Economic Crises, the ‘Breakdown Theory’ and the Struggle Against Revisionism in the German Social Democracy

Among the assertions of the revisionist movement, led by Eduard Bernstein within the German Social Democratic Party, was their claim that generalized world economic crises were unlikely to recur. Similar claims were made during the 1960s—taken seriously by certain Marxists of those days—as well as during the recent “Great Moderation.”

Bernstein thought that general crises were already a thing of the past in the late 1890s. A little premature to say the least! This was well before such economists as John Maynard Keynes and Milton Friedman, who according to their followers had discovered the way to abolish capitalist crises without abolishing capitalism itself. It seems that such bourgeois claims—always duly echoed by certain forces in the workers’ and left movements such as Bernstein’s original revisionists—are themselves cyclical.

While Bernstein and other like-minded forces in the old Social Democracy held that capitalist crises were fading away, revolutionists like Rosa Luxemburg put great emphasis on the periodic capitalist economic crises. To the revolutionary wing of the Social Democracy, the recurring capitalist economic crises were a sign of the approaching “breakdown” of capitalism, the very “breakdown” that the revisionists denied. The revisionists pointed to the “fact” that crises were becoming less intense and generalized as a sign that capitalism was adapting itself to the new forces of production that were being created.

Bernstein and his fellow revisionists drew the conclusion that the perspective was not a workers’ revolution that would overthrow the political rule of the capitalist class and then transform the capitalist form of economy into socialism. Instead, the revisionists foresaw a gradual and more or less continuous reform of the existing social order in the interest of the workers.

Or, as Bernstein put it, the movement is everything, the final goal is nothing. From the revisionist perspective, a major future capitalist economic crisis would only get in the way of the struggle for reforms. The different views on capitalist crises and their future among the German Social Democrats of a century ago coincided with the divisions between the revolutionists on the left, the revisionists on the right, and the centrists who wavered between the two.

In the years that followed, and down to our own day, the attitude toward crises and the tendency toward an economic breakdown of capitalism has continued to divide the left and right wings within the workers’ movement.

In her “Reform and Revolution,” Luxemburg therefore could not ignore Bernstein’s claim that crises were fading away as capitalism continued to develop. In doing this, Luxemburg not only had to explain the fallacies of Bernstein’s theories, but put forward some of her own ideas on crises. The ideas on crises she did put forward in “Reform and Revolution” shed light on the breakdown” theory that Luxemburg developed in the “Accumulation of Capital” and her “Anti-Critique.”

After brilliantly explaining the fallacy of Bernstein’s claim that capitalism was avoiding crises through cartels—capitalist monopolies—and the credit system, Luxemburg had to offer an explanation of why Germany had not experienced a major economic crisis since the crash of 1873. (1)

“But, “Luxemburg wrote, “if the credit system, cartels, and the rest do not suppress the anarchy of capitalism, why have we not had a major commercial crisis for two decades, since 1873? Is this not a sign that, contrary to Marx’s analysis the capitalist mode of production has adapted itself—at least, in a general way—to the needs of society?” (Chapter II, “Reform or Revolution”)

She continued: “The crisis of 1825 was, in effect, the result of extensive investment of capital in the construction of roads, canals, gas works, which took place during the preceding decade, particularly in England, where the crisis broke out. The following crisis of 1836-1839 was similarly the result of heavy investments in the construction of means of transportation. The crisis of 1847 was provoked by the feverish building of railroads in England (from 1844 to 1847, in three years, the British Parliament gave railway concessions to the value of 15 billion dollars). In each of the three mentioned cases, a crisis came after new bases for capitalist development were established. In 1857, the same result was brought by the abrupt opening of new markets for European industry in America and Australia, after the discovery of the gold mines, and the extensive construction of railway lines, especially in France, where the example of England was then closely imitated. (From 1852 to 1856, new railway lines to the value of 1,250 million francs were built in France alone). And finally we have the great crisis of 1873—a direct consequence of the first boom of large industry in Germany and Austria, which followed the political events of 1866 and 1871.” (2)

Here Rosa Luxemburg explains that the concrete history of crises up to the time she was writing “Reform and Revolution,” around 1898 (3), had been preceded by a major wave of investment in fixed capital and a major expansion of the basis of capitalist production. None of the capitalist crises up to that time had been preceded by a stagnation of capitalist production but rather by its vigorous expansion.

So that up to now” [emphases added—SW], Luxemburg wrote, “the sudden extension of the domain of capitalist economy, and not its shrinking, was each time the cause of the commercial crisis. That the international crises repeated themselves precisely every ten years was a purely exterior fact, a matter of chance [emphasis added].”

While accidental factors certainly play a certain role in the exact timing of crises, Marx did not see the fact that crises came at about 10-year intervals as simply a matter of chance. He saw the need of the industrial capitalists to renew obsolete or worn-out machinery about every 10 years as providing a “material basis” for the industrial cycle of a length—give or take a few years—of about 10 years. (4)

Notice that while Luxemburg agreed as a matter of empirical fact that crises were preceded by upsurges of capitalist investment, she qualified this with the phrase up to now. Luxemburg was implying that this was only a temporary feature of crises, and this would not necessarily hold in the future.

Luxemburg on cartels

“Generally speaking,” Luxemburg wrote, “combines treated as a manifestation of the capitalist mode of production, can only be considered a definite phase of capitalist development.” She continued: “Cartels are fundamentally nothing else than a means resorted to by the capitalist mode of production for the purpose of holding back the fatal fall of the rate of profit in certain branches of production. (5) What method do cartels employ for this end? That of keeping inactive a part of the accumulated capital. That is, they use the same method which in another form is employed in crises. The remedy and the illness resemble each other like two drops of water.”

This is a brilliant pioneering analysis of the then new phenomenon of capitalist monopoly. But notice, Luxemburg, writing in the late 1890s when “monopoly capitalism” was just emerging, saw cartels as a feature of “a definite phase of capitalist development.” (6)

By a “definite phase of development,” Luxemburg did not mean that cartels develop once capitalism reaches its highest stage of development—such as Lenin did in his 1916 pamphlet “Imperialism,” written about 18 years after Luxemburg wrote “Reform and Revolution.”

Luxemburg, in contrast, back in 1898 saw the increasingly widespread cartelization of capitalist industry as a temporary phase of capitalism that would disappear when the real decline of capitalism sets in. “When the outlets of disposal begin to shrink,” Luxemburg explained, “and the world market has been extended to its limit and has become exhausted [emphasis added—SW] through the competition of the capitalist countries—and sooner or later that is bound to come—then the forced partial idleness of capital will reach such dimensions that the remedy will become transformed into a malady, and capital, already pretty much ‘socialized’ through regulation, will tend to revert again to the form of individual capital [emphasis added—SW].”

Luxemburg foresaw not just the temporary flooding of the market, such as we see in a cyclical crisis of overproduction, but a permanent exhaustion of the world market. But what would cause such a permanent glut of the market? In “Reform and Revolution,” she assumed that the permanent exhaustion of the world market that would define the decline of capitalism would be the “competition of the capitalist countries.”

This is a very weak argument from a Marxist point of view. It is reminiscent of Adam Smith’s theory that the rate of profit tends to fall because of increasing competition among the capitalists. Marx, in contrast, always looked for the forces that were operating behind the surface phenomena of competition. For example, unlike Smith, Marx didn’t attribute the tendency of the rate of profit to fall to growing competition but instead explained the tendency as arising from the rising organic composition of capital.

Luxemburg in her later works, when she claimed that permanent exhaustion of the world market was approaching, was not satisfied by the explanation she gave in “Reform and Revolution”—a growing competition among the various capitalist countries. Growing competition among the capitalist countries, or among individual capitalists within a country for that matter, is a sign of the increasing exhaustion—at least temporarily—of the market but not its cause. In her “mature” works, “The Accumulation of Capital” and the “Anti-Critique,” Luxemburg attempted to explain the basic cause—not competition—of what she saw as the inevitable permanent exhaustion of the world market.

In the late 1890s, Luxemburg foresaw a coming stage of capitalism where the world market would be more or less permanently glutted, and competition would be much fiercer among both the individual capitalists and the capitalist countries than it was before the epoch of the permanent exhaustion of the world market set in.

However, in the late 1890s, when Luxemburg was writing “Reform and Revolution,” far from being exhausted the world market was in a stage of vigorous expansion. The revisionists saw this vigorous expansion of the world market and the consequent capitalist prosperity as permanent and adopted their perspectives accordingly. Luxemburg, in contrast, saw the vigorous expansion of the world market that was occurring in the late 1890s as temporary, but she wasn’t quite able to explain why this was so.

A century later, relatively few Marxists would defend Luxemburg’s views that the world market is heading toward a state of permanent exhaustion, and even fewer would hold that capitalist monopoly is merely a passing phase. These ideas—especially the latter one—seem very strange for generations of Marxists who have been brought up on Lenin’s “Imperialism, the Highest Stage of Capitalism.”

Indeed, most present-day Marxists—largely because of the wide acceptance of the concept of non-commodity money—feel very uncomfortable with the view of Marx and Engels that cyclical capitalist crises are crises of overproduction. With the passing of the international gold standard, can’t the “monetary authorities” create as much money and monetarily effective demand as is necessary to ensure “full employment,” if only they desire it? From the viewpoint of most of our present-day Marxists, if crises occur anyway, they must involve a fall in the rate of profit rather than a general overproduction of commodities.

Many modern Marxists hold the view that the “monetary authorities” periodically deliberately reduce “monetarily effective demand” so that the capitalists whose interests they serve can use the resulting unemployment to increase the rate of surplus value and overcome a falling rate of profit. (7) To these modern Marxists, the idea of a permanent exhaustion of the market seems completely fantastic. We have come a long way since the days of Rosa Luxemburg.

Around the turn of the 20th century, the left-wing German Social Democrats and Karl Kautsky—then considered the world’s leading living Marxist theoretician, who like Rosa Luxemburg also opposed the revisionists—saw the cause of the continued growth of the market as the progressive expansion of capitalism into pre-capitalist agrarian regions. This wasn’t simply due to some whim but reflected what had happened over the immediately preceding decades.

During the last part of the 19th century, the leading capitalist powers—with Britain and France in the lead and Germany and the United States bringing up the rear—were busy dividing up the agrarian regions—what we might call today the “third world”—among themselves. Certainly it was true that Britain and France—which were losing ground in the world market to the new and far more efficient capitalist competition from the United States and Germany—were seizing colonies in agrarian regions at least in part to guarantee the market share of their industrial capitalists. Wasn’t the penetration of capital into the pre-capitalist agrarian markets the key to the continued growth of the world market? (8)

But what would happen once capitalist production ran out of the remaining agrarian pre-capitalist regions? Wouldn’t the world market then have reached a stage of permanent exhaustion?

At this time, it seems that few if any German Social Democrats had any awareness of Marx’s mathematical demonstration of expanded capitalist reproduction. Marx’s theory of capitalist expanded reproduction using clumsy arithmetical values are indeed among the most difficult parts of “Capital.” (9) It is not surprising that even the most erudite German Marxists generally avoided this material.

The only Marxists that showed much interest in Marx’s diagrams on capitalist reproduction, both simple and expanded, were the Russian Marxists, who used them to demonstrate that, contrary to the views of their populist opponents, the development of capitalism in Russia was both inevitable and historically progressive. But in Germany, Marxists did not have to deal with opponents who questioned the very possibility of capitalism there. In Germany, the question was how much longer capitalism could last, not whether it was possible.

When Luxemburg did become aware of Marx’s diagrams of expanded reproduction about a decade after she wrote “Reform and Revolution,” she was very alarmed. The diagrams seemed to pull the rug right out from under the basic economic arguments that had served the left wing so well in the struggle against the revisionists. (10) I have already explored Marx’s diagrams of simple and expanded reproduction in dealing with the theory that the cyclical crises of capitalism arise due to disproportions among the various branches of production. But I will briefly review them here.

The basic assumptions of Marx in his diagrams of expanded reproduction

First, in dealing with reproduction both simple and expanded, Marx assumed a “pure capitalist society.” The entire population is divided into industrial capitalists on one side and wage workers who produce surplus value for the industrial capitalists on the other.

Second, Marx abstracted technological progress and any change in the organic composition of capital. There is no falling tendency of the rate of profit in volume II of “Capital.” There are also no prices of production. All commodities—just as they are in the much more widely read volume I of “Capital”—are sold at prices corresponding directly to their values.

Therefore, the “breakdown” theory that is most popular among those of today’s Marxists who support a breakdown theory, based on the tendency of the rate of profit to fall, plays no role at all in Marx’s diagrams of either simple or expanded reproduction. Very few of today’s Marxists support Luxemburg’s breakdown theories.

Marx’s expanded reproduction schemes—especially his second perfected scheme—proceed smoothly from year to year. In Marx’s diagrams of expanded reproduction, not only is there no reason for capitalist expanded reproduction to ever break down, there is no “business cycle”—industrial cycle—of any kind either. The capitalism of Marx’s expanded reproduction diagrams knows neither historical limits or cyclical crises. It simply expands forever without crises.

Luxemburg’s mature views on her ‘breakdown’ theory

In her “Accumulation of Capital” and “Anti-Critique,” Rosa Luxemburg tried to prove that Marx’s diagram of expanded reproduction contained a fatal flaw.

In dealing with reproduction, Marx developed the equation IIc = Iv + Is as the equation for simple reproduction. (11) The industrial capitalists engaged in the production of commodities that serve as items of personal consumption must exchange a certain portion of their output, IIc, for means of production Iv + Is.

If simple reproduction is to proceed without a hitch, not only must Department II provide all the means of personal consumption needed by capitalists and workers of Department I in terms of use values, but Department I must provide all the means of production that are physically required by Department II to maintain—but not expand—its level of production.

It is worth pointing out here that in his reproduction diagrams Marx is only interested in exchanges between the two departments of production, not within them.

Since we are dealing with capitalist (re)production—a form of commodity production, and Marx assumed that all commodities sell at their values, there is another important condition. IIc must represent the same quantity of abstract human labor measured in terms of time that Iv + Is represent.

In developing his mathematical demonstration of capitalist reproduction, Marx began with simple reproduction, since simple reproduction must always be contained within expanded reproduction. Understanding the conditions of simple reproduction is therefore the necessary starting point to understand expanded reproduction.

In simple reproduction, it is assumed that the capitalists of both departments consume the entire surplus value in the form of of items of personal consumption. But in expanded reproduction, it is assumed that capitalists consume only part of the surplus value in the form of items of personal consumption, the rest must be “capitalized”—transformed into new capital.

Any increase in IIc must be matched by a similar expansion of Iv—the wages paid by the industrial capitalists of Department I plus the portion of Is—the surplus value appropriated by the capitalists of Department I—that is used for their personal consumption.

Luxemburg said that in expanded reproduction the capitalists will therefore be consuming only part of the surplus value. This is true as far as their personal consumption is concerned. But in truth, the capitalists of Department I can still consume their entire surplus value, but some of the surplus value must be consumed productivity, not personally. If expanded reproduction is to occur—an absolute necessity if we are to have a capitalist economy—a portion of the surplus value of Department I must be converted into new capital, both constant and variable. (12)

The capitalists of Department I productively consume a portion of the surplus value that is converted into new constant capital by expanding their scale of production through the purchase of additional machinery beyond the machines that have worn out and need replacement, plus raw and auxiliary materials beyond that necessary to simply maintain the existing scale of production. This, however, involves exchanges that are strictly internal to Department I.

Yet another portion of the surplus value must be transformed into additional variable capital. How do the capitalists of Department I consume this portion of the surplus value? They must consume this portion through the purchase of additional labor power, whether by increasing the hours worked or by hiring additional workers beyond those that simply replace the workers who have retired or died.

How is expanded reproduction financed?

Unlike the case with simple reproduction, the capitalists of Department I need increasing amounts of money both to finance their increasing personal consumption and to purchase additional labor power. Where does this extra money come from?

“The exchange of commodities on the market,” Luxemburg writes, “is an internal or family matter between capitalists. The required money for this process, of course, comes out of the capitalists’ pockets—as every employer must lay out the money capital in advance—and returns into the pockets of the capitalist class after the exchange on the market has taken place.” (Chapter 1, “Anti-Critique”)

If we assume that there are preexisting hoards of surplus money—which indeed is the normal condition under capitalism—these hoards can be run down as expanded reproduction advances. Money that was previously “burning holes in the collective pockets” of the capitalists must be thrown into circulation as expanded reproduction proceeds.

But if expanded reproduction is to continue, at some point these hoards will be run down. If money comes “from the pockets of the capitalists,” won’t the whole process of expanded reproduction come to a halt at this point once all the hoards of idle money are drawn into circulation? This would indeed be the case if there was not a special industry that produces additional money material.

Marx pointed out that before gold—or whatever commodity functions as money material—can be money it must first be a commodity. And like all commodities, money material must be produced by human labor. Many popularizations of Marx’s theory of simple and expanded capitalist reproduction simply leave out the money problem altogether. If only the correct proportions are maintained between Department I and Department II, simple and expanded reproduction can proceed. However, if we abstract money from our reproduction models, we are building Say’s Law right into them. This is an error that many Marxists have come to grief over. (13)

If you exclude money from reproduction, you end up with commodities purchasing commodities. The more commodities that are produced—as long as they are produced in the correct proportions—the more demand will rise. Crises of generalized overproduction of commodities are rendered impossible.

At most you might have a partial overproduction of commodities—as allowed by Say—perhaps too many means of production in Department I backed by an underproduction of means of personal consumption in Department II, or visa versa. Many crises theories—especially those based on disproportionate production—developed by Marxists in the years after the death of Engels stumbled exactly on this point.

Marx did not make this mistake. He built the production of money material into his models so that monetarily effective demand is accounted for. Money, of course, has certain peculiarities compared to other commodities. For example, a gold coin can be used to purchase many commodities in the course of a year. It does eventually become lighter in circulation, so it cannot be used indefinitely.

However, if we replace the gold coins with monetary tokens—such as paper money—the gold can be withdrawn from circulation and used to “back” the circulating tokens. In that case, the gold can last indefinitely. The money commodity—gold—becomes “immortal.” All that needs to be replaced are the worn-out tokens that represent gold in circulation, and this can be done at a nominal cost in terms of human labor.

Let X represent the total value of commodities that need to be sold in the course of a year. We need only a small fraction of X in the form of bullion backing the token currency to support the circulation of the commodities. But it is still true that as expanded reproduction proceeds, more gold that functions as money material must sooner or later be produced. If it isn’t, expanded reproduction will grind to a halt as soon as the hoards of idle money are fully drawn into circulation.

In developing his diagrams of expanded reproduction, Marx had to decide where to put the gold producing—mining and refining—industry. Strictly speaking, gold insomuch as it functions as money is neither a means of consumption nor means of production. In order to stick to his two-department diagram, Marx decided to put the gold producing industry in Department I—the department that produces the means of production.

He did this because when gold does not function as money it functions as a raw material, and the production of raw materials belongs in Department I. Marx was able to take full account of money and stick to his mathematically elegant two-department scheme at the price of introducing a slight inconsistency into the diagrams. Monetary gold that Marx had Department I produce is not a means of production and indeed plays no role at all in the physical process of reproduction, whether simple or expanded.

Sticking with Marx’s two-department scheme, a certain number of capitalists in Department I use their newly produced gold to purchase additional labor power Iv and additional elements of constant capital—which circulates only in Department I—and the additional means of consumption that a growing economy—expanded reproduction—makes possible for their personal delights.

This new money does not not come from their pockets but from their newly produced commodity capital. The newly produced commodity capital of the industrial capitalists engaged in gold production has the peculiar quality of being in its natural form money. Therefore, there is a fraction of the capitalists of Department I—the gold producers—who are able to buy without having first sold. This is what allows the market to expand.

The exact form of the monetary system doesn’t really matter here. If we imagine that gold coins are used as currency—which was the case in early capitalism—the industrial capitalists who produce the gold simply have to bring their newly mined gold to the mint in order to use it as currency.

If a gold standard is in effect, the gold producers can exchange their gold for banknotes. Under today’s paper money system, they exchange their newly mined gold for commercial bank-created credit (checkbook) money. The increasing level of gold production enables the “monetary authorities” to create additional token money that swells bank reserves without the newly created token money depreciating against gold. And the swelling mass of token money made possible by the growing mass of metallic money forms the basis for the creation of additional credit money through the “fractional reserve” commercial banking system.

So regardless of the exact “monetary system” in effect, thanks to the gold mining and refining industry—assuming gold is produced in adequate quantities—there will always be enough money to finance the ever-growing scale of capitalist expanded reproduction.

Luxemburg’s ultimate argument

Coming to a blind wall here in her search for a fatal flaw in Marx’s diagrams of expanded reproduction, Luxemburg came to her ultimate argument.

“In our assumed total stock of commodities in capitalist society,” Luxemburg wrote, “we must accordingly find a third portion, which is destined neither for the renewal of used means of production nor for the maintenance of workers and capitalists. It will be a portion of commodities which contains that invaluable part of the surplus value that forms capital’s real purpose of existence: the profit destined for capitalization and accumulation. What sort of commodities are they, and who in society needs them?”

In simple reproduction, Rosa Luxemburg explained, once all commodity exchanges have taken place—that is, all commodities are in the hands of their ultimate consumers—all the commodities that represent surplus value will be in the possession of the capitalist class either in the form of consumer necessaries or luxury items that only the capitalists get to consume.

When the commodities that represent surplus value are subtracted from the total mass of commodities produced in a year, that fraction of the remaining commodities whose material use values function as consumer necessaries that keep the workers alive and producing the next generation of workers are purchased with the money that the workers obtain in exchange for the labor power they sell to the capitalists. The mass of commodities that represents surplus value are strictly off bounds to the workers.

But what about the case of expanded reproduction? The capitalists “must tighten their belts” and “save,” as the bourgeois economists say, a certain portion of their profits—surplus value realized in money form—in order to expand the scale of their production. Or what comes to exactly the same thing, they must transform a certain portion of their realized surplus value—profits—into new constant and variable capital.

As the capitalists of Department I transform some of their surplus value into new constant capital they must carry out exchanges with other capitalists within their own department. Such inner department exchanges play no role in Marx’s diagrams of expanded reproduction and are of no concern to us here.

But what about the portion of the surplus value that the capitalists of Department 1 transform into new variable capital? In order to do this, they must indirectly with the help of their newly hired workers—engage in an exchange with Department II. (14) They use this newly created surplus value—which has already been converted into profit that exists in money form—to hire additional workers. For their part, the capitalists of Department II engaged in their own expanded reproduction have to produce more items of personal consumption for these newly hired Department I workers to consume.

“Here we have come to the nucleus of the problem of accumulation, Luxemburg wrote, “and we must investigate all attempts at solution. Could it really be the workers who consume the latter portion of the social stock of commodities? But the workers have no means beyond the wages covering bare necessities which they receive from their employers.”

The capitalists of Department I cannot themselves consume in the form of consumer commodities that portion of the surplus value they transform into new variable capital. And, according to Luxemburg, the workers cannot under capitalist conditions of production ever consume an atom of surplus value. Therefore, Luxemburg argues, if the conditions of capitalist production are to prevail, the portion of the additional commodities that Department II produces in order to fulfill the needs of the expanded reproduction of Department I will not in fact find buyers within a closed capitalist system.

The capitalists of Department I must give some of their surplus value to the newly hired workers if the extra means of personal consumption produced by Department II—which are necessary if expanded reproduction is to proceed in a physical sense—are to find buyers. But this will mean, Luxemburg argued, that newly hired workers of Department I will be consuming surplus value. And that cannot ever happen under capitalist production, according to Luxemburg.

Therefore, the extra commodities produced by Department II to support the expanded production of Department I will not find buyers in a purely capitalist economy. And if these commodities cannot find buyers, expanded reproduction will not be able to physically proceed. The whole process of expanded reproduction will therefore grind to a halt unless buyers from outside the capitalist system—simple commodity producers—can be found in sufficient quantity. (15)

Luxemburg had proved to her satisfaction that in a “pure” capitalist society with no simple commodity producers, capitalist expanded reproduction and thus capitalism itself is impossible. At the point that capitalism has conquered all spheres of production on a global scale, it has become impossible—it must break down. In Luxemburg’s mind, her belief that the world market was headed for exhaustion sooner or later, which in “Reform and Revolution” she had attributed unscientifically to increasing competition among the various capitalist countries, now had a solid scientific basis.

Or did it?

Let’s go back to the capitalists of Department I as they undertake expanded reproduction. These capitalists set aside a certain portion of their realized surplus value—profit—in order to expand their work forces—hire additional workers. Doesn’t this mean that the workers are consuming surplus value, something they are strictly not allowed to do?

But before the newly hired workers of Department I are “allowed to consume a portion of the surplus value,” this surplus value has been converted into variable capital—in the form of the labor power of the newly hired workers. Indeed, assuming that the workers cannot “save” their wages but must use them entirely for purposes of personal consumption, and assuming also that there are no simple commodity producers, doesn’t all the variable capital—and constant capital, as well—represent past surplus value that has been transformed into capital by the capitalists? Therefore the newly hired workers have not violated any of the laws of capitalism when they sell their labor power for money wages to the capitalists of Department I.

The newly hired workers, who have not we can assume mastered Rosa Luxemburg, will proudly spend “their first paychecks” on the commodities that are necessary to reproduce their labor power. These are the very commodities produced by Department II that Rosa Luxemburg claimed could never find buyers. As these workers proudly spend their first paychecks, they do not know they are carrying out what according to Luxemburg is an economically “illegal” operation. And capitalist expanded reproduction will roll happily onward.

The Russian Marxist N.I. Bukharin (16), who in 1924 wrote a polemic against the by then dead Luxemburg entitled “Imperialism and the Accumulation of Capital,” pointed out that Luxemburg built her entire argument by applying the conditions that apply to simple reproduction to expanded reproduction. Of course, if we assume in advance the conditions of simple reproduction, we can “prove” that expanded reproduction is impossible.

In the hands of the Russian Bukharin—who came from the tradition of Russian Marxism that was well-versed in the diagrams of expanded reproduction thanks to its struggle against the Russian populists—the economic theory that had formed the basis of the struggle of the entire left wing of the German Social Democracy against revisionism collapsed.

Between the time that Luxemburg penned the “Anti-Critique” and Bukharin wrote “Imperialism and the Accumulation of Capital,” the Russian Revolution and the revolutionary wave that followed swept across Europe. For awhile it seemed that Soviet (17) power, the power of the working class massively organized through workers’ councils—soviets in Russian—which had seized state power, would sweep across Europe and then the whole world. Under these conditions, the whole question of the “breakdown theory” seemed extremely academic.

Luxemburg herself when she was released from prison by the German revolution of November 1918 didn’t attempt to further develop her breakdown theory—she was too busy organizing the Sparticist League and then the German Communist Party. In 1919, she was murdered along with Karl Liebneckt by the Free Corp thugs—forerunners of the Nazis—who were in a bloc with the ex-Marxist Social Democratic Party. The Social Democrats were upholding bourgeois parliamentary democracy against the “threat” of a “Communist Soviet dictatorship,” Or what comes to exactly the same thing, the political rule of the working class and socialist revolution. (18)

But by 1924 the initial revolutionary wave that had followed the seizure of power by the Russian working class was ebbing. It was becoming clear that capitalism was still around and would be for some time.

Henryk Grossman in 1929, the year by coincidence that the super-crisis of 1929-33 began—an event that was completely unexpected by Bukharin, asked an interesting question. Exactly what breakdown theory did Bukharin propose to replace Luxemburg’s failed attempt? Grossman answered, nothing. But if there is no economic limit to capitalism, if capitalism can expand forever like it does in Marx’s diagram of expanded reproduction in volume II of “Capital,” doesn’t socialism cease to be a necessity and become once again a utopia?

The starting point of Grossman’s critique was the diagram of expanded reproduction developed by Austrian-Marxist Otto Bauer in reply to Luxemburg’s “Accumulation of Capital.” (19) Bauer’s work was the most important contribution made by those German and Austrian Social Democrats opposed to Luxemburg’s breakdown theory as developed in her “Accumulation of Capital.”

In developing his answer to Luxemburg, Bauer had improved on Marx’s diagram of expanded capitalist reproduction by taking into account the rise in the organic composition of capital and the consequent fall in the rate of profit.

Remember, Marx had left out the entire question of the rise in the organic composition of capital and the falling tendency of the rate of profit in his own diagrams of expanded reproduction. As Marx would say, “these things don’t exist for us” when he wrote volume II of “Capital.” This was characteristic of Marx’s method; Marx dealt with these questions only in volume III.

It therefore fell to Otto Bauer to integrate Marx’s theory of expanded reproduction found in volume II of “Capital” with Marx’s theory of the rising organic composition of capital and falling rate of profit developed in volume III. Bauer, who like Marx took his enhanced diagram of expanded reproduction four years forward, showed that capitalist reproduction could proceed smoothly over the four-year period. But could Bauer’s model of expanded capitalist reproduction with its assumptions of a rising organic composition of capital and a falling rate of profit continue forever? Henryk Grossman did the math, and as result the whole breakdown debate entered a new stage.

This will be the subject of next week’s post.


1 This was true of Germany but not the United States. The United States experienced a serious recession-depression in the early and mid 1880s and a crash even worse than 1873 followed by a deep depression starting in the spring of 1893. The U.S. economy was more unstable than the German economy because (1) the United States lacked a central bank, and (2) the populists were attempting to replace the gold standard with a silver standard. The latter factor led to periodic runs against gold reserves by capitalists who feared a coming devaluation of the U.S. dollar.

2 Rosa Luxemburg here was referring to the wars between Austria and Prussia in 1866 and France and Prussia in 1870-71, which led to the unification of Germany.

3 In a later edition of “Reform and Revolution,” Luxemburg was able to point to the global capitalist crises of 1900 and 1907-08 as refutations in practice of the revisionist claim that general world market-wide capitalist crises were things of the past.

4 The U.S. economy experienced a major downturn starting in 1873, another around 1882 or 1883 and yet another in 1893. Here we see a 10-year cycle. However, on the scale of the world market the 10-year industrial cycle was less clearly defined during the 19th century “Great Depression,” which lasted from 1873 to 1896, than it had been earlier. This was an era of relatively low gold production and secular falling prices.

The generally impaired state of expanded capitalist reproduction—especially in Britain, still the the leading capitalist country—in the period between 1873 and 1896 tended to prevent full industrial cycles on the scale of the world market. Luxemburg wrote the first edition of “Reform and Revolution” immediately after the “Great Depression” but before the renewed upsurge in capitalist expanded reproduction led to the worldwide economic crises of 1900 and 1907.

5 Here Luxemburg described a fall in the rate profit as “fatal,” but later in her “Anti-Critique” Luxemburg denied that the tendency of the rate of profit to fall would lead to the collapse of capitalist production before the sun burned out. She claimed that this was true because while the rate of profit tends to fall, the mass of profit grows. Since the growing mass of profit “compensates” for the fall in the rate of profit, Luxemburg had become convinced that the a falling rate of profit would never lead to a collapse of capitalist production in practice.

6 Lenin, in his famous 1916 pamphlet “Imperialism, the Highest Stage of Capitalism,” actually dated the beginning of the monopoly capitalist, or imperialist, stage proper to the year 1900, when the electricity cartel did not break up during the world economic crisis of that year.

If we are to follow Lenin strictly here, “Reform and Revolution” was written before the beginning of the era of monopoly capitalism proper had even begun. Still, the theory of imperialism that Luxemburg developed in her later writings, which was closely tied to her breakdown theory, was quite different than the theory of imperialism developed by Lenin. Lenin’s theory of imperialism was centered on the growing power of capitalist monopolies, while Luxemburg’s theory was centered on the drive of the imperialist countries to get control of the remaining agrarian pre-capitalist markets.

Both Lenin and Luxemburg were consistent opponents of imperialism, despite their differing views on its economic roots.

7 This modern view implies that crises might be avoided if only the labor movement can apply enough political pressure on the government and the “monetary authorities” such as the U.S. Federal Reserve System, forcing them to maintain a level of “effective monetary demand” that is favorable for the trade union struggles of the workers.

While there have been episodes where capitalist governments and the central banks have followed policies designed to induce a recession to weaken the trade unions—for example, the Roosevelt recession of 1937-38—the vast majority of economic crises have occurred despite the attempts of the governments and central banks to prevent them. If recessions occur simply because of the policies of particular governments and central bankers, it might be possible to end recessions without abolishing capitalism simply by pressuring the capitalist governments and central banks to avoid “recessionary policies.”

8 The far more recent Marxist Ernest Mandel—1923-1995—attributed the “long wave with an undertone of expansion” that according to him lasted from the 1890s down to 1913 to the wave of colonization carried out by leading capitalist powers at the end of the 19th century. So it is hardly surprising that contemporary Marxists would have done the same.

9 Marx had to carry out these laborious calculations without the help of modern electronic computers and calculators that are available to us today. It is not surprising that Marx made numerous arithmetic errors that had to be corrected by his editors. Imagine trying to do these calculations with the aid of whatever artificial light was available in Victorian times before modern electrification.

No wonder the German Social Democrats of the late 19th and early 20th centuries, who also lacked our modern computers and electronic calculators, generally steered away from this material.

10 The German Social Democratic Party formally rejected the revisionists’ arguments, though the revisionists were allowed to remain in the party despite their open support of European colonization of Africa, Asia and Latin America. Rosa Luxemburg in vain had attempted to have the revisionists expelled. While the German Social Democratic Party remained nominally Marxist, this tolerance towards the revisionists and their often racist pro-colonial views—despite Luxemburg’s demand for their expulsion—was a sign that the revolutionary spirit of Marxism was eroding in the party well before the betrayal of August 4, 1914, when the Social Democrats supported the request of the government for war credits in the Reichstag.

11 Remember, Marx divided production into two departments. Department I produces all the means of production other than human labor power. Department I produces the commodities that are used as raw and auxiliary material, factory buildings, and machines used on capitalist farms and in mines, factories and factory buildings. Department II produces the means of personal consumption of both the capitalists and the workers. The letter c stands for constant capital, v stands for variable capital—human labor power that creates surplus value—while s stands for surplus value.

12 Marx in his diagrams of expanded reproduction was only concerned with the exchanges between the department that produces the means of production and the department that produces the means of personal consumption. As far as his analysis of reproduction is concerned, Marx is not concerned with the exchanges that take place within the two departments of production.

13 Among the Marxists who fell into this trap was Rudolf Hilferding, an early supporter of the theory of “non-commodity money.” Even in the days of the international gold standard, Hilferding claimed in his famous book “Finance Capital” that “paper money” reflected the value of commodities directly without any need for a special money commodity. Lenin specifically criticized Hilferding for his wrong theory of money in his pamphlet “Imperialism,” which was partially based on Hilferding’s “Finance Capital.” Hilferding explained crises as caused by disproportions between the various branches of production. What Hilferding could not explain was crises of generalized overproduction of commodities. Because of his theory of “non-commodity money,” Say’s Law was built right into his model.

14 For simplicity, I will assume that all additional labor power that the capitalists of Department I purchase represents the hiring of additional workers and not the extension of the workday.

15 Luxemburg’s opponents pointed out that since simple commodity producers can be seen as workers who are their own industrial capitalists, the existence of simple commodity producers doesn’t really solve the problem. They held that Luxemburg therefore had proved too much—she had proved the absolute impossibility of capitalism with or without independent commodity producers. But capitalism exists as an empirical fact. Therefore Luxemburg’s argument is clearly wrong.

16 Bukharin—a close associate and sometime friendly opponent of Lenin—emerged as the leading theoretician of both the Soviet Communist Party and the Communist International after Lenin suffered a stroke in the spring of 1923 that effectively ended his revolutionary career. In the struggle that soon broke out in the Soviet Communist Party and the Communist International between supporters of Leon Trotsky, who denied that it was possible to build a full and complete socialist society in the Soviet Union alone without victorious socialist revolutions in other countries, and the supporters of Joseph Stalin, who held that it was possible, Bukharin supported the Stalin position. In 1929, Bukharin was removed from leading party positions including his most important, the chairmanship of the Communist International, because of his opposition to Stalin’s program of accelerated industrialization financed by the rapid collectivization of agriculture.

17 “Soviet” means council in Russian. But in the years following the October revolution of 1917, the word “soviet” took on a new international meaning. For example, when the American Communist leader William Z. Foster wrote a book advocating a “Soviet America,” he didn’t mean that Russia should rule America but rather that the American working class would rule America through its own workers’ councils. Today, after decades of reaction against the Russian Revolution, the word “soviet” has largely lost the meaning it had in the revolutionary years following 1917—at least for now.

18 Such a dictatorship would also have been the highest form of workers’ democracy. A far cry from the dictatorship that did replace the imperialist parliamentary bourgeois democracy that was defended by the ex-Marxist German Social Democratic Party through the murder of Rosa Luxemburg and Karl Liebnecht—the fascist dictatorship of Adolf Hitler.

19 Austrian-Marxism refers to a trend that was associated with the Social Democratic Party of Austria. Though the Austrian-Marxists made valuable contributions to Marxist theory in the years before World War I, politically they were closer to German Social Democratic centrists than they were to the revolutionary left wing of the German Social Democratic Party associated with Rosa Luxemburg. They had a definite tendency toward opportunism, and tended to take the revolutionary edge off Marxism.


4 thoughts on “Economic Crises, the ‘Breakdown Theory’ and the Struggle Against Revisionism in the German Social Democracy

  1. “So regardless of the exact “monetary system” in effect, thanks to the gold mining and refining industry—assuming gold is produced in adequate quantities—there will always be enough money to finance the ever-growing scale of capitalist expanded reproduction.”

    The section which this paragraph was the conclusion to didn’t make sense to me because we’re not on the gold standard. Can you explain how the argument in this section is relevant since currency is no longer backed by gold?

  2. uv: As I read the blog, it is because gold still is money, whether you deny it or not. That is why capitalists flee into gold when the dollar loses value, which happens if the amount of token money grows relatively to the amount of gold. That there is no promise from the central bank exchange token money for a gold at a fixed price doesn’t change that. The currency isn’t backed up by gold, but its value is still measured in gold, just like any other commodity’s.

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