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 2
Profit Squeeze
Basic formula of capitalist production
The basic formula of capitalist production is M—C…P…C’—M’. (1) Industrial capitalists begin with a sum of money M. They must then find on the market the elements of productive capital — both constant capital (factory buildings, machinery, and raw and auxiliary materials) and variable capital (labor power), the only commodity that produces surplus value. The productive capital, both constant and variable, is represented by C.
Next, the industrial capitalist must bring the elements of C together in the act of production, represented by the letter P. During the production process, the capital of the industrial capitalist is expanded through the absorption of surplus value. Marx called this the “self-expansion of capital,” or in some translations, the “valorization” of capital.
Remember, the actual “self-expansion of capital” comes from the variable capital alone. When the production process has been completed, the capitalist possesses a sum of commodities that have a greater value than either M, the money capital, or C, the commodity elements of the productive capital that the industrial capitalist started with.
This increase in value, the surplus value, is represented by the prime sign. Marx called C’ (the produced commodities that contain surplus value but have not yet been sold) commodity capital. These commodities must then be sold at their values if the industrial capitalist is to fully realize the surplus value contained within them in money form.
If this is done successfully, the industrial capitalist will possess a sum of money — M’— equal to the money the industrial capitalist started out with, plus an additional sum that represents the surplus value realized in money form — profit.
Notice how we find money at both the starting point of the formula and the termination point. Here we assume that all goes well and that there are no crises. But, in fact, crises are possible at each point in the process.
For example, it is possible the capitalist will not be able to find all the necessary elements of C on the market. Perhaps there are shortages of some elements of constant capital, or there might not be enough workers with the necessary skills. That is, there may be a shortage of certain types of skilled labor such as carpenters, bricklayers, or fitters.
Something might also go wrong in the production process, P, itself. (2) Finally, for some reason, it might not be possible to successfully complete the phase C’—M’. The capitalist owners of the commodities might not find buyers at all, or if they do, they might have to sell at prices so low that the surplus value cannot be fully or even partially realized.
Insufficient production of surplus value
The theory of underconsumption that we examined in the preceding chapter has put the emphasis on the C’—M’ transition. In contrast, the profit-squeeze schools see the source of crisis in either the M—C phase or the P (production) phase. As I have already noted, the industrial capitalist might not be able to find enough labor power of the necessary skills at prices — that is, wages — low enough to produce a sufficient amount of surplus value to make carrying out production worthwhile.
The problem might also arise in the P phase. The resistance of the workers to capitalist exploitation at the “point of production” — for example, a strike or slowdown such as “work to rule” — might result in little or no surplus value being produced. In either case, a crisis will result.
Let’s assume that the industrial capitalist cannot find enough labor power of the right type that is necessary to produce a particular kind of commodity. In this case, our industrial capitalist will not be able to fully transform the initial M to C successfully. Our industrial capitalist might then decide to hold onto their M for the time being. If the shortage of labor power affects only one or at most a few lines of production, our industrial capitalist might turn into a money capitalist for now and lend out the surplus M to other industrial capitalists through the credit system. But if the shortage of labor power affects all branches of capitalist industry, this will not work. Money will then be hoarded.
As a secondary phenomenon, the widespread hoarding of money will give rise to both an apparent shortage of money on the one hand and an apparent generalized overproduction of commodities on the other. What appears as a generalized overproduction of commodities will really be a generalized shortage of the commodity labor power, the sole source of surplus value.
The essence of the crisis, therefore, will not be a problem of realizing surplus value but of producing surplus value. With this kind of crisis, if the shortage of labor power is removed, both the production and the realization of surplus value will again proceed smoothly. In Volume III, Chapter 15 of Capital, Marx even gave a name to this type of crisis. He called such a crisis the “absolute overproduction of capital.” (3)
Could the cyclical crises that have marked capitalist production since 1825 be, in essence, crises of the absolute overproduction of capital? According to this theory, during the period of cyclical upswing and boom, the demand for the commodity labor power grows faster than the supply. As the boom goes on, the demand for labor power outruns the supply at existing wages. An “absolute overproduction of capital” occurs when new investment fails to increase the amount of produced surplus value.
Such a crisis may take the form of a shortage of money on one side and a generalized overproduction of commodities relative to money on the other. As the downturn takes hold, production will slump, workers will be laid off, and unemployment will soar. The general shortage of the commodity labor power will, therefore, disappear. Capitalist production will again become profitable, leading to an economic recovery that will last until, once again, the demand for the commodity labor power outruns the supply of labor, leading once again to a new absolute overproduction of capital and a new crisis.
Here, we have a cyclical movement. Since the size of the potential working-class population is growing, each cycle will reach a higher level of production before the crisis breaks out, just as happens in the real concrete industrial cycles that have occurred in the world capitalist economy since 1825.
Class-struggle theory
Another possibility is that the crisis begins during the P phase. As demand for labor power rises, workers more and more resist their exploitation by capital at the point of production. Increasingly, they refuse to produce surplus value for the bosses. As the amount of surplus value produced shrinks, a crisis will sooner or later break out. Again, the industrial capitalists will react by hoarding money M so the crisis will appear to be a crisis of the generalized overproduction of commodities relative to a shortage of money. But in essence, in this case, the crisis arises from the class struggle between the working class and the capitalist class.
Could the periodic crises of capitalist production be rooted in this struggle? Those who give an affirmative answer sometimes call it the class struggle theory of crisis. In this way, two of Marx’s main ideas, the class struggle and the periodic economic crises under capitalist production, are integrated.
Bell and Cleaver and the class-struggle theory of crises
Peter Bell and Harry Cleaver presented a version of this theory in a lengthy article that first appeared in 1982 in the Journal of Research in Political Economy, Volume 5. It was reprinted in The Commoner, Autumn 2002. (4) Before I take up the Bell and Cleaver article (which has many interesting quotes and facts about the evolution of Marx’s economic ideas), I want to make the following observations.
First, the class-struggle theory of crises and demand for workers outrunning the supply are related concepts. During a period of mass unemployment, workers will tend to be far more submissive to the demands of the bosses on the factory floor than will be the case during a period of acute labor shortages. Given a situation of mass unemployment, the shop foreman, acting as a representative of the industrial capitalist, will threaten workers resisting capitalist exploitation by explaining that there are many other people out there who would like their jobs.
But if there is a general shortage of labor, it is the workers who can threaten to quit. If the shortage of labor is severe enough, workers will quickly find other jobs, perhaps with better pay and better working conditions. Indeed, under these conditions, many industrial capitalists will attempt to lure workers working for other capitalists by offering better pay and conditions. The workers will be in a good position to offer resistance to capitalist exploitation on the shop floor, thereby tending to undermine the production of surplus value.
Skilled and unskilled labor
Skilled workers are in a position to take advantage of the cyclical upswings to a much greater extent than unskilled workers. As a general rule, workers spend money, time, and effort learning a skill only if they have reason to expect considerably higher wages over their working lifetimes. For example, plumbers might be in great demand, and wages offered for this type of skilled labor will then rise. As a result, many young people will learn the plumbing trade. The number of plumbers offering their labor power on the labor market might then begin to exceed the demand for their type of skilled labor power at the prevailing wage. The wages of plumbers will then fall.
As a result, fewer people will be interested in entering the plumbing trade, and the number of workers with that particular skill will decline. In time, the demand for plumbing labor power will begin to exceed the supply, and the wages of plumbers will again increase. Therefore, as a general rule, shortages of skilled labor appear during economic upswings. If such shortages did not occur during the favorable stages of the industrial cycle, over time, the wages of skilled labor would fall to the minimum received by unskilled labor. There would be no economic incentives for young people to learn special skills, and the supply of skilled labor would dry up.
In this way, in the long run, the law of value tends to set the supply of each type of skilled labor equal to the demand of the industrial capitalists for each particular type of skilled labor power. The “reserve army of unemployed” — unemployed workers who can be drawn into production as the capitalists need them — tends to keep a lid on the wages of unskilled workers. Therefore, an economic upswing has to last much longer for the growing demand for labor power to raise the wages of unskilled workers. However, if the upswing lasts long enough, even the wages of unskilled labor will rise.
The more workers are organized into strong labor unions, the better they will be able to take advantage of favorable conjunctures in the labor market. Rising wages reduce the problem of “underconsumption,” but only by striking at the very heart of capitalist production, the production of surplus value.
Indeed, this is one of the leading objections to the underconsumption theory.
But in the real world, the more wages rise, the closer is the crisis. It does no good for the industrial capitalists to sell their commodities at their values if the rate of surplus value falls to zero. There can be no question of realizing surplus value that is not produced. Where there is no production of surplus value, there can be no realization of surplus value in money form or profit. And where there is no profit, there cannot be in the long run capitalist production.
The labor market today is international
Today, we have to remember that the labor market is increasingly international. Whenever the domestic labor market shows signs of tightening, capitalist governments weaken, remove or do not enforce restrictions on immigration.
Nowadays, many tasks can even be “outsourced” over the Internet. In the real world, long before an absolute overproduction of capital occurs, a crisis of the relative overproduction of commodities and capital breaks out. It would take an economic boom lasting for several decades, maybe more, before anything like an absolute overproduction of capital would develop under today’s conditions.
While even today, shortages of skilled labor create problems for the industrial — and other — capitalists during upswings in the industrial cycle, unskilled workers can always be turned into skilled labor through on-the-job training or automation, and a deepening of the division of labor can replace skilled labor with unskilled labor.
Therefore, there is a real problem with the attempt to reduce crises to an insufficient supply of labor power. It’s been a long time since anything like a generalized shortage of unskilled labor has been observed on today’s globalized labor markets. Was the labor market all that tight in the period immediately preceding the economic crisis that began in August 2007, for example?
A critique of Bell, Cleaver, and the class-struggle theory of crisis
Bell and Cleaver divide the work of Marx into two periods, the first in the 1840s and early 1850s, when, following Engels, Marx saw a generalized overproduction of commodities as the primary cause of crises. The second period begins in 1857 onward, when: “Whereas before, overproduction was the unique and only superficially understood theory of crisis,” now overproduction was “both fully analyzed and allocated a much more limited role in Marx’s theory.” (Peter Bell and Harry Cleaver: “Marx’s Crisis Theory as a Theory of Class Struggle,” The Commoner, No. 5, p. 5)
But are Bell and Cleaver correct? Did Marx shift from an “overproduction” theory of crises to a “class struggle theory of crises” around 1857?
Stimulated by the economic crisis that broke out in the second half of 1857 in the United States and quickly spread to Britain and Europe, Marx returned to his economic studies with renewed vigor. He spent the fall and winter of 1857-1858 filling a series of notebooks that, many years after his death, were published under the title of the Grundrisse. (5)
It was in this period that Marx made his most important economic discovery. The capitalists, Marx now realized, do not buy the “labor” of the workers as the (bourgeois) economists held. Rather, they buy the ability of the workers to work — the labor power of the workers. The amount of labor that it takes society to produce a given quantity of the commodity labor power measured in terms of time is quite different from the amount of value-creating labor also measured in terms of time that workers are required to perform for a capitalist once they have sold their labor power. The difference between the amount of time that workers perform for the capitalist once they have sold their labor power and the quantity of labor necessary to reproduce their ability to work for a given quantity of time once it becomes embodied in commodities is what Marx called surplus value.
Therefore, starting in 1857, Marx saw clearly for the first time that surplus value will be produced even if all commodities, including the commodity labor power are sold at their values. From that point onward, Marx insisted that if you cannot explain surplus value — profit when realized in money — on the assumption that all commodities, including labor power, sell at their value, you cannot explain surplus value at all.
In these notebooks, Marx made many additional breakthroughs in his theory of value and money that carried him far beyond the Ricardian theory of value. The most important of these was the distinction between concrete labor, which produces use values, and abstract labor, which is the very substance of value once it becomes embodied in commodities. The Grundrisse notebooks are, therefore, considered to mark the beginning of Marx’s mature economic writings.
Marx’s later published works, A Contribution Towards a Critique of Political Economy and Capital itself, were based on the notebooks of 1857-1858. There is no doubt that the winter of 1857-1858 marked a major transition in Marx’s economic thought. As regards economic theory, it was the most creative period of his life.
This does not mean that Marx discarded all his views on economics he had held before 1857. For example, did Marx change his view, expressed in the Communist Manifesto, that the general overproduction of commodities was the primary cause of the capitalist economic crises “that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly”?
As I pointed out in the introduction to this work, there is no sign of such a shift in Engels’ description of cyclical crises as crises of the overproduction of commodities in Anti-Duhring, which was written in 1877 near the end of Marx’s lifetime. Is it possible that Marx came to have a radically different explanation of the periodic economic crises that characterize the capitalist mode of production than his closest friend, Frederick Engels?
Bell and Cleaver versus Marx
Bell and Cleaver themselves provide evidence that Marx had not changed his view that the cyclical crises of capitalism are crises of overproduction when he wrote Volume I of Capital by quoting the following from that work:
“It is these absolute movements of the accumulation of capital which are reflected as relative movements of the mass of exploitable labor-power, and therefore seem produced by the latter’s own independent movement. To put it mathematically: the rate of accumulation is the independent, not the dependent, variable; the rate of wages, the dependent, not the independent variable.” (Capital, Volume I, Chapter 25: “The General Law of Capitalist Accumulation”)
Bell and Cleaver are clearly bothered by this evidence that Marx had not changed his fundamental view on the nature of the periodic economic crises that marked the history of capitalist production from 1825 onward. They write: “While constantly cited by orthodox Marxists to show the limitation on the potential power of wage struggles, this passage seems totally one-sided. Capital accumulates and sometimes the pace of that accumulation induces rises in wages, sometimes their fall. In contemporary terms, the rise and fall of wages are determined by the changing industrial demand for labor.” (p. 56)
What Bell and Cleaver see as “one-sided” is simply the application of the law of value to wages.
During the boom, the accumulation of capital accelerates, and the demand for labor power increases, making possible a rise in wages and a temporary fall in the rate of surplus value. Then, when the cyclical crisis comes, the rate of accumulation drops or even goes negative, the demand for labor power plummets, wages fall, and the rate of surplus value rises once again.
While some crises are preceded by significant falls in the rate of surplus value, this is not always the case. For example, there is no evidence that there was a significant fall in the rate of surplus value in the period preceding the crisis of 2007-2009.
Bell and Cleaver, however, believe that it is the rise in wages and the growing resistance to capitalist exploitation on the shop floor that causes the rate of accumulation of capital to drop, which causes the crisis, and not a general overproduction of commodities. The apparent generalized overproduction of commodities is the result of the crisis, according to Bell and Cleaver, not its underlying cause. Marx, on the other hand, saw declines in capital accumulation as a consequence of cyclical crises of overproduction.
Bell, Cleaver, and Say’s law
Bell and Cleaver seem to be looking for an alternative explanation for crises than the one based on Marx because they don’t see how such a general glut of commodities can develop. “But,” they write, “if the expansion of capital based on absolute and relative surplus value strategies results in a growth of points of exchange, and in the expansion of money available to buy the output, there is no reason to think that money will be less than the value of the commodities to be sold.” (p. 43) Here Bell and Cleaver are flirting dangerously with Say’s law. Why, for example, will the supply of money increase in such a way that there will always be enough “available to buy the output”?
Is it simply a question of the monetary authority issuing money in just the right quantities? When he was a professor of economics at Princeton, Ben Bernanke was inclined toward this view. But starting in the summer of 2007, Bernanke, who was by then chairman of the Federal Reserve Board, found out in practice that things are not so simple. Later in this work, we will examine the economic laws that actually determine the quantity and value of money.
Are crises victories for the workers?
Bell and Cleaver write: “For workers, the most important thing about capitalist crisis is that it is, for the most part, the consequence of their struggles. The rupture of accumulation by struggle is a moment of conquest.” (pp. 58-59) Like, for example, the later part of 2008 when unemployment on a global scale began to soar as millions of workers lost their jobs? I am afraid few workers would agree that the soaring rate of unemployment caused by a crisis is a “conquest.” (6)
Aren’t the spokespeople for big business complaining that “excessive demands” of workers are driving the economy into crisis? By resisting these “excessive demands,” the spokespeople for business explain, they are doing all in their power to avoid economic crisis. Bell and Cleaver agree with these arguments. The only difference is that they see economic crises as victories for the workers, while most people, including workers, certainly do not welcome the arrival of economic crises.
If the weight of scientific evidence supported Bell and Cleaver’s view that the defensive struggles waged by the working class under capitalism are the primary cause of the periodic economic crises that affect the capitalist economy, we would have to accept the evidence no matter what the political implications.
But does the evidence really support this? To be fair to Bell and Cleaver, they wrote these words during the deep recession of the early 1980s, which represented the final stage of the prolonged stagflation crisis that had affected the global capitalist economy during the 1970s. The decades preceding the 1970s had indeed seen huge gains for the workers, at least in the advanced capitalist countries, in terms of both wages and social insurance.
However, this was not the case during the period that preceded the crisis of 2007-2009. On the contrary, those decades saw a steady retreat on the part of the workers of both the advanced — imperialist — countries and the underdeveloped countries. Indeed, the most important political development of these years was the counterrevolutionary destruction of the planned economies of the Soviet Union and the East European countries. This represented the greatest defeat suffered by the workers’ movement in its history.
If the class-struggle theory of Bell and Cleaver is correct, shouldn’t these defeats have “removed” the crisis? Indeed, for several decades during the so-called Great Moderation, the spokespeople for the ruling capitalist class pointed to the relatively limited nature of economic crises during those years to make exactly this point.
To use their language, the victory of “free market” policies and the defeat of socialism, by which they meant the concessions the capitalists had granted to the working class in the post-World War II years, had ushered in a period of great capitalist prosperity with only very mild and increasingly infrequent recessions. The capitalist spokespeople predicted that capitalist prosperity would last as long as the capitalists were successful in resisting any return to a “socialist” policy of again granting concessions to the workers.
Then came the events of 2007-09.
(1) Capital, Volume II, Chapter 1: The Circuit of Money Capital https://www.marxists.org/archive/marx/works/1885-c2/ch01.htm (back)
(2) This is actually quite common in agriculture. Frost, drought and flooding often considerably lower agricultural production and can cause it to fail altogether. (back)
(3) Capital, Volume III, Chapter 15, Section 3, Paragraph 3. https://www.marxists.org/archive/marx/works/1894-c3/ch15.htm (back)
(4) Marx’s Theory of Crisis as a Theory of Class Struggle, Peter Bell and Harry Cleaver. https://files.libcom.org/files/cleaver05.pdf (back)
(5) Grundrisse. Foundations of the Critique of Political Economy (Rough Draft) https://www.marxists.org/archive/marx/works/1857/grundrisse/ (back)
(6) The crisis of 1929-32 in Germany led straight to the victory of Hitler and the greatest defeat that the modern working class had suffered up to that time. This crisis was anything but a victory for the working class. (back)
A Critique of Crisis Theory 