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 11: The Boom Phase
The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during a boom that capitalist expanded reproduction develops with anything approaching full force. But because it is developing vigorously, so too do its contradictions grow until they again find vent in a crisis.
As we saw in the preceding chapter, during the phase of average prosperity, excess capacity is whittled away at both ends. On one end, it is reduced by the destruction by the capitalists of factories that will never again be profitable. Another portion of the previously idled factories and machinery are put back into operation, with a significant portion of their value written off. The bankruptcies of industrial capitalists that transfer the ownership of devalued fixed capital from weak to strong hands play a significant role here. This, combined with rising demand during the boom phase, allows a portion of the forces of production idled during the preceding crisis to function again as capital which yields to its owners at least the average rate of profit. In this way, excess capacity is progressively reduced.
As the margin of excess capacity shrinks, the percentage of the productive forces that are lying idle is reduced to such an extent that the industrial capitalists are forced to undertake massive investments in new factories packed with state-of-the-art machinery. Under the pressure of competition, individual industrial capitalists cannot afford to see their margin of excess capacity shrink to zero for fear of not being able to meet the rising demand for their commodities.
If industrial capitalists cannot meet the demand, their customers will turn to competitors. Therefore, individual factory owners aim to retain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand, preventing loss of market share.
Once a sufficient number of industrial capitalists respond to this pressure to expand by undertaking significant new investments, average prosperity is transformed into a boom. With the onset of the boom, recovery finally spreads to the sub-department of Department I which produces the means of production used by Department I itself.
Not only do sectors of Department I, such as the factory construction industry, languishing since the end of the last boom, finally come to life, but business also improves further in Department II. The workers and capitalists of the sub-department of Department I that produce means of production for Department I now have greatly expanded purchasing power for the items of personal consumption that are produced in Department II. Keynesian economists call this the “multiplier” and “accelerator” effects. The growing boom feeds on itself.
Once it gets going, the real question becomes, why doesn’t the boom last indefinitely?
How contradictions of capitalist expanded reproduction grow during the boom
The more the individual industrial capitalists attempt to expand their margin of excess capacity, the more the margin of excess capacity shrinks overall due to the operation of the accelerator effect. Therefore, the attempt of the industrial capitalists to halt the shrinkage of their remaining excess capacity is doomed to fail.
The more the individual industrial capitalists attempt to increase their excess capacity by increasing their investments, the more the operation of the accelerator effect results in the further shrinkage of the industrial capitalists’ excess capacity as a whole.
Like crises, booms vary significantly in intensity as well as duration. The intensity of a given boom can be measured by the extent to which excess capacity disappears. An “ideal” boom would lead to a complete disappearance of excess capacity. In this case, all the forces of production would now be functioning as capital. However, in all real-world booms, excess capacity does not disappear altogether, though it shrinks considerably. The closer a particular boom gets to the ideal boom, the more factories and other enterprises are forced to operate at the limits of their physical capacity to produce.
Under these conditions, driven by their need not to lose customers, many industrial capitalists are forced to operate their factories at levels of capacity that exceed the optimum levels. The ability of the factory and its workers and machines to produce is often strained to the point that the productivity of labor drops slightly in some branches of industry.
The high-pressure production of the boom increases the number of worker deaths as the workday is extended, workers’ injuries increase, and machinery is damaged. Any decline in productivity due to the pressure on the productive forces does not mean that the productive forces are declining in an organic way. It simply means that the demand for commodities is so strong relative to the given development of the productive forces that industry is working at a level beyond its technically optimum efficiency.
Disproportionate production
As long as there is significant excess capacity, the problem of disproportionate production is held in check. For example, some industries might work at only 60% of their optimum capacity, while others might work at 85%. Nevertheless, even those working at 85% still retain enough excess capacity to rapidly increase production if rising demand makes this profitable for their industrial capitalist owners. However, as a developing boom causes capacity utilization to climb throughout the economy, the chances increase that certain branches of industry will not be able to meet the demand for their commodities at anything like prevailing prices.
The result will be bottlenecks, shortages, and skyrocketing prices of the commodities that are in particularly short supply. This is most likely to happen in raw materials and primary commodities. From the crisis right through the phase of average prosperity, primary commodity prices tend to stay low relative to their prices of production. As long as the rate of profit remains below the average rate of profit in the primary commodity-producing sector, capital tends to flow out of these sectors toward other more profitable sectors of production.
It is not always possible to rapidly increase raw material production in the face of rapid rises in demand. During a period of low profits, exploratory budgets that finance the search for new raw materials remain low. In addition, since investment in primary commodities is weak due to below-average profit rates, investment in new technology that makes it possible to exploit poorer ores or drill deeper oil wells remains minimal. Major progress in the ability to drill deeper oil wells or obtain metal from poorer ores requires not only the invention of new technical processes but also massive new investments to put them into effect on a large scale.
However, these investments will not be made as long as the rate of profit in the extraction industries remains below the average rate of profit. Therefore, when the onset of an industrial boom causes the profits of primary commodity producers to suddenly increase — rising from below the average rate of profit, or even altogether unprofitable levels — to huge super-profits, it will take a while for searches for new sources of supply and the development and introduction of new technology to bear fruit.
Therefore, until new investments in primary commodity production begin to take effect, raw and auxiliary materials will likely remain scarce at current prices. The only way supply can be equalized with demand under these conditions is through rapid price increases. Rising prices for raw materials and energy, for example, put downward pressure on the profits of industries dependent on the given raw material.
The industries facing these downward pressures on their rates of profit will begin the search for substitute raw and auxiliary materials and/or find ways to economize on these materials. But again, this may take some time, especially if it involves the development of new technologies and major new investments.
In the case of agricultural commodities, there is the further factor that the decision to plant crops can only be carried out at certain times of the year. If prices of these commodities suddenly start to soar during the growing season, it will be necessary to wait until the next growing season before a new crop can be started.
As long as there are still reserves of idle cash in the banks or the limits to expanding clearing agreements and credit have not yet been reached, there will be a sufficient quantity of money to keep markets for commodities growing. Therefore, it is possible for these price increases to be passed on to buyers.
However, once excess cash has been fully absorbed into circulation and the inflation of credit has reached its limit, it will no longer be possible for cost price rises to be passed along to customers. From that point onward, rising raw materials costs eat into profits or even turn boom-time profits into outright losses for industries dependent on the now scarce raw and auxiliary materials. When this occurs, increases in raw and auxiliary prices cease to be “inflationary” and become highly “deflationary” and may even trigger the outbreak of the next crisis.
The boom and the rise in the organic composition of capital
Even if an increasing percentage of new capital takes the form of constant capital — machinery and raw and auxiliary materials — variable capital can still grow in absolute terms at an accelerated rate. In fact, at this stage of the industrial cycle, variable capital tends to grow faster than the working population. That is the reserve army of the unemployed shrinks. The balance of forces in the labor market begins to shift in favor of the sellers of labor power — the workers.
This shift tends to halt, and may for a while even reverse, the rise in the ratio of unpaid to paid labor — the rate of surplus value. The capitalists respond to this situation by replacing living labor with dead labor — machinery. The tight labor markets accelerate the growth in the organic composition of capital.
On average, individual industrial capitalists have to pay for all the dead labor — constant capital — they use, but they pay for only a portion of the living labor. However, to the extent that the rate of surplus value falls, and they are forced to pay for a greater proportion of the living labor they use, it becomes attractive to them to transform a greater proportion of their profits into constant as opposed to variable capital, causing the organic composition of capital to rise.
Working in the same direction, rising prices of raw and auxiliary materials — energy, for example — further increase the organic composition of capital in the sphere of prices, and depletion of raw materials can even cause a rise in the organic composition of capital in the sphere of values as well.
During the boom, when the forces are production are developing at the fastest rate possible under capitalist production, the rate of profit comes under downward pressure in two ways. One is through the fall in the rate of surplus value. The fall in the rate of surplus value, in turn, causes the organic composition to grow faster, further reducing the rate of profit. This shows a deep-seated conflict between the needs for the development of the productive forces and capitalism. All this points towards the inevitable transformation — if human civilization is to continue — of capitalism into socialism.
The boom exerts pressure on both sources of wealth — Mother Earth and human labor — and ends up accelerating the growth in the organic composition of capital. This, along with the stagnating or even momentarily declining rate of surplus value, implies a fall in the rate of profit. The sole aim of capitalist production is profit, yet the stronger the boom is, and the longer it lasts, the more the very basis of profit is undermined. This is enough to demonstrate that a boom cannot last forever.
Marx defined an absolute overproduction of capital as a hypothetical situation where a further investment of capital would lead to a decline in the total quantity of surplus value produced owing to a fall in the rate of surplus value.
Marx explains: “There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labor, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the laboring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labor to necessary labor.” (1)
As the shortage of the quantity of labor power relative to the demand for it grows acute, the capitalists bid workers away from one another — first skilled labor, which actually happens to a certain extent in real-world booms, and, if the boom lasts long enough, unskilled workers as well.
An absolute overproduction of capital would undoubtedly cause an acute crisis for capitalist production if it ever developed in reality. Over the years, many Marxists have assumed that this hypothetical situation is Marx’s actual crisis theory. However, Marx and Engels emphasized in many places that crises are actually caused by a relative, not absolute, overproduction of commodities.
Long before an absolute overproduction of capital develops, a relative overproduction of commodities — general flooding of the market with unsold commodities — brings the boom to a halt. And a relative overproduction of commodities implies a relative, not an absolute, overproduction of capital. The boom is doomed to collapse not because there are too few potential workers but because there is not a large enough market for the commodities that the workers can produce with the help of the growing forces of production.
The “timely” arrival of a crisis of the generalized overproduction of commodities prevents a crisis of an absolute overproduction from developing. This is indeed perhaps the most important “service” that crises of relative overproduction perform for capital.
How the industrial boom causes inflation
As excess capacity melts away, it becomes increasingly common for the demand for commodities at existing prices to exceed supply. As Marx explained in his early work Wage Labor and Capital, (2) under these conditions, competition between the capitalist sellers of commodities vanishes. A “sellers’ market” prevails in more and more commodity markets. Under these conditions, supply can only be equalized with demand through a rise in market prices. As long as the boom continues, prices will keep right on rising.
A powerful factor that leads to higher prices during the industrial boom is the increased construction of new factories and other large construction projects. It takes a considerable amount of time to build a large factory. Not only do the factory buildings have to be built, but new large-scale machines also have to be constructed, installed, tested, and debugged before the factory can be put into production.
The capitalists engaged in these activities receive profits, and the workers receive wages. In addition, the capitalists collect a cash flow that realizes in money form the value of the constant capital used up in production. This cash flow is reflected on the income statement under “allowances for depreciation.” The total cash flow — profits and wages plus depreciation allowances — increases the buying power of both the capitalists and workers of Department I. But until the new factories are in production, there will be no increased supply of commodities to meet the increased demand. Until the new factory construction actually leads to increased production, the supply and demand of commodities can only be equalized at higher prices.
The ‘wage-push’ theory of inflation
During booms, the capitalist media and many economists — especially those of the Keynesian school — claim that it is the rise in the price of a particular commodity — labor power — that is responsible for the rise in the price of all other commodities. Only restraint on the part of the unions, Keynesian economists claim, can end the “cost-push” inflation without a recession, as if recessions — crises — can be avoided under capitalist production!
In contrast, the rival neoliberal, or “monetarist,” school of economists — the followers of Milton Friedman, the other “giant” of 20th-century bourgeois economics — plays down or denies these claims altogether. According to the Friedmanites, changes in the general price level are governed by the rate of growth of the quantity of money relative to the rate of growth of the quantity of commodities. They hold that this, not changes in money wages, governs the rate of inflation — or deflation. Ironically, the Keynesian school, the school of bourgeois economists generally viewed as more friendly to the working class, insists that trade unions exercise “wage-restraint” to “hold inflation in check” during economic booms.
The workers are well advised to disregard the advice of their Keynesian “friends” in this regard. If they follow the advice of Keynesian economists during the boom, the only phase of the industrial cycle when the balance of forces on the labor market favors them, they can be sure that the bosses will not practice the same moderation when the balance of forces on the labor market once again shifts in favor the bosses, as it surely will. On the contrary!
During booms, the workers have no alternative but to push for rises in money wages because prices of commodities that enter into the consumption of the working class are rising, for the reasons we examined above. The workers must ask for raises in money wages to defend their existing standard of living. If the demand for labor power does exceed the supply at existing prices — wages — the workers may find themselves in a position to take advantage and to win an actual rise in their standard of living. When this happens, and this is very much the exception under capitalism, the unions under pain of destruction must take full advantage of the situation while it lasts.
Marx wrote in Value, Price, and Profit: “These few hints will suffice to show that the very development of modern industry must progressively turn the scale in favor of the capitalist against the working man and that consequently the general tendency of capitalistic production is not to raise, but to sink the average standard of wages, or to push the value of labor more or less to its minimum limit. Such being the tendency of things in this system, is this saying that the working class ought to renounce their resistance against the encroachments of capital and abandon their attempts at making the best of the occasional chances for their temporary improvement? If they did, they would be degraded to one level mass of broken wretches past salvation. I think I have shown that their struggles for the standard of wages are incidents inseparable from the whole wages system, that in 99 cases out of 100, their efforts at raising wages are only efforts at maintaining the given value of labor [Marx means labor power here -SW], and that the necessity of debating their price with the capitalist is inherent to their condition of having to sell themselves as commodities. By cowardly giving way in their everyday conflict with capital, they would certainly disqualify themselves for initiating any larger movement.” (3)
Strikes and booms
Under boom conditions, industrial capitalists are especially afraid of strikes. Remember, the boom begins because each industrial capitalist fears losing customers to other industrial capitalists. This forces each industrial capitalist to undertake major investments so that they will be able to meet the rising level of demand for their commodities. If a strike occurs, it will likely mean that a particular industrial capitalist will lose customers to the competition.
Therefore, during the boom phase of the industrial cycle, the bosses are far more likely to compromise with, or even simply grant, labor union demands for higher wages and better working conditions. If the unions are able to win the right to withhold their labor power in an organized way — that is strike — at all times, the boom is the best time to threaten strikes to defend and even increase the workers’ standard of living. During the boom, a strike might not even be necessary.
Wage increases that exceed productivity growth are not inflationary
The (bourgeois) economists, especially those of the Keynesian school, like to claim that increases in wages that exceed the growth in productivity of labor are inflationary. The capitalist media often explain that a rise in the productivity of labor means an equal growth in real wages and that any wage increase in excess of that is inflationary, as though it was a proven scientific fact. In fact, this alleged law was refuted 200 years before these lines were written by the great English classical economist David Ricardo.
It is true that if real wages rise faster than the rise in the productivity of labor in those branches of industry that produce commodities that enter into the consumption of the workers, the rate of surplus value will indeed drop. And a falling rate of surplus value, all other things remaining equal, will mean a decline in the rate of profit. But a decline in the rate of profit is not the same thing as a rise in the prices of commodities — inflation.
When bourgeois economists claim that real wages should never rise faster than the growth in the productivity of labor, they are really saying — whether they realize it or not — that the ratio of unpaid to paid labor should never fall! What a fine doctrine indeed — from the viewpoint of the exploiters, that is!
Remember, industrial capitalists, under the pressure of competition, cannot simply increase prices because their wage costs, unit labor costs, or any other portion of their cost price, for that matter, are rising. If the industrial capitalists could increase prices at will, what would prevent prices from rising to infinity? But, in reality, it is only when demand exceeds supply at existing prices — and not when wage costs or unit labor costs rise — that industrial and commercial capitalists can increase their prices. Otherwise, when “labor costs” rise, the industrial capitalists — and commercial capitalists — simply have to accept a lower rate of profit than they would have made otherwise.
Price, value, and the boom
In order to achieve revolutionary rises in the productivity of labor, new, more efficient methods of production that enable commodities to be produced with considerably less labor have to be put into operation on a large scale. If they are not, labor productivity will not rise, and the value of commodities will not fall. Older factories can be made more productive by retooling — that is, replacing old, less-powerful machinery with new.
However there are frequently limits to the extent older factories can be upgraded to take advantage of new technology. Factory buildings are often designed around the type of machinery they contain. For example, 19th-century multi-story factory buildings were often built around gigantic steam engines. A factory would contain one very large steam engine, and the motive power produced by the steam engine would be transmitted to the various factory machines through a system of levers and pulleys. These machines were often located on different floors.
The replacement of steam with electricity dictated a major change in the structure of factory buildings. Each machine could now contain its own electric motor (or motors). Electricity made possible the modern assembly line. Assembly line production generally requires a huge single-story factory building.
Therefore, it wasn’t really possible to convert the old-fashioned multi-story factory buildings to modern assembly line mass-production factories. Many old multi-story factory buildings had to be torn down and replaced during the transition to modern electrically powered assembly lines. Since the new buildings required a lot more real estate, they were usually constructed in a different location, often in the countryside, where land prices — and rents — were cheap.
In the steel industry — the heart of heavy industry — successive generations of steel mills were built around successive generations of steel-making technology. The Bessemer process, the open-hearth process, the electric furnace process, and finally, the modern basic oxygen process succeeded one another. Today, a similar evolution is occurring in the young microchip manufacturing industry. Each great new advance in the manufacturing of microchips requires the construction of ever more extensive and more automated “fabs.”
To make these successive revolutions in production effective, it is not enough for science and technology to make it possible. That is only the first step. Large-scale industrial investments have to be made to create factories and machines that take full advantage of the new production techniques. This is what the famous bourgeois economist of innovation, Joseph Schumpeter, called “innovation.” (4)
Invention is a necessary precondition for innovation, but it is not innovation itself. Under the capitalist mode of production, the large-scale investments that, along with invention, result in innovation are generally undertaken only during the boom phase of the industrial cycle.
In boom times, the number of industrial workers increases absolutely, and unemployment declines, but the faster growth in the productivity of labor made possible by the utilization of new technology causes industrial production to increase much faster than the increase in the number of employed industrial workers. As we saw above, absolute employment is growing, and unemployment is declining, but relative to the level of production, the number of industrial (and other) workers is declining. This is a reminder that despite the claims of the bourgeois politicians and economists during the boom that “full employment” is now permanent, the boom-time decline in the level of unemployment is only temporary.
Under inflationary boom conditions, the accelerated rise in the organic composition of capital does not necessarily mean an immediate fall in the rate of profit, as reported on the capitalists’ books. First of all, during the boom, the turnover of capital, including variable capital, accelerates as commodities fly off the shelves.
This created the illusion in the minds of Keynes and Michal Kalecki, the Polish-born economist who independently came up with many of the same formulations found in Keynes and their followers, that the rate and mass of profits are determined not by the ratio of unpaid to paid labor — rate of surplus value — and the organic composition of capital times the number turnovers of variable capital in a given period of time but the level of investment itself. According to this view, the more the capitalists spend on investment, the higher the mass and rate of profit will be.
A fall in the rate of profit on a given quantity of capital in a given period can be more than compensated for by an increased number of turnovers in a given period. Remember, the rate of profit is calculated over a given period, usually a year, and not on each turnover cycle of capital.
The value of commodities, the amount of labor socially necessary to produce them, falls at an accelerated pace during the boom as increased investment in constant capital reduces the quantity of labor that is socially necessary to produce a commodity with a given use value and quality. But as long as the boom lasts, market prices, far from falling, are rising. The market rewards those industrial capitalists who adopt more constant capital-intensive methods of production with super-profits, while those who retain the older, more labor-intensive methods can still continue to realize, for the time being, the average rate of profit. This is possible because values on one hand and prices and profits on the other are moving in opposite directions.
As long as this occurs, the increasing utilization of constant capital in production means a lower cost price, while the sale prices keep on rising despite the falling value of the commodities that are being produced. This is why, as long as the boom lasts, the older factories using more variable capital continue to make more or less the average rate of profit, while the new factories that employ relatively — and sometimes even absolutely — fewer workers make super-profits.
The (bourgeois) economists point to this as proof that Marx was wrong when he said only living labor creates profit (surplus value). They claim the super-profits made by new constant capital-intensive factories show that not only living labor (variable capital) but also constant capital is directly producing profit — surplus value. The key to keeping the boom going, these bourgeois economists claim, is to keep the level of productivity growing while maintaining “effective monetary demand” through appropriate monetary policies.
But doesn’t this divergence between price and value that develops during the boom shows that the Marxist law of value is being violated? Aren’t the bourgeois economists right after all? The law of value would indeed be violated if the divergent movement between prices and values could continue indefinitely.
Remember, during the depression and into average prosperity, prices are below their values. Market prices had fallen during the preceding crisis. During the recovery phases that precede the boom, the industrial capitalists are in a position to meet rising demand by increasing production, so prices tend to remain below the values of commodities. The industrial capitalists can do this because there are not only many idle workers, even idle skilled workers, but also idle machines and factories that can be pressed back into production as the demand for commodities rises.
Therefore, as the boom takes hold, commodity prices that have generally been below values now begin to rise above values. Relative to commodities, money material — we assume gold bullion in these chapters — begins to depreciate relative to its own (labor) value against other commodities.
This is not to be confused with a relative devaluation of gold, defined as a situation where gold falls in value — the quantity of labor necessary to produce a given quantity of gold — relative to the value of most other commodities.
However, as commodity prices rise above their values, the forces that will bring down commodity prices begin to emerge. What are these forces? During the first phase of the economic expansion, as we have seen, prices have been generally below their values. This means that the rate of profit in the branch of industry that produces money material — gold bullion — has been realizing more than the average rate of profit. But with the onset of the boom, that situation reverses.
Boom causes a fall in relative and absolute rate of profit
Remember that under the gold bullion standard monetary system that we are assuming in these chapters, producers of gold bullion — gold mining and refining companies — have no trouble finding markets for their commodity. The producers of gold bullion simply exchange their newly produced bullion for freshly printed banknotes at the central bank. In this chapter, we assume not only a gold bullion standard but only one capitalist country and, therefore, one central bank.
As average prosperity gives way to boom, the producers of (non-money) commodities also find it increasingly easy to sell their commodities as the expanding markets make it easier for the industrial capitalists that produce commodities other than money material to sell their commodities, the number of turnovers of their capital in a given period, including their variable capital, increases. All other things remaining equal, the result is an increase in the rate of profit they realize in a given period.
Therefore, even if there was no general rise in the prices of commodities, the industry that produces money material will experience a relative fall in its rate of profit compared to other industries. This in and of itself would be sufficient to encourage a flow of capital out of that industry and into other industries that are now realizing a higher rate of profit.
But as we have seen, the boom does lead to higher commodity prices. The rise in commodity prices causes the rate of profit of the industry that produces money material to fall absolutely. The stronger the boom and the longer it continues, the more both the relative and absolute rate of profit will fall in that industry. In reaction, capital will flow out of the industry that produces money material and into other branches of industry.
Notice the industry that produces money material and not gold. The reason is to emphasize that it is not the nature of gold as a commodity but instead, as money that is involved here. If a commodity other than gold bullion functions as the money commodity, the situation would be exactly the same as the situation is when gold functions as money material, which is what we assume here.
The contradiction between money as measure of value and as means of circulation
In earlier chapters, I explained that the basic function of money is that it is the special commodity that, in terms of its own use value, measures the values of all other commodities. If commodities sell at their values, this means that the value of the quantity of money that constitutes the price of the commodity represents the same amount of abstract human labor as the commodity whose exchange value it is measuring.
This creates the possibility that this equality may, in fact, become an inequality. If the market price of a commodity is below the value of the commodity, the quantity of money material such as gold that constitutes the price of the commodity on average takes less labor to produce than the commodity whose value the money material is measuring in terms of its own use value.
Conversely, if the price of a commodity is above its value — which increasingly is the case in the boom — the quantity of labor that, on average, is necessary to produce the given amount of gold is greater than the quantity of labor that, on average is necessary to produce the commodity. Relative to its value, gold — or whatever serves as the money commodity — can become depreciated against most, or even all, other commodities.
Since under capitalism, money is a commodity that, like all other commodities, must not only be produced but must be produced at a profit, the growing disproportion that develops in the sphere of circulation between prices and values must increasingly spread to the sphere of production.
Other branches of industry are now making super-profits, while in the gold mining and refining industry, the rate of profit is falling below the long-term average. (The average rate of profit refers not simply to the rate of profit in all industries but also to the rate of profit across a number of good and bad years.) Indeed, if the boom went on long enough as commodity prices continued to rise, the profits in gold mining and refining would disappear altogether. Gradually, the production of gold bullion — money material — would grind to a halt. Therefore, the boom is doomed to collapse sooner or later.
During the industrial boom, capitalists whose commodity is the money commodity gold, like all other industrial capitalists, have to pay higher money wages — wages that happen to be measured in terms of the very commodity they are producing — as well as higher prices for all the inputs that represent their constant capital — also measured in terms of the use value of the commodity they produce.
Therefore, by definition, unlike other industrial capitalists, the gold-producing industrial capitalists are not in a position to raise prices as the costs of the commodities they use to produce their particular commodity rise. And as we have already seen, unlike other capitalists, they cannot compensate for their rising costs through increased turnover of their capital due to rising sales.
This happens not because of the depletion of gold in the ground but because of the basic contradictions of commodity production itself, which lead to, among other things, the differentiation between commodities and money. Even if there was an infinite quantity of gold in the ground, as long as it takes human labor to extract and refine it, at a certain point in the course of the boom, gold production will stagnate and eventually decline.
On the other hand, if it did not take human labor to extract gold from the ground and refine it into gold bullion, gold bullion would not be a commodity at all and, therefore, could not function as money material.
Therefore a boom must sooner or later cause a shortage of money material — tight money. The law of the (labor) value of commodities once it has developed to its full extent — in highly developed capitalism — must lead to reproduction of such a situation on a periodic basis.
The more the production of commodities rises during the boom, the more the market will lose its ability to expand. In his famous pamphlet Socialism: Utopian and Scientific — actually a part of the much larger work Anti-Dühring (5) — Frederick Engels explained:
“The enormous expansive force of large-scale industry, compared to which that of gases is mere child’s play, now appears to us as a need for qualitative and quantitative expansion that laughs at all counteracting pressure. [Engels’ emphasis] Such counteracting pressure is formed by consumption, by sales, by markets for the products of large-scale industry. But the capacity of the market to expand, both extensively and intensively, is primarily governed by quite different laws that operate far less energetically. The expansion of the market cannot keep pace with the expansion of production [emphasis added -SW].” (6)
What Engels did not explain is what the laws are that actually govern the expansion of markets and why these laws “far less energetically” than the laws that govern the expansion of production. This has caused generations of Marxists to look for some explanation of crises other than the ability of capitalist industry to expand production much more rapidly than it can expand the market.
When Volume II of Capital was published by Engels after Marx’s death and gradually absorbed by the rising generation of Marxists, the difficulty was only increased. In Volume II, Marx developed his reproduction formulas, which combine both production and circulation. These formulas show the market expanding in lockstep with production. Therefore, there seemed to be a contradiction between Socialism: Utopian and Scientific” and Volume II of Capital.
Since Volume II of Capital is viewed as more profound than the popular Socialism: Utopian and Scientific, generations of Marxists have tended to ignore Engels’ “popular explanation” of crises and find other more “profound” explanations, usually focused on the problems of producing as opposed to realizing surplus value. Other Marxists, such as the Monthly Review school, have been attracted to underconsumptionist explanations of crises and fallen under the influence of John Maynard Keynes.
But now, if we follow the logic of Marx’s law of value, though at a quite different level of abstraction than Marx used when he worked out the reproduction formulas in Volume II — remember, throughout Volume II Marx assumes that commodities sell at their values — we begin to see that, just as Engels explained in Socialism: Utopian and Scientific, the capitalist system once it has reached the stage of the large-scale application of machinery to production, does acquire the ability to expand production at a much faster rate than it has the ability to expand markets.
Let’s take a closer look at this. When there is an increased demand for a non-money commodity — shoes, for example — the market signals through higher prices and profits that more capital—more of society’s total labor time — should be devoted to producing shoes. But because money measures the value of all commodities in its own use value and is the standard of price — dollars, cents, etc., are definite amounts of gold measured in terms of weight — and profits are also measured in definite amounts of gold measured in terms of weight the market mechanism cannot work the same way for money material as it does for other commodities.
A rise in prices — all other things remaining equal — means an increase in the need for money as a means of circulation. But the same rise in prices reduces the profitability of making the commodity that functions as money.
Therefore, as prices rise, the markets, through a decline both relatively and absolutely in the profitability of the industry that produces money material, signal to the industrial capitalists to make less, not more, money material. The more prices rise, the more means of circulation are needed, but the fewer the means of circulation are produced. And the longer the boom goes on, the more this will be so.
Then, as money gets scarce, contrary to the teachings of the quantity theory of money, it isn’t prices that fall but interest rates that rise. There is still no signal to the industrial capitalists to produce more money material. The only effect is that higher interest rates reduce the profit of enterprise of all the industrial capitalists, including those engaged in the production of money material.
While (bourgeois) economists who either explicitly or implicitly accept Say’s Law claim that it is the expansion of (non-money) commodities that form the basis for the expansion of the market, ultimately, according to Marx’s perfected law of labor value, it is the expansion of the production of money material that governs the expansion of the market.
True, as we have already seen during periods of crisis, depression, and even average prosperity, considerable hoards of idle money are concentrated in the banks. As long as this situation exists, it is possible to expand the market by mobilizing society’s existing supply of money and further economizing money — through expanding clearing arrangements, for example. Therefore, expansion of the market is governed by the rate of growth in the quantity of money material only in the long run.
This is why rising investment can at first stimulate the further expansion of the market through the accelerator effect but later flood the market and lead to a crash as the accelerator effect abruptly fails.
This will clearly be true as long as the gold standard prevails. Remember, under the gold exchange standard we are assuming in this chapter, the central bank must keep on hand a certain reserve of gold bullion in order to redeem its banknotes in bullion on the demand of the bearer. As the central bank issues more notes, it must sooner or later increase its reserve of gold bullion, or it will at some point be forced to suspend the convertibility of the notes or otherwise devalue its banknotes. And according to our assumptions, the central bank is not allowed to do this.
Since we are assuming only one capitalist country in this chapter, the only way the central bank can increase its bullion reserves, in the long run, is through the production of additional gold bullion—though it might, for a while, attract additional gold bullion from private hoards, or even from gold that was used for non-monetary purposes but then melted down and recovered as bullion. But since these supplies of gold are limited, and the need for the capitalists to expand markets is unlimited, more gold must eventually be produced if the market is to keep on growing.
Paper money
But can’t we solve this problem by simply ending the requirement that banknotes issued by the central bank retain their convertibility? Won’t the central bank then be able to issue as many banknotes as the growing demands of circulation require? This idea has occurred to many economists over the decades. These have ranged from amateurs all the way to university- and mathematically-educated professional economists, most famously John Maynard Keynes. Keynes, especially, was known for his hatred of gold, calling it a “barbarous relic.”
In the U.S., some “progressives” did not have to wait for Keynes in order to oppose the gold standard. They have opposed the gold standard since the 19th century, claiming that if it was abolished and gold money was replaced by either cheap silver money or paper money, prosperity — and jobs for the workers — would be assured without transforming capitalism into socialism.
During the depression of the 1890s, the populist U.S. Democratic candidate for president, Williams Jennings Bryan, (7) declared, “Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”
Notice how both Bryan — who was not an educated economist — and Keynes considered that it was the gold standard, not the exploitation of the wage-earning working class by a class of capitalist non-workers, to be the “barbarous relic.” Bryan — much like Keynes — imagined that it would be possible to reconcile the “commercial interests” and the “producing masses” by simply abolishing the gold standard.
If non-commodity money, or as it was called in Keynes’s time, a “managed currency,” based not on a particular money commodity but rather on the needs of commodity circulation as a whole, is really possible, it should be perfectly possible to eliminate crises of generalized overproduction of commodities while retaining the capitalist system of exploitation of wage labor. It would only be a matter of figuring out the technical details.
To both Bryan and Keynes, crises of overproduction, such as the one in the 1890s that Bryan faced or the 1930s Depression that Keynes face,d represented a merely mechanical breakdown in the monetary system. Such breakdowns, therefore, could be fixed by a monetary reform — replacing the gold standard with “free silver” for Bryan or for Keynes paper money combined when necessary with deliberate deficit spending by the central government financed by new printed paper money not backed by gold.
As economist and biographer Sylvia Nasar wrote, Keynes “insisted that the Western economies were suffering from a mechanical breakdown for which there was a relatively easy fix.” Modern “stabilization policies” have been searching for the correct “mechanical fix” — sometimes emphasizing “monetary policy,” sometimes “fiscal policy” — since the 1930s Depression, without success.
True, during every economic boom, (bourgeois) economists claim they have finally figured out how to stabilize the economy. These claims were made by the Keynesian “new economists” of the 1960s and again during the far more modest capitalist prosperity — interrupted by some “mild” recessions — of the “Great Moderation” that lasted from 1983 to 2007.
But acute crises — not just “mild recessions” — have so far always returned just as Marx said they would, whether the monetary system is based on gold, silver, or “fiat money.” This is exactly what we would expect if a “managed currency” based not on gold or some other money commodity but rather on the needs of commodity circulation as a whole was, as Marx’s theory of value showed, impossible.
The examination of this question, however, does not belong here, where we assume a gold bullion standard, a single capitalist nation and currency, and a single central bank, but in future chapters. Here, we merely note it.
The stock market and the boom
With the onset of boom conditions, both the mass and the rate of profit rise sharply. Rising profits mean rising dividends. Therefore, the beginning of the boom is strongly “bullish” for corporate stocks.
As the industrial cycle nears its peak, however, the demand for credit increasingly exceeds the supply at existing interest rates. Interest rates start to rise rapidly. Since stock market prices are formed by dividing the annual dividends by the long-term rate of interest — a process called capitalization — rising interest rates are highly “bearish” for corporate stock prices.
Since stocks are often bought on “margin” — that is, on credit — the stock exchange finds itself in competition with the industrial and commercial capitalists, and nowadays with consumers as well, for the remaining shrinking pool of credit. The “call rate,” the rate of interest that brokers pay the bankers and other creditors for borrowed money, begins to rise sharply. This puts pressure on the brokers to demand more cash when buying stocks for their customers’ accounts. The contraction of margin credit puts further downward pressure on stocks.
When stock prices slip, causing equity in customers’ accounts to fall below margin requirements, the brokers demand additional cash. When their customers can’t meet their margin calls with more cash, the brokers dump stocks on the market to raise cash to pay off the loans being called in, and the market “crashes.”
A “crash” or “bear market” can sometimes be held at bay for a while by a continued rise in the absolute mass of dividends due to higher dividend payouts.
Why do higher interest rates lead to higher dividend payouts?
Investors — money capitalists — will shift from stocks to bonds if rising yields on bonds are not matched by rising dividends plus capital gains on stocks. Therefore, as interest rates rise, corporate boards and managers are forced to increase dividend payouts or face a fall in the price of shares of the corporation they manage — though, as a general rule, they only own a minority of the shares. If share prices of the corporations they manage do indeed fall, it can lead to “hostile takeovers” where the existing “management” is replaced by new owners.
Therefore, if they possibly can, management, faced either with the danger of a hostile takeover or being ousted by the board due to “poor performance,” will increase dividends or use the corporation’s money to buy back the corporation’s shares, even at the risk of undermining the corporation and risking its eventual bankruptcy. When the going gets tough, the managers are forced by the logic of the capitalist system to put their own individual interests as money capitalists ahead of the shareholders, who function as collective industrial or commercial capitalists that “management” is supposed to represent.
The stock market is highly speculative and has its own cycles of bull and bear markets that are to a certain extent, independent of the industrial cycle. Stock market traders speculate on the future levels of dividends and profits. Not every stock market crisis — a sudden and sharp decline in stock prices — indicates the arrival of a cyclical crisis of overproduction. The stock market can “crash” at any stage in the industrial cycle. For example, there was a major stock market crash in 1962. This crash occurred in the early phase of the unusually powerful industrial cycle of the 1960s.
However, the approach of a major cyclical crisis of overproduction inevitably means that a sharp decline in stock market prices will occur as contracting profits — and outright losses associated with the crisis — result in lower, in some cases, zero dividends. If corporate bankruptcy leads to liquidation, the stockholders can even be wiped out.
Sometimes, stock market prices peak before the arrival of the crisis proper, but in other cycles, a final wave of speculation keeps the “bull market” alive until the crisis proper arrives. We will examine this more closely in the next chapter, where we will examine the crisis phase of the industrial cycle.
A digression on the effect of a fall in the value of gold relative to other commodities
Suppose the value of gold has fallen, either due to the discovery of rich new gold mines — more favorable natural conditions of production — or changes in technology, such as the ability to extract more bullion from poorer ores. In the late 19th century, both these things happened. New gold mines were discovered in Alaska, northern Canada, and South Africa. The South African mines were to become the leading source of gold for most of the 20th century.
In addition, the large-scale application of the cyanide process beginning in the closing years of the 19th century made it possible to extract much greater quantities of gold from ore of a given gold content than was possible before.
When the value of gold drops, this will mean, as long as commodity prices remain unchanged, a sharp decline in the cost-price of producing gold bullion. This leads to a sharp rise in the rate of profit, both relatively and absolutely, for the gold mining and refining industry. As a consequence, commodity prices measured in terms of gold will have to rise to bring the profit in the gold bullion-producing industry back to the average rate of profit.
Capital will flow into the now super-profitable gold bullion-producing industry, causing production of gold to rise. Contrary to the teachings of the quantity theory of money schools, the rise in the quantity of gold bullion will not immediately raise commodity prices but will lower interest rates, thus increasing the profit of enterprise. The lower rate of interest and rising cash reserves will then accelerate the rate of growth of the market.
This accelerated expansion of the market will cause a more powerful than normal industrial boom — or a series of such booms — that will continue until higher commodity prices once again raise the cost price of producing gold bullion sufficiently to reduce the rate of profit in the gold bullion-producing industry back to the average rate of profit.
And this is exactly what happened. The years after 1896, when commodity prices reached the lowest point they were to reach during the late 19th century long depression, saw not only a powerful series of booms but a sharp rise in the general price level. Since these years corresponded to the height of the international gold standard with the currency of all the chief countries that were then engaged in large-scale capitalist production on the gold standard, including Russia from 1897 onward, these higher prices were expressed in both bullion and nominal currency values alike. It was a “gold inflation” as opposed to inflation caused by the reduction of the amount of gold that a given currency unit-dollar, euro, yen, yuan, ruble, etc., represents.
In the U.S., the “gold inflation” caused widespread agitation by debt-ridden farmers and other small businessmen for a switch to the silver standard to virtually disappear. William Jennings Bryan, though he continued to be a major leader of the Democratic Party and ran for president again on the Democratic ticket in 1900 and 1908, made no more “cross of gold” speeches.
The converse case—growing depletion of gold—increases the value of gold relative to the commodities whose value gold measures in terms of its use value. This causes the above process to work in reverse. Booms are cut short, and longer and more severe crises lower commodity prices until the rate of profit in the gold mining and refining industry is restored to the average rate of profit.
(1) Marx, Capital, Volume III, Part III, The Law of the Tendency of the Rate of Profit to Fall. Chapter 15. Exposition of the Internal Contradictions of the Law, III. Excess Capital And Excess Population https://www.marxists.org/archive/marx/works/1894-c3/ch15.htm (back)
(2) Marx, Wage Labor and Capital https://www.marxists.org/archive/marx/works/1847/wage-labour/ (back)
(3) Marx, Value, Price and Profit, XIV. The Struggle Between Capital and Labor and its Results. https://www.marxists.org/archive/marx/works/1865/value-price-profit/ch03.htm#c14 (back)
(4) Joseph Schumpeter was born in Austria and worked as a professional economist in both Austria and Germany. He left Germany in 1932, just before Hitler came to power, and spent his last years teaching at Harvard University.
Though a conservative bourgeois economist who opposed the “Keynesian Revolution” in bourgeois economics of the 1930s, he became a friend of Paul Sweezy and had some influence on the Monthly Review school.
Schumpeter is primarily known as the economist of “innovation.” He developed a theory of “business cycles” based on the notion that cycles in capitalism are caused by waves of innovation. He coined the phrase “creative destruction.” (back)
(5) Engels, Anti-Dühring. Herr Eugen Dühring’s Revolution in Science https://www.marxists.org/archive/marx/works/1877/anti-duhring/ (back)
(6) Engels, Socialism: Utopian and Scientific, page 74 https://foreignlanguages.press/wp-content/uploads/2020/08/C04-Socialism-Utopian-and-Scientific.pdf (back)
(7) At the end of his life, William Jennings Bryan, a fundamentalist Christian, prosecuted John Scopes, a Tennessee high school biology teacher who violated a state law that banned the teaching of human evolution in state-funded schools. The case was prosecuted in order to test the constitutionality of laws that ban the teaching of Darwin’s theory of evolution in public schools. Scopes was defended by the famous criminal defense lawyer Clarence Darrow. Bryan won a conviction, but the conviction was overturned on a technicality.
Most progressive historians portray Bryan, called “the Great Commoner,” as a progressive political leader. However, in the Scopes trial, Bryan appears as a forerunner, not of a progressive in politics, but of the Christian Right.
This apparent contradiction in Bryan’s politics can be easily resolved. Bryan represented the declining class of small property owners — mostly farmers — who owned their own means of production and employed little, if any, wage labor. The small property owners were hard hit by the deflationary trend of prices between the crash of 1873 and the crash of 1896. Since the economic revolution worked against this class, this class was hostile to the evolution of capitalism.
It wanted to freeze any further economic evolution in place in order to preserve the way of life they were accustomed to. Since these small property owners opposed the evolution of the capitalist economy that was destroying their way of life, these people were naturally hostile to evolution in biology and human origins as well. William Jennings Bryan was quite consistent throughout his political life. It is our “progressive” historians — who analyze the political leaders of the past in terms of whether they were “progressive” or “conservative” and not in terms of what classes they represented — who are inconsistent. (back)
A Critique of Crisis Theory 