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The pattern of slump-boom-slump-boom can be seen clearly in the economic statistics for most of the 19th century during which Marx wrote. Periods of rapidly rising output, with unemployment falling to about 2 percent of the workforce, alternated with periods of falling output, with unemployment rising to about 10 percent. The alternation seemed to follow a regular, natural rhythm like that of the moon or of the biblical ‘seven good years and seven bad years’. But there was also a long term tendency, over several cycles, for slumps to get deeper and longer and for booms to get shallower and shorter.
So the late 1870s and 1880s – the time from which the Carnegie comment comes – was often referred to as the ‘Great Depression’, meaning that internationally the capitalist economy seemed in worse trouble than any known before. Nearly 50 years later, the 1930s, with much higher levels of unemployment still, were referred to likewise as the ‘Great Depression’.
How is this worsening of capitalist crisis to be accounted for?
Some of the early pro-capitalist economists like David Ricardo had noted that profit rates declined over time. They were much lower when Ricardo and others wrote than they had been ten or 20 or 30 years before. This decline in profit rates could explain the deepening of slumps, since with lower average profit rates it would take longer for industry to recover after each down turn. But how was the decline in profit rates itself to be explained?
Ricardo explained this by a phenomenon to be found in agriculture – the ‘law of diminishing returns’. Beyond a certain point, the output of crops from a certain field does not grow as quickly as the amount of seeds you plant or the effort you put into irrigating them, because you begin to approach the limits of the soil’s fertility. The trouble with this theory, which is still taught in ‘neo-classical’ economics today, is that there is no obvious reason why it should apply to the production of manufactured goods. Often it is relatively cheaper to manufacture things in long production runs, not shorter ones. But if that is so, there is no reason why the rate of profit should fall.
Consequently, the deepening of crises and the rising level of unemployment is a complete mystery to modern day capitalist economists. As one of them, Andrew Oswald of the London School of Economics, says:
Rising unemployment across the nations of the western world looks unstoppable... The truth is economists do not know why unemployment has been tending upwards.
Marx, however, had an explanation for the falling rate of profit – and therefore for the long term deepening of crises and growing levels of unemployment.
He said it was built into the very nature of capitalist accumulation. Each capitalist is in competition with every other capitalist. The only way to survive in this competition is to introduce ever new machines, embodying ever greater amounts of ‘dead labour’.
Each capitalist has to introduce as much labour saving equipment as possible. And so investment grows faster than labour force.
You can see this today if you look at the investments of virtually any firm. It is invariably accompanied by ‘rationalisation’ – by reducing the number of workers required for each task. This does not always mean that the total workforce falls. Sometimes a massive increase in output allows the total workforce to grow. But it very rarely keeps up with the growth in total output or the expansion of total investment.
The ratio of investment to labour (which Marx referred to as ‘the organic composition of capital’) tends to rise.
There are many empirical studies which show this happening over the last quarter of a century. The American economist N.M. Bailey showed in the reputable Bookings Papers in 1981 that the ratio of capital to labour in US manufacturing was 1.43 in 1957-68 and 2.24 in 1972-75, while the Oxford statistician Colin Clark showed a rise in the ratio of capital to output in Britain from 1.78 in 1959-62 to 2.19 in 1972-75. The Financial Times columnist Samuel Brittan noted with bewilderment in 1977:
There has been an underlying long term decline in the amount of output per unit of capital in manufacturing... in the industrial countries... One can construct a fairly plausible story for any one country, but not for the industrial world as a whole.
An article in Lloyd’s Bank Economic Review (June 1989) tells how: ‘In the UK, as in many modern industrial countries, the working population tends to be static, while the stock of capital grows...’
The growth in the ratio of investment to labour is not a problem for the individual firm. All a particular firm is concerned with is getting labour saving equipment more quickly than its competitors so as to be able to produce more cheaply and undercut them. So the individual firm will always tend to go for the latest machinery using the smallest amount of labour, knowing this will enable it to grab markets from its rivals and raise its profits at their expense.
But it can become a problem for capitalism as a whole. For if every firm is introducing labour saving equipment, then the ratio of investment to labour throughout the whole system will grow greater.
As we have seen, it is labour, not machinery, that creates value. When machinery grows faster than labour, investment grows faster than value. And, if the proportion of value going to the employers as surplus value is fixed, then investment grows faster than surplus value – or, as we would put it in everyday language, investment rises much faster than profit.
But if this is so, then the rate of profit – the ratio of profit to investment – must decline.
In other words, the greater the success of capitalists in accumulating, the greater is the pressure throughout the system for the rate of profit to fall.
It is important to notice that this whole argument rests on seeing how what is good for the individual capitalist is bad for the capitalist system as a whole. The individual capitalist invests because with more advanced labour saving technology he can beat his competitors and grab some of the profit that previously went to them. But if all capitalists do this, the total rate of profit falls until it hits all of them. This in turn increases the competitive pressure on each and encourages further investment in labour saving technology and a further fall in profit rates throughout the system.
Some economists claim Marx must be wrong about the falling rate of profit, because no capitalist will ever invest if it reduces his profits. This was the argument advanced by the Japanese economist Okishio and accepted by many would be left wing critics of Marxism, like Ian Steedman, in the 1970s and 1980s. But it is fallacious because it does not see that the individual capitalist can do things to increase his own profit while at the same time acting, inadvertently, to reduce the profitability of the system as whole.
Socialists who accepted the arguments of Okishio and Steedman ended up in the strange situation in the 1970s and 1980s of saying there is no inbuilt downward pressure on profit rates and no reason for slumps to get more intractable. Yet these were years in which profit rates did fall below those known in previous decades and in which three great crises shook the system internationally.
The tendency for profit rates to fall does not mean they always do so, any more than the law of gravity prevents some objects (rockets, aircraft) from going upwards. Rather it acts as downward pressure on profit which capitalists seek ways of counteracting.
The most obvious way for them to react to such pressure on profits is to make workers work longer and harder for less pay. Marx described this as the capitalist trying to increase the ‘rate of exploitation’. And he said there were three ways they tried to do this.
(i) ‘Absolute Surplus Value’
Firstly, the capitalist can make workers toil for longer without raising their pay proportionately. The result is that the number of ‘surplus’ hours the worker gives to the capitalists rises ‘absolutely’ – which is why Marx refers to this as increasing ‘absolute surplus value’.
This method of forcing profits up was very widespread in the early days of industrial capitalism, and Marx’s Capital provides many examples of it. However, for much of the present century it seemed to have passed into history. In the advanced industrial countries, at least, workers’ resistance had forced capitalists to concede a shorter working week and holidays with pay. The 72 hour weeks of Victorian times had become the 48 hour week and then the 44 hour week. During the economic crisis of the early 1930s the US Congress even went so far as to vote for a bill which would have reduced the working week to 30 hours. And although this bill was eventually blocked by big business opposition, the received wisdom was that the future would see workers enjoying ever greater amounts of leisure.
As B.K. Hunnicut says in a study of working hours in the US, there were confident predictions that:
Hours of work would continue to decline as they had for over a hundred years, and that before this century was over, less than 660 hours per year would be required of the average worker – less than 14 hours a week.
But, ‘in reality, the century long movement [for reducing working hours] had reached a turning point in 1933, and the process suddenly reversed, with hours of work getting longer for a decade.’
In the 1940s American working hours stabilised at the new, higher level. But then with a renewed period of economic crisis after 1973 they got longer again, as Hunnicut also says:
The Louis Harris organisation conducted a series of polls over the last 15 years concerning the average working week in the US. The found that the average working week increased 20 percent, from 40.6 hours in 1973 to 48.4 hours in 1985.
In Britain the average working week today is an hour longer than in 1983, with the average male worker doing 45.1 hours a week including overtime. In Japan the average working year fell until the mid-1970s, but then stabilised. In mainland Western Europe the downward trend in working hours continued to the beginning of the 1990s recession. But since then employers have been exerting increasing pressure to reverse the trend, claiming that such hours make European firms uncompetitive compared with Japan and the US. It required strike action by the German metal workers’ union to stop employers reneging on their promise to introduce the 35 hour week.
(ii) ‘Relative Surplus Value’
Secondly, the capitalists can pressure the workers into working harder. Marx pointed out that once capitalists found they could not increase the working week any further in the mid-19th century, they turned to imposing on the workers ‘increased expenditure of labour in a given time, heightened tension of labour power, and closer filling up of the pores in the working day...’
The drive for increased productivity became an obsession for big business, as was shown by the movement for ‘scientific management’ founded by the American F.W. Taylor in the 1890s. Taylor believed that every task done in industry could be broken down into individual components and timed, so as to determine the maximum which workers could accomplish. In this way, any breaks in the tempo of work could be eliminated, with Taylor claiming he could increase the amount of work done in a day by as much as 200 percent.
Taylorism found its fullest expression with the introduction of the assembly line in Henry Ford’s car plants. The speed at which people worked now depended on the speed at which the line moved, rather than their individual motivation. In other industries, the same pressure on people to work flat out was achieved by increasing surveillance by supervisors, with, for instance, mechanical counters on machines indicating the level of work achieved. And today a similar approach is being attempted in a variety of white collar occupations with increased use of assessment, attempts at payment by results, the use of keystroke counters on computers, and so on.
Increasing the intensity of work has three advantages for capitalists.
The first capitalist to increase the intensity of his workers’ labour is able to produce more in the same time than his rivals and so undercut them in the market. But he loses the advantage once the other capitalists copy him and increase the productivity of their workers. This is why the drive to increase productivity is endless and why workers make a terrible mistake when they accept the capitalist’s argument that increased productivity will protect jobs – all that it does is trap workers in different firms in an endless and futile battle to work harder than each other.
The second gain for the capitalists is more permanent. Increased productivity means that workers produce the equivalent to their own livelihood in a shorter time than before. So instead of taking, say, four hours to produce the goods necessary to renew their ability to work (their labour power), they can do so in three or even two hours. If the working day remains the same length, the share of it going to the capitalist as surplus value can increase.
Surplus value grows relative to labour power, even though the total working day remains fixed. For this reason, Marx called this phenomenon increased ‘relative surplus value’.
Increasing the intensity of production has a third advantage for capitalists, especially during a time of rapid technological change. It enables them to get more work out of their machinery before it gets out of date. This is particularly valuable to them if they combine increased intensity of labour with shift systems and flexible working that enable them to run the machinery all hours of the day and every day of the week.
So important is increasing the intensity of labour that capitalists have, on occasions, been willing to do a trade off, by which they accept a shorter working day in return for increased productivity. Marx noted:
Where we have labour, not carried on by fits and starts, but repeated day after day with unvarying uniformity, a point must inevitably be reached where extension of the working day and intensity of labour mutually exclude each other, in such a way that lengthening the working day becomes compatible only with lower intensity, and a higher degree of intensity only with a shortening of the working day.
From the capitalist side Taylor saw this clearly. One of his schemes to drive up the intensity of work applied to a group of women inspection workers. They had a ten and a half hour day, but he noted that they spent some of the time chatting to each other. He cut their working day by a couple of hours while moving their chairs further apart so they could not talk to each other. This increased their output enormously, although it made them so much more tired that their attention to their work fell. Taylor’s reaction was then to provide them with four ten minute breaks in which they were encouraged to walk round and talk to each other, so recovering their attentiveness.
In a somewhat similar way, Henry Ford tried to insist that as well as working flat out his workers had fixed spells of ‘leisure’ – and tried to supervise these so as to prevent the workers wasting them on things like alcohol which would sap their working ability.
The same attitudes persist in some companies today. The Financial Times management page can report that in Japan: ‘Many companies have banned excessive hours... Oki electric, the machinery manufacturer, said that its researchers would be evaluated by their research results rather than the number of hours spent working’. It goes on to report that in Britain too, there is ‘concern about over work’ as ‘many managers realise, for example, that unless employees take holidays and maintain a life outside work they will fail to perform effectively’.
In fact, this talk of conceding a shorter working week in return for increased intensity of labour rarely gets translated into practice these days. In Japan the working year has remained at 2,100 hours for more than a decade, with one male worker in six doing more than 3,100 hours. In Britain managers still prefer to pressurise existing workers into doing longer hours rather than taking on new workers, so that the average manual worker does an average of nine hours overtime a week, while bosses in sectors like further and higher education are doing their utmost to enforce a longer working week and shorter holidays upon employees. In Germany employers, beaten back on their attempt to scupper the 35 hour week agreement, are now doing their best to force acceptance of Sunday working. As Reiner Hoffman, of the European trade union institute, told the Financial Times, ‘The major concern of European employers is to reduce unit labour costs to a minimum in the interests of competitiveness.’ This has meant attempting to force workers to accept more ‘flexible’ working patterns, with more shift working, more weekend working and more acceptance of ‘annualised hours’ systems, which compel workers to do a longer working week than usual whenever it suits the employer.
There is a simple reason why the trend today is once more towards a lengthening rather than a reduction in work hours.
Marx pointed out in Capital that there are limits to the extent to which increasing the intensity of labour can offset pressure on profit rates.
Those pressures arise, it will be recalled, because the total amount of employed labour power throughout the system does not rise as fast as investment – indeed, it can even begin to fall in absolute terms. But, however hard they are forced to work, a small group of workers cannot produce as much surplus value as a big group.
A simple example shows this. Assume there are one million workers each working an eight hour day, with four hours of that being sufficient to repay the employer for the costs of their wages. The capitalist class will get from them the equivalent of four million hours of surplus value a day.
What happens if the workforce is cut to 100,000 as a result of new technology which increases productivity tenfold?
The workers can now cover the cost of their wages in one tenth of four hours – that is in 24 minutes. The employers now get a huge 7 hours 36 minutes of surplus value from each worker. But the total surplus value from the workforce as a whole does not increase. In fact, it falls from 4 x 1 million = 4 million hours, to 100,000 x 7hr 36mins = 760,000 hours. And even if immense pressure is applied to the workers to make them work twice as hard, the amount of surplus labour each provides will only rise by an additional 12 minutes per worker – or by a mere 12 mins x 100,000 = 20,000 hours altogether.
In this way, capitalists eventually find there are limits to their ability to compensate for the fall in the rate of profit by increasing the productivity of their workers. And when that happens, they will be enormously tempted to try to lengthen working hours. After all, in our example, every extra hour the workers can be forced to provide without a wage increase adds 100,000 hours to surplus value – or five times as much as making them work twice as hard.
In practice, of course, capitalists are rarely able to make workers do longer hours without giving anything in return. Usually they pay overtime rates. But often they regard these as paying for themselves, since many workers will, mistakenly, put up with low hourly rates provided there is sufficient overtime to enable them to just make ends meet.
(iii) ‘Immiseration’
The third way for capitalists to try to raise their profit levels is crude wage cutting – or, as Marx put it, ‘the absolute immiseration of workers’. Because Marx used this phrase, there have been many crude attacks on his economic analysis for allegedly claiming workers can only get poorer under capitalism. This, for instance, is the reason William Keegan, the economic columnist of the Observer newspaper, gives for dismissing Marx’s ideas in his book The Spectre of Capitalism.
But Marx does not claim that wages always go down under capitalism. He lived in England in the third quarter of the 19th century when he could see this certainly was not happening. And he explicitly rejected the ‘iron law of wages’ of the German socialist leader Lassalle, which held wages could never rise. Instead, Marx argued that capitalists would try to counter the downward pressure on profit rates by cutting back on the share of output that went to wages. When total output was rising, this was quite compatible with a limited increase in workers’ living standards. There could be ‘relative immiseration’ as the workers’ share of output fell, without workers themselves getting worse off.
In practice, capitalists are often trying to get workers to increase productivity in exchange for limited improvements in wages. So workers in the major European countries in the 1970s and 1980s saw small improvements in their living standards even during a period of crises. But they paid for these improvements by increased shift working, increased tiredness and increased stress.
Thus a 1978 survey of 26 year old men in Britain reported that 38 percent felt they were under severe nervous strain at work; a 1982 survey revealed that 19 percent of men and 23 percent of women in semi-skilled and unskilled jobs ‘experienced emotional strain’; a 1980s study found that ‘machine paced’ workers ‘maintain high levels of adrenalin during off-the-job hours... Workers complained of an inability to unwind and relax after working all day. Additionally they reported being too tired to interact with their spouse and children after working all day’.
The picture seems to be growing worse. Surveys by Swedish trade unions show that the proportion of workers who felt their jobs involved ‘a high degree of stress or mental strain’ grew from 9 percent in 1970 to 15 percent in 1980, while the numbers reporting stress ‘to some extent’ rose from 22 percent to 37 percent; most blamed ‘the escalated pace of work’. The Swedish Institute for Social Research found ‘a steady increase in the proportion of the population having stressful working conditions’. Japanese surveys showed that rather than reducing workloads, ‘the increasing use of robots and other microelectronic technology is resulting in more overtime, less leave and greater mental stress at factories and plants’. And in Britain a recent survey of managers by psychologist David Lewis shows that ‘office workers are being put under too much stress and moving towards a Japanese style working week of 12-hour days and work filled evenings’ as ‘office staff work harder than ever, with lunch breaks cut to 20 minutes’.
A point can be reached in which capitalists despair of raising profits sufficiently just by pushing down the workers’ share of output and begin to pursue policies of trying to reduce wages absolutely. This has been happening in the US over the last 20 years. Average wages have fallen as employers have forced ‘concessions’ including wage cuts from unions and have followed a ‘runaway shop’ strategy of shifting factories from regions with strong unions to regions with weak unions, cutting wages by up to half in the process.
Attempts are now being made to repeat the process in Britain, with ‘contracting out’ being used to force workers to accept lower wages to keep their jobs in areas like cleaning, catering, sections of the civil service and so on. When such methods no longer work, firms threaten to move production overseas, to countries where workers are less well organised and wages are lower.
The tendency to increase ‘absolute surplus value’, ‘relative surplus value’ and ‘immiseration’ are not ‘laws of the capitalist economy’ if by that is meant inbuilt trends that cannot be resisted. They are, rather, methods the capitalists turn to once profit rates come under pressure. But they are also methods which invariably incur resistance from workers, leading to an accentuation of bitterness in society and making widespread class struggle more likely.
Capitalists try to raise the level of exploitation in order to counter the fall in the rate of profit and protect themselves against the crisis.
One of the tenets of the monetarist version of neo-classical economics is that crisis can be avoided if capitalists are successful in doing this. Provided wages fall sufficiently, it holds, a point will be reached at which ‘marginal costs of production’ fall below prices, profitability will be restored, capitalists will start investing again and the market for goods will grow until there is full employment. The key to solving the crisis, it insists, is breaking ‘trade union monopolies’ over labour which prevent the fall in wages.
But the whole history of capitalism shows that increasing the rate of exploitation in this way does not ward off slumps. Slumps have occurred just as much in countries where trade unions are weak or non-existent as in countries where they are strong. In the early 1930s the weakness of British and American trade unions – and the virtual non-existence of trade unions in Fascist Italy – did nothing to stop the onset of slump. In the 1980s and 1990s the weakening of unions in Britain and the US under Thatcher and Reagan did not prevent recession being much deeper than in the 1940s, 1950s and 1960s when unions were much stronger.
One of the powerful points made by the Keynesian economists of the 1930s and 1940s against the old orthodoxy was that cutting wages could actually deepen the crisis, not end it.
Unemployment grows with the onset of slump because firms cannot sell the goods they produce. Cutting wages reduces the total market for consumer goods and therefore means fewer goods can be sold. The immediate effect, then, of wage cutting – or of increasing productivity without increasing wages – is to widen the gap between what is produced and what can be bought. It is to deepen the slump.
Of course, this would not matter if investment were to rise automatically to compensate for any decrease in consumption due to wage cutting. The demand for new industrial building and machines would make up for the drop in the demand for consumer goods. But there is no mechanism which ensures that a fall in consumption is automatically balanced by a rise in investment. Indeed, if firms expect consumption to fall, they are likely to fear that the market for their goods will contract and to reduce their investment to avoid ending up with factories capable of producing many more goods than they can sell.
The orthodox neo-classicalists have never been able to answer the Keynesians’ devastating critique of their position. All they have ever done is to assert that, if slumps do not solve themselves, it is because workers’ resistance to falling wages has not been broken enough.
But there was also always a weakness in the Keynesian case – a weakness which is also found in some Marxists influenced by Keynesianism, like the Americans Paul Baran and Paul Sweezy. They could not explain why investment should remain so low as to lead to deeper slumps and smaller booms. This is because the Keynesians accepted much of the orthodox ‘neo-classical’ economics and so could not see that there was bound to be a long term downward pressure on profits which could not be stopped by wage cutting. Keynes himself had spoken of a fall in what he called ‘the marginal efficiency of capital’ and had expected this to continue in future. Most of his followers abandoned this notion and based themselves on passages in his writings which blamed the crisis on the psychological condition of businessmen rather on some innate tendency in the capitalist system. If firms undertook investment, these passages claimed, it was because of ‘animal spirits – of a spontaneous urge for action rather than inaction’. But, ‘if the animal spirits are dimmed and the spontaneous optimism falters... enterprise will fade and die’ so that ‘slumps and depressions are exaggerated in degree’.
The Keynesians therefore argued that the tendency towards slumps could be stopped by limited government intervention in the economy designed to create a feeling of optimism about future prospects among those who ran big business. In a slump, they argued, the government should spend money and discourage wage cutting. In this way, it would create a market for goods, allow firms to expand their output and encourage investment by making it seem likely that markets would grow still further. The increased wealth created as the economy recovered from slump would, they further argued, allow a rise in both working class incomes and profits.
Keynesian ideas dominated mainstream economic thinking in the quarter of a century after the 1930s slump, as we have seen earlier. But they lost their influence with the crisis of the mid-1970s. A high degree of government intervention in all the major economies failed to stop that crisis and the only result seemed to be to superimpose a high level of inflation on the rising levels of unemployment. Almost everywhere governments and businessmen retreated into the old orthodoxy which held that the answer to slumps lay in combining anti-union laws with rising unemployment to hold wages down.
Economists influenced by Keynesianism, like Galbraith in the US and William Keegan, Will Hutton and Paul Ormerod in Britain, have been able to punch enormous holes through this reborn old orthodoxy. Yet they cannot themselves point to any sure way of ending the increasingly severe slumps. Their own remedy to low investment consists in urging Britain and America to copy the methods of the German and Japanese economies – although these economies have been going through severe slumps of their own. And they want the same holding down of wages as do the monetarists, except they want the government to have incomes policies rather than simply leaving things to the market to impoverish workers.
But on one thing Keynes certainly was right. Holding down consumption increases the likely impact of any crisis. For it means there is a growing disproportion between the potential output of the economy and the consumption levels of the mass of the people. Investment has to fill an even bigger gap if all the goods produced are going to be sold. The likelihood of a situation arising in which they cannot be sold, in which there is ‘overproduction’, grows greater.
If profit rates are not high enough to bring that investment about, then a deep slump occurs. Capitalists find themselves in a Catch 22 situation. If they increase exploitation in order to raise profits, then the gap to be filled is still greater. If they reduce exploitation in order to expand the market for consumer goods, profit rates fall and investment is not high enough to stop a slump developing anyway.
The dilemma arises because accumulation has proceeded to such a level that there is a huge contrast between the scale of production and the size of the workforce. This finds expression through the workforce not being able to produce enough profit to match the level of investment needed, leading to capitalists refusing to invest and to firms being unable to sell all their produce.
In a sane society there would be no such dilemma. For there is an absolute need for the goods produced, if society’s priorities were the wellbeing of the mass of people. But the motive force of the present system is not people’s wellbeing. Those who control capital behave the way they do in order to increase their profits, to expand their holding of capital. Precisely because of this, huge sectors of the productive apparatus of capitalism grind to a halt.
Worsening crises are not a result of human frailty or some natural catastrophe. They are, rather, an inbuilt fault of a system in which the satisfaction of human need through productive labour is subordinated to the drive of capitalists to accumulate ever more wealth in their own hands. They show, in Marx’s words, that ‘the capitalist mode of production meets in the development of the productive forces a barrier which has nothing to do with the production of wealth as such’, that ‘the real barrier of capitalist production is capital itself’.
This is why deepening crises cause such perplexity to pro- capitalist economists of all sorts. Even those economists and politicians who want to reform the system take its basic features for granted. And so they end up seeing growing unemployment, deepening pools of poverty, the ‘end of lifetime employment’, growing insecurity and ever greater pressures to work harder as natural phenomena like earthquakes or tempests, which we cannot prevent and have to learn to live with.
Conventional economics assume that capitalism will go on forever, with crisis as an accident that occurs sometimes. Marx’s analysis, by contrast, shows that worsening slumps are endemic in the system. But that does not mean capitalism simply collapses of its own accord, or that slumps go on forever. In the century and a quarter since Marx finished Capital the system has known booms – some going on for a very long period of time – as well as slumps, and there have been periods in which workers’ living standards have improved, as well as periods in which they have got worse.
What is more, the system as a whole has expanded massively over the long term. When Marx started his researches in the 1840s, industrial capitalism was characteristic only of the north of England, parts of Belgium and the north eastern seaboard of the United States, along with small patches of France and Germany. By the time he died in the 1880s, it was dominant right across north western Europe and throughout North America, and was making its first advances in Japan. Today, every country on the globe is dominated by it. Today, total output of the world’s economy is four or five times what it was in 1945, and 20 or 30 times what it was in the 1840s.
If Marx’s account of capitalism had simply talked about the capitalist system stagnating or declining, it would clearly have been just as mistaken as those orthodox economic schools that only talk about the expansion of the system.
In fact, Marx insisted that alongside the tendency for the rate of profit to fall there exist certain ‘countervailing factors’.
What were these countervailing factors? Some we have already looked at – the various measures capitalists take to raise the rate of exploitation and so push up profit rates. But in themselves these cannot stop crises. Neither can they halt the long term trend for profit rates to decline, since, as we have also seen, a few workers exploited intensively cannot produce as much surplus value as a much larger group of workers less intensively exploited.
Another factor that helped raise profit rates in Marx’s own day was foreign trade. At that time the fully capitalist economies were surrounded by much larger pre-capitalist societies in Asia, Africa, Latin America and Eastern Europe. The capitalists could use the crudest means (pillaging India, moving millions of slaves from Africa to the Americas, compelling the Chinese to buy opium, conquering Egypt at the behest of the bankers) to get hold of the wealth of these societies at below its real value and so raise their own profits.
This is not a method that can work for any length of time today, now that the whole world is capitalist. The capitalists of one country can improve their position by forcing the rulers of other countries to sell them goods cheaply – as with Middle East oil in the 1960s and early 1970s. But this entails the redistribution of profits between capitalist countries, not the raising of profits right across the capitalist world.
For Marx a third ‘countervailing’ factor was vitally important, and remains so today. This is the way in which each individual crisis has an impact on the long term trends within the system.
Crises are devastating for capitalism. They create panic within ruling classes and misery among the mass of the people. But they also have advantages for those individual capitalists who manage to avoid going bust. For they find they can buy up the assets of other capitalists on the cheap and can use the high levels of unemployment to force down wages.
Thus during the great Wall Street crash of 1929 some capitalists were able to sit back and wait until stock prices were at record lows and then move in to buy up whole companies on the cheap. In the more recent slump of the early 1990s the Canary Wharf office development in London’s East End which had cost £2 billion to build was reduced in value to £60 million. This was devastating to its original owners, the Reichman Brothers, who were forced out of business. But it was a godsend to the firms which bought it up at a bargain basement price.
Capitalist firms survive the slump by cannibalism, by some eating up others. The survivors can get hold of means of production at a price much lower than their old value. They find they can begin to expand production using the most modern plant and machinery without paying the full price for it. Investment can grow in extent without growing in cost. This prevents the cost of investment growing much more quickly than the total labour force – easing the pressure on the rate of profit.
The crisis forces a ‘restructuring’ of capitalism, in which many individual firms go to the wall, allowing the survivors to recover their profits at the expense of others. And because so much capital is ‘written off’ during the slump, the long term growth of investment compared with the labour force is not nearly as marked as it would be otherwise. So recession has the paradoxical effect of allowing profit rates and industrial expansion to recover.
As one history of modern economic crises notes, when the US went rapidly into recession in 1884, ‘failures came in quick succession; unemployment increased and wages fell 25 to 30 percent in textiles and by 15 to 22 percent in the iron and steel industry...’ But the Carnegie group for one had saved up large profits during the previous boom and was ‘thus able during the depression to buy up competing factories cheaply. There was a general improvement in the economic climate in early 1886...’
In a similar way, recovery from the recession in Britain in the early 1890s was associated with a wave of takeovers by five big banks (Barclays, Lloyds, Midland, National Provincial and Westminster) which gave them a virtual monopoly. Alongside this there was a concentration of ownership in textiles and metallurgy, widespread rationalisation of industry, the introduction of new technologies in the shoe making and printing industries, and several great lockouts which forced workers to accept lower wages and a worsening of conditions.
Crises blunted the tendency for investment to rise much more quickly than the labour force through the second half of the 19th century. But it did not do away with this tendency completely. According to one estimate the ratio of investment to labour in the US doubled between 1880 and 1912, according to another it rose by 25 percent between 1900 and 1918, while a third estimate suggests the ratio of investment to output rose from 2.02 in 1855-64 to 2.16 in 1875-83.
As an important study by Gillman has noted, the ratio of investment to labour in the US ‘displays a fairly persistent tendency to rise’ in the period, although ‘it was fairly slow compared with Marx’s hypothetical example’. The result was that by the end of the century, as historian Eric Hobsbawm has noted:
Both the old and the new industrial economies ran into problems of markets and profit margins... As the titanic profits of the industrial pioneers declined, businessmen searched desperately for a way out.
A similar pattern was to be seen in Britain in the 1980s. The recession of 1980-82 led to something like a third of manufacturing capacity shutting down, even though firms were producing about the same amount as before by 1987. This slowed down considerably the growth of investment compared with labour. As the article in Lloyds Bank Review quoted earlier told:
The capital stock has been rising, but at a declining rate. It was rising at 4 percent in 1970, decelerating to 2 percent by 1982...
Under these conditions, increasing exploitation of workers – who accepted small wage cuts and more onerous working conditions out of fear of unemployment – could actually raise the rate of profit a little. But again, as a century earlier, the recovery of profit rates was only a partial recovery, above the level of the early 1980s, but still substantially below that for the 1950s, 1960s and early 1970s. This was brought home in a devastating fashion when boom suddenly gave way to slump, first in Britain and the US, then in France, Germany and Japan, in the early 1990s.
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Last updated on 15 November 2009