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From The New International, Vol. XV No. 5, July 1949, pp. 153–156.
Transcribed & marked up by Einde O’Callaghan for ETOL.
Economic journals and popular magazines are again featuring articles concerning the possibility of a business recession in the United States. Despite the unprecedented period of prosperity enjoyed by this country since the start of World War II, those economists who are willing to bank their professional reputations on a continued expansion of American production coupled with full employment and a steadily rising standard of living for the entire population are few and far between. Remembering the crisis of the ’30s, most writers have switched over to an entirely different type of thinking: that crises are part and parcel of “our way of life,” unpleasant, yet necessary for the preservation of “our democratic system”; that some government intervention is essential to minimize the effects of crises and hasten the return of prosperity; that such governmental interference should remain at a minimum, and that government effort must be focussed in directions where it will not compete with private industry to any major degree.
To a very large extent, this type of economic thinking has its roots in the acceptance, to some degree or other, of an underconsumptionist analysis of capitalist economy. This analysis of capitalism is held not only by bourgeois economists, however, but by a very large number of Marxist writers, many of whom confuse the underconsumptionist theory with Marx’s analysis of capitalist crises, and preach a more or less sophisticated version of the underconsumptionist argument. To the serious student of the Marxian analysis, however, it is essential that underconsumptionist fallacies be avoided, and limitation to a reformed capitalism be clearly understood.
In essence, the underconsumptionist argument may be summed up as follows: All value is created by labor. By working on a raw material and transforming it into a finished product, additional value is created. The worker receives (in wages), however, only a portion of the increase in value which his labor has produced. These wages are the value of his labor power, the value of the number of goods and services required to maintain himself and his dependents on the “standard of living” basis existing in his community. Since the increase in value which he has created is more than the value of his wages, the balance can be expropriated by the capitalist and becomes his profits.
No disparity as yet exists between the above conclusions and a simplified Marxian analysis (see below). From this point on, however, any resemblance between Marxism and underconsumptionism is wholly coincidental.
The underconsumptionist argument continues: Because the worker receives back, in wages, only a portion of what he produces, he can only buy back goods equal in value to the wages which he has received. The persons from whom the capitalist purchased the raw materials and machinery necessary to produce the finished product, in turn, can only buy back finished goods equal in price to the goods purchased from them. This leaves our capitalist with finished goods, equal in value to his profit, or surplus. This profit cannot be realized in cash, however, until these surplus goods are sold and money realized from their sale. But who is to buy back these goods? The capitalist class is relatively small, and constantly decreasing in numbers. The quantity of goods which it is possible for them to consume is necessarily limited. Given maximum consumption on the part of the capitalist class, it is still impossible (?) for them to buy back more than a portion of these surplus goods. The balance remains on wholesaler and retailer shelves as an unsold and unsalable inventory, from which the profit cannot be immediately realized.
As this inventory mounts, production is suspended and layoffs occur, the result of natural desires on the part of our capitalist to dispose of his unsold inventories before proceeding with the production of further commodities. This in turn means a decrease in employment and in total wages, a curtailment of buying power and a resultant stockpile of additional unsold inventory.
When unsalable goods reach a certain peak and unemployment hits a high level, the country finds itself in the grip of a cyclical crisis, with its resultant manifestations. When the unsalable inventory is reduced (production falls below consumption, export increases, or a war enables two warring capitalists to destroy their own and their opponent’s goods) it again becomes possible to sell additional goods as produced, workers are rehired, new machines bought and a period of relative prosperity reappears.
Not only is the above theory a vulgarized and grossly inaccurate approximation of the workings of capitalist society, as pictured by Marx, but it tends to give rise to a series of dangerous misconceptions regarding the capitalist society in which we live.
If we were to accept this theory, for instance, we would be face to face with the following:
Unfortunately, the seeds of disintegration inherent in capitalist society are planted far deeper than advocates of the underconsumptionist argument realize. Theoretically, it is quite possible for a capitalist society to be in equilibrium, that is, produce exactly as many commodities of each type as are required in any given period of time by the entire population. That portion of the total product which would be required by the working class and the individual capitalists in order for them to live would be available in the form of consumer goods necessities. The balance would be manufactured into consumer goods luxuries (by definition: consumer goods used by the capitalist class exclusively, including yachts, private aircraft, exclusive clubs, war material, etc.) and capital goods, including both machinery and raw materials.
In actuality, however, the tendencies toward disproportion in our economy so strongly outweigh the counter-tendencies as to make disequilibrium and relative overproduction the prevailing rule. Any consumer goods item which can be sold at a fairly good rate of profit and whose production does not require too high an initial investment is soon being produced by numerous competing industrialists, each anxious to obtain a “fair share” of the profitable pie. The resultant competition soon brings the profit down to the average rate and finally below average. Capital is at this point transferred away from the production of this item and on to some other commodity, but not before several investors have enjoyed that common yet unpleasant experience of having made a negative profit.
Of and by itself, the market tends to govern relative overproduction of individual commodities such as has just been described, and prevents an acute crisis from developing from this fact alone. Another and far more serious form of disequilibrium, however, cannot so easily be negated.
Because of the tremendous cost of capital equipment required to produce machinery and raw materials (steel, aluminum, coal, etc.), production in these fields is controlled by a limited number of capitalists. A certain amount of overall planning is therefore possible in the capital goods industry, competition is less keen, relative overproduction not so common and over-expansion more easily avoided. As a result, the production of consumer goods material tends, in normal times, to increase at a far more rapid pace than the production of capital goods commodities. This, in turn, creates a disproportion between the two departments, making exchange between the departments imperfect, and resulting in the piling up of unsold commodities. This tendency is further heightened by what may be called the “anti-damp” tendency, as opposed to the “damping” tendency described by many bourgeois economists. This tendency may be briefly summed up as follows:
The average machine (fixed capital) usually wears out only after a period of approximately ten years. During this time a portion of the value of this machine is constantly being transferred to the commodities which it produces. At the end of the ninth year, however, our machine is still producing just as many items as it did in the first year, regardless of its loss of value. It need, therefore, be replaced only after it is completely worn out at the end of the tenth year (barring earlier obsolescence). During the ten-year period it has been in use the money representing the value of its wear and tear, plus sufficient funds for accumulation, must be set aside by its owner for eventual replacement of the machine.
If the machine is a fairly new invention, all capitalists have been forced to purchase it at approximately the same time, if they were to continue production on a competitive basis. Not all the machines wear out at the same time, however, and the bourgeois economists therefore concluded that a “damping” or leveling out tendency sets in, whereby after a period of time just as many machines tended to wear out in any given year as in any other year, preventing a rush of orders all at once, followed by a period of slack. But an anti-damp tendency exists (Marx) which far outweighs this damping tendency. This results from the fact that times are always equally conducive for the purchase of machines and tools. During a period of depression, for instance, with small chances of high profit and a very good chance of taking a considerable loss, capitalists will delay or completely suspend the replacement of their capital goods equipment. When conditions begin to pick up, however, and profits are again possible, a terrific rush to re-equip plants will ensue. The same situation holds true during a war, when many consumer goods are no longer produced, and the capital equipment is therefore not replaced. The war is no sooner over, however, than a need arises to replace the fixed capital of all these plants on or about the same time. Each war and each crisis, therefore, is the start of a cycle which through the anti-damp tendency is the starting point of the next prosperity-crisis cycle.
The whole structure and nature of capitalist society and the market tends to aggravate and heighten a crisis once it has started. The stockpiling of large quantities of unsold commodities, one of the first signs of disequilibrium and impending crisis, eventually forces down the price of these goods to well below value in an attempt to “move” the stock. Inability on the part of the weaker industrialists to continue in business with these lower prices results in bankruptcies; inability to meet debts as due, sale of bankrupt stock at below the cost of production (in an effort to realize cash to meet debts) and a stoppage of production due to the inability to sell goods at a profit (given the new market price). [1]
Little by little, the bankrupt stocks are consumed, fixed capital must be replaced, cost of production drops, due to an increase in productivity, a lower wage rate is imposed upon the working class if possible, and the economy begins slowly to recover from its period of crisis.
Side by side with these tendencies, augmenting the worst effects of the crisis and having a definitely paralyzing effect upon the economy of its own, is a deeper, graver and more far-reaching tendency in capitalist economy. This is sometimes referred to as “the theory of diminishing returns,” and known to Marxian economists as the tendency toward a fall in the rate (and eventually the mass) of profit.
Although it is extremely difficult to go into the many complicated factors which Marx uncovered to show the existence of this phenomenon, I will try to present it in rough summary form.
All value, says Marx, is created by labor. The worker, who labors, gets paid for his labor power, or the value of commodities and services which he requires to maintain himself and family at a level consistent with the average standards prevailing in his community at the time. The value of the worker's labor power must be less than the increase in value which his labor creates, otherwise he cannot be profitably hired by the capitalist and will remain unemployed. The increase in value brought about by the worker’s labor, less the value of his labor power, represents the capitalist’s surplus.
To operate efficiently, a capitalist must use the very latest productive machinery, else his costs per commodity produced cannot remain competitive. The tendency within the economy, therefore, is to invest constantly a greater and greater proportion of capital in machinery and raw materials and a smaller and smaller proportion in labor power.
The value of the machinery and raw materials consumed enters unchanged into the value of the finished product. No surplus, therefore, is created from that portion of the capitalist’s investment, yet competition from other capitalists forces him to invest an ever larger percentage in these “unprofitable” items and an ever smaller percentage in the profit-creating labor power. Use of these machines, however, increases the productivity of labor. More goods are therefore produced in the same period of time, bringing down the value of labor power (cost of goods consumed by the working class) and increasing the percentage of each worker’s produce which it is possible for the capitalist to expropriate. This is a countertendency to the fall in the rate of profit.
Nevertheless, this greater “rate of surplus” can only be expropriated from an ever smaller proportion of the capitalist’s investment. With the rate of profit falling, the mass of investment must be constantly increased to obtain a continued increase in the mass of profit. As productivity increases, however, so large an investment must be made in capital goods for every dollar invested in labor power, that it becomes impossible (profitably) to hire the same quantity of workers as in the past, given the available investment capital. Workers, no longer profitable, are laid off. Less labor hours, however, means the production of less value. Even with an increase in the rate of exploitation, therefore, the point must eventually be reached when the mass of surplus must drop. At this point the crisis becomes secular and permanent. Given the continued existence of capitalism, a crisis of this sort can be resolved only by imperialism and war, and then only for a limited period of time.
The above short summary does not take into account any but the most obvious features of a capitalist crisis. No attempt has been made to include the entire schemata of Marx’s thinking and what has been presented is in an oversimplified and incomplete form. The three volumes of Capital cannot, unfortunately, be condensed into the space of this short article.
One thing, however, is extremely important and, I hope, evident from the above presentation. Crises are not caused by inability of society to consume all that it produces, but by disequilibrium and a falling rate of profit. An increase in workers’ pay will not solve a capitalist crisis. It will heighten it by bringing about a further cut in the rate of profit. The capitalists, being well aware of this point, do all they can to cut wages. The continuation of capitalism, therefore, is dependent upon a constantly increasing rate of exploitation. For his own protection it is essential that the worker protect and expand his standard of living, but with no illusions regarding its “beneficial” effect on capitalist crises.
From the point of view of the capitalist, mounting unemployment (up to a point) need not be a sign of crisis. A “labor pool” means lower wages, and if the mass of profit continues to rise this surplus of labor power is looked upon by the capitalist class as a boon rather than an evil. Only when the mass of profit begins to fall does the bourgeois economist become concerned with the conditions of the world.
In conclusion, the United States is today at the beginning of what appears to be the oft-predicted post-war slump. The reasons for this crisis must be found in the anti-damp tendency resulting from World War II. The production of capital goods equipment is finally slowing down. Many large firms, including General Motors, appear to have completed their recapitalization in 1948. By the end of 1949, there is every reason to believe that the call for capital goods equipment for this country will be temporarily reduced to a low point, resulting in disequilibrium and serious crisis.
The smashing of the European economy, however, and the resultant need for rebuilding at least that section of Europe under the American imperialist orbit, makes a period of relative prosperity for the next several years entirely possible, depending upon the European political picture and the consequent “advisability” of extending additional loans for rebuilding European productive potential at this time.
In view of the reluctance of both Russia and the U.S. to start an immediate shooting war, it appears very likely that a “peace agreement” will be concluded between them within the next year. Loans to Europe will then be considerably increased and the present crisis will be of short duration. Inability to conclude such an agreement, on the other hand, will result in a speeding up of the war economy, and the outbreak of open hostilities, resulting in a crisis of an entirely different type from the one under discussion.
It does not appear too likely that such a war will materialize in the immediate future, however, and a prognosis of short but perhaps fairly sharp cyclical crisis, followed by negotiated peace in Europe, increased loans, recapitalization and relative equilibrium, a fairly prosperous economy and the gradual building up of the war economy appears to be the most likely aspect of the next immediate period in American economic history.
The secular crisis which follows Europe’s recapitalization, however, will be far more severe, in all probability, than the crisis of the ’30s. Its arrival, or the war economy and war which come in its place, all else being equal, may well be the scissors which rips to shreds the remnants of our capitalist economy.
1. With many large factories being geared for high production, the increase in percentual overhead resulting from a cut in orders often increases costs to the point where production of orders in reduced quantities becomes unprofitable even at the price at which these goods had been sold by the very same firm when ordered in larger amounts.
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