Law of the Accumulation and Breakdown, Henryk Grossman 1929

3. Modifying Countertendencies


An abstract deductively elaborated theory never coincides directly with appearances. In this sense the theory of accumulation and breakdown expounded above does not directly correspond with the appearances of bourgeois society in its day to day life. The conditions of capitalism conceived in its pure form (which we have analysed so far) and those of the system in its empirical manifestations (which we have to analyse now) are by no means identical. This is because a theoretical deduction involves working with simplifications; many real factors pertaining to the world of appearances are consciously excluded from the analysis.

So far we have assumed:

i)                that the capitalist system exists in isolation - that there is no foreign trade;

ii)              that there are only two classes — capitalists and workers;

iii)            that there are no landowners, hence no groundrent;

iv)             that commodities exchange without the mediation of merchants;

v)               that the rate of surplus value is constant and corresponds to the magnitude of the wage — that is a rate of surplus value of 100 per cent;

vi)             that there are only two spheres of production, producing means of production and means of consumption;

vii)           that the rate of growth of population is a constant magnitude; viii) that the value of labour power is constant;

viii)         that in all branches of production capital turns over once a year.

Any theory has to work with such provisional assumptions which are a potential source of mistakes. But these assumptions have allowed us to determine the direction in which the accumulation of capital works, even if the results of this analysis have a provisional character.

Marx was perfectly conscious of the abstract, provisional nature of his law of accumulation and breakdown. Having presented ‘the absolute general law of capitalist accumulation’, he says that ‘Like all other laws it is modified in its working by many circumstances, the analysis of which does not concern us here’ (1954, p. 603). Elsewhere, in describing the process of accumulation, he writes: ‘This process would soon bring about the collapse of the capitalist production were it not for counteracting tendencies’ (1959, p. 246). Marx gave an analysis of these counteracting tendencies in various places in Capital Volume Three as well as in Theories of Surplus Value.

Once we have shown the tendency of accumulation in its pure form we have to examine the concrete circumstances under which the accumulation of capital proceeds, in order to see how far the tendency of the pure law is modified in its realisation. We are asking whether, and if so in what direction, the tendencies of development of the pure system are changed once this system reincorporates, by degrees, foreign trade, landowners who live off groundrent, merchants and the middle classes — and once the rate of surplus value or the level of wages are allowed to vary. These considerations mean that the abstract analysis comes closer to the world of real appearances. It enables us to verify the law of breakdown: to see to what extent the results of the abstract theoretical analysis are confirmed by concrete reality.

Considering the gigantic increases in productivity and the enormous accumulation of capital of the last several decades the question arises —why has capitalism not already broken down? This is the problem that interests Marx:

the same influences which produce a tendency in the general rate of profit to fall, also call forth counter-effects, which hamper, retard, and partly paralyse this fall. The latter do not do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced. (1959, p. 239)

Once these counteracting influences begin to operate, the valorisation of capital is reestablished and the accumulation of capital can resume on an expanded basis. In this case the breakdown tendency is interrupted and manifests itself in the form of a temporary crisis. Crisis is thus a tendency towards breakdown which has been interrupted and restrained from realising itself completely.

Return for a moment to the illustration of the cyclical process of accumulation in Figure 2 above.

Due to the very nature of the accumulation process there is a basic difference between the two phases of the cycle with respect to their duration and their character. We have seen that only the phase of accumulation is defined by a specific regularity; that only the length of the expansion phase(O-Z1, O-Z2...) and the timing of the downturn into a crisis are open to exact calculation. No such calculation is possible with respect to the duration of the crisis (Z1-O1, Z2-O2 ... ). At Zl, Z2, and so on valorisation collapses. The ensuing overproduction of commodities is a consequence of imperfect valorisation due to overaccumulation. The crisis is not caused by disproportionality between expansion of production and lack of purchasing power — that is, by a shortage of consumers. The crisis intervenes because no use is made of the purchasing power that exists. This is because it does not pay to expand production any further since the scale of production makes no difference to the amount of surplus value now obtainable. So on the one hand purchasing power remains idle. On the other, the elements of production lie unsold.

At first only further expansion of production becomes unprofitable; reproduction on the existing scale is not affected. But with each cycle of production this changes. The portion of the surplus value earmarked for accumulation each year goes unsold. As inventories build up the capitalist is forced to sell at any price to obtain the resources to keep the enterprise going on its existing scale. He is compelled to reduce prices and cut back on his scale of production. The scale of operations is reduced or they shut down completely. Many firms declare bankruptcy and are devalued. Huge amounts of capital are written off as losses. Unemployment grows.

This sickness leads in one of two directions. Either there is nothing to stop the breakdown tendency from working itself out and the economy simply ceases to function; or specific measures are undertaken to counteract the sickness so that the sickness is stopped and turns into a healing process. The question arises: how is a crisis surmounted? How is a new period of upswing initiated? The mere statement that crises are a form of sickness is quite useless if we have no conception of what this sickness is caused by. The specific means by which a crisis is surmounted are obviously closely related to the diagnosis of the sickness. The remedies prescribed would vary according to whether the underlying cause of crises is seen as the underconsumption of the masses, as disproportions between branches of production or as a shortage of capital.

There are, of course, cases where the boom has been precipitated by a massive flow of funds from abroad — for instance, the huge imports of American capital into Germany over 1926—7. But in numerous instances —and this is the general rule — crises have been surmounted without any flow of foreign funds. And just as crises have been surmounted while many of its so-called causes (for instance, underconsumption of the masses) are still present, so we find that all the factors generally cited to explain the boom turn out to be quite useless in explaining how the depression itself is overcome. The remedies proposed are not logically connected with the diagnosis of industrial sickness.

In contrast to these various theories, our theory shows that the means actually enforced to surmount a crisis correspond perfectly to the actual causes of industrial sickness in our analysis. In this sense the theory provides a consistent explanation of the two phases of the industrial cycle, both of the turn from expansion to crisis and of the process through which the crisis is later surmounted. From the argument that crises are caused by an imperfect valorisation of capital it follows that they can only be overcome if the valorisation of capital is restored. But this cannot come about by itself, merely in the course of time. It presupposes a series of organisational measures. Crises are only surmounted through such a structural reorganisation of the economy.

The capitalist mechanism is not something left to itself. It contains within itself living social forces: on one side the working class, on the other the class of industrialists. The latter is directly interested in preserving the existing economic order and tries, in every conceivable way, to find means of ‘boosting’ the economy, of bringing it back into motion through restoring profitability.

The circumstances through which the crises can be overcome vary enormously. Ultimately however, they are all reducible to the fact that they either reduce the value of the constant capital or increase the rate of surplus value. In both cases the valorisation of capital is enhanced — the rate of profit rises. Such circumstances lie both within production and in the sphere of circulation, and pertain both to the inner mechanism of capital as well as to its external relations to the world market.

The capitalist’s continual efforts to restore profitability might take the form of reorganising the mechanism of capital internally (for instance, by cutting costs of production, or effecting economies in the use of energy, raw materials and labour power) or of recasting trade relations on the world market (international cartels, cheaper sources of raw material supply and so on). This involves groping attempts at a complete rationalisation of all spheres of economic life. Many of these measures fall while the programme of reorganisation is often completely beyond the reach of the smaller enterprises, which are thus wiped out. In the end capital finds suitable means of raising profitability and a reorganisation is gradually enforced. By its very nature the duration of this reorganisation and economic restructuring process is something purely contingent and therefore impossible to calculate.

In the pages that follow I shall not go into a detailed description of all the several countertendencies that hinder the complete working out of the breakdown. I shall confine myself to presenting only the most important of them and to showing how the operation of these countertendencies transforms the breakdown into a temporary crisis so that the movement of the accumulation process is not something continuous but takes the form of periodic cycles. We shall also see how, as these countertendencies are gradually emasculated, the antagonisms of world capitalism become progressively sharper and the tendency towards breakdown increasingly approaches its final form of an absolute collapse.

Part 1: Countertendencies Internal to the Mechanism of Capital

Increases in the rate of profit through the expansion of productivity

In Chapter 2 I outlined the methodological considerations which prompted Marx to analyse the problem of accumulation and crisis on the assumption of constant prices. This assumption made it possible to prove that the cyclical movements of expansion and decline are independent of fluctuations in the level of commodity prices and wages. Here I want to show that the opposite assumption of the bourgeois economists, who take the price fluctuations as their starting point, simply confuses the issue.

We have already seen that in analysing the business cycle Lederer starts from rising prices as the decisive factor: ‘If we look at periods of boom, then we find that in such periods all prices rise’ (1925, p. 387). According to Lederer, expansions in the scale of production which characterise periods of boom are a result of rising prices. But how is the general increase in prices possible? Lederer argues that if the value of money is held constant a general increase in prices can only flow from changes on the commodity supply side. ‘However’, Lederer continues, ‘such changes in the volume of production are only consequent on changes in the level of prices’ (p. 388). So Lederer sees a vicious circle which can only be broken by new purchasing power being injected into the process of circulation by the expansion of credit. ‘Only credit creates the boom or makes it possible’ (p. 391) by raising the level of demand and therefore of prices. ‘Only through additional credit and thus newly created purchasing power is any significant expansion of the productive process possible’ (p. 387).

Lederer’s argument is unconvincing. Apart from its defective methodological starting point, it is both logically contradictory and contradicts the actual course of the boom. Firstly a general increase in prices is something meaningless apart from the case where the value of money falls. Yet such a general price increase is purely nominal - it has no impact on the mass of profit. Bearing this in mind the whole basis of Lederer’s deductions simply falls. Secondly the most important renovations and expansions in the productive apparatus occur in periods of depression when commodity prices are low. It is the demand generated by these programmes of expansion that raises the level of prices, assuming that this demand exceeds the supply.

In principle rising prices are by no means necessary in surmounting crises. They are only a consequence, not a cause, of booms. Extensions in the scale of production can, and do, occur without rising prices and even if the level of prices is low. This is basic to any understanding of the problem. According to Lederer rising prices and the programmes of expansion supposedly linked to them are a result of credit expansion. In which case it follows that credit is released when prices are still low. So Lederer has to be able to tell us who will take the credit to extend the scale of production when prices are low? Lederer is simply running in circles.

The fact remains that programmes of expansion are undertaken in periods of depression when prices are low. Any deeper analysis has to start here if we are going to understand the process in its pure form. At a certain level of the accumulation of capital there is an overproduction of capital or a shortage of surplus value. Overproduction does not mean that there is not enough purchasing power to buy up commodities, but that it does not pay to buy commodities for programmes of expansion because it is not profitable to extend the scale of production: ‘In times of crisis ... the rate of profit, and with it the demand for industrial capital has to all extents and purposes disappeared’ (Marx 1959, p. 513). Due to lack of profitability, accumulation is interrupted and production is carried out on the existing scale. Prices are bound to fall. The fall in prices is only a consequence of stagnation not its cause.

Because commodities are unsaleable when the crisis starts, competition sets in. Each individual capital tries to secure for itself, at the cost of other capitals, that which is unattainable by the totality of capitals. From a scientific point of view, this proves that competition is necessary under capitalism. We started by assuming the most favourable condition for capital, a state of equilibrium in which supply and demand coincide. Yet at a certain level of the accumulation of capital competition must necessarily arise. Earlier we looked at the capitalist class as a single entity. But in examining the crisis we must take account of the mutual competition of the individual capitalists.

Let us go back to the question posed earlier - how is the crisis surmounted? How does a renewed expansion of production come about? The answer is: through the reorganisation and rationalisation of production by which profitability is again restored even at the depressed level of prices prevailing. Figure 4 is a schematic illustration of the entire movement.

Figure 4


The crisis started at the prices prevailing at level 1. As a result the price level fell from B to C until they stabilised at their new and lower level 2 (line C—D). Taking all the capitals in their totality, further accumulation was quite pointless on the prevailing basis. Suppose there are four enterprises, of equal size but different organic compositions, in a particular branch of industry:

1)  50c : 50v

2)  40c : 60v

3)  35c : 65v

4)  25c : 75v


   150c :250v


Assume that 150c represent the absolute limit of accumulation on the existing basis. At this point a crisis ensues and the companies are forced to reorganise, that is to rationalise their plants. For example companies 1 and 2 decide to merge so that the organic composition expands, say in the ratio of 7c: 3v. In the new enterprise with 90c only 38v (instead of 110) is thus used. Labour power to the value of 72v is set free; rationalisation leads to the formation of a reserve army. Once the merger is complete we have three enterprises as a result of the concentration process and a reserve army of 72v.

1)  90c: 38v

2)  35c : 65v

3)  25c : 75v


   150c :178v

For the new enterprise resulting from the merger, the higher organic composition entails a restoration of its profitability even at the lower price level 2. Firstly because the higher organic composition of capital means an increase in the productivity of labour and thus a reduction in unit costs. Secondly because an increase in the productivity of labour also means a higher rate of surplus value. This increase in the rate of surplus value implies that as the other companies also decide to rationalise the total surplus value obtainable expands proportionately, quite irrespective of the fact that every year a new generation of workers is appearing on the labour market. It follows that the maximum possible limit to the accumulation of capital is pushed further back beyond the level 150c.

During the crisis there was overproduction. How was the upturn produced? Was the scale of operations reduced? On the contrary, it was expanded even further. And yet the crisis was surmounted.

That crises are surmounted although the scale of operations is extended even further is the best proof that crises do not stem from a lack of purchasing power, a shortage of consumers, or from disproportions in the individual spheres of industry. Because the crisis is rooted in a lack of valorisation it necessarily disappears once profitability is improved even if prices remain low.

The empirical evidence for this view confirms it word for word. Take the example of German shipping where, due to massive overproduction of tonnage and the ruinously low freight charges that followed, the biggest shipping companies incurred consistently heavy losses throughout the depression years 1892—4. How was this severe crisis overcome? R Schachner tells us that the depression in freight charges stimulated important changes in the technological structure of shipping. In 1894 and 1895, ‘encouraged by low construction costs, all the big companies went in for the large scale steamer’ (1903, p. 5). Due to this revolution in shipping enterprise, world shipping statistics show an increasing average size of ships: in 1893 the average was 1 418 gross register tons, in 1894 1 457 grt, in 1895 1 499 grt, in 1896 1 532 grt. The smaller companies could no longer compete on the freight market with these giant steamers and were forced to sell off their steamers at enormous losses. The position of the big shipping companies was entirely different, despite their intense competition with England. In 1895 the Hamburg—America line stated in its annual report: ‘Despite miserable freight charges, our new steamers were able to operate at a profit due to their large tonnage and their savings in (fuel) costs’ (p. 7). To overcome the crisis of overproduction of tonnage the tonnage was expanded even further, despite low prices.

The same process was repeated when, after the boom years of 1897—1900, a new crisis started in 1901. Again there was an attempt to relieve the impact of the depression through a general drive to cut costs in shipping by expanding the individual scale of operations still further (Schachner, p. 96). This happened a third time after the War. In spite of the huge losses due to the War, world shipping was afflicted by an oversupply of loading capacity. By 1926 world tonnage had increased by 31.7 per cent compared to its pre-war level.

Yet world trade had still to recover its pre-war levels, so it is not surprising that there was a state of severe depression in the world freight market. Rates declined steeply to rockbottom levels of profitability. How was this crisis overcome? Despite the massive oversupply of tonnage, international shipping converted to the latest type of vessels with a still larger scale of operations. As against an average capacity of 1 857 grt in 1914, the figure was 2 136 grt in 1925. Loading capacities increased even more sharply. Today a modern 8 000 ton steamer with a 10-knot speed consumes only 30 tons of coal per day. Prior to the War it consumed 35—6 tons per day. Yet the most significant technological change, decisive to the whole question of profitability, was the introduction of a new type of propulsion. In 1914 mechanised vessels formed just 3.1 per cent of the total world tonnage. By the end of 1924 their share was 37.6 per cent. As against the old coal-run steamers, the new mechanised ships were characterised by much higher loading capacities relative to size, by lower fuel costs and by savings in manpower. For instance on English vessels, despite a shorter working day, average crew size declined from 2.58 per grt in 1920 to 2.41 per grt in 1923.

In short, despite the trough in freight rates, the technological rationalisation of shipping restored profit levels and enabled the industry to overcome its crisis.

Because it is so recent, we hardly need to substantiate the fact that the last great depression following the German stabilisation of 1924—6 was overcome by the same methods of rationalisation — by a process of fusion and concentration, and increases in the productivity of labour through technological renovations. Profitability was revived and the crisis surmounted through increases in productivity and extensions in the scale of production. If we survey the process in its pure form over a longer period of several cycles and in abstraction from various countertendencies, it follows that prices show a declining tendency from one crisis to the next (in Figure 4, from level 1 to level 2 and so on), whereas the scale of production undergoes continuous expansion. In reality the process does not take this pure form due to the intervention of various subsidiary factors.

In a given branch of production the crisis is never overcome purely through the technological improvements within the branch itself. The capitalists also gain from the technological and organisational changes accomplished in other spheres of industry, either because these changes reduce their investment costs by cheapening basic elements of the reproductive process or because improvements in transport or monetary circulation shorten the turnover time of capital and thus increase the rate of surplus value. The more a movement of rationalisation spreads and penetrates into a whole series of new industries, the more the boom gains in intensity because improvements in one sphere of industry mean an expanding mass of surplus value in others.

Reducing the costs of variable capital through increases in productivity

a) Starting from a dynamic equilibrium the previous analysis assumed a constant rate of surplus value of 100 per cent throughout the course of accumulation. This conflicts with reality and has a purely fictitious, tentative character. It has to be modified.[1] Rising productivity cheapens commodities; in so far as this includes commodities that go into workers’ consumption, the elements of variable capital are thereby cheapened, the value of labour power therefore declines and surplus value and the rate of surplus value increase. Marx says:

hand in hand with the increasing productivity of labour, goes ... the cheapening of the labourer, therefore a higher rate of surplus value, even when the real wages are rising. The latter never rise proportionally to the productive power of labour. (1954, p. 566)

A further factor in enhancing the rate of surplus value is the rising intensity of labour that goes together with general increases in productivity. The increasing degree of exploitation of labour that flows from the general course of capitalist production constitutes a factor that weakens the breakdown tendency.

b) The ‘depression of wages below the value of labour power’ (Marx, 1959, p. 235) works in the same direction. Obviously, since the efficiency of work is going to fall, this can only be a temporary step.

Throughout the analysis we have assumed, in keeping with the hypothetical state of equilibrium, that the commodity labour power is fully employed — that there is no reserve army to begin with and consequently, like all other commodities, labour power is sold at its value. However I have shown that even on this assumption, a reserve army of labour necessarily forms at a certain level of capital accumulation due to insufficient valorisation. Beyond this point the mass of the unemployed exert a downward pressure on the level of wages so that wages fall below the value of labour power and the rate of surplus value rises. This forms a further source of increases in valorisation, and so another means of surmounting the breakdown tendency. The depression of wages below the value of labour power creates new sources of accumulation: ‘It ... transforms, within certain limits, the labourer’s necessary consumption fund into a fund for the accumulation of capital’ (Marx, 1954, p. 562).

Once this connection is clear, we have a means of gauging the complete superficiality of those theoreticians in the trade unions who argue for wage increases as a means of surmounting the crisis by expanding the internal market. As if the capitalist class is mainly interested in selling its commodities rather than the valorisation of its capital. The same holds for F Sternberg. He cites the low wages prevalent in England in the early nineteenth century as one reason ‘why the crises of this period caused far deeper convulsions in English capitalism than those of the late nineteenth century’ (1926, p. 407). Low wages, and therefore a high rate of surplus value, form one of the circumstances that mitigate crises.

Shortening the turnover time and its impact on the rate of surplus value

In the reproduction schemes a period of production lasts one year and the working period and period of production are identical. There is no period of circulation and the working periods follow one another immediately.

The duration of the production period is the same in all spheres of production and the assumption is made that in all branches capital turns over once every year. None of these several assumptions corresponds to reality and they are intended purely for simplification. First the working period and production time are not identical in reality. Secondly, apart from the production time, there must also be a circulation time. And finally turnover time varies from one branch of production to another and is determined by the material nature of the process of production. If the analysis is to bear any correspondence to the real appearances those assumptions also have to be modified.

According to Marx the ‘difference in the period of turnover is in itself of no importance except so far as it affects the mass of surplus labour appropriated and realised by the same capital in a given time’ (1959, p. 152). The impact of turnover on the production of surplus value can be summarised by saying that during the period of time required for turnover the whole capital cannot be deployed productively for the creation of surplus value. A portion of the capital always lies fallow in the form of either money capital, commodity capital or productive capital in stock.

The capital active in the production of surplus value is always limited by this portion and the mass of surplus value obtained diminished in proportion. Marx says that the ‘shorter the period of turnover, the smaller this idle portion of capital as compared with the whole, and the larger, therefore, the appropriated surplus value, provided other conditions remain the same’ (1959, p. 70).

The reduction of turnover time means reductions of both production and circulation time. Increases in the productivity of labour are the chief means of reducing the production time. As long as technological advances in industry do not entail a simultaneous considerable enlargement of constant capital, the rate of profit will rise. Meanwhile the ‘chief means of reducing the time of circulation is improved communications’ (Marx, 1959, p. 71). The technological advances in shipbuilding mentioned above fall into this category.

The rationalisation of German railways with the introduction of the automatic pneumatic brake made possible total savings of around 100 million marks a year, mainly through reductions in personnel and major changes in the speed of freight traffic. Once shunting was mechanised so that trains could be built more quickly and cheaply, and many lines were electrified, the railway system was completely revolutionised.

Apart from improvements in transport, savings are achieved by reducing expenditure on commodity capital. Before commodities are sold they exist in the sphere of production in the shape of stock whose storage constitutes a cost The producer tries to restrict his inventory to the minimum adequate for his average demand. However this minimum also depends on the periods that different commodities need for their reproduction. With improvements in transport, storage costs can be cut as a proportion of the total volume of sales transactions. In addition such costs tend to fall relative to total output as this output becomes ‘more concentrated socially’ (Marx, 1956, p. 147).

Every crisis precipitates a general attempt at reorganisation which, among other things, attacks the existing level of storage costs. The time during which capital is confined to the form of commodity capital tends to become progressively shorter. That is, the annual turnover of capital is speeded up. This is a further means of surmounting crises. Marx says that:

the scale of reproduction will be extended or reduced commensurate with the particular speed with which that capital throws off its commodity form and assumes that of money, or with the rapidity of the sale (1956, p. 40).

The additional money capital required for an expanded scale of production

Many writers argue that the programmes of expansion characteristic of the boom are impossible without an additional sum of money; that additional credit creates the boom or makes it possible. But the capitalist mechanism and its cyclical fluctuations are governed by quite different forces. I have already shown that production can be extended even if the level of prices remains constant or falls.

Nevertheless assuming a given velocity of circulation of money, additional money is required to extend the scale of production. But this is for quite different reasons than those adduced by supporters of the credit theory. We know from Marx’s description of the reproduction process that both the individual and the total social capital must split into three portions if the process of reproduction is to have any continuity. Apart from productive and commodity capital, one portion must stay in circulation in the form of money capital. The size of this money capital is historically variable. Even if it grows absolutely it declines in proportion to the total volume of sales transactions.

At any given point of time however, it is a given magnitude which can be calculated according to the law of circulation. If production is expanded then, other things being equal, the mass of money capital also has to be expanded. What is the source of this additional money capital required for expansions in the scale of reproduction?

In Chapter 15 of Capital Volume Two Marx showed how through the very mechanism of the turnover money capital is always periodically set free. While one portion of capital is tied up in production during the working period another portion is in active circulation. If the working period were equal to the circulation period the money flowing back out of circulation would be constantly redeployed in each successive working period, and vice versa, so that in this case no part of the capital successively advanced would be set free. However in all cases where the circulation period and the working period are not equal ‘a portion of the total circulating capital is set free continually and periodically at the close of each working period’ (Marx, 1956, p. 283). As the case of equality is only exceptional it follows that ‘for the aggregate social capital, so far as its circulating part is concerned, the release of capital must be the rule’ (p. 284). Thus a ‘very considerable portion of the social circulating capital, which is turned over several times a year, will therefore exist in the form of released capital during the annual turnover cycle which is set free ... the magnitude of this capital set free will grow with the scale of production the magnitude of the released capital grows with the volume of the labour process or with the scale of production’ (p. 284).

Engels thought that Marx had attached ‘unwarranted importance to a circumstance, which, in my opinion, has actually little significance. I refer to what he calls the “release” of money capital’ (1956, p. 288). This assessment of Engels appears to me to be completely off the mark. Through his analysis Marx did not merely show that large masses of money capital are periodically set free through the very mechanism of the turnover. He also explicitly refers to the fact that due to the curtailment of the periods of turnover as well as to technical changes in production and circulation - as we have seen, carried through chiefly in periods of depression — a ‘portion of the capital value advanced becomes superfluous for the operation of the entire process of social reproduction ... while the scale of production and prices remain the same’ (p. 287). This superfluous part ‘enters the money market and forms an additional portion of the capitals functioning here’ (p. 287). It follows that after every period of depression a new disposable capital stands available. This setting free of a part of the money capital also affects the valorisation of the total capital; it increases the rate of profit in the sense that the same surplus value is calculated on a reduced total capital. The setting free of a part of the money capital is thus a further means of surmounting the crisis. Marx thus shows that despite the assumption of equilibrium:

a plethora of money capital may arise ... in the sense that a definite portion of the capital value advanced becomes superfluous for the operation of the entire process of social reproduction ... and is therefore eliminated in the form of money capital -. a plethora brought about by the mere contraction of the period of turnover, while the scale of production and prices remain the same. (p. 287)

The reduction in the turnover period generates an additional mass of money capital which is used to expand the scale of reproduction further whenever a period of boom is beginning. Marx has this function in mind when he states that the ‘money capital thus released by the mere mechanism of the turnover movement ... must play an important role as soon as the credit system develops and must at the same time form one of the latter’s foundations’ (p. 286).

The conflict between use value and exchange value

Up to now Marxists have drawn attention to the fact that with the general progress of capital accumulation the value of constant capital increases absolutely and relative to variable capital. Yet this phenomenon forms only one side of the accumulation process; it examines the process from its value side. However — and this cannot be emphasised enough — the reproduction process is not simply a valorisation process; it is also a labour process, producing not only values but also use values. Considered from the side of use value, increases in the productivity of labour represent not merely a devaluation of the existing capital, but also a quantitative expansion of useful things.

Earlier I referred to how rising productivity cheapens the use values consumed by workers and, as a result, raises the rate of surplus value. Now we shall examine the impact of increases in the mass of use values, through rising productivity, on the fund for accumulation. Marx proceeds from the empirical fact that:

with the development of social productivity of labour the mass of produced use values, of which the means of production form a part, grows still more. And the additional labour, through whose appropriation this additional wealth can be reconverted into capital, does not depend on the value, but on the mass of these means of production (including means of subsistence), because in the production process the labourers have nothing to do with the value, but with the use value, of the means of production. (1959, p. 218)

Increases in productivity that impinge on the material elements of productive capital, especially fixed capital, mean a higher profitability for individual capitals. The same mechanism operates when we look at the process of reproduction in its totality. Marx writes:

with respect to the total capital ... the value of the constant capital does not increase in the same proportion as its material volume. For instance, the quantity of cotton worked up by a single European spinner in a modern factory has grown tremendously compared to the quantity formerly worked up by a European spinner with a spinning wheel. Yet the value of the worked up cotton has not grown in the same proportion as its mass. The same applies to machinery and other fixed capital ... In isolated cases the mass of the elements of constant capital may even increase, while its value remains the same, or falls. (1959, p. 236)

The expansion in the mass of use values in which a given sum of value is represented is of great indirect significance for the valorisation process. With an expanded mass of the elements of production, even if their value is the same, more workers can be introduced into the productive process and in the next cycle of production these workers will be producing more value. Marx writes that as a consequence of growing productivity:

More products which may be converted into capital, whatever their exchange value, are created with the same capital and the same labour.

These products may serve to absorb additional labour, hence also additional surplus labour, and therefore create additional capital. The amount of labour which a capital can command does not depend on its value, but on the mass of raw and auxiliary materials, machinery and elements of fixed capital and necessities of life, all of which it comprises, whatever their value may be. As the mass of the labour employed, and thus of surplus labour increases, there is also a growth in the value of the reproduced capital and in the surplus value newly added to it. (p. 248)

Elsewhere Marx says:

the most important thing for the direct exploitation of labour itself is not the value of the employed means of exploitation, be they fixed capital, raw materials or auxiliary substances. In so far as they serve as means of absorbing labour, as media in or by which labour and, hence, surplus labour are materialised, the exchange value of machinery, buildings, raw materials, etc, is quite immaterial. What is ultimately essential is, on the one hand, the quantity of them technically required for combination with a certain quantity of living labour, and, on the other, their suitability, ie, not only good machinery, but also good raw and auxiliary materials. (1959, pp. 82—3)

With increases in productivity and the mass of use values, the mass of means of production (and of subsistence) which can function as means of absorbing labour expands more rapidly than the value of the accumulated capital. The means of production can therefore employ more labour and extort more surplus labour than would otherwise correspond to the accumulation of value as such. Marx says that with increases in productivity and a cheapening of labour power the:

same value in variable capital therefore sets in movement more labour power, and, therefore, more labour. The same value in constant capital is embodied in more means of production, ie, in more instruments of labour, materials of labour and auxiliary materials; it therefore also supplies more elements for the production both of use value and of value, and with these more absorbers of labour. The value of the additional capital, therefore, remaining the same or even diminishing, accelerated accumulation still takes place. Not only does the scale of reproduction materially extend, but the production of surplus value increases more rapidly than the value of the additional capital. (1954, p. 566)

This tendency for the mass of use values to expand runs parallel with the opposite tendency for constant capital to increase in relation to variable — and hence for the number of workers to decline. However these ‘two elements embraced by the process of accumulation ... are not to be regarded merely as existing side by side in repose ... They contain a contradiction which manifests itself in contradictory tendencies and phenomena. These antagonistic agencies counteract each other simultaneously’ (Marx, 1959, pp. 248—9). ‘The accumulation of capital in terms of value is slowed down by the falling rate of profit, to hasten still more the accumulation of use values, while this, in its turn, adds new momentum to accumulation in terms of value’ (p. 250).

In Table 2.2 we saw that with an increase in working population of 5 per cent a year and an expansion of constant capital of 10 per cent, the system would have to collapse in year 35. But because the mass of capital grows more rapidly in use value than in value terms, and because the employment of living labour depends not on the value but on the mass of the elements of production, it follows that to employ the working population at a given level a much smaller capital would actually suffice than shown in the table itself. Increases in productivity and the expansion of use values bound up with them react as if the accumulation of values were at a lower or more initial stage. They represent a process of economic rejuvenation. The life span of accumulation is thus prolonged. But this only means that the breakdown is postponed, which, ‘again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency’ (p. 236).

It is thus completely inadequate to examine the process of reproduction purely from the side of value. We can see what an important role use value plays in this process. Marx himself always tackled the capitalist mechanism from both sides — value as well as use value.

The emergence of new spheres of production with a lower organic composition of capital

Critics have often pointed out that according to Marx’s prognosis ‘competition rages like a plague among the capitalists themselves, eliminates them on a massive scale until eventually only a tiny number of capitalist magnates survive’ (Oppenheimer, 1927, p. 499). Sternberg repeats the same point. Having portrayed Marx’s argument in this fashion it is easy to pronounce that it is not substantiated by the concrete tendencies of historical development.

But this overlooks the essential point of Marx’s methodological procedure. Marx’s schemes deliberately simplify — they show only two spheres of production within which individual capitals progressively succumb to concentration. On this assumption the number of capitalists progressively declines. But the assumption that there are only two spheres of production is fictitious and it has to be modified so as to correspond with empirical reality. Marx shows that there is a continual penetration by capital into new spheres in which:

portions of the original capitals disengage themselves and function as new and independent capitals. Besides other causes, the division of property, within capitalist families, plays a great part in this. With the accumulation of capital, therefore, the number of capitalists grows to a greater or lesser extent (1954, p. 586)

The concentration of capital is thus supplemented by the opposite tendency of its fragmentation. In this way ‘the increase of each functioning capital is thwarted by the formation of new and the sub-division of old capitals (p. 586). Because the minimum amount of capital required for business in spheres with a higher organic composition is very high and is growing continuously, smaller capitals ‘crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of’ (p. 587). These are naturally spheres with a lower organic composition where a relatively larger mass of workers is employed.

If a new branch of production comes into being employing a relatively large mass of living labour — in which therefore the composition of capital is far below the average composition which governs the average profit — a larger mass of surplus value will be produced in this branch. Marx says that competition ‘can level this out, only through the raising of the general level (of profit), because capital on the whole realises, sets in motion, a greater quantity of unpaid surplus labour’ (1969, p. 435). Obviously this must also restrain the breakdown tendency. On the one hand the lower organic composition of capital raises the rate of profit, on the other the formation of new spheres of production makes possible further investment of capital.

In this way a cyclical movement evolves — the self-expanding capital searches out new investment possibilities while new inventions create such possibilities, new spheres of industry develop suddenly, superfluous capital is reabsorbed, and gradually there is a new accumulation of capital which is destined to become superfluous on an ever larger scale, and so on. This accounts for the importance of:

new offshoots of capital seeking to find an independent place for themselves ... as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profits compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out. (Marx,1959, p. 259)

British capitalism is deeply symptomatic of these processes. While the traditional industrial centres of the North, of Scotland and Wales have been in a chronic crisis, a whole series of new industries have begun to spring up in the South, in the Midlands and in the areas surrounding London. A report published by the inspector-general of factories shows that these industries have a much lower organic composition of capital. For example around London, apart from a few car-assembly plants, there are factories producing bandages, minor electrical fittings, bedsteads, bedspreads, ice-creams, mixed pickles, cardboard boxes and pencils. Among the few newer industries with a fairly high organic composition are rayon and automobiles. The latter involves some 14 500 units, over half of which are repair shops scattered across the country. According to data released by the Ministry of Labour (1926) the number of workers employed in the new industries increased by 14 per cent in the space of three years (1923—6), while those employed in the older industries like coalmining and shipbuilding declined by 7.5 per cent.

Earlier Britain could afford to import small-scale stuff from the Continent and Japan, whereas now it has to produce it itself. Even if the development of such industries does relieve the general impact of the economic depression it cannot compensate for the catastrophic consequences of the decline of the older branches which formed the basis of Britain’s domination. In fact the new industries employ a total of only 700 000 workers, whereas the majority are still in the traditional branches like coal, textiles, shipbuilding and so on.

The struggle to abolish groundrent

A model of pure capitalism where there are only two classes, capitalists and workers, assumes that agriculture forms only a branch of industry completely under the sway of capital. In other words we abstract from the category of groundrent, from the existence of landlords. But how are the results of this analysis modified once this assumption is dropped?

Modern, purely capitalist, groundrent is simply a tax levied on the profits of capital by the landlord. To the landlord ‘the land merely represents a certain money assessment which he collects by virtue of his monopoly from the industrial capitalist’ (Marx, 1959, p. 618). When Marx refers to the levelling of surplus value to average profit he says:

This appropriation and distribution of surplus value, or surplus product, on the part of capital, however, has its barrier in landed property. Just as the operating capitalist pumps surplus labour, and thereby surplus value and surplus product in the form of profit, out of the labourer, so the landlord in turn pumps a portion of this surplus value ... out of the capitalist in the form of rent. (p. 820)

Rent thus plays a role in depressing the level of the average rate of profit, it speeds up the breakdown tendency of capitalism. Spokesmen of capitalism have always been hostile to groundrent because ‘landed property differs from other kinds of property in that it appears superfluous and harmful at a certain stage of development, even from the point of view of capitalism’ (p. 622). Ricardo’s writings were directed against the interests of the landlords and their supporters. The land reform movements of the latter part of the nineteenth century sprang fundamentally from the same source.

The struggle to eliminate commercial profit

Commercial profit has the same impact on the breakdown of capitalism as groundrent Earlier we assumed that merchant’s capital does not intervene in the formation of the general rate of profit. Again, this assumption has a purely methodological value; it has to be modified. Marx says that ‘in the case of merchant’s capital we are dealing with a capital which shares in the profit without participating in its production. Hence, it is now necessary to supplement our earlier exposition’ (1959, p. 284). Commercial profit is a ‘deduction from the profit of industrial capital. It follows [that] the larger the merchant’s capital in proportion to the industrial capital, the smaller the rate of industrial profit, and vice versa’ (p. 286). Clearly this will intensify and speed up the breakdown of capitalism.

In periods of crisis this struggle against traders is a means of improving the conditions of valorisation capital. In his report on the American crisis, Professor Hirsch has shown that in America the elimination of large-scale traders by rural cooperatives in grain, fruit and milk has assumed massive proportions, with cooperative sales accounting for as much as 20 per cent of the total sales of US agricultural produce. The cotton farmers of the north are likewise engaged in a struggle to eliminate intermediaries and supply the spinners directly.

This movement acquires its most powerful expression in the drive by the modern cartels and trusts to increase profitability by reducing the costs of sales and import transactions through a centralisation and elimination of intermediary trade. According to Hilferding its capacity to wipe out the trader is one of the basic reasons for the superiority of the combined enterprise. With the rapid advance of cartelisation in the iron and steel industry, the significance of commercial capital has declined. There is a striking tendency to wipe out intermediary trade as the mining and production stages are integrated vertically into a single enterprise, so that no profit is diverted to commercial capital at any single stage of the process. This is the realisation of Rockefeller’s maxim; ‘pay a profit to nobody’. Commercial capital is either left to supplying small customers or forced into a position of dependence on industrial capital. ‘The development of large-scale industrial concerns, or the formation of monopolies’, says T Vogelstein:

has dethroned the princely merchant and transformed him into a pure agent or stipendiary of the monopolies ... This world of monopolies is ridding itself of every vestige of commerce ... By transferring sales transactions to the syndicates ... the industrial concern reduces purely commercial activity to a minimum and leaves this to a few people in the head office or to individual trading concerns affiliated to itself. (1914, p. 243)


The formation of their own export organisations by the larger associations and concerns is yet another example of the tendency to wipe out independent large-scale trade. In copper a system of trading survives but no longer as an independent function; the system is intricately connected with the producers. Dyestuffs and electricals are two industries with their own sales organisations abroad. According to the calculations made by E Rosenbaum of Germany’s total imports in 1926, around 48.3 per cent were direct, that is, transacted without the mediation of any trading concerns. In the case of textile raw materials the figure was 50 per cent and in ores and metals as high as 90 per cent (1928, pp. 130 and 146).

The squeeze on commercial profit to enhance the average rate of profit on industrial capital is a product of the growing barriers to valorisation that arise in the course of capital accumulation. Therefore as the level of accumulation advances, the tendency to eliminate commercial capital intensifies.

However the squeeze on commercial profit is not tantamount to a cessation of commercial activity. The latter cannot be done away with under capitalism because commercial agents fulfil basic functions of industrial capital in the process of its circulation, namely, its function of realising values. In this respect they are simply representatives of the industrial capitalist. Marx says that:

In the production of commodities, circulation is just as necessary as production itself, so that circulation agents are just as much needed as production agents. The process of reproduction includes both functions of capital, therefore it includes the necessity of having representatives of these functions, either in the person of the capitalist himself or of wage labourers, his agents. (1956, pp. 129—30)

Despite the tendency for commercial profit to be eliminated, commercial functions gain in importance as capitalism develops. This is regardless of whether they are represented by individual merchants, trade organisations, cooperatives or industrial trusts and concerns. Prior to capitalism there was no large-scale commercialisation of the product of labour: ‘The extent to which products enter trade and go through the merchants’ hands depends on the mode of production, and reaches its maximum in the ultimate development of capitalist production, where the product is produced solely as a commodity’ (Marx, 1959, p. 325). It follows that the share of commerce in the overall occupational structure must expand. There is a growing number of commercial businesses and commercial employees. A new middle stratum of commercial agents, commercial employees, secretaries, accountants, cashiers emerges.

The question arises — what impact does the existence of this new middle stratum have on the course of the capitalist reproduction process? Can it reduce the severity of capitalist crises and weaken the breakdown tendency, as the reformists have argued ever since Bernstein? Marx points to the different character of this middle stratum which arises on the foundations of capitalist production:

The outlay for these [commercial wage-workers], although made in the form of wages, differs from the variable capital laid out in purchasing productive labour. It increases the outlay of the industrial capitalist, the mass of the capital to be advanced, without directly increasing surplus value. Because it is an outlay for labour employed solely in realising value already created. Like every other outlay of this kind, it reduces the rate of profit because the advanced capital increases, but not the surplus value. (1959, p. 299)

Due to the variable capital expended on these commercial wage workers, the accumulation fund available for the employment of more productive workers is reduced.

A part of the variable capital must be laid out in the purchase of this labour power functioning only in circulation. This advance of capital creates neither product nor value. It proportionately reduces the dimensions in which the advanced capital functions productively. (Marx, 1956, p. 136)

The rate of valorisation of the total social capital is thereby diminished and the breakdown tendency intensified, quite regardless of the fact that these middle strata may initially consolidate the political domination of capital. As these middle strata grow the breakdown is speeded up. As long as the mass of surplus value is growing absolutely this is not visible. But once there is a lack of valorisation due to the advance of accumulation this fact is shown all the more sharply.

The economic function of ‘third persons’

The term third persons is used by Marx in a double sense. Sometimes he refers to the independent, small-scale producers who are remnants of earlier forms of production. They are not intrinsically connected with capitalism as such and so must be excluded from any analysis of its inner nature. We shall see later how far these elements can and do affect capitalist production through the mediation of the world market. Secondly Marx understands by third persons bureaucrats, the professional strata, rent receivers and so on, who exist on the foundations of capitalism but do not participate in material production either directly or indirectly and are therefore unproductive from the standpoint of such production. They do not enlarge the mass of actual products but, on the contrary, reduce it by their consumption, even if they perform various valuable and necessary services by way of repayment. The income of these people is not obtained by virtue of their control of capital, so it is not an income got without work.

However important these services may be they are not embodied in products or values. In so far as the performers of these services consume commodities they depend on those persons who participate in material production. From the standpoint of material production their incomes are derivative. Marx writes:

All members of society not directly engaged in reproduction, with or without labour, can obtain their share of the annual commodity product — in other words, their articles of consumption — primarily out of the hands of those classes to which the product first accrues — productive workers, industrial capitalists and landlords. To that extent their revenues are materially derived from wages (of the productive labourers), profit and rent, and appear therefore as derivative vis--vis those primary revenues. (1956, p. 376)

This group of third persons which was initially excluded from the analysis of pure capitalism has to be reintroduced at a later stage. Marx points out that society ‘by no means consists of only two classes, workers and industrial capitalists, and ... therefore consumers and producers are not identical categories’ (1969, p. 493). The:

first category, that of the consumers ... is much broader than the second category [producers], and therefore the way in which they spend their revenue, and the very size of the revenue give rise to very considerable modifications in the economy and particularly in the circulation and reproduction process of capital. (p. 493)

What significance does the existence of these people have for the reproduction and accumulation of capital? In so far as their material incomes are dependent incomes — that is, drawn from the capitalists — we are dealing with groups which are, from the standpoint of production, pure consumers. As long as this consumption by third persons is not sustained directly at the cost of the working class, surplus value or the fund for accumulation is reduced. Of course these groups perform various services in return, but the non-material character of such services makes it impossible for them to be used for the accumulation of capital. The physical nature of the commodity is a necessary precondition of its accumulation. Values enter the circulation of commodities, and thereby represent an accumulation of capital, only insofar as they acquire a materialised form.

Because the services of third persons are of a non-material character, they contribute nothing to the accumulation of capital. However their consumption reduces the accumulation fund. The larger this class the greater the deduction from the fund for accumulation. In Germany in 1925 the services of such groups were valued at six billion marks, which amounts to 11 per cent of the total national income. In Britain, where there is a large number of such persons, the tempo of accumulation will have to be slower. In America, where their proportion is low, it can be much more rapid. If the number of these third persons were cut down, the breakdown of capitalism could be postponed. But there are several limits to any such process, in the sense that it would entail a cut in the standard of living of the wealthier classes.

Expanding the scale of production on the existing technological: basis: simple accumulation

Along with Bauer we assumed that each year there are technological changes going on which mean that constant capital is expanding more rapidly than variable capital. However production is not always expanded on the basis of a higher organic composition. Capitalists may expand production on the existing technological basis for an extended period of time.

In such cases we are dealing with simple accumulation where the growth of constant capital proceeds in step with variable capital — the expansion of capital exerts a proportional attraction on workers. Of course, the technological foundations of capitalism are being constantly improved and the organic composition is always changing. Nevertheless these changes are ‘continually interrupted by periods of rest, during which there is a mere quantitative extension of factories on the existing technical basis’ (Marx, 1954, p. 423).

As the accumulation of capital advances these periods of rest become progressively shorter. However to the extent that such periods of rest occur, they imply a weakening of the breakdown tendency. Marx writes:

This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason why the rate of profit does not fall as much as the total capital of society grows. (1959, p. 263)

We shall see that as world market antagonisms intensify, technological superiority is the sole means of surviving on the world market. The sharper the struggle on the world market the greater the compulsion behind technological changes, so that the intermediate pauses are shortened. Gradually this counteracting factor becomes less and less important.

The periodic devaluation of capital on the accumulation process

The assumption of constant values is one of the many underlying the reproduction scheme of Marx. Bauer adopts this assumption in two senses: (i) the value of the constant capital used up in the process of production is transferred intact to the product; (ii) the values created in each cycle of production are accumulated in the next cycle without undergoing any quantitative changes. (Some values are of course destroyed in consumption.) This constancy is postulated although Bauer’s scheme presupposes continuous technological progress. He does not notice the contradiction.

Technological progress means that since commodities are created with a smaller expenditure of labour their value falls. This is not only true of the newly produced commodities. The fall in value reacts back on the commodities that are still on the market but which were produced under the older methods, involving a greater expenditure of labour time. These commodities are devalued.

There is no trace of this phenomenon in Bauer’s scheme. He refers to devaluations but this is only due to periodic overproduction. The implication is that if the system were in equilibrium there would be no devaluations — the value relations of any given point of time would survive indefinitely. Things are quite different in Marx. Devaluation necessarily flows out of the mechanism of capital even in its ideal or normal course. It is a necessary consequence of continual improvements in technology, of the fact that labour time is the measure of exchange value.

It follows that the assumption of constant values has a purely provisional character. The question arises — how is the law of accumulation and breakdown modified in its workings when the assumption is dropped? Until now this problem has never been posed. Both Bauer and Tugan realised that holding values constant is a simplifying assumption. But neither modified this assumption. For this reason their models of reproduction are completely unrealistic fictions which cannot reflect or explain the actual course of capitalist reproduction.

Devaluation of capital goes hand in hand with the fall in the rate of profit and is crucial for explaining the concentration and centralisation of capital that accompanies this fall.

We have seen how the accumulation process encounters its ultimate limits in insufficient valorisation. The further continuation of capital depends on restoring the conditions of valorisation. These conditions can only be secured if a) relative surplus value is increased orb) the value of the constant capital is reduced ‘so that the commodities which enter either the reproduction of labour-power, or into the elements of constant capital, are cheapened. Both imply a depreciation of the existing capital’ (Marx, 1959, p. 248). This depreciation does not come about as a consequence of overproduction but in the normal course of capitalist accumulation — as a result of constant improvements in technology. Advances in technology thus entail ‘periodical depreciation of existing capital — one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital value through formation of new capital’ (p. 249).

The result of the devaluation of capital is reflected in the fact that a given mass of means of production represents a smaller value. The result is analogous to that which arises from growing productivity — cheapening of the elements of production and a faster growth of the mass of use values as compared with the mass of value. However in the case of rising productivity the elements of production actually start off cheaper whereas here we are dealing with a case where the elements of production produced at a given value are only subsequently devalued.

With devaluation the technological composition of capital remains the same while its value composition declines. Both before and after devaluation the same quantity of labour is required to set in motion the same mass of means of production and to produce the same quantity of surplus value.

But because the value of the constant capital has declined this quantity of surplus value is calculated on a reduced capital value. The rate of valorisation is thereby increased and so the breakdown is postponed for some time. In terms of Bauer’s scheme, periodic devaluation of capital would mean that the accumulated capital represents a smaller value magnitude than shown by the figures there and would, for example, only reach the level of year 20 as late as year 36.

In other words, however much devaluation of capital may devastate the individual capitalist in periods of crisis, they are a safety valve for the capitalist class as a whole. For the system devaluation of capital is a means of prolonging its life span, of defusing the dangers that threaten to explode the entire mechanism. The individual is thus sacrificed in the interest of the species.

The devaluation of accumulated capital takes various forms. Initially Marx deals with the case of periodic devaluation due to technological changes. In this case the value of the existing capital is diminished while the mass of production remains the same. The same effect however, is produced when the apparatus of reproduction is used up or destroyed in terms of value as well as use value through wars, revolutions, habitual use without simultaneous reproduction, etc. For a given economy the effect of capital devaluation is the same as if the accumulation of capital were to find itself at a lower stage of development. In this sense it creates a greater scope for the accumulation of capital.

The specific function of wars in the capitalist mechanism is only explicable in these terms. Far from being an obstacle to the development of capitalism or a factor which accelerates the breakdown, as Kautsky and other Marxists have supposed, the destructions and devaluations of war are a means of warding off the imminent collapse, of creating a breathing space for the accumulation of capital. For example it cost Britain 23.5 million to suppress the Indian uprising of 1857—8 and another 77.5 million to fight the Crimean War. These capital losses relieved the overtense situation of British capitalism and opened up new room for her expansion. This is even more true of the capital losses and devaluations to follow in the aftermath of the 1914—18 war. According to W Woytinsky, ‘around 35 per cent of the wealth of mankind was destroyed and squandered in the four years’ (1925, pp. 197—8). Because the population of the major European countries simultaneously expanded, despite war losses, a larger valorisation base confronted a reduced capital, and this created new scope for accumulation.

Kautsky was completely wrong to have supposed that the catastrophe of the world war would inevitably lead to the breakdown of capitalism and then, when no such thing happened, to have gone on to deny the inevitability of the breakdown as such. From the Marxist theory of accumulation it follows that war and the destruction of capital values bound up with it weaken the breakdown and necessarily provide a new impetus to the accumulation of capital. Luxemburg’s conception is equally wrong: ‘From the purely economic point of view, militarism is a pre-eminent means for the realisation of surplus-value; it is in itself a sphere of accumulation’ (1968, p. 454).

This is how things may appear from the standpoint of individual capital as military supplies have always been the occasion for rapid enrichment. But from the standpoint of the total capital, militarism is a sphere of unproductive consumption. Instead of being saved, values are pulverised. Far from being a sphere of accumulation, militarism slows down accumulation. By means of indirect taxation a major share of the income of the working class which might have gone into the hands of the capitalists as surplus value is seized by the state and spent mainly for unproductive purposes.

The expansion of share capital

Among the factors that counteract the breakdown Marx includes the fact that a progressively larger part of social capital takes the form of share capital:

these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, once costs have been deducted ... These do not therefore go into levelling the rate of profit, because they yield a lower than average rate of profit. If they did enter into it, the general rate of profit would fall much lower. (1959, p. 240)

In the scheme, where the entire capitalist class is treated as a single entity, the social surplus value is divided among the portions a~ and a~ required for accumulation, and k which is available to the capitalists as consumption. Now suppose there were capitalists (owners of shares, bonds, debentures, etc.) who did not consume the whole of k, but generally only a smaller portion of it, then the amount remaining for accumulation would be larger than the sum a~ + a~. This could then form a reserve fund for the purposes of accumulation, which would make it possible for accumulation to last longer than is the case in the scheme. The fact that many strata of capitalists are confined strictly to this normal interest, or dividend, is thus one of the reasons why the breakdown tendency operates with less force. This is also the basic reason why Germany, following the example of Britain where this happened much earlier, has seen a sharp increase in the bonds of the industrial societies.

The accumulation of capital and the problem of population

Bauer argued that crises only stem from a temporary discrepancy between the scale of the productive apparatus and increases in population. The crisis automatically adjusts the scale of production to the size of population and is then overcome. Luxemburg produced a brilliant refutation of this harmonist theory (1972, pp. 107—39). She showed that in the decades prior to the War the tempo of accumulation was more rapid than the slow rate at which the population increased in various countries. Bauer’s observation that ‘under capitalism there is a tendency for the accumulation of capital to adjust to the growth of population’ (1913, p. 871) is thus incompatible with the facts. In the fifty years from 1870 to 1920, the US population increased by around 172 per cent, while the accumulation of capital in industry expanded by more than 2 600 per cent.

However Luxemburg’s critique, which is perfectly valid against Bauer, makes the basic mistake of seeing population only as a market for capitalist commodities: ‘It is obvious that the annual increase of ‘mankind’ is relevant for capitalism only to the extent that mankind consumes capitalist commodities’ (1972, p. 111). She sees in population a limit to the accumulation of capital in the sense that it cannot provide a sufficient market for those commodities.

My own view is diametrically opposed to both Bauer’s and Luxemburg’s. Against Bauer, and using his own reproduction scheme, I have shown that from a certain stage — despite increases in population — an overaccumulation of capital results from the very essence of capital accumulation. Accumulation proceeds, and must proceed, faster than population grows so that the valorisation base grows progressively smaller in relation to the rapidly accumulating capital and finally dries up. From this it follows that if capital succeeds in enlarging the valorisation base, or the number of workers employed, there will be a larger mass of obtainable surplus value — a factor which will weaken the breakdown tendency. Therefore there is a perfectly comprehensible tendency for capital to employ the maximum possible number of workers. This does not in the least contradict the other tendency of capital of ‘employing as little labour as possible in proportion to the invested capital’ (Marx, 1959, p. 232). This is because the mass of surplus value depends not merely on the number of labourers employed — at a given rate of surplus value — but on raising the rate of surplus value through increases in the amount of means of production relative to living labour applied in the production process.

From this it follows that with ‘a sufficient accumulation of capital, the production of surplus value is only limited by the labouring population if the rate of surplus value ... is given’ (Marx, 1959, p. 243). Therefore population does form a limit on accumulation, but not in the sense intended by Luxemburg. If population expands the interval prior to absolute overaccumulation is correspondingly longer. This is what Marx means when he writes:

If accumulation is to be a steady, continuous process, then this absolute growth in population - although it may be decreasing in relation to the capital employed — is a necessary condition. An increasing population appears to be the basis of accumulation as a continuous process (1969, p. 477).

The tendency to employ the largest possible number of productive workers is already contained in the very concept of capital as a production of surplus value and surplus labour.

Oppenheimer’s criticism, that Marx was forced to admit that despite the overall displacement of workers their total number grows, is really unfounded and meaningless. Capital accumulation is only possible if it succeeds in creating an expanded valorisation base for the growing capital. For example at the low degree of accumulation which survived in Germany up to the end of the 1880s the nascent large-scale industry failed to absorb the entire working population. Emigration became necessary to contain this situation. In the decade 1871—80 some 622 914 persons emigrated abroad from the country. In the following decade this number rose to 1 342 423. But with the rapid upsurge of industrialisation and the accelerated tempo of accumulation in the 1890s, emigration ceased and even gave way to immigration from Poland and Italy into the industrial areas of the West. The absorption of these additional labour powers provided the basis for producing the surplus value required for the valorisation of the expanded capital.

Natural increases in urban population and migration from the countryside were insufficient. This was the case despite continuous intensification of labour which meant that the mass of exploited labour was growing faster than the number of exploited workers. A shortage of labour power persisted despite the recruitment of new workers and the reabsorption of workers displaced by the increasing mechanisation of work processes and rising organic composition of capital. After the 1907 crisis capital was compelled to seek out an expanded valorisation base by intensifying the incorporation of women workers. This had the additional advantage of being cheaper. In a penetrating account of the German economy A Feiler tells us:

It became increasingly clear that the rapid expansion of female labour which had characterised the depression years of 1908 and 1909 was not some passing phenomenon that would vanish once the rate of employment restabilised. It survived the depression years into the boom. The number of women workers continued to rise. In the five years from 1905 to 1910... the number increased by 33 per cent. This trend intensified in the years that followed. The number of women employed in factories and offices increased much more rapidly than the number of men. This was a revolution pure and simple ... At the end of 1913 there were as many employed women in Germany as employed men. (1914, p. 86)

However, not much more can be drawn out of the disposable mass of labour power. Children and old people cannot be inducted into the production process. The reservoir of human labour is running dry. If there is a declining inflow of labour into production the source of additional surplus value is restricted. This means an intensified struggle on the world market in search of the sources of additional surplus value required for the valorisation of the expanded capital.

But even in countries where population is expanding the danger of overaccumulation is inherent. Given a rising organic composition of capital, every increase in the number of workers implies only a temporary weakening of the breakdown, not its final overcoming. Because constant capital expands much more rapidly than population it follows that after a more or less long period of accumulation a point must come at which the given population is not enough to valorise the swollen mass of capital. At this point capital begins to press against the extreme boundary of valorisation. Population begins to form the limit to the accumulation of capital not because the consumption base of capital is too narrow but because the valorisation base is insufficient. As a result of insufficient valorisation a reserve army is created and there is chronic unemployment. Yet this unemployment has nothing to do with the introduction of machinery: it flows from the accumulation of capital. A working population which is scarce generates a working population which is surplus.

It is not difficult to see why the question of population should have changed so rapidly since Malthus’ time. The slow tempo of accumulation characteristic of early capitalism generated a concern about overpopulation and its attendant misery. Today bourgeois writers in both France and Germany are concerned about whether the future accumulation of capital will find adequate reserves of labour power at its disposal. The modern bourgeois economist is characterised by his dread of underpopulation.

It might be argued that the threat is not too serious because there are still hundreds of millions of people in the enormous continents of Asia and Africa who could satisfy capital’s insatiable appetite for labour. But the point is not whether there are large masses of people in this or that part of the world, but whether they are available where capitalism needs them. If we look at the matter this way then colonial capitalism and imperialism are characterised by a shortage of labour power. It would be superfluous to go into all the evidence available from various parts of the world. I shall only take a few examples.

Australia is not important as a market for the advanced capitalist economies. Australia’s significance lies in its production. Next to Argentina, Australia is the world’s most important producer of wool. Broken Hill District alone supplies around 20 per cent of the world’s total production of zinc. The copper mines of Mount Morgan are among the world’s largest. The immigration of cheap labour power has therefore always played an important role in the various colonisation projects relating to Australia, starting with the famous system devised by Wakefield who established his own companies in Adelaide, South Australia (1836) and Wellington in New Zealand (1839) by importing impoverished immigrant workers whose fares were paid by him.

This drive for labour power has persisted. According to W Pember-Reeves Australia’s production could be increased significantly if coloured workers were allowed jobs on the sugar plantations of Queensland (1902, Chapter 4). However capital ran up against the opposition of white workers to the immigration of coloured workers. W Dressler tries to counter this fear of competition from immigrant labour by saying that in the long run the white workers would leave the unhealthy jobs to immigrant workers and would have to take on supervisory functions (1915, pp. 188—9). As recently as 1925 we hear that ‘in Australia there is an absolute shortage of labour power’ (F Hess, 1925, p. 138).

The picture is the same in all the colonial countries. It is true of the South African mines, the cocoa plantations of San Tome, the copper districts of Katanga, the cotton fields of French Cameroon and Equatorial Africa, the sugar plantations of the Dominican Republic and Guyana, the rubber plantations of Sumatra and Borneo. ‘In large parts of Africa’, according to a report in the Berliner Borsen Courier [Berlin Stock Exchange Courier], the black population ... is being pushed back into increasingly smaller reservations ... in Kenya around five million acres have been reserved for settlement by whites.’ In this way ‘increasingly greater masses of blacks are compelled to sell their labour power to European entrepreneurs at starvation wages’ (6 May 1928). In Sumatra and Borneo whatever little labour there is prefers to work on the rubber plantations of the native peasantry than on the large-scale plantations owned by the big European capitalists, who literally treat them like animals.

When Marx described the gruesome exploitation of the British working class in Capital bourgeois economists called it a ‘one-sided’ picture and tried their best to show that the conditions described were characteristic only of the early stages of industrial development, and were bound to be superseded by the gradual progress of social reforms. Yet Marx’s description of the conditions of the British working class of the early nineteenth century was an empirical illustration of tendencies which Marx had established through a theoretical analysis of the nature of capital.

Restrained in its wolf-like hunger for labour at home, West European capital celebrates even more unbridled orgies of exploitation in the territories recently opened up to capitalist production. The shameless character of capital’s exploitation of the labour of women and children is repeated here on an enormously magnified scale. And the immense squandering of human life that follows only intensifies the shortage of labour.

Part 2: Restoring Profitability through World Market Domination

Introduction: The economic function of imperialism

Among the several simplifying assumptions which underlie Marx’s analysis of the reproduction process is the assumption that the capitalist mechanism is an isolated entity without any external relationships: ‘The involvement of foreign commerce in analysing the annually reproduced value of products can ... only confuse without contributing any new element of the problem, or of its solution. For this reason it must be entirely discarded’ (Marx, 1956, p. 474).

Yet Marx himself repeatedly underlined the colossal importance of foreign trade to the development of capitalism; in 1859 he proposed a six-book structure for his investigations of the capitalist economy and intended the ‘world market’ to be one of the six. Although the structure of the work was later changed, its object of inquiry remained basically the same. In Capital we find the ‘creation of the world market’ listed as one of the ‘three cardinal facts of capitalist production’ (1956, p. 266). Elsewhere Marx writes: ‘Capitalist production does not exist at all without foreign commerce’ (1956, p. 474). And:

it is only foreign trade, the development of the market to a world market, which causes money to develop into world money and abstract labour into social labour ... Capitalist production rests on the value or the transformation of the labour embodied in the products into social labour. But this is only [possible] on the basis of foreign trade and of the world market. This is at once the precondition and the result of capitalist production. (Marx, 1972, p. 253)

So what scientific value can there be in a theoretical system which abstracts from the decisively important factor of foreign trade?

People have tried to escape the problem by postulating a gap in Marx’s system; they have argued that after all Capital is an unfinished work. Thus A Parvus argues that the founders of scientific socialism ‘died much too early’ (1901, p. 587) to leave us any analysis of trade policy. Recently A Meusel has argued that Marx was naturally less interested in problems of foreign trade because the only significant foreign trade controversy which he lived to see, the struggle for the abolition of the Corn Laws, appeared to be a conflict between the landed aristocracy and the industrial middle class; ‘it was easy to suppose that the working class had no immediate strong interests of its own in policies relating to foreign trade’ (Meusel, 1928, p. 79). This distortion explains why Meusel cannot grasp the tremendous importance of foreign trade in Marx’s work, even though this is repeatedly and emphatically drawn out in Capital and Theories of Surplus Value. Luxemburg also starts from the conception that Marx ignored foreign trade in his system, that ‘he himself explicitly states time and again that he aims at presenting the process of accumulation of the aggregate capital in a society consisting solely of capitalists and workers’ (1968, pp. 330—1). Luxemburg could only explain this by postulating a gap in Marx’s work, supposedly due to the fact that ‘this second volume [of Capital] is not a finished whole but a manuscript that stops short half way through’ (pp. 165-6). Luxemburg then constructs a theory to fill in the so-called gap. This may be a convenient way of disposing of theoretical problems but it shatters the underlying unity of the system and creates a hundred new problems.[2]

What Luxemburg sees as a gap in Marx’s system is transformed by Sternberg into its basic limitation. Marx turns out to be a builder of completely abstract systems which were bound to lead to untenable conclusions insofar as they ignored the basic aspects of reality. He says that ‘Marx analysed capitalism on an assumption that has never corresponded with reality, namely that there is no non-capitalist sector’ (1926, p. 303). Whereas Luxemburg at least regarded Marx’s whole system as a solid achievement of theory, Sternberg informs us that the whole system is a delapidated structure. He states that Luxemburg ‘broke off too soon’ in her demolition of Marx’s system. She ‘failed to see that every stone of the structure is affected by the fact of the existence of a non-capitalist sector, not only the accumulation of capital but crisis, the industrial reserve army, wages, the workers’ movement and, above all, the revolution’ (p. 9). So all these basic questions of Marxist theory are tackled incorrectly because Marx built his system on the unproven and improbable assumption that there are no non-capitalist countries.

The grotesque character of this entire exposition is obvious. It is the product of a whole generation of theoreticians who go straight for results without any philosophical background, without bothering to ask by what methodological means were those results established and what significance do they contain within the total structure of the system. Sternberg writes a book of over 600 pages simply to register the observation that Marx described only pure capitalism, isolated from external trade relations. Because Marx never ordered the various passages dealing with foreign trade under capitalism into a single, structured chapter, these passages are totally ignored. This is a sad proof of the decline of the capacity to think theoretically.

The function of foreign trade under capitalism

The importance of foreign trade for the increasing multiplicity of use values


The progress of capitalism increases the mass of surplus product accruing to capital. The number of human needs is unlimited and when people have enough of some products there are always others which they can use. Towards the middle of the last century people consumed a greater variety of products than fifty years earlier, and today this variety is greater still.

Foreign trade plays an important role in expanding this multiplicity of products. Here what matters is international exchange as such, regardless of whether it takes place with capitalist or non-capitalist ones. By increasing the multiplicity of products foreign trade has the same impact as product diversification on the home market. An increasing variety of use values facilitates accumulation and weakens the breakdown tendency. Marx says:

If surplus labour or surplus value were represented only in the national surplus product, then the increase of value for the sake of value and therefore the exaction of surplus labour would be restricted by the limited, narrow circle of use values in which the value of the [national] labour would be represented. But it is foreign trade which develops its [the surplus product’s] real nature by developing the labour embodied in it as social labour which manifests itself in an unlimited range of different use values, and this in fact gives meaning to abstract wealth. (1972, p. 253)

Thus the limits on the production of surplus value are extended; the breakdown of capitalism is postponed.

This aspect of the exchange relationship does not exhaust the problem of foreign trade and its impact on the tendencies of capitalism. Looking at the matter from the value side, I have shown that the problem of breakdown by no means lies in an excess of surplus value but in its opposite, a lack of sufficient valorisation. Therefore we have to examine foreign trade from the aspect of its impact on valorisation.

Expansion of the market as a means of reducing the costs of production and circulation


To understand why foreign trade and market expansion are important we do not need to fall back on the metaphysical theory of the realisation of the surplus value. Their importance is more obvious. Hilferding argues:

the size of the economic territory ... has always been extremely important for the development of capitalist production. The larger and more populous the economic territory, the larger the individual plant can be, the lower the costs of production, and the greater the degree of specialisation within the plant, which also reduces costs of production. The larger the economic territory, the more easily can industry be located where the natural conditions are most favourable and the productivity of labour its highest. The more extensive the territory, the more diversified is production and the more probable it is that the various branches of production will complement one another and that transport costs on imports from abroad will be saved. (1981, p. 311)

Due to mass production British industry, which was the workshop of the world down to the 1870s, could carry through a division of labour, increases in productivity and cost savings to a level that was unattainable elsewhere. Whereas weaving and spinning were originally combined, later they were separated. This resulted in geographical specialisation. Burnley made the traditional calico prints, Blackburn clothed India and China, Preston manufactured fine cottons. The factory districts lying close to Manchester concentrated on more complicated fabrics, like the cotton velvets of Oldham and high quality calicoes of Ashton and Glossop. Only mass production of this kind made possible the construction of specialised machines for individual operations, and this meant important savings in investment and enterprise costs.

Manchester, previously the centre of the industry, more and more specialised as the exclusive base of the export trade. In the basements of the city’s commercial firms, which were often several stories underground, steam engines and hydraulic presses were reducing cotton yams and fabrics to half their thickness.

Such a high level of production specialisation meant huge cost reductions due to savings in non-productive expenses, reduced work interruptions and increases in productivity and the intensity of labour. Economies in production are supplemented by economies in the sphere of circulation. The number of importers, brokers and so on is compressed to the absolute minimum. An intricate system of transport connects supply bases to centres of production. Special credit organisations emerge with their own terms of payment. All of this enhances valorisation by reducing the costs of investment, manufacturing and marketing. This is what accounted for the competitive superiority of British capitalism.

The compulsion to produce the greatest possible surplus value is enough to account for the enormous importance of market expansion and struggles for markets. We do not need to fall back on Luxemburg’s notion of the necessity of non-capitalist markets for realising surplus value. In fact it is irrelevant whether the markets in question are capitalist or not., What matters is mass outlets, mass production and the specialisation and rationalisation of work and circulation which mass production makes possible. It makes no difference whether German chemicals are exported to Britain or to China.


Finally the specialisation and geographical concentration of production in specific lines contributes to the training of a highly efficient workforce, and therefore to increases in the skill and intensity of labour. A German worker cited by Schulze-Gaevernitz talks of German workers being less efficient than British workers due to lack of tradition, in the sense that in Britain workers have acquired a basic experience in handling machinery through specialised work lasting over generations. The result is that in Britain three or four workers can operate 1 000 spindles whereas in Germany at that time it needed six to ten (1892, p. 109).

We should add that France for example, which possesses an old and flourishing silk industry at Lyons, remained totally dependent on Britain for her imports of raw silk from China and Japan. All attempts to procure Chinese silk directly, with the help of French banks, failed because Britain was able to buy the silk more cheaply due to her extensive trade connections and lower freight costs. In addition despite the double freight costs involved in importing the raw material all the way from Australia and shipping the final product back there, British woollens remain cheaper and more competitive than Australian woollens because the size of the Australian market forces the individual units there to diversify instead of specialising. Domestic prices are higher than world market prices, sales are confined exclusively to the home market and this means that protection is necessary. The same holds for the woollen industries of La Plata (Argentina) and South Africa, although wool is directly available there and this dispenses with double transport costs.

All this explains why the USA has emerged as an increasingly more dangerous competitor on the world market. The enormous advantages of a large and integrated scale of operations, in territorial terms, gives American industry completely different possibilities of expansion than those available in Europe.

Mass production and mass sales have always been basic objectives of capitalist production. But they have become matters of life and death for capitalism only in the late stage of capital accumulation when a purely domestic valorisation of the gigantic mass of capital becomes more and more difficult. Mass production is necessary to obtain the various advantages of specialisation which are inseparable from mass production. It is also necessary for achieving a level of competitive superiority on the world market. Politically mass production means the triumphant domination of the large-scale enterprise over the small and medium enterprises. It explains the tendency to form transnational empires in place of the nation state. The categories in terms of which we think today are no longer those of nation states but of entire continents.

Foreign trade and the sale of commodities at prices of production deviating from values


Among the simplifying assumptions of the reproduction scheme an especially important role is played by the assumption that commodities exchange at value; that is, that their prices coincide with their values. This is only possible if we abstract from competition and suppose that all that happens in circulation is that one commodity of a given value is exchanged against another of the same value. But in reality commodities do not exchange at their values. Such an assumption has to be dropped and the conclusions established on that basis further modified.

What sort of modifications are required? Up to now this problem has always been examined from the standpoint of the transfer of value among capitalists — a social process in which the prices of production of individual commodities differ from their values but on the basis of total price remaining equal to total value. No one has systematically tackled the problem of the deviation of prices from values in international exchange or related this problem to the overall structure of Marx’s system. For instance Hilferding and the followers of Kautsky were in no position to grasp the elements of novelty in Marx’s treatment of this problem as long as they were mainly interested in rejecting the theory of breakdown. This likewise precluded any deeper analysis of the function of foreign trade under capitalism.

If like Ricardo, we suppose that the law of value is directly applicable to international trade then the question of foreign trade has no bearing on the problem of value and accumulation. On this assumption foreign trade simply mediates the exchange of use values while the magnitude of value and profit remains unaltered. In contrast Marx draws out the role of competition in international exchange.

If we look at the sphere of production it follows that the economically backward countries have a higher rate of profit, due to their lower organic composition of capital, than the advanced countries. This is despite the fact that the rate of surplus value is much higher in the advanced countries and increases even more with the general development of capitalism and the productivity of labour. Marx (1959, pp. 150—1) gives an example where the rate of surplus value is 100 per cent in Europe and 25 per cent in Asia while the composition of the respective national capitals is 84c +16v for Europe and 16c + 84v for Asia. We get the following results for the value of the product


16c + 84v + 21s = 121. Rate of profit 21/100 = 21 per cent


84c + 16v + 16s = 116. Rate of profit 16/100 = 16 per cent

International trade is not based on an exchange of equivalents because, as on the national market, there is a tendency for rates of profit to be equalised. The commodities of the advanced capitalist country with the higher organic composition will therefore be sold at prices of production higher than value; those of the backward country at prices of production lower than value. This would mean the formation of an average rate of profit of 18.5 per cent so that European commodities will sell for a price of 118.5 instead of 116. In this way circulation on the world market involves transfers of surplus value from the less developed to the more developed capitalist countries because the distribution of surplus value is determined not by the number of workers employed in each country but by the size of the functioning capital. Marx slates that through foreign trade:

three days of labour of one country can be exchanged against one of another country ... Here the law of value undergoes essential modification ... The relationship between labour days of different countries may be similar to that existing between skilled, complex labour and unskilled simple labour within a country. In this case, the richer country exploits the poorer one, even where the latter gains by the exchange. (1972, pp. 105—6)

In effect price formation on the world market is governed by the same principles that apply under a conceptually isolated capitalism. The latter anyway is merely a theoretical model; the world market, as a unity of specific national economies, is something real and concrete. Today the prices of the most important raw materials and final products are determined internationally, in the world market. We are no longer confronted by a national level of prices but a level determined on the world market. In a conceptually isolated capitalism entrepreneurs with an above average technology make a surplus profit (a rate of profit above the average) when they sell their commodities at socially average prices. Likewise on the world market, the technologically advanced countries make a surplus profit at the cost of the technologically less developed ones. Marx repeatedly draws out the international effects of the law of value. For instance he says, ‘most agricultural peoples are forced to sell their product below its value whereas in countries with advanced capitalist production the agricultural product rises to its value’ (1969, p. 475). In Chapter 22 of Capital Volume One entitled ‘national differences in wages’, Marx writes:

the law of value in its international application is ... modified by this, that on the world market the more productive national labour reckons also as more intense, so long as the more productive nation is not compelled by competition to lower the selling price of its commodities to the level of their value. (1954, p. 525)

With the development of capitalist production in a given country therefore, the national intensity and productivity of labour rise above the international average level.

The different quantities of commodities of the same kind, produced in different countries in the same working time, have, therefore, unequal international values, which are expressed in different prices, ie, in sums of money varying according to international values. The relative value of money will, therefore, be less in the nation with a more developed capitalist mode of production, than in the nation with a less developed. (p. 525)

Likewise in Chapter 17:

the intensity of labour would be different in different countries, and would modify the international application of the law of value. The more intense working day of one nation would be represented by a greater sum of money than the less intense day of another nation. (p.492)

Finally in Capital Volume Three:


Capitals invested in foreign trade can yield a higher rate of profit, because, in the first place, there is competition with commodities produced in other countries with inferior production facilities, so that the more advanced country sells its goods above their value even though cheaper than the competing countries. In so far as the labour of the more advanced country is here realised as labour of a higher specific weight, the rate of profit rises, because labour which has not been paid as being of a higher quality, is sold as such ... As regards capitals invested in colonies, etc, on the other hand, they may yield higher rates of profit for the simple reason that the rate of profit there is higher due to backward development, and likewise the exploitation of labour, because of the use of slaves, coolies, etc. (1959, p. 238)

In the examples cited above the gain of the more advanced capitalist countries consists in a transfer of profit from the less developed countries. it is irrelevant whether the latter are capitalist or non-capitalist. It is not a question of the realisation of surplus value but of additional surplus value which is obtained through competition on the world market through unequal exchange, or exchange of non-equivalents.

The enormous significance of this transfer process and the function of imperialist expansion are only explicable in terms of the theory of breakdown developed earlier. I have already shown that capitalism does not suffer from a hyperproduction of surplus value but, on the contrary, from insufficient valorisation. This produces a tendency towards breakdown which is expressed in periodic crises and which in the further course of accumulation necessarily leads to a final collapse.

Under these circumstances an injection of surplus value by means of foreign trade would raise the rate of profit and reduce the severity of the breakdown tendency. According to the conception I have developed and which, I believe, is also Marx’s conception, the original surplus value expands by means of transfers from abroad. At advanced stages of accumulation, when it becomes more and more difficult to valorise the enormously accumulated capital, such transfers become a matter of life and death for capitalism. This explains the virulence of imperialist expansion in the late stage of capital accumulation. Because it is irrelevant whether the exploited countries are capitalist or non-capitalist — and because the latter can in turn exploit other less developed countries by means of foreign trade — accumulation of capital at a late stage entails intensified competition of all capitalist countries on the world market. The drive to neutralise the breakdown tendency through increased valorisation takes place at the cost of other capitalist states. The accumulation of capital produces an ever more destructive struggle among capitalist states, a continuous revolutionisation of technology, rationalisation, Taylorisation or Fordisation of the economy — all of which is intended to create the kind of technology and organisation that can preserve competitive superiority on the world market. On the other side accumulation intensifies the drift to protectionism in the economically backward countries.

Kautsky sees the essence of imperialism in a striving to conquer the non-capitalist agrarian parts of the world. He therefore sees imperialism as merely an episode in the history of capitalism that will pass with the industrialisation of those parts of the world. This conception is totally false. Imperialism must be understood in the specific form that Luxemburg gives to it in her theory of the role of the non-capitalist countries. Imperialist antagonisms subsist even among the capitalist states in their relations to one another. Far from being merely an episode that belongs to the past, imperialism is rooted in the essence of capitalism at advanced stages of accumulation. Imperialist tendencies become stronger in the course of accumulation, and only the overthrow of capitalism will abolish them altogether.

The argument developed here shows how foreign trade can function as a means of surmounting crises. While commodity exports are not confined to periods of crisis or depression it is a fact that in boom periods, when the level of domestic prices is high and shows an upward trend, accumulation in individual spheres of industry creates a market for industry as a whole, and industry works mainly for the national market. Foreign trade gains importance in periods of internal saturation, when valorisation disappears due to overaccumulation and there is a declining demand for investment goods. The drive to export in a period of depression acts as a valve for overproduction on the domestic market. In Germany after the boom year of 1927 there was a tapering off early in 1928. Although a depression has still to come there was, in the first four months of 1928, a retreat in domestic demand practically all along the line. At the same time however, exports provided a compensation. From January to April 1928 exports were around 18.5 per cent higher than in the corresponding part of the previous year. Thus here we have a means of partially offsetting a crisis of valorisation in the domestic economy.

The international character of economic cycles


Far from signifying the impending doom of European capitalism, as Hildebrand (1910) and others forecast, the industrialisation of the more backward countries signifies an expansion of world exports. Contrary to Luxemburg’s theory the backward countries gain importance as markets for advanced capitalism precisely to the degree that they industrialise. Today the industrialising colonies are much better markets than the purely agricultural colonies, while the advanced capitalist countries are the best markets. In fact the notion that the backward countries, still mainly dependent on agriculture, could produce enough commodities to pay for the colossal wealth of the capitalist nations is something bordering on absurdity.

The fact that the more industrialised a country is the greater its share of industrial imports, or the fact that the industrialised nations form the best markets for each other, helps to explain a phenomenon for which Luxemburg’s theory has no explanation. I mean the international character of the economic cycle. An upswing in production goes together with rising imports of raw materials, semi-finished goods and soon. In periods of boom net exports of raw materials and semi-finished goods exceed net exports of finished commodities, while the ratio is reversed in periods of depression. Thus there is a strong correlation between booms and raw material imports.

A boom in one country is communicated to other countries through the medium of commodity imports. In this way the rhythm of boom movements becomes progressively synchronised, even if international differences in the chronology of the business cycle persist. Even prior to the War we saw the gradual formation of a parallelism in the economic cycles of the most important countries. The crises of 1900, 1907 and 1913 all had an international character. This parallelism was interrupted by the War and the breaking off of mutual economic ties, but after the War it started to crystallise once more.

Table 3.1: German imports 1925—7 (billions of marks)




Raw materials & semi-finished goods




Finished goods




The minor boom of 1925 was followed by the depression of 1926 when the total volume of imports declined steeply. In the boom year of 1927 imports exceeded the level of 1925. It is easy to see that such a rapid increase of German imports, by 3.2 billion marks, is bound to have an invigorating effect on the world market. As long as it is sufficiently strong the boom in a single country can communicate itself to all its trade partners. For instance the German boom of 1927 drew along with it all the neighbouring countries of central and eastern Europe which have close economic ties to Germany. In that year there was a revival, of varying strength, in Poland, Czechoslovakia, Austria, Hungary, Switzerland, Belgium, Netherlands, Sweden and Finland.

In periods of depression things are reversed. Imports decline and a chain repercussion starts as orders are cancelled.

Foreign trade and world monopolies

The tremendous importance of cheap raw materials to the level of the rate of profit and thus to the valorisation of capital was first established through practical experience. However the classical economists found it difficult to explain the fact theoretically due to their confusion of the rate of profit with the rate of surplus value. Marx was the first to establish the connection clearly through his own exposition of the laws that govern the rate of profit:

Since the rate of profit is s/C, or s/c + v, it is evident that everything causing a variation in the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even ifs and v, and their mutual relation, remain unaltered. Now, raw materials are one of the principle components of constant capital ... Should the price of raw material fall ... the rate of profit rises ... Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material. This shows, among other things, how important the low price of raw material is for the industrial countries. (1959, p. 106)

Marx goes on to point out that the importance of raw materials to the level of profitability is constantly growing with the development of capitalist industry:

the quantity and value of the employed machinery grows with the development of labour productivity but not in the same proportion as productivity itself, ie, not in the proportion in which this machinery increases its output. In those branches of industry, therefore, which do consume raw materials ... the growing productivity of labour is expressed precisely in the proportion in which a larger quantity of raw material absorbs a definite of labour, hence in the increasing amount of raw material converted in, say, one hour into products ... The value of raw material, therefore, forms an ever-growing component of the value of the commodity product. (1959, p. 108)

The growing importance of raw materials is also obvious in the fact that as industrialisation advances every capitalist country becomes increasingly dependent on raw material imports. For instance in Germany imports of raw materials for industrial purposes increased by between 40 to 55 per cent between the late 1880s and 1912.

A further point is that monopolistic controls in the world market are easier to carry through in the sphere of raw materials where the range of possible applications is very wide. Competition among the capitalist powers first exploded in the struggles to control raw material resources because the chance of monopoly profits were greatest here. Yet this is not the only factor. Control over raw materials leads to control over industry as such. F Kestner says:

Because only raw materials or means of production are susceptible to long-term monopolisation, which is generally not the case with finished products - unless raw material syndicates intervene - cartelisation necessarily shifts the economic balance in favour of heavy industry, both in terms of price formation, and in terms of the fact that the processing industries fall under the sway of the raw materials industries. (1912, p. 258)

The struggle for control of raw materials is thus a struggle for control over processing industries, which is itself finally reducible to the drive for additional surplus value. Because raw materials are only found at specific points on the globe, capitalism is defined by a tendency to gain access to, and exert domination over, the sources of supply. This can only take the form of a division of the world. A world monopoly in raw materials means that more surplus value can be pumped out of the world market. For competitors who face such a monopoly it means that the breakdown of capitalism is intensified. The economic roots of imperialism, of the incessant drive to dominate territories capitalistically and later politically, lie in imperfect valorisation.

Perhaps the most obvious case of this is the Anglo—American struggle over oil. The struggles for petroleum in the Caucasus, Mesopotamia and Persia are already well known so I shall be brief here. Oil first became a burning issue for Britain when the discovery of the diesel-engine made it possible to substitute liquid fuel for coal in shipping. Yet the biggest reserves of crude oil and the bulk of oil production were concentrated in American hands. Britain saw the American monopoly as a threat. F Delaisi points out that for close to a century the whole power of British trade and industry was founded on her control over coal. Superiority in the coal market, and especially in the production of bunker coal, enabled Britain to consolidate its traditional maritime dominance. Britain could afford to charge cheaper rates on return-freight than her competitors:

Thus commodities destined for Britain paid lower transport costs than those destined for other countries. Hence British industry enjoyed a real premium on all overseas raw materials. This was an enormous advantage over all competitors in the struggle to win international markets. (Delaisi, 1921, p.40)

Once shipping converted to oil all this could change. Britain produced no petroleum. British domination over sea transport was seriously threatened. Then there was the experience of the World War which showed the importance of automobiles and aircraft. The decisive strategic significance of allied control over oil reserves became more and more obvious the longer the War lasted. The oil politics of the postwar period was a direct consequence of these experiences.

Britain realised the implications of this situation quite early on and, at the beginning of this century, quietly and unobtrusively started to acquire reserves of oil that were still going. Against Rockefeller’s Standard Oil Trust, Britain founded a series of oil trusts: Royal Shell (later expanded into Royal Dutch Shell), Mexican Eagle, Anglo-Persian Oil, etc. Britain even settled down in the USA to take on the competition of Standard Oil. By 1919 The Times could report a speech by G Prettyman, a well-known oil expert, who on the inauguration of the new Anglo-Persian refinery was quoted as saying:

At the outbreak of the War the position was such that the British Empire with her enormous worldwide interests controlled only two per cent of world petroleum reserves ... On the currently prevalent foundations and methods of work used, about which he would not like to go into detail, he feels that once differences are settled, the British Empire should not be very far from controlling over half the world’s known reserves of petroleum. (7 May 1919)

This result could be achieved thanks to a powerful vertical concentration of the entire industry from production down to distribution, and the corresponding conglomeration of capital which could exert fantastic pressure.

The British oil industry was thus welded together into a single block which today embraces 90 per cent of all Britain’s oil interests. At the end of 1920 Anglo-Persian Oil unified some 77 companies with a nominal capital of around 120 million, and Royal Dutch Shell 50 firms with 300 million. Apart from these, there were another 177 companies representing a capital of 266 million. Altogether these firms represent a total capital of 686 million; 52 per cent of this is invested in production, 16 per cent in trade, 12 per cent in transport and 11 per cent in refining.

What was the point of this huge effort? Military security is only part of the answer. Delaisi notes that ‘Britain no longer needs to fear the American monopoly’ (p. 58). Just prior to the War Britain controlled all the most important coal stations. For the future it sought to control the major oil stations through a tightly organised petroleum industry. One of the basic objectives of Britain’s oil strategy was to attain a near monopoly over the transportation of oil. How far this succeeded can be gauged from a report in The Times of March 1920, cited by Delaisi, which quotes Sir Edgar Mackay as saying:

I can say that two thirds of the fields in operation in Central and South America are in British hands ... The Shell group controls interests in all the important oilfields on earth, including those in the USA, Russia, Dutch East Indies, Rumania, Egypt, Venezuela, Trinidad, British India, Ceylon, the Malay States, north and south China, Siam, the Straits Settlements and the Philippines. (Delaisi, 1921, p. 64)

The economic significance was drawn out when Mackay said:

Assuming their current curve of consumption rises further, then after ten years the United States will have to import 500 million barrels a year which makes, even supposing a very low price of $2 per barrel, an annual expenditure of $1 billion, and most of that, if not all, will go into British pockets. (p. 64)

The idea of joint international control over raw material resources has been mooted time and time again. Even the International Congress of Mineworkers, which took place in August 1920, formulated a resolution calling for the creation of a central international office in the League of Nations. Such an office would not only produce a detailed inventory of all existing resources and gather statistics on them; it would also look after the ‘distribution of fuels, minerals and other raw materials’. Such proposals are utopian. I have already shown that the antagonisms of world economy find their deepest source in the lack of valorisation which goes together with the general advance of accumulation. A shortage of surplus value in one national economy can only be compensated at the expense of other economies. Even capitalist attempts to create joint world monopolies have ended in failure, due to irreconcilable interests among the various parties.

The conflict of interests remains the basic aspect in the sense that the whole function of world monopolies lies in the national enrichment of some economies at the cost of others. As a result the increasingly frequent projects to evolve joint control and distribution schemes for raw materials remain pious wishes. Marx already pointed out, with prophetic foresight, that the attempts to regulate production that are often discernible in periods of crisis vanish:

as soon as the principle of competition again reigns supreme ... All thought of a common, all-embracing and far-sighted control over the production of raw materials gives way once more to the faith that demand and supply will mutually regulate one another. And it must be admitted that such control is on the whole irreconcilable with the laws of capitalist production and remains for ever a pious wish, or is limited to exceptional cooperation in times of great stress and confusion. (1959, p. 120)

The function of capital exports under capitalism

Earlier presentations of the question


From a scientific point of view we have to explain why capital is exported and what role is played by the export of capital in the productive mechanism of the capitalist economy.

Sombart is the best example of the superficial way in which these problems are handled in the prevailing theories. He tells us: ‘No one can doubt that economic imperialism basically means that by enlarging their sphere of political influence, the capitalist powers are enabled to expand the sphere of investment for their superfluous capital’ (1927, p. 71). Here the relation between capital expansion and the drive for power is wrongly described; Sombart makes the drive for power the precondition for capital expansion. The opposite is the case — capital expansion is a precursor of the political domination that follows.

Secondly, from a purely economic point of view, Sombart does not explain why there is such a thing as the expansion of capital to foreign territories. This is something self-evident for him. What we have to explain theoretically is simply presupposed as obvious without any analysis or proof. Why are capitals not invested in the home country itself? Because they are superfluous? But what does superfluous mean? Under what conditions can a capital become superfluous? Sombart simply uses phrases without the slightest attempt to clarify things scientifically.

This issue has been debated for a whole century ever since Ricardo argued that when ‘merchants engage their capitals in foreign trade, or in the carrying trade, it is always from choice and never from necessity: it is because in that trade their profits will be somewhat greater than in the home trade’ (1984, p. 195).

In his book on imperialism J A Hobson maintains that foreign investments form ‘the most important factor in the economics of imperialism’ (1905, p. 48). He goes on to state that:

Aggressive imperialism ... which is fraught with such grave incalculable peril to the citizen, is a source of great gain to the investor who cannot find at home the profitable use he seeks for his capital, and insists that his government should help him to profitable and secure investments abroad. (p. 50)

But why are profitable investments not to be found at home? Hobson does not refer to this decisive question. In general his study, which is a valuable descriptive work, evades all theoretical issues. A Sartorius von Waltershausen states that ‘in today’s world economy the agrarian countries are net importers of capital, the industrialised countries net exporters’ (1907, p. 52). However he adds that ‘even the highly developed countries stand in debtor—creditor relationships to one another’ (p. 52). Obviously the agrarian/industrialised distinction cannot account for export of capital. In that case what is the driving force behind this? Sometimes Sartorius refers to ‘economic saturation’, a superfluity of the available capital in relation to investment possibilities. But this is not explained. Sartorius appears to have a vague feeling that such a state of saturation is linked to a relatively advanced stage of capitalist development. But Sartorius stays at this purely empirical level.

The treatment of this problem by S Nearing and J Freeman is just as unsatisfying. They agree that the industrialised countries of Europe became exporters of capital only at a specific stage in their development. The same is true of America: ‘The United States also reached this stage at the start of the present century’(1927, p. 23). The trend was then accelerated by the war — a whole process of development which might otherwise have taken much longer was compacted into a single decade by the events of the war. But what were these events? The war enormously speeded up the transformation of the USA from the position of a debtor to one of a creditor. The USA became a capital exporting nation ‘and was bound to remain so as long as there was surplus capital looking for investment’ (p. 24). But the authors do not show why such a surplus emerges or why it cannot find investment in the domestic economy.

Even in Marxist writings we search in vain for any explanation of the specific function of capital exports in the capitalist system. Marxists have simply described the surface appearances and made no attempt to build these into Marx’s overall system. So Varga says, ‘The importance of capital exports to monopoly capitalism was analysed in detail by Lenin in Imperialism; hardly anything new can be added’ (1928, p. 56). Elsewhere he simply casts aside any attempt to analyse the problem theoretically and simply produces facts about the volume and direction of international capital flows. ‘The rate of profit’, he says, ‘regulates not only the influx of capital into individual branches of industry, but also its geographical migrations. Capital is invested abroad whenever there are prospects ofobtaining a higher rate of profit’ (1927, p. 363). This conclusion is hardly original.

Varga fails to understand the dimensions of the question when he goes on to say, ‘Capital is exported not because it is absolutely impossible for it to accumulate domestically without “thrusts into non-capitalist markets”, but because there is the prospect of higher profit elsewhere’ (p. 363). In other words Varga starts from the false assumption that whatever its total amount, capital can always find an unlimited range of investment possibilities at home. He overlooks the simple fact that in denying the possibility of an overabundance of capital, he simultaneously denies the possibility of an overproduction of commodities. In addition Varga imagines any argument that there are definite limits to the accumulation of capital, and that capital export necessarily follows, is incompatible with Marx’s conception and can only be made from Luxemburg’s position.

I shall show that Varga’s conception is untenable, that it was precisely Marx who showed that there are definite limits to the volume of capital investments in any single country; that it was Marx who explained the conditions under which there arises an absolute overaccumulation of capital and therefore the compulsion to export capital abroad. Varga does not notice that his conception of unlimited investment possibilities flatly contradicts and is incompatible with any labour theory of value. Investment of capital demands surplus value. But surplus value is labour and in any given country labour is of a given magnitude. From a given working population only a definite mass of surplus labour is extortable. To suppose that capital can expand without limits is to suppose that surplus value can likewise expand without limits, and thus independently of the size of the working population. This means that surplus value does not depend on labour.

Sternberg argues that the export of capital constitutes a powerful factor for generating a surplus population. By reinforcing the reserve army it depresses the level of wages and enables a surplus value to arise(!). The expansion of capital ‘is therefore one of the strongest supports of the capitalist relation and its continuity over time’ (1926, p. 36) because a surplus value can arise ‘only if there is a surplus population’ (p. 16).

Export of capital is supposed to be the most powerful factor of surplus population. Yet in Germany in the years 1926—7 we saw the exact opposite: massive inflows of foreign capital were crucial to the general wave of rationalisation and played a major role in displacing workers or creating a surplus population. If it were simply a question of reducing the amount of capital so as to reduce the demand for labour then a simple transfer of capital would be enough to solve this. For instance German capitalists can go to Canada and settle down there. But this is not an export of capital so much as a loss of capital. In fact if it were simply a question of reducing the amount of capital, the essential aspect of capital exports - the drive to improve the conditions for the further expansion of capital — would no longer hold.

Sternberg tries to explain the export of capital, as he does all other phenomena of capitalism, by reference to competition. Yet the problem is to explain capital exports in abstraction from competition and therefore from the existence of a surplus population. The question is, what compels the capitalist to export capital when there is no reserve army and labour power is sold at its value?

Hilferding is not much better. Because he denies the possibility of a generalised overproduction of commodities, there are no limits to the investment of capital in a given country. So capital is exported only because a higher rate of profit can be expected: ‘The precondition for the export of capital is the variation in rates of profit, and the export of capital is the means of equalising national rates of profit’ (1981, p. 315). The same holds for Bauer. Inequality of profit rates is the sole reason why capital is exported: ‘Initially the rate of profit is higher in the more backward countries which are the targets of imperialist expansion ... capital always flows to where the rate of profit is highest’ (1924, p. 470).

Capital exports are thus explained in terms of the tendency for the rate of profit to equalise. But Bauer has the feeling that this explanation is quite useless when it comes to understanding modern imperialism. There has always been a tendency for rates of profit to equalise, whereas capital exports from the advanced capitalist countries started with real vigour only recently. Bauer himself says:

The drive for new spheres of investment and new markets is as old as capitalism itself; it is as true of the capitalist republics of the Italian Renaissance as of Britain or Germany today. But the force of this tendency has increased enormously in the recent decades. (p. 471)

How does he explain this? Ultimately Bauer has to look for an explanation of rising capital exports in the aggressive character of modern imperialism, which is precisely what has to be explained. Apart from this, if higher rates of profit are what account for the flow of capital to the less developed continents of Asia, Africa and elsewhere, then it is impossible to understand why capital should ever be invested in the industries of Europe and the United States. Why is the whole surplus value not earmarked for export as capital?

In fact we have already seen that an average rate of profit forms on the world market. On page 247 of his book Bauer knows this. But when he comes to deal with the roots of export of capital and imperialist expansion (p. 461) he forgets it and falls back onto the banal conception that the higher rate of profit of the backward countries is the cause of capital exports. We argued earlier that on the world market the technologically more advanced countries make a surplus profit at the cost of the technologically backward nations with a lower organic composition. This is what stimulates and simultaneously drives capital to keep developing technology, to force through continuous increases in the organic composition in the advanced countries. Yet this only means that as progressively higher levels of organic composition are introduced, a field is simultaneously created for more profitable investments. However high profits may be in the colonial countries, they would appear to be higher still in the chemical and heavy industries at home which, given their organic composition, are making surplus profits. So the question remains — why is capital exported at all? Bauer can’t explain this.

It is not necessarily true that in countries recently opened up to capitalist production the organic composition is always lower. While West European capitalism may have needed 150 years to evolve from the organisational form of the manufacturing period into the sophisticated world trust, the colonial nations do not need to repeat this entire process. They take over European capital in the most mature forms it has already assumed in the advanced capitalist countries. In this way they skip over a whole series of historical stages, with their peoples dragged straight into gold and diamond mines dominated by trustified capital with its extremely sophisticated technological and financial organisation. Does Bauer mean to suggest that British capitalists invest in railway construction in Africa or South America because the organic composition of the railways there is lower than in England? Argentina’s beef industry works on huge refrigerated plants equipped with the most modern technology with large sums of capital invested by the meat-processing firms of Chicago. An industry of this type could only have developed after a revolutionary change in transport and refrigeration techniques, and this again presupposes a high organic composition of capital.

Bauer senses that there is no factual basis in the argument about higher rates of profit in less developed countries, so he drags in various other factors in the conviction that piling up doubtful arguments is a good enough substitute for one correct one. ‘At any given time’, he says, ‘a part of the social money capital always lies fallow’ (1924, p. 462). ‘If too much money capital lies fallow the consequences can be disastrous for capitalism’ (p. 462). Therefore there is a drive for spheres of investment that will absorb the superfluous capital. One form of this drive is the export of capital which, according to Bauer, ‘reduces the volume of capital that lies fallow in a given country at a given time’ (p. 470).

Here two completely different explanations tend to coalesce. One deals with productive capital, the other with money capital that is not active in production. In his second theory Bauer has merely confused money capital which is deposited in banks with capital that lies fallow and searches for investment opportunities. A portion of the total social capital must always exist in the form of money, in the shape of money capital. If reproduction is to be continuous the size of this portion cannot be reduced at will. The period of time which capital, individual or total, spends in any of its three forms is not determined arbitrarily by bankers or industrialists. It is objectively given. And because the size of money capital is not arbitrarily determined, any more than is the size of commodity capital or productive capital, definite numerical ratios must obtain in the division of capital into three portions. Marx says:

The magnitude of the available capital determines the dimensions of the process of production, and this again determines the dimensions of the commodity capital and money capital in so far as they perform their functions parallel with the process of production. (1956, p. 106)

Summarising the results of his analysis Marx writes:

Certain laws were found according to which diverse large components of a given capital must continually be advanced and renewed — depending on the conditions of the turnover — in the form of money capital in order to keep a productive capital of a given size constantly functioning. (p. 357)

He goes on to add that to ‘set the productive capital in motion requires more or less money capital, depending on the period of turnover’ (p. 361). So although money capital is itself unproductive — it creates no value or surplus value and limits the scale of the productive component of capital — it cannot be arbitrarily diminished or cast aside because it fulfils necessary functions.

Bauer turns all this upside down. In Marx the money capital that lies fallow is only a portion of industrial capital in its real circuit, constituting a unity of its three circuits. In Bauer money capital that lies fallow is a part of money capital ‘which has been pushed out of the circuit of capital’ (1924, p. 476).

In Marx the size of the money capital depends on the length of the turnover period. In Bauer the length of the turnover period depends on the size of the money capital. So instead of a slower turnover tying up too much money capital, an accumulation of too much money capital slows down the turnover according to Bauer.

The upshot is that production does not determine circulation, circulation determines production. Bauer says: ‘Any change in the ratio of fallow to invested capital, of productive capital to capital in circulation ... completely transforms the picture of bourgeois society’ (p. 463). The mystical power of money capital to do this lies with the banks. In fact expansion is only possible due to the banks: ‘Thanks to the scale of resources at their disposal at any given time, they [the banks] can consciously direct the flow of capital to the dominated areas’ (p. 472). Capital is exported because the banks decide it. The banks seemingly can do what they like.

So what of the objective laws of capitalist circulation? Obviously for Bauer these must belong to the realm of fantasy.

Bauer refers to fallow money capital which is expelled from the circulation of industrial capital and returns to production through the export of capital. But from statistics on international trade, Bauer knows that international capital movements take place mainly in the form of commodities and hardly at all in the form of money or as money capital. It is not money capital but commodity capital which is expelled from the circulation of industrial capital. This merely shows that there is an overproduction of commodity capital which is unsaleable and which cannot therefore find its way back into production. In fact Baser himself accepts that export of capital creates an outlet for commodities.

Overaccumulation and export of capital in Marx’s conception


Marx points to the consistency of Ricardo’s argument that if overproduction of commodities is impossible then there ‘cannot ... be accumulated in a country any amount of capital which cannot be employed productively’ (Ricardo, 1984, p. 193).

This proposition is founded on J B Say’s thesis that demand and supply are identical. It shows that ‘Ricardo is always consistent. For him, therefore, the statement that no overproduction (of commodities) is possible, is synonymous with the statement that no plethora or overabundance of capital is possible’ (pp. 496—7). Marx then refers to the ‘stupidity of his [Ricardo’s] successors’:

who deny overproduction in one form (as a general glut of commodities on the market) and who not only admit its existence in another form, as overproduction of capital, plethora of capital, overabundance of capital, but actually turn it into an essential point of their doctrine. (p. 497)

The epigones of Marx, for instance Varga, merely reverse this stupidity. They accept the overproduction of commodities and even ‘make this a fundamental part of their doctrine’, but deny the overproduction of capital.

For Marx there could be no fundamental distinction between the two phenomena. The question is: what is the relation between these two forms of overproduction, the form in which it is denied and the form in which it is asserted or accepted? ‘The question is, therefore, what is the overabundance of capital and how does it differ from overproduction?’ (p. 498).

Those economists who admit to the possibility of an overabundance of capital maintain that ‘capital is equivalent to money or commodities. So overproduction of capital is overproduction of money or of commodities. And yet the two phenomena are supposed to have nothing in common with each other’ (p. 498). Against this ‘thoughtlessness, which admits the existence and necessity of a particular phenomenon when it is called A and denies it when it is called B’ (p. 499) Marx emphasises that when we are dealing with overproduction we are not dealing merely with an overproduction of commodities as commodities. We are dealing with ‘the fact that commodities are here no longer considered in their simple form, but in their designation as capital’ (p. 498). The commodity ‘becomes something more than, and also different from, a commodity’ (p. 499).

In a situation of overproduction the producers confront one another not as pure commodity owners but as capitalists. This means that in every crisis the valorisation function of capital is disrupted. A capital that fails to valorise itself is superfluous, overproduced capital. In this sense overproduction of commodities and overproduction of capital are the same thing. ‘Overproduction of capital, not of the individual commodities — although overproduction of capital always includes overproduction of commodities — is thus simply overaccumulation of capital’ (Marx, 1959, p. 251).

The heart of the problem of capital exports lies in showing why it is necessary and under what conditions it comes about. Marx’s achievement was that he did precisely this.

Marx showed the circumstances which determine a tendential fall in the rate of profit in the course of accumulation. The question arises — how far can this fall go? Can the rate of profit fall to zero? Many writers believe that only in such a case can we speak of an absolute overaccumulation of capital. As long as capital yields a profit, however small, we cannot speak of overaccumulation in an absolute sense because the capitalist would rather be content with a small profit than have no profit at all.

I shall show that this idea is completely false, that there is a limit to the accumulation of capital and this limit comes into force much earlier than a zero rate of profit. There can be absolute overaccumulation even when capital yields a high interest. The crux of the matter is not the absolute level of this interest, but the ratio of the mass of surplus value to the mass of accumulated capital.

In identifying the conditions on which this limit depends mere empiricism is quite useless. For instance in the utilisation of fuel the experience of almost 100 years has shown that it was always possible to obtain a greater quantity of heat from a given quantity of coal. Thus experience, based on several decades’ practice, might easily suggest that there is no limit to the quantity of heat obtainable through such increases. Only theory can answer the question whether this is really true, or whether there is not a maximum limit here beyond which any further increases are precluded. This answer is possible because theory can calculate the absolute quantity of energy in a unit of coal. Increases in the rate of utilisation cannot exceed 100 per cent of the available quantity of energy. Whether this maximum point is reached in practice is of no concern to theory.

Starting from considerations of this sort Marx asks, what is overaccumulation of capital? He answers the question thus: ‘To appreciate what this overaccumulation is ... one need only assume it to be absolute. When would overproduction of capital be absolute?’ (1959, p. 251) According to Marx absolute overproduction would start when an expanded capital could yield no more surplus value than it did as a smaller capital:

As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working time supplied by this population, nor the relative surplus working time, could be expanded any further (this last would not be feasible at any rate in the case where the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore when the increased capital produced just as much, or even less, surplus value than it did before its increase, there would be absolute overproduction of capital. (p. 251)

According to Marx’s definition of absolute overaccumulation it is not necessary for profit on the total capital to disappear completely. It disappears only for the additional capital which is accumulated. In practice the additional capital will displace a portion of the existing capital so that for the total capital a lower rate of profit results. However whereas a falling rate of profit is generally bound up with a growing mass of profit, absolute overaccumulation is characterised by the fact that here the mass of profit of the expanded total capital remains the same.

To understand the conditions under which this occurs I shall first analyse the simplest case where population and the productivity of labour are constant.

Absolute overaccumulation of capital with the size of population and technology held constant

Marx says:

Take a certain working population of, say, two million. Assume, furthermore, that the length and intensity of the average working day, the level of wages, and thereby the proportion between necessary and surplus labour, are given. In that case the aggregate labour of these two million, and their surplus labour expressed in surplus value, always produces the same magnitude of value. (1959, pp. 216—17)

Under these presuppositions capital accumulation runs up against a maximal limit which can be calculated exactly because the maximum amount of surplus value obtainable is exactly given. It would make no sense to continue accumulation beyond this limit because any expanded capital would yield the same mass of surplus value as before. If accumulation were continued it would necessarily lead to a devaluation of capital and a sharp fall in the rate of profit:

a portion of the capital would lie completely or partially idle (because it would have to crowd out some of the active capital before it could expand its own value), and the other portion would produce values at a lower rate of profit owing to the pressure of unemployed or but partly employed capital ... The fall in the rate of profit would then be accompanied by an absolute decline in its mass ... And the reduced mass of profit would have to be calculated on an increased total capital. (1959, p. 252)

This constitutes a case of absolute overaccumulation of capital ‘because capital would be unable to exploit labour ... to the degree which would at least increase the mass of profit along with the growing mass of employed capital’ (p. 255). According to Marx this would be the case ‘in which more capital is accumulated than can be invested in production ... This results in loans abroad, etc. in short, to speculative investments’ (1969, p. 484).

Absolute overaccumulation with a growing population and changing technology (increases in the organic composition of capital)

It would be wrong to conclude that absolute overaccumulation is only possible when population and technology are held constant. Using Bauer’s scheme I have shown that it can and must arise on the basis of the assumptions: a) of a progressively rising organic composition of capital and b) of annual increases in population. Under the conditions postulated by this model, absolute overaccumulation does not set in immediately but only after a certain interval. I showed (in Table 2.2, p. 75) that after year 21 the capitalists could have no interest in accumulating at the existing rate (10 per cent for constant capital, 5 per cent for variable) because a capital expanded at this rate would be too large to be valorised to the same degree.

The personal consumption of the capitalists would start declining. So instead of accumulating the surplus value (of year 20) — that is, incorporating it into the original capital — they will earmark it for capital export.

Since businessmen are not inclined to cut down their own consumption, there will be a shortage of the portion earmarked for accumulation. By year 36 there has to be a reserve army (of 11 509 workers) and simultaneously a superfluous capital (of 117 174). This is the situation that prevailed in Britain early in 1867 as reported in Reynolds’ Newspaper: ‘At this moment, while English workmen with their wives and children are dying of cold and hunger, there are millions of English gold — the produce of English labour — being invested in Russia, Spain, Italy and other foreign countries’ (Marx, 1954, p. 625).

From this moment on accumulation runs into difficulties. The profit earmarked for accumulation cannot be invested in expanding business in the industry in which it was made. This is because industry is saturated with capital. Marx says:

if this new accumulation meets with difficulties in its employment, through a lack of spheres of investment, ie, due to a surplus in the branches of production and an oversupply of loan capital, this plethora of loanable money capital merely shows the limitations of capitalist production ... an obstacle is indeed immanent in its laws of expansion, ie, in the limits in which capital can realise itself as capital. (1959, p. 507)

The limits to accumulation are specifically capitalist limits and not limits in general. Social needs remain massively unsatisfied. Yet from the standpoint of capital there is superfluous capital because it cannot be valorised.

It is absolutely false to argue, as Luxemburg does, that Marx’s reproduction scheme ‘contradicts the conception of the capitalist total process and its course as laid down by Marx in Capital Volume Three’ (1968, p. 343). The fundamental idea underlying Marx’s scheme is the immanent contradiction between the drive towards an unlimited expansion of theforces of production and the limited valorisation possibilities of overaccumulated capital. Precisely this is the necessary consequence of Marx’s schemes of reproduction and accumulation. Because Luxemburg transformed these limited valorisation possibilities into a limited capacity for consumption she could find no trace of that immanent contradiction in thescheme itself. Against this Marx shows that:

the self expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are [sic] continually broken through by the credit system. (1959, p. 441)

The limit of overaccumulation is broken through by the credit system, that is, by export of capital and the additional surplus value obtained by means of it. It is in this specific sense that the late stage of accumulation is characterised by the export of capital.

How does Luxemburg reconcile the fact of capital exports with her theory of the non-realisability of surplus value under capitalism? She devotes a special chapter, ‘international loans’ (1968, Chapter 30) to this question. Over some 30 pages she tells us how the capitalist countries of Europe export capital to the non-capitalist countries, build factories there, create a capitalist system and draw them by stages into their own sphere of influence. But there is not a word about how the surplus value produced in the former is realised in the latter. Instead we are told how the masses of Egypt and elsewhere have to work for long hours at low wages, how they are drawn into the capitalist nexus. In short Luxemburg shows us not how the surplus value produced under capitalism is realised in the backward countries but how an additional surplus value is produced in these countries, by means of capital exports, and brought back to the countries of advanced capitalism. The existence of capital exports is not only irreconcilable with Luxemburg’s theory, it directly contradicts it. Capital exports bear no relation to the realisation of surplus value. They are related to the problem of production, of the production of additional surplus value abroad.

An inductive verification


I have proposed two sorts of argument: i) that the valorisation of capital is the driving force of capitalism and governs all the movements of the capitalist mechanism — its expansions and contractions. Initially production is expanded because, in the early stages of accumulation, profit grows.

Afterwards accumulation comes to a standstill because, at a more advanced stage of accumulation, and due to the very process of accumulation, profit necessarily declines. ii) Apart from trying to explain the oscillations of the business cycle I have tried to define the law of motion of capitalism - its secular trend - or, in Marx’s words, the general tendency of capitalist accumulation. I have shown how the course of capital accumulation is punctuated by an absolute overaccumulation which is released, from time to time, in the form of periodic crises and which is progressively intensified through the fluctuations of the economic cycle from one crisis to the next. At an advanced stage of accumulation it reaches a state of capital saturation where the overaccumulated capital faces a shortage of investment possibilities and finds it more difficult to surmount this saturation. The capitalist mechanism approaches its final catastrophe with the inexorability of a natural process. The superfluous and idle capital can ward off the complete collapse of profitability only through the export of capital or through employment on the stock exchange.

To take up this latter aspect. Hilferding devotes a whole chapter to speculation and the stock exchange (1981, Chapter 8). All we learn from it is that speculation is unproductive, that it is a pure gamble, that the mood of the stock exchange is determined by the big speculators, and banalities of this sort. Because Hilferding denies the overaccumulation of capital he removes any basis for understanding the essential function of speculation and the exchange. In his exposition the stock exchange is a market for the circulation of titles of ownership, divorced from and rendered independent of the circulation of the actual goods. Its function is to mobilise capital. Through the conversion of industrial capital into fictitious capital on the exchange, the individual capitalist always has the option open to withdraw his capital in the form of money whenever he likes. Finally the mobilisation of capital in the form of shares, or the creation of fictitious capital, opens the possibility of capitalising dividends. According to Hilferding speculation is necessary to capitalism for all these reasons.

In all this there is no reference to the function of speculation in the movement of the business cycle. I have already pointed out that superfluous capital looks for spheres of profitable investment. With no chance in production, capital is either exported or switched to speculation. Thus in the depression of 1925—6 money poured into the stock exchange. Once the situation improved at the end of 1926 and the start of 1927 credits were displaced from the exchange into production.

The relationship between the banks and speculation which is discernible in the specific phases of the business cycle is also reflected in minor fluctuations within any given year. In periods when the banks can employ their resources elsewhere the exchange is subdued; it becomes brisk only when those resources are again released. Speculation is a means of balancing the shortage of valorisation in productive activity by gains that flow from the losses made on the exchange by the mass of smaller capitalists. In this sense it is a power mechanism in the concentration of money capital.

Let us take the present economic situation of the USA as an example of these movements. Despite the optimism of many bourgeois writers who think that the Americans have succeeded in solving the problem of crises and creating economic stability, there are enough signs to suggest that America is fast approaching a state of overaccumulation. A report dated June 1926 notes that

Since the War the capital formation process has advanced with extreme rapidity. Capital is now looking for investment outlets, and due to its overflow, it can only find these at declining rates of interest. Naturally this has meant an increase of all ... real estate values ... Furious speculation in the real estate is one result. (Wirtschaftsdienst, 1926,1, p. 792)

The basic characteristic of the economic year 1927 is that industry and commerce have watched their production fall, their sales decline and their profits contract. Reduced sales and lower production release a portion of the capital which flows into the banks in the form of deposits. The banks attract industrial profits for which there are no openings in industry and commerce. At the end of 1927 the holdings of the member banks of the US Federal Reserve System were $1.7 billion more than a year earlier. This constitutes a rise of 8 per cent against the 5 per cent considered normal.

The retrogression in industry and commerce contrasts sharply with the overabundance of cheap credit money.

The discount policy of the Federal Reserve Board has to be seen in this context. It is not that capital flows into Europe because rates of interest are higher. On the contrary US rates of interest have been cut in order to promote an outflow of capital. The financial expert Dr Halfeld reports that there were two reasons why in August 1927 the US banks of issue reduced the discount rate from 4 per cent to 3.5 per cent. Firstly to create an outflow of gold to Europe which is short of capital and, secondly, to revive domestic business. Yet this discount policy failed. Despite the substantial outflow of gold, US interest rates continued to remain low in the open market and vast sums of money were directed into speculation. The depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices. According to estimates of the US department of commerce, in 1927 the USA invested $1 .648 billion of new capital abroad. While this was partly matched by a reverse flow of $919m, the greater part of this money flowed straight into the New York stock exchange for speculation. Advances by New York banks by way of brokers’ loans on the stock exchange totalled $4.282 billion at the start of May — 46 per cent higher than in the previous year. On the other side, disbursements to industry and commerce remained low up to the middle of February. Towards the end of March there was a massive outflow of capital from the country, including large-scale buying up of foreign securities.

As a countervailing measure, the federal reserve banks decided on a discount policy which was the reverse of the one followed late in 1927. All twelve banks raised the discount rate from 3.5 per cent to 4 per cent. In April 1928 the Chicago and Boston bankers increased the rate a second time to 4.5 per cent and several banks followed suit. The discount rate thus returned to a level not seen by American money markets since early 1924. The results of the new discount policy appear to have been a complete failure if we go by the staggering bout of speculation on the New York stock exchange in the last week of March 1928. In fact despite the measures taken by the clearing house association against further extension of speculative credits, the flood of speculation reached a feverish pitch by August.

The fever of speculation is only a measure of the shortage of productive investment outlets. Dr Flemming is therefore quite right in saying that loans to foreign countries offer one way of eliminating difficulties since income from production cannot be redeployed on the domestic market. Not higher profits abroad, but a shortage of investment outlets at home is the basic underlying cause of capital exports.

Today America is doing its best to avert the coming crash — already foreshadowed in the panic selling on the stock exchange of December 1928 — by forcing up the volume of exports. The recent Copper Exporters Incorporated has been followed by the formation of the Steel Export Association of America, a joint export organisation of the two major American concerns - US Steel Corporation and Bethlehem Steel. When these efforts are matched by a similar drive by the Germans and the British, the crisis will only be intensified.

The result: intensified international struggle for investment outlets, transformations in the relationship of finance capital and industrial capital


Lenin was quite correct in supposing that contemporary capitalism, based on the domination of monopoly, is typically characterised by the export of capital. Holland had already evolved into a capital exporter by the close of the seventeenth century. Britain reached this stage early in the nineteenth century, France in the I 860s. Yet there is a big difference between the capital exports of today’s monopoly capitalism and those of early capitalism. Export of capital was not typical of the capitalism of that epoch. It was a transient, periodic phenomenon which was always sooner or later interrupted and replaced by a new boom. Today things are different. The most important capitalist countries have already reached an advanced stage of accumulation at which the valorisation of the accumulated capital encounters increasingly worse obstacles. Overaccumulation ceases to be a merely passing phenomenon and starts more and more to dominate the whole of economic life.

This is the case with France which, according to B Mehrens ‘has an almost chronic superfluity of money’ (1911, p. 230). This superabundance of capital is interrupted by periods of boom. But these boom periods are becoming shorter and shorter. The revival which started in Germany in 1910 was already over by 1912. The boom was over so quickly that A Fuller asked somewhat melancholically, ‘Now was that a boom, or were we already in the purgatory of the depression?’ (1914, p. 109).

Since 1918 the economic cycle has become progressively shorter. This is perfectly comprehensible in terms of the theory I have developed in this book. As rationalisation sustained its momentum after the war the accumulation of capital lurched forward sharply. A substantial part of plant expansions was carried through with the help of foreign loans. However in economic terms this is irrelevant to the fact that capital expanded enormously with the result that the valorisation of the expanded capital became more difficult. Apart from this, the problem of valorisation was further aggravated by the fact that America was now absorbing one part of the surplus value in the form of interest on her loans. At this advanced stage of accumulation booms become less intensive; they have changed their character ‘Today we no longer expect booms to bring increased prosperity to all sectors of the economy ... We are generally quite content if industry as a whole tends to prosper, and especially if the main industries and firms show higher prosperity’ (Feiler, 1914, p. 106).

Under these circumstances the overabundance of capital can only be surmounted through capital exports. This has therefore become a typical and indispensable move in all the advanced capitalist countries. Export of capital has thus become a means of warding off the breakdown, of prolonging the life-span of capitalism.

The bourgeois economist proclaims triumphantly that Marx’s theory of breakdown and crises is false and contradicted by the actual development.

He is generous enough to concede that it bore some correspondence to the formative period of capitalism in the 1840s. But when conditions changed the theory simply had the ground removed from under its feet:

When Marx worked out his theory of crisis ... one could actually suppose that the recessions following the booms would become progressively worse. It was always possible to extrapolate from the line 1825—1836—1847 and end up with the theory of catastrophe worked out by Marx. In fact, even the crisis of 1857 still fitted into the picture. We know from their correspondence how both Marx and Engels saw in the breakdown of the boom in 1857 ... a vindication of their theory of crisis. (Sombart, 1927, p. 702)

According to Sombart the crisis of 1857 was the last great catastrophe of the classic type that Britain would go through. Germany and Austria had still to go through their own crisis in 1873. After that

Europe’s economic life was underpinned by a conscious drive to neutralise, mitigate and abolish the tensions; this was a tendency that persisted down to the War and nothing in the War itself or the years that followed it at all weakened or transformed this tendency ... What emerged out of capitalism ... was the very opposite of the prophesised sharpening of crises; it was their elimination, or, ‘cyclical stability’ as people have been saying more recently. (p. 702)

The one-sidedness of this description is shown by the facts. Bourgeois economists prefer to convince themselves more than others that we are through with crises. Sombart assures us that we have not seen a serious crisis in Europe since 1873. But we know that the French crash of 1882 is reckoned among ‘the most serious crises in French economic history’ (Mehrens, 1911, p. 197) and that it precipitated a depression that was destined to persist for over one and a half decades. According to Sombart, in Britain ‘the full savagery of unbridled capitalism burst forth really for the last time in the 1840s ... Already in the 1850s the drive for expansion was much weaker and therefore also the setback’ (1927, p. 703). The facts prove the opposite. The crisis of 1895 was preceded by intense speculation chiefly in South African gold shares:

The real boom started only in 1895 ... Of all the attacks of pure speculative frenzy which the City has lived through, this was the worst, the wildest and the most pernicious. While it raged, more money was won and lost than in half a dozen earlier booms and panics. It ruined ten times as many people as the South Seas swindle and undoubtedly played its part in bringing forth the Boor War. (Financial Times, cited Weber, 1915, p. 270)

Commentators have tried to explain the novel character of crises by saying that the banks have succeeded in imposing regulation over economic life:

They can systematically withhold credit and stop capital issues, where claims are economically unsound. And in this way they can ensure that the creation of capital takes a rational form ... They can thereby prevent speculation on the exchange and moderate the over optimism of industry itself. (Feiler, 1914, p. 168)

The fact that the character of crises has changed is traced back to increasing planning and conscious regulation of the economy. Changes that are rooted in complex causes are interpreted as the achievements of bankers.

The worst orgies of speculation are possible in a period when, with the transition from individual forms of property to its social form in share capital, enormous fortunes accumulated over several decades are thrown on to the market and sacrificed on the stock exchange. These are the flotation periods bound up with vast regroupments and concentration of wealth. They are therefore periods of wild speculation. But once this process of concentration of share capital has already reached an advanced level, with the general progress of accumulation and through the mediation of the stock exchange, the exchange itself is left only with the residual stock capital in the hands of the public. Under these conditions speculation is badly debilitated, not of course through the conscious intervention of banks which supposedly centralise command over the economy into their own hands, but because there is not enough material for the exchange to digest. At an already advanced level of concentration of share capital, speculation on the stock exchange is bound to lose its impetus as its middle-class base of small rentiers, workers, civil servants and so on, dries up.

Yet this only compels the idle money capital to rush into other outlets, into export of capital, as the only investments promising greater returns.

This alone is one reason why world market struggles for investment outlets become increasingly sharper.

This brings us to the second reason why the character of crises in Britain has temporarily changed. As long as our attention is fixed on an isolated capitalism it follows that advanced stages of accumulation will necessarily generate crises in their sharpest and most savage forms.

During the first 50 years after 1825 when British relations with world economy were still only embryonic, and Britain could thus be regarded to some extent as an isolated capitalism, the crises of capital accumulation were enough to precipitate wild panics and collapses. But the more Britain succeeded in building relations with world economy, expanding foreign trade and discovering foreign outlets for overaccumulated capital, the more the character of those crises changed. But with the progress of accumulation the number of countries grows in which accumulation approaches absolute limits. If Britain and France were the world’s first bankers, today the list includes America — as well as a whole series of small donor countries like Belgium, Switzerland, Holland, Sweden.

Germany’s capital imports are a purely temporary phenomenon. Given the technologically advanced structure of German industry, high productivity of labour and very low wages, the rate of surplus value is extremely high. Therefore the tempo of accumulation is much faster so that Germany will reimburse her foreign debts sooner than people imagine and emerge on the world market as an exporter of capital. Yet in proportion to the growth in the number of countries which export capital, competition and the struggle for profitable outlets is bound to intensify. The repercussions of this will necessarily sharpen the crisis at home. If the early crises of capitalism could already lead to wild outbreaks, we can imagine what crises will be like under the growing weight of accumulation when the capital exporting countries are compelled to wage the sharpest struggles for investment outlets on the world market.

B Harms forecasts that the USA is already approaching the absolute limits of accumulation, so that ‘the capital which flows into the USA by way of interest payments over the coming decades, must in some form find its way back into the world markets’ (1928, p. 8). This will promote the further industrialisation of the newcomers. But this process of industrialisation, encouraged by American capital, can only revolutionise European exports. In future only means of production can be exported. Yet the development of American industry is driving the US in the same direction:

In other words we have to reckon with the fact that soon the USA itself will be emerging as one of the world’s biggest suppliers of the means of production. The well known enquiries of the Balfour Report and the proceedings of the last ‘Imperial Conference’ have produced instructive evidence for such an assumption. (Harms, p. 8)

Should the USA start exporting means of production, ‘this must ultimately lead to a situation where the European debtor countries simply cannot sustain debt servicing charges to the US’ (Harms, p. 8) and cannot pay for their imports of raw materials and means of subsistence. In other words Harms foresees the approach of one of the most terrible crises involving the bankruptcy of European capitalism - although he consoles himself with the illusion that the USA will voluntarily refrain from capital goods exports so as not to smash completely the solvency of her European debtors.

This makes it possible, finally, to form some more adequate picture of the relation of banking capital, or finance capital as Hilferding calls it, to industrial capital. It is well known that Hilferding sees the basic characteristic of modern capitalism in the dominance of finance capital over industry. He argues that with the growing concentration of banking, the banks increasingly come to control capital invested in industry. As capitalism develops, more and more money is mobilised from the unproductive classes and placed at the disposal of industrialists by the banks. Control over this money, which is indispensable to industry, is vested in the banks. So as capitalism develops and with it the credit system, industry becomes increasingly dependent on banking. An ever-increasing proportion of capital in industry is finance capital: it belongs to the banks and not to the industrialists who use it. With the growing concentration of money and banking capital the ‘power of the banks increases and they become the founders and eventually rulers of industry’ (Hilferding, 1981, p. 226). As banking itself develops:

there is a growing tendency to eliminate competition among the banks themselves, and on the other side, to concentrate all capital in the form of money capital, and to make it available to producers only through the banks. If this trend were to continue, it would finally result in a single bank or a group of banks establishing control over the entire money capital. Such a ‘central bank’ would then exercise control over social production as a whole. (p. 180)

Hilferding needed this construction of a ‘central bank’ to ensure a painless, peaceful road to socialism. As we have seen already, Hilferding imagines that the socialising function of finance capital can facilitate the overcoming of capitalism.

Hilferding’s exposition contradicts the actual tendencies of development of capitalism. It is also incompatible with the fundamental ideas of Marx’s theory. For if Hilferding were right in arguing that the banks dominate industry, this would only shatter Marx’s theory of the crucial importance of production itself to the structure of capitalism. The crucial role would then be played not by the productive process but by finance capital, or structures in the sphere of circulation.

Given the law of accumulation that we have developed, it follows that the interrelations of banking and industrial capital are historically changeable. We have to distinguish three phases. At a low stage of capital accumulation, when prospects for expansion are unlimited, the capital formation of industry itself is not enough. Therefore industry relies on a flow of credits from the outside, from non-industrial strata. The building of a credit system centralises the dispersed particles of capital and the banks acquire enormous power as mediators and donors of industrial credit. This was the phase France passed through after 1850 and which came to a close in Germany at the start of the present century.

The further progress of accumulation alters the interrelation of banks and industry. In France the initial capital shortage passed over into a chronic superfluity of money. In this phase industry establishes its independence. Obviously the specific configuration depends on the given country and the given sphere of industry. As far as German large-scale industry is concerned, Weber could write:

On the whole, there is no basis for the widespread fear that industry, and especially large-scale industry, is managed according to the wishes of bank directors; on the contrary, the movement of concentration and the formation of industry associations has made industry far more independent of the banks. (1915, p. 343)

At more advanced stages of accumulation industry becomes increasingly more independent of credit flow because it shifts to self-financing through depreciation and reserves. For instance Feiler cites the example of the Bochumer Verein (by no means one of the industrial giants) which, with an initial share capital of 30 million marks, within nine years declared dividends equal to the entire nominal value of the share capital, and simultaneously earmarked 40 million marks for new investments (1914, p. 112). Nachimson has shown that over the period from 1907—8 to 1913-14, the share capital controlled by the German industrial finance corporations declined from 29 per cent of the total capital of all joint stock companies to 26.8 per cent. In the same period their foreign holdings declined from 90 per cent of the total liabilities of all stock companies to almost half. He concludes, ‘These figures strongly suggest that the role of banks has declined in importance’ (1922, p. 85). Although Nachimson accepts Hilferding’s theory of the domination of industry by the banks, he says:

However it is important to point out compared with the start of the twentieth century, there has been a distinct tendency for industry to become independent of the banks ... Whereas the banks rely on external capital flows which are basically derived from industry, the equity funds of the industrial companies have been rising continuously ... Industrialists like Thyssen, Siemens, Rathenau, Stinnes ... do not come from banking circles, but from industrial circles and they are increasingly dominating the banks, just as the banks once dominated them. (p. 87)

Finally in a third phase industry finds it progressively more difficult to secure a profitable investment, even of its own resources, in the original enterprise. The latter uses its profits to draw other industries into its sphere of influence. This is the case with Standard Oil Corporation according to R Liefmann’s account (1918, p. 172). When the overaccumulated capital of a certain industry finds scope for expanding into other industries defined by the lower degree of accumulation, funds are channelled into ‘the New York money market, where they play a crucial role’ (p. 172). In countries like Britain, France and especially the USA, it is simply not possible to speak of industry being dependent on the banks. On the contrary industry has recently been dominating the banks. Apart from its own assets in banks, industry sets up its own financial institutions precisely in order to secure a profitable investment for its own surplus funds. In Germany firms like AEG are not only independent of the banks, they stand in a solid position in financial circles due to their own massive bank accounts. In a chapter on recent international trends in industrial financing T Vogelstein (1914) points out that the typical balance sheet of modern large-scale companies shows a completely different picture from the past. There is a tendency for the share of equity funds to increase at the expense of borrowed funds, or for the company to acquire its own assets in the banks. According to Vogelstein, this is one of the reasons why banks have been turning to the stock exchange by way of investments.

The historical tendency of capital is not the creation of a central bank which dominates the whole economy through a general cartel, but industrial concentration and growing accumulation of capital leading to the final breakdown due to overaccumulation.



1. It is a sign of Bauer’s misunderstanding of Marx’s method when he uses this provisional, simplifying assumption of a constant rate of surplus value of 100 per cent in his analysis of reproduction, but forgets to modify it later.

2. Opponents of Marxism accept Luxemburg’s critique with great jubilation because it entails conceding the defective character of Marx’s system on a crucial point.