Capitalism and Crisis
Capitalism expands because it unleashes economic forces compelling every capitalist and, to a certain extent, every worker, to behave in ways that are functional for the accumulation of capital as a whole. In spite of this degree of internal coherence, capitalism is also deeply and irredeemably flawed, both because capitalism systematically stunts human potential, and because the subordination of human needs to the profit motive triggers crises and contradictions that limit the scope for the reproduction of capital itself. These tensions and limits are discussed below and revisited in Chapter 15. The worldwide crisis that began in 2007 is examined in Chapter 14.
Marx’s Theory of Accumulation and Crisis
Marx’s theory of the necessity as opposed to the mere possibility of regular crises in capitalist economies draws upon the interaction between competition, class conflicts and the laws of accumulation. These come together in his treatment of the law of the tendency of the rate of profit to fall (LTRPF). The LTRPF will be discussed in Chapter 9. For the moment, it is sufficient to observe that crises can occur apart from immediate movements in the rate of profit; indeed, they can be due to factors originating from outside the circuit of capital; for example, social, political or technical upheavals. The possibility of erosion in the profit rate because of the inability of capitals to be restructured to achieve higher profitability, and the fragility of the stock exchange to ‘bad’ news and its repercussions for economic reproduction, are all too familiar. Other potential causes of crisis include price crashes due to overproduction in key industrial sectors, the collapse of important financial institutions, and instability induced by foreign trade or political turmoil at home or abroad.
Marx argues that crises can always arise, because of the contradiction between the production of use values for profit and their private consumption. It is only under capitalism, where production for profit rather than use dominates, that overproduction of a commodity can prove an embarrassment. In other societies it would be a cause for celebration, because it would mean increased consumption. But for capital, consumption is not enough; sustained accumulation requires the realisation of profit. This depends upon sale and, if this becomes impossible, production may be curtailed and capital as a whole forced to operate on a reduced scale, with serious implications for employment and social welfare.
For example, a set of capitalists producing a particular commodity may be subject to some disturbance generated either in the economic sphere or elsewhere. However, the expanded reproduction of their own capitals is intimately integrated with other circuits of capital. Their inputs are the supplies of other capitalists, and vice versa. The economy may be seen as a system of expanding circuits linked together like interlocking cogwheels. If one set of wheels slows down or grinds to a halt, so will others throughout the system. For example, for the clothing industry to expand there must be a co-ordinated increase in the production of textiles, requiring a higher production of flax and cotton, more machinery, and so on, and more workers and finance must be available for all these industries. It is the necessary but unplanned and competitive interlocking of capitals that leads Marx to talk of the anarchy of capitalist production. In this, Marx anticipates some of Keynes’s best insights, not least through his schemes of reproduction. But Marx’s analysis goes further and deeper in many respects, extending consideration of the level of (effective) demand to its sources in the production and accumulation of surplus value, and arguing that crises are forcible changes in the pace of accumulation as well as its internal structure. He sees them as necessary in the sense that they forcibly resolve the internal contradictions of accumulation which would otherwise persist. Crises are also unavoidable, as is shown below.
Theories of crisis generally start from the breakdown of individual circuits of capital, together with the social consequences of private decisions on production and purchase. A circuit of capital may be broken in any of its links (see Chapter 5, Figure 5.1). The break may be either voluntary or involuntary on the part of the capitalist, who may be able but unwilling, or willing but unable, to allow the circuit to continue. In the first case the capitalist will be speculating, either anticipating that profitability may be increased by delaying the circuit, or hoping to create or exploit a monopoly position by doing so; alternatively, the capitalist may be pessimistic about the possibility of realisation of the surplus value that may be produced. In the second case, the capitalist is subject to forces beyond immediate control.
There is unlikely to be a break of the circuit in the sphere of production, unless labour takes industrial action or there are major natural or technical disruptions (including rapid technological change in unfavourable financial circumstances). Instead, almost all crises appear to originate in the sphere of circulation, as an inability or unwillingness to buy, sell or invest. Consider the moment 
in the industrial circuit of capital (Chapter 4). A voluntary break here implies that C is available for sale, but the owner of M might anticipate a lower price for the inputs or hope to create such a lower price. In particular, for LP, this may be done by reducing (or threatening to reduce) the level of employment as part of a strategy to increase the rate of surplus value.
The break in the circuit may also be involuntary. The owners of inputs may attempt to create or exploit a monopoly position – in particular, labour may strike. Alternatively, inputs may not be available because, in the previous round of production, outputs – partly present inputs – may have been produced in the wrong proportions. This will create excess demand for particular commodities and, normally, an excess supply in other sectors. If this becomes generalised across many producers and sectors, the situation is termed a crisis of disproportionality. These remarks need to be modified if the commodity in short supply is labour power, in which case there will be an excess demand for labour, but also an excess supply of (unused) money capital.
A break in the sphere of circulation may also appear between C’ and M’. A capitalist may speculate about the future price of commodity capital, creating a voluntary break. Alternatively, it may be impossible to sell produce, meaning that the commodity is in excess supply. This could be because of disproportionality or because those who normally buy the commodity may be unable to do so because they do not have money to hand, access to credit or profitable prospects. For example, if other circuits have been broken, for whatever reason, workers, capitalists and others will not receive their regular flow of income and hence will not make their usual expenditures. If this becomes generalised, it is known as a crisis of overproduction (or, from another point of view, of underconsumption). Marx put the whole matter neatly when he suggested that commodities are in love with money, but the course of true love never did run smooth.
Marxists have usually looked at crises of overproduction/underconsumption and disproportionality by dividing the economy into two sectors, investment and consumption, following Marx’s scheme for expanded reproduction (see Chapter 5). Some have argued that there is a persistent tendency for the supply of consumption goods to outstrip the demand for them, others that there is a tendency for a disproportionately large production of investment goods. Both are logically possible, but disproportions (overproduction in one sector, underproduction in another) are just as likely to occur within the consumption and investment goods sectors as between the two as aggregates. Moreover, it is easy to confuse a crisis of disproportionality in which consumption goods are in excess supply with a crisis of overproduction. The latter will be characterised by a general excess in supply of commodities (a ‘glut’) and the previous development of excess productive capacity. A crisis of disproportionality does not presuppose this generalised excess supply, but merely localised gluts in several influential economic sectors which may, eventually, trigger a crisis of overproduction.
Breaks in individual circuits of capital will occur often given the anarchy of capitalist production, fluctuations in market prices, disruptions in international trade, the vagaries of the credit system, financial or other types of speculation, monopolisation, and the economic obsolescence of fixed capital as a result of technological progress. Occasionally these will be sufficiently important to generate a crisis, its extent depending upon the patterns of disruption and, subsequently, on adjustment in economic reproduction. However, this description of the possibilities of crisis is limited, because it leaves implicit the motive of capitalist production: profit. The determining influence in production from the capitalist’s standpoint is the amount of profit thrown off by the circuit of capital. All obstacles may be overcome if s is large enough. Should profitability be improving, capitalists will be reluctant to suspend sales in order to speculate on higher and later profit, deny wage increases, or in any way hinder the process of profit making. This is so much so that the financial system will often prolong a speculative boom long after profitability has started to show signs of weakness in anything other than paper terms (see Chapter 14). Profits can pay and pave the way. Should the ability to capture profits be constrained, then not only will some capitalists be expelled from production by bankruptcy, but general pessimism will reign, production will be curtailed and a systemic crisis will be in prospect.
Movements in profitability depend not only on the conditions of sale, but also on movements in values. As has been seen in Chapter 3, the process of competitive accumulation brings frequent reductions in the values of all commodities. It is a contradictory feature of capitalism that individual profit is pursued by reducing values through relative expulsion of living labour from production, even though labour is the only source of surplus value and, therefore, of profit. Marx analyses this contradiction in the context of the LTRPF (see Chapter 9).
Theories of crisis focusing on overproduction, underconsumption, disproportionality and the falling rate of profit have given rise to an extensive literature; however, in isolation these approaches are limited. Rather than being presented as competing Marxian crisis theories in their own right, they can more usefully be analysed as component parts of Marx’s analysis of systemic fragility and economic crises in capitalism.
Intra-sectoral competition (see Chapter 6) creates a tendency toward uneven (disproportional) development between sectors, and a tendency to overproduction within each sector. In certain circumstances, possibly associated with a decline in the profit rate, these processes may trigger a general crisis. However, more important than these associations is the fundamental cause of crisis. For Marx, capitalist crises are ultimately due to the contradiction between the capitalist tendency to develop without limit the productive forces (and expand the surplus value that must be realised) and the limited social capacity to consume the product. Economic stability under these circumstances requires that an increasing part of the product must be purchased by capitalists for investment purposes or luxury consumption, which is not always possible. Capitalism therefore always tends to be unstable and prone to crisis. The crisis explodes when production has developed beyond the possibility of profitable realisation. This can occur for various reasons, and what matters for the explanation of specific crises is how their underlying cause – the subordination of the production of use values to the production of surplus value – manifests itself through disproportionality, overproduction, underconsumption or the falling rate of profit.
Accumulation, Crisis and the Development of the Proletariat
In the simplest possible scenario, suppose that, as capital accumulates, the ratio between constant and variable capital advanced (c ⁄ v) remains unchanged; therefore, the employment of labour must also increase. It would be unrealistic to expect that the labour supply could increase indefinitely without a rise in wages. However, if the wage rate increases faster than labour productivity in the wage goods sector there will be a squeeze on profitability and, consequently, a reduction in the rate of accumulation (in the limit, there will be no accumulation of capital when wages rise so much that the production of any surplus value at all is threatened). Yet as accumulation slackens so does the demand for labour, and the upward pressure on the wage rate is reduced as the power of labour diminishes with unemployment. Profitability is restored, and with it accumulation, and the cycle repeats itself (this argument has to be qualified if the ratio c ⁄ v changes; see Chapter 8).
This is how Marx described the decennial business cycles of the early nineteenth century. He also linked them to the synchronised renewal of fixed capital and the volatility of commercial credit. Significantly, and in contrast to classical political economists, Marx explained fluctuations in employment, wages and profitability by fluctuations in the rate of accumulation, rather than vice versa. He considered absurd the Malthusian doctrine of alternating decimation and stimulation of the size of the proletariat by sexual reproduction in response to wages falling below and then rising above some physiological subsistence level. This could hardly explain ten-year cycles. Marx was also heavily critical of the classical economists’ fascination with the idea of decreasing returns in agriculture (see Chapter 13). In contrast, he stressed the driving force, under capitalism, of the increasing productivity of manufacturing industry.
Described in these aggregate terms, economic activity appears to fluctuate smoothly, driven by changes in the rate of accumulation. Nothing could be further from the truth. The overall picture may conceal enormous variations between sectors and geographical regions within the economy. Moreover, it has already been shown that capital has a persistent tendency to increase productivity and expel living labour from production.
Marx argues that, under capitalism, technical change would not only save living labour absolutely, but also relative to other means of production. This is achieved primarily by the economies of scale due to factories and the use of new machinery. Thus, the amount of machinery per worker will tend to grow over time, increasing the technical composition of capital (see Chapter 8) and speeding up production. Each worker turns over a given mass of raw materials in a shorter time, reducing the amount of labour socially necessary to produce each commodity.
The expulsion of living labour from production may be accompanied by an overall expansion in employment, because of growth of total output. But competitive accumulation proceeds in an uncoordinated fashion. Across sectors and regions, outputs and employment will not expand in balance. With the technological changes there will now be a shortage, now an excess of labour and means of production available. However, the expulsion of living labour from all production processes will tend to produce rising unemployment (tempered, as explained above, by economic expansion and the opening of new sectors and avenues for accumulation). Marx called this the industrial reserve army, or surplus population – note that the surplus is created and maintained over time by capital accumulation, rather than through the biological reproduction of the workers, as had been suggested by Malthus. This surplus includes a layer of the permanently unemployed, condemned to pauperisation by the combination of the rhythm and characteristics of accumulation and their own perceived unsuitability for capitalist employment, whether because of age, gender, background, past experience (or lack thereof), disability, or for whatever reason. The greater the reserve army is relative to employment, the greater is the competition for employment and the lower will be wages. Similarly, the greater the reserve army and its layer of permanently unemployed, the greater the extension of poverty and misery. Marx singled out this feature of capitalism as the general law of capitalist accumulation.
So far, we have analysed the demands that capital accumulation places on the proletariat – a constant disruption of individual and social life. Particular changes may be forced by political, economic, ideological and legal coercion, or induced through the market by changes in wages and skill requirements. Both the particular method chosen and the outcome will depend upon the strength of organisation behind the two classes. In addition the strength of the capitalist class increases as accumulation is accompanied by greater centralisation and, simultaneously, by the greater strength, organisation and coercive power of the state. Marx argues that, at the same time as capital is centralised, so are masses of workers concentrated together in production. Such economic organisation tends to encourage political organisation and awareness and the struggle for economic and social change. As accumulation progresses, so the strength, organisation and discipline of the proletariat can grow with the development of its material conditions.
Capitalism fulfils the positive role of developing society’s productive potential, turns the principles of economic efficiency into universally held values, and creates the material conditions for communism. At the same time, capitalism is the most destructive mode of production in history. Capitalist economies are chronically unstable because of the conflicting forces of extraction, realisation and accumulation of surplus value under competitive conditions. This instability is structural, and even the best economic policies cannot avoid it completely. It was shown in Chapter 6 that competition forces every capital to find ways to increase labour productivity. This generally involves technical changes that increase the degree of mechanisation, the integration between labour processes within and across firms, and the potential scale of production. But these processes are always uneven and wasteful. They are associated with large fixed capital investment, speculation, labour-market shifts, deskilling, structural unemployment, bankruptcy, crisis, and the failure to meet the basic needs of all despite the availability of the means to satisfy them.
Accumulation also contributes to the development of the agent of capital’s destruction, the organised workers, and provides the rationale for that destruction: the socialisation of production to be accomplished by a co-ordinated and radically democratic planning process harnessing society’s productive potential. The proletariat accomplishes its historical role, the expropriation of the class of capitalists, when they overcome the institutions enforcing capitalist discipline within production and in society at large, and create alternatives permitting the abolition of economic exploitation.
This does not necessarily occur during an economic crisis. For while crises are associated with reduced profits, high unemployment and downward pressures on wages, a recession is also a time when the working class tends to be weakened. In addition, changes within a mode of production, let alone the transition from one to another, cannot simply be read off from economic conditions alone, because they are dependent on political and ideological conditions. These, together with the labour movement’s economic position, tend to be at their strongest when conditions are prosperous. So the relationship between economic analysis and revolution is not only complex, but is dependent upon other influences as well (this is explored further in Chapter 15).
The literature on crisis theory is extensive, diverse and bitterly contested. One division is between those who hold to a theory of falling profitability (and there are differences between them over how and why) and those who do not. Other differences in the literature reflect relative emphasis on production, distribution, exchange, finance and the balance of power between capital and labour and within the capitalist class. Increasingly, the (economic) role of the state has been seen as a source of, or response to, crisis, although in deference to ‘globalisation’ this now has less prominence. This may change once more in the wake of the current crisis.
Marx himself never discusses his theory of crisis systematically; see, however, Marx (1969, ch.17, 1972, ch.20). The interpretation in this chapter is based on Ben Fine and Laurence Harris (1979, ch.5). For overviews of Marx’s theory of crisis, see Simon Clarke (1994, 2012), Duncan Foley (1986, ch.9), David Harvey (1999, ch.13), Michael Heinrich (2013), Michael Howard and John King (1990), Michael Perelman (1987), Anwar Shaikh (1978), John Weeks (2010, chs 5, 8) and Research in Political Economy (vol.18, 2000). Underconsumptionist theories are critically reviewed by Michael Bleaney (1976) and John Weeks (1982b). A revival of the debate on crisis has been sparked by Robert Brenner (1998, 2002). For a taste of the ensuing literature, see Historical Materialism (vols 4–5, 1999) and Ben Fine, Costas Lapavitsas and Dimitris Milonakis (1999). See also references in Chapter 14 for the recent renewal of the debate.