Crisis theory

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Crisis theory, concerning the tendency for the rate of profit to fall in a capitalist system, is now generally associated with Marxian economics. Earlier analysis was provided by Jean Charles Léonard de Sismondi who provided the first suggestions of its systemic roots.[1] John Stuart Mill in his ‘Of the Tendency of Profits to a Minimum’ which forms Chapter IV of Book IV of his Principles of Political Economy and Chapter V ‘Consequences of the Tendency of Profits to a Minimum’ provides a conspectus of the then accepted understanding of a number of the key elements post-Ricardo but without the theoretical working out that Marx wrote & Engels published subsequently in Capital Volume III.

There are several elements in Marx’s presentation which attest to his familiarity with Mill’s formulations notably Mill’s treatment of what Marx would subsequently call counteracting tendencies: destruction of capital (commercial revulsions §5, improvements in production §6, importation of cheap necessaries and instruments §7,and emigration of capital §8).[2]

Crisis theory was only partially understood among leading Marxists at the beginning of the twentieth-century. A relatively small group including Lenin, and Rosa Luxemburg attempted, not always successfully, theoretically to defend the revolutionary implications of the theory, while others like Eduard Bernstein argued against its continued applicability.[3] It was Henryk Grossman who most successfully rescued Marx’s theoretical presentation ... ‘he was the first Marxist to systematically explore the tendency for the organic composition of capital to rise and hence for the rate of profit to fall as a fundamental feature of Marx’s explanation of economic crises in Capital.’[4]

After the 1930s Joseph Schumpeter's concept of creative destruction attempted to reformulate Marx's analysis in less revolutionary light.[5] In this context "crisis" refers to an especially sharp bust cycle of the regular boom and bust pattern of what Marxists term "chaotic" capitalist development, which, if no countervailing action is taken, develops into a recession or depression.[citation needed]

In terms of historical materialism theory, such crises will repeat until objective and subjective factors combine to precipitate the transition to the new mode of production either by sudden collapse in a final crisis or gradual erosion of the basing on competition and the emerging dominance of cooperation.[citation needed]

Causes of crises

Karl Marx considered his crisis theory to be his most substantial theoretical achievement. He presents it in its most developed form as Law of Tendency for the Rate of Profit to Fall combined with a discussion of various counter tendencies, which may slow or modify its impact. A key characteristic of these theoretical factors is that none of them are natural or accidental in origin but instead arise from systemic elements of capitalism as a mode of production and basic social order. In Marx's words, "The real barrier of capitalist production is capital itself".[6]

In Marxist terms, the economic crises are crises of overproduction and immiseration of the workers who, were it not for the capitalist control of the society, would be the determiners of both demand and production in the first place.[7][8]

These systemic factors include the classical 3:

However, as stated above, all such factors resolve to the synthetic viewpoint that all such crises are crises of over and/or misappropriated production relative to the ability and/or willingness of the workers who generate the bulk of demand to consume.


It is a tenet of many Marxist groupings that crises are inevitable and will be increasingly severe until the contradictions inherent in the mismatch between the mode of production and the development of productive forces reach the final point of failure, determined by the quality of their leadership, the development of the consciousness of the various social classes, and other "subjective factors".

Thus, according to this theory, the degree of "tuning" necessary for intervention in otherwise "perfect" market mechanisms will become more and more extreme as the time in which the capitalist order is a progressive factor in the development of productive forces recedes further and further into the past. But the subjective factors are the explanation for why purely objective factors such as the severity of a crisis, the rate of exploitation, etc., do not alone determine the revolutionary upsurge. A common example is the contrast of the oppression of the working classes in France in centuries prior to 1789 which although greater did not lead to social revolution as it did once the complete correlation of forces[9][10][11] appeared.


Crisis theory is central to Marx's writings; it helps underpin Marxists' understanding of a need for systemic change. It is controversial; Roman Rosdolsky said "The assertion that Marx did not propose a 'breakdown theory' is primarily attributable to the revisionist interpretation of Marx before and after the First World War. Rosa Luxemburg and Henryk Grossman[12] both rendered inestimable theoretical services by insisting, as against the revisionists, on the breakdown theory."[13] More recently David Yaffe 1972,1978 and Tony Allen et al. 1978,1981 in using the theory to explain the conditions of the 1970s and 1980s re-introduced the theory to a new generation and gained new readers for Grossman's presentation of Marx's crisis theory.

Henryk Grossman’s re-presentation of both the central importance of the theory for Marx and the working out of its elements in a partially mathematical form was published in 1929. Central to the argument is the claim that, within a given business cycle, the accumulation of surplus from year to year leads to a kind of top-heaviness, in which a relatively fixed number of workers have to add profit to an ever-larger lump of investment capital. This observation leads to what is known as Marx's law of the tendency of the rate of profit to fall. Unless certain countervailing possibilities are available, the growth of capital out-paces the growth of labour, so the profits of economic activity have to be shared out more thinly among capitals, i.e., at a lower profit rate. When countervailing tendencies are unavailable or exhausted, the system requires the destruction of capital values in order to return to profitability.

Paul Mattick's Economic Crisis and Crisis Theory published by Merlin Press in 1981 is an accessible introduction and discussion derived from Grossman's work. François Chesnais's [1984] chapter Marx's Crisis Theory Today in Christopher Freeman ed. Design, Innovation and Long Cycles in Economic Development Frances Pinter, London, discussed the continuing relevance of the theory.

Andrew Kliman has made major new contributions[14][15] with a thorough and trenchant pilosophical and logical defence of the consistency of the theory against a number of its critics.[16]

Difference between Marxists and Keynesians

Keynesian Economics which attempts a "middle way" between laissez-faire, unadulterated capitalism and state guidance and partial control of economic activity, such as in the French dirigisme or the policies of the Golden Age of Capitalism attempts to address such crises with the policy of having the state actively supplying the deficiencies of unaltered markets.

Marxists and Keynesians approach and apply the concept of economic crisis in distinct and opposite ways. The Keynesian approach attempts to stay strictly within the economic sphere and describes 'boom' and 'bust' cycles that balance out. Marxists, on the other hand, see economic crisis as part of the larger crisis of the social order they wish to supplant.[17]

There is also a Post Keynesian economics debt-crisis theory of Hyman Minsky.

See also


  1. ^ Isaac Illyich Rubin [1979] ‘Sismondi as a Critic of Capitalism’ Chapter 37 in A History of Economic Thought, InkLinks, London
  2. ^ John Stuart Mill [1965] Principles of Political Economy with Some of Their Applications to Social Philosophy, University of Toronto Press
  3. ^ Kuhn, Rick Economic Crisis and Socialist Revolution: Henryk Grossman’s Law of accumulation, Its First Critics and His Responses
  4. ^ Rick Kuhn [2004] ‘Economic Crisis and Socialist Revolution: Henryk Grossman’s Law of accumulation, Its First Critics and His Responses’, originally published in Paul Zarembka and Susanne Soederberg (eds) Neoliberalism in Crisis, Accumulation, and Rosa Luxemburg’s Legacy Elsevier Jai, Amsterdam Research in Political Economy, 21, 2004 pp. 181–221. ISSN: 01617230 (series). ISBN 0762310987.
  5. ^ Joseph A. Schumpeter [1976]Capitalism, Socialism & Democracy, Routledge, London
  6. ^ "Ch. 15 Vol 3 of Capital".
  7. ^ "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." Capital, Volume III Part V Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital § II Ch. XXX Money-Capital and Real Capital p. 484 in the New World paperback edition.
  8. ^ Money-Capital and Real Capital ¶ 20
  9. ^ Correlation of Forces 'A Revolutionary Legacy' Major Richard E. Porter
  10. ^ "correlation of forces", online dictionary
  11. ^ Correlation of Forces and Means: Quantifying Modern Operations
  12. ^ Rick Kuhn Economic Crisis and Socialist Revolution: Henryk Grossman's Law of accumulation, Its First Critics and His Responses
  13. ^ Rosdolsky 1980.382 fn32
  14. ^ Andrew Kliman [2007] Reclaiming "Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency, Lexington, Lanham
  15. ^ Andrew Kliman [2011] The Failure of Capitalist Production: Underlying Causes of the Great Recession, Pluto
  16. ^ A Critique of Crisis Theory From a Marxist perspective Current specialist blog & discussion with resources by Sam Williams from Jan 2009
  17. ^ "'Seize the Crisis!'" Samir Amin, Monthly Review December 2009

External links

Further reading