Marxism and under-consumption
By Tom O'Donnell
The current crisis is leading to a revival of interest in Marxism in general and in Marxist explanations of capitalist crises in particular. Even in Britain this occasionally reaches the commentary of the mass media. Unfortunately, the commentary is usually produced by non-Marxists who mangle ideas and reproduce only their own misunderstandings.
In particular, a persistent distortion of Marxist ideas is the notion that economic crises are caused by 'under-consumption'. Under-consumption is the process where workers are denied the full value of their expended labour-power in the production of commodities, and so cannot consume all the commodities produced in any economy.
The argument runs that this eventually causes an overhang of unsold commodities, leading to a sharp contraction in their production of by the capitalists, because they cannot realise a profit. It is frequently but incorrectly asserted that this is the Marxist theory explaining the cause of recurring capitalist crises.
At a factual level, the acid test of all theory, under-consumption cannot at all explain the global economic crisis of the early 1970s, which was characterised by a surge in prices, which is normally associated with rising consumption. An excess supply of commodities would lead to their being dumped on the market and falling prices. Similarly, the current crisis has been accompanied by rising global commodities' prices, where the rise in food prices in particular has been a major factor producing economic and political instability.
But it is also worth examining under-consumption from the theoretical level, because it is persistently offered as an explanation for crises.
Marxism and under-consumption
A crisis represents a change from a previous state. Therefore any explanation of crisis must identify the factors which have altered so that a crisis ensues. In Marxist theory, under-consumption falls at this first hurdle. This is because it rests on a constant, not a changing feature of capitalist production. The extraction of surplus value is inscribed in the capitalist mode of production. The workers never receive the full value of their expended labour-power.
Marx and his collaborators were persistent and explicit in demonstrating that under-consumption is a constant feature of capitalism, and in fact of all societies based on exploitation (the extraction of a social surplus would also be required for a prolonged period under socialism). As a constant feature, it cannot at all be the factor which explains periodic crises.
So, Engels argues
'But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes….It [explaining the crisis by reference to under-consumption- ed.] is like a mathematician attempting to explain the variation in the ratio between two quantities, one constant and one variable, not by the variation of the variable but by the fact that the constant quantity remains unchanged. The under-consumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which has long been recognised. But it tells us just as little why crises exist today as why they did not exist before.'
(Engels, Anti-Duhring, Part III: Socialism, III. Production)
Falling rate of profit
Marx identified what he designated 'The Law of the Tendency of the Profit Rate to Fall' as an inner law of capitalism. The importance of this law may be gauged by the fact he designated it as the specific expression of the progressive development of the social productivity of labour (which occurs throughout human history) under the capitalist mode of production. (Capital Volume III, Chapter 13).
Although there are countervailing tendencies, where capitalists attempt to increase their profits by a series of measures (cutting wages, increasing the pace of production, lengthening the working day for no extra pay, and so on), it is this inner law which causes the periodic crises of capitalism. The purpose of capital is its own self-expansion, but this is negated and periodically overwhelmed by the falling rate of profit.
The entire third part of Volume 3 of Capital is devoted to analysing the law of the tendency of the profit rate to fall. Here, Marx is explicit,
'…..the gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit, so long as the rate of surplus-value, or the intensity of exploitation of labour by capital, remain the same. Now we have seen that it is a law of capitalist production that its development is attended by a relative decrease of variable in relation to constant capital, and consequently to the total capital set in motion.'
There are two key points here. In reverse order to the Marx's presentation of them here (but not in Capital as whole), the first is that the development of capitalist production is accompanied by a rise in the proportion of constant capital, that, is of buildings, plant, machinery, intermediate goods (used in the production of other goods) and so on, and a fall in the proportion of variable capital, that is labour. The second is that this change in the organic composition of capital, where there is a growing proportion of constant capital, leads to a gradual fall in the rate of profit (so long as other factors, such as increased exploitation do not offset that). The rate of profit is the mass of profit as a proportion of the total capital employed. It follows that, even if the level of profits rises, as the total capital employed increases at a greater rate, then there is a tendency of the profit rate to fall.
Given that the purpose of capitalism is to expand capital, it is relatively easy to see why the law of the tendency of the profit rate to fall would lead to crises. But Marx goes further, arguing that the law shows the inherent barriers to and internal contradictions of the capitalist mode of production itself,
'that at a certain point confronts this development [increasing labour productivity] itself in a most hostile way and has constantly to be overcome by way of crises.'
Marx summarises it in this way,
'Production comes to a standstill not at a point where needs are satisfied, but rather where the production and realisation of profits impose this'
(Capital Volume III, Chapter 15, 3. Surplus capital alongside surplus population).
Marxism and crises
The present crisis appeared as if it were a banking crisis in 2007 to 2008, beginning in the United States. But a declining rate of profit leads to declining investment. Investment in the US economy had already begun to contract as early as 2006. Similarly, the Great Depression of the 1930s and the early 1970s crisis appeared as stock market and currency crises respectively. But in both cases, investment declined before the appearance of a financial crisis. OECD data shows that US investment first began to contract in 1969, well before the crisis.
Marx had foreseen this aspect of capitalist crises too. He argued that a proportion of financial capital begins to operate autonomously in the latter stages of a business cycle, concentrated in financial speculation. However, financial capital in general, including speculative capital, does not have a permanent life of its own. It is finally determined by the growth of productive capital, which comes to a halt when the consumption of wholesale goods ceases. Wholesalers provide intermediate goods for investment or for onward sale.
In Marx's words,
'This explains the phenomenon that crises do not first break out and are not first apparent in the retail trade, which bears on immediate consumption, but rather in the sphere of wholesale trade, as well as banking, which places the money capital of the entire society at the wholesalers' disposal'
(Capital Volume III, Chapter 18).
Capitalist crises are not caused by under-consumption, which is a constant feature of capitalism. Instead, an inner law of capitalism is the tendency of the declining rate of profit. This is a function of the changing organic composition of capital, where the increase in the social productivity of labour causes a rising proportion of constant capital and declining proportion of variable capital. At a certain point a declining rate of profit leads to a falling level of investment. This was the case in the 1930s, the 1970s and in the current global crisis. This is not at all negated by the appearance of the crisis as a financial collapse. The investment decline precedes the financial crisis and determines it, especially in relation to the contraction of financial speculation, which ultimately rests on productive investment and can only temporarily expand beyond it.
This can only be a brief outline of Marxist analysis of economic crises. There is evidently a growing interest in Marxist ideas, in part because policies based on all other explanations of the current crisis have failed. Readers are encouraged to participate in this growing revival of Marxist ideas by reading and discussing the original works.
References
Engels, Anti-Durhring
Marx, Capital Volume 3
By Tom O'Donnell
The current crisis is leading to a revival of interest in Marxism in general and in Marxist explanations of capitalist crises in particular. Even in Britain this occasionally reaches the commentary of the mass media. Unfortunately, the commentary is usually produced by non-Marxists who mangle ideas and reproduce only their own misunderstandings.
In particular, a persistent distortion of Marxist ideas is the notion that economic crises are caused by 'under-consumption'. Under-consumption is the process where workers are denied the full value of their expended labour-power in the production of commodities, and so cannot consume all the commodities produced in any economy.
The argument runs that this eventually causes an overhang of unsold commodities, leading to a sharp contraction in their production of by the capitalists, because they cannot realise a profit. It is frequently but incorrectly asserted that this is the Marxist theory explaining the cause of recurring capitalist crises.
At a factual level, the acid test of all theory, under-consumption cannot at all explain the global economic crisis of the early 1970s, which was characterised by a surge in prices, which is normally associated with rising consumption. An excess supply of commodities would lead to their being dumped on the market and falling prices. Similarly, the current crisis has been accompanied by rising global commodities' prices, where the rise in food prices in particular has been a major factor producing economic and political instability.
But it is also worth examining under-consumption from the theoretical level, because it is persistently offered as an explanation for crises.
Marxism and under-consumption
A crisis represents a change from a previous state. Therefore any explanation of crisis must identify the factors which have altered so that a crisis ensues. In Marxist theory, under-consumption falls at this first hurdle. This is because it rests on a constant, not a changing feature of capitalist production. The extraction of surplus value is inscribed in the capitalist mode of production. The workers never receive the full value of their expended labour-power.
Marx and his collaborators were persistent and explicit in demonstrating that under-consumption is a constant feature of capitalism, and in fact of all societies based on exploitation (the extraction of a social surplus would also be required for a prolonged period under socialism). As a constant feature, it cannot at all be the factor which explains periodic crises.
So, Engels argues
'But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes….It [explaining the crisis by reference to under-consumption- ed.] is like a mathematician attempting to explain the variation in the ratio between two quantities, one constant and one variable, not by the variation of the variable but by the fact that the constant quantity remains unchanged. The under-consumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which has long been recognised. But it tells us just as little why crises exist today as why they did not exist before.'
(Engels, Anti-Duhring, Part III: Socialism, III. Production)
Falling rate of profit
Marx identified what he designated 'The Law of the Tendency of the Profit Rate to Fall' as an inner law of capitalism. The importance of this law may be gauged by the fact he designated it as the specific expression of the progressive development of the social productivity of labour (which occurs throughout human history) under the capitalist mode of production. (Capital Volume III, Chapter 13).
Although there are countervailing tendencies, where capitalists attempt to increase their profits by a series of measures (cutting wages, increasing the pace of production, lengthening the working day for no extra pay, and so on), it is this inner law which causes the periodic crises of capitalism. The purpose of capital is its own self-expansion, but this is negated and periodically overwhelmed by the falling rate of profit.
The entire third part of Volume 3 of Capital is devoted to analysing the law of the tendency of the profit rate to fall. Here, Marx is explicit,
'…..the gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit, so long as the rate of surplus-value, or the intensity of exploitation of labour by capital, remain the same. Now we have seen that it is a law of capitalist production that its development is attended by a relative decrease of variable in relation to constant capital, and consequently to the total capital set in motion.'
There are two key points here. In reverse order to the Marx's presentation of them here (but not in Capital as whole), the first is that the development of capitalist production is accompanied by a rise in the proportion of constant capital, that, is of buildings, plant, machinery, intermediate goods (used in the production of other goods) and so on, and a fall in the proportion of variable capital, that is labour. The second is that this change in the organic composition of capital, where there is a growing proportion of constant capital, leads to a gradual fall in the rate of profit (so long as other factors, such as increased exploitation do not offset that). The rate of profit is the mass of profit as a proportion of the total capital employed. It follows that, even if the level of profits rises, as the total capital employed increases at a greater rate, then there is a tendency of the profit rate to fall.
Given that the purpose of capitalism is to expand capital, it is relatively easy to see why the law of the tendency of the profit rate to fall would lead to crises. But Marx goes further, arguing that the law shows the inherent barriers to and internal contradictions of the capitalist mode of production itself,
'that at a certain point confronts this development [increasing labour productivity] itself in a most hostile way and has constantly to be overcome by way of crises.'
Marx summarises it in this way,
'Production comes to a standstill not at a point where needs are satisfied, but rather where the production and realisation of profits impose this'
(Capital Volume III, Chapter 15, 3. Surplus capital alongside surplus population).
Marxism and crises
The present crisis appeared as if it were a banking crisis in 2007 to 2008, beginning in the United States. But a declining rate of profit leads to declining investment. Investment in the US economy had already begun to contract as early as 2006. Similarly, the Great Depression of the 1930s and the early 1970s crisis appeared as stock market and currency crises respectively. But in both cases, investment declined before the appearance of a financial crisis. OECD data shows that US investment first began to contract in 1969, well before the crisis.
Marx had foreseen this aspect of capitalist crises too. He argued that a proportion of financial capital begins to operate autonomously in the latter stages of a business cycle, concentrated in financial speculation. However, financial capital in general, including speculative capital, does not have a permanent life of its own. It is finally determined by the growth of productive capital, which comes to a halt when the consumption of wholesale goods ceases. Wholesalers provide intermediate goods for investment or for onward sale.
In Marx's words,
'This explains the phenomenon that crises do not first break out and are not first apparent in the retail trade, which bears on immediate consumption, but rather in the sphere of wholesale trade, as well as banking, which places the money capital of the entire society at the wholesalers' disposal'
(Capital Volume III, Chapter 18).
Capitalist crises are not caused by under-consumption, which is a constant feature of capitalism. Instead, an inner law of capitalism is the tendency of the declining rate of profit. This is a function of the changing organic composition of capital, where the increase in the social productivity of labour causes a rising proportion of constant capital and declining proportion of variable capital. At a certain point a declining rate of profit leads to a falling level of investment. This was the case in the 1930s, the 1970s and in the current global crisis. This is not at all negated by the appearance of the crisis as a financial collapse. The investment decline precedes the financial crisis and determines it, especially in relation to the contraction of financial speculation, which ultimately rests on productive investment and can only temporarily expand beyond it.
This can only be a brief outline of Marxist analysis of economic crises. There is evidently a growing interest in Marxist ideas, in part because policies based on all other explanations of the current crisis have failed. Readers are encouraged to participate in this growing revival of Marxist ideas by reading and discussing the original works.
References
Engels, Anti-Durhring
Marx, Capital Volume 3
http://www.socialistaction.net/Economics/Marxism-and-under-consumption.html
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