To understand capitalist economic crises is therefore primarily to understand the
dialectical contradictions which lead to them. However, there are multiple contradictions
involved, and their interrelationships are complex.
(A quick note about dialectical contradictions for
those who are unsure of the concept: Dialectical contradictions are not the same as what
are called contradictions in formal logic (i.e. both the assertion and denial of the
identically same statement). Dialectical contradictions are an assemblage of two
opposing forces, interlocked in their mutual opposition. An example in geophysics is
the movement within the earth of tectonic plates that serves to push up mountains,
which is opposed by the weathering forces of wind, rain and ice which (together with
gravity) wear down mountains. A better word than “contradictions” here might be
“oppositions”, but we are stuck with the former term for historical reasons. The two
opposing forces in a dialectical contradiction are often called the “aspects” or
“poles” of the contradiction.)
1.2 The fundamental contradiction of capitalism.
The most fundamental dialectical contradiction in
capitalist society is that between the social character of production and private
appropriation. This same contradiction is the most fundamental explanation for the
existence of crises in a capitalist economy.
But keep in mind that contradictions can often be
expressed in different ways, and at different levels of abstraction. Or, alternatively,
we can say that dialectical analyses at different levels of abstraction form different,
but related contradictions. Thinking at high levels of abstraction, or at lower
levels—both have their advantages and disadvantages. Usually we need to do both
if we are really to thoroughly understand something.
Mitchell Resnick, a researcher in artificial intelligence,
Talking about the contradiction between the social
character of production and private appropriation is speaking at a high level of
abstraction. But it is also extremely useful, and quite illuminating, to translate a
contradiction like this into more concrete terms. We will be doing this in a moment.
1.3 The contradiction between production and consumption.
There is, however, another substantially different
contradiction that is wider in scope than this fundamental contradiction of capitalist
society. This is the contradiction between production and consumption that leads to the
forced underconsumption by the masses in all economic systems (until we finally
get to communist society). However, this important contradiction is changed in one very
critical way under capitalism. In all earlier forms of economy, the masses’ consumption
was restricted primarily for one reason: the productive forces were incapable
of producing enough to meet everyone’s needs and wants. (In pre-capitalist class
society—i.e., under slavery and feudalism—there was a secondary reason, namely that
the ruling class ripped off a grossly disproportionate share of what was
produced. But though this aggravated the situation, the basic problem was still that
the productive forces were incapable of satisfying everyone’s needs and wants.)
In capitalist society this general contradiction
between production and consumption (or, spelling it out further, between limited
production and desired higher consumption) still exists, but its nature is
transformed. The new social character of production, together with improved technology
(which also creates many of the necessary preconditions for social production), has
qualitatively transformed the capability of people to produce goods; there has
been a massive qualitative leap in the productive capability of society. The basic
problem is no longer that a primitive social technique prevents the forces of production
from easily being expanded to meet all the reasonable needs and wants of the people.
Instead, the problem is that capitalism has an inherent internal flaw which
prevents society from using its new productive capability to the fullest. This inherent
internal flaw is the result of the first contradiction I mentioned, the fundamental
contradiction of capitalist society, the contradiction between social production and
private appropriation. Each time production really begins to soar this internal
contradiction in capitalism results in a crisis, and production has to be drastically
cut back again—even though the needs of the people are still unsatisfied. The necessary
social form of production is in place (at least in rough approximation), but
can’t be thoroughly employed. Sufficient technology has long been in place (and
continues rapidly to improve), but again it cannot be thoroughly employed. It is the
contradiction between social production and private appropriation, or in other words,
the capitalist relations of production, which stand in the way of the full
employment of this social production and technology to satisfy the needs of all the
people. So the end result is the same as before capitalism arose: even though the social
and technical productive capability now exists, not enough goods are actually
produced and actually put into the hands of all those who need them. (Once again, the
problem is aggravated by the capitalists ripping off a grossly disproportionate share
of what is produced, but this is still a very secondary factor. The basic problem
lies in the contradictions of the economic system itself, not in how greedy the
capitalists may or may not be in this country or that, or in this period or that.)
1.4 Crises of overproduction.
Even though capitalist production, like all earlier
forms of production, cannot in practice produce enough to satisfy the needs and
wants of everyone, it does regularly get into situations (crises) in which it produces
much more than it knows what to do with within the framework of its social relations.
These are the crises of overproduction, but overproduction in relation to what
can be profitably sold, not overproduction in relation to what people need and want.
If the problem is that a significant part of what
is produced cannot be sold, the obvious question is “Why can’t it be sold?” And to
this you can say, somewhat abstractly, “because of the contradiction between social
production and private appropriation”, or you can say, somewhat more concretely
(and also with Marx), “because of the poverty and forced restrictions on the
consuming power of the masses”.3 These are really two
ways of saying the same thing here, just at different levels of abstraction. And in
either case, further elaboration is obviously called for. How exactly, does
private appropriation lead to this result? How exactly, does the consuming
power of the masses come to be so restricted?
1.5 The contradiction between the restricted consumption of the masses,
and the unrestrained expansion of capitalist production.
Notice that we have now pushed the general contradiction
between production and consumption into the background, and are focusing instead on a
somewhat related but much more specific contradiction, which gets to the essence of the
overproduction crises which only develop under capitalism. (And it will not do
to confuse these two contradictions as it sometimes seems to me that various Marxist
writers have done.) This contradiction specific to capitalism is the one between
the restricted consumption of the masses and the tendency of the capitalists to keep
expanding production indefinitely. This is where Marx’s famous statement enters the
picture, and it does in fact get to the heart of the matter of what capitalist
economic crises are all about: “The ultimate reason for all real crises always
remains the poverty and restricted consumption of the masses as opposed to the drive
of capitalist production to develop the productive forces as though only the
absolute consuming power of society constituted their limit.”4
This contradiction is itself a consequence
of, or a more concrete expression of, the fundamental contradiction between
social production and private appropriation. I find it curious that some Marxists do
not understand this point since it seems so obvious. What does it mean to say that
there is a contradiction between social production and private appropriation? Well,
one aspect of the contradiction here is that the workers come together and produce
goods collectively in a very organized manner. The other aspect of the contradiction
is that the capitalists then own what is produced, not the workers who actually
produced it. True, the capitalists pay the workers something, namely an amount
equivalent in value to only a portion of the value of the commodities that they
produce. To say that there is a contradiction here is, in part, to say that this
situation leads to some serious problems. What problems? Well, this will take some
discussion to fully bring out. But as a first approximation, there appears to be
one clear problem here in that the workers cannot possibly buy back from the
capitalists all that they produce for them. The generated market for the
commodities produced (among the workers who produce them) is always smaller
than the value of commodities produced. The total market, therefore, among the
masses as a whole (including all the workers and their families, as well as
the rest of the lower classes), will always be smaller than the total production
of the entire working class. How then can these goods be sold? How then can
production keep going?
The bulk of the theory of capitalist economic
crises is the detailed exploration of this question—how can production be kept
going when the capitalists only pay the workers a portion of the value that they
produce? There are indeed ways to do this—for a while! The problem is that
all these ways eventually lead to other serious problems, so serious in
fact that they must inevitably result in major interruptions in the production
process, i.e., economic crises.
1.6 Comparing the key contradictions.
(This section is a little difficult. If you start
to find it confusing, I suggest you skip the rest of it for now and go on to
section 1.7.) Almost all Marxists agree that the contradiction
between social production and private appropriation is “the basic cause of crises”.
But many of them then turn around and deny that the contradiction between the restricted
consumption of the masses and the tendency of capitalists to expand production
indefinitely has much, if anything, to do with crises. This amounts to affirming the
truth in the abstract, but denying it in the concrete.
To help clarify matters here, let’s write down
the three contradictions we have been talking about so far and try to bring out
their interrelationships a bit better.
- The contradiction between production and consumption in all forms
of economy so far in history. (This contradiction may take on a
somewhat different character in different forms of economy. In particular,
it takes on a special character in capitalist society because—unlike
earlier economies—under capitalism the productive forces have become
so powerful that they are now capable of producing enough to meet
everyone’s needs and wants—or, at least, they would be if it
weren’t for another contradiction inherent in capitalism, namely
- The contradiction between the social nature of production and private
appropriation in capitalist society.
- The contradiction between the restricted consumption of the masses
under capitalism, and the tendency of the capitalists to keep expanding
production without limit.
I think that many people have interpreted
contradiction C as being a specific form of contradiction A, perhaps the specific
form that contradiction A takes in capitalist society. This is not exactly correct.
Even in capitalist society, contradiction A is still properly stated as being “the
contradiction between production and consumption”. The difference in capitalist
society is that this contradiction between production and consumption takes on
a different character, and not that it becomes a different contradiction
which needs to be rephrased in a different way. We could say, however, that
contradiction C is a concrete expression of contradiction A as it applies to
capitalist society only. C may therefore be viewed as a subsidiary contradiction
to A (but only with regard to capitalist society).
Similarly, I suppose you could say, somewhat
loosely, that contradiction B is “implicit” in contradiction A, but only in the
sense that A remains true in capitalist society because of the existence
of contradiction B.
But the part that people are most apt to miss
here is the close connection between contradictions B and C. Of course both
contradictions A and C explicitly mention consumption, while contradiction B
does not. But what some people apparently don’t understand is that contradiction
B also has important implications for consumption, implications which are made
explicit in the more concrete expression of contradiction C. As I said earlier,
contradiction C really is a consequence of, or a more concrete expression of,
contradiction B. I view this as equivalent to saying that C is a subsidiary
contradiction of B.
So I would argue that contradiction C is
both a subsidiary contradiction to A and to B. How can this be? Simply
because C is a more concrete expression of A with respect to capitalist
society, and because C is a more concrete expression of B with respect to
a major way in which that abstract contradiction plays out in capitalist
society. No big mystery here, really.5
Thus, all three of these contradictions are
indeed interrelated, but of them contradiction C is the most concrete and therefore
the one for us to focus on.
It is also true that there are additional
consequences of, or additional concrete expressions of, or additional subsidiary
contradictions to contradiction B, including the following:
D. The contradiction between the social
nature of production within each enterprise and the anarchy of the overall
market which connects all the various capitalist enterprises.
Contradiction D is also a fairly important
contradiction from the point of view of fully understanding capitalist economic
crises. But it is quite secondary to contradiction C. That is, of these two
subsidiary contradictions to contradiction B, the most important one by far is
contradiction C, and contradiction D is of only secondary importance. To really
understand capitalist economic crises you must focus on contradiction C, not D.
Not everybody agrees with this. In fact, the first,
and biggest division among Marxists theorizing on the nature of capitalist economic
crises comes over their divergent opinions on this issue. Some, like the RCP and
even Lenin in his earlier writings on political economy, have pretty much ignored
contradiction C, or have dismissed it as not being of central importance in crisis
theory.6 These folks (even the young
Lenin!7) have all accepted “Say’s Law”—that the
expansion of capital “generates its own demand and markets”, as the RCP expresses
it.8 If you accept Say’s Law you must pooh-pooh
contradiction C as being either totally incorrect, or at least pretty much beside
the point as far as the basic cause of capitalist economic crises is concerned.
Marx attacked and ridiculed Jean-Baptiste Say
and his “principle” (now known universally as “Say’s Law”).9
When Lenin wrote his early economic essays most of Marx’s comments on Say were not
available to him. The RCP has much less of an excuse. I’m not saying we should never
disagree with Marx, but when we do disagree we should openly point out our
disagreements and explain the reasons for them. This is the only honest thing to do
for people who call themselves Marxists.
We will soon see why “Say’s Law” is nonsense, and
we will return to further discussion of contradiction D later on
1.8 Why consumption is so constrained.
Let’s first consider the question of why consumption
is so restrained. The basic explanation for this is bound up in the very concept of
surplus value. According to Marx, the workers sell their labor-power to
the capitalists for a certain period of time, and for a certain sum of money which
represents (on average) the value of that labor-power. But the actual
labor performed by the workers for the capitalists during that time produces a
value in commodities much greater than that for which they are paid. Some of that
produced value (once the commodities are sold) will go to pay wages. Some of it will
go for raw materials, for the replacement of machinery used up in the production
process, and for electric power, heating and other such overhead. But that still
leaves a big remaining piece which Marx called surplus value. This is the source of
the capitalists’ profits.10
Now what this all amounts to is that the workers
produce more value than they are paid for. This means, of course, that the workers
and their families cannot possibly buy back all that they produce. This is
not necessarily a problem for the continuation of production, however, as long as
the capitalists find something else to do with the surplus value. There are
two things that they can do with it (once the commodities which contain that surplus
value are sold and turned into money): 1) use it for personal consumption goods for
themselves and their families; and 2) use it to purchase new factories and machinery
and materials, and hire more workers, to expand production. (Putting the money in
the bank ordinarily amounts to an indirect way of doing the second thing, since
other capitalists will borrow the money to expand production, etc. But if the Bank
cannot find a credit-worthy company to loan the money to, this will in itself serve
to interrupt the process of accumulation. This is one of the things that often
happen on a massive scale when a crisis breaks out, and thus greatly aggravates the
We have noted that the workers themselves cannot
hope to buy all the goods that they produce since their wages cover only a portion
of the value that their labor creates. But capitalist production is so powerful,
and constantly grows more powerful, which means that the capitalists and their
families also have no personal use for most of what can be and is produced.
True, the capitalists as a group live in great luxury, and often have many luxurious
homes, many expensive cars, many servants, a yacht, and so forth. But there are
limits to how much even they will choose to spend on such extravagances. This means
that more and more of the surplus value produced in capitalist production must be
funneled into the further expansion of production, if it is to be used at all.
1.9 Why production tends to be so unrestrained.
So let’s turn to that other aspect of the
contradiction, the question of why capitalist production tends to be so unrestrained
(relative to the actual market), and why and how the capitalists seek to expand it
One answer to this is simply that the capitalists
have all this loot, all this surplus value, and don’t know what else to do with most
of it except to plow it back into the further expansion of production. Another answer
is that the capitalists always want to expand their wealth (even if they don’t really
know what to do with what they have already). Their wealth comes from the reproductive
process of capital, so they naturally wish to expand this reproduction process as
rapidly as possible. The capitalists want wealth not only for the purchase of more
luxuries, but also, and much more importantly, for the prestige and power that such
wealth brings in their circles. In fact this obsession is usually a far more powerful
drive than that springing from any enjoyments they may receive from personal luxuries,
no matter how deeply they are piled up. For most capitalists, accumulation itself
becomes the main goal in life, and the principal way of increasing the rate of
accumulation is through the continual expansion of production.
There are, in addition, many other reasons why
capitalists seek to expand production as rapidly as possible. There is the matter of
stark, naked fear, for example, the fear of competitors, the fear of being driven
bankrupt. Market share is an important factor in the survival of a company. Increased
levels of production usually allow for more and more economies of scale, allowing the
bigger companies to undercut the smaller ones and force them out of business. Larger
companies have more clout against the workers and unions, and more clout with the
government. (Although the government is controlled by the capitalists as a class,
each of them seeks additional special privileges and benefits from it.) And if a
company can expand its own production (and simultaneously absorb its competitors or
drive them out of business) to the point where it becomes either a complete, or at
least a de facto monopoly in certain markets, it then has the opportunity to increase
its profits enormously.
1.10 The capitalist refusal to keep investing.
Now we come to a very curious and fascinating point.
Nothing I’ve said so far demonstrates that there must necessarily be crises! So
why do they happen? Brace yourself, because the answer may seem flippant at first.
It is only because the capitalists, or a sufficiently
large section of them, eventually decide that it no longer makes any sense to
keep expanding production and therefore refuse to do so, that we have a crisis
of overproduction. This is the real horror of it all for the bourgeoisie (or at least
the few among them that have an inkling of the truth): capitalist crises are the result
of the conscious refusal to invest in the further expansion of production on the
part of those whose whole reason for being is such investment! They refuse for one very
good reason: they do not see that they can make a profit through further investment,
since they do not see a market for those products (and because they can’t fully utilize
the factories that they already have).
Such decisions not to plow back all their collective
surplus value (beyond that which they siphon off for their personal extravagant
consumption) mean that they are not building new factories, not buying more machinery,
not buying raw materials, not purchasing more electricity, not purchasing more
labor-power (hiring more workers), and so forth. In other words, they are not
buying all sorts of commodities which they otherwise would have bought. Those
commodities remain unsold, and the producers of those “Department I” sort of commodities
(used to expand production, rather than for personal consumption) must therefore cut
back production themselves, lay off workers, and so forth. It is easy to see that
such a thing could ripple through the entire economy, which would spiral down into
recession or worse.
But given all the reasons for continuing to expand
production, why should the capitalists ever voluntarily decide to stop or slow
down the process? The reasons can be complicated, but in the end it all comes down to
this: It does not make sense to keep expanding production indefinitely when that new
capacity is clearly not going to be used.
Nor does it make any sense to keep expanding
production indefinitely even if that production is used, provided the
only thing it is used for is building more factories whose only product is the parts
and machinery for new factories to make more factories, in an absurd, endless
Amazingly enough, a scheme like this has actually
been put forward as a “logical” proof that capitalism need not develop economic crises.
A century ago the American bourgeois economist J. B. Clark said there would be no glut
(overproduction) if the capitalists simply “build more mills that should make more
mills for ever.”11 Another comment along the same lines
is that of F. H. Knight who claimed that “there is no reason why the entire productive
capacity of society should not be used to construct new capital goods, if the
population should decide to save all its income!”12
Actually, however, such schemes could not really work. Maurice Dobb explained, for
example, that “J. B. Clark’s picture of building ‘mills to build more mills for ever’
can never be actualized, since in the real world mills are always specialized to a
particular current stream of demand connected with consumption in the near future,
and not a stream of demand stretching to an indefinite
While the scheme to build mills whose sole output
is more mills for the sole purpose of building yet more mills, ad infinitum, has
never been tried, and doubtless never will be, the capitalists have tried (to some
degree) something more along the lines of F. H. Knight’s suggestion to simply keep
building up the productive capacity in all industries. This is a big part of
the reason why capacity utilization percentages are often so low, especially in the
imperialist era. Moreover, the capacity utilization figures that the U.S. government
publishes are grossly exaggerated. The standards used are changed every once in a
while so that the figures don’t look so ridiculously low. For example in December
1976 the Federal Reserve Board succumbed to mounting pressure from the “business
community” and other government agencies and revised their capacity utilization rate
series drastically upward. What was formerly said to be merely a 73% utilization
rate suddenly became 81%.14
Paul Sweezy and Harry Magdoff once remarked (in
the course of criticizing the “capital shortage” thesis) that
In short, over time during each long-term
economic cycle, the capitalists build up their real unused productive
capacity to an ever greater degree. The standards for capacity utilization
are occasionally revised in order to partially hide the capital surplus and
over-investment. The over-investment is being carried out partly so that
corporations will be able on short notice to rapidly expand production (and thus
not miss profit opportunities), but mostly because corporations have all this
enormous amount of capital at their disposal that they don’t otherwise know what
to do with.
But even the most profligate corporation will
not continue to build up unused production endlessly. Eventually its managers will
say, “this is ridiculous”, and stop investing. And when this happens in large
sections of the economy simultaneously, a major overproduction crisis breaks out.
1.11 Excess capacity hurts profits.
Another thing to consider here is that building up
unused productive capacity hurts profits. If a company has two plants to produce
the goods that only one plant is actually needed to produce, then its overhead
is tremendously increased, and its profits are correspondingly reduced.
It could be argued that this wouldn’t really matter
if the rate of surplus value, and thus the rate of profit was sufficiently high to
begin with, and/or was expanding rapidly. Even if such things were true, however,
what about building a third idle plant… or a fourth? Eventually an ever-increasing
stock of unused factories and machinery would be bound to hurt profits significantly,
certainly compared to what they might otherwise be.
Moreover, if just one company in an industry builds
up its unused capacity more than the others, its rate of profit would fall compared
with its competitors. Its stock price would decline and Wall Street analysts would
howl. The company would be forced to cut back on the senseless expansion of unused
productive capacity—at least to the prevailing industry standard. In other words,
the “bloating” of the productive plant in an industry can only occur in an
oligopolistic (or monopolistic) situation, and only as long as all the big companies
follow more or less the same policy.
While it may be in the interests of the capitalist
system as a whole to keep expanding unused productive capacity without end, it
is not in the interests of any single company to do so—at least beyond the prevailing
industry standards. The necessity to maintain the profits of the individual company
means that the whole scheme has severe limits. And even if the few big companies in
an industry in one country all simultaneously add unused plant, in this era
of more globalized capitalism a competitor in another country may force an end to
this extravagance. This has actually happened over the past few decades in many
industries. For example, the bloated American car manufacturers in Detroit have had
to “restructure” and slim down (including closing a great many excess factories) in
order to compete with Japanese and South Korean car companies.
In his famous book, The General Theory of
Employment, Interest, and Money (1935), John Maynard Keynes actually lamented
that modern capitalism is not as wasteful as he supposed ancient society to be:
Ah, yes, if only all the big corporations could put
the masses to work building more and more pyramids, unneeded railroads, or unused
factories! This would not only give them jobs, but also give the capitalists something
to do with their ever-growing pile of surplus value. But it won’t work—not only
because the capitalists are “too sensible” to do such a thing—but also because such
make-waste programs destroy profits.