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.
Section 3: Industrial Cycles
Introduction: Concrete and Abstract Industrial Cycles
No two industrial cycles are alike, just as no two snowflakes are identical. Each industrial cycle is shaped by numerous non-cyclical factors, including technological, political, and military influences, as well as the discovery of new natural resources unique to that cycle.
For instance, new industries emerge while older, more established ones decline and disappear. Horse-drawn carriages gave way to automobiles, and now gasoline-powered cars are being replaced by hybrid and electric vehicles. In a similar fashion, pens were replaced by typewriters, which were then overtaken by desktop computers, and later by laptops.
In terms of industrial production, the steam engine that powered early industrial capitalism was supplanted by the electric motor during the age of monopoly capitalism. Now, digital electronics are increasingly replacing analog electrical technology.
Some cycles are characterized by significant technological innovations in both production methods and products, while others are not. Certain cycles experience acute raw material shortages before reaching a crisis point; others do not.
In some cycles, strong unions and frequent strikes near peak industrial activity contribute to higher wages — both in nominal and real terms — leading to falling rates of surplus value. Conversely, other cycles occur when unions are weak, even during peak demand for the commodity labor power.
Revolutions, counterrevolutions, and war play important roles in certain cycles. Others have unfolded in relatively peaceful times. In some cycles, the governments have done little to combat mass unemployment, while in others, they have engaged in deficit spending in a bid to induce recovery. Some cycles have seen devaluations in the gold values of the currencies, while others have unfolded under “gold standard” conditions where the gold values of the currencies are stable.
Boom- and depression-dominated cycles
There have been cycles where the phases of recession and depression are short-lived, but the boom phase is prolonged. These I call “boom-dominated” cycles. In other cycles, the phase of crisis and depression is dominant, and the boom is very short-lived. These I call “crisis-depression-dominated” cycles.
Sometimes crises are accompanied by violent financial crises marked by crashing stock markets and collapsing banks and other financial institutions. One example would be the crisis of 2007-09. Other times, there is only a period of “tight money” and moderate declines in stock markets.
The political consequences of the differences between concrete industrial cycles can be great. Therefore, it is important to understand how and why individual industrial cycles differ from one another. But before we can do this, we must describe an abstract industrial cycle, i.e., the ways that individual industrial cycles differ from one another must be abstracted.
Only when we grasp why at a certain stage of its development, the process of capitalist expanded reproduction must generate industrial cycles will we be able to investigate how and why the concrete industrial cycles that have occurred in the history of capitalist reproduction differ from an abstract industrial cycle.
What should be abstracted?
First, we abstract the division of the capitalist system into different capitalist nation-states. That is, we will assume that the world is one capitalist nation. Competition between different capitalist nation-states plays an extremely important role in real industrial cycles. And the interaction between capitalist countries, on one side, and the Soviet Union and its allies, on the other, certainly influenced the concrete industrial cycles of the 20th century.
However, it is precisely because industrial cycles take the entire world market as their stage that the consequences of the world market not being organized in one capitalist nation-state must be abstracted. These consequences can only be examined once the basic causes of the industrial cycle have been explained. To do this, we will assume that the world consists of a single capitalist nation-state with a single currency.
In addition, we will assume a gold bullion standard exists. We will assume a gold bullion standard rather than a gold coin standard to abstract the effects of gold coins being worn down in circulation, which have had important economic effects in some epochs of capitalism. For purposes of simplification, we will also assume that gold bullion is the sole money commodity.
Why assume a gold bullion standard?
Why do we have to assume a gold standard when the international gold standard in all its forms has been dead for decades? This is because, as we have already seen, changes in the gold values of currencies can exert a considerable influence on business conditions and can generate significant economic fluctuations on their own. We must not, however, confuse the economic fluctuations caused by changes in the gold values of currencies with the industrial cycle.
To abstract the elements of economic instability caused specifically by variations in the gold values of currencies, we assume a gold bullion standard. Since we are assuming a single capitalist nation with a single currency, we also leave out the effects of the fluctuations of rates of exchange between currencies as well as the movement of gold bullion among the various capitalist nations that played a very important role in the concrete industrial cycles of the gold standard years.
We assume that the currency is defined as a fixed weight of gold bullion of a given fineness and that banknotes of the single world central bank — the monetary authority — remain fully convertible into gold bullion at all times to the bearer on demand.
Therefore, we assume only two forms of money: gold (or real) money and credit money. Token (or fiat) money, as far as we are concerned, does not exist. However, we have to assume the existence of credit money because the industrial cycle crowned by a general crisis of overproduction presupposes a highly developed credit system, which includes credit money.
In future chapters, we will first remove the assumption of a single capitalist nation and the assumption of gold bullion as opposed to a gold coin standard. This will allow us to examine the effects of fluctuations in exchange rates and the movement of gold between nations under the various forms of the international gold standard. These correspond more or less to the concrete historical conditions that prevailed before August 1914, when World War I broke out.
We will then be able to analyze the decline and fall of the gold standard and the effects of token money currencies of variable and generally declining gold values on the industrial cycle. At this future stage of the investigation, we will have to introduce token money.
Only after we have dropped the assumption of the gold standard and introduced token money will we be in a position to examine the effects of the “stabilization policies” associated with the work of John Maynard Keynes and Milton Friedman, which aim at reducing the amplitude of and ideally eliminating the industrial cycle altogether. As we will see, the stabilization policies associated with both Keynes and Friedman depend on replacing the gold standard with a token money system, also called by the bourgeois economists a “fiat currency” — or in everyday language, paper money — system.
The four phases of the industrial cycle
Marx divided the industrial cycle into four phases. Each successive cycle begins with a crisis now often called a “recession.” The crisis, or recession proper, is followed by what Marx called the “depression” or “stagnation.” The phase of depression or stagnation gives way to the phase that Marx called “average prosperity.” Average prosperity develops into the boom phase proper, which is the final phase of each successive industrial cycle.
As is true with all cyclical phenomena, whether in nature or human society, each successive phase of the industrial cycle necessarily leads to the next phase. Thus, crisis ends in depression, depression leads to average prosperity, and average prosperity triggers the boom. The boom must end in crisis, and the industrial cycle then repeats itself.
A note on the term ‘depression’
It is important to distinguish between how both Marx and later bourgeois business cycle theorists who wrote before the Depression of the 1930s used the term “depression” and how today’s bourgeois economists and historians use it.
For example, the economic crisis of 2007-09 was dubbed by the bourgeois economists and media the “Great Recession.” Note, a recession but not a depression. The economists of both the Keynesian and Friedmanite schools insist that even if their “stabilization policies” have failed in every other way, they have avoided a return to actual “depressions.”
But how do they use the word “depression”? They are not using the word the same way that Marx or Engels did. No surprise there. But they also use the word depression in a completely different way than bourgeois business cycle experts did before the 1930s. The latter defined the term “depression” much as Marx and Engels did, unlike today’s bourgeois economists and historians.
Today, the word depression, in its economic sense, is used by economists and media to refer to an economic disaster like the 1930s. Anything less than that is referred to as a recession. This definition of economic depression was never used before the 1930s for the simple reason that a depression like the 1930s had never occurred, and few could imagine that a crisis like the one that did happen in the 1930s ever could or would occur. Even the Marxists in the 1920s, though they certainly correctly stressed the inevitability of a new capitalist crisis, were stunned by the collapse of the world capitalist economy that unfolded after 1929.
Depressions before 1929
Therefore, when economists and politicians boast about how they have avoided “depressions” since the 1930s, the media fail to explain that the economics profession has changed its definition of what a “depression” is. Before the 1930s, students of the business cycle, both bourgeois and Marxist, defined a depression as the stage that occurs in every industrial cycle between the time when industrial production reaches the lowest point of the recession and the time when it finally exceeds the highest level of the preceding cycle.
It did not matter whether the prior recession was severe or shallow. According to the definition of an economic depression accepted by Marxists and bourgeois economists before 1929, every recession, no matter how “mild,” was followed by a depression of greater or lesser length.
Therefore, by the historical definition of the words “economic depression,” depressions did not end with the Depression of the 1930s. Capitalist depressions of varying degrees of severity have continued to occur since World War II. However, as of this writing, none has yet matched the Depression of the 1930s in severity and its overall social and political consequences. But neither, of course, did any depression that occurred before the 1930s.
The new definition of depression, as applied to economics, adopted by (bourgeois) economists, politicians, journalists, and governments after World War II — an economic crisis at least as bad as 1929-33 — enables the (bourgeois) economists, media, and politicians to hide the fact that stabilization policies associated with Keynes, Friedman or any other school of bourgeois economists have completely failed to eliminate depressions.
The current falsified definition of depression enables capitalist governments to claim during economic downturns that really were “depressions” that the direct employment of the unemployed by the government was not justified since this is only a “recession.” After the recession has passed, the (bourgeois) economists and politicians take credit for designing “stabilization” policies that once again saved us from a “depression.”
How the National Bureau of Economic Research has eliminated depressions
The U.S. National Bureau of Economic Research (NBER) is a private research organization that dates U.S. business cycles. The NBER recognizes only two rather than four stages of the industrial cycle. These are what the NBER calls “contraction” — the crisis or recession — and the “expansion.” What the NBER calls the expansion includes the stages of depression, average prosperity, and boom. Therefore, the depression phase, as used by pre-1929 business cycle experts, disappears. Strictly speaking, even the Depression of the 1930s disappeared, though everybody knows that there was a horrible depression in the 1930s.
Even though the NBER is only a private research organization, the media treats their dating of “contractions” and “expansions” as representing some kind of objective truth. There are many problems with the NBER’s dating of business cycles, even beyond the fact that they have reduced from four to two the phases of the industrial cycle. We have to remember that the NBER is dominated by economists who are strongly committed to the capitalist system. Unsurprisingly, they aim to portray the U.S. capitalist economy in the best light possible. This is the job description of a (bourgeois) economist, after all.
For example, the NBER usually waits months before admitting that a preceding “expansion” has finally ended. They certainly wouldn’t want to acknowledge that the U.S. economy had entered a “contraction” prematurely since that could encourage “inappropriate” policies by the government to combat unemployment.
But as soon as the economy shows even the slightest hints of sustained improvement in the sense of rising profits and industrial production — even if unemployment is still rising and the rise in industrial production is very slight, and even in some cases statistically dubious — the NBER declares that the economy has entered a new expansion. Since the NBER only recognizes two phases of the industrial cycle, neither one is defined as a depression. By definition, the U.S. economy is never in a depression.
What was the Depression of the 1930s, and how did it differ from other downturns in the history of the capitalist industrial cycle?
In the United States, the quasi-official rate of unemployment was estimated at 25 percent at the bottom of the crisis of 1929-33 and was over 50% for African Americans. U.S. official unemployment rates then lingered in the double digits through 1940.
In contrast, official unemployment rose only briefly above 10 percent at the lowest point of the “Volcker shock” recession in 1982 and the “Great Recession” in 2009. However, NBER’s definition of unemployment emerged in the 1930s. Those unemployment figures do not include anyone doing temp work or workers reduced to part-time employment. In addition, the count only includes people who are not working but are “actively looking for work.” Of course, “actively looking” can be interpreted in multiple ways; therefore, the numbers are subjective and unreliable. A more realistic estimate of unemployment would be around 50% for both the United States and Germany at the bottom of the crisis in 1932-3.
In addition, since the 1930s, the U.S. government has further narrowed the official definition of who is “unemployed.” In the 1930s, WPA workers employed by the federal government on useful public works projects were counted as unemployed. Today, they would be counted as “employed.” The typical historical stereotype of the Depression era unemployed is a person selling apples for 5 cents. Today, however, these people would not be considered unemployed at all. Instead, they would be counted as “self-employed independent business people.”
Therefore, for official unemployment in the U.S. to again hit 25 percent, the real level of unemployment would have to be considerably higher than it was in March 1933, the month of the highest unemployment during the entire U.S. 1930s Depression. And the official level of unemployment would have to approach the levels of March 1933 before the bourgeois economists and media conceded that an economic downturn was a bona fide depression.
It is quite possible that even if we were able to recreate the 1930s Depression in the U.S. exactly, the media and the economists would call it a Great Recession and a disappointing recovery but not an actual depression because the official level of unemployment as reported by the government was still well below the levels of the 1930s.
What caused the Depression of the 1930s, and will it happen again?
If we consider the redefinition by governments of what people should be counted as unemployed, the gap between the deep downturns of the early 1980s and especially the Great Recession of 2007-09 and the 1930s Depression is reduced. However, it remains true that the economic crisis that began in 1929 remains a truly unique event in the history of capitalism. If you look at graphs of economic activity, earlier crises appear like barely discernible ripples in the ascending line of expanded capitalist reproduction until the early 1930s, when a sharp “V” appears.
In this work, the causes of the economic crisis of the early 1930s will be carefully reviewed. However, the question of “what caused the Depression” combines three questions that have to be treated separately. The first is, what causes the industrial cycle and its downward phases — the recession-depression that occurs to one degree or another in every industrial cycle? Second, why does capitalist expanded reproduction take the form of what Marx called the industrial cycle and what bourgeois economists call the “business cycle” in the U.S. and the “trade cycle” in Britain?
The third question is why the downward phase of the industrial cycle that began in 1929 was so much more severe than any other economic downturn that has occurred in the history of capitalism. And of even greater interest, what are the chances that a similar or worse economic disaster may be lurking in the future?
For example, the crises of the 1970s were considerably worse than the earlier post-World II recessions, and the Great Recession of 2007-09 and its aftermath are already considerably worse than the crises of the 1970s. If this trend continues, it will only be a matter of time before a crisis as bad or worse than the crisis of the 1930s occurs. However, before we can answer the second and examine the third question, we must answer the first. Why does the industrial cycle, which includes the phases of crisis, recession, depression, and stagnation, occur in the first place?
A note on terminology
In this work, I will define the word depression with a small “d,” the way it was by students of the capitalist industrial cycle before the 1930s, as the phase of the industrial cycle between the moment that industrial production reaches its lowest point and the time it exceeds the preceding peak. I will use the word Depression with a capital “D” to refer either to the Depression of the 1930s or to a possible future crisis of comparable or greater severity.
I will also describe the crisis of 1929-33 — which forms only part of what historians refer to as the “Depression of the 1930s” — as the super-crisis. Virtually all historians date the beginning of the Depression, at least in the United States, to 1929 — usually to the stock market crash that occurred in October of that year — and extend the Depression through at least the entire decade of the 1930s.
The span of the Depression
It is also generally agreed among historians and economists of virtually all political persuasions that the U.S. Depression contained two actual “recessions”: the recession of 1929-33, which I call the super-crisis, and the lesser but still violent recession of 1937-38. Many historians extend the American Depression through 1940 and sometimes right up to 1941 when the United States formally entered World War II.
By this definition, the span of the U.S. Depression began with the October 1929 stock market crash and ended with the Japanese attack on Pearl Harbor in December 1941. The conclusion is then often drawn that only the onset of the full-scale war economy of World War II ended the Depression. And indeed, if we accept the dating of the Depression as beginning in 1929 and ending in 1941, this is a simple historical fact.
Left Keynesians and some Marxists, especially but not limited to the followers of the Monthly Review school, believe that the Depression only ended because World War II broke out. They hold that the Depression would have continued indefinitely if a world war or some other comparable government “stimulus” had not occurred. These schools of economists then conclude that only the continued heavy military expenditures that have occurred since World War II have prevented another Depression with a capital “D” from occurring once World War II ended. Whether these claims are valid will be a central subject of our review in this work.
However, the next few chapters are not the place in our study to examine these questions. Instead, basing ourselves not only on Marx but on the contradictory crisis theories that have been put forward by the various schools of Marxists since the death of Marx and Engels already examined, as well as anything useful we might be able to extract from bourgeois economists, we must explain the causes of the capitalist industrial cycles. We must explain why capitalist expanded reproduction doesn’t proceed smoothly from year to year as it does in the formulas of expanded reproduction that Marx developed in Volume II of Capital but instead develops in the wave-like pattern that Marx called the industrial cycle.
A Critique of Crisis Theory 