Capitalism’s crisis cycle

Capitalism is a system of society in which the means of production take the form of “capital” or wealth used to produce other wealth with a view to profit. It is a system where wealth is produced to be sold profitably on a market. For capitalism to have come into existence (and to continue to exist) certain conditions have to be met, in particular the separation of the producers from the means of production. The producers must have been reduced to the status of a propertyless proletariat compelled to sell their mental and physical energies for a wage or salary to the minority who monopolise (own and control) the means of production. The essential features of capitalism are then: production for profit, buying and selling, wage labour, class monopoly of the means of production and distribution.

Capitalism differs from other systems of society by the fact that under it production is not carried on for use. Even under another class system like feudalism most production was for use; the peasants produced their own subsistence needs, the rest going in kind to maintain the barons, the church and other exploiters. It was the same in ancient slave society. Capitalism is different in that goods are no longer produced to be directly used but to be sold on a market with a view to profit.

Decisions about production — what to produce, how it is produced, where it is produced, and soon — are no longer simple decisions to produce what is needed, either by the producers or by their exploiters. Decisions about production become decisions to produce those goods which, at any moment, appear most likely to procure a profit when they are sold. In other words, production is governed by the search for profits, by the impersonal forces of the market which express themselves in the minds of the individual capitalists (or of their hired managers) as the “profit motive”.

As a matter of fact the situation is even more impersonal than this simplified description might suggest. For the individual capitalist does not seek profits just to satisfy their own personal needs. To stay a capitalist they are obliged to reinvest. rather than consume in riotous living, the greater part of the profits they make — in other words, to accumulate capital. It is this in fact — the accumulation of capital — rather than simply making profits that is the object of production under capitalism. The individual capitalist, just as much as the wage and salary earner, is a mere cog in this economic mechanism which is beyond human control and which operates independently of human will.

The accumulation of capital is not the mere amassing of greater and greater sums of money; it reflects itself as the expansion of the means of production, the growth of the stock of machines, factories, means of transport and communication and other means for producing wealth.

This growth, however, does not proceed smoothly and in a straight upward line. The general trend is upward — capitalism has immensely increased the stock of means of production since it made its historical debut in the 16th century and particularly since it entered its industrial phase in the 18th century — but this growth is in fits and starts. Illustrated graphically capitalism’s growth pattern would be an alternating series of peaks and troughs, with each peak normally being higher than the previous one. Or, more accurately, as a series of upward moving waves. Traditionally of course the metaphor that has been used is of a cyclical movement, the ups and downs of growth under capitalism being described as “the business cycle”, the “trade cycle” or the “economic cycle”.

Marx’s explanation, in a nutshell, is that growth under capitalism is cyclical due to the unplanned nature of production — what he calls the “anarchy of production” or the fact that production decisions are taken by a host of independent, profit-seeking, competing firms. This anarchy of production coupled to the search for profits, said Marx, leads to one sector of the economy over-expanding in relation to the others, so provoking by a chain reaction a more general slow-down or halt to growth.

Marx, towards the end of Volume II of Capital (published after his death by Engels from his notes and thus not a form Marx would necessarily have regarded as ready for publication) divides production into two main sectors, or departments:

Dept I: producing means of production or what academic economists today would call “producer goods” or “capital goods”.
Dept II: producing means of consumption or “consumer goods”.

If there is to be steady growth then these two sectors must grow in proportion. The necessary proportion is quite easy to work out. Thus Ernest Mandel in his Introduction (not at all bad apart from the occasional nonsense about Russia being “non-capitalist” or “post-capitalist”) to the new Penguin translation of Volume II:

. . . the equilibrium formula of expanded reproduction . . . implies an identity of the rate of growth of demand for consumer goods generated by department I. and a rate of growth of constant capital in department II (p.67).

In a sense this division of production into only two sectors is a gross simplification but its logic lies in the fact that it brings out that capitalism is not a system of production for use and that the output of Department II is restricted in the end by the need to limit the consumption of the producers at the expense of profits and capital accumulation. All the same, there are in fact as many sectors as there are industries and, if growth is to be smooth, all these sectors, or sub-sectors, must expand proportionately. It is thus easy to see how, given the anarchy of production, crises are possible, in fact inevitable, under capitalism. As Mandel puts it:

the very structure of the capitalist mode of production, as well as its laws of motion, imply that the “conditions of equilibrium” are inevitably destroyed; that “equilibrium” and “harmonious growth” are marginal exceptions to (or long-term averages of) normal conditions of disequilibrium (“overshooting” between the two departments) and uneven growth, (p.31)

Crises are due not to simple disproportionality but come about because this happens in the context of a society where production is for profit and where consumption is restricted by the majority being exploited by a minority class. A crisis, as a more or less sudden stop to growth, is in fact only one phase of the capitalist economic cycle. In Volume I of Capital (which he did himself see to the press) Marx speaks of the “life of industry” being a “series of periods of moderate activity, prosperity, overproduction, crisis and stagnation” which are “recurring cycles whose successive phases cover a number of years and which always end in a general crisis, which is the end of one cycle and starting point of another”.

The key factor governing the move from one of these phases to the next — from moderate activity to prosperity to overproduction and crisis to stagnation — is profits, short and medium term variations in the rate of profit.

In the period of moderate activity, which is the period of recovery just after the stagnation (the period Tory ministers have been saying for the past year or so is just round the corner!), industrial activity is beginning to pick up. This means that more workers are in employment and have more money to spend. More money to spend means a larger market for consumer goods, which means that capitalist firms in this sector will expand production ordering new factories, machines and raw materials from the producer goods sector. This interaction between the two sectors eventually leads to the period of prosperity and boom, with relatively full employment, rising wages, full order books. So it is the confirmation of the confidence that capitalist firms had in being able to sell profitably what they produced that leads from the period of “moderate activity” to that of “prosperity”.

But this period of prosperity does not last for ever. It inevitably ends in “overproduction”, as capitalist firms become over-confident. This is because the competing firms in an industry all assume that they will sell their goods profitably on the expanding market. As a result the total amount produced comes to be more than enough to satisfy the market. In this sense, there is “overproduction” in one industry. This leads to lay-offs and cutbacks of production which affect other industries, and so to a generalised “overproduction” and an end to the boom.

In Marx’s day, when most industry and trade was financed by trade bills, this led to a loss of confidence in credit and to a financial crash — or crisis in the sense Marx used it in this context. Then followed the period of stagnation: a fall in industrial output, mass unemployment — which is what we today more usually mean by crisis.

The evolution from “stagnation” to “moderate activity” is once again governed by a change in the rate of profit. As a slump continues the conditions are eventually created for a restoration of profit levels and a gradual recovery of economic activity. Profit levels are restored by a number of factors: (1) depreciation of capital, through bankruptcies, write-offs, takeovers, fall in the value of stocks and so on: (2) a fall in real wages; (3) a fall in real interest rates as the supply of capital for lending comes to exceed the demand. These three factors all work to increase the rate of industrial profit and eventually bring about a recovery, and so the cycle recommences.

This is our analysis of the current slump. It is one phase of the economic cycle which is repeated under capitalism and will in time give way to the next phases: moderate activity, prosperity and then another crisis and stagnation. In other words, capitalism will eventually recover from the present crisis.