Chris Harman

Zombie Capitalism

Part One: Understanding the System: Marx and Beyond

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The Dynamics of the System

Illusions and reality

The history of capitalism in Marx’s time and that of his immediate successors was punctuated by economic crises that occurred about once every ten years – there were 15 in the US in the 110 years between 1810 and 1920. For a few years firms would invest on a large scale, taking on new workers; building new factories and buying new machines would create a demand for the products of industries like construction, steel and coal, which in turn would take on new workers; the new workers would receive wages which in turn enabled them to buy goods. Very fast rates of economic growth led firms to do everything they could to lure people from the countryside – and increasingly from other, poorer countries – into selling their labour power in the towns. Unemployment would fall to around 2 percent. Then something always seemed to go wrong. Giant firms would suddenly go bust, cancelling the demand for the products of other industries, where firms would also go bust; right across the economy workers – many only recently drawn into industry – would be sacked; their loss of buying power then ensured that the crisis ricocheted from industry to industry; panic would sweep through the capitalist class, while unemployment shot up virtually overnight to 10 percent or higher, where it would stay for months or even years until a new period of rapid growth took off.

The mainstream economics of the time denied that such “crises of overproduction” were endemic to the system, basing their arguments on a populariser and vulgariser of Adam Smith’s ideas, Jean-Baptiste Say. His “law” argued that supply and demand must always coincide, since every time someone sold something someone else must have bought it: supply, it was claimed, created its own demand. So John Stuart Mill argued:

Each person’s means for paying for the production of other people consists in those [commodities] that he himself possesses. All sellers are inevitably by the meaning of the word buyers ... A general over-supply ... of all commodities above the demand is ... [an] impossibility ... People must spend their ... savings ... productively; that is, in employing labour. [1]

The founders of the neoclassical school had to accept that in practice the economy experienced a “trade cycle” or “business cycle” of booms and recessions, in which for some reason supply and demand did not always balance as their theory claimed. Their reaction was to blame these things on external factors that somehow led to temporary distortions in an otherwise fundamentally healthy system. So Jevons wrote that the business cycle was a result of sun spots which, he claimed, affected the climate and therefore the productivity of agriculture and the profitability of trade, while Walras saw crises as disturbances caused by the failure of prices to respond to supply and demand, comparable in effect to passing storms on a shallow lake. [2]

Some later neoclassical economists did try to develop theories of the business cycle. Anwar Shaikh has summed up their approach:

the system is still viewed as being self-regulating; only now the adjustment is seen as being cyclical rather than smooth... In orthodox theory a cycle is not a crisis ... Cycles must be viewed as “small fluctuations” ... which at first approximation one may justifiably neglect ... Violent or prolonged expansions and contractions arise from external factors ... Crises, therefore, remain outside the normal process of capitalist reproduction. [3]

This view still persists in what is known as “real business cycle theories”. These hold that:

business cycles are the aggregate result of the optimum response of individuals to changes in the economic environment ... The economic cycle is assumed to have a stochastic [irregular – CH] oscillation around a trend. [4]

They still do not allow what they see as short-term aberrations to undermine their faith in an unchallengeable system of laws which lay down how any efficient economy must operate.

The possibility of crisis

Karl Marx, by contrast, argued that the possibility of general crises of overproduction was built into the very nature of capitalism. He destroyed the arguments based upon Say’s law in a couple of paragraphs in the first volume of Capital. Of course, he acknowledged, every time someone sells an article someone else buys it. But, argued Marx, once money is used to exchange goods through the market, it does not follow that the seller has then immediately to buy something else. Money acts not only as a measure of value in directly exchanging goods, but also as a means of storing value. If someone chooses to save the money they get from selling a good rather than spending it immediately, then there will not be enough money being spent in the system as a whole to buy all the goods that have been produced:

Nothing can be more childish than the dogma that because every sale is a purchase and every purchase a sale, therefore the circulation of commodities necessarily implies equilibrium of sales and purchases. If this means that the number of actual sales is equal to the number of purchases, it is mere tautology. But its real purport is to prove that every seller brings his buyer to market with him. Nothing of the kind. The sale and the purchase constitute ... an exchange between a commodity-owner and an owner of money, between two persons as opposed to each other as the two poles of a magnet ...

No one can sell unless some one else purchases. But no one is forthwith bound to purchase, because he has just sold. Circulation bursts through all restrictions as to time, place, and individuals, imposed by direct barter, and this it effects by splitting up, into the antithesis of a sale and a purchase, the direct identity that in barter does exist between the alienation of one’s own and the acquisition of some other man’s product. If the interval in time between the two complementary phases of the complete metamorphosis of a commodity become too great, if the split between the sale and the purchase become too pronounced, the intimate connexion between them, their oneness, asserts itself by producing – a crisis. [5]

The inevitability of crisis

These arguments used by Marx in Volume One of Capital “imply the possibility, and no more than the possibility, of crises”. [6] But in Volume Three he went further, to argue for the inevitability of crises. He did so by moving beyond the most abstract considerations about the buying and selling of commodities with money to look at the concrete process involved in capitalist production and exchange. As is often remarked, Marx did not provide a single, integrated account of the crisis. Rather he refers to different aspects of the crisis in writings that are scattered in different parts of the text. [7] But it is not that difficult to construct a coherent account from these.

The starting point is that competitive accumulation means that capitalists are simultaneously trying to increase the output of their goods as much as possible at the same time as trying to maximise profits by holding down wages. But wages constitute a major part of the money available to buy goods. Production tends to move in one direction, the consumption of the masses in the other:

The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus value on an extended scale ... The more productiveness develops, the more it finds itself at variance with the narrow basis on which the conditions of consumption rest ... [8]

Some people have interpreted this passage as meaning that the mere fact that workers are exploited limits the scale of the market and creates crises. [9] Such “underconsumptionist” versions of Marxism share some features in common with the form of the mainstream economics that developed in the 1930s under the influence of Keynes. The conclusion seems to be that capitalism can escape crisis if the state intervenes to raise consumption the moment a recession seems likely to develop.

But Marx’s own argument does not stop with pointing to the possibility of consumption falling below production. He goes on to insist that the double nature of one set of commodities, those that make up the means of production, as both values and use values, makes that inevitable. A Russian Marxist economist of the late 1920s, Pavel V. Maksakovsky, spelt out how this double nature works itself out. [10] As we have seen, the exchange value of goods is determined by the amount of labour required to produce them using the average level of techniques and skill operating in the system as a whole (what Marx refers to as “abstract labour”). But their production involves concrete human labour bringing objects (“use values”) into physical interaction with each other. The correct relations between different exchange values and different use values must exist for production to take place.

The more industry develops, the more complicated these relations become. Textile machines cannot be produced without steel; steel without iron ore and coal; coal without cutting machinery, winding gear and so on. But the chains of physical interaction depend on chains of buying and selling, in which coal firms sell to steel firms, steel firms to textile firms and textile firms to consumers – that is, to people who get wages or profits to spend from other firms so long as these can sell their goods.

Such long, intertwined chains linking production to final consumption only function if two completely different conditions are fulfilled. The correct physical relations between things that go to produce other things has to exist determined by the law of physics, chemistry and biology. But, at the same time, each act of production has to expand the amount of value (i.e. the amount of average abstract labour) in the hands of the owners of each particular firm. The physical organisation of the production of use values has somehow to correspond with the capitalist determination of prices by values.

Discrepancies between the two requirements mean that the expansion of production inevitably leads to bottlenecks in the supply of raw materials, causing their prices to rise, cutting into the profits of those capitalists who buy them, and so redistributing surplus value from the capitalists producing finished goods and components to those producing raw materials. It also means that the demand for one vital commodity, labour power, can begin to exceed the supply, leading to upward pressure on wages (at least in money terms, although workers may not see it like this if rising raw material prices cut into the buying power of the expanded wage).

That is not all. If it were, the problem would simply be a tendency towards disproportionality between the different parts of the economy. [11] But there are further problems. Production will not take place at all unless capitalists think they can sustain themselves in competition with other capitalists, by getting a rate of profit at least equal to the average in the system as a whole. To guarantee this they have repeatedly to reorganise production, using more advanced techniques to increase productivity per worker. But as all the capitalists try to do this, they continually reduce the average amount of labour needed to produce goods – and therefore the value of the goods. The physical quantity of goods produced by the system will tend to rise, but the value of each individual good will tend to fall. The two things necessary for the system to function, the physical organisation of production and the flow of value through the system, both change repeatedly – but without there being any automatic compatibility between the changes taking place.

Firms undertake production by buying physical equipment (machines, buildings, computers and so on) at prices dependent on the average amount of labour needed to produce them at a particular moment in time. But even as production is taking place, increases in productivity elsewhere in the system are reducing the value of that equipment and of the goods the firm is producing with it. The firm’s calculations of profitability were based on the amount it had to spend on this equipment in the past, not on what its present value is – but it is on its initial investment that the firm has to make a profit. So the rapid rate of accumulation that characterises the boom has the effect of cutting the prices of each unit of output, and this hits the profits to be made on investments made earlier in the boom.

Not only do the values of goods keep changing, but, Maksakovsky shows, the reaction of capitalists to these changes leads prices to diverge from values. As profits fall, some firms stop new investments for a period. This reduces the demand for the goods of the other firms that previously supplied them. These then try to maintain their sales by cutting their prices below the levels determined by value while they sack workers in order to try to protect their profits on the goods they are selling at reduced prices and at that same time cancel their own investments for fear they will not be profitable. A wave of contraction goes through the economy and with it a general reduction of prices below values.

The contraction does not last forever. Some firms go bankrupt, allowing other firms to buy plant and equipment on the cheap and to cut the wages which workers are prepared to accept. Eventually, a point is reached where they can expect to get higher than average profits it they embark on a new round of investment and a new wave of expansion takes off as capitalists rush to take advantage of the better business conditions. Competition leads firms to undertake a level of investment which temporarily exceeds the existing output of new machinery, components and raw materials. The “overproduction” of the downturn is replaced by “underproduction” in the upturn, and just as prices before were below values in the slump, now they rise above values in the boom. But this only lasts until all the new plant and machinery pass into production, increasing output at the same time as reducing the value of individual goods, making some investment unprofitable and giving rise in time to yet another downturn.

The central point is that the cycle is not a result of mistaken decisions by individual capitalists or their governments, but of the very way value expresses itself in prices. This takes place through a continual oscillation with prices arising above and falling below values, not through some continuous equilibrium.

This cannot be grasped without starting with the objective contradictions expressed in the notion of value. Only by dialectically drawing out these contradictions was Marx able to provide an overview of the system’s dynamic.

Credit and financial capital

The spells of expansion and contraction are modified and intensified by the role played by credit – and those who play a special part in the development of this, the bankers.

Capital passes through different forms in the course of capitalist production. [12] It begins as money. This is used to buy instruments and materials of production and labour power as commodities, which in turn are combined in the production process to produce other commodities. These are sold to get more money, which is then used to buy more means of production and labour power. In this way one cycle of production follows another endlessly, so that “every element” in it “appears as a point of departure, transit and return”. [13]

So capital takes the form of money, of commodities, of means of production and labour power, then of commodities again and finally of money. For the system to operate, all these forms have to exist simultaneously. If production is to keep going without a stop, there has to be a supply of money to buy commodities, a supply of commodities to be bought as productive capital and a supply of labour power. The cycle of capitalist production, then, is made up of three interconnected circuits – of money, of productive capital and of commodities. Each circuit fulfils a function for capital accumulation – and does so to some extent according to a dynamic of its own.

In the early stages of capitalism, when the units of production were small, the productive capitalist could operate to some degree independently. He had the possibility of financing the buying of plant and machinery and paying his workers from his own pocket. He also had the possibility of selling his output directly to those who consumed it.

But as the individual enterprises grew bigger, the capitalist often found his own resources were not enough to pay in advance for all the plant, machinery and materials he needed. He had to borrow from others. He came to rely on credit, and on special institutions, banks, ready to lend to people in return for interest on these loans.

At the same time, as the scale of the market grew, he could only sell his goods by relying upon specialists in the wholesale and retail trades, who would not be able to pay him for all those goods until they had, in turn, sold them to the final consumers. The productive capitalist borrowed on the one hand and lent on the other. Credit became an indispensable part of capitalist production. And the greater the extent of capitalist production within a particular economy, the longer and more complex became the chains of credit, of borrowing and lending.

The productive capitalist could also become a large scale lender. His fixed capital – his factory building and machinery – was only renewed every few years. But production provided a more or less constant flow of profits. He could lend these profits to others in the interim before renewing his own fixed capital – and would do so in return for the payment of interest.

Once capitalism is fully developed as the dominant way of producing in a particular economy, the lending of past profits by those productive capitalists who do not wish to immediately reinvest becomes the chief source of the funds for those capitalists who do wish to invest but lack sufficient past profits to do so. The financial system emerges as a network of institutions that mediate between different productive capitalists (and the state, insofar as discrepancies that exist between its immediate tax income and its immediate expenditure lead it to also borrow and lend).

Those who run the financial institutions are out to make profits just as much as the productive capitalists are. They have funds of their own (their banking capitals) which pay for the expense of their operations and bridge any gap that might open up between their lending and borrowing (or, at least, are meant to bridge the gap – all too often in the history of the system they have not), and they expect to earn a profit on them, just as the productive capitalists do on their capitals. There is a difference, however. The financial capitalists’ profits do not come directly from production, but from a share they get of the productive capitalists’ profits in return for lending to them – that is, interest payments.

The rate of interest has often been confused in mainstream economic writings with the rate of profit. But in fact the level and direction of movement of the two are quite different. The rate of profit, as we have seen, is determined by the ratio of surplus value to investment in the production process. By contrast, the rate of interest depends solely upon the supply and demand for loanable funds. If there is more money available for lending in an economy, then the rate of interest will tend to fall; if there is an increased demand for borrowing it will tend to rise.

Since the profits of productive capitalists are the major source of the funds for lending, a high rate of profit will encourage a lower rate of interest. On the other hand, if profits are low, more productive capitalists will themselves want to borrow and this will exert a pressure for interest rates to rise. How these contradictory pressures on interest rates work themselves out depends on other factors, particularly borrowing and lending by the state and the movement of funds in and out of a national economy. But these other factors cannot do away with the pressures of real production on the financial sector.

Other complications arise out of this state of affairs. The lending that financial institutions make is not necessarily restricted to the amount they actually have at their disposal as a result of their own investment and borrowing. The financial institutions can assume that what they have borrowed will not have to be paid back immediately. Therefore they can extend their lending beyond their immediate means, trusting that enough of it will be paid back for them to meet their own debts as they become due.

This makes sense so long as the productive sector of the system is expanding its output; increased lending today can be paid back out of increased output and surplus value in the not too distant future.

Such prophecies about increased lending being recoverable are self-fulfilling up to a degree, since the increased lending to productive capital encourages it in turn to increase its own levels of investment, and to produce more profits from which to repay the bankers. But invariably a point is eventually reached when the drive for financial profits leads to levels of lending above what can be paid back out of the expansion of real output, producing financial crises on the one hand and attempts to escape their impact through fraud on the other. As Marx puts it, “The credit system accelerates the material development of the productive forces and the world market”, but does this through developing “the incentive to capitalist production, enrichment through exploitation of the labour of others, to the most pure form of gambling and swindling”. [14] Finance drives “the process [of production] beyond its capitalist limits” resulting in “overtrade, overproduction and excessive credit” [15] in ways that rebound on production itself.

Marx’s view of this process foreshadowed by a century the currently fashionable account of Hyman Minsky [16], according to which financial operations invariably move on from a stage of normal profitable business (“hedging”) to one of speculation which culminates at a point (a “Minsky moment”) when all of what is lent cannot be recovered – and encourages Ponzi [17] or pyramid schemes whereby money from new investors is simply used to pay high interest rates to old investors.

The final complication is that financial institutions do not only use their funds to lend to productive capital. They also lend to individuals for their own requirements (notably for buying property), or to buy shares in already existing companies through the stock exchange. Such use of funds is expected to earn the going rate of interest, just as lending to productive concerns does, and for this reason is regarded by the financial institutions as an “investment” of “capital”. Yet it in no way contributes to the process of capital accumulation, and the interest earned is parasitic on what is taking place in the productive sector of the economy. For this reason Marx calls it “fictitious capital”, describing it as “the most fetish like form of the relations of capital” [18], since “capital appears as a mysterious and self-creating source of interest” and “it becomes the property of money to generate value and yield interest, much as it is an attribute of pear trees to bear pears”. [19]

Finance, speculation and the crisis

We have seen that the profits of productive capital are the main source of the funds that the banks have at their disposal for lending, and that the productive capitalists’ need for funds for accumulation is a major source of borrowing from the banks. This means that the cycle of expansion and contraction of new investment is accompanied by a cycle of expansion and contraction of lending. But the two cycles are not fully in phase with each other.

Credit expands as the boom begins to take off, with some capitalists keen to lend rising profits and other capitalists keen to borrow, all convinced that there will be no problems of repayment with interest. But eventually a point is reached where the frenzy of investment begins to exceed the funds coming from pools of previous profits. Firms outbid one another as they try to get access to these pools, raising the level of interest they are prepared to pay to get credit. Rising interest rates cut into profits just as rising raw material prices and money wages do so as well. They add to the pressures tipping the system from expansion into crisis. The contraction that follows makes firms and banks much less willing to lend – they fear they may need every penny themselves as their revenue from sales threatens to decline. But contraction also increases the need for many firms to borrow if they are going to make up the shortfall in their sales incomes and not be forced into bankruptcy by unpaid bills. Interest rates continue to rise for a time, despite the shortage of profits to pay them, and add to the downward forces in the system.

Fluctuations are intensified because of something else that happens at the height of the boom. Firms and banks see that lending is a quick way to boost their profits. They offer credit through “financial paper” (in effect promises to pay) of various sorts far in excess of their cash reserves on the assumption that other people and institutions will trust in such “paper” and accept it as payment for commodities without trying immediately to turn it into cash. In effect, credit created by the banks comes to be treated as a form of money – and as “credit money” is counted in certain measures of the money supply.

Such easy credit encourages each firm to undertake massive productive investments as it competes to get a bigger slice of the expanding market than its rivals, even though this causes their combined output to far exceed the capacity of the market to absorb it. Easy credit also enables those on friendly terms with the banks to embark on an orgy of luxury spending, and all sorts of crooks and fraudsters to join in the very profitable business of borrowing in order to lend and lending in order to borrow. The real, underlying processes of production, exploitation and creation of surplus value get completely hidden from view – until the economy suddenly starts turning down and all the bits of paper which represent credit have to be repaid from profits which are too small to do so. At this point firms and banks come to distrust the ability of each other to pay back what has been borrowed, and lending can grind to a virtual stop in what is today called a “credit crunch”:

The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system ... and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction. [20]

The behaviour of “fictitious capital” serves further to intensify the general boom-recession cycle of capitalism. Despite its non-productive nature, the monetary value of fictitious capital at any point in time represents a claim on real resources that can be converted into cash and from cash into commodities. When, say, share prices are rising during a boom, they add to the capacity of their owners to buy goods and tend to intensify the boom; when they fall with a recession, this adds to the pressure, reducing expenditure through the economy as a whole. The inevitably unstable, suddenly fluctuating, prices of the various sorts of fictitious capital add to the general instability of the system as a whole. They intensify the swings from boom to recession and back, and they also play havoc with the capacity of money to provide a fixed measuring rod for value.

Major economic crises almost invariably involve crashes of banks and other financial institutions as well as the bankruptcy of productive firms and rising unemployment for workers. It is easy then for people to misunderstand what is happening and to blame finance, the banks or money for the crisis, rather than the capitalist basis of production.

The modernity of Marx

Marx’s picture of crisis was far ahead of his contemporary mainstream economists. It was not until the 1930s that study of crises began to be taken seriously by the mainstream. Even the archpriest of free market economics, Friedrich August von Hayek, could admit in one passage that Marx was responsible for introducing, in Germany at least, ideas that could explain the trade cycle, while “the only satisfactory theory of capital we yet possess, that of Böhm-Bawerk”, had “not helped us much further with the problems of the trade cycle”. [21]

Recurrent economic crises are as much a part of our world as of Marx’s. Some at least of the ideological heirs of John Stuart Mill, Jevons and Böhm-Bawerk do not try to conceal the fact – at least when they are writing for an elite upper class audience in the Financial Times or the Economist, rather than propagandising to the masses. So the long-time Conservative chancellor of the exchequer in Britain, Nigel Lawson, who once embraced the “monetarist” doctrine that crises were an accidental result of central bankers allowing the money supply to go wrong [22], was eventually arguing that he was not responsible for the slump which followed the implementation of his policies because the “business cycle” is inevitable. They see the crisis as “creative destruction” without making clear that the creative element consists of wealth for one class, while the destruction is of the livelihoods of others.

I will return to the question of crises in the 21st century later in this book. All that needs to be said for the moment is that there is no problem accounting for them by starting with Marx. Indeed, the only serious question confronting Marx’s crisis theory does not arise from the occurrence of crises today, but rather from the fact that for three and a half decades, from 1939 to 1974, a major capitalist country like Britain did not experience a recession in which economic output fell, while the biggest economy, the US, only experienced one very brief such recession (that of 1948–9). The absence of such crises became a major element in economic discussion in the decades of the 1950s, 1960s and early 1970s. And without coming to terms with it, one cannot grasp the intractability of the boom-recession cycle today.

However, if crises were an inevitable feature of capitalism for Marx, they were not in themselves the central point in his analysis of its long-term dynamic. They were a cyclical feature of the system which it had managed to cope with several times by the time Capital was published, however great the hardship they had caused to the mass of the population, the distress to those capitalists who went bust, or the occasional outburst of popular discontent. They were not in themselves going to bring the system to an end. As the Russian revolutionary Leon Trotsky put it nearly 40 years after Marx’s death, “capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling”. [23] The long-term dynamic came from elsewhere than the crisis – from two long-term processes at work in the system, processes that were a product of its ageing as it went through each repetition of the cycle of expansion and contraction.

The tendency of the rate of profit to fall

The theory

The first of these processes is what Marx called “the law of the tendency of the rate of profit to fall” (sometimes called, for short, by Marxists since, “the falling rate of profit” – the phrase I will often use here).

This is one of the most difficult parts of Marx’s theory for newcomers to his ideas to understand, and also one of the most contentious. Non-Marxist economists reject it. So the often perceptive Observer economic columnist William Keegan has denounced Marx’s account as “an obsolete economic textbook which was itself written during the early, faltering phase of unreformed capitalism” quoting the French economist Marjolin to the effect that, “A modicum of experience and some knowledge of history was enough to cast doubt on the [Marxist] theory of an inevitable decline of capitalism owing to a falling rate of profit.” [24] Many Marxists who accept the theory of value and the main contours of Marx’s account of the crisis are just as dismissive of it. [25] Others hedge round their support for it with so many provisos as to effectively cut it out of any account of the system’s long-term development.

Yet Marx himself regarded it as absolutely central. It enabled him to assert that capitalism is doomed by the very forces of production which it itself unleashes:

The rate of self-expansion of capitalism, or the rate of profit, being the goal of capitalist production, its fall ... appears as a threat to the capitalist production process. [26]

This “testifies to the merely historical, transitory character of the capitalist mode of production” and to the way that “at a certain stage it conflicts with its own further development”. [27] It showed that “the real barrier of capitalist production was capital itself”. [28]

Marx did not pick the idea that profit rates fall out of thin air. It was common among economists who preceded him. [29] As Eric Hobsbawm has said, “Two things worried the early 19th century businessmen and economists: the rate of their profits and the rate of expansion of their industries.” Adam Smith had believed profit rates must fall as a result of increased competition and Ricardo because of supposed “diminishing returns” in agriculture. [30] Marx provided an explanation which did not depend on such questionable assumptions [31], but upon grasping that the dynamic of capitalist accumulation contains within it an irresolvable contradiction.

Each individual capitalist can increase his own competitiveness through increasing the productivity of his workers. The way to do this is for each worker to use more and more “means of production” – tools, machinery and so on – in his or her work. That involves the means of production expanding more rapidly than the workforce. There is a growth in the ratio of the physical extent of the means of production to the amount of labour power working on them – a ratio that Marx calls the “technical composition of capital”. [32] But other things being equal, a growth in the physical extent of the means of production will also be a growth in the level of investment needed to buy them. So there will also be an expansion in the ratio of investment to the workforce, in the value of the means of production compared with wages (or, to use Marx’s terminology, of “constant capital” to “variable capital”). This ratio is Marx’s “organic composition of capital” (as explained in Chapter One). [33] Its growth, for Marx, is a logical corollary of capital accumulation.

Yet the only source of value and surplus value for the system as a whole is labour. So if investment grows more rapidly than the labour force, it must also grow more rapidly than the creation of new value, and profit comes from this. In short, capital investment grows more rapidly than the source of profit. As a consequence, there will be a downward pressure for the ratio of profit to investment – on the rate of profit.

The reason for the growth of investment is competition – the need of each capitalist to push for greater productivity in order to stay ahead of competitors. But however much competition may compel the individual capitalist to take part in this process, from the point of view of the capitalist class as a whole it is disastrous. For, as we saw in the previous chapter, capitalists measure the success or failure of their undertakings not in terms of the total profit they bring in but in terms of the rate of profit.

Two objections are often raised to this picture of Marx’s. The first is that technological advance does not always involve increasing the ratio of means of production to workers – that it can be “capital saving” rather than “capital intensive”. If scientific knowledge is progressing and being applied as new technologies, then some of these technologies may employ less machinery and raw materials per worker than old technologies. At any one time there will be some new technologies that are capital-saving.

This is true. But it does not refute Marx. For there are likely to be a greater number of “capital intensive” rather than “capital saving” innovations. At any given level of scientific and technical knowledge some innovations may indeed be capital-saving. But when all these have been employed, there will still be other innovations (or at least capitalists will suspect there are other innovations) to be obtained only by increasing the level of investment in means of production. The fact that some technical progress can take place without any rise in the ratio of capital to labour does not mean that all the advantages of technical progress can be gained without such a rise. If an individual capitalist can increase the ratio of capital to workers he will be able to invest in and take advantage of innovations that need more capital as well as those that do not. If he cannot increase this ratio then he will benefit only from those innovations that do not – and he will lose out in competition with those who can. Since, in theory at least, there is no limit to the possible increase in the ratio of means of production to workers, there is no theoretical limit to possible innovation based on this method of competition.

In the real world, every operating capitalist takes it for granted that the way to gain access to the most advanced technical change is to increase the level of investment in means of production or “dead labour” (including the dead labour accumulated in the results of past research and development). It is only in the pages of the most esoteric journals of political economy that anyone imagines that the way for the Ford Motor Company to meet competition from General Motors or Toyota is to cut the level of physical investment per worker. The capitalist usually recognises that you cannot get the benefits of innovation without paying for it.

For these reasons the average amount of means of production per worker, Marx’s “technical composition of capital”, will rise – and with it the “organic composition of capital”. Only one thing could stop the pressure for this rise: if for some reason there was a shortage of profit-seeking investment. In such a case the capitalists would be forced to forego hopes of achieving the innovations possible through greater investment and settle for those they might stumble upon by accident.

The second argument against Marx’s account claims that changes in technique alone cannot produce a fall in the rate of profit. For, it is said, capitalists will only introduce a new technique if it raises their profits. But if it raises the profit of one capitalist, then it must raise the average profit of the whole capitalist class. So, for instance, Ian Steedman states, “The forces of competition will lead to that selection of production methods industry by industry which generates the highest possible uniform rate of profit through the economy.” [34] The same point has been accepted by various Marxists economists over the last 40 years, for instance by Andrew Glyn [35], Susan Himmelweit [36], Robert Brenner [37] and Gérard Duménil and Dominique Lévy [38] – and has been elaborated mathematically by Nobuo Okishio. [39] They conclude that capitalists will only adopt capital intensive techniques that seem to reduce their rate of profit if that rate is already being squeezed either by a rise in real wages or by external competition. These things, not the organic composition of capital, hit the rate of profit.

Marx’s own writings provide a simple answer to any such argument: that the first capitalist to invest in a new technology gets a competitive advantage over his fellow capitalists which enables him to gain a surplus profit, but that this surplus will not last once the new techniques are generalised.

What the capitalist gets in money terms when he sells his goods depends upon the average amount of socially necessary labour contained in them. If he introduces a new, more productive, technique, but no other capitalists do so, he is producing goods worth the same amount of socially necessary labour as before, but with less expenditure on real concrete labour power. His profits rise. [40] But once all capitalists have introduced these techniques, the value of the goods falls until it corresponds to the average amount of labour needed to produce them under the new techniques. The additional profit disappears – and if more means of production are used to get access to the new techniques, the rate of profit falls. [41]

The implications of Marx’s argument are far reaching. The very success of capitalism at accumulating leads to problems for further accumulation. Eventually the competitive drive of capitalists to keep ahead of other capitalists results in a massive scale of new investment which cannot be sustained by the rate of profit. If some capitalists are to make an adequate profit it can only be at the expense of other capitalists who are driven out of business. The drive to accumulate leads inevitably to crises. And the greater the scale of past accumulation, the deeper the crises will be.

The countervailing tendencies

Marx’s theory, it should be stressed, is an abstract account of the most general trends in the capitalist system. You cannot draw from it immediate conclusions about the concrete behaviour of the economy at any individual point in space and time. You have first to look at how the general trends interact with a range of other factors. Marx himself was fully aware of this, and built into his account what he called “countervailing tendencies”. Two are of central importance.

First, there is increasing the rate of exploitation. If each worker contributes more surplus value this will counteract the fact that there are fewer workers per unit of investment. The increased exploitation could result from increasing the length of the working day (Marx’s “absolute surplus value”), cutting real wages, increasing the physical intensity of labour or a fall in the cost of providing workers with a livelihood as a result of increased productivity. In this case the capitalist could increase the proportion of each individual worker’s labour that went into surplus value, even if the worker’s living standard was not reduced. Such an increase in the rate of exploitation could counteract some of the downward pressures on the rate of profit: the total number of workers might not grow as fast as total investment, but each worker would produce more surplus value even if he or she did not suffer a wage cut or have to work any harder.

There is, however, a limit to the capacity of this method to counter the downward pressure on profit rates – the number of hours in the working day. The number of hours per day that go into providing for the upkeep of the worker can fall from four to three, or from three to two, but it cannot fall below zero! By contrast investment in means of production can increase without limit. [42]

Take the example of a firm which employs a static workforce of 30,000. Even if it worked them as long as was physically possible each day (say, 16 hours) and paid them no wages, its daily profit could not exceed the value embodied in 30,000 × 16 hours labour. This is a limit beyond which profit cannot grow. But there is no such limit on the degree to which investment can grow (and with such a high level of exploitation there would be an enormous quantity of old surplus value to be turned into new enlarged investment). So a point will be reached where profits stop growing, even though competition forces the level of investment to continue rising. The ratio of profits to investment – the rate of profit – will tend to fall.

The second “countervailing factor” is that the increase in the productivity of labour means there is a continual fall in the amount of labour time – and therefore of value – needed to produce each unit of plant, equipment or raw materials. The “technical composition of capital” – the physical ratio of factories, machines, etc. to workers – grows. But the factories, machines and so on get cheaper to buy. And so the expansion of investment in value terms would be rather slower than the expansion in material terms. This would counteract to some extent the tendency for the value of investment to outstrip the growth in surplus value.

There have been claims that this is more than just a “countervailing tendency” to Marx’s law and in fact completely destroys it. Critics argue, using mathematical equations provided by Okishio, that technical progress means that goods are always being produced more cheaply than in the past. [43] If a rise in the ratio of dead to living labour in a certain industry increases productivity, the price of its output will fall compared to the output of other industries. But that in turn will reduce the costs of investment in these industries and its ratio to labour. Lower investment costs will lower the organic composition of capital and raise the rate of profit.

At first glance the argument looks convincing. It is, however, false. It rests upon a sequence of logical steps which you cannot take in the real world. Investment is a process of production that takes place at one point in time. The cheapening of further investment as a result of improved production techniques occurs at a later point in time. The two things are not simultaneous. [44]

There is an old saying, “You cannot build the house of today with the bricks of tomorrow.” The fact that the increase in productivity will reduce the cost of getting a machine in a year’s time does not reduce the amount a capitalist has to spend on getting it today. And if some other capitalist buys the cheaper machine, it immediately reduces the value of the machine owned by the first capitalist. While the new capitalist might be able to turn out goods in a more profitable way, the first capitalist has to deduct from his profits the loss in the value of his machine. [45]

When capitalists measure their rates of profit they are comparing the surplus value they get from running plant and machinery with what they spent on acquiring it at some point in the past – not what it would cost to replace it today. The point has added importance when it is remembered that the real process of capitalist investment takes place in such a way that the same fixed constant capital (machines and buildings) is used for several cycles of production. The fact that the cost of the investment would be less if it took place after the second, third or fourth round of production does not alter the cost before the first round of production.

The alleged disproof of Marx arises, as does the so-called transformation problem, from applying simultaneous equations to processes taking place through time. Simultaneous equations, by definition, assume simultaneity, with no passage of time.

The decline in the value of their invested capital certainly does not make life any easier for the capitalists. To survive in business they have to recoup, with a profit, the full cost of their past investments, and if technological advance means these investments are now worth, say, half what they were previously, they have to pay out of their gross profits for writing off that sum. What they have gained on the swings they have lost on the roundabouts, with “depreciation” of capital causing them as big a headache as a straightforward fall in the rate of profit. [46]

Capitalism is based not just on value but upon the self-expansion of the values embodied in capital. This necessarily implies a comparison of current surplus value with the prior capitalist investment from which it flows. The very notion of “self-expanding values” is incoherent without it. And the loss of value of the equipment and materials of production that have already been paid for is detrimental to the self-expansion of value.

The fall in the cost of investment might help the new capitalist. But he in turn is under pressure from still other capitalists who invest after him in still cheaper equipment. And all the time the existence of surplus value made in previous rounds of production and available for investment in still newer techniques serves to push up the ratio of investment to the labour force.

There is continual growth in the mass of surplus value seeking an outlet for investment. The more of this surplus value an individual capitalist can get hold of, the bigger the investments he can make and the more productivity-increasing innovations he will be able to introduce compared to his competitors. A capitalist may be able to buy today a machine which is twice as productive as one he paid the same price for a year ago. But that is no help to him if a rival is using greater accumulated surplus value to buy a machine four times as productive. The individual capitalist can stay in business only if he spends as much surplus value as possible on new means of production. If the means of production become cheaper, that only results in his having to buy more of them in order to achieve competitive success. So long as there is more surplus value available for investment than there was previously, the organic composition of capital will tend to rise, other things being equal. [47] It makes no difference if the physical means and materials of production are cheaper – that just causes more of them to be employed.

Crisis and the falling rate

But if the depreciation of capital through increased productivity cannot by itself save the rate of profit, it can if it is combined with something else – the crisis. For the crisis involves some capitals being made bankrupt. They are then forced to dispose of their capital not just at its depreciated value, but for anything they can get, however little. The beneficiaries are those capitalists who survive the crisis. They can pick up means of production – accumulations of value – on the cheap, enabling them to restore their own rates of profit.

In this way depreciation can ease the pressure on the capitalist system as a whole, with the burden of paying for it falling on those capitalists who were driven out of business, but not on those who remained. Those capitalists who die bear many of the costs of depreciation for the system as whole, making it possible for those who live on to do so with lower capital costs and eventually higher rates of profit than would otherwise be the case. “The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium.” [48]

There is a continual double interaction between the long-term tendency for the rate of profit to fall and cyclical crises. The rise in the ratio of investment to labour employed as new investment takes place during periods of expansion exerts a downward pressure on the rate of profit, just as it is under pressure from rising raw material prices and wages. This can have a direct effect, with the fall in the rate of profit causing firms to stop investing, so causing recession in the capital goods industries which then spreads elsewhere. Or it can happen indirectly if firms are successful in protecting the rate of profit temporarily by forcing down real wages. In that case, firms in the consumer goods industries cannot sell all their goods – or, as Marx puts it, they cannot “realise the surplus value” that they have exploited – and their profits fall, again producing recession. [49]

But the crisis in turn leads to some firms going bust and provides opportunities for other firms to buy up their equipment and raw material and take on workers at lower wages. If enough firms go bust, the crisis itself can work to completely counteract the long-term downward tendency of the rate of profit. In short, the decline in the rate of profit helps produce the cyclical crisis, but the cyclical crisis helps resolve the long-term decline in the rate of profit.

Marx’s account of the falling rate of profit was not published until 11 years after his death and did not have a big impact on the analyses of his followers in the next two decades. It barely featured in the most important works of Marxist analysis by Rosa Luxemburg, Vladimir Lenin and Nicolai Bukharin. It was accepted by Rudolf Hilferding but was not central to his analysis. [50] It was not until the 1920s that a concerted attempt was made to use it to analyse the long term trajectory of the system by the Polish-Austrian Marxist Henryk Grossman. He was reacting to the propensity of many Marxists to deny that capitalism was inevitably heading to a great crash, a “breakdown”. He took up the argument in the form in which it had been put by the Austrian social democrat Otto Bauer, who claimed to show that capitalism could expand indefinitely, using schema from Marx in Volume Two of Capital depicting the interrelation between different sectors of capitalist production. [51]

Grossman claimed to prove, as against Bauer, that if these schema were applied over a sufficiently large number of cycles of production a point would be reached at which the rate of profit would be too low to allow production to continue without cutting into workers’ real wages and the consumption of the capitalist class itself. This would happen because “the scope of accumulation expands ... in proportion to the weight of the already accumulated capital” even as the rate of profit tends to decline. Eventually a point would be reached where sustaining accumulation absorbed all existing surplus value, leaving none for the luxury consumption of the capitalist class, and then beginning to eat into the value needed to sustain the working class. [52]

Alternatively, if surplus value was used on an increasing scale to maintain the rate of profit on existing investment, there would be a collapse in the mass of surplus value available for new investment. The industries catering for investment would not be able to function. There would be “absolute over-accumulation” and “a state of capital saturation in which the over-accumulated capital faces a shortage of investment opportunities and finds it more difficult to surmount this saturation”. [53] In either case the system would no longer be able to reproduce itself.

There have been many objections to Grossman’s arguments. [54] It is not clear from his argument why the rate of expansion of investment has to remain constant from one cycle to another, rather than slowly decline in response to the decline in the rate of profit and in doing so reduce the tendency of the organic composition of capital to rise. In that case the “breakdown”, it might seem, could be postponed for a very long time. Further, Grossman’s book is ambiguous about whether his theory proves the inevitability of crisis or the inevitability of a complete breakdown of the system. He recognises that the crisis can counteract the tendency of the rate of profit to fall, but still concludes that:

the mechanism as a whole tends relentlessly towards its final end with the general process of accumulation ... Once these counter-tendencies are themselves defused or simply cease to operate, the breakdown tendency gains the upper hand and asserts itself in the absolute form of the final crisis. [55]

Yet it is possible to see hypothetical circumstances in which Grossman’s arguments would apply. Intense competition between capitals – itself intensified by falling profit rates – could compel each to invest in ever more expensive means of production so as to obtain the advanced technology that is a precondition for survival. In this way the technical prerequisites of successful competition would contradict the possibility of maintaining profitability; the embodiment of capital in certain use values would contradict the possibility of expanding its value. Resistance from the working class could prevent restoration of profit rates through the method of paying for labour power at below its reproduction costs. And something might prevent the usual boom-recession cycles from driving some firms out of business and easing the long-term problems of others. Grossman’s theory can then show how the falling rate of profit can produce deep problems for the system, without being treated as definitive proof that capitalism has to collapse of its own accord.

The concentration and centralisation of capital

The second long-term process recognised by Marx was what he called the “concentration and centralisation” of capital. [56] It is not difficult to grasp what is involved. Concentration refers to the way in which exploitation enables individual capitals to accumulate and so grow larger. The small firm becomes a big firm and the big firm becomes a giant – providing it can survive each cyclical crisis. Centralisation refers to the way in which each crisis weeds out some capitals, leaving those that remain controlling a bigger part of the whole system.

This process has important implications – not all of which were fully drawn out by Marx himself. The bigger the individual units of capital and larger the proportion of the system as a whole they constitute, the greater will be the impact on the rest of the system every time one of them goes bust. If a small firm stops making profits and goes bust, this will destroy only a small part of the market for other, previously profitable, small firms that supply it. There will be a very limited domino effect. If, however, one of the giants of the system goes bust, it can have a devastating impact on other previously profitable big firms that depended on it for their own markets, and on any banks or other firms that have lent it money. The domino effect becomes an avalanche effect.

At the same time, however, the very size of firms can provide them with protection from market forces up to a certain point. The individual acts of labour within a great capitalist enterprise are not directly in competition with individual acts outside it. Instead managerial decisions determine how they relate to each other. As Marx puts it:

In manufacture ... the collective working organism is a form of existence of capital. The mechanism that is made up of numerous individual detail labourers belongs to the capitalist ... Manufacture proper not only subjects the previously independent workman to the discipline and command of capital, but, in addition, creates a hierarchic gradation of the workmen themselves ... Not only is the detail work distributed to the different individuals, but the individual himself is made the automatic motor of a fractional operation ... [57]

The great enterprises are like islands within the system where the relation between the work done by individuals is organised by a plan, not by the interrelation of their products through the market:

What ... characterises division of labour in manufactures? The fact that the detail labourer produces no commodities. It is only the common product of all the detail labourers that becomes a commodity. Division of labour in society is brought about by the purchase and sale of the products of different branches of industry, while the connexion between the detail operations in a workshop is due to the sale of the labour power of several workmen to one capitalist, who applies it as combined labour power ... While within the workshop, the iron law of proportionality subjects definite numbers of workmen to definite functions; in the society outside the workshop, chance and caprice have full play in distributing the producers and their means of production among the various branches of industry. [58]

The islands of planning within the enterprises do not exist apart from the sea of commodity production around them. The internal regime is a response to the external pressure to extract and accumulate surplus value in order to compete: “Anarchy in the social division of labour and despotism in that of the workshop are mutual conditions the one of the other.” [59] The despotism arises from the pressure on the capitalist to relate the productivity of labour within the enterprise to the ever changing productivity of labour in the system as a whole. But this cannot be done without using compulsion, pressing down on each worker, to achieve what is brought about in the wider society by the blind interplay of commodities.

The law of value operates between enterprises through the market. Within the enterprise it has to be imposed by conscious regulation on the part of the capitalist. Planning within capitalism is not the opposite of the market; it is the way in which the capitalist tries to impose the demands of the market on the workforce. [60]

The capitalist can often still have a certain leeway within which to operate. The enterprise can make profits if the market for its output is growing rapidly despite costs of production internally departing markedly from those currently prevailing in the system as a whole. Things are similar when it has gained a major share of the market in a sector of production that requires very large amounts of fixed capital. The production methods associated with the physical structure of its fixed capital (its use value) can be much more costly than those available in the system as whole (e.g. when old machines using many workers are used), but the enterprise is protected from serious competition for a long period of time by the sheer cost to new firms of entering the industry to compete with it. The existence of a certain capital as a fixed, physically constituted use value as well as a potentially fluid exchange value means that the law of value does not apply to it directly and instantaneously.

This is not a state of affairs that can last indefinitely. Eventually the development of new, more advanced production methods in the wider system will lead to it facing sudden serious competition. It is then, through the impact of crisis on it, that the enterprise is forced to restructure so as to produce according to the law of value or to go under. The more enterprises there are that have been relatively protected in the past – that is, the higher the concentration and centralisation of capital – the greater will be the crisis when it eventually breaks.

But in the interim the giant firm can evade the crisis – and sometimes the interim can be a very long time. If many giant firms are able to do this for a period, the impression can arise that that system – or part of it – has become crisis free. What is not noticed is that the price it pays for avoiding crises is that it is there is no restructuring to offset the long-term downward pressure on profitability. Capitals avoid small crises, only to be hit, eventually, by a much greater one.

The other limit of capitalism?

There is a final point that has often been lost in expositions of Marx’s ideas: his stress on the expansion of the “forces of production” has been interpreted as identification with economic growth at all costs. Yet in both the earlier and the later writings of Marx and Engels there is a keen awareness of the contradictory character of such growth within class societies in general and within capitalism in particular. They wrote in 1845–6:

In the development of the productive forces there comes a stage when productive forces and means of intercourse are brought into being which, under existing relations, can only cause mischief, and are no longer productive but destructive. [61]

Marx and Engels did not just view capitalism as generally destructive. They also provided the outlines of a critique of the particular ecological damage wrought by it, as writers like John Bellamy Foster have emphasised in recent years. [62]

Marx saw human beings as an integral part of the natural world. “Labour”, he wrote:

is, in the first place, a process in which both man and Nature participate, and in which man of his own accord starts, regulates, and controls the material reactions between himself and Nature. He opposes himself to Nature as one of her own forces, setting in motion arms and legs, head and hands, the natural forces of his body, in order to appropriate Nature’s productions in a form adapted to his own wants. [63]

But the drive of capital to create surplus value leads to it undermining of the vitality of nature – and the conditions for human life:

Exploitation and squandering of the vitality of the soil takes the place of conscious rational cultivation of the soil as eternal communal property, an inalienable condition for the existence and reproduction of a chain of successive generations of the human race. [64]

There arises “an irreparable break in the coherence of social interchange prescribed by the natural laws of life”. [65] “Capitalist production develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth – the soil and the labourer ...” [66] Just as “large-scale industry ... lays waste and destroys ... labour-power”, “large-scale mechanised agriculture ... directly exhausts the natural vitality of the soil ...” [67] Capitalist production, Marx recognised, was slowly destroying the very basis on which it, like all human production, rested – the metabolic interaction between humanity and the rest of the natural world.

Marx’s remarks were mainly concerned with the immediate effects of capitalist agriculture on soil fertility, which in his time could only be overcome by the use of guano – nitrous mineral deposits resulting from thousands of years of bird droppings to be found mainly on the coast of northern Chile. Marx’s insights were taken up and developed in this sense by Karl Kautsky in the 1890s as implying a crisis of food production in the short term. But they seemed to lose their relevance with the discovery of how nitrous fertilisers could be made artificially (through the Haber-Bosch process) during World War One and world food production was able to expand without difficulty throughout the 20th century. But analyses of the relation between humanity and nature had wider implications than a simple concern with food output, as was spelt out by Engels in his manuscript The Dialectics of Nature, which was not published until 30 years after his death, in the mid-1920s.

Here Engels noted that, although humans differ from other animals in being able to “master” nature, this historically has often had unforeseen negative consequences which cancelled out initial gains. He took as an example the way in which deforestation had wreaked havoc on Greece, Mesopotamia and Asia Minor:

Thus with every step we are reminded that we by no means rule over nature as over a foreign people, like someone standing outside nature – but that we, with flesh and blood and brain, belong to nature and exist in its midst. [68]

Scientific progress was slowly providing the means to avoid causing ecological calamities by controlling and regulating “production activity”. But “this regulation” required “something more than mere knowledge”. It required “a complete revolution in our hitherto existing mode of production, and simultaneously a revolution in our whole contemporary social order”. [69] This was necessary because:

The individual capitalists, who dominate production and exchange, are able to concern themselves only with the most immediate useful effect of their actions ... In relation to nature, as to society, the present mode of production is predominantly concerned only about the immediate, the most tangible result; and then surprise is expressed that the more remote effects of actions directed to this end turn out to be quite different, are mostly quite the opposite in character. [70]

The implication is that capitalism contained another inbuilt limit besides that of its inbuilt tendency to economic crises. It is that left to itself it could eventually destroy the very environmental conditions for any form of human existence, including its own. Neither Marx nor Engels developed this implication. But it would become very important a century later.

A dynamic and contradictory system

The recognition that capitalism is an ever expanding system of alienated labour runs through the pages of Marx’s economic writings. It is a system in which people’s living force is taken from them and turned into a system of things that dominate them. Capital is labour that is transformed into a monstrous product whose only aim is to expand itself: “Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” [71] It is this which gives capitalism a dynamic of growth unparalleled in previous societies.

The endless drive to pump out surplus value in order to further pump out yet more surplus value, of accumulation in order to further accumulate, knows no bounds. As capitalism emerged in parts of north west Europe, it was compelled to stretch out its tentacles to encompass the whole earth, subjecting ever more living labour to it:

The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere. The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations. [72]

What stands out from Marx’s analysis is precisely what has been missing from mainstream economics since his time – a sense of the mass forward rush of capitalism. [73] His model provides, as no other has, an account of a system that had expanded to fill most of Western Europe and North America by the time of his death in 1883 – and expanded further to fill the whole globe in the 20th century. But that is not all. His model was not only of a self-expanding system, but of one whose expansion is based upon the interplay of contradictory forces that finds expression in the crisis and the downward pressure on the rate of profit. The expansion of the system simultaneously leads to a massive growth in the productive forces – the capacity of humanity to produce its livelihood – and of the transformation of these into destructive forces through the crippling of people’s lives.

Capitalism has been a totalising – I am tempted to write “totalitarian” – system, in a way in which no previous mode of production had been, compelling the whole world to dance to its frenzied rhythms of competition and accumulation. As it has done so, the system as a whole has continually reacted back upon the individual processes on which it depends. It forces each capital to force down the price of labour power to the minimum that will keep its workers able and willing to work. [74] The clash of capitals compels each to accumulate in a way that will produce downward pressure on profit rates for all of them. It stops any of them standing still, even if they occasionally become aware of the devastation they are causing. It is a system that creates periodic havoc for all those who live within it, a horrific hybrid of Frankenstein’s monster and of Dracula, a human creation that has escaped control and lives by devouring the lifeblood of its creators.

It is this understanding which above all distinguishes Marx’s approach from every school of mainstream economics, orthodox and heterodox alike, and which means it alone provides a guide for analysing capitalism in our century. But doing so means using Marx’s concepts to go beyond Marx.

* * *


1. John Stuart Mill, Principles of Political Economy (London 1911), p. 339.

2. See L. Walras, Elements of Pure Economics, p. 381. For Jevons, see Eric Roll, A History of Economic Thought (London, Faber, 1962), p. 376.

3. Anwar Shaikh, An Introduction to the History of Crisis Theory, in Bruce Steinberg and others (eds.), US Capitalism in Crisis (New York, Union of Radical Political Economics, 1978), p. 221. Also available at

4. Luca Pensieroso, Real Business Cycle Models of the Great Depression; A Critical Survey, Discussion Papers 2005005, Universite Catholique de Louvain, 2005, pp. 3–4, available at; see also Randall E. Parker, Economics of the Great Depression, p. 29.

5. Marx, Capital, Volume One, pp. 110–111.

6. As above, p. 111.

7. This, for instance, is the argument of Pavel V. Maksakovsky, in The Capitalist Cycle (Leiden, Brill, 2004).

8. Marx, Capital, Volume Three, pp. 239–240.

9. The most prevalent recent version has probably been that expounded by the radical American economists Paul Baran and Paul Sweezy in their book Monopoly Capital (London, Penguin, 1968). They see capitalism’s problem as lying in a growing “surplus” which cuts the buying power of the masses and produces a secular trend to stagnation. A somewhat similar position is expounded by Joseph Steindl, Maturity and Stagnation in American Capitalism (New York, Monthly Review, 1976). See my critique of these positions in my book, Explaining the Crisis, pp. 148–154. See also Michael Bleaney, Underconsumption Theories (London, Lawrence and Wishart, 1976); Anwar Shaikh, An Introduction to the History of Crisis Theory, in Bruce Steinberg and others (eds.), US Capitalism in Crisis, pp. 229–231.

10. The rest of this section is a paraphrase of the argument in Pavel V. Maksakovsky, The Capitalist Cycle.

11. Interpretations of Marx’s analysis which saw things simply in terms of disproportionality were prevalent among reformist socialists in the first decades of the 20th century. See Paul Sweezy, The Theory of Capitalist Development, p. 156.

12. This paragraph is a very condensed summary of the first four chapters of Volume Two of Marx’s Capital (Moscow, Progress Publishers, 1984).

13. Marx, Capital, Volume Two, p. 100.

14. Marx, Capital, Volume Three, p. 432.

15. As above, p. 495.

16. See, for example, In Praise of Hyman Minsky, Guardian, 22 August 2007.

17. Named after an Italian American fraudster of the early 1920s. There is an early account of such a scheme in Charles Dickens’s Martin Chuzzlewit, written in 1844–5.

18. Marx, Capital, Volume Three, p. 383.

19. As above, p. 384.

20. As above, p. 249.

21. F.A. Hayek, Prices and Production (London, George Routledge, 1935), pp. 103–104.

22. See the quotes from Nigel Lawson in William Keegan, Mr Maudling’s Gamble (London, Hodder & Stoughton, 1989), p. 55.

23. Leon Trotsky, Report on the World Economic Crisis and the New Tasks of the Communist International, The First Five Years of the Communist International, Volume One (New York, Pathfinder, 1972).

24. W. Keegan, The Spectre of Capitalism (London, Radius, 1992), p. 79. On the socialist left the Marxist account was rejected in the 1970s by Andrew Glyn, Bob Sutcliffe, John Harrison, Paul Sweezy and others. For a full account of the views of these “Marxist” critics of Marx’s, see my book Explaining the Crisis, pp. 20–30.

25. For instance, those who accept the theories of monopoly associated with Baran and Sweezy; the Sraffian, neo-Ricardian current of Harrison, Steedman, Hodgson, Glyn and others; also critics of the Sraffians such as Bob Rowthorn.

26. Marx, Capital, Volume Three, pp. 236–7.

27. As above, p. 237.

28. As above, p. 245.

29. See, for instance, John Stuart Mill, Principles of Political Economy, Book 4, Chapters 4 and 5, available at

30. Eric Hobsbawm, Industry and Empire (London, Penguin, 1971), p. 75.

31. Marx’s rejection of Ricardo’s explanation makes nonsense of Robert Brenner’s assertion that Marx’s theory rests on a “Malthusian” assumption that “productivity can be expected to fall”. See Robert Brenner, The Economics of Global Turbulence, New Left Review, 1:229 (1998), p. 11.

32. Marx, Capital, Volume One, p. 612.

33. Marx also uses another concept, the “value composition of capital” to describe the ratio of investment in means and material of production to the cost of labour power (or, in his terminology, the ratio of constant capital to variable capital, or c/v). Marx then defines the organic composition of capital as the value composition “in so far as it determined by the technical composition”. Fred Moseley argues this distinguishes changes in the organic composition from changes in the value composition due to alterations in the cost of either means of production or labour power. See Fred Moseley, The Falling Rate of Profit in the Postwar US Economy (London, Macmillan, 1991), pp. 3–6. See also the discussion at By contrast, Ben Fine and Lawrence Harris in Rereading Capital (London, Macmillan, 1979, pp. 58–60) argue that the “value composition of capital is the ratio of the current value of the means and material of production consumed to the current value of labour power consumed”. The point is that the current value of the capital consumed is not necessarily the same as the value of the original investment – indeed this is a point we will deal with later, and the value of consumed capital will tend to be less than the value of invested capital, as increased productivity reduces the socially necessary labour needed to produce each unit of capital.

34. I. Steedman, Marx After Sraffa, p. 64; compare also pp. 128–29.

35. Andrew Glyn, Capitalist Crisis and the Organic Composition, Bulletin of the Conference of Socialist Economists, 4 (1972); Andrew Glyn, Productivity, Organic Composition and the Falling Rate of Profit: A Reply, Bulletin of the Conference of Socialist Economists, 6 (1973).

36. Susan Himmelweit, The Continuing Saga of the Falling Rate of Profit: A Reply to Mario Cogoy, Bulletin of the Conference of Socialist Economists, 9 (1974).

37. Robert Brenner, The Economics of Global Turbulence (London, Verso, 2006), footnote, pp. 14–15.

38. Gérard Duménil and Dominique Lévy, The Economics of the Profit Rate (London, Edward Elgar, 1993).

39. Nobuo Okishio, Technical Changes and the Rate of Profit, Kobe University Economic Review, 7 (1961), pp. 85–99.

40. For Marx’s argument with a numerical example, see Capital, Volume One, pp. 316–317.

41. For more on this argument, with a simple numerical example of my own, see my book Explaining the Crisis, pp. 29–30.

42. For a general mathematical proof of this argument, see, for instance, N. Okishio, A Formal Proof of Marx’s Two Theorems, Kobe University Economic Review, 18 (1972), pp. 1–6.

43. See, for example, the arguments of Hodgson, Steedman, Himmelweit, Glyn, Brenner, and Duménil and Lévy.

44. This point was made by Robin Murray in a reply to an attempt by Glyn to use a “corn model” to disprove the falling rate of profit (see Robin Murray, Productivity, the Organic Composition and the Rate of Profit, Bulletin of the Conference of Socialist Economists, 6, 1973). It has since been amplified by the temporal single-system school of Marxist economists.

45. Robert Brenner; after rejecting Marx’s theory of the tendency for the rate of profit to fall on the basis of Okishio’s argument, then puts forward an account of his own which rests precisely on the way in which capitalists who have invested a lot in fixed capital in the past see their prices undercut and their profits threatened by capitalists who have invested more recently with cheaper or technologically more advanced fixed capital. Having accepted Okishio’s position on one page, Brenner provides his own refutation of Okishio a few pages later – and does not realise he has done so. See Robert Brenner, Economics of Global Turbulence, pp. 14–15 and 28–31.

46. Marx, Capital, Volume Three, p. 231.

47. Exceptional cases will be when completely new lines of production emerge with low organic compositions of capital but with a level of production and investment capable of absorbing a lot of accumulated surplus value. But these exceptions will soon be gripped by the tendency for their organic compositions to rise.

48. Marx, Capital, Volume Three, p. 241.

49. Marx’s argument is contained in Volume Three of Capital, pp. 239–240 and p. 252. Ever since Marx’s time there have been debates between various schools of Marxists who see the crisis as originating in the rate of profit or in the disproportion between different sectors of production and the rate of profit. In these passages Marx sees the tendency of the rate of profit to fall as clashing with the pursuit of the capital’s self-expansion, so producing disproportionalities and a periodic lag of effective demand behind global output. Confusion arises because Marx did not finish Volume Three of Capital, leaving behind a sometimes fragmentary manuscript which Engels tried to put into some order. It is then all too easy for people to quote from one page without relating it to what appears on other pages.

50. Rudolf Hilferding, Finance Capital (London, Routledge, 1981), pp. 93 and 257.

51. Otto Bauer was responding to an argument about the breakdown of capital from Rosa Luxemburg (discussed further on) which was very different to that of Henryk Grossman.

52. Henryk Grossman, The Law of Accumulation and the Breakdown of the Capitalist System, (London, Pluto, 1992), p. 76. See also Rick Kuhn, Henryk Grossman and the Recovery of Marxism (Champaign, IL: University of Illinois Press, 2006), pp. 224–234. Grossman based his argument, in part, on a passage in Volume Three of Capital (p. 247), where Marx writes that, “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 decrease in the mass of profit, since the mass of employed labour power could not be increased and the rate of surplus value raised under the conditions we had assumed, so that the mass of surplus value could not be increased either.”

53. Henryk Grossman, The Law of Accumulation and the Breakdown of the Capitalist System (London, Pluto, 1992), p. 191.

54. See Rick Kuhn, Henryk Grossman and the Recovery of Marxism, pp. 138–148.

55. Henryk Grossman, The Law of Accumulation and the Breakdown of the Capitalist System (London, Pluto, 1992), p. 76. Also Rick Kuhn, Henryk Grossman and the Recovery of Marxism, p. 85.

56. See, for instance, Marx, Capital, Volume Three, p. 241.

57. Marx, Capital, Volume One, p. 360.

58. As above, p. 356.

59. As above.

60. For a very good presentation of this argument, see Marx’s Theory of Value, in Michael Kidron, Capitalism and Theory (London, Pluto, 1974), pp. 74–75.

61. K. Marx and F. Engels, The German Ideology, in Marx and Engels, Collected Works, Vol. 5, p. 52.

62. See John Bellamy Foster, Marx’s Ecology (New York, Monthly Review, 2000); Paul Burkett, Marx and Nature: A Red and Green Perspective (London, Palgrave, 1999).

63. Marx, Capital, Volume One, p. 177.

64. Marx, Capital, Volume Three, p. 792.

65. As above, p. 793.

66. Marx, Capital, Volume One, pp. 506–508.

67. Marx, Capital, Volume Three, p. 793.

68. F. Engels, The Dialectics of Nature, in Marx and Engels, Collected Works, Vol. 25, p. 461.

69. As above, p. 462.

70. As above, p. 463.

71. Marx, Capital, Volume One, p. 233.

72. Marx and Engels, Communist Manifesto, available at

73. There were a few exceptions in the 20th century, most notably Joseph Schumpeter in his Capitalism, Socialism and Democracy (London, Allen & Unwin, 1943), but they nearly always owed a debt to Marx for their approach, even while trying to adjust his findings to justify capitalism rather than damn it.

74. For this reason, Marx does not only describe the law of value as functioning in an abstract model of commodity production in Chapter One of Volume One of Capital, but also as it functions at a more concrete level through the interplay of capitals in the chapter Distribution Relations and Production Relations in Volume Three of Capital (pp. 857–859).

Last updated on 7 May 2021