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Crises in Capitalism

This document provides an overview of crises in capitalism. It begins by discussing how capitalism differs from previous economic systems in its potential for crisis due to overproduction when the circulation of commodities is interrupted. It then examines Marx's theory that crises can emerge from a falling rate of profit. The document outlines simple and expanded models of economic reproduction and explains different types of crises including underconsumption, wage squeeze, and disproportionate crises. It aims to define economic crises and compare necessity and possibility theories of their origins within capitalism.

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khushi rewar
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0% found this document useful (0 votes)
89 views15 pages

Crises in Capitalism

This document provides an overview of crises in capitalism. It begins by discussing how capitalism differs from previous economic systems in its potential for crisis due to overproduction when the circulation of commodities is interrupted. It then examines Marx's theory that crises can emerge from a falling rate of profit. The document outlines simple and expanded models of economic reproduction and explains different types of crises including underconsumption, wage squeeze, and disproportionate crises. It aims to define economic crises and compare necessity and possibility theories of their origins within capitalism.

Uploaded by

khushi rewar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Crises in Capitalism

Lesson: Crises in Capitalism

Lesson Developer: Vaishali Kapoor and Rakhi Arora Sharma

College/ Department: DDU and Rajdhani College, Delhi Universiry

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Crises in Capitalism

Table of Contents
Lesson: Crises in Capitalism

 Learning outcomes

 Introduction

 Capitalism and Crisis

 Overproduction vs Say’s Law


 Circulation M-C-M’

 Simple and expanded Reproduction scheme

 Types of Crisis

 Under consumption Crisis


 Wage squeeze
 Falling rate of profit sustained crisis
 Disproportionality crisis
 Marxian analysis of crisis Vs Tugan’s disproportionality crisis

 Summary

 Exercises

 Glossary

 References

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Crises in Capitalism

Learning outcomes:
After you have read this chapter, you should be able to:-

a) Define Economic Crisis

b) Explain phenomenon of ‘overproduction’

c) Distinguish between possibility theories and necessity theories

d) State role of State in possibility theories of crisis

e) Describe under-consumption crisis.

f) Narrate disproportionality crisis.

I. Introduction
Crisis and its aftermath have been in news headlines, debates, books journals and research
papers. It is also the cause of worry for every government and business. Macroeconomists
and researchers around the globe are trying to reason out the causes for current crisis.
Various macro-economic theories: Keynesian, classical, Marxian, Austrian, Minsky etc. are
used as theoretical models for explanation of recent crisis.

In this chapter we will discuss crises and their nature in capitalism. This chapter is divided
into three sections. First section provides crisis origination in capitalism. In the second
section, simple and extended reproduction scheme are explained and their equilibriums are
established. Third section discusses various types of crises.

II. Capitalism and Crisis


Even in the societies prior to capitalism, crisis was prevalent but with different reasons. The
reasons for crisis were natural disaster, war or some catastrophic occurrence that interrupts
the production of commodities and acute shortage becomes one of the reasons for
emergence of economic crisis. But in capitalism the crisis follows the unsalable commodity
surplus. In this section, we will explore how circulation of M-C-M’ is interrupted and engulf
the capitalist’s society into crisis.

II.1. Overproduction Vs Say’s Law-

Say’s explains, “Supply creates its own demand”. Say’s Law alleges that a sale is
followed by a purchase of equal amounts. Ricardo (another classical economist)
further pursues this and remarks that circulation of C-M-C is never interrupted and
the producer produces either to consume or sell.

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Crises in Capitalism

The production then is either consumed by producer or he sells it for other goods
and money is only medium of exchange and interruption is C-M-C is also then
imaginary.

Marx disagrees to it and questions that why would buy since other person has to sell.
Also, he considers role of money beyond what Ricardo described i.e. to split
exchange into two separate transactions: purchase and sale. What if first producer
(A) sells his goods and does not buy from other (B)? Then, in that case since B is
unable to sell his goods, he won’t buy from C and C in turn would fail to buy it from
D and the chain goes on. The end result of this is overproduction by all in this chain
starting from B.

II.2. Circulation M-C-M’


If the circulation under simple commodity production i.e. C-M-C is considered; then
overproduction can be considered an impossibility since production is for
consumption. But in capitalist order, circulation takes the form of M-C-M’. Creation of
the surplus i.e.∆M=M’-M is the sole objective of a capitalist. Capitalists undertake
production for profit and this makes capitalist society vulnerable to crisis: crisis of
overproduction.

Capitalist is interested in expanding surplus, ∆M as large as possible. Rather it is not


absolute ∆M but ∆M relative to the magnitude of the original capital i.e. ∆M/M. This
∆M/M is nothing but another way of representing the rate of profit. Keeping in mind
the M-c-M’ circuit and the rate of profit as aim of capitalist, let’s explore the
possibility of crisis in capitalism.

Any break may it be in simple commodity production circuit C-M-C or in M-C-M’


circuit, will result in crisis. Any withholding of buying power from market, will initiate
a contraction in the circulation process and will result in ‘overproduction’.
Overproduction in first year would mean that producer would curtail production in
forthcoming years. Equivalently, any disruption to ∆M would translate into doubts
about profitability and hence, producer would be hesitant to throw his money M into
circulation.

There are two sorts of possibilities. Firstly, ∆M disappears or becomes negative. This
would kill every incentive of a capitalist to reinvest money. This phenomenon could
be witnessed but can’t explain the onset of crisis. Rather this would be the outcome
of depression that the entire economy suffers losses (negative ∆M). Secondly, there
could be fall in ∆M or fall in the rate of profit. Rate of profit can be assumed to fall
but yet remains positive. Since, it is the rate of profit that keeps capitalist interests
and fall in it could create grounds for capitalist to curtail their operations and the
curtailment to be sufficient for the onset of crisis? The answer is YES.

When rate of profit falls below usual range, capitalist will not invest in that industry
and will look for other industry where he could reap usual rate of profit. If, however,
all industries are experiencing fall in the rate of profit then he can do no better than
postponement of investment till the favorable conditions are on the cards. In the
meantime, the postponement of reinvestment by all capitalists would have already
disturbed the circulation process and the crisis precipitate.

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Crises in Capitalism

What could have saved the onset of capitalism crisis? Following are the explanations
to it (though at times not possible):

a) Increase in consumption by capitalist

If capitalist increases the personal consumption during the phase of low rate of
profit. Then only demand’s composition will alter keeping circulation process intact.
But since it was argued that capital accumulation is what capitalist always desire for
and this urge to accumulate capital never withers away. The driving force behind
capital accumulation is the rate of profit and also the capitalist is interested not in
the use value but in exchange value i.e. expansion of surplus value and capitalist
would not produce output for its immediate consumption ( contrast it with C-M-C).

b) Fall in the interest rate

Before we discuss this point; what is usual rate of profit? How low we consider, when
we refer to lower rate of profit? It is lower than which level? Answer to it is the rate
of interest. Modern theorists explain that there are two types of capitalists: those
who undertake production, entrepreneurs and those who supply funds at pre
specified interest rate, money capitalist. If rate of profit falls below the interest rate,
then entrepreneurs would not borrow from money capitalist and this breaks the
circulation process and seeds for crisis are sown.
It seems plausible that fall in interest rate could trouble shoot this problem. But in
actuality, money capitalists’ desire to loan funds dies away with fall in the interest
rate.
To conclude, capitalists would have to postpone their reinvestment decision till the
demand in the market has picked up.

III. Simple and Expanded reproduction


In the simple reproduction scheme, we assume that there are two departments viz.
Department I and Department II. Department I produces means of production or
capital goods and Department II produces consumption goods or wage goods.

Total value in Department I, w1=C1+V1+S1


Total value in Department II, w2=C2+V2+S2

Where,
‘C’ represents constant capital
‘V’ represents variable capital
‘S’ represents surplus
‘1’ used as subscript for Department I
‘2’ used as subscript for Department II

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Crises in Capitalism

Total surplus- sum of S1+S2- is consumed by capitalist i.e. expenditure is made on


consumption goods. Wages given to workers is also consumed by the workers. So,
capitalists and the workers demand consumption goods. For equilibrium, total
demand for consumption goods should equal total value produced in Department II.
Algebraically,
V1+V2+S1+S2=C2+V2+S2
V1+S1=C2……………………………………………………………………………….(i)

‘C2’ is the demand for constant capital by Department II from Department I. ‘V1+S1’
is the total demand for consumption goods by Department I from Department II. So,
equilibrium condition requires that net demand (demand from other than own
department) equals net supply (production supplied to all departments but its own).
If this condition is satisfied, the scale of production remains unchanged from year to
year.
Simple reproduction scheme ignores the fact that capitalists desire to accumulate
capital, which is taken into consideration in expanded reproduction scheme. For this
reason, surplus that accrued to capitalist is divided into four parts. First,
consumption by the capitalists should be at least at the last year level of
consumption, Sc. Second, increment in their consumption, S∆c. Third, capital
accumulation or addition made to constant capital, S ac. Lastly, surplus is spent on
wages (variable capital) on newly recruited workers to work on with additional
constant capital, Sav. So, the surplus equals sum of these FOUR components.
S=Sc+ S∆c+ Sac+ Sav

With these assumptions about surplus value, we now work out equilibrium conditions
in expanded reproduction scheme. The reproduction scheme for two departments
works as follows:

C1+V1+SC1+ S∆c1+ Sac1+ Sav1=W1


C2+V2+SC2+ S∆c2+ Sac2+ Sav2=W2

For equilibrium, demand for capital goods must equal total output of constant capital
and demand for consumption goods must equal total output of consumption goods.
Algebraically, it is expressed as follows:

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Crises in Capitalism

C1+ Sac1+C2+ Sav2= C1+V1+SC1+ S∆c1+ Sac1+ Sav1


And
V1+SC1+ S∆c1+ Sav1+V2+ SC2+ S∆c2+ Sav2= C2+V2+SC2+ S∆c2+ Sac2+ Sav2

After simplification both reduce to the following equation:

C2+ Sac2= V1+SC1+ S∆c1+ Sav1………………………………………………….(ii)

The results derived thereof will be used while explaining the under consumption and
disproportionality crisis (will be discussed in the coming sections).

IV. Types of crisis


Crisis would be divided on the following two bases:
a) All commodities sell at the equilibrium value or not.
Crisis can be associated with tendency for falling rate of profit and all commodities
are assumed to sell at their equilibrium values. On the other hand, it could be that
capitalists are unable to sell the commodities at their equilibrium value and it is
termed as ‘realization crisis’.

b) Role of State
The tendency of falling rate of profit and various counteracting tendencies are
assumed to be at equal footing, then balance of forces will determine system’s final
direction and crisis is a possibility and leaves scope for state action to regulate the
outcome. This is the possibility theory of crisis. If tendency of falling rate of profit
is assumed dominant and other tendencies operate within the limits set by former
then crisis is inevitable and state can no longer effectively control the outcome. This
is the Necessity theory of Crisis.

IV.1 Under-consumption Crisis


Under-consumption crisis is clubbed under the possibility theory of crisis and is
also known as Stagnation Theory of Crisis. In capitalist form of production, wages
are paid to the workers and profits accrue to profits and the sum of these two
constitute value of net product with latter being growing in comparison to former.
Hence, wages (that are spent on goods) are always not sufficient to buy back the
entire production and ‘demand gap’ is generated. Greater the share of profits to
wages, greater is the demand gap.

In capitalists savings (viewed as ‘leakage’) is not spent on goods then a part of the
production would not be sold or at least at their normal value. So viewed in this
sense, it is a type of realization crisis. This would not cease till profits contract to a
level so low that capitalists are forced to consume their entire income. Not that
demand gap can only be filled by consumption but also by investment demand.
Investment demand would also lead to higher level of production and employment.
The interplay between stagnating tendency- savings by capitalists and countervailing

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Crises in Capitalism

tendency of expansion- investment by capitalists; will determine the final outcome


for the system.

Capitalists save in order to grow and for honour, respect in the society. But the
decision to invest or not rests upon two factors:
Foundation for large scale commerce and trade- when there is economic,
political and international stability, then under such normal conditions capitalist
would invest and would have optimistic view about profitability in future.
Fuel for large scale investment- when new products, new markets and new
technologies coincide, then this become opportunity for capitalists.

Foundation and fuel together forms basis for expansionary forces. If fuel runs out
and rivalries among capitalists undermine foundation, then stagnation becomes order
of the day.

In modern times, monopoly capitalism is relevant form of capitalism under which a


few firms dominate industry and restrict output and charge higher prices. In this
way, capitalists’ profits are yet very large compared to wages to the workers. This
makes even greater demand gap and makes crisis then inevitable.

Since, there is demand gap that brings crisis; state can be very helpful by either
spending directly or by providing stimulus to private spending. Though feasibility of
such an option is monopoly capitalism is susceptible. In response to state’s action,
monopolists would raise prices than expanding output. Hence, state can play
important role in restricting monopolies through price controls and regulation.
Increased social welfare and higher wages would not only benefit workers but also to
the capitalists or to capitalist society as a whole.

IV.2 Wage Squeeze


With the rise in real wages and other things being equal, rate of profit tends to fall.
But rise in real wages have to be sufficient enough to offset the rise in productivity of
labor, for rate of profit to be on decline. Wage theorists believe real wage rise to be
only reason for fall in the rate of profit, which otherwise would have increased. Since,
here too we assume tendency for fall in the rate of profit: rise in real wages and
countervailing tendency: rise in productivity to operate at equal footing; hence wage
squeeze is a part of possibility theory of crisis.

To offset the demand gap created by monopoly capitalists, state can undertake
policies and sustain the boom. But if boom lasts for long, it reduces reserve army of
labor and hence, exerts upward pressure on real wages, which then lowers the rate
of profit, and crisis becomes inevitable. State intervention, to avoid under
consumption crisis, turns under consumption wage crisis into wage squeeze. State
can help recovery of capitalism if state can maintain both rising of profit and real
wages.

IV.3 Falling rate of Profit sustained crisis-

Marx’s falling rate of profit theory is necessity theory, wherein fall in the rate of
profit is assumed to be dominant theory and others as countervailing forces that are

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Crises in Capitalism

subordinate to the former. In this theory, all commodities including labor are
assumed to be selling at equilibrium value and therefore, its not a type of realization
crisis.

As we have discussed in the last chapter, rate of profit, ‘p’ is the function of organic
composition of capital ‘q’ and the rate of surplus value,‘s’ :

P=s’ (1-q)
Capitalists accumulate constant capital to extend their control and displace labor by
machinery. This causes ‘c’ and organic composition of capital to plunge. Assuming
rate of surplus value constant, increase in q will reduce the rate of profit. Although
increased use of machinery would increase labor productivity but this counteracting
cause operates within the limits defined by dominant tendency.

The impact of downward trend in the rate of profit is that capitalists would curtail
investment demand because for a capitalist the driving force behind capital
accumulation is the rate of profit. Also for the time being, real wages rise, and due to
the slowdown of investment, productivity falls; so constant wages would mean
increase in real wages. Viewed this way, ‘under consumption’ and ‘wage
squeeze’ are the outcomes of profitability crisis.

Since profitability crisis emerge due to capitalism system’s built in character of


capital accumulation and cannot be done away with either by raising wages and/or
curtailing monopolies; so one can conclude that state can’t manage profitability
crisis. If capitalist system is to be maintained and crisis to be avoided, then it would
require attack on workers and political parties will be unwilling to do so (since its not
populist action). Marx viewed possibility of socialist system overthrowing the
capitalist system itself as one of the solution to crisis in capitalism. Capitalist system
will come to an end when profits- the enliving force- keeps on going down and never
rise.

IV.4 Disproportionality crisis


Tugan postulate that disproportionality is the only cause of crisis. If every producer
produced goods in correct propositions then market would never be flooded with
unsalable commodities and ‘no overproduction’ or ‘no under consumption’ can be
seen. If the relative propositions of commodities are correct then the commodities
would sell at their values and in case of any disturbance, capitalists would face
realization problem and disproportionality crisis is also a type of realization crisis.

In the capitalist order, each capitalist produces for market; the size of which he
estimates before undertaking production and with imperfect knowledge either he
ends up with ‘too little’ or ‘too much’ for the market. Trial and errors year after year
would eliminate errors and correct proportions would then be attained. But the
economic environment under which capitalists operate is under constant change. If
capitalists over estimated the demand in the market, then the result will be
overproduction. In the forthcoming years, he would lower production and so will the
demand for labor and employment.

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Crises in Capitalism

Assuming that the expansion in commodity production in other branches of


production will follow the curtailment in one industry is unreasonable. Had it been
the case, deficit in production in one industry could have been made up by others.
Since there is no valid ground for acceptance of such an assumption (that why others
would expand production) means that circulation process is interrupted. If this
interruption is large one, then it could threaten the working of entire capitalist
system and calls for crisis thereof. The crisis had emerged due to disproportionality
between various branches of production. This disproportionality has its own roots in
plan-less, anarchic character of capitalist production.

This crisis had roots in disproportionality between various branches of production.


Marx believes that disproportionality can be due to faulty employment of labor
among spheres of production. Market value, in response, rises or falls and results
into the withdrawal of capital from one sphere of production to another. Marx view
this sort of crisis as a mechanism for bringing about equilibrium.

IV.5 Marxian Analysis of crisis Vs Tugan’s Disproportionality


Crisis

Tugan rejected Marx’s theory of either under consumption or over production and
emphasizes that these could be the outcome of disproportionality crisis only. Tugan
maintained that fall in consumption by workers and capitalists can’t be the origin of
crisis in demand for consumption goods. A fall in demand for consumption goods can
be compensated by increase in the production of means of production. The means of
production or investment demand will make up for fall in demand for the
consumption goods.

On the lines proposed by Tugan, assume that S ∆c and Sav are zero in expanded
reproduction scheme. Recall the equilibrium condition of the expanded reproduction (
given by equation θ below) is reproduced as follows:
V1+SC1+ S∆c1+Sav1= C2+ Sac2
The equilibrium condition with assumption of S∆c=0 and Sav=0 boils down to:
V1+SC1= C2+ Sac2………………………………………………….(2)

As we already know that V1,Sc1 and C2 also correspond to simple reproduction and
hence,V1+SC1= C2 must always be maintained. This would imply that Sac2 is zero.

Hence, we have proved by contradiction that if consumption goods demand is


curtailed then no accumulation would take place in Department II.

Tugan rejected under consumption crisis as a form of crisis. He argues that if labor
and capital are assumed mobile then there can be upshot of production of means of
production goods, more labor being employed in Department I while output of
Department II remains constant; so case for expanded reproduction scheme can be
reconstructed. The increase in production goods is consistent with absolute but
smaller increase in consumption goods.

He takes argument to a level where there is only one worker who will be engaged in
mass production of new machines and consumption goods for the capitalists. To him,
capitalism is run by and for the capitalists. Workers can be displaced by machinery
and contraction of consumption by working class would not call for crisis as long as
proportions are maintained.

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Crises in Capitalism

Total output expands and the proportion made up by means of production grows
always larger. The only requisite is that correct proportions must always be
maintained.
Tugan has been widely criticized by other economists for the fact that Tugan has
taken such an extreme position.

Conrad Schmidt: he argues with Tugan that capitalism can’t end. However,
opposes him by saying that consumption is enliving force that keeps production in
motion.
Kautsky: Capitalism though equates men and machines but society is and will
always remain a society of men. Social relation is of men to men and not of men to
machine. Human labor is a value-creating factor and role of human consumption
can’t be underestimated. Production is and will expand for human consumption.

Louis B. Proudin: Means of production are nothing more than means of production
of consumable goods. When demand for consumption is curtailed; then production of
means of production is meaningless and if produced is called as ‘over production’.

Rosa Luxemberg: Interdependency of consumption and production, as considered


by Tugan, is referred to as vulgar economic fantasy by Rosa.

Bukharin: There is a chain of related industries which create market for others and
this chain ends when industry produces consumer goods.

Marx favors under consumption theory of crisis, is clear by his statement,


“……………………cause of all real crisis always remains the poverty and restricted
consumption of the masses as compared to the tendency of capitalist production to
develop the productive forces in such a way that only the absolute power of
consumption of the entire society would be their limit.”

Sweezy’s formulation of under consumption crisis


Capitalism has inherent tendency to expand capacity to produce consumption goods
more rapidly than the demand for consumption goods and hence, crisis of under
consumption will follow. This tendency manifests itself in two ways:

Capacity is actually expanded


Capacity creation is a regular and continuous feature of capitalism. This translates
into increasing the volume of consumption goods being entering into the market. A
point will be reached where supply exceeds demand and sooner or later, production
will be curtailed.

Idle Productive forces


Productive forces are not anymore utilized in producing additional capacity.
Additional capacity produces demand for goods but is less than the latter, hence
making additional capacity creation redundant.

In order to get rich, capitalists are required to do the following:


 Making as much profit as possible and accumulation of surplus
rises as proportion.

 Investment should be rising proportion of accumulation, where

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Crises in Capitalism

accumulation by capital= Sac+ Sav and investment refers to S ac i.e.


addition to constant capital.

 Consumption is decreasing proportion of surplus value, although


capitalists consumption must be increasing (S∆c is positive).

 Investment of wages (Sav) is diminishing ratio of total


accumulation.

The above four conjectures together imply that the rate of growth of consumption
declines relative to rate of growth of means of production.

Capitalist act in a way that following ratio shows a steady decline:

Ratio of Rate of growth of consumption to Rate of growth of means of


production

If one looks at this problem from the production/supply side then nature of
production process enforces that following ratio remains constant.

Ratio of Rate of growth of output of consumption goods to Rate of growth of


means of production

It is thus proved that in the capitalist system, there is inherent tendency for the
growth in consumption to lag behind growth in output of consumption goods. Viewed
this way, ‘under consumption’ and ‘over production’ are opposite sides of same coin.
Under consumption is first witnessed in the means of production department and
over production in consumption goods.

To conclude, under consumption is a special case of disproportionality between


growth of demand for consumption goods and growth of capacity to produce
consumption goods. This disproportionality though does not arise from plan-less
character of capitalism but from inherent tendencies of capitalism.

Summary
 If there is any disturbance in the circulation process, result is crisis and this sort of
disturbance is not specific to capitalism and could erupt in all forms of society
including capitalism.

 When all tendencies i.e. those boosting rate of profit and those suppressing rate of
profit operate on equal footing, then state has a vital role to play in manipulating
outcome. If fall in rate of profit is major tendency then state’s intervention would not
be able to circumvent crisis.

 If government intervenes in under-consumption crisis by creating effective demand


and if boom lasts for long, it would have two effects: tightening labor market and

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Crises in Capitalism

rise in real wages. State action to prevent under-consumption crisis creates wage-
squeeze crisis.

 Wage-squeeze and under-consumption could not be causes of a general crises and


rather outcome of profitability crisis. Fall in profits would induce capitalists to lower
investment demand creating under-consumption and simultaneously, leading in real
wages. If fall in rate of profit is dominant tendency then state has no role to play to
avoid crisis.

 Tugan proposed disproportionality crisis and argues that only reason for crisis is
disproportionality. If production in various branches is maintained ion correct
proportions, then crisis could never occur.

 Tugan argued that under-consumption is not possible and found production of means
of production and consumption goods as perfectly substitutable. Consumption goods’
demand and production fall even then means of production’s production will continue
to rise as capitalists have urge to accumulate and capitalism is for capitalists. Tugan
has been criticized for taking such extreme position.

 Sweezy demonstrated two important things: first, rate of growth of production


exceeds rate of growth of consumption and second, result of it is overproduction or
its equivalent underconsumption.

Exercises

Q1. Crisis is inevitable under capitalism. Explain.

Q2. State has an important role to play in circumventing crises. If yes, explain how.

[hint: possibility theories]

Q3. Can there be a form of crises where in all commodities sell at their true values?
Discuss.

[hint: profitability crisis]

Q4. “The only cause of general crisis is disproportionality among various branches of
production”. Elaborate.

Q5. Crisis emerges when producers are not able to sell their products at their true
values. Comment.

[hint: realization crises : underconsumption and disproportionality crises]

Q6.’Underconsumption and overproduction are flip sides of a same coin’. Explain how
it is possible in capitalism?

[hint: sweezy’s formulation of undeconsumption crisis]

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Crises in Capitalism

Question Number Type of question

7 True or False

Question
a) Anything produced will be sold off in the market.

b) Boosting of demand by government in monopoly capitalism is effective.

c) Wage squeeze is not a cause but result of underconsumption.

d) Undertaking production for capitalist is important may it be consumption


goods or investment.

e) There is an inherent tendency for ratio of rate of growth of means of


production to rate of growth of consumption to rise.

Correct Answer / a) True


Option(s) b) False
c) True
d) False
e) True

Justification/ Feedback for the correct answer

a) The flip side of it is overproduction and it is irrelevant that someone


will consume since it has been produced.
b) The efforts of government to diminish demand gap would result in
higher prices instead of output and hence government can put regulations in
place that curtail monopolies.
c) Wages rise when government sustain boom in phase of declining
investment demand.
d) This is Tugan’s argument. But this is nothing more than his whim and
fancy. Fall in purchasing power of working class has been responsible in
shaping up crisis.
e) Accumulation implies faster rate of growth of means of production.
Appropriation of surplus to consumption falls so as to sustain ever growing
accumulation.

Glossary

 Economic Crisis: Economic crisis refers to a situation when disturbances in the


capitalist order become so severe that entire political and economic system is
threatened and their smooth functioning has been brought to an end.

 Effective Demand: when a consumer has both desire and ability to buy then it is
referred as effective demand. Effective demand was proposed by JM Keynes and
explains that consumer’s effective demand fell during great depression. Effective

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Crises in Capitalism

demand in one market is constrained by other market. During great depression,


demand in goods market was constrained by wage conditions in labor market.

 Accumulation: Accumulation refers to ploughing back of profits for expansion of


capital base.

 Falling rate of profit : Marx formulated Falling rate of profit and explained that rate
of profit has a tendency to fall with the rise in capital accumulation.

References

1. P. Sweezy, The theory of Capitalist Development,Monthly Review Press, 1942,


Chapters 8 and 10.

2. Anwar Shaikh,2000, Entries on “Economic Crises” and “Falling rate of profit” in T.


Bottomore et al.(eds.), The Dictionary of Marxist Thought, OUP, Indian edition, Maya
Blackwell.

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