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One of the key features of capitalism is the recurrence of periodic, systemic crises. These crises are either denied by capitalist economists, attributed to specific circumstances (and thereby taken as an exception rather than a rule) or it is claimed that, actually, the cause of the crisis was state intervention and attempts at planning which have thwarted the logic of the market and deformed an otherwise perfect system.
The recurrence and regularity of these crises makes all such arguments demonstrably false.
Capitalist production is production for profit. A commodity produced under capitalism has both a ‘use value’ (a coat can be worn) and an ‘exchange value’ (a coat can be sold) [see Back to Basics pt4]. In order for the exchange value of a commodity to be realised, it must be sold. Therefore there must (ultimately) be a buyer who is interested in the use value of the commodity. However, capitalism is driven, by the profit motive, to continually expand production, and yet at the same time to constantly increase the rate of exploitation by restricting wages. This places a contradiction at the heart of the system, between the need for more and more consumers, and the restriction of the ability of the masses to consume.
This contradiction can only be resolved through periodic crises, during which massive amounts of value are destroyed and the system reset. For this reason, capitalism is inherently unstable.
These crises come in different forms and have different triggers but their underlying cause is the contradiction outlined above. One example of such a crisis, triggered by an imbalance between the different departments of the economy following technological advance, is given below.
Under modern capitalism, there is a huge interdependency of industry. As production methods become more specialised in individual character, they become more social in their overall character. This interdependence is further extended by the use of credit to pay for improvements in the means of production, creating a system where one company defaulting on a debt can cause a whole series of companies and banks to miss payments to their creditors and where companies are regularly spending profits before they are realised.
Capitalist production can be divided into two broad categories: the production of capital goods, or the means of production, and the production of consumer goods. Whilst some commodities will clearly fall into both categories, most companies will produce mainly for industry or for consumers. The demand for capital goods is directly related to that proportion of capitalist profit which is reinvested into the production process, plus the amount necessary to replace machinery and raw materials used in the process. On the other hand, demand for commodities is directly related to the cost of labour (paid in wages to the workers and spent on commodities) and that proportion of capitalist profit spent on commodities (both necessary and luxury items). Therefore both branches of production are intimately linked and, for capitalism to progress without crisis, both must develop at an equal rate.
Now let us examine the process of production at the point when a new means of production is introduced. Initially, the new technology is introduced in a few enterprises only and, for a short period of time, these enterprises will receive above average profits since the labour embodied in their products is less than is socially necessary. Soon other enterprises will seek to introduce new means, first in the original sector, then across the whole sphere of production. This increased investment in means of production increases production in the capital goods sector, which in turn increases employment and therefore available purchasing power and hence develops sales of consumer goods, stimulating a new wave of investment.
Since the capital goods sector has a slower rate of reaction, due to the nature of its product, demand far outstrips supply and the prices of capital goods increase more than those of consumer goods, as does the rate of profit.
This encourages investment in the capital goods sector in preference to the consumer goods sector, causing an initial break in the even development of both sectors. This break in the rate of profit causes the capital goods sector to expand faster than the consumer goods sector, but at the same time both sectors are expanding as employment increases, wages rise (although not as fast as prices) and demand for commodities increases. The capital goods sector delivers on the new means of production, meaning that rates of production are increased greatly in the consumer goods sector.
Slowly, a point is reached where the relation between supply and demand for consumer goods begins to change. Demand for consumer goods has reached its current maximum, due to the slow increase in wages, yet the rate of production continues to increase due to previous investments in new means of production which are only now delivering results. As supply begins to outstrip demand, those businesses operating below the average rate of production and therefore investing more than socially necessary labour time in the production of commodities, find that the cost of production of their goods is now higher than their market value (exchange value). This is possible because of the separation in time between the production of these commodities and their sale.
Due to the expansion of credit and the loans readily provided by banks during the boom in production when the rate of profit was much higher than interest rates, many of these enterprises continue to produce at a loss using projected future profits.
Eventually, the slump reaches a point where even commodities produced using socially necessary labour time cannot be sold for their cost of production due to a glut in the market. Bank loans are now refused or charged at exorbitantly high interest rates and the entire system of credit collapses with many businesses going bankrupt or being bought up by the larger businesses which have the resources to weather the recession. In one fell swoop, the contradiction between the use value and exchange value of commodities is resolved with the ruin of thousands of lives and the loss of enormous quantities of value.
After the financial crash, which may last months, or even years, the number of businesses operating in each sector is greatly reduced, as is their output. Those businesses (generally the larger ones) which have weathered the collapse are simply selling off stocks accumulated during the end of the boom, when demand began to fall or, where necessary (for instance perishable consumer goods), carrying out production to order. Slowly, the financial situation stabilises and, with wages driven down by the pressure of unemployment, some businesses begin to make a profit again. Prices of capital goods remain lower than consumer goods (since people need essentials such as food and clothing even during a recession) and it is not long before some of the businesses which survived, with their competitors having gone bankrupt or been bought out, decide to invest in new means of production to expand into the growing market. Hence the cycle begins again.
This cycle, and the destruction inherent in it, will continue as long as the contradiction between use value and exchange value, between the social character of production and the private character of appropriation, continues.
“The last cause of all real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces as if only the absolute power of consumption of the entire society would be their limit.”
(Karl Marx, Capital, Vol. III, p568)