In a response to my critique of theories that explain crises by a long-term tendency of the rate of profit to fall due the rise in the organic composition of capital, reader Jeffery Curtis wrote: “I’m not sure this was a fair representation of the falling rate of profit crisis theory. For example, your bit about departments I and II I’ve never heard of in any interpretation of the falling rate of profit. The only crisis theory I’ve read about using that is a temporal disproportionality theory concerned with fixed capital (demand falls for department I goods as machines last for years, so they fall and take wages with them, department II slowly falls and crisis erupts).”
Jeffery makes other points in his response, most of which I agree with, that all readers of this blog should read carefully. In due course, all the questions that Jeffery raises will be dealt with. But it is the first question, the relationship between Department I and Department II, which is the main subject of this week’s post. What is really involved in the question of Department I and Department II is capitalist reproduction and its role in crisis theory.
Disproportionality and the anarchy of production
Just like the insufficient surplus value families of crisis theories can be divided into sub-groups, such as profit squeeze, class struggle and falling rate of profit brought about by the rising organic composition of capital, so the disproportionality school can be divided into two sub-groups. One can be called the anarchy of production theory, and the other emphasizes the disproportions between the two great departments of production, Department I, which produces the means of production, and Department II, which produces the means of (personal) consumption.
In this post, I will examine the anarchy of production school. The question of the necessary proportionality between Departments I and II involves the question of reproduction, which I will begin to examine in next week’s post.
Is the falling rate of profit the key to periodic economic crises?
Perhaps among Marxists today, the tendency of the rate of profit to fall is the most popular explanation for capitalism’s cyclical economic crises, with underconsumption a distant second.
This theory, which naively leaves out the question of *realizing* surplus value, goes something like this: During the boom, the combination of technological progress, competition of the industrial capitalists among themselves, and, especially, competition between the industrial capitalists and the working class forces the industrial capitalists to increasingly substitute machinery—dead labor—for living labor. This is especially true near the peak of the boom, when conditions are most favorable for the working class on the labor market.
More and more of the surplus value that is consumed *productively* is transformed into constant capital, and less and less is transformed into variable capital. The result is a rise in the organic composition of capital and a fall in the rate of profit.
I mentioned earlier that the insufficient surplus value family of crisis theories can be divided into two sub-families: the profit squeeze school and the falling rate of profit school.
The profit squeeze school sees the cause of crises as rooted in the fall in the rate of surplus value that develops as the demand for labor power rises during a boom, creating more favorable opportunities for the workers to struggle against capitalist exploitation. The fall in the rate of exploitation eventually reduces the rate of profit so much that a crisis results.
But there is another version of the insufficient surplus value school. This school traces the cause of crises to the fall in the rate of profit brought on by the rise in the organic composition of capital. This is the famous law of the tendency of the rate of profit to fall.
These crisis theories are not mutually exclusive, because boom conditions not only put downward pressure on the rate of surplus value but at the same time encourage a growth in the organic composition of capital. The lower the rate of surplus value, the more the industrial capitalists will attempt to economize on labor power, or what comes to exactly the same thing, the more they will substitute constant capital—or dead labor—for variable capital—or living labor.