Crisis Theories: Disproportionality (pt. 3)

According to Marx, the capitalist mode of production can in the long run exist only as a system of expanded reproduction. But expanded reproduction can only take place if certain proportions are maintained between Department I, which produces the means of production, and Department II, which produces the means of (personal) consumption.

Marx’s basic assumptions

Marx developed his diagrams of expanded reproduction in volume II of “Capital” from the diagrams of simple reproduction. Like was the case with simple reproduction, Marx assumed that society consists of only two classes, industrial capitalists and productive workers. Like was the case with the diagrams of simple reproduction, the rate of surplus value is 100 percent. That is, the workers work half the time for themselves and half the time for the industrial capitalists.

Crisis Theories: Disproportionality (pt. 2)

In a response to my critique of theories that explain crises by a long-term tendency of the rate of profit to fall due the rise in the organic composition of capital, reader Jeffery Curtis wrote: “I’m not sure this was a fair representation of the falling rate of profit crisis theory. For example, your bit about departments I and II I’ve never heard of in any interpretation of the falling rate of profit. The only crisis theory I’ve read about using that is a temporal disproportionality theory concerned with fixed capital (demand falls for department I goods as machines last for years, so they fall and take wages with them, department II slowly falls and crisis erupts).”

Jeffery makes other points in his response, most of which I agree with, that all readers of this blog should read carefully. In due course, all the questions that Jeffery raises will be dealt with. But it is the first question, the relationship between Department I and Department II, which is the main subject of this week’s post. What is really involved in the question of Department I and Department II is capitalist reproduction and its role in crisis theory.

Crisis Theories: Disproportionality

Disproportionality and the anarchy of production

Just like the insufficient surplus value families of crisis theories can be divided into sub-groups, such as profit squeeze, class struggle and falling rate of profit brought about by the rising organic composition of capital, so the disproportionality school can be divided into two sub-groups. One can be called the anarchy of production theory, and the other emphasizes the disproportions between the two great departments of production, Department I, which produces the means of production, and Department II, which produces the means of (personal) consumption.

In this post, I will examine the anarchy of production school. The question of the necessary proportionality between Departments I and II involves the question of reproduction, which I will begin to examine in next week’s post.

Crisis Theories: Falling Rate of Profit (cont’d)

Is the falling rate of profit the key to periodic economic crises?

Perhaps among Marxists today, the tendency of the rate of profit to fall is the most popular explanation for capitalism’s cyclical economic crises, with underconsumption a distant second.

This theory, which naively leaves out the question of *realizing* surplus value, goes something like this: During the boom, the combination of technological progress, competition of the industrial capitalists among themselves, and, especially, competition between the industrial capitalists and the working class forces the industrial capitalists to increasingly substitute machinery—dead labor—for living labor. This is especially true near the peak of the boom, when conditions are most favorable for the working class on the labor market.

More and more of the surplus value that is consumed *productively* is transformed into constant capital, and less and less is transformed into variable capital. The result is a rise in the organic composition of capital and a fall in the rate of profit.

Crisis Theories: Falling Rate of Profit

I mentioned earlier that the insufficient surplus value family of crisis theories can be divided into two sub-families: the profit squeeze school and the falling rate of profit school.

The profit squeeze school sees the cause of crises as rooted in the fall in the rate of surplus value that develops as the demand for labor power rises during a boom, creating more favorable opportunities for the workers to struggle against capitalist exploitation. The fall in the rate of exploitation eventually reduces the rate of profit so much that a crisis results.

But there is another version of the insufficient surplus value school. This school traces the cause of crises to the fall in the rate of profit brought on by the rise in the organic composition of capital. This is the famous law of the tendency of the rate of profit to fall.

These crisis theories are not mutually exclusive, because boom conditions not only put downward pressure on the rate of surplus value but at the same time encourage a growth in the organic composition of capital. The lower the rate of surplus value, the more the industrial capitalists will attempt to economize on labor power, or what comes to exactly the same thing, the more they will substitute constant capital—or dead labor—for variable capital—or living labor.

Crisis Theories: Profit Squeeze

Basic formula of capitalist production

The basic formula of capitalist production is M-C..P..C’-M’. An industrial capitalist begins with a sum of money M. He or she must then find on the market the elements of productive capital—both constant capital in the form of factory buildings, machinery, and raw and auxillery materials and 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. It is during the process of production that 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 process of production 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 out with.

Crisis Theories: Unconsumption (cont’d)

Ricardo, Say and the liberal answer to Sismondi and Malthus

The French economist J.B. Say, who lived between 1767 and 1832, is famous for his “law of markets,” which allegedly proved that a general overproduction of commodities was impossible. Some authorities credit James Mill, the father of John Stuart Mill and a friend of Ricardo, for discovering this so-called law. The law, however, is generally known as “Say’s Law.” So that’s how I will refer to it here.

How did Say “prove” the impossibility of a general overproduction of commodities? He argued that while money makes the exchanges of commodities much easier, it is by no means absolutely necessary for commodity exchange. Commodity exchange can proceed, at least in principle, without money.

Therefore, Say abstracted away money. If money is left out, commodity exchange is the exchange of one commodity for another. The totality of these commodity exchanges makes up the market. Thus, the means of purchasing commodities are commodities themselves.

Crisis Theories: Underconsumption

The most popular explanations for economic crises advanced by Marxists since the death of Engels in 1895 are underconsumption, profit squeeze and disproportionality. The theory of underconsumption explains crises by the inability of the working class to “buy back” the full product it produces.

Profit squeeze theories can be be divided into two sub-theories. One version puts the blame for crises on a decline in the rate of surplus value caused by the fall in unemployment that occurs during a boom. The other sub-theory, in contrast, sees the rise in the organic composition of capital causing a fall in the rate of profit. The fall in the rate of profit leads to the crisis.

The theory of disproportionality can also be divided into two sub-theories. One puts the emphasis on the anarchy of production. For example, raw materials might be produced in insufficient amounts as industrial production expands leading to an economic crisis. The other sub-theory puts the emphasis on the relationship between the two great departments of production, the one that produces means of production (called Department I by Marx) and the one that produces consumer goods (called Department II by Marx). It is asserted that either Department I produces too much relative to Department II or Department II produces too much relative to Department I and that this leads to a general economic crisis.

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

These writings are built on the foundations of “Capital,” a work that at least in Germany is becoming a bestseller once again. But “Capital” itself, though it lays the foundation, is not a book about the periodic crises capitalist production goes through. Nor is there a section within “Capital” dealing with such crises, as is generally the case with works that popularize the theories of “Capital.”

Since Marx and Engels put so much emphasis on crises in the Communist Manifesto and other works, this omission at first seems surprising. Marx had planned to crown his economic work with a book on the world market, the state, competition and crises. As is well known, Marx did not have the time to write this work. It is, of course, impossible for any other person to write the work Marx might have written if he had had the time.