The Problem: Marx Didn’t Leave a Completed Crisis Theory

A Marxist Guide to Capitalist Crises

Introduction

Sam Williams
March 1, 2015

This book is based on my blog Critique of Crisis Theory. The blog is focused on one question of Marxist economic theory: What are the causes of periodic economic crises such as the one that occurred in 2007-09 that have marked the concrete history of the world capitalist economy since 1825?

The blog and this book are built on the foundations of Capital, which, during the panic in 2008, became a bestseller once again. However, that work itself, though it lays the foundation, is not about the periodic crises capitalist production goes through. Nor is there a section within it dealing with crises as such.

Since Marx and Engels put so much emphasis on crises in the Communist Manifesto and other works, this omission seems surprising. However, according to Marx’s original plan, Capital was to be only one of a series of books he intended to write on economics. According to this plan, Marx would crown his economic work with a book on the world market, the state, competition, and crises. However, Marx did not have the time to produce this work.

Evolution of capitalism

It is, of course, impossible for anyone else to write the book that Marx would have written if he had been given the time needed. This isn’t simply because only Marx was Marx. Since the time of Marx, capitalism has evolved from industrial capitalism based on free competition to monopoly capitalism. It passed through the Great Depression of the 1930s, the so-called Keynesian revolution in government economic policies, the end of the international gold standard and the stagflation of the 1970s, the neoliberal reaction from the 1980s on, the crisis of 2007-09, and its aftermath. These events provided considerable material for crisis theory that was unavailable to Marx.

Economic crises of varying intensities break out in the capitalist world market about every seven to 11 years. This pattern has been observed since the second quarter of the 19th century. These crises have survived all attempts by capitalist governments to stamp them out. Periods of violent crises have been succeeded by periods of more moderate crises, followed by even more severe crises.

Mainstream capitalist economists dismiss crises, or “recessions” as they call them, as accidental or, at most, secondary phenomena. In Marxist theory, however, crises play a far more important role. To understand why this is so, we must understand another aspect of Marxism far more basic than crisis theory — historical materialism.

Historical materialism holds that one form of human society does not give way to another until the development of the forces of production characterizing a given epoch has come into fundamental conflict with the existing social relations of production or, in legal language, property relations. Eventually, this renders the further development of human society — and of economic production, which is the foundation of every human society going back to the time when our species first differentiated from the rest of the animal kingdom — impossible within the framework of existing relationships of production.

There then begins a process of revolutionary transformation, which sooner or later brings not only property relations but also ideological life and even religious institutions into harmony with the new productive forces and the relationships of production or property forms that the new productive forces require.

For example, in the Communist Manifesto, written between December 1847 and January 1848 in the wake of the worldwide capitalist economic crisis of 1847, the young Marx explained the root cause of the end of feudal society: It had come into conflict with the new productive forces. The further development of these new forces of production demanded the abolition of the monopolistic restrictions of guild production and feudal-serf relations in agriculture and their replacement by “free wage labor.”

Feudal social and economic relations and its system of serf labor had been sufficient for developing new techniques in agriculture and craft production that had developed in Europe after the fall of the Roman Empire. This was true even though feudal society, with its serfdom, hierarchy, orders, and clericalism, strikes us today as having been horribly unfree and unjust.

However, toward the end of the Middle Ages, new methods of production were coming into conflict with the prevailing feudal relations. There began an era of revolutionary transformation that for centuries banished the feudal world and gave birth to modern capitalist society with its democracy, individual freedoms, equality of all before the law (at least in theory), separation of church and state, free markets (free trade and free competition), and above all the labor market — “free” wage labor.

Up to this point, many bourgeois historians and economists are prepared to go along with Marx. But they say that now that all feudal restrictions on the development of the economy have been removed, no additional revolutions are needed. Future centuries will see the continued growth of society’s wealth based on capitalist private property, competition, and wage labor. Human society has reached its final form. Since no qualitative changes in the economy or the political system of liberal democracy will occur in the future, history has reached its end.

Neoliberalism

Present-day “neoliberalism” wages a struggle against all concessions that the working class over the last 200 years has wrung from the capitalist ruling class. Neoliberals claim these restrictions on business must be removed so that the rate of economic growth can be accelerated. They claim to continue the progressive struggle that the original liberals waged several centuries ago against lingering feudal restrictions on capitalist industry. They hold that their struggle against the gains won by the working class will lead to full employment and a new rise in the standard of living for all.

The most extreme manifestation of neoliberalism was the dismantling of the planned economies of the Soviet Union and Eastern Europe by the anti-communist governments that rose to power in the 1980s and 1990s. The leaders of these new governments claimed that by removing the restrictions that the planned economies placed on industry and agriculture, the resulting economic upswing would lead to a great rise in the standard of living of the entire population.

Instead, industrial and agricultural production plunged, and except for the members of the new capitalist class and a few hangers-on, the standard of living has greatly declined. Much of the population faces truly dire poverty, and whole regions have seen a collapse of modern civilization. What greater refutation of neoliberalism could be imagined, not in theory but in practice?

Marx versus liberals

In contrast to the economic liberals, Marx held that it was precisely “free capitalist relations” — that is, capital itself that was the new barrier to the development of the forces of production and human society. Therefore, according to the theory of historical materialism, capitalism cannot be the final form of society. “It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on trial, each time more threateningly,” Marx wrote in the Manifesto. “In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity—the epidemic of over-production.” (1 )

It is not necessarily true that capitalism will be overthrown during a particularly severe “commercial crisis”—to use the original name for cyclical capitalist crises—as the early socialist movement held around the turn of the 20th century, though this is, of course, a possibility. Rather, the economic contradictions that come to a head during capitalist crises prove that capitalist production is simply a phase in the history of production that must sooner or later be replaced by a higher mode of production if humanity is to survive.

An amazing man

Frederick Engels, who co-authored the Communist Manifesto, was an amazing man. He was a 19th-century businessman, Karl Marx’s closest friend and collaborator, and an uncompromising advocate of a world working-class revolution. Engels combined a profound theoretical knowledge of political economy with the practical experience of a businessman who had helped steer the textile firm of Engels and Erman through booms and crises that wracked the mid-19th-century world textile market. This is a resumé few can match.

In 1877, Engels wrote a polemical work known as Anti-Dühring against the now-forgotten German professor Eugen Dühring, who was then gathering influence in the early German Socialist Workers Party, the forerunner of the German Social Democratic Party. Here, Engels gives a classic description of capitalist economic crises that anybody old enough to remember the crisis of 2007-09 will recognize.

At the time it was written, Karl Marx was still very much alive, though his ability to work was significantly reduced by ill health. If the mature Marx had disagreed with his friend’s work, he would surely have let it be known. Instead, he contributed a chapter to it. Therefore, we can be confident that the following quote from the work reflects the views not only of Engels but of the mature Marx as well on the subject of cyclical crises.

Engels wrote: “We have seen that the ever-increasing perfectibility of modern machinery is, by the anarchy of social production, turned into a compulsory law that forces the individual industrial capitalist always to improve his machinery, always to increase its productive force. The bare possibility of extending the field of production is transformed for him into a similarly compulsory law. The enormous expansive force of modern industry, compared with which that of gases is mere child’s play, appears to us now as a necessity for expansion, both qualitative and quantitative, that laughs at all resistance. Such resistance is offered by consumption, by sales, by the markets for the products of modern industry. But the capacity for extension, extensive and intensive, of the markets is primarily governed by quite different laws that work much less energetically. The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real solution so long as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another ‘vicious circle’.” (2 )

Here, Engels sees crises as collisions between two counter-posed forces: the physical ability modern science and technology give the industrial capitalists to expand production seemingly without limit, and the need of the same industrial capitalists to do just that due to the pressure of the competition amongst themselves, and (3 ) “the quite different laws” that govern the growth of markets. These laws dictate that markets, though they too grow both intensively and extensively, expand at a rate much slower than the ability and need of the industrial capitalists to expand production.

Since under capitalism, production cannot, in the long run, grow faster than the market, this contradiction is periodically resolved through a massive contraction of production, destruction of existing productive forces, and large-scale

unemployment. This resolution is only temporary. After the crisis and sometimes years of stagnation, production enters a new powerful expansion that again leads to a new flooding of the market and a new crisis.

As these crises and their “side effects” — such as world wars, for example — become increasingly destructive, replacing capitalism with socialism becomes urgent and eventually must take place if modern society is to survive. In Anti–Dühring — this material can also be found in Socialism, Utopian and Scientific (4 ), a part that has been published as a standalone pamphlet — Engels gives a masterly description of the basic contradictions of capitalist production, the contradiction between the growing socialization of production versus the continuation of individual appropriation of the product, the overall anarchy of production versus its increasingly centralized, socialized and globalized character, and the deepening conflict between an ever more wealthy capitalist class and the growing, increasingly exploited working class.

Laws governing growth of market not spelled out

However, Engels does not formulate the laws governing the market’s growth and expansion. While his readers do not doubt that he considers the fundamental contradictions of capitalism to be behind the inability of the market to grow as fast as production, Engels does not actually explain why this is and indeed must be so.

Why does the conflict between the private appropriation of wealth and the socialized nature of production; the growing anarchy of production in society between competing entities versus the increasingly planned nature of production within the capitalist enterprise, and later the giant transnational capitalist corporations; and the growing antagonism between the capitalist ruling class and the working class lead by necessity to a situation where the growth of the market cannot keep up with the growth of production?

Many political generations have come and gone since Engels wrote Anti-Dühring. So, it might be thought that the answer to this question would be well understood by the fighters of the 21st century. Yet Marxists give the most diverse and sometimes completely contradictory explanations of why this is so. Indeed, many — perhaps most — Marxists largely disagree with Engels and Marx as well and deny that industrial overproduction is the essence of the cyclical economic crises that mark the concrete history of capitalism from 1825 onward.

I will examine the crisis theories that have been proposed by various schools of Marxists, and make some suggestions based on many decades of thought, research on and study of the concrete history of crises from the crisis of 1825 to those that have occurred in my own time, how this puzzle can finally be resolved. Along the way, I will examine the attempts of capitalist governments to counteract crises and their results, as well as the relationship between crises, imperialism, militarism, and war.

Marx’s method and his theory of crises

Why did Marx not leave a complete theory of crises? The answer can be found in his method. Originally, Capital was to be only a part of a much more ambitious project entitled A Critique of [Bourgeois] Political Economy. In addition to the book on capital, Marx, according to his letter to Engels dated April 2, 1858, [4] planned to write books on landed property, wage labor, the state, international trade, and the world market. It was probably to be the last book on the world market that would have contained the theory of crises.

The theory of crises would have crowned the entire critique of political economy since it is during crises that all the contradictions of capitalist production, many of them normally hidden, rise to the surface. Due to his declining health, it eventually became clear to Marx that he would almost certainly not be able to complete his project. Capital (all three volumes plus Theories of Surplus Value) (5 ) was to be only one of six books according to the plan of 1858.

It seems that Marx also worked into Volume III of Capital elements of what had been the book on landed property according to the original plan. Marx was not able to incorporate a complete rounded theory of crises into any part of Capital. The full theory of crises simply does not belong in that work.

Why not? Again, it’s a matter of method. Marx always began at the abstract level, only gradually working towards the concrete. Just like crises in practice are the crown of capitalism’s basic contradictions, the theory of crises would crown the Critique of Political Economy. And therefore, the theory of crises would have to come last.

Marx’s mature economic works that were published in the author’s lifetime — that is, the works written after Marx had worked out, at least in his head, his most important contributions to economics — consist of exactly two books: A Contribution to the Critique of Political Economy (1859) (6 ) and Volume I of Capital (1867) (7 ).

Other books by Marx, The Poverty of Philosophy (8 ) and Wage Labor and Capital, (9 ) belong to Marx’s early period, before he had worked out his theory of labor power and surplus value and many other important economic discoveries that are crucial to a complete theory of capitalist crises. Value, Price, and Profit, considered part of Marx’s mature work, was published as a pamphlet or small book after the author’s death. (10 ) It was part of a debate in which Marx defended trade unions at a meeting of the International Workingmen’s Association (First International) held in London around the time of the publication of the first volume of Capital in German.

Other economic works of Marx were not published in his lifetime. The Grundrisse, (11 ) generally considered the earliest of Marx’s mature economic works is a series of notebooks that Marx wrote up in the winter of 1857-58 when his interest in economics was stimulated by the worldwide economic crisis of those years. It was published first in Moscow in 1939-41, and a later English version was brought out in 1973 by Penguin Books with a new translation by Martin Nicolaus. In 2008, a new version was published by Routledge, edited by Marcello Musto. (12 )

The Grundrisse is a rich mine, but it is a series of notebooks by the author, not a work meant for publication in that form. Many ideas were just being worked out for Marx’s self-clarification.

Volume I of Capital (the only part finished by Marx himself) deals with capitalist production. It explains how surplus value arises based on the production of commodities exchanged at their values — based on an hour of (abstract) embodied labor for one hour of (abstract) embodied labor. Volume II of Capital deals with the circulation of capital and the problem of reproduction. The subject matter of volume III was to be capitalist production as a whole — the unity of capitalist production and circulation.

Volume III introduces such crucial concepts as the equalization of the rate of profit and the transformation of values into prices of production, as well as the famous law of the tendency of the rate of profit to fall. This volume also contains a section on landed property and differential and absolute ground rent, which perhaps was originally intended for the book on landed property that Marx never wrote. It contains many scattered observations on credit, the money market, banking, currency, interest rates, and, yes, crises. Volume III is also enriched by footnotes by Engels, many dealing with the concrete crises of the 19th century, based partially on Engels’ personal experiences as a Manchester businessman.

But Volumes II and III are also a series of notebooks put together by Engels. They retain a rough, unfinished character. This is especially true of Volume III. Theories of Surplus Value, a part of what was to be a history of economic thought, were put together from Marx’s notebooks by Karl Kautsky (13 ) after Engels’ death. Later, after World War II, the Institute of Marxism-Leninism of the Central Committee of the Communist Party of the Soviet Union put out a different version. Their version contains an introduction that is very critical of Kautsky’s work. (14 )

Of the two economics books that belong to Marx’s mature period that Marx finished, the Contribution to a Critique of Political Economy of 1859 deals with the nature of commodities, money, and exchange rates. It is mostly known for its famous introduction; the book itself is little read. Much of its subject matter — though not all — was repeated in “much-improved form,” according to Marx, in the first three, and most abstract chapters of Capital, Volume I.

Marx made some interesting observations on crises in a letter to N.F. Danielson (a Russian Populist writer) dated April 10, 1879, (15 ) in which he gives a fascinating analysis of the crisis that was then hitting England. He even says that he didn’t want to publish the next volume of his book before the crisis had worked itself out.

Even at this very late stage in his life, Marx was still learning from the evolution of the world capitalist economy and its concrete crises. To the end, he was as much a student as he was a teacher. Engels, in the years after Marx died in 1883 until his own in 1895, wrote letters to various correspondents with much to say about crises and the concrete development of the world capitalist economy in those years. These letters deserve careful study. (16 )

Attempts to further develop Marxist crisis theory inadequate

Since the death of Engels, many Marxists have attempted to develop Marxist crisis theory. They tend to be based on published and unpublished quotes from Marx’s works (in Marx’s lifetime). In these chapters, I will examine these proposed solutions to the puzzle of capitalist crises. I will examine the most popular crisis theories various Marxist writers have put forward since Engels’ death. This examination does not claim to be exhaustive, but it covers the most common crisis theories. All these theories are, in my opinion, interesting and contain elements of the truth but are inadequate by themselves.

I will examine currency, exchange rates, credit, interest rates, banking, world trade, competition, and the world market. This book won’t, of course, be the exhaustive work that Marx planned to write. But it will say what has to be said to support a correct theory of world market-wide periodic economic crises of capitalism. No crisis theory can, in my view, be correct if it does not include a careful examination of these subjects.

I will also examine the so-called “Law of Comparative Advantage,” (17 ) which preaches to oppressed countries that they should abolish their protective tariffs and open their markets to “free trade.” This idea is central to the arguments of neoliberal economists. Anybody who has had the misfortune to take a college-level economics course has been exposed to this so-called law, though most people no doubt have long forgotten it, along with much else they learned in college courses.

On these foundations, I developed a theory of crises based on the concrete conditions of credit and competition found on the world market but rooted in the basic laws of motion of capitalism that were worked out by classical political economists and, later, Karl Marx.

Other chapters will deal with the concrete history of capitalism and a question closely related to crisis theory — the controversial view accepted by some Marxists and strongly rejected by others that, in addition to short-term business cycles of some seven to 11 years, the capitalist economy shows a series of much longer cycles or “waves” that extend over several business cycles. I examine the period from the mid-19th century up to the outbreak of the current crisis to see what concrete evidence there is for the existence or absence of “long waves.”

Finally, I look at the breakdown theory, which is closely related to crisis theory. This began as a debate between Rosa Luxemburg (18 ) and the other leaders of the old German Social Democratic Party, which grew out of the struggle against Edward Bernstein’s original “revisionism.” (19 ) The debate was later continued by Henryk Grossman (20 ) and Paul Mattick (21 ) in the years after the Russian Revolution.

Between them, Luxemburg on one side and Grossman and Mattick on the other put forward two contradictory “breakdown” theories. The supporters of both versions hold that capitalist production has a built-in limit beyond which it cannot go. Though formally apart from crisis theory, which deals with the periodic crises of capitalism, Luxemburg’s and Grossman’s contradictory “breakdown” theories are closely connected with their respective crisis theory.

Crisis of 2007-09 vindicates Marx

The 2007-09 crisis proved again that Marx was correct when he explained that periodic cyclical crises are endemic to capitalism and will never be eliminated while this mode of production exists.

In the wake of that crisis, the (bourgeois) economists attempted once again to find a way to prevent a repeat of a crisis like 2007-09. Various schemes were put

forward requiring banks to hold more capital relative to their liabilities – and not for the first time – were put forward. But increasingly, the economists in the wake of that crisis simply circulated old ideas. The truth is that the economists were running out of ideas in their attempts to find a way to control, if not eliminate crises while retaining the capitalist system. The truth is that everything that could be thought of as feasible has already been tried. These ideas range from the international gold standard, protectionism, free trade, abolition of the international gold standard, increased regulation of banking and business, deregulation of banking and business, currency inflation, and government spending to generate increased demand. And all come up short.

There have been, and may well be — though this is by no means certain — periods, such as the “Great Moderation” of 1983-2007, when crises become less severe for a while for reasons I will examine in this book. What is certain is that the contradictions of capitalist production will continue to be reproduced on an ever-larger scale as long as capitalist production continues. Sooner or later, these growing contradictions inherent in capitalist production will find vent in the form of severe economic crises, as they have done periodically since 1825.

As crises have become a greater threat to capitalist society, the state has been forced to take ever stronger and more expensive financial measures to keep the more destructive consequences in check. The result has been that, as time goes on, crises increasingly involve the finances of the state itself. Therefore, more than was true of the early crises in Marx’s day, or even as late as the 1920s, the modern cyclical crises of capitalism become increasingly political and economic crises.

This trend was in full display during the crisis of 2007-09. Already by that date, the necessity for society to take over the management of the means of production was so pronounced that even the extreme right-wing neoliberal Bush administration found itself forced to partially nationalize the banking system. By then, the banking system had evolved into a system dominated by a handful of gigantic universal banks that were increasingly tending to dominate industry and capitalist society as a whole.

This doesn’t mean a U.S. president will carry out the socialist revolution during some future crisis! But just as Engels explained, the fact that capitalist governments are forced to intervene increasingly in the sphere of production while resisting it at every step indicates that the task of socializing the means of production must be carried out sooner or later — increasingly sooner — if modern society is not to go to pieces and be reduced to barbarism.

And what about the agent of this takeover by society of the management of the means of production? Marx said it would have to be the working class, the class that sets the means of production into motion and produces the surplus value that is the basis of profit, the sole motive of capitalist production. Could Marx have been right about that as well, whatever the state of the workers’ movement at any particular time? What other conclusion can be drawn?

Aim of the book

So, the real aim of this book is to help provide weapons to the younger generations of workers and revolutionary intellectuals to move this process along. After mastering the results of incomplete revolutions of the last century, revolutions that stopped halfway and were then driven back, though not all the way back to their starting points, a new movement of workers “ready to storm heaven” must be launched like that of the immortal Paris Commune of 1871 the Russian Revolution of October 1917 and the “October wave” of revolutions that followed.

This time, the storming of heaven must not stop halfway. It must not stop until all of heaven’s positions are captured and secured. There is no other choice. I hope this work will make a modest contribution to the preparatory work for this task by helping educate the coming revolutionary generation about the real nature of capitalist production and the need to transform this system based on the private ownership of the means of production into a system based on the collective ownership of the means of production by the associated producers, a communist society where class rule is forever abolished.
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(1) https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm

(2) https://www.marxists.org/archive/marx/works/1880/soc-utop/ch03.htm

(3) https://www.marxists.org/archive/marx/works/1880/soc-utop/ch03.htm

(4) https://wikirouge.net/texts/en/Letter_to_Friedrich_Engels,_April_2,_1858

(5) https://www.marxists.org/archive/marx/works/1863/theories-surplus-value/

(6) https://www.marxists.org/archive/marx/works/1859/critique-pol-economy/

(7) https://www.marxists.org/archive/marx/works/1867-c1/

(8) https://www.marxists.org/archive/marx/works/1847/poverty-philosophy/

(9) https://www.marxists.org/archive/marx/works/1847/wage-labour/

(10) https://www.marxists.org/archive/marx/works/1865/value-price-profit/

(11) https://www.marxists.org/archive/marx/works/1857/grundrisse/

(12) Karl Marx’s Grundrisse: Foundations of the critique of political economy 150 years later. Edited by Marcello Musto. New York: Routledge, 2008