WRITTEN FOR ECONOMICS 249 WITH PROFESSOR MADRA AT GETTYSBURG COLLEGE
Understanding the Crises of Capitalism and an Analysis of their Effects in Modernity
Introduction
Karl Marx, in his three volumes of Capital, creates an anatomy of capitalism through a separate analytical framework outside of the constraints of the neoclassical economic framework. Capital, and by extension capitalism, once dissected reveals an inconsistent internal logic of self-replication, where its own crises become seeds for a new generation of capital and capitalists to grow from. It is these crises which are both the propellant and bane of capitalism, and in need of closer examination.
The crises of capitalism are primarily attributed to an assumed desire for expansion among the capitalist class (Adaman and Madra, pp. 213-214). There is also an under-analyzed yet important hint of the crises to come using simple capital exchange, an indication of an inherent penchant for crisis in even non-expansionary business environments. These crises will be broken into crises of accumulation and crises of production, and then combined to better illustrate their importance to the propagation of capitalism.
This paper will begin with a discussion of the Marxian anatomy of capital and a discussion of the terms and ideas of self-replication inherent to it. I will proceed to analyzing accumulation and production crises, along with an analysis concerning “countervailing tendencies” seen in production crises. The crises will then be analyzed simultaneously to illustrate their collective effect. The paper will conclude with a discussion of two Marxian readings of the current financial crisis with Marx’s crises of capitalism as a center-piece.
Terming the Crises
The importance of the Marxian analysis is to understand capitalism without using capitalism’s own terms or internal logical framework. It is breaking from these ideals that allows a more thorough critical view point unhindered by a self-correcting internal methodology. The Marxist critique must be termed, then, to understand its relationship with capitalism.
Marx suggests that both the stagnation and growth of capital in a capitalist economic climate will serve to punish the worker. Should capital stagnate, industry will stagnate, lowering job opportunities for the worker and increasing competition amongst the labor class, lowering wage altogether. Should capital grow, it will manifest in the hands of the biggest producers first, driving out small industrials while also causing labor to increasingly divide. More laborers will appear in the market to fill fewer jobs, again hurting the labor class (Marx, pp. 214-217)
This tendency of capitalism, in growth, stability, or stagnation, to punish the laboring class provides the basis for these crises. The laborer, having no option but to work, must constantly sell himself for only the amount of money that will reproduce his current living conditions another day. In essence then, the laboring class is made futile due to the ability of the capitalist class to control wages as well as possess control of the industry.
It is the desire to possess surplus value that governs the capitalist in expansionary periods. Simple exchange (which the worker might desire) involves the capitalist supplying the funds to fulfill commodities, earn money in return for the fruits of labor and the means of production, and supply only the money back to recreate the same iteration (Hunt, p. 214). The more devious method of exchange involves a desire for expansion on the part of the capitalist, in which the returns of money exceed the inputs. While crises can occur in both types of exchange, the capitalist path seems to be the desire for expansion.
Surplus value is attributed to be the goal of capitalism then. Surplus value itself is the subtraction of the input money from the gained money of exchange, commonly denoted as M’ – M. Hunt suggests that to Marx, “…the quest for ever greater quantities of surplus value was the motive force propelling the entire capitalist system” (p. 214). While this will be the focal point of our analysis of the crises of capitalism, we cannot forget simple exchange. While it may lead to crises due to the rising costs over time to replicate its existence, it inherently creates no surplus value or capital accumulation. The capitalist is largely buying commodities and labor at a fair price only needed to replicate business, as opposed to expand. This will not be the sort of crisis we will develop, but we will mention it again as we move through the countervailing influences to the falling rate of profit.
What are, then, accumulation and production crises? An accumulation crisis occurs due to a desire to obtain surplus value at a rate which the market cannot sustain. This may occur through underconsumption, where laborers cannot afford to buy all that the capitalist supplies, or overaccumulation, where the capitalist produces more than the market can sustain (Adaman and Madra, pp. 216-217). Production crises rely on the notion of the falling rate of profit, where continued iterations of exchange eventually lead to, or are affected by, the increase in the cost of constant capital. This increase leads to a falling rate of profit, where the capitalist must change the inputs in the equation (M – C – M’) to receive a profit and surplus value.
The changes made by the capitalist to receive profit and surplus value are denoted as “countervailing tendencies”, capitalist interactions with the market to alleviate the falling rate of profit. These countervailing tendencies often lead to perverse reactions that actually help replicate capitalism into the future, leading to antithetical gains from crisis.
The Self-Replicating Tendencies of the Capitalist Framework
Before moving into a dissection of each type of crises, an assessment of the self-replicating tendencies of capitalism should be made. As the capitalist model of exchange, in both simple and expansionary forms, seeks to make sure the capitalist remains or is bettered at its conclusion, there is an economic incentive to keep the capitalist class stable. The social phenomenon is debatable, however, as why would an oppressed class keep the capitalist system in place and continue to initiate cultural new comers to the system’s workings?
In the social climate, I point to spontaneous order as the method by which capitalism enables its longevity. Spontaneous order among individuals suggests that a social convention, once formed, will be repeated by its followers even if not economically efficient. Others will see this convention and begin to enact it to feel socially modern, finally transforming the convention into a norm. In terms of game theory, the incentive to “cheat” comes from breaking the social norm (Sugden).
This idea seems to describe the replication of capitalism. Individuals who initially partook and profited are the entrepreneurs and managers, who establish themselves within the capitalist system but in a higher class than the majority. Seeing the success of these individuals, laborers have an expectation of success, and begin to follow the forming social convention. As capitalism becomes more and more accepted, it becomes a norm, making sure that individuals are indoctrinated into the capitalist system for fear of being ostracized socially.
Replication can be witnessed economically as well within this social reading. The higher class either is able to replicate itself for one more round through simple exchange, or is able to grow through expansionary policy. Reinvestment of surplus value gives strength to capitalist institutions, affords the higher costs of constant capital, and is able to buy more labor from those indoctrinated in social normality. The incentive to cheat then goes primarily to the capitalist, as the laboring class does not have the means necessary (as payment is only issued by the capitalist) to “cheat” and break from social normality. The capitalist holds power over both the economic and social aspect of the culture, and in this way seeks gain from replication through a furthering of business goals. An attempt to cheat could also further expansionary capitalist notions, as the idea relies on a higher gain of surplus value over the norm as a measure of success (Sugden, p. 96).
The individual had to be reshaped to conform to the demands of capitalism. Social convention begins to dictate this change to survive, with individuals growing in the shape of commodities rather than realized human beings (Hunt, p. 242). The valuation of labor as a commodity creates “alienation”, where the working class experiences dehumanization which psychologically shapes them to the methods of capitalism (Hunt, p. 243). The social and economic replications of capitalism then fortify this assumption over time, creating an ostracized working class that cannot compete with the capitalist class (Norton, p. 25)
Accumulation Crises
The desire for replication and surplus value is most evident in the appearance of accumulation crises. Accumulation crises arise from the desire for expansionary growth and accumulation of wealth in business. This leads to a cyclical framework, where each round of expansionary growth provides the fodder for another round to occur. The desire for accumulation even begins to seep into simple exchange, where increases in the cost of constant capital over time mean a higher profit must be paid for the next round to afford the replication of input commodities.
The circuit of capital model provides an understanding of how capital is viewed in a cyclical fashion. Capital initially works as money, which is used to purchase both the means of production and labor power necessary to produce a commodity. The second circuit involves “productive capital”, where bought commodities from the first circuit produce a saleable, new commodity. This commodity provides the basis for surplus value for the capitalist, or the good which can provide another round of simple exchange, as it can be sold at a price equal to or greater than the cost of inputs. The third circuit sells the commodity and transforms the commodity capital back into money capital, allowing another iteration of the circuits to continue with higher initial investments in the future (Adaman and Madra, p. 214).
The idea of the circuits of capital is that surplus value begets surplus value. It is impossible within the capitalist sphere to grow without the creation of surplus value. Even holding all else constant, having any birth rate above zero in a population would eventually create competition among labor and enact a changing of the values of in any exchange equation. This means that expansionary exchange must at some point occur, leaving capital accumulation the goal of the capitalist class, and by extent, capitalism (Norton, pp. 28-30).
With capital accumulation as the goal, or at the very least a natural product, of capitalism, accumulation crises must develop in order to keep the market from enacting an impossible state of perpetual expansion. How the market tries to correct itself is the basis for crises, and requires delving into the systemic issues with capitalism in the long-run.
Underconsumption is a class-based accumulation crisis enacted due to the value of labor. The capitalist seeks a surplus value, but in doing so attempts to pay for the commodities to produce it for as low a price as possible. Labor is then paid a wage which cannot support constant capitalist growth, and laborers are unable to afford the commodities created by the capitalist.
This means that the capitalist must produce at a level that is both affordable and demanded by the laboring class. The capitalist “…could not transform these commodities into money, or realize their profits by selling these commodities in the market, because of lack of consumer demand” (Hunt, 241). Even when producing to obtain a surplus value, it is not always possible within the current dimensions of the market.
Overaccumulation is the opposite of underconsumption. The crisis of overaccumulation relies on the capitalist producing too much of a commodity before realizing it will not sell in the market place. Overaccumulation appears in the market due to a lack of regard for the effects of capitalism on input commodities and when desire for surplus value gets too great. The capitalist production system can no longer support itself through auto-replication, and demands a change occur to the inputs.
The reactions to these crises range from instinctive to perverse. The most obvious solution to both would be to increase worker’s wage, enabling them to consume at a greater level. The overall surplus value may go down from the optimum, but not so far as if the products simply sat on the shelf. This makes sense in a simple exchange mechanic, but not in the surplus value optimizing characterization.
The capitalist with tendencies toward surplus value growth would take a different path. Hunt suggests the implementation of labor-saving machinery (p. 241), expanding output without having to pay the higher wage. This would in turn lead to the aggregate of capitalists also buying machinery and again not realizing the full value of the commodities being sold. The neoclassical reading would suggest, however, that simple exchange capitalists would begin to die out through not being able to pay for higher wages, while this loss of competitors would drive down labor price for the remaining capitalists (Backhouse, p. 157). The idea of countervailing tendencies is better seen with regard to the falling rate of profit within production crises.
Production Crises and Countervailing Influences
Production crises fall primarily into the discussion of the falling rate of profit as inherent to capitalism. If the falling rate of profit is accurate, the capitalist cannot fully realize surplus value as profit is destined to decline. More likely, however, the falling rate of profit is not entirely accurate, and even if it is, the capitalist is likely to attempt to overtake it in a desire to, at the very least, remain in the market.
Defining the falling rate of profit and why it exists, if it even does, within a Marxian structure is difficult. A cyclical reading of the capitalist structure goes as far as to suggest that the falling rate of profit leads to expansion: as businesses fail, the surviving businesses are able to grow and enter into a new period of expansion (Backhouse, p. 160; Ramirez, p. 40). The falling rate of profit can also be used a dismissal of Marx’s critique of capitalism, or as an illustration of how, eventually, the capitalist system must collapse under its own weight (Adaman and Madra, p. 218).
The cyclical approach seems most likely however, as it fits into the neoclassical construction of business cycles (Resnick and Wolff, 1987, pp. 40-41). The capitalist is able to recover from periods of depression via his “countervailing tendencies,” methods of survival that act to suppress the effects of the depression upon any individual capitalist. Marx outlines five of these tendencies, noting that total profit for the capitalist will not truly fall even in periods of depression due to these tendencies (Hunt, pp. 238-240; outlined in Adaman and Madra, p. 226).
The first of these tendencies is increasing the rate of exploitation. Exploitation, in Marx’s terms, is when a laborer produces more than labor than is actually consumed (Wolff, pp. 106-107). For the capitalist, increasing the rate of exploitation means that the laborer will produce more in the same paid amount of time, effectively increasing surplus demand without outlaying additional funds. The competition for labor will ensure that someone will work the highly exploited position, and in turn guarantee the wanted surplus value for the capitalist (Hunt, pp. 239-241).
The second tendency is the depression of wages below their value. Similar to exploitation, the capitalist attempts to pay the worker less for the same amount of labor. This works to increase surplus value via lowering the price of input commodities.
Third, the capitalist may attempt to lower the cost of the means of production. In terms of commodity pricing, this is almost identical to the depression of wages, but varies in systemic application. The goal for the capitalist is to make sure that constant capital is always producing at a rate that guarantees surplus value over the actual (and always increasing) cost of constant capital (Hunt, p. 239).
Fourth, society will produce an increase in the surplus population. This is the aforementioned birth rate above zero, where eventually there will be increased competition for labor among workers which drives down wages. Overpopulation could also increase demand overall, as more individuals will be searching for more goods from capitalists.
Finally, the capitalist can more actively participate in foreign trade. Marx believed that foreign investment could yield higher profits as well as lowering variable costs (labor) internally. By extension, surplus value would increase from higher profits and the lowering variable costs.
It is these tendencies that help the capitalist recover from the falling rate of profit and being the cyclical correction of the capitalist state. These reactions are largely perverse, indicating the nature of capitalism to not only experience crisis, but benefit from it through its own tendencies. The perversity occurs in the idea of the reactions largely suppressing the majority while bettering a few. There is a social cost to these decisions which represent perversity, and suggests a future crisis that may impact capitalism in a way that countervailing tendencies cannot explain away.
Combining the Crises
These crises, at first glance, may seem separated by different ideals. Accumulation crises are more end-commodity based, relying on a lack of demand and money to occur in the market. Production crises, and by relation the falling rate of profit, seems more inherently systemic and long-term, influencing capitalist decision over time rather than in any particular market instance. The actual effects of capitalism on a populace, however, are created from the effects of these crises working in tandem to each other at different referential scopes of the economy.
The countervailing tendencies provide the most obvious example of how these crises can be combined to form a unified critique. The actual effects of the countervailing tendencies can create accumulation crises. If wages are depressed and constant capital becomes cheaper, the crises of underproduction and overaccumulation emerge from the woodwork.
Individuals cannot buy the produced goods, while more goods are produced due to cheaper constant capital. Both crises begin to appear simultaneously, eventually correcting but at the cost of the working class. The capitalist is forced to self-correct, but this could just as easily lead to business failures as the crisis destroy weaker capitalist institutions.
The fallout from their destruction will once again help capitalist growth, as more labor will be willing to work for less yet less effort will have to be made to maximize surplus value. The economy returns to a norm, yet only after experiencing a major set of crises that affects both the working class and the capitalist.
In a more subtle way, the crises combine across time periods. With production crises occurring in the long-term and to be planned for, and accumulation crises largely happening in the short-run, they are not always destined to occur simultaneously. While effects may linger and collaborate, as demonstrated previously, the crises are two different entities at most periods.
The question, then, is what occurs if the crises combine? The effects of countervailing tendencies, falling profits, and an over-saturated market for individuals who cannot afford basic needs suggests a cataclysm, one that must be stretched over a great period of time and affecting all classes for its duration.
Crises of Capitalism in Modernity
This combination of crises seems to be represented in the financial crash of 2009 and 2010. The corrective mechanisms inherent to the capitalist system began to be taken to an extreme, primarily in the financial market.
The desire for surplus value is represented best within the inner-workings of finance capital. Money earned is almost entirely surplus: there is no labor to truly higher, and money comes from loans and other debt obligations. The funds for the financial market, however, come from more traditional capitalist sources.
It is the combination of the effects of the financial market collapse and the traditional crises of accumulation and production that played the largest hand in creating the financial crash. A depressed and competitive labor market ensured that individuals could not afford payments on financial necessities. Seeking relief, more and more risky opportunities arose, and individuals had no recourse but to buy despite the risk premium. As the labor class defaulted, the assets of the financial sector lost value, heavily impacting capitalists of all trades. The rate of profit fell dramatically even in the short term, and individuals could not buy necessities, let alone the overaccumulated goods stocking store shelves.
Every individual had to deal with these crises occurring in combination, and each looked for different methods of explaining and dealing with crises. Unemployment rose, wages fell, and an already competitive job market exploded with new additions. To better understand this crisis, we will compare two Marxist evaluations of it, and will conclude with how the Marxist anatomy of capital is crucial to understanding capitalism in modernity.
Analyzing the Financial Crash
Two modern interpretations in the Marxist analytical tradition have been published in the last year. The first is The Violence of Financial Capitalism by Christian Marazzi, which provides a historical interpretation of the crisis followed by a political and governmental economic reading. The other reading is “The Economic Crisis: A Marxian Interpretation” by Stephen Resnick and Richard Wolff. This reading is more directly Marxist, focusing on the interaction between class and crises.
Marazzi’s interpretation focuses on a desired return to more traditional economic materials in place of the dominance of the financial industry. There is an insistence that “both the left and right wish for an unlikely return to the real economy…” (Marazzi, p. 46), yet Marazzi believes this is not enough. In a Marxist analysis this is undeniably true; while labor competition would fulfill many new job opportunities, the presence of new industries would inevitably capitalize on the competition and suppress the value to the working class.
There is an increasingly external production of capital among the financial sector, one which can be demonstrated empirically (Marazzi, p. 51). This external production can be sublimated to the consumer as well, meaning that capitalist can require the consumer to buy an unfinished product and use their own labor to complete it (p. 52). More and more labor value is being sapped from the consumer to create surplus value for the capitalist, and in doing so the capitalist manages to gain surplus value through a lowering of input in a perverse method.
In essence, the crisis is largely due to the perversion of capitalists into new methods of accumulation that are not empirically sound. While the original expansionary exchange model is hardly a just goal for the laboring class, it does not as actively leech into the personal life of the laborer. The laborer is subjected to both the work day and construction of products for the capitalist outside of work time, as well as investment funds being increasingly controlled by a shadow banking industry with little regard for “real economics.”
Resnick and Wolff propose an increased exploitation of the labor class as the determinant of crisis. While this is similar to the ideas of Marazzi, it produces a more traditional Marxist interpretation. Countervailing influences, though not necessarily named as such in the article, provide the incentive to maximize profits, but not necessarily at the risk of a falling rate of profit. It is the individual’s desire to maximize surplus that drives the financial market and managing capitalists to further exploit the worker, suppress wage growth, and invest wealth so it “…led to very rapid growth in enterprises specializing in managing such wealth” (Resnick and Wolff, 2010, p. 181).
This desire to create wealth was capitalized on through the depressed wages of the working class. The need for funds allowed banks to loan at exorbitant rates that the laborer had no choice to accept, and then these funds could once again be sank into the financial management enterprises that were gaining increasing clout among the capitalist class (Resnick and Wolff, 2010, pp. 181-182). The labor class was forced into complicity in this reading as they were squeezed of any remaining value due to stagnant and even declining real wages (pp. 178-179).
A novel solution to the crisis is the conclusion of Resnick and Wolff: “Eliminate class exploitation” (2010, pp. 182). This would, in the context of theoretical Marxism, work. While the growth of the population over time would have to be accounted for, among other issues, the change to what is largely a new set of economic theories would have to incorporate it as well. It is quickly noted that while this new class alignment would not dispel crises or contradictions, it would at the very least remove disparities among the population.
The connecting element between these analyses is the idea of class exploitation and the construction of an inherently broken financial management system. A major contrast occurs, however, in the method of exploitation. Marazzi’s idea of the capitalist usurping non-market labor hours from the lower class is opposed to the more traditional depression of wages and increased exploitation rates within capitalist structures. These ideas, however, do function together, and are a difference primarily in sorting out the main cause of class exploitation. If the laborer were not willing to perform the after-hours labor, would a return to “real economics” occur? There is an economic incentive to perform this labor, much as there is an economic incentive to engage in the broken financial policies which Resnick and Wolff discuss as being another plight of the laborer.
The major issue within both seems to be the existence of the surplus capital based financial market. Its creation seems to be almost solely for the capitalist to extract any remaining surplus labor from the laborer, while also allowing financial institutions to propose incentives to a disenfranchised class. There is an active violence towards the laboring class, and it occurs most observably within the capitalist-dominated financial industry.
Conclusions
The existence of crises within capitalism is primarily the result of the desire for surplus labor. Even using simple exchange mechanics, there is a necessity for the capitalist to procure surplus value for the future. The primary method of obtaining this value is by exploiting the laboring class, in turn creating crises of accumulation and production for the entirety of the capitalist society.
The perverse reactions to these crises promote a self-replication of capitalism into the future. The propellant of capitalism is its cyclical nature where, even in the failure of some capitalists, the remaining can prosper and even expand. This creates a social tendency toward capitalism and its structures, echoed again and again via the establishment of social norms concerning capitalism.
The current financial crisis can be understood by the new radical nature of capitalists. The previously developed equation for expansion is not enough to gauge surplus, as capitalists incentivize extra labor and bad investments to guarantee their own total profits. It is the individual capitalist, when considered in the aggregate, that creates a crisis: more and more exploitation finally collapses the system. Without a rethinking of social norms, however, this crisis stands to be just another depression before another great capitalist expansion phase.
Works Cited
Adaman, Fikret, and Yahya Madra. "Marxisms and capitalisms: From logic of accumulation to articulation of class structures." Twentieth-century Marxism: a global introduction. Abingdon: Routledge, 2007. 212-229. Print.
Backhouse, Roger. The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century. Princeton: Princeton University Press, 2004. Print.
Hunt, E. K. History of Economic Thought: A Critical Perspective (History of Economic Thought). 2 ed. Armonk, New York: M.E. Sharpe, 2002. Print.
Marazzi, Christian. The Violence of Financial Capitalism. Los Angeles: Semiotext(E), 2010. Print.
Marx, Karl. "On The Question of Free Trade." The Poverty of Philosophy. New York: International Publishers, 1963. 207-226. Print.
Norton, Bruce. "Reading Marx for Class." Re/presenting Class. Durham & London: Duke University Press, 2001. 23-55. Print.
Ramirez, Miguel. "Marx, Wages, and Cyclical Crises: A Critical Interpretation." Contributions to Political Economy 26 (2007): 27-41. Print.
Resnick, Stephen, and Richard Wolff. Economics: Marxian versus Neoclassical. Baltimore: The Johns Hopkins University Press, 1987. Print.
Resnick, Stephen, and Richard Wolff. "The Economic Crisis: A Marxian Interpretation." Rethinking Marxism 22.2 (2010): 170-186. Print.
Madra, Yahya. "The Marxian Challenge: Class Conflict and the Fetishism of Commodities in Capital." History of Economic Thought and Analysis. Gettysburg College. Glatfelter Hall, Gettysburg, PA. 4 Oct. 2010. Class lecture.
Wolff, Jonathan. "Marx and Exploitation." The Journal of Ethics 3.2 (1999): 105-120. Print.
