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 10: From Crisis to Boom
The capitalist industrial cycle consists of four major phases: crisis, stagnation, average prosperity, and boom.
Here, we examine an idealized industrial cycle, though real-world cycles are invariably more complex, featuring smaller fluctuations such as the so-called “Kitchin” inventory cycles, which will be examined in a later chapter.
Each phase of the industrial cycle sets the stage for the next. Every cycle brings capitalist expanded reproduction to a higher level than its predecessor. The crisis phase marks both the conclusion of one cycle and the beginning of another. However, starting with the crisis is problematic because it represents the culmination of all contradictions inherent in capitalist production. These contradictions accumulate during the rising phases of the cycle until a crisis of generalized overproduction of commodities becomes unavoidable.’
We must first investigate the contradictions of capitalist production that make crises inevitable. Next, we must explore how these contradictions develop and grow during the upward phases of the cycle. Finally, we need to analyze the crisis itself.
Therefore, we cannot begin with the crisis. Instead, we have to start with the period immediately after the crisis, where it has resolved — to the extent possible under capitalist production — the contradictions that led to the crisis in the first place. We then have to show how the contradictions that led to the previous crisis are inevitably reproduced at a new higher level of development that will, in turn, lead to a new crisis. But first, let’s examine why all crises of overproduction are limited in time.
Why are all crises of overproduction limited in time?
In “Theories of Surplus Value,” Marx criticized Adam Smith’s view that falling profit rates result from an abundance of capital. Marx wrote that “if Smith explains the fall of the rate of profit by superabundance of capital, accumulation of capital, then this is regarded as a permanent effect and this is wrong. However, the transitory superabundance of capital, overproduction, and crisis, this is another matter. There are no permanent crises.”
It is not a question of the crisis of overproduction but rather a succession of such crises that erupt periodically. Over the decades, during severe and prolonged overproduction crises and the depressions they produce, more than one Marxist has forgotten this — or never learned it. When a major new upswing of capitalist production develops, it is easy to swing to the other extreme and see the upswing as permanent.
Historically, every significant upswing in capitalist production since Frederick Engels’s death in 1895 has been accompanied by claims from bourgeois economists that Marx’s theories have been refuted.
The classic example of this reaction was the Depression of the 1930s, which was followed by several very strong upswings of the capitalist industrial cycle in the 1950s and 1960s. For many — not only Marxists, of course — who lived through the Depression decade, it seemed that the Depression was a permanent condition. Later on, however, the prosperity that followed — whether it was attributed to “enlightened Keynesian stabilization policies,” post-World War II tariff cutting, the Bretton Woods international monetary system, the “postwar reconstruction,” “welfare state,” “spending on arms,” or “the scientific-technological revolution” — was also seen as permanent. (2)
Therefore, it is essential to understand why all cyclical crises of overproduction are limited in time. To explain this, we have to return to the role of money. The existence of a separate money commodity that confronts all other commodities makes generalized crises of overproduction possible. Understanding the role of money is also crucial to understanding why all such crises eventually end.
Let’s imagine a crisis that is far worse than any crisis that has ever occurred in the real world. As a kind of thought experiment, suppose that all credit money was wiped out, leaving only metallic money. Remember, according to our current assumptions, token money does not exist, though even if we assume it does, the basic argument remains unchanged. In our imagined crisis, the entire credit system has completely collapsed, and all banks have failed.
In addition, imagine that industrial production has dropped to zero. Would such a purely imaginary collapse of all industrial production wipe out all monetarily effective demand? No.
The owners of metallic money would still possess purchasing power and would be obliged to continue to purchase commodities to remain alive. They would also be obliged to distribute this purchasing power in some form to the unemployed workers if they have any intention of resuming the production of surplus value once the crisis had run its course. If they did not, all the workers would soon die of starvation, and there would be nobody to hire to produce surplus value when existing inventories were exhausted.
If the workers died of starvation, capitalism would indeed experience an “automatic” collapse since one of the vital preconditions of capitalist production is a free proletariat, free of both slavery and serfdom and free of ownership of the means of production. Even then, the capitalist crisis of overproduction would not be permanent because capitalism itself would cease to exist. The extinction of the working class would also make socialism impossible since there would no longer be a class with both ability and interest in building it.
Therefore, even if we assume that industrial production has dropped to zero, a certain amount of effective monetary demand would continue. Demand would exceed supply.
Therefore, in all real-world crises, it is only a matter of time before the stocks of overproduced commodities would fall to such low levels leading to commodity shortages relative to monetarily effective demand — the market clears. Once again, the resumption of production of surplus value-containing commodities becomes profitable. The point to grasp is that while the declining industrial production that occurs during a crisis leads to a contraction in demand, the decline in demand in a crisis is always less than the decline in production. This limits the crisis in time, and it eventually ends.
Recovery begins
The recovery begins first in Department II — the department that produces the means of personal consumption. From there, the incipient upturn spreads to the producers of raw materials that have to be produced to meet current production. Industrial production has now passed the lowest point. The contraction in industrial employment — and other employment, as well — now more or less comes to an end. The general overproduction of commodity capital has now been overcome, and the crisis proper has ended. However, this end of the crisis does not mean the end of the unemployment crisis — quite the contrary.
Indeed, industrial employment rises very little during the first phase of the upturn. The reason is that many factories and mines during the crisis are forced to operate at levels far below their optimum level of productivity. As inventory rebuilding proceeds, more factories and mines come closer to their optimum utilization levels. The resulting surge in productivity enables the bosses to increase production considerably for a time without rehiring any workers.
Even official government unemployment figures often continue to rise for some months after the lowest point of industrial production has passed. The rate of unemployment and, even more so, the absolute number of unemployed is a lagging indicator of the turn in the industrial cycle.
As a result, for a considerable period after the crisis proper ends — perhaps years later — the labor market conditions continue to favor buyers of labor power — industrial and other capitalists — over sellers of labor power — the workers.
What the onset of an upward trend in industrial production indicates is that the overproduction of commodity capital has been overcome. The same is not true, however, of the overproduction of the elements of fixed capital such as factory buildings and machinery.
The generalized overproduction of commodities that make up commodity capital that developed during the preceding boom would not have been possible without a similar overproduction of the commodities that make up the means of production. It takes far longer to overcome the overproduction of commodities that make up the means of production as opposed to the means of consumption. Though industrial production is rising, the capitalists are still leaving a huge quantity of productive forces—what the economists call “excess capacity” — idle.
It usually takes about a year to a year and a half to overcome the overproduction of commodity capital — excessive inventories — but it takes three or four years to overcome the overproduction of the long-lived elements of fixed capital. As a result, for a considerable time after the crisis proper has ended, factory shutdowns continue.
As long as this situation continues, we cannot expect a significant rise in investment in fixed capital, no matter how low long-term interest rates fall. This would be true even if the rate of interest fell to zero. In addition, as long as investment remains minimal, depression lingers on in the Department I industries that produce the means of production.
In turn, the depressed conditions in Department I limit the recovery in Department II. Continued relatively low profits in Department I, combined with low employment in Department I, limit the personal consumption of the capitalists and especially the workers of Department I. Therefore, the end of the crisis is not the same as the arrival of prosperity.
During the crisis, the economy has become very liquid. The crisis has not only contracted the level of commodity circulation in terms of units of use values, but it has also caused most commodity prices, including the price of the commodity labor power, which produces surplus value, to fall. As a result, a given quantity of money, measured in terms of weights of gold bullion, will circulate more commodities in terms of use values than it could before. In addition, the fall in the general price level increases both the relative and absolute profitability of the special industry that produces money material.
The relative rise in the profitability of the industry that produces money material
Since money material remains in high demand during the crisis, there is no slowdown in the turnover of the capital invested in the money material-producing industry. This is best illustrated by the kind of currency system we are assuming here: the gold bullion standard.
Under a gold bullion standard, the central bank stands ready to exchange all the gold bullion offered for its own banknotes. That is, the central bank is both willing and able to “buy” all the gold bullion that has been newly produced by the gold mining and refining industries. Unlike the case with all other commodities, the producers of gold bullion — money material — have no problems finding buyers for their product.
Therefore, the gold mining and refining industries do not experience any decline in either the rate or mass of profit brought on by a decline in sales. As a result, the rate of profit of the industry that produces money material rises relative to the rate of profit of all — or most — other commodity-producing industries.
The absolute rise in the profitability of the industry that produces money material
In addition, the gold mining and refining industries will experience an absolute rise in both the rate and mass of profits. Due to the fall in commodity prices during the crisis, the number of commodities of a given use value that a given weight of gold bullion can purchase increases.
For example, the fall in money wages since the crisis began means that the industrial capitalists that produce money material will be able to hire and exploit more workers at a higher rate of surplus value than they could before. Also, as we have already seen, unlike other capitalists, the capitalists that produce money material will have no trouble realizing the value of their commodities in terms of money.
A rise in production of money material
Capital is always flowing from industries that are making less than the average rate of profit or outright losses to industries that are making more than the average rate of profit. Starting with the crisis, capital begins to flow from other industries toward the gold mining and refining industry, which will now be making super profits. The more severe the crisis, all else remaining equal, the more this will be true. Since this process begins when the production of commodities is declining in most, if not all, other industries, the rate of the accumulation of money capital in the gold mining and refining industry accelerates.
The fall in the general price level that occurs during the crisis not only increases the purchasing power of existing money but also leads to accelerated production of new money. A portion of the capital invested in the production of (non-money) commodities flows into the industry that produces money material — assumed here to be gold mining and refining.
The consequent rise in the production of money material expands the quantity of metallic money. Thus, it creates the basis for an expansion of the quantity of credit money and credit in general, which will occur later as the recovery gains momentum. In this way, the crisis itself creates the basis for the next great expansion of the market, which will enable the upswing to reach a considerably higher level than the previous upswing.
The longer the prices of commodities are below the values or prices of production of commodities, the more liquid the economy becomes, and the greater will be the future expansion of the market. With money abundant and new investment minimal, businesses are in a position to retire debts incurred during the preceding boom. This is why especially severe and prolonged crisis-depressions are often followed by dramatic expansions of the market and especially powerful economic booms. It is precisely the crisis-depression that creates the basis for the renewed expansion of the market. The possibility is therefore created to realize the value of a much greater mass of commodities, including the surplus value that these commodities contain than was possible before the crisis.
Shift to a cash-based economy
Marx pointed out that in the wake of a crisis, the economy operates mainly on a cash, not a credit system. Marx noted in Chapter 33 of Volume III of Capital: “Hence the sudden change of the credit system into a monetary system during crises.” (3)
The purchasing power and the quantity of metallic money increased during the crisis. In addition, the effects of any increase in the quantity of metallic money, both absolutely as measured in terms of weight and relatively as measured in terms of purchasing power, mean an increase in the quantity of credit money and credit are not necessary for the early stages of upswing. With so much cash around, there is far less need than before the crisis to use credit to purchase commodities.
Instead, the mere rise in the velocity of circulation is sufficient to finance a considerable rise in economic activity as money hoarded in the banking system is gradually drawn back into circulation. A considerable expansion of economic activity can therefore occur at the early stages of the rising phases of the industrial cycle with little or no increase in the demand for credit.
The combination of a great abundance of money capital and low demand for loan money even in the face of rising economic activity means that interest rates, both long and short-term, remain low. The competition between the industrial and commercial capitalists, on one side, and the money capitalists, on the other, strongly favors the industrial and commercial capitalists.
The multiplier effect
The rise in monetarily effective demand feeds on itself due to the working of what Keynesian economists call the multiplier and accelerator effects. First, let’s examine the multiplier effect.
When previously unemployed workers are hired or rehired, they receive wages and spend their wages on reproducing their labor power — that is, on consumer goods. The capitalists that sell these commodities to newly hired or rehired workers notice a rise in demand for their commodities and sooner or later either hire additional workers or increase the hours of the workers they are already employing. These workers, in turn, spend their increased wages on additional commodities that they need to reproduce their labor power.
In addition, as profits rise, the capitalists can be expected to increase their personal — unproductive — consumption, especially for luxury commodities. While the very richest capitalists with huge amounts of capital might not reduce their personal consumption during a crisis even if they have to live “on their capital” for a time, this isn’t true of the smaller capitalists. And they are far more numerous than the super-rich capitalists. The “millionaires” make up a considerable part of the market for items of personal consumption, a fact that the underconsumption schools of crisis theory tend to forget.
As the small capitalists increase their personal consumption, especially for luxury items, the owners of the factories that produce these items are then forced to hire additional workers. At first, sales rise gradually, but as the multiplier effect grows stronger, the pace of improvement rises, accelerating the turnover of variable capital. Remember, the higher the turnover rate of variable capital is, the higher the rate, as well as the mass of profit, will be in a given period , all else remaining equal. Therefore, as the post-crisis depression moves toward average prosperity, there are sharp rises in both the mass and rate of profit, even in the absence of a rise in commodity prices.
During the depression, commodity prices, for the most part, stopped falling, even though they are, as a rule, not yet rising. Excess capacity remains high, and any rise in the demand for commodities can be quickly met by increased production at existing low — relative to underlying labor values — prices. Therefore, these low prices relative to values are preserved, which means a continued rise in gold production.
After prices have stopped falling, the still low level of selling prices is now compensated for by the low level of the prices of inputs — cost prices. It is not low prices relative to labor values but falling prices that cause a fall in profits and even losses for industrial and commercial capitalists. While the industrial capitalists are forced to sell their commodities at prices that are still below the values of their commodities, they also get to buy raw and auxiliary materials and labor power at prices below their values. Only the high prices of long-lived elements of fixed capital that were bought during the boom when prices exceeded labor values and have not been written down continue to harm the rate and mass of profit.
Unemployment crisis continues
A crisis followed by a lingering depression means that the rate of surplus value is high and continues to increase. Not only is unskilled labor cheap and plentiful, but for the most part, skilled labor is plentiful and cheap as well. From the viewpoint of the industrial capitalists — though not the workers, of course — this is a win-win situation.
This is why the capitalists strongly oppose any suggestions that the government directly hire the unemployed. To the extent such hiring is done, the position of the sellers of the commodity labor power is strengthened relative to the buyers. This is exactly what capitalists do not want.
However, this is not the only benefit that capital obtains in the aftermath of the crisis. The constant capital has been devalued, which tends to lower, or at least retard, the increase in the organic composition of capital, especially when the organic composition is calculated in terms of market prices as opposed to values.
The actual devaluation of the elements of constant capital largely occurred during the preceding boom. At that time of high investment, much state-of-the-art technology was applied that rapidly lowered the values of commodities — the amounts of socially necessary labor to produce the commodities of given use values under the prevailing conditions of production.
However, this change in the value of constant capital isn’t reflected in lower prices until the crisis forcibly lowers prices. Therefore, the devaluation of capital that occurs during the boom does not become effective in the sphere of prices until the crisis. In the wake of the crisis, the lowered prices of the elements of constant capital, combined with the higher rate of surplus value, work in the direction of raising both the rate and mass of profit.
The crisis has expanded the production of surplus value and created conditions that make the realization of surplus value easier as well. This leads to a sharp rise in both the rate and mass of profit as soon as the crisis proper has passed. Many factories and machines that could not function as capital during the crisis can begin to do so again, though often not before their values have been considerably written down on the books or transferred to new capitalist owners through bankruptcies. Here we see the importance of bankruptcies of individual capitalists and capitalist firms in contributing to the rise in the rate of profit that launches the recovery.
The rise in the profit of enterprise
At the same time, the rate of interest remains low at this stage of the industrial cycle because of the great abundance of money capital that exists for the reasons we discussed above. The competition between the industrial and commercial capitalists and the money capitalists for surplus value strongly favors the former. The recovery is launched by this combination of a high rate of profit combined with a low rate of interest. The profit of enterprise provides the incentive for capitalists to act as industrial capitalists as opposed to money capitalists.
The depression and the stock market
The depression phase, though it means continued hard times for workers, is a highly favorable time for the owners of corporate stocks. First, during the preceding crisis, stocks fell sharply, so there were many good bargains around. If a company has survived the actual crisis, it has a good chance — though there are never any guarantees — to live on, at least to the next crisis. The low rate of interest is also favorable for stocks since the price of stocks is determined — leaving aside the swings of speculation that are so characteristic of the stock market — by the level of dividends divided by the rate of interest. This process is called the capitalization of dividends. Everything else remaining equal, the lower the rate of interest, the higher stock prices will be.
It is widely believed that the stock market is a reliable predictor of major turns in the industrial cycle. And that a sharp fall in the stock market announces the arrival of virtually every crisis of overproduction in the history of capitalism. Likewise, every major period of prosperity in the history of capitalism has witnessed major increases in stock market prices. However, there have been many sharp falls in stock market prices during prosperity, so there can be a stock market crisis without an overproduction or any other type of economic crisis.
Also, the stock market has been “wrong” about every major turning point in the history of capitalism. For example, stock market prices were bullish right through the first half of 1929. They certainly didn’t anticipate the crisis of 1929-33 and only fell after the crisis had already begun. In the late 1940s, on the eve of the Great Boom of the 1950s and 1960s, they were wrong again, this time in the opposite direction. And despite the preliminary crisis of August 2007, the stock market completely failed to anticipate the arrival of the Great Recession, making a new all-time high in September 2007.
For the reasons we examined above, the rate of profit rises rapidly during the post-crisis depression phase of the industrial cycle. Not only are interest rates low and likely to remain low for some time due to high gold production and the continued low level of commodity prices, but the rate of profit and, therefore, the level of dividend payments rise as the rate and mass of profit rise. As a growing mass of dividends capitalized at the existing low interest rates translates into higher stock market prices, a bull market in corporate stocks develops.
The low rate of interest, however, allows the corporations to keep payout levels low since the flow of dividends is being capitalized at that low rate of interest. A given mass of dividends, therefore, translates into higher stock market prices now than will be the case later when the rate of interest has begun to rise. This hurts the small saver — or small money capitalist — who must spend their dividends as opposed to reinvesting them to maintain their accustomed standard of living. This is less of a concern for the large money capitalists who can compensate for a low rate of dividends or yields on stocks by the great amount of corporate stock they own. The low rate of dividend payouts, in turn, enables the industrial and commercial capitalists to increase their independence from the banks at this stage of the industrial cycle since they can hold onto more of their profits in the form of retained earnings rather than pay them out as dividends.
The beginnings of the recovery in Department I
The recovery begins in Department II and gradually spreads to Department I but does so in stages. The first stage in the recovery of Department I is the increased demand for raw and auxiliary materials. As profits in Department II continued to rise, the industrial capitalists of this department began to reopen factories that were either completely shut down or were only in partial operation during the crisis. Before they do so, the industrial capitalists might retool them.
In factories that are about to be reopened, worn out or obsolete factory machines might now be replaced with new and more up-to-date models. Once the factories are reopened, retooling is much more difficult since it is hard to remove old machinery and install new ones without disrupting ongoing production. Therefore, the recovery that at first benefits only the raw and auxiliary material branches of Department I now spreads to the machine-building industry.
Since the industrial cycle runs about ten years, the last similar retooling would have been about ten years prior, when the economy was also emerging from crisis. The average lifespan of factory machines is about ten years, so it is time to replace these machines anyway. This further stimulates the recovery of the machine-building industry.
Average prosperity arrives
As factories are increasingly reopened with new, more powerful machinery, industrial production rises above its old pre-crisis level. The depression phase is now over, and the phase of average prosperity has arrived. Let’s now review the situation that faces both the industrial capitalists and the working class as the depression phase ends and the phase of average prosperity begins.
The above-average rate of unemployment that has prevailed since early in the preceding crisis has considerably raised the rate of surplus value. This, combined with the fall in the prices of the elements of constant capital during the post-crisis depression, translates into sharp increases in the rate of profit. The organic composition of capital has been lowered, or at least its rise has been considerably reduced, both in terms of values and prices. To the extent that the prices of agricultural commodities used in food production or that enter into the production of other wage goods fall, the rate of surplus value is further increased since it is possible to keep money wages down without lowering real wages so much that the reproduction of labor power is endangered.
The rise in the rate of surplus value helps postpone the inevitable renewed rise in the organic composition of capital as depression gives way to average prosperity. Why is this? As a general rule, we can assume that industrial capitalists must pay the full value of the elements of constant capital. But as Marx explained in his epoch-making analysis of surplus value that begins with Chapter 4 in Volume I of Capital, they only pay a part of the new value created by the labor of the industrial workers. Therefore, the higher the rate of surplus value, the less the industrial capitalists pay for this newly created value. The only value the industrial capitalists pay for — the constant capital and the paid-for portion of the workers’ labor-enters the cost price — as opposed to the price of production, the price that society as a whole must pay for commodities.
The higher the rate of surplus value, the more likely it will be cheaper for the industrial capitalists to use variable capital as opposed to constant capital. Therefore, crises and depressions by raising the rate of surplus value not only directly raise the rate of profit but indirectly counter its fall by keeping in check the rise in the organic composition of capital. Therefore, crises are among the most important mechanisms that convert the fall in the rate of profit into a mere tendency.
As we see, the rate of profit is rising sharply as the depression fades and the stage of average prosperity arrives. Equally important, due to the low rate of interest, the profit of enterprise, which provides the incentive to produce surplus value, rises sharply relative to the overall rate of profit. This encourages the capitalists to act as industrial or commercial capitalists as opposed to money capitalists. A portion of the money capitalists convert themselves into industrial or commercial capitalists. The “spirit of enterprise” is strongly encouraged. Marx noted in Chapter 22 of Volume III of Capital: “We shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit.” (4) Therefore, the transition from stagnation to average prosperity requires a combination of low rates of interest and rising rate of profit, and consequently a rapidly rising profit of enterprise.
Average prosperity and the reserve industrial army
During the phase of average prosperity, the size of the reserve industrial army shrinks considerably. An increasing number of unskilled workers find jobs that offer “steady” employment, and the threat of layoffs recedes. Actual labor shortages begin to appear for certain types of skilled labor power whose complex labor is counted as a multiple of simple labor.
Precisely what particular types of skilled labor power are in short supply will vary from cycle to cycle. If a particular type of skilled labor power is in short supply during one cycle, an increasing number of young workers will train for that skill. During the next cycle, that trade might be so overcrowded that there continues to be considerable unemployment in that trade even during average prosperity. As a result, young workers will shun the overcrowded trade.
In the next cycle, the trade will be under-supplied with the skilled labor power it requires. In this way, the price — wages — of skilled labor power is kept in line with the value of skilled labor power over several industrial cycles.
However, in addition to the skilled trades that are “overcrowded” for the current industrial cycle, the supply of unskilled labor remains high relative to the demand for unskilled labor. While actual wage cutting begins to taper off, wage increases are still hard to come by except for those workers whose skilled labor power happens to be in short supply during this particular industrial cycle. As a result, the rate of surplus value remains high and, indeed, may increase further during the stage of average prosperity.
From average prosperity to boom
As soon as industrial production exceeds the previous peak, average prosperity has now arrived but not as yet a new boom. As long as considerable excess capacity remains — that is, a substantial quantity of the existing productive forces still cannot function as capital — industrial investments will still not be made in sufficient quantity for a full-scale boom. During the phase of average prosperity, industrial capitalists can still meet rising demand by retooling and reopening existing factories.
The majority of industrial capitalists are still in a situation where if they were to carry out a large-scale investment that would greatly increase their ability to produce commodities, they would be forced to sell their expanded quantity of newly produced commodities at greatly reduced prices, or the commodities would pile up unsold. This would mean that their older “high-cost” factories would be rendered unprofitable. Therefore, any moves to increase the quantity of their productive forces would lead not to increases in the rate and mass of their profits but rather to a contraction in both. And without these investments, large sections of industry in Department I, especially the sub-sectors of Department I that produce means of production for other Department I industries, continue to stagnate.
Therefore, during average prosperity, capitalist expanded reproduction is not yet in full bloom. The key to transforming average prosperity into a true boom is the whittling away of the remaining excess capacity — the lingering effects of the overproduction of the commodities that made up the elements of fixed capital in the preceding boom.
The postponement of the boom provides a service for capitalist production. By keeping the prices of commodities low relative to the values of commodities it keeps gold production high for a longer period than would otherwise be the case and, therefore, increases the ability of the market to suddenly expand when the boom does arrive.
The accelerator effect and the transition from average prosperity to boom
The continued destruction of a portion of the old high-cost factories and the reopening of other factories, along with the shift from partial to full utilization of other factories and other forces of production, progressively reduce excess capacity. Though not yet the rule, an increasing number of industrial capitalists find themselves in a situation where they will be unable to meet the additional demand if they fail to increase their productive forces.
If an industrial capitalist is forced to turn away potential customers, the would-be customers will turn to alternative sources of supply — the competitors of our industrial capitalist. To prevent the competition from luring away customers, our industrial capitalists will have to invest in additional factories or enlarge existing ones. As more and more industrial capitalists find themselves in a situation where they risk having trouble meeting additional demand if they do not increase the productive forces at their disposal, the industrial construction industry, which has been depressed since the last crisis, comes back to life. In addition to increased demand for construction workers, there will be increased demand for building materials. This means increased orders for the metal-producing industries and, ultimately, for the mining industries as well.
Eventually, [prices of] primary commodities that have been low since the last crisis begin to rise. Just as the multiplier effect causes an increase in the production of consumer commodities produced by one capitalist to lead to a rise in demand for the consumer commodities produced by other industrial capitalists, rising investment in the production of industrial commodities by one industrial capitalist leads to a further rise in such investment by other industrial capitalists. This is called by economists the “the accelerator effect.”
In addition, industrial capitalists that produce commodities consumed productively by other industrial capitalists are forced to hire additional workers. The newly hired workers become buyers of additional consumer commodities necessary to reproduce their labor power and some of the now rapidly growing mass of profit realized by the capitalists of Department I is spent on consumer commodities as well. As a result, the accelerator effect interacts with and strengthens the multiplier effect, pushing the economy toward boom conditions.
Keynesian economists put great emphasis on the accelerator effect. However, we have to remember that the accelerator effect will push the economy toward “full employment” only as long as there is enough money capital to finance it as well as a sufficient quantity of money or credit to buy the increased quantity of commodities that are produced.
Remember, the formula of capitalist production is M—C…P…C’—M’. On the left side of the formula, if an insufficient amount of M is available, the process of capitalist production cannot get off the ground. And on the right side, there has to be enough M to realize the value of C’ as M’. Therefore, if a sufficient quantity of money is not available, the rising investment will lead to a crisis, not a boom.
However, as we have seen during the phase of average prosperity, there is plenty of money available to finance the approaching boom. Since commodity prices have been below the values of commodities, gold production has remained highly profitable, giving a powerful stimulus to the production of gold. A considerable quantity of idle cash is still available in the banks, allowing the economy to operate on a sound cash basis rather than on a credit basis.
Because of this abundance of cash, the rising investment does not provoke a new crisis but rather, through the accelerator effect, pushes the economy towards a new boom.
The stock market and average prosperity
The rising mass of dividends is still being capitalized at low rates of interest. The bull market that was already flourishing during the depression continues — with inevitable ups and downs, or “corrections” as stock market operators call them — during the phase of average prosperity. Sell-offs in the stock market are quickly followed by powerful rallies that bring stock prices to new all-time highs. The stock market “bulls” continue to prevail over the “bears.”
While the rate of interest has remained low or risen only modestly during average prosperity, both the rate and especially the mass of profit are high and rising. Dividends rise along with profits even if payout levels remain low due to the low rate of interest. As bourgeois economists put it, the “cost of capital” remains low.
(1) Quoted from Josef Winternitz, “The Marxist Theory of Crisis.” https://www.marxists.org/subject/economy/authors/winternitz/1949/marxisttheoryofcrisis.htm (back)
(2) The “scientific-technological revolution” was second only after “arms spending” as an explanation of the particular post-World War II prosperity.
This is an example of lazy thinking using the “scientific-technological revolution” as a cliché rather than the real progress of science and technology.
To be more specific, the scientific-technological revolution of the post-World War II boom years was broken down into atomic energy and computerization as the two technological revolutions that were driving the post-World War II boom. However, atomic energy turned out to be something of a dud as atomic energy plants proved to be far less profitable than traditional power plants based on fossil fuels. As for computerization, it didn’t begin to get seriously underway until after the end of the post-World War II boom. During the 1950s and 1960s, the computer industry played a quite modest role.
In reality, the booms of the 1950s and 1960s were driven by technologies that were already widely applied before the Depression. For example, the renewed automoblization, as Baran and Sweezy called it in “Monopoly Capital.” Autombolization was rapidly gaining momentum in the U.S. and was about to spread to Europe when the crisis of 1929-33 brought it to a screeching halt.
Far more radical technological changes like the electronic circuit board and electronic miniaturization — which made the real computer revolution — did not begin to play a massive economic role until after the close of the postwar boom period. If the scientific-technological revolution were the driving force of the boom, the boom should have started and not ended in the 1970s. (back)
(3) Marx, Capital, Volume III, Part V, Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital. Chapter 33. The Medium of Circulation in the Credit System https://www.marxists.org/archive/marx/works/1894-c3/ch33.htm (back)
(4) Marx, Capital, Volume III, Part V: Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital. Chapter 22. Division of Profit. Rate of Interest. Natural Rate of Interest. https://www.marxists.org/archive/marx/works/1894-c3/ch22.htm (back)
A Critique of Crisis Theory 