Why Capitalism Requires Expanded Reproduction

A friend Nick wants to know why capitalism can only exist as expanded reproduction. In Volume II of “Capital,” Marx developed the diagrams for both simple and expanded reproduction. Why can’t capitalism function as a system of simple reproduction?

I examined the question of simple and expanded reproduction in my main posts, especially here and here. Here I want to focus on the question of why capitalism can’t exist as a system of simple reproduction. Didn’t Marx, after all, create a mathematical model that shows exactly how simple capitalist reproduction works? (1) Yet in many places throughout “Capital,” Marx emphasized that capitalism can exist only as expanded reproduction.

Without going into detail, let’s review the basics of Marx’s diagrams of simple and expanded reproduction.

First, Marx assumed a pure capitalism. He was not interested in other modes of production such as simple commodity production that in the real world exist side by side with capitalist production.

Second, Marx was interested only in the two most economically important fractions of the two major classes in capitalist society. These are the industrial capitalists—defined as the capitalists who purchase the labor power of productive-of-surplus-value workers—on one side, and the industrial workers—the workers who produce surplus value—on the other. (2) The non-industrial capitalists such as merchants and money capitalists and non-productive workers—workers who do not produce surplus value—play no role in the diagrams.

Simple reproduction

In Marx’s diagram, or mathematical model, of simple reproduction, the accumulation of capital is absent. The total social capital is simply conserved, not accumulated. All the surplus value produced by the working class is consumed in the form of items of personal consumption by the capitalist class. This consumption consists of what Marx called necessities, items that are also consumed by the working class, and luxury items that are consumed by the capitalist class alone.

The economy simply reproduces itself without any change. As machines are used up, they are replaced by identical machines. Raw materials and auxillary materials that are consumed are replaced by identical raw and auxillary materials. As workers die or retire, they are replaced by other workers with identical skills.

The market and the monetary system in Marx’s diagrams of reproduction

Many Marxists when they produce diagrams of simple reproduction—as well as expanded reproduction—simply leave out the question of money and the market. By leaving out money, they imply a system of barter where commodities exchange directly with commodities. They therefore build Says’s so-called law—that commodities are purchased by means of commodities, and therefore a general overproduction of commodities is impossible—right into the foundations of their model. Attempts to explain crises on the basis of mathematical models of either simple or expanded reproduction that leave out money are doomed to failure from the start.

The problem of the market and simple reproduction

Marx, however, avoided this error, though he made no attempt to explain either crises or the industrial cycle in general in his mathematical models of simple and expanded reproduction. In simple reproduction, where exactly the same kind of commodities are produced in the same quantities year after year, the market, or monetarily effective demand, must remain unchanged. Like production, the market for commodities neither grows nor contracts.

The monetary system in Marx’s models of reproduction

In Marx’s reproduction models, there is neither token nor credit money and also no credit and no clearing houses. Marx assumes a simple monetary system of full-weight gold coins. The velocity of circulation of the gold coinage is assumed to be fixed and unchanging. As the gold coins used for currency grow light in circulation—due to wear and tear of the circulating coinage—newly mined gold minus the newly mined gold that is used for non-monetary purposes is used to replace the full-weight gold coins that have grown light in circulation. (3)

The gold coins in circulation that have a given and unchanging rate of turnover provide just enough monetarily effective demand to purchase the total commodity production. Since neither credit, clearing houses, or changes in velocity of the circulation plays a role in Marx’s reproduction diagrams, gold production is fixed at levels that maintains a level of monetarily effective demand that exactly matches the total commodity production. There is nether underproduction or overproduction of any commodity. (4)

Consequently, all value, including the surplus value, is fully realized. In analyzing reproduction, as I explained before, Marx used direct prices—he assumed that the prices of all commodities are exactly equal to their values or direct prices. (5) Marx didn’t even develop the concept of prices of production until Volume III. Therefore, prices of production, which achieve the equalization of the rate of profit between branches of production with different organic compositions of capital and turnover periods, play no role in Marx’s reproduction diagrams.

What else did Marx leave out of his models of simple and expanded reproduction?

First, Marx left out of his models the fluctuations of market prices around values—or direct prices. And second, Marx, as I have already mentioned, left out the transformation of values—or direct prices—into prices of production. Only in Volume III do we learn that market prices do not fluctuate around values—direct prices—but around prices of production.

Also abstracted from Marx’s model of simple reproduction—and of his model of expanded reproduction—is technological change and the rising organic composition of capital, and consequently the tendency of the rate of profit to fall.

Expanded reproduction

Only when Marx deals with expanded reproduction is the accumulation of capital bought into the diagrams. In expanded reproduction, unlike the case with simple reproduction, the capitalists accumulate a portion of the surplus value as capital. The new capital is divided into new variable capital—labor power purchased by the (industrial) capitalists—and constant capital such as factory buildings and machines—fixed capital—and raw and auxiliary materials—constant circulating capital.

The problem of the market in expanded reproduction

In expanded reproduction, the level of commodity production is ever increasing. Therefore, unlike the case with simple reproduction, an ever-expanding market is necessary. How does the market grow? Like in his model of simple reproduction, Marx abstracted token money, credit money and credit in general, clearing houses and changes in the velocity of circulation. He retained from his model of simple reproduction, a monetary system of full-weight gold coins with a fixed rate of turnover.

Therefore, in addition to meeting all non-monetary demand, and in expanded reproduction a rising demand, for gold as a raw material and the replacement of the gold coins that grow light in circulation, the gold bullion producing capitalists must in expanded production produce a sufficient quantity of gold to circulate the ever-growing volume of commodity production.

What Marx abstracted in his model of expanded reproduction

Marx abstracted from his model of expanded reproduction just like he did in his model of simple reproduction technological progress, a rising organic composition of capital and the tendency of the rate of profit to fall. He also abstracted the transformation of values or direct prices into prices of production. Also abstracted was the fluctuations of market prices around direct prices. Therefore, Marx made no attempt to model either crises or the industrial cycle in his mathematical model of expanded reproduction.

Crises and Marx’s model of expanded reproduction

As I mentioned above, unlike the models of simple and expanded reproduction developed by post-Marx Marxists that leave out money, Marx’s model includes an ever-growing market to match the ever-growing level of commodity production. It is therefore possible to extend Marx’s model—that is, reduce the level of abstraction—to one in which market prices fluctuate around direct prices, and by further extension, around prices of production, and to one which includes the industrial cycle and the periodic crises of overproduction that crown the cycle. (See my posts on the ideal industrial cycle.)

On paper, Marx’s model of expanded reproduction runs forever. Marx calculated his model over four periods, but it would not be difficult to write a computer program that could run Marx’s model forever, assuming that the computer had unlimited memory, which in the material world no computer can have. (6)

In the real world, as opposed to our imaginary computer with unlimited memory, Marx’s model of expanded reproduction can “run” only as long as there is sufficient raw and auxiliary materials, money material, means of subsistence and workers to produce and realize in money form an ever-rising mass of surplus value.

The rise in the quantity of inputs—raw materials, auxiliary materials such as energy, and money material, on one side, and means of subsistence and labor power—workers—on the other, obeys the laws of exponential functions. If you graph an exponential function, the rate of increase is at first gradual, but eventually the slope of the curve explodes towards the mathematical limit of 90 degrees. Or what comes to exactly the same thing, the mass of any of the inputs taken individually, not to speak of the mass of all inputs added together, will eventually exceed the mass of the entire material universe.

Therefore, Marx’s model of expanded capitalist reproduction, though incomplete in many ways, is already sufficient to show that expanded capitalist reproduction is a process limited in time. It represents only a phase in the history of human production.

If capitalism can only exist in the form of expanded reproduction—as Marx repeated in many places in “Capital”—then capitalism as a system of production is historically bounded. It cannot possibly be the final form of production as the (bourgeois) economists claim. If, however, capitalism could exist in the form of simple reproduction—like John Maynard Keynes held, for example, in his “General Theory”—it is at least possible that capitalism could be the final form of human production.

Therefore, Nick’s question is an important one, since it involves nothing less than whether or not capitalism can be the final form of human production as the (bourgeois) economists claim, or whether, as Marx held, capitalism is simply a transitory if necessary chapter in the history of human production.

Capital can only exist in the form of many capitals

It is often asserted that capital can exist only in the form of many capitals. But why can’t capitalism, at least in principle, exist in the form of a single capital?

Let’s assume that the assertion that capitalism can exist only in the form of many capitals is false. Suppose that eventually the tendency towards the centralization of capital proceeds to the limit. A single corporation emerges that controls all of production. Let’s call our imaginary corporation the Universal Company Inc. (7) Its stock is traded on Wall Street and other global stock exchanges. Indeed, it is the only stock traded on the world’s stock exchanges, because it is the only corporation. It is the only business in the world.

Every factory, mill, mine, farm is controlled by Universal’s board of directors. Managers and technical personnel hired by its board of directors determine exactly what kind of goods are produced and the proportions in which each type of good is produced. Under the rule of Universal Company Inc., all workers are employees of the company since there are simply no other corporations to work for. Under the rule of Universal, what is the highest authority that the individual workers face? Why it’s the board of directors of Universal, which is elected by the stockholders of Universal on the principle of one share one vote.

But do the products of the labor of the workers of Universal take the form of commodities? The answer is no. Why not? Remember, Marx defined commodity production as a situation where the producers work for their own private accounts. Producers of commodities exchange the products of their labor and face no higher authority than the mutual pressure they exert on one another. Or what comes to exactly the same thing, the highest authority the producers face is competition among themselves. But this is not the case with the workers of Universal.

Instead of being indirectly social, the labor of the workers of Universal is directly social, as would also be the case under the rule of the associated producers. The board of directors and its subordinate employees such as managers, computer experts, foremen and so on see to it that the workers produce the right products in the right proportions. Since there is no commodity production, there is also no money, since money is simply a form of the commodity. And for the same reason, there is no capital, since capital consists of commodities and money. Where there is no commodities and money, there is no capital. And where there is no capital, there is no accumulation of capital.

The board of directors of the Universal Company Inc. might choose to continue expanded reproduction, but if it does, it will be accumulating use values not capital.

Since I am assuming a class of stockholders, the workers of Universal are indeed exploited. They are forced—just like is the case at the present day—to work some of the time for the boss—the stockholders of Universal—and some of the time for themselves. This allows the stockholders of Universal to live without working.

But the surplus product produced by the surplus, or unpaid, labor of the workers cannot take the form of surplus value, because there is no commodity production and labor does not take the form of value. And where there is no value, there can be no surplus value. And where there is no surplus value, there is no commodity production and no money. The surplus labor of the workers cannot take the form of profit—surplus value realized in the form of money. And where there is no surplus value and no capital, there is no capitalist mode of production.

While some might want to call our imaginary system of exploitation run by the Universal Company “state capitalism” in order to underline its exploitative nature as opposed to the system of cooperative production carried out by the associated producers, they would be forgetting that there have been other systems of exploitation in the history of human production over the last ten thousand years besides capitalism. But our imaginary system would not be a form of capitalism whatever else it might be, because it would lack the essential characteristics that separate capitalist production from other forms of exploitation.

For example, there would be no crises of the general overproduction of commodities, if only because there is no commodity production. In principle, our imaginary system might experience a generalized overproduction of use values, but that is something very different than the crises we experience under capitalism, which combine a generalized overproduction of commodities with a generalized underproduction of use values.

Another hint pointing to the historically limited nature of capitalist production

Here we see another hint of the historically limited nature of capitalist production. As capitalism develops, capital becomes centralized in ever fewer hands. The whole trend of capitalist production is towards the creation of a universal corporation that will centralize all production in its hands. Yet if capitalism were ever to actually realize its tendency and create a real Universal Company, it would negate itself. It would have ceased to be capitalism!

Each individual capital must either expand or die

Therefore, capitalism can only exist in the form of many capitals. Each individual capital must either expand or be destroyed by its rival capitals. Just like each individual capital is made up of commodities and money (M—C—M’, with money itself being a commodity), the total social capital is made up of individual capitals (M—C—M’s), each of which is forced to expand or die. In a sense, each capital must strive to become our imaginary Universal Company, though by definition as long as capitalism exists no capital can actually achieve its ultimate aim.

Since each individual capital that makes up the social capital is forced to expand under pain of destruction by other capitals, the total social capital—the sum total of the individual capitals—must, leaving aside momentary interruptions caused by crises and wars—continuously expand.

Money and simple reproduction

A further hint that capitalism cannot in fact exist in the form of simple reproduction is found if we examine Marx’s diagram of simple reproduction. In this diagram, Marx assumes that the currency system exists in the form of full-weight gold coins. Marx further assumes that the money commodity, which he assumes is gold, has both monetary and non-monetary uses. However, an ideal money—which does not exist and has never existed—would only have monetary use values, the most important of which is that it measures in terms of its own use value the values of all other commodities.

At the dawn of commodity production, society used the main form of wealth in terms of use value—cattle, for example—as the commodity in whose use value the values of all other commodities were measured. This is quite natural. If wealth consists largely of cattle, it is natural to start measuring other forms of wealth in terms of cattle. But as commodity production developed further, commodities such as cattle were replaced by the precious metals, which have very limited use values outside of their monetary function. Why is this?

As money developed its role as the universal measure of wealth, this led to its role as a means of accumulating or hoarding wealth. Wealth was accumulated in an abstract form that could be converted into any particular use value that could be found on the market.

However, in order to act as a means of accumulation, money must both be durable—you wouldn’t want your monetary savings to die on you—but also concentrate a great deal of value in a small physical mass in order to store your savings in a reasonable space. Precious metals that are both durable and concentrate a great amount of value in a small physical mass therefore form excellent means of accumulation or hoarding.

This implies that the commodity that functions as money makes an expensive means of production. Gold might be a better conductor of electricity, for example, than copper, but gold’s high value makes it uneconomical to use compared to much cheaper copper. Therefore, the very attributes that make a commodity a good money tend to expel it from the spheres of production and consumption.

If these trends were taken to their logical conclusion—which has not occurred in reality—the only use values of the commodity that functions as money would be its monetary use values.

A question occurs here. Why didn’t Marx assume in his reproduction diagrams that gold’s only use value is its monetary use value? Marx makes many other abstractions. And there is indeed a tendency for the use values of the money commodity to contract towards a situation where its only use value is money. Of course, the only way to answer this question to ask Marx. But since Marx is no longer living, we cannot do this. We can only speculate.

Marx’s two-department model

In his diagrams of reproduction, both simple and expanded, Marx combined the many branches of production that exist in the real world into only two departments. These are the department that produces means of production, including raw and auxiliary materials, which Marx called Department I, and the department that produces the means of personal consumption, which Marx called Department II.

Rosa Luxemburg pointed out that insofar as gold functions as money it is neither a means of production nor a means of personal consumption. Luxemburg proposed that the production of money material be put in a department of its own, namely Department III.

There is no reason why we can’t do this if we want to, but it certainly complicates the diagrams. We lose the mathematical elegance of having only two departments of production and end up with a messier three-department scheme. Marx therefore solved the problem by assuming that gold has not only monetary functions but non-monetary functions, which in reality it indeed does. This enabled Marx to put the production of gold bullion into Department I, since gold bullion insofar as it doesn’t function as money material is a raw material. By doing this, Marx was able to preserve his two-department scheme without complicating it with the creation of a third department.

However, let’s assume for the sake of argument that gold’s other use values have all fallen away leaving only its monetary use value—something that isn’t theoretically impossible. (8) If we make this assumption and retain Marx’s currency system of full-weight gold coins—the amount of gold that is produced in simple reproduction would have to exactly equal the amount of gold that is lost through the wear and tear of the coinage.

However, we know that gold in circulation can always be replaced by tokens such as paper money or small coins made of base metals. So let’s modify Marx’s diagram of simple reproduction in the following way:

First, we will assume that gold has only one use value—to serve as money material. Second, we will assume that instead of using gold as a medium of circulation, it is replaced by tokens that represent gold in circulation. This would eliminate the wear and tear that gold coinage inevitably suffers in circulation and therefore would be economically more efficient—it would save society the labor time that is used to produce gold bullion. Instead of producing additional gold, we simply have to have our capitalists produce additional paper and ink and some base metals to make up for the wear and tear of the tokens in circulation—something that can be done with far less labor time, thus freeing up society’s labor time for other uses.

Assuming simple reproduction, there would be no need to produce the money commodity gold itself at all under the above assumptions. The gold that has been produced in the past would be sufficient and would back the token currency. But a commodity that is not produced is no commodity at all. But if gold is not a commodity, how can its use value serve as the measure of value? Here we end up with a logical contradiction that hints that simple capitalist reproduction is impossible.

If we allow any production of gold at all—assuming that gold’s only use value is to serve as money—which is necessary to keep gold a commodity, we no longer have simple reproduction, because gold is allowed to accumulate. We are introducing into our model of simple reproduction the accumulation of capital—or potential capital—in the form of money. But in true simple reproduction, there is no accumulation of capital, neither money capital nor real capital. But here we have the accumulation of at least a potential money capital. We also have the potential expansion of the market. In simple reproduction, however, the market does not expand but remains the same from year to year.

Therefore, even at the level of extreme abstraction, simple reproduction doesn’t seem to work. Simple reproduction is only real insomuch as it forms a necessary part of expanded reproduction, but it cannot exist independently of expanded reproduction.

Therefore, we again reach the conclusion that capitalism can only exist in the form of expanded reproduction. Keynes’s hopes of a capitalism of only simple reproduction becomes a reactionary utopia. Instead, as Marx held, capitalism can only be a phase in the history of production and cannot possibly be the final stage in the history of of production if modern society is to avoid ruin. It can only be the forerunner—though a necessary forerunner—of a new and higher stage of production.

The only alternative to this would be the mutual ruin of the contending classes and the destruction of modern society. There are no other choices.

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1 Simple reproduction can be reduced to a simple equation: CII = VI + SI, where CII is the constant capital of Department II that is used up, VI represents the commodities produced by Department I that replace the value of the variable capital that is consumed by the capitalists of Department I during each reproduction cycle, and SI represents the surplus value produced by the workers of Department I.

2 Many workers who produce surplus value are classified as service workers in the statistics put out by capitalist governments—for example, many fast-food workers and other restaurant workers, hotel workers, workers in wholesale and retail trade and so on. See my replies to Mike Treen’s questions here and here.

3 Marx divided the gold producing industry into two sectors: one sector producing gold to be used as raw material in the production of non-monetary commodities and the rest to be used for monetary purposes. Since the non-monetary gold belongs to Department I, Marx put the entire gold producing industry into Department I—a procedure criticized by Rosa Luxemburg.

4 In simple as in expanded reproduction, the commodities of varying use values must be produced in the correct physical proportions as well as the correct value proportions. In addition, money material must be produced in exactly the right proportions to maintain effective monetary demand so that demand is neither less than or greater than the level of commodity production.

If all these conditions are fulfilled, reproduction proceeds smoothly without crises of any kind. In the real world, these conditions are fulfilled only on average by constantly deviating from them. Some commodities are overproduced, while others are underproduced. Overall, market demand sometimes exceeds the supply at market prices that correspond to prices of production, and at other times fall short of the supply.

It is these average conditions—that can only exists by constant deviation from the average—that allow reproduction, both simple and expanded, to proceed in a smooth crisis-free way. Marx’s models of reproduction abstract the inevitable deviations from the average conditions and therefore of necessity exclude crises.

5 Direct prices, a term coined by Professor Anwar Shaikh of New York’s New School, are prices that directly reflect values. That is, the value of the commodity and the value of the money—gold—that it is sold for represent exactly the same amount of value. Or what comes to exactly the same thing, the commodity and the money—gold—that it is sold for embody exactly the same quantity of abstract human labor measured in terms of some unit of time.

6 In terms of computer programing, such a program would use an infinite loop. When the numbers get too big for the computer’s memory to handle, the program will crash. In a sense, the crash of the computer program does model the inevitable collapse of capitalism in that both operate in a material world where resources are finite.

7 The question of whether such a universal corporation could emerge in the real world is beyond the scope of this reply. For the sake of argument, I am assuming this is possible, and this indeed would be the natural end point of the tendency for capital to become ever more centralized. Almost every Marxist who has given this matter any thought has assumed that capitalism will be converted into socialism through a workers’ revolution long before capitalist centralization reaches its logical conclusion.

8 Or we might assume that so much gold is discovered on asteroids—and future technology and engineering solve the problem of mining asteroids cheaply—that gold becomes radically cheapened and ceases to function as money material. Instead, another precious metal that is rare even on asteroids emerges. This metal is so expensive that its only use value is to function as money material.

Alternately, the mining of asteroids never becomes economical, at least under capitalism, and gold mines become depleted to the point that gold becomes so expensive that it loses its non-monetary use values, retaining only its use value as money.