In the midst of one of history’s most severe crises of capitalism, there is no more apt time than the present to briefly survey the basics of Marxist economics. It would be beyond the scope of this short article to trace the development of the theory from the works of Marx up until the present day so hopefully it should suffice to lay out the basics of the Marxist analysis of capitalism and its approach to economic crises.
To start, all Marxists take the position that capitalism is inherently crises-prone, and that these crises are the realisation of fundamental contradictions within the capitalist system. This is not to say that we can glean much satisfaction from merely pointing to a contemporary crisis and saying ‘We told you so’. All crises are the products of different historical factors and the accumulation of varying contradictions. However, there are a number of basic contradictions in capitalism which come to the fore in varying degrees during a time of crises. It is vital that we understand them to get beneath the surface and unearth the true mechanisms of capitalism.
The nature of capitalist accumulation:
Unlike in the past, the purpose of commodity production under capitalism is not in the first instance for the creation of use-values. That is to say, the major stimulus for capitalists wishing to produce goods is not that they or other people need to use them, but that in selling those goods they will make a profit. It follows, therefore, that goods which are useful may not be manufactured because they are unprofitable to produce. It also follows that when production becomes unprofitable it will stop and the economy will enter a period of crisis. This can be demonstrated in abstract terms by the following schema, as done in a similar manner by Paul Sweezy in his work The Theory of Capitalist Development:
In simple (non-capitalist) production, the producer sells his product in order to purchase other products which satisfy specific needs or wants. He starts with Commodities, turns them into Money and then back into a different Commodity. In other words, C-M-C.
Under capitalism, the capitalist starts with Money, uses this money to purchase Commodities (labour power and means of production), and then after the process of production he sells the commodities for more Money: M-C-M.
However, if the value of M at the beginning and the end of production is the same then the whole process was pointless from the point of view of a capitalist. For production to take place, therefore, the value of M must be made larger. In other words, M-C-M1 where the value of M1 is greater than that of M.
Surplus value and the rate of profit:
In order to understand where this added or ‘surplus’ value comes from we must look closer at the process of production. In essence, it involves two elements: means of production (or constant capital, C) and labour power (or variable capital, V). However, as we have seen, if the value of the inputs (C+V) is equal to that of the output, then there is no point to production. There must, therefore, be another element involved.
For Marx, the importance of labour (V) as a commodity is that it produces value. A capitalist pays a worker a fixed wage for his labour power yet the commodities produced by labour exceed that value. In other words, the sum total of production in a fixed period is not merely C+V but C+S+V and from this surplus (S) derives profit.
When we factor in the costs of labour and of means of production in generating profit, we can simplistically express the rate of profit as S/(C+V). However, in Capital, Marx assumed that the whole stock of capital is used up in the production of a commodity. While this kept the calculations simple, it has led to some misunderstandings. When calculating the rate of profit, it must be remembered that the total constant capital (C) is not all used up because its composite elements have different lifespans. For example, a factory may last fifty years, a machine ten years and raw materials just a week. Furthermore, this formulation excludes rent. Nevertheless, it is necessary to accept such simplifications for the purposes of an overview.
The organic composition of capital:
As we have seen, V is the element which produces surplus value (S) when it interacts with C in the process of production. Therefore, if the proportion of C to V is altered, with values remaining constant, so is the amount of S. This proportion is known as the organic composition of capital, expressed as C/V in a single cycle or C/(C+V) if we consider total invested capital. In concrete terms, a change in this ratio manifests itself as a growth of machinery over that of labour. This occurs due to technological advancements, which necessarily spread throughout industries in the process of capitalist accumulation due to the pressures on firms to remain competitive.
The tendency for the rate of profit to fall pt.1:
As labour is the value-producing commodity in the process of capitalist production, it follows that its decline relative to that of constant capital leads to a gradual reduction in the amount of surplus value produced. This simple observation Marx called the tendency for the rate of profit to fall.
However, it must be stressed that it is only a tendency which logically follows from Marx’s labour theory of value. Due to the vast number of counter-acting tendencies which can flow both from the increase in machinery and from elsewhere, what is often misunderstood as a law can only accurately be described as a tendency. These counter-acting causes include raising the rate of exploitation (S/V), known in bourgeois economics as the productivity of labour, which allows labour to produce more surplus value than it would be able to do with lesser means of production. If the productivity gains of the new machinery outweigh their cost, the rate of profit will clearly fall slower or not at all.
Another counter-acting tendency is the fact that elements of constant capital (say, raw materials or new machinery), may become more numerous as production expands in certain industries, causing them to fall in cost. This drop may be substantial and cancel out any losses in profitability.
Most obvious to ordinary workers are attempts by capitalists to lengthen the working-day, introducing ‘scientific management’ or ‘Taylorism’, or to depress wages. The latter of which can occur, to give some examples, due to an influx of new labour into the labour market (through the reserve army of the unemployed or liberalisation of the labour market within a body such as the European Union) or through government policies such as income controls.
The tendency for the rate of profit to fall pt.2:
With these numerous counter-acting forces in play it is by no means determined that the rate of profit will continue to fall indefinitely in all cases. As Sweezy points out, an assumption of the tendency for the rate of profit to fall on account of a rising organic composition of capital presupposes a constant rate of surplus value (ie. the changes in technology will not affect how much surplus value is produced by the workers).
Marx made this assumption in parts of Capital in order to analyse one aspect of the tendency. In the real word (and in Volume III of Capital) the rate surplus value will be affected by the changing organic composition of capital. The introduction of new machinery, as we have noted above, can be considered a counter-acting force but there are definite limits to its ability to check a fall in the rate of profit (a point neglected in Sweezy’s analysis but noted by Nick Beam). As Marx put it himself, “Two workers working for 12 hours a day could not supply the same surplus value as 24 workers each working 2 hours, even if they were able to live on air and hence scarcely needed to work at all for themselves.” If the organic composition of capital is altered too much and the amount of variable capital reduced, it is not possible after a certain point to generate the same level of surplus value and thus of profit.
Thus, in keeping with the totality of Marx’s work, it is better to consider the rate of profit as a rate which can be altered by the movements of both variables (the organic composition of capital and the rate of surplus value), plus the other counter-acting tendencies at work, whilst noting the limits placed on an increase in the rate of surplus value being able to cancel out a fall in the rate of profit.
Finally, as Sweezy argues, the very process of capitalist expansion contains within it forces which will squeeze the rate of profit. We speak here of a growing economy’s increasing demand for labour which will raise wages and reduce the rate of surplus value. We might also mention the growth of the trade union movement or legal protection (however limited) for workers. Factors which resist this encroachment of profits might be the formation of employers’ organisations, monopolies to maintain high prices or state action designed to attack the living standards of the working class.
The effect of falling profits in crises:
We mentioned at the beginning the nature of production under a capitalist system. Very simply put, production is contingent on profitability. Furthermore, the capitalist (in general rather than personal terms) does not value wealth in the same way as a feudal aristocrat. For a capitalist, wealth begets more wealth as the increased value of M1 is thrown back into production to grow and expand his enterprise. This makes capitalism especially susceptible to crises.
The capitalist measures the success of a venture according to the difference between the wealth at the start (M) and that at the end (M1). Unless this difference (lets call it D) is positive the capitalist will have made a loss. Therefore, he is concerned with the fraction of D/M, or the rate of profit. Thus, a falling rate of profit removes the incentive to invest and expand and causes a crisis in one part of the system. Given the inter-relatedness of capitalist economies, it is possible for this crisis to become widespread, just as we have seen in recent years. If profit rates fall in all industries then nothing will be gained from moving capital from one to another and the result will be a crisis.
Finally, because individual capitalists are driven by the profit motive they will take only secondary account of what everyone else is doing. If the rate of profit drops in one industry, it is perfectly likely for a flood of capital to flow into another one leading to overproduction in that industry. If commodities become subject to overproduction their price will fall and this will cut further into the rate of profit. This is known as a ‘realisation crisis’ because the surplus value in commodities will not become fully ‘realised’ in the act of selling. This is because their new price will not reflect the old cost of production; this crisis stems from the fact that in capitalism sale and purchase are separated both in space and time. If a capitalist buys raw materials but is later unable to sell his commodities he will have ‘overproduced’.
It is clear from the range of forces operating in the capitalist system that crisis can stem from any one or any combination of elements and it is the job of the economic historian and not of the abstract theorist to determine the root causes of a crisis. However, a clear theoretical perspective is necessary to avoid superficial analyses like the sort prevalent in the current bourgeois press. Of course, anything short of book-length cannot hope to cover all the necessary ground but hopefully this overview will serve as an elucidation and explanation of some of the most important concepts in Marxian political economy.
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