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International Socialism, July/August 1975


John Ure

Marxist Economics (Part 2)

Capitalism as a System of Crisis


From International Socialism, No.80, July/August 1975, pp.23-26.
Transcribed & marked up by by Einde O’Callaghan for ETOL.


BECAUSE CAPITALISM is a system based upon the domination and control of one particular class, upon the transmutation of the means of making a living into capital, upon the domination of capital over people, of dead labour over living, it is a system which can brook no alternatives. It has had to destroy or absorb all other social systems in which it has come into contact in its quest for growth and expansion, but by doing so it has also destroyed the myth that society is something more or less than the collective endeavours of human beings. Marx expressed this memorably in the Communist Manifesto when he wrote:

‘The bourgeoisie cannot exist without constantly revolutionising die instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form was, on the contrary, the first condition of their existence under all earlier ruling classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all newly formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind.’

When Marx wrote this capitalism was still in its ascendancy, was still conquering new heights and sweeping all before it. In the sense that it was breaking down age old social rigidities, was developing the productive capacities of men and women, and was opening up real possibilities of adapting nature to useful social purposes never before dreamt of, capitalism could be said to have been in its progressive stage of development. That point has long passed.

Today the earth stands either as part of the capitalised world of the West or East, or as part of the underdeveloped world condemned to poverty and backwardness because it cannot buy its entry ticket into the world market as a producer, it cannot develop its industry for lack, not of need or of effort but of capital. Although these countries are inevitably subject to the operations of international capitalism the geographical spread of capital stops short of them. Instead the growth of capital has been within the already heavily capitalised regions of the industrialised world because that is where labour productivity is already greatest, that is where most surplus value can be produced, and that is where therefore the markets are.

But today also more and more of the system’s resources are used to maintain and safeguard what already exists rather than to continue its further expansion. The indications of this are widespread and well known. The increasing growth of State bureaucracies and agencies; the continued high level of arms and space expenditures; the waste of competitive advertising and other promotional devices to enable business to sell more; the army of workers employed on matters of financial control, supervision, coupon-clipping and every other aspect of ensuring an efficient realisation of surplus value as profits; and so on. One recent study of the US economy for 1970 estimates that, from capital’s own point of view, at least 60 per cent of output was unproductive – i.e. did not in itself contribute to the economic growth of the system.

Capitalism today is a system which has exhausted its historical progressiveness. If further expansions of it take place for limited periods they will not contribute anything to the further qualitative development of social history since the social basis of capitalism has already been well established. And further quantitative increases in wealth, far from leading to general improvements in social conditions, already very often produce deteriorations in welfare, in environmental pollution, in social disruption, in intensified alienation. Increases in wealth of course do not need to have these effects, but they almost always will given the class nature of distribution which is merely the opposite side of the coin to the class nature of production. So the quantitative expansion of capitalism in no way ensures social progress, although it does open up possibilities of united action by strongly-placed sections of workers and trade unions to extract from it social reforms. But the non-expansion of capitalism spells crisis which in turn ensures the inability of the system to concede reforms. A weak capitalist class faced with a strong working class will no doubt scrape the bottom of the reformist barrel for a far longer time than a strong capitalist class faced with a relatively weak working class, but in a prolonged or continuing crisis situation reformism is doomed. The cause of crisis in capitalism is therefore of vital concern to revolutionary socialists.

The Falling Rate of Profit

THE BASIC long run economic dilemma of capitalism lies in the fact that at every stage in its growth the value of production consists more and more of physical capital employed and relatively less and less living labour – the organic composition of capital rises. The total costs of production become enormous, which has the corollary effect of reducing the total number of independent capitals that can stay in operation. Only through the continued effort to increase the surplus value squeezed from a relatively (and often an absolutely) shrinking workforce can total profits keep pace with rising costs – ie can the profit per unit of invested capital, or the rate of profit, be kept up.

There are, naturally, a range of possible counter-acting factors to what Marx called ‘the tendency of the rate of profit to fall’. For example, anything which cheapened the cost of constant capital (ie machinery, raw materials, power, buildings, etc) such as the discovery of new, easily obtainable mineral deposits, or cost-reducing technical innovation in making machinery, or a favourable shift in the price of imports of capital goods, would boost profits. So also would anything which reduced the cost of variable capital (i.e. living labour) such as cheap food imports or technical innovation in the manufacture of consumer goods. Such events would reduce the portion of the working day spent reproducing the value of labour-power itself and therefore increase the portion of the working day spent producing surplus value. Marx called this increasing ‘relative’ surplus value. So a successful drive by management to push up the workspeeds or reduce manning schedules without loss of output – i.e. to increase the rate of exploitation or productivity of labour – would boost profits. So also would lengthening the working day or what Marx called increasing ‘absolute’ surplus value. But these counteracting factors are most likely to be the effect rather than the cause of profitability. Major technological invention and innovation, for example, does not arise, contrary to school myth, as a result of the studious observation of steaming kettles but rather as a result of massive infusions of cash into research and development projects in design offices, laboratories, test shops, and the like. It is in times of vigorous economic growth and prospects of high profits that such expenditures are seriously undertaken by modern capitals. Again under what circumstances is productivity likely to be rising? When rates of growth are high, and when therefore investment or capital accumulation is high. Should the accumulation of capital be interrupted, should the rate of growth falter, then the tendency for the rate of profit to decline will show itself more readily. And the greater the investment from the boom period, and therefore the greater the organic composition of capital, the more pressure there is on the rate of profit.

For each and every individual capital the compulsion to grow is dictated by competition from other capitals, but at the same time investment decisions by individual capitals to increase capacity, to modernise, to raise the organic composition of their capital structures, will only be taken if there appears to be a reasonable assurance of profits on that investment. If all capitals follow suit then a general condition must prevail to ensure that those profits do in fact appear: namely that there is an overall expansion in the system, that there arc growing markets in which the increased output can be sold. Should this condition not be fulfilled a profits crisis would appear in the form of an overproduction of goods (or of the capacity to produce those goods). Only by reducing prices could all the goods be sold, could the market be cleared – but that would inevitably mean a lower rate of profit, or possibly none at all. So the ability of the system to grow, its ability for example to provide employment for workers from underdeveloped countries or backward regions of Europe – i.e. its capacity to exploit a larger quantity of living labour – will determine for how long the average rate of profit in the system can be maintained.

The Basic Structure

THE HISTORY of capitalism has been one of periodic economic crises. When Marx began his analysis of the mechanisms within capitalism that produced fluctuations between boom and slump, between growth and crisis, he was dealing with a capitalism in which capitals were still relatively small, in which there was little direct economic state intervention and comparatively little waste production. We shall have to take account of these factors in any modern analysis of crises, but for the moment we can follow Marx in describing the basic structure of the system.

It was clear to Marx that almost all goods and services produced by capitalism could be classified into one of two types: those which aid further production directly (capital goods) and those which are made for consumption by people (consumption or wage-goods) and which aid production indirectly by keeping workers fit for work. Capitals will invest money into either type of production if there is a profit in it. An investment in a sheet-metal press, for example, may be aimed at the production of steel sheets to be sold to General Electric or Hoovers for the production of refrigerators. Or the press may be used in the production of the refrigerators themselves. Clearly the press is a capital good, not a consumption good, but is it employed in a capital goods industry or a consumers goods industry? Obviously, in the former situation it is employed in a capital goods industry because the output of that industry – steel sheeting – is a capital good itself used in the production of something else: namely refrigerators. In the latter situation it would appear that it is employed in a consumer goods industry because the output of that industry – refrigerators-is a consumption good for sale to the public. But suppose the refrigerator is for sale to a deep-freeze factory owned by Ross or Birds Eye. Then it becomes a capital good entering into the production process of frozen peas or fish-fingers. We need not tie ourselves up in knots. The point is simply that although we can divide most things into either capital or consumption goods, depending upon how they are used (and many can be used either way), it is clear that we can also talk about capital or consumer goods industries, and many factories can have their foot in both camps. Fords produces motor cars which can be sold to private motorists as consumption goods or to a company employing commercial travellers as capital goods. It matters not a hoot to Fords so long as somebody buys them.

This division can be used to clarify the workings of the economy as a whole. Marx classified all capital goods industries under what he called department one, and all consumer goods industries under department two. Now what happens to the output of these two departments? Since all industries need capital goods, even if they comprise only the bricks and mortar of an office, it follows that the output of department one enters all industries, whether they are in department one or two. And since all industries which employ anybody at all require consumption goods upon which wages and salaries are spent, then it follows that the output of department two also enters all industries. This can be illustrated by a diagram.

[ Diagram ]

According to how much of the output of department one (capital goods) goes back into department one itself, and how much goes into department two to produce consumer goods, will depend the system’s ability to expand. The output of consumer goods is limited by the input of capital goods into department two, which is limited by the output of capital goods from department one, which is limited by the input of capital goods into department one from department one! A growing and expanding capitalist system therefore requires the growth of department one production, and because, as we have already seen, growdi is central to die stability and even survival of the system, department one is crucial.

We can also identify two different types of process going on. On the one hand there is the production of goods, such as steel or refrigerators, and on the other there is the circulation of goods, the buying and selling or exchange process (remember Marx called goods produced specifically for sale or exchange ‘commodities’). The distinction is important because clearly the extraction of surplus value, the exploitation of labour, can only take place during the production process. Any additional surplus value a capital may be able to syphon from the market (the circulation process) by charging a price which is greater than the value of its product can only come out of the surplus value that was produced under and would have gone to, other capitals. In other words, there may be (and in practice always is) a redistribution of surplus value between capitals as a result of competition, but no additional surplus value can be created that way. It is the same with foreign trade. A country (or national capital) which is highly competitive may be able to get more than its share of world surplus value, in which case there is a net addition to that society’s wealth, but only at the expense of some other nation. Only in the production process is surplus value actually created. But the circulation process of buying and selling is absolutely necessary if that surplus is to be realised (ie turned into hard cash) as profit.


THIS CLASSICAL picture of the economy is therefore one of interdependence, with surplus value being produced by workers in all industries, be they capital or wage-goods industries, and capitals competing according to their relative sizes and strengths in the market (the circulation process) for the largest share of the total surplus value they can get. If we now adjust this picture to take account of the hugeness of modern capitals, and add to it the role of the state as consumer, producer and redistributor of surplus value by means of monetary, taxation and planning policies, we still have the same principle of interdependence, but with at least two new considerations of major significance. Firstly, the widespread nature of control exercised by individual capitals today, the amount of ‘economic space’ they occupy, increasingly unites under their single control both the supply of capital goods and consumer goods. Large capitals increasingly supply more and more of their own needs, and to this extent they replace the market mechanism with their own planned expansion or planned layoffs. This can considerably help to expose to public view the whole process of production and investment decision-making taken in industry, and the system as a whole, which were previously easily lost in the ideological mists of free markets. The consequences for political struggle are important. Workers who previously would suffer redundancy from their isolated positions of employment are better placed to appeal for solidarity from workers who work at different stages of the production process but who are now employed by the same capital. The demand for state aid and public control of one large capital is clearly more easily appreciated than in the case of innumerable small or medium-sized scattered capitals.

Secondly, whereas in the classical period the growth of the capital goods industry was dependent upon the growth of both departments one and two, and therefore its growth was synonymous with the growth of the total system, now department one can, in principle, grow as a result of state-induced and financed demand for purely waste production (e.g. arms). In this event the achievement of a small expansion of the total system (primarily in department one) is accompanied by a growing proportion of waste output, albeit necessary waste in terms of the system’s own logic. (N.B. Any expenditure which helps the system to survive will be, however grudgingly, accepted as ‘necessary’ by the trustees of capital despite the fact that it may not help the system to grow and is therefore economically ‘waste’. E.g. old age pensions, i.e. incomes for which there is no corresponding output, to provide consumption for which there is no forthcoming work, are economically wasteful in capital’s terms).

What is to stop this cycle of interdependency from continuing forever in a smooth upward spiral of growth? In purely theoretical terms it may be possible to construct a model of capitalism which went on expanding indefinitely, with a set of perfect balances between the outputs and inputs of the different departments of production, in which the long-run tendency for the rate of profit to fall was permanently offset by rising rates of exploitation and, more decisively, a steady increase in the size of the workforce capitals could employ and therefore exploit. In theory, department one could even live off itself, but in practice this would involve doing away with people – the ultimate theoretical expression of alienation!

There are however good reasons for dismissing the idea of some kind of capitalist perpetual motion machine, just as in the real world we can dismiss the idea of mechanical perpetual motion absent of friction. Firstly, as we noted earlier, the possibilities of capitalist expansion are limited to the economic-geographical space occupied by the already industrialised/capitalised regions of the world. The gap between the actual productive capacities of the underdeveloped areas and the productive capacities required for them to compete successfully for surplus value in the world markets and thereby be able to build up their capital is just too great, and is growing. That is why, for example, Arab oil money will seek investment in the already industrialised countries and not, in the main, in its political homeland. Secondly, the growth of fewer but larger capitals in the developed nations works in the direction of reducing, not extending, the proportion of the population employed. The problems of regional unemployment within the industrialised nations will grow, not decline, as the concentration of capital continues.

Thirdly, the actual operation of capitalism guarantees economic fluctuations from booms to slumps. When Marx outlined the basic structure of the system of his day he described its actual functioning as a cyclical motion. Starting the cycle with a period of investment – i.e. the expansion of department one which supplies investment or capital goods – the growth of the total system was triggered off as employment rose in department one, resulting in more people having more money in their pockets to spend. That in turn stimulated the output of consumer goods from department two industries, which in turn further stimulated the output from department one as the consumer industries themselves carried out investment programmes. Employment of both labour and resources would therefore rise in all industries until something like full employment had been achieved. At this point wages and other costs would rise as capitals competed for increasingly scarce resources. The degree to which costs rose would be determined largely by the technical problems involved in increasing production of those resources and by the commercial power of those capitals controlling the output of scarce resources. Capitals enjoying a monopoly control could exploit their market position to effectively ‘tax’ surplus value away from other capitals. At full employment levels there are certain shortages which capital will not be able to do much about, for example the supply of skilled labour-power. (N.B. Immigration rarely provides large quantities of highly skilled labour-power, although the very richest capitals may be able to attract certain categories of high skill, e.g. the ‘brain drain’ to the US during the 1960s). Lots of overtime, of course, results but the increase in absolute surplus value is partly reduced by the premium of overtime rates of pay which organised workers can achieve. Nor can the supply of larger and more complex pieces of machinery or buildings or generating capacity be turned on just like a tap. The result would be rising costs, including wages, which, because of the competition between capitals, could not be passed on in higher prices. Consequently profits would be squeezed leading to the postponement of future investment programmes.

The immediate effect is twofold: to reduce the levels of overtime and employment generally and thereby the earnings of workers; and to reduce the levels of demand by industry for stock, for new machinery, for new plant, etc. There emerges a gap between the productive capacity of the system and the quantity of goods and services which the system can profitably purchase from itself. Since everything which is not waste production has, in the long-run, to end up as an article of consumption, we can say that there is a gap between production and consumption. The cause of the crisis is not underconsumption because at full employment the high level of earnings will probably outstrip increases in production. The cause of the crisis is production beyond the capacity of the system to sustain it in the short-run, ie overproduction. Overproduction is the effect of unbridled, unplannable competition between capitals which is part of the very nature of capitalism itself – a system of mutually dependent but antagonistic capitals struggling for surplus value.

The Money Mechanism

BEFORE FINALLY modifying this cyclical movement in today’s terms there is an important monetary mechanism which is associated with the boom-slump tendencies. As capitals have grown in absolute size they have embarked upon larger and larger investment programmes which require finance. Still the most important source of finance remains profits ploughed back directly into capital, but also larger and larger borrowings from banks, trust funds, insurance companies, etc. have been used. Because these investment programmes are themselves the means by which innovation occurs, and innovation – be it in production techniques which lower costs, or new products which capture new markets – is a main weapon in the struggle for the division of total surplus value between capitals, all capitals of all sizes tend to increase their borrowings to finance investments during booms. But in the struggle for surplus value only a portion of capitals will be able to repay their loans out of their gains. Many others will have maintained their share, but only at the increased costs involved in those investments. Still others, and historically the smaller capitals, will have lost their shares and may default on their loans, in which case they either have to borrow further to cover their losses, or they go under as bankrupt. In either case the banks will not be able to recoup their lendings. Larger banks will balance these losses against their gains from larger, more successful customers, but smaller banks can easily find themselves under considerable threat in times of widespread financial failure by their small and medium-sized customers. In 1974 the Bank of. England had to rally over £1,000 million to the aid of such banks to prevent the possible collapse of entire sectors of the finance-capital structure.

The net effect of this process is to infuse more money into the system in times of boom, upon which credit is built up, only a portion of which is necessarily repaid out of the system during periods of recession or slump. This is one of the inflationary mechanisms of post-war capitalism. At each twist of the upward economic spiral the total money supply increases faster than output and therefore value of money tends to fall. Internationally the same credit-creating process operates, especially via the so-called Euro-currency markets (bank lendings, in European centres, of dollars, sterling, marks, etc to corporations, money speculators, and the like) which has the added volatility of not being directly under the control of any individual state. Euro-currencies rose in quantity from about $1 billion in 1957 to over $100 billion in 1972.

One important change in the operation of booms and slumps is the strategy adopted by large capitals. Their dominant position in the market enables them to push up prices during the booms to reap rich profits which buy them a ticket to ride through future recessions. They also have a preference against competition in the form of lowering prices which they fear can easily get out of control and can establish precedents which they would rather avoid in a period of general inflation – especially when they are unable to force down money wages and salaries. So even during periods of recession large capitals may push up prices to compensate for the falling off in sales.

State Economic Management

SINCE 1945 the state has intervened in the economy to replace the free operation of the cyclical motion of capital by conscious attempts at regulation. Before this change the pattern of cycles was profoundly influenced by the life-expectancy of the major items of capital equipment – large scale investment in new machinery and plant marking the beginnings of the new cycle. Such factors are not, wholly irrelevant today, but the state can both directly and indirectly influence the demand for capital equipment (e.g. directly by placing orders with private companies or offering tax relief on new investments) according to its assessment of the overall balance of the economy. By running budget deficits (i.e. spending more than was raised by taxation, state borrowing, etc.) during times of recession (i.e. mini-slump) the state tries to forestall major slumps. By increasing taxation during boom periods the state attempts to curtail excessive expansions (and thereby crises of overproduction).

The need to operate at full employment, or full capacity, levels of production is primarily the economic one that it is the most efficient, the least costly (per unit of output) way of operating either a single capital, or a collection of capitals which together constitute a national state capital. The political pressure from the organised working class to achieve full employment was certainly an important factor in post-war Britain, but far less so in West Germany, Japan or even the US. However there is an important difference between the need to operate at full employment and the ability of any one national economy to do so. Only when world production and world trade are buoyant do individual states have room to manoeuvre towards full-capacity working. When world growth slows-up or halts, as a result of rising costs eating into profits internationally, the inflationary consequences for the economy which continues to run at full capacity and full employment are to create balance of payments and exchange-rate problems. Deflation by the state becomes imperative. And that sparks off overproduction and profit problems. When that happens the immediate response of the state is to attempt a substantial shift of resources from wages and salaries to profits to relieve the immediate pressure upon capital. But this in no way solves the dilemma of spare capacity, of overproduction. The renewed expansion of domestic capital will in fact depend upon the revival of world export markets and rising real income at home resulting from increased overseas trade.

International Contradictions

AND THAT is the nub of the matter. While the capitalist world was proceeding through an expansion more or less synchronised in its constituent parts (i.e. West Germany, Japan, France, the US, etc.), crises within individual national economies were cushioned. But once a crisis of the world system occurs national recessions threaten to become prolonged periods of slump. And at work internationally are the same two contradictions in the system that operate at national levels. On the one hand there is the tendency for profit rates to fall, which can only be offset by the expansion of the whole system. On the other there is the problem of overproduction which such expansion leads to. Even ignoring the latter problem, we have seen that there are good reasons for doubting that capitalism could continue to expand fast enough – i.e. to create more opportunities for squeezing more surplus value out of more workers – to offset the tendency for the rate of profit to fall.

The key then for an understanding of the present period of crises has to lie in an understanding of the causes of post-war boom – in particular the role played by arms expenditures – and the contradictions which are bringing it to an end. Since crises are but part of the movement of capital itself the marxist view of the present and the future must of necessity involve a view of the past.

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