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.

Underconsumption

In this posting, I will examine the theory of underconsumption, the advocates of which include the “Monthly Review school” grouped around the monthly U.S. socialist magazine Monthly Review.

The supporters of underconsumption point to a very profound contradiction of capitalist production. Under the pressure of competition, the industrial capitalists are obliged to expand production without limit, but at the same time, competition forces them to drive their costs down as far as possible. This forces the industrial capitalists (nowadays all large-scale industrial production is in the hands of corporations that act as collective industrial capitalists) to pay the lowest possible wages.

The ‘race to the bottom’ undermines the market

“Thus it comes about,” Engels writes in “Anti-Duhring,” “that the overwork of some becomes the preliminary condition for the idleness of others, and that modern industry, which hunts after new consumers over the whole world, forces the consumption of the masses at home down to a starvation minimum, and in doing this destroys its own home market.” Today, this is called the “race to the bottom.”

The underconsumptionists point out, correctly, that if capitalist production was production for the needs of the workers, there would not be any crises of overproduction. Capitalist overproduction is overproduction of exchange values, not overproduction of use values. A crisis of overproduction of exchange values breaks out when there is still very much an underproduction of use values, especially use values that the workers themselves need.

Sismondi, the father of crisis theory

The father of the underconsumptionist theory of crises and of crisis theory in general was the Swiss economist Simondi de Sismondi, who lived between 1773 and 1842. (1) Sismondi had begun his work as an economist as an economic liberal, the school that began with the French Physiocrats (2) and was developed further by the famous British economists Adam Smith and David Ricardo. But as the contradictions of the emerging system of industrial capitalism became clear to him, Sismondi broke with economic liberalism.

Marx considered Sismondi, alongside Ricardo, to be the last of the classical economists. According to Marx, after Ricardo and Sismondi there was only vulgar economics (3) on one side and socialist criticism on the other.

Sismondi saw that as industrial capitalism was developing, it not only encouraged the unlimited development of production but was steadily impoverishing the mass of the workers, artisans and peasants, who formed the great majority of the population. The introduction of machinery and the overall growth in the productivity of labor, as well as the ruin of the peasants and small artisan producers, was producing a huge army of unemployed. The unemployed were, in turn, driving down the wages of the employed workers to the barest subsistence.

Sismondi saw that as industrial capitalism developed industrial production without limit it was bound to collide with the limits on effective demand arising from the growing impoverishment of the great majority of the population. This contradiction, Sismondi held, would lead to “general gluts”—that is, to economic crises caused by a general overproduction of commodities.

During the 1810s, however, the economic crises that hit industrial Britain could still be explained as arising from special causes, such as the disruption of trade with continental Europe due to the wars between post-revolutionary France and Britain, and then the end of these wars in 1815, which led to mass unemployment as war production was suddenly curtailed.

Ricardo referred to these phenomena as a sudden change in the channels of trade. However, in opposition to Sismondi, Ricardo and his liberal supporters insisted that under peaceful conditions of capitalist development a “general glut” of commodities could not occur.

In 1825, two years after the death of Ricardo—Sismondi was still alive—Sismondi was vindicated when the first global economic crisis broke out that could not be traced to a war, blockade, crop failure or some other non-economic “external shock.” Twelve years later, in 1837, a second similar crisis broke out that had even more devastating effects than the first crisis. Capitalism’s industrial cycle—what modern economists call the “business cycle”—had begun.

Many socialist agitators over the decades have used the theory of underconsumption first developed by Sismondi as their explanation for crises. The modern socialist version of underconsumption is far more sophisticated than Sismondi’s pioneering efforts, since it rests on Marx’s theory of surplus value. Marx explained that the workers in addition to performing a certain amount of labor that reproduces the value of their wages are also obliged to perform an additional amount of surplus labor that under capitalism takes the form of what Marx called “surplus value.” Were it otherwise, the industrial capitalists would not purchase the one commodity that the workers have to sell, their labor power.

Therefore, the workers can buy only a portion of the vast mass of commodities that they produce. The underconsumptionists argue that inevitably the industrial capitalists produce more commodities than the workers can purchase, leading periodically to massive overproduction, factory shutdowns, unemployment and slump—in a word, a general crisis of industrial overproduction.

It is certainly true that if capitalist production was production for the needs of the producers-consumers like socialist production is, a general crisis of industrial overproduction would be impossible. If industrial production under socialism ever rises to the level where all material human wants are fully satisfied, this would not be a crisis. It would mean that the age-old dream of universal abundance had finally been achieved. But capitalist production is not, after all, a system of producing to meet the needs of the producers-consumers, it a system of production for the profit of the capitalists.

Capitalist consumption

What the supporters of the underconsumption theory often forget is that under capitalist production the workers are not the only buyers of commodities. The capitalists also consume, and though relatively few in numbers, they are no slouches when it comes to their consumption duties. In addition to the very rich capitalists who stand at the very top of the pyramid of wealth, there is a much larger number of small capitalists who help out when it comes to consumption. The greater the exploitation of the workers, the more the conditions of the workers approaches the bare biological minimum, the greater the mass of surplus value available to support a relatively large mass of small capitalists.

An example of a small capitalist is a person who has a few million dollars in “investments” and can live quite comfortably off the dividends and interest without having to work for a living. This section of the capitalist class makes up in terms of numbers for its individually more limited consumption power.

Workers who don’t produce surplus value

In addition to the small capitalists, what the classical economists and Marx called unproductive workers are also consumers. What are unproductive workers?

Both classical political economy and Marx, unlike the currently dominant “neoclassical marginalist school,” distinguished between productive workers, who produce surplus value, from unproductive workers, who do not. Domestic servants and soldiers were the traditional examples given in classical writings on political economy of unproductive workers.

The productive workers produce the value that replaces the value of the consumer goods that they consume, as well as a surplus value above and beyond it. In contrast, the value of the consumer goods that the unproductive workers consume must be replaced by surplus value produced by the productive workers. While not producing surplus value, they do, however, assist the capitalists in consuming commodities that cannot be consumed by the workers who actually produce these commodities.

Unproductive workers as an economic category

As capitalist production develops, the productive powers of labor grows and the number of unproductive workers increases. The mass of surplus value grows both with the number of productive workers exploited and with the growth in relative surplus value. (4) In addition, a given quantity of surplus value measured in hours of labor represents a greater amount of use values as the productivity of labor increases. This make it possible to maintain a greater number of unproductive workers with a given amount of surplus value.

The transnational corporations employ large numbers of “managerial employees,” many of whom do not produce surplus value. Modern corporations also deploy huge armies of sales people. The employees of the FIRE (finance, insurance and real estate) sector, as well as most employees of the state, such as police officers, prison guards and soldiers, are examples of unproductive workers.

I want to point out that when I say “unproductive workers,” no moral or political judgment is involved. Many people who do very necessary work like school teachers working for the public schools, for example, perform work that is very important for society but do not produce surplus value for capital. Similarly, solders who are forced to join up by either a military draft or an “economic draft” should not be politically grouped together with cops, prison guards and other hangers-on who do the dirty work of the capitalist class.

The political role of unproductive (of surplus value) workers is a very important and vast subject, which cannot be dealt with here. The only question I am concerned with here is their economic role as purchasers of commodities that the productive (of surplus value) workers lack the purchasing power to purchase themselves.

In addition to the unproductive workers, the state itself purchases and consumes commodities such as supercomputers, guns, tanks, missiles, planes and bombs. Many economists, some pro-capitalist, some Marxist, have seen this unproductive consumption as the main means by which capitalist society staves off overproduction.

Malthus gives a reactionary twist to Sismondi’s theory

Thomas Robert Malthus, the British economist best known for his theory of population, was among the relatively few economists who agreed with Sismondi that general gluts were both possible and a very real threat to the existing order of things. However, he gave a reactionary twist to Sismondi’s theory.

Sismondi was something of a romantic who often looked back to the past before the contradictions of capitalism had reached such a high degree of development. Malthus, however, saw the landowners, the state and the clergy as playing a necessary role in making it possible for capitalist society to consume the enormous volume of commodities it was capable of producing. Malthus had a great influence on John Maynard Keynes, and through Keynes on certain Marxists writers, especially those whose formative period was the Great Depression of the 1930s.

Keynesian Marxists

In their work “Monopoly Capital,” the founders of the Monthly Review school, the “Keynesian Marxists” Paul Baran and Paul Sweezy saw the growth of unproductive workers such as sales people, and especial state expenditures mostly for military purposes, as the key factors that transformed the Great Depression of the 1930s into the post-World War II prosperity.

While the political viewpoint of Baran and Sweezy, who were supporters of socialism, was radically different from that of Malthus, the reactionary defender of semi-feudal interests, their economic theories have some points in common.

One big difference between Sweezy and Baran, on one side, and Malthus, on the other, besides their completely different politics, is that Baran and Sweezy saw underconsumption and stagnation emerging only during the monopoly stage of capitalism, where giant corporations can charge monopoly prices for their commodities. According to Baran and Sweezy, the corporations thus tend to price themselves out of the market, since consumers can’t afford these monopoly prices.

Baran and Sweezy held that “third consumers” become necessary to realize the monopoly profits. If these are not forthcoming in sufficient numbers, the economy will sink into stagnation such as happened in the 1930s unless the trend toward stagnation is offset by some great new industry such as the railroads or the automobile.

Malthus, in contrast, saw the problem emerging under the pre-monopoly capitalism of his own day, since according to him all profit (not just monopoly profit as in Baran and Sweezy) represents an extra add-on above and beyond the actual value of the commodity.

Rosa Luxemburg is also sometimes grouped with the “underconsumptionists.” Her theory, however, was quite different from the school of Baran and Sweezy. In her book “Accumulation of Capital,” Luxemburg advanced the thesis that in a pure capitalist society, made up only of capitalists and workers, expanded capitalist reproduction would not be possible because the surplus value could not be realized.

Since capitalism can only exist as a system of expanded reproduction, this is equivalent to saying that a “pure capitalist society” consisting only of capitalists and workers cannot exist. Her “third consumers,” however, were not the landowners, unproductive workers and the state as was the case with Malthus, Keynes, Baran and Sweezy but the remaining independent commodity producers such as working peasants who have to sell their products on the market.

Since Luxemberg’s theory deals with the question of Marx’s reproduction tables that appear in Volume 2 of “Capital,” a detailed examination of it will have to await a closer look at the problem of reproduction under capitalism. Luxemburg’s theory forms the basis of one of two “breakdown theories” proposed by Marxists that attempt to find a purely economic limit to capitalist production.

But in addition to the unproductive consumption of the industrial capitalists and their hangers-on, there is the question of what Marx called the productive consumption of the industrial capitalists. I will discuss this in the next posting, where I will examine how the economic liberals—the supporters of Ricardo—answered the arguments of Sismondi and Malthus on the threat of crises of a “general glut” of commodites under capitalist production.

As will be seen, the arguments between Ricardo one on side and Sismondi and Malthus on the other continue to find echos not only among modern bourgeois economists but among today’s Marxists as well.

__________

1 While Sismondi’s crisis theory is generally considered to be a form of underconsumptionism, Henryk Grossman held that Sismondi saw the cause of crises in the contradiction between exchange and use value and therefore denies that he should be grouped with the underconsumptionists. Grossman makes a crucial point about the conflict between use and exchange value being the source of crises, and and I will be saying a lot more on this subject as these posts progress.

2 The Physiocrats, also known as the “Economists,” were a school of economics that arose in France in the years immediately preceding the French Revolution. They supported free trade in opposition to the prevailing mercantilist restrictions and free competition. They coined the expressions laissez faire—leave alone—and laissez passer—let it pass. In other words, they urged the government to keep its hands off the economy. For this reason, they are considered to be the founders of economic liberalism. The Physiocrats were the first economists who saw the origin of surplus value in the sphere of production rather than in the sphere of circulation, though they held that only agricultural labor was productive of surplus value.

3 Marx distinguished between what he called the classical economists and the vulgar economists. The classical economists were early bourgeois economists who made genuine scientific investigations of the workings of the emerging capitalist economy without which the economic work of Marx would have been impossible. The term vulgar economists, as used by Marx, refers to bourgeois economists who are simply professional apologists of the capitalist system. They advance only superficial explanations of the workings of the capitalist economy. Marx held that all bourgeois economists after 1830 were vulgar economists, because the growing class antagonism between the capitalists and working classes made further development of scientific economics on a pro-capitalist basis impossible.

4 In volume I of “Capital,” Marx distinguished relative surplus value from absolute surplus value. Suppose the workday is eight hours and the rate of surplus value is 100 percent. This means that the worker works four hours replacing the value of her wage, and then performs four hours of unpaid labor for the capitalist. Now, if the boss extends the workday from eight hours to 10 hours without raising the daily wage, the worker will now have to perform six hours of unpaid labor for the capitalist rather than four as before. The rate of surplus value will rise from 100 percent to 150 percent. This would be an example of a rise in absolute surplus value.

Suppose, however, the workday remains unchanged but the growth in the productivity of labor reduces the labor necessary to produce the consumer goods the workers must consume to reproduce her labor power on a daily basis from four hours to only two hours. Again, I assume that the daily wage remains unchanged. Though there has been no lengthening in the working day or change in the daily wage, the worker will now have to work for free for six hours for the boss and only two hours for herself. The rate of surplus value will rise from 100 percent to 300 percent. This would would be an example of a rise in relative surplus value.

4 Responses to “Crisis Theories: Underconsumption”

  1. 2010-’11: From Austerity to Collapse? « Reflections on a Revolution Says:

    [...] Essentially, what we are witnessing is a problem as old as capitalism itself. Karl Marx rightly observed that capitalism never solves its own crises; it merely moves them around. As David Harvey points out in his excellent new book — The Enigma of Capital and the Crises of Capitalism — austerity measures are merely a way of socializing the losses and privatizing the gains. While this temporarily fills the pockets of the rich, it will not solve the fundamental problem of capital accumulation, which is crucially blocked by a crisis of underconsumption. [...]

  2. cambridgeforecast Says:

    where can one read formally stated underconsumption theories, old and new?

  3. Socialist Party : Leadership attempts to silence the opposition…….with boredom! | Facing Reality Says:

    […] Militant, now Peter Taffe’s Socialist party, reject this, preferring instead the “underconsumptionist”  model pioneered by US Marxists Baran & Sweezy . (not a US cop […]

  4. Karl S Bonner Says:

    There’s nothing radical about Underconsumption Theory; the mainstream economists generally accept Diminishing Marginal Propensity to Consume (DMPC). That’s all you need to establish that low-wage, top-heavy income growth will cause aggregate demand to lag behind aggregate supply.

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