Crisis theory

Crisis theory, concerning the causes and consequences of 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]^[2] 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. A precise and useful survey of the competing theories of crisis in the different strands of political economy and economics was provided by Anwar Shaikh in 1978.^[3]

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 through commercial revulsions §5, improvements in production §6, importation of cheap necessaries and instruments §7,and emigration of capital §8.^[4]^[5]

Marx's 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, to theoretically defend the revolutionary implications of the theory, while others first Eduard Bernstein and then Rudolf Hilferding that argued against its continued applicability.^[6] It was Henryk Grossman^[7] 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.’^[8]

Following the extensive setbacks to independent working class politics, the widespread destruction both of people, property and capital value, the 1930s saw attempts to reformulate Marx's analysis with less revolutionary consequences for example Joseph Schumpeter's concept of creative destruction.^[9] 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.^[10]

There have been attempts particularly in periods of capitalist growth and expansion, most notably in the long Post-War Boom^[11] to both explain the phenomenon and to argue that Marx's strong statements of its 'law like' fundamental character under capitalism have been overcome in practice, in theory or both. As a result, there have been persistent challenges on this aspect of Marx's theoretical achievement and reputation.^[12]

It continues to be argued in terms of historical materialism theory, that 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.^[13] 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." Roman Rosdolsky observed that ‘Marx concludes by saying that the law of the tendency of the rate of profit to fall is ‘in every respect the most important law of modern political economy ... despite its simplicity, it has never before been grasped and even less consciously articulated ... It is from the historical standpoint the most important law.’^[14]^[15] 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".^[16]

Application

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^[17]^[18]^[19] appeared.

Kuruma in his 1929 Introduction to the Study of Crisis ends by noting "... my use of the term "theory of crisis" is not limited to the theory of economic crisis. This term naturally also encompasses the study of the necessity of imperialist world war as the explosion of the contradictions peculiar to modern capitalism. Imperialist world war itself is precisely crisis in its highest form. Thus, the theory of imperialism must be an extension of the theory of crisis."^[20]

Influence

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, Henryk Grossman and Samezō Kuruma^[21]^[22] both rendered inestimable theoretical services by insisting, as against the revisionists, on the breakdown theory."^[23] More recently David Yaffe 1972,1978 and Tony Allen et al. 1978,1981 in using the theory to explain the conditions at the end of the post-war boom 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^[24]^[25]^[26] with a thorough and trenchant pilosophical and logical defence of the consistency of the theory in Marx’s work, against a number of the criticisms proposed against important aspects of Marx's theory since the ’seventies.^[27]

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.

Marx and Keynesians approach and apply the concept of economic crisis in distinct and opposite ways.^[28] The Keynesian approach attempts to stay strictly within the economic sphere and describes 'boom' and 'bust' cycles that balance out. Marx observed and theorised economic crisis as necessarily developing out of the contradictions in capitalist production relations.

"Where Marx differs from Keynes is precisely on the question of the falling rate of profit. It is not the propensity to consume or subjective expectations about future profitability that is crucial for Marx. It is the rate of exploitation and the social productivity of labour that are the key considerations and these in relation to the existing capital stock. While for Keynes the low marginal productivity of capital has its cause in an over-abundance of capital in relation to profit expectations,^[29] and therefore to a 'potential' over-production of commodities (the capitalist will not invest). For Marx the overproduction of capital is only relative to the social productivity of labour and the existing exploitation conditions. It represents an insufficient mass of surplus-value in relation to total capital. So that for Marx the crisis is, and can only be, resolved by expanding profitable production and accumulation, while for Keynes, it can supposedly be remedied by increasing 'effective demand' and this allows for government induced-production."^[30] Yaffe noted in 1972 that "... passages in Volume III referring to the underconsumption of the masses in no way can be interpreted as an underconsumptionist theory of crisis. The basis usually given for a 'underconsumptionist theory of crisis' is Marx's statement that "The last cause of all real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way, that only the absolute power of consumption of the entire society would be their limit" ^[31]^[32] The above passage contains within it no more than a description or a restatement of the capitalist relations of production. Marx called it a tautology to explain the crisis by lack of effective consumption ...^[33]^[34]"

Other explanantions have been formulated, and much debated,^[35] including:

The tendency of the rate of profit to fall. The accumulation of capital, the general advancement of techniques and scale of production, and the inexorable trend to oligopoly by the victors of capitalist market competition, all involve a general tendency for the degree of capital intensity, i.e., the "organic composition of capital" of production to rise. All else constant, this is claimed to lead to a fall in the rate of profit, which would slow down accumulation.
Full employment profit squeeze.^[36] Capital accumulation can pull up the demand for labor power, raising wages. If wages rise "too high," it hurts the rate of profit, causing a recession. The interaction between the employment rate and the wage share has been mathematically formalised by the Goodwin model.
Overproduction. If the capitalists win the class struggle to push wages down and labor effort up, raising the rate of surplus value, then a capitalist economy faces regular problems of excess producer supply and thus inadequate aggregate demand - the underconsumptionist theory. On which Engels comments "the underconsumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. The underconsumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The underconsumption of the masses is therefore also a prerequisite condition for crises, and plays in them a role which has long been recognised. But it tells us just as little why crises exist today as why they did not exist before" ^[37]^[38]^[39]
The Post Keynesian economics debt-crisis theory of Hyman Minsky.

References

^ https://www.marxists.org/archive/kuruma/crisis-intro.htm
^ Isaac Illyich Rubin [1979] ‘Sismondi as a Critic of Capitalism’ Chapter 37 in A History of Economic Thought, InkLinks, London
^ Shaikh, Anwar [1978] An introduction to the History of Crisis Theories in U.S. Capitalism in Crisis, URPE, New York
^ John Stuart Mill [1965] Principles of Political Economy with Some of Their Applications to Social Philosophy, University of Toronto Press
^ Shoul, Bernice (1965) ‘Similarities in the work of John Stuart Mill and Karl Marx’, Science & Society, 29 (3), Summer, pp. 270-295.
^ Kuhn, Rick Economic Crisis and Socialist Revolution: Henryk Grossman’s Law of accumulation, Its First Critics and His Responses
^ https://www.marxists.org/archive/grossman/1922/crises/index.htm
^ 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 0161-7230 (series). ISBN 0762310987.
^ Joseph A. Schumpeter [1976]Capitalism, Socialism & Democracy, Routledge, London
^ Schumpeter, Joseph A., Opie, Redvers (1983) [1934]. The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. New Brunswick, New Jersey: Transaction Books. ISBN 9780878556984. Translated from the 1911 original German, Theorie der wirtschaftlichen Entwicklung.
^ Bullock, Paul and Yaffe, David 1975 Inflation, the Crisis and the Post-War Boom RC 3/4 November 1975, RCG
^ Shaikh, Anwar [1978]
^ Roman Rosdolsky [1980] 'The Making of Marx's 'Capital p.381
^ Roman Rosdolsky [1980] 'The Making of Marx's 'Capital p.381.[fn. corrected Marx 1973 Grundrisse p.748]
^ Kliman, Andrew [2015] The Great Recession and Marx's Crisis Theory. American Journal of Economics and Sociology, 74: p.241.
^ "Ch. 15 Vol 3 of Capital". marxists.org
^ Correlation of Forces 'A Revolutionary Legacy' Major Richard E. Porter
^ "correlation of forces", online dictionary
^ Correlation of Forces and Means: Quantifying Modern Operations
^ Samezō Kuruma (1929) |https://www.marxists.org/archive/kuruma/crisis-intro.htm
^ https://www.marxists.org/archive/kuruma/crisis-intro.htm
^ Rick Kuhn Economic Crisis and Socialist Revolution: Henryk Grossman's Law of accumulation, Its First Critics and His Responses
^ Rosdolsky 1980.382 fn32
^ Andrew Kliman [2007] Reclaiming "Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency, Lexington, Lanham
^ Andrew Kliman [2011] The Failure of Capitalist Production: Underlying Causes of the Great Recession, Pluto
^ Kliman, Andrew [2015] The Great Recession and Marx's Crisis Theory. American Journal of Economics and Sociology, 74: 236–277.
^ A Critique of Crisis Theory From a Marxist perspective Discussion and resources by Sam Williams from Jan 2009
^ Mattick, Paul, Marx & Keynes 1974, Merlin
^ Keynes, J.M. p136:'It is important to understand the dependence of the marginal efficiency of a given stock of capital on changes in expectations because it is chiefly this dependence which renders the marginal efficiency of capital subject to somewhat violent fluctuations which are the explanation of the Trade Cycle'
^ https://www.marxists.org/subject/economy/authors/yaffed/1972/mtccs/mtccs4.htm Yaffe, David [1972]
^ 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.
^ Money-Capital and Real Capital ¶ 20
^ Marx, Karl Capital Volume II, p410-1. See also Capital Volume III p239 where the same point is made.
^ Yaffe, David [1972]
^ Shaikh, Anwar [1978] An introduction to the History of Crisis Theories in U.S. Capitalism in Crisis, URPE, New York
^ Glyn, Andrew & Sutcliffe, Robert British Capitalism, Workers and the Profit Squeeze Penguin 1972
^ Engels, Frederick Anti Duhring, Moscow 1969,p340-1.
^ "'Seize the Crisis!'" Samir Amin, Monthly Review December 2009
^ Heinrich, Michael http://monthlyreview.org/2013/04/01/crisis-theory-the-law-of-the-tendency-of-the-profit-rate-to-fall-and-marxs-studies-in-the-1870s/

External links

Capital, Volume 1, "Chapter 1" by Karl Marx
"Crisis of Capitalism" by MIA Encyclopedia of Marxism
"Crisis and Hope: Theirs and Ours" Noam Chomsky, 2009
A Critique of Crisis Theory From a Marxist perspective Current specialist blog & discussion with resources by Sam Williams from Jan 2009