The Phases of the Industrial Cycle

The crisis, sometimes called the “recession,” marks the end of one industrial cycle and the beginning of the next one. Recession is characterized by a decline in industrial production and employment. The decline in employment is most severe in the industrial sector but affects many other sectors of the economy as well. The recession, or industrial crisis, ends when industrial production reaches its lowest point.

The period between the lowest point of industrial production and when industrial production again reaches the highest point of the preceding cycle is known as the “depression,” or sometimes the phase of “stagnation.”

The phase of the industrial cycle that follows the end of the depression, or stagnation stage, is called the period of “average prosperity.” There is still considerable unemployment of both workers and machines, and capital investment is still weak. Stagnation and depression conditions therefore linger longest in the industries of Department I, the sector that produces the means of production.

After the period of average prosperity comes the boom. Industry is operating as close to “full capacity” as it ever does—outside of all-out war—under the capitalist mode of production. Unemployment sinks to its lowest level of the cycle. Conditions become more favorable to the sellers of labor power. This is the most favorable point in the industrial cycle for union organization and strikes.

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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. 

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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.

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