CHAPTER SIXTHE CYCLICAL NATURE OF CAPITALIST

PRODUCTION

A characteristic feature of capitalism is its trade, or business or economic, cycle. The concepts of “Boom,” “Crisis” and “Slump,” or “Recession,” or “Depression”, have now found their places in the academic economic literature and practical policy measures. Economists, politicians and policy-makers have generally accepted theview that these are identifiable phases of economic life,with slumps and recessions seen as a "necessary pain" to be tolerated from time to time.

Repeating economic cycles of booms, crises and slumps areendemic to capitalist production. However, economists andpoliticians take a superficial view of booms and slumps, portraying capitalism as a generally stable, harmonious and self-adjusting system. On the other hand, Karl Marx presented a clear and wide-ranging analysis of the cause and effect of capitalist accumulation cycles in his works. According to him, the trade cycle is an inherent feature of capitalism, an integral part of its “law of motion”.

MARX ON THE POSSIBILITY OF CRISES

The early nineteenth century French economist Jean-Baptiste Say (1767-1832) argued that “overproduction” wasimpossible because supply creates its own demand, or as he put it in his well-known saying, “Every seller brings a buyer to market.” Actually this saying originated in the axiom “Every sale is a purchase” put forward by Dr. François Quesnay (1694-1774), the Physiocrat. This is only true for barter – the direct exchange of one commodity for another – where both parties get what they want simultaneously. Marx pointed out that where the exchange of commodities takes place through money this isno longer the case:

“Nothing could be more childish than the dogma, that

because every sale is a purchase, and every purchaseis a sale, therefore the circulation of commodities necessarily implies an equilibrium between sales andpurchases … [I]ts real purport is to show that everyseller brings his own buyer to market with him … No one can sell unless someone else purchases. But no one is forthwith bound to purchase because they havejust sold.”1

On the other hand, if a seller cannot make a sale then hecannot make a purchase either:

“The metaphysical equilibrium of purchases and salesis confined to the fact that every purchase is a sale and every sale a purchase, but this gives poor comfort to the possessors of commodities who unable to make a sale cannot accordingly make a purchase either.”2

This makes a crisis – as the point at which the circulation of commodities is interrupted – a theoreticalpossibility:

“If the interval in time between the complementary phases of complete metamorphosis of a commodity become too great, if the split between the sale and the purchase become too pronounced, the immediate connexion between them, their oneness, asserts itself by producing – a crisis.”3

According to Marx, then, the division of exchange into purchase and sale contains the general possibility of commercial crises. True, money and its circulation via trade and commerce had come into existence long before capitalism (i.e. wage-labour/capital relation or buying and selling of labour-power under production for profit) came into existence. Moreover, humanity did not see any commercial crises before capitalism. Periodic commercial crises have been a typical characteristic of the capitalist mode of production ever since the first such crisis in 1825.

However, Marx wanted to show more than that crises were possible under capitalism and that, if one occurred, it would just be accidental. He wanted to show how crises were inevitable under capitalism.

MARX ON THE INEVITABILITY OF CRISES

What, for Marx, made crises inevitable under capitalism was its nature as an economic system of the accumulation of capital out of the profits made from “realizing”, i.e.converting into money, the surplus value extracted from the unpaid wage-labour of the producers (the working class). Every capitalist enterprise, as an autonomous unit of capital seeking to expand itself, was in competition with other capitalist enterprises to realize the surplus value to do this by selling the commodities in which it was embodied.

This anarchic, competitive struggle to realize and accumulate surplus value as new capital inevitably resulted in a disproportionate development between the different branches of industry. It was this inevitable disproportionality, owing to the spontaneous nature of capitalist production, which leads to crises, with proportionality or equilibrium in itself being accidental.4 Crises were in fact a way of forcibly bringing about equilibrium, if only temporarily, and of allowing capitalaccumulation to resume:

“The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium. The contradiction, to put it in a very general way, consists in that the capitalist mode of production involves a tendency towards absolute development of the productive forces, regardless of the value and surplus-value itcontains, and regardless of the social conditions under which capitalist production takes place; while, on the other hand, its aim is to preserve thevalue of the existing capital and promote its self-expansion to the highest limit (i.e., to promote an

ever more rapid growth of this value).”5

On a different level, crises were are a manifestation of the contradiction between the forces of production (what can be produced) and the relations of production (which restricted what can be sold, most consumers being exploited wageworkers):

“The conditions of direct exploitation, and those ofrealising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits.”6

“Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt themass of production to the scale of production, not vice versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier.”7

“The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. The violent destruction of capital not by relations external to it, but rather as condition of its self-preservation, is the most striking form in which advice is given it to be gone and to give room to a higher state of social production. … These contradictions lead to explosions, cataclysms, crises, in which by momentaneous suspension of

labour and annihilation of a great portion of capital the latter is violently reduced to the pointwhere it can go on.”8

The activating cause of a crisis is the disproportionate development which, due to the inherently anarchical nature of capitalist production, inevitably occurs as the different autonomous capitals seek to expand regardless of the overall impact of this. The necessary condition for a crisis is “the limited dimensions of consumption under capitalism”. Analogically, an explosion in a coalmine happens only when a spark ignites an explosive gas pocket. Here the activating cause is the spark and the necessary conditionis the existence of the explosive gas pocket.

MARX’S DESCRIPTION OF THE ECONOMIC CYCLE

Crises, then, are no accident under capitalism; nor is the resulting interruption in production permanent. They are the way in which capital accumulates on a society-wide basis over time, not as a steady upward line but as a period of rapid growth, followed by a sudden interruption, followed by another period of rapid growth,followed by another interruption, in a continuing upward spiral.

As Marx described it first in 1847:

“…production is inevitably compelled to pass in continuous succession through vicissitudes of prosperity, depression, crisis, stagnation, renewed prosperity, and so on.”9

And, twenty years later, in his major published work, Volume I of Capital:

“The factory system’s tremendous capacity to expand with sudden immense leaps, and its dependence on theworld market, necessarily gives rise to the following cycle: feverish production, a consequent glut on the market, then a contraction of the market, which causes production to be crippled. The

life of industry becomes a series of periods of moderate activity, prosperity, over-production, crisis and stagnation.”10

In Value, Price and Profit, a lecture delivered in London to trade unionists in 1865, Marx expressed himself directly in English:

“capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, over trade, crisis and stagnation.”11

In current terminology, we would use the word “boom” rather than “prosperity”, and “recession,” “depression” or “slump” for Marx’s word “stagnation”.

Although a “crisis” leads to “stagnation” it is not the same (though frequently the two are conflated, even by Marx himself as in some of the quotes above). Here it is the financial crash that results when trade bills cannot be honoured and bank loans cannot be repaid, which represents the turning point in the trade cycle that closes a phase of prosperity or boom with high profits for the capitalists and rising wages and salaries for theworkers. A crisis is a sudden breaking point registering the end of a boom, though signs of some slackening of production will have begun to have become evident beforehand. After that a full-scale period of “stagnation”, or slump, sets in as production falls and unemployment rises dramatically.

Marx’s “state of quiescence” meant a phase when a recession is ending, production has stopped falling, unemployment has stopped rising and market tendencies take a moderately even course from the low level. The period of “growing animation” meant the period when industries are expanding in full swing. However, owing tothe constant improvement of technology – automation, robotics etc. – we also see “jobless growth” whereby, with new industries coming up and replacing old ones, production rises while unemployment also rises.

By “over-trade”, Marx meant the phase when many firms in a particular branch of industry have produced more than they can profitably sell. This is often also called “overproduction” but this can be misleading as it is not overproduction in relation to needs, but only in relationto market, i.e. paying demand, as Marx reminds us:

“The word over-production in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an over-production of products – in the sense that the amount of products is excessive in relation to the need for them. On the contrary, it must be said that on the basis of capitalist production, there is constant under-production in this sense. The limits to production are set by the profit of the capitalist and in no way by the needs of the producers. But over-production of products and over-production of commodities are two entirely different things.”12

In a boom, when the market is hungry for more commoditiesand profits are rising, enterprises go on accumulating capital. However, this situation does not last. Enterprises constantly compete for profits, which they require so as to be able to accumulate capital and thereby survive against their competitors.

Under capitalism, thousands of competing enterprises operating without social co-ordination or regulation makedecisions about investment and production. The competitive drive to accumulate capital compels enterprises to expand their productive capabilities as ifthere was no limit to the available market for the commodities they are producing. This eventually leads some enterprises – usually those that have grown very rapidly – to over-extend their operations for the available market. Thus, a situation of “over-trade” develops in one or more branches of industry (but not all) during the boom.

In capitalism, growth is not, and cannot be, planned. Anarchy rules over the market. The growth of one industryis not linked to the growth of other industries but simply to the expectation of profits, and this gives riseto uneven accumulation and growth between the various branches of production. The over-accumulation of capital in some sectors of the economy soon appears as an overproduction of commodities. Goods pile up, unable to be sold, and the enterprises that have over-extended their operations have to cut back production.

Then competition for a larger share of the markets involves enterprises in a price war that leads to fallingprofits and losses. Eventually the out-competed enterprises go bankrupt. Others cut back or put off further expansion projects, reduce production and sack surplus workers.

The crucial aspect of overproduction is an over-expansionand over-supply by a particular industry or group of commodity producers. This results in an abrupt check to the expansion of that industry, which entails a knock-on effect and chain reaction on other industries connected to or dependent on it.

Improved communication technology and the growing importance of keeping stock levels and non-working capital to a minimum have reduced the chance of a dramatic oversupplying of a market. On the other hand, asMarx mentioned, there is another factor for getting into a situation of serious oversupply:

“The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of thesocial capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs thelimitations of his private capital in so far as he

handles it himself.”13

HOW A BOOM TURNS INTO A SLUMP

As commodities remain unsold, revenue and profits fall, making further investment at the same time more difficultand less worthwhile. Accumulation stalls, saving and hoarding increase and the unstable forces of money and credit soon transmit the downturn to other sectors of theeconomy. The initially over-expanded enterprises cut backon investment and this leads to a fall in demand for their supplier’ products, who in turn are forced to cut back, causing difficulty for their suppliers' suppliers, and so on. Profits fall, debts mount up and the banks push interest rates up and contract their lending in a vicious downward spiral of economic contraction. In this way, what started as a partial overproduction for particular markets is turned into general overproduction with most sectors of industry affected. As Engels pointedout, with the onset of a crisis, capitalism enters into a

“vicious circle … bankruptcy follows upon bankruptcy, execution upon execution. ... It becomesa trot. The industrial trot breaks into a canter, the canter grows into the headlong gallop of a perfect steeplechase of industry, commercial credit,and speculation, which after break-neck leaps, ends where it began - in the ditch. And so over and over again. We have now, since the year 1825, gone through this five times, and at the present moment (1877) we are going through it for the sixth time. And the character of these crises is so clearly defined that Fourier hit all of them off when he described the first as crise pléthorique, a crisis of plethora.* In these crises, the contradiction between socialized production and capitalist appropriation ends in a violent explosion. The circulation of commodities is, for the time being, stopped. Money, the means of circulation, becomes a hindrance to circulation. All the laws of productionand circulation of commodities are turned upside down. The economic collision has reached its apogee.

The mode of production is rebellion against the modeof exchange, the productive forces are in rebellion against the mode of production which they have outgrown. ... “abundance becomes a source of distress and want” (Fourier).”14

The result of this chain reaction throughout the economy is a slump with consequential high unemployment. Nevertheless, while some industries have “over-traded” others may still be expanding, with the overall curve moving downwards having small up-and-down ripples.

HOW A SLUMP TURNS INTO A BOOM In a slump there is simultaneously a problem of falling market demand alongside declining profits. Attempting to deal with one problem (say consumer demand) at the expense of the other (profits) as governments have done, will not improve the situation. A number of quite distinct and separate things need to happen before a slump can run its course. Firstly, some capital has to bewiped out or devalued if excessive productive capacity isto be tackled, with devalued capital being bought cheaplyby those enterprises in the best position to survive the slump. Secondly, destocking needs to take place, with overproduced commodities bought up cheaply or written offentirely. Investment will not resume if the market is still saturated. Thirdly, after this has happened, there needs to be an increase in the rate of industrial profit helped by both real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump.) This will help renew investment and increase accumulation. In addition, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated if it is not to act as a drag on future accumulation. Through these mechanisms, a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production.

During recovery from a depression, the market for each industry appears to be expanding, and the enterprises in

each industry in each country get ready to expand again. However, none of them knows for sure how much the total demand is going to be. As they are always involved in competition against one another, each enterprise struggles to enter as quickly as possible and to capture as large a share as it can. As Marx noted, they all act as if the market were unlimited. Consequently, productioneventually over-expands in one industry; and the ground is prepared for the next slump, which prepares the groundfor the next period of growth, and so on in an ever-repeating cycle, even if the level of production is higher during the succeeding cycles.

Crises and slumps invariably follow this general pattern.Although endemic under capitalism, the cycle does not occur in an identical pattern everywhere every time. Eachcycle has some peculiar features of its own. No one can forecast about where, when and how a crisis is going to happen. No one can predict in the global economy which industry or country will be first affected or which will remain immune altogether or which will recover first. Sometimes the initial overproduction takes place in consumer goods industries, as it did in 1929, and spreadsfrom there. At other times, as in the mid-1970s, the initial over-expansion is in the producer goods sector where enterprises produce new means of production like industrial steel or robotics equipment. In the slump of the early 1990s a major factor was the over-extension of the commercial property sector and some of the high-tech 'sunrise' industries. The present slump was triggered by overproduction in the US house-building sector. Whatever the immediate reason, the result is always the same – falling prices and production, increased bankruptcies, wage cuts and unemployment, with an attendant growth in poverty and misery.

CRISES CANNOT BE FORECAST OR AVOIDED

Despite repeated occurrences of the trade cycle, many economists believe that it is possible to overcome the anarchy of capitalist production or at least to forecast when the next crisis will happen so that measures to

avoid it can be taken. Some argue that globalization of production, changes in finance and the nature of employment, government policy, emerging markets and information technology have all worked to restrict trade cycles. However, the prevailing separation between the act of selling and the act of buying lingers, with the chance that a seller may not find a buyer when needed. Marx’s observation that “no one can sell unless someone else purchases … But no one is forthwith bound to purchase because he has just sold” remains valid.

These economists fail to see what Marx worked out clearlybecause they do not study the Marxist analysis of trade cycles. Trade cycles have been taking place since about 1825 and all remedial economic measures have failed to stop their recurrence. Quite evidently, the cycles have come to exist as long as capitalism exists.

Capitalists have to decide about what will be in their best interest under the coercive laws of competition. Allare in a war against all. Capitalists do not share information. Coercive laws of competition work against any co-operative communication of information. Information provided by the capitalist governments involves only past experiences and has little analytical precision and implication. Positivist economists assume that price signals are transparent and capitalists are capable of tackling capitalism in all its contradictions and anarchic actions; that their legendary captains of industries are wise enough to choose the best rational option in order to maximize their profits. However, those imaginary capitalists do not share information and are involved in internecine conflicts against one another around the globally accumulated profit. Capitalism is a system of class conflicts, competition, artificial scarcity, secrecy, fragmented economic knowledge and decisions in the light of the profit motive, which is irrational and anti-social in that it thwarts the means of production from being used to satisfy social needs. Capitalism does not work in the interest of the whole society.

Because of uncertainty about the market situation and theinaccuracy of information due to existence of separate capitals and anarchy, no capitalist enterprise knows if it would find buyers for the whole of its supplies. Moreover, today’s portfolio investment has alienated the capitalists from the productive processes. In addition, capitalist enterprises do not know what other capitalist enterprises in their own sectors, countries or abroad aregoing to do. Even then, they expect to sell off their supplies in the market. However, forces of demand and supply do not work the way they think. Fluctuations shatter expected equilibrium.

This problem bedevils the economists and the governments they serve. Economists and the governments are incapable of generating computer models based on rational agents having all the information needed for correct decision-making, because the real process of capitalist productionand exchange runs in the opposite direction. Since enterprises do not share information, there is no harmonyin production. Thus, rational evaluation of a situation is unworkable. That government statisticians are of little help is made evident by the continuing succession of trade cycles. Economists, statisticians and politicians are powerless before the destructive forces unleashed by commodity production and exchange. They are helpless against the events happening in other countries of the world. Governments cannot administer away the periodical occurrences of the trade cycles.

One common view of how to avert a slump once a boom has come to an end is to increase wages as a means of preventing demand from falling. This view was endorsed, and justified theoretically, by John Maynard Keynes (1883-1946) and his school of economists, but as Marx pointed out:

“It is sheer tautology to say that crises are causedby the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective

ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means onlythat no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wagesrise generally and the working-class actually gets alarger share of that part of the annual product which is intended for consumption. From the point ofview of these advocates of sound and “simple” (!) common sense, such a period should rather remove thecrisis. It appears, then, that capitalist productioncomprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, andat that always only as the harbinger of a coming crisis.”15

You cannot avert crises by raising wages at the expense of profits, any more than by raising profits at the expense of wages. Keynesian policies when tried have always failed.

THE LIMITS OF CAPITALISM As we have seen in Chapter Three, commodities came into being with the advent of the ancient private property with its simple commodity production and exchange before capitalist era, but “commodity production becomes generalized, becomes the typical form of production” onlyin capitalism.. According to Marx:

“In themselves money and commodities are no more capital than are the means of production and of subsistence. They want transforming into capital.

But this transformation itself can only take place under certain circumstances that centre in this, viz., that two very different kinds of commodity-possessors must come face to face and into contact; on the one hand, the owners of money, means of production, means of subsistence, who are eager to increase the sum of values they possess, by buying other people’s labour-power; on the other hand, freelabourers, the sellers of their own labour-power, and therefore the sellers of labour. Free labourers,in the double sense that neither they themselves form part and parcel of the means of production, as in the case of slaves, bondsmen, &c., nor do the means of production belong to them, as in the case of peasant-proprietors; they are, therefore, free from, unencumbered by, any means of production of their own. With this polarization of the market for commodities, the fundamental conditions of capitalist production are given. The capitalist system pre-supposes the complete separation of the labourers from all property in the means by which they can realize their labour.”16

Capital has not invented surplus-labour. It is only by turning the pre-capitalist producers into wage-workers and their means into capital, by transforming their labour-powers into values and their surplus labour into surplus value, commodity production enforces “itself uponthe whole society”, to “develop all its latent potentialities”, to become “the typical form of production”, thereby turning the law of value into the society’s fundamental law. In the words of Engels: “The 'exchange of labour for labour on the principle of equal valuation,' … that is to say, the mutual exchangeabilityof products of equal social labour hence the law of value, is the fundamental law of precisely commodity production, hence also lf its highest form, capitalist production.”17 Moreover, Marx pointed out, “Production of surplus value is the absolute law of this mode of production.”18

With the progressive conquest of the economy and society by value through dominating over all relations, all

direct patriarchal, idyllic relations were done away with.

Marx again:

“As soon as this process of transformation has sufficiently decomposed the old society from top to bottom, as soon as the labourers are turned into proletarians, their means of labour into capital, assoon as the capitalist mode of production stands on its own feet, then the further socialization of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors,takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by theaction of the immanent laws of capitalistic production itself, by the centralization of capital.One capitalist always kills many. Hand in hand with this centralization, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the co-operative form of the labor-process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economizing of all means of production by their use as means of production of combined, socialized labour, the entanglement of all peoples in the net of the world-market, and with this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of

capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished alongwith, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. Thus integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.”19

THE REAL BARRIER

“The real barrier of capitalist production is capital itself.It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa, the means of production are not mere means for a constant expansion of the living process of the society of producers. The limits within which the preservation and self-expansion of the value of capital resting on the expropriation and pauperisation of the great mass of producers can alone move – these limits comecontinually into conflict with the methods of production employed by capital for its purposes, which drive towards unlimited extension of production, towards production as an end in itself, towards unconditional development of the social productivity of labour. The means – unconditional development of the productive forces of society – comes continually into conflict with the limited purpose, the self-expansion of the existing capital.The capitalist mode of production is, for this reason, a historical means of developing the material forces of production and creating an appropriate world-market and is, at the same time, acontinual conflict between this its historical task and its own corresponding relations of social production.”20

The very process of value’s coming into being and self-assertion is itself alienating, and hence competitive.

The law of competition of alienated and self-expanding values in order to appropriate surplus value leads to progressively higher organic composition of the social capital, i.e. a constant increase in the constant constituent at the expense of its variable, or reversely,a constant relative decrease in its variable vis-à-vis its constant (c/v), and consequently the total capital {c/(c+v)}. This causes in a progressive development of social productivity of labour. “The immediate result of this is that the rate of surplus-value, at the same, or even a rising, degree of labour exploitation, is represented by a continually falling rate of profit.21

“This is in every respect the most important law of modern political economy and most essential for understanding the most difficult relations.”22 This law, anexpression of the self-contradictions of the law of value, through throat cut competition leads to violent destruction of capital by capital “not by relations external to it but rather as a condition of its self-preservation”23

Then it becomes necessary that this relation be replaced with a higher form of social production.

Taking over the great institutions of production, distribution and communication, first by joint-stock companies, later on by trusts, then by the state, and nowby the multinationals, the capitalist class demonstrated itself to be a superfluous class. Salaried employees now perform all its functions. As Engels concluded:

"In proportion as anarchy in social production vanishes, the political authority of the state dies out. Humankind, at last the master of their own formof social organization, becomes at the same time thelord over nature, his own master – free. To accomplish this act of universal emancipation is thehistorical mission of the modern working class. To comprehend thoroughly the historical conditions and

thus the very nature of this act, to impart to the now oppressed working class a full knowledge of the conditions and of the meaning of the momentous act it is called upon to accomplish – this is the task of the theoretical expression pf the working class movement, scientific socialism.”24

For today’s revolutionaries, the abolition of private property does not mean abolition of the pre-capitalist private property, “there is no need to abolish that; the development of industry has to a great extent already destroyed it and is still destroying it daily,” as has been observed by Marx and Engels in the Manifesto. For establishing socialism what is to be abolished is the property in its present form, which is based on the antagonism of capital and wage-labour – a relation of production, which is constantly being reproduced by wage-workers not in their own interest but in the interest of their employers.

CAPITALISM WILL NOT COLLAPSE

In Volume II of Capital Marx outlined a reproduction schemafor capitalist production on an expanded scale assuming atwo-sector economy, and in Volume III gave his view aboutthe tendency of the rate of profit to fall predicted by David Ricardo (1772-1823) and others. Marx recorded many observations on these questions, which are to be found inthe relevant parts of Capital and Theories of Surplus Value. For a comprehensive understanding of what his point of view was, one has to study these scattered texts carefully. However, students of Marx have unduly emphasized this or that aspects of his theory of crises leading to confusions. While dealing with Marx’s reproduction schema, some students of Marx have made mistakes, emphasizing this or that aspect and portraying perspectives about capitalism’s eventual purely economic breakdown or even imminent collapse.

Rosa Luxemburg claimed in her 1912 work The Accumulation of

Capital to have found a “flaw” in Marx’s schema and that accumulation and expansion was impossible as he assumed under “pure” capitalism, i.e., a society and economy composed only of capitalists and workers and their hangers-on and dependants. She envisaged that capitalism had to rely on non-capitalist areas of the world economy to buy the part of the product in which the surplus valuedestined for accumulation was embodied. According to her,as capital approaches the point where humanity only consists of capitalists and proletarians, further accumulation would become impossible. Thus, she envisageda permanent crisis. Some of her followers are always foreseeing a state of imminent collapse. This is far fromadequate in that it takes little consideration of the question of “one capital killing many capitals” whereby capitalism always renovates itself. In addition, overall demand is not determined only by theconsumption of the workers and the capitalists as she assumed, but by this plus the investments of the capitalists. There is therefore no permanent surplus production in Luxemburg’s sense and no global saturation of markets. In any case, the reason of recurring crises and depressions cannot be found simply in the sale of commodities on the market any more than it can be solely found in the sphere of production.

In 1929 Henryk Grossman in The Law of the Accumulation and Breakdown of the Capitalist System examined the schema and came to the opposite conclusion – that the capitalist system would eventually breakdown due not enough surplus value being produced. He tied this to Marx’s explanation of thelong-run tendency of the rate of profit to fall as being due to the increasing proportion of capital invested in machinery and equipment (constant capital, c) compared with that invested in the purchase of productive wage-labour (variable capital, v). This is a more plausible mistake than Luxemburg’s as it could in theory happen – but only in theory since, for it to happen, technical progress in capitalism and the growth of constant capitalwould have to be extremely fast and high so that ‘c/v’ tended to infinity.

Marx himself, however, never believed in the possibility or existence of a permanent crisis due to some such factor as Luxemburg and Grossman claimed to have identified. Discussing a similar view put forward by AdamSmith (1723-1790), Marx specifically rejected there beingsome permanent obstacle to capital accumulation:

“When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist”25

Paul Mattick in Economic Crises and Crisis Theory (Merlin Press, 1981) attempted to explain capitalism’s periodic crises as a check and correction to the long-term tendency of the rate of profit to fall. However, in asserting that a falling rate of profit makes crises inevitable from time to time as a means of countering this, Mattick was going beyond Marx’s understanding that this was only a tendencyand one which could be checked or even overcome by countervailing tendencies and measures. Marx listed thesein Chapter 14 of Volume III of Capital as:

A. The increasing intensity of exploitation by raising the rate of absolute surplus value by lengthening of the working day – through increasing the working hours, by economically compelling almost all of a family including children to work multiplying working time by number of hands for a single family wage, as wellas through introducing shift work.

B. Raising the relative rate of surplus value by: (i) increasing the surplus labour at the expense of

the necessary labour in a working day, (ii) cheapening of the elements of constant capital,

and (iii) increasing productivity and intensity of

work via unceasing improvement of technology. C. Depression of wages below the value of labour power.

D. Relative over-population. E. Foreign trade. F. The increase of joint-stock companies, issuing stocks and shares.

Experience has adequately proved that these have been powerful enough to prevent any observable fall in the rate of profit in the long run, even though the short-term rate of profit has come up or down depending on which phase of its periodic cycles capitalism has been in. In any event, such a long-run permanent tendency, even if it were observable, would not be able to explain the periodic cycles of crises involving booms and slumps that are an observable feature of capitalism. This has to be sought elsewhere – in the disproportionate development that results from the inherent anarchic nature of capitalist production.

Capitalism will not breakdown economically. It will, as usual, pass through cycle after cycle of booms, crises, slumps and recovery until it is replaced with socialism by the working class.

Capitalism is a system of society containing a dynamic yet anarchic interaction between productive forces and social relations of production. The productive forces comprise raw andauxiliary materials, premises and machinery, and mental and physical skills of workers to produce goods and services, which constitute the social wealth. The social relations of production are the class relations between the capitalist class and the working class. The capitalist class is that tiny part of the population thatowns and controls the means of production and distribution by virtue of which they employ workers with the main object of making profit through their exploitation. This class is parasitically unproductive. The working class is the immense majority of people who own or control nothing but their ability to work which they sell for a wage or a salary in order to survive under the economic compulsion of exploitation. Thus, the principal contradiction in capitalism is the

unceasing conflict between the forces of production and the social relations of production that manifests throughthe conflict between the two great opposing classes. The potential and practical ability to produce abundantly to meet the needs of the whole society goes side by side with the main objective of profit, which limits sales of commodities to only paying purchasers at profitable prices.

This contradiction engenders the periodical economic cycles of boom – crisis – slump, whereby the social relations of production restraint the forces of production within the anti-social fetters of production for profits, causing a class struggle that gives rise to socialist ideas as workers oppose the prison-like features of the wages-slavery. A slavery that binds workers’ lives within narrow limits of artificial scarcity vis-à-vis potential and even actual abundance in reality.

Socialism is different from capitalism. This will be a worldwide social system based on production for use. Things – homes, food, clothing and all other necessaries – will be produced not for sale on the market with a viewto profit, but for direct use. There will be no exchange or trading of things, hence no trade cycles – no booms, no economic crises or slumps. Socialism will be a societywithout poverty and hunger, and without any system of employment. Having abolished the wages system with its consequential exploitation, people as “associated producers” will cooperate to produce what the society needs. Competition and war will be the things of the past. Society will write on its banner: “From each according their ability, to each according to their needs.”

THE GREAT CRASH OF 1929

On Tuesday 29 October 1929, the boom in the price of stocks and shares on the New York stock exchange came to an abrupt end in what has gone down in history as the Great Crash.

Stocks and shares are titles to ownership of part of a business. They entitle their owners to a percentage of the profits of that business in the form of dividends or,in the case of certain kinds of shares, fixed interest payments. In theory, the price of a share reflects the value of the firm's assets. In practice, it fluctuates with the firm's profit-making record and expected profits. It is this latter that introduces an element of gambling into shareholding, since the firm can never knowin advance whether or not it will in actual fact make thehoped-for profits. If it doesn't then the price of its shares will fall and the shareholders will suffer a loss.If it does then the price of its shares will increase andthe shareholder will receive a capital gain as well as a dividend.

A stock exchange boom is essentially a period of speculation for capital gains on rising share prices. It need have nothing whatsoever to do with the profit-makingrecord or prospects of the firms whose shares are traded.It is enough that there is a sustained excess of buyers over sellers on the stock market. With prices continuallyrising, capital gains can be made simply by buying sharesone day and selling them the next. A telephone call is all the effort required.

Until October 1929, there was such a boom on the New Yorkstock exchange. Share prices were rising, and everybody expected them to go on rising. Stories of people 'gettingrich quick' from buying and selling shares encouraged others to try their luck. Actually, as long as the boom continued it was not a question of luck at all but a matter of having money. If you did not have ready cash, you could borrow the money to buy the shares. Certainly, you needed some collateral, but there were cases of shares already bought on loans – and even of the shares to be bought by that loan –being accepted as collateral.

The trouble with a speculative boom of this sort is that it cannot go on forever. Sooner or later the excess of buyers over sellers must disappear. Everybody knows this,

but investors cannot resist the temptation to make easy money.

The Great Crash was followed by a severe industrial depression, summarised by J.K. Galbraith in his very readable book on the subject:

“After the Great Crash came the Great Depression which lasted, with varying severity, for ten years. In 1933, Gross National Product (total production ofthe economy) was nearly a third less than in 1929. Not until 1937 did the physical volume of productionrecover to the levels of 1929, and then it promptly slipped back again. Until 1941 the dollar value of production remained below 1929. Between 1930 and 1940 only once, in 1937, did the average number unemployed during the year drop below eight million.In 1933 nearly thirteen million were out of work, orabout one in every four in the labour force. In 1938one person in five was still out of work.26

One school of thought, the monetarists, sees the Great Crash and Great Depression as the outcome of government interference in the 'natural' workings of capitalism. According to them, the stock exchange boom and its inevitable crash were caused by the monetary policy pursued by the US government and central bank (the Federal Reserve Board). What gives monetarist explanations of this crisis, and of crises in general, a semblance of plausibility, is the fact that monetary bungling can aggravate a crisis. And there is no doubt that in the years up to 1929 the Federal Reserve Board, in pursuing a cheap money policy with easy credit and lowinterest rates, did encourage the stock exchange boom, and so helped make the crash all the greater when it came. A stricter monetary policy might have cut short theboom at a much earlier stage and thus prevented so great a crash, even if not a minor one, but the question is: would it also have avoided the Great Depression?

Here the answer must be no. For a slowing down of economic activity was evident in the summer of 1929, some

months before the Crash (a knowledge of this must have been a factor in bringing the stock exchange boom to an end). This downturn was particularly evident in the consumer goods sector, where the firms concerned had overestimated demand and were finding themselves lumberedwith excessive stocks. In other words, the depression wasgoing to happen anyway, whether or not there had been thestock exchange boom and crash. More fundamental economic factors were at work than speculations on the stock market or the monetary bungling of the Federal Reserve Board.

An attempt to identify these fundamental economic factorsusing the categories of Marxian economics has been made by Sydney H. Coontz in Productive Labour and Effective Demand (1965) and by Ernest Mandel.

A depression is the result of an unbalanced growth of onesector of the economy having expanded too fast for the other sectors. Simplifying matters, the economy can be divided into two main sectors, the one producing means ofproduction (sometimes called 'capital goods' or, more accurately, 'producer goods'), and the other producing consumer goods. The conditions for steady, balanced growth under capitalism can then be stated to be:

“The purchase of consumer goods by all the workers and capitalists engaged in producing capital goods must be equivalent to the purchases of capital goodsby the capitalists engaged in producing consumer goods (including in both categories the purchases needed to expand production). The constant reproduction of these conditions of equilibrium thusrequires a proportional development of the two sectors of production. [for Marx’s analysis see the note 4 below] The periodical occurrence of crises isto be explained only by a periodical break in this proportionality or, in other words, by an uneven development of these two sectors.”27

What happened in America in the 1920s was that the producer goods sector expanded too fast for the consumer

goods sector. Production and productivity increased whilewages and prices remained comparatively stable. Wages didin fact rise, but the main benefits of the increase in productivity went to the capitalists in the form of increased profits. Most of these additional profits were reinvested in production (though some found their way to the New York stock exchange). It was this that led, according to figures quoted by Galbraith, to the rapid extension of the producer sector as compared with the consumer goods sector:

“During the twenties, the production of capital goods increased at an average annual rate of 6.4 percent; nondurable consumers' goods, a category which includes such objects of mass consumption as food and clothing, increased at a rate of only 2.8 per cent.”28

An expansion of the producer goods sector at a faster rate than the consumer goods sector is not in itself a situation of disproportionate development. Indeed, it hasbeen precisely the historical role of capitalism to buildup and develop the means of production at the expense of consumption. However, so-called 'production for production's sake' cannot in practice continue indefinitely, since it demands either a sustained series of new inventions and innovations or a continually expanding market for consumer goods.

The relatively full employment in America in the 1920s – unemployment was officially only 0.9 per cent in 1929 – did mean that the market for consumer goods expanded, butthe falling share of wages and salaries in National Income meant that this was not going to continue. The expansion of the producer goods sector levelled off, further retracting the market for consumer goods since its workers now had less to spend. Expressed in terms of the formula for balanced growth stated above, the purchase of consumer goods by the workers (and capitalists) in the producer goods sector had come to be less than the purchase of producer goods by the capitalists in the consumer goods sector. In other words,

an overcapacity had developed in the consumer goods sector, which expressed itself in an overproduction of consumer goods and the build-up of stocks. As Coontz putsit (using the language of academic economics):

“. . . stagnation in the capital goods industry, thedisplacement of labour in this sector, meant that worker and entrepreneurial consumption expenditures failed to rise pari passu with investment in the consumer sector. It was this disproportionality thatgenerated the Great Depression.”29

The Great Depression — which occurred all over the world and not just in America — was not an accident, but simplycapitalism working in a normal way. It exposed capitalismfor the irrational, anti-social system that it is. While millions were unemployed and reduced to bare subsistence levels, food was destroyed because it could not be sold profitably. It was in the 1930s that the Roosevelt administration introduced the notorious policy of paying farmers not to grow food, a policy accurately described by a later President, Kennedy, as 'planned underproduction'. Even in times of boom and prosperity capitalism underproduces, but in times of depression thisis even more flagrant.

The Depression eventually came to an end — with the war and preparations for war.

THE CREDIT CRUNCH

In August 2007, a new term came into the English vocabulary – “credit crunch”. However, to describe an oldphenomenon: the sort of credit crisis that used to occur at regular intervals in the 19th century. This also had happened in 1907 and 1929. It is all there in Marx’s description and analysis of them in Volume III of Capital. There is the same panic, the same bank collapses, the same dash for cash, and the same government intervention to make cash available even by breaking its own rules. And the same downturn in economic activity.

What the existence of a credit crisis shows is that moneyhas been unwisely lent by banks. The loans have turned out to have been unwise because the borrowers have found themselves unable to repay them. If these defaults are widespread and important enough then the entire financialsystem can be affected.

Nevertheless, how does it come about in the first place that at the same time a large number of borrowers become unable to repay loans?

In the 19th century, the loans that turned bad were made, for instance, typically to cotton manufacturers to exportto India or China and proved unsound when more cotton goods were produced than could be absorbed by these markets. Panic set in when the trade bills issued to finance these exports could not be honoured. In other words, it was caused by some economic event: overproductionin some sector of the real economy in relation to the market (paying demand) for its products, an overproduction brought about by the anarchic pursuit of profits that is built-in to the capitalist system.

This time the loans that turned bad were made, in America, to individuals to buy a house. This stimulated, and then sustained, a boom in housing construction. In the end, paying demand was unable to keep up with the supply of new houses for sale, as demonstrated by the fall in house prices and the increasing number of defaults. In other words, there was overproduction in theUS housing sector.

These defaults had an impact on the whole global financial system because of the way in which the originalloans had been financed — or rather re-financed. They hadbeen pooled by batches into bonds by US investment banks (“securitized”, in the jargon), and then pooled again with other loans, into other bonds, and sold by them to other banks and other financial institutions throughout the world, but mainly in America and Europe. So that whenthe borrowers of the original loans defaulted in large numbers this had an effect on global credit markets.

Most people don't like banks, seeing them as institutionsthat in some mysterious way create money and then charge interest on it, so getting money for nothing. Actually, banks are financial intermediaries which can only lend money to people and businesses out of money that has beendeposited with them or which they have themselves borrowed. As the US Federal Reserve put it in one of their educational documents:

“Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money.”30

The IMF has even coined a new verb to describe what banksdo: they “intermediate”.

Banks are profit-seeking capitalist enterprises in which the owners have invested capital with a view to making a profit. A bank has to have its own capital as reserves and to invest in the buildings and office equipment and in the wages and salaries of bank workers. The business of a bank is to borrow and re-lend money, basically to channel unused money to where it can be used, most of it going in the end to capitalist enterprises to use as capital to invest in trade and industry.

Banks obtain the money to lend either (retail) from individual depositors or (wholesale) by themselves borrowing the money on the money market. As the US Federal Reserve has pointed out above, they make their profit out of the difference between the rate of interestat which they borrow and the (higher) rate at which they lend. The ultimate source of this profit is the surplus value, produced by workers in productive activity, which capitalists who have invested borrowed capital in production have to share, in the form of interest payments, with those who have invested in financing.

Banks can only lend what's been deposited with them or what they themselves have borrowed. Somewhat less in factas they have to keep some of what has been deposited withthem as cash to deal with withdrawals. In America the official “cash ratio”, or “fractional reserve”, of cash to loans is 10 percent. What this means is that for every£100 deposited banks have to retain £10 as cash. The other £90 they can lend out. Some people misunderstand a 10 percent cash ratio to mean that if £100 is deposited with a bank, the bank can then lend out £900. This is an understandable mistake, arising from misleading textbook explanations of “fractional reserve banking” which attribute this power to the whole banking system (but notto individual banks), and one which currency cranks erectinto a theory, claiming that what banks do is create money out of thin air by a mere stroke of the pen and then charge interest on it. But no bank does or can do this; they can only lend what has been deposited with them or what they themselves have borrowed. Even the theory of fractional reserve banking, correctly understood, does not challenge this as it assumes that the money banks lend eventually finds its way back to a bank as a new deposit.

Since the 1990s, banks have been involved in two other activities: “securitization” and “derivatives”.

Securitization involves converting a future stream of income into a capital sum and selling it as a “security”,or bond, yielding the stream of income as interest. This — and vice versa, converting a capital sum into a stream of income — is a calculation that insurance companies have long been doing. Marx called a capital sum calculated in this way “fictitious capital”, though a better term might be “imaginary” or “notional” capital since there’s nothing dishonest or dodgy about it. One example is the price of land, which is based on the expected future rents expressed as a capital sum. The stream of future income that banks began to turn into interest-bearing bonds were, for instance, mortgage repayments but also the interest payable on other loans. In fact, different interest streams from different loans

came to be packaged together into a single bond.

"Derivatives" are so-called because they are “derived” from real assets. These are essentially bets on how the price of real assets such as commodities or shares or government bonds or currency is going to change over time. When these are not pure gambling, it can be considered a form of insurance against a company or a loan failing (by betting that this will happen). Big money can be made out of derivatives if you win the bet, but so can big losses if you get it wrong. To obviate this risk hedge funds have come into existence to, precisely, hedge the bets.

Because both securitization and derivatives were unregulated (one reason why banks resorted to them so much), dealings in them have become known as “the shadow banking system”, which is also based on making a profit between borrowing at one rate of interest and lending at a higher rate.

As we explained, what happens in a boom is that capitalist enterprises assume that it will continue and so they all plan to expand their production, investing innew machinery, building new factories, taking on more workers. However, when this all comes on stream, it is found that productive capacity exceeds market demand. There is overproduction (in relation to paying demand, not real needs of course). This has both financial and economic consequences. Workers are laid off, orders with sub-contractors are not renewed, which in turn have a knock-on effect, leading to further lay-offs and factory closures.

This time the market that overexpanded was that for housing in America. Beginning in 2000 there was an expansion in the construction of new houses for sale. There was also widespread renovation for resale of existing housing. The purchase of these houses was financed by loans from specialist mortgage lenders, whichwere supplied with money “wholesale” by investment banks.A boom in house-building and house-buying developed.

House prices rose but workers’ incomes did not, so, to keep up demand, mortgage lenders lowered their standards.They began to grant more and more "sub-prime" loans, so-called because they were given to people whose income wasbelow the normally accepted level and so had a higher chance of defaulting.

Eventually the inevitable happened. sub-prime borrowers did default, which represented a fall in paying demand for houses. By early 2006, house-building peaked. The boom came to an end and house prices began to fall. However, far from stimulating the market, this left millions with a house worth less than their mortgage, which meant not only that they had to cut their consumption but also that the banks would not get all their money back even if they repossessed the houses. Thehousing boom could in theory have continued if people’s incomes had gone up and at the same rate. Nevertheless, it did not and it could not have. Once borrowers began defaulting, the mortgage lenders suffered losses and so had less to lend. Credit tightened, which provoked yet more defaults and which had an effect on the wider economy.

What had happened was that more houses had come to be built than people could afford to pay for or, from another angle, than could be sold profitably. In other words, overproduction (in relation to what people could afford, not in relation to housing needs). A recent studyby the Bank for International Settlements in Basle, entitled “The Housing Meltdown: Why did it happen in the United States?”, uses such terms as “an overhang of excess supply”, “overbuilding of new housing” and “a substantial oversupply of housing”, producing figures to show

“that between 2001 and 2006, the United States builtmore new homes than would have seem to been requiredby the growth of its population”

and

“The US housing construction sector seems to have managed to build up a substantial oversupply of housing. The United States was therefore more likelyto experience a sharp fall in prices than some othercountries, even before credit supply tightened.”31

That this overproduction in one sector in one country provoked a world-wide financial crisis not only shows that the cycle of “moderate activity, prosperity, overproduction, crisis and stagnation” analyzed by Marx is still operative, but it also bears witness to the extent of capitalist globalization.

Notes 1 Marx, Capital, Vol. I, Ch. 3, 1886 English translation,

Moscow, 1961, p. 113 2 Marx, A Contribution to the Critique of Political Economy, Progress,

1978, pp.96-97 3 Marx, Capital, Vol. I, Ch. 3, pp.114-5 4 PROPORTIONALITY / DISPROPORTIONALITY

The internal metamorphosis of capital goes on as V = c + v + s, whereV = value of the total global production, c = constant capital, v = variable capital and s = surplus value. Now suppose for simplicity that the total global production consists of two departments: Department I that produces only means of production and Department II that produces only means of consumption.

Ic + Iv + IsThen, V = {

IIc + IIv + IIs

Let us first analyze the simple reproduction of capital: (here we assume thatthe rate of surplus value or the rate of exploitation (s/v = 100%) remains the same in both the departments, and capitalist class consumes the whole surplus value so that only the total value of the global social production is reproduced. Take Ic = 4000c and Iv = 1000v, hence Is = 1000s; IIc = 2000c and IIv = 500v, hence IIs = 500s)

Department I → 4000c + 1000v + 1000sThus, } = V9000 (global social production)

Department II → 2000c + 500v + 500s

Now for continuation of the reproduction process the exchange

between the two departments must go on unhindered. Note that the values of the departments are reproduced in the form of commodities. Hence, the 4000c (Instruments of Labour + Material of Labour) are used up in the Department I itself. However, the wages of the workingclass (1000v) and the profits of the capitalist class (1000s) cannot me cannot be realized in constant capital. Therefore, Department I will have to exchange 2000 output in the form constant capital with the commodities for consumption solely produced by the Department II.On the other hand, Department II produces 3000 value in the form of commodities for consumption only, so it will meet its own consumptionneeds of the workers (500v) and the capitalists (500s) from its own production, and offer for exchange 2000 value in the form of articlesfor consumption with the Department I that produces only means of production. Therefore, the condition of equilibrium with simple reproduction is:

Iv + Is =IIc

This abstraction gives you an idea about accumulation of capital as inherently a self-reproductive process. The process becomes more evident through expanded reproduction of capital whereby global social valuegoes on increasing itself. Since the units of capital, i.e., self-expanding values do not grow evenly, coherently, coercive competition among them always occurs in each striving to remove others out of the market. In so doing they have to produce the commodity more cheaply. This can be done by finding out cheaper sources of means of production and labour-power. Labour-power is cheapened by raising the productivity of labour that requires reinvestment of a portion of surplus value in improved machineries and work processes. Thus, the history of capital is the history of its expanded reproduction, which, in other words, is the expanded reproduction of wage-labour / capital relations.At this instant, suppose a portion of surplus values of both the departments enter into the production processes as capital. Then, surplus values of each department is divided into two parts, e.g., A – the part that provides for the consumption of the capitalists, and B – the part that is added to the existing capital.

Therefore, Is = IA + IB IIs = IIA + IIB

Again, the part B of each department will be subdivided into two: onegoing into the augmentation of constant capital, IBc and IIBc; the other into the variable capital, IBv and IIBv. Thus, the formulae of social production stand as:

I → Ic + Iv + IA + IBc + IBv V = {

II → IIc + IIv + IIA + IIBc + IIBv

We have already considered the first three items while dealing with

the simple reproduction of capital. Therefore, here we have to consider that part of surplus value adding to the capital. Based on the same reasoning as simple reproduction if expanded reproduction has to proceed unbroken, IBv has to be equal to IIBc. Now by combining this necessary equation of expanded reproduction with the exchange equation of simple reproduction we get the condition of equilibrium as follows:

(Iv + IA + IBv) = (IIc + IIBc)

In other words, the sum total of all new variable capital of Department I and the part of surplus value of the same department that goes into the consumption has to be equal to the constant capital of Department II.

However, since the capitalist mode of production has no a priori regulation of its reproduction process, or in other words, its process of reproduction through coercive competition among self-expanding values represents its inherent anarchy, the hypothetical equation as above never occurs. Disproportionality prevails. From this theoretical illustration of expanded reproduction, it is evident that accumulation of capital is a self-expanding process wherein expansion of constant capital and the increase of the consumption of the workers and the capitalists are included. Thus, commodity production can expand its own market as far as it is able to transform surplus value into capital. The aim of each capitalist is to maximize their profits (i.e. maximization of the surplus value produced). However, if this effort leads to creating less profit than previously, surplus value could not be entirely transformed into capital. Hence, there will be a rupture in the process of accumulation.

5 Marx, Capital, Vol. III, Moscow 1974, p.249. Also at: http://www.marxists.org/archive/marx/works/1894-c3/ch15.htm

6 Marx, Capital, Vol. III, Moscow 1974, p. 239 7 Ibid. p. 251 8 Marx, Grundrisse, Pelican, 1981, pp.749-50 9 Marx, Poverty of Philosophy, CW, Vol. 6, p.137 10 Marx, Capital, Vol. I, Ch. 15, Vintage Books, New York,

p.580, a more accurate translation than Samuel Moore’sversion of 1886, cf. Vol. I, Moscow, 1974, pp. 425-26

11 Marx, Value, Price and Profit, Ch. XIII, CW, Vol. 20, p.143 12 Marx, Theories of Surplus Value, Volume II, Moscow, 1968, p.

527 13 Marx, Capital, Volume III, Moscow, 1974, p. 441 14 Engels, Anti-Duhring, Moscow, 1969, p. 326-28; [*Fourier,

Oeuvres complètes, Vol. VI, Paris,1845, pp. 393-94. cited by Engels]

15 Marx, Capital, Vol. II, Moscow, 1974, pp.414-15 Also at: http://www.marxists.org/archive/marx/works/1885-c2/ch20_01.htm#4

16 Marx, Capital, Vol. I, Moscow, 1974, p.668 17 Engels, Anti-Dühring, Progress, 1969, p.370, emphasis added 18 Marx, Capital, Vol. I, Progress, 1974, p.580, emphasis

added 19 Ibid. pp.714-15 20 Marx, Capital, Vol. III, Progress, 1974, p.25021 Ibid. p.213 22 Marx, Grundrisse, Pelican, 1981, p.48 23 loc.cit. p.74924 Engels, Anti-Dühring, Moscow, 1969, p.338 25 Marx, Theories of Surplus Value, Volume II, p. 497. Marx’s

emphasis 26 J.K. Galbraith, The Great Crash 1929, Pelican, p. 186 27 Mandel, Marxist Economy Theory, Vol.1, p.349 28 Ibid. pp. 192-3 29 Ibid. p. 154 30

http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf. P. 57

31 www.bis.org/publ/work259.htm