The Falling Rate of Profit - Understanding the current financial crisis

By Brendan Mcooney

The financial world is a mysterious one. It appears that through trading stock, advancing credit, or swapping currencies profit can appear out of thin air- that is, money can be turned into more money just by clicking some buttons on a computer or placing a call to a stockbroker. Indeed much of the confusion and mystique we attach to the dizzying world of finance comes from this illusion of money growing from money.

This is inherently abstract. To most of us, money is something we earn from performing concrete labor. And we use this money to buy real commodities- actual physical objects or services that represent labor done by other people out there in the economy. For us, money (M) is an abstract step of measuring value that exists between two very real concrete things: the labor we perform (C) and the labor of the commodities we buy (C). C-M-C

But for the capitalist, this realm of the concrete is not the goal. It is the abstract power of money that is important. To turn money into more money (M-M1) is the goal of capitalist production. For productive capitalists (capitalists that generate profit by selling commodities) the concrete labor process that creates commodities is an annoyance along the way to making a profit. They thus seek to minimize the time it takes to make a commodity so that they can turn their commodities back into money as quickly as possible.

For financial capitalists there is no annoying stage of concrete labor. They move their money to one place and it magically turns into more money. So why then, aren’t all capitalists in finance? Why do they bother producing commodities anyway?

The answer to that should be obvious. Without commodities and human labor to make them we couldn’t even have an economy. All value in the economy eventually relates back to the labor process. And though financial capitalists may never see a worker or set foot on a shop-floor, the profit they make is ultimately, in one way or another, dependent on the value produced by productive capitalists, whether through interest on loans, stock value, rent, etc.

But if we let financial capital carry on in its own mad way, turning money into more money through increasingly exuberant orgies of investment it is not hard to see how this can create temporary bubbles of speculation. Symbols of value- credit, mortgages, even money itself- can be traded back and forth assuming prices way above the actual value of the asset until the financial sector finds itself awash in ‘fictitious capital’. This is a fancy word for symbols of value that are divorced from any real value- any real connection to the labor process- in the way an actual commodity is.

But if you have your thinking cap on you might already see that we can’t blame crisis solely on financial capital. The monstrous bubbles of fictitious values it creates are only a problem if there isn’t enough value in the economy to back up all those symbols of value. We must also look to the productive side of the capitalist class and ask “why isn’t there enough value in the economy to back up all that fictitious value?” How come there aren’t enough wages to pay off those mortgages? Why does the government have to go into debt in order to bailout investment firms and banks?

To answer these questions we need some theory about the rate of accumulation- the rate at which real value is produced in a capitalist society. The theory of the falling rate of profit is such a theory, and it is this theory that will be the topic of this video after many mentions and sneak-previews in other videos. The theory of the falling rate of profit argues that the basic way in which value is created in a capitalist society contains a basic contradiction which destabilizes accumulation. If not offset by some countervailing influence this will cause capitalism to go into crisis.

The basic argument is actually pretty simple. If capitalists see the concrete stage of commodity production (C) as an annoying step in between an initial investment (M) and profit (M1) it is in their interest to decrease the amount of time spent in this concrete stage while getting the most possible value out of it. This is basically what it means to increase efficiency. Workers produce more commodities per labor-hour, thus increasing the physical productivity relative to the initial investment.

The problem is that the more efficient capitalists are at producing commodities the less those commodities are worth. And this is simply because increased efficiency means less labor input per commodity and therefore less value, meanwhile more spending on labor-saving, efficient machines. So the very actions that capitalists take to generate more profit create a falling rate of profit.

This theory, that increased efficiency drives down the rate of profit has aspects that are both intuitively commonsensical and aspects that seem illogical. It makes intuitive sense that the more there is of a commodity the less it is worth. It doesn’t seem to make sense that capitalists would continue to behave in ways that drove down their own rate of profit. Let’s look more closely at this process and try to unravel the mystery.

The expansion of value is the essence of capitalism. Capitalists exist to turn raw materials, tools and labor power into commodities of greater value, to sell them for money and then to start the process all over again the next day. Competition between capitalists creates a race to lower prices relative to rival capitalists. But if price were ever lowered below the actual value of a commodity capitalists couldn’t make a profit at all. The only way to lower the price of a commodity and thus out-compete a rival is to produce something more cheaply than a rival capitalist. How is this done? -By increasing the productivity of labor.

Remember, commodities’ values are equal to their socially-neccesary labor time- the amount of time it takes, in general, for a commodity to be produced under average conditions. Let’s say you are a capitalist who makes widgets and the average firm produces 10 widgets an hour per worker. But your firm only produces 5. In order to make the same amount of profit as your competitors you would have to sell your widgets at a higher price. But you can’t get away with charging more for your widgets because people will just go buy from someone else who can make them cheaper. You will be forced to get your workforce to achieve average productivity or else go out of business. You will be forced to achieve the socially necessary labor time.

Now, if you can get your workers to produce 15 widgets an hour then you are producing at under the socially necessary labor time. This means your can sell your widgets at slightly less than the average cost, outselling your rivals and getting more profit per widget than them. Whereas other firms’ widgets are worth one tenth of an hour of labor time (a worker makes 10 widgets an hour) your widgets are worth a fifteenth of an hour. But you can charge anywhere from and eleventh to a fifteenth and still undersell your rivals.

How do you achieve more efficient production? Obviously you can make your workers work harder. But you will encounter some opposition if you try to get them to work too hard. After all, workers are people with a certain level of tolerance for their own exploitation. We can assume that all of your rivals are making their workers work equally hard. Your only other option is technical innovation. If you invest in better machines, new machines, fancy computers, new conveyor belts, etc. you can make your workers more productive. And this is exactly what capitalists do all the time. This is the motor behind the dazzling technological dynamism of a capitalist society.

Once you’ve achieved a more efficient production system other capitalists are going to want to do the same. It is hard to keep technological advances secret for long. Once all of your competitors are producing 15 widgets an hour per worker the socially necessary labor time of a widget goes down. Now all widgets are worth only 1/15th of an hour. The value of the commodity has fallen, and with it the amount of profit that can be made from it. The actions of individuals competing to make a profit by producing at less than the socially necessary labor time, eventually lowers the socially necessary labor time itself, thus undermining the aggregate profit rate. (repeat this)

The rate of profit is the total profit over the total price of inputs: profit/inputs. We call the profit s for surplus value- the amount of additional value added by labor, over and above the money paid to workers for their wages. We divide the inputs into two categories: wages paid to workers, and expenditures on pre-produced commodities like machines, raw materials, factories, etc. At the time of buying one of these pre-produced commodities the capitalist pays a price representing the value of the commodity. This value is then transfered onto the final product, but no additional value can be transferred by a machine or raw material, so we call the value of these pre-produced commodities “constant” and denote them with “c”. Since the wages paid to workers are not representative of a specific amount of value that will be produced per worker, that is, since there is no way of knowing how much value a worker will produce, we call their value “variable” and denote this with “v”.

We can then translate profit/inputs into s/c+v. This is the standard equation for the rate of profit (though you will sometimes see it written as s/v/c/v.) From this equation it is easy to see that an increase in investment in either c or v must correspond to a rise in the amount of surplus value in order for the rate of profit to rise or stay the same. If s stays the same while c or v increases then the rate of profit will fall.

In our example of capitalists reducing the socially necessary labor time of widgets we saw that although some capitalists gained a temporary advantage over others through increased efficiency, ultimately the same amount of workers produced the same amount of value each hour. The value was just spread out over more widgets. In terms of our equation s/c+v this means that surplus value does not rise just because physical output rises.

What does rise is c. In order to increase the efficiency of output capitalists had to spend more on machines and raw materials. This means that the denominator in the equation is increasing. And this means a falling rate of profit.

So when people say “it doesn’t make sense that capitalists would invest in ways that drove down their rate of profit” you can now explain to them the following 3 points:

1. We see the price of commodities fall all of the time due to increased efficiency. Notice the plummeting price of digital technologies, once adjusted for inflation. This means that increased productivity does not mean increased value. The same amount of workers are producing the same amount of value. This value is just spread out over more, cheaper commodities. But for some “mysterious” reason capitalists keep racing to pump out more and more cheaper commodities, even though it ultimately undermines the rate of profit.

2. Capitalists’ decisions are not centrally coordinated decisions made for the long-term benefit of the capitalist class. They are totally anarchic, the result of thousands of individual capitalists all competing against one another for temporary, short-term market advantage. The immediate, on-the-ground pressure on an individual capitalist is to increase output per worker to achieve maximum possible efficiency without regard to the effect on aggregate values or market saturation.

3. Capitalist do not operate from a conscious labor theory of value. To them, increased physical output means increased profits. This confusion of physical output with value is referred to as “physicalism”. It is the same theoretical error that confuses many of the critics of the falling rate of profit like Nobuo Okishio and John Roemer. Both capitalists and their bourgeois theorists are stuck in a theoretical quagmire where they think the value of commodities stays the same regardless of how efficient the production process is, while it is quite obvious to any lay observer that the value of commodities is constantly decreasing with rising productivity.

There are however some counter-vailing tendencies against a falling rate of profit and it is to these counter-vailing tendencies that we will turn next.

Again, if you have your thinking cap on you may have noticed that this entire thesis of the falling rate of profit is predicated on one assumption: that capitalists will increase their investment in constant capital (c) relative to variable capital (v). The ratio of c to v (c/v) is usually called the “organic composition of capital” though sometimes you will hear it referred to as the “value composition of capital”. It should be clear by now that if the organic composition of capital rises that the rate of profit falls. But if the organic composition of capital shrinks- if v rises relative to c- this should counteract the tendency toward a falling rate of profit.

Indeed this was a major strategy in response to the crisis of the early 70’s in which the west found itself with an overaccumulation of constant capital in the form of large factories and other industrial infrastructure. By an increased use of subcontracting in the 3rd world firms were able to move production overseas to take advantage of cheaper, easily exploited labor. In many parts of Asia and Latin America there was no need to increase efficiency via constant increases in technology because the labor force, displaced from their rural means of production through deregulation in trade, was so vulnerable and exploitable.

While such investment strategies stem the falling rate of profit, they do so by expanding capitalist social relations into new areas on the periphery of capital. In so doing they don’t resolve the contradictions implied in the falling rate of profit, they merely displace these contradictions in space by bringing more people and spaces into the system. In doing so all sorts of disequilibriums are created in the fabric of capitalist space. The eventual rise to economic power of some areas of the periphery has much to do with the current disequilibrium of international capitalist relations.

A second way of stemming the falling rate of profit has to do with decreasing the value of constant capital. If the race to improve efficiency is cheapening all commodities we can expect the costs of inputs like machines and raw materials to fall as well. This allows capitalists to increase the physical amount of technology they use without increasing the value of constant capital. Unlike the previous “fix” which displaced crisis in space, this “fix” is part of the internal logic of capital and, some argue, could very well be a permanent fix.

What should be added though is that many production technologies involve very large investments in fixed capital. Fixed capital is constant capital that is fixed in space like roads, bridges, damns, factories, skyscrapers, enormous machines, etc. An enormous investment in fixed capital commits the investor to the long term use of this fixed capital, preventing the capitalist from switching to new, cheaper constant capital. The turnover time of fixed capital investments can be several years to several decades, as the capitalist waits for the cost of a new building or road to pay itself off. Thus the “fix” provided by the falling value of constant capital is neutralized in the case of fixed capital investments. The longer an industry has been around, the more automated production tends to be, so there is a tendency toward increasing investments in fixed capital.

The problems of turnover time in fixed capital investments are often overcome through the credit system. By borrowing money for investments, or borrowing money in expectation of future revenues, capitalists can get the money they need now, instead of waiting decades for an investment to pay itself off. In this way the credit system creates a socially necessary turnover time which equalizes turnover time across industries allowing industries with massive fixed capital investments to stay competitive with more labor-intensive industries. This also means that the crisis of overproduction of constant capital and the subsequent falling rate of profit are displaced in time and transferred to the credit system.

And this takes us back to our starting point. If capital can make good on all of it’s credit- if it can turn all of its investments into real value, we are safe from crisis. But if capital can’t generate enough profit relative to its investments, if technological change destabilizes value creation in one way or another we get crisis in the form of bubbles of credit which can’t find value, massive factories which can’t make a profit, shelves of commodities that can’t be sold and masses of workers without jobs. The theory of the falling rate of profit provides a starting point for analyzing how all of these factors are inter-related. While there are countervailing tendencies away from a falling rate of profit, many of them are mere displacements of crisis which merely postpone crisis, bottling it up to breakout with increasing violence when it can no longer be contained. We must also remember that there is no centrally coordinating body in a capitalist society to manage investments in a way that stabilizes the rate of profit. We are almost ready to begin an analysis of the way these abstract forces have evolved historically to land us in our present state.

Tim Wise: On White Privilege

Commodities

By Bredan Mcooney

It seems fitting that we begin our explorations of the economy by examining the commodity. Of all the elements of our economy, many of them abstract and hidden, commodities are the one element that is most concrete and familiar to us. Yet despite their familiarity, commodities contain some inner secrets, invisible to the naked eye, which, when revealed, will illuminate larger mysteries about the world we live in.

Commodities are everywhere. For instance, right now I am writing this in a cafe where I am eating a food commodity, sitting at a table commodity, wearing clothing commodities and using utensil commodities. When I finish here I will walk out of the building commodity onto the sidewalk commodity next to the street commodity where car commodities are whizzing back and forth in front of sign commodities which are telling me how much I need to buy drug commodities and beer commodities. In the course of an average day I interact with millions of commodities. It far out-distances my human interactions.

This is no accident. I need commodities to survive. I need food commodities, clothing commodities, housing commodities, etc. And so I spend most of my waking life working so that I can buy these commodities. You do to.

But while people have always worked to survive, people haven’t always worked for commodities. Yes, people have always eaten food, worn clothes and lived in houses… but food, clothes and houses haven’t always been commodities. In fact commodities only come about in a capitalist society and, though we sometimes forget it, capitalism hasn’t been around forever. But how can food sometimes be a commodity and sometimes not? What makes a commodity a commodity? And what does capitalism have to do with it?

Here’s a short definition of commodities: Commodities are objects or services which are made by wage-laborers, sold by capitalists and purchased by consumers.

We will expand upon this definition carefully, bit by bit, until it yields up all of its mysteries.

1. Commodities are made by workers for capitalists.Capitalists own productive capital. That is, they own capital that can be used to make commodities: factories, raw materials, machines, etc. But they need people to work in their factories, at their machines, with their raw materials. They hire workers to do the actual labor required to turn all this productive capital into commodities. Once a worker has made a commodity it does not belong to him or her. It is the exclusive property of the capitalist.

2. Capitalists sell commodities to consumers.The capitalist doesn’t want the commodity for his or her own use. (Does the owner of Genera Mills just want to eat a lot of cereal? Does Philip Knight, the ceo of Nike, just want to wear a lot of shoes?) Capitalists are not really interested in the particular commodities they are producing. They could be making pharmaceuticals, tennis shoes or widgets. Their primary concern is that they sell these commodities to consumers for money. The money they get from this sale goes to pay for the productive capital they just used and the workers they just hired. The rest is profit. Where does profit come from? That is a question for later. (see exploitation)

3. Consumers buy commodities from capitalists and use them.We are all consumers. We must buy in order to live. We must work in order to buy. Thus we live to work. Some commodities go straight to the consuming public. Other commodities like steel and corn are purchased by other capitalists to make more commodities. In the latter case, some commodities go through many transformations until they reach their final state. Once they reach this final state they are consumed- as food which is eaten, fuel which is used up, cars which are driven till they die, etc. Anything left over is thrown away. Thus do we get garbage, pollution, and second hand shops.

So commodities have three dimensions: The making, the selling/buying and the consuming. Each dimension is unique, telling us different things about both commodities and about the world around us. Yet they are all interrelated, meaningless without the other dimensions. Each dimension corresponds to a different way of measuring the value of a commodity. Now we will look closer at each of these three dimensions, or values, to see what sort of secrets they conceal.

Let’s start with the last one: consuming. Licking an ice cream cone, riding a bike, shooting a gun, watching TV- these are the ways we normally interact with commodities. They have value to us because we can use them. This is called “use value”. If we didn’t have a use for something, we wouldn’t buy it. And if no one had a use for something, capitalist wouldn’t hire workers to make it. Thus use-value is a very important dimension to the nature of the commodity. Yet use-values are subjective. I like hot sauce, you don’t. I like red cars, you like blue cars. I like scotch, you like gin. There are billions of different subjective preferences out there. That’s why we say that use-value is a heterogeneous concept. This will be an important point later.

Now we’ll jump to the first dimension I listed: making.All of these commodities have to be made by someone. If something doesn’t require work to exist then it isn’t a commodity. Sunlight- not a commodity. Weeds- not a commodity. Hugs- not a commodity. Water, watches, coal- all commodities. Commodities require labor. Thus do we get a second type of value: labor value. A pancake requires very little labor to make, thus it has a very low labor value. I’m eating a stack of pancakes right now and it cost me about 3 dollars. A car takes a lot of labor to make- many different persons labor together, performing very difficult tasks. The raw materials, machines, and power used to make cars are all products of labor too. These impart a fraction of their value to each commodity. Cars have a very high labor value. That’s why they are so expensive.

Let’s compare this to use-value. This morning I chose to get up and go to a cafe to eat some pancakes instead of going to buy a car. Pancakes have more use to me at the moment. Thus they have a greater use-vale to me. This has nothing to do with their labor-value. The fact that I wanted pancakes more than a car doesn’t make pancakes more expensive! So though use-value and labor vale are important aspects of commodities, they help us explain different things. This is why we will generally turn to labor value to help us explain our third dimension: selling/buying.

We call the dimension of selling and buying “exchange”. Like many other things we’ve discussed thus far, exchange at first seems like a pretty self-explanatory dimension. Yet it is here in the realm of the buyer and seller that the most mystification happens. It is here where the true nature of things are obscured from view. We must approach with caution.

You walk into a grocery store. You turn down the aisle, grab a bottle of ketchup and carry it to the checkout line. You pay the clerk money and you take the ketchup home and put it all over your hot dog.

That is exchange. What could be more familiar? Now you’re wondering where the mystery is…
Let’s expand the scenario by fleshing out some more details:

You walk into the grocery store with money in your pocket. The money is part of your wages- money you were paid for performing a specific type of work, say mowing lawns. In the grocery store you see aisles and aisles of very different commodities, all with different use-vales and all made by a very different type of labor. There are strawberries which were handpicked by migrant workers in California and shipped in trucks driven by Teamsters. There are plastic utensils made at a plastic factory in China by 12 year old girls. There are pans, and meat and yogurt. You could buy any of these things with your money but you are only interested in ketchup. You grab your ketchup and bring it to the checkout counter. You take out your money- money which represents your lawn-mowing- and pay it to the clerk. This money goes to Heinz to pay for the cost of the labor of the person who made the bottle, the person who made the ketchup and the person who put the ketchup in the bottle. (For now we leave out the middleman function which the grocery store and other retailers plays in getting this money to Heinz.)
This is exchange. Now we usually don’t think about that whole network of relationships when we go to buy ketchup. But there’s more. Now I will tell the story one more time, this time in a very abstract way:

You work. You exchange the work you do for the work other people do. This work is all embodied in commodities. Anyone’s work can exchange for any other person’s work because, unlike the realm of use-value, the realm of exchange is homogeneous.

This is how labor, exchange and use value all fit together into a coherent system. Now unless you are obsessive about this stuff like me, you probably don’t think about these abstract categories when you go to buy ketchup. You also probably don’t think about some of the paradoxes hidden in these abstractions. Did you see any paradoxes yet? Any mysteries waiting to be solved? Look closer and I will reveal them to you a little at a time.

Here’s one:Heterogeneous labor practices are exchangeable in a homogenous market place. In other words, very different types of work all all exchangeable with one another.

Think of it! Billions and billions of people working all over the world, performing very different types of labor. Billions of people all consuming things they didn’t make themselves. The act of exchange brings all of these labors and uses together. But why is possible to exchange anyone’s work for anyone else’s?

Well, the short answer is: Money. To understand the way money works, let’s first imagine a world with no money- a world where we would have to barter: Imagine a coal miner trying to barter a lump of coal for a toothbrush or for a sandwich. How much coal does it take to equal a toothbrush? How many toothbrushes equal a sandwich? Use-value isn’t really going to help us here. Yes, obviously the two parties can only trade if they both want to use what the other person has. But that doesn’t tell us how much of one commodity trades for the other. Instead we must turn to labor-value. Coal mining is hard and time consuming work. Making sandwiches is easy and fast. That makes coal worth more than sandwiches. So a fair trade might be: an hour of really intense sandwich making for an hour of really easy coal mining…. so maybe- 50 sandwiches for a bucket of coal.

In other words, if we can reduce commodities to the amount of labor it took to make them then it becomes easy to measure their exchange value. The labor becomes homogeneous when it is exchanged. We will talk more about this later in greater detail, but for now it’s safe to generalize and say that hard work is hard work. I measure the value of something by asking myself what it would take for me to make it myself. So the amount of labor- whether measured in time or sweat- becomes an abstract idea that can measure any commodity. (A few fancy sounding phrases come out of this like “the homogenization of labor” and “socially necessary labor time.” We’ll talk about these later.)

Now let’s bring money back in. Why don’t we barter? Can you imagine trying to figure out how many pencils are worth a biopsy? How many t-shirts are worth a taxi-ride? Eventually we would need some sort of abstract measure of value to compare all commodities against. This is what money does. The exchange value of all commodities are measured in money. Money stands between labor and commodities. It is a measure of value.

You may be curious as to how money came about. This will have to be a question for another time. So perhaps I will leave you with another paradox: Although we pay for labor with money wages, and although we buy the objects of labor with money, the actual money price of commodities don’t always directly correspond with their labor value. There are a few other forces (which we will have to get into later) that intervene in this process in a way that obscures the underlying labor value of commodities. Thus, though labor is central to the basic nature of commodities, that act of exchange has the appearance of being separated from labor. This is why I said that the realm of exchange is one of mystification and confusion. When we buy ketchup at the grocery store we don’t see the people making the ketchup nor do we associate the money we pay with the work that they did. We are just buying ketchup. Exchange separates us from the underlying realities of the labor all around us.

Wow. That is a really long definition for “commodity”. Let’s review a bit. We started with a definition of commodities: that they are made by workers, sold by capitalists, and bought by consumers. By examining this three step process, through the language of labor value, exchange value and use-value, we discovered many interesting things which we usually don’t think about though we participate in them every day. Labor creates all of the use-values around us. We can exchange these diverse use-values because we measure all commodities by the abstract amount of labor that went into making them. Money acts as our standard of measurement. But this act of exchange obscures the underlying reality of labor going on all around us.

But who cares about this underlying reality of labor? Who cares that labor creates all value? Well what do you think about the fact that our entire society is built on and based around people working, yet it’s the people who don’t have to work- the capitalists who just own capital and hire workers- who are the rich and powerful, while the people who actually do the work have to labor their lives away to scrape by? What do you think about the fact that although so much our lives are devoted to working, we never have control over any of that labor- it goes directly to a capitalist to sell for profit? And what of the fact that although everybody works and everybody consumes, often times it seems so hard to find a good job that allows you to buy the things you need to consume?

You see, within these academic sounding terms of use-value, exchange-value, and labor value lie the most important moral questions of our age.

We will have much time to ponder these questions later. To end I would like to leave you with a summary of some of the unanswered questions from above.

Where does profit come from?How exactly is heterogeneous labor measured to create this concept of “abstract labor”?Where did the concept of money come from anyway?How does money price become separated from labor value? What is the relationship between the two?

All these and much more await.

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.

David McNally on the current economic crisis

http://www.socialistproject.ca/inthenews/meltdown4_mcnally.mp3

David McNally (professor)
From Wikipedia, the free encyclopedia
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David McNally is a Professor of political science at York University in Toronto, Ontario and chair of the university's political science department.[1]

He is also a founder and former member of the International Socialists and a founding member of the New Socialist Group.


[edit] Books
He has published several books including:

Another World is Possible: Globalization and Anti-Capitalism, Winnipeg: ArbeiterRing Publishing, 2005 (a new and revised edition came out in early 2007).
Bodies of Meaning: Studies on Language, Labor, and Liberation, Albany: State University of New York Press, 2000.
Against the Market: Political Economy, Market Socialism and the Marxist Critique, London: Verso, 1993.

Exploitation and Morality

By Brendan Mcooney www.kapitalism101.wordpress.com

Exploitation is a heavy word. The term implies a strong moral critique of capitalism. Many people identify with this, but it turns others off. This video will deal with this problem by attempting to provide the proper perspective for questions surrounding the moral dimension of the theory of exploitation.

Q. Are all capitalists bad people?
A. some are, some aren’t but they all have to exploit workers in order to make a profit. Class and exploitation are objective concepts. They are meant to explain social phenomena. They also imply a strong moral critique of capitalism in general- as a whole. They are not concepts that are meant to explain the personalities or moral character of individuals. Capitalists are compelled by necessity to exploit workers. They have no choice in this issue. Do we blame them or do we blame the system? Often particularly blatant acts of individual exploitation do seem worthy of individual condemnation- we might condemn the GAP for exploiting little girls in Saipan, or WalMart for not paying its workers a living wage- but these individual condemnations have to be seen as part of a larger critique of capitalism in general. Are the individuals who make these decisions bad people? One often wonders how some CEOs go to sleep at night, but contemplating the subjective mentality of the ruling class is more of an aimless subjective past-time than an important issue for economic or social thought.

Q.Is marx creating a false dichotomy? Doesn’t everyone- including capitalists- work?
A. Yes, many capitalists may perform various tasks in the course of a work day. But it’s not the type of work but the relation to the means of production. Capitalists may perform labor. But because capitalists own the means of production, they own the social product. They can then decide how much to pay workers, how much to pay themselves and how much to reinvest in production. These decisions are based on their own self-interests as capitalists. These decisions have meaningful social consequences.

Q. Is exploitation always bad? My friend owns a used bookstore. He’s not super rich- he can barely pay his mortgage. his 2 employees are well paid and happy. he gets along well with them…. it doesn’t seem like exploitation to me…!
A. We often don’t have a problem agreeing that Exxon, Nike, or GM exploits its workers. The large, impersonal nature of these organizations, their huge corporate profits in comparison to their meager wage bills, the massive layoffs and restructuring that have disasterous consequence all in the name of profit. It makes intuitive sense that these capitalists are benefiting from the exploitation of their workers.This is not as obvious with tiny capitalists.

The French word for tiny capitalist is Petit Bourgeois. The PB differ enough from large capitalists that they are usually placed in a separate class, distinct from capitalists and workers- the PB class. The PB own small businesses, hire just a few workers and do not have a stake in the large productive forces of society where most of the SV is created for the capitalist class.Working for a small capitalist can sometimes be very exploitative, because the profit margin is so low the workers have to really work hard and don’t get paid all that well. at other times, workers are well paid, develop personal relations with boss, etc. In these later cases, it is often hard to condemn small capitalists.if all capitalism was petty bourgeois: it wouldn’t elicit the sort of moral outrage that corporate capitalism does. Yet there are still fairer, more democratic models of production. It’s nothing personal (just like when a capitalist does something immoral in the name of profit. Capitalist morality is different.)is small capitalism possible? no. competition forces capitalists to chase bigger and bigger profits and to grow and grow, centralize. (people often associate perfect competition with an ideal capitalism, but perfect competition leads to the centralization of capital.) In order to check this: strong barriers to capital mobility, progressive tax on profits, things that actually hinder competition. this would result in regional monopolies, pissed off capitalists… relation of capital to the state.some resources are natural, large monopoliesInstead of asking if small capitalism is possible, picture what it would be like if all enterprises- big or small- were collectively run by workers.

Q. globalization example?- aren’t sweatshops good for 3rd world workers?
A. The function of 3rd world labor: primitive accumulation, industrial reserve army1stly. The huge amount of SV extracted from foreign workers is not going to those countries to develop infrastructure, improve social spending or in any way better the lives of workers. Instead it flows into the coffers of international capitalists. Are the meager wages paid to 3rd world workers really enough to develop the social infrastructure necessary to bring these economies in line with the 1st world? No.2ndly. It is wrong to assume that one day the whole world will look like a 1st world country. Capital develops geographical space unevenly as it flows around the globe. It creates pockets of wealth and pockets of poverty- as seen in the disparities between the 1st world and the 3rd world and as seen in the disparities within the 1st world. There are many places in the US which resemble a 3rd world country. If capitalism can’t lift americans out of poverty how do we expect it to lift Chinese workers out of poverty?

3rdly. Much of globalization entails the destruction of subsistence agriculture and the proletarianization of peasntry. ie. by flooding mexico with cheap agricultural products, nafta caused the dislocation of many mexican farmers who then migrated to the border to find work in the maquiladora sector. If the proletarianization of 3rd world workers allows them to buy a modicum of consumer goods this doesn’t mean that they have better lives, more control over their lives, or more social power. It actually means that they are now dependent on a capitalist for their livelihood- forced to sell their labor for a wage (wage slavery).4. The effect on 1st world workers is to drive down wages and break unions. Look at american economy. The effect of freer capital mobility is always bad for workers. Human beings can’t move that fast.

Q.Are we promoting violence against capitalists?
A. No. But capitalism enforces exploitation with violence. Therefore the call for its abolition brings a violent response from capital. Of course a transition to a post-capitalist society could, theoretically, by peaceful. But it would require taking away capital (social power) from capitalists. Assuming most capitalists won’t just give away their social power, it will have to be taken by force- state force, armed force, violence, whatever. The question of revolutionary tactics is a tricky one because capitalism is so entrenched, has such a powerful monopoly on economic force and physical force; has such a hegemonic grip on our culture… it seems inescapable. So really, capitalism shouldn’t have much to fear by some people sitting around and talking about the possibility of one day having a more just society. But it does. Capitalism can’t even tolerate a little bit of dissent. I think that is because 1. capitalists know, deep down, that we are right and it bothers them; and 2. they are worried dissent among workers could interfere with profits.

Kapitalism 101

10 Step Program for Capitalist Equilibrium. By Brendan Mcooney

Ahhhh, capitalist equilibrium…. A world of free and voluntary exchange, perfect competition, the perfect allocation of resources to meet the demands of consumers, of maximum freedom for all individuals…
Or is it? In a world of drastic inequality and crisis we have to ask why the real world diverges so drastically from this picture of capitalist equilibrium. Are there external forces hindering capitalist equilibrium or are inequality and crisis actually the true face of capitalism?
Already with the present crisis we mostly hear the former argument in various forms: that the crisis comes from poor government regulation, corruption, or central bank interference, inflation…
Most amusing is the argument of the far libertarian right that claims US economy is actually a socialist economy because of the tax system, state spending and the central bank. Thus any crisis could never be a crisis of capitalism, but only socialism. With such logic it is difficult to make any claims about whether capitalism works, because according to this argument there never has been and there never will be some abstract pure form of capitalism in which there is no government, no coordination of banking, no corruption, etc. This bourgeois conception of capitalism as a self-regulating system of free and voluntary exchange is an abstraction. But it is not the abstraction itself which is the problem with the bourgeois argument.
It is precisely this same abstraction which Marxists use to build their theory of capitalist crisis. The theory that capitalism is inherently prone to violent crisis is not built upon a model of government regulation, central bank-led inflation, etc. It proceeds from the same basic abstraction that bourgeois economy proceeds from: a free and voluntary exchange of commodities among equals. Let us then, take a whirlwind, speed-tour of how the logic of crisis is built from this abstraction. In just 10 steps!
1. Yes, you can fool some people sometimes… you can rip people off… you can always find a sucker, but by and large, in a society with free exchange trade tends to be trade between commodities of equal value. Because if someone is trying to rip you off you can always go trade with someone else. This tends to equalize the exchange value between commodities. Yes, this is an abstraction which makes certain assumptions, but it is the inherent tendency within in exchange.
2. We can’t talk about an equality of exchange without some notion of value. It is logically impossible. Because the point of an economic analysis is to explain how all the productive activities of trillions of people are coordinated in one vast system, we use human labor as our notion of value. Again, this is an abstraction. Labor varies in intensity and expertise. But by and large, in the same way in which exchange creates an equivalence of value among heterogeneous commodities, exchange reduces work to a socially necessary abstract labor time. In other words, when commodities are exchanged this implies that an equal amount of work went into the making of them.
3. None of this would be possible without money. We don’t exchange commodities directly with other commodities (C-C). Money intervenes in this process (C-M-C). We need money to measure the amount of value, the amount of socially necessary abstract labor time, represented by a commodity. With money, this abstract notion of value becomes more concrete. With this concreteness comes all of the ways concrete, empirical reality varies around this abstract form. We get price fluctuations and imbalances. Supply and demand cause money prices to shift above and below the actual labor value of a commodity. But underneath this fluctuation lies an abstract equilibrium price and this price corresponds to the amount of abstract labor in a commodity. These fluctuations are not exceptions to the abstract model. They are part of the model, made possible with necessary introduction of M into C-M-C.
4. Money is really powerful. It is the only measure of value. It can be exchanged for any other commodity. It also makes this possible: We can change C-M-C into M-C-M. People can set their money in motion, buying commodities, and then sell these commodities to someone else for more money (M-C-M1)! They can use their money not just as a medium of exchange in the free and voluntary exchange of commodities. The goal, for some, becomes not attaining the things one needs, but getting more of the same thing: money. We call these people capitalists and we call this never ending cycle of M-C-M1 capitalism.
5. But now our model appears to contradict our basic starting point: equal exchange. How is M-C-M1 possible in a world of equal exchange? Some one has to get ripped off at some point. But if we assume that we can’t make a profit by fooling people through exchange we have to look somewhere other than exchange. Capitalists don’t just sell the same commodities they buy. They buy raw materials, partially finished commodities, machines and human labor. At the end of their production process they have new commodities of greater value than they began with. They sell these commodities for a profit. We could write this: M-C…C1-M1. What happens in this mysterious production process? Where does that extra value come from? It comes from the difference between the wages paid to workers and the value created by those workers. This difference between the value created by human labor and the wages paid to those laborers is called surplus-value. Surplus value takes its money form as profit.
In fancy talk we call this surplus “s”. We call the human labor power bought by wages “v” for variable capital. And we call the other commodities the capitalist buys “c” for constant capital. We call labor power variable because there is no way of knowing from the wage paid to a worker how much value they will produce each day. That is entirely up to how hard the capitalist can get them to work. In other words, the input in wages does not necessarily equal the output in value. We call all the other inputs (raw materials, machines, etc) constant capital because they can’t be made to work harder. Thus, if you will indulge me in a little simple algebra, the value of a commodity is worth: c+v+s while the capitalist only paid c+v to make it!
That’s a lot of information to jam into 5 steps, but if you’ve been watching many of my videos hopefully this all is review. At this stage we have an abstract model of a capitalist society: a model with two classes, capitalists and workers, one which benefits at the expense of the other. The model is constantly in motion as capitalists in competition seek new ways to increase the amount of surplus they extract from workers. This motion is responsible for much of the social antagonism in the world as well the incredible dynamism and innovation of a capitalist society.
Again, this model is an abstraction. In a real capitalist society there is a lot more complexity to this class map. But this is the way we proceed from the abstract to the concrete. We started with just the free and equal exchange of commodities and now we already have a theory of value and profit, a basic class structure and the beginnings of a model for the dynamics of motion in a society driven by the quest for profit. At each stage in the analysis, the model comes to resemble the real world more and more and at each stage we see how much variation is possible within the model, how many different types of capitalist worlds could emerge from the model.
The model doesn’t move from abstract to concrete merely by injecting real world phenomena randomly into the analysis (like crude libertarians who start with an abstract concept of freedom through free exchange and then throw the Federal Reserve into the analysis without building any sort of theoretical structure with which to understand the relation of central banking to the system of exchange.) Instead we will see features of the real world emerge from the constant expansion of the basic concept of free and voluntary commodity exchange.
Next we will look at the way this basic class antagonism between capitalists and workers creates disequilibrium in the systems of production and exchange. It doesn’t create this disequillibrium through political struggle- that would be more of a libertarian argument- that political interference with the market creates crisis. It destabilizes through the market and through production itself through a crisis we will eventually call “overaccumulation”.
Once we’ve abstracted from the details of the falling rate of profit argument towards a more general theory of capitalist overaccumulation, we can begin to examine the ways the crisis of overaccumulation moves through space, constantly displacing crisis in geographical space as capital is globalized. And then we can talk about the way crisis is displaced over time via the credit system. And once we’ve talked about space and time we can talk about the role of the state in displacing crisis.
Only then, once this theoretical structure is complete can we begin to look at the history of capitalist crisis: The way capitalism evolved through successive displacements of the overaccumulation problem via Keynsianism, globalization and credit bubbles. In contrast, the mainstream media and also much of left media start the the analysis with a brief history of sub-prime mortgages as if that is a logical starting point!
Whether or not you learn this from one of my videos or a book or wherever… it is imperative for us to understand the basic structure of this argument if we are to come up with ways of surviving this coming crisis. It may very well be far bigger and more devastating than we can imagine.
Part two of this video asks an important question: Could such a system achieve equilibrium? I will set our model in motion and discuss the way value is created, expanded and recreated on a mass scale. This will then lead to an explanation of what would be required for this abstract model of capitalism to achieve equilibrium.
Part 2
6. Capitalist are in competition with each other. In order to survive they have to make more profit than their competitors- which is another way of saying “extract as much surplus value from workers as they can.” Again, this is an abstraction. Some capitalist may be better or worse than others at this. The intensity of competition and the power of a labor movement can affect their ability to extract surplus value. But the drive to increase surplus value is the dominant tendency. One of the best ways of doing this is through technological innovation. By replacing some workers with machines a capitalist can increase the output per worker. Of course, once other capitalists adopt these innovations, the amount of socially necessary labor time in a commodity drops and the race to innovate begins all over again. Thus our model sees a cyclical rate of of unemployment and a constant race to innovate as related features of the same drive to increase surplus value.
7. This means that the total value of all the commodities in the economy is greater than the total amount of wages. This could create a system-wide problem if there wasn’t enough demand to buy back all of the products created by capital. This is the problem of underconsumption which I discussed in my last video (Consume!). At the end of that video we concluded that capitalists could escape the underconsumption problem with the right reinvestment strategies. That is, if capitalists reinvest their surplus in expanding production they can increase the general demand in society enough to keep demand in pace with supply. This creates a further imperative for capitalism to keep growing. If growth ever slows the whole system can go into crisis.
8. The question then is, what sort of investment strategies would create a system in equilibrium? How much of the surplus should be spent on wages? How much on constant capital? To make this more complicated, we have to realize that there are two general types of commodities. There are consumer goods, the stuff you and I buy in the store, and there is constant capital, all the tools, raw materials and machines that capitalist need to buy. This complicates our equilibrium model a little because now we have to take into account capitalists paying workers, workers buying from capitalists, capitalists buying consumer goods from capitalists, and capitalists buying constant capital from capitalists. To visualize all this we divide the capitalist class into two “departments”. Department 1 produces means of production (or c, constant capital) for the entire capitalist class. Department 2 produces consumer goods for both capitalists and workers. We can diagram this model of the economy thus:Department one: c + v + sDepartment two: c + v+ s
This diagram shows the total value of all the commodities in both departments. Both departments’ commodities are the total of all constant and variable capital and surplus value. Department one makes constant capital for itself, but it’s workers and capitalists must turn to Department 2 for consumer goods. Department 2 produces consumer goods for all of the capitalists and workers, but it must turn to department 1 for constant capital. Capitalists have to decide how much of their surplus to devote to reinvesting in c+v and how much to spend on personal consumption. Their investment decisions determine the amount of supply and demand in the economy.
[An aside: Sometimes, in response to some of my videos about the labor theory of value, viewers countered that supply and demand are much better and explaining price than labor times. Here, in this video, I am explaining the way this model leads us to an explanation of the way supply and demand are created in the first place. It took us sometime to get to this point because we are not only concerned with measuring prices, but also with explaining the way the basic social structure of capitalism is reproduced. It is a much wider and more ambitious scope.]
If all these inputs and outputs line up, if everything balances out, capitalism is in equilibrium. But if things go out of balance we will see the overproduction of some commodities in one of the departments without enough demand to buy it back. If such an overproduction diverges far from balanced growth we see violent crisis in the economy: profit falls, investment falls, unemployment rises, commodities face devaluation, etc.
9. Karl Marx set about to establish such a model for a capitalist society in equilibrium. And he discovered this. If Department 1 reinvests half of its surplus in constant and variable capital, at the same ratio of constant to variable capital, and if Department 2 reinvests 3/10’s of it’s surplus in constant and variable capital, preserving the same ratio, the model can grow forever without crisis. Of course it may encounter external barriers, like environmental crisis, but our investigation here is about internal crisis.
I’ve decided that the math of the argument isn’t all that suited for a Youtube video. But if you’d like to check it out, you can check out my wordpress blog where I have posted a “Math Supplement” to this video.
http://kapitalism101.wordpress.com/math-supplement-to-capitalist-equilibrium/
So there you go: capitalism, theoretically, can grow and grow forever without problem. Story over.
Well… maybe there are a few more things to say….
10. If you’ve been paying close attention, you might have noticed, even without the math supplement, that there are some fishy things about this equilibrium model. First of all, if equilibrium requires very specific investment strategies, how are these reinvestment strategies ever to be reached if they are the result of lots of individual capitalists acting on their own? We can’t use the old argument of supply and demand naturally balancing each other out, of the “hidden hand of the market” coordinating reinvestment, because we’ve just seen that supply and demand themselves are formed via these very reinvestment strategies. Such a restrictive reinvestment scheme could only be reached by accident.
In fact, these restrictions actually conflict with some of the more important aspects of our model. If exchange is free and voluntary than the model should allow capitalists to invest outside of their own department. We know that this happens all the time in the real world- automakers invest in computer companies, soft drink companies invest in the entertainment industry, etc. Michio Morishima has shown that if we allow capitalists to invest outside of their department, our model produces either progressive economic stagnation or violent crisis.
This model also assumes that capitalists don’t change the ratio of constant capital to variable capital when they reinvest- in other words, it assumes that for every $100 reinvested, $50 go to new machines and $50 go to new workers. But we have already argued that the whole point of introducing machines into the labor process is to replace human labor. That’s what machines are for. So, it makes no sense to reinvest in production at the same proportions.
If we allow for a steady increase in machines relative to workers we start to see a fall in the total amount of value created relative to total investment. In other words, we get a falling rate of profit. A falling rate of profit means a shrinking pool of profitable investments. And this means that capital stops flowing: a crisis.