Crises in Capitalism
Crises in Capitalism
Table of Contents
Lesson: Crises in Capitalism
Learning outcomes
Introduction
Types of Crisis
Summary
Exercises
Glossary
References
Learning outcomes:
After you have read this chapter, you should be able to:-
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.
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.
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.
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.
What could have saved the onset of capitalism crisis? Following are the explanations
to it (though at times not possible):
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).
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.
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
‘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:
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:
The results derived thereof will be used while explaining the under consumption and
disproportionality crisis (will be discussed in the coming sections).
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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’.
Bukharin: There is a chain of related industries which create market for others and
this chain ends when industry produces consumer goods.
The above four conjectures together imply that the rate of growth of consumption
declines relative 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.
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.
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.
rise in real wages. State action to prevent under-consumption crisis creates wage-
squeeze 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.
Exercises
Q2. State has an important role to play in circumventing crises. If yes, explain how.
Q3. Can there be a form of crises where in all commodities sell at their true values?
Discuss.
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.
Q6.’Underconsumption and overproduction are flip sides of a same coin’. Explain how
it is possible in capitalism?
7 True or False
Question
a) Anything produced will be sold off in the market.
Glossary
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
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