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"Crisis Theory for Anticapitalists" blog

Introduction to the History of Crisis Theories : Anwar Shaikh

An Introduction to the History of Crisis Theories


 U.S. Capitalism in Crisis, U.R.P.E., New York.
This paper is about the history of crisis
theories. Broadly speaking, the term "crisis" as
used here refers to a generalized set of failures in
the economic and political relations of capitalist
reproduction. In particular, the crises we seek to
examine are those towards which the system is
internally driven, by its own principles of operation. As we shall see, it is in the nature of capitalist
production to be constantly exposed to a variety
of internally and externally generated disturbances
and dislocations. But only at certain times do these
"shocks" set off general crises. When the system is
healthy, it rapidly revives from all sorts of setbacks; when it is unhealthy, practically anything
can trigger its collapse. What we seek to examine
is different explanations of how and why the
system periodically becomes unhealthy.

I Reproduction and Crisis

Consider how peculiar capitalist society is. It
is a complex, interdependent social network,
whose reproduction requires a precise pattern of
complementarity among different productive
activities: and yet these activities are undertaken
by hundreds of thousands of individual capitalists

who are only concerned with their private greed
for profit. It is a. class structure, in which the
continued existence of the capitalist class requires
the continued existence of the working class: and
yet no blood lines, no tradition, no religious
principle announces who is to rule and who is to
be ruled. It is a cooperative human community,
and yet it ceaselessly pits each against the other:
capitalist against worker, but also capitalist
against capitalist and worker against worker.

The truly difficult question about such a
society is not why it ever breaks down, but why it
continues to function. In this regard, it is
important to realize that any explanation of how
capitalism reproduces itself is at the same time
(implicitly or explicitly) an answer to the question
of how and why non-reproduction occurs, and
vice versa: in other words, the analysis of reproduction and the analysis of crisis are inseperable.
This is true whether or not a particular theory

makes this connection explicit.
In the history of economic thought, we can
distinguish three basic lines of analysis about
capitalist reproduction. First, and most popular, is
the notion that capitalism is capable of automatic
self-reproduction. It may be smooth and efficient
(neoclassical theory), or it may be erratic and
wasteful (Keynes), but it is self-equilibrating.

Lastly, there is the position that, though
capitalism is capable of self-expansion, the accumulation process deepens the internal contradictions on which it is based, until they erupt in a
crisis: the limits to capitalism are internal to it.
This line is almost exclusively Marxist, and
includes both "falling rate of profit" and "profit
squeeze" explanations of crisis.

The second position takes the opposite tack:
here, it is argued that/ by itself, the capitalist system is incapable of self-expansion. It must grow to
survive, but it requires some external source of
demand (like the non-capitalist world) in order to
keep it growing. This means that its reproduction
is ultimately regulated by factors outside of the
system: the limits to the system are external to it.
The different schools of underconsumption, including Marxist ones, have their origin in this line
of thought.

Above all, there are no necessary limits to the
capitalist system or to its historical existence: if left
to itself (neoclassical theory) or if properly
managed (Keynes) it can last forever.
bourgeois theory.
this has always been the dominant conception in

Each of the above positions implies a corresponding notion of crisis, why they occur and what
they imply. We will therefore examine each in

II Capitalism as Automatically

In what follows we will discuss the laissezfaire and Keynesian traditions of orthodox theory
in separate sections.

A. The Laissez-Faire Tradition
Unfortunately we are all too familiar with the
notion of capitalism as a self-regulating, smooth,
efficient and harmonious system. From its beginning in Adam Smith's "Invisible Hand" to the
impotent elegance of modern general equilibrium
analysis this one conception has dominated
bourgeois theory. The fundamental contradiction
of all human existence is said to arise from the
insatiability of human wants in the face of the
limited availability of physical resources.1 The
insatiable greed of capitalism is thus transformed
into an attribute of Human Nature; its insane
plunder of our planet is therefore only "natural,"
the inevitable outcome of a battle within Nature
itself. Human Nature meets Physical Nature. In
this way greed, competition and selfishness are
eternal: there is nothing we can do about them, no

way we can eliminate them. In fact, on this basis
capitalism is presented as that social set of rules
which automatically permits the freest expression
to the above "intrinsic" human drives. Moreover,
since it represents the optimal institutional solution to an eternal "natural" conflict, capitalism
remains eternally optimal. It has no limits other
than some unimaginable mutation in Human
Nature or some unimaginable destruction in
Physical Nature. Leave it alone, and capitalism
will reproduce itself smoothly, efficiently and
probably forever. So the story goes.

Since the system is viewed as self-regulating,

the process of regulation tends to be ignored.

Thus, the dominant tendency within this proble

matic is to concentrate on either static or balanced

growth equilibria. In this way the impression is

given that the adjustment process itself is negligi

ble. Indeed, this strategy is quite necessary, since

the notion of a prolonged adjustment process is a

question of crises.

them to (periodically, at least) deal with the

Nonetheless, their ideological function require

make economists resentful, at times quite surly.

Even so, crises occur anyway. This tends to

threat to the concept of equilibrium and hence to
the cherished optimality of the system.

Economists who study the history of empirical phenomena are inevitably impressed not only
with the frequency of crises but also with their
apparent regularity. In the U.S., for example
Wesley Clair Mitchell counts fifteen "crises"
within the 110 years from 1810 to 1920, while Paul
Samuelson lists seven "recessions" in the thirty
years from 1945 to 1975.2 In between was the
Great Depression which lasted almost ten years!

There are basically only two ways to absorb
this evidence into the main body of theory without
permanently damaging it. First and foremost, it
can be argued that in principle crises need never
occur; that they do in fact occur may then be
attributed to factors which are external to the
normal functioning of capitalist reproduction.
Through no fault of its own, the system is
periodically disrupted by crises. In this tradition
we find crisis blamed either on Nature (sunspots,
crop failures in general, etc.) and/or on Human
Nature (psychological cycles of optimism and
despair, wars, revolutions, and political blur/-,

But the regularity of crises proves hard to pin
on sunspots or consumer bio-rhythms, while the
one-shot explanations like wars and political
blunders are just not adequate to explain apparently cyclical phenomena. Consequently we get

It is important to note that in orthodox theory
a cycle is not a crisis. In order to be consistent with
the overall theoretical structure, cycles must be
viewed as being essentially "small fluctuations,"
second order variations which at first approximation one may justifiably neglect. In this way the
cyclical nature of the adjustment process does not-
represent a limit to the ability of the system to
reproduce itself.

The branch of orthodox economics known as
business cycle theory is a combination of these
two basic approaches. Regular, non-violent fluctuations are internal to the system: contractions
and expansions are part of the normal business
cycle. Violent or prolonged expansions and
contractions, however, arise from external factors
originating in Nature and Human Nature, factors
which either turn a cycle into a crisis, or
precipitate one entirely on their own. Crises, therefore, remain outside the normal process of
capitalist reproduction.

In spite of its yeoman service, business cycle
theory has always occupied a minor role in laissezfaire economics. Its subject matter was too
dangerous, its history too tainted by anti-capitalist
sentiments, for it to be comfortably integrated into
the main body of theory. With the advent of
Keynesian economics, however, this changed. We
shall see why shortly.

B The (Right) Keynesian Tradition

We have so far been speaking of the "laissezfaire" tradition within bourgeois theory, since this
has almost always been the dominant one. But the
massive worldwide collapse of capitalism during
the Great Depression dealt this tradition a staggering blow. The collapse itself was "easily" explained
by the faithful in a variety of ways similar to those
described above: what was inexplicable was the
fact that the system did not seem to exhibit any
tendency to snap back to "normal" full employment equilibrium. Even by official (conservative)
.estimates unemployment in the U.S. hovered
around ten million people in 1939 — a full ten
years after the "Great Crash."

notion which led to the conclusion that
capitalism tended automatically to, more or less,
notoriously are "expectations" since First, this.
from follow major conclusions Two capitalists.
ofspirits" "animal and "expectations" the on
a significant extent on the anticipation of profits,
and employment. But investment plans depend to
crucial factor in determining the level of output
investment spending planned by capitalists is the
level of his analysis the production. Instead, in
fully utilize the available labor force and means of
volatile, capitalist reproduction is likely to be
quite erratic. Second and even more important,
there exists no automatic mechanism within
capitalism which would make capitalists plan just
the right amount of investment so as to assure full
employment. It should be noted, however, that
the system is presumed to be automatically self-
equilibrating: it is just that the equilibrium does
not preclude persistent unemployment or inflation.

Keynes attacked the orthodox notion that
"supply determined its own demand," for it was

As the Depression dragged on, as social the concept of the business cycle; it represents the
other basic way to absorb the phenomena of crises
into orthodox theory. Within this concept, the
system is still viewed as being self-regulating: only
now the adjustment process is seen as being
cyclical rather than smooth. Various factors
internal to the system's operation give rise to self-
generating cycles, so that self-reproduction has an
internal rhythm.
took its place.
ingly into disrepute and Keynesian theory rapidly
unrest deepened, laissez-faire theory fell increas-

The so-called Keynesian Revolution was an
ambivalent one, however. Much of the "deep"
structure of Keynes' analysis was the same as that
of the orthodoxy he attacked:4 the division of
society into producers and consumers (not classes)
the same basic view of human nature, the crucial
importance of psychological "propensities" and
preferences, the role of supply and demand, and
above all the general reliance on equilibrium
analysis. It is no wonder then that a portion of the
orthodoxy was able to absorb Keynes into a new
version of bourgeois theory. Conceding that there
was indeed no automatic mechanism to make
capitalist reproduction smooth, efficient and crisis
free, the neoclassical Keynesians (Bastard Keynesians, as Joan Robinson calls them) turned to the
State as the mechanism which would bring to life
the society pictured in the laissez-faire parables. If
the State did its job well, it would manipulate
aggregate demand so as to maintain near full
employment with little or no inflation; with this
modification, "the rest of the doctrines of the
(orthodoxy) could be revived."5

Since economic fluctuations are an admissable part of Keynesian theory, business cycle
theory becomes a much less dangerous branch of
economics. Indeed, since the State in principle can
eliminate fluctuations, it becomes imperative to


study cycles and crises in detail in order to know

followers, the so-called left Keynesians, among

Keynes also generated another branch of

on the current crisis are no exception.

tion as a series of errors in "policy."' Their views

erratic and violent history of capitalist accumula

Not surprisingly, Keynesians tend to see the

since the so-called Keynesian Revolution.

wealth of information about crises has sprung up

how great aConsequently, them. counter to

whom the leading figure is Joan Robinson. Her

views, along with those of Michael Kalecki and

Joseph Steindl, will be discussed in the next


Ill Capitalism as Incapable of Self-Expansion

From the very beginning, the laissez-faire
vision of a harmonious, crisis-free capitalism has
been bedeviled by an equally old and equally
persistent notion of capitalism as being inherently

incapable of accumulation. The internal forces of
the system, it is argued, can at best reproduce it at
some stationary level: but as stagnant capitalism
soon degenerates. Competition sets each against
the other, yet because there is no growth no one
can gain except at the expense of someone else.
Capital is set against capital, worker against
worker, and class against class. Either the
antagonisms become too intense and the system
explodes, or else it decays into a society (like
China of old) in which a tiny ruling elite rests on a
base of mass poverty and human misery. In either
case, a non-accumulating capitalism will not last
Interestingly enough, this countervailing ar-
gument begins from the same initial conception as
the theory it attacks. Orthodox theory has always
insisted that the ultimate goal of all capitalist
production is to provide for consumption: that
which is not consumed now is plowed back into
production in order to provide for future consumption. Either way, it is consumption which
rules the roost. In the dark glass of underconsumption theory, this same notion becomes a weapon in
the attack on capitalism. Throughout the long and
complex history of this branch of crisis theory, the
following argument appears again and again: yes,
the ultimate regulator of all production is indeed
consumption, currently or in the future; however,
capitalist production responds not to need but to
purchasing power, not to demand but to "effective" demand (i.e. demand backed by money).
And such is its contradictory nature, that if left to
itself it is incapable of generating sufficient

effective demand to support accumulation. The
intrinsic mechanisms of the system, in other
words, tend to point it towards a stationary state:
it requires some external source of effective
demand — external, that is, to its basic mechanisms — in order to continue growing.

A. The Concept of the Demand Gap
The basic tenet of underconsumption theory
then, is that the demand for consumer goods and
services determines not only the production level
of Department II (consumer goods), but also that
of Department I (producer goods). Output in the
producer goods industry is ultimately regulated by
the input requirements of the consumer goods
industry: the demand for producer goods is therefore "derived" from the demand for consumer

Suppose we divide all social production into
two major branches or "Departments." Department I produces producer goods (raw materials,
fuel, plant and equipment, etc.), while Department II produces consumer goods and services
(food, clothing, entertainment, etc.).

Over the past 150 years, there have been
many attempts to specify the exact nature of the
underconsumption problem. In spite of the variety
of formulations, however, it is quite striking how
overall production.
ofregulator ultimate the goods is consumer
for demand the that notion the is

Notice that this does not merely say that the
output of Department II influences the output of
Department I, and vice versa. It says something

stronger, namely that the causation is
primarily one way, that Department II is the
leader and Department I is the follower.

Parallel to this notion is a conception of
circulation as a process whereby society's product
is shared out between workers and capitalists.
Thus, out of the total social product, part of it is
conceived of as being the replacement of the inputs
used up in producing it, and the remaining part,
the net product, is thought of as being available
for "distribution" among workers and capitalists.

A similar breakdown is made on the income
side. Out of the sales of all firms, an amount of
money is said to be set aside to replace money
expended for producer goods used up during
production. The rest is the net operating income of
the firms which is divided into wages and profits.
This net income, what orthodox economists call
net national income, is the source of effective
demand for the net product.


Net production has two,sides, therefore. On
the one hand we have goods and services and on
the other we have net money income, which

product still remains to be sold, and capitalist
income — profit — still remains to be expended. If
these two could match up, all of the product
would be sold and the "demand gap" completely
filled. But under what conditions will this happen?

equals wages plus profits: supply on one side, and
effective demand on the other.
We can now state the basic problem of under-
consumption theory. Workers generally spend all
their wages. They therefore "buy back" a portion
of the net product, at its normal price. But since
workers never receive the whole of net income,
they can never buy back the whole of net product.
Workers' consumption always leaves a "demand
gap;" moreover, the lower the share of their
wages, the greater the "demand gap."
At this stage in the analysis the surplus
The early underconsumptionists tended to
visualize the net product as being composed solely
of consumer goods. Given their fundamental
premise that the output of Department I is
regulated by the input requirements of Department II, they easily fell into,-the-idea that in any
period of time the output of Department I is just
sufficient to replace the inputs used up by the
system as a whole. This means that although the
total social product is made up of both producer
goods (Department I) and consumer goods (Department II), the net product (the total minus the
replacement requirements) consists solely of consumer goods. *

This does not mean that capitalists will not
try to accumulate. What it in fact implies is that
the attempts of the class as a whole to accumulate
will be self-defeating. Ater all, in the cut-throat
competition of one capitalist against another, the

* The net product is that part of the total product over
and above that necessary to maintain the productive
system. If we subtract workers' consumption from it, we
get that part of the total product over and above the maintenance requirements of the productive system and of the
workers who operate it: it is the surplus product.
size of a capitalist's assets are an important index
of power. And one important way to increase in
size and power is to save, invest and thereby
grow. So capitalists will keep trying to accumulate. Imagine, therefore, that we begin from the
initial situation pictured above, in which Department I produces just enough producer goods to
maintain the productive capacity of the system,
Department II produces an amount of

goods which are completely "bought
back" by workers and capitalists consuming all
their income.' Now suppose that the next time
around capitalists spend only part of their profits
on consumer goods; the rest they invest by buying
producer goods, hiring workers, and setting up
firms in Department I and/or Department II.

A curious thing happens at this point. Let's
say that total profits amount to $200,000, which
the capitalist class at first spends entirely on
personal consumption. Now suppose they cut
back their consumption to $150,000, and the
remaining $50,000 they invest by using $30,000 to
buy producer goods (from the inventories of
Department I) and $20,000 to hire workers (out of
the reserve army of the unemployed). The net
drop in consumer demand is only $30,000, since
the drop in capitalist consumption demand is
partially offset by the extra consumption of the
newly hired workers. Nevertheless, demand for
consumer goods does drop, so that sales in
Department II will fall which in turn means that its
own demand for producer goods will fall, thus
decreasing sales in Department I. Yet, the very act
which led to all of this has simultaneously
expanded productive capacity in general. Their
attempt to expand capacity has therefore made
redundant not only the extra capacity they have
added but also a part of the capacity which existed
before. Inevitably this must cause them to
retrench. Internally generated accumulation negates itself.

Since expansion occurs gradually and take
time to complete, one can imagine that it takes a
while for the lack of "effective demand" to make
its effects felt, and another while for the contraction which ensues to work itself out. The consequence of the attempted accumulation would
therefore be a boom followed by a bust, with zero
net accumulation over the cycle. This, according
to the logic of underconsumption theory, would
be the expected behavior of a capitalist economy
left to itself.

Cycles of boom and bust are no strangers to
the history of capitalism. At the same time,
however, the study of history makes it abundantly

clear that these cycles are accompanied by
tremendous secular growth in actual capitalist
economies — a fact which stands in sharp contrast
to the intrinsically stagnant capitalism implied by
underconsumptionist logic. Invariably, therefore,
underconsumption theories have had to resort to
"exogenous" (i.e. external) factors to explain this
great contrast between history and theory. In the
next two sections, which deal with the history of
pre-Marx and post-Marx underconsumption theories, respectively, we will see what an important
position these external elements occupy.

B. Conservative and Radical Underconsumption
In the preceding section I have attempted to
present both the essential logic behind underconsumption arguments and the implications which
follow from this logic. In doing so I have used
modern conceptual tools such as Marx's two
Departments and Kalecki's aggregate supply and
demand analysis. But these concepts are relatively
new, and quite naturally the argument does not
appear in precisely this form in the actual history
of underconsumption theory. In fact, what is quite
striking about this history is that while the notion
of a "demand gap" appears throughout, the
corresponding implication about the impossibility
of self-sustained capitalist accumulation is seldom
grasped. Particularly among the non-
Marxian theories, this implication is assiduously
avoided. It is a difficult position indeed to live and
write in the 19th century, during a period of almost
explosive capitalistic growth, and have your
theory tell you that growth is not intrinsic to
capitalist production.

Convinced of the soundness of their basic
position but either unaware of or unwilling to
accept its full implication, the early underconsumptionists almost universally adopted the position that too much accumulation would cause a
crisis. They would begin by assuming that the
economy was growing at some "sustainable" rate.
Following the logic I have outlined in the
preceding section, they would then assume that
capitalists cut back this consumption and invested
the amount so saved in additional producer goods
and workers. Thus, while investment had expanded productive capacity, the net cut back in
consumer goods demand and its subsequent effect
on producer goods demand resulted in underutilization of even the capacity which had existed
before. "Too much saving" had led to a slump.*

But what their logic actually implied was that

any saving would lead to a slump, a fact that was
soon pointed out by their opponents. In his excellent study entitled Underconsumption Theories,
Michael Bleaney summarized the dilemma of the
early underconsumptionists:

The general position of these writers was that
there is a limit above which the rate of
accumulation becomes dangerously high,
threatening to precipitate a slump. But the
logic of the argument as they develop it is that
this limit is in fact a zero rate of accumulation, as is effectively pointed out by Chalmers. Thus they are caught in a trap, in which
either they must draw back from the brink
and discard part of their results, or they must
openly state the absurdity of their conclusions.7
The first major economist to land himself in

this dilemma was Thomas Malthus (1820s). True
to the underconsumptionist tradition, Malthus
argued that it is the demand for consumer goods
which regulates production, so that only a certain
rate of growth was "sustainable." Of course, given
the logic of his argument and the conclusion
implicit in it, Malthus was never able to say just
what this "sustainable" rate of growth was.
Nevertheless, he did emphasize that (too much)
would not fill the demand gap left by workers, so
that crises of overproduction (underconsumption)
were distinctly possible in capitalism. In Malthus'
hands this tendency towards underconsumption
became a reactionary apologetic for feudal land-
owners, whose high living and conspicuous
consumption was presented as a welcome counter-
balance to the tendency of capitalists to (over)
save. (Malthus is also famed for his attack on the
consumption capitalist saving would mean that

working class through his so-called laws of
population. Then, as now, these brutish "natural
laws" were never meant to represent the behavior
of the "civilized" ruling classes.)

Simonde de Sismondi was a contemporary of
Malthus who also saw a tendency toward under-
consumption within capitalism. Once again, we
find here the argument that the level of consumption regulates overall production, so that production can grow only as fast as consumption grows.
But capitalism restricts the consumption of the
masses by keeping them in poverty; the workers
are too poor to buy back their own product (here

* The underconsumptionists did not envision any
Keynesian discrepancy between planned saving and
planned investment. Capitalists plan both, and what they
save is invested, not hoarded. Hoarding does not play a
major role in underconsumption theories, as Bleaney (op.
cit., pp. 50-51) points out.

again the ubiquitous demand gap). Moreover, as
capitalism develops, income distribution becomes
more and more unequal, so that consumption of
the masses grows more slowly than overall wealth
(the gap widens). In Sismondi, therefore, not only
does a tendency to underconsumption exist, but if
also gets worse as capitalism matures. Over time
crises get worse, and competition among nations
for external markets gets more fierce.

Unlike the reactionary Parson Malthus, Sismondi was a radical who was deeply impressed by
the suffering of the peasants and workers under
capitalism. In his time he stood at the head of what
Marx called petty-bourgeois socialism, which
8economic reforms out.
other and these carry to state the to looked
distribution in favor of peasants and workers, and
income inchanges radical championed himself
Sismondi conditions. these ameliorate toas so
engendered by capitalism and sought to reform it
cruelty against the and destruction

Both Malthusian and Sismondian schools of
underconsumption mention external markets as
sources of consumption demand. In Malthus this
is only a passing reference; in Sismondi, however,
foreign markets are an important outlet for
domestic overproduction, and he sees increasing
international rivalry as arising out of the worsening underconsumption problem. Of course, in
order for international trade to be a solution to
this problem, a given nation must export more to
others than it imports from them. This is
obviously impossible for the world as a whole. If
all trade is confined to capitalist spheres only,
then foreign trade is internal to the world capitalist system and offers no escape from the under-
consumption problem. Sismondi consequently
does not present foreign trade as a general solution
to the problem.

Between the time of Sismondi (1850s) and the
time of J.A. Hobson (1900s) came the great watershed in capitalist history which marks the
beginning of the Age of Imperialism. In the years
between the 1870s and 1914, for instance,
European foreign investments rose over 700%,
much of it going to the so-called Third World. It is
therefore not at all surprising that by the 1900s
foreign trade, through imperialism, began to
appear to be a solution to the problem of under-
consumption. After all, if one conceives of the
world in terms of the imperialist capitalist nations
and the underdeveloped Third World, it becomes
possible to also imaging this Third World absorbing the excess savings of the developed capitalist
countries — either directly in the form of foreign

investments, or indirectly in the form of commodity exports. Both in Hobson and in Rosa Luxemburg (whom I will discuss in the next section), the
connection between underconsumption and imperialism becomes very important.

Hobson begins in the now familiar way of
underconsumptionists. He explicitly identifies the
ultimate object of all production, even under
capitalism, as being the production of consumer
goods. Moreover, he is the first one to explicitly
treat Department I (the producer goods industry)
as being strictly subordinate to Department II
(consumer goods), so that the whole production
process may be treated as a vertically-integrated
system beginning from raw materials and proceeding in successive stages to the final product which
consists of consumer goods alone. Lastly, he too
begins by postulating a "sustainable" rate of
growth (which of course he cannot define) and
then goes on to show that (too much) saving leads
to a slump. Crises arise from (over) saving.'

Hobson also introduces the concept of the
"surplus," which plays an important role in his
subsequent analysis. Generally speaking, the
"surplus" is defined by Hobson to be the excess of
the total money value of the output over the
strictly necessary costs of producing that output.10
This concept involves distinguishing between
necessary and unnecessary cpsts of production, as
well as between costs of producing and other
expenses (such as selling costs, sales taxes, etc.). It
is a broader concept than what I defined earlier as
profits (sales minus all costs), but we need not
pursue the difference here.

In any case, Hobson's notion of surplus
includes unnecessary "costs" such as monopoly
profits and rent of land (since these do not stem
from production of any sort). As capitalism
develops, these "unearned incomes" swell, and
since their recipients tend to consume little,
oversaving tends to occur. There is, therefore, a
worsening problem of underconsumption.11

According to Hobson, foreign trade provides
an outlet for excess savings and a market for
excess production, even under competitive capitalism. However, as industry becomes more concentrated and monopoly becomes widespread, the
underconsumption problem moves to a qualitatively higher level. On the one hand monopoly
profits swell the surplus, leading to greater
savings; on the other hand since monopolies
achieve these excessive profits by raising prices,
they tend to shrink the market. The same factors
which expand savings thus reduce the outlets for
them. Imperialism arises as the solution: imperial

ism is the highest stage of underconsumption.

However, this need not be so, says Hobson.
The root cause of crises and imperialism lies in the
inequality of income and the excessive incomes of
monopolists and rentiers, and the solution lies in
appropriate reforms:

Let any turn in the tide of politico-economic

forces divert from these owners their excess of

income and make it flow, either to the

workers in higher wages, or to the community

in taxes, so that it will be spent instead of

being saved, serving in either of these ways to

swell the tide of consumption — there will be

no need to fight for foreign markets or foreign

areas of investment.12

A surprising number of theses advanced by
Hobson in the 1900s reappear in subsequent
Marxist analysis. Writing in 1916, Lenin emphasizes the connection between monopoly and
imperialism, though he rejects Hobson's under-
consumption analysis. On the other hand, in the
1920s, the German revolutionary Rosa Luxemburg
argues that the roots of imperialism in fact lie in
the underconsumption problem, though she of
course rejects the conclusions which Hobson
draws from this. More recently, in the United
States, influential works by Marxists Paul Sweezy
and Paul Baran have revived Hobsonian notions
such as the view of overall production as a
vertically integrated sector, the concept of the
"surplus," the notion that monopoly tends to
make the surplus rise, and above all the argument
that the absorption of the surplus represents an
intrinsic problem of capitalist production which
becomes more acute with the prevalence of
monopoly. We turn to these theories next.

C. Marxian Underconsumption and Disproportionality Theories
In the early underconsumption theories, the
problem is invarial •• D -f?d in terms of too great a
rate of accumulation. We have seen that according
to their own logic, however, any accumulation
tended to negate itself. Inevitably, underconsumptionists were driven to the conclusion that
capitalism tended' towards stagnation, that a
self-expanding capitalism was impossible.

Marx completely destroyed this argument. In
order to see why, we need to discuss some of the
conceptual advances made by him.

We are already familiar with the first great
advance, which was to conceptualize overall
production in terms of two major branches or
Departments, producer goods (I) and consumer
goods (II). This means that the total product over

any period of time is composed of both types of

The second breakthrough by Marx was to
clarify the nature of effective demand. The underconsumptionists, it will be recalled, identified
basically three types of effective demand: replacement demand which buys back producer goods to
replace those used up, workers consumption
demand which buys back their "share" of the
product, and capitalists' consumption and net
investment demand which must fill the "demand
gap" in net output.

Marx's first point of departure involves a
question of time. Suppose the production process
in each Department takes a given length of time,
say one year. Well then, the producer goods used
up in the overall process cannot be bought out of
this year's production, because the first 'inished
producer good which derive from production
started in this year won't roll off the assembly line
until the end of the year. Similarly, workers
employed during this year cannot "buy back" the
consumer goods resulting from their current
activities because these goods won't be ready till
the end of the year; nor can capitalists consume
what is not yet available.

Let's go back to the beginning of the year. To
keep the example as simple as possible, assume
that all goods to be used over the year are bought
at the beginning of the year (this is an expositional
device only). Capitalists decide the level of
production they would like for the current year.
They therefore buy a certain amount of producer
goods, and hire a certain number of workers; the
workers in turn use their wages to buy consumer
goods. At the same time, capitalists also must buy
a certain amount of consumer goods for their own
personal consumption over the year. Notice that
the effective demand originates entirely with the
capitalist class: workers' wages are part of the
year's gross investment expenditures by capitalists.
It is quite illegitimate to treat consumption and
investment as being functionally independent,
since the bulk of consumption comes from wages,
which are themselves a necessary aspect of invest
ment expenditures. '

At the beginning of the year, therefore, it is
the capitalist class through its consumption and
investment expenditures which determines effective demand. But who sells the commodities?
Why, the capitalist class, of course! The beginning
of this year is also the end of the last year; it is
therefore also the time when the finished product
of last year's production process becomes available. Last year's production provides the capitalist

class with the commodity-supply available for sale

during this year; this year's expenditures by the

capitalist class on gross investment and personal

consumption determine the effective demand for

that commodity supply. If this sounds bizarre, it

should be remembered that capitalist reproduction

is bizarre. Production and consumption decisions

are undertaken by hundreds of thousands of

individual capitalists with no thought whatsoever

for the reproduction of the system as a whole.

Though it is the capitalist class which determines

both ends of the supply-demand relationship,

capitalists do not do so as a class but rather as

individuals. The difficult part is to explain why

they ever manage to "come out right." We will

return to this point shortly.

It is not difficult to go on from here to show
that steady growth is easily possible, with effective
demand in each year being just sufficient to buy
the available supply at "normal" prices.13 If investment grows by 10%, then output grows by 10%.
If therefore capitalist consumption also grows by
10%, each year's output will find waiting for it the
effective demand to buy it. After Marx, the
possibility of "balanced growth" has become a

Balanced growth implies that productive

capacity and effective demand can grow at

roughly the same rate. Taken by itself, however, it

does not necessarily imply that capitalism achieves

anything remotely like that. Nor does it tell us

anything about which way the causation might

run if such growth was indeed possible on the

average. Nonetheless, the fact that expanding

reproduction is possible poses a distinct threat to

underconsumption theories. It is in the light of this

challenge that we encounter Marxist versions of

underconsumption theory.

A little background on Marx's writing is in
order here. During the period 1858-1865, Marx
wrote and rewrote the bulk of the manuscripts
from which his great three volume work, Capital,
is taken. Volume I was published by 1867, but
Volume II — in which the analysis of the capitalist
reproduction process appears — was never put
into final form, even though it was revised in the
early 1870s and again in the late 1870s. Marx did
not live to complete this task, and the latter two
volumes were compiled and published by Engels.
^During Marx's lifetime, therefore, the published
parts of Marx's work did not deal with reproduction and growth.14

In Volume I Marx demonstrates that a surplus

product can arise only if workers as a whole work

more hours in a given day than it takes for them to

produce the goods they themselves consume and
goods needed to replace those used up in the
production process. It is this surplus labor time of
workers over and above that necessary for them to
maintain themselves and the productive system,
which provides the surplus product appropriated
by the capitalist class.

In Czarist Russia, this struck a responsive
note. Capitalism had begun its destruction of
social forms, in particular the ancient peasant
commune, the mir. In the 1850s, it was being
argued by some populists that the mir could serve
as the basis for a direct transition to socialism,
without having to go through the horrors of
capitalist industrialization. By 1880, Volume I of
Capital had provided Marxist populists not only
with a devastating critique of capitalism in general
but also — by means of a little extrapolation —
with an important theoretical weapon against
capitalism in Russia.15

The Marxist populists saw Marx's emphasis
on surplus labor-time as proof of the impossibility
of capitalism in Russia. In classic underconsumptionist fashion, they reasoned that since workers
produced more than they consumed, the home
market would never be sufficient to permit
growth. The developed Western capitalist nations
had escaped this dilemma by finding foreign
markets; but Russia, they argued, was too
underdeveloped to compete effectively on the
world market. Capitalism therefore was not viable
in Russia. Organizing the peasants was the key to

Volume II of Capital was published in 1885,
two years after Marx's death. Even so, fifteen
years later the Marxist populists were still insisting
that "it is impossible for a capitalist country to
exist without foreign markets."16 But by now a
counter-argument had developed within Russian
Marxism; and it counted some heavy names on its
side: Bulgakov, Tugan-Baranowsky, Struve, Lenin.

This latter group of Marxists made two major
criticisms of the populist underconsumption argument. First, they noted that it was a fact that
capitalists and commodity relations were rapidly
growing everywhere in Russia. Lenin's first book
The Development of Capitalism in Russia (1899)
was aimed at making just that point. Secondly,
Lenin and the others attacked the logical basis of
the populist argument. The basic error, they said,
lay in imagining that even under capitalism,
consumption was the goal of production. Capitalism produced for profit, not consumption, and
Marx's analysis of expanded reproduction estab

lished beyond a doubt that this profit-motivated
production was entirely capable of generating its
own internal markets. Underconsumption was not
an intrinsic problem. Capitalism was already
there, it was viable and spreading, and organizing
the urban proletariat was an urgent task.

That round of the debate was decisively won
by Struve, Bulgakov, Tugan-Baranowsky and
Lenin. But their victory only set the stage for
another, even more important series of questions:
if capitalism was indeed capable of self-sustained
growth, what is there to prevent it from growing
forever? What are its limits, in other words?
Moreover, how are we to understand the devastating crises it is periodically subject to?

Tugan-Baranowsky's response was to argue
the extreme position that capitalism was totally
independent of consumption, provided Departments I and II grew in the correct proportions to
one another. But, he argued, given the anarchy of
capitalist production, this correct proportionality
was a matter of chance. The trial-by-error nature
of capitalist production would therefore periodically give rise to such great imbalances that
reproduction would be interrupted and a crisis
break out. Lenin rejected Tugan-Baranowsky's
assertion that consumption was irrelevant, but at
this time other than emphasizing the anarchy of
capitalist production as a source of crises, he did
not provide a clear cut crisis theory. He was not to
return to this subject. In Germany, some ten years
later the disproportionality theory of crises
cropped up again, this time in Rudolph Hilferding's massive work on monopoly capitalism.
Both Tugan-Baranowsky and Hilferding were
later to argue that since it was the anarchy of
capitalism which led to crises, planning would
eliminate crises. "Organized capitalism," in Hilferding's words, was the solution, and the parliamentary path to State control was the means.17

Rosa Luxemburg refused to accept this
resolution of the debate. As a revolutionary
activist, she was completely opposed to the
reformism which the disproportionality theory
seemed to engender. Once one admits "that
capitalist development does not move in the
direction of its own ruin," she declared, "then
socialism ceases to be objectively necessary." To
abandon the theory of capitalist collapse was to
abandon scientific socialism. And so she set out to
revive the Marxist underconsumption debate.18

Since it was Marx's examples of expanding
reproduction (balanced growth) which proved to
be the decisive factor in the earlier debate among
Russian Marxists, Luxemburg attacked these

examples directly. Marx plainly demonstrated the
abstract possibility of expanded reproduction, she
conceded , but he did not seem to realize that it
was nonetheless impossible in reality because,
from a social point of view, the capitalist behavior
it requires makes no sense.™ Imagine that at the
end of a production cycle the whole social product
is deposited in a warehouse. At this point
capitalists come forward and withdraw a portion
of the total product to replace their producer
goods used up in the last cycle, and workers come
and withdraw their means of consumption. This
leaves the surplus product, from which capitalists
withdraw a portion for their personal consumption. Now Luxemburg asks, where do the buyers
for'the rest of the product come from? (This is of
course the traditional underconsumption problem
of filling the "demand gap"). If Marx is right, she
says, then it is the capitalist class which buys back
the rest of the product in order to invest it and thus
expand productive capacity. But that makes no
sense at all, for "who are the new consumers for
whose sake production is ever more to be
enlarged?" Even if capitalists did what Marx says
they will, in the next period productive capacity
will be even greater, the gap to be filled even
larger, and the problem even more intractable.
Marx's "diagram of accumulation does not solve
the question of who is to benefit in the end by
enlarged reproduction. . ." Expanded reproduction is algebraically possible but socially impossible.20

It follows that actual capitalist accumulation
can be explained only through some forces
external to "pure" capitalist relations. Luxemburg
notes that the Malthusian solution of a third class
of unproductive consumers makes no sense, since
their revenue could only come from profits or
wages. Similarly, foreign trade among capitalist
nations also provides no solution for capitalism as
a whole, since it is internal to the world system.
She therefore argues that capitalist accumulation
requires a strata of buyers outside of capitalist
society who continually buy more from it than
they sell to it. Thus trade between capitalist and
non-capitalist spheres is a prime necessity for the
historical existence of capitalism, and imperialism
necessarily arises as capitalist nations struggle
over control of these all important sources of
effective demand. Moreover, as capitalism expands to cover the globe the non-capitalist milieu
shrinks correspondingly, and with it shrinks the
prime source of accumulation. The tendency to
crises is heightened, and competition among
capitalist nations for the remaining non-capitalist

areas intensifies. World crises, wars and revolu

tions are the inevitable outcomes of this process.

Even if Luxemburg were right about the

impossibility of accumulation, her solution would

not work since it requires the "Third World" to

continually buy more than it sells. Where would

the excess revenue come from?

But in fact she is also wrong about the

possibility of accumulation. To see this we need to

return briefly to the analysis presented at the

beginning of this section. Recall that at the end of

the production cycle, it is the capitalists who are in

possession of the whole social product. At the

same time, it is also their gross investment and

personal consumption expenditures which are the

original source of effective demand for this very

product (since workers' wages are a part of overall

investment). Now, aside from their own personal

consumption, their remaining expenditure (gross

investment) is in no way motivated by consump

tion as such. It is motivated entirely by the antici

pation of profit. What Marx's examples show is

that if capitalists did undertake the appropriate

amount of investment, then they would indeed be

able to sell their product and make the anticipated

profits. If this success spurs them to reinvest once

again in anticipation of yet more profits, they

would be rewarded once again, and so on. All the

while consumption would expand due to the

growing employment of workers and the growing

wealth of capitalists. But this expansion of

consumption would be a consequence, not a


Yet if this refutes Luxemburg's criticisms of
expanded reproduction, it still does not answer the
two crucial questions she began with. First, what
forces, if any, make expanded reproduction
possible in reality? And second, is it not true that
if expanded reproduction is actually possible,
"capitalist development does not move in the
direction of its own ruin?"

That which theory debates, reality decides. In
1929 a devastating worldwide capitalist crisis
erupted, to be followed by over ten years of deep
depression and unemployment. Given this background, the problems of capitalist reproduction
once more rapidly rose to prominence.

The first major attempt to revive underconsumption theory as an explanation of crises was

* Readers familiar with Volume I of Capital might
recall that Marx distinguishes two types of circuits involving purchase and sale: C-M-C and M-C-M'. In the former
the object is consumption, but in the latter the object is the
expansion ot capital. It is the latter which is the dominant
(regulating) circuit of capitalist production. Luxemburg
forgets this.
made by Paul Sweezy, in his influential book The

Theory of Capitalist Development (1942). Sweezy

explicitly set out to formulate an underconsump

tion theory "free of the objections which have

been levelled at earlier versions."21

In this early attempt Sweezy is still very much
in the grip of the traditional underconsumption
notion that the demand for consumer goods
regulates overall production. From this point of
view Department I appears as part of the vertically
integrated productive apparatus of Department II
so that changes in the output of Department I
(producer goods) are in effect changes in the
capacity to produce consumer goods. In addition,
Sweezy argues that "empirical evidence" suggests
that a 1% change in Department I output will
increase capacity output of consumer goods by
1 %. This is a virtual replay of Hobson, whom we
analyzed earlier.

Now consider effective demand, which as we
have seen is composed of capitalist consumption
and total investment expenditures (the latter in
turn being composed of expenditures on producer
goods and on hiring workers). As capitalism
develops, Sweezy notes, mechanization proceeds
apace and it takes more and more machines and
materials to back up one worker; this means that
capitalist investment expenditures on producer
goods rise faster than those on wages. Given his
analysis of production, the investment expenditures on producer goods imply proportional
increases in consumer goods capacity, whereas the
more slowly rising expenditures on wages of
course translate into workers' consumption. It
appears, therefore, that the capacity to produce
consumer goods expands faster than the consumption demand of workers. A "demand gap" thus
opens up. Of course, capitalist consumption
demand might fill the gap. But as capitalism
develops capitalists tend to invest proportionately
more, and consume proportionately less, of their
profits, so that their consumption lags behind the
productive capacity of Department II. Sweezy

. . .it follows that there is an inherent tenden

cy for the growth of consumption to fall

behind the growth in the output of consump

tion goods . . . this tendency may express

itself either in crises or in stagnation, or


The fundamental error in Sweezy's analysis is
the traditional underconsumptionist one of reducing Department I to the role of an "input" into
Department II. Once this assumption is made, it
necessarily follows that an increase in production

of producer goods must expand the capacity of
consumer goods. But this is false: producer goods
may be used to make producer goods also, and as
we noted in the critique of Luxemburg, expanded
reproduction requires that they be so used.
Contrary to Sweezy's reasoning, it is perfectly
possible to have a rising ratio of machines and
materials per worker and a proportional growth in
the outputs of both Departments, while still
having expanded reproduction.

Sweezy's second attempt, made along with
Paul Baran, came over twenty years later in
Monopoly Capital. In the first attempt, as we have
seen, Sweezy argued that capitalism had an
intrinsic tendency to expand the production
capacity of Department II faster than consumption
demand. Monopoly Capital, written in the light of
Marx, Keynes and Kalecki, no longer restricts
itself to Department II or consumer demand alone.
Instead, it is argued here that modern capitalism
has a tendency to expand total productive
capacity faster than internally generated effective
demand — so that in the absence of external
factors, "monopoly capitalism would sink deeper
and deeper into a bog of chronic depression."23

It follows from this diagnosis that "the fairly
long periods during which the (actual) accumulation process has proceeded in a vigorous fashion
with . . . the demand for labor power expanding
rapidly and productive capacity being utilized at
or close to full capacity" must be explained
through external factors,24 Thus Baran and Sweezy
point to major innovations (steam engine, railroads, automobile), imperialist expansion and
wars, and the stimulation of demand in general
through advertising, government policy, etc., as
being crucial factors in overcoming the inherently
stagnant nature of monopoly capitalism.

The association of monopoly with slow
growth and excess capacity is not new. Many
theories (as we shall see) attempt to explain this
correlation. Baran and Sweezy's specific contribution is their argument that these phenomena arise
from the persistent tendency of monopoly capitalism to ouer-expand productive capacity and thus
drive itself towards crises and/or stagnation. We
must therefore seek out the logical basis of this

Recall that in Marx's analysis it is total
investment and capitalist consumption expenditures which determine effective demand (total
investment includes expenditures on wages, which
in turn determines workers' consumption). Moreover, insofar as the personal consumption of the
capitalist class responds more or less passively to

past and present profits, it is total investment
which is in fact the crucial variable.

Now suppose that at the beginning of a given
year, total investment expenditures for next year's
production are large enough to expand productive
capacity but not large enough to buy all of the
existing social product. Then capitalists will on the
one hand have initiated an expansion of their
future productive capacity, while on the other
they will find demand insufficient for even their
present capacity.
Given the anarchic nature of capitalist production, such an outcome is to be expected fairly
often. The question is, is this merely one aspect of
the regular fluctuations in capitalist reproduction,
or is it something more? Marx, for instance,
argued that capitalists are driven to accumulate as
rapidly as objectively possible, so that a discrepancy such as the above tends to be self-correcting.
But if one could somehow argue that in each
period investment tends to remain in the range
described above — large enough to expand
capacity but not large enough to purchase the
preceding period's supply — then of course
productive capacity will outrun effective demand
and the system will be faced with a demand gap or
"realization problem." This is precisely the argument implicit in Baran and Sweezy's assertion that
the (potential) surplus expands faster than the
system's ability to.absorb it. Yet, though they tend
to lay much of the blame for this problem on
monopoly, they do not discuss why monopolists
would persist in over-expanding productive capacity in the face of insufficient demand. The crucial
element of their whole thesis therefore remains
unexplained. In his recent survey of Marxist crisis
theories, Erik Olin Wright notes this all important

The most serious weakness in (this) underconsumptionist position is that it lacks any
theory of the determinants of the actual rate
of accumulation. . . Much underconsumptionist writing has, at least implicitly, opted
for Keynes' solution to this problem by focusing on the subjective anticipation of profit on
the part of capitalists as the key determinant
of the rate of accumulation. From a Marxist
point of view this is an inadequate solution.
I have not yet seen an elaborated theory of
investment and rate of accumulation by a
Marxist underconsumptionist theorist, and
thus for the time being the theory remains
In their book, Baran and Sweezy cite contri

butions made by Joan Robinson, Michael Kalecki,
and Joseph Steindl. Since these authors are also an

is i

integral part of the left-Keynesian theoretical
tradition, it behooves us to investigate the implications of their respective analysis for the question
of crises.

Investment plays a crucial role in both
Keynesian and Marxian analysis. But in Keynesian
theory the emphasis is very much on the short-run
determinants of investment decisions. Insofar as
the above authors treat investment decisions,
therefore, they tend to focus primarily on the
short-run and only secondarily on long-run
structural changes. Joan Robinson's early work
only treats structural change in passing, whereas
her later works rely mainly on Kalecki.26 Kalecki
in turn, when he briefly deals with the long-run,
simply assumes that in the absence of external
factors capitalism tends toward stagnation. It is
innovation, therefore, which is the major factor in
pushing investment above the level necessary to
just reproduce the system, and he argues that it is
the decline in the intensity of innovations in
monopoly capitalism which accounts for its
recent slow growth.27 This is all very ad hoc,
though, and in his last major work (1968) Kalecki
emphasizes that a satisfactory explanation of
long-run determinants of investment was still

Lastly, Steindl begins by notion the incompleteness of Kalecki's long-run analysis, and sets
out to remedy this defect. In the final analysis,
however, he too is forced to postulate a decline in
the intensity of innovation as the primary factor in
the slow growth of modern capitalism, though he
emphasizes that monopoly tends to exacerbate the
effects of this decline. Like Kalecki before him, he
too ends by declaring that a satisfactory explanation has yet to be found.2' It is not surprising,
therefore, that Baran and Sweezy prefer to set out
their own versions of the problem.

IV Capitalism as Self-Limiting Accumulation

Radical and Marxian underconsumption theories tend to focus on effective demand as the
limiting factor in capitalist accumulation. In
Marx's own analysis, however, effective demand
is not an intrinsic problem. On the contrary, in his
view capitalists are driven to accumulate as
rapidly as possible, so that self-expanding reproduction, not stagnation, is the normal tendency of
the system. This does not imply that the
accumulation process is smooth, or that partial
crises may not occur along the way due to crop
failures, etc. But it definitely does imply that the
limits to the accumulation process do not arise

from an insufficiency of demand.

Does this mean, as Rosa Luxemburg so
eloquently argues, that once one rejects underconsumption theory one is forced to accept the view
that accumulation (and hence capitalism itself) is
capable of indefinite extension? Not at all.
According to Marx, the limits to accumulation are
entirely internal to the process. "The real barrier
of capitalist production is capital itself."30

Capitalist accumulation is motivated by
profitability. But, according to Marx, accumulation progressively lessens profitability, so that it
tends to undermine itself. This is the famous law
of the tendency of the rate of profit to fall, which
we shall turn to shortly. At the same time,
accumulation implies extension of capitalist relations, increase of the proletariat and of its

Declining profitability means declining rates
of accumulation and increasingly fierce competition among (national and international) capitalists
for markets, materials and cheap labor-power. As
weaker capitals are eliminated, economic concentration and centralization (i.e., "monopoly") increases. Moreover, it becomes increasingly necessary for capitalists to attack wages either directly,
through mechanization, or through import of
cheap labor-power and/or export of capital to
poorer countries.

At the same time, the size of the working class
and the extent of its collective experience in
struggling against capital is continually on the rise.
Thus capital's increasing attack on labor is met
with an increasing resistance and counter-attack
(over the long-run). The class struggle intensifies.

It is important to realize that the tendency for
profitability to decline (as Marx derives it) is not
caused by high wages although rising real wages
may well exacerbate it. This means that the
periodic crises which result from declining profitability cannot be attributed to labor's demands or
resistance, though of course different historical
stages and political situations are very important
in explaining how the system as a whole reacts to
each crisis. As long as capitalist relations prevail,
however, its general tendencies will continue to
operate. Consequently Marx emphasizes that the
task of the proletariat is not only to resist capital
but to overthrow it.

It should be obvious from this brief sketch
that rising "monopoly," declining rates of accumulation and deepening class struggles can be
explained as consequences of the basic laws of
capitalist development, rather than as factors
giving rise to new laws — as is attempted by Baran

and Sweezy, for instance.* Since the law of declining profitability is central to this explanation, we
must examine it further.

A. Marx's Theory of the Falling Rate of Profit
The question of profitability has two important aspects. First, what is the basis of profitability
and what determines its extent? Second, how does
capitalism develop this basis and what effect does
this in turn have on its extent?

In answer to the first question, Marx begins
with the labor process. In all societies, he notes,
the objects necessary to satisfy human needs and
wants imply a certain allocation of society's labor-
time, of its productive activities, in specific
proportions and quantities. Otherwise the reproduction of the society is impossible.

While the allocation of social labor is
fundamental to all societies, the extraction of
surplus labor is the basis of all class societies. This
surplus labor forms the material and social basis of
the class relation. The extraction of surplus labor
must be enforced, for it provides the ruling class
not only with its means of consumption, but also
with its means of domination.

In most societies, the allocation of social
labor-time and the extraction of surplus labor are
socially regulated, by tradition, by law, by force.
But in capitalist society, productive activity is
privately undertaken by individual capitalists on
the basis of potential profit. Reproduction is not
an explicit consideration, and yet it must and does
take place. On the surface, it is money prices and
profits which provide the day to day "feedback"
which determines capitalists' decisions. But, Marx
argues, in reality it is the total labor times (labor
values) involved in the production of commodities
which regulate the money phenomena. This
regulation of prices and profits by labor values
and surplus value is in fact the manner in which
the social requirements of reproduction manifest
themselves in capitalist society. We will henceforth deal directly with labor values and surplus
value, since these are the real regulating elements.

During the labor process, workers use instruments of labor (plant and equipment) to transform
materials into finished products. The total labor-
time required for the finished product is therefore

* Incidentally, it is worth noting that when, as a
consequence of declining profitability, capitalists curtail
their investment expenditures, part of the product available
will not be sold and it will appear that the crisis is caused by
lack of effective demand, by "underconsumption." But in
fact this "underconsumption" is only a reaction to the crisis
in profitability. It is a symptom, not a cause.
composed of two parts: first, the labor-time

implicit in the means of production (materials,

plant and equipment) used up; and second, the

current labor time expended by workers in the

labor process itself. Marx calls the first element

"constant capital" (C) since it reappears in the final

product, while he calls the second "value added by

living labor" (L). The total labor value of any final

product is therefore C + L.

Out of the final product, part is just the
equivalent of means of production used up. Its
labor value will therefore be C, since this is the
labor value of the actual means of production used
up. This leaves us with the net product on one
hand, and value added by living labor (L) on the
other. The net product is the material equivalent
of living labor time L.

If there is to be a surplus product, then only
part of the net product must go to replace the
consumer goods used up by workers. The value
added by living labor (L) is therefore composed of
two parts, one of which corresponds to the labor-
value of the workers' consumption requirements

(V) and the other to the labor value of the surplus
product (S). In other words, it is the difference
between the time workers actually put in (L), and
the time necessary to reproduce themselves (V) —
their surplus labor time (S) — which gives rise to
the surplus product and hence to real profits: S =
The division of living labor time into
necessary (V) and surplus labor time (S) is therfore
the hidden basis of capitalist society. Marx calls
the ratio S/V "the rate of surplus value" or "the
rate of exploitation." Other things being equal, the
greater the rate of exploitation the greater the
amount of surplus value and hence the greater the

The time workers actually put in (L) is
determined by the length of the working day. The
time necessary to reproduce themselves (V), on the
other hand, is determined by both the amount of
goods they consume (their "real wage") and the
labor-time it takes to produce these goods. The
mass of surplus value (S) and the rate of exploitation (S/V) can therefore be increased in two ways:
directly, by lengthening the working day L so that
surplus labor time is directly increased; and
indirectly, by lowering the necessary labor-time V
so that more of a given working day is spent in
surplus labor-time. This latter method of increasing S and S/V requires that either workers' real
wages be reduced or that the productivity of their
labor be raised so that it takes them less time to
produce their means of consumption, or both.

Capitalists constantly try all methods of
increasing the rate of exploitation. But over time
the growing strength of the working class has
sharply restricted attempts to lengthen the working day and/or lower the real wage. Thus
increasing the productivity of labor has come to be
the principal means of raising the rate of exploitation. But the paradoxical thing about capitalism,
according to Marx, is that the very means by
which it raises the rate of exploitation tends to
lower the rate of profit. The rising productivity of
labor manifests itself in a falling profitability of

The rate of surplus value S/V expresses the
division of the working day into necessary and
surplus labor-time. It measures the degree of
exploitation of productive workers. But to capitalists the crucial thing is the degree of profitability of
capital. From their point of view, they invest
money in means of production (C) and in workers
(V), with the intention of making profit (S). The
amount of profit (S) relative to their investment (C

+ V) is the capitalist measure of success. In other
words, it is the rate of profit S/(C+V) which
regulates the accumulation of capital.
This is where the paradox comes in. In their
continuing battles against one another,* individual capitals are constantly forced to lower unit
costs so as to gain an edge over their competitors
(the current battle over pocket calculators is an
excellent example of this process). As far as
success in battle of sales is concerned, anything
which lowers unit costs will do.

But capitalists are also perpetually engaged in
another battle — the battle of production, in the
labor process. And it is here that mechanization
arises as the principle means of raising the
productivity of labor and hence lowering unit
costs. Capitalists hire workers for a specified
period, and their aim is to squeeze the maximum
possible productivity out of them during the
labor-process, at the lowest possible cost. This
implies not only struggles over the real wage and
the length and intensity of the working day, but
also over the nature of the labor process itself.
From the very beginning capitalists have sought to
"perfect" the labor process by subdividing it into
increasingly specialized and routinized tasks. With

* These battles are what Marx calls the "competition
of capitals." But this use of the term competition is not the
same as in "perfect competition," the opposite of which is
"monopoly." In Marx the progressive concentration and
centralization of capitals implies fiercer "competition of
capitals" over progressively greater parts of the world. The
so-called "monopoly" stage of capitalism does not supercede competition but rather intensifies it.
capitalist control of the labor process human
productive activity is made increasingly mechanical, automatic. It is no surprise then that these
mechanized human functions are progressively
replaced by actual machines. As machines replace
some human functions, the others are even more
subject to the tyranny of the mechanical, until
some of these functions too are replaced by
machines, and so on.*

The tendency towards mechanization is therefore the dominant capitalist method of raising the
social productivity of labor. It arises out of
capitalist control of the labor process, of human
productive activity. As such, neither growing
worker resistance nor rising real wages are the
intrinsic causes of mechanization, though they
may well speed up this tendency.

Increasing mechanization gives rise to what
Marx calls a rising technical composition of
capital. Ever greater masses of means of production and materials are set into operation by a given
number of workers. According to Marx, this in
turn implies that out of the total labor value (C +
L) of the final product, progressively more comes
from the means of production used up and
progressively less from living labor. In other
words, the rising technical composition is reflected
in value terms as a rising ratio of "dead to living
labor," of C to L.

The rate of profit, as we have seen, is
S/(C+V). But S = L-V, since surplus labor-time

(S) equals the time workers actually put in (L)
minus the time necessary to reproduce themselves
(V). Therefore, even if "workers lived on air"
(V=0), the most that S could be is smax/C=L/C.
Consequently, L/C is the ceiling to the rate of profit, while the floor is of course zero. Now, if a
rising technical composition does indeed reflect
itself as a rising ratio C/L — hence a falling ratio
L/C — then the actual rate of profit will be progressively squeezed between a descending ceiling
and an unyielding floor, so that it must itself
exhibit a downward tendency. This is what Marx
means by the tendency of the rate of profit to fall.
The falling tendency described above is independent of how L is divided between V and S, and
hence independent of the rate of exploitation S/V.
In fact, if the real wage of workers were constant,
the rising productivity of labor due to mechanization would continually raise S/V; the greater the
productivity of labor, the less time it takes
workers to produce a given bundle of consumer

* For a brilliant analysis of the modern labor process,
see Harry Braverman's Labor and Monopoly Capital,
Monthly Review Press, New York, 1974.

goods so that a greater portion of a given working
day becomes surplus labor-time. Even when real
wages do rise, as long as they rise less rapidly than
productivity, the rate of exploitation will still rise.
It is perfectly possible, therefore, to have both a
rising real wage and a rising rate of exploitation."
This is in fact the general situation pictured by
Marx, on the grounds that workers can never
capture all the productivity gains of mechanization without bringing accumulation to a halt and
thus killing the golden goose.* For Marx the class
struggle over real wages operates within certain
objective limits, the limits given by the accumulation of capital. These limits are intrinsic to
capitalism itself, and can be transcended only by
overthrowing it.

Almost all Marxist commentators accept as a
fact that mechanization is an overwhelming reality
of capitalist production. However, one important
school of thought attributes mechanization not to
the capitalist control of the labor process, as does
Marx, but rather to capital's reaction to growing
worker resistance and/or rising real wages (in the
long-run). Typically, they begin by postulating a
rise in real wages under given conditions of
production, which leads to a fall in the rate of
profit, which in turn induces capitalists to substitute machines for workers. From this point of
view, of course, mechanization and its attendant
rise in the productivity of labor are the principal
means of increasing profitability, while rising
wages tend to diminish it. Depending on which
factor prevails they say, the rate of profit can go
either way. * * Paul Sweezy and Maurice Dobb, for
instance, both hold this point of view.33

This analysis is correct — as far as it goes.
Rising real wages will indeed induce mechanization, and this may or may not offset the effect of
the higher wages on profitability. But in Marx the
rising real wages are themselves made possible by
a prior cause, namely the mechanization arising
from the battle of production. Thus the effect that
Sweezy and Dobb analyze is a secondary one,
superimposed on (and indeed only possible

* " This is precisely the point Marx makes in Volume
I of Capital, in the first part of the chapter entitled "The
General Law of Capitalist Accumulation" (Ch. XXV,
Section I), when he notes that real wages can rise only if
they do "not interfere with the progress of accumulation"
(p. 619).
** "For a more detailed discussion of this position,
as well as some of the mathematics (such as the so-called
"choice of technique" theorems) used to support it, see
"Political Economy and Capitalism: Notes on Dobb's
Theory of Crises," by this author, forthcoming in the

Cambridge Journal of Economics.

because of) the primary one. Given that they

ignore the primary cause, it is not surprising that

they can find no particular reason for the rate of

profit to fall.

Another major objection to the law argues
that mechanization (whatever its cause) does not
necessarily imply a falling tendency to the rate of
profit. Consider a given number of workers, so
that L is given. Mechanization means that the
mass of means of production employed by these
workers increases. But this is also accompanied by
a rise in the productivity of labor and hence a fall
in the labor value of commodities, since it now
takes less time to produce a given commodity.
Therefore the labor value of the means of
production (C) will not rise as fast as their mass
and may even fall. Marx argues that nonetheless C
will rise, so that C/L will rise and the falling
tendency will operate. But, say the critics, suppose
the labor value of the means of production fall as
fast or even faster than its mass rises? Then C/L
will stay constant or even fall, and no downward
pressure will be exerted on the rate of profit.

It must be said at the outset that this objection
is a valid one, since it points to a gap in the falling
rate of profit argument. As constructed in the
current literature, there is a strong presumption
that a rising ratio of machines to workers also
implies a rising ratio of "dead" to living labor

(i.e. of C to L). But attempts to specify the exact
connection between the two (such as Yaffe's)34
have not been satisfactory, so that the possibility
of the scenario pictured by the critics always
remains open. This issue is still very much the
subject of debate, and is treated at greater length
in the forthcoming article referred to in the
preceding starred footnote.
Another currently popular objection has to
do with the notion that capitalists would never
choose to employ a technique of production which
lowers their rate of profit. A falling rate of profit is
therefore automatically excluded. This argument
is often stated mathematically, as in the so-called
"Okishio Theorem,"35 but its basic presuppositions underlie a widely shared analytical framework ranging from left Keynesians such as Joan
Robinson to Marxists such as Bob Rowthorn. In
terms of the above discussion, the crucial error
here lies in the presupposition that technical
progress is merely a question of capitalist "choice"
and not one of necessity. Marx noted long ago that
under capitalism it is the necessity of competition
that forces capitalists to choose the technique with
a lower unit cost, even when it implies a lower rate
of profit. Whoever makes this move first will

undersell the others. The only "choice" the

remaining capitalists will then face is between

making some profits at a lower rate than before

and making no profits at all because their product

costs too much.36

Lastly, some Marxists reject the notion of a
rising C/L on empirical grounds. Since C is the
labor value of the means of production, and L is
the value added by living labor, their money
equivalents are K, the money value of the means
of production, and Y, the money value added or
"net national product." On this basis the "capitaloutput ratio" K/Y is examined, and since official
statistics indicate that it tends to be constant over
long periods, this is said to militate against the
notion of a rising C/L.37

It is interesting that these same Marxists

strenuously oppose accepting at face value the

official statistics on unemployment, the extent of

poverty, the incidence of malnutrition, etc. — on

the grounds that bourgeois conceptions of these

categories so dominate their construction as to

make them practically useless. Unemployment

statistics, for instance, do not count those who

have given up looking for work, those who never

succeeded in finding jobs in the first place (such as

black teenagers), and those who do not enter the

work force because of the hopelessness of it (such

as housewives). It is not uncommon, therefore, for

radicals and Marxists to estimate "real unemploy

ment" to be two to three times the official figure.

And yet when it comes to absolutely fundamental

categories such as "capital" and "value added,"

official statistics are suddenly accepted without

question. We will return to this important point in

the discussion of "profit squeeze" theories of

crises. For the moment it is sufficient to note that

the one Marxist statistician who has bothered to

examine how these statistics are gathered, and to

correct them for the conceptual differences be

tween Marxist categories and orthodox ones, has

found precisely that the "capital-output" ratio

seems to rise steadily.38

B. A History of Falling Rate of Profit Theory
The tendency of the rate of profit to fall as

capitalism develops was widely accepted by

Classical economists as an incontrovertible fact.

The problem lay in explaining this phenomenon.

Adam Smith (1770s) for instance, noted that

when more capitals crowd into a particular

industry, they expand supply, drive down prices,

and hence lower profits. In the same way, he

argued, as accumulation progresses capital as a

whole will become more plentiful and this will

depress the rate of profit.

Critics quickly pointed out that capitals

crowd into a particular industry only when the

industry has a rate of profit above the average;

moreover, by so doing they merely drive its rate of

profit back down towards the average. The

average rate consequently remains unexplained,

and there is no reason given in Smith why

accumulation should alter it in any way.

Some forty years later, David Ricardo (1810s)

offered an alternate explanation. As the society

develops, he argued, more land has to be brought

into cultivation to feed the growing population.

This means bringing progressively less fertile land

under cultivation, so that food becomes increas

ingly expensive to produce. In Marxian terms, the

labor value of food rises. For a given working day,

therefore, necessary labor-time rises and surplus

labor-time falls correspondingly. Thus the rate of

surplus value falls as society develops, and with it

falls the rate of profit — not because worker's real

wages rise, but because the productivity of

agricultural labor falls.

The crucial conclusion in Ricardo is that the

productivity of agriculture tends to decline. In his

critique of the Ricardian theory of rent, Marx

demonstrates that this conclusion is neither

logically nor empirically true. Indeed, capitalist

history is characterized throughout by a rising

productivity of labor, both in industry and in

agriculture. As we have seen in the preceding

section, Marx's own explanation of the falling rate

of profit is based on a rising productivity of social

labor and a rising rate of surplus value.

The rate of profit falls, not because labour

becomes less productive, but because it be

comes more productive. Not because the

worker is less exploited, but because he is

more exploited. . ,39

Marx considered his own explanation of the
"tendency of the rate of profit to fall as [capitalist]
society progresses" to be "one of the greatest
triumphs over the great stumbling block of all
previous economics." It is the lynchpin of his
analysis of laws of motion of the capitalist system.
And yet, curiously enough this law plays a
relatively minor role in much of the history of
Marxist thought. It is completely absent from
underconsumption theories, for instance, and as
we shall see in the next section, it is similarly
absent from "profit-squeeze" theories.

Part of the reason for this neglect stems from
the previously examined objections to the logic of
Marx's derivation of the falling tendency. But

another, perhaps even more important basis for
rejecting this law is a political one.40 To conceive
of capitalism as being subject to "laws of motion,"
it is said, is to treat a human social arrangement as
if it were a machine or some physical process. This
downplays and degrades the role of human beings
in determining the course of events. People, not
laws of motion, make history. Furthermore, it is
argued, belief in the proposition that the rate of
profit tends to decline will lead to a fatalistic and
passive attitude towards the task of overthrowing
capitalism. Finally, it is sometimes added that in
any case the analysis of the causes of crises is too
abstract an issue to be of use in the practical
politics of class struggle.

There is no question that Marx did conceive
of capitalist history in terms of laws of motion,
and of human history in general in terms of
objective forces acting on and thus limiting human
action. And yet this is the same Marx who
elevated class struggle to the highest level, who
actively championed the immediate overthrow of
capitalism (not in some fatalistic future), and who
participated in the most practical politics on the
basis of his theoretical analysis. Is there a
contradiction between these two aspects of Marx?

Not at all. On the contrary, as Henryk
Grossmann (Germany), Paul Mattick (U.S.) and
David Yaffe (Britain) argue, it is precisely from
Marx's theoretical framework that revolutionary
politics flow.

Grossman was the first major Marxist to shift
the discussion of crises away from underconsumption and disproportionality theories. Heavily
critical of these theories on both logical and
political grounds, Grossmann emphasized instead
the centrality of the law of the falling rate of profit
to a theory of crises. Of particular importance in
Marx, he noted, is the fact that as the rate of profit
falls, the growth in the total amount of profit must
slow down and eventually halt. At the point
where new investment no longer generates additional profits, investment will be curtailed and a
crisis will break out.41 As the crisis spreads,
weaker and less efficient capitalists will be wiped
out, and stronger ones will be able to buy up their
assets at abnormally low prices. With rising
unemployment the position of workers is weakened. Real wages tend to fall while the labor'
process tends to be intensified, so that the rate of
exploitation rises. All of these factors raise the rate
of profit. Thus each crisis itself sets the stage for
the recovery and the next cycle of boom and bust.

None of this says when a particular crisis will
break out, since many factors can retard or

accelerate the effects of the falling rate of profit. In
this sense class struggle is crucial not only in the
question of the timing of crises, but also in the
arena of fighting their effects. Even more important to Grossmann, however, is that crises are
"objectively revolutionary situations." To show
the necessity of crises within capitalism is therefore
to show the necessity of preparing in advance for,
and seizing the moment of these objectively
revolutionary periods. Lastly, based on his reading of Marx, he makes an important connection
between theory and practice:

. . .no economic system, no matter how

weakened, collapses by itself in automatic

fashion. It must be "overthrown." The

theoretical analysis of the objective trends

leading to a paralysis of the system serves to

discover the "weak links." Change will come

about only through the active operation of

the subjective factors.42

Paul Mattick elaborated on Grossman's work

in a variety of ways. Of particular importance is

Mattick's point that the reason Marx speaks of

capitalist society in terms of laws of motion is

precisely because capitalism is regulated not by

conscious human decision by rather by "thing-like

relations" — the relations of the market, of prices

and profits. Like Grossmann before him, Mattick

emphasizes that crises provide revolutionary and

reactionary opportunities, but only class struggle

can determine which path will be chosen. Whether

capitalism turns to fascism, or is turned into

socialism, is not determined before hand.43

In the last few years, David Yaffe has set out
both to present Marx's economic analysis and to
apply it to the current crises. The full extent of his
analysis is beyond the scope of this discussion. As
far as crisis theory is concerned, in addition to
points similar to those made by Grossmann and
Mattick, Yaffe adds the following. First, that
because a crisis shows up in terms of prices and
profits, there is a tendency to think of prices and
profits as causes of crises. For instance, since by
definition profit is the difference between sales and
costs, anything which causes a fall in profitability
will necessarily imply another way of defining a
fall in profits. But one portion of costs is merely
the price of some goods, like materials, etc. (and
hence the sales of some other industries). Therefore any decline in profitability tends to be
compared to the remaining portion of costs, to
wages, and from here it is only a short step to the
argument that "high" wages are the cause of the
decline. In this way an effect is made into a cause.

Similar points can be made for stagnation,
rising unemployment, inflation, rising state expen

ditures and sharpening class struggles all over the
world. Each of these, Yaffe argues, is a phenomenon of the development of the crisis, not a cause.
As the rate of profit falls, accumulation will slow
down and unemployment will rise. Capitalists will
increase prices to try and maintain profitability,
thus giving rise to an inflationary spiral. At the
same time the State is forced to step in, on one
hand to maintain employment at politically
acceptable levels, and on the other to subsidize
and even take over ailing industries. State
expenditure therefore increases rapidly. But the
deficit financing of the State only accelerates
inflation, while its support of employment levels
prevents wages from falling enough to help restore
profitability. In this way the contradiction is
deepened, and it becomes harder and harder to
find policies which "work." This, says Yaffe, is the
stage we are now in, all over the capitalist world.44

C. Class Struggle and the Profit Squeeze
Every crisis underscores the importance of
profits for capitalist production, and raises anew
the question of what regulates profitability.

Every decline in profitability, in turn, tends,
sooner or later, to be traced to high wages. Now,
it is certainly true that a reduction in wages, other
things being equal, will raise profits. But it does
not follow that a given decline in profits is necessarily due to excessive wages. The question is,
how do we tell which is cause and which is effect?

In Marx's analysis, a rising real wage is
expected to accompany a rising rate of exploitation, so that by itself the wage rise will not
contribute to a fall in profitability. In Marxist
terms, therefore, only when the rise in real wages
is large enough to actually lower the rate of
exploitation can we say that the fall in profitability
is due (in part, at least) to "high wages."*

Marx of course rejects this explanation, on
the grounds that the accumulation of capital itself
provides objective limits within which wage
struggles are confined, so that, in general, the rate
of exploitation rises. In fact, he argues that the
rate of profit falls precisely because workers
become more exploited, not less.

At the most abstract level, the money
equivalent of the rate of surplus value S/V is the
ratio of "profits" to "wages" TT/VV. A fall in the
profit-wage ratio could then be taken as evidence

* "Nothing is more absurd . . . than to explain the fall
in the rate of profit by a rise in the rate of wages, although
this may be the case by way of an exception." (Marx,
Capital/V.I, Ch. XVI, p. 240)
of an excessive rise in real wages. But this
reasoning is false.

First of all, it is perfectly possible to have
workers exploited more and hence to have them
produce a greater surplus product, while at the
same time to have capitalists unable to sell this
greater product and hence be unable to translate it
into money profits. For instance, in a crisis
brought about by a falling rate of profit (a la
Marx), as some capitals go out of business others
will be deprived of buyers for part of their
products. Prices will fall, and with them will fall
profits and the ratio of profits to wages. To
compensate for this, the surviving capitalists will
drive their workers even harder, exploit them even
more, in an effort to lower costs and stay in
business. In the throes of a crisis, therefore, a
falling profit-wage ratio will be accompanied by a
rising rate of exploitation. Moreover, under these
circumstances both are symptoms, not causes, of
the crisis.

But the above pattern would not hold prior to
the outbreak of a crisis. Would it not be
legitimate, then, to view the "profit-wage" ratio as
an index of the rate of exploitation — during non-
crisis periods? If so, a falling profit-wage ratio
prior to a crisis would be powerful evidence that
workers had indeed succeeded in raising their real
wages fast enough to lower the rate of exploitation
and hence precipitate the crisis. It is precisely this
theoretical identification of TT/W as an index of
S/V which defines the "profit-squeeze" branch of
Marxist crisis theory, as set out by Glyn, Sutcliffe
and Rowthorn in England and Boddy and Crotty
in the United States.45

Ostensibly, their argument rests on the
empirical observation that crises are preceded by a
fall in the profit-wage ratio. But this same
observation is frequently made by bourgeois
economists too, as in the recent case of William
Nordhaus of the Brookings Institute.46 Unlike
Nordhaus, however, the Marxists go one step
further by identifying the observed profit-wage
ratio with the rate of exploitation. It follows from
this that the decline in profitability is really an
expression of a fall in the rate of surplus value,
which in turn can only be due to a sufficiently
large rise in real wages. Ironically, whereas the
bourgeois economist Nordhaus blames the decline
on the "cost of capital," the Marxists attribute it to
"labor problems!"

In a sense, profit-squeeze arguments are as
old as capitalism. Nobody knows better than
capitalists how important profits are to the
system, and for obvious reasons none have been

quicker to blame high wages for precipitating
crises. In this sense, a capitalist version of the
profit-squeeze argument crops up with every

At a slightly more abstract level, bourgeois
economists have long argued that falling profitability is due to the fact that workers have been able
to increase their "share" of net national product (at
the expense of the capitalist "share," of course).
Remarking on two of his contemporaries, the
Frenchman Frederic Bastiat (1840s) and the American Henry Carey (1860s), Marx notes that though
"they accept the fact of the tendency of the rate of
profit to fall. . .they [mistakenly] explain it simply
and entirely as due to the growth in the value of
labour's share. . .""

In many respects, the current Marxist profit-
squeeze theory is similar to that of Bastiat and
Carey. Erik Olin-Wright, in his survey of Marxist
crisis theories, summarizes the modern version in
the following way:

The essential argument is very simple: the

relative share of national income going to

workers and capitalists is almost entirely a

consequence of their relative strengths in the

class struggle. To the extent that the working

class develops a strong enough labor move

ment to win wage increases in excess of pro

ductivity increases, there will be a tendency

for the rate of exploitation to decline and thus

for the rate of profits to fall (to be "squeezed"

by rising wage bills). Such a decline in profits

results in a corresponding decline in invest

ments and thus even slower increases in

productivity. The end result is economic


The modern Marxist version, therefore, follows the economic logic of Bastiat and Carey in
taking the tendency of the rate of profit to fall to
be a consequence of a falling rate of exploitation.
But there is a crucial political difference between
the two versions in that whereas the bourgeois
economists decry this situation, the Marxists
celebrate it. The Marxist profit squeeze theory
makes class struggle over working conditions the
crucial factor that (in the last instance) determines
the course of capitalist reproduction. To these
Marxists, the fact that the development of the
system has reached a stage where labor is strong
enough to precipitate crises is a very hopeful sign.
If the working class is able to bring the system to
its knees through its wage demands, then it may
already be strong enough to resist the attacks on
these real wages which are part and parcel of the
"recovery" process. They may perhaps even be
strong enough to "solve" the crisis by taking over

state power.

The great virtue of this theory is its simplicity. Even in capitalism, we have "politics in
command." The practical politics of class struggle,
not some abstract laws of motion, are what we
need to analyze in order to understand capitalist
history. Capitalist accumulation is indeed internally limited, but it is labor, not "capital itself" (as
Marx says), which is the ultimate barrier to

Simplicity is really a virtue only if the simple
explanation is the correct one. The penalty for
being wrong, after all, is failure. And so we go
back to the central theoretical point, and ask: can
we in fact impute a falling rate of exploitation
from an observed fall in the profit-wage ratio? In
other words is TT/W indeed an index of S/V? To
answer these questions, we need to trace out the
money forms of S and V.

Consider the end of a reproduction cycle of
total capital. Beginning with the sales receipts, we
can then trace out the disbursement of this money

Suppose total sales (M') amount to $100,000.
From these, capitalists set aside $40,000 to replace
the costs of materials and machines used up (C*) in
producing the commodities which were sold, and
$20,000 to replace the wages advanced (V*) to the
production workers who were employed in the
production process.* The remaining amount,
$40,000, is what capitalists themselves call gross
profits on sales (S*). It is the receipts from the sale
of commodities minus the material and labor costs
of producing these commodities. From the point of
view of the system as a whole, these gross profits
represent the money equivalent of the surplus

From the Marxian point of view, "gross
profits" (S*) represent the money equivalent of
surplus labor-time of production workers, while
the wages (V*) of these workers represent the
money equivalent of their necessary labor time.
The proper index of the exploitation of production
workers — i.e. of the rate of surplus value — is

S*/Vp*= 40,000/20,000 = 200%

But to capitalists matters look very different.
From gross profits they still have to deduct the

* I am using the term production workers because it is
not possible to adequately develop the concept of
productive labor within the confines of this paper.
Similarly, I use the term commodity to cover both goods
and services which are sold for money. The distinction
between productive and unproductive labor does not
reduce to the simplistic distinction between goods and

money they have expended in trying to sell the
commodities. These selling expenses, as capitalists
call them, consist of the material (C*j) and labor
costs (V*j) of transforming the produced commodities into money sales. In addition, they must
also deduct indirect taxes T (sales, license and
property taxes, etc.), because from their point of
view these too are an "expense" of business. What
is left after all these deductions is called net
corporate income* (TT). If selling expenses C* +
V*, = $15,000 + $10,000, and indirect taxes T =
$5,000, then net corporate income TT = $10,000.

From the point of view of the capitalist class
both selling expenses and indirect taxes are
genuine expenses of business. Indeed, even from
the point of view of the system as a whole they
may be' regarded as strictly necessary expenditures, since both commercial capital (wholesalers/
retailers) and the state perform indispensable
functions. But the fact that they are indispensable
expenditures does not in any way alter the fact
that they are also derivative forms of surplus
value. It is necessary to produce the surplus
product before it can be sold; selling it only
changes the title of ownership of this product, not
its magnitude. The extent to which part of the
surplus product is absorbed by title-changing
activities (buying and selling) and by state
activities** is merely an index of the distribution
and legitimation expenses of the system.

Unfortunately, the profit-squeeze theorists
fail to grasp this crucial point.*** Invariably, they
identify the rate of surplus value with TT/VV, the
ratio of net corporate income to all wages. In
terms of the above illustration, TT= $10,000, and
W = wages of production workers + wages and
salaries of salespeople, etc. = $20,000 + $10,000
= $30,000, so that TT/W = 10,000/30,000 =
33V3%. This is a far cry from the true rate of
surplus value, S*/V* = 200%.

By confusing TT/W with S*/V*, the true rate
of exploitation in any given time period is vastly
understated, as the above example illustrates (the
magnitudes involved correspond quite closely to
the actual current magnitudes I get on the basis of
a much more complex and detailed analysis of the

*Net corporate income will in turn be split into cor
porate income tax, pure rent (as opposed to depreciation
and maintenance of buildings and equipment, which is
properly speaking a part of costs of production or of selling
expenses), interest/ dividends, and retained earnings.

*"Other than actual state production.

** *This important criticism of the profit squeeze logic is
also made in a critique of Boddy-Crotty (op. cit.)
appearing in The Communist, Vol. 1, No. 2.

U.S. economy*). What is worse, TT/W has a built
in downward bias over time relative to the true
rate S*/V*, because in all capitalist economies,
both selling expenses and indirect taxes have risen
sharply. This is particularly true since World War
II. It is fallacious, therefore, to explain the
observed fall in the "profit-wage" ratio TT/W by
means of an imputed fall in the rate of exploitation. On the contrary, it is quite possible that a
rising rate of exploitation, accompanied by a
falling rate of profit a la Marx, has resulted in a
declining rate of accumulation and rising unemployment. In the face of this, increased inter-
capitalist rivalry and increased state intervention
appear as responses to a deepening crisis, not
causes of it. Empirically, these responses manifest
themselves as increased selling expenses and
increased taxes, which show up as declining TT/W
even though S*/V* is rising. This, in effect, is
Yaffe's explanation of the current world crisis.
It is worth repeating that an observed decline
in the "profit-wage" ratio TT/W does not by itself
provide us with an explanation. To get behind
mere observation, we need a theory of the
determinants of profits in order to know which
factors are accountable for the empirical trend.
But we also need to know how the empirical categories correspond to the theoretical ones, for
otherwise we will end up imputing the wrong
cause. This is precisely the error made by the
profit squeeze school: they base themselves on the
theory of surplus value, and yet they completely
fail to consider the difference between this
complex and powerful Marxian category and the
bourgeois category of "profit" (net operating
income). In this way they mistakenly attribute the
secular decline in profitability, and hence the
current world crisis itself, to a squeeze on profits
emanating from wages.


History teaches us that capitalism is periodically subject to ruptures in its economic and social

* In actual practice, reconstructing the money equivalents of S*, V*, and W is vastly more complicated than
indicated above. In effect, it involves transforming national
income accounts, based on Keynesian categories, into
Marxian accounts based on the value categories of Marx.
This is a theoretically difficult task, as well as being
empirically difficult. Nonetheless, it is quite feasible and
indeed absolutely necessary. On the basis of fairly detailed
calculations (which I obviously cannot present here), I find
that the real rate of surplus value S/Vp* rises from 1900 to
1972, while TT/W declines over the same period. Rising
"expenses" and rising taxes account for a large part of this

fabric. At these times the social tensions inherent in
the system stand out in sharp contrast. The
bourgeois platitudes of the various orthodoxies
begin to wear thin, to take on a desperate air, and the
struggle of the classes breaks out into the open.

We are learning this lesson of capitalist
history once again. The post war boom which was to
usher us through the golden gates of the 21st century
is now officially dead. All over the capitalist
world, political and economic crises abound.
International competition intensifies as capitalists
struggle to survive; banks fail, giant industries fail,
the international monetary system itself lurches from
one crisis to another; unemployment deepens while
prices continue to rise and everywhere the class
struggle sharpens.

How are we to understand this latest crisis of
capitalism? Certainly we must study and analyze it
in detail, not just locally or nationally but on a
world scale. But that by itself will never be
enough. We must at the same time understand that
crises are nothing new to capitalism. Their
periodic and devastating appearances have been
recognized, analyzed, and theoretically grasped by
many others long before we even came to ask the
question. To understand this is to understand the
necessity of studying the explanations of our
predecessors, so that we may benefit from them and
to build upon them. If the task is to overcome the
system, then it is imperative to understand it. The
price of ignorance is failure.

The object of this paper has been to present and
analyze the basic positions which have historically
emerged on the question of capitalist crises. I have
tried to be as rigorous as possible in this task, while
at the same time not assuming any prior knowledge
of the subject. In so doing I have tried to present not
only what a particular type of theory says, but also
why it makes that argument, how the argument
develops historically, and what political positions
have been associated with it at various times.

Rather than summarize what has been discussed in the body of this paper, I would instead
like to focus on three lessons which I believe are
implicit in the history of crisis theories.

The first lesson has to do with the relation
between theory and politics. Each theoretical
position implies a certain mode of changing the
system. In that sense, every theory has political
implications for the practice based upon it. But it is
important to realize that no simplistic connection


1. See Alchian, A.A. and Allen, W.R., Exchange and
Production Theory in Use (Belmont, Ca.: Wadsworth
Publishing Co., 1969), Chs. 1-4, for a forthright presentation
of the neoclassical conception.
may be made between a particular set of
theoretical concepts and the politics which can
be expected to be allied with them. Take the
case of underconsumption theory, for
instance. Its proponents have included the
reactionary Parson Malthus, the petty bourgeois
socialist Simone de Sismondi, the revolutionary
activist Rosa Luxemburg, and the whole
modern "monopoly capitalism" school based
on the work of Paul Sweezy and Paul Baran.
Its opponents, on the other hand, include
bourgeois theorists of all stripes, from Ricardo
onwards, but also Marx and Lenin. Neither
among the supporters of underconsumption
theory nor among its critics can any
common political position be discerned.
Similar arguments can be made for every other
crisis theory.

The second important lesson has to do
with theory and*the "facts." It is a very serious
mistake to assume that "facts" are somehow
given independently of any conceptual
framework. Even a brief study of the history of
national income accounts quickly
demonstrates that the data we are confronted
with at any given time is the numerical
representation of particular theoretical
categories. These data are of course based on
events in the real world, but the manner in
which these events are codified and
enumerated also depends on a theory about the
world. The pattern which emerges on the basis
of Keynesian categories (which underly
current national income accounts) need not be
at all the same as that which emerges on the
basis of Marxist categories. In the discussion
of the profit squeeze theories, for instance,
we saw how important it was not to confuse
the profit-wage ratio (TT/W) with the rate of
exploitation (S/V). It would be a terrible loss
indeed to abandon a correct theory because it
does not correspond to "facts" which are
based on entirely different categories.

The third lesson has already been
discussed at the beginning of this section. To
briefly reiterate it, in analyzing the crisis it is
not sufficient to just study its phenomena. It is
equally necessary to study the explanations of
crises, both past and present. Otherwise we are
very likely to simply reinvent what has
already been invented, and make the same
mistakes which others long ago have made.
It has often been said that those who ignore
history are condemned to repeat it. To this it
should perhaps be added that those who
ignore theory are condemned to reconstruct it.

2. Wesley Ctair Mitchell, "Business Cycles," in Readings
in Business Cycle Theory, American Economic Association
(London: George Allen and Unwin, 1961), p. 43; Samuel-
son, Paul, Economics (New York: McGraw-Hill Book Co.,
1976), pp. 250-251.
3. Samuelson, op. cit., p. 257.
4. Robert Lekachman, A History of Economic Ideas
(McGraw-Hill Book Comapny, 1976), p. 343.
5. Joan Robinson, Economic Heresies (New York: Basic
Books, Inc., 1971), p. x.
6. Lekachman, op. cit., p. 347-348. This was very much
Keynes' own perspective, and it continues to be reflected in
that of his followers.
7. Michael Bleaney, Underconsumption Theories: A His
tory and Critical Analysis (New York: International
Publishers, 1976), p. 63.
8. Michael Barrat-Brown, Economics of Imperialism
(London: Penguin Books, 1974), p. 170.
9. Bleaney, op. cit., pp. 153-168.
10. Ibid., p. 180.
11. Ibid., p. 171.
12. Hobson quoted in Bleaney, op. cit., p. 166.
13. For a discussion of what "normal" prices are and how
they are determined in Marx, see my article, "Marx's
Theory of Value and the Transformation Problem/ " in
The Subtle Economy of Capitalism, ed. Jesse Schwartz,
(Santa Monica, Cal.: Goodyear Publishing Co., Inc.,
1977), pp. 106-137.
14. Karl Marx, Grundrisse, (London: Penguin Books,
1973) translated with a foreword by Martin Nicolaus, pp.
15. Russell Jacoby, 'The Politics of the Crisis Theory:
Towards the Critique of Automatic Marxism II," Telos, 23,
Spring 1975, pp. 5-11.
16. Ibid., p. 10. The quote is from Danielson.
17. Ibid., pp. 14-16.
18. Ibid., p. 22.
19. Bleaney, op. cit., p. 89.
20. Ibid., p. 193.
21. Paul Sweezy, The Theory of Capitalist Development,
(New York: Monthly Review Press, 1942), p. 179.
22. Ibid., p. 183.
23. Paul Baran and Paul Sweezy, Monopoly Capital
(New York: Monthly Review Press, 1968), p. 108.
24. Paul Sweezy, "The Economic Crisis," Monthly
Review, Vol. 26(10), March 1975, pp. 1-8.
25. Erik Olin-Wright, "Alternative Perspectives in the
Marxist Theory of Accumulation and Crisis," in Schwartz,
pp. 215-226.

26. Bleaney, op. cit., p. 225.
27. Ibid., pp. 245-248.
28. See Joseph Steindl, Maturity and Stagnation in
American Capitalism, (New York: Monthly Review Press,
1976), p. xvii, footnote 7.
29. Ibid., pp. xv-xvi.
30. Karl Marx, Capital (New York: International Pub
lishers, 1967), Vol. Ill, p. 250.
31. Ibid., p. 213.
32. Karl Marx, Capital (New York: International Pub
lishers, 1967) Vol. I, p. 604.
33.Sweezy, op. cit., p. 88; Maurice Dobb, Political
Economy and Capitalism (London: Routledge & Kegan
Paul, Ltd., 1937), pp. 108-114.

34. David Yaffe, "Inflation, the Crisis and the Post-War
Boom," Revolutionary Communist, No. 2,1976, pp. 5-.
35. N. Okishio, "Technical Change and the Rate of
Profit," Kobe University, Vol. 7,1961, pp. 85-99.
36. Marx, op. cit., Vof. Ill, p. 264. See also a real
example of this process which Marx provides and analyzes
in the Grundrisse, op. cit., pp. 383-385.
37. Geoff Hodgson, "The Theory of the Falling Rate of
Profit," New Left Review, 84, March-April 1974.
38. See Victor Perlo, "Capital-Output Ratios in Manu
facturing," Quarterly Review of Economics and Business,
8(3) Autumn. 1966, pp. 29-42.
39. Karl Marx, Theories of Surplus Value (New York:
International Publishers, 1967), p. 439.
40. The following discussion draws heavily from Jacoby,
op. cit., section V.
41. Ibid., p. 35.
42. Ibid., p. 37.
43. Ibid., p. 43.
44. Yaffe, op. cit., pp. 5-32.
45. See Andrew Glyn and Bob Sutcliffe, British Capital
ism, Workers and the Profit Squeeze, (London: Penguin
Books, 1972); Bob Rowthorn, "Mandel's Late Captialism'"
New Left Review, 98, July-August 1976, pp. 59-83; and
Raford Boddy and James Crotty, "Class Conflict and
Macro-Policy: The. Political Business Cycle," Review of
Radical Political Economics, Vol. 7, No. 1,1975.
46. William Nordhaus, 'The Falling Share of Profits,"
Brookings Papers, 1976, No. 1, pp. 169-208.
47. Marx, Grundrisse, op. cit., p. 755.
48. Wright, op. cit., p. 216.



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