Crisis Theories: Profit Squeeze

Basic formula of capitalist production

The basic formula of capitalist production is M-C..P..C’-M’. An industrial capitalist begins with a sum of money M. He or she must then find on the market the elements of productive capital—both constant capital in the form of factory buildings, machinery, and raw and auxillery materials and labor power, the only commodity that produces surplus value. The productive capital, both constant and variable, is represented by C.

Next, the industrial capitalist must bring the elements of C together in the act of production, represented by the letter P. It is during the process of production that the capital of the industrial capitalist is expanded through the absorption of surplus value. Marx called this the “self-expansion of capital,” or in some translations the “valorization” of capital. Remember, the actual “self-expansion of capital” comes from the variable capital alone.

When the process of production has been completed, the capitalist possesses a sum of commodities that have a greater value than either M, the money capital, or C, the commodity elements of the productive capital that the industrial capitalist started out with.

Crisis Theories: Unconsumption (cont’d)

Ricardo, Say and the liberal answer to Sismondi and Malthus

The French economist J.B. Say, who lived between 1767 and 1832, is famous for his “law of markets,” which allegedly proved that a general overproduction of commodities was impossible. Some authorities credit James Mill, the father of John Stuart Mill and a friend of Ricardo, for discovering this so-called law. The law, however, is generally known as “Say’s Law.” So that’s how I will refer to it here.

How did Say “prove” the impossibility of a general overproduction of commodities? He argued that while money makes the exchanges of commodities much easier, it is by no means absolutely necessary for commodity exchange. Commodity exchange can proceed, at least in principle, without money.

Therefore, Say abstracted away money. If money is left out, commodity exchange is the exchange of one commodity for another. The totality of these commodity exchanges makes up the market. Thus, the means of purchasing commodities are commodities themselves.

Crisis Theories: Underconsumption

The most popular explanations for economic crises advanced by Marxists since the death of Engels in 1895 are underconsumption, profit squeeze and disproportionality. The theory of underconsumption explains crises by the inability of the working class to “buy back” the full product it produces.

Profit squeeze theories can be be divided into two sub-theories. One version puts the blame for crises on a decline in the rate of surplus value caused by the fall in unemployment that occurs during a boom. The other sub-theory, in contrast, sees the rise in the organic composition of capital causing a fall in the rate of profit. The fall in the rate of profit leads to the crisis.

The theory of disproportionality can also be divided into two sub-theories. One puts the emphasis on the anarchy of production. For example, raw materials might be produced in insufficient amounts as industrial production expands leading to an economic crisis. The other sub-theory puts the emphasis on the relationship between the two great departments of production, the one that produces means of production (called Department I by Marx) and the one that produces consumer goods (called Department II by Marx). It is asserted that either Department I produces too much relative to Department II or Department II produces too much relative to Department I and that this leads to a general economic crisis.

The Problem: Marx Didn’t Leave Us a Completed Crisis Theory

These writings are built on the foundations of “Capital,” a work that at least in Germany is becoming a bestseller once again. But “Capital” itself, though it lays the foundation, is not a book about the periodic crises capitalist production goes through. Nor is there a section within “Capital” dealing with such crises, as is generally the case with works that popularize the theories of “Capital.”

Since Marx and Engels put so much emphasis on crises in the Communist Manifesto and other works, this omission at first seems surprising. Marx had planned to crown his economic work with a book on the world market, the state, competition and crises. As is well known, Marx did not have the time to write this work. It is, of course, impossible for any other person to write the work Marx might have written if he had had the time.