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 1: Crisis Theories
The Debate Among the (Bourgeois) Economists About the Possibility of a General Glut of Commodities
Even before the first general capitalist crisis hit the world market in 1825, a debate occurred among the political economists on whether or not a general glut of commodities was possible. On one side were J.B. Say, James Mill (father of John Stuart Mill), and David Ricardo; on the other side were Simondi de Sismondi and Thomas Robert Malthus
Sismondi, the father of crisis theory
The Swiss economist Simondi de Sismondi (1773-1842) had begun as a champion of economic liberalism, or what comes to the same thing; he was what we would call today a “free market” economist. But as he observed the development of the capitalist system during the opening decades of the 19th century, he became increasingly alarmed. What bothered Sismondi was exactly who was going to buy the ever-increasing mass of commodities that were being churned out by capitalist industry.
In the early 19th century, before the rise of the modern workers’ movement, the capitalist system was driving wages down to the barest biological subsistence. The small independent producers — the peasants and artisans who owned their own means of production — could not meet the competition of large-scale industry, which was increasingly under-selling them. The ruined peasants and artisans were being forced to sell their labor power to the industrial capitalists at rock-bottom wages.
Sismondi’s fears realized
Sismondi predicted that because the capitalist system was increasing production without apparent limit on one side while at the same time destroying the purchasing power of the great mass of society on the other, capitalism would inevitably suffer from periodic general gluts of commodities. On this point, events beginning with the first general crisis of overproduction in 1825 and continuing with the most recent crisis — that of 2007-09, at the time of this writing — have proved Sismondi correct.
The end of classical political economy and the debate on the general glut
Sismondi can be considered to be the father of crisis theory. Marx considered him, along with David Ricardo (1772-1823), to be the last representative of what he called classical political economy. By classical political economy, Marx referred to the economists who were concerned with finding the economic laws that governed the emerging capitalist system as opposed to simply serving as apologists for the capitalist system. The founder of scientific socialism considered himself to be very much the student as well as a critic of the classical economists.
Alongside the economists that Marx considered to be representative of the classical school, there were those he called the vulgar economists, who were simply apologists for the capitalist system and sometimes, as was the case with Thomas Robert Malthus, the landlords as well. Malthus supported the capitalists in their struggle against the workers, but in the class struggle that raged between the landlords and the capitalists, Malthus supported the landlords against the capitalists.
While the classical economists dug beneath the surface appearances and discovered that the values of commodities were determined by the quantities of labor that were, on average, necessary to produce them, the vulgar economists like Malthus limited themselves to describing the surface appearances much like “mainstream” economists do today. For example, Malthus explained the origin of profit — the most important question in all of economics — as the extra charge that the capitalists add to the cost-price of their commodities so they can earn a “fair” return on investment.
As the class struggle between the workers and the capitalists increasingly overshadowed the class struggle between the retreating landlords and the advancing capitalists, the further progress of economic science became impossible on a pro-capitalist basis. The science that studies the laws and destiny of a capitalist economy shifted from the representatives of the capitalist class to the representatives of the working class.
Therefore, the controversy that broke out among the political economists on the possibility of a general glut occurred during the final stage of bourgeois political economy as a science.
Thomas Robert Malthus
Thomas Robert Malthus (1766-1834) is best known for his so-called law of population. This “law” holds that the poverty of the overwhelming mass of the people can never be overcome no matter how much the productive power of human labor grows.
According to Malthus, this is because no matter how much the means of subsistence grow, the human population would grow even faster. This “law” has been refuted by reality. Today, it is well known that the population grows slowest in the countries where wages are highest and fastest where wages are rock bottom. This is exactly the reverse of the so-called Malthusian population law. But in the early 19th century, Malthus’s so-called law was accepted not only by his reactionary supporters but also by his liberal opponents such as David Ricardo.
Less well known is the fact that Malthus agreed with Sismondi that the capitalist system was prone to general gluts of commodities. Malthus, however, gave Sismondi’s theory of general gluts and underconsumption a reactionary twist. The prophet of eternal poverty for the “masses” became the champion of what Marx called “overconsumption” by the landlords, clergy, and the non-producing dependents of the state!
Malthus’s theory of underconsumption
Applying his theory of population, Malthus held that any rise of wages above bare subsistence would be unsustainable because it would cause the rate of increase of the working population to exceed the rise in the means of subsistence. The labor market would become glutted, and wages would fall below biological subsistence levels, causing a portion of the working class to die off through famine and starvation. This would re-balance the labor market, allowing wages to rise again to biological subsistence but not above — at least not for very long.
Even if a lasting rise in wages were possible, Malthus was opposed to it. According to Malthus, higher wages only increase prices. This is an argument we still hear today, especially from the “Keynesian” economists. With the consumption of the working class confined to bare subsistence as an eternal law of nature, Malthus held, the workers could not possibly provide a sufficient demand to purchase the growing quantity of commodities that they were producing.
Could increased consumption of consumer goods by the capitalists themselves provide a solution? That wouldn’t work either, according to Malthus. The industrial capitalists are forced, after all, to maximize their accumulation of capital. They accumulate only to the extent they refrain from (personal) consumption.
In addition, the capitalists had to add a “fair profit” above the cost-price of their commodities. Therefore, the capitalists plus the workers together simply lacked the purchasing power to buy back the full commodity product. Therefore, Malthus argued, the capitalists plus the workers could never provide the necessary demand.
Malthus’s proposed solution to general gluts
Malthus’s solution was a class of third consumers who consume without producing. Happily, such a class was available: the landlords. They could be assisted in their consumption duties either by the clergy — Malthus himself was a clergyman of the established state-supported Church of England. If that were not enough, there would always be the possibility of large-scale unproductive state expenditures such as spending on wars. The state expenditures had to be unproductive because if they were productive, they would add to the tendency toward general gluts.
These third consumers — landlords, clergymen, and the unproductive dependents of the state such as soldiers and the owners of government bonds — would provide the necessary monetarily effective demand that would prevent ruinous general gluts of commodities — what are today called generalized recessions.
In order to provide the necessary effective demand, Malthus urged the government of Britain to maintain the system of protective tariffs on agricultural commodities (called the corn laws), which kept rents — and food prices — high. In addition, he looked kindly on expenditures for wars, since all this kept “monetarily effective demand high” and kept the wheels of capitalist industry humming.
Marx held Malthus in very low esteem both for his now thoroughly refuted theory of population and his proposed “solution” to capitalism’s periodic crises of overproduction or general gluts of commodities. Marx pointed out that Malthus was actually a champion of overconsumption on the part of the landlords and the dependents of the state, including the clergy. The overconsumption on the part of the non-capitalist and non-working class “third consumers” was to compensate for the underconsumption of the impoverished masses on one hand and the “thrifty capitalists” on the other.
Notwithstanding Marx’s low opinion of Malthus’s theories, they have a surprisingly modern ring to them. They anticipate the theories of John Maynard Keynes. Indeed, Keynes was a great admirer of Malthus, both of his theory of population and his theories of general gluts.
Elements of truths in underconsumptionism
The supporters of underconsumption as the root cause of crises, starting with Sismondi and Malthus, point to a very real contradiction of capitalist production.
Marx wrote in Volume III of Capital, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.” (1)
Marxist supporters of underconsumption use the quote to bolster their claims that Marx, like Sismondi (whom Marx admired) and Malthus (whom Marx did not admire), himself held an underconsumptionist theory of crisis.
Under the pressure of competition, as the underconsumptionists correctly note, the industrial capitalists are obliged to expand production without limit, but at the same time, competition forces them to drive their costs down as far as possible in order to maximize their profits. This forces the industrial capitalists — and other capitalists such as merchants and bankers — to pay the lowest possible wages and salaries.
“Thus it comes about,” Engels wrote in Anti-Duhring, “that the overwork of some becomes the preliminary condition for the idleness of others, and that modern industry, which hunts after new consumers over the whole world, forces the consumption of the masses at home down to a starvation minimum, and in doing this destroys its own home market.” Today, this is called the “race to the bottom.” (2)
If capitalist production were production for the needs of the worker-consumers, crises of overproduction would be impossible. Under an economic system where production is geared to the needs of the worker-consumers, if more were produced than the worker-consumers needed, the hours of work would be reduced. There would be no crisis.
However, capitalist production is most certainly not production for the workers’ needs; rather, production is for the capitalists’ profits. Capitalism, therefore, keeps the workers’ consumption within the narrow limits allowed for by production for profit. Therefore, in the final analysis it is indeed true that the real ultimate cause of crises is the fact that the consumption of the great majority — the workers — is kept within the narrow limit that is allowed by production for profit.
But certain pro-labor underconsumptionists claim that if we raise wages through labor unions and political action without abolishing capitalism itself, we eliminate or at least greatly mitigate the crises. Marx, however, did not agree.
Indeed, Marxists who are opponents of the underconsumption-based crisis theories quote Marx’s observation that wages rise during economic booms that immediately precede the outbreak of a crisis. According to underconsumptionists, this should prevent the crisis but in reality, Marx observed, it does not. Marx wrote in Volume II, “But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ‘simple’ (!) common sense, such a period should rather remove the crisis.” (3)
Say’s so-called law of markets, the liberal economists’ answer to Sismondi and Malthus
Let’s return to the pre-Marxist days of the early 19th century.
How did the supporters of economic liberalism — the “free-market economists” of the day such as Say, Mill, and Ricardo answer Sismondi and Malthus? The economic liberals believed that they had proven that the threat of a general glut of commodities that had so alarmed Sismondi and been used by Malthus to support his reactionary pro-landlord politics was impossible. Say is generally credited with developing the alleged proof, which has been dubbed “Say’s law,” though some economic historians credit James Mill for the “discovery.”
Say’s law holds that commodities are always exchanged for commodities, though this is obscured by the role of money as a means of circulation. According to Say’s Law, money makes commodity exchanges vastly more efficient, but it is quite possible to imagine commodity exchange without money. Therefore, as Say would have it, in order to understand the fundamental laws that govern the exchange of commodities, we must abstract money as a mere means of circulation and look only at the exchange of commodities as though money did not exist. In the final analysis, the supporters of Say’s law claim that money is “neutral.”
If we abstract money, Say argued, we will see that it is commodities themselves that provide the purchasing power to purchase other commodities. Suppose the quantity of commodities on the market was suddenly doubled. Wouldn’t this cause a “general glut” — a terrible economic crash?
Not according to Say’s law. But where would the demand come from to buy twice as many commodities? According to Say, by doubling the quantity of commodities, we would at the same time be doubling the means of purchasing the commodities — other commodities. Therefore, Say and his followers believed that they had proven that the limits of the market were set by the physical limits of production. Or, in popular language, supply creates its own demand.
Say did concede that commodities could be produced in the wrong proportions. Perhaps too many means of production would be produced, and not enough means of consumption, or perhaps the reverse would be the case. In that case, some commodities would indeed be overproduced, causing their market prices to fall below their “cost of production.” However, the overproduction of some commodities would be backed up by the underproduction of other commodities. The market prices of the under-produced commodities would rise above their cost of production. In the real world, capital is always flowing from sectors where market prices are below the cost of production, or what comes to exactly the same thing, profits are below the average rate, to sectors where market prices are above the cost of production. Therefore, a crisis of overproduction of some commodities will always be accompanied, according to Say’s law, by an offsetting underproduction of other commodities.
The Ricardian criticism of Malthus
Ricardo accepted Say’s “proof” that generalized gluts were impossible. He also accepted Malthus’s theory of population. Ricardo and his followers, however, took strong exception to Malthus’s proposed solution to what they believed was the non-existent danger of generalized commodity gluts.
Where, the Ricardians asked, did the incomes of the landlords — ground rent — and other “third buyers” come from? Wasn’t ground rent just a portion of the “net income” — the surplus value, as Marx would later call it — of society? Ground rents are deductions from the “net income” of society that would otherwise go to the capitalists in the form of profits. The same is true of the incomes of the clergy, unproductive dependents of the state, and indeed the government itself — Malthus’s other “third consumers.” As one of the Ricardians put it, no merchant — capitalist — pays his own customers to buy his commodities.
Imagine if you saw this advertisement: “If you are a landowner, clergyman, state employee, or government bondholder and can prove you are a non-producer, we have a deal for you! Our dealership is selling new luxury automobiles for a price of $100,000. But for you non-producers out there, don’t worry! We will provide you free of charge the full $100,000 to buy our cars. The cars will cost you absolutely nothing! This a permanent offer, not a one-time sales gimmick.”
Now imagine that this offer — for landowners, clergymen, state dependents — applied not only to cars but all commodities. Even the corporations that sell arms to the government would agree to supply the arms for absolutely nothing in return! They agree to bear the entire cost! This was Malthus’s “solution” to the problem of generalized commodity gluts.
The problem is that no capitalist is interested in selling for the sake of selling. The real capitalists are interested in selling for the sake of making a profit. If they pay a portion of the customers to buy their products — that is, in effect give away their commodities free of charge to “non-producers” — they make no profit on these sales but instead incur massive losses.
In reality, the higher such overconsumption on the part of the landlords, church, and state and its dependents, the lower are the profits of the capitalists, all other things remaining equal. Far from accelerating capitalist economic growth, the result is a reduction of economic growth. At best, it can be argued that instead of “achieving” economic stagnation indirectly through the effects of crises, we end up achieving stagnation directly through the high rents and taxes that eat up the profits of capitalist industry. Under capitalism, no profits equal no production.
Ricardo pointed out that when the industrial capitalists “saved,” they were engaged in what Marx was to call productive consumption. Industrial capitalists had two choices. They could use a portion of their profits — the part net of their and their families’ expenses — to purchase more factories, machines, and labor. Alternatively, they could lend their money either directly or, more likely, through a middleman, such as a banker, to other industrial capitalists. The latter capitalists, in turn, could use the borrowed savings to purchase additional factory buildings, machines, and raw and auxiliary materials, sharing a portion of the profits with the capitalist savers in the form of interest.
In theory, of course, the industrial capitalists could hoard their profits in the form of idle money. But that would be irrational, Ricardo and the other free market economists argued, because idle money bears no profit. Therefore, rational capitalists would spend, either directly or indirectly, the entire profit they earned. Some would be spent, of course, on their own and their families’ upkeep. This would include, in addition to necessaries like food and clothing, luxury items such as “fancy carriages” in Ricardo’s time or Gulfstream jets today.
What was not spent by “thrifty capitalists” on their own personal living expenses would be invested either directly or indirectly in expanding industrial production, including the hiring of additional workers to produce still more — profit for the capitalists. There would be no problem finding markets for commodities as a whole — the capitalists themselves would be their own best customers — though individual commodities could, as Say acknowledged, be overproduced relative to consumer tastes while other commodities are being underproduced.
As for workers who were paid bare subsistence — Ricardo agreed with Malthus on the question of “overpopulation” and wages — they had no alternative but to spend all of their wages on the means of subsistence. Obviously, the workers could not hoard their money since if they did they would starve to death. Therefore, neither the capitalists nor the workers would ever hoard money. Both of the main classes of capitalist society — the capitalists and the workers — throw the money that passes through their hands immediately back into circulation
Therefore, the Ricardians argued, the capitalists had absolutely no need for unproductive “third consumers” — the landlords, clergymen, soldiers, and other unproductive state employees, the state itself, or its creditors — to provide the demand to buy the commodities they were producing. These third consumers would only “consume” a portion of what would otherwise be capitalists’ profits. Therefore, economic liberalism preached that incomes of unproductive third persons should be reduced as much as possible.
(1) Capital, Volume III, Chapter 30: Money-Capital and Real Capital (back)
(2) Anti-Dühring, Frederick Engels, 1877, Part III: Socialism (back)
(3) Capital, Volume II, Chapter 20: Simple Reproduction (back)
A Critique of Crisis Theory 