Understanding the Crisis of Capitalism

UNDERSTANDING THE CRISIS

Civilization is undergoing a crisis of massive proportions. A crisis that is simultaneously social, political, ecological and economic. All these aspects, are of course, interrelated, but in the last instance are rooted in the system of economy which predominates. It is this crisis, often called the crisis of capitalism, that I chose to explore.

Before going any further, what is capitalism?

Defining the system is of the utmost importance, for without a clear understanding of what the system is, we can never get to the root of the problem. There is an assumption among naïve sectors of the left business itself, buying and selling, is capitalism. But this is not true. While market exchange and private property are necessary preconditions for the existence of capitalism, they are still not capitalism. Private ownership and exchange existed for at least 2000 years before capitalism. There are two aspects which make a system specifically capitalist. The first is the goal of production. In pre-capitalist systems the reason for an economic endeavor was consumption. Under capitalism, consumption is secondary, the primary goal is accumulation of capital. The second key aspect is the separation of the producers from the means of production, ie, wage-workers, not independent artisans or peasants. Thus a society of peasants and artisans exchanging goods is not capitalist but Simple Commodity Production (SCP) .

The difference between Simple Commodity Production and Capitalism can be rendered in two formulas; The formula for SCP is C-M-C. C is the commodity produced and sold, M is the money from the transaction, and C is the commodity bought with it. Thus the peasant sells his carrots, takes the money and buys cheese with it. The goal is consumption. For capitalism the formula is M-C-M1, M is the money capital advanced to create the commodity, C, which is then sold and a greater amount of money capital M1 is the result.

The perpetual augmentation of capital is the raison d'etre of capitalism. And when that augmentation slows down or stops, the system goes into crisis.

The capitalist economic system has undergone periodic crises, which vary in intensity and duration, approximately every ten years since the 1830s. Why this happens has been a point of contention, virtually since the first breakdown. There are several explanations. One is the “under-consumption theory” and the second is the theory of the decline in the rate of profit. Less known are the Kondratiev cycles

Under-consumptionism is based on the obvious reality that wage workers cannot buy all of the product they produce. In order for the employer to amass profit, the workers must be paid a good deal less than the wealth they actually create. This was largely offset in the past by the fact that wage earners were only a minority of the economically active. Farmers and small business people could buy up the products produced by wage labour. Much of the production was also for developing the means of production, i.e. machine tools, locomotives, ships, infrastructure and not simple consumer goods. Once the overwhelming majority of the population became wage earners and expenditure on means of production has become less important thru cybernation, underconsumption becomes a gnawing problem.

This is the fact lying behind all the talk of stagnation due to the “decline of the middle class” (high-wage workers) who are no longer in a financial position to purchase the great masses of consumer goods that they used to. Keeping consumption up thru deficit spending during a down-turn was also the basic idea of Keynsian economics. For Keynes, underconsumption was the key problem of capitalism.

The problem with underconsumption theories is they do not explain the periodicity of the crises. Lack of purchasing power is an on-going problem - like a running sore – but it cannot adequately explain why ever so often the system goes into near collapse mode.

The theory of the decline in the rate of profit is also rooted in something obvious. Capitalist production depends upon a regular rate of profit. If an industry becomes less profitable, capital will shift away from it. Should the entire economy become less profitable, investment rates will decline and the economy will stagnate. Less obvious however is the underlying cause for the decline in that rate of profit.

Production involves two basic things, 1. machinery, 2. labour power to operate/maintain those machines. In a competitive economy, the value of the machine will simply be passed on to the product as a fraction of the cost of that machine. The only “thing” that can produce more value than its own value is labour power. This, as we have seen above, is obvious – workers produce more value than they are paid, and if they did not they would not be employed. Wage labour is thus ultimately the profit producer, not the machine the labourer operates. Competition among firms leads to cost cutting. One of the most important of these, is eliminating labour power. Mechanization (and eventually robotics and cybernation) eliminates workers. This gives an edge for the first company doing this, but eventually all adopt these changes and profit rates will soon be the same for all companies. Thus, a “race” exists to replace labour with machine. In shrinking the productive work force, the rate of profit will thus have a tendency to decline, since labour power and not machine is the root of profitability.

The decline in the rate of profit is not absolute or linear. It can be offset by cheapening the means of production, shifting factories to low-wage countries, or violently beating down wage rates at home. There are problems with the decline in rate of profit theory. It is sometimes difficult to prove, indeed some political economists deny that it really happens. But this is not the key problem for this discussion. As with underconsumption theories, the decline in the rate of profit cannot adequately explain the periodicity of crises.

Kondratiev cycles (1) or “K-waves” are long waves, 40-60 years of alternating high growth and stagnation. The economy comes out of stagnation thru technological innovation, which raises growth and profitability. For example, the 1950s economy was based largely on petrochemicals, automobiles and aircraft. This began to go into the tank in the 1970s. A long period of stagnation has followed, to be supposedly replaced by info tech and green tech in the near future. Problems – while it explains long-term periodicity, what about in the short term? What does it say about the crisis of the 1980s? Or 2008? Which is cause and which is effect? Is it the rate of profit that determines the technology or the technology that determines the rate of profit?

How then can we look at the crisis if there are such limitations to the presumed explanations? Fortunately for us there is a school of political economists who have gone beyond the underconsumptionist-rate of profit dichotomy and created a new synthesis. This is the “Japanese School” of Kozo Uno, Makoro Itoh and Thomas Sikine.(2)

Uno sees the reoccurring crises as a matter of “overproduction of capital.” Capital expands during prosperous times, and old fixed capital is rarely eliminated. Expansion creates a rise in wages. Wage rises eventually cause a reduction of profits and an increase in prices of goods produced, not to mention a rise in demand for these goods bought by higher wages. This can bring about speculative stockpiling. Lower profits create a demand for money capital, raising interest rates. Lower profits in industry can also bring a shift of investment to speculative investments in bonds and real estate. The increase in interest rates is fatal to speculators, bringing an end to expansion and the beginning of crisis.

Collapse of speculation leads to a decline in prices of goods and credit situation deteriorates further. A chain reaction of business failures results. Lay-offs of workers lowers worker income and general wages, which it turn cuts consumption, further aggravating the crisis. Capital – in the form of plants, commodities and credit documents - are effectively destroyed. Loanable capital is plentiful, yet few can borrow. Eventually, some business owners will adopt new methods and processes in light of the destruction of fixed capital. The renewal of equipment helps restore the rate of profit and a new phase of prosperity begins.

“The life cycle of fixed capital... furnishes a material basis of the periodic crises, in particular it is a decisive determinant of the circuit of business cycles, for the simultaneous renewal of fixed capital … is the starting point for every new prosperity phase.” Itoh 117

Thus the cyclic nature of crises are explained. And under-consumption, decline in rate of profit and to a large extent the K-waves, can be seen as aspects of the major contradiction, which is the over-production of capital.

Pretty clear, right? But if you think about it, this was not how the Depression of the 1930s ended. There was no “natural” restoration of production and prosperity, rather it took massive state investment and war. So too, the crisis of 2008 – which we are still in – has resulted in an astronomical amount of dollars pumped into the system – the state once more. But the Japanese political economists have an answer for that too. What I just laid out above is a pure theory of capital , or, if you like, a theory of pure capital – a capitalism which no longer exists. It is necessary for us to examine the historical stages of capitalism to comprehend the crisis.

Most of the 19^th century, and mainly in Britain, there was a situation near to the ideal of a “pure” capitalism. While capitalism was always dependent upon the state (enclosing peasant property, stealing continents, destroying competitors, building infrastructure, shooting striking workers) during this period it was largely autonomous. Businesses were small by today's standards, fixed capital was relatively cheap, making it easier to set up a factory. Competition and the market were unencumbered. Workers were powerless and the employers could adjust their wages and hours more or less as they wished. Crises performed a function of eliminating the weak, were of short duration, and gave rise to new forms of production.

The growth of textile mills meant the need for transportation, giving rise to railways and steam ships. But this meant the increasing development of heavy, rather than light industry. Heavy industry, such as steel mills, locomotive factories, rolling mills and foundries, required massive investment, so joint stock companies came to the fore and individual capital could not compete. The demand for investment capital gave rise to investment banking and securities markets. Competition began to eliminate the smaller firms. The new monopolies could always limit output to raise prices or thru trusts “rig the market.” Hence market forces were now restricted. Crises – such as the Depression of the 1870s – were much more serious than before, due to lack of flexibility rooted in the much greater costs. A demand for the state to step in arose and “free trade” gave away to tariffs. State-sponsored war production and infrastructure grew in importance. States conquered other countries to control the supply of raw materials and markets. This period was known as the Age of Imperialism and terminated in the disastrous World War.

The logic of capital – competition, markets, minimum state intervention – no longer fully operated from the late 19^th Century-on. And “If bourgeois economic policy cannot successfully 'internalize the externalities' present so the logic of capital may operate autonomously, then such an economy is no longer viably capitalist, no matter how desperately chremastistic [wealth-gaining, LG] activities are engaged in...the law of value [cannot] operate when political considerations so greatly effect outputs, prices, investment, trade flows and the mobility of labor.” Bell 205

When capitalism transformed itself away from the pure model, this meant the system could not ever develop autonomously. From now on, it needed something external to it. Hence capitalism could not last indefinitely. Decay and eventual collapse were inevitable.

Post-World War1 capitalism could not get itself out of crisis by itself. This required ever-more government involvement. Government R and D, macro-management of the economy, a managed currency, preserved but restricted capitalism. The “welfare state” and full employment policies of post WW2 Fordism were incompatible with labor power as a commodity. “War Keynsianism” - most especially in the USA, in which the government financed industry and R and D thru “defense” expenditure from the end of WW2 to the present, has had a major impact.

By the end of the 1960s market saturation and high labor costs cut into profitability and made manufacturing, especially in the US and Britain, uncompetitive. In both countries manufacturing went into decline. US manufacturing 1970, 24.3% GDP, 2015, 12% GDP In 1985 the USA produced 28% world's goods, 2016, 18.2% (3) Loss of profitability led to a drive to undermine the welfare state and off-shoring of production. The advent of neoliberalism in the late 1970s with its slashing of social services has to be seen in this light. Financial services were deregulated, leading to offshore banking, giving rise to an economy based on speculation in finance and real estate. This sector is now larger than manufacturing. Rather than productive capital we have non-productive speculation to which can be added rent-seeking thru the new forms of enclosure – intellectual property rights, GMOs, privatization of water and other natural monopolies, etc. There is the massive US debt, by which the US attempted to pull out of the 2008 crash by printing dollars and securities. By making the rest of the world accept what is actually worthless paper, the US is engaging in a form of tribute economy.

At the same time there has been a sharp decline in productive labor. A vast number of people are employed in a non-productive capacity, eg – most costs for a printed circuit come from non-productive labor. Innovation has to be continuous in a system where computers, phones etc change from year to year. Thus huge R and D costs and changing and retiring fixed capital. Bell 213

So what we have is a system that is largely non-productive, tribute-based, controlled by monopolies where the market does not really function and propped up thru the state by military expenditure and the money printing press. This is hardly the capitalism of the era of pure capitalism. All that remains of capitalism is the overwhelming predominance of wage labor and the incessant drive for accumulation. Other than that, capitalism is dead, and in spite of “libertarian” fantasies, never to be revived as a system.

We have been living – unknown to most of us – in a great transition out of capitalism for the last 100 years. Quite early on Marx and Engels saw how capitalism was transforming itself in a non-capitalist direction thru the joint stock company, state involvement and market-suppression. They felt this evolution would grease the track toward socialism. They were too optimistic, way too optimistic. Yes, the desire for a democratic economy does exist and always has. But the proponents of such change are a minority and divided by foolish dogmas and secular superstitions. Without positive change we can only get further breakdown or out and out collapse.

I have long been dissatisfied by the orthodox Marxist notion of feudalism as a natural mode of production transitioned out of slave society. Examining classical Egyptian, Chinese and Japanese societies, I see not a specific mode of production, but a reoccurring response to the breakdown of an empire or centralized state. Breakdown results in power fragmented among warlords, gangsters, local petty chieftains. Perhaps, in the absence of socialism, we are transitioning toward a contemporary form of feudalism with the corporation as a virtual principality and the CEOs as our lords and masters.

But all is not entirely lost. The major externalities that I have avoided mentioning before now, are of course, environmental. Capitalism in its decadence has brought us to the brink of destruction with global warming. For every self-styled socialist, there are probably ten people concerned about this massive problem. The only rational response is green energy and a steady state economy. Green energy can come about – is coming about – thru the democratic action of the population. That it is being developed and installed by mostly green capitalists is beside the point. It is happening because of external, (ie non-capitalist) forces. Ironically, there will be a great deal of growth to implement the green economy. (Retrofitting houses, building new enviro-friendly ones, electrifying rail, green energy etc) In building the infrastructure for the steady state economy, capitalism – or what is left of it – will have one last kick at the can. For steady-state means the last aspect of capitalism will vanish – endless accumulation for its own sake – and thus the capitalist system will become a museum piece along with the steam engine and the buggy whip.(4)

1. Nikolai Kondratiev, 1892-1938 Marxist political economist, a former Socialist Revolutionary, was an important member of the People's Commissariat of Agriculture where he developed a 5 year Plan for agriculture that did not entail forced collectivization. In 1925 he published “The Major Economic Cycles” where he laid out his ideas. After Lenin's death, Kondratiev was seen as an enemy by Stalin who eventually had him arrested. He was shot in 1938, about the time of the purge of the Old Bolsheviks. He was later rehabilitated by the USSR and his works published and translated.

2. One very positive move is their separation of political economy from party politics, in an attempt to understand what is really happening and not what your tendency wishes was happening. (neoliberal economists are apologists for the corporate status quo, social democrats are underconsumptionists, as are many “orthodox Marxists”. Left-communists favour the decline in the rate of profit.)

3. http://www.theglobaleconomy.com/USA/Share_of_manufacturing/

4. Does this mean capitalism will be replaced by socialism? I think if you have read this article, you will have realized that the world is a good deal more complex than 19^th C thinkers thought possible. Other than the fact the system replacing capitalism will not be capitalist, who knows for sure? However, the mass desire for democracy at all levels of society would seem raise the possibility for a cooperative, self-managed socialism.

For further reading:

Paul Mattick, “Marx and Keynes”, “Economics, Politics and the Age of Inflation”

John Bell, “Capitalism and the Dialectic”

Makoro Itoh, “Value and Crisis.”

John Bellamy Foster, Fred Magdoff, “The Great Financial Crisis”