any problem at all for capitalist production as long as a sufficient mass of surplus value is produced.

In his analysis of cyclical crises, Grossman assumed that commodities sell at their values. Grossman said this was Marx’s method in analyzing the production of surplus value and simple and expanded reproduction in Volume II of Capital. Though he greatly emphasizes Marx’s method, Grossman makes grave methodical errors.

Marx showed that to explain surplus value — the most important task in all of economic science — it was necessary to strip capitalism naked by assuming that all commodities sell at their values. The transformation of values into prices of production completely obscures this. Once the transformation of values into prices of production occurs, the fact that surplus value is created by the living labor of the workers alone is obscured. It appears that both constant and variable capital produce surplus value equally.

Bringing in market prices that fluctuate around production prices would only further obscure the real origins of surplus value. To analyze market prices, it is necessary to analyze supply and demand as well as competition. None of this clarifies the origins or nature of surplus value; it only further obscures it.

Reproduction, both simple and expanded, can also best be analyzed by sticking to the assumption that prices equal values — or direct prices. Bringing in production prices, let alone market prices, only confuses the essence of reproduction. That is why Marx put his analysis of simple and expanded reproduction in Volume II of Capital, where he maintained the assumption that prices equal direct prices, and not in Volume III, where he analyzed the rise in the organic composition of capital, the tendency of the rate of profit to fall, and the transformation of values into prices of production.

But things are different with crises of the generalized overproduction of commodities. These periodic capitalist crises are characterized precisely by the fact that supply exceeds demand for the vast majority of commodities at the same time. How does such a situation arise, and why is the periodic recurrence not only possible but inevitable? Any realistic and complete crisis theory must deal with and explain these things. If we abstract supply and demand — the competition between buyers and sellers of commodities — we abstract the subject of our study. This is an improper use of the method of abstraction, what Marx called a violent abstraction.

Grossman’s wrong theory of cyclical crises

Grossman’s theory of cyclical crises was derived from Bauer’s diagram of expanded reproduction. As the organic composition of capital rises and the rate of profit declines, the point must be reached where not enough surplus value is produced to prevent a substantial rise in unemployment.

Long before the capitalists were forced to live on air, investment declined because insufficient surplus value was being produced. As capitalist investment declines, the demand for the commodities Department I produces drops. This causes the appearance of overproduction in Department I, which then reacts on Department II as the personal consumption of both the capitalists and workers in Department I is cut back. In Grossman, a crisis of insufficient production of surplus value is the cause of overproduction, not the relative overproduction of commodities.

According to Grossman, because the production of surplus value is too low to maintain expanded capitalist reproduction, the capitalists are forced to attack the workers’ living standards. The way out of the crisis is either the overthrow of the capitalist system — which has broken down relative to its Bauerian harmonies — by the workers, or else the capitalists succeed in increasing the rate of surplus value sufficiently and capitalist expanded reproduction starts up again.

According to Grossman’s theory of crisis, once the rate of surplus value is increased sufficiently, the crisis ends, though a new crisis — and breakdown, again relative to Bauerian harmonies — is inevitable as the rise in the organic composition of capital and the fall in the rate of profit resume.

The periodic relative overproduction of commodities, which to Marx and Engels was the cause of the periodic capitalist crises, is not the cause of crisis in Grossman any more than it was for Bauer. Rather, for Grossman, it is the inevitable breakdown of the Bauerian equilibrium rooted in the rising organic composition of capital that is the cause of the periodic cyclical crises of capitalism.

Political dangers in Grossman’s theory

If Grossman’s theory of cyclical crises is correct, it would mean that capitalist crises can be shortened or even avoided if only the workers are willing to put up with a greater degree of exploitation. Since cyclical crises, according to Grossman, are caused only by an insufficient production of surplus value, the solution — assuming capitalism is to be retained — is for the workers to practice wage restraint, which allows profits to rise once again and leads to economic recovery. This is exactly the conclusion that the marginalists draw.

If Grossman’s theory were widely accepted in the workers’ movement, this would play into the hands of the bosses and their hired-gun economists, who, on the occasion of every crisis, tell the workers they must accept massive wage cuts if the crisis is to be overcome and full employment restored. But this is nonsense if the essence of cyclical capitalist crises is the relative generalized overproduction of commodities.

No sacrifice on the part of the workers can avoid or even shorten these inevitable periodic capitalist crises. No matter how successful the capitalists are in increasing the rate of surplus value, the overproduced commodities — both in the form of commodity-capital inventories and in the form of fixed capital — must either be sold off at prices more or less below their values or, in the case of fixed capital, written down or destroyed altogether. This is the process that must occur, as Engels points out in Socialism: Utopian and Scientific, before recovery can begin.

Grossman’s real breakdown theory

Now let us return to whether there is a real breakdown theory at all in Grossman, or whether there is simply a theory — a largely incorrect one — of periodic capitalist crises.

Did Grossman believe that capitalism, even with its periodic crises caused by the rising organic composition of capital and falling rate of profit, could continue forever — or at least until the sun burns out, as Luxemburg put it? The answer is no. Or rather, it is yes only if we assume that the population can increase without limit forever. This assumption is incompatible with materialism, not to speak of the laws of biology.

In Volume III of Capital, Marx gives an illustration of a hypothetical economic crisis based on the absolute overproduction of capital. Many Marxists, including Grossman, have treated this as though Marx were describing a more or less typical cyclical crisis. But the example is better understood as an illustration of a different kind of limit.

In Marx’s hypothetical crisis in Volume III, the cause of the crisis is an absolute overproduction of capital, not a relative overproduction of commodities. Marx’s capitalists have gotten into quite a jam because they have temporarily run out of labor power. As a result, no investment increase can increase surplus value production. Indeed, the competition among the capitalists for the existing labor power only reduces the rate of surplus value and therefore actually reduces the production of surplus value further.

The absolute contraction of profits — not only the fall in the rate of profit — causes production to collapse and unemployment to soar. We have the paradoxical situation of mass unemployment caused by a labor shortage. Without an increase in population, any attempt by the capitalists to resume expanded capitalist reproduction will simply cause the crisis to erupt anew.

The only way Marx’s capitalists get out of the jam is through continued population growth. But what would happen if the total population and the proletarianization of the population reached the maximum extent possible? If we make these assumptions, the capitalists have no way out.

Once the maximum number of workers that can be employed is employed, a further rise in surplus value is only possible through the rise in the rate of exploitation — the rate of surplus value. But even this has a limit. The workday cannot be extended beyond 24 hours, nor can the amount of surplus value produced by each worker in a 24-hour day exceed 24 hours. The real limits are considerably lower because the human organism needs rest, and wages cannot be reduced to zero.

So, at some point, in light of the limits that the material world places on the growth of the human population and consequently on the production of surplus value, capitalist production must break down — not just temporarily, but for good. It is a historically limited process that had a beginning and must sooner or later come to an end.

A capitalist limit to production

It is important to realize that this is a capitalist limit, not an absolute limit to production. A socialist economy might well be able to continue to increase production beyond the point where the total number of workers has stopped growing by introducing more machines and taking other measures to increase labor productivity. But this would do the capitalists no good.

The growing mass of material use values in capitalist production is only a by-product. The real purpose of capitalist production is to increase the mass of surplus value — unpaid labor. Capitalist production aims to reduce to a minimum the paid labor necessary to produce a commodity, while increasing as much as possible the unpaid labor that the commodity contains. Under socialist production, by contrast, the aim is to reduce to a minimum the total labor used to produce the product.

Therefore, once it is no longer possible to increase the mass of surplus value any further — which is inevitable at some point thanks to the restraints of the material world we live in — capitalism must come to an end. This is no temporary cyclical crisis; capitalism breaks down for good.

Grossman’s breakdown theory — valid despite his mistakes in crisis theory — is therefore quite enough to establish the historically limited nature of the capitalist mode of production. It can only exist during the period, extending over a certain number of centuries, in which it is possible to increase the mass of surplus value rapidly. A necessary, if not sufficient, condition for this is a rapidly increasing population. Once the population is no longer growing, the days of capitalism are numbered.

Grossman wrote in 1929: “Today bourgeois writers, in both France and Germany, are concerned about whether the future accumulation of capital will find adequate reserves of labour power at its disposal. The modern bourgeois economist is characterized by his dread of underpopulation.” Grossman correctly sees that underpopulation, relative to the need of capitalism to expand the total mass of surplus value toward infinity, must in our material world lead to the permanent breakdown of capitalism sooner or later.

But was capitalism anywhere near this limit in 1929 — or even in the early 21st century? Grossman’s own argument becomes more strained here. He acknowledged that there were still hundreds of millions of potential workers in Asia and Africa. And in practice, if workers are not where capital needs them, capital either brings them to where it needs them or goes to them.

Historically, proletarians have been recruited primarily from the peasantry. Even in the early 21st century, there were still huge peasant populations in China, India, and Africa that could potentially be drawn into capitalist production. Once those reserves are exhausted, however, it becomes much more difficult to expand the surplus value-producing working class.

Rosa Luxemburg pointed out in the Anti-Critique that once a country has become largely capitalist rather than pre-capitalist peasant, the rate of population growth tends to slow. This raises the possibility that capitalism, like earlier exploitative systems, may ultimately run up against limits in reproducing and expanding its labor force.

We can see that a breakdown theory based on the impossibility of endless population growth need not rely on Malthus. Indeed, today the populations of most imperialist countries are stagnant or declining without immigration. If capitalism eventually comes to an end because it proves unable to increase the number of its wage slaves beyond a certain limit, it would not be the first mode of production to perish because of its inability to increase the size of its working class.

Grossman saw some of the contradictions of capitalist production — such as the problems of producing surplus value — while denying others, such as the problem of realizing value and surplus value. Therefore, he saw only half the picture. Despite that, he did demonstrate that capitalism cannot last forever.

But if we have to wait until capitalism finally reaches the limit pointed to by Grossman — the maximum mass of surplus value beyond which any further increase is impossible — then the chances of socialist revolution in the lifetime of even the young people of the early 21st century would be slim. And if capitalism succeeds first in turning the earth into an ecological and social hell, the environment may be so damaged that the socialist alternative itself becomes harder to realize.

The greatest political danger in Grossman’s breakdown theory

This is perhaps the greatest political danger of Grossman’s breakdown theory, based entirely on the problems of producing surplus value. Grossman’s breakdown theory might lead to putting off the socialist revolution to a relatively distant future when there might be both the necessity and, thus, the possibility of a socialist revolution much sooner.

Notes

Eduard Bernstein, Evolutionary Socialism, 1899. https://www.marxists.org/reference/archive/bernstein/works/1899/evsoc/ch04-conc.htm ↩
At the 1893 World’s Columbian Exposition, Samuel Gompers declared, “We want more.” ↩