Reading Capital as Crisis Theory: Part 2

We conclude our article on Marx’s theory of crises based mainly on the interpretation of the Marx-scholar Samezo Kuruma.

What factors within capitalism transform the possibility of crisis (discussed in Part 1) into an actual crisis? Considering this question requires an understanding of what Marx means by his enigmatic statement that the ‘true barrier to capitalist production is capital itself’ (Capital Vol. 3, Penguin, p. 358).

Capitalism tore down the external barriers posed by feudalism and other modes of production, and in so doing freed up the space needed for its own development. But even though it eliminated ‘the limits not corresponding to it, which were barriers to it’, Marx observes, ‘it is by no means the case that it thereby suspended all limits, nor all barriers’; it remains limited ‘by itself’ and ‘by its own conditions of life’ (Grundrisse, Penguin, p. 650).

In Volume 3 of Capital, Marx notes that ‘the methods of production that capital must apply to its purpose and which set its course toward an unlimited expansion of production’ continually run up against the ‘barriers within which the maintenance and valorization of capital-value has necessarily to move’. In short, “the means – the unrestricted development of the forces of social production – comes into persistent conflict with the restricted end, the valorization of the existing capital’ (pp. 359–60).

The powerful drive of capital to continually augment itself by developing the productive forces without limit runs up against a barrier that capital itself imposes as self-expanding value. In Grundrisse, Marx says that capital by its nature ‘posits a barrier to labour and value-creation, in contradiction to its tendency to expand them boundlessly’ and as such ‘it is the living contradiction’ (p. 421).

A crisis can be understood as arising from the tension generated from capital pushing beyond its own barriers to develop productive power without limit.

Capital as a ‘Living Contradiction’

In the first volume of Capital, Marx explains the motive underlying the incessant drive to raise productivity under capitalism. Introducing improved production conditions that raise the productivity of labour allows individual capitals to produce commodities using less labour time. As a result, the ‘individual value’ of those commodities is lower than the ‘social value’ for the given commodity type, which is determined by the labour time necessary under average production conditions. If the commodities produced under improved conditions are sold at the prevailing market price, an ‘extra surplus value’ can be obtained (as the difference between the ‘individual’ and the ‘social’ value). But an even neater trick is to sell the commodities below the ‘social value’ but above their ‘individual value’ so as to still pocket extra surplus value but also ensure the sale of the commodities and undersell competitors.

The desire among individual capitals for profit is insatiable, expressing a survival instinct in the capitalist jungle, so their drive to raise productivity toward that end is also without limit. But this drive that seems absolute collides with barriers imposed by capitalism as a system of production for profit.

In the realm of immediate production, where the aim is the creation of surplus value, capital confronts three barriers according to Marx: it must have the necessary means of production, a sufficiently large working population, and an adequate level of labour exploitation (i.e. rate of surplus value). Capital does everything in its power to secure sufficient labour power that can be adequately exploited, including extending the working day and tapping into cheaper sources of labour power.

But capital cannot rest on its laurels after extracting surplus labour from workers in the production process. That only brings the ‘first act’ to an end: it is still necessary to sell the commodities produced to realise the surplus value created. If this ‘second act’ is a flop, all that good exploitation will have gone to waste and it will be difficult, if not impossible, to continue capital accumulation.

The barriers within the circulation process include the need for sufficient demand for specific use-values (backed by adequate purchasing power), enough money to realise the surplus value created, and the transformation of the commodities produced into money via sales. Capital is restricted, in other words, by the ‘proportionality between the different branches of production and by the society’s power of consumption’. But the barrier posed by consumption is not determined by the absolute consumption needs of society, Marx is careful to note that this is ‘the power of consumption within a given framework of antagonistic conditions of distribution, which reduce the consumption of the vast majority of society to a minimum level’ (Capital Vol. 3, p. 352). Reformists who think that crisis could be overcome by raising working-class consumption are treating capitalism as if it were a system of production for use rather than profit.

‘Double-edged Law’ of Accumulation

Understanding how capital as a ‘living contradiction’ relates specifically to crisis requires taking a closer look at the consequences of raising productivity.

As productivity rises, relatively less labour is needed to utilise the machinery and other means of production, so that the quantity of the means of production increases in proportion to the quantity of labour. Expressed in terms of value, this means that the quantity of ‘constant capital’ invested in the means of production increases compared to the quantity of ‘variable capital’ invested in labour power. Marx calls this a heightening of the ‘organic composition of capital’.

The ‘constant capital’ is so named because its value is merely transferred to the finished product (without adding any new value), whereas the use of ‘variable capital’ in the production process can generate surplus value. This is why the rate of surplus value, which expresses the degree of labour exploitation, is calculated by dividing the quantity of surplus value by the variable capital. The rate of profit, in contrast, is surplus value divided by variable and constant capital. Thus, even if the rate of surplus value remains the same, the profit rate will fall if the proportion of constant to variable capital increases.

Marx argues that the rate of profit will tend to decline as the organic composition of capital rises through the development of productivity. This is his ‘law of the tendential fall in the rate of profit’ presented in Volume 3 of Capital. But Marx is careful to describe this as a ‘double-edged law’ because the ‘decline in the profit rate [is] coupled with a simultaneous increase in the absolute mass of profit’ (p. 326).

If individual capitals are to survive through continued expansion, they must make up for the fall in the profit rate by expanding the quantity of profit. For example, a capital of 1,000 at 40 percent produces 400 in profit, so if the profit rate falls by half to 20 percent, the capital invested would have to increase in the inverse ratio, to 2,000, in order to just yield the same 400 in profit. And if the mass of profit is to grow, the capital would have to increase at a higher ratio than the ratio at which the profit rate fell. The declining rate of profit thus accelerates the accumulation of capital.

Marx has been ridiculed for arguing that there is a tendency for the rate of profit to gradually fall, but this was widely considered an unquestionable fact that had to be explained. Adam Smith had attributed the tendency to increased competition among capitals, while Ricardo pinned the blame on increased grain prices due to the ‘law of diminishing returns on land’. For Marx, the key question was not whether the profit rate tended to fall or not but why the decline is not more rapid despite steadily increasing productivity. In other words: Why is the fall tendential rather than absolute?

Marx answers this question by pointing to counteracting factors to the law, which include the more intense exploitation of labour (ie, increased rate of surplus value), the cheapening of the value of constant capital, and the expansion of the relative surplus population that drives down the value of labour. Such factors are said to moderate the tendency for profit to fall. However, it is important to note that the counteracting factors operate within the same ‘law’ since they all arise from the same reasons that produce the tendential fall in the rate of profit, namely the increase in the productive power of labour.

Phases of the industrial cycle

One way to understand the relation of the ‘double-edged law’ to crisis is to trace the way the law unfolds across what Marx calls the ‘industrial cycle’ (also known as the ‘business cycle’). Marx identified the following phases of a typical industrial cycle: moderate activity, prosperity, overproduction, and crisis and stagnation.

The destruction of capital through the explosion of crisis and the stagnation that follows is not enough to get a new cycle going. Some impetus is needed, whether the emergence of important new use-values, expansion of new markets, or improved production conditions. Under such an impetus, stagnation can give way to moderate activity in at least a few sectors of production. At this stage, the relatively low wages and prices for machinery and materials, as well as expanding markets, help to raise the rate of surplus value (and profit), so even when individual capitals raise productivity to obtain extra surplus value, it does not immediately lead to a fall in the rate of profit. The ‘counteracting factors’ mentioned earlier exercise considerable force.

Moderate activity gives way to the phase of prosperity, when the profit rate tends to rise in not only some leading sectors but generally. Moreover, the expansion of one sector leads to increased demand for products in other sectors, creating a virtuous cycle for capital. But the new production methods introduced at first by individual capitals within the leading sectors steadily spread more widely to raise the productive power of labour across the economy. This results in a heightening of the organic composition of capital that begins to bring down the rate of profit. The lower profit rate spurs even more rapid accumulation by making it necessary to invest a greater quantity of capital to obtain even the same amount of profit. And that increased accumulation in turn heightens the organic composition of capital even further.

During the phase of prosperity, the accelerated accumulation and increased sale of products leads to an absolute rise in the quantity of profit despite the falling rate of profit. On the surface, everything seems to be humming along. At this point, as the memory of the last crisis fades away, articles may begin to appear in the financial press about how ‘things are different this time around’.

However, the fall in the rate of profit that accompanies the increased pace of accumulation ‘gives rise to a competitive struggle’ (p. 365) between capitals, marking the point at which the phase of prosperity begins to give way to the phase of overproduction. The ‘competitive struggle’ Marx refers to arises from the need to compensate for the fall in the rate of profit by an increase in the mass of profit. He notes that big capital possesses the conditions necessary to succeed in that endeavour, whereas smaller capital and new capital ‘must first acquire them’, leading to a fierce struggle between these actors.

This competitive struggle is fuelled by an expansion of the credit required by individual capitals to cover the steadily rising minimum level of capital investment. Capitals unable to keep up must either shift to some production sector with a lower minimum level or take the ‘adventurous paths’ of speculation and swindles. The frenzied competition that emerges from (and in turn spurs) accelerated accumulation increases demand for labour power, thus shrinking the ‘relative surplus population’ of workers. The temporary increase in wages that results drives down the rate of surplus value, causing the profit rate to sink further.

Nevertheless, on the surface of things, the economy is ‘booming’: the quantity of profit, wages, stock and real-estate prices continue to rise. But this is just the ‘storm before the calm’ – the phase of overproduction that will be followed by prolonged economic stagnation.

As the cycle enters the phase of overproduction, there is a ‘plethora of capital’, which Marx defines as ‘capital for which the fall in the profit rate is not outweighed by its mass’ (p. 359). Under the sharp decrease in the rate of profit, additional investment of capital only yields the same or even less profit than before. Marx says that the ‘overproduction of capital’ (which ‘always involves overproduction of commodities’) means the ‘overproduction of the means of production’ that ‘can be applied to exploiting labour at a given level of exploitation’ below which ‘disruption and stagnation in the capitalist production process, crisis, and the destruction of capital’ (p. 364) would occur. Crisis is the forcible solution to the overproduction of capital through mothballing or destroying the means of production and labour power that cannot serve the immediate needs of capital augmentation (even though otherwise they could be used to produce useful things).

The contradictory process of capital accumulation that culminates in crisis might be summarised as follows:

The development of productive power in pursuit of profit raises the composition of capital, leading to a fall in the profit rate accompanied by an increase in the mass of profit; this ‘double-edge law’ in turn spurs even faster capital accumulation and concentration that heightens the capital composition further. The falling profit rate raises the minimum level of capital investment necessary, unleashing a ‘competitive struggle’ between individual capitals that larger capitals are in an optimal position to win, while smaller capitals are forced into desperate speculation and swindles (further inflating the real-estate and stock bubbles). Amidst the intensified competition, demand for labour power drives up wages temporarily, leading the profit rate to fall sharply, which generates a ‘plethora of capital’ unable to function at the low profit rate. Crisis temporarily resolves the overproduction of capital by clearing away the excess and driving down wages, thereby exposing the absurdity of a social system that leaves human needs unmet while letting its means of production and labour power go to waste.


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