Crisis Theory- an outline

By Brendan Mcooney - Kapitalism 101

Introduction

As the global financial crisis deepens, as it topples more banks, seeps into more corners of the economic universe, the search for answers/reasons will increase. As we search for answers we must always remember that in a capitalist society there is much mystification… through money, through credit, through temporal and spatial distortions… There are so many ways to displace crisis- to transfer its contradictions elsewhere- that it is often hard to locate the original source of crisis. Locating that original source and explaining the way crisis moves through all of these various levels of mystification/displacement will be the goal of my ECON303 playlist.

There is so much to say about capitalist crisis… It will take many videos and even then I’ll probably barely scratch the surface. But with so many videos we will need some way of tying everything together. This video will be sort of a table of contents- an outline of the general theory of capitalist crisis which touches upon various aspects to be filled in, in greater detail, in subsequent videos. Rather than focus solely on the specific features of this current crisis, this first run of crisis videos will retain a macro/theoretical perspective.

There are two main theoretical views of capitalist crisis. The view of bourgeois economics is that capitalism is essentially a self-equilibrating system. Social inequality and crisis are the result of external forces which inhibit the full working-out of market forces. As such, government regulation and spending and unions become common sites of criticism.

The line of theory which originates with Karl Marx and stretches up to the present with a wide body of diverse literature on crisis theory holds exactly the opposite view. Capitalism in its basic form is inherently unstable. Not only does it generate uneven economic terrain and exploitation but it also is prone to all variations of crisis. This is a result of the natural working out of the inner logic of capitalism and has nothing to do with external forces. In fact, these external forces are usually attempts to mediate those inherent crisis tendencies. Thus the attempts of financial regulators or government to mediate these crisis tendencies cause these institutions to take the blame for crisis.

The videos in this crisis series will follow in this marxist perspective.

In bourgeois economics the economy is considered demand driven. Capitalists, in responding to the desires of people, make things. Thus people acting on their private desires create the world they want to live in in a sort of consumer democracy. Exchange is seen merely as an exchange of use-values- of subjective utility embodied in commodities moving through space. Once demand and supply equalize an economy is in balance. If anything interferes in this process - a government that distorts demand through state spending or a union which sets wages above their equilibrium- we get distortions in the market.

In the marxist perspective the economy is driven by individual capitalists in competition with each other over the amount of surplus value they can capture from the workforce. That is, capitalists don’t just produce commodities to meet demands (after all what is advertising for if not to create demand for commodities which are not yet sold?) The point of producing a commodity is to profit from its sale. Thus the quest for more profit is what drives capitalist production. The argument that will be laid out here is that this same chaotic competition between capitalists for surplus value is what eventually creates crisis. This is often referred to as a contradiction between the forces and relations of production. The forces of production are the machines, factories, etc.- and the relations of production are the basic class relations in society- capitalists in competition with each other to better exploit workers. The contradiction between these forces and relations has to do with the fact that workers are creating the value that sustains this system, yet the drive is to replace them with machines in order to make their labor more efficient. Thus the social relations compel capitalists to improve the forces of production in a way which undermines the goal of these same social relations (to extract more value from workers).

Here we need another standard of value other than use-value. If we are to understand the source of profit and the way this quest for profit eventually causes crisis we will need a more objective measure of the exchange value of commodities than this vague bourgeois notion that profit is merely the result of different personal utilities.

As argued in more detail in many of my other videos, the amount of value that exists in a society at any time directly corresponds to the amount of abstract labor contained in all of the commodities. Thus the labor time that goes into producing a commodity is what gives it its value. Profit comes from an inequality in the exchange between capitalists and workers (not between capitalists and consumers). Its not that consumers pay more for a commodity than it is worth. Consumers buy commodities, more or less, at their values, but capitalists don’t pay for the full value of the labor that goes into making these commodities when they pay workers. This is exploitation- the true source of profit.

Thus capitalists are constantly striving to increase the amount of surplus value they extract from workers. We read about their success or failure in the business section of the newspaper when economists talk about “labor efficiency”. This is just the bourgeois term for exploitation. I talk more extensively in other videos about the way in which capitalists strive to increase surplus value. The general goal is to decrease the amount of labor that goes into their commodities relative to other capitalists. And this is most often done through technical innovation. Thus capitalism experiences a rapid turnover of technologies as capitalists race each other to improve labor efficiency. By changing the productivity of labor they reduce the value of commodities. But eventually the commodities become too cheap and here we run into a problem- a lack of profitable investments…. but here I am getting ahead of myself.

Equilibrium equations

But before we ask why an economy goes into crisis we must first ask why it doesn’t. After all, capitalism doesn’t collapse into crisis every day. It has long periods of growth as well. We start then by asking what it would take for capitalism to be in an equilibrium state.

First of all we should remember the circuit of capital- M-C-M1. The basic goal for an individual capitalist and for the class as a whole is to grow- to turn money into commodities and then back into more money. Whenever this circuit stops for any reason we get a crisis- money which can’t be turned into commodities or commodities that can’t be turned into more money. An uninhibited circuit of capital is therefore a goal of any equilibrium model.

Productive capitalists can be divided into two departments. Department one produces the means of production: factories, machines, tools, etc. Department two produces finished consumer goods. Both departments receive as inputs constant and variable capital with which they create a surplus. Department one makes means of production for both itself and Department two. Department two makes commodities for both workers and capitalists in both departments. Thus we can create some equations which describe the proper balance of exchanges between these two departments. If Department one buys just the right amount of constant and variable capital and produces just the right amount of surplus and Department two does the same, the values produced will be just enough to allow an equilibrium of exchange between both departments.

But what happens when we allow for growth? After all, growth is imperative to capitalism. If profits are made within the context of competition, this means capitalists must reinvest their profits in order to expand production. So we will need to come up with the right reinvestment strategies so as to keep a balanced equilibrium between Departments one and two.

The problem is that capitalists, acting as individuals, have no way of knowing what these proper reinvestment strategies would be so they have no way of reinvesting in ways that stabilize accumulation. On the contrary, their reinvestment strategies usually revolve around attempting to make labor more efficient. This means that the basic values in our equations are constantly shifting. Once we start adjusting for changes in technology we find that the equations for balanced accumulation begin to generate explosive oscillations in which both departments tend to overaccumulate capital in the face of shrinking profitable opportunities for this capital to be invested. This results in a crisis of overaccumulation.

Overaccumulation is an extension of the theory of the falling rate of profit. As capitalists render labor obsolete and replace it with machines they begin to narrow the amount of additional value which can be squeezed from the remaining workers. Thus the rate of profit falls. This means a shrinking of possibilities for investment which causes the circuit of capital to bunch up- all sorts of machines, commodities and labor get caught mid-circuit, unable to find an available site for investment. Of course, there are counter-vailing tendencies away from a fall in the rate of profit. So we will need more discussion of the specifics of this argument.

As workers are eliminated from production and replaced by machines, as labor becomes less valuable, as wages fall, as the ranks of the unemployed grow, capitalists experience a crisis of realization. That is, they have a problem realizing, or actualizing, the values of the commodities they produce. A commodity isn’t of value to the capitalist unless it can be turned into money. If there are not enough wages in the economy to buy back all the stuff workers produce then capitalism experiences a crisis of underconsumption.

In addition there are all sorts of temporal and spacial inconsistencies within the circuit of capital which make things more confusing and offer opportunities for breaks in the circuit of capital. Some commodities- skyscrapers, roads, stadiums- take a long time to build. After they are built they take a long time to earn back all of the money spent on them. The money invested in them is suspended in time until the date far in the future in which they can earn back the initial investment. With the credit system as a guide capitalists can attempt to compensate for these temporal hang-ups, but then we get into fictitious value creation and all the dangers of financial speculation on debt.

How can all of this happen? How can capitalists act in a way which destabilizes their own existence? As I’ve already stated, capitalism is a result of individual capitalists making decisions which are the best for themselves. These decisions result in collective ends that are to nobody’s liking. Thus, individual capitalists never see the whole picture. They never realize that they are undermining themselves.

In addition to this must be added the confusions and distortions that enter the picture when we consider that value is measured in money. I’ve already spoken in a number of videos in my ECON202 playlist about the contradictions in the money form and how these contradictions play out at higher and higher levels of credit resulting in huge fictitious bubbles. These fictitious bubbles, like the sub-prime mortgage debacle we are currently witnessing, are a result of the way money obscures the value it is supposed to represent; It is obscured to such an extent that false values are created which must eventually pop.

And here we will also have to bring in the famous debate over the “transformation problem” and “prices of production”. The argument here is that money allows surplus value to be distributed socially amongst capitalists through an average rate of profit so that capitalists aren’t adversely effected, on an individual level, by changes in labor productivity. Various capitalists employ different ratios of machines to labor. They contribute to the aggregate pool of value according to how much labor they employ. But they withdraw profit from this pool according to how much machinery (or constant capital to be more specific) they employ. This reversal is a necessary result of the imperfect way in which money measures value. Individual capitalists do not have an incentive to maintain the general, aggregate pool of value. On the contrary, it is in their interest to diminish their contribution to the aggregate pool of value. This argument, and the controversy behind it, will need more elaboration in future videos.

Conclusion

This is the basic outline of the theory of capitalist crisis. I will be making videos about many of these arguments in more detail: balanced accumulation, the falling rate of profit, underconsumption, the profit squeeze, overaccumulation, fixed capital, prices of production, etc.
Of course the argument needs to be taken further. What does it mean to say that capitalism goes into crisis? What exactly is a crisis and what does it mean for the future? Capitalism has been through many crisis in the past and has always recovered. Crisis causes a devaluation of capital. This devaluation evens the playing field, restoring balance and allowing capitalist accumulation to begin anew, albeit in different forms often. Thus we will need videos on devaluation and accumulation cycles.

I will end this series on crisis theory by taking these arguments one step further: it seems in our lifetime that capitalism may encounter contradictions from which it cannot survive. The crisis in the environment, the crisis of global finance and money, the crisis in intellectual property and the crisis in the creation of space are all sites in which we may be able to lay the theoretical grounds for a final stage of capitalist crisis. That is, the contradictions between the forces and relations of production may become too strong to be resolved by capitalism itself and this may point us toward a new, post-capitalist mode of social relations.