Otto Bauer’s Answer to Rosa Luxemburg

Of all the Social Democrats that criticized Rosa Luxemburg’s “Accumulation of Capital,” the most important contribution was that of Otto Bauer (1881-1938). Bauer was a leader of the Austrian Social Democratic Party and became the party’s top leader in 1918.

In order to refute the breakdown theory that Rosa Luxemburg presented in her “Accumulation of Capital,” Bauer developed a diagram of expanded capitalist reproduction that, unlike Marx’s, included a rising organic composition of capital and consequently a falling rate of profit.

Bauer set himself the task of proving that even in the face of a falling rate of profit, expanded reproduction could not only proceed smoothly, it could do so at an accelerating pace. An accelerating rate of accumulation—a rising rate of economic growth—would be necessary if full employment was to be maintained in the face of the rising labor productivity implied in Bauer’s diagram.

Bauer’s diagram of expanded reproduction does illustrate some of the fundamental laws of motion of the capitalist system that Marx’s own diagram does not. (1) Unlike Marx’s diagrams, Bauer’s diagram includes the rising organic composition of capital, a falling rate of profit, a rising mass of profit, and the faster development of Department I—the department that produces the means of production—relative to Department II—the branch that produces the means of personal consumption.

Bauer’s diagram therefore illustrates some basic laws of motion of the capitalist system that Marx developed only in volume III of “Capital” and therefore, according to Marx’s method of presentation, is unknown in volume II. Not only the quantitative growth of the productive forces but also their qualitative growth are illustrated in Bauer’s diagram of expanded capitalist reproduction. (2)

Bauer’s economic harmonies

Bauer assumed a 10 percent rate of accumulation for constant capital and a 5 percent rate of accumulation for variable capital. He also assumed an unchanging rate of surplus value of 100 percent. Or what comes to exactly the same thing, the workers work half the time for themselves and half the time for their bosses. Bauer further had the working population grow at a rate of 5 percent per year. Therefore, a 5 percent rate of accumulation for the variable capital is necessary to maintain full employment. Since constant capital grows faster than variable capital, the rate of accumulation actually accelerates.

Or to put in everyday language, despite a growing level of “automation,” full employment is maintained because the rising rate of economic growth exactly compensates for the increasing level of automation. (3)

“We can see,” Henryk Grossman explained in his 1929 critique of Bauer, the “Law of Accumulation and Breakdown,” “that after ten years the original capital expands from a value of 300,000 to 681,243, or by 227 per cent, despite a continuous fall in the rate of profit.

“In the second decade,” he continued, “the rate of expansion of capital amounts to 236 per cent, although the rate of profit falls even further from 24.7 to 16.4 per cent. Finally in the third decade the accumulation of capital proceeds still faster, with a decennial increase of 243 per cent, when the rate of profit is even lower. So Bauer’s scheme is a case of a declining rate of profit coupled with accelerated accumulation.”

Grossman explained that Bauer assumed “a productive mechanism in which constant capital amounts to 200,000 and variable capital to 100,000.” He continued: “The other assumptions are that: 120,000 of this constant capital is apportioned to Department I (means of production) and 80,000 to Department II (means of consumption); that the variable capital is equally divided between both spheres; that the constant capital expands by 10 per cent a year and the variable capital by 5 per cent; that the rate of surplus value is 100 per cent and that in any given year the rate of accumulation is equal in the two department.”

But how can the rate of capitalist expanded reproduction—capital accumulation—be maintained and indeed increased sufficiently to maintain full employment in the face of growing “automation,” while the rate of profit is progressively declining? Shouldn’t the rate of accumulation fall with the rate of profit? And if it does, won’t the rate of the accumulation of variable capital fall below the rate of growth of the working population? And won’t this lead to a rising unemployment—not full employment?

Like Marx, Bauer brought his diagrams forward only four years. During those four years, Bauer’s calculations show that if the capitalists consume a smaller percentage of the total surplus value unproductively—spending relatively less on items of personal consumption, they cannot only maintain a rate of accumulation sufficient to maintain full employment, but they get to consume as a class—not necessarily as individuals, that will depend on the growth of the population of capitalists—absolutely more items of personal consumption in terms of value. Since labor productivity is rising rapidly, this will translate into a still greater quantity of use values.

In Bauer’s diagram, while the rate of profit falls from 33.3 percent in year one to 30.3 percent in year four, a greater percentage of the total profit is capitalized and a smaller percentage of the total profit is consumed on items of personal consumption. This doesn’t involve any undue hardship for the capitalists, because they are getting an absolutely larger slice of the pie in terms of personal consumption—in value terms—even though their slice represents a smaller percentage of the total pie—total wages plus the surplus value that is consumed unproductively by the capitalists.

In terms of material use values, the capitalists’ consumption will increase even faster, since with rising labor productivity each quanta of abstract human labor—unit of value—will represent more use values to delight the appetites of the capitalists.

As for the standard of living of the workers, the rate of surplus value is held at 100 percent throughout the four years that Bauer extends his diagram. In terms of value, the wages of the workers remain constant. But in terms of use values, a steady rise in real wages is implied. The workers get to consume an unchanging amount of value every year, but with a higher productivity of labor, the same amount of value means a rise in the real wages of the workers. In Bauer’s diagram, just like the capitalist economic journalists and economists like to explain, the real wages of the workers rise as productivity of labor rises. The faster the productivity of labor grows, the faster will be the growth in real wages.

So despite the fall in the rate of profit, the standards of living of both the capitalists and the workers keep rising. The only difference implied between the growth of the living standards of the two classes is that while the living standard of the workers increases in proportion with labor productivity, the living standard of the individual capitalist will grow at a somewhat slower rate assuming the population of the capitalists grows at the same rate as the workers. The difference between the living standard of the workers and that of the capitalists will therefore gradually narrow over time.

Therefore, the implication of Bauer’s model is that class antagonisms should gradually soften as capitalism develops. This is exactly the same conclusion that the bourgeois marginalist economists, including Keynes, arrived at. (4) The difference is that Bauer drew these conclusions on the basis not of marginalism but Marx’s critique of classical political economy!

Henryk Grossman described Bauer as a “neo-harmonist,” since both capitalists and workers benefit from capitalist development, with the workers benefiting even more than the capitalists. The tendency of Bauer’s capitalism to advance the standard of living of the workers relative to that of the capitalists becomes stronger the more that capitalism develops, as we will see below.

Rosa Luxemburg’s reaction to Bauer’s diagram

“[I]f capitalist production can act limitlessly as its own consumer, i.e. production and market are identical,” Luxemburg explained in her “Anti-Critique,” “it becomes totally impossible to explain the periodic appearance of crises.”

She continued: “This would mean rejecting Marx and finally ending up with the man whom Marx ridiculed so thoroughly … the ‘wretched man’ Say, who in 1803 propounded the dogma: It is absurd to say that too much of all commodities can be produced, there can only be partial crises, but no general ones: if for this reason a country has too much of one kind of product, that only proves that it has produced too little of some other kind.” (5)

Luxemburg is right here. The spirit of Say’s Law does indeed completely saturate Bauer’s diagram. Of course, Bauer might have claimed that his diagram abstracts crises and that the whole problem of crises must be examined at a lower level of abstraction. This is no doubt what Marx would have said about his own diagram of expanded reproduction, which unlike Bauer’s abstracts both the rising organic composition and the falling rate of profit. However, we will see below that Bauer at least implicitly did accept Say’s Law.

“Capitalist accumulation” in Bauer diagram, Rosa Luxemburg claimed, “becomes objectively limitless once capitalist production has built a sufficient market for itself. As production will still grow, i.e. the productive forces will develop without limit [emphasis added—SW], even when all mankind is divided into capitalists and proletarians, as there is no end to the economic development of capitalism, the one specifically Marxist foundation crumbles.”

“According to Marx,” Luxemburg continued, “the rebellion of the workers, the class struggle, is only the ideological reflection of the objective historical necessity of socialism, resulting from the objective impossibility of capitalism at a certain economic stage [emphasis added—SW].”

Luxemburg was appealing here to basic principles of historical materialism against Bauer. If capitalism in no way limits the development of the forces of production—and this is indeed what Bauer’s diagram of expanded reproduction appears to demonstrate—then the capitalist mode of production is in Marxist terms an absolute mode of production—it will last as long as human society lasts. If we accept these conclusions, any idea of a society beyond capitalism, any idea of socialism, is a utopia.

Remember, in Bauer there is neither an absolute nor a relative impoverishment of the workers. If Bauer’s diagram presents an accurate picture of real life capitalism—and we assume that the basic principles of historical materialism of Marx and Engels are also true—we can expect an endless and fruitful struggle for reforms as capitalist development proceeds but hardly a socialist revolution.

The only job of the organized workers’ movement—both party and trade union—will be to make sure the rate of surplus value does not rise above 100 percent. And considering capitalism’s powerful tendency toward “full employment” that Bauer diagrams seem to demonstrate, this task should be well within the power of the trade unions.

If what Bauer’s diagram appears to show corresponds even approximately to capitalist reality, then Bernstein was right to say “the movement is everything, the goal is nothing.” Or as the notorious opportunist, racist and pro-imperialist founder of the American Federation of Labor Samuel Gompers put it, the slogan of the workers’ movement should simply be “more”!

Bauer’s diagram seemed to present a picture of complete capitalist harmony—both between the classes as well as between the growing forces of production and the capitalist relations of production—that rivals the harmonies of bourgeois marginalism. (6) This is why Henryk Grossman described Bauer’s model as “neo-harmonist.”

Bauer on cyclical crises

But even Bauer could not deny that cyclical crises do in fact occur. What was Bauer’s theory of cyclical crises? His theory fit right in with his overall picture of capitalist harmony. According to Bauer, the rate of accumulation adjusts itself to the growth of population through the movements of the industrial cycle.

Therefore, the tendency towards full employment in Bauer is built right into his model just like it is built into the foundations of the marginalist model, though the model allows cyclical deviations from full employment.

“Accumulation presupposes expansion of the range of production,” Bauer wrote, “and this expands through population growth … In capitalist production there is a tendency for capital accumulation to adjust to the growth of population … The tendency for accumulation to adjust to the population growth determines the international relations [of capital—Trans.] … When the capitalist world economy is seen as a whole, the tendency in the industrial cycle to adjust accumulation to the population growth becomes visible … The periodic return of prosperity and of the crisis of depression is the empirical expression of the fact that the mechanism of capitalism acts to cancel over accumulation and under accumulation and continually readjusts accumulation to the population growth.” (Quoted by Luxemburg in “Anti-Critique”)

If Bauer is correct, cyclical crises don’t break out because the market is glutted—commodities are unable to find buyers—but rather because the capitalist system periodically demands more of the commodity labor power—the commodity that alone produces surplus value—than is available on the labor market. This and not the need to sell the commodities—find markets for them—at a profit, as Engels put in “Socialism Utopian and Scientific”—is the barrier that capitalism periodically runs into. (7)

During the boom, according to Bauer’s theory, the process of expanded reproduction develops with a vigor that is greater than can be sustained in the long run by the given rate of growth of the working population. Every industrial cycle—business cycle—ends with what Marx called in volume III of “Capital” an absolute overproduction of capital—and not a relative overproduction of commodities.

During the cyclical crisis, reproduction falls below the level that the growth in population will allow over the long run. This “compensates” for the boom, when expanded reproduction proceeds temporarily at a faster rate than the growth in population will allow over the long run. Averaging out the faster than sustainable growth of the “boom”—determined by the rate of growth of the working population—with the slower than sustainable growth of the depression, you get exactly the rate of economic growth that the growth of the population will allow over each industrial cycle.

If the rate of growth of the working population accelerates, capitalist economic growth will duly accommodate it, and enough extra jobs will always be created to maintain full employment in the long run. If the rate of growth of the working population slows down, so will the rate of economic growth. But in all cases, the rate of economic growth under capitalism will always be—leaving aside short-term cyclical deviations—adequate to maintain “full employment.” Milton Friedman himself couldn’t have provided a prettier picture of capitalist harmony.

The difference between absolute and relative overproduction

What did Marx mean when he referred to the relative overproduction of commodities in cyclical crises, as opposed to absolute overproduction in a hypothetical situation he examined in volume III of “Capital”?

In a relative overproduction, the production of commodities does not exceed the need for material use values of the total population. On the contrary, Marx emphasized, in terms of the needs of the great mass of the population, there is always an underproduction under capitalism, never overproduction. The result is mass poverty as basic human needs go unmet.

If during a crisis of overproduction, capitalism was overthrown and replaced by socialist production, it would immediately become apparent that there is a shortage of material use values, not an overproduction of them. Indeed, the planned economies of the Soviet Union and its allies were plagued not by crises of overproduction but by a chronic “goods famine,” a shortage of material use values. (8)

But according to Bauer, in contrast to Marx and Engels, a cyclical crisis develops not because there is a relative overproduction of commodities but when the demand for the commodity labor power exceeds the supply. In plain language, a cyclical crisis erupts because of a shortage of labor. The industrial capitalists cannot find additional labor power to increase production any further.

Let’s imagine an economy plagued by just such a labor shortage—which is therefore on the eve of a cyclical crisis, if we follow Bauer’s theory. Let’s assume as a thought experiment that a socialist revolution occurs and capitalist production is replaced by socialist production. Would the labor shortage disappear?

Assuming the forces of production remain unchanged—which would have to be the case in the “short run,” as Keynes would say—the answer will be no. In Marx, during a cyclical crisis capitalism runs into a barrier that is peculiar to the capitalist mode of production but not production in general: the relative overproduction of commodities.

In Bauer, in contrast, during a cyclical crisis capitalism runs into a barrier that would be a barrier to any economy, especially a socialist economy that aims at satisfying the material needs of all members of society, and not simply those of a relatively small ruling class of non-workers. (9)

Rosa Luxemburg, in contrast to Bauer, understood correctly that capitalism has a built-in tendency toward the relative—not absolute—overproduction of commodities and therefore towards the relative overproduction—not absolute overproduction—of (real) capital.

For example, during the current world depression factories are lying idle or even being destroyed by their capitalist owners, not because there aren’t enough workers offering their labor power for sale on the market—anybody who has been trying to find a job lately knows that—but because the commodities that they could be producing if all existing factories and other productive forces were operating at full capacity would not be able to find buyers at profitable prices.

Luxemburg’s mistake was that she couldn’t explain why on a periodic basis a relative overproduction must appear once capitalism has developed to a certain point. She was led down a wrong path when she tried to explain capitalism’s tendency toward relative overproduction of both (real) capital and commodities by an inherent inability to fully realize the entire surplus value in a pure capitalist economy consisting only of capitalists and workers.

Grossman on the contradictions of Bauer’s diagram

In the following paragraphs, I only examine Grossman’s theories as put forward in his 1929 work “Law of the Accumulation and Breakdown” and not in any of his other works.

Marx in his diagram of expanded capitalist reproduction only extended his model for four years. In reality, Marx only needed to extend his diagram to the second year. Marx’s model runs forever, quantitatively increasing while remaining qualitatively unchanging. This is a basic mathematical attribute of Marx’s diagrams of expanded capitalist reproduction that arises from Marx’s basic assumptions and abstractions when he designed his diagrams.

But is this the case with Bauer’s diagram? Not at all. Bauer perhaps thought it was, since like Marx he brought his model forward for only four years. But four years aren’t forever. How long could Bauer’s model actually run if we use the assumptions Bauer used when he designed the model? It fell to Henryk Grossman to do the math. He demonstrated that by the 36th year Bauer’s model mathematically completely breaks down! This is true even if with Bauer we tactically accept Say’s Law—as Grossman indeed did.

Because of his basic assumptions, Bauer’s model has very different mathematical attributes than Marx’s model of expanded capitalist reproduction.

Bauer had the rate of profit decline steadily, though the absolute mass of profit rises. The capitalists, therefore, have to invest more and more of their profits productively in order to maintain a rate of accumulation necessary to maintain full employment. Or what comes to exactly the same thing, they must consume relatively an ever lower percentage of the surplus value in the form of items of personal consumption.

But the capitalists can never invest—consume productively—more than 100 percent of the total surplus value. If the rate of profit is 30 percent, the rate of accumulation cannot be higher than 30 percent, even if the capitalists “live on air” and capitalize their entire surplus value.

If the rate of profit falls to 20 percent, the maximum rate of accumulation cannot be higher than 20 percent. If the rate of profit falls to 10 percent, then the maximum possible rate of accumulation falls to 10 percent—assuming the capitalists direct none of the surplus value to personal consumption. In reality—even thrifty capitalists have to eat now and then, after all—the rate of consumption must be less than 10 percent. (10)

Therefore, the rate of investment and thus full employment can be maintained in the face of a fall in the overall rate of profit only for a limited period of time. Eventually, the fall in the rate of profit must lead to a fall in the rate of investment and, assuming an unchanged rate of population growth, the appearance of unemployment. The harmonies of Bauer’s diagram come to an end or, to use Grossman’s favored expression, result in a “breakdown.”

Grossman showed that using Bauer’s assumptions by year 36 the rate of profit falls to 8.7 percent. There is simply not enough total surplus value—profit—even if the personal consumption of the capitalists has fallen to below zero—if that were possible—to maintain full employment without increasing the rate of surplus value.

Indeed, in terms of value—hours of abstract human labor—capitalist consumption cannot increase after the 20th year. It might continue to increase in terms of use values for some time beyond that due to the rise in the productivity of labor. But eventually in order to maintain full employment it must drop to zero in terms of hours of abstract human labor.

And no matter how much the productivity of labor increases—unless the productive forces grow to such an extent that no labor is needed at all, but then how are we going to produce surplus value, which is the only aim of the system?—zero hours of abstract human labor translate into zero material use values. By year 35, the capitalists must learn how to live on air to maintain Bauer’s harmonies. After that, even if the capitalists have learned how to live on air, it will be impossible to maintain full employment and keep the rate of surplus value at “only” 100 percent.

Either unemployment keeps growing progressively or the rate of surplus value must rise. This will be all the more so if we assume that the capitalists must spend some of their profits on personal consumption if they are to live!

Some common objections to Grossman’s demonstration

Naturally, Grossman’s model of capitalist “breakdown”—which is actually Bauer’s model extended to the year 36—brought a wave of objections, just like Luxemburg’s earlier work had. One objection was that Grossman made completely unrealistic assumptions about the rise in the organic composition of capital. For example, Grossman has the constant capital grow twice as fast as the variable capital in order to have the model “break down” as early as year 36. But in the real world, constant capital doesn’t grow at anywhere near that rate.

But the figures are Bauer’s, not Grossman’s. This criticism should be addressed to Bauer not Grossman.

Another objection is that Grossman has the capitalists starve to death beginning in the 35th year! The absolute impoverishment of the capitalist class—not the working class—causes capitalism to collapse. Logically then, it should be the capitalist class that rises up in revolution against capitalism, not the working class, which is doing quite well up to this point.

But again, the fault for this lies not with Grossman—he is only following the logic of Bauer’s diagram—but with Bauer. Grossman has simply carried out Bauer’s assumption that the difference in the levels of consumption between the capitalists and workers narrows as capitalism develops to its logical mathematical limit. In the end, if we follow Bauer’s assumptions, the workers get to consume all the items of personal consumption that are produced and the capitalists get to consume none of them.

What Grossman demonstrated was that in Bauer’s “neo-harmonist” model it is the capitalists who will suffer absolute impoverishment and eventually will face starvation and death. Presumably, then, it will be the capitalists who will turn against the capitalist system, who end up consuming none of the means of personal consumption that are produced. The natural political conclusion is that it will be the capitalists who will support a transition toward socialism.

If Bauer’s model reflected even remotely capitalist reality, the way to socialism lies not through class struggle but through class collaboration. The actual class-collaborationist practice of Bauer’s Austrian Social Democratic Party was indeed in accord with his economic model. Unfortunately for Bauer and his Social Democrats, the Austrian capitalist class failed to grasp the conclusions that flow from Bauer’s “neo-harmonist” model. (11)

In the real world, the capitalist class will never allow itself to starve to death. Long before the capitalists starve, they will reduce the level of accumulation and use the resulting unemployment to raise the rate of surplus value far above 100 percent. Unlike Bauer, Marx believed that the rate of surplus value would rise over time, and that no action of the trade unions could prevent it. This was one law of motion discovered by Marx that Bauer did not build into his model. The result was the absurdities that Grossman unearthed simply by extending Bauer’s model to the 36th year.

Nor is there really any need to assume “full employment” in analyzing the laws of the capitalist system, unless we are trying to picture capitalism as a system of harmony in the manner of the vulgar bourgeois economists. Bauer and the bourgeois economists notwithstanding, under capitalism unemployment is an absolute necessity, even if the extent of unemployment fluctuates with the successive phases of the industrial cycle.

What Grossman proved was that unwittingly Bauer built a model that is not harmonious at all. Economists and “vulgar socialists” like Otto Bauer may lie—or perhaps deceive themselves—but mathematics does not. Bauer’s model is powerful enough—once its real implications were brought out by Grossman—that even though it was designed by its creator to show harmony—it actually proved the exact opposite.

Did Grossman really prove that capitalism must collapse at a certain point?

But does Grossman really demonstrate that capitalism will at a certain point become economically impossible? Did Grossman—or more properly Bauer—really build a mathematical model of the final breakdown of capitalist production beyond which its continued existence becomes mathematically impossible? Didn’t Grossman simply demonstrate the absurdities of Bauer’s “neo-harmonist” claims? After all, didn’t Grossman simply show that even accepting Bauer’s claims, capitalism tends not toward full employment but towards a rise in the unemployed and must in the long run increase the rate of surplus value if it to survive?

But is this really a final breakdown of capitalism? Doesn’t unemployment—the reserve industrial army—and a rising rate of surplus value—with some fluctuations—mark the entire history of capitalism?

Before I examine this question, I want to mention some genuine weaknesses in Grossman’s 1929 “Law of the Accumulation and Breakdown.”

Grossman’s mistakes in method

While Rosa Luxemburg made the mistake of claiming it would be impossible even in theory to fully realize the surplus value needed for expanded reproduction in a pure capitalist economy, Grossman made the bigger mistake of not seeing the realization of surplus value and value in general as any problem at all for capitalist production as long as a sufficient mass of surplus value is produced.

Grossman in his analysis of cyclical crises assumed that commodities sell at their values. Grossman said that this was Marx’s method in analyzing the production of surplus value and simple and expanded reproduction in volume II of “Capital.” Though he puts great emphasis on Marx’s method, Grossman himself makes grave methodical errors. He doesn’t seem to have really understood Marx’s method.

Marx showed that in order to explain surplus value—the most important task in all of economic science—it was necessary to strip capitalism naked by assuming that all commodities sell at their values. The transformation of values into prices of production completely obscures this. Once the transformation of values into prices of production occurs, the fact that surplus value is created by the living labor of the workers alone is completely obscured. It appears that both constant and variable capital are equally producing surplus value. This was the starting point of the whole reaction against Ricardo’s theory of labor value and all of vulgar economics that followed.

Bringing in market prices that fluctuate around the prices of production would only further obscure the real origins of surplus value. To analyze market prices, it is necessary to analyze supply and demand and competition. None of this does anything to clarify the production of surplus value; it only further obscures it. In analyzing the origins of surplus value, it is necessary to assume that supply and demand—the competition between the capitalists and between the capitalists and workers, and the competition between the workers themselves—cancels itself out. The only way to proceed is to assume that prices directly reflect values.

Reproduction, both simple and expanded, can also best be analyzed by sticking to the assumption that prices equal values. Bringing in prices of production, let alone market prices, only confuses the essence of reproduction, whether simple or expanded. Again, it is better to examine capitalism without its “clothes” of market prices fluctuating around prices of production.

That is why Marx put his own analysis of simple and expanded reproduction in volume II of “Capital,” where he maintained his assumption that prices equal values, and not in volume III, where he analyzed the rise in the organic composition of capital, the tendency of the rate of profit to fall, and the transformation of values into prices of production.

But things are different with crises of the generalized overproduction of commodities. These periodic capitalist crises are characterized precisely by the fact that supply exceeds demand for the vast majority of commodities at the same time.

How does such a situation arise once capitalism has reached a certain degree of development, and why is the periodic recurrence of such a situation not only possible but inevitable? Any realistic and complete crisis theory must deal with these things and explain them. If we abstract supply and demand—the competition between buyers and sellers of commodities—we would be abstracting the very subject of our study. This is an improper use of the method of abstraction—what Marx called a violent abstraction.

Grossman’s wrong theory of cyclical crises

Grossman’s theory of cyclical crises was derived from his—or rather Bauer’s—diagram of expanded reproduction. As the organic composition of capital rises and the rate of profit declines, the point must be reached where not enough surplus value is produced to prevent a substantial rise in unemployment. Long before the capitalists are forced to live on air, investment declines because not a enough surplus value is being produced.

As capitalist investment declines, the demand for the commodities produced by Department I drops. This causes the appearance of overproduction in Department I, which then reacts on Department II as the personal consumption of both the capitalists and workers in Department I is cut back. In Grossman, a crisis of the insufficient production of surplus value is the cause of overproduction, but the relative overproduction of commodities is not the cause of the crisis. (12)

According to Grossman, because the production of surplus value is too low to maintain expanded capitalist reproduction, the capitalists are forced to attack the living standards of the workers. The way out of the crisis is either the overthrow of the capitalist system, which has “broken down,” by the workers—and of course this is what Grossman himself desired—or the capitalists succeed in increasing the rate of surplus value sufficiently and capitalist expanded reproduction starts up again.

According to Grossman’s theory of crisis, once the rate of surplus value is increased sufficiently, the crisis ends, though a new crisis and “breakdown” is inevitable as the rise in the organic composition of capital and the fall in the rate of profit resume. The periodic relative overproduction of commodities, which to Marx and Engels was the cause of the periodic capitalist crises, is not the cause of the crisis in Grossman any more than it was the cause of the crisis for Bauer. Rather, for Grossman it is the inevitable breakdown of the “Bauerian equilibrium” that is rooted in the rising organic composition of capital that is the cause of the periodic cyclical crises of capitalism.

The generalized relative overproduction of commodities, which includes the general relative overproduction of real capital, is no more the cause of the crisis for Grossman than high unemployment is the cause of the crisis.

Political dangers in Grossman’s theory

If Grossman’s theory of cyclical crises is correct, this would mean that capitalist crises can be shortened or even avoided if only the workers are willing to put up with a greater degree of exploitation. Since cyclical crises, according to Grossman, are caused only by an insufficient production of “surplus value,” the solution of the crisis—assuming capitalism is to be retained—is for the workers to practice “wage restraint,” which allows profits to rise once again, leading to economic recovery.

But if Grossman’s theory were to be widely accepted in the workers’ movement, this would play into the hands of the bosses and their “hired-gun economists,” who on the occasion of every crisis tell the workers they have to accept massive wage cuts if the crisis is to be overcome and “full employment” restored. In the name of restoring “full employment,” the bourgeois economists explain to the workers—but never to the bosses—that they must tighten their belts and sacrifice.

But if the essence of cyclical capitalist crises is the relative generalized overproduction of commodities, then this is nonsense. No “sacrifice” on the part of the workers can avoid or even shorten these inevitable periodic capitalist crises.

No matter how successful the capitalists are in increasing the rate of surplus value, the overproduced commodities—both in the form of commodity capital (inventories) but also in the form of fixed capital—must be either sold off at prices that are more or less below their values, or in the case of fixed capital, either written down or destroyed altogether. This is the process that must occur, as Engels points out in “Socialism Utopian and Scientific,” before recovery can begin.

If the workers are not able to struggle against the effects of the inevitable periodic capitalist crises on their standard of living, how can we expect them to ever make a socialist revolution?

Grossman’s real breakdown theory

Now I will return to whether there is a real breakdown theory at all in Grossman. Or is there simply a theory—a largely incorrect one at that—of periodic capitalist crises? According to Grossman, can capitalism even with its periodic crises caused by the rising organic composition of capital and falling rate of profit continue forever, or at least until the “sun burns out,” as Luxemburg put it?

The answer is no. Or rather it is yes only if we assume that the population can increase without limit, forever. This assumption is, or course, incompatible with materialism or the laws of physics, not to speak of the laws of biology.

In volume III of “Capital,” Marx gives an illustration of a hypothetical economic crisis based on the absolute overproduction of capital. Here many Marxists, including Grossman, made what I believe is the mistake of assuming that Marx was illustrating a more or less typical cyclical crisis. I don’t believe that this was Marx’s intention.

For one thing, the examination of cyclical crises according to Marx’s plan lay beyond “Capital” in a book—which Marx unfortunately never got to write—that would deal with competition, the world market and world trade and crises.

In Marx’s volume III hypothetical crisis, the cause of the crisis is an absolute overproduction of capital, not a relative overproduction of commodities. Marx’s capitalists have gotten themselves into quite a jam, because they have temporarily run out of labor power, and as result no increase in investment can increase the production of surplus value. Indeed, the competition among the capitalists for the existing labor power only reduces the rate of surplus value and therefore actually reduces the production of surplus value further.

The absolute contraction of profits—not only the fall in the rate of profit—causes production to collapse and unemployment to soar! We have the paradoxical situation of mass unemployment caused by a shortage of labor. Without an increase in population, any attempt by the capitalists to resume expanded capitalist reproduction will simply cause the crisis to erupt anew.

The only way Marx’s capitalists get out the jam that they find themselves in is through the continued growth of the population that Marx in volume III of “Capital” is kind enough to provide.

But what would happen if the total population, along with the “proletarianization” of the population, has reached the maximum extent possible. If we make these assumptions, there will indeed by no way out for our capitalists.

Once the maximum numbers of workers that can ever be employed are employed, a further rise in surplus value is only possible through the rise in the rate of exploitation—the rate of surplus value. But wouldn’t the economic crisis caused by the absolute overproduction of capital enable the capitalists to increase the rate of surplus value and squeeze more surplus value out of the existing workers?

Let’s for the sake of argument assume that this is true. But now there will be an absolute mathematical limit beyond which the mass of surplus value can never rise. The workday cannot be extended beyond 24 hours, nor can the amount of surplus value produced by each worker in a 24-hour day ever exceed 24 hours. Even if the workers lived on air and worked 24/7, the amount of surplus value will reach an absolute mathematical limit beyond which it cannot be increased.

The real limits of surplus value production will be considerably less, because, first, the human organism needs some rest. About 17 or 18 hours per day seems to be the physiological limit for the expansion of the workday, and of course wages cannot be reduced to zero. Just as Grossman’s—or rather Bauer’s—capitalists cannot live on air, neither can the workers. And here—completely unrealistically—I am leaving out any resistance of the workers to the attempts of the capitalists to increase the rate of exploitation to the absolute mathematical limit.

So at some point, in light of the limits that the material world places on the growth of the human population and consequently on the production of surplus value, capitalist production must break down—not just temporarily but for good. It is a historically limited process that had a beginning and must sooner or later come to end.

A capitalist limit to production

It is important to realize that I, or rather Marx in volume III of “Capital,” was describing a capitalist limit, not an absolute limit to production. A socialist economy might well be able to continue to increase production beyond the point where the total number of workers has stopped growing by introducing more machines and taking other measures to increase the productivity of labor.

But this would not do the capitalists any good. In capitalist production, the growing mass of material use values is only a by-product. The real purpose of capitalist production is to increase the mass of surplus value—unpaid labor.

Capitalist production aims to reduce to a minimum the paid labor that is necessary to produce a commodity but increase as much as possible the unpaid labor—the surplus value—that the commodities labor produces contain. Under socialist production, the aim is to reduce to a minimum the amount of the total labor that is used to produce the product as much as the development of the productive forces allows.

Once it is no longer possible to increase the mass of surplus value any further—which is inevitable at some point thanks to the restraints of the material world we live in—capitalism must come to an end. This is no temporary cyclical crisis; capitalism breaks down for good.

Grossman’s breakdown theory—which is fully valid despite the mistakes he made in his theory of cyclical crises—is therefore quite enough to establish the historically limited nature of the capitalist mode of production. It can only exist during the period—which extends over a certain number of centuries—when it is possible to rapidly increase the mass of surplus value. A necessary if not sufficient condition for this is a rapidly increasing population.

Once the population is—for whatever reason—no longer growing, the days of capitalism are numbered. “Today bourgeois writers,” Grossman wrote in 1929, “in both France and Germany are concerned about whether the future accumulation of capital will find adequate reserves of labour power at its disposal. The modern bourgeois economist is characterized by his dread of underpopulation.”

Eighty years later this remains true, not only for France and Germany but for virtually all the imperialist countries as well—notwithstanding the current crisis of mass unemployment that has engulfed the globe due to the current depression!

Grossman correctly sees that “underpopulation”—relative to the needs of capitalism to expand the total mass of surplus value to the point of infinity—must in our material world lead to the permanent breakdown of capitalism sooner or later.

But—remember, Grossman was writing 80 years ago in 1929—was capitalism anywhere near this limit beyond which capitalism does indeed become simply impossible?

Grossman tried to argue that even 80 years ago capitalism was approaching the limit of its ability to increase the mass of the surplus value that it was wringing out of the workers beyond which it becomes impossible. But here his arguments sound more than a little forced.

“It might be argued,” Grossman wrote, “that the threat [of “underpopulation”—SW] is not too serious because there are still hundreds of millions of people in the enormous continents of Asia and Africa who could satisfy capital’s insatiable appetite for labour.”

Clearly Grossman feels uneasy here. The breakdown of capitalism is inevitable but perhaps not for quite some time yet. “But the point,” Grossman goes on, “is not whether there are large masses of people in this or that part of the world, but whether they are available where capitalism needs them.”

But don’t we see today that capital is indeed penetrating deep into the heart of the Asian continent, where the great mass of the remaining actual and potential producers of surplus value are to be found? It is no accident that it is on the Asian continent that we see today the fastest growth of capitalist industrial enterprises.

Since Grossman wrote, the population of Asia has grown enormously, and Grossman’s plea that the potential workers are not “where capitalism needs them” is quite unconvincing. If the workers that capital needs to produce more surplus value “are not where capital needs them,” capital will either bring them to where it needs them—immigration—or it will go to them.

In practice, the limits of capitalism in Grossman might not be that much different than the absolute limit of capitalism that Rosa Luxemburg unsuccessfully sought to establish in her own work. Capitalism will be at the point of becoming economically impossible around the time that capital has fully conquered all of the world’s production and has consequently drawn the entire global working population into capitalist production.

A secondary criticism that was made of Luxemburg can therefore be made of Grossman as well. Considering the great number of peasants in the world’s population—more so in Luxemburg’s and Grossman’s time than is the case today, of course—who have not yet been drawn into capitalist production, the end of capitalism is still far in the future.

Historically, proletarians have always been recruited primarily from the peasantry, who are used to both a low standard of living and are well adapted to hard physical labor. Once the mass of peasant or small farmers has been exhausted, it becomes much more difficult to increase the size of the surplus value-producing working class.

Even today, there are still well more than a billion peasants who are potential surplus value producers—in China and India. But what will happen when these peasants have been fully separated from their means of production—assuming, of course, that capitalist production continues to expand in these two countries until the entire potential working population has been drawn into capitalist production? (13) Won’t the potential growth in the world working class then grind to a halt?

This seems all the more likely, because as Rosa Luxemburg pointed out in the “Anti-Critique” almost 100 years ago once a country has become largely capitalist as opposed to pre-capitalist peasant, the rate of population growth always slows down. Women are less and less inclined to function as baby-creating machines that they are are obliged to be in peasant societies. This is especially true in this age of birth control.

This, by the way, vindicates Marx’s claim that Malthus libeled the human race when he claimed that the population would inevitably overwhelm any possible increase in the means of subsistence. The Rev. Thomas Robert Malthus was a British economists who was a contemporary and opponent of Ricardo. While Ricardo generally spoke for rising industrial capitalism, Malthus defended the reactionary landlord interests.

According to Malthus, any increase of the means of subsistence will mean a corresponding increase in the human population, since people could hardly expect to restrain their sexual instincts. Two thousand years of Christian preaching against “sexual immorality” had scant results in this regard! Today, this argument seems quaint when the seeking of sexual pleasure has been almost entirely separated from human reproduction.

Indeed, the population of virtually all the imperialist countries with the exception of the United States is actually declining. The only reason that population is still increasing in the United States is the high level of immigration. If we discount the growth due to immigration, the population is declining in the United States as well.

It may well be that the size of human population will be limited by quite different factors than the maximum human population that Earth—and the rest of the solar system—can physically maintain.

Nowadays, the only force pushing in the direction of turning our beautiful planet into an overpopulated nightmare is not sexual desire but capitalism itself.

If capitalism eventually comes to an end because it proves unable to increase the number of its wage slaves beyond a certain limit—thereby setting an ultimate limit to the amount of surplus value that can be produced—it would not be the first mode of production to perish because of its inability to increase the size of its working class.

The ancient slave system of Rome flourished as long as its military expansion was able to increase the number of slaves. But once that expansion ceased, the inability of the slave holders to breed a sufficient number of captive slaves brought about the downfall of the entire ancient mode of production based on slave labor that had once dominated the Mediterranean world.

As I explained above, Grossman saw some of the contradictions of capitalist production—such as the problems of producing surplus value—while he denied others—such as the problem of realizing value and surplus value. Therefore, Grossman saw only half the picture. Despite that, he did demonstrate that capitalism must eventually break down.

But what happens if we analyze the prospects of a capitalist “breakdown”—the material basis for a socialist revolution—in light of all and not simply some of the capitalist contradictions? If we have to wait until capitalism has finally reached the limit pointed to by Grossman—the maximum mass of surplus value beyond which any further increase is impossible—perhaps about a century from now—the chances of a socialist revolution in the lifetime of even young people alive today would be slim. (14)

And if capitalism does succeed in turning the earth into the overpopulated hell of dystopian science fiction stories, the environment of the earth might be so damaged that it would be impossible to establish a socialist society. In that case, the modern class struggle between the capitalists and the wage workers would end in the “mutual ruin of both contending classes.” Modern society would be ruined and our species might very well face extinction.

The greatest political danger in Grossman’s ‘breakdown’ theory

This is perhaps the greatest political danger of Grossman’s breakdown theory, based entirely on the problems of producing surplus value. Grossman’s “breakdown” theory might lead to “putting off” the socialist revolution to a relative distant future when in fact there might be both the necessity and thus the possibility of a socialist revolution much sooner.

This will be the subject of the next posts, which will conclude this series.


1 The rising organic of capital, the tendency of the rate of profit to fall, and the consequent tendency of Department I to grow faster than Department II were capitalist laws of motion that were discovered by Marx. But he did not build them into his reproduction model in volume II of “Capital,” because Marx explained these laws of motion only in volume III of “Capital.”

One law of motion that Bauer left out of his diagram was the tendency of the rate of surplus value—the rate of exploitation of the working class—to rise. In Bauer’s diagram of expanded reproduction, there is not only no absolute impoverishment of the working class, there is no relative impoverishment of the working class. This significant omission, in line with what Henryk Grossman called Bauer’s “neo-harmonist” view of capitalism, is curiously in line with his opportunist approach to politics. At least with Bauer there was no conflict between theory and practice.

2 Because the growth in the productivity of labor—rising organic composition of capital—the rise in output under capitalism is always greater than the growth in employment. Therefore, output must always rise faster than the growth of the working population in order to prevent unemployment from rising. In Bauer’s economic theory, the basic economic laws of capitalism cause output to grow fast enough—leaving aside cyclical fluctuations—to guarantee full employment. If the Nobel prize in economics had existed in Bauer’s time, he might have been the first socialist to win it! His basic conclusions were not that far from bourgeois marginalism.

3 The independent variable in Bauer’s system that all other variables must adjust to is the rate of growth of the population. In Bauer’s diagram, a 5 percent annual rate of growth of population is assumed. Therefore, variable capital must also grow by exactly 5 percent, since Bauer assumes both full employment and an unchanging 100 percent rate of surplus value. In fact, the very rapid rise in the productivity of labor suggested in Bauer’s diagrams implies a very rapid rise in the real wages of the workers. So in a Bauer type of capitalism, there would not only be full employment—every person who needs a job would quickly be able to find one—the level of real wages would not be governed by what is necessary to reproduce the labor power of the workers but would rise with the growth of labor productivity.

4 To be fair to him, Keynes at least qualified this by saying that this will be true if the government and central banks follow policies that prevent overproduction crises. Remember, Keynes conceded that crises of overproduction were possible under capitalism—which is more than we find in Bauer—though Keynes claimed that they could be avoided if the governments and central banks followed the correct policies. However, in Bauer’s model Says Law seems to be built right in and crises of general (relative) overproduction cannot occur. While Keynes was a purely bourgeois economist who hated socialism, and Bauer was a “democratic socialist,” Keynes presented in his “General Theory” a more radical criticism of capitalism than Bauer did.

5 Through his writings, Marx showed as much contempt for Say as he showed respect for Ricardo, though Ricardo himself accepted Say’s Law.

6 They seemed to because Bauer carried his calculation forward only four years.

7 “Socialism Utopian and Scientific” was originally part of a much larger work of Engels, “Anti-Duhring,” directed against the now-forgotten German university professor Eugene Durhing, who had declared himself a socialist and had gained some influence in the early German Social Democratic Party.

8 Pro-capitalist economists made much of the fact that stores in the “West” were brimming with abundant commodities while stores in the Soviet bloc were chronically understocked. They forgot to add that only those with adequate amounts of money could afford to actually buy the abundant commodities. Over the last 20 years, the people who live in the former Soviet bloc—with the exception of the new capitalist class and their hangers-on—have found this out to their sorrow.

9 In addition to being plagued by a chronic “goods famine,” the Soviet bloc countries suffered from a chronic shortage of labor.

10 Assuming that only capitalists accumulate. This was indeed Bauer’s assumption, and it largely corresponds with the situation that exists in the real world.

11 In 1918, the Austrian Social Democratic Party, now under the leadership of Otto Bauer himself, and following the logic of Bauer’s “neo-harmonist” economic theories, formed a coalition government with the reactionary bourgeois Social Christian Party. In 1934, Bauer’s coalition “partners” launched a civil war that brutally crushed the Social Democratic Party, established a dictatorship and forced Bauer into exile. Four years later, the Social Christian dictatorship was replaced by the even worse dictatorship of Adolf Hitler’s Nazi party, with the support of the Austrian capitalist class.

12 In most real world cyclical crises, the crisis begins in the production of means of personal consumption—Marx’s Department II, not Department I. In the latest crisis, the overproduction first manifested itself in the home-building industry. The building of homes belongs in Department II, not Department I.

Through the first stage of the crisis of 2007-09—from August 2007 to July 2008—industries producing the means of personal consumption were slumping, industries producing the means of production—such as the steel industry and the oil extraction industry, for example—were still booming. This fact, which is the general pattern in real world crises, is hard to explain within the framework of Grossman’s theory of cyclical crises.

13 For example, what are the chances that the ruling Communist Party of China will finally live up to its name and curb the growth of capitalist production in favor of socialist production at some point? Examining this subject would take us far beyond the limits of these posts. Another question is the prospect for socialist revolution on the Indian sub-continent with all its explosive economic and social contradictions. This is also a vast subject that would take us far beyond the subject matter of these posts but is, of course, of vital importance to the longevity the world capitalist system.

14 At best, any attempts within the lifetime of those now alive at socialist revolution would be doomed to experience the fate of the Russian Revolution. Socialist construction might begin and even register huge achievements in some countries such as it indeed did in the Soviet Union, but it would be doomed to succumb to the hostile capitalist environment sooner or later.


3 thoughts on “Otto Bauer’s Answer to Rosa Luxemburg

  1. Hi. I’m reading through this series on breakdown theory. I found this post to be especially informative and helpful in understanding the falling rate of profit theory of crisis.

    The part of your post which explains Grossman’s breakdown theory isn’t adding up for me, though.

    According to my understanding of this theory, when population is not growing, once there is full employment, capitalists can’t invest in new machines or expand production because of a labor shortage – there are no new workers to hire to match the new machines.

    But I thought that more advanced technology means more efficient production which means a smaller and smaller workforce is necessary to produce the same number/type of commodities.

    So instead of investing in new machines, capitalists could invest in more efficient machines which would allow production to be expanded even though no new workers have been hired.

    So even if population is stagnant, it seems to me that expansion can continue, simply by using more efficient technology to produce more commodities with the same number of workers.

    I know the above may be wrong, and if so I hope you can explain why.

    Thanks 🙂

  2. I wish there was an option to edit comments. Anyways, one sentence needs correcting:

    I should have written:
    “So instead of investing in *more* machines, capitalists could invest in more efficient machines which would allow production to be expanded even though no new workers have been hired.”

    What I did write:
    “So instead of investing in *new* machines….”

  3. “Otto Bauers Answer to Rosa Luxemburg | A Critique of Crisis Theory” was indeed a marvelous post, cannot
    help but wait to read through even more of ur articles.
    Time to spend a bit of time on the internet haha.
    Thanks for your effort ,Hai

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