Henryk Grossman 1922

The Theory of Economic Crises

Written: 1919;
First Published: 1922;
Source: Henryk Grossman ‘The Theory of Economic Crisis’ Bulletin International de l’Académie Polonaise des Sciences et des Lettres. Classe de Philologie. Classe d’Histoire et de Philosophie. I Partie. Les Années 1919, 1920, 1922, Kraków, pp. 285-290;
Transcription/Markup:  Rick Kuhn, Steve Palmer;
Proofread: Steve Palmer;
Copyleft: Internet Archive(marxists.org) 2005. Permission is granted to copy and/or distribute this document under the terms of the Creative Commons License.

The text uses some unconventional terms for basic Marxist concepts:

hausse = boom
process of making pay = valorisation process
process of work = labor process
super-production = surplus value
super-production of tonnage = overproduction of tonnage

Dr. HENRYK GROSSMAN: Teorja kryzysów gospodarczych (The Theory of Economic Crisis)
Meeting of June 16, 1919

Crises in a capitalist economic mechanism occur when a certain amount of merchandise of a definite value (m) cannot be sold within the limits of the said mechanism. The problem presented by the crises consists in determining the factors which condition them, and more particularly in ascertaining whether the crises result from the very essence of the existing economic order, or whether they are the result of inessential and accidental influences. An ineffective dispute of more than a hundred year’s duration, based as it was on theoretical considerations only, has induced many investigators of the problem to try the historical method: the key to the theoretical explanation was sought in descriptions, as detailed as possible, of the reality of experience. In opposition to this tendency the author is of opinion that naïve empiricism must be abandoned and – experiments being out of the question – logical constructions must be attempted. As a physicist investigating the fall of bodies, examines, in his desire to exclude the accidental and external influences of air, the fall of bodies in vacuo, under conditions created artificially, so the question whether crises results from the essence of the economic mechanism under consideration can only be explained when we make this mechanism independent in our thoughts of the disturbing influences of foreign markets and investigate it as existing for itself, as if in a vacuum. Apart from methodological considerations, this position is also recommended by an analysis, on its merits, of the hypothesis which, while establishing the impossibility of selling the total value of the year’s produce within the limits of the capitalist mechanism, sees in the existence of non-capitalist foreign markets an indispensable condition for realising ‘super-production’ (m). Since, then, the hypothesis of foreign markets leads to fictitious solutions, it must be assumed beforehand, that the realisation of m is bound to take place within the capitalist mechanism, and further enquiry attempts to fix the conditions under which such realisation would be possible. The unbroken chain of social production in an economic system based on hired labor can be schematically represented in the following manner: Producers invest in production, in the course of the year, an amount of real capital – such as instruments of production, buildings, raw material etc – which may be indicated by the letter c, and in addition to this sum of capital to cover the expense of workers’ wages which we shall indicate by v, and thus they obtain an annual produce of P = c + v + p, where p indicates an average amount of profit without which they would not undertake production. For simplification, let us suppose that the real capital is entirely used up in the course of a year’s production and must be renewed annually if production in the following year is not to be interrupted. Assuming c = 4 000, v = 1 000, P = 6 000, we obtain for p the figure of 1 000. From the value of P = 6 000, the capitalist is obliged, according to the above assumption, to deduct 4 000 for the renewal of real capital (c), so that the total amount of the joint income remaining is 2 000, of which v = 1 000 is in the hands of the workers, and p = 1 000 in the hands of the employers. We assume further that outside these two classes of society drawing a direct income there is no other class: that the incomes of lawyers, physicians, artists, officials etc, can be classified under the incomes of either the one or the other of the two fundamental classes above-mentioned. If the capitalists consumed p entirely, social production would run along the same lines year by year, and we should have to deal with direct reproduction. But experience presents to us reproduction amplified, that is to say a state of things in which producers consume only part of p, for instance 600, which we shall call k, – whereas the remaining part of the profit p, that is to say 400 – let us call it the coefficient of accumulation (m) – serves for the enlargement of the apparatus of production. Experience shows that the enlargement of the scale of production takes place among periodical perturbations. As long as the quantity represented by m finds purchasers in the market, the economic mechanism is in a period of ‘hausse’, followed at more or less regular intervals, by a period of stagnation when the remainder m can not, because of a lack of demand, be consumed by the producers. Another question: under what conditions is the realisation of m = 400 possible, and who realises it? Not the workers, because their purchases must move within the limits of their income v = 1 000. Not the capitalists, because their fund of consumption amounts to k = 600, already expended. When the joint income v + p amounts to 2 000, the joint fund of consumption v + k amounts to 1 600. Who, then, realises the remainder m? The problem, as we see, is one of quantity, and we shall deal in what follows, with such theories only as have endeavored to solve the problem. Since neither the workers nor employers as consumers – and there are no other social classes in our abstract society – can be purchasers of m, it follows that only the employers as producers can be the purchasers, that is to say: super-production m must be used up by the producers themselves for the enlargement of the apparatus of production. Here we approach the kernel of the problem. A crisis is the result of planless accumulation. Any enlargement of the apparatus of production can only take place, without disturbance, on condition that the coefficient m intended for accumulation be divided in strictly defined proportions: 1) Among different branches of joint production (the sphere producing instruments of production, the sphere producing goods for consumption, etc); 2) Within each such branch among the component parts of capital c: v. The beginnings of a theory of proportional distribution of productive forces came from J. B. Say, who, however, taking for the starting point of his analysis the pre-capitalist system, based on the labor of independent producers, could not explain capitalist crises. Karl Marx was the first to work out this idea in application to the capitalist system, but he was not able to finish his work. Correct mathematical form was only given to his formulae by Professor Tugan Baranowsky (1901) and Otto Bauer (1913), who pointed out that if only the proportions laid down by the formula as to the distribution of accumulated capital were observed, accumulation could be infinitely prolonged without crises. The crises, as a matter of fact, are caused by the circumstance that nobody troubles to observe the proportions demanded by the formula. Owing, however, to the oscillations of prices and wages, there takes place, ex post, an automatic reestablishment of the disturbed balance, and a readjustment of the apparatus of production to the proportions required by theory; for, owing to high wages or low prices respectively, the capitalist profit diminishes and the speed of accumulation slows down, causing a restriction of the apparatus of production, whilst, on the contrary, with low wages or high prices, the producer’s profit grows, and with it the apparatus of production grows also. At this point the chain of ideas of the accepted doctrine breaks off. Herkner pointed out as early as 1892 that the so called ‘law of wages’ was ‘a regulator too apt to deceive’. Indeed, the basis of fact for the theory of automatic regulation here discussed is not in accord with experience. The policy of production practised by the trusts teaches us that an increase of demand and prices, instead of enlarging the apparatus of production often restricts it, if the rise in prices produced thereby secures for the trusts higher profits than they would obtain by enlarged production. Conditions are analogous in the case of a fall of prices. There is no question of an automatic re-establishment of disturbed proportion in the apparatus of production. The super-production of tonnage in Germany, the crises called forth by it and the lowering of tariffs in the period from 1892 to 1895, and again in 1909, did not cause any restriction of the production of tonnage, but, on the contrary, its enlargement, because it was decided to build new ships of a bigger type. In spite of lower tariffs these new ships were able, owing to their more economic construction, to work at a profit. The appearance of ships of the new type deprives the old ones of value: their owners go bankrupt, not being able to work at a profit. The new purchasers, however, having bought these ships very cheaply, have a new basis for making them pay. Even old ships now work at a profit. The result, then, is the following: in spite of the ‘super-production’ of tonnage, new ships have been built. The apparatus of production, instead of becoming restricted, has been enlarged. And the crisis, nevertheless, has passed! What has been restricted is – the value of the ships. The crisis, then, is not a restriction of the real apparatus of production, but a breakdown of the accepted system of prices and values, and its reorganisation on a new level.

The above example conclusively shows that in the problem here investigated we must distinguish two sides in economic phenomena: their value, and the material foundation for the value. Now only we can take up research at the point, where the accepted doctrine stopped. If it asserts, and proves with mathematical precision, that crises would be impossible if only a definite proportion were observed in the accumulation of capital, no objection can be raised to such reasoning. But we ask: what is the proportion, which it is necessary to observe in the distribution of accumulated capital? Is it a proportional distribution of capital as measured by its value, or by the quantity of its real bulk? Is it, for instance, the value of ships or the size of their tonnage? This question, so important for the problem of proportional distribution of the powers of production, has never yet been put. The capitalist process of reproduction, it appears, demands both kinds of proportion. A definite proportion in the distribution of capital as measured by value is indispensable in the capitalist process of production as a process of making pay, a process of drawing profits from the difference in value at the beginning and at the end of production. But the process of production is at the same time a technical process of work. In the process of work it is not value that is active, but the real and personal factors of production, which stand in a strictly defined technical relation to each other, depending on the technical development of each particular branch of work (manual labor, use of machines, etc). Only if both proportions, viz. the proportion of capitals in the process of making pay, and in the technical process of work, covered each other, that is to say if they ran along the same lines, would crises be impossible. But we have seen that this is not so. The amplitude of movements of the accumulation of capital in the process of making pay (as measured by value) is different from the amplitude of movements of the accumulation of capital in the process of work (as measured by the real bulk of the apparatus of production). The two amplitudes cross each other. Agreement between the two movements can only be an accident, and their disproportion is a constant and unavoidable phenomenon of the economic mechanism under investigation, a disproportion resulting from the double character of its essence, which is on the one hand a process of making pay, on the other, one of work. Bankruptcy of employers on the one hand, unemployment of masses of workers on the other, are met with not only in periods of depression, but in phases of fullest development as a constant symptom of our economic life. Conversely, even in periods of greatest depression the process of accumulation, of enlarging, never stops. A period of depression differs from one of hausse not in quality, but in quantity only, the phenomena of disturbance being more intense. Why such intensification happens periodically, why such disturbance is not evenly distributed over all sections of a longer period of time, but embraces at certain times larger circles than formerly, that is a secondary problem in the investigation of economic crises.