Does Capitalist Production Have a Long Cycle? (pt 3)

The mid-Victorian boom

The period from 1848 to 1873 is sometimes called by economic historians the mid-Victorian boom. It saw a huge expansion of industry, world trade and a generally rising price trend. The mid-Victorian boom was not crisis-free, however. A sharp if brief crisis erupted in 1857, and another occurred in 1866.

The economic crash that hit Austria and Germany hard in the spring of 1873 and spread to Wall Street that fall is generally considered to mark the end of the mid-Victorian boom and the beginning of the “Great Depression” of the 19th century. Thereafter, prices trended downwards until bottoming out in 1896.

For supporters of the long-cycle theory, the mid-Victorian boom represented an upswing in the long cycle, or for supporters of Mandel-type long waves, an expansionary long wave. Students of this episode in economic history have the advantage of being able to study the economic commentaries of Marx and Engels themselves, both in published works and private letters.

Does Capitalist Production Have a Long Cycle? (pt 2)

The long semi-cycles of Ernest Mandel

We saw in earlier posts that most economic historians and economists, both bourgeois and Marxist, agree that the concrete history of the capitalist mode of production shows alternating periods of rapid expansion lasting for several decades followed by periods of much slower growth or semi-stagnation of varying lengths. There has been much dispute about whether these alternations represent cyclical forces operating from within the capitalist economy or are caused by changes of a non-cyclical nature in the “external” environment.

Among the Marxists, we saw that men as different as the U.S. socialist economist Paul Sweezy and Leon Trotsky agreed that the alternations between rapid growth and semi-stagnation are non-cyclical. If these alternations in long-term growth are non-cyclical, this would be in contrast to the the 10-year industrial cycle and the shorter, less-well-defined “Kitchin cycle,” where each stage in the cycle necessarily leads to the next stage.

Does Capitalist Production Have a Long Cycle?

The question of whether in addition to the industrial cycle of more or less 10 years’ duration there is a longer cycle extending over several “10-year” cycles has divided both Marxists as well as those bourgeois economists who have shown interest in business cycles.

Some economists, both Marxist and bourgeois, have held that in addition to the 10-year industrial cycle that I have been examining up to now, there are other economic cycles of varying lengths that can be traced in the history of the world capitalist economy. Especially controversial has been the proposal that capitalist production is characterized by a “long cycle” that extends over periods as long as 50 or even 60 years.

Other Marxists and bourgeois economists have denied that there is any evidence to support the existence of a long cycle. The quasi-regular fluctuations of business conditions over 10-year periods is called a cycle because each phase of the cycle leads of necessity to the next phase. In my posts on an ideal industrial cycle, I examined this in some detail. But what would be the mechanism of a longer cycle as opposed to the mechanism of the 10-year industrial cycle?

The Ideas of John Maynard Keynes (pt 5)

Keynes on the ‘trade cycle’

Keynes throughout the “General Theory” was concerned with explaining how his marginalist concept of “equilibrium”—marginal efficiency of capital = rate of interest—could correspond to mass unemployment. The industrial cycle itself was of secondary concern for Keynes. But in chapter 22, entitled “Notes on the Trade Cycle,” he does deal with the industrial cycle, or as he called it in the English manner, the “trade cycle” or “industrial trade cycle.”

When he did deal with the industrial cycle, marginalism hindered Keynes at every step. Unlike the classical economists and Marx, the marginalists do not distinguish between use value and exchange value. As a marginalist, even if an unorthodox one, Keynes therefore had problems in explaining how commodities could be overproduced yet be “scarce” at the same time.

The Ideas of John Maynard Keynes (pt 3)

Ricardo and Marx versus Keynes

Ricardo, unlike Adam Smith, attempted to use the law of labor value consistently. He sensed that the law of labor value applied not only to simple commodity production but also to capitalism proper. Ricardo was not completely successful in this, but he was certainly on the right track. He realized that price is a relationship between two commodities, the commodities whose price is being measured and the money commodity—gold—in which the price of the commodity is reckoned.

According to the Ricardian law of labor value, market prices tend to fluctuate around an axis determined by the relative values of gold and the commodity whose value gold is measuring. Ricardo realized that a rise or fall in wages would affect the rate of profit but not the overall prices of commodities.

Marx developed Ricardo’s law of labor value further, resolving the contradictions that Ricardo himself was unable to overcome. However, even the Ricardian version of the law of labor value is quite sufficient to refute the claim of Keynes that wages determine prices.

As for Marx, he demonstrated in the first three chapters of volume I of “Capital” that price must always be measured in terms of the use value of the commodity that serves as the universal equivalent. Assuming gold is the money commodity, exchange value, or what comes to exactly the same thing, price, is always a certain quantity gold measured in terms of weight.

The Phases of the Industrial Cycle (pt.4)

From boom to crisis

Marx sometimes called the stage of the industrial cycle just before the outbreak of the crisis the phase of fictitious prosperity. The economy is going gang-busters, the rate of profit appears to be high, and the mass of profit keeps growing. Unemployment compared to all other phases of the industrial cycle is very low and still falling. At long last, the balance of forces on the labor market are beginning to tilt in favor the working class.

But the continuation of the boom now depends on the increasingly unsustainable inflation of credit. As long as debts can be “rolled over” rather than paid, and terms of payment can be further extended, the boom can go on.

Later, after the boom’s inevitable collapse, the recriminations fly. Why was “regulation” so lax? Why were so many derivatives and exotic credit instruments created? How could so many loans have been extended to people who couldn’t possibly repay them?

But those questions will be asked later. While the phase of fictitious prosperity lasts, it can only be maintained by progressively eliminating regulations designed to prevent the reckless extension of credit and instead encouraging “financial innovation” to unfold without hindrance.

The Phases of the Industrial Cycle (pt. 3)

The real industrial boom begins

The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during the boom that capitalist expanded reproduction develops with full vigor. Therefore, it is the boom that develops the contradictions inherent in capitalist production to the point where they can only be resolved—only temporarily as long as capitalist production is retained—by a crisis.

I explained in the last post that during the phase of average prosperity, excess capacity is whittled away at both ends, so to speak, by the closing down of factories that will never again be profitable, and the reopening of factories and machinery that after write-downs can once again yield to the industrial capitalists the average rate of profit.

As the margin of excess capacity shrinks, the percentage of industry that is 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. The industrial capitalists do not want to see their margin of excess capacity shrink to zero. They want to maintain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand.

The Phases of the Industrial Cycle (pt. 2)

How recessions end

During recessions, inventories—commodity capital—are run down as production declines faster than sales. At some point, therefore, industrial production will begin to rise, because the industrial capitalists have to rebuild their inventories. This is why all recessions eventually end.

The recovery begins first in Department II—the department that produces the means of personal consumption. The contraction in industrial employment more or less comes to a halt once rising industrial production caused by the need to rebuild inventories begins.

However, industrial employment rises very little during the first phase of the upturn. Many factories during the recession were forced to operate at levels far below their optimum level of productivity. As inventory rebuilding proceeds, more factories come closer to their optimum utilization levels. The resulting surge in productivity enables the bosses to increase production considerably while adding few, if any, workers. Therefore, for a considerable period of time after the recession proper ends, labor market conditions continue to favor the industrial capitalists over the workers. This remains true after the rise in the rate of unemployment begins to taper off.