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. (1)

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.

This increase in value, the surplus value, is represented by the prime sign. Marx called C’ the produced commodities that have absorbed surplus value but have not yet been sold commodity capital. These commodities must then be sold at their values if the industrial capitalist is to fully realize the surplus value contained within them in money form. (2)

If this is done successfully, the industrial capitalist will posses a sum of money, M’, equal to the money the industrial capitalist started out with plus an additional sum that represents the surplus value realized in money form—profit. Notice how we find money at both the starting point of the formula and the termination point. Here we assume that all goes well and that there are no crises. But, in fact, crises are possible at each point in the process.

For example, it is possible the capitalist will not be able to find all the necessary elements of C on the market. Perhaps there are shortages of some elements of the constant capital, or there might not be enough workers with the necessary skills. That is, there may be a shortage of certain types of skilled labor such as carpenters, bricklayers or fitters.

Or something might go wrong in the production process, P, itself. Or, finally, for some reason it might not be possible to successfully complete the phase C’-M’. The capitalist owners of the commodities might not find buyers at all, or if they do, they might have to sell at prices so low that the surplus value cannot be fully or even partially realized.

Insufficient production of surplus value

The theory of underconsumption that we have examined in the preceding posts has put the emphasis on the C’- M’ transition. In contrast, the profit-squeeze schools see the source of crisis in either the M-C phase or the P (production) phase. As I already noted, the industrial capitalist might not be able to find enough labor power of the necessary skills at prices—that is, wages—low enough to produce a sufficient amount of surplus value to make carrying out production worthwhile. Or the problem might arise in the P phase. The resistance of the workers to capitalist exploitation at the “point of production” might result in little or no surplus value being produced. In either case, a crisis will result.

For example, let’s assume that the industrial capitalist cannot find enough labor power of the right type that is necessary to produce a particular kind of commodity. In this case, our industrial capitalist will not be able to fully transform the initial M to C successfully.

In this case, our industrial capitalist might decide to hold onto his or her M for the time being. If the shortage of labor power affects only one, or at most a few, lines of production, our industrial capitalist might turn into a money capitalist for now and lend out the surplus M to other industrial capitalists through the credit system. But if the shortage of labor power affects all branches of capitalist industry, this will not work. Money will then be hoarded.

As a secondary phenomena, the widespread hoarding of money will give rise to both an apparent shortage of money, on one hand, and an apparent generalized overproduction of commodities, on the other. What appears as a generalized overproduction of commodities will really be a generalized shortage of the commodity labor power, the sole source of surplus value.

The essence of the crisis, therefore, will not be a problem of realizing surplus value but of producing surplus value. With this kind of crisis, if the shortage of labor power is removed, both the production and the realization of surplus value will again proceed smoothly. In volume III of “Capital,” Marx even gave a name to this type of crisis. He called it the “absolute overproduction of capital.” (3)

Could the cyclical crises that have marked capitalist production since 1825 be in essence crises of the absolute overproduction of capital? If this theory is true, during the period of cyclical upswing and boom, the demand for the commodity labor power grows faster than the supply. As the boom goes on, the demand for labor power outruns the supply at existing wages. An “absolute overproduction of capital” occurs when new investment fails to increase the amount of produced surplus value.

Such a crisis may take the form of a shortage of money, on one side, and a generalized overproduction of commodities relative to money, on the other. As the downturn takes hold, production will slump, workers will be laid off and unemployment will soar. The general shortage of the commodity labor power will therefore disappear. Capitalist production will again become profitable leading to an economic recovery that will last until once again the demand for the commodity labor power outruns the supply of labor, leading once again to a new “absolute overproduction of capital” and a new crisis.

Here we have a cyclical movement. Since the size of the potential working-class population is growing, each cycle will reach a higher level of production before the crisis breaks out, just like happens in the real concrete industrial cycles that have occurred in the world capitalist economy since 1825.

Class-struggle theory

Another possibility is that the crisis begins during the P phase. As the demand for labor power rises, workers more and more resist their exploitation by capital at the “point of production.” Increasingly, they refuse to produce surplus value for the bosses. As the amount of surplus value produced shrinks, a crisis will sooner or later break out. Again the industrial capitalists will react by hoarding money M so the crisis will appear to be a crisis of the generalized overproduction of commodities relative to a shortage of money. But in essence in this case, the crisis arises from the class struggle between the working class and the capitalist class.

Could the periodic crises of capitalist production be rooted in the class struggle between the capitalist class and the working class?

Those who give an affirmative answer sometimes call it the class-struggle theory of crisis. In this way, two of Marx’s main ideas, the class struggle and the periodic economic crises under capitalist production, are integrated.

Peter Bell and Harry Cleaver give a version of this theory in a lengthy article that first appeared in 1982 in the Journal of Research in Political Economy, volume 5. It was reprinted in The Commoner, Autumn 2002. Before I take up the Bell and Cleaver article (which has many interesting quotes and facts about the evolution of Marx’s economic ideas), I want to make the following observations.

First, the “class-struggle theory of crises” and demand for workers outrunning the supply are related concepts. During a period of mass unemployment, for example, the workers will tend to be far more submissive to the demands of the bosses on the factory floor than will be the case during a periods of acute labor shortages. Given a situation of mass unemployment, the shop foreman, acting as a representative of the industrial capitalist, will threaten any worker resisting capitalist exploitation by explaining that there are many other people who would like her job.

But if there is a general shortage of labor, it is the worker who can threaten to quit. If the shortage is severe enough, the worker will quickly find another job, perhaps with better pay and better working conditions. Indeed, under these conditions many industrial capitalists will attempt to lure workers working for other capitalists by offering better pay and conditions. The workers will be in a good position to offer resistance to capitalist exploitation on the “shop floor,” thereby tending to undermine the production of surplus value.

Skilled and unskilled labor

The skilled workers are in position to take advantage of the cyclical upswings to a much greater extent than unskilled workers. As a general rule, workers spend money, time and effort learning a skill only if they have reason to expect considerably higher wages over their working lifetimes. For example, plumbers might be in great demand, and wages offered for this type of skilled labor will then rise. Many young people will, therefore, learn the plumbing trade. The number of plumbers offering their labor power on the labor market might then begin to exceed the demand for their type of skilled labor power at the prevailing wage. The wages of plumbers will then come under downward pressure.

As a result, fewer people will be interested in entering the plumbing trade and the number of workers with that particular skill will begin to decline. In time, the demand for plumbing labor power will begin to exceed the supply, and the wages of plumbers will again increase. Therefore, as a general rule, shortages of skilled labor appear during economic upswings. If such shortages did not occur during the favorable stages of the industrial cycle, over time the wages of skilled labor would fall to the minimum received by unskilled labor. There would be no economic incentives for young people to learn special skills, and the supply of skilled labor would dry up.

In this way, in the long run, the law of value tends to set the supply of each type of skilled labor equal to the demand of the industrial capitalists for each particular type of skilled labor power.

The “reserve army of unemployed” tends to keep a lid on the wages of unskilled workers. Therefore, an economic upswing has to last much longer for the growing demand for labor power to raise the wages of unskilled workers. However, if the upswing lasts long enough, even the wages of unskilled labor will eventually rise. The more the workers are organized into strong trade unions, the better they will be able to take advantage of favorable conjectures on the labor market. Rising wages reduce the problem of “underconsumption” but only by striking at the very heart of capitalist production, the production of surplus value.

Indeed, this is one of leading objections to the underconsumption theory. As Marx noted, it is precisely on the eve of the crisis that wages tend to rise. According to the underconsumptionists, as Marx also observed, this should remove the crisis. But in the real world, the more wages rise the closer is the crisis. It does no good for the industrial capitalists to sell their commodities at their values (4) if the rate of surplus value falls to zero. There can be no question of realizing surplus value that is not produced. Where there is no production of surplus value, there can be no realization of surplus value in money form, or profit. And where there is no profit, there cannot be in the long run capitalist production.

The labor market today is international

Today, we have to remember that the labor market is increasingly international. Whenever the domestic labor market shows signs of tightening, capitalist governments weaken, remove or do not enforce restrictions on immigration. Nowadays, many tasks can even be “outsourced” over the Internet.

In the real world, long before an absolute overproduction of capital occurs, a crisis of the relative overproduction of commodities and capital breaks out. It would take an economic boom lasting for several decades, maybe more, before anything like an absolute overproduction of capital would develop under today’s conditions.

While even today shortages of skilled labor create problems for the industrial—and other—capitalists during upswings in the industrial cycle, unskilled workers can always be turned into skilled labor through on-the-job training, or automation and a deepening of the division of labor can replace skilled labor with unskilled labor.

Therefore, in my opinion, there is a real problem with the attempt to reduce crises to an insufficient supply of labor power. It’s been a long time since anything like a generalized shortage of unskilled labor has been observed on today’s increasingly globalized labor markets. Was the labor market all that tight in the period immediately preceding the economic crisis that began in August 2007 and is raging on the world market as this is written?

A critique of Bell, Cleaver and the class-struggle theory of crisis

Bell and Cleaver divide the work of Marx into two periods, the first in the 1840s and early 1850s, when, following Engels, Marx saw overproduction as the primary cause of crises. The second period begins in 1857 onward, when: “Whereas before, overproduction was the unique and only superficially understood theory of crisis,” now overproduction was “both fully analyzed and allocated a much more limited role in Marx’s theory.” (p. 5)

Stimulated by the economic crisis that broke out in 1857 in the United States and quickly spread to Britain and Europe, Marx returned to his economic studies. He spent the fall and winter of 1857-58 filling a series of notebooks that many years after his death were published under the title of the “Grundrisse.”

In these notebooks, Marx made many breakthroughs in his theory of value and money that carried him far beyond the Ricardian theory of value. I will explore these breakthroughs in future posts. It was in the “Grundrisse” that Marx first distinguished between labor and labor power and treated surplus value as a specific economic category in its own right. The “Grundrisse” notebooks are therefore considered to mark the beginning of Marx’s mature economic writings.

Marx’s later published works, “A Contribution Towards a Critique of Political Economy” and “Capital” itself, were based on the notebooks of 1857-58.

But did Marx change his view, expressed, for example, in the “Communist Manifesto,” that overproduction was the primary cause of the periodic economic crises “that by their periodical return put on trial, each time more threateningly, the existence of the entire bourgeois society”? As I pointed out earlier, there is no sign of such a shift in Engels’ description of cyclical crises as crises of the overproduction of commodities in “Anti-Duhring,” which was written in 1877, near the end of Marx’s lifetime.

Bell and Cleaver versus Marx

Bell and Cleaver themselves provide evidence that Marx had not changed his view that the cyclical crises of capitalism are crises of overproduction when he wrote volume I of “Capital.”

“It is these absolute movements of the accumulation of capital,” Bell and Cleaver quote “Capital,” volume I, “which are reflected as relative movements of the mass of exploitable labor-power, and therefore seem produced by the latter’s own independent movement. To put it mathematically: the rate of accumulation is the independent, not the dependent, variable; the rate of wages, the dependent, not the independent variable.” (“Capital,” volume I, part VII: “The Accumulation of Capital”).

“While constantly cited by orthodox Marxists to show the limitation on the potential power of wage struggles,” Bell and Cleaver write, “this passage seems totally one-sided. Capital accumulates and sometimes the pace of that accumulation induces rises in wages, sometimes their fall. In contemporary terms the rise and fall of wages are determined by the changing industrial demand for labor.” (p. 56)

During the boom, the accumulation of capital accelerates and the demand for labor power increases making possible a rise in wages and a temporary fall in the rate of surplus value. Then when the cyclical crisis comes, the rate of accumulation drops or even goes negative, the demand for labor power plummets, wages fall and the rate of surplus value rises once again.

Isn’t this just what we are seeing before our eyes as the present economic crisis unfolds? Bell and Cleaver believe that it is the rise in wages that causes the rate of accumulation of capital to drop bringing about a crisis. Marx, on the other hand, saw declines in capital accumulation as a conseqence of cyclical crises, which to him were crises of the generalized overproduction of commodities.

“But,” Bell and Cleaver write, “if the expansion of capital based on absolute and relative surplus value strategies results in a growth of points of exchange, and in the expansion of money available to buy the output, there is no reason to think that money will be less than the value of the commodities to be sold.” (p. 43)

Here Bell and Cleaver are assuming exactly what must be proved. Of course, if Bell and Cleaver are supporters of the quantity theory of money, which I explored in the last post, their point is well taken. But if the quantity theory of money is not valid, then there appears no obvious reason why this assumption would necessarily be true. Perhaps Bell and Cleaver believe that with today’s fiat or paper money, the governments and central banks will always be able to create just the right amount of money to keep capitalist production humming along.

Ben Bernanke—the head of the U.S. Federal Reserve System—found out the hard way last fall that this is not so easy to pull off in practice, even with a “pure” system of fiat money. In later posts, I will examine what really determines the quantity and value of money in light of Marx’s general theory of value, money, and prices. This question is not nearly as simple as Bell, Cleaver and many other modern Marxists assume it is.

Are crises victories for the workers?

“For workers,” Bell and Cleaver write, “the most important thing about capitalist crisis is that it is, for the most part, the consequence of their struggles. The rupture of accumulation by struggle is a moment of conquest.” (pp. 58-59) Like, for example, the fall of 2008 when unemployment on a global scale began to soar as millions of workers lost their jobs? I am afraid few workers would agree that the soaring rate of unemployment such as we are now witnessing is a “conquest” of the working class!

Finally, Bell and Cleaver write, “The possibility of crisis, is above all, the possibility the working class has of disrupting and ultimately destroying the system.” (p. 28)

I would prefer to put it this way: The periodic crises of capitalist production, such as the one that is occurring now, are punishments that the workers receive for failing to transform capitalist production into socialist production in good time. Such crises, therefore, do not represent victories for the workers but rather defeats.

The current crisis, for example, was preceded not by any great gains by the workers but rather by terrible defeats workers and their allies suffered during the last two decades of the 20th century. If the class struggle had gone the other way, and global capitalism had been transformed into global socialism during the final decades of the last century, the current economic crisis with its accompanying unemployment, falling wages, misery amidst the production of “too many commodities,” and the resulting human tragedies would not be happening.

In the next post, I will examine the question of the tendency of the rate of profit to fall. Could this be the root cause of the periodic economic crises of capitalism as many Marxists hold?

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1 The transformation of values into prices of production caused by the equalization of the rate of profit across the different branches of industrial production hides this from the industrial capitalist as well as the vulgar economist. When commodities sell at their prices of production so that equal capitals yield equal profits in equal periods of time regardless of their organic compositions and turnover periods, profit appears to arise from the total capital and not the variable capital alone. In order to demonstrate that surplus value arises from variable capital alone, Marx had to assume in volume I of “Capital” that commodities sell at prices that are directly proportional to their actual labor values.

2 More strictly, commodities must be sold at their prices of production if the industrial capitalist is to realize the average rate of profit. But the transformation of values into prices of productions affects nothing of the essence here.

3 In volume III of “Capital,” Marx described a hypothetical crisis caused by an absolute overproduction of capital. However, did Marx believe that the cyclical crises of capitalist production were actually caused by such absolute overproductions of capital? In my opinion, the answer is no. The actual cyclical crises of capitalism such as the one we are passing through at the present time are, rather, characterized by what Marx called the relative overproduction of commodities, which also means the relative, not absolute, overproduction of capital.

For example, today there is a huge amount of idle constant capital as well as a vast and now very rapidly growing army of unemployed workers. If the idle constant capital and the idle workers were bought together, there would be a vast increase in the amount of surplus value produced. The problem is that under current market conditions this surplus value could not be realized in money form, and surplus value that is not realized is of no use to the capitalists.

4 Anwar Shaikh, I believe, introduced the concept of “direct price.” Strictly speaking, commodities are never sold at a value but at a price—that is, for a definite sum of money. Even if there is an exchange of two commodities of equal price so that no money changes hands, the price of the commodities is defined in terms of money, even though in this case only money of account is involved.