Socialist Studies Socialist Studies

Socialist Party of Great Britain - Capitalism In Crisis - Marx, Crisis and Overproduction.

Capitalism in crisis

The global economic depression continues compounded by debt-ridden capitalist states imposing austerity programmes resulting in riots, looting and social disorder. The media are worried that governments and politicians are unable to get a grip. The US loses its triple A credit rating making it more expensive to borrow and more expensive for the capitalist class to support in taxation. “Capitalism in Crisis”, screamed the DAILY MAIL on August 6th 2011 with its pet historian, Dominic Sandbrook lamenting at the loss of faith in free market capitalism where “the common man” sees capitalism as just “a fig leaf for the greed of the rich”.

The Free Market policies of George Osborne, the Chancellor of the Exchequer, flounder with continued low growth and high unemployment. His critics call upon him to produce a “Plan B” but nobody can agree what a “Plan B” would look like given the failure of the economic policies associated with Gordon Brown’s Labour Government and the free market economics associated with former President Bush, the late Professor Milton Friedman and onetime chairman of the Federal Reserve, Alan Greenspan. And what of the Bank of England’s Quantitative easing – it only gave the capitalist economy an increase spike in inflation.

In the United States, President Obama’s Keynesian policies are also proving equally ineffective with a debt crisis forcing cuts in government spending and where 13.9 million workers are unemployed, some 9.1% of the workforce. The economies of most European Union countries are also in a mess with over 22.5 million workers unemployed in the EC alone – about 1 in ten workers (EUROSTAT June 2011).

In an article “Whatever Osborne believes, we will spend years in the doldrums”, Jeremy Warner, an economic commentator, says that government policies are not working “…normal market economics (is) apparently incapable of providing answers” (DAILY TELEGRAPH 3rd August 2011).

Of course “normal market economics” is ineffectual. Economists just do not understand the capitalist system they inhabit; as one wit observed 30 economists will give 90 different opinions all of them wrong. These economists are not students of capitalism in the way Adam Smith, David Ricardo or Karl Marx were and, instead, believe that capitalism is what happens on Wall Street or in the smart offices of merchant bankers, currency speculators and hedge fund managers.

The graveyard of political economy is full of failed economic theories. And one market economic theory which has been well and truly killed off has been the belief that economic crises are caused by an overall shortage of purchasing power.

There is not an overall shortage of purchasing power

Some writers, including Major Douglas (see his Social Credit 1924) and J.M. Keynes (see his GENERAL THEORY OF WAGES, INTEREST AND MONEY, 1936), have argued that there is an overall shortage of purchasing power in capitalist society and that this is the cause of crises and depressions. Douglas proposed that the government should distribute to the population a cash “national dividend” to correct the supposed shortage.

Keynes maintained that this overall shortage of purchasing power made it impossible to sell all the products of industry in the home market, hence the pressure to sell abroad. And that if home demand is increased by the adoption of his proposals pressure to export would disappear and thus remove a major cause of war.

Of course the poor lack purchasing power, but the poor and rich combined always have the purchasing power to buy the products of industry (see Marx’s CAPITAL VOLUME II, chapter 20, Simple commodity production and Chapter 21, Accumulation and Reproduction on an extended scale). However, it must be remembered that capitalist production produces only for profit and the amount of commodities produced at any given time do not correspond with the real needs of the working class. Capitalism does not produce to meet the needs of all society.

The failure of some products of industry to find buyers, which produces a crisis, is not due to any overall shortage of purchasing power but it is due to the failure of capitalists to exercise their power to purchase commodities at a crucial time.

Marx dealt with it in his answer to the economist J. B. Say.

J. B. Say argued that a serious depression should not take place because “every seller brings a buyer to market”, by which he meant that every producer of commodities who sells his products then has the cash with which he can at once buy other products and so keep industry busy.

Marx considered Say’s theory in CAPITAL VOL. 1, Chapter III, section 2. He accepted Say’s argument with, however, one qualification. He agreed that the sellers have the cash with which they can go at once out and buy some other commodity, but he pointed out that “no one is forthwith to purchase because he has just sold”.

The capitalist who may have just sold his commodities and has money-capital hoarded in the bank may choose not to buy and if the interval of time between the sale and the purchase is too great, the result is “a crisis”.

The question to be answered then is why this failure to buy commodities takes place?

Say has disregarded the fact that part of capitalist expenditure which is investment (as distinct from the capitalists’ purchase of necessities and luxuries for personal consumption) has as its sole purpose making a profit, and if there is no prospect that a profit can be made the capitalist refrains from buying although he has the means to buy.

Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do. When the economic conditions improve and there is a prospect of making a profit, companies were only too willing to invest.

Several examples of capitalists hoarding money-capital can be given.

When the 1979 depression began the electrical company G.E.C. had what the media called a “cash mountain” of £1500 million. Instead of using it to produce more electrical goods G.E.C. preferred to lend it to banks and the government (some cash was returned to shareholders).

Later on, in 1984, when unemployment was 3,200,000, other companies found themselves in a similar position. THE DAILY MAIL (30th October 1984) reported “Companies have never had so much cash”, and the FINANCIAL TIMES (10th Nov, 1984) said “Many companies are brim-full of cash they can hardly find any use for”.

In the present economic depression, where, in the US, President Obama is using Keynesianism to stimulate the economy without any success, Corporations are taking advantage of record-low interest rates by issuing bonds. Instead of investing this cash in their business, or using it to hire new workers, they are holding it as insurance in case the economy continues in depression.

According to the ABOUT.COM GUIDE (August 9th 2010), companies in the US were sitting on $8.4 trillion in cash in March 2010 about 7% of assets – the highest level since 1963. Banks were making record profits from issuing the bonds, while holding back on loans to small businesses and individual borrowers as the banks are in Britain.

This is not unusual. Banks are not charities but lend capital for interest to borrowers they believe will pay them back. If banks do not view the economic conditions as favourable to lending money to businesses then they will use it for other purposes or hoard it. And there is nothing governments can do.

The same applies to the capitalist class. Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do and so the unemployed rate in the United State remains around the 9.1% level despite the US government’s so-called stimulus policy. When the economic conditions improve and there are prospects of making a profit, companies will be only too willing to invest.


This brings us on to the question of the word “overproduction”.

Marx cautioned:

The word overproduction in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only, the most immediate needs are satisfied, there can of course be absolutely no talk of over-production of products – in the sense that the amount of products is excessive in relation to the need for them. On the contrary, it must be said that on the basis of capitalist production, there is constant underproduction in this sense. The limits to production are set by the profit of the capitalist and in no way by the needs of the producers. But over-production of products and over-production of commodities are two entirely different things” (THEORIES OF SURPLUS VALUE, Part II, p. 527).

Capitalism shapes production and distribution to the limitations imposed by the market not by what people actually need. And because of their wealth and privilege the capitalist class can source the best housing, food and life style.

Workers, on the contrary, are constrained by what they can and cannot buy by the wages system. The wages system is a form of rationing. What workers receive in wages and salaries and what they need as human beings to live creative and fulfilled lives are two entirely different things.

Under capitalism there is constant underproduction of goods and services. Capitalism acts as, what Marx called, “a fetter on production” (see COMMUNIST MANIFESTO and Preface to a CONTRIBUTION TO A CRITIQUE OF POLITICAL ECEONOMY), restricting what can be produced by the imposition of the private ownership of the means of production and the profit motive.

Even in a period of economic boom when wages are rising the real needs of the working class go largely unmet. Free creative labour producing useful things; for example, is impossible when labour is tied to capital.

To release the forces of production from class relations of production requires the conscious and political establishment of Socialism. Only common ownership and democratic control of the means of production and distribution by all of society can enable the forces of production to be developed to their full potential.

People instead of Profit

Capitalism does not produce to meet human need but to produce commodities for sale on the market in order to make a profit. Capitalism is only interested in buying customers not in meeting human need as such. Capitalism has the potential to create a society of abundance but production for profit imposes severe limitations on productive capacity, where it should be directed and for whom.

Capitalism, as a consequence, ensures luxury and privilege for the rich and poverty for the rest of society. This has led reformists to believe that human need should come before profit as though capitalism could be reformed to ensure full employment or commodities to meet unmet need.

Capitalism cannot do this. Capitalism’s imperative is capital accumulation and profit under pain of competition. The slogan should not be “people before profit” but “people instead of profit”; that is replacing capitalism with Socialism.

Workers under capitalism have nothing to sell employers but their labour power or ability to work and they are employed by the capitalist class only while it is profitable to do so; that is, while employers can still pump out of workers unpaid labour time as profit.

As Marx noted:

…what workers in fact produce, is surplus value. So long as they produce it, they are able to consume. As soon as they cease to produce it, their consumption ceases, because their production ceases (THEORIES OF SURPLUS VALUE, PART II, p. 519).

Capitalists are not in the business to provide workers either with jobs or to improve their standard of living. They are in the business to employ workers in order to exploit them by forcing workers to produce more social wealth than they receive in their wages and salaries. Workers produce, what Marx called, “surplus value” from which the capitalist class draw their unearned income of rent, interest and profit.

Contradictions of Capitalist Production

Marx does not generally discuss a crisis in terms of cause and effect but as a process of contradictions. In fact the contradictions in commodity production condition and set limits to what happens in the market generally.

Marx, for example, writes that the “deepest and most hidden cause of crises” (THEORIES OF SURPLUS VALUE, PART III p. 84) is the way in which capitalism is forced to develop the productive forces within the narrow limits of capitalist relations of production.

Capitalism’s crises are violent disturbances which take root in the contradictions associated with commodity production and value creation even though the crises makes its appearance in market failure and financial turmoil (for the primacy of commodity production in Marx’s critique of political economy see the introduction to GRUNDRISSE pp 83-100 Penguin 1981).

Marx does not offer a simple causal connections between commodity production and circulation but he makes clear that “what appears as a crisis on the money market in actual fact expresses anomalies in the production and reproduction process itself” (CAPITAL VOLUME II p 393).

In CAPITAL VOLUME III when discussing, for example, credit he writes:

The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits,…, This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system” (p 431-2).

Marx went on to say that capitalism was impelled by its “own immanent laws” to use the forces of production without limitation even though capitalism could only develop the forces of production on a “restricted social foundation” and was heavily constrained by the “narrow limits” of the social system itself.

This, for Marx, was:

the deepest and most hidden cause of crises, of the crying contradictions within which bourgeois production is carried on and which, even at a cursory glance, reveal it as only a transitional, historical form” (THEORY OF SURPLUS VALUE VOLUME 3, page 84).

In another apposite passage which holds good for today’s economic conditions Marx wrote:

Over-production, the credit system, etc., are means by which the capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has the driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital. Hence crises arise, which simultaneously drive it onward and beyond (its own limits) and force it to put on seven-league boots, in order to reach a development of the productive forces which could only be achieved very slowly within its own limits” (THEORIES OF SURPLUS VALUE VOLUME 3 page 122).

Note Marx’s reference to how credit is similar to wearing the magical “seven-league” boots allowing the wearer to take strides of seven leagues (twenty-one miles). The boots make an appearance in Goethe’s play FAUST when worn by Mephistopheles (Part II Act 4). This passage complements Marx’s earlier remarks that capitalism is a “fetter on production”.

As Marx was to write:

Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production, not vice versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this imminent barrier” (CAPITAL VOLUME III, Chapter XV Exposition of the Internal Contradictions of the Law p. 256).

Put more concisely: “The real barrier of capitalist production is capital itself” (CAPITAL VOLUME III, Chapter XV loc cit p. 250).

And what response was there from the defenders of capitalism? “Creative destruction” wrote the economist J. M. Schumpeter of the trade cycle. Yet the destruction of workers’ jobs is socially disruptive, worrying and unpleasant. Unemployment is not “creative”. And creativity is denied the working class in a social system shaped and deformed by capital in the form of exploitation, war, poverty and social alienation. Engels correctly referred to the process of commodity production and the trade cycle as anarchic.

What workers have to recognise is that the trade cycle with its periodic cycle of high unemployment is a fact of life under capitalism. Politicians can no more anticipate an economic crisis than they can produce economic policies to eradicate the subsequent trade depression. The cycle takes its course even though it means social distress, discomfort and pain. It is far better for the working class to act in its own interest and consciously and politically replace capitalism with Socialism.

Back to top

Socialist Studies

email: |