Education For SocialiStS

5 IntroducIng MarxIst EconoMIcs

Education for Socialists

How tHe SyStem workS chriS harman tHe Value of money JoSEph choonara accumulation and criSeS alEx callinicoS

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introducing marxist Economics

How tHe SyStem workS

chriS harman Extracts from How Marxism Works (1979)

How the system began

One Of the most ludicrous arguments you hear is that things could not be different to the way they are now. Yet things were different. And not on some distant part of the globe, but in this country, not so long ago. A mere 250 years ago people would have regarded you as a lunatic if you had described to them the world we live in now, with its huge cities, its great factories, its aeroplanes, its space expeditionseven its railway systems were beyond the bounds of their imagination. for they lived in a society which was overwhelmingly rural, in which most people had never travelled ten miles outside their local village, in which the pattern of life was determined, as it had been for thousands of years, by the alternation of the seasons. But already, 700 or 800 years ago, a development had begun which was eventually to challenge this whole system of society. Groups of craftsmen and traders began to establish themselves in towns, not giving their services for nothing to some lord as the rest of the population did, but exchanging products with various lords and serfs for foodstuffs. Increasingly they used precious metals as a measure of that exchange. It was not a big step to seeing in every act of exchange an opportunity to get a little extra of the precious metal, to make a profit. At first the towns could only survive by playing one lord off against another. But as the skills of their craftsmen improved, they

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created more wealth, and they grew in influence. The burghers, the bourgeois or the middle classes began as a class within the feudal society of the Middle Ages. But they obtained their riches in a quite different way to the feudal lords who dominated that society. A feudal lord lived directly off the agricultural produce he was able to force his serfs to produce on his land. He used his personal power to make them do this, without having to pay them. By contrast the wealthier classes in the towns lived off the proceeds of selling non-agricultural goods. They paid workers wages to produce these for them, by the day or week. These workers, often escaped serfs, were free to come and go as they likedonce they had finished the work for which they had been paid. The only compulsion on them to work was that they would starve if they did not find employment with someone. The rich could only grow richer because rather than starve, the free worker would accept less money for his work than the goods he produced were worth. We will return to this point later. for the present what matters is that the middle class burghers and the feudal lords got their wealth from quite different sources. This led them to want society organised in different ways. The feudal lords ideal was a society in which he had absolute power in his own lands, unbound by written laws, with no intrusion from any outside body, with his serfs unable to flee. He wanted things to stay as in the days of his father and grandfather, with everyone accepting the social station into which they were born. The newly rich bourgeoisie necessarily saw things differently. They wanted restraints on the power of individual lords or kings to interfere with their trade or steal their wealth. They dreamed of achieving this through a fixed body of written laws, to be drawn up and enforced by their own chosen representatives. They wanted to free the poorer classes from serfdom, so that they could work (and increase the burghers profits) in the towns. As for themselves, their fathers and grandfathers had often been under the thumb of feudal lords, and they certainly did not want that to continue.

introducing marxist Economics

They wanted to revolutionise society. Their clashes with the old order were not only economic, but also ideological and political. In an illiterate society where the main source of general ideas about society was church preaching, ideological chiefly meant religious. Since the medieval church was run by bishops and abbots who were feudal lords in their own right, it propagated pro-feudal views, attacking as sinful many of the practices of the urban bourgeoisie. So in Germany, Holland, Britain and france in the 16th and 17th centuries the middle classes rallied to a religion of their own: Protestantisma religious ideology that preached thrift, sobriety, hard work (especially for the workers!) and the independence of the middle class congregation from the power of bishops and abbots. The middle class created a God in their image, in opposition to the God of the Middle Ages. Today we are told at school or on television about the great religious wars and civil wars of that period as if they were just about religious differences, as if people were daft enough to fight and die merely because they disagreed over the role of the blood and body of Christ in the Holy Communion. But much more was at stake the clash between two completely different forms of society, based upon two different ways of organising the production of wealth. In Britain the bourgeoisie won. Horrific as it must seem to our present ruling class, their ancestors consecrated their power by cutting off a kings head, justifying the act with the rantings of Old Testament prophets. But elsewhere the first round went to feudalism. In france and Germany the Protestant bourgeois revolutionaries were wiped out after bitter civil wars (although a feudal version of Protestantism survived as the religion of northern Germany). The bourgeoisie had to wait two centuries and more before enjoying success, in a second round that began without religious clothing in 1789 Paris.

exploitation and surplus value

In slave and feudal societies the upper classes had to have legal controls over the mass of the working population. Otherwise those who

Education for Socialists

worked for the feudal lord or the slave owner would have run away, leaving the privileged class with no one to labour for it. But the capitalist does not, usually, need such legal controls over the person of the worker. He doesnt need to own him or her, provided he ensures that the worker who refuses to work for the capitalist will starve. Instead of owning the worker, the capitalist can prosper providing he owns and controls the workers source of livelihoodthe machines and factories. The material necessities of life are produced by the labour of human beings. But that labour is next to useless without tools to cultivate the land and to process naturally occurring materials. The tools can vary enormouslyfrom simple agricultural implements such as ploughs and hoes to the complicated machines you find in modern automated factories. But without the tools even the most highly skilled worker is unable to produce the things needed for physical survival. It is the development of these toolsusually referred to as the means of productionthat separates modern human beings from our distant ancestors of the Stone Age. Capitalism is based on the ownership of these means of production by a few people. In Britain today, for instance, 1 percent of the population owns 84 percent of the stocks and shares in industry. In their hands is concentrated effective control over the vast majority of the means of production the machines, the factories, the oil fields, the best agricultural land. The mass of the population can only get a livelihood if the capitalists allow them to work at and with those means of production. This gives the capitalists immense power to exploit the labour of other peopleeven though in the eyes of the law all men are equal. It took some centuries for the capitalists to build up their monopoly control over the means of production. In this country, for instance, the parliaments of the 17th and 18th centuries had first to pass a succession of enclosure Acts, which drove peasants away from their own means of production, the land which they had cultivated for centuries. The land became the property of a section of the capitalist class and the mass of the rural population were forced to sell their labour to capitalists or starve.

introducing marxist Economics

Once capitalism had achieved this monopoly of the means of production, it could afford to let the mass of the population enjoy apparent freedom and equality of political rights with the capitalists. for however free the workers were, they still had to work for a living. Pro-capitalist economists have a simple explanation of what then happens. They say that by paying wages the capitalist buys the labour of the worker. He must pay a fair price for it. Otherwise the worker will go and work for someone else. The capitalist gives a fair days wage. In return the worker should give a fair days work. How then do they explain profit? This, they claim, is a reward to the capitalist for his sacrifice in allowing the means of production (his capital) to be put to use. It is an argument that can hardly convince any worker who gives it a moments thought. Take a company that announces a net rate of profit of 10 percent. It is saying that, if the cost of all the machinery, factories and so on that it owns is 100 million, then it is left with 10 million profit after paying the wages, raw material costs and the cost of replacing the machinery that wears out in a year. You dont have to be a genius to see that after ten years the company will have made a total profit of 100 millionthe full cost of its original investment. If it is sacrifice that is being rewarded, then surely after the first ten years all profits should cease. for by then the capitalists have been paid back completely for the money they put in in the first place. In fact, however, the capitalist is twice as wealthy as before. He owns his original investment and the accumulated profits. The workers, in the meantime, have sacrificed most of their lifes energy to working eight hours a day, 48 weeks a year, in the factory. Are they twice as well off at the end of that time as at the beginning? You bet your boots theyre not. even if a worker saves assiduously, he or she wont be able to buy much more than a colour television set, a cheap central heating system or a second-hand car. The worker will never raise the money to buy the factory he or she works in. The fair days work for a fair days pay has multiplied the capital of the capitalist, while leaving the worker with no capital and no choice but to go on working for roughly the same wage.

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The equal rights of the capitalist and the worker have increased inequality. One of Karl Marxs great discoveries was the explanation for this apparent anomaly. There is no mechanism that forces a capitalist to pay his workers the full value of the work they do. A worker employed, for example, in the engineering industry today might create 400 of new output a week. But that does not mean he or she will be paid this sum. In 99 cases out of 100, they will get paid considerably less. The alternative they have to working is to go hungry (or live on the miserable sums handed out by the social security). So they demand not the full value of what they produce, but rather just enough to give them a more or less acceptable living standard. The worker is paid only enough to get him to put all his efforts, all his capacity for work (what Marx called his labour power) at the disposal of the capitalist each day. from the capitalists point of view, providing the workers are paid enough to keep them fit for work and to bring up their children as a new generation of workers, then they are being paid a fair amount for their labour power. But the amount of wealth needed to keep workers fit for work is considerably less than the amount of wealth they can produce once workingthe value of their labour power is considerably less than the value created by their labour. The difference goes into the pocket of the capitalist. Marx called it surplus value.

the self-expansion of capital

If you read the writing of apologists for the present system, you will soon notice that they share a strange belief. Money, according to them, has a magical property. It can grow like a plant or animal. When a capitalist puts his money in a bank he expects it to increase in amount. When he invests it in the shares of ICI or Unilever he expects to be rewarded by offshoots of fresh money every year, in the form of dividend payments. Marx noted this phenomenon, which he called the self-expansion of capital, and set out to explain it. As we saw previously, his explanation began not with money, but with

introducing marxist Economics

labour and the means of production. In present society, those with enough wealth can buy control of the means of production. They can then force everyone else to sell to them the labour needed to work the means of production. The secret of the self-expansion of capital, of the miraculous capacity of money to grow for those who have plenty of it, lies in the buying and selling of this labour. Lets take the example of a worker, who well call Jack, who gets a job with an employer, Sir Browning Browne. The work Jack can do in eight hours will create an additional amount of wealthworth perhaps 48. But Jack will be willing to work for much less than this, since the alternative is social security. The efforts of pro-capitalist MPs, such as the obnoxious Tory Peter Lilley, ensure that he will only get 12 a day on social security to keep himself and his family. They explain that to give more would be to destroy the incentive to work.1 If Jack wants to get more than 12 a day he has to sell his ability to work, his labour power, even if he is offered much less than the 48 worth of wealth he can create in eight hours. He will be willing to work for, perhaps, the average wage, 28 a day. The difference, 20 a day, goes into the pocket of Sir Browning. It is Sir Brownings surplus value. Because he had enough wealth to buy control of the means of production in the first place, Sir Browning Browne can guarantee growing richer by 20 a day for every worker he employs. His money keeps growing, his capital expanding, not because of some law of nature, but because his control of the means of production allows him to get someone elses labour on the cheap. Of course, Sir Browning does not necessarily have all the 20 to himselfhe may rent the factory or the land, he may have borrowed some of his initial wealth from other members of the ruling class. They demand in return a cut of the surplus value. So perhaps he forks out 10 to them as rent, interest and dividend payments, leaving himself with only 10 profit.

1: needless to say, the sums have changed (though not much!) since Harman wrote this pamphlet, as have the names of the MPs, but the message remains the sameeditors note.

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Those who live off dividends have probably never seen Jack in their lives. nevertheless, it was not the mystical power of pound coins that gave them their income, but the all too physical sweat of Jack. The dividend, the interest payments and the profit all came out of the surplus value. What decides how much Jack gets for his work? The employer will try to pay as little as possible. But in practice there are limits below which he cannot go. Some of these limits are physicalit is no good giving workers such miserable wages that they suffer from malnutrition and are unable to put any effort into their work. They also have to be able to travel to and from work, to have somewhere they can rest at night, so that they do not fall asleep over the machines. from this point of view it is worth even paying for what the workers think of as little luxurieslike a few pints in the evening, the television, the occasional holiday. These all make the worker more refreshed and capable of doing more work. They all serve to replenish his labour power. It is an important fact that where wages are held too low the productivity of labour falls. The capitalist has to worry about something else as well. His firm will be in business for many years, long after the present set of workers have died out. The firm will require the labour of their children. So they have to pay the workers enough to bring up their children. They also have to ensure that the state provides these children with certain skills (such as reading and writing) through the educational system. In practice, something else matters as wellwhat the worker thinks is a decent wage. A worker who gets paid considerably less than this may well neglect his work, not worrying about losing his job since he thinks it is useless. All these elements that determine his wage have one thing in common. They all go towards making sure he has the life energy, the labour power, that the capitalist buys by the hour. The workers are paid the cost of keeping themselves and their families alive and fit for work. In present capitalist society, one further point has to be noted. Huge amounts of wealth are spent on such things as police forces

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and weapons. These are used in the interests of the capitalist class by the state. In effect, they belong to the capitalist class, although they are run by the state. The value which is spent on them belongs to the capitalists, not the workers. It too is part of the surplus value. Surplus value = profit + rent + interest + spending on the police, army and so on.

the labour theory of value

But machinery, capital, produces goods as well as labour. If so, its only fair that capital as well as labour gets a share of the wealth produced. every factor of production has to get its reward. That is how someone who has been taught a little pro-capitalist economics replies to the Marxist analysis of exploitation and surplus value. And at first sight the objection seems to make some sense. for, surely, you cannot produce goods without capital? Marxists have never argued that you could. But our starting point is rather different. We begin by asking: where does capital come from? How did the means of production come into existence in the first place? The answer is not difficult to find. everything people have used historically to create wealthwhether a neolithic stone axe or a modern computeronce had to be made by human labour. even if the axe was shaped with tools, the tools in turn were the product of previous labour. That is why Marx used to refer to the means of production as dead labour. When businessmen boast of the capital they possess, in reality they are boasting that they have gained control of a vast pool of the labour of previous generationsand that does not mean the labour of their ancestors, who laboured no more than they do now. The notion that labour was the source of wealthusually referred to as the labour theory of valuewas not an original discovery of Marx. All the great pro-capitalist economists until his time accepted it. Such men, like the Scottish economist Adam Smith or the english economist David Ricardo, were writing when the system of industrial capitalism was still fairly youngin the years just before and just after the french Revolution. The capitalists did not yet dominate

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and needed to know the real source of their wealth if they were ever to do so. Smith and Ricardo served their interests by telling them that labour created wealth, and that to build up their wealth they had to free labour from the control of the old pre-capitalist rulers. But it was not long before thinkers close to the working class began to turn the argument against the friends of Smith and Ricardo: if labour creates wealth, then labour creates capital. And the rights of capital are no more than the rights of usurped labour. Soon the economists who supported capital were pronouncing the labour theory of value to be a load of nonsense. But if you kick truth out the front door, it has a habit of creeping in the back. Turn on the radio. Listen to it long enough and you will hear some pundit or other claim that what is wrong with the British economy is that people do not work hard enough or, another way of saying the same thing, productivity is too low. forget for a minute whether the argument is correct or not. Instead look closely at the way it is put. They never say machines do not work hard enough. no, it is always people, the workers. They claim that if only the workers worked harder, more wealth would be created, and that this would make possible more investment in new machinery. The people who use this argument may not know it, but they are saying that more work will create more capital. Work, labour, is the source of wealth. Say I have a 5 note in my pocket. Why is that of use to me? After all, its only a piece of printed paper. Its value to me lies in the fact that I can get, in exchange for it, something useful that has been made by someone elses labour. The 5 note, in fact, is nothing more than an entitlement to the products of so much labour. Two 5 notes are an entitlement to the products of twice as much labour, and so on. When we measure wealth we are really measuring the labour that has been expended in creating it. Of course, not everyone produces as much with their labour in a given time as everyone else. If I set out, for instance, to make a table, I might take five or six times as long as a skilled carpenter. But no one in their right mind would regard what I had made as five or six times as valuable as a table made by a skilled carpenter. They would

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estimate its value according to how much of the carpenters labour would be needed to make it, not mine. Say it would take a carpenter an hour to make a table, then they would say that the value of the table to them was the equivalent of one hours labour. That would be the labour time necessary to make it, given the usual level of technique and skill in present society. for this reason, Marx insisted that the measure of the value of something was not simply the time it took an individual to make it, but the time it would take an individual working with the average level of technology and the average level of skillhe called this average level of labour needed the socially necessary labour time. The point is important because under capitalism advances in technology are always taking place, which means that it takes less and less labour to produce goods. for example, when radios were made with thermionic valves they were very expensive items, because it took a great deal of labour to make the valves, to wire them together and so on. Then the transistor was invented, which could be made and wired together with much less labour. Suddenly, all the workers in the factories still making valve radios found that the value of what they were producing slumped, for the value of radios was no longer determined by the labour time needed to make them from valves, but instead by the time needed to make them with transistors. One final point. Prices of some goods fluctuate wildlyon a day-to-day or a week-to-week basis. These changes can be caused by many other things besides changes in the amount of labour needed to make them. When the frost in Brazil killed all the coffee plants the price of coffee shot up, because there was a shortage throughout the world and people were prepared to pay more. If tomorrow some natural catastrophe was to destroy all the televisions in Britain, there is no doubt the price of televisions would shoot up in the same way. What economists call supply and demand continually causes such fluctuations in price. for this reason, many pro-capitalist economists say that the labour theory of value is nonsense. They say that only supply and

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demand matter. But that is nonsense. for this argument forgets that when things fluctuate they usually fluctuate around an average level. The sea goes up and down because of tides, but that doesnt mean we cannot talk of a fixed point around which it moves, which we call sea level. Similarly, the fact that prices go up and down from day to day does not mean that there are not fixed values around which they fluctuate. for instance, if all the televisions were destroyed, the first new ones to be produced would be very much in demand and fetch a high price. But it would not be long before more and more were on the market, competing with each other until the price was forced down close to their value in terms of the labour time needed to make them.

competition and accumulation

There was a time when capitalism did seem like a dynamic and progressive system. for most of human history, the lives of most men and women have been dominated by drudgery and exploitation. Industrial capitalism did not change this when it made its appearance in the 18th and 19th centuries. But it did seem to put this drudgery and exploitation to some useful purpose. Instead of wasting vast amounts of wealth on luxury for a few parasitic aristocrats or in building luxury tombs for dead monarchs or in futile wars over which son of an emperor should rule some God-forsaken hole, it used wealth to build up the means of creating more wealth. The rise of capitalism was a period of growth in industry, cities, means of transportationon a scale undreamt of in previous human history. Strange as it may seem today, places such as Oldham, Halifax and Bingley were the home of miracles. Humanity had never before seen so much raw cotton and wool turned so quickly into cloth to clothe millions. This did not happen because of any special virtues possessed by the capitalists. They were always rather noxious people, obsessed only with getting wealth into their own hands by paying as little as possible for the labour they used. Many previous ruling classes had been like them in this respect without building up industry. But the capitalists were different in two important respects.

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The first we have dealt withthat they did not own workers, instead paying them by the hour for their ability to work, their labour power. They used wage slaves, not slaves. Second, they did not themselves consume the goods their workers produced. The feudal landlord lived directly from the meat, bread, cheese and wine produced by his serfs. But the capitalist lived by selling to other people the goods produced by workers. This gave the individual capitalist less freedom to behave as he pleased than the individual slave owner or feudal lord had. To sell goods, the capitalist had to produce them as cheaply as possible. The capitalist owned the factory and was all-powerful within it. But he could not use his power as he wished. He had to bow down before the demands of competition with other factories. Lets go back to our favourite capitalist. Sir Browning Browne. Assume that a certain quantity of the cotton cloth produced in his factory took ten hours of workers time to turn out, but that some other factory could produce the same amount in five hours of workers time. Sir Browning would not be able to charge the price for it equivalent to ten hours of labour. no one in their right mind would pay this price when there was cheaper cloth just down the road. Any capitalist who wanted to survive in business had to ensure that his workers worked as fast as possible. But that was not all. He also had to make sure that his workers were working with the most up-to-date machinery, so that their labour produced as many goods in an hour as did the labour of those working for other capitalists. The capitalist who wanted to stay in business had to make sure he owned ever greater amounts of means of productionor, as Marx put it, to accumulate capital! The competition between capitalists produced a power, the market system, that had each and every one of them in its grip. It compelled them to speed up the work process all the time and to invest as much as they could afford in new machinery. And they could only afford the new machinery (and, of course, have their own luxuries on the side) if they kept workers wages as low as they could. Marx writes in his major work. Capital, that the capitalist is like a miser, obsessed with getting more and more wealth. But:

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What in the miser is mere idiosyncrasy is, in the capitalist, the effect of a social mechanism in which he is but one of the wheels... The development of capitalist production makes it constantly necessary to keep increasing the amount of capital laid out in a given industrial undertaking, and competition makes the immanent laws of capitalist production to be felt by each individual capitalist as external coercive laws. It compels him to keep constantly extending his capital in order to preserve it. But extend it he cannot, except by means of progressive accumulation. Accumulate, accumulate! That is Moses and the prophets!

Production does not take place to satisfy human needeven the human needs of the capitalist classbut in order to enable one capitalist to survive in competition with another capitalist. The workers employed by each capitalist find their lives dominated by the drive of their employers to accumulate faster than their rivals. As Marxs The Communist Manifesto put it:
In bourgeois society living labour is but a means to accumulate dead labour... Capital is independent and has individuality, while the living person is dependent and has no individuality.

The compulsive drive for capitalists to accumulate in competition with one another explains the great rush forward of industry in the early years of the system. But something else resulted a wellrepeated economic crisis. Crisis is not new. It is as old as the system itself.

economic crisis
The accumulation of wealth on the one hand, of poverty on the other. That was how Marx summed up the trend of capitalism. every capitalist fears competition from every other, so he works his employees as hard as possible, paying wages as low as he can get away with. The result is a disproportion between the massive growth of means of production on the one hand, and the limited growth in

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wages and the number of workers employed on the other. This, Marx insisted, was the basic cause of economic crisis. The easiest way to look at this is to ask: who buys the greatly expanding quantity of goods? The low wages of the workers mean they cannot afford the goods produced by their own labour. And the capitalists cannot increase wages, because that would be to destroy profit, the driving force of the system. But if firms cannot sell the goods they produce, they have to shut down factories and sack workers. The total amount of wages then falls still more, and yet more firms cannot sell their goods. A crisis of overproduction sets in, with goods piling up throughout the economy that people cannot afford to buy. This has been a recurrent feature of capitalist society for the past 160 years. But any quick-witted apologist for the system will soon point out that there should be an easy way out of the crisis. All thats needed is that capitalists invest their profit in new factories and machines. That will provide jobs for workers, who in turn will then be able to buy the unsold goods. This means that as long as theres new investment all the goods produced can be sold and the system can provide full employment. Marx was no fool and recognised this. Indeed, as weve seen, he realised that the competitive pressure on capitalists to invest was central to the system. But, he asked, does this mean the capitalists will invest all their profits, all the time? The capitalist will only invest if he thinks he is guaranteed a reasonable profit. If he doesnt think there is such a profit to be made, he wont risk his money in investment. Hell put it in the bank and leave it there. Whether the capitalist invests or not depends on how he assesses the economic situation. When it looks right, the capitalists all rush to invest at the same time, falling over each other searching for construction sites, buying up machines, scouring the earth for raw materials, paying over the odds for skilled labour. This is usually called the boom. But the frenzied competition for land, raw materials and skilled labour forces up the prices of these things. And suddenly a point is

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reached where some firms discover their costs have risen so much that all their profits have disappeared. The investment boom all at once gives way to an investment slump. no one wants new factoriesconstruction workers are sacked. no one wants new machinesthe machine tool industry goes into crisis. no one wants all the iron and steel that is being producedthe steel industry is suddenly working below capacity and becomes unprofitable. Closures and shutdowns spread from industry to industry, destroying jobsand with them the ability of workers to buy the goods of other industries. The history of capitalism is a history of such periodic lurches into crisis, into the insanity of unemployed workers going hungry outside empty factories, while stocks of unwanted goods rot. Capitalism creates these crises of overproduction periodically because there is no planning, so theres no way to stop the stampede of capital into and out of investment all at once. People used to think that the state could stop this. By intervening in the economy, increasing state investment when private investment was low, then reducing it when private investment caught up, the state would keep production on an even keel. But nowadays state investment too is part of the lunacy. Look at British Steel. Some years ago, when the firm was still nationalised, steel workers were told their jobs were being scrapped to make way for vast modern automatic furnaces designed to produce more steel more cheaply. now they are being told that yet more workers must lose their jobsbecause Britain was not the only country to embark on these massive investment plans. france, Germany, the United States, Brazil, eastern europe, even South Korea, all did the same. now theres a world surplus of steela crisis of overproduction. State investment is being cut. Steel workers, of course, suffer both ways. This is the price humanity is still paying for an economic system where the production of massive wealth is controlled by a small privileged group interested only in profit. It does not matter whether these small privileged groups own industry directly, or control it indirectly through their control of the state (as with British Steel). While they use this control

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to compete with each other for the largest share of the profits, whether nationally or internationally, it is the workers who suffer. The final lunacy of the system is that the crisis of overproduction is not overproduction at all. All that surplus steel, for instance, could help solve world hunger. Peasants around the world have to plough the land with wooden ploughsharessteel ploughshares would increase food production. But the peasants have no money anyway, so the capitalist system isnt interestedtheres no profit to be made.

why crises tend to get worse

Crises do not just take place with monotonous regularity. Marx also predicted they would get worse as time went on. even if investment took place at an even rate, without fits and starts, it could not stop the overall trend towards crisis. This is because the competition between capitalists (and capitalist nations) forces them to invest in labour-saving equipment. In Britain today almost all new investments are designed to cut the number of workers employed. That is why there are fewer workers in British industry today than ten years ago, even though output has increased over that time. Only by rationalising production, by increasing productivity and by cutting the workforce can one capitalist get a bigger share of the cake than another. But the result for the system as a whole is devastating. for it means that the number of workers does not increase at anything like the same speed as investment. Yet it is the labour of workers that is the source of the profits, the fuel that keeps the system going. If you make bigger and bigger investments, without a corresponding increase in the source of profits, you are heading for a breakdownjust as surely as if you expected to drive a Jaguar on the amount of petrol needed to keep a Mini going. That is why Marx argued 100 years ago that the very success of capitalism in piling up huge investments in new equipment led to a tendency of the rate of profit to decline which means ever worsening crises.

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Marx predicted that as capitalism got older, its crises would get worse because the source of profit, labour, does not increase nearly as rapidly as the investment needed to put labour to work. Marx wrote when the value of the plant and machinery needed to employ each worker was fairly low. It has shot up since then, until today it can be 20,000 or even 30,000. Competition between capitalist firms has forced them to use ever bigger and ever more expensive machinery. The point has been reached where, in most industries, it is taken for granted that new machinery means fewer workers. As Marx put it, the rate of profit will tend to fall. He predicted that a point would eventually be reached at which any new investment would seem a perilous venture. The scale of expenditure needed for new plant and machinery would be colossal, but the rate of profit would be lower than ever before. When this point was reached, each capitalist (or capitalist state) would fantasise about huge new investment programmesbut be afraid to make them for fear of going bust.

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tHe Value of money

JoSEph choonara From Socialist Review 330 (november 2008)

PITY MOneY. Over recent months it has been injected into markets, destroyed in financial meltdowns and stock market collapses; it has been devalued and revalued and passed along the increasingly unfathomable webs spun by capital.1 This raises some questions. Take the concept of the economic bubble. Assetsshares or properties perhapssoar in price and then the bubble bursts. But this implies that it is a bubble relative to something else, relative to some real measure of wealth. Similarly we might ask how the paper wealth recently wiped off stock markets relates to the real wealth that presumably lurks in the background. The great classical economists such as Adam Smith (1723-90) had to answer such questions. Back then the capitalist class was still establishing itself against the old landed aristocracy. These pioneers of economics looked for some yardstick of value, and they found it in human labour. Labour, wrote Smith, is the real measure of the exchangeable value of all commodities. Karl Marx developed this labour theory of value far more rigorously. He pointed out that capitalism, now entrenched as the dominant economic system, was creating a uniform yardstick for wealth in socially necessary labour.

1: This article was written in the wake of the collapse of the Wall Street bank Lehman Brothers in 2008, which led to a sharp downturn in the world economy, along with desperate action by governments to try to contain the crisiseditors note.

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the labour theory of value

This was not the labour of a particular individual or the amount expended in producing a particular commodity. It was the amount of labour that would be required by the typical worker using the normal technique and equipment available at that point in history. These assumptions made sense in a world where machinery and the division of labour had simplified production, stripping it of all artistry, and where a mass working class was emerging. This kind of labour could be measuredin person-hours or even person-seconds. The value of the machinery and raw materials used in production could also be measured. Such things are dead labour the crystallised past labour of workers. So machinery acquires value when workers fashion it from iron, just as the iron itself acquires value as workers smelt it. As raw materials are used their value passes into the commodities produced from them. So too with machinery: a machine that costs 10,000 and lasts ten years would, all other things remaining equal, add 1,000 of value to the commodities produced with it each year. If that is the case, then the capitalist makes neither a profit nor a loss on their dead labour. The amount they pay to acquire it is the same as the value it adds to their output. Living labour is different. The capitalist gets a whole days labour from each worker. But the worker only needs to take home enough value to get them back to work the next day. They might work eight hours but produce the value of their wage in just four. Only living labour expandscreating new, unpaid for, value for the capitalist. Living labour is the source of profit, and squeezing labour to get this profit is called exploitation.

the rate of profit

Of course, capitalists are ignorant of Marxist economics. for them it appears as if all of their investments are creating value, both machinery and workers. So it seems perfectly logical to the capitalist to invest in an ever greater stock of machinery, computers and factories.

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even if the capitalist had read Marxs Capital, they would still be obliged to accumulate dead labour. Investment in dead labour makes workers more productive, reducing the total labour time in each commodity. Capitalists compete by cheapening their commodities, and any capitalist who does not play the game is soon driven out of business. The capitalist who invests earliest can win this battle of competition, so investment seems perfectly rational to the individual capitalist. But across the system as a whole its effects seem completely irrational. In the long term an ever greater mass of dead labour is accumulated compared to the amount of living labour exploited. If dead labour grows faster than living labour (the source of profit) then the capitalists must be getting fewer pennies of profit for each pound of investment. In other words, the rate of profit falls. Because the rate of profit governs how fast the system can expand, its fall seems to pose a threat to capitalism itself.

restoring profits
How can profit rates recover? Capitalists could simply squeeze workers harder. If workers toil longer (and for less) they create more value for the capitalist (and get less for themselves). But there are limits to this. eventually the workers would die of exhaustion or starvation. And, presumably, they would resist long before that happened. The second way capitalism recovers is through crisis. In a crisis, goods, including the dead labour bought by capitalists, pile up in warehouses and are sold at bargain prices. failing companies are bought up cheap by competitors. Workers suffer unemployment and wage cuts. Investments of all kinds are devalued, boosting profit rates. The bigger the problems, the greater the destruction needed to solve them. But, as capitalism ages, companies get bigger as they accumulate value and take each other over. eventually the failure of the biggest companies threatens to drag down healthy bits of the system. The painful medicine of crisis becomes more dangerous, so states bail out unhealthy companies and seek to postpone the crisis.

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Prophet and swindler

finance is an important part of capitalism. finance, Marx said, is both prophet and swindler. It is a means by which capitalism expands more rapidly, but also a source of instability and crisis. Banks allow some capitalists to save profits they cannot invest immediately and others to invest profits they do not yet have. If capitalism is like a balloon, with the various firms painted on its surface, credit is like the air being pumped inside. As the balloon expands the surface tension grows. Credit and debt bind the different firms together. A pinprick at one point on the balloon can cause the whole thing to collapse. The financial system gives new dynamism to capitalism but is linked to the production of value by living labourthe growth of credit must not lose touch with the production of new value. If you want to keep pumping more air into the balloon, eventually you need a balloon made from a greater amount of rubber.

finance and the rate of profit

The bloated financial system we see today reflects changes in capitalism over the past century. The Great Depression of the 1930s and the Second World War saw the destruction and reorganisation of capital on a vast scale, paving the way for the golden age of capitalismthe 1950s and 1960s. But by the 1970s falling profit rates had halted this period of expansion. The ruling class responded by attacking workers to boost profit rates. Profitability was restored but only partially, and certainly not to the levels seen in the early 1950s. This meant that for those with spare cash it seemed more logical to pump it into the financial system than the real economy. This meant lending to banks, to certain states or directly to consumers. Workers are drawn into the financial system both as a source of potential money (savings, pension funds, etc) and a source of borrowing. Personal debt has allowed capitalists to hold down our pay but still have us purchase more of the goods they produce. The bubble of debt helped keep the system going. Subprime mortgages

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were part of this bubble.2 And waves of financial innovation saw mortgage debt repackaged as complex assets that could then be bought, sold and gambled on.

into the casino

There are whole chunks of the system with little discernible social valueand these have expanded along with the financial system. The most well-known examples are stock markets. for Marx these were markets in fictitious capital. Capital is simply value that expands through the exploitation of living labour. So what is fictitious capital? If I buy shares in a company and the money I pay is then invested in wages and machinery, then that money is being used as real capital. In exchange I hold in my hand a bit of paper, which may entitle me to a claim on the future profits of the enterprise (dividends). But this paper is not, in itself, capital. nonetheless, huge markets can exist to trade these bits of paper. And the prices these bits of paper attract may bear little resemblance to any underlying flow of value. This is an example of a market in fictitious capital. now, if the stock market comes crashing down, making my piece of paper worthless, no real value has been destroyed (although it may not feel this way if your pension is wiped out in the crash). It is only if the firm itself goes bust that there is a real destruction of value. The stock market is simply the most visible such example. Another is the $50 trillion market in credit default swaps that insure against the risk that debts cannot be repaid. This has become a vast arena for speculation. If companies measure their profit by subtracting the price of such assets at the beginning of the year from the price at the end, such speculation can help create the illusion of profitabilityat least for a time.

2: The collapse of the market in subprime mortgages (i.e. those sold to people with little prospect of being able to pay them back) in the US helped to precipitate the economic crisis that began in 2007editors note.

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Just as the study of the human body relies on pathology, so the study of capitalism relies on crisis. now the patient is sick, we can see what makes it tick. The underlying problems in the real economy and the difficulty in solving these through crisis meant that any resolution was deferred. It is as if the patient has been treating a tumour with aspirin. The sickness has grown and shifted in the body. Once the disease becomes unmanageable with painkillers, the sickness is revealed all the more rapidly. It manifests itself first in the chaos sweeping the financial system and markets in fictitious capital. But these are symptoms, and dealing with the symptoms is not a cure. The disease lies deeper, as we shall see in the coming months. It is a disease rooted in the drive for profit, a drive that must lead the system into crisis again and again. It is a crisis of capitalism.

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accumulation and criSeS

alEx callinicoS an extract from The Revolutionary Ideas of Marx (1983)

One Of the main features of capitalism which sets it off from other modes of production, is the accumulation of capital. In slave or feudal societies, the exploiter will consume the bulk of the surplus product which he has seized from the direct producers. Production is still dominated by use value: its objective is consumption. This changes once the capitalist mode of production prevails. Most of the surplus value squeezed out of the workers is not consumed. Rather, it is reinvested in further production. It is this process, through which surplus value is constantly ploughed back into the production of yet more surplus value, that Marx calls the accumulation of capital. In a famous passage in volume one of Capital, Marx shows how this gives rise in the capitalist class to an ideology of abstinence, in which the bourgeoisie are encouraged to deny even their own consumption, and to save as much surplus value as possible so that it may be reinvested:
Accumulate, accumulate! That is Moses and the prophets! Industry furnishes the material which saving accumulates [says Adam Smith]. Therefore save, save, i.e. reconvert the greatest possible portion of surplus value or surplus product into capital! Accumulation for the sake of accumulation, production for the sake of production: this was the formula in which classical economics expressed the historical mission of the bourgeoisie in the period of its domination.

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But, says Marx, the motive for this is not greed (though as an individual the capitalist might be greedy). We dont need to look for some natural propensity to truck and barter in human nature. The system itself provides the capitalists motive:
In so far as he is capital personified, his motivating force is not the acquisition and enjoyment of use values, but the acquisition and augmentation of exchange values As such, he shares with the miser an absolute drive towards self-enrichment. But what appears in the miser as the mania of an individual is in the capitalist the effect of a social mechanism in which he is merely a cog.

This social mechanism is competition between many capitals. We have seen that Marx believed the influence of individual capitals on one another has the effect precisely that they must conduct themselves as capital. This is especially true of accumulation itself. A capital which does not reinvest surplus value will soon find itself outstripped by its rivals. Those who have invested in improved methods of production are able to produce more cheaply and can undercut the price of the first capitals goods. A capital which fails to accumulate will soon find itself driven into bankruptcy. The accumulation process, just because it is inseparable from competition between capitals, is not a smooth or even affair. Marx argues that the accumulation process is also the reproduction of capitalist relations of production. What he means is that society cannot go on existing unless production is constantly renewed and this depends on capitalists ploughing the value they have realised on the market back into production. Marx distinguishes between two forms of reproduction. Simple reproduction takes place when production is renewed at the same level as previouslyand the economy stagnates rather than grows. Extended reproduction, however, involves surplus product being used to increase production. This latter case is the norm under capitalism. In volume two of Capital Marx analyses the conditions under which simple or extended reproduction takes place. He shows that

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here use value plays a very important role. for reproduction to happen, it is not enough for there to be the money to buy labour power and the instruments of production. There must also be enough consumer goods to feed the workers, and enough machinery, raw materials and so on for them to put to work. Marx divides the economy into two broad sectors, Departments I and II. Department I of the economy produces the means of production: for instance, mining for raw materials and factories producing machinery. Department II produces consumer goods: food, clothing and so on. Marx shows that for either simple or extended reproduction to happen, both departments must produce goods in certain proportions. But whether these proportions between the different sectors of the economy actually hold is a matter largely of accident. Capitalists produce, not for themselves, but for the market. There is no guarantee whatsoever that what is produced will be consumed. Whether this happens depends on there being effective demand for the commodity. In other words, not only must someone want to buy it, but they must have the money to do so. Often this demand does not exist. The result is an economic crisis. for example, let us say that capitalists in Department I (means of production) cut the wages of their workers in order to increase the rate of surplus value. These workers will then be able to buy fewer of the products of Department II (consumer goods). Capitalists in Department II may react to this decline in their markets by cutting back on their orders for new plant and equipment. Department I capitalists, hit in turn by this fall in demand for their products, may lay off workers, which then causes their Department II counterparts to do the sameand so on. The possibility of economic crises is inherent in the very nature of the commodity. A commodity is sold, and the money used to buy another commodity. But there is no reason why a sale must necessarily be followed by another purchase. Having sold his commodity, the seller may decide to hoard the money he has received. There are often conditions in which capitalists decide to do precisely this, because the rate of profit is too low for it to be worth their while to invest.

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The source of crises is thus ultimately the unplanned character of capitalist production, where a balance is itself an accident owing to the spontaneous nature of this production, as Marx writes. However, this merely shows that crises are possible. To understand why they actually happen we have to dig deeper into the nature of the accumulation process. Marxs explanation of economic crises is based on what he called the law of the tendency of the rate of profit to fall, in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations, he wrote. The rate of profit has a general tendency to fall under capitalism, says Marx. not just in specific areas of the economy nor just in particular periods but generally, and the reason, he says, is the continual increase in the productivity of labour. To use his own words, The progressive tendency of the rate of profit to fall is just an expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour. The higher the productivity of labour, the more machinery and raw materials an individual worker is responsible for. In other words, the amount of constant capital invested in plant, equipment and raw materials grows relative to the variable capital used to pay the workers wages. In value terms, this means that the organic composition of capital is higher.1 Because labour power is the source of surplus value, the higher the organic composition of capital, the lower the rate of profit. So as productivity increases, the rate of profit falls. But if this is so, then why should any capitalist ever invest for higher productivity? The answer is that, in the short term, he benefits from doing so, and in the long term he is forced to do so by competition. Let us recall that the individual value of a commodity, the actual labour embodied in it, may differ from the social or market value, which is determined by the average conditions of production in that industry. now take the case of an individual capitalist using these average conditions of production. Suppose that he introduces a
1: The organic composition of capital was, for Marx, the ratio of the value of constant capital to variable capital within the production processeditors note.

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new technique, which raises the productivity of his workers above the average. The individual value of his commodities will fall below their social value because they have been produced more efficiently than is normal in that sector. The capitalist can now fix their prices at a level that is lower than the social value thus undercutting his competitors, but still higher than their individual value, thus realising an extra profit. But this situation will not last indefinitely. Other capitalists will adopt the new technique to prevent themselves being undercut and driven out of business. Once this innovation becomes the norm in the industry the social value of its products will fall to match the individual value of the innovators commodities, wiping out his advantage. Through the pressure of competition capitals are therefore compelled to adopt new techniques and raise the productivity of labour. The law of determination of value by labour time thus acts as a coercive law of competition, writes Marx. for the individual capitalist, the determination of value as suchinterests him only in so far as it raises or lowers the cost of production of commodities for himself, thus only in so far as it makes his position exceptional. each capitalist is concerned to raise the productivity of labour only as a means of outstripping his competitors. The effect is to force all the many capitals to conform to the law of value, and constantly to increase the productivity of labour. However, the outcome of all these self-seeking actions by capitalists out to increase the amount of surplus value they can seize from their workers and their competitors is to bring down the general rate of profit:
no capitalist ever voluntarily introduces a new method of production no matter how much more productive it may be, and how much it may increase the rate of surplus value, so long as it reduces the rate of profit. Yet every such new method of production cheapens the commodities. Hence, the capitalist sells them originally above their prices of production, or, perhaps, above their value. He pockets the difference between their costs of production and the market prices of the same

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commodities produced at higher costs of production. He can do thisbecause his method of production stands above the social average. But competition makes it general and subject to the general law. There follows a fall in the rate of profitperhaps first in this sphere of production and eventually it achieves a balance with the rest, which is, therefore, wholly independent of the will of the capitalist.

This tendency of the rate of profit to fall is a reflection of the fact that beyond a certain point, the development of the powers of production becomes a barrier for capital; hence the capital relation a barrier for the development of the productive powers of labour. The greater productivity of labour, which reflects humanitys growing power over nature, takes the form, within capitalist relations of production, of a rising organic composition of capital, and hence a falling rate of profit. It is this process which underlies economic crises. The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. The falling rate of profit is, however, only the starting point of Marxs analysis of capitalist crises. He stresses that there are counteracting influences at work, which cross and annul the effect of the general law, and which give it merely the characteristic of a tendency, a law whose absolute action is checked, retarded and weakened. Indeed, the same influences which produce a tendency in the general rate of profit to fall, also call forth counter-effects, which hamper, retard and partly paralyse this fall. for example, the rising organic composition of capital means that a smaller number of workers can produce a given amount of commodities. The capitalist may well react by sacking the surplus workersthis may indeed have been his aim in introducing the new technique in the first place. The result is that the accumulation of capital involves the constant expulsion of workers from production. What Marx calls relative overpopulation is created. It is not, as Malthus and his followers claimed, that there are more people than there is food to keep them alive. Rather, there are more people than

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capitalism needs, and so the surplus is deprived of the wages on which workers depend for their existence. The capitalist economy consequently generates an industrial reserve army of unemployed workers, which plays a crucial role in the accumulation process. not only do the unemployed provide a pool of workers that can be flung into new branches of production. They also help to prevent wages from rising too high. Labour power, like every commodity, has a valuethe labour time involved in its production, and a pricethe amount of money paid for it. The price of labour power is wages, and like all market prices wages fluctuate in response to rises and falls in the supply and demand of labour power. The existence of the industrial reserve army keeps the supply of labour power large enough to prevent the price of labour power from rising above its value. Writes Marx, The general movements of wages are exclusively regulated by the expansion and contraction of the industrial reserve army. This does not mean that Marx believed in the iron law of wages, according to which wages cannot rise above the bare physical minimum necessary for subsistence. As he pointed out in the Critique of the Gotha Programme, this so-called law is based on Malthuss theory of population, and is therefore utterly false. Capitalism, as we have seen, involves constant increases in the productivity of labour. These lead, of necessity, to a steady reduction in the value of commodities, including labour power. The falling value of consumer goods means that the purchasing power of workers wages can stay the same or even rise although the value of labour power has fallen. So in absolute terms, workers living standards may well rise. In relative terms, however, their position has deteriorated, because the rate of surplus value has risen, and so their share of the total value they have created has fallen. The existence of an industrial reserve army strengthens the position of the capitalist, and makes it easier for him to increase the rate of surplus value. If the total amount of capital remains the same, then the rate of profit will rise. So a greater intensity of exploitation is one counteracting influence on the falling rate of profit.

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Increasing the rate of exploitation is double-edged, however. If it is achieved through increasing the productivity of labour, then the organic composition of capital will rise, and so a higher rate of surplus value will in this case mean a lower rate of profit. Marx believed that such a situation was typical of the tendency of the rate of profit. He rejected any attempt to explain economic crises through workers winning higher wage increases:
The tendency of the rate of profit to fall is bound up with a tendency for the rate of surplus value to rise nothing is more absurd, for this reason, than to explain the fall in the rate of profit by a rise in the rate of wages, although this may be the case by way of an exception The rate of profit does not fall because labour becomes less productive, but because it becomes more productive. Both the rise in the rate of surplus value and the fall in the rate of profit are but specific forms through which growing productivity of labour is expressed under capitalism.

The same was true, Marx argued, of another counteracting influence, the cheapening of the elements of constant capital. Rising productivity in Department I, the production of the means of production, means that the value of the plant, machinery and so on which make up the constant capital falls:
With the growth in the proportion of constant to variable capital, grows also the productivity of labour, the productive forces brought into being, with which social labour operates. As a result of this increasing productivity of labour, however, a part of the existing constant capital is continuously depreciated in value, for its value depends, not on the labour time it cost originally, but on the labour time with which it can be reproduced, and this is continually diminishing as the productivity of labour grows.

Many critics of Marx (some of them Marxists) have argued that the fact that rising labour productivity cheapens the elements of

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constant capital means that the organic composition does not rise and so the rate of profit does not fall. even though the technical composition of capital, the physical ratio between means of production and labour power, grows enormously, they contend, in value terms this relationship stays the same because the cost of producing the means of production has fallen. What they ignore is that what matters for the capitalist is the return he makes on his original investment. The money he laid out on plant, equipment and so on will have been to buy these means of production at their original values, not the labour time it would now cost to replace them. He must make an adequate profit on this investment, not on what it might now cost him to make it. But let us now look at crises themselves. It is indeed mainly through crises that the value of constant capital is brought in line, not with the labour time it cost originally, but with the labour time with which it can be reproduced. economic crises may be precipitated by a variety of factors. for example, one may be brought on by a sudden rise in the price of some important raw materialsuch as the fourfold rise in the price of oil in 1973-4. Often crises start through some disruption of the financial system for example, a major bank going bankrupt, or a stock market crash. A large portion of the third volume of Capital is devoted to explaining how development of the credit system, as a result of which more and more money is created by the banks themselves, plays a vital role in both preventing and bringing about crises. However, the underlying cause of crises is always the tendency of the rate of profit to fall, and the counteracting influences which it brings into play. We have seen that the nature of the commodity is such that money gained by selling a commodity may be hoarded rather than used to buy another commodity. This takes place on a massive scale during economic crises. Vast numbers of commodities go unsold. This sets capitalism apart from earlier modes of production. In slave and feudal societies crises were those of underproduction, of shortage, in which there was not enough to feed everyone. Capitalist crises, however, are those of overproduction. This does not mean, Marx emphasises, that the amount of products is excessive

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in relation to the need for them The limits to production are set by the profit of the capitalist and in no way by the needs of the producers. Too many commodities have been produced to realise an adequate profit for the capitalist. If we want an example, we need look no further back than the butter mountains and wine lakes created to keep the price of agricultural goods high, while more than 700 million people starve in the Third World. At the same time as crises are produced by the internal contradictions of capital accumulation, they are always momentary and forcible solutions of the existing contradictions. This takes place through what Marx called the depreciation or devaluation of capital. The collapse of the markets for their goods forces many capitals out of business. effectively, large amounts of capital are destroyed. The destruction of capital is sometimes literalmachinery rusts, stocks of goods rot or are destroyed. But falling prices also wipe out a large part of the value of the means of production. The destruction of capital through crises means the depreciation of values which prevents them from renewing their reproduction process as capital on the same scale. It is in this way, through economic crises, that the value of constant capital is brought in line, not with the labour time originally used to produce it, but with what it would now cost to reproduce it. In this manner the organic composition of capital is reduced and the rate of profit recovers. So crises serve to restore capital to a condition in which it can be profitably employed:
The periodical depreciation of existing capitalone of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital value through the formation of new capitaldisturbs the given conditions within which the process of circulation and reproduction of capital takes place, and is therefore accompanied by stoppages and crises in the production process.

There are other ways in which crises serve to offset the tendency of the rate of profit to fall. Marx writes that crises are always prepared

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bya period in which wages rise generally and the working class actually gets a larger share of that part of the annual product which is intended for consumption. This reflects the fact that at the height of economic booms many commodities become scarce because they are in demand by so many capitals eager to get as large a share of the market as possible. This is true of labour power: as the pace of economic growth quickens, so the industrial reserve army is run down, and workers, especially skilled ones, become scarce. The workers improved bargaining position then enables them to bid up the price of labour power, and so the rate of wages rises. An economic recession, by forcing up unemployment, makes it easier for the employers to drive down wages, and to compel those workers still with jobs to accept worse conditions of production. Crises, then, are periods when the capitalist system is reorganised and reshaped in order to restore the rate of profit to a level at which investment will take place. not all capitals benefit equally from this process. The weaker and less efficient firms, and those with an especially large burden of out-of-date machinery, will be driven out of business. The stronger and more efficient capitals survive, and emerge from the recession stronger. They are able to buy up land and instruments of production at bargain-basement prices, and to force on workers changes in the labour process which will increase the rate of surplus value. Crises therefore contribute to the process which Marx called the centralisation and concentration of capital. Concentration takes place when capitals grow in size through the accumulation of surplus value. Centralisation, on the other hand, involves the absorption of smaller by bigger capitals. The process of competition itself encourages this trend, because the more efficient firms are able to undercut their rivals and then to take them over. But economic recessions speed up the process by enabling the surviving capitals to buy up the means of production cheap. A constant increase in the size of individual capitals is therefore an inevitable part of the accumulation process. The path characteristically described by modern industry, Marx writes, takes the form of acycle (interrupted by smaller

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oscillations) of periods of average activity, production at high pressure, crisis, and stagnation. The alternation of boom and slump is an essential feature of the capitalist economy. As Trotsky put it, Capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling Crises and booms were inherent in capitalism from its birth; they will accompany it to its grave. The analysis of the way in which crises are built into the accumulation of capital, which Marx develops in Capital, is conducted at quite a high level of abstraction. It needs to be elaborated by an account of how, as the system grows older, the centralisation and concentration of capital makes it more difficult for crises to perform their role of restoring the conditions of profitable accumulation. nevertheless, Capital provides the basis of any attempt to understand the capitalist economy.

conclusion
The difference between capitalism and its precursors arises from the relations of production:
It is clear that in any economic formation of society where the use value rather than the exchange value of product predominates, surplus labour will be restricted to a more or less confined set of needs, and that no boundless thirst for surplus labour will arise from the character of production itself.

The feudal lord, for example, was content so long as he received enough rent from his peasants to support himself, his family and his retainers in the style to which they were accustomed. The capitalist, however, has a voracious appetite, a werewolf-like hunger for surplus labour which springs from the need to match the technical improvements of his competitors or be driven out of business. Marx was a firm defender of what he called the great civilising influence of capital against those who looked back nostalgically to pre-capitalist societies. He praised the economist Ricardo for having his eye solely for the development of the productive forces. To assert, as sentimental opponents of Ricardos did, that production

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as such is not the object, is to forget that production for its own sake means nothing but the development of human productive forces, in other words the development of the richness of human nature as an end in itself. So capitalism was historically progressive:
[It] drives beyond national barriers and prejudicesas well as all traditional, confined, complacent, encrusted satisfactions of human needs, and reproductions of old ways of life. It is destructive to all this, and constantly revolutionises it, tearing down all the barriers which hem in the development of the forces of production, the expansion of needs, the all-sided development of production, and the exploitation and exchange of natural and mental forces.

At the same time, however, the tendency of the rate of profit to fall shows that capitalism is not, as the political economists believed, the most rational form of society, but is rather a historically limited, and contradictory mode of production, which fetters the forces of production at the same time as it develops them. The real barrier of capitalist production is capital itself, writes Marx. The violent destruction of capital, not by relations external to it, but rather as a condition of its self-preservation, is the most striking form in which it is given it to be gone and to give room to a higher state of social production. Contrary to what many commentators, some of them Marxists, have said, Marx did not believe that the economic collapse of capitalism is inevitable. Permanent crises do not exist, he insisted. As we have seen, the crises are always momentary and forcible solutions of the existing contradictions. There is no economic crisis so deep that the capitalist system cannot recover from it, provided that the working class is prepared to pay the price in unemployment, falling living standards, deteriorating working conditions. Whether any crisis leads to higher state of social production depends upon the consciousness and action of the working class.

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Sample questions for discussion

Marxs analysis of capitalism involves a labour theory of value. How would you respond to someone who claimed that prices depend on how scarce or plentiful a given commodity is? How effective can government action be in eradicating crises? How would you answer someone who told you that the problems of capitalism are an expression of humans natural greed? Can robots be exploited?

further reading
Karl Marxs account of capitalism, the three volumes of Capital and his various other writing on the subject, are available in many different editions and are on the Marxist Internet Archive (www.marxists.org). The most accessible is the text Value, Price and Profit. Joseph Choonaras Unravelling Capitalism: A Guide to Marxist Political Economy is an introduction to the economic ideas of Marx and their application to capitalism. Chris Harmans longer work Zombie Capitalism: Global Crisis and the Relevance of Marx explores the historical development of capitalism in greater detail. Both books are available from Bookmarks. So too is Alex Callinicoss The Revolutionary Ideas of Karl Marx, from which an edited extract is included here.