According to Marx, the capitalist mode of production can in the long run exist only as a system of expanded reproduction. But expanded reproduction can only take place if certain proportions are maintained between Department I, which produces the means of production, and Department II, which produces the means of (personal) consumption.
Marx’s basic assumptions
Marx developed his diagrams of expanded reproduction in volume II of “Capital” from the diagrams of simple reproduction. Like was the case with simple reproduction, Marx assumed that society consists of only two classes, industrial capitalists and productive workers. Like was the case with the diagrams of simple reproduction, the rate of surplus value is 100 percent. That is, the workers work half the time for themselves and half the time for the industrial capitalists.
The diagrams of expanded reproduction deal only with the capital used up in the annual reproduction process plus the newly accumulated capital. The ratio of constant to variable capital of five-sixth constant to one-sixth variable is preserved. (1) In the diagrams, the capitalist economy is allowed to grow in size but remains qualitatively unchanged.
We have a kind of dynamic equilibrium of economic growth. Marx assumes that half the surplus value is transformed into new capital—capitalized. The other half is consumed unproductively by the capitalists.
This is the big difference between expanded reproduction and the simple reproduction that we explored last week. In simple reproduction, the capitalists consume all the surplus value unproductively. The existing capital is preserved, but there is no accumulation of capital. In the diagrams of expanded reproduction, Marx introduced the accumulation of capital in the framework of reproduction. (2)
Marx developed the following set of equations. The first equation represents Department I and the second Department II. Let’s start with Department I.
There is 5,000 worth of constant capital consumed and 1,000 worth of variable capital. Since the rate of surplus value is 100 percent, the surplus value is also 1,000. (3) Adding these numbers together, we get a total annual output of 7,000 means of production. Half of the surplus value of 1,000 will be accumulated, transformed into new capital during the next annual cycle, and half will be consumed unproductively by the capitalists.
The second equation represents the production of Department II, the means of consumption. The constant capital that will have to be replaced is 1,430, the variable capital is 285 and the surplus value is 285. The total production of means of consumption, therefore, is 2,000.
5,000Ic + 1,000Iv + 1,000Is = 7,000
1,430IIc + 285IIc + 285IIs = 2,000
In order to preserve the existing ratio of constant to variable capital required by his method, Marx had five-sixths of the newly created capital in Department I (5/6 x 500) transformed into constant capital and (1/6 x 500) accumulated as new variable capital. This comes to about 417 new constant capital and 83 in new variable capital. (4) Since only variable capital produces surplus value and the rate of surplus value is 100 percent, the surplus value produced by Department I will rise in the next annual reproduction cycle from 1,000 to 1,083.
This calculation is pretty straightforward. The real problem is, how much does Department II have to increase its production to maintain the conditions of expanded reproduction?
Now, the five-sixths of the 500 in surplus value that is to be converted into new constant capital remains within Department I. That leaves one-sixth of 500 of the surplus value that is accumulated by Department I as additional variable capital. This comes to 83 in new variable capital. However, this new potential variable capital is made up of commodities whose material use values consist of means of production.
The workers of Department I cannot be paid in means of production, they must be paid in means of consumption. In order to obtain the necessary means of consumption, Department I must enter into exchange with Department II. The problem that must be solved is how much does the constant capital of Department II have to expand in order to maintain the equilibrium between Department I and Department II. The key to the solution is the equation cII = vI + sI. (5) Remember, simple reproduction is contained within expanded reproduction.
The second equation, which represents the production of the means of consumption, has 1,430 of constant capital, 285 of variable capital and, since the rate of surplus value is 100 percent, 285 in surplus value. We therefore have a total annual production of 2,000 means of consumption before expanded reproduction begins.
Notice that cII has a value of 1,430. However, Iv has a value of 1,000 and sI also 1,000. Now I want to get to the simple reproduction that is contained within the expanded reproduction. Following Marx’s assumption, I therefore divide 1,000 by two to get half of sI that will be consumed unproductively by the capitalists of Department I. Remember, the entire output of Department I consists of use values that are totally unsuitable for personal consumption.
Here we notice an inequality. Department I is overproducing by 70 relative to the needs of simple reproduction as illustrated by the expression 1,430cII < 1,000Iv + 500Is. Department I needs an additional 70 in terms of means of personal or unproductive consumption for the capitalists of Department I. Department I will also need an additional 83 in terms of means of consumption—wages—for the additional workers it must hire.
But before the exchange takes place with Department II, the 83 exist only in the form of means of production totally unsuitable for consumption by the newly hired workers of Department I. So Department I will need a total 70 (increased unproductive consumption for the capitalists of I) + 83 (for wages for newly hired workers of I) in consumer goods. In order to meet this additional demand for consumer goods from Department I, cII must in the next annual cycle of reproduction increase from 1,430 to 1,583.
So in the next year—or whatever the reproduction period is—cII has to rise from 1,430 to 1,583.
Now, what about the next term in the second equation, 285IIv? Like in Department I, there is five-sixths constant capital for every one-sixth variable capital. In order to maintain this ratio, Marx simply had to calculate 20 percent of 1583 (one-sixth is 20 percent of five-sixths), which he rounded down to 316. Where does the additional variable capital (316 – 285), or 31, come from? It is deducted from sII just like the additional 153 in cII is. Since the rate of surplus value is 100 percent, this means that sII will also be 316 in the next reproduction cycle. Overall, production of means of consumption therefore must rise from 2,000 to 2,215 (2,000 + 153 + 31 + 31).
Marx continued the calculation through year—or production period—four, the results of which are reproduced below.
5,417c + 1,083v + 1,083s = 7,583
1,583c + 316v + 316s = 2,215
5,869c + 1,173v + 1,173s = 8,215
1,715c + 342v + 342s = 2,399
6,358c + 1,271v + 1,271s = 8,900
1,858c + 371v + 371s = 2,600
In the above calculations, as previously indicated, Marx kept the organic composition unchanged. If we add in a rise in the organic composition of capital, certain basic laws of motion of capitalist production arise, though for reasons of method Marx did not demonstrate this in volume II of “Capital.”
If Iv is allowed to grow more slowly in percentage terms compared to cI, which will be the case if the organic composition of capital is rising in Department I, all other things remaining equal cII will also have to grow more slowly if overproduction in Department II relative to Department I is to be avoided. A rising organic composition of capital means a fall in the rate of profit, the rate of surplus value remaining unchanged.
Since the organic composition of capital can be expected to rise over time, we would expect that Department I—the production of the means of production—will grow faster than Department II (6)—the production of the means of consumption—and the rate of profit will show a tendency to fall.
Marx did not, however, extend his diagrams in volume II to illustrate these tendencies. This is because he didn’t introduce the tendency of the rate of profit to fall based on the rise in the organic composition of capital until volume III. So to demonstrate the fall in the rate of profit based on expanded reproduction with a rising rather than a stable organic composition of capital would have been out of place in volume II.
Only after he had written volume III could Marx have produced diagrams that would illustrate expanded reproduction with a rising organic composition if he was to remain true to his method. As far as is known, Marx never actually developed diagrams illustrating expanded capitalist reproduction with a rising organic composition of capital. However, he provided future generations of Marxists with all the necessary tools to do so, and as we will see below this was indeed done in the early years of the last century.
The tables of expanded reproduction and crisis theory
Like was the case with simple reproduction, if things are to proceed smoothly, proportionality must be maintained in both value terms and use value terms. There are plenty of opportunities for things to go wrong and for crises of various types to erupt.
Again, the great majority of Marxists who have dealt with reproduction, whether simple, expanded with an unchanged organic composition, or expanded with a rising organic composition of capital and a falling rate of profit, have ignored the question of money. As we have seen before in these postings, as long as we abstract money, we remain stuck in the world of Say’s Law.
Marx, however, did not abstract money. In the case of simple reproduction, Marx assumed that the gold-producing and refining industries produced just enough gold to replace the gold that was lost due to the wear and tear of the circulating gold coinage.
With expanded reproduction, this level of gold production would not be sufficient. It would be necessary, using Marx’s assumptions, that currency consists only of full-weight gold coins, that annual gold production not only cover the replacement of the wear and tear of circulating gold coins, but additional gold must be produced in order to circulate the rising quantity of commodities produced both in Department I and Department II—unless there is a pre-existing surplus of gold coins on hand or the velocity of money circulation increases.
But is this really a problem? Can’t the state and its “monetary authority” simply increase the amount of “fiat money” as commodity production expands? (7) Or can it? Before we can answer this question, we will have to examine Marx’s theory of money, which is found not in volume II of “Capital” but rather at the very beginning of volume I. I will start this examination with next week’s post.
As volume II of “Capital” was gradually assimilated by the Marxist movement in the early years of the last century, crisis theories based on disproportionality between the two departments of production became popular. This was the era of the Second International (8) before World War I and the Russian Revolution. In this era, virtually all Marxists called themselves “Social Democrats,” including Lenin and other future leaders of the Russian Revolution. (9)
Unlike in the years after the Russian Revolution, the term Social Democrat did not necessarily mean reformist. In those years, while some Social Democrats were indeed reformists, others like Lenin and Rosa Luxemburg were revolutionaries. In addition to the revolutionary wing on the left, represented by Lenin and Luxemburg, on the right were “revisionists” such as the German Social Democrat Edward Bernstein, who was already openly reformist. (10)
There was also a broad “center” that wavered between the two poles. This center, which included such figures as Karl Kautsky, Rudolf Hilferding and Otto Bauer, sometimes made valuable contributions to Marxist theory but tended toward reformism in practice. This period, outside of Russia, was not yet revolutionary. (11) In Western Europe, as well as the United States, these years were somewhat like the first 25 years after World War II, when great capitalist prosperity prevailed. As a consequence, revolution did not seem to be on the immediate agenda.
On the other hand, the prosperity meant that there was a great and growing demand for the commodity labor power. This encouraged the rapid growth of the workers’ movement in Western Europe, both at the trade union level and the level of the Social Democratic parties of the Second International. These parties were making great gains in elections, and a Social Democratic majority in the German Reichstag, or parliament, seemed to be only a matter of time. The “progressive” but not revolutionary political atmosphere in the regions lying to the west of the czar’s empire encouraged both the development of Marxist theory, on one hand, and reformist practice, on the other. These were the conditions that gave rise to the centrist current in the international Social Democracy.
It is true that disproportionalities between the departments of production—as well as disproportionalities within them—can give rise to crises of various kinds. However, such crises can be seen as mere accidents. Therefore, the more reformist-leaning Social Democratic theoreticians held out the hope that as capitalism became more “organized” through the growing power of the banks, trusts and cartels, the anarchy of production that marks capitalism would grow less intense. Disproportions between Department I and Department II, as well as disproportions within the departments would perhaps grow less intense.
The result would be that crises would become milder as capitalism was gradually transformed into a planned economy. This combined with the growth in the power of the parliaments, along with the growing number of Social Democrats elected to the parliaments, would mark a gradual evolutionary transition from rule by the exploiting capitalist minority to the socialist working-class majority. Like capitalist exploitation itself, the reformists hoped, crises would simply fade away.
Marx’s reproduction formulas and the breakdown theory
As we I explained above, Marx carried out his calculations over four periods of expanded reproduction. But in principle, the reproductions formulas can be continued to infinity as long as the rules of expanded reproduction are adhered to. Here capitalism appears as an economic system without limits, even if there are accidental disproportions and crises along the way. The reformists within and around the international Social Democracy were delighted. They had won a great victory over the revolutionary wing of the Social Democracy with the help of Marx himself! Hadn’t Marx proved that capitalism could last in effect forever? And hadn’t he done so in a much more convincing way than the bourgeois economists themselves?
In this period, the reformist and centrist currents west of the Russian Empire were joined by certain tendencies that arose within Russian Marxism.
As I mentioned last week, the first Russian Marxists had split with the Russian Populists on the issue of whether capitalism could develop at all in Russia. The Russian Marxists used Marx’s reproduction diagrams to prove that capitalism could and indeed would develop in Russia. As long as the proper proportions were maintained between Department I and Department II, all the value and surplus value produced by the capitalist economy could be realized. The problem of adequate markets—though perhaps not entirely without frictions and the occasional crisis—would take care of itself. As capitalist industry continued to grow in Russia, and capitalist relations spread in agriculture, the Russian Marxists felt vindicated.
The Russian Marxists in those years did not believe that Russia was on the eve of a socialist revolution. Instead, they held—and this was the belief of Western Marxists as well—that Russia was instead on the eve of a bourgeois revolution. The revolution that was approaching in Russia would sweep away czarist autocracy and feudalism and thus provide far better conditions for the further development of Russian capitalism. Only after Russian capitalism reached a high degree of development would the transition to socialism in Russia be on the agenda.
Bourgeois Russian Marxism
Marx, therefore, appealed not only to early representatives of the Russian proletariat but also to certain representatives of the rising bourgeoisie. These bourgeois Russian Marxists converted Marx into a prophet of capitalism. Hadn’t Marx proven, in volume II of “Capital,” that capitalism could expand without limit? Hadn’t Marx proven that markets would not be a problem as long as the correct proportions of production were maintained? And the correct proportions of production would arise through the normal process of capitalist competition. Though there might be occasional crises along the way, the bourgeois Marxists argued, in the long run the limits of the market were the same as the limits of production. Though Russia’s capitalist development was belated relative to the Western Europe, America and even Japan, that would not be a problem. There would be plenty of markets to go around for all the capitalists, both old and new. And who had proved this in the rigorous language of mathematics? Why Karl Marx himself!
These bourgeois Russian Marxists were sometimes called “legal Marxists,” since they adapted to czarist legality. Mikhail Tugan-Baranovsky, who was close to Russian legal—or bourgeois—Marxism, used Marx’s reproduction tables to prove that capitalism in general and Russian capitalism in particular had a brilliant future ahead of it. It didn’t matter, how much capitalism expanded, or even how high the organic composition of capital rose, as long as the right proportions were maintained between Department I and Department II. Just as Say and Ricardo had explained a century before, supply would create its own demand.
Rosa Luxemburg sounds the alarm
Rosa Luxemburg was alarmed. In her struggle against the German “revisionists,” Luxemburg had depended heavily on a built-in tendency toward economic collapse within capitalism. In “Reform or Revolution,” Luxemburg had foreseen a declining phase of capitalism that would set in when the ability of the world market to expand was finally exhausted.
“Reform or Revolution,” the first edition of which was published in 1898, was written during a lull in worldwide capitalist crises. (12) Luxemburg put forward the thesis that the early crises—the ones from 1825 to 1866 plus the Austro-German-American crisis of 1873—had been based on the expansion of the world market. But the crises that would mark the declining phase of capitalism would occur against the background of a world market that would increasingly be losing its ability for further expansion. As time went on, the new markets that the capitalists needed would become fewer and fewer. When “Reform or Revolution” was published, Luxemburg and the Social Democrats outside of Russia were largely unaware of the reproduction tables in volume II of “Capital.”
But when Luxemburg did become aware of the reproduction tables of volume II, she was indeed very alarmed. Hadn’t Marx himself emphasized that no social order disappears until it had fully developed the productive forces that it was adequate for? For example, feudalism didn’t give way to capitalism because capitalism was a “better” or more “just” system, but because the productive forces that were arising from the late middle ages onward could less and less be confined within the narrow limits set by feudal agriculture and guild production.
But didn’t the fall in the rate of profit brought about by the rise in the organic composition mean that capitalism would eventually have to give way to socialism? Luxemburg was not convinced by this argument. Why not? As we already have seen, the fall in the rate of profit is accompanied by a rise in the mass of profit. The capitalists are compensated for the fall in the rate of profit by the growth in the size of their capitals. Despite the fall of the rate of profit, profits earned by the capitalist class keep growing. Luxemburg didn’t see how the fall in the rate of profit would lead to the end of capitalism before, as she put it, “the sun burned out.”
In her the “Accumulation of Capital,” first published in 1913, Luxemburg tried to find a flaw in Marx’s diagrams of expanded reproduction. She claimed in the “Accumulation” that she had proven that expanded reproduction could not take place in a closed system where every person was either an industrial capitalist or a productive worker. These, remember, were indeed Marx’s assumptions in both his tables of simple and expanded reproduction.
Expanded capitalist reproduction, Luxemburg held, was only possible because of the existence of simple commodity production, which existed side by side with the capitalist system. As simple commodity production continued to decline, it would be only a matter of time before the world market would indeed be exhausted just as she had assumed in “Reform and Revolution.” Capitalism would then have reached the point where all the productive forces that are adequate for it had been developed. The material base would have then been fully laid for the inevitable transition to socialism. (13)
Few of her fellow Marxists, including most famously Lenin, found the arguments that Luxemburg advanced in the “Accumulation of Capital” convincing. This seemed to leave the fall in the rate of profit as the only built-in barrier to capitalism’s ability to develop the productive forces after all. But then what would prevent capitalism from lasting until the sun burned out, to use Luxemburg’s words?
The “centrist” Social Democrat Otto Bauer had somewhat earlier offered his own tables of expanded reproduction. Unlike Marx’s, these tables featured a rising organic composition of capital and a fall in the rate of profit. Like Marx, Bauer’s diagrams covered four periods of reproduction. During these four periods, Department I grows faster than Department II, and the rate of profit falls. Yet the rate of accumulation is maintained.
Bauer accomplished this by having his capitalists gradually increase the part of the surplus capital that is accumulated compared to the part that is consumed unproductively. This seemed to prove—and may have partially inspired—Luxemburg’s point that the gradual fall in the rate of profit that would be expected as the organic gradually increased would never lead to the collapse of capitalism.
The ink of the “Accumulation of Capital” had barely dried, before World I broke out. Three years later, revolution broke out in Russia, and contrary to the expectations of the great majority of Russian and Western Marxists alike—the revolution brought the working class to power, and the Russian Revolution assumed a socialist character.
For awhile, it looked as though the Russian revolution would sweep throughout Europe and beyond. Workers’ soviets—soviet is Russian for council—covered Germany in 1918. It appeared as though Germany would supplement the Russian Revolution with a powerful revolution of its own. Unlike in Russia, where the economic conditions were far from ripe for socialism according to virtually all Marxists, in Germany with its highly developed and centralized industry, conditions were more favorable for the establishment of a socialist society. Under these conditions, the whole breakdown controversy raised by Rosa Luxemburg seemed rather academic, to say the least.
But after 1923, European capitalism seemed to be entering into a new stage of “stabilization.” In that year, N.I. Bukharin, then considered the leading theoretician of the now ruling Soviet Communist Party and the Communist International, launched a renewed attack on Luxemburg’s “breakdown theory,” which I will examine in future posts.
Bukharin’s main point was that a pure capitalist society consisting only of capitalists and workers would have no trouble realizing the value and the surplus value of the commodities it produced as long as the correct proportions of production were maintained. In 1929, however—which happened to be the year that the crisis of 1929-33 began—Henryk Grossman reopened the breakdown debate. He did this by simply extending Bauer’s reproduction tables and showed that the dynamic equilibrium of the tables would indeed break down if the calculation were extended far enough. The breakdown controversy was reopened. (14)
I will return to this extremely important question, since it concerns nothing less than the ultimate fate of modern society. But before I do this, I have some unfinished business, since I have to explore the theory of money. I will have to abandon volume II of “Capital” for now in favor of the very beginning of volume I. Once this out of the way, I will be able to take another look at the breakdown controversy.
1 Marx’s method made this assumption necessary. If Marx had allowed for a rising organic composition of capital, he would have had to deal with the fall in the rate of profit. However, Marx dealt only with reproduction in volume II, leaving to volume III the tendency of the rate of profit to fall.
2 In contrast, the models developed by the various early neoclassical marginalist economists were static, with no economic growth. Later models of economic growth developed by bourgeois economists are all more or less inspired by Marx’s diagrams of expanded reproduction.
3 Marx dealt with both simple and expanded reproduction before he introduced the equalization of the rate of profit and the transformation of values into prices of production for a good reason. If he had worked with prices of production rather than values, the fact that it is the variable capital alone that produces surplus value would have been hidden just like it is to the capitalists in the daily struggle of competition and to the vulgar bourgeois economists who remain stuck in the world of appearances produced by prices of production.
6 The so-called Austrian school of bourgeois economics, which is popular on the libertarian right, almost certainly borrowed the more rapid growth of Department I relative to Department II from Marx. In their terminology, production becomes more “round about” as capitalism develops. In Marxist terms, Department I grows more rapidly than Department II and the organic composition of capital rises. Loyal in principle to Say’s Law, the Austrians deny that crises are caused by a general overproduction of commodities in both Department I and Department II, but rather are caused by an overproduction in Department I relative to Department II. I will explore the Austrian school in future posts, but this not yet the place to do it.
7 Both John Maynard Keynes and Milton Friedman solved the problem of “where the money will come from” by referring to the “monetary authority.” Both these bourgeois economists rely heavily on the “monetary authority” to produce the crisis-free capitalism both economists claimed was possible if only the governments and their “monetary authorities” followed the policies they recommended.
8 The Second International was founded in 1889 and and ended its progressive role in 1914 when most of the various sections of the international supported their own imperialist governments in World War I. In the years between 1889 and 1914, virtually all Marxists as well as many reformists and labor liberals were members of the Second International.
9 Engels had expressed reservations about the term “Social Democrat.” The aim of the workers’ movement was not to develop a new form of democratic state, he pointed out, but to overthrow class society entirely and replace it with a classless society where the means of production will be owned in common. The disappearance of class rule and classes themselves imply not a democratic state but the disappearance of the state altogether. At the time of the Russian Revolution, Lenin urged that the term “Social Democrat” be abandoned and replaced by the term “Communist.” Since then, “Social Democrat” has been used only by openly reformist tendencies in the workers’ movement.
10 At the end of the 19th century, the German Social Democrat Edward Bernstein led a campaign to transform the German Social Democratic Party, SPD, into an openly reformist non-revolutionary party. Bernstein and his supporters became known as “revisionists.” In that period, “revisonism” was not an insult but simply expressed the reality that certain Social Democrats had “revised” Marx by rejecting his revolutionary conclusions in favor of reformism.
Much later, after World War II, the leaders of the Chinese Communist Party claimed that the Soviet Communist Party under the leadership of Nikita Khrushchev had adopted “revisionist” policies—that is, it had replaced the revolutionary policies of Lenin with reformist policies that were analogous to those urged by Bernstein a half century earlier. Within a few years, however, the term “revisonism” degenerated into a simple political insult, when the Chinese Communists claimed that Khrushchev and his successors had fully restored capitalism in the Soviet Union and even compared the Soviet Union under their leadership to Nazi Germany. The use of the term “revisionist” to describe the policies of the Soviet Communist Party was quietly dropped after Deng Xiao-ping became the de facto head of the Chinese Communist Party in 1978.
11 The growth of imperialism must be kept in mind when examining the evolution of the Social Democracy and the workers’ movement in general. Increasingly, the world was being divided into a handful of countries that exploited the rest of the world, and a much larger number of oppressed countries that were either openly converted into colonies, or like China were converted into semi-colonies. This enabled the capitalists of the oppressor nations to use super-profits drawn from the oppressed countries to improve the conditions of a layer of workers in the imperialist countries. This in turn created a basis for reformism and reactionary pro-imperialist policies in general within the workers’ movements of the oppressing imperialist countries. For example, Bernstein and other “revisionists” openly supported colonialism. In contrast, colonialism was opposed by the revolutionary wing of the Social Democracy.
12 Between 1825 and 1866, world capitalism was hit by a series of world-wide economic crises, much like the current crisis, which is hitting all countries that are engaged in capitalist production at the same time. In the spring of 1873, Austria and Germany were hit by sharp economic crises, which spread to the United States in the fall of that year. But Britain, still the center of world capitalism, avoided an acute economic crisis, escaping with only some business stagnation.
In the 1880s and 1890s, recessions tended to hit different capitalist countries at different times. In the last part of the decade of 1890s, just before the revisionist controversy broke out, a powerful economic boom set in throughout the capitalist world. The capitalist economists, pointing to these developments, claimed that severe world-wide economic crises were unlikely to occur in the future, a view supported by Bernstein and other revisionists. In “Reform and Revolution,” first published in 1898 and aimed at the revisionists, Luxemburg challenged this view.
13 The supporters of the breakdown concept are often accused of passively waiting for capitalism to “automatically” break down. This is clearly completely false in Luxemburg’s case. Luxemburg was very much a revolutionary of action who literally died on the revolutionary front lines in 1919. Henryk Grossman, in his work, emphasized that the transition to socialism would not occur automatically due to the purely economic breakdown of capitalism but could occur only through the conscious action of the working class.