Marx’s Theory of Crisis Simon Clarke Marx’s Theory of Crisis 1 Simon Clarke 1 Introduction: Marxism and the Theory of Crisis 5 Political Economy and the Necessity of Crisis 5 Marxist Theories of Crisis 7 The Impasse of Contemporary Marxism 9 Marx and the Marxist Theory of Crisis 10 The Theory of Crisis in the Second International 13 The Marxist Heritage: Engels's Theory of Crisis 15 Kautsky and the Historical Tendencies of Capitalist Accumulation 18 Kautsky's Theory of Secular Overproduction 20 Kautsky's Theory of Crisis 21 Bernstein's Challenge –- Reform or Revolution 24 Tugan-Baranowsky and the Necessity of Crisis 26 Hilferding and the Disproportionality Theory of Crisis 30 Competition and the investment cycle 32 The investment cycle and the crisis 35 Stabilisation and the necessity of crisis 37 Rosa Luxemburg's Underconsumptionist Theory of Crisis 41 Crises Associated with the Falling Rate of Profit 44 The Reformulation of Marxist Crisis Theory in the 1970s 47 Class struggle and capitalist crisis 48 Crisis and the law of the tendency for the rate of profit to fall 49 Class Struggle and the Rate of Profit 52 Is There a Marxist Theory of Crisis? 54 Engels's Theory of Crisis 57 Marx's Early Development of Engels's Analysis 59 The Dynamics of Capitalist Production and the Tendency to Crisis 61 The Theory of Crisis in the Communist Manifesto 66 The Early Theory of Overproduction and Crisis 67 Production, Circulation and Global Crisis after 1848 68 The Politics and Theory of Crisis after the 1848 Revolutions 68 The Historical Development of Capitalist Crises 70 Money, Credit and Crisis in the Notebooks of 1851 73 The Theory of Crisis in 1853 79 Revolutionary Hopes and the Crisis of 1857 81 Production and Circulation 86 Money, Crisis and Currency Reform 88 The Money Form and the Possibility of Crisis 90 The Transition from Money to Capital 91 The Self-Expansion of Capital and Overproduction 93 Production and Realisation 94 Marx's Theory of Crisis: One Theory or Three? 96 Disproportionate Production and General Overproduction 98 Competition and Disproportionality 99 Underconsumption and the Tendency to Crisis 101 Disproportionality and the Valorisation of Capital 105 The Tendency for the Rate of Profit to Fall 111 The tendency for the composition of capital to rise 111 The composition of capital and the formation of a relative surplus population 112 The composition of capital and the tendency for the rate of profit to fall 113 The tendency for the tate of profit to fall and the tendency to crisis 115 The Dynamics of Capitalism and the Tendency to Crisis 117 The Methodology of the Grundrisse and the Theory of Crisis 121 Underconsumption Theories: Malthus and Sismondi 126 Overproduction and Crisis: Say and Ricardo 130 The production of surplus value and the possibility of crisis 130 Disproportionality and general overproduction 132 The tendency to crisis and the critique of political economy 134 The contradictions of capital and the possibility of crisis 136 Money, credit and the possibility of crisis 138 Capitalist production and the possibility of crisis 139 Capitalist Reproduction, Disproportionality and Crisis 140 The Falling Rate of Profit and the Tendency to Crisis 144 The Critique of Political Economy and the Falling Rate of Profit 145 Is There a Tendency for the Rate of Profit to Fall? 147 The tendency for the composition of capital to rise 148 The rate of exploitation and the rate of profit 149 The Falling Rate of Profit and Relative Surplus Population 152 The Concentration of Capital, the Rate of Profit and Crisis 155 Internal Contradictions of the Law 157 The mass of profit, the rate of profit and the tendency to crisis 158 The rate of profit, crisis and the depreciation of capital 160 The falling rate of profit and the absolute overaccumulation of capital 162 Overaccumulation and crisis 163 What is the significance of FROP? 166 The Theory of Crisis in Capital 169 Politics and the Theory of Crisis 170 The Theory of Crisis in the First Volume of Capital 171 The General Law of Capitalist Accumulation 172 Labour shortage, wages and crisis 173 Crises and the historical tendency of capitalist accumulation 175 The Necessity of Crisis and the Periodicity of the Cycle 178 Fixed Capital and the Periodicity of the Cycle 179 Fixed Capital and the Problem of Reproduction 184 Credit and the Investment Cycle 187 Conclusion 191 Bibliography 197 Introduction: Marxism and the Theory of Crisis Political Economy and the Necessity of Crisis With every boom the apologists for capitalism claim that the tendency to crisis that has plagued the capitalist system since its very beginnings has finally been overcome. When the boom breaks, economists fall over one another to provide particularistic explanations of the crash. The crisis of the early nineteen nineties was the result of the incautious lending of the nineteen eighties. The crisis of the early nineteen eighties was the result of excessive state spending in the late nineteen seventies. The crisis of the mid nineteen seventies was the result of the oil price hike and the inflationary financing of the Vietnam war … the crisis of the nineteen thirties was the result of inappropriate banking policies … … . Every crisis has a different cause, all of which boil down to human failure, none of which are attributed to the capitalist system itself. And yet crises have recurred periodically for the past two hundred years. Bourgeois economists have to deny that crises are inherent in the social form of capitalist production, because the whole of economic theory is built on the premise that the capitalist system is self-regulating, the principal task of the theoretical economist being to identify the minimal conditions under which such self-regulation will be maintained, so that any breakdown will be identified as the result of exceptional deviations from the norm.1 Even the most apologetic of economists cannot fail to notice that recurrent crises occur, but, developing the traditions of classical political economy, the economists explain such crises as contingent phenomena. The normal operation of the forces of supply and demand ensures that there is always a tendency towards equilibrium. This means that crises can only arise as a result of external shocks, which temporarily disrupt equilibrium, or internal disturbances, which impede or subvert the processes of market equilibration. Within the framework of general equilibrium theory capital moves between branches of production in response to variations in the rate of profit which arise from imbalances between supply and demand.2 This movement of capital is the means by which competition maintains proportional relations between the various branches, so that disproportionalities which might disrupt accumulation are evened out by the smooth interaction of supply and demand. Any crisis of disproportionality, such as that of the mid nineteen seventies, is then attributed to market imperfections, in this case the monopoly powers of the oil producers. Within neo-classical theory the overall balance of supply and demand is maintained by the interaction of the rate of interest and the rate of profit. If there is a shortfall of investment the demand for investment funds will fall, leading to a decline in the rate of interest which will stimulate renewed investment. A stable monetary policy will ensure that equilibrium is maintained. In the classical world of the gold standard a deficit on the balance of international payments provided the prime indication of overheating, the outflow of gold and currency reserves forcing the monetary authorities to tighten monetary policy to rectify the imbalance. Similarly, the onset of 1 There are professional as well as ideological reasons for such an assumption. The economists' claim to their role of scientific soothsayers depends on their possession of models with determinate and quantifiable solutions. 2 Even within the framework of general equilibrium theory the conditions of stability of the equilibrating mechanism are very restrictive and unrealistic. recession led to an inflow to the reserves which permitted a more relaxed monetary policy. In the modern world the indicators of inflationary and deflationary pressures are more complex, but the principle remains the same. A crisis of overaccumulation, such as that which struck at the end of the nineteen eighties, is then the result of lax monetary policies which have stimulated inflationary and speculative over- investment. For all their mathematical sophistication, the explanations of crises offered by today's economists are no different from those that were being put forward at the beginning of the nineteenth century. It was always recognised that a large external shock, such as a war or harvest failure, might precipitate a temporary disruption in the relations between branches of production, or in the international economic relations of the national economy, but the cause of such a crisis lies outside the capitalist system, and it was assumed that stability would soon be restored by the normal processes of market adjustment. Apart from such external shocks, the principal cause of crises was traditionally identified as the discretionary intervention of the government in the regulation of the economy. In particular, if the government sought to stimulate the economy artificially by printing money to finance its excessive spending, it would promote over-investment, which would lead to an inflationary boom. Eventually the boom would collapse as unsound and speculative ventures failed, requiring a period of recession to purge the excesses from the system. The cyclical alternation of boom and bust which has marked the history of capitalism is not, therefore, inherent in the capitalist mode of production, but is the result of the folly and irresponsibility of politicians.3 Keynes questioned the stability of the classical macroeconomic adjustment mechanism, but otherwise his work remained largely within the classical framework.