Are Marx and Keynes Compatible? Pt 8

Sweezy attempts to develop a theory of crises in ‘Theory of Capitalist Development’

In “Monopoly Capital,” Sweezy (and Baran) treated crises and the industrial cycle only in passing. In contrast, in “The Theory of Capitalist Development” Sweezy examined Marxist crisis theory in considerable detail. Even today, “The Theory of Capitalist Development” can be recommended for anybody interested in the development of Marxist crisis theory in the first part of the 20th century.

In his survey, Sweezey examined the writings of such Marxists as Kautsky, Hilferding, Rosa Luxemburg and Henryk Grossman. Sweezy found essentially three crisis theories among these early 20th-century Marxists.

One was put forward by Karl Kautksy around the turn of the 20th century. It involved the question of whether capitalism was evolving toward a state of chronic depression.

What is sometimes called the “Great Depression” of 1873-1896 (1) had come to an end, and the world capitalist economy was entering a phase of rapid economic expansion. According to Kautsky, it was the existence of agrarian markets still dominated by pre-capitalist simple commodity production that explained capitalism’s continued ability to grow.

However, as capitalism continued to develop, these markets would be expected to decline in importance and the world capitalist economy would, if socialist revolution did not intervene, sink into a state of more or less permanent depression. This would mark the end of capitalism’s ability to develop the productive forces of humanity.

Therefore, according to Kautsky, the cyclical crises and their associated depressions were heralds of the approaching state of permanent depression. As such, they were reminders that capitalist production was historically limited and would inevitably give way to a higher mode of production.

Later, in 1912, Rosa Luxemburg attempted to prove Kautsky’s turn-of-the-century views in a rigorous way in her “Accumulation of Capital.” Luxemburg believed that she had indeed proven that assuming that all production is capitalist—that is, there are no more simple commodity producers—expanded capitalist reproduction would be a mathematical impossibility. And remember that according to Marx capitalism can only exist as expanded reproduction.

Luxemburg’s theory of imperialism

In order to provide expanding markets for its capitalists, Luxemburg explained, each advanced industrial capitalist country is driven to dominate as many pre-capitalist agrarian regions as possible. Luxemburg therefore believed that she had discovered not only the absolute economic limit to capitalist production beyond which it could not exist—and therefore the economic inevitability of the transition to socialism—but had also explained the economic basis of imperialism. Luxemburg’s view formed one of two theories of imperialism that were held by early 20th-century Marxists.

The other theory, supported by Hilferding and Lenin, identified imperialism with the growth of monopolies and finance capital. Indeed, for Lenin monopoly capitalism and imperialism were different words for the same thing.

With few exceptions, most Marxists believed that Luxemburg had not proven that expanded capitalist reproduction would be a mathematical impossibility in a pure capitalist society where all pre-capitalist simple commodity production had given way to capitalist production.

If the Kautsky-Luxemburg theory of crises (2) had been correct, it would indeed have provided a materialist proof that capitalism would in the course of further development necessarily give way to a higher mode of production. In contrast, Sweezy in “The Theory” showed that a rival theory—that crises arise out of disproportions among the branches of capitalist production—had no such implication.

According to this theory, periodically disproportions grow to such an extent that a crisis is needed to restore proportional production. Here crises appear as mere accidents and not as part of a historical trend pointing toward the inevitable future downfall of capitalism.

Indeed, it was held by the more right-wing Social Democrats that as the power of the banks, trusts and cartels grew and capitalism became more organized, disproportionate production would become rarer and crises would become less severe. In fact, there was much speculation that a future universal cartel would be able to eliminate capitalist crises altogether. (3)

Tugan-Baranovsky’s theory of unlimited growth of productive forces under capitalism

The disproportion theory of crises was developed to an extreme by the Ukrainian semi-Marxist economist Mikhail Tugan-Baranovsky (1865-1919). Inspired by Marx’s diagrams of expanded reproduction formulas in Volume II of “Capital,” Tugan-Baranovsky claimed that as long as the proper proportions of production were maintained, there was virtually no limit to the ability of capitalism to expand and develop the productive forces. Therefore, Tugan-Baranovsky held, in complete contradiction to Marx’s historical materialism, a future transition to socialism depended on the moral superiority of socialism relative to capitalism, and
not economic necessity.

To understand Tugan-Baranovsky’s arguments, we should recall the basic equation for capitalist reproduction: cII = vI + sI. The term cII refers to the constant capital that is used up by the department of production that produces the means of personal consumption, called by Marx Department II.

On the right side of the equation, the term vI refers to the means of production that Department I—the department of production that produces means of production—produces that are exchanged for the means of consumption that are destined to be consumed by the workers—the producers of surplus value.

The other term that appears on the right side of the equation, sI, refers to the means of production that are exchanged for the means of consumption produced for the personal consumption of the capitalists. According to Marx’s theory of expanded reproduction, any increase in cII must be matched by an increase in vI + sI. As capitalism develops, the organic composition of capital rises. This means that both cII and vI + sI will grow more slowly than production as a whole. Or what comes to exactly the same thing, cI, which represents the means of production that are used to produce additional means of production and therefore circulate entirely within Department I, grows faster than the economy as a whole.

Tugan-Baranovsky claimed that as long as the proper proportions are maintained between the various branches of production, there is no limit whether extensive or intensive on the ability of capitalism to develop the productive forces. Tugan-Baranovsky went so far as to claim that even if the productivity of labor rises to the extent that only a single worker is left, capitalist production would continue to go its merry way.

Sweezy was appalled by Tugan-Baranovsky’s arguments, just as many other Marxists have been over the decades. Isn’t production in the final analysis always production to meet some human need? In Tugan-Baranovsky—like in Ricardo—we have production solely for the sake of production! (4)

One thing that Sweezy overlooked in his criticism of Tugan-Baranovsky in “The Theory” is that capitalism is about accumulation of capital not use values. The accumulation of use values is merely a byproduct of the accumulation of capital.

Capital consists of value—that is why Marx defined capital as “self-expanding value.” If there was only one worker, even if she worked 24/7 she would be (re)-producing far less value—embodied human labor measured in terms of time—than the hundreds of millions workers do today. Therefore, no matter how much in terms of use values was produced by a mass of the productive forces beyond anything that exists today, these productive forces would represent far less capital measured in terms of hours of embodied labor time—value—than they have ever represented in the history of capitalist production.

But capitalist production above all aims at expanding value and not use values, and so it is hard to see how the productive forces could actually develop the way Tugan-Baranovsky claimed they could within the limits of capitalist production.

Falling rate of profit theory of crises

The third theory of crises examined by Sweezy was the “falling rate of profit theory,” which remains popular today. As capitalism develops, the organic composition of capital rises, which assuming that the rate of surplus value is unchanged will lead to a fall in the rate of profit. Even if the rate of surplus value rises, it is quite possible that a higher rate of surplus value will express itself in a lower rate of profit. That is because the rate of surplus value is calculated on the variable capital alone, while the rate of profit is calculated on the total capital.

Since capitalism is production for profit, if the rate of profit keeps falling isn’t it only a matter of time before the rate of profit will be too low to provide sufficient incentive for continued capitalist investment? To use the language of the Keynesian economists, investment opportunities will begin to vanish.

Instead of converting money into commodities—means of production and labor power—the industrial capitalists will turn into misers and hold on to their money. This hoarding of money will then lead to a generalized overproduction of commodities. The mass unemployment created by the crisis increases the rate of surplus value, which again raises the rate of profit, which leads to recovery and the cycle repeats.

Sweezy pointed out that the falling rate of profit—or inadequate production of surplus value—crisis theory does not say that a generalized overproduction of commodities causes the crisis. Rather, it says that a generalized overproduction of commodities develops as a result of the crisis.

According to the falling rate of profit theory of crises, if the rate of surplus value rises sufficiently the crisis goes away. Henryk Grossman and after his death Paul Mattick have been the leading Marxist supporters of this theory of crises.

Sweezy found all three crisis theories inadequate if not just plain wrong. Luxemburg’s claim in the “Accumulation of Capital” was subjected to sharp attacks by many Marxists shortly after it was published. Lenin in his obituary to Luxemburg in 1919 (5) mentioned that she was wrong about the accumulation of capital, a clear reference to her “Accumulation of Capital.”

Sweezy accepted that the Kautsky-Luxemburg theory had been convincingly refuted, which with very few exceptions remains the consensus of Marxists to this day. Sweezy also, however, was not satisfied with the “disproportionate production” theory, which reduced crises to mere accidents. Certainly, Sweezy sensed that there was more to crises than mere accidental disproportions. There are many statements in Marx to that effect. This left the falling rate of profit theory of crises.

Sweezy had doubts about that crisis theory as well. Sweezy, remember, did not find Marx’s demonstration of the tendency of the rate of profit to fall due to the rising organic composition of capital at all convincing. Wasn’t it just as likely, Sweezy wrote, that the rate of surplus value would rise faster than the organic composition of capital? If it did, the rate of profit would rise rather than fall.

The Sweezy of “The Theory” therefore believed that the tendency of the rate of profit was indeterminate. But if the tendency of the rate of profit is indeterminate, the rug is pulled out from the supposed inevitability of crises caused by a falling rate of profit. Capitalism could just as well develop in a crisis-free way.

However, the concrete history of capitalism is marked by repeated crises. The Sweezy of “The Theory” therefore believed that there must be some other factor behind crises than the tendency of the rate of the profit to fall due to the long-term rise in the organic composition of capital.

Sweezy’s proposed solution to the problem of crises

In “The Theory of Capitalist Development,” Sweezy held that there are actually two types of crises. One type is caused by an insufficient rate of profit. The other is caused by underconsumption. Given Sweezy’s doubts about the tendency of the rate of profit to fall, he almost certainly believed that real-world crises were of this second type. (Chap. VIII, Sec. 4, p 145, “Theory of Capitalist Development)

Sweezy’s theory of crises, crises of underconsumption

Sweezy rejected what he called the “naive underconsumption theory that is popular among trade unionists,” which we often see even today in the socialist press—that workers cannot buy back all the commodities that they produce. If the capitalists did pay the workers enough to buy back the products they produced, there would be nothing left over for the capitalists and the other exploiters. There would be no profits and no capitalism.

Sweezy developed a far more sophisticated theory of crisis of underconsumption. In Sweezy’s view, crises of underconsumption arise not from low wages but rather the opposite—wages that are “too high” as far as capitalist production is concerned.

When the rate of surplus value falls, the capitalists respond by replacing workers with machines, which causes the organic composition of capital to rise. A rise in the organic composition of capital means that the means of production should rise relative to the means of consumption. However, Sweezy held in the “The Theory” that a rise in the means of production necessarily means a proportionate rise in the production of the means of consumption as well.

Sweezy held that as the organic composition of capital rises, the capitalists of Department I convert a smaller and smaller percentage of the total surplus value into either personal means of consumption or into additional variable capital.

Instead, Department I produces additional means of production that are used within Department I itself to produce still more means of production. Exactly where Department II is supposed to obtain its additional means of production to expand its scale of production so that it keeps up with Department I isn’t clear. In any case, Sweezy believed that the result will be “underconsumption”—an insufficient demand for items of personal consumption. This shortfall in demand for consumer items might express itself in either a crisis or in stagnation. (6)

A critique of Sweezy’s underconsumption theory of crisis

This argument is open to the same criticism that N.I. Bukharin made of Rosa Luxemburg’s argument that it would be impossible for the capitalists to realize their surplus value in a closed capitalist economy. Luxemburg had argued that workers can only consume their wages but not surplus value. However, in order to carry out expanded reproduction the capitalists have to capitalize a portion of their surplus value in the form of additional variable capital. This is not possible, Luxemburg argued, because the workers in that case would be consuming surplus value.

What Luxemburg overlooked was that the workers are consuming yesterday’s surplus value that has now been converted into additional means of consumption that workers convert into additional labor power when they consume their wages. The workers are then forced to sell this additional labor power to the capitalists, which becomes additional variable capital. Therefore, variable capital just like constant capital is nothing but the accumulated surplus value of the past.

Or as Bukharin put it, Luxemburg proved the impossibility of expanded reproduction in a pure capitalist economy by assuming the conditions of simple reproduction. Under simple reproduction, none of the surplus value is converted into variable capital. If we don’t allow surplus value to be converted into variable capital, Luxemburg’s implicit assumption, we of course cannot have expanded capitalist reproduction.

Sweezy’s argument is open to the same objection. Sweezy assumes the conditions of expanded reproduction with an unchanged organic composition of capital to prove that expanded reproduction with a rising organic composition must lead to an “underconsumption.” Carried to its logical extreme—which Sweezy does not do—this would imply that expanded capitalist reproduction with a rising organic composition of capital is impossible. In reality, the contradiction that Sweezy believed would inevitably lead to underconsumption disappears once we realize that a rising organic composition of capital means that Department II must invest some of its profits in Department I.

There are many ways capital can move from Department II to Department I. In some cases, it is simply a matter of who the industrial corporation (industrial capitalist) sells its commodities to that determines whether its production counts as part of Department I or Department II. For example, in the case of an electricity generating firm, the electrical power counts as production in Department II if it is sold to individuals or families who use it for their personal consumption and as Department I if the power is used to power factories.

In other cases, many factories can easily shift production from items that serve as personal consumption to items that serve as means of production. Especially in the age of giant monopolies, large corporations often own factories that produce different types of commodities with different use values and over time can easily invest more in their factories that produce means of production as opposed to personal consumption.

In addition, the system of credit, banks and stock markets offers many ways that capital can be transferred from a slower growing Department II to a faster growing Department I.

Indeed, in a capitalist economy we know capital is always moving from branches of production that are earning a lower than average rate of profit to branches of production the are earning a higher than average rate of profit. If we assume a rising organic composition of capital, the industrial capitalists will find more opportunities for investment where the rate of profit exceeds the average in industries producing the means of production than they will find in industries that produce the means of personal consumption. This does not mean that the movement of capital from Department II to Department I will proceed without  friction, as Marx liked to say. But it will proceed.

Since it was clear that capitalism over the decades was expanding with a rising organic composition of capital, Sweezy had to explain how this could happen. Otherwise, he would be in danger of having to explain why the actual development was “impossible.” New industries therefore played for Sweezy the role that pre-capitalist simple commodity production played for Luxemburg.

Reflecting the influence of Schumpeter, Sweezy held that “new industries” could overcome underconsumption. For example, it might take many years to build a system of railroads. During the period when the tracks are being laid, a huge number of construction workers have to be paid, which enables them to spend their wages on consumer commodities.

The capitalists who own the construction companies also have to spend a portion of their profits on means of personal consumption. Yet the railroad while it is under construction delivers no commodities to the market. The demand for consumer commodities will be increased without any immediately offsetting increase in the supply of consumer commodities. Instead of a glut in Department II, there will be a shortage of commodities, which will then oblige the capitalists in Department II to increase their investments. This is indeed how the “accelerator effect,” as the bourgeois economists call it, works. (7)

Sweezy admitted that this was the case in new industries, but industries do not have to be new industries to call for large-scale investments that stir up demand for consumer commodities long before they contribute to an increase of consumer commodities. All that is required is that such investments take a certain period of time to complete.

For example, railroad technology was developed in the early 19th century, but investments in railroads were still stirring up a large-scale demand for consumer goods into the early 20th century, long after railroads had ceased to be a new “innovative” technology. Indeed, in “Monopoly Capital” Baran and Sweezy attribute the rapid growth of the U.S. economy right up to the crisis of 1907 to the continued impact of “railroadization.”

Sweezy seems to assume that once an industry has ceased to be “new,” no large-scale investments will be undertaken. This seems like a rather arbitrary assumption unless we assume that all industries that are not in the process of being either partially or entirely replaced by other industries that do the same thing with different technology are by definition “new” industries.

For example, railroad transportation in the U.S. was increasingly replaced by trucks starting in the second decade of the 20th century. Trucks are simply an application of automobile technology and the internal combustion engine to the transport of commercial commodities. Therefore, when automobile technology, which includes trucks, developed on a large scale starting in the 1910s, investment in railroads went into a long-term decline.

What Baran and Sweezy were to call “railroadization” in “Monopoly Capital” was replaced by “automobilization.” Therefore, there will always be “new” industries by definition to counteract the “underconsumption” even if technological innovation were to cease entirely. If the automobile and the internal combustion engine had not been developed, for example, railroads would still be a “new” industry even today.

Sweezy also saw bad investments by the capitalists as a force that offsets the tendency toward underconsumption. These bad investments generate demand. The construction companies that create new factories and railroads have to be paid, generating demand for consumer commodities by both the capitalists and the workers of the construction industries. But if the resulting factories fail to produce more consumer commodities that people are willing to buy, demand is produced without generating an additional supply of (salable) commodities.

Bourgeois “business cycle” theorists often blame mistaken investments for causing crises. The crisis then liquidates the bad investments. Sweezy turned this argument on its head and held that bad investments tend to prevent crises or “stagnation.”

Sweezy’s biggest error

Last week, I wrote that Sweezy made a grave error in “The Theory” when he failed to investigate the forms of value and money. Because of this error, he could not really grasp the essence of crises as crises of generalized overproduction of all commodities relative to the money commodity. He didn’t realize that generalized overproduction involved not only an overproduction of the means of consumption—Marx’s Department II—but also of means of production—Marx’s Department I.

Sweezy failed to understand that under capitalism, once it has developed to the point where the industrial capitalists can rapidly expand production, production will, due to the basic contradictions of commodity production, necessarily grow faster than the combined purchasing power of the workers and the capitalists and their hangers-on including the state. Periodically, therefore, crises must break out that keep the growth of production in line with the growth of the market in the long run.

At least before the 1970s, Sweezy accepted the claim that the government could always step in to purchase the unsold commodities. In “The Theory,” he seems to take for granted that as long as there are unsold commodities, the government and its monetary authority can issue additional legal tender paper money and use it to purchase the unsold commodities ensuring “full employment.” He thus assumed that if only the government is willing to spend enough money it can always push the economy if it wishes right up to the point of “full employment” and keep it there. This is why Sweezy is often considered a “Keynesian” Marxist.

He correctly saw that today’s monopoly capitalism has a major problem in realizing the value of the commodities it produces. But he didn’t understand why this is so. He therefore assumed that spending by the capitalist government if it is large enough can always solve the problem of realizing value and surplus value, and thus crises and stagnation.

Only late in life when he observed the “stagflation crisis” of the 1970s and early 80s—after “Monopoly Capital” had been written—did Sweezy note that the purchasing power that the government and the monetary authorities were attempting to create was being devoured by inflation. He began to lose his earlier confidence in the ability of the government to create the necessary purchasing power right up to “full employment.” But even then he was never able to explain why this was so and integrate it into his basic economic theory.

The incorrect idea that the capitalist government can create demand at will right up to “full employment” if only it spends, and if necessary prints, paper money continues to exercise a considerable influence in Monthly Review circles.

An example of this is the publication by “Mrzine,” an online publication supported by the Monthly Review Foundation, of a famous article by Michal Kalecki, “Political Aspects of Full Employment.” In it, Kalecki explained that it is well within the power of the capitalist state to create “full employment” if it wishes to. I will have more to say on this question in my final segment in this reply, which will deal with the question of how the workers can wage the fight to abolish unemployment.

Sweezy’s disillusionment with Keynes reflected in his letter to Baran

In his 1962 letter to Baran, Sweezy expressed a growing dissatisfaction with Keynes. This is interesting in light of John Bellamy Foster’s recent emphasis on Keynes. Let’s see what Sweezy had to say about Keynes in his 1962 letter to Baran.

“What was new in Keynes,” Sweezy wrote to Baran,” was the assertion that, left to itself, the competitive economy could not recover—unless the marginal efficiency of capital [expected profits on new investment] happened to be high enough, which Keynes thought it had a deeply rooted tendency not to be. In other words, he introduced the problem of stagnation, alias underemployment ‘equilibrium.’ This you will not find in any of the earlier theories in the classical-neoclassical tradition—though of course many respectable thinkers such as Hobson and Veblen made serious attempts to explain them [the contradictions]. It was thus Keynes’s historical merit to bring the problem of stagnation into the orbit of orthodox, accredited economics where it occupied the center of the analytic stage for a good decade. (Note well, however, that since the late 1940s it has been largely banished again.)”

“His vision,” Sweezy wrote to Baran, “of a stagnating economy has all sorts of ramifications and implications which were absent from the neoclassical vision.”

“And I must say,” Sweezy wrote in the same letter, “that the more I read of the General Theory the less convincing his arguments seem.”[emphasis added—SW]

The missing ingredient in the Monthly Review School—crises

What Keynes left out, according to Sweezy, was monopoly. While that is true as far as it goes, it raises the question of why a capitalist system based on free competition evolved into a capitalist system where monopoly plays a growing role. This is an extremely important question, because Marx (and Engels) saw the tendency toward the concentration and centralization of capital as more than anything else pointing toward the inevitable transition to a higher mode of production.

Capitalism grows out of simple commodity production that is based on small-scale scattered production. It evolves toward monopoly, which itself is, according to Marx and Engels as well as Lenin, merely a transitional stage toward a planned socialist economy managed by the associated producers.

Crises, monopoly, stagnation and the historical tendency of capitalist production

According to Marx, as capitalism develops, capital becomes more and more centralized. The centralization of capital means that the number of independent enterprises shrinks. Taken to its logical extreme, all of production would end up being centralized in the hands of a single corporation. Once this happens, the planning principle would entirely extinguish the market.

There would be no further commodity production, no money and of course no crises of generalized overproduction of commodities for the simple reason that no commodities would be produced. All we would have to do to achieve a socialist society would be to eliminate the stockholders, who would play no necessary role at all, and subordinate the management of the corporation to the employees—the associated producers.

Why do the number of independent firms decline? One of the reasons is the growing economies of scale. As a rule, larger enterprises have lower individual prices (costs) of production and can undersell the smaller enterprises. It is no accident that “neo-classical” economists, who have good reason to play down or deny the growth of monopoly, like to assume “constant returns to scale.” But there is another reason for the growth of monopoly.

Once capitalism evolved to the point where it could rapidly increase industrial production, it gained the ability to expand production faster than the market for its products can grow. Suppose that there are a hundred independent capitalist enterprises producing a given commodity, but the entire market demand can be meet by 90 enterprises if they work at full capacity. Competition will therefore tend to reduce the number of independent firms to 90.

Now assume that once the number of enterprises drops to 90, the entire market demand can be satisfied by 75 enterprises if they work at full capacity. Competition will then further reduce the number of independent enterprises to 75. Competition, therefore, resembles a game of musical chairs in which the number of players is steadily reduced. It is only a matter of time before only a handful of independent firms exist and monopoly—or oligopoly—is born.

The firms in the monopolist association then attempt to bring the game of musical chairs to a halt by dividing up the market and keeping some of their capacity idle—or if too much capacity has to be idled, arrange a planned liquidation of the excess capacity. They also try to prevent any new firms from attempting to enter the business and often turn to the state power to keep rival firms out.

They use the planning principle not to expand the production of use values so that all reasonable human needs are met but rather use it to hold back the expansion of use values in order to prevent the collapse of capitalist relations of production entirely. This is what monopoly capitalism—also called imperialism—is all about.

But things do not end there. The tendency for production to expand faster than markets again reasserts itself despite the monopolies, leading to new crises of overproduction. This causes competition to break out anew, breaking up the existing monopolistic associations. However, renewed competition leads to even greater centralization of capital and new monopolistic associations with even fewer independent corporations than the old associations had.

Expanding markets counteract the tendency toward the centralization of capital

Marx wrote that the capitalist mode of production would indeed quickly collapse if there weren’t counteracting decentralizing trends that counter the centralizing trends. But what are these decentralizing trends that work in the direction of prolonging the capitalist mode of production?

Though as a rule markets grow more slowly than the ability of the industrial capitalists to expand, there are certain situations where the market for a time grows faster than the capitalists’ ability to expand production. Under these conditions, the tendency toward the centralization of capital reverses and gives way to a counter-tendency toward the decentralization of capital.

For example, within each industrial cycle there is stage where the market expands at a rate that exceeds the ability of the industrial capitalists to increase production. However, the market cannot maintain the rate of expansion for reasons that I have examined in my main posts.

In addition, when new types of commodities are invented, there is a period when the market grows faster than production of the new type of commodity. It seems that the market for smart phones—essentially hand-held computers that have a phone “function”—is going through such a phase at present.

When this happens, many existing or aspiring “entrepreneurs” try their luck, and for awhile the number of firms producing the new commodity expands. Or what comes to exactly the same thing, capital becomes increasingly decentralized. But it is only a matter of time—and the more capitalism develops the shorter the time is—before overproduction appears and most of the new entrepreneurs are driven from the field leaving a only a few survivors. Or as the business press puts it, the phase of “maturation” sets in and “consolidation” occurs. Capital becomes centralized and the new branch of production is monopolized by a handful of corporations.

Another situation where capital becomes decentralized arises when a very tight monopoly made up of a few very large corporations—which represents a high degree of concentration of production as well as the centralization of capital—succeeds in maintaining profits that are far above the average rate of profit for a prolonged period. In this case, the centralization of capital in a particular branch of industry has gotten ahead of itself. Eventually, however, the exceptionally high monopoly super-profits encourage other industrial capitalists to make exceptional efforts to overcome the “barriers to entry.”

Very often this doesn’t happen in the country where the large monopolies that are making exceptional super-profits are located but in other capitalist countries that are passing through a rapid phase of capitalist development.

One example of this is the global auto industry after World War II. It seemed that the U.S. “big three” plus the smaller and now long defunct American Motors had the world market for themselves. Indeed, no large new automobile firms were to emerge within the U.S., while American Motors collapsed.

But on the international level, the U.S. monopoly was increasingly challenged by European and then Japanese automobile producers. Eventually, this led to the collapse of the super-profits of the “big three.” Indeed, the super-profits were replaced by massive losses. Eventually, the “old” General Motors went bankrupt. A similar pattern can be observed in the steel and other basic industries.

However, sooner or later overproduction leads to renewed centralization, this time on a global scale. Since under capitalist production the ability of the industrial capitalists to increase production is greater than the long-term ability of the market to expand—despite fluctuations in the opposite direction—the ascendant tendencies toward the centralization capital ultimately trumps the tendencies working toward the decentralization of capital.

The Monthly Review School has a major advantage over the rival “falling rate of profit” Grossman-Mattick school, because its adherents do understand that the realization of surplus value is a major problem for the capitalist system. And they have correctly put the spotlight on monopoly and stagnation. Monopoly shows that the capitalist system is not only “irrational,” as Baran and Sweezy stressed in “Monopoly Capital,” but that the economic system itself is evolving in the general direction of socialism. And more recently, they have called attention to the phenomenon of “financialization” that followed the 1979-82 Volcker Shock.

What they are still lacking is a correct theory of money and crises. However, in order to achieve this they will have to pick up where Sweezy left off in his “Theory of Capitalist Development.” As I explained last week, Sweezy cut short his analysis of value by failing to analyze the forms of value and money. If the Monthly Review School does analyze the forms of value, they will be able to understand that the periodic capitalist crises are exactly what Marx and Engels called them, crises of the general overproduction of commodities.

A correct crisis theory will tie together the Monthly Review views of monopoly and stagnation. The transition of capitalism to socialism will emerge as an economic inevitability as well. However, they will not be able to do this if they remained focused on Keynes. That is the wrong path.


1 Also called by some the “Long Depression” to distinguish it from the 1930s Great Depression.

2 Though Kautsky put forward essentially the same ideas of the limits of capitalist production that Luxemburg attempted to rigorously prove in her “Accumulation of Capital,” he did not support Luxemburg’s view on the accumulation of capital and its historic limits in 1912 or later.

3 A universal cartel if it could completely suppress competition and establish a planned economy would indeed end crises. But such an economy would no longer be a commodity-producing economy and therefore would not be a capitalist economy. Lenin in his famous 1916 pamphlet “Imperialism” stressed that monopoly capitalism, or imperialism, was not pure monopoly—if it were, it would no longer be capitalism— but rather an unstable mixture of monopoly and free competition.

4 The more rapid growth of the department that produces the means of production relative to the department that produces the means of consumption means that the fraction of the economy that represents (gross and net) investment will grow faster than the portion of production that represents the means of consumption. However, as Keynes was well aware, spending on investment is far more unstable than spending on personal consumption. It is always possible to postpone the building of a new factory or even the replacement of an old factory, but every person has to eat every day. Therefore, as the economy becomes more dependent on investment as opposed to personal consumption, it becomes ever more crisis prone.

More severe crises mean deeper and longer periods of stagnation and a stronger trend toward monopoly. Therefore, despite the seeming “rigor” of Tugan-Baranovsky’s arguments, the more capitalist production consists of the production of means of production to build more means of production the worse crises are, the more monopoly will grow, and the closer capitalism will be to collapse. Therefore, the intuitive feeling of Sweezy and many other Marxists that Tugan-Baranovsky’s arguments were absurd were in the final analysis correct after all.

5 Lenin in his 1919 obituary to Luxemburg—who had been murdered by proto—Nazi “Free Corps” thugs with the support of the Social Democratic government—described Luxemburg as an eagle. He explained that even eagles can occasionally sink to the level of barnyard fowl, but that barnyard fowl can never soar to the level of eagles.

6 Sweezy’s analysis of the problem of simple and expanded reproduction is necessarily incomplete because he failed to develop a theory of money.

7 Industrial and transportation enterprises in order to pay the construction companies that generate additional demand for items of personal consumption that help provide a market for Department II during the periods of construction must have access to an already existing hoard of money. If such a hoard does not exist, they will not be able to pay the construction companies that generate the demand for the commodities of Department II. Again, Sweezy did not analyze this extremely important aspect of the question because of his failure in “The Theory” to analyze money. This weakness in “The Theory” was not remedied in “Monopoly Capital,” which ignored value and therefore money altogether.

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