Chris Harman

How Marxism Works

Economic crisis

The accumulation of wealth on the one hand, of poverty on the other.

That was how Marx summed up the trend of capitalism. Every capitalist fears competition from every other, so he works his employees as hard as possible, paying wages as low as he can get away with.

The result is a disproportion between the massive growth of means of production on the one hand, and the limited growth in wages and the number of workers employed on the other. This, Marx insisted, was the basic cause of economic crisis.

The easiest way to look at this is to ask: who buys the greatly expanding quantity of goods? The low wages of the workers mean they cannot afford the goods produced by their own labour. And the capitalists cannot increase wages, because that would be to destroy profit, the driving force of the system.

But if firms cannot sell the goods they produce, they have to shutdown factories and sack workers. The total amount of wages then falls still more, and yet more firms cannot sell their goods. A ‘crisis of overproduction’ sets in, with goods piling up throughout the economy that people cannot afford to buy.

This has been a recurrent feature of capitalist society for the past 160 years.

But any quick-witted apologist for the system will soon point out that there should be an easy way out of the crisis. All that’s needed is that capitalists invest their profit in new factories and machines. That will provide jobs for workers, who in turn will then be able to buy the unsold goods. This means that as long as there’s new investment all the goods produced can be sold and the system can provide full employment.

Marx was no fool and recognised this. Indeed, as we’ve seen, he realised that the competitive pressure on capitalists to invest was central to the system. But, he asked, does this mean the capitalists will invest all their profits, all the time?

The capitalist will only invest if he thinks he is guaranteed a ‘reasonable’ profit.

If he doesn’t think there is such a profit to be made, he won’t risk his money in investment. He’ll put it in the bank and leave it there.

Whether the capitalist invests or not depends on how he assesses the economic situation. When it looks right, the capitalists all rush to invest at the same time, falling over each other searching for construction sites, buying up machines, scouring the earth for raw materials, paying over the odds for skilled labour.

This is usually called the ‘boom’.

But the frenzied competition for land, raw materials and skilled labour forces up the prices of these things. And suddenly a point is reached where some firms discover their costs have risen so much that all their profits have disappeared.

The investment boom all at once gives way to an investment ‘slump’. No one wants new factories – construction workers are sacked. No one wants new machines – the machine tool industry goes into crisis. No one wants all the iron and steel that is being produced – the steel industry is suddenly working ‘below capacity’ and becomes ‘unprofitable’. Closures and shutdowns spread from industry to industry, destroying jobs – and with them the ability of workers to buy the goods of other industries.

The history of capitalism is a history of such periodic lurches into crisis, into the insanity of unemployed workers going hungry outside empty factories, while stocks of ‘unwanted’ goods rot.

Capitalism creates these crises of overproduction periodically because there is no planning, so there’s no way to stop the stampede of capital into and out of investment all at once.

People used to think that the state could stop this. By intervening in the economy, increasing state investment when private investment was low, then reducing it when private investment caught up, the state would keep production on an even keel. But nowadays state investment too is part of the lunacy.

Look at British Steel. Some years ago, when the firm was still nationalised, steel workers were told their jobs were being scrapped to make way for vast modern automatic furnaces designed to produce more steel more cheaply. Now they are being told that yet more workers must lose their jobs – because Britain was not the only country to embark on these massive investment plans. France, Germany, the United States, Brazil, Eastern Europe, even South Korea, all did the same. Now there’s a world surplus of steel – a crisis of overproduction. State investment is being cut.

Steel workers, of course, suffer both ways. This is the price humanity is still paying for an economic system where the production of massive wealth is controlled by a small privileged group interested only in profit. It does not matter whether these small privileged groups own industry directly, or control it indirectly through their control of the state (as with British Steel). While they use this control to compete with each other for the largest share of the profits, whether nationally or internationally, it is the workers who suffer.

The final lunacy of the system is that the ‘crisis of overproduction’ is not overproduction at all. All that ‘surplus’ steel, for instance, could help solve world hunger. Peasants around the world have to plough the land with wooden ploughshares – steel ploughshares would increase food production. But the peasants have no money anyway, so the capitalist system isn’t interested – there’s no profit to be made.

Why crises tend to get worse

Crises do not just take place with monotonous regularity. Marx also predicted they would get worse as time went on.

Even if investment took place at an even rate, without fits and starts, it could not stop the overall trend towards crisis. This is because the competition between capitalists (and capitalist nations) forces them to invest in labour saving equipment.

In Britain today almost all new investments are designed to cut the number of workers employed. That is why there are fewer workers in British industry today than ten years ago, even though output has increased over that time.

Only by ‘rationalising production’, by ‘increasing productivity’ and by cutting the workforce can one capitalist get a bigger share of the cake than another. But the result for the system as a whole is devastating. For it means that the number of workers does not increase at anything like the same speed as investment.

Yet it is the labour of workers that is the source of the profits, the fuel that keeps the system going. If you make bigger and bigger investments, without a corresponding increase in the source of profits, you are heading for a breakdown – just as surely as if you expected to drive a Jaguar on the amount of petrol needed to keep a Mini going.

That is why Marx argued 100 years ago that the very success of capitalism in piling up huge investments in new equipment led to a ‘tendency of the rate of profit to decline’ which means ever-worsening crises.

His argument can be applied very simply to capitalism today. Instead of the old picture of ‘bad times’ turning into ‘good times’, of slumps turning into booms, we seem to be in a never ending slump. Any spell of upturn, any drop in unemployment, is limited and short lived.

Apologists for the system say this is because investment is not high enough. Without new investment there are no new jobs, without new jobs there’s no money to buy new goods. So far, we can agree with them – but we don’t agree with their explanation of why this is happening.

They blame wages. Wages are too high, they say, which cuts profits to the bone. Capitalists are frightened to invest because they won’t get ‘sufficient reward’.

But the crisis has continued through long years in which government pay policies have cut workers’ living standards and pushed profits up. The years 1975-78 saw the biggest cut in workers’ living standards this century, while the rich grew richer – the top 10 percent pushed up their share of the national cake from 57.8 percent in 1974 to 60 percent in 1976.

There still isn’t enough investment to end the crisis – and that goes not just for Britain but for other countries where wages have been cut back, for France, for Japan, for Germany.

We would do better to listen to what Karl Marx said 100 years ago than to listen to those who apologise for capitalism today.

Marx predicted that as capitalism got older, its crises would get worse because the source of profit, labour, does not increase nearly as rapidly as the investment needed to put labour to work. Marx wrote when the value of the plant and machinery needed to employ each worker was fairly low. It has shot up since then, until today it can be £20,000 or even £30,000. Competition between capitalist firms has forced them to use ever bigger and evermore expensive machinery. The point has been reached where, in most industries, it is taken for granted that new machinery means fewer workers.

The international economic agency OECD has predicted that employment in the world’s major economies will fall, even if by some miracle investment soars.

Which it won’t. Because capitalists care about their profit, and if their investment increases fourfold but their profit only doubles, they get really upset. Yet this is what must happen if industry grows more quickly than the source of profit, labour.

As Marx put it, the rate of profit will tend to fall. He predicted that a point would eventually be reached at which any new investment would seem a perilous venture. The scale of expenditure needed for new plant and machinery would be colossal, but the rate of profit would be lower than ever before. When this point was reached, each capitalist (or capitalist state) would fantasise about huge new investment programmes – but be afraid to make them for fear of going bust.

The world economy today is very much like that. Rover plans new production lines – but fears it will lose money. British Steel dreams of those big plants it planned – but have to keep them on ice because it cannot sell its present output. The Japanese shipbuilders have given up investing in new yards – and some of the old ones are being shut down.

The very success of capitalism in building ever vaster and more productive machinery has brought the system to the point of seemingly permanent crisis.

A point was reached in the slave societies of the ancient world and the feudal societies of the Middle Ages where either a revolution would transform society or it would enter a permanent crisis that would drive it backwards. In the case of Rome, the lack of a revolution led precisely to the destruction of Roman civilisation and to the Dark Ages. In the case of some feudal societies – Britain and, later, France – revolution destroyed the old order and enabled new social advance to take place, under capitalism.

Now capitalism itself faces the choice between permanent crisis, which eventually will plunge humanity back into barbarism through poverty and war, or a socialist revolution.


Last updated on 26 January 2010