Marx and Under-Consumption: A Reply to Professor Galbraith

Link to Part 1.

The Affluent Society –  Part 2

A Reply to Professor Galbraith

It often happens that when people look for a criticism of Marx, not being sure where to look, they look in the wrong places. Professor Galbraith, for instance, looked to Moscow, to Mr. Strachey and even to Mrs. Joan Robinson.

He gathered from some of these sources that Marx had formulated an absolute law of poverty and that the system’s chief defect was acute and chronic under-consumption. Along with the ever greater ability to turn out wealth the workers’ living standards would decline, capitalism would choke under the weight of its unsold commodities and collapse. As if “all this—and purgatory, too,” was not enough. Professor Galbraith adds another alleged Marxian theory of crises, of a continuous fall in the rate of profit and hence capital investment, with slumps of ever greater magnitude and final breakdown. Which one Marx was really supposed to hold we are not informed. Our view is that he held neither. However, let our motto be one crisis one article, and it is the under-consumptionist variety which will be its subject.

In view of all that has been said of Marx as an “under-consumptionist” theorist, the only statement which has any bearing on the matter is in Vol. 3 of Capital, where he says,

“The last cause of all real crises, always remains the poverty and unrestricted consumption of the masses as compared with the impulse of capitalist production to develop the productive forces as if only the absolute powers of consumption of society were their limit.”

This statement is merely an interpolation by Marx when he is discussing at length the view that shortage of capital is a cause of crises. This statement seems out of context with the passage, but even so, it is obvious that Marx was drawing attention to the contradiction between the tendency of capital to expand in an absolute way the powers of production, and the limits imposed upon it by the antagonistic income distribution inherent in capitalist society. This has nothing to do with under-consumption theories as understood, but implies the conflict between productive powers and productive relations.

To put it simply, capital accumulation logically leads to a demand for labour power and hence to a rise in real wages. It is true that wages are part of the consumption fund of capitalist society and an increase in real wages means increased consumption for workers. But wages are also the purchase price of labour-power and if as a consequence of increased capital investment, wages rise, this means for capitalists an increase in costs and a lowering of the rate of profit. Should wage earnings reach a level which threatens the customary rate of profit yield, then capital investment may sharply recoil.

It is the essence of this society that wage advances can never wholly absorb capitalist profits. The ceiling of wages and hence consumption cannot extend beyond the point where additional wage advances annul profit returns on capital outlay. Even an approximation to such a state of affairs will suffice to induce a downward trend in capital accumulation. The impulse then of capitalist production to expand the forces of production in such a way that only the entire satisfaction of social needs is its ultimate limit is inhibited and finally checked by the antagonistic class income distribution of capitalist society—wages and profits. The forces of production come into conflict with the social relations of production.

The fact that extant society is not one of conscious motivation, directed towards social ends, but of profit motivation, places grave restrictions on its productive powers and hence consuming powers. As Marx points out : —

  “. . .  It is not a fact that too much wealth is produced. But it is true that there is a periodical over- production of wealth in its capitalistic and self-contradictory form. . . . The capitalist mode of production for this reason meets with barriers at a certain scale of production which would be inadequate under different conditions. It comes to a standstill at a point determined by the production and realisation of profit, not by the satisfaction of social needs.” Vol 3 (p. 303).

This is why Marx indicted capitalism as a system of organised scarcity. In this sense and only in this sense can there be a Marxist view of under-consumption.

How little Marx had in common with the underconsumption theory of crises which Professor Galbraith thrusts upon him, along with so many others, can be seen by his criticism of the economist Rodbertus, who formulated in essentials the generally accepted under-consumption theory of crises. It holds that crises are the result of a deficit of purchasing power of the mass of people and would be remedied by raising wages. Marx himself emphatically repudiated such a view, thus:—

  “It is purely a tautology to say that crises are caused by the scarcity of solvent consumers or paying consumption. The capitalist mode of production does not know of any other mode of consumption but a paying one, except that of the pauper or of the thief . . . But if one were to clothe this tautology with a semblance of profounder justification by saying that the working class receive too small a portion of their own product and the evil could be remedied by giving them a larger share of it or by raising wages; we should reply that crises are always preceded by a period in which wages rise generally and the working class get a larger share of the annual product intended for consumption. From the advocates of simple common sense such a period should remove a crisis. It seems then that capitalist production comprises certain conditions which are independent of good or bad will and permit the working class to enjoy that relative prosperity only momentarily and, at that, always as a harbinger of a coming crisis.” Vol. 2 (pp. 475/6.)

There is also a footnote to this passage by Engels which says, “advocates of the theory of crises of Rodbertus are requested to make a note of this.”

The under-consumptionist theory of crises always depicts capitalist society as what it is not and cannot be; a system serving the needs of the community. For them crises are not the outcome of capitalist relations of production, but a defect in the monetary mechanism which can be regulated via banks and state action. This comprises the essentials of Keynes’ theory.

Under-consumptionists hold that the cause of crises is due to deficit purchasing power, i.e., the inability to buy back the ever-increasing amount of commodities thrown on the market. But as we have already noted, before the boom breaks, the workers’ purchasing power is at its height. It is not then lack of purchasing power which causes a cut back in investment by capitalists and unsold stocks to appear on the market, but because from the capitalist standpoint wages are too high and profit margins too low. It is this which can give rise to a crisis (a sharp break in price equilibrium) and if big enough brings about depression.

If this happens there will be a falling spiral of wages and profits and unsold stocks will pile up. This is not a cause, but an effect of certain conditions and has nothing to do with a defect in the monetary mechanism or some absolute deficit in purchasing power. What actually takes place is that a number of capitalists—members of the ruling social group—take decisions as to the future trend of capital investment and, of course, production. If they decide not to invest at the existing profit level or cut back, it is because from the capitalist standpoint the existing income distribution is an unsatisfactory one for them. Profit margins are too small and wage bills too big. As has been already stated it is not a question of workers having too little purchasing power (wages), but from the capitalist view too much. But supposing a crisis does break out. It does not follow there is an overall lack of purchasing power. There is plenty of available purchasing power in banks, holdings, reserves, and the pockets of capitalists to buy up surplus stock for needy workers. But capitalists do not choose to spend their money that way.

There are good reasons why they should not redistribute purchasing power this way. As Marx pointed out, the capitalist, if not a miser by nature, is one by necessity. Being realists they know in any depression period they must husband their resources—even seek to increase them, conditions permitting, if they are to successfully ride the next wave boom.

Capitalism knows of only one form of consumption and that is paying consumption, and as we have seen the system operates in such a way as to impose in relation to the ability to produce wealth, a restrictive consumption on the working class. To say this is due to a lack of purchasing power is the merest tautology. Actually capitalist society generates the purchasing power necessary for the realisation in terms of money, of the wealth it produces. For instance, suppose a boom starts in the capital goods industry (it could, of course, start elsewhere), increased production of the means of production will by employing more and more labour-power, generate increased purchasing power among workers which will be transmitted to the industries producing consumption goods. These industries will expand and order further machines and auxiliaries for this purpose and so a continuous process will go on in the generating of purchasing power. Under the stimulus of demand, prices will rise and the purchase price of labour-power will rise also. In fact, generally speaking, labour-power during the later stages of the boom tends to rise faster than other commodities. Increased purchasing power is synchronised with increased production.

Capitalism, however, is based on anarchy of production. Capitalists do not meet beforehand to harmonise production in accordance with social aims and ends. Capitalists for that reason, invest with little regard and knowledge of other capital investments being carried out at the same time. As a result different industries expand at a different rate and disproportionality of production, as Marx calls it, takes place. If then one industry—say the one producing capital goods—over-expands in relation to the industry producing consumption goods, it means they have over estimated demand and if on a big enough scale, the realisation price of their products will be unremunerative. This disproportional development relative to other industries will, however, have cumulative effects. Not only will the industry affected by over-expansion cut back investment, but as a consequence reduce orders to other concerns linked with them. In turn, these other concerns will do likewise and so on from trade to trade. As a result of cancellation of orders and contracts, unsold stocks will pile up. Relative over-production, which started in one industry, then assumes the proportion of general over-production—but, it must be stressed, not absolute over-production.

In such a situation production and employment will fall sharply and so, of course, will purchasing power. To say that if the workers’ wages were higher, all this could have been avoided is to utterly misunderstand the nature of capitalism. In the first place the cut back in investment by the industry that had over expanded its demand was not a question of purchasing power, but profit margins due to unremunerative prices. What is more, workers do not spend their money in the capital goods industry. Again, from the standpoint of the employers in the capital goods industry, wages are too high and a factor in helping to reduce profit margins.

It is not then a question of too much wealth being produced and too little purchasing power to buy it back which brings a crisis, but simply that an over-expansion in one sphere of industry has been big enough to start a downward spiral of investment and profits. Thus there comes into existence a volume of capital investment too great to be consistent with former profit earnings. As Marx points out, “Since production depends on investment [such a situation] constitutes an over production of capital which takes the form of an over production of commodities” (italics ours).

It might be argued that increased taxation of capitalists might be a means of disbursing extra purchasing power among workers in times of a crisis to prevent a slump. Increased taxation at such a time would, however, be most inappropriate and meet with strong resistance from capitalists. Not only would increased taxation deplete capital funds necessary for future expansion, but the purchasing power generated via taxation at one phase of the cycle, will as the result of restricted expansion, not be available at another phase of the cycle (the boom). But this in no way supports some under-consumptionist view of a total deficit of purchasing power being the cause of crises. It merely means a redistribution of purchasing power via a redistribution of income. Neither Keynes nor the Labour Party have made such proposals.

If Marx had believed in a law of absolute poverty based on absolute under-consumption, why he took such pains to analyse the trade cycle of capitalism—Boom— crises—depression, must for ever remain a mystery. For on the premise of absolute under-consumption, it is not a question of how slumps come to start, but how under such conditions a boom can ever begin.

Some Labour economic theorists have claimed to have gone beyond Keynes by advocating a further period of extensive investment just prior to the boom breaking. (Planned Capitalism). It is, however, at the top of the boom that demand for labour-power is greatest and its purchase price highest. To maintain investment at a high level would deplete the existing labour reserves, cause increased competition among employers for labour-power, and so enhance its price. Along with increased labour costs would go the increase of the supply price of the various factors in production and repeat the process of mounting costs and the narrowing of profit margins to the point where the volume of capital investment would yield too small a profit margin at the existing level. Such theorists seem to forget that capitalism is and always must be a profit motivated society. A profitless capitalism is a contradiction in terms.

We have, of course, dealt with much of this in past issues. We believe, however, it might still be of some benefit to readers, even Professor Galbraith, if he should by any chance read it.