Crisis Theories: Disproportionality
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. (1)
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.
Capitalist production is unplanned and anarchic production. Indeed, the key question that political economy had to answer once it became a science was how, despite the anarchy, the system can work at all. Each branch of production depends on other branches for essential inputs. A garment factory, for example, needs cloth, threads, sewing machines, electricity and buildings.
The same situation exists in every other branch of production. Computers need circuit boards, circuit boards need chips, chips need silicon. The industries that produce these inputs need their own raw and auxiliary materials. These in turn need their own inputs to carry out their production. Any modern economy is a very complicated system of inputs and outputs. For production to continue, commodities must be produced in the proper proportions. Slight disproportionality will lead to crises in production. Beyond slight disproportionality, production and with it modern society would disintegrate completely.
Law of Value regulates proportionality through anarchy
Classical political economy realized that what was really involved was the need to assign the labor time of society in the proper proportions among the various branches of production. This was the basis of the Law of Labor Value developed by classical political economy. Adam Smith in his famous work, “The Wealth of Nations,” explained how the fluctuations of market prices around what Smith called natural prices—what Marx later called prices of production—regulate the capitalist economy precisely through the anarchy. How does the Law of Value, which regulates anarchic capitalist production, work?
With some modification, due to the tendency of competition to equalize the rate of profit among the different branches of capitalist production (which Marx explained in volume 3 of “Capital”), what Smith called the natural price of a commodity is determined by the quantity of labor socially necessary to produce that particular commodity under the given conditions of production.
If a particular commodity is produced in less than the quantity necessary for the reproduction of capitalist society, the market price will rise above the price of production, to use Marx’s terminology, or Smith’s natural price. The capitalists in that branch of production will realize a super-profit, a rate of profit above and beyond the average rate of profit. (2)
These super-profits will attract additional capital, as capitalists, driven by the pressure of competition to seek the highest possible rate of profit, crowd into the given branch of production, either by extending existing enterprises or establishing new ones. Production of the commodity in question will then increase until the market price drops to and then below the price of production. Once the market price falls below the price of production, capital will begin to flow out of that branch towards branches of production where market prices exceed production prices. (3)
Law of Value works through constant minor crises
As overproduction develops in a given branch of production, let’s say coat manufacture, market prices will fall below production prices, or what comes to exactly the same thing, the rate of profit in the coat-producing industry will fall below the average rate of profit. Indeed, it is quite possible that the coat industry will make outright losses. Capital will exit the coat industry.
As this happens, coat-producing factories will be curtailed or even shut down altogether. Here, we have a crisis of overproduction, but only a partial crisis of overproduction affecting one industry as opposed to a general crisis of overproduction affecting all, or at least most, branches of production. Unlike general crises of overproduction, such as the one we are in now, partial crises of overproduction are allowed by Say’s Law.
As a result of a crisis of overproduction in the coat industry, workers employed in coat manufacture will be laid off. As coat production declines, the market price of coats will begin to recover. Eventually, the market price will rise to and then above the price of production of coats. Laid-off workers will be recalled, and new workers will be hired. The coat trade will now experience prosperity and coat production will expand once again. This will continue until overproduction again leads to falling prices and profits. These swings of the rate of profit around the average rate of profit in the coat industry signals to the industrial capitalists whether too little or too much of society’s labor time is employed in producing coats relative to the needs of capitalist society. (4)
Capitalist economy is never in equilibrium
A situation where capitalist production is in equilibrium, or what comes to the same thing, the market prices of all commodities coincide with their prices of production, never occurs in practice. Indeed, it is extremely rare for any market price to actually coincide with its price of production. Instead, capital is constantly flowing from branch to branch, flowing out of branches that are experiencing overproduction—defined as a rate of profit below the average—and towards branches that are experiencing underproduction—defined as a rate of profit above the average. (5)
During periods of average prosperity—that is, the mid-phase of the industrial cycle after the most recent crisis has been overcome but before a new boom has developed—capitalist production will present a picture of crises of overproduction in some branches offset by underproduction—super profits—in other branches. (6) During the phase of the industrial cycle that follows the phase of average prosperity, market prices will rise above the price of production in most branches of production. Or what comes to the same thing, the rate of profit averaged across industries is above the long-term general rate of profit. Under boom conditions, older high-cost factories will tend to make the average rate of profit, postponing their eventual closure, while new state-of-the-art factories will make huge super-profits.
It’s important to realize that the concept of the average rate of profit doesn’t simply mean a mathematical average of the individual rates of profit of the industrial capitalists that are engaged in the various branches of production at any given point in time. In order to arrive at the average rate of profit, you also must average individual rates of profit across a series of both good and bad years. Or, what comes to exactly the same thing, rates of profit must be averaged across an entire industrial cycle, which runs from crisis, stagnation and average prosperity to boom and back to crisis, in order to calculate the average rate of profit.
Minor crises and major crises
It is extremely unlikely that even under boom conditions there won’t be some industries—and certainly there will always be individual industrial capitalists—that will be experiencing their own crises of overproduction—less than average rates of profits. Do the major general crises that periodically shake the world market somehow grow out of these everyday partial minor crises of overproduction? If the answer is yes, how do the minor partial crises affecting only individual industries or even individual capitalists become converted into major general crises at periodic intervals?
One thing that should be kept in mind is that the capitalists don’t realize that a disproportion in production exists until it is signaled through changes in prices and profits. (7) Such signals don’t appear until the disproportion in production has developed to a certain a point. The industrial capitalists are always responding after the fact.
While most of the commodity dearths and gluts that emerge from the daily anarchy of capitalist production are minor, it must be remembered that minor is a relative concept. If you are a garment worker who is laid off due to a minor overproduction of coats, the crisis may not be so minor to you and your family. In addition, when the anarchy of capitalist production interacts with the forces of nature, the crises of disproportionality may no longer be so minor. They can take on a character that shakes capitalist society to its foundations.
Raw materials prices and economic fluctuations
In volume III of “Capital,” Marx discusses the important role that changes in raw materials production and prices plays in economic fluctuations. Indeed, one theory of crises stresses the periodic underproduction of raw materials relative to finished goods, or what comes to the same thing, overproduction of inished goods relative to the production of raw materials. This is the major cause of the periodic general economic crises, according to this school. Indeed, in the concrete history of industrial cycles, high prices and shortages of raw materials are usually signs that a general economic crisis is approaching.
In industry, a rise in market prices above the prices of production, assuming a certain amount of excess capacity exists—which is usually if not always the case—will lead quickly to an increase in production. However, the same isn’t true in agriculture. The natural conditions of production in agriculture generally dictate that the planting of crops occurs at a specific time of year. The decisions on how much to grow, therefore, are made at planting time—for example, during the spring.
If market prices then rise unexpectedly due to an unforeseen rise in demand, it might take as much as a year before production can be increased. During that year, a sharp rise in the price of agricultural raw material such as cotton can put severe pressure on the profits of the industrial capitalists who use cotton as a raw material—for example, the spinners who use cotton as a raw material to manufacture yarn.
This also applies to the branches of agricultural production whose products enter directly into the consumption of the workers. For example, if after the spring planting season for grain an unexpected boom begins, the industrial capitalists will expand the number of workers employed, which will increase the demand for grain, possibly causing grain prices to soar. Again, there will be no opportunity to increase grain production until the following spring. Such a rise in grain prices, will drive up food prices in general—grain is also used to feed cattle—and will put upward pressure on money wages, even if real wages remain unchanged. The rise in money wages will in turn squeeze the profit margins of the industrial capitalists.
The conditions of production in agriculture are very dependent on weather conditions that vary considerably from year to year. Even if the farmers plant the right amount of crops, bad weather—for example, a drought or a spring frost—might lead to a considerable shortfall in crops across the board, both those that enter into the wages of the workers and those that function as raw materials.
For example, the disastrous potato blight that hit Ireland in 1846 not only led to widespread famine and depopulation on the island, it also caused violent price fluctuations. First, a great rise in agricultural prices leading inevitably to speculative demand that drove prices even higher. The speculation was then followed by a price crash, which dragged down many trading houses engaged in the trading of agricultural commodities. The bankruptcy of these houses played an important role in the economic crash that hit Britain in October 1847.
Disproportionate production in the extractive industries
In the extractive industries—mining, oil wells, natural gas, and so on—the levels of production are determined not simply by the immediate decisions taken by the industrial capitalists in that sector. Levels of production also depend on long-term exploration for new supplies of ores, oil, coal and natural gas, which are created by the processes of nature, not human labor.
If raw material prices are low for a prolonged period—which is usually the case in the wake of major economic downturns—exploration budgets are cut. Then, if demand for these mineral and energy raw materials suddenly rises due to an onset of an economic boom, it may well prove impossible to quickly increase production sufficiently to meet the suddenly expanded demands of industry. The result will be soaring raw materials prices, which cut into the profits or even wipe out the profits of large sectors of capitalist industry.
Eventually, the super-profits—profits above the average rate of profit—in the extractive industries will lead to a big increase in the search for new sources of raw materials, as well as the application of new technology to either find additional sources of raw material or make better use of existing sources. This rush of investment and exploration, however, tends to hit the market just when demand for these raw materials is peaking or past its peak, leading to a collapse of prices and profits in these industries, which then leads to cuts in long-term exploration budgets of the industrial capitalists engaged in these branches of production. These successive swings in investment in raw materials production have major impacts on economic activity across the board.
In addition, there is always the danger that the depletion of mines, oil wells, sources of natural gas, and so on can led to disproportionate production. Suppose that due to depletion of oil fields the production of oil is peaking out. Society will have to find other ways to produce energy, either tar sands, coal, hydro-electric, nuclear fission (or maybe in the future nuclear fusion), biomass, solar, wind—whatever will yield the highest rate of profit to the industrial capitalists.
However, huge amounts of capital are tied up in oil refineries. Try as you will, an oil refinery (8) cannot be used as a nuclear power plant, generate energy directly from the sun, or serve as a wind farm. If the movement of prices indicates to the industrial capitalists that the depletion of the world’s oil fields has proceeded so far that drilling oil is no longer profitable, and lots of capital is tied up in oil refineries, a major crisis for those industrial capitalists who have large amounts of their capital tied up in oil refineries will occur.
If this happens, oil refineries will lose their material use value, the refining of oil, and therefore no longer be able to function as capital. They will have to be scrapped, and the industrial capitalists who own the oil refineries will suffer major losses and the possibility of bankruptcy. In the event of bankruptcy, their creditors might very well be dragged down. If these creditors are major banks that function as pivots of the credit system, the crisis could spread to the sphere of credit affecting many other branches of industry and commerce.
Also, the effects of the depletion of oil fields might not end there. The shortage of oil and the consequent rise in the price of gasoline would cause consumers to shun the gasoline-consuming monsters produced by Detroit. This is exactly what we saw during the inflationary 1970s and again during the surge in oil prices that preceded the 2008 crash. Much of the value of the capital invested in factories that produced these gasoline-devouring machines will have to written off. A crisis for the auto makers will affect many other branches of production that depend on the auto manufacturers for customers, such as the makers of auto parts.
A concrete historical example
Let’s examine how a major economic crisis can emerge from disproportionate production. Instead of giving an abstract example, let’s examine an actual historical crisis, the one that followed the Napoleonic wars, what Marx called the anti-Jacobian wars, in the years after 1815. (9) It was under the influence of this crisis that the great debate about the possibility of a general glut between Sismondi and Malthus, on one side, and Say and Ricardo, on the other, took place. Afters years of war and high military spending, England’s victory in the wars that followed the French Revolution led to a sudden and considerable curtailing of military spending.
Factories that had been manufacturing arms and uniforms suddenly found themselves without orders. On top this, there was a run of disastrous weather caused by a drop in global temperatures that is believed by scientists today to have been caused by the eruption of Mt. Tambora in Indonesia in April 1815, which temporarily reduced the sunlight reaching the earth’s surface. The year 1816 was so cold that it has gone down in history as the year without a summer. Crops failed throughout North America and Europe due to abnormal rains and summer frosts. Though 1816 was the worst year, bad weather and crops continued for a number of years. The disastrous weather led to real famine in Europe and North America. sometimes called the “last great substance crisis in the Western world,” if you overlook the horrible Irish potato famine of 1846.
The world capitalist economy was therefore hit by two major shocks. The end of the prolonged period of war meant that too much of society’s labor time was deployed in the war industries compared to the quite different needs of capitalist society in “peacetime.” At the same time, there was a massive underproduction of agricultural commodities due to the disastrous weather. People had to pay a lot more for food and therefore had a lot less money left over to spend on commodities produced by the other industrial capitalists.
The result was that commodities piled up in warehouses unsold. Workers faced layoffs not only in war industries caused by the outbreak of “peace” but also in other industries, because the “price shocked” population no longer had the money to buy the products of their industries. Peace, famine and depression marched hand and hand. It was in the middle of these disturbances that Sismondi published his “Nouveaux principles,” in which he expressed the belief that capitalism was producing “general gluts” of commodities.
Ricardo on the crisis
According to Ricardo, the post-1815 economic crisis was caused by a “sudden change in the channel of trade” brought about by the end of the prolonged war. In addition, there was not a general overproduction of commodities, since in agriculture there was rather an underproduction, at least during the famines caused by the terrible weather of 1816, the year without a summer.
This crisis, however, did not emerge entirely from the internal contradictions of capitalism. Indeed, this crisis was characterized by what bourgeois economists call “external shocks.” (10) For example, the unseasonable summer rains and frosts would have led to major crop failures even if another mode of production rather than capitalism had been in place. In any pre-capitalist mode of production, a major crisis would also have occurred due to massive crop failures. Even for a socialist economy, a natural disaster affecting large areas of the globe such as that which occurred in 1816 might be a challenge. Therefore, Ricardo and Say were able to claim against Sismondi and Malthus that in the absence of “an external shock” to the economic system, a general economic crisis or glut of commodities could never occur.
The crisis of 1825 a crisis of a new type
If we look back at economic crises that occurred before 1825, we find years of bad trade and high unemployment were generally accompanied by bad harvests. When the harvest was bad and food prices were high, most people, except for the very rich, simply didn’t have the purchasing power to buy manufactured commodities that they had bought in good years when food prices were low. While the trend line of business was far from smooth, and years of recession and higher than usual unemployment occurred, the fluctuations were tied to alterations of good and bad agricultural years.
Here we have not so much a general overproduction of commodities but rather an overproduction of manufactured commodities relative to an underproduction of agricultural commodities. But beginning with the crisis of 1825, the pattern changed. Though changing prices of agricultural commodities and other raw material continued to play an important role, crises were not so closely associated with harvest failures. Instead, they now followed years of exceptional capitalist prosperity—booms in capitalist industry.
Crises, both crises of shortages and crises of overproduction of some commodities backed up by crises of shortages of other commodities, occur on a virtual daily basis under the capitalist mode of production. Even Say admitted as much.
But how do general crises of overproduction emerge from the anarchy of production? Many Marxists have tried to answer this question by looking not at the accidental daily gluts and dearths of particular types of commodities but rather to the relationship between the two main departments of production as defined by Marx—Department I, which produces the means of production, and Department II, which produces the means of consumption.
This leads us straight to the question of the reproduction of the capitalist economy. Next week, I will begin the examination of this question. Could the capitalist reproduction process hold the answer to the riddle of the economic crises that periodically hit the capitalist economy?
2 When a super-profit is made, the industrial capitalists appropriate the interest on the capital plus the profit of enterprise—interest and profit of enterprise being the average profit—plus an additional profit that represents a super-profit. In competition, the industrial capitalists are always seeking to earn a super-profit. Though motivated only by desire for gain, the industrial capitalists in seeking out super-profits are in fact filling the gaps in capitalist production. This is an example of Adam Smith’s famous “invisible hand” at work.
3 Marx sometimes used “production prices” as shorthand for prices of production. Marx preferred the term “price of production” used by Sismondi and occasionally by Ricardo to “cost of production,” often used by the economists, which tends to confuse the cost to the industrial capitalists of producing a commodity—cost price—with the cost to society of producing the particular commodity—the price of production. The difference between the price of production—the cost to society—and the cost price—the cost to the industrial capitalists—is precisely the profit.
4 Modern bourgeois economists have developed complex mathematical models “proving” that free competition produces the “optimum” distribution of capital and labor available to society. However, even if the market worked “perfectly”—which the current crisis proves, not for the first time, that it doesn’t—the only thing that would be achieved would be a distribution of society’s labor time that is “ideal” for the reproduction of capitalist society. The “perfect” distribution of the labor time of society that would be achieved pre-supposes capitalist society conditions of exploitation and class rule.
For example, the market dictates that much of society’s labor time is spent producing luxury items, while the needs of the unemployed, the semi-employed or workers—especially those in oppressed countries that barely earn the biological subsistence—and the peasantry are either completely or largely ignored. This is not to mention the huge amounts of the labor available to society that is spent on militarism, defending various national groups of capitalists from each other, and above all defending the capitalists from the working class and peasantry.
5 Bourgeois economists of the various neoclassical marginalist schools—orthodox economics—construct complicated mathematical models based on ideal capitalist equilibrium. If the economy was really in equilibrium, every industrial capitalist would keep on producing exactly what they are currently producing in the exact quantities they are producing it for as long the equilibrium lasts. The capitalist economy would never change, and there would not only be no recessions but no economic growth. Such models, it goes without saying, are completely divorced from reality.
6 The industrial cycle begins with the crisis, which gives way to stagnation, sometimes called the “depression”—in this sense not necessarily in the extreme form of the 1930s—and is then followed by the phase of average prosperity, which in turn gives way to the phase of boom that leads to overproduction and a new crisis. While no two industrial cycles are exactly alike, and the intensity of the various phases differ greatly from one industrial cycle to another, these basic phases have reproduced themselves to one degree or another in virtually every industrial cycle that has occurred since 1825.
7 Speculation here plays an important role. For example, if the price of a particular commodity such as oil has been rising sharply for awhile, various speculative capitalists start purchasing the commodity, not in order to consume it either productively or unproductively, but simply on the belief that its price will continue to rise. The idea is to resell the commodity after its market price has risen even higher. Holding the commodity, in turn, causes its price to rise even more, leading to more speculation and still higher prices.
As far as the industrial capitalists who actually produce the commodity are concerned, society is demanding more of the commodity they are producing, so they keep on increasing production and keep on making huge super-profits, which then leads to even higher production. The speculation can disguise the fact that production of the commodity in question may already be in amounts far in excess of the actual needs of capitalist society once the demand provided by the speculators is subtracted. When the “bubble” finally bursts, the industrial capitalists that have been producing the commodity in question suddenly see their profits vanish and even experience massive losses, indicating that in fact overproduction has been in progress for some time. Such speculation, especially when financed by credit, which separates purchase and payment, can lead to massive overproduction. Instead of a minor crisis, there is a major crisis, at least for the industry concerned.
9 The Jacobin clubs formed the most radical party during the French Revolution. Under the leadership of Robespierre, they dominated France starting in 1793 until Robespierre was overthrown in July 1794. This period corresponds to the most radical and democratic phase of the French Revolution. Even though this phase ended in July 1794, the British ruling class continued to be horrified by the democratic shock waves that continued to be felt. The wars against post-revolutionary Napoleonic France were therefore often in the 19th century referred as the anti-Jacobin wars. In some ways, this is reminiscent of the anti-communist “cold war” that the United States waged against the Soviet Union after World War II. Today’s bourgeois historians never use the term “anti-Jacobin war, therefore playing down the tremendous impact the French Revolution of 1789-94 had on the origins of the world as we know it today.
10 External shocks are a favorite explanation for crises used by bourgeois economists. According to these arguments, crises occur not due to the internal contradictions of the capitalist system but from shocks arising outside the economic system—the implication being that if such shocks did not arise, capitalism would have no economic crises.