A layperson’s guide to crisis theory

Anwar Shaikh

The next topic in our introduction to Marxism online class is something of a calculated risk since it involves readings and discussions of some fairly difficult questions around what has been described as “crisis theory”. Not only is some of the material pretty challenging, I have to confess that it is an area that I don’t consider myself an expert in (as opposed to ecology–the next topic after this one.)

I think it is worth going into since it is a hot topic on the Marxist left, especially in the academy. It is also being referred to every time there is a major convulsion in the international economy, such as the one we are in now. Basically, you find an attempt to explain something like the dot-com bust or the subprime mortgage fiasco of today as a function of the capitalist system itself and specifically its inherent tendencies to implode.

As I pointed out in my reference to Ernest Mandel’s chapter on crisis from his 1990 book on Karl Marx earlier in the week, you cannot find much support for inherent tendencies toward crisis in the 3 volumes of Capital itself. Marx was content to analyze the functioning of capitalism in normal conditions, which was sufficient to condemn the system when you keep in mind that child labor, 12 hour working days and miserable wages characterized the system in its initial stages. You didn’t need an economic collapse to persuade workers to become socialists. Factory work was radicalizing enough.

Over the next week or so, I intend to serve as a kind of guide to some of the more important literature in this vein which I hope does not end up as the blind leading the blind. As someone who has been mystified in the past by the furious debates among people I all regard as friends and comrades over these questions (Patrick Bond, Leo Panitch, Doug Henwood to name a few), I figured that it was high time for me to come up to speed and bring the rest of you along with me.

As has been the case up to now, all of the readings will be on the Internet. Some of the Marxists I have identified as being prime examples of this sub-discipline are Rosa Luxemburg, Henryk Grossman, Paul Mattick, David Harvey and Paul Sweezy. But before we begin reading and discussing their articles, it might make sense to begin with an excellent introduction to the literature by Anwar Shaikh, a New School professor who is an acknowledged expert in the field. His web page consists of many articles and books that can be downloaded for free: http://homepage.newschool.edu/~AShaikh/, including the one that I will be reviewing here. Also included are a number co-written by Ahmet Tonak, an old friend who was on Marxmail and PEN-L for a long time until he relocated to Istanbul. If you visit Shaikh’s website, it will be obvious that he is a proponent of the “falling rate of profit” thesis, one of the key components of crisis theory.

It should be noted, however, that the falling rate of profit was noted by Marx himself in part III of V. 3 of Capital as the title would clearly indicate: “The Law of the Tendency of the Rate of Profit to Fall”. Notwithstanding Marx’s assertion that such a tendency leads to crisis, it does not automatically follow that it is an absolute tendency. Profits do not only tend to rise and fall, it is also difficult for Marxist economists to come to an agreement about whether they are rising or falling at a given moment in time, as furious debates between Robert Brenner and Sam Gindin forwarded to Marxmail would indicate.

Shaikh begins by making a useful point, namely that “the truly difficult question about such a society [capitalist] is not why it ever breaks down, but why it continues to function.” In other words, the analysis of “reproduction” (the normal functioning of capitalist society) and the analysis of crisis are inseparable.

Shaikh next identifies 3 basic lines on whether the capitalist system is “self-equilibrating”, a technical term that refers to the system’s ability to resolve momentary upsets, either as large as the Great Depression of the 1930s, or the dot-com bust of 2000, which seemingly had no impact on the underlying economy at all.

1. There are no necessary limits on the capitalist system. When left to its own devices (Milton Friedman) or properly managed (Keynes), it can go on forever.

2. The capitalist system is incapable of self-expansion. It can grow, but only at the expense of the non-capitalist world. Shaikh writes that the “different schools of underconsumption, including Marxist ones, have their origin in this line of thought.”

3. Capitalism is capable of self-expansion, but the accumulation process only deepens the internal contradictions on which it is based, until a crisis is provoked. This is a strictly Marxist approach which can include both a “falling rate of profit” and a “profit squeeze” explanation of crisis.

Since there are (hopefully!) none of us who are committed to #1, I am going to move ahead and recapitulate Shaikh’s discussion of #2.

Underconsumption theory rests on the notion that there are two “departments” involved with capitalist production. Department 1 produces capital goods, such as raw materials, fuel, buildings and machinery. Department 2 consists of consumer goods and services. Demand in Department 2 drives production in Department 1. In other words, if workers begin to buy Ipods, there will be a need for stepped up production of microchips, etc. in Department 1.

Once the capitalist pays for the costs of production in Department 1 type commodities, he is left with “net operating income”, which is divided into wages and profits and available for future demand. Since workers’ wages constitutes only a portion of net income, they can only purchase a portion of the net product of goods and services. The bosses still have cash available in the form of their profits, thus it is incumbent upon them to purchase the backlog of consumer goods. However, if they spend their money in this fashion, there will be no money available for new investment or growth.

Underconsumptionist theory can be found in non-Marxist economics, including in Malthus. When adopted by Marxists, it is typically the result of not understanding Marxist economics sufficiently. For example, Marx’s writings were embraced by Russian populists in the 1870s but they gave them an underconsumptionist twist. They reasoned that since workers produced more than they consumed (a crude understanding of the production of surplus value), the home market in Russia would be inadequate for growth and hence impossible for future capitalist development. In their eyes, the only possibility for social revolution rested in the peasant communes, which did not operate on the basis of capitalist profit and hence avoided the underconsumptionist conundrum.

Against the populist interpretation of Marx’s labor theory of value, Lenin and Tugan-Baranowsky observed the growth of capitalism in the Russian countryside despite the populists’ failure to notice it, and went on to explain it in terms of a more correct understanding of Marxist economics.

Unlike the Russian populists, Rosa Luxemburg had a much better grasp of Marxist economics. But that did not prevent her from adapting some of their arguments. Shaikh presents her argument as follows:

Imagine that at the end of a production cycle the whole social product is deposited in a warehouse. At this point capitalists come forward and withdraw a portion of the total product to replace their producer goods used up in the last cycle, and workers come and withdraw their means of consumption. This leaves the surplus product, from which capitalists withdraw a portion for their personal consumption. Now Luxemburg asks, where do the buyers for’the rest of the product come from? (This is of course the traditional underconsumption problem of filling the “demand gap”). If Marx is right, she says, then it is the capitalist class which buys back the rest of the product in order to invest it and thus expand productive capacity. But that makes no sense at all, for “who are the new consumers for whose sake production is ever more to be enlarged?” Even if capitalists did what Marx says they will, in the next period productive capacity will be even greater, the gap to be filled even larger, and the problem even more intractable. Marx’s “diagram of accumulation does not solve the question of who is to benefit in the end by enlarged reproduction. . .” Expanded reproduction is algebraically possible but socially impossible.

If Rosa Luxemburg’s underconsumptionist analysis is faulty, it at least has the merit of allowing her to see the expansionist character of the capitalist system, which at least on an empirical basis does seek to resolve crisis at home by attacking non-capitalist spheres abroad and integrating them into the capital accumulation process. David Harvey, one of the more respected Marxist economists on the scene today, has adapted Luxemburg’s theory for his own notion of “accumulation by dispossession”. Clearly, this analysis overlaps with his own and other economists’ views on the nature of imperialism today, which will be our next topic for discussion.

After Rosa Luxemburg, the next attempt by a Marxist to adapt underconsumptionism was Paul Sweezy’s “The Theory of Capitalist Development”, written in 1942 at a time when capitalist crisis was obviously very much on the minds of Marxists everywhere. Although Sweezy’s book is not online, it is worth quoting a salient passage to give you a sense of how he saw the problem:

The real task of an underconsumption theory is to demonstrate that capitalism has an inherent tendency to expand the capacity to produce consumption goods more rapidly than the demand for consumption goods. To put the point in another way, it must be shown that there is a tendency to utilize resources in such a way as to distort the relation between potential supply of and potential demand for consumption goods. This tendency may manifest itself in one of two ways. Either (1) capacity is actually expanded and the difficulty becomes apparent only when an increasing volume of consumption goods begins to come on the market. There will then be a point beyond which supply exceeds demand at normally profitable prices, and as this point is passed production of consumption goods, or production of additional capacity, or more likely both, will be curtailed. In this case, then, the tendency in question manifests itself in a crisis. Or (2) there are idle productive resources which are not utilized to produce additional capacity, because it is realized that the additional capacity would be redundant relative to the demand for the commodities it could produce. In this case, the tendency does not manifest itself in a crisis, but rather in stagnation of production. It follows that if the tendency to underconsumption can be established, it can serve to explain both crises and periods of stagnation. At the same time, however, it must be expected that there are many forces which counteract the tendency to underconsumption, so that for long periods the latter may remain latent and inoperative. For the present we shall attempt only to establish the tendency to underconsumption, leaving the counteracting forces and their mutual interaction for consideration in Chapter xii.

It should be mentioned at this point that Paul Sweezy’s tended to see underconsumptionism as having more of a tendency to result in “stagnation of production” than in crisis, especially as the U.S. moved away from the awful economic impasse of the Great Depression and into postwar prosperity. From the 1950s onward, Sweezy, Paul Baran and the other intellectuals associated with Monthly Review could hardly be regarded as “doom and gloom” prophets. Mostly, they saw the evils of capitalism in some ways as consistent with the point of view embodied in Capital, Volume One. Capitalism sucked because of the way that labor was exploited on a “normal” basis. While Marx identified this process with the cruelties of the factory system, Sweezy and Baran approached more in terms of the failure of the capitalist system to produce a decent society. Whether it is a 12-hour working day or being bombarded by laxative ads on television, the capitalist system left a lot to be desired.

That view was put forward in “Monopoly Capital”, co-written by Sweezy and Baran. In it you no longer find the same underconsumptionist arguments of the 1942 book, but more of an analysis that posits capitalism as system that has an intrinsic tendency to expand the production capacity of Department II faster than consumer demand. This amounts to more of an overproductionist emphasis but the net result is the same.

Moving on to #3, or capitalism as a system of self-expansion but only through the deepening of internal contradictions, you get into a group of thinkers, who while sharing that framework, have all sorts of hot debates about how that framework relates to economic realities.

This is how Shaikh formulates the basic approach:

Radical and Marxian underconsumption theories tend to focus on effective demand as the limiting factor in capitalist accumulation. In Marx’s own analysis, however, effective demand is not an intrinsic problem. On the contrary, in his view capitalists are driven to accumulate as rapidly as possible, so that self-expanding reproduction, not stagnation, is the normal tendency of the system. This does not imply that the accumulation process is smooth, or that partial crises may not occur along the way due to crop failures, etc. But it definitely does imply that the limits to the accumulation process do not arise from an insufficiency of demand.

Does this mean, as Rosa Luxemburg so eloquently argues, that once one rejects underconsumption theory one is forced to accept the view that accumulation (and hence capitalism itself) is capable of indefinite extension? Not at all. According to Marx, the limits to accumulation are entirely internal to the process. “The real barrier of capitalist production is capital itself.”

Capitalist accumulation is motivated by profitability. But, according to Marx, accumulation progressively lessens profitability, so that it tends to undermine itself. This is the famous law of the tendency of the rate of profit to fall, which we shall turn to shortly. At the same time, accumulation implies extension of capitalist relations, increase of the proletariat and of its strength.

Declining profitability means declining rates of accumulation and increasingly fierce competition among (national and international) capitalists for markets, materials and cheap labor-power. As weaker capitals are eliminated, economic concentration and centralization (i.e., “monopoly”) increases. Moreover, it becomes increasingly necessary for capitalists to attack wages either directly, through mechanization, or through import of cheap labor-power and/or export of capital to poorer countries.

At the same time, the size of the working class and the extent of its collective experience in struggling against capital is continually on the rise. Thus capital’s increasing attack on labor is met with an increasing resistance and counter-attack (over the long-run). The class struggle intensifies.

The remainder of Shaikh’s article is a presentation of his own take on the falling rate of profit, followed by a history of the theory with a focus on Henryk Grossman, Paul Mattick and David Yaffe. Rather than spending any time to recapitulate this section of his article, it would probably make more sense to go directly to their articles, which will happen over the course of the next week or two.

In the meantime, I invite you to read Shaikh’s article at: http://homepage.newschool.edu/~AShaikh/crisis_theories.pdf