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The Economic Crisis: Will Capitalism Fail?

24 August 2009

Despite the recent pronouncement by the governor of The Bank of Canada that the recession is over, we are suffering through the worst crisis in capitalism since the 1930s Depression. Even he had to admit that the employment figures might not recover until 2014. So for the over seven million North Americans who have lost their jobs in this recession, the recession is definitely not over. The Toronto jobless rate was recently pegged at 9.6% and 15% for the 18-24 age group. These figures are even worse as they are shamelessly manipulated and ‘seasonally adjusted’ to reflect only a fraction of the real rate. For example, those who have given up looking for jobs, those in part-time jobs who want full time, and those who are underemployed and take temporary jobs until something better comes along, are not counted. Unfortunately, the job of the modern-day economist is to be a cheerleader for the capitalist system and put a happy face on the bleak outlook that capitalism offers. Recently, an ‘economist’ interviewed on CBC radio, explained the continued rise in unemployment as a good sign because it meant that more people must be looking for a job and that is a sign of their confidence in an improving economy! Today, however, the TSE dropped a gut-wrenching 316 points, wiping out much of the recent gain that gave rise to optimism.

Oprah reported that 10 000 American families per day were losing their homes to repossession. The houses sit empty because the stock of unsold houses is so high. Thus we have millions of families who have to live with friends or relatives, or, worse, in tent cities because they have no home, and millions of homes standing empty waiting for tenants. It’s all part of the madness of a system that can only produce for those with the money to pay for their commodities and to hell with those who can’t.

The financial meltdown triggered by the sub-prime mortgage fiasco is the greatest financial disaster since 1929. Venerated financial houses, such as Lehman Brothers, that have been solid for decades and with assets in the hundreds of billions came tumbling down or required billions in federal money to stay afloat. And, of course, the collapse of General Motors, the cadillac of corporations, is something no one would have predicted just a short time ago.

Every recession is a crisis in the capitalist mode of production. Marx wrote that capitalist production moves through certain periodic cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis, and stagnation - what is referred to today as ‘the business cycle’. The manifestation of a recession is an oversupply of goods to the market that cannot be sold immediately, sending a signal to the production units to slow down or stop production and thus creating unemployment. The production units reduce orders for the means of production, raw materials and machinery, which causes more lay-offs and the unemployed reduce their purchases, creating a snowball rolling down a hill effect. But what causes the overproduction? Marxist scholars such as Rudolph Hilferding and Mikhail Tugan-Baranovsky pointed to the anarchy of capitalist production as the culprit and scientific socialists developed this idea. For steady sustained growth, capitalist production needs a state of equilibrium between the various sectors of the economy and between supply and demand. The absence of social regulation means that this is rarely achieved and only for short periods of time. Production is based on the expectation of profit and profit is highest in a boom period. Then the drive for maximum profits sees production lines ramped up and new ones created. No one wants to miss out on the bonanza and no one expects to be the one who can’t sell his commodities. Eventually, of course, all this expansion means that productive capacity goes beyond what the market can absorb and productive capital is tied up in the form of unsold goods. Profits drop and capital turns over slower or is withdrawn altogether. In addition, the reserve army (that part of the work force that is often unemployed or on welfare and kept around only to be activated in times of expanded production) disappears in a boom so that demand for labour increases, raising its price and reducing profitability and depleting the investment fund of the capitalists. This results in a lower demand for producer goods, i.e. natural resources, machines, etc. producing a crisis in that sector. Thus the anarchy of production, the loss of equilibrium between sectors, and rising wages, create the climate for recession.

Once the recession is upon us, conditions that are favourable to a recovery become apparent. Companies that declare bankruptcy sell off their assets cheaply to their rivals. Less demand for producer goods means lower prices. The reserve army and many others are laid off creating a competition for jobs and thus lowering wages. Lower demand for loans reduces interest rates like any other commodity. The large stocks built up before the advent of the recession gradually decline to a point where production is again necessary. All of these factors make investing in production more attractive and the cycle begins its upward swing. It is evident then that the seeds of every boom are to be found in every recession and, conversely, the seeds of every recession are to be found in every boom. This boom and bust cycle is an entirely natural occurrence of the capitalist mode of production. It hasn’t collapsed capitalism yet, and, in fact, recessions tend to strengthen the system by weeding out the weak and inefficient enterprises, something not apparent in the state-run capitalism of the Soviet Union, contributing to its demise. Collapse theories developed in the latter part of the nineteenth century, in part as a response to the Long Depression, 1873 to 1895. Several leading theoreticians and leaders of left organizations presented collapse scenarios. Karl Kautsky said that capitalism is incapable of prolonged survival because of the inability of markets to keep pace with production. Henry Hyndman, of the Social Democratic Federation, thought that the depression would bring an attempt to substitute collective for capitalist control, i.e. a social revolution. Engels wrote that while productive power increases in geometric ratio, markets increase in an arithmetic one. Rosa Luxembourg, Kautsky, and Bogdanov based collapse theories on the restricted purchasing power of the working class. This underconsumption theory argued that aggregate demand, i.e. workers’ consumption fund plus capitalists’ consumption fund could not buy the total product, especially when the capitalists used some of their fund for reinvestment thus reducing the total available for buying products. Luxembourg theorized that the extra product, not bought by the workers or the capitalists, was disposed of in those parts of the world not yet under the capitalist mode of production. Since the tendency of capitalism is to expand and spread, then that market would shrink until the extra product could not be sold putting capitalism into a crisis from which it could never recover. The companion parties of the World Socialist Movement argued that total aggregate demand consists of workers’ consumption plus capitalists’ consumption plus capitalists’ investments because those investments were not lost but used to buy the means of production – raw materials, machinery, buildings etc.

In addition, since the exchange value of a commodity is determined by the amount of socially necessary labour embedded in it, then a value equal to that must be shared between the workers and the capitalists, i.e. the total purchasing power is equal to the total sum of values. Even though value and price may vary (according to the supply and demand of the market) the sum total of values equals the sum total of prices. Thus the workers and the capitalists together would be able to buy all the products on the market. If underconsumption were true, then it would have stifled the growth of capitalism completely. A second collapse theory centered around the falling rate of profit due to the rising rate of the organic composition of capital. Capital invested is divided into two parts. Constant capital is that part that buys the raw materials and producer goods such as machinery and is transferred directly through the productive process to the finished product. Variable capital is used to buy labour-power that produces surplus value (that value created by the worker over and above his wage) that is embedded in the commodity and realized at its sale. That is the only source of profit. As technology and machinery develop, more of the invested capital goes into the constant part and less into buying labour-power, more into dead labour (machinery) and less into living labour. Thus the part producing surplus-value shrinks and with it the rate of profit. However, so far, the fall in the rate of profit has been very slow and often not apparent at all. Marx noted that this falling rate is only a tendency, not a law, and is offset by many other factors such as shift work, increased use of the machinery, ( increases the rate of exploitation), cheapening of the elements of constant capital (cheap goods that don’t last long), higher productivity, including higher intensity of work, and the increased rate of the turnover of capital. Thus, it is unlikely that the rise in the organic composition of capital will bring about collapse of the system. The real evidence is that capitalism has continued and continues to expand despite regular crises and doesn’t look like collapsing any time soon. Whether other factors such as the end of an oil-based economy or global warming will have a major effect on the health of capitalism remains to be seen What we can say for sure is that :

  1. A recession is a normal consequence of capitalism.
  2. A recession can invigorate capitalism.
  3. Capitalism is not likely to collapse of its own accord any time soon.
  4. If collapse theories were true, all socialists would need to do is sit back and do nothing.
  5. If capitalism did collapse, it wouldn’t necessarily mean that socialism would follow.
  6. Socialism is the task of the working class and can only come about by the actions of a conscious majority understanding and wanting socialism.
  7. Thus we must assume capitalism will continue and work towards its demise.
  8. Collapse theories therefore undermine the real work of socialists, just as do time and energy spent on reforms and alternative systems within capitalism such as cooperatives, fair trade, and communes.

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