![[Diagram 9: The Basic Factors in Capitalist Production]](diagram09-small.jpg)
MIA > Archive > Fraina/Corey Archive > Decline of Am. Cap.
IF capitalist production and prosperity depend upon an increasing output and absorption of capital goods, as Keynes and other bourgeois economists admit, it follows that there are limits to the economic development of capitalism, to the accumulation of capital.
These limits result periodically in crises and depressions. Cyclical breakdowns express an overdevelopment of capital equipment, which lessens the output and absorption of capital goods and checks the expansion of industry. In the epoch of the upswing of capitalism the limits were only relative, as overdevelopment of capital equipment was relative and temporary. Depression, overcome by the action of cyclical forces, was succeeded by a new upsurge of prosperity resulting from new and larger demands for capital goods, because of the working of the long-time factors of expansion. But as these factors approach exhaustion, the overdevelopment of capital equipment begins to assume absolute and permanent forms. Industry is now unable to absorb an increasing output of capital goods: the limits to the development of capitalist production and prosperity become absolute.
At the same time, and necessarily, the limits to the development of consumption become absolute. An increase in consumption depends upon a still larger increase in the output of capital goods. As this output rose in the epoch of the upswing of capitalism, the limits upon consumption were only relative. Overdevelopment of capital equipment was accompanied and made possible by underdevelopment of consumption, the final cause of crises and depressions; but there was a rise in consumption. As, however, the capacity of industry to absorb new capital goods begins to decrease, consumption must remain stationary or fall: the limits to the development of capitalist production and prosperity become absolute.
Thus the movement of production and consumption brings about a permanent crisis in production and prosperity. The crisis can be solved only by intensive development of the social forces of consumption. As, under capitalist conditions, however, increasing consumption is a by-product of an increasing output of capital goods, which now tends to decrease, the crisis is insoluble. This is the decline of capitalism.
But why cannot capitalist production develop the forces of consumption? They can and must be developed, insist many bourgeois economists, whose discussion of the problem of consumption is growing. Attention is forced upon this problem because the productive forces are now so great, the antagonism between production and consumption so apparent. Nor is this merely a result of the depression: consumption was stressed in the pre-1929 mythology of prosperity. The discussion of consumption, wherein two groups may be distinguished, is wholly inadequate, as it is entangled in all the contradictory relations of production which make the problem insoluble under capitalism.
One group insists that the problem of consumption can be solved if the monetary mechanism is manipulated to force prices to fall and permit absorption of an increasing output of goods. Or if marketing, including advertising, is made more efficient. Or if “consumer credit” becomes as general as producer credit and “finances” consumption. Or if distribution is “rationalized” by still greater growth of the chain stores. These proposals may all be dismissed without much consideration: they emphasize secondary factors of exchange and not the primary factors of production and its relations. The proposals would tend, moreover, to create more disproportions. Falling prices are a source of instability, increase consumption only temporarily, and threaten the rate of profit. “More efficient” marketing multiplies overhead costs and the wastes of distribution. “Consumer credit” is merely a disguised form of instalment selling. The chain stores neither make distribution more rational nor increase mass purchasing power and consumption: they create new disturbing factors, increase unemployment in the distributive trades, and are associated with monopolist abuses.
Another group insists that the problem of consumption can be solved only through industry disbursing more mass purchasing power to permit more consumption. Mass production must depend upon mass consumption: only greater consumption can absorb the output of the enormously productive forces of industry. This is an approach to the real problem. But it ignores the crucial questions of how, under capitalist conditions, consumption can increase while the output of capital goods tends to decrease, and of what would happen to the rate of profit and capitalism itself if the output of consumption goods rises while the output of capital goods falls. The “consumption” economists neglect the factor of capital goods, where Keynes and others neglect the factor of consumption.
In one form or another the promise to “increase consumption” appears in all the arguments of the apologists of state capitalism. In Italy and Germany, in Britain and France, there is a mass of words and acts “in favor” of greater mass consumption: meanwhile it tends to remain stationary or fall. The National Industrial Recovery Act proclaims its aim thus: “To increase the consumption of industrial and agricultural products by increasing purchasing power.” [1] What all the words and acts mean in practice is a concern with markets to absorb the output of industry and insure capitalist profits. This involves, however, a fundamental economic problem, most clearly formulated (among the apologists of Niraism) by Rexford Guy Tugwell. [2] His analysis is incomplete but it reveals the desperate straits of capitalist production.
The older “era of development” of the productive forces has definitely come to an end, Tugwell maintains. Unrestrained competition, while it formerly “may have been a useful economic creed,” is now “the final suicide compulsion which afflicts free industry. It throttles itself by closing off its access to markets.” Economic development and competition must decline.
This is both cause and effect of a new era in American capitalism: “Our economic course has carried us from the era of economic development to an era which confronts us with the necessity for economic maintenance. In this period of maintenance there is no scarcity of production. There is, in fact, a present capacity for more production than is consumable, at least under a system which shortens purchasing power while it is lengthening the capacity to produce.”
In this “new era” the dominant problem is consumption. “More and more conspicuous,” Tugwell insists, “is the dependence of our economic existence upon the purchasing power of the consumer upon wages, that is, and protected prices ... Only a socialized industry can market its goods continuously because, until it is socialized, it cannot join in the protection of demand ... This era of maintenance, the era of our present and future existence ... demands a new control, a control designed to conserve and maintain our economic existence.”
The crucial point in Tugwell’s argument is the contrasting of the era of development with the era of maintenance. Or, in other words, the epoch of the upswing of capitalism has been succeeded by the epoch of its decline.
What was the “era of development”? It was the era when the older industries were being mechanized, new industries arising, and new regions conquered by industrialism. This meant an increasing output and absorption of capital goods, an increasing accumulation of capital. The curve of production was upward.
What is the “era of maintenance”? It is the era when the older industries are all mechanized, scarcely any new industries are developing, and the industrialization of new regions is declining. The productive forces are ample, highly efficient, capable of producing more goods than the markets can absorb because consumption is limited by the social relations of capitalist production. Only to “maintain,” not to increase, the existing productive forces requires a tremendous growth in mass consumption. Under these conditions the tendency is to restrict new capital goods to replacements, to “maintenance” of equipment. This means a decreasing output of capital goods, a decreasing accumulation of capital. The curve of production is downward.
The downward tendency of production is not something new. Its first manifestation is a decrease in the average yearly rate of industrial growth (7.6% in 1902-06, 4.6% in 1909-14 and 3.8% in 1922-29). The decrease was relative, a flattening of the upward movement. Yet that in itself is ominous, as capitalism must expand or decline: it cannot stand still. Moreover, it is significant that the flattening took place when there was an increasing output of capital goods, particularly in 1922-29. If the output tends to decrease, the downward movement of production must become absolute. And this development, as well as the economic decline with which it is identified, is inherent in the dynamics of capitalist production ...
While Tugwell distinguishes the two epochs of capitalism, he does not recognize the implications. It is, of course, a problem of consumption. The barriers of capitalist production can be broken down only by an upsurge of mass consumption. But the barriers are created by capitalist production itself, which always restricts consumption. The problem is now more acute, as the formerly relative limits imposed upon the development of consumption (and production) tend to become absolute, because of the decreasing output of capital goods. Thus, instead of making possible greater mass consumption and economic stability, the “era of maintenance” creates new disturbances and engenders a state of permanent crisis. Tugwell ignores the fundamental problem: How, under capitalism, can consumption rise while there is a fall in the output and absorption of capital goods?
The basic nature of this problem appears clearly in a concrete analysis of the relation of the production of capital goods to prosperity and depression (Table V). This relation is the controlling factor in all stages of capitalist production. It conditions both the upswing of capitalism and its decline.
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TABLE V |
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OUTPUT |
WAGE- |
WAGES |
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1929 |
1931 |
1929 |
1931 |
1929 |
1931 |
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MANUFACTURES: |
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Total |
$18,000 |
$8,125 |
2,685,000 |
1,710,000 |
$3,955 |
$2,015 |
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Percentage of All |
25.6 |
19.6 |
30.4 |
26.5 |
33.9 |
27.9 |
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OTHER |
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* Not available. |
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In 1929, the gross value output of capital goods industries was $18,000 million, or 25.6% of all manufactures. These figures contain a considerable amount of duplication, representing the value of materials. But there are no duplications in the final form of capital goods, in machinery and transportation equipment, whose value was $8,450 million. Add $4,190 million as the probable unduplicated value of construction. That makes approximately $12,640 million, an output of capital goods equal to nearly 25% of the net value ($51,290 million) of non-agricultural goods produced in the United States in 1929. [1*]
In their various stages the manufacture of capital goods employed 2,685,000 workers and paid out $3,955 million in wages, or 30.4% of all workers and 33.9% of all wages in manufactures. (There are no duplications in these figures.) Including construction and mining, the production of capital goods and their materials employed 4,435,000 workers, who received $6,730 million in wages. Another 450,000 workers and $700 million in wages must be added on the assumption that one-quarter of transportation is occupied in moving capital goods and their materials. Thus in 1929 the production of capital goods employed 4,885,000 workers, 31.5% of industrial workers and 17.5% of all workers, and paid out $7,430 million in wages, 40% of industrial wages and 22.8% of all wages. [2*] This is exclusive of probably 750,000 clerical workers receiving $1,125 million in salaries who were similarly employed. It is also exclusive of the millions of workers in the consumption goods industries, the distributive trades, and professional occupations who are dependent upon the demand and purchasing power of capital goods workers.
The figures of output, employment, and wages clearly reveal the direct economic significance of capital goods. They have a still greater significance in the relations of capitalist production as a whole.
The output of capital goods is a fundamental factor in accumulation. It permits the conversion of profits into capital. Capital is a social relation, the private ownership of the means of production, which gives the capitalist owners the power to exploit the workers and secure an income. The workers are exploited by providing them with the instruments of labor, with capital goods. If the output of capital goods slows down, it means a decrease in the mass of workers exploited by the capitalist class and a consequent lowering of its income and wealth.
The two departments of industry, one producing capital goods, including materials, and the other producing consumption goods, are interdependent. The first supplies the means of production which the second uses to produce means of consumption. Capitalists in the consumption goods industries convert their unconsumed profits into capital by investing them in capital goods to produce more consumption goods. (Some of them may invest a part of their profits in capital goods to produce more capital goods, while some of the capitalists in the capital goods industries may invest a part of their profits in capital goods to produce consumption goods.) Profits flow from the department producing consumption goods to the department producing capital goods and return in the form of “concrete” capital, of capital goods to produce more profits. From the standpoint of the individual capitalists in the two departments, only that part of their workers’ output is surplus value or surplus product which represents unpaid labor. But from the standpoint of capitalist production and the capitalist class as a whole, all the output of workers producing capital goods is in a sense “surplus product,” because the part which represents paid labor (wages) is paid for with the output of the unpaid labor (surplus means of subsistence) of workers producing consumption goods. Upon this fundamental relation is based the whole economic superstructure. If there were no output of capital goods their producers, of course, would make no profits. Still more serious, there would be no accumulation; the profits of capitalists in the consumption goods industries would have to be consumed or put into non-productive investments, becoming a burden upon industry and profits.
As long as the relation between the two departments of industry is undisturbed, production is on the upswing and prosperity prevails. There is an active accumulation of capital, the conversion of surplus value, of profit, into capital by means of an increasing output and absorption of capital goods.
But the process of accumulation simultaneously depends upon consumption and limits its development. If consumption is not increasing, the demand for capital goods must eventually fall. And accumulation tends to restrict mass purchasing power and consumption. The antagonism is overcome, for a time, and in spite of the lag of wages behind profits, because the production of capital goods sustains consumption by creating consumer purchasing power. Unlike industries producing consumption goods, the capital goods industries offer nothing for sale to consumers: their customers are capitalists, who buy and pay with profits. They make no direct demands upon the consumer purchasing power created by them.
Eventually, of course, most capital goods offer consumption goods or services for sale. But this is only eventually and conditionally true.
The greater part of construction, public works and industrial buildings, never offers any competition to the producers and sellers of consumption goods. Only a small part of construction, private dwellings, is offered for sale to consumers; another part, apartments, offers services. Transportation and electric power equipment also offer services eventually (part of their output, however, is absorbed by industry). But in all these cases the capital investment is heavy, and many years elapse before full demands are made upon consumers.
Only one form of capital goods, industrial machinery, throws its output upon the market for direct sale to consumers. This, however, is done gradually. For a time the new industrial machinery put into operation is offset by the production of other machinery, provided orders increase more than output.
The production of capital goods, which do not throw their output upon the market or do so only eventually, creates consumer purchasing power in the form of wages and clerical salaries (and part of other salaries and profits). Of this purchasing power, amounting in 1929 to $8,550 million, not one penny is spent on the output of capital goods industries. All of the wages and clerical salaries, except minor savings and expenditures on services, is spent on the output of consumption goods industries. These industries, of course, create purchasing power of their own. But of this an important part represents the wages of workers producing consumption goods which are consumed by the workers who produce capital goods. If the output of capital goods falls, the workers thrown out of work lessen or cease their demands for consumption goods. The result is a decrease in the output of consumption goods and an increase in unemployment among the workers whose output was bought and consumed by the workers who formerly were engaged in the production of capital goods. This is not all. As the newly unemployed consumption goods workers lessen or cease their demands, there is another decrease in output and more unemployment in the consumption goods industries. Total consumer purchasing power drops much more than the mere drop in the purchasing power of capital goods workers. The relation between the two departments of industry must be adjusted on a lower level of general production. (Necessarily there is a fall also in the demand for services, including professional services.)
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The fundamental nature of this relation appears clearly if we assume that there is no output of capital goods and that the industries producing consumption goods must depend exclusively upon the purchasing power they create. In this case their output, other than the part consumed by the capitalists, managerial employees, and non-workers generally, must be bought and consumed by the workers producing the consumption goods. This requires either a great rise in wages or a great fall in prices. Profits are limited to what the capitalist class can consume. There are no real profits and no conversion of these profits into capital because they depend upon that part of consumption goods consumed by the workers producing capital goods.
Thus the production of capital goods, with its creation of consumer purchasing power, sustains consumption and makes its increase possible. But only as long as an increasing output and absorption of capital goods creates new purchasing power greater than the sum of prices of the additional consumption goods thrown upon the market by newly producing capital goods.
The temporary equilibrium is eventually upset by an overproduction of both capital goods and consumption goods. Cyclical limits arise to check the further expansion of production. There is crisis, breakdown, and depression.
The crisis initially may be engendered by a restriction of the production of capital goods or of consumption goods, or of both simultaneously. But basically it is a crisis in capital goods, the demand for which falls because the consumption goods industries are overequipped in terms of available consumer purchasing power. For, in spite of the purchasing power distributed by the capital goods industries, the lag of wages behind profits creates a deficiency in consumption. This makes it impossible to sell the mounting mass of products thrown upon the market by the consumption goods industries, whose productive powers have been greatly augmented by newly producing capital goods. As the crisis develops the output of capital goods falls much more than the output of consumption goods, the depth of the fall measuring the depth of the depression. In 1931, the output of capital goods (in manufactures) was 54.9% lower than in 1929, the output of consumption goods only 36.6% lower; employment among capital goods workers was 36.3% lower and their wages 49.1% lower, and only 21.9% and 32.6% lower among consumption goods workers. [3*] While the proportional fall of wages in the capital goods industries was greater, the absolute fall was greater in the consumption goods industries – $1,940 million compared with $2,520 million. Theoretically the decrease in both employment and wages in the consumption goods industries should be larger; this does not happen because unemployed capital goods workers (and others) maintain a limited consumer demand by means of savings, loans, and charity. By 1932 the output of all forms of capital goods was 75% lower than in 1929; in addition, the output of durable consumption goods was 75% lower and of non-durable consumption goods 30% lower. [3]
Depression persists as long as there is a shrinkage in the consumer purchasing power of workers in the capital goods industries, which creates a still larger absolute shrinkage in the purchasing power of workers in the consumption goods industries, the distributive trades, and professional occupations. A renewed demand for capital goods is necessary to stimulate cyclical revival. While it throws no consumption goods upon the market, an increase in the output of capital goods creates purchasing power among the workers re-employed to produce them, and invigorates consumer buying. The renewed demand for capital goods usually starts with orders for replacements of equipment, eventually no longer postponable, or with orders for more efficient equipment to save labor costs, or with equipment required by a new industry. Production begins to revive.
If the demand for capital goods is sufficiently large, and if the resulting revival is accompanied by an increasing output and absorption of capital goods, the revival moves onward to recovery and prosperity.
If, however, the demand for capital goods is insufficient and does not increase, because of considerable overequipment in the older consumption goods industries and the failure of new industries to develop – in other words, because of exhaustion of the long-time factors of expansion – there can be no complete recovery and no upsurge of prosperity.
The demand for capital goods must consist of more than mere replacements. It must be an increasing demand. Otherwise recovery and prosperity will be limited. An increasing demand for capital goods depends upon the expansion of older industries and the development of new industries. But the older industries are enormously overequipped and no new industries are developing. Hence industry lacks, and will continue to lack, the stimulus of a vigorous demand for capital goods. This explains the depth and duration of the depression. More important, it explains why capitalism is now in an “era of maintenance,” why it becomes impossible to restore prosperity on any considerable scale. [4*]
The “era of maintenance” means that industry is no longer able to absorb an increasing output of capital goods. And this means that the conditions of depression – on a somewhat higher level, however – will be the conditions of prosperity. Employment and consumer purchasing power are restricted among capital goods workers (even if the output of capital goods is merely constant, because of improving technological efficiency and the coming of new workers into the labor market). The result is unemployment and restriction of purchasing power among consumption goods workers, and among the workers in clerical, distributive, and professional occupations. The general level of production must fall, resulting in a “depressed” prosperity. Permanent and absolute limits arise to the development of capitalist production. The resulting economic decline persists, as in the case of depression, as long as there is no upward movement in the output and absorption of capital goods.
Why not stimulate the output of capital goods? But this cannot be done if the consumption goods industries are overequipped, if no new industries arise, if the long-time factors of expansion are exhausted. The NRA’s efforts artificially to stimulate the output of capital goods have been largely unsuccessful. Similar efforts in Germany, on a much greater scale, merely intensified the economic crisis. Nor are public works a substitute for profit-yielding capital goods. They are not an accumulation of capital. They must be paid for with public money; and whether this is done by means of loans or taxation, it imposes a burden upon industry, profits, and wages (particularly wages). There may be an increase in the export of goods and of capital, which results in capital accumulation. But the scope of this is limited, under the conditions of the world to-day, and it means imperialism.
Why not stimulate consumption? This is the obvious solution. The productive forces are highly developed. Their mere use means the abolition of unemployment and poverty. But the question is not whether an increase in consumption is possible and would result in permanent industrial revival. It is and it would. The question is whether capitalism can and will promote an increase in consumption which interferes with the making of profits. This the apologists of Niraism ignore, or they insist that higher profits and higher consumption are not mutually exclusive. In other words, they believe that the problem can be solved within the limits of capitalist relations. Thus William Green, president, American Federation of Labor, says:
“Refusal to share gains with producing workers dries up the sources of larger income for industry. There are two main channels through which workers share in the prosperity and progress of an industry: a shorter work week and higher wages as measured by buying power ... If workers could buy all they need and want, industries could be earning more, wages and dividends would rise ... Our power to produce is practically unlimited so far as the mechanics of production go. The controlling limit is the ability of consumers to buy. Here we run into a difficulty created by our failure to realize the interdependence between production and retail buying. Not only have we failed to do industry-wide and nation-wide planning for our business institutions, but the individual employer has failed to realize that the wages paid his employees constitute part of the retail market upon which his business depends ... Unless a much larger proportion of the returns on products goes to wage and salary workers there will not be the market for the increased output.” [4]
That is exactly what William Green was preaching in the pre-1929 “Golden Age,” when he insisted that “high wages” was the accepted policy of American employers. It did not work then. How can it work now? Employers would not reject shorter hours and higher wages if they really meant higher profits. In the epoch of the upswing of capitalism shorter hours and higher wages were, within limits, compatible with higher profits because of the increasing output and absorption of capital goods. That condition does not exist in the “era of maintenance.” Nor is Green’s theory unworkable only if there is no national planning. For planning must proceed within the orbit of capitalist production, whose “controlling limit” is not “the ability of the consumer to buy,” but the making of profits and their realization as capital by means of an increasing output of capital goods, an increasing accumulation of capital.
If there is a definite downward tendency in the output of capital goods, three conditions are necessary to insure an increase in mass consumption:
Upon these fundamental adjustments depends an increase in employment, income, and consumption among workers and professionals engaged in the production of services.
The three conditions are, of course, economically realizable. But not under the relations of capitalist production, as they would tend to force the rate of profit down to zero. (Nevertheless, the workers must fight for shorter hours and higher wages, whatever the effect upon profits. For the workers must resist the capitalist efforts to impose upon them the burdens of decline. But as any really shorter hours and higher wages threaten the existence of profit, the capitalists will not yield and the workers must broaden their action: the issue becomes one of saving capitalism or of overthrowing it. In this situation the real interests of the farmers and professionals are identified with the struggle of the workers. Only an increasing mass purchasing power can create an effective demand for agricultural products and for services, particularly of the more poorly paid professionals; and only socialism can release the productive forces to serve all mankind.)
How is the rate of profit threatened by adoption of the three conditions to absorb the unemployed and increase mass consumption? That part of the output of consumption goods workers which was formerly consumed by capital goods workers must now be consumed, through higher wages, by workers who produce consumption goods. Every capitalist appropriates surplus value. This becomes capital, however, only in the form of capital goods. The output of workers producing consumption goods is all consumed. It is consumed by themselves, by workers producing capital goods, and by other classes, including capitalists. The output of workers producing capital goods is not consumed. It becomes concrete capital, capable of producing more profit. Or consider the matter in terms of wages: The wages of workers producing consumption goods are spent on buying part of their own output, which is consumed. The wages of workers producing capital goods are not spent on their own output, but on consumption goods. All their output becomes income-yielding wealth. Thus the wages and consumption of other than capital goods workers are, from the angle of capitalist production as a whole, sheer, if necessary, waste. The surplus product or profit appropriated by the capitalist class must decrease in the measure that workers producing consumption goods consume more of their product. This is inevitable if unemployed capital goods workers are absorbed in the production of consumption goods. They now consume their own product instead of the surplus product of other workers, formerly appropriated by the capitalists and converted into capital. And their consumption now produces no compensation in the form of capital goods. The situation becomes clear under the assumed condition of no output of capital goods: surplus product or profit would practically disappear except for capitalist consumption of necessaries and luxuries. (Hence the production of luxuries tends to increase in the epoch of the decline of capitalism.)
Under these conditions, and from a capitalist angle, the only way out is an intensification of the export of capital and imperialism. For then an increase in production and employment does not depend upon an increase in wages and mass consumption which results in no accumulation of capital. The additional output (both consumption goods and capital goods) is exported and payment received in the form of foreign investments, or capital claims upon foreign labor, production, and income. Thus the export of capital is a capitalization of the labor of workers who otherwise would be unemployed; or who, if employed, would merely produce goods for their own consumption, and thereby threaten profits ...
How much chance is there, then, of an increase in mass consumption? Even in the epoch of the upswing of capitalism, and of an increasing output and absorption of capital goods, there were periods when mass consumption was merely stationary or fell, although it tended in general to rise. In the epoch of the decline of capitalism, mass consumption must fall because of the decrease in the output and absorption of capital goods. [5*] For an increase in mass consumption, involving shorter hours and higher wages, simultaneously with a decrease in the output of capital goods, would not only disastrously lower the rate of profit but tend to abolish profit altogether. Capitalists are not going to raise wages and shorten hours merely to sell more goods to workers on which they make no profit, particularly as this tends to abolish profit if done on a sufficiently large scale. It is more advantageous to depress the level of production, to restrict it within profitable limits, however small. This means millions of unemployed and lower mass standards of living: but that is of secondary importance in a profit economy. The problem is thus one of the abolition of capitalism, not of reconciliation and collaboration ...
Capitalism has always restricted production – by its underdevelopment of the forces of consumption, by the restrictive practices of monopolist combinations, by the decline of production in depressions. In 1928-29, years of unprecedented prosperity, many industries were producing from 25% to 75% below capacity. Yet there was overproduction. And in the pre-1929 years of prosperity the efforts to “control” production and prices resulted in the organization of “trade institutes,” intended to adjust output to demand. “Organized with the approval of the Federal Trade Commission, they desire to do within the law what the law expressly forbids, and profess to avoid the charge of illegality which wrecked the open-price associations.” [5] Restriction of production was justified on the plea that it meant avoidance of overproduction and depression. Demand is not, however, restricted by lack of wants but by lack of purchasing power to satisfy them. Overproduction was not the result of misjudging demand, but of the whole movement of production and consumption. If output had been adjusted to demand, on the basis of stifling wants instead of satisfying them, it would have lowered employment, wages, and consumer purchasing power and upset the very economic equilibrium it was intended to maintain – exactly what happened in 1929-30.
Where, however, the restriction of production was formerly only relative, it tends to become absolute in the epoch of the decline of capitalism. This expresses itself both in objective developments and in deliberate policy. Capitalism rebels against its historical function, the development of production. Where once it offered economic progress, it now offers economic stagnation.
Since the World War, large-scale efforts have been made to restrict the output of agricultural commodities, particularly wheat, cotton, rubber, sugar, and coffee ... Brazil “controls” coffee production, burns the “surplus” crop, and spends $1,000,000 advertising in American newspapers – to increase consumption! ... International cartels “regulate” the output of minerals ... France and England limit production in one form or another ... Fascist Italy restricts consumption (and production) because of its unfavorable trade balance: exports must go up, imports down ... Fascist Germany increases the power of cartels to “fix” production downward and prices upward, while “excess production” in agriculture is made legally punishable: output must be limited to “what the German economic body is able to consume” – on the basis of the prevailing mass starvation! ... Fascism everywhere magnifies the tendency toward economic nationalism and “autarchy,” which necessarily means a decrease in production and consumption ... General Eoin O’Duffy, leader of the Irish Fascists, says: “The revival of Irish industry is my first aim. My idea is not heavy industries but hand industries which would have a double advantage for us: they would enable us to find work for our people and also to keep them on the land instead of encouraging them to herd in towns.” [6] ... These are manifestations of deliberate revolt against the productive forces of modern industry and their capacity to liberate mankind from want.
Niraism also tends to restrict production. The policy of restriction appears most clearly in the program of the Agricultural Adjustment Administration, which destroys “surplus” crops and offers the farmers inducements to reduce output. It appears also in the program of the National Recovery Administration. And the policy is implicit in the National Industrial Recovery Act itself: “To avoid undue restriction of production (except as may be temporarily required.)” [7] The “temporarily” is interpreted in their own fashion by capitalist interests:
“The methods which many business groups are proposing for curing the depression all come down to one essential – produce less and collect more. Rule out new capacity or improved methods; restrict the output of present plants; eliminate price-cutting and other cruel devices of unrestricted competition; base prices on the high cost of producing little; produce only as much as can be sold at cost – these are typical of the suggestions which appear over and over again.” [8]
In agreement is the president of the Building Trades Council of the American Federation of Labor, who, in advocating control of industrial production and the allocation of quotas, says:
“We should go the whole length necessary to complete recovery as soon as possible, or, in other words, to adopt in manufacturing, mining and construction the same direct, comprehensive policies that are being put into effect by the Agricultural Adjustment Administration.” [9]
In accord with its state capitalist nature, the NRA creates an apparatus and policy for the deliberate restriction of production – disguised as “controlled production.” Practices formerly illegal are now sanctioned by the government: the National Industrial Recovery Act categorically suspended the anti-trust laws. Trustification of industry is encouraged, and trade associations are practically given the powers of cartels to “regulate” production and prices. The “fair” competition prescribed in the codes means higher prices and profits and lower output. Prices are fixed to insure “fair” profits, although lower prices and profits might induce more consumption, production, and employment. The NRA enormously enlarges the scale of monopoly conditions and practices, and monopoly tends toward the restriction of production.
Yet the avowed aim of the National Industrial Recovery Act is “to increase the consumption of industrial and agricultural products by increasing purchasing power”! [10] This is merely one of the contradictions of Niraism, of state capitalism, which professes to increase simultaneously consumption and prices, wages and profits, employment and technological efficiency.
Consumption must necessarily fall in the epoch of the decline of capitalism because of the permanent economic crisis, unmistakably evident in the policy of restricting production. The necessity is accepted and rationalized by fascism. Thus an American fascist says: “Countries with a less abundant supply of natural wealth and capital will be compelled to introduce a restricted consumption system of one sort or another possibly by the strict regulation of wages and price levels.” To make the Fascist medicine more palatable he excepts the United States, “whose productive capacity is already great enough to guarantee a more than adequate standard of life for the entire population.” [11] But American capitalism is not using and cannot use, without danger, its “productive capacity, already great enough to guarantee a more than adequate standard of life.” The great productivity of industry itself creates the conditions which result in decreasing consumption. And who will consume less? Not the capitalists, the upper bourgeoisie. Those who will consume less are the workers and farmers, the lower bourgeoisie, the unemployed or poorly paid professionals. In the epoch of the upswing of capitalism the workers’ consumption decreased only relatively; now capitalism, in the epoch of its decline, forces an absolute decrease in consumption upon the workers. Mass standards of living must fall precisely when industry is capable of raising them to unheard-of heights ...
The policy of restricting production (and consumption) includes “fixing” prices and “insuring” profits. These measures are not always successful; or, if successful, create new disturbing conditions.
Efforts to restrict, on a world scale, the output of agricultural commodities (sugar, coffee, rubber) resulted in temporarily higher prices; but this encouraged new competitive plantings and more output, and the “control” schemes broke down. Prices are raised by the American farmers’ reduction of acreage and crops; the government wastes millions of public money to “compensate” the farmers, whose critical situation becomes worse; and, unless the policy is temporary, experience shows that the restriction schemes will fail.
The efforts to restrict industrial production go hand in hand with efforts to increase it. This contradiction reflects a more fundamental one: the conditions of decline force capitalist industry to restrict production. But the restriction of production, whether or not it is a result of deliberate policy, threatens the foundations of capitalism, as large-scale industry depends upon increasing output. Restriction is profitable only when practiced by a limited number of industries or enterprises; when all of them restrict output, they strangle each other and industry itself.
If production is restricted, larger profit margins become necessary on the smaller output. The result is higher prices and lower demand. Or improved technological efficiency and more unemployment. “The NRA wants business to buy new machinery, modernize its plants, and compete through increased efficiency in producing low-cost products.” [12] Or a combination of both. And consumption tends to fall.
If prices are fixed, they will usually be fixed upward. But if prices rise while output falls, increasing unemployment and decreasing wages, demand and consumption must fall.
If prices are not fixed but are left, under the conditions of decline, to find their own level, bankruptcy and the depreciation of capitals will develop on an unprecedented scale because of unprofitable prices and intensified competition.
If industry is assured “fair” profits by means of “fair competition” and an upward fixing of prices, survival becomes easier, and bankruptcy and the depreciation of capitals will tend to diminish. The drive to improve technological efficiency loses much of its force and lessens the demand for capital goods. Surplus capital will increase, seeking investment anywhere, anyhow, strengthening competitive pressures. Eventually the “balance” of fixed prices and profits is upset, and both fall disastrously.
If competition is limited within an industry, it will intensify the competition of increasing technological efficiency and the competition of industry against industry. Dam competition here, it overflows there.
Thus “controls,” particularly in the epoch of decline, do not abolish the contradictions and antagonisms of capitalist production, but aggravate them. Nor do they abolish overproduction, which is a relative condition. On a lower level of economic activity, wages will still lag behind profits and consumption behind production. There will still be cyclical crises and breakdowns. These disasters were not averted in the highly cartellized and “controlled” industry of Germany. Whether industry is “free” or under “controls,” whether prices rise or fall [6*] or capitalism is on the upswing or downswing, there is still that alternating expansion and contraction in the output of capital goods which determines the cycle of prosperity and depression.
The deliberate policy of restriction is not the major factor tending to drive production downward in the epoch of the decline of capitalism. That is determined primarily by the forces of decline itself, by the inability of industry to absorb an increasing output of capital goods. The lower level of production is the outcome of efforts to avert the disastrous fall in the rate of profit which would ensue if mass consumption rose simultaneously with a decrease in the output of capital goods. But on the lower level of production the rate of profit still tends to fall disastrously. For all the contradictions pressing down the rate of profit in the epoch of the upswing of capitalism must necessarily work with greater force in the epoch of decline.
While production tends to lower levels, there will be no reversion to small-scale industry (one of the demagogic promises of fascism). [7*] On the contrary, larger masses of fixed capital will be required because of the desperate endeavors to raise profits by lowering costs. There will be an augmenting of the higher composition of capital, variable capital (wages) decreasing in favor of constant capital (equipment and materials). The fixed portion of constant capital particularly will increase because the downward tendency of production limits the demand for raw materials. Under the conditions of decline, changes in the composition of capital may not be as great, in an absolute sense, as in the past, but they will be greater relatively to the lower level of production. And on this lower level, the contradictions and antagonisms set in motion by the higher composition of capital become more acute and devastating.
In the epoch of economic upswing, and increasing production, variable capital fell only relatively to constant capital: there was an absolute rise in employment and wages (and mass consumption). In the epoch of decline, and economic stagnation, variable capital tends to fall absolutely, and this means a decrease in employment, wages, and mass consumption. While consumption falls, the capacity of industry rises, the more so as technological progress makes new machinery much more efficient than the old. The problem of excess capacity is enormously aggravated. Overhead costs become greater as output fails, more than formerly, to grow sufficiently. Each unit of product requires a constantly larger capital investment. Excess capacity becomes worse if “controls” assure “fair” profits and make survival easier, or if prices are fixed upward and demand and consumption are thereby lessened. High profits create more disturbances because of the downward tendency of production. [8*] While the conditions of decline mean a considerable destruction of capital and depreciation of capital values, the problem of surplus capital becomes more acute because of the lower level of production and the narrowing of investment opportunities. Surplus capital is still more abundant if “controls” assure “fair” profits and prevent destruction and depreciation of capitals. In both cases an increase in excess capacity occurs. The productive forces become so great that their full utilization is unprofitable; yet production is unprofitable if capacity is not fully utilized. The rate of profit tends to fall disastrously.
Control excess capacity? But that means a lower output of capital goods, the basis of prosperity. Increase consumption? But that tends to abolish profits. Capitalist production must expand or decline: it cannot be stabilized. And the capitalists are forced to do the very things which aggravate their problems. A ruling class is the slave of the contradictions and the destiny of its being. Thus the American slave power, beset by the necessity of expansion or the inevitability of decline, chose the suicidal adventure of war ...
Not only, in the epoch of decline, is there a greater downward pressure on the rate of profit: the mass of profits tends to fall. Formerly, a fall in the rate was offset by a rise in the mass of profits. The capitalists are enriched more by an income of $2,000,000 on a capital yielding 5% than by an income of $1,000,000 on a capital yielding 10%. And the mass of profits must tend to fall under the conditions of constantly larger fixed capital, lower production, and increasing excess capacity. [9*] The rate of profit falls more precipitously and aggravates all the disturbances created by the fall. In the effort to save itself capitalism strengthens the downward pressure on the rate and mass of profit. The state spends money lavishly to prop up the sagging foundations of capitalism – loans to industry and subsidies, public works, promotion of exports, imperialism, and war. It must also spend money on relief, to prevent a revolt of the masses. These expenditures increase the public debt and taxation. The burdens of taxation are thrust mainly upon the workers, farmers, and lower bourgeoisie, but profits are also taxed, and tends to lower the mass and rate of profit. (If the drain on profits becomes too great, relief is cut, and capitalism, by means of Fascism, throws all the burdens of decline upon the masses.)
The fall in the rate of profit, particularly in the epoch of decline, is the most serious threat to capitalism. Many bourgeois economists, among them Keynes, admit the prospect of a steadily falling rate of profit (or rate of interest). But some of them view the matter with equanimity. Thus Keynes says:
“The prospect for the next twenty years appears to me to be a strong tendency for the natural-rate of interest to fall, with a danger lest this consummation be delayed and much waste and depression unnecessarily created in the meantime by central banking policy preventing the market-rate of interest from falling as fast as it should ... The risk ahead of us is ... lest we experience the operation of a marketrate of interest which is falling but never fast enough to catch up with the natural-rate of interest, so that there is a recurrent profit deflation and a sagging price level. If this occurs our present regime of capitalist individualism will assuredly be replaced by a far-reaching socialism.” [13]
By a stroke of hocus-pocus, Keynes converts the threat to capitalism into a promise of life everlasting. If only the capitalists accept a lower rate of profit! But they won’t. Keynes himself proves this, by his unsuccessful agitation to lower the interest rate. Capitalist production is a perpetual struggle against the tendency of the rate of profit to fall. The struggle becomes more desperate in the epoch of decline. If a small fall in the rate of profit creates crises and depressions, a considerable fall necessarily throws capitalism into convulsions. For profit is practically abolished if the rate falls too low, as profits would be absorbed by capital replacements.
An American fascist, Lawrence Dennis, clearly appreciates the danger: “The present financial organization of society is such that a progressive decline of the interest rate to near zero would entail consequences which seem humanly unendurable. The declining interest rate would paralyze economic activity long before a zero interest rate was approximated.” [14] Why? Because capitalism will not passively accept a rate of profit which threatens profit itself. It will not voluntarily accept doom. Capitalism will struggle against the falling rate of profit. It will destroy and depreciate capitals, so that the rate on the surviving capitals may rise. It will limit production, throw millions out of work, lower wages, and depress mass consumption, in order to “earn” a higher rate of profit. Yes, capitalism will struggle, desperately and brutally. It will resort to the export of capital and imperialism, and war, to prevent the rate from falling. It will resort to Fascism, as is urged by Dennis, whose heart bleeds over the fall in the interest rate, subjugating the workers and farmers, degrading the professionals, mobilizing savagery in defense of the profit system. The fall in the rate of profit is not, as Keynes seems to imagine, the means of a smooth transition to a “new social order” which “is” and yet is “not” capitalism. It is the expression of economic decline and an omen of violent class struggles, social explosions, and wars.
But the fall in the rate of profit is also the omen of a really new social order. For Keynes is right on one thing: because of disturbances created by the falling rate of profit, “capitalist individualism will be replaced by far-reaching socialism.” In final analysis, the falling rate is due to the antagonism between production and consumption under capitalism; and the growing antagonism is an expression of the objective socialization of industry and the enormous increase in its productivity, the objective basis of socialism. The fall in the rate of profit indicates, moreover, that there are economic limits to the development of capitalism, that it nurtures the seeds of its own decay. In the words of Marx:
“The rate of profit is the compelling power of capitalist production, and only such things are produced as yield a profit. Hence the fright of the English economists over the decline of the rate of profit. That the bare possibility of such a thing should worry Ricardo shows his profound understanding of the conditions of capitalist production ... What worries Ricardo is the fact that the rate of profit, the stimulating principle of capitalist production, the fundamental premise and driving force of accumulation, should be endangered by the development of production itself. There is indeed something deeper than this hidden at this point, which he vaguely feels. It is here demonstrated in a purely economic way, that is, from a bourgeois point of view, within the confines of capitalist understanding, from the standpoint of capitalist production itself, that it has a barrier, that it is relative, that it is not an absolute but only an historical mode of production corresponding to a definite and limited epoch in the development of the material conditions of production.” [15]
1*. In 1929 the net value of manufactures, less $13,300 million of duplicated materials, was $47,100 million. The net value of construction, less a probable $2,000 million of materials supplied by manufactures and mining, was $4,190 million. Thus the net value of non-agricultural goods produced was approximately $51,290.
2*. The sharp difference in the percentage of workers and of wages is explained by the fact that there are millions of hired farm laborers, servants, and other groups who receive unusually low wages. In 1929, the average yearly wage for workers employed in the production of capital goods and their materials was approximately $1,500; it was only $1,180 for the workers as a whole.
3*. In both departments of industry, wages decreased more than employment because of reductions in wage rates and the resort to the “stagger” system or part-time work. Both are methods of throwing the burdens of depression upon the workers.
4*. This is discussed more fully in Chapter XXIII, Prosperity and Capitalist Decline.
5*. Would not more consumption mean more demand for capital goods? Only within limits, as the productive powers of industry are already highly developed. It would not compensate for the shorter hours necessary to absorb the unemployed in the production of consumption goods and for the higher wages necessary to absorb the output. Substantial and profitable demands for capital goods depend upon the development of new industries and the industrialization of new regions. The solution is possible under socialism: increase the output of “capital goods” in the form of finer homes and schools, shorten hours and raise “wages,” increase mass consumption and leisure.
6*. “Steadying industry by steadying prices ... may, of course, simply mean steadying dividends without regard to output ... Under perfectly steady prices there would still be great booms and depressions in the capital-making industries, and resulting booms and depressions in industry at large.” J.M. Clark, The Economics of Overhead Costs (1924), pp.404-06.
7*. The German fascists made far-sweeping and categorical promises to help the “small man,” the small producer. A dispatch to the New York Times, December 24, 1933, says: “The policy in industry is ambiguous. Cartel combinations have been favored, even enforced, in the interest of big industry, but, simultaneously, numerous small measures have been taken to encourage petty undertakings and hand workers.” Thus the promises are completely repudiated, for the measures “to encourage petty undertakings and hand workers” are unimportant, in the nature partly of demagogy and partly of “relief.” A similar situation prevails in Fascist Italy. The basis of modern industry is large-scale production.
8*. “There is possibly a permanent slackening of the rate of increase of needed new investment which, by requiring smaller savings, will make larger profits a more disturbing problem in the future ... We shall not need such a large increase of investment.” Ralph E. Flanders, The Economics of Machine Production, Mechanical Engineering, September 1932, p.608. Proportions are decisive in this connection. Profits are proportionately higher where, on a lower level of production, their ratio to “needed” investment is as 5 to 3 than where, on a higher level of production, the ratio is 10 to 9.
9*. “As soon as a point is reached where the increased capital produces no larger, or even smaller, quantities of surplus value than it did before its increase, there would be an absolute overproduction of capital ... There would be a strong and sudden fall in the average rate of profit. ... A portion of the capital would lie fallow completely or partially ... while the active portion would produce values at a lower rate of profit, owing to the pressure of the unemployed or partly employed capital ... The fall in the rate of profit would then be accompanied by an absolute decrease in the mass of profits.” Karl Marx, Capital, v.III, p.295.
1. L. Valenstein and E.B. Weiss, Business Under the Recovery Act (1913), p.237.
2. Rexford Guy Tugwell, Design for Government, Political Science Quarterly, September, 1933, pp.323-26.
3. W.H. Rastall, The Machinery Industry at Grips With the Business Cycle, Mechanical Engineering, January, 1933, p.11; David Friday, The Formation of Capital, American Economic Review, Supplement, March 1933, p.93.
4. William Green, National Planning: Labor’s Point of View, New York Times, December 17, 1933.
5. Edward S. Mead, Adjusting Excess Productive Capacity to Closed Markets – the ‘Institutes’, Annalist, July 19, 1929, p.98.
6. New York Times, November 1, 1932; New York Tribune, October 8, 1933; Clair Price, A New Champion Enters the Irish Lists, New York Times, September 17, 1933.
7. Valenstein and Weiss, Business Under the Recovery Act, p.236.
8. Mordecai Ezekiel, Can We Starve Ourselves Rich, To-day, March 10, 1934, p.8.
9. Frank Briggs, New York Times, September 28, 1933.
10. Valenstein and Weiss, Business Under the Recovery Act, p.237.
11. Clark Foreman, The End of Internationalism, New Republic, August 9, 1933, p.333.
12. Malcolm Muir, Deputy Administrator of the NRA, New York World-Telegram, September 27, 1933.
13. John Maynard Keynes, A Treatise on Money (1930), v.II, pp.208, 386.
14. Lawrence Dennis, Is Capitalism Doomed? (1932), p.36.
15. Karl Marx, Capital, v.III, p.304.
Last updated on 29.9.2007