Part 3: The accumulation of capital
The purpose of this Part is to show the explanatory power of Marxist analysis in looking at the dynamics of capitalism, including Marx’s theory of crisis. Then we can investigate how far Marx’s crisis theory illuminates our understanding of the great Recession.
The laws of motion of the system affect all our daily lives profoundly. Having a basic grasp of these laws of motion helps us to understand how changes in social being produce changes in consciousness and thus to participate in the fight for a better society – socialism.
This is not an attempt to ‘prove’ the labour theory of value, as Marxists have been challenged to do over and over again. It is intended rather to show the dramatic effects that the operation of the law of value has on working people’s lives.
The economics profession as a whole has shown itself to be clueless and in denial in the face of the Great Recession, an event which could well serve to ruin the livelihoods of millions of working people all over the world. Marxism offers an explanation for the crisis, and a way forward from the chaos of capitalism.
This is in sharp contrast to economic orthodoxy which, at best, regards crisis as an accidental disturbance of production under capitalism. In the worst case, as we saw in the Introduction, official economists are prepared to swear blind that crisis is impossible, even after it has happened! By contrast Marx saw capitalism as a system which inevitably produces crisis. To understand why the system ‘breaks down’ from time to time, we need to know how it works the rest of the time.
Chapter 3.1: The problem of value
Marx begins his analysis in Capital Volume I with the commodity. The commodity is first of all a useful thing. That does not mean it has to be a material thing, as Marx makes clear. But use values are incommensurable. How do we compare apples with oranges?
Secondly it is an exchange value, which means it can be compared and exchanged with other commodities. To possess this quality of exchangeability commodities must possess a common property they share with one another – value. What does this common property consist of? Marx concludes that, “If then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour” (Capital Volume I, p.128)
This approach to the problem of value is daunting to the first time reader, as Marx himself recognised. We intend to approach the issues in a different way. When his friend Kugelmann raised the difficulty of his approach in 1868, the year after the publication of Capital, Marx replied as follows:
“The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.” (Marx-Engels Selected Correspondence, p.209)
This is our starting point:
- All societies have to work in order to live.
- All societies have to allocate the labour available to them according to their priorities.
- In a market economy this proportional allocation of labour and the products of labour are regulated through the exchange value of commodities.
- The exchange value of commodities is determined on average by the labour time required to produce them.
Socially necessary labour time
Corresponding to the twofold nature of the commodity is the twofold nature of the labour that produces it. Concrete labour produces specific use values, but use values are incommensurable. Marx shows that the substance of value is abstract labour. Abstract labour may be regarded as labour from the general pool of labour power available to any society. The magnitude of value is determined by the amount of labour time necessary to produce the commodity. Equal quantities exchange for one another. Marx goes on to qualify this at once:
“Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time…
“We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour time socially necessary for its production.” (Capital Volume I, p.129)
- To qualify our previous conclusion, the value of a commodity is determined on average by the socially necessary labour time involved in its production.
The amount of socially necessary labour time to make the commodity is proportional to its price. We are treating money here as the monetary expression of labour time. Labour is not consciously allotted to different purposes. The division of labour is implemented through private exchanges mediated with money.
Let us look at how the allocation of labour is determined through the exchange process under capitalism which is, after all, an unplanned system. How many commodities of each type shall be produced? How much labour time shall be allocated to the production of each? These matters are decided by the impersonal forces of the market. The exchange of commodities is not just a private matter concerning the owners of the commodities. In fact every individual act of exchange is subject to objective economic laws that go to shape the dynamics of the entire capitalist system.
Exchange is the way that a vast global division of labour is established under capitalism through the world market. Since capitalism is an unplanned system, too many of some sorts of commodities are continually being produced, so prices fall below their value in the glut. Too few are produced of others, so prices rise above their value with the shortage. How could it be otherwise, since nobody knows how much is the ‘right’ amount to fulfil demand at any point in time? So the capitalists just go ahead, get the commodities produced, and hope they can sell them. Some make fortunes, others fail.
Commodities are usually sold above or below their value, subject to the forces of supply and demand. Only accidentally or occasionally are they actually sold at their value. But value is the axis around which the day to day movement of prices oscillates. Marxists do not deny the importance of supply and demand. For us these surface forces are the executors of the fundamental laws of motion of capitalism identified by Marx. As John Stuart Mill put it, the palpitations of the waves upon the surface of the sea do not negate the fact that there is a sea level and that it varies according to the pull of the tides.
- The law of value is executed by the forces of supply and demand in an unplanned society where commodity production is universal.
What drives capitalism?
The establishment of this average socially necessary labour time is no abstract process outlined in books. In introducing the concept, Marx offers the following example:
“The introduction of power looms into England probably reduced by one half the labour required to weave a given quantity of yarn into cloth. The handloom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.” (ibid p.129)
The determination of value by the amount of socially necessary labour time means that the quicker the commodity can be produced, the less it will cost. The speed with which the commodities can be produced depends on the productivity of labour. The power loom wiped out the handloom weavers on account of its greater productivity.
The formation of the socially necessary labour time for weaving cloth predominantly by power looms was a huge and dramatic incident in the early history of the British working class movement. It was an event, stretching over decades, which caused the impoverishment and ruin of hundreds of thousands of handicraft workers and their families. And the determination of socially necessary labour time in this devastating and revolutionary fashion is a continuous process under capitalism, causing upheaval and destroying livelihoods as it goes on.
What are the mechanisms driving this apparently impersonal operation of market forces? They are twofold: the need for the capitalists to exploit the working class more and more effectively; and the impulsion caused by competition between the capitalists themselves. As we shall see these processes are interrelated.
- Capitalism is driven by competition between capitalists and by the need all capitalists feel to exploit their workers more effectively.
Chapter 3.2: Exploitation
Exploitation and class society
All societies, as Marx reminded Kugelmann, have to work for a living. All societies have to allot the products of the total labour among their members. Marx calls the labour required to produce the goods that make up the subsistence of the toilers necessary labour.
When the productivity of labour rises sufficiently to produce a surplus over and above the subsistence needs of the population, the question will be posed: who is to enjoy this surplus? The ruling class in all forms of class society is that section of the population that grabs and appropriates the surplus. Exploitation in all forms of class society is nothing else but the extraction of surplus labour by the ruling class from the toiling and exploited classes. Under capitalism this exploitation is hidden behind a veil, a veil that Marx was committed to pierce:
“Capital has not invented surplus labour. Wherever a part of society possesses the monopoly of the means of production, the labourer, free or not free, must add to the working time necessary for his own maintenance an extra working time in order to produce the means of subsistence for the owners of the means of production, whether this proprietor be the Athenian devotee of the good and the beautiful, Etruscan theocrat, Roman citizen, Norman baron, American slave owner, Wallachian boyar, modern landlord or capitalist.” (Capital Volume I, pp.344-5)
Marx cites the Reglement organique written by the boyars (landlord class) of what is now Romania to show that exploitation was central to their class society and to any class society. The Reglement was a kind of rule book specifying how much corvée (an obligation to perform unpaid labour) must be performed by the peasantry. The ‘beauty’ of this document, from Marx’s point of view, is that the principle of exploitation is spelled out and transparent. As he points out in the passage above, the ruling class in all forms of class society legitimises its exploitation through its ownership of the means of production. One difference between capitalism and the rule of the boyars is that in the latter case the right to snaffle unpaid labour from the peasantry is written down in a book!
“The comparison of the greed for surplus labour in the Danubian Principalities with the same greed in English factories has a special interest, because surplus labour in the corvée has an independent and palpable form.” (ibid p.345)
“The necessary labour which the Wallachian peasant does for his own maintenance is distinctly marked off from his surplus labour on behalf of the boyar. The one he does on his own field, the other on the seignorial estate. Both parts of the labour time exist, therefore, independently, side by side one with the other. In the corvée the surplus labour is accurately marked off from the necessary labour.” (ibid p.346)
In practice the Reglement allowed for unlimited exploitation. “The 12 corvée days of the Reglement organique cried a boyar drunk with victory, amount to 365 days in the year.” (ibid p.348)
In all forms of class society the wealth (mass of use values) is produced by the toilers. The product of their labour divides into necessary labour (labour that goes to their subsistence) and surplus labour (the fruits of exploitation enjoyed by the ruling class).
We shall return to the specific form of exploitation of the working class later.
- Exploitation is a common feature of all forms of class society.
- It involves a division in the labour performed by the exploited class into necessary labour for their own maintenance and surplus labour, appropriated by the ruling class.
Workers and peasants
There are obvious differences between those who work for a wage under capitalism and the wretched Wallachian peasantry. We can assume that the extraction of a surplus from the peasants by the boyars was closely accompanied by the threat of physical force. Exploitation certainly does take place under c apitalism. In contrast to pre-capitalist class societies it need not in principle be accompanied by extra-economic compulsion. It classically occurs through what appears to be a contract over wages freely entered in to by both parties, as with other relations under capitalism. Exploitation happens through impersonal market forces.
That is the theory. In practice the capitalist class has never hesitated to use force when it suits their interests. Marx explains that the process of primitive accumulation examined below, the creation of the modern working class, “is written in the annals of mankind in letter of blood and fire.” (Capital Volume I, p.875) The dawn of capitalism also saw an obscene florescence of outright slavery as the direct counterpart to the emergence of wage labour. And capitalism created the world market through the colonial exploitation of three continents.
The capitalist state does have has a role in guaranteeing the profits of the capitalist class. “The modern representative state,” according to Engels, “Is an instrument of exploitation of wage labour by capital.” (The origin of the family, private property and the state, p.168) The state guarantees the rights of private property, which disproportionately benefits the capitalists, who own much more property than the workers. The state may intervene in the wage bargaining process, for instance to enforce a minimum wage or to pass anti-union laws. But the worker is usually exploited through the wages contract, without the direct intervention of the state.
It is actually this asymmetry of ownership that makes the wages contract a one-sided affair. The capitalist class, like every ruling class before it, has a monopoly over the means of production.
How this situation came to pass is a long story. Marx calls this process primitive accumulation, the accumulation of the preconditions for capitalist production. This consists on the one hand of the piling up of fortunes in the form of money. The Wallachian boyars, of course, measured their wealth in land.
Secondly primitive accumulation involves the complete separation of the toilers from independent access to the means of production. In the case of peasants, that means the loss of their own plot of land. The workers then have no option but to labour for a wage for the capitalist class, who have progressively acquired a monopoly in the means of production.
The capitalists own the factories, mines, farms and offices, the means of making a living under capitalism. The wage workers are formally free. Unlike the Wallachian peasants, they don’t have to work for a particular boss. The peasants in Romania were serfs, regarded as being as much an appurtenance of the land as a hedgerow, and their unborn children were regarded in the same light. We ‘free’ wage workers rightly see this as a monstrous form of slavery. But, as we can see from Marx’s description, the peasant household has access to its own field. We can assume that, despite the insatiable exactions of the landlords, in normal times the family can feed and clothe themselves at a modest level. Barring famines, their livelihood is more secure than that of a wage worker. Unemployment is not a threat; the word doesn’t even occur in their lexicon.
The difference between workers and peasants is that the workers are ‘free’ in two senses; they do not have to work for any particular capitalist. And they are free from any share in owning the means of production. They have no choice but to work for a capitalist, since the capitalists between them monopolise the means of production.
- Unlike peasants, workers are free in a twofold sense; first they are not obliged to work for a particular capitalist.
- Secondly, since they have no right of access to the means of production, they have to sell their labour power to a capitalist in order to maintain themselves.
Chapter 3.3: The case of Henry Ford
We shall illustrate the dynamics of capitalism by looking at the history of a man and a firm – Henry Ford. We are fortunate in being able to make use of Upton Sinclair’s book The Flivver King. The Flivver was a popular name for the Model T Ford which, together with the Volkswagen Beetle, was the most iconic and important car of the twentieth century. Sinclair wrote his book in 1937 as part of a drive to unionise Ford Motor Co. Although the characters in the book such as Abner Shutt, his family and neighbours, are fictitious, Sinclair drew his information on Ford-America from the public domain. It is not only accurate but sharply observed, informed as it is by a socialist perspective.
Workers are told they are paid for the work they do. After all, they are free agents. If they don’t like the boss, they can collect their cards and go somewhere else. There seems to be no exploitation in the wages contract. If you work overtime, you get paid more for more work. If the firm falls on hard times and has to impose short time working, you will lose money. If you are paid for piece work, the harder you work the more you get paid. What could be fairer than that?
Marx described the standard of living enjoyed by the exploited in class society as their means of subsistence. Does this apply to the wages that workers earn in capitalist society as well? Marx rooted the exploitation of wage labour in the fact that, despite appearances, workers are not actually paid for the labour they perform. They are paid for their labour power, their subsistence:
“We mean by labour power, or labour capacity, the aggregate of those mental and physical capabilities existing in the physical form, the living personality, of a human being, capabilities which he sets in motion whenever he produces a use value of any kind.” (Capital Volume I, p.270)
So the capitalist buys a capacity, not a predefined lump of work. What does he get for his money? He gets labour. Labour is the use value of labour power. How much labour he gets out of that capability is up to him. Like the Wallachian boyar, he is forever thinking up ways to squeeze more out of this labour power. That drive, and the resistance to it, forms the central thread of much of the remainder of this narrative.
Through most of Capital Volume I Marx assumes that workers are paid by the day, though he carefully examines other forms of payment such as piece work in Part Six: Wages. He does so for two reasons. The first is that most British workers in the nineteenth century were paid by the day. The second reason is that, whatever the form of wages such as payment by results, they really represent a subsistence for the workers.
In comparing the British factory workers of his time with the Romanian peasant, Marx uses the following example to show how the identical process of exploitation is going on:
“Suppose the working day consists of 6 hours of necessary labour, and 6 hours of surplus labour. Then the free labourer gives the capitalist every week 6 x 6 or 36 hours of surplus labour. It is the same as if he worked 3 days in the week for himself, and 3 days in the week gratis for the capitalist. But this is not evident on the surface. Surplus labour and necessary labour glide one into the other. I can, therefore, express the same relationship by saying, e.g., that the labourer in every minute works 30 seconds for himself, and 30 for the capitalist, etc.” (ibid pp.345-6)
In Marx’s hypothetical example above the worker works 6 hours ‘for himself’, that is to reproduce values sufficient to be exchanged for money equivalent to his wages. He then works 6 hours in the 12 hour day he works for 6 days a week to produce surplus labour. Under capitalism this surplus labour is called surplus value. The rate of surplus value, the rate of exploitation, in this case is 100%. As we shall find out later on, not all this goes directly to the capitalist who directly employs the workers. It goes to feed the entire class of exploiters.
The process of exploitation is veiled. Henry Ford didn’t wave a copy of the capitalist equivalent of the Reglement Organique at the workers like a Wallachian boyar. All we see in the factory of the Henry Ford Motor Co. is cars coming off an assembly line. In fact some cars are sold so as to pay the workers’ wages and more cars are sold to be turned into surplus value. This is how the workers are paid for their subsistence. For part of their working day, working hour, working minute or for any piece of work they perform they are in effect working for themselves. The rest of the time they produce a surplus for the boss class, surplus value.
- Whatever the form of appearance of the wages contract, workers are not paid for the work that they do but for their labour power.
Subsistence and class struggle
What does subsistence mean in this case? The subsistence requirements of an American worker working for Ford are certainly different from those of a Wallachian peasant. The Shutts, at one point in Upton Sinclair’s narrative, are a four car household. In fact this was the only way they could get around Detroit at the time. Cars were a necessity, which is not to say that every working class household could afford one. Sinclair’s book is full of incidents where, in hard times, the car has to be sold or is repossessed.
Marx of all people was least inclined to ignore the class struggle. He knew that workers aspired to share in the greater and greater quantity of wealth they were creating. “In contrast, therefore, with the case of other commodities, the determination of the value of labour power contains a historical and moral element.” (ibid p.275)
Upton Sinclair records the fact that in January 1914 Henry Ford introduced a minimum wage of $5 per day for his workers. Sinclair notes that, so far from being a unilateral act of philanthropy, Ford was grappling with massive problems of absenteeism and labour turnover, caused in large part by the relentless speedup imposed at the Ford plant. Sinclair also tells us of the regime of spies and busybodies that were part of the Ford way of life at Highland Park. The book recounts the daily struggle for a decent existence by the Shutt family and their fellow workers. For instance in 1930 when Henry Ford magnanimously unveiled his plan to raise the basic wage to $7, “There were only a few soreheads to point out that since Henry had established his five-dollar minimum, sixteen years back, the cost of living in the Detroit area had nearly doubled, so that the new seven-dollar wage was far less than the old one had been.” (Sinclair p.73)
American workers at this time were the most prosperous in the world. Yet the workers at Ford were still scrambling to keep up with the cost of living. Savings they built up in good times disappeared during layoffs and recession. Workers in the USA were still being paid a subsistence, though with “a historical and moral element.” (Capital Volume I, p.275)
Meanwhile Henry Ford, who Abner Shutt had first encountered as an enthusiast trying to build a horseless carriage in his neighbourhood workshop, had become a billionaire, the richest man in the world. And he had done so from his workers’ unpaid labour.
- Wages paid for the workers’ labour power do not just provide a bare physical subsistence, but contain a historical and moral element.
Ford and socially necessary labour time
The law of value states that the value of a commodity is determined on average by the amount of socially necessary labour time involved in its production. That means that value is inversely related to productivity. The more productive the workers are, the less value the commodities they produce will contain, and the less they will tend to cost. This law is executed by competition between capitalists. It was Henry Ford’s genius that he didn’t see the motor car as a toy for the rich, as so many of his contemporaries and rivals did, but as a tool for the masses. He had to sell cheaper than the competition. The best way to do that was to make his cars cheaper, by means of mass production techniques. Labour saving tools and machinery are so called because they economise on the expenditure of labour time, and therefore allow each commodity to contain a smaller amount of value and to cost less.
“In 1909, before the assembly line method was introduced, just over 12,000 Model T Fords were sold at around $950 each; by 1916 sales had risen to 577,000 while the basic price had fallen to $360. This achievement was partly a result of pronounced economies of scale of speed (the average time for assembling a chassis falling from 12.5 man hours in June 1913 to 1.5 man hours in January 1914). (Schmitz–The Growth of Big Business in the United States and Western Europe, 1850-1939, p.63)
Schmitz talks of ‘economies of scale and speed’ (a term he borrows from Alfred Chandler). What does he mean but the coercive operation of the law of value? Why should the price of the Model T have fallen from $950 to $360 in seven years? Because it took much less labour time, socially necessary labour time, to produce one.
Writing of the panic of 1907, Sinclair observes, “It cut down the Ford sales slightly, but not much, for this new product was more and more wanted, and among the hundred million people of America there are always some who can buy what they want. Henry Ford, planning tirelessly, would find new ways to give it to them more cheaply. In the year after the panic he produced 6,181 cars, a little over three per worker; but within three years he was managing to get thirty-five thousand cars out of six thousand workers. (Sinclair p.21)
Here Sinclair calculates the effect of rising productivity on the price of the cars directly in labour time. One worker in 1910 is now producing nearly six cars in a year. The productivity of labour has doubled in three years.
- Raising the productivity of labour means that workers produce more use values in a given time.
- Since the value of the commodities is determined by the socially necessary labour time involved in their production, they will get cheaper as productivity rises.
The division of labour
“The work of assembling the flywheel magneto, a small but complex part, was put on a sliding table, just high enough to be convenient for the workers, who sat on stools, each one performing one operation upon a line of magnetos, which crept slowly by. In the old way, a man doing the work of making a magneto could turn out one every twenty minutes; now the work was cut into twenty-nine operations, performed by twenty-nine different men, and the time per magneto was thirteen minutes and ten seconds. It was a revolution
“They applied it to the making of a motor. Done by one man, it had taken nine hours and fifty four minutes. When the assembling was divided among eighty-four different men, the time for a motor was cut by more than forty percent.” (Sinclair p.26)
No doubt when Upton Sinclair penned this passage he was aware as to how strikingly it resembles the example given at the beginning of Adam Smith’s book, The Wealth of Nations. Smith showed how the division of labour in a pin factory means an enormous increase in the productivity of labour in making pins:
“To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business…could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.”
Then Smith outlined how the division of labour works:
“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations.”
Smith observed the effect at first hand in a small pin factory. The improvement in productivity was dramatic:
“Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day.”
We would expect the price of pins to fall as a result, since they are composed of so much less socially necessary labour time than before, just as the price of cars fell steadily as productivity improved in the motor industry. The other thing to note is that the workers become more and more productive as a natural result of the division of labour. Yet under capitalism the benefits accrue to the owners of the means of production.
- The division of labour raises the productivity of labour, but the benefits accrue to the capitalist.
Rising productivity and the car industry
The effects of enhanced productivity in the car industry were not confined to Henry Ford and his plant. At the dawn of motor production dozens, hundreds of enthusiasts were tinkering with prototype horseless carriages in sheds and workshops. If this reminds the reader of the early days of Silicon Valley, it should do. The transition from craft to mass production methods is a natural and normal part of the innovation process under capitalism.
In the UK alone 221 firms began motor manufacture between 1901 and 1905. S.B. Saul observes that 90% of these had left the industry by 1914. (The motor industry in Britain to 1914) The USA had a much bigger home market for cars and was a more advanced capitalist country by this time. The same process of the concentration of capital advanced there with seven league boots.
Later professionalisation of the trade meant the transition from amateur enthusiasts, such as Henry Ford had been in the beginning, to the production of relatively expensive motors by craft methods, till Ford’s mass production methods began to dominate the industry. What happened to the pioneers of car production? Unless they managed to find a niche as a sports or luxury model (The Model T was a very basic design, which made it easy to mass produce, and it was much ridiculed as a result.) they were bound for extinction. “One capitalist always strikes down many others”, as Marx says (Capital Volume I, p.929). Henry Ford’s advances in assembly line production struck down many aspiring motor manufacturers.
The rise in productivity made possible by assembly line techniques inevitably means that smaller and weaker laggard capitals fall by the wayside. They simply can’t keep up with the industry leaders and innovators. The scale of production inevitably rose with the vastly increased output from the new plants. By the 1930s the US auto industry was completely dominated by three mass production giant firms – Ford, General Motors and Chrysler. But though there were far fewer firms in the industry, the big three in Detroit still saw each other as rivals. Every Ford sold meant an American citizen who would not be buying a Chrysler or a GM car any time soon. Competition remained the driving force of the accumulation of capital.
“Henry Ford might insist, as he continually did, that competition was wrong, and that he did not believe in it; but the fact was that he was competing at every moment in his life, and would continue to do so as long as he made motor-cars. In a hundred different plants scattered over the United States efforts were being made to beat him. In the long run, the successful ones would be those who contrived, by one method or another, to get the most out of a dollar’s worth of labor.” (Sinclair p.27)
So this competition was not just a contest between capitalists as to who could make and sell cars cheapest. It was also at bottom, as Sinclair notes, a contest in squeezing more and more surplus out of the working class.
- Competition between capitalists produced dramatic increases in productivityand the scale of production, and falls in the price of cars.
Surplus value in practice
Where did Henry Ford’s profits come from? From his workers – where else could they possibly come from? The workers at Ford, like the peasants in Romania, were being exploited. That means that some of the value added in production went to reproduce the elements of their wages. And some of the value they added went to make Henry Ford rich. Surplus value is the unpaid labour of the working class.
Upton Sinclair did not have the information to work out the rate of exploitation at Ford. Business secrecy is protected precisely so such details won’t leak out. But the facts speak for themselves. At the beginning of the tale Henry Ford lives in the same neighbourhood as Abner Shutt. By the 1930s he is the richest man in the world, a billionaire.
In 1909, we are told, Ford was selling 12,000 cars at $950 each. Some money from those cars he sold went straight to pay the workers’ wages. Some went to pay for other expenses – the cost of depreciation on the plant, electricity, tyres upholstery and the rest. And some went into Henry Ford’s pocket. This was a surplus, just like that appropriated by Etruscan theocrats, Norman barons and the rest of them. It was surplus value. It was unpaid labour, the fruits of exploitation.
In the hypothetical example Marx used in comparing the exploitation of factory workers in Britain, he suggested that the workers worked six hours to produce the elements of their own subsistence and six hours in producing surplus value. There are two factors that veil the reality of this exploitative relationship: the first is that the nature of the wages contract suggests that the workers are being paid for their labour; in fact they are being paid for their labour power, for their keep.
The second is that (unlike the Danubian peasant) the wage worker doesn’t actually produce all the commodities that they buy with their wages. In the usual way they will specialise in producing a single commodity all day. Usually they will be a detail worker in the production process. Neither will they normally spend part of their time producing goods their boss will consume. They find themselves part of a vast worldwide division of labour imposed by the market, in which commodities produced by the workers of the world are all exchanged against money and pass from continent to continent.
What is the rate of surplus value in the UK today? From the government ‘Blue Books’ used long ago by Marx we can find data that, though rough and ready, can give us a clear idea of the rate of exploitation. We choose the year 2007 as the last set of statistics likely to be unaffected by the crisis. (Crises usually hit profits harder than wages.) All figures are at current market prices.
Gross Domestic Product £1,401.042m
Compensation of employees £744.857m
Surplus value £656.185m
The formula for surplus value is S/V, where S is surplus value and V is variable capital, the sum laid out by the capitalist on wages. Surplus value is derived simply by deducting employee compensation (which we identify as the wages bill for the country) from GDP. Everything apart from employee compensation counts as surplus value. In the figure for surplus value we have therefore included the following categories: Operating surplus, Taxes, Government supply, and a mixed, mysterious category called Mixed income, which is a little less than 6% of GDP for that year.
This gives a rate of surplus value of about 87%.
Assuming a working day of 7 hours, the workers work on average about 3 hours 45 minutes for themselves and 3 hours 15 minutes to produce surplus value.
(From United Kingdom National Accounts: Blue Book 2007, Office for National Statistics)
[Why include taxes as part of the surplus value? Here is the traditional Marxist justification for the procedure:
“‘Taxes!’ A matter that interests the bourgeoisie very much but the worker only very little. What the worker pays in taxes goes in the long run into the cost of production of labour power and must therefore be compensated for by the capitalist.” (Engels, The Housing Question, p.36)]
- The working class is exploited by the capitalist class, who extract a surplus from them.
- The form taken by the surplus extracted from the workers is surplus value, the unpaid labour of the working class.
- The worker also spends time on necessary labour, producing commodities that are sold to pay their wages.
Chapter 3.4: ‘Getting the most out of a dollar’s worth of labor’
Raising the rate of surplus value
As we have seen, in the battle to make more profits the capitalists need to compete against their rivals. They sell cheaper by making cheaper, raising the productivity of labour in the process. All the time they are engaged, as Upton Sinclair puts it, in the search “to get the most out of a dollar’s worth of labor.”
The extraction of surplus value gives us the basic anatomy of capitalism as a system of exploitation, as a form of class society. But, since the search for surplus value is never ending, it also provides us with the framework to analyse the dynamics of capitalism.
The rate of surplus value or rate of exploitation is given by the formula S/V, when S is surplus value and V is variable capital. For instance, when Marx gave the example of the British factory worker compared with the Romanian peasant, he suggested the former worked six hours for himself and six for the capitalist. In that case the rate of surplus value (S/V) would be 6/6 or 100%. How can the capitalists raise the rate of exploitation? Marx deals with two main methods: these are raising absolute surplus value and increasing relative surplus value.
“The surplus value produced by prolongation of the working day, I call absolute surplus value. On the other hand, the surplus value arising from the curtailment of the necessary labour time, and from the corresponding alteration in the respective lengths of the two components of the working day, I call relative surplus value.” (ibid p.432)
- The capitalists are impelled by competition among themselves, and by the need ‘to get the most out of a dollar’s worth of labor’, to increase the rate of surplus value, the rate of exploitation
Absolute surplus value
The search for absolute surplus value is dealt with magnificently in Chapter 10 of Capital Volume I, entitled The working day. If workers are paid by the day, as most were in the nineteenth century, then what could be simpler than for the boss to demand that they work more and more hours for their recompense? In terms of our earlier example, if the bosses manage to force the workers to work a 14 hour day instead of 12 hours, while still paying them the same daily wage then the rate of surplus value (S/V) rises to 8/6 = 133%.
As is often the case in the early stages of an industrial revolution there were masses of desperate people prepared to work for a pittance. No doubt bourgeois economists would put down the possibility of super-exploiting these workers by extending the working day without limit to the forces of supply and demand. The supply of labour exceeded the demand, so the ‘price’ of the workers fell.
In a sense they are right. Supply and demand is important, specially when it is you who are supplying yourself and being demanded (or not) by the bosses. Marx was very much alive to the opportunities provided by recession for the capitalists to try to drive wages below the value of labour power which, as we know, is a level ultimately decided by class struggle. Upton Sinclair was equally aware of this, as he shows in his book. Both men also knew that periods of boom and relatively full employment provided the working class with the best opportunity to advance the level of real wages.
Upton Sinclair does not deal with the production of absolute surplus value as a way of raising the rate of surplus value in his book. The length of the working day was taken as a given in early twentieth century America by most sections of the working class. Workers were by and large paid by the hour. But the main reason for its unimportance to the likes of Henry Ford comes from the obvious advantages of assembly line production, speedup and other techniques to raise the rate of exploitation.
That does not mean that the extraction of absolute surplus value has ceased in modern capitalism. We can all list the occupations where workers are expected to work all the hours to make up a living wage. The mere payment of wages by the hour does not rule out the setting of an hourly rate at such a low level that vulnerable workers are forced to work far longer than the norm established by the better organised sections of the working class.
The extraction of absolute surplus value does not require much initiative or entrepreneurial skill. All the employer needs is the whip hand over the workers. But it was a very successful means of raising the rate of exploitation in the early years of the British industrial revolution. In the end the decisive victory over this process of lengthening the working day was achieved by the British working class itself, pressing for the legal limitation of the working day.
Marx also observes that the capitalist enthusiasm for overworking their employees was in danger of killing the goose that laid the golden eggs. He quotes the Inspectors of Factories as advising that, “The Ten Hours’ Act, in the branches of industry subject to it has ‘put an end to the premature decrepitude of the former long hour workers’” (Capital Volume I, p.416)
- The capitalist gains absolute surplus value by making the worker labour longer for the same wages.
- That means the worker spends more time in producing surplus value and a smaller proportion of their labour time on necessary labour.
Relative surplus value
If the worker is paid by the day and we regard the working day as fixed for the time being, there is only one other way the capitalist can raise the rate of exploitation. Since the working day is divided into a paid part and an unpaid part, the capitalists must reduce the hours that the workers labour to produce the elements of their own maintenance. This will automatically increase the hours they produce surplus value. And the way to do that is to raise the productivity of labour.
The extraction of relative surplus value is a much more complex process than that of absolute surplus value. It is not a conscious outcome of the calculations of the capitalists. Marx says that in essence it consists in shortening the amount of time the workers labour to produce the elements of their wages. But, as we know, the workers do not spend time in the workplace producing all the things they need to subsist on in their natural form. So how does this process work? The impetus comes from the need for capitalists to compete with one another and thus to raise the level of productivity of their workers.
The outcome of increased productivity means that commodities are produced with less socially necessary labour time. In monetary terms they are cheaper. We now have to consider what the effect of cheapening commodities has on the economy as a whole. One possibility is that they are wage goods, commodities that by and large are bought by workers with their wages. If they are wage goods, what will happen when they get cheaper? Will the workers enjoy a higher and higher standard of living through the falling price of necessaries? Our answer is, ‘not necessarily’. Falling prices do not always afford the workers a rising standard of living. The issue is determined by the balance of forces between worker and employer, by the class struggle.
It is quite obvious that workers in advanced capitalist countries have made big gains in their standard of living compared with 200 years ago. There are many more goods in the notional basket of commodities that make up the elements of their maintenance than was the case in the reign of Queen Victoria. Many of these new wants were not even invented at that time. To be fair to Henry Ford, part of his vision was that ordinary working people, wage workers and small farmers, would be able to afford a car made by the methods of mass production he pioneered. It is also the case that for workers and farmers at that time their Model T Ford was not a luxury for riding out on Sunday. It was a necessity for getting to work or sending their crops to market.
- Relative surplus value is gained by making the worker labour more effectively, more productively, in a given time.
- This means that the worker spends more time producing surplus value and less time on necessary labour.
Raising the productivity of labour
Marx’s analysis of the extraction of relative surplus value in Capital remains the core of our analysis here. If productivity doubles throughout the economy then prices will halve. If we assume that workers’ living standards remain the same in real terms then, if they formerly worked four hours to produce the elements of their subsistence and four hours producing surplus, they now only need work two hours to produce the basket of goods they need to subsist upon. That means they can work six hours for the boss in an eight hour day. The rate of exploitation has jumped from 100% (S/V = 4/4) to 300% (S/V = 6/2).
Here is the classic position outlined by Marx:
“The cheapened commodity, of course, causes only a proportionate fall in the value of labour power, a fall proportional to the extent of that commodity’s employment in the reproduction of labour power. Shirts, for instance, are a necessary means of subsistence, but are only one out of many. The totality of the necessaries of life consists, however, of various commodities, each the product of a distinct industry; and the value of each of those commodities enter as a component part into the value of labour power…Whenever an individual capitalist cheapens shirts, for instance, by increasing the productiveness of labour he by no means necessarily aims at reducing the value of labour power and shortening, by as much the necessary labour time. But it is only in so far as he ultimately contributes to this result that he assists in raising the general rate of surplus value. The general and necessary tendencies of capital must be distinguished from their forms of manifestation.” (ibid p.433)
Just to emphasise the last point. The capitalist does not set out to reduce the labour time necessary to reproduce the elements of the workers’ subsistence. All he seeks is to steal a march over his competitors. Yet raising the rate of surplus value is the ultimate outcome of the capitalists’ acts. Marx does not derive the laws of motion of capitalism from the motivations of the capitalists. On the contrary he sees the motivations of the capitalist as a product of their position in bourgeois society.
- The production of relative surplus value is an unconscious process, driven by competition between capitalists.
- The overall result of this competition is to raise the productivity of labour and make commodities cheaper.
- This reduces the necessary labour time performed by the worker, and therefore raises the rate of exploitation.
Capitalists compete with one another. The overall result of this competition is that productivity rises and prices fall. Naturally this is a process that takes place unevenly in real time. The first capitalists who introduce a labour saving technique can sell the commodity at a price corresponding to the prevailing socially necessary labour time. This is set at the standard level of productivity then established within the industry. Since the innovators have actually had the commodity produced with less labour time (i.e. in principle cheaper) they can make a super-profit for a period of time by selling their goods above their individual value, at the prevailing industry norm.
As their competitors hasten to retool with the new technique, the value of the commodity (the socially necessary labour time required to produce it) will gradually fall to a new, lower average and the super profit will disappear. Thus the pursuit of a higher rate of profit is like chasing a will o’ the wisp.
Here is an example showing graphically how the value of a commodity is determined by socially necessary labour time in the longer term, and how raising the productivity of labour drastically reduces the value of the commodity and its monetary expression, price.
The first ballpoint pen was produced for sale by the Reynolds International Pen Company in 1945:
“The price was set at $12.50…In the early stages the cost of production was estimated to be around $0.80 per pen…By early 1946 (Reynolds) employed more than 800 people in its factory and was producing 30,000 pens per day”
Rival firms sprang up. So, “Reynolds introduced a new model, but kept the price at $12.50. Costs were estimated at $0.60 per pen.”…“Fortune reported fears of an impending price war in view of the growing number of manufacturers and the low cost of production.”…“By Christmas 1946 approximately 100 manufacturers were in production, some of them selling pens for as little as $2.98.”…
“In mid 1948 ballpoint pens were selling for as little as $0.39 and costing about $0.10 to produce. In 1951 prices of $0.25 were common. Within six years the power of the monopoly was gone for ever.”
This example is taken from Richard G. Lipsey-An introduction to positive economics, p.393, a standard economics textbook. Lipsey is an opponent of the labour theory of value. The whole of his book is intended to provide an alternative explanation of economic phenomena. Yet this example shows graphically how the law of value is the regulator of output and price under capitalism.
The search for super-profits not only generalises the use of new technology throughout the capitalist system; it also opens up new areas of the globe to capitalism. The conquest of new markets is usually associated with the reaping of super-profits, with a higher rate of profit. For instance when British capitalists began to export machine woven cotton to the rest of the world, local handloom weavers were wiped out because they could not compete on price. Locals in the rest of Europe, Asia, Africa and the Americas would compare the price of the imported cloth with prices associated with the productivity of handloom weaving and find the British products cheap.
This is the usual good fortune of industrial pioneers under capitalism. They can sell for a time at a price above the individual value of their product but below the norm established by the former level of productivity, the prevailing social value. Eventually the level of productivity associated with the new technology will become the norm all over the world and super-profits will disappear. This was a painful process that involved the destruction of the livelihoods of millions of handloom weavers all over the world. Even when the lower prices associated with the productivity of machine woven cloth became the norm, the sheer mass of profits from a market of the whole world made the Lancashire cotton magnates very rich. The result of this search for super-profits in new and distant markets binds the world together within the capitalist market.
- Capitalists compete with one another to make commodities cheaper.
- If they can sell their commodities cheaper as a result, they will make a super-profit for a time.
- Capitalists also try to make a super-profit by invading markets not yet completely subject to the laws of capitalism.
- The outcome of their endeavours is to extend the global reach of the capitalist system.
The logic of capitalism
This is how Marx explains the effects of this search for super-profits:
“On the other hand, however, this extra surplus value vanishes, so soon as the new method of production has become general, and has consequently caused the difference between the individual value of the cheapened commodity and its social value to vanish. The law of the determination of value by labour time, a law which brings under its sway the individual capitalist who applies the new method of production, by compelling him to sell his goods under their social value, this same law, acting as a coercive law of competition, forces his competitors to adopt the new method.” (Capital Volume I, p.436)
The net result of this competitive process, unknown to the competitors, is that commodities in general will be produced with progressively less labour time and therefore be represented with a smaller quantity of value. That is surely progress for humanity at least in principle, even if it is an unconscious result of the striving of the capitalists for super-profits.
In the twenty-first century we all take for granted many things that were no part of the Shutts’ subsistence basket in the 1930s. So what? The working class has gained some share in the enormous outpouring of commodities we have contributed to. We are more dependent than ever upon wage labour on account of the ruling class’s grip upon our livelihoods for us to make a living. The shackles of wage slavery have still to be struck off.
The motivation of the capitalists in searching for super-profits is not to raise the rate of relative surplus value but to steal a march on their competitors. The intention of the individual capitalist and the outcome of the working of the law of value are two completely different things. The law of value actually works through continual attempts by capitalists to negate its operation. The analysis of the production of relative surplus value is a classic illustration of the general position taken by Marx, that the laws of capitalism operate behind the backs of the individual economic actors, whether workers or capitalists:
“It is not our intention to consider, here, the way in which the laws, immanent in capitalist production, manifest themselves in the movements of individual masses of capital, where they assert themselves as coercive laws of competition, and are brought home to the mind and consciousness of the individual capitalist as the directing motives of his operations. But this much is clear; a scientific analysis of competition is not possible, before we have a conception of the inner nature of capital, just as the apparent motions of the heavenly bodies are not intelligible to any but him, who is acquainted with their real motions, motions which are not directly perceptible by the senses.” (ibid p.433)
- When the new technology and higher level of productivity associated with it are taken up generally within the industry, the super-profit will disappear.
- The laws of capitalism operate behind the backs of individual capitalists and independently of their will.
- The result of the search for super-profits is to raise the overall level of productivity and the global reach of capitalism.
Intensity of labour
The production of more absolute surplus value is achieved by making the worker labour for more hours for the same wages over the working day. The capitalist also strives to make the wage earners work harder in the time they are at work. “Increased intensity of labour means increased expenditure of labour in a given time” (ibid p.660).
To achieve this, the capitalist needs to control the labour process. As we have seen in the case of Ford, this is accomplished by mass production methods that turn the workers into an appendage of the machinery.
The principal ways the capitalists can make the labour of one hour worth more to them than before is by making the workers produce more use values in a given period of time; they do this mainly by making their workers supervise more machines and by speeding up the assembly line. This intensification of labour and the accumulation of capital that raises the productivity of labour through the mechanisation of the labour process are two processes that go hand in hand.
“There was always a clamor from the sales department to get more cars. When the plant was turning out a thousand a day, those who had the job in hand knew that by increasing the speed of the assembly line one minute in an hour, they would get sixteen more cars that day. Why not try it? A couple of weeks later, after the workers on the line had accustomed themselves to the faster motions, why not try it again?
“Never had there been such a device for speeding up labor. You simply moved a switch and a thousand men jumped more quickly. It was an invisible tax, like the tariff, which the consumer pays without being aware of it. The worker cannot hold a stopwatch, and count the number of cars which come to him in an hour. Even if he learns about it from the man who set the speed of the belt – again it is like the tariff in that he can do nothing about it. If he is a weakling, there are a dozen strong men waiting outside to take his place. Shut your mouth and do what you’re told!” (Sinclair p.27)
- The capitalists also strive to increase the intensity of labour, to make the workers perform more labour in a given time.
- Two classic methods of raising the intensity of labour are speeding up the assembly line and making the worker mind more machines.
Chapter 3.5: The dynamics of capitalism
The general formula for capital
Marx contrasted the circulation of capital with that of commodities under petty commodity production. The sellers in petty commodity production aim to exchange a commodity they own (and which they probably produced) for money. For their purposes this is simply an intermediate step. It’s stage one. They don‘t want to hang on to the money but to exchange it for another commodity. In effect they intend to exchange a use value they don’t want for one they do want. Money is just an intermediary. Characteristically they end up exchanging an exchange value they own for a commodity of equal value.
Marx labels this as a C – M –C exchange. He contrasts this with the circulation of capital. Let us assume capitalists start with money. Their intention is to end with money, more money than they started with. There is no point for them in exchanging a commodity worth £100 for another worth £100. But that is what the traders of commodities usually do in the C – M – C circuit. For the capitalists the exchange of commodities, and the production of those commodities, is purely incidental to the production of surplus value. So the circuit of capital is M – C – M’, where M’ is a greater sum of money than M with which the capitalist started.
As Marx often had occasion to point out, capital is not a thing. It is a social relation. Capital goes through different forms of existence in its circulation process. Let us begin our analysis with money capital. Whereas the boyars start with land as the basis of their social power, the capitalists begin with money. The capitalists lay out their money on means of production and labour power. Then production can begin. As we know the surplus value is actually generated in the production process by the labour power of the workers being set to work to produce necessary and surplus labour. It must then be realised, the value created turned back into the money form and the circuit completed.
But the necessary labour has not at the stage of production been translated into wages for the workers; nor has the surplus labour become surplus value jingling in the pockets of the capitalists. The firm will usually specialise in producing one or a narrow line of goods. Whether these be motor cars or ice lollies, they have to be sold in order for the values congealed in the commodities to be realised. The production of surplus value and its realisation are two acts separate in time and in place. There are no guarantees that surplus value that has been produced can be realised. Yet, till the commodities have been realised, the circuit of capital has not been completed and capitalist production cannot continue.
Purchase and sale represent the unity of two processes. Yet these two processes can be ruptured and become independent of one another. The result is crisis. As Marx puts it, “The independence of the two correlated aspects can only show itself forcibly as a destructive process. It is just the crisis in which they assert their unity, the unity of different aspects.” (Theories of Surplus Value Volume II, p.500)
This gives us the possibility of crisis. We shall follow this up in more detail in Chapter 1.7 Marx’s theory of crisis.
- Under capitalism the aim of the capitalist is to start with money and end up with more money.
- Capital performs a circuit: from money; to production; to commodities produced; to money once more.
- Surplus value must not just be produced. It also has to be realised through the sale of the commodity so that the capitalist can begin the process of exploitation again.
Constant capital, variable capital and surplus value
So far we have dealt with the determination of the value of commodities and the decisive role of the productivity of labour in this process. We have also dealt with the division of the working day (or working time generally) into paid labour and unpaid labour, surplus value. We have seen that the battle over this division is never-ending, the objective basis for the class struggle.
As we know, Upton Sinclair was not allowed to look at Henry Ford’s account books in order to establish the rate of exploitation. After all he was preparing a novel, whose whole purpose was to aid the union drive at Ford which, if successful (and it was), would curtail Henry Ford’s ability to extract more and more surplus value from his workforce without let or hindrance.
We postulated rates of exploitation such as 100% in the examples we have given. If we could give Henry Ford the right of reply, he would no doubt explode that his rate of profit was nothing like as high as we have suggested. And he would be right.
The division of the working day which gives us the rate of exploitation can be represented by V (variable capital) and S (surplus value). By variable capital we mean the money the capitalist lays out in wages. We work out the rate of exploitation with the formula S/V.
But the capitalist doesn’t just have to purchase the services of working class people before the production of surplus value can commence. Earlier we suggested a random list of other expenses Henry Ford might have to pay: the cost of depreciation on the plant, electricity, tyres, upholstery and so forth. So the overall rate of profit on capital outlaid will generally be lower than the rate of surplus value (rate of exploitation).
All these other costs apart from wages are regarded by Marx as constant capital. They are constant capital because they pass their value unchanged to the final product. Constant capital is dead labour. When we come to consider the value of the commodity, as opposed to the division of the working day, this can be divided into three parts: constant capital (C), variable capital (V) and surplus value (S).
This notion of constant capital is easy enough to grasp in the case of the tyres. Henry Ford pays the tyre manufacturer $50, or whatever they cost, and adds $50 to the price of the car. Theoretically he could sell cars with no tyres, and the customers could go out and buy tyres for $50. The tyres are the object of a past process of exploitation. The workers in the tyre factory performed paid labour and unpaid labour in making the tyres, just like Henry Ford’s car workers. Then the tyres are sold to Henry Ford at their value (on average). He makes no money out of buying tyres.
It might be more difficult for the reader to accept that the cost of the plant is also dead labour and does not produce a surplus for Henry Ford. Doesn’t assembly line production make car workers much more productive than engineers working in a shed, as was the case in the early days of the industry? Of course the assembly line workers produce more cars. But the cars are cheaper, because they contain less socially necessary labour time than motors produced under craft conditions. The workers are now producing more use values, not more exchange value. The same amount of labour time expresses itself in a greater mass of use values.
The assembly line was produced by workers who were exploited just like the Ford workforce. Then it was sold at its value to Henry Ford. Only the depreciation on the assembly line goes into the value of a motor car, not its entire value. If the assembly line cost $10 million and assists in the production of a million cars before it gives up the ghost, then we can say it adds $10 to the value of each car.
The Marxist way of looking at value as being composed of living labour (V + S) and dead labour (C) is not confined to ourselves. Living labour is the value added in the production process. Her Majesty’s Revenue and Customs use the same form of calculation when they send out bills for Value Added Tax in the UK. In assessing a motor manufacturer’s liability to pay VAT they may, as a first approximation, bill them for tax on the full sales price of the cars sold.
The car company’s accounts department will at once reply that the costs of tyres, glass, upholstery and all the other components they bought in are not value added. They will not use the expression ‘constant capital’, but that is the basis of their counter-claim. So they will supply copies of the invoices they paid for these items to HMRC, in effect arguing that they are items of dead labour that added no value in the production of cars. VAT is only levied on value added, that it on the new labour (value) added in the production process. And that’s official.
- The capitalist lays out money on constant capital, which passes its value unchanged to the final product.
- He also lays out variable capital to pay the workers’ wages.
- The value of a commodity may be broken down into constant capital, variable capital and surplus value.
The rate of profit
What is decisive in the considerations of the capitalists is not the rate of exploitation but the rate of profit – how much extra they get out compared with what they put in (invest). This is not just the lodestar of individual capitalists. It is a vital regulator of the capitalist system as a whole.
We have already had occasion to point out that the capitalist system is unplanned. How much capital equipment is needed at any point in time? Nobody knows. Nobody calculates. Still it is important for Henry Ford that, when he decides it would be profitable to increase the production of motors at his plant, he should be able to go to the marketplace and buy tyres, upholstery, wood for dashboards and whatever other components he needs in sufficient quantities and proportions to turn out more cars.
Likewise it was important for the workers who came to Detroit that they could be decently housed, clothed and fed. This didn’t happen automatically. Detroit at this time was a vibrant capitalist metropolis sucking in all manner of skills and resources to back up the fast-growing motor industry. How is this proportionality between the different inputs needed for capitalist firms to grow established? How do the use values needed for capitalism to reproduce itself as a system come into existence?
All these skills and resources were attracted to the Detroit area by the search for profit. Capital must reproduce itself. It must find the means to satisfy all its material needs in the marketplace. A vast division of labour is achieved entirely through people buying and selling. But when they are buying and selling, they are oblivious to the actual needs of society, which are unknown to them. They are all looking to their own advantage. Capitalists measure the advantage to themselves in profit, and naturally they look to their own rate of profit compared with that of other capitalist firms.
As we pointed out earlier, commodities are only sold occasionally and accidentally at their value. Usually they are sold at a price above or below their value. If supply exceeds demand, and as a result commodities are sold at a price below their value, this means the capitalists who sell them will have to take a cut in profit. If low profits persist, this can be taken as a signal that the capitalist is in the wrong line of business. Marginal capitalists in the industry are likely to drop away.
Likewise if demand in an industry is booming and capitalists in an industry are making bumper profits, then two things are likely to happen; first the incumbent capitalists will maximise output to the fullest extent to take advantage of the super-profits to be made. They will work their capacity to the utmost, take on more workers and offer overtime to those already on the books. They may plan to expand their output potential. Secondly other capitalists, particularly those that find themselves trapped in low-profit industries, will begin to think seriously about upping stakes and moving to where the serious money can be made.
So the regulator of the division of labour within an unplanned economy is the rate of profit. Low profits in a sector cause exit while high profits attract new entrants. Capital flows are the way in which proportionality is established in an unplanned economy. Naturally the working of these capital flows is as chaotic on the surface as the day-to-day movement of prices.
- Capitalists are guided in their investment decisions by expectations of profit.
- The rate of profit thus serves as a regulator for the capitalist system as a whole.
Chapter 3.6: How capitalism evolves
The accumulation of capital
Don’t think for a moment that Henry Ford spent all the surplus value extracted from his workers on himself, on fine living. He lived well, as Upton Sinclair testifies. But the majority of that surplus value was accumulated, ploughed back into production. Any capitalist has to decide whether to consume the surplus unproductively or to accumulate it, and in what proportions. This decision is presented here as a choice. But really the individual capitalist and individual firm don’t have much choice. They must accumulate or go under. That is the lesson Henry Ford taught his rivals.
Under capitalism there is no natural limit to the rate of exploitation. Nor is there any limit to the accumulation of capital under the system. There is an impulsion upon the capitalists to accumulate most of the surplus value. Thus they are continually raising the level of productivity and, potentially, making us all richer. This is important. Romania remains a desperately poor country. In part this is the heritage of the rule of the boyars. Feudalism did not develop the productive forces in the way capitalism does. Capitalism has a completely different dynamic from previous forms of class society. It is the dynamics of the system that we are trying to outline here.
We have already seen that, in the hunt for higher productivity, capitalists are forced to accumulate the lion’s share of the surplus value as capital rather than spending it on their personal consumption.
It is obvious to the casual observer that the transition from weaving cloth by handloom weavers to the general use of power looms consists of a progressive replacement of human labour power by machinery in the production process. The transition of the Ford Motor Co. from Henry’s shed to the giant River Rouge plant opened to make the Model A Ford in 1928 is an instance of exactly the same trend.
As a result the scale of production in a firm is likely to expand and the number of firms in an industry to fall over time. Marx calls this the concentration of capital. Rather than the small-scale competitive capitalism that typified nineteenth century capitalism, the system in the twenty-first century is dominated by giant firms. These still compete against one another for market share, but quite often this rivalry may be pursued in different ways from just competing on price. Attempts at product differentiation which can lead to an advertising blitz are just one example of a different form of competition between capitalists.
Alternatively, large corporations can use their financial muscle to buy their rivals out. Big firms that supply one another and become interdependent may also form networks. These in turn can solidify into alliances pitted against other capitalist networks. Informal networks can also turn into friendly mergers or provoke hostile takeovers of rival firms.
Centralisation of capital means the merger of capitalist firms, the concentration of ownership rather than production. Whereas the driving force of the concentration of capital is the ever-increasing scale of production and the rising minimum efficient scale needed to produce and sell competitively in modern business, the centralisation of capital derives from the advantages of joint ownership. Production may be divided into different plants separated geographically, but unified by a common purpose which is drawn up by a common management team.
- Raising the productivity of labour in an industry naturally produces a larger scale of production, bigger units of production and a smaller number of firms. This is called the concentration of capital.
- Capital also becomes centralised through links of ownership rather than production.
The organic composition of capital
Henry Ford achieved his victories over his rivals by spending first and most on machinery in order to raise the productivity of labour. So the proportion of his capital laid out on labour power (variable capital) compared with that invested in plant and machinery (constant capital) was falling as production became more capital intensive. The natural accompaniment to the raising of the productivity of labour under capitalism is therefore the increasing capital intensity of production.
Marx explains that this is a general tendency in capitalist production, “Every advance in the use of machinery entails an increase in the constant component, that part which consists of machinery, raw material, etc., and a decrease in its variable component, the part laid out in labour power.” (Capital Volume I, p.578)
Marx calls this process the rising organic composition of capital. Readers may find it intuitively obvious that the proportion of dead labour to living labour tends to rise over the history of capitalism – that twenty first century workers usually have more machinery behind their elbow than nineteenth century workers. But Marx is not just referring to the mass of constant capital compared to the number of workers. He calls this ratio the technical composition of capital. It cannot be computed because, just as use values are incommensurable, we cannot compare a mass of machinery etc. of different types with a number of workers.
The organic composition of capital is expressed by the formula C/V, where C is constant capital and V is variable capital. It is calculated in value terms. Since price is here the monetary expression of labour time the organic composition of capital is the value of constant capital relative to variable capital, or how much the capitalist lays out on them respectively. The increase in capital per worker is known in conventional economics textbooks as capital deepening. Here are the figures given in Angus Maddison’s Contours of the World Economy 1-2030 AD, (p.305) for the UK and the USA. All figures are in 1990 dollars.
Gross Stock of Machinery and Equipment Per Capita
1820 92 87
1870 334 489
1913 878 2,749
1950 2,122 6,110
1973 6,203 10,762
2003 14,291 32,240
These figures are, as we see, only a first approximation to the organic composition of capital. All the same they represent a triumphant vindication of Marxist analysis.
- The rising proportion of constant capital relative to living labour in the production process is called the increasing organic composition of capital.
- The increasing organic composition of capital is a fundamental trend in capitalist production.
The tendencies of capitalist production
Ford was progressively employing more and more workers as he grew to be an industrial giant. This is how the accumulation of capital proceeds. Marx deals with it in the long Chapter 25 of Capital Volume I: The general law of capitalist accumulation.
He opens the discussion by asserting that, “A growing demand for labour power accompanies accumulation if the composition of capital remains the same.” (p.762) Of course the accumulation of capital does not usually leave the composition of capital untouched. Theoretically the capitalists could open another wing to their plant or another plant in their firm with an identical organic composition of capital to the others and employing the same technology. Given the continual technical progress under capitalism, that is highly unlikely, except in a ‘mature’ or stagnant industry – and that is not where the biggest profits are to be made.
Though firms are likely to employ more workers as they grow, that leaves out of account the wider picture. Weaving firms employing power looms were no doubt taking on ‘hands’ in the early decades of the development of the new technology, but they were ‘displacing’ vastly greater numbers of handloom weavers. Nor was this process confined to the UK. Traditional handicrafts in India and elsewhere were laid waste by British machine-woven cloths with which the handloom weavers were incapable of competing. Handloom weavers were reduced to penury all over the world. The law of value is no mere theoretical construct. It strikes with the power of a hurricane.
Advances in productivity are an imperative under conditions of capitalist competition. They are expressed in a rise in the relative importance of machinery, in particular in the capital laid out by the magnates of industry. Ford’s early workshops could not possibly have competed with his own mass production plants a generation later. The accumulation of capital therefore is usually accompanied by “a relative diminution of the variable part of capital”, according to Marx (ibid p.772). Whether that leads to an absolute fall in the number of employed workers is uncertain. Marx goes on to explain how capitalism generates a reserve army of labour from its own dynamics.
Capitalism is an unplanned system. In this it resembles a creature with no brain, no central system for thinking and planning. The brontosaurus was such a creature. Unfortunately it is now extinct. In an unplanned system it is always possible that too little or two much might be produced. After all nobody knows how much ‘too little’ or ‘too much’ actually is.
Since the capitalists are actually interdependent, if too little is produced in one industry and too much in another that will cause problems for firms further down the supply chain. This dislocation could set off a more general crisis of the system if profits took a tumble. A crisis of overproduction occurs when capitalists cannot sell their commodities and therefore cannot realise the surplus value that has been produced. Under capitalism trade is not conducted by petty proprietors exchanging products for products for their own satisfaction but by capitalists who are only interested in profit. It is ultimately because production is not to satisfy human wants but to make profit for capitalists, that a crisis of overproduction is an ever-present possibility.
In a footnote to Capital, Chapter 4 (p.254), Marx highlights this confusion in the outlook of an apologist of capitalism:
“‘The inextinguishable passion for gain, the auri sacra fames,’ (accursed love of gold) ‘will always lead capitalists.’ (MacCulloch: ‘The Principles of Polit. Econ.’ London, 1830, p. 179.) This view, of course, does not prevent the same MacCulloch and others of his kidney, when in theoretical difficulties, such, for example, as the question of overproduction, from transforming the same capitalist into a moral citizen, whose sole concern is for use values, and who even develops an insatiable hunger for boots, hats, eggs, calico, and other extremely familiar sorts of use values.”
Crisis is inherent in capitalism because it is an unplanned system where production is for profit and not human wants. The purpose of this Chapter is to outline the dynamics of capitalism. We are mainly concerned with the long term trends rather than the fluctuations of boom and slump, which we shall deal with separately. To sum up these trends in a single phrase they are, “the abolition of the capitalist mode of production within the capitalist mode of production itself.” (Capital Volume III, p.569) Capitalism is preparing the material conditions for a higher mode of production – socialism.
- As it accumulates, capitalism naturally tends to generate a reserve army of labour.
- Capitalism naturally produces crises. This is because it is an unplanned system where production is for profit.
Tasks of the working class
But socialism will not emerge of its own accord. It must be fought for. Socialism can only come about by the destruction of capitalism, which has to be the conscious act of millions of working class people. What will cause this questioning of capitalism in the minds of the workers?
There was no revolution against the boyars in Romania, though the serfs lived lives that in many ways were incomparably poorer and more wretched than those of twenty-first century wage workers. Conditions were stagnant, and we can assume that consciousness stagnated as a result. How different is the capitalist system and the lives of the mass of workers who live under it! Capitalism is unprecedentedly dynamic and continually shakes up the lives of its wage slaves. That was the story of the Shutts who lived through the Great Depression of the 1930s, and it’s the same today. Capitalism is incapable of offering its workers a secure existence.
Since being determines consciousness, changes in consciousness are likely to be triggered in changed conditions. This book is being written as the world is dominated by the effects of a gigantic recession. Coming after a long period of relatively full employment and rising living standards for most workers in Britain and other advanced capitalist countries, this recession is bound to produce a profound questioning and criticism. Capitalism stands revealed as a system that squanders human and material resources and where the ruling class always strives to make the workers bear the burden of the crisis and other flaws of their system. It is hoped that this book will contribute to an understanding of the alternative and how to achieve it.
We have seen that the law of value acts as a natural force like a tsunami, disrupting and ruining people’s lives over and over again in good times and (specially) in bad. Capitalism has developed the productive forces enormously. It has taken us to the threshold of abundance, and then slammed the door firmly in our face.
Capitalism also develops a mass working class, who can and will act as its gravediggers. Even now, more than ever, millions of peasants, handicraft workers and small traders are being drawn into the maw of wage labour. There are now more than a billion wage workers. They, together with their families, outnumber the peasantry for the first time in the history of the world. They are an absolute majority of the globe’s population.
The working class, unlike the isolated peasantry of Wallachia, are concentrated together by the concentration of capital. The technology of mass communication developed by capitalism keeps them informed of movements elsewhere and helps them to plan their own resistance. They find that the small victories they win against the boss are achieved by unity in action. They are schooled in solidarity. The world’s working class, faced with the failure of capitalism, will increasingly turn to the ideas and programme of socialism.
- Capitalism is an unprecedentedly dynamic form of class society.
- Capitalism developed the productive forces, and so produced the conditions for a higher form of society – socialism.
- Capitalism also created a mass working class, who can and will carry through the socialist transformation of society.
The historical tendency of capitalist accumulation
What are the general tendencies of capitalist production in broad historical terms? Where are they taking us? Marx sums up his analysis in Chapter 32 of Capital Volume I, entitled The Historical Tendency of Capitalist Accumulation. After dealing with the process of primitive accumulation, he continues (ibid pp.928-9):
“As soon as the labourers are turned into proletarians, their means of labour into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialisation of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralisation of capital. One capitalist always kills many. Hand in hand with this centralisation, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the cooperative form of the labour process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economising of all means of production by their use as means of production of combined, socialised labour, the entanglement of all peoples in the net of the world market, and with this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated…
“The transformation of scattered private property, arising from individual labour, into capitalist private property is, naturally, a process, incomparably more protracted, violent, and difficult, than the transformation of capitalistic private property, already practically resting on socialised production, into socialised property. In the former case, we had the expropriation of the mass of the people by a few usurpers; in the latter, we have the expropriation of a few usurpers by the mass of the people.”
Chapter 3.7: Marx’s theory of crisis
The purpose of this Chapter is to look at Marx’s scattered writings on crisis and to try to find out what he actually said on the subject. Secondly we spend much of the rest of this book trying to test Marx’s interpretation of how capitalism accumulates, and how it stumbles into crisis, against the reality of the capitalist economy. We look in detail at the recent world economic crisis that began in 2007 and which we call the Great Recession.
As David Harvey remarks (The enigma of capital p.116), “There has been a tendency within the history of crisis theorising to look for one dominant explanation for the crisis-prone character of capitalism. The three big traditional camps of thought are the profits squeeze (profits fall because real wages rise), the falling rate of profit (labour-saving technological changes backfire and ‘ruinous’ competition pulls prices down), the underconsumptionist traditions (lack of effective demand and the tendency towards stagnation associated with excessive monopolisation).”
Harvey has omitted the disproportionality school of crisis theory associated with Hilferding, among others. Harvey responds to these controversies by retreating into eclecticism. To be fair, his book is not centrally concerned with the causes of the Great Recession and mainly pursues his own themes.
What is the ‘cause’ of capitalist crisis? We believe a consistent thread can be found in Marx’s writings. And the attempt to develop a coherent Marxist theory of crisis must be made. We cannot change the world unless we understand it. The reason we put ‘cause’ of capitalist crisis in inverted commas here is because much of the confusion as to the reasons for the boom-slump cycle comes from the different levels of causation that are at work.
- The cause of the crisis is neither an institutional tendency to produce too many consumer goods relative to capital goods or any other disproportionality inherent in the capitalist system.
- Notions of overproduction and underconsumption cannot explain the boom-slump cycle. They cannot tell us why the crisis breaks out when it does.
- Both the profits squeeze theorists and those who argue that the underlying cause of the crisis lies in the tendency for the rate of profit to fall agree that a decline in the rate of profit is fundamental to the onset of recession. They disagree as to why it has fallen. We investigate what has happened to the rate of profit later.
- We try to show that the underlying cause of crisis and the basic explanation for the cycle are movements in the rate of profit. These movements in turn can be analysed using Marx’s law of the tendency for the rate of profit to fall which manifests itself as a periodic overaccumulation of capital. Overaccumulation is the overproduction of capital.
Overproduction as the form of appearance of capitalist crisis
As is well known, the Communist Manifesto refers to a capitalist crisis of overproduction. Sometimes overproduction is referred to as the realisation problem. This means that the crisis manifests itself as capitalists being unable to sell goods that have already been produced. Overproduction, in other words, is not absolute but relative to the purchasing power of the population.
Now it is true that the Manifesto is not a major economic work of the mature Marx. In 1848 he had not yet developed the notion of labour power, for instance. But there is absolutely nothing wrong with the formulation of the Manifesto, as long as we understand that overproduction is the form of appearance of capitalist crisis. We can and do point to the paradox of idle workers confronting idle machines as the cause of want. This is a distinctive feature of capitalism, an ‘achievement’ no other social system can show.
“It is enough to mention the commercial crises that by their periodical return put on trial, each time more threateningly, the existence of the entire bourgeois society…In these crises there breaks out an epidemic that in all earlier epochs would have seemed an absurdity – the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.” (Communist manifesto, pp.7-8)
This is all very clear. But it is description, not explanation. It tells us what happened, not why it happened.
Engels has a very similar approach to crisis in Anti-Duhring. (This passage is reproduced in Socialism utopian and scientific.) “As a matter of fact since 1825, when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all the civilised peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. Commerce is at a standstill, markets are glutted, products accumulate as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of workers are in want of means of subsistence because they have produced too much of means of subsistence.” (pp.379-80)
- We argue that the crisis takes the form of appearance of a realisation crisis, of a crisis of overproduction. That means goods produced cannot be sold.
Underconsumptionist theories of crisis
What could be more obvious than to argue that, since the commodities cannot be sold, the root of the problem lies in the fact that the workers who produce them cannot afford to buy them? The working class is exploited in the scientific sense that they produce more values than they are paid in the form of wages. This is the logic of the underconsumptionist view.
Engels, in his chapter on ‘Production’ in Anti-Duhring, is a stern critic of Duhring’s underconsumptionist interpretation of capitalist crisis. He points out that the restricted consumption of the masses is a permanent feature of capitalism:
“But unfortunately the underconsumption 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. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they underconsumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while underconsumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;” (pp.395-6).
Exploitation is a feature of all class societies. So is underconsumption. By contrast to capitalism, all previous economic crises have taken the form of famines, of physical shortages of the means of subsistence. Only capitalism produces periodic crises of overproduction. Why is capitalism different?
It is quite true that workers can’t buy all the value they produce. Surplus value ends up, of course, in the hands of the capitalist class. This is just another way of saying capitalism is a system where production is for profit.
If the crisis were really caused by the ‘restricted consumption of the masses’ we would expect it to be manifested by an overproduction of consumer goods relative to capital goods. In fact this is by no means the usual case in actual capitalist crises. Most crises have actually begun in the capital goods sector. If the crisis were caused by underconsumption we would expect the workers to suddenly cease providing an adequate market for the capitalists, so triggering the crisis.
Actually workers’ living standards usually rise in the boom phase that precedes the onset of crisis. Their consumption falls as they are laid off as a result of the crisis, further shrinking markets. Their restricted consumption is thus a symptom of the crisis, not its cause.
- Underconsumption is a permanent condition of capitalism.
- It cannot therefore explain capitalist crisis.
Theories of crisis based on disproportionality
Capitalism is an unplanned system. Another theory of crisis is that the slump is caused by capitalist anarchy. Capitalist firms are dependent on one another. How much they produce depends on how much other firms produce. This is true of their inputs (of raw materials etc.) and for the sale of their finished products. But capitalist firms are unaware of their interdependence and regard themselves as independent, free spirited buccaneering outfits. Even if they became aware of their mutual interdependence, they would not be able to communicate this to other firms.
So capitalists can produce commodities in the wrong proportions. Marx investigated the problem of the reproduction of the material elements of production in Capital Volume II. Each capitalist is producing outputs that are inputs for other capitalists. National income consists of a circular flow of commodities, and every capitalist has to find the material components of production available in the marketplace. Definite proportions between the different sectors of production have to be established for this to happen. But of course the individual capitalist just takes it for granted that this will always occur.
How are these proportions established in practice? It is a central feature of capitalism that the system is unplanned. It is actually a permanent feature of capitalism that there is localised overproduction of some commodities and underproduction of others at the same time. Corrections are made after the fact, through falling prices and profits in the case of overproduction, and rising prices and profits in the case of scarcity. This in turn will cause capital flows into and out of those sectors. The question is – why should this continuous process lead to a generalised crisis?
It is true that in a horse race, if one horse trips that can bring the others down. But why should the horse trip in the first place? Surely the molehill (or whatever) is what we would say caused the accident? It is not just that the horses are bunched – competing with one another, yet dependent on the other horses keeping the right distance – that causes the collapse. Yet disproportion between different sectors is often presented a fundamental cause of capitalist crisis.
The problem of reproduction is particularly acute in the case of capital goods. One argument against the underconsumptionist school is that investment is the most volatile component of national income, not consumption. The boom-slump cycle is thus an investment cycle. Booms correspond to periods with high profits leading to high levels of investment, while slump is a period when profits collapse, leading to steep falls in investment.
“Just as the heavenly bodies always repeat a certain movement once they have been flung into it, so also does social production, once it has been thrown into this movement of alternate expansion and contraction. Effects become causes in their turn, and the various vicissitudes of the whole process, which always reproduces its own conditions, takes on the form of periodicity.” (Capital Volume I, p. 786)
Here Marx compared the economic cycle with the movements of heavenly bodies, such as comets. Once put in orbit for any reason they continue to circulate round their orbit with great regularity. Once a great volume of investment comes on stream at the beginning of an upswing, we can expect a mass of this investment to become obsolescent at about the same time later on. This will produce an investment cycle linked to the boom-slump cycle. We have the same problem as the astronomer who wants to find out how Halley’s Comet got into its present orbit. We are still not able to explain why capitalism goes into crisis when it does.
“To the same extent as the value and durability of fixed capital applied develops with the development of the capitalist mode of production, so also does the life of industry and industrial capital in each particular investment develop, extending to several years, say an average of ten years…We can assume that, for the most important branches of large-scale industry, this life cycle is on average ten years. The precise figure is not important here. The result is that the cycle of related turnovers extends over a number of years, within which capital is confined by its fixed component, is the material foundation for the periodic cycle…But crisis is always the starting point of a large volume of new investment. It is also therefore, if we consider the society as a whole, more or less the new material basis for the next turnover cycle.” (Capital Volume II, p.264)
All this is true, but it does not provide a fundamental explanation for the boom-slump cycle. We shall try to show later that the cycle is primarily caused by movements in the rate of profit, and that the profit cycle produces a corresponding investment cycle.
- Investment is volatile and its fluctuations are important in analysing capitalist crisis.
- Fixed capital may tend to be replaced in cycles related to the boom-slump cycle; but the periodicity and incidence of this investment cycle must itself be explained.
Marx and the tendential fall in the rate of profit
There is an impulsion on every capitalist to raise the productivity of labour. Though there are other ways he can do this, historically and in practice it has been crucial to put more and more machinery etc. behind the elbow of each worker in order that they can produce faster and cheaper.
To exploit the workers more effectively costs the capitalists more. More and more constant capital (plant and machinery etc.) is deployed for each worker. This will mean than more and more dead labour is used compared to living labour in the production process. But constant capital (dead labour) passes its value unchanged to the final product. Only living labour produces new values.
The proportion of the mass of machinery per worker is what Marx calls the technical composition of capital. What concerns the capitalist is how much dead labour costs compared with living labour.
The organic composition of capital measures the ratio of the value of living to dead labour in the production process. “By the composition of capital we mean…the ratio between its active and passive component, between variable and constant capital.” (Capital Volume III p.244) Marx adds, “The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it.” (ibid p.245).
There is a tendency for the organic composition of capital to rise over time in those branches of industry where labour saving equipment can be applied, and therefore in the economy as a whole. This is the fundamental reason for the tendential fall in the rate of profit.
Here is an illustration of the capital intensity of modern capitalist production, taken from a newspaper article (Mark Milner, Guardian April 17th 2007). The General Motors plant producing Astra cars at Ellesmere Port was to be revamped. The report stated that:
- The plant will employ 2,200 workers
- Productivity is likely to rise by 30%
- The plant will produce 180,000 cars a year
- Investment will be 3.1 billion Euros (round about £2 billion at the exchange rate at the time)
So each worker would produce nearly 90 cars a year on average. (Of course no worker produces a car single-handed. It is a team effort.) The machinery behind the elbow of each worker is getting on for £1,000,000!
This is casual and empirical but powerful evidence as to the correctness of Marx’s analysis of the dynamics of capitalism – the connection between rising productivity and a higher level of exploitation, the increasing scale of production and the greater mass of dead labour relative to living labour applied in the production process as the system develops.
Marx goes on to specifically link this rising organic composition with the tendency for the rate of profit to fall. “With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a rising organic composition of the total capital, and the direct result of this is that the rate of surplus value, with the level of exploitation of labour remaining the same or even rising, is expressed in a steadily falling general rate of profit…The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour.” (ibid pp.318-9)
The whole point about the investment in fixed constant capital is that it locks away the capitalist’s money for years. So the rate of profit is calculated on the total capital advanced, whether used up or not.
In Capital Volume III Marx wrote three chapters on The law of the tendential fall in the rate of profit. This law is also referred to in the Grundrisse, where Marx describes it as “in every respect the most important law of modern economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated” (p.748). This is not an isolated thought from an unpublished preparatory manuscript. In his economic manuscripts of 1861-3 he repeated this formulation almost word for word: “This law, and it is the most important law of political economy, is that the rate of profit has a tendency to fall with the progress of capitalist production” (Marx Engels Collected Works Volume 33, p.104).
We shall argue that Marx was right and that crisis in the post-War capitalist economy can be explained in terms of movements in the rate of profit, and ultimately by Marx’s theory.
Marx presents this tendency as a law. Different people use the word ‘law’ in different senses. Some scientific writers quite legitimately use the term to mean a statistical regularity. In this case there would be a law for the rate of profit to fall if we could observe the rate of profit falling continuously. We can’t. And Marx is quite clear that is not how the tendency for the rate of profit to fall operates in practice. For him a tendency is a force operating in a certain direction.
- The rising organic composition of capital produces a tendential fall in the rate of profit.
This force, in a dialectical way, actually unleashes contradictory forces that may tend to drag the rate of profit up. Marx mentions six counteracting factors to the underlying tendency for the rate of profit to fall.
The most important of these counteracting factors are increasing the rate of exploitation and cheapening the elements of constant capital. This is the case because both of these occur as a result of the tendency in capitalism to make labour more productive and commodities cheaper. Could these counter-tendencies indefinitely offset the tendency for the rate of profit to fall? The operation of these counter-tendencies will be tested in practice later on in this book.
We use the symbols used by Marx:
- C is constant capital
- V is variable capital, the amount laid out on wages by the capitalist
- S is surplus value, conventionally divided into rent, interest and profit.
- The rate of exploitation is S/V.
- The organic composition of capital is C/V.
- The rate of profit is S/(C + V).
Increasing the rate of exploitation
Let us assume that the worker works four hours to produce the elements of her own subsistence and four hours producing surplus value. As a result of new techniques, productivity doubles and the worker is now only working two hours for herself and six hours for the bosses. Her standard of living is unaffected – she can still buy the same bundle of wage goods as before. But there are limits to this process in increasing the rate of exploitation.
In mathematical terms the rate of exploitation is bounded by the new value added by the worker (V + S). As productivity continues to rise in the sector producing wage goods, S tends to increase towards (V + S), while V tends to zero. As long as constant capital continues to increase (C tends to infinity), the rate of profit must eventually fall.
Cheapening the elements of constant capital
The same tendency to raise productivity and reduce the relative price that prevails in consumer goods industries is also at work in the capital goods sector. Though the mass of constant capital per worker has risen enormously over time, the cost of each unit of constant capital will tend to fall. This fall in the price of constant capital will reduce the organic composition of capital, expressed in market prices. This is another important counteracting factor to the tendential fall in the rate of profit.
There is more capital at the worker’s elbow, but each unit of capital costs less because of rising productivity. The question is: can this indefinitely offset the tendency for the rate of profit to fall? Marx believed it could not. We later quote Alan Freeman’s work to show that the reason for falling profits in the USA is overwhelmingly because of the rising organic composition of capital.
Andrew Kliman’s Reclaiming Marx’s ‘Capital’: A refutation of the myth of inconsistency published in 2007 deals correctly with the interpenetration of the tendential fall in the rate of profit and the counteracting factors:
“In short, although the falling tendency of the rate of profit is ‘constantly…overcome’, the tendency is not nullified. It makes its presence felt, since it is only ‘overcome by way of crises.’ Recurrent economic crises, not a declining rate of profit over the long term, are what Marx’s theory actually predicts.” (p.31)
- Raising the rate of exploitation cannot indefinitely offset the tendency for the rate of profit to fall.
- If the organic composition of capital continues to rise, then the constant tension between the tendency for the rate of profit to fall and the counter-tendencies must eventually produce crises.
How the tendency manifests itself in practice
Marx’s analysis is actually subtler than many give it credit for. “There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time…We have seen how it is that the same reasons that produce a tendential fall in the profit rate also bring about an accelerated accumulation of capital and, hence, a growth in the absolute magnitude or total mass of the surplus labour (surplus value, profit) appropriated by it.” (ibid p.331) In Capital Volume III, Marx even referred to the law as a “double-edged law of a decline in profit rate coupled with a simultaneous increase in the absolute mass of profit, arising from the same reasons.” (ibid p.326)
So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In the end though, if the rate of profit continues to fall then the mass of profit must follow suit. This is what happened in 2006 on the eve of the Great Recession.
In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth’), each of which involves less and less labour time to produce, and so each has less value congealed within itself.
Secondly, the reader should bear in mind that, “we are deliberately putting forward this law before depicting the decomposition of profit into various categories, which have become mutually autonomous.” (ibid p.320) Rent, interest and profit, conventionally presented as the components of surplus value, all vary against one another and all follow their own economic laws. This is very important when we consider the actual onset of crisis.
Chapter 15 of Capital Volume III (The development of the law’s internal contradictions), provide the only complete explanation provided by Marx of boom and slump as part of a cycle and not, as underconsumption theorists would have it, as a crash coming out of a clear blue sky. Marx does discuss the realisation problem in Chapter 15. “The conditions for the immediate exploitation and for the realisation of that exploitation are not identical. Not only are they separate in time and space, they are also separate in theory. The former is restricted only by society’s productive forces, the latter by the proportionality between the different branches of production and by society’s power of consumption.” (Capital Volume III, p.352)
It is precisely at this stage in his analysis that Marx introduces the concept of overaccumulation. “Overproduction of capital and not of individual commodities – though this overproduction of capital always involves overproduction of commodities – is nothing more than overaccumulation of capital.” (ibid p.359)
He goes on, “There would be an absolute overproduction of capital as soon as no further additional capital could be employed for the purpose of capitalist production. But the purpose of capitalist production is the valorisation of capital, i.e. appropriation of surplus labour, production of surplus value, of profit.” (ibid p.360)
So overaccumulation is overproduction of capital, which manifests itself as overproduction of commodities. But too much capital is produced only in relation to profit-making potential. And this tendency produces an unseemly scramble among the capitalists for their chance to grab what profit there is.
“Concentration grows…since beyond certain limits a large capital with a lower rate of profit accumulates more quickly than a small capital with a higher rate of profit. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The so-called plethora of capital is always basically reducible to a plethora of that capital for which the fall in the rate of profit is not outweighed by its mass.” (ibid p.359)
So Marx sees no contradiction in raising the so-called realisation problem in the middle of a chapter dealing with the falling rate of profit as the underlying cause of capitalist crisis. It is precisely the fall in the profit rate that produces the crisis, and overproduction (overaccumulation) is its form of appearance.
To put it another way the fact of overproducing firms may be regarded as the trigger of the crisis in Marx’s account, while the fall in the rate of profit is the underlying cause.
- Marx referred to a double-edged law of a declining rate of profit with an increasing mass of profit.
- Marx shows how the tendential fall in the rate of profit and the counteracting factors interact with one another to produce the underlying cause of the boom slump cycle.
The destruction of capital
Moreover viewing the crisis as a crisis of profitability enables us to understand how the downturn prepares the basis for a later upswing. The essential mechanism is through the destruction of capital in a recession.
“The periodic devaluation of existing capital, which is a means immanent to the capitalist mode of production for delaying the fall in the profit rate and accelerating the accumulation of capital value by the formation of new capital, disturbs the given conditions in which the circulation and reproduction process of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process” (ibid p.358).
This destruction of capital is not mainly physical destruction and obsolescence. The destruction of capital values in a crisis actually prepares the way for a reduction in the organic composition of capital, and a revival in the rate of profit. In this way we can explain the entire boom-slump cycle.
In a slump unwanted stocks and unused machinery are sold in fire sales of the assets of bankrupt firms. “Secondly, however, the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use values…A large part of the nominal capital of the society i.e. of the exchange value of the existing capital is once for all destroyed, although this destruction, since it does not affect the use value, may very much expedite the new reproduction.” (Theories of surplus value Volume II, p.496)
The crisis therefore prepares the way for a new upturn in the same way as naturalists explain that forest fires can actually prepare the woodland for a new period of growth.
- The destruction of capital effectively reduces the organic composition of capital and raises the rate of profit.
- In doing so, it prepares the conditions for a new upturn and provides the outlines of an explanation for the boom-slump cycle.
Chapter 3.8: Ancillary factors in capitalist crisis
We have tried to disentangle the underlying cause of crisis (the fall in the rate of profit) from the various triggers that seem to have begun the movement from boom to slump in this and previous crises. These apparently accidental factors are really the manifestation of economic necessity. The credit crunch in 2007 and the oil price spike in 1973 were two such triggers. There are also the ancillary factors that affect the course and severity of the downturns and make each one a unique historical event, as we see in Parts 1and 2.
The ancillary factors we shall discuss are:
- commodity prices
- stocks (inventories)
- interest rates
- world trade.
We shall check how important these ancillary factors were in the Great Recession.
One important economic effect of the crisis, of course, is that, by creating mass unemployment, the boss class has the whip hand in trying to drive down the wages of the employed workers. “Stagnation in production makes part of the working class idle and hence places the employed workers in conditions where they have to accept a fall in wages, even beneath the average; an operation that has exactly the same effect for capital as if relative or absolute surplus value had been increased while wages remained at the average.” (Capital Volume III, p. 363) The point is that movements in wage levels are based on the bargaining power of the contending classes, which is determined by the level of unemployment – itself dependent on the stage reached in the economic cycle.
It has been mentioned several times that the most favourable situation for the working class is at the crest of a boom when labour power is in heavy demand and may exceed supply for a while. That is when real wages are most likely to go up. In a recession the boot is on the other foot.
We have seen that process unfold dramatically over the past three years. Involuntary part-time working, wage cuts, prolonged wage freezes, ‘give back’ contracts, short time working, layoffs, redundancies, mass unemployment and a complete drying up of job vacancies – this has been the lot of the working class generally. The Great Recession was a signal for an all-out assault on workers’ wages and conditions. Wages are far more than an ‘ancillary’ factor when they represent your living standards!
This onslaught was quite unexpected for a new generation of workers who for the most part had not experienced hard times before. So the assault did not immediately provoke a co-ordinated counter-attack from the working class who, after all, had few weapons to fight back with. All the same it has produced a hardening of attitudes and a widespread recognition of the precariousness of life under capitalism.
We must remind ourselves that unemployment is a lagging indicator of crisis. In the USA, Britain and most continental European countries the jobs situation has hardly improved throughout 2010 and 2011 and, with ferocious cuts in the pipeline, austerity looms for years ahead. This makes it difficult, but all the more important, for workers to fight back. It also gives the labour movement time to mobilise.
Working class determination to resist is growing worldwide, and we have already seen the first lightning bolts of class struggle. The Great Recession will be remembered as the opening of a new period of working class struggle against capitalism.
Marx was also aware of the competitive struggle between individual capitalists, and its deleterious effect on their system as a whole, in the teeth of a crisis. Unlike Adam Smith, he did not see competition as the driving force of the falling rate of profit. “Competition, generally this essential locomotive force of the bourgeois economy, does not establish its laws, but is rather their executor. Unlimited competition is therefore not the presupposition for the truth of the economic laws but rather the consequence – the form of appearance in which their necessity reveals itself.” (Grundrisse, p.552)
For Marx the fall in the rate of profit intensifies the pressure on individual capitalists to compete with one another. “(T)he fall in the profit rate that is bound up with accumulation necessarily gives rise to a competitive struggle. Compensation for the fall in the profit rate by an increase in the mass of profit is possible only for the total social capital and for big capitalists who are already established. New and independently operating additional capital finds no compensatory conditions of this kind ready made; it must first acquire them, and so it is the fall in the profit rate that provokes the competitive struggle between capitals and not the reverse”(Capital Volume III, p.365)
Marx observed that “it is one thing to share out profits and another to share out losses.” Competition under capitalism is not like a ‘fair fight’ between equally matched contestants. It is a process where the weakest, hanging on during the good times, finally go to the wall. Often what remains is looted by the winners, or rather survivors. This is what has happened to Woolworths and MFI. This is what has turned many of our high streets into boarded up ghost towns. This is what very nearly happened to GM and Chrysler in the USA. This is the reality of capitalist competition.
This process is all part of the destruction of capital, the ‘healing’ process of the bust. Capitalism seems to have adopted the anarchist Bakunin’s slogan, “The passion for destruction is a creative passion.” How far must this devastation go? How many working people’s lives have to be shattered before the conditions for a big upturn are prepared? We shall see.
Typically a prolonged upswing will produce a boom in the price of raw materials. We suppose in theory that an increase in the demand for an industrial product is likely to call forth an instant increase in its supply as its price goes up and capitalists, mindful of the profit motive, respond by boosting production. But there are biological and geological limits in the responsiveness of organic and mineral materials’ production to demand conditions. As a result commodity prices are likely to respond spasmodically to changes in demand, with soaring peaks and dizzying drops.
This was most noticeable in the case of oil, which was actually the major basic cheap resource that fuelled capitalism in the ‘golden years’ after the Second World War. Our ‘rigorous’ neoclassical economists descend to the most casual empiricism when they characterise the 1973-4 crisis as an ‘oil crisis.’ They are incapable of noticing that oil prices generally are determined by the demand for oil, given the supply constraints, and that the demand is provided by capital accumulation, particularly in the advanced countries.
Of course, since oil is an important resource for capitalism, if the price of oil rises towards the end of an upswing then that is going to increase costs and therefore cut into profits. And because the rate of profit is likely to be falling by this stage, it is theoretically possible that the oil price hike could help precipitate a fall in the actual mass of profit and bring about a recession. The important point is to see how commodity prices are located in the cycle of accumulation.
Commodity prices have by and large stayed buoyed up throughout the Great Recession. There are two reasons for this. The first is that there is a speculative element in the trade for commodities. There is still plenty of idle money around with time on its hands to do mischief. Despite the depressed conditions in the world economy early 2011 has seen a spike in food prices. This obviously hits workers in the poor countries hardest.
The second reason raw material prices have stayed high is because of demand from China, a densely populated resource-poor country. Chinese industry is a powerhouse. All its trading partners have been lifted by demand for raw materials and components being sucked in to China. The recession has demonstrated that permanent feature of historical development, combined and uneven development. China has hardly been touched by the downturn at all. It is true that the Chinese economy is only responsible for about 8% of global output, but the regional impact of its continued growth has been immense, as is the effect it has had on raw materials suppliers as far away as Africa.
In a boom the capitalists exude confidence. They develop the belief that ‘this time it’s different’ – this time the boom will last forever. As a result they build up stocks of raw materials, confident in the good times to come. In doing so, of course, they act as excellent customers to the capitalists responsible for producing raw materials. They may also allow stocks of finished goods to accumulate in the warehouses, sure that they will be sold in the fullness of time.
It’s a different story in a slump. Unsold stocks of finished goods are a millstone around their necks. They may well reduce output below what is actually required so as to realise the values of their unsold stocks first. They may be forced to do this because their profits have disappeared and that is the only way to escape bankruptcy. The niggardly approach they develop in the slump to husbanding raw materials hits the capitalists producing these raw materials, for whom this market is the only way they have of making a living.
It is widely believed that there is a stock cycle within the overall boom-slump cycle. This is called the Kitchin cycle. Kitchin suggested that the cycle of building up and running down stocks took place over 4-5 years. This theory was developed during what is now called the ‘just in case’ phase of industrialisation, where big manufacturers routinely held big stocks of components, ran large stores holding spare parts in their factories and housed these stocks in warehouses, just in case.
The expectation is that, as output turns down, piles of unused stocks will stand exposed. Firms will then carry on producing by using up their existing stocks of materials and components. Of course that means they will cancel contracts with their suppliers for the time being. That will have a knock-on effect on the economy. When they have used up existing stocks they will re-open supply lines and rebuild their stocks. This creates a mini-cycle within the cycle.
Japanese manufacturing developed the ‘just in time’ (JIT) system, where component suppliers sometimes delivered on the hour, just in time to be incorporated into the production process. Naturally JIT economised on the capital that was invested in stocks that would otherwise have been lying around unused. It cut costs. It has been widely adopted in other countries. Computerisation has in principle allowed much more effective stock control and planning – until an unforeseen event like the credit crunch causes the whole chain of production to seize up like a motorway pile-up.
It is not absolutely clear what has been happening to stocks since the recession bit. There have been contradictory reports in the financial press, but it seems that the feeble recovery beginning in 2009 has not been led by massive investment in capital equipment. There remains far too much excess capacity for that to be widespread. Capitalists, it seems, have rebuilt stocks instead, but reports in the financial press up to the summer of 2011 suggest that phase of recovery is more or less over. We may have to wait to establish exactly what role the running down and building up of stocks has played in the Great Recession.
Capitalists have no way of knowing what the future will hold for them. Yet they have to develop a view as to how markets are likely to evolve. Under these conditions capitalists’ expectations can acquire the power of a material force in the economy. Marx gleefully chronicles the swindles carried out by capitalists upon one another. Yet these swindles were indicative of a certain mentality – the belief that anyone with money could make more money. This outlook becomes dominant after a long period of boom because it reflects a certain reality.
On the other hand a crash caused by failed capitalist projects can drag quite reputable and viable capitalist firms and individuals down with it. That is the price capitalists pay for their system. Really the market division of labour makes them all interdependent upon each other and dependent upon the operation of the law of value. But they do not realise this. “(I)n the midst of accidental and ever-fluctuating exchange relations between the products, the labour time socially necessary to produce them asserts itself as a regulative law of nature. In the same way the law of gravity asserts itself when a person’s house collapses on top of him.” (Capital Volume I, p.168) After the crash, caution becomes the dominant mood. And of course that caution makes recovery slower.
We have seen almost hysterical mood swings between boom and slump, and the effect they had on economic developments. The bubble was sustained for a while entirely by euphoria, by a suspension of disbelief, by a feeling that participant speculators were walking on air.
Then came the crash. The objective conditions for capitalist profit-making were revealed to be horrible. But that had been the case for years previously. It was as if the movers and shakers of the system had suddenly woken up to the fact that they had been living in cloud cuckoo land. The let down was extreme. There is no doubt that the new mood of sobriety, of enduring a hangover after a very entertaining party, has been important in causing investment to suddenly shut down and for the world to plunge into recession.
When we discuss the tendency for the rate of profit to fall, by ‘profit’ we meant surplus value as a whole. The rate of profit is calculated as total surplus value divided by total capital invested. Yet surplus value is usually divided into rent, interest and profit (actually there are others who share in this surplus). All three factors can vary against one another.
Traditionally, the share of surplus value going to finance capital is called interest. Interest rates are connected to the boom-slump cycle in a complex way, analysed by Marx in Capital Volume III. We cannot treat the subject fully here.
“If we consider the turnover cycles in which modern industry moves – inactivity, growing animation, prosperity, overproduction, crash, stagnation, inactivity, etc.,.. – we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis.” (Capital Volume III, p.482)
After a recession, interest rates are generally low. Manufacturing capitalists are not making much profit, so they cannot afford to pay the banks much interest. They are not investing in new plant. They are certainly not investing with borrowed money, but gradually trying to cover their losses and restart production on a modest scale with the resources available to them. As production picks up, the demand for loan capital from manufacturing capitalists rises.
When a crash is looming, “In times of pressure, the demand for loan capital is a demand for means of payment and nothing more than this; in no way is it a demand for money as means of purchase. The interest rate can then rise very high”…just when the industrial capitalists can least afford it. (Capital Volume III, p.647) In a crash everybody needs hard cash. The whole crazy process is about to begin again.
The new millennium boom was weak and anaemic. It was fed by artificially low interest rates. Since the conditions for making profits in production were unspectacular, much of this cheap money flowed into speculation. Therefore low interest rates profoundly shaped the course and pattern of the boom.
In a sense the entire crisis began with a change in the conditions for borrowing. The credit crunch was not just a sudden hike in interest rates, which Marx identified as the usual pattern at the onset of crisis. On this occasion loan capital dried up altogether. That had the same effect as Marx had outlined, but even more dramatically.
We would expect that, as profit-making opportunities re-emerge, capitalists would exploit the division of labour to introduce more economies of scale and divide the world ‘rationally’ into areas that can produce goods at the lowest possible cost. This division of labour between capitalist firms is not organised but governed by market forces. We would therefore expect to see trade, including international trade, advance during the upswing and contribute to the strength of that upswing. We would also expect to see trade shrink in the downturn as each capitalist, and each capitalist nation-state, turns on the others, determined to load the burdens of the crisis on anyone but themselves.
As Armstrong (Capitalism since 1945) shows, trade liberalisation did not kick-start the revival of the European and Japanese economies in the years right after the Second World War. The reason for this was the enormous imbalances in the world economy – in particular the complete dominance of the USA over the capitalist world. All the other advanced countries had massive deficits with America.
“Nor was continued European expansion based on massive import growth from the United States or elsewhere…Indeed, imports fell in 1948 and only regained 1947 levels in 1951. Meanwhile exports steamed ahead and by 1950 had regained prewar levels, with imports still some 10% below.” (pp.82-3) In other words the increased exports were not a sign of reviving economic health, but served just to repay accumulated debts.
When the road was clear, trade interacted dialectically with profit-making potential in production to push the upswing higher. “The years of the boom saw a phenomenal explosion of trade. Between 1951-3 and 1969-71 the volume of world trade in manufactures grew by 349% whereas the volume of output grew by 194%” (ibid p.153).
The slowdown hit trade as well as production. The slowdown in trade made the slowdown in production worse. “The growth of world trade slowed down sharply after 1973, growing at an average 3.8% a year over the period 1973-88, compared to 8.7% per year during the previous decade” (ibid p.296). As we shall see later, world trade actually fell in volume terms in the wake of the 1974 crash.
We quote Kindleberger (in National income and the crisis in Part 6) to show that, for poor and peripheral countries, trade was by far the most important and volatile element of national income during the Great Depression. Their economies went into a tailspin because their export markets in the advanced countries dried up. Trade-led growth has also been a way for capitalist countries such as Japan and Korea to develop.
Of course we should not see trade as a completely independent factor in economic development. Usually world trade develops rapidly when profit-making opportunities abound and accumulation is proceeding fast. And countries develop on the back of world trade because they have developed a competitive advantage in production.
So trade is volatile. Precisely for this reason the Eichengreen O’Rourke index, which tracked the downward path of the Great Recession against 1929-33, showed that for the first year of the recent crash, world trade was actually collapsing faster than it had done after 1929. Then it slowed and reversed after one year. The turnaround can be attributed to the revival in profits, which was noticeable by the beginning of 2009. But world trade can augment the fluctuations in capitalist production.
Movements in the rate of profit are at the heart of the Great Recession and of the partial recovery we have seen since. But boom and slump are complex, multi-layered processes. These ancillary factors have their own importance in the development of the Great Recession.
- Any real capitalist crisis involves a complex interaction of factors. The Great Recession showed that clearly.
- The tendential fall in the rate of profit is the underlying cause of capitalist crisis.
- Many other factors interact with it in the complexity of capitalist boom and slump.