From Socialism Today July-August 1999 | Home | News | Donate | Join 

A Theoretical Exchange: 

What Are the Causes of the Current World Capitalist Crisis?

In Capitalism's Economic and Political Crisis, featured in Socialism Today 32, October 1998, Lynn Walsh set out to delineate succinctly the main features of the current international situation, focusing mainly on the crisis in the world economy.

Some key aspects of the post-war upswing (1950-74) were briefly sketched in and contrasted to the present period; and the main elements of the current crisis were analysed. 

Picking up on some of the points made in the article, Matt Wrack has raised some theoretical issues from a critical standpoint. We believe that readers may be interested to consider Matt's criticisms and to hear our response, which explains the reasoning behind some of the shorthand formulations, used for brevity, in the October article and unavoidably in other Socialism Today commentary on the world economy.

Matt Wrack writes

LYNN WALSH'S EXPLANATION of capitalism's economic turmoil (Socialism Today, October 1998) raises a number of theoretical issues.

Lynn provides an account of the end of the post war boom which emphasises the growing strength of the working class. This strength, Lynn argues, enabled workers to resist "further intensification of exploitation" and to use "their industrial strength to increase their share of the wealth produced". (p10) The capitalists were forced to make significant concessions in terms of "state welfare services and relatively high living standards". (Relative to what?!) Lynn also argues that as the "technological systems" of the post-war period reached their limits, productivity growth slowed and rising real wages were "no longer compatible with high profits".

This is, of course, the 'profit-squeeze' theory most commonly associated in Britain with Andrew Glyn, John Harrison and others. (It also draws on the theories of the Regulation School associated with Aglietta, Lipietz and others). The main problem with the version presented here is that absolutely no evidence is presented for any of the claims made!

One indicator of any redistribution of national product would be figures for income distribution. The figures for Britain bring into question any claim that income was redistributed during the post war boom. For example, between 1949 and 1979 the income share (after tax) of the bottom 50% of the population actually fell! (See Chris Pond, The changing distribution of income, wealth and poverty, in C Hamnett, L McDowell and P Sarre, 1989, The changing social structure, London, Sage, pp46-51). 

The main redistribution during this period was among the wealthy and not from the wealthy to the working class. During the same period, income tax was extended to sections of the working class who had previously been exempt. Figures for the distribution of wealth (as opposed to income) show a similar failure of redistribution. (Chris Pond, ibid, pp66-75). Lynn rightly criticises official statistics on unemployment. He should adopt the same scepticism toward claims of 'progressive taxation' (p11) and redistribution of wealth and income.

Some people argue, of course, that we have to take into account the so-called 'social wage' when estimating the extent of redistribution. However, it is well known that the better off benefited disproportionately from 'welfare' spending during the boom. One study concluded as long ago as 1982 that "public expenditure on health care, education, housing and transport systematically favours the better off, and thereby contributes to inequality in final incomes". (Julian Le Grand, 1982, The strategy of equality, London, p137 - my emphasis)

Unless Lynn can come up with some evidence we have to conclude that the case for the so-called 'profits-squeeze' is thin indeed.

In dealing with capitalism's current crisis, Lynn adopts a completely opposite view. He argues that the basic problem now is that mass unemployment, poverty, etc have restricted "the ability of the working class to purchase the goods they produce". Lynn's overall explanation is neatly summed up in the following: "The strong demand but diminishing profits of the post-war upswing have been replaced by booming profits combined with increasingly inadequate demand". (pp10-11)

Lynn here adopts the classic underconsumptionist view that crisis is caused by the inability of the working class to buy back what it produces. Lynn argues that this arises from "one of the most basic contradictions of capitalism: the tendency of capital accumulation to outpace the growth of the employed labour force" (p10). Unfortunately Lynn does not provide any explanation of this tendency, why it arises or why it is so central to capitalism! Lynn does not explain why this tendency should produce diametrically opposite results in the 1990s (underconsumption) from those produced in the 1960s (profits squeeze).

The major problem with both profit-squeeze and underconsumptionist theories is that they confuse the appearance of things for the underlying reality. Profit, by definition, is the difference between costs and sale price. Therefore, any fall in profitability can appear (to the capitalist) as being caused by rising costs. Wages are the obvious scapegoat. In the minds of the capitalists cause and effect become confused. What is surprising is when we hear similar explanations from Marxists!

Both profit-squeeze and underconsumptionist theories are concerned with the way the social product is distributed. In one view the workers receive 'too much' for profitability (profit-squeeze); in another they receive 'too little' (underconsumption). This concern is reflected in Lynn's emphasis on the changing role of demand in producing crisis. In contrast, Marx emphasised the importance of production: "...the profit of capital as such, has to exist before it can be distributed, and it is extremely absurd to try to explain its origin by its distribution". (K Marx, Grundrisse, Penguin, 1973, p684). It is by understanding how profit is produced that we can explain both changes in demand and economic crisis.

Marx's theory explains that profit originates in the surplus value created in production by the labour of workers. Capitalists seek to increase the productivity of labour by investment in labour-saving technology. The resulting rises in productivity mean that relatively less workers are needed to produce a given output. Since only living labour produces value this process means that there exists a tendency within capitalist production for less value (and therefore less surplus value) to be produced in relation to the total investment of the capitalists. Since there is less surplus value produced, there is less to distribute. The rate of profit must fall.

From this it is clear that Marx's view of productivity is the opposite of Lynn's. Lynn sees a slowdown in productivity growth as contributing to falling profits. In contrast, Marx argues that increases in productivity mean that profits will tend to fall.

The contradictory role of increases in productivity mean that capitalism is prone to periodic crises. However, these processes are not immediately obvious on the surface of society. If profitability falls and accumulation slows, capitalists will be forced to cut back production, close factories etc. Workers are sacked and lose their wages. This results in a fall in demand. It now appears as though the crisis has been caused by insufficient demand although the process began with a decision by the capitalists in response to falling profitability. Again cause and effect are confused. It is the job of Marxists to look below the surface phenomena in order to examine the real processes of capitalism.

Lynn Walsh replies:

MARX PROVIDED US with indispensable theoretical tools for analysing contemporary capitalism. But it would be a mistake to believe that Marx's theory offers ready-made explanations of the post-war upswing or the current depression phase of international capitalism. Marxist theory cannot provide elucidation in advance of careful analysis of concrete contemporary trends. In Capital and other writings, Marx elaborated a theoretical analysis of the inner logic and contradictions of the capitalist system, which he abstracted from the reality of 19th century capitalism. Even on an abstract theoretical level, however, Marx did not assume a single path for the accumulation of capital and certainly did not advance a simple model for capitalist crisis. While showing the inevitability of crisis, Marx's writings suggest a number of possible routes to crisis.

Marx shows that capitalist breakdown can develop through an excess of capital, either through the tendency of the rate of profit to fall or through over-accumulation of capital in relation to the employed population. An excess of capital (which may give rise to overproduction) leads to a fall in profitability (Capital III, p350, pp360-68). Though giving more weight to excess capital causes, Marx also shows that breakdown can develop, under certain conditions, through an excess of commodities. This can either be through imbalances between various branches of production or because of the restricted purchasing power of the majority of society. (Capital III, p352 and p615) Marx also points to the possibility of external shocks which can push the system into crisis before the inner mechanisms fully work themselves out.

In order to understand the contemporary capitalist crisis we have to apply these theoretical tools not merely to the question of the immediate causes of crisis, but to the whole capitalist cycle: stagnation, recovery, upswing, crash, depression, etc (which was largely outside the scope of Capital). Analysis cannot be limited to the cycle of manufacturing industry within a national economy, but has to include production, trade, and the money system on an international scale. Today's capitalism is a far more complex international system than it was in Marx's time (when British capitalism dominated the world market), and Marxist economic theory has to be applied in a skilful, all-sided way.


References to the three volumes of Capital are to the Penguin edition (1976, 1978, 1981), giving chapters as well as page numbers to help reference to other editions. References to Theories of Surplus Value, which consists of Marx's critical notes on the classical political economists (Smith, Ricardo, etc), written before Capital but only published after his death, are to the Progress Publishers, Moscow, edition (Vols I & II, 1969; Vol III, 1972). The abbreviation 'ACCs' refers to the 'advanced capitalist countries'.

Who's an under-consumptionist?

ONE OF MATT'S claims is that by pointing to the current emergence of overcapacity (reflecting market weakness) as a crisis factor, I am adopting "the classic under-consumptionist view…", implying that my analysis is self-evidently mistaken from a Marxist point of view. But what does 'under-consumptionist' mean?

Marx certainly never accepted the arguments of theorists like Malthus, Sismondi, Chalmers and Rodbertus, who in a simplistic way saw deficiencies of the market as a chronic contradiction of capitalism. Those who accept the idea of insufficient demand for commodities from the working class as a permanently insurmountable problem for the system have difficulties in explaining periods of dynamic capital accumulation (such as the 1950-73 upswing). Malthus and others failed (among other things) to understand the role played by expansion of the means of production in creating increased demand for (capital) goods. Their ideas may be described as 'under-consumptionist', as can Rosa Luxemburg's mistaken idea that accumulation is impossible in a closed capitalist system (consisting solely of capitalists and workers) and that capitalist growth required the continual extension of the capitalist market to new areas, such as colonies.

While rejecting the ideas of Malthus, however, Marx did not accept the equally false notion of Say (adopted by Ricardo) that supply always creates its own demand, thus maintaining an equilibrium in the market. Marx was far from rejecting the idea that, at a certain stage of the capitalist cycle, there will be a deficiency of aggregate demand for commodities - a deficiency in which the weakness of the workers' demand for commodities is a significant component.

For instance, in Capital II, chapter 16, The Turnover of Variable Capital, Marx deals with the cycle of unemployment/full employment, low wages/increased wages, weak demand/strong demand, during the capitalist cycle of growth and slump. In a period of rapid growth, successful capitalists and especially speculators, "exert a strong consumer demand on the market, and wages rise as well". "A part of the reserve army of workers whose pressure keeps wages down is absorbed. Wages generally rise, even in the formerly well-employed sections of the labour market. This lasts until, with the inevitable crash, the reserve army of workers is again released and wages are pressed down once more to their minimum and below it".

Significantly, at this point there is a footnote inserted by Engels, a cryptic manuscript sketch by Marx which he intended to elaborate later:


"Contradiction in the capitalist mode of production. The workers are important for the market as buyers of commodities. But as sellers of their commodity - labour-power - capitalist society has the tendency to restrict them to their minimum price. (My emphasis - LW).

"Further contradiction: the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production; because the limit to the application of the productive powers is not simply the production of value, but also its realisation. (In other words, the capitalists have to sell commodities to consumers before they can realise the value embodied in commodities, cover wages and production costs, and pocket the surplus value - LW)

"However, the sale of commodities, the realisation of commodity capital, and thus of surplus-value as well, is restricted not by the consumer needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor". (Capital II, ch 16, 391)

With the rise of workers' living standards during the post-war upswing, poverty (in the ACCs though not in the majority of underdeveloped countries) became for a period relative poverty (though a minority of the workers still suffered from absolute poverty). But in the current phase of world depression large sections of the working class are once again being driven into absolute poverty through chronic mass unemployment, low wages and cuts in social benefits.

There are many passages in Capital and Theories of Surplus Value where Marx presents overproduction (an excess of commodities/deficiency of demand) as a contradiction in the capitalist mode of production. Does this make him an 'under-consumptionist'?

In distinction from the crude 'under-consumptionists', who focussed on weak demand as a chronic problem without understanding the whole cycle of the production and realisation of surplus value, Marx saw crises of excess commodities as occuring at "definite periods" (Theories of Surplus Value III: 56). It would be a mistake to isolate the weakness of workers' purchasing power as the primary cause of capitalist crisis. Weak demand is one link in a chain of cause and effect, a crisis tendency which can come to the fore at a certain stage of the capitalist cycle, exerting a decisive effect in that particular conjuncture.

Such developments cannot be dismissed as mere "appearances". True, it would be incorrect to treat such trends as "surface phenomena" disconnected from the system's inner forces which, driven by a complex logic, unfold over time in an equally complex sequence. Nevertheless, they have to be theoretically grasped as the concrete processes through which the basic contradictions of capitalism work themselves out. In order to understand the present stage of capitalism and formulate political strategies, Marxists have to apply basic Marxist theory to an analysis of these concrete contemporary trends - the reality in which we operate.

Methodology: cause and effect

MATT FINDS A contradiction in my analysis of a profit crisis at the end of the upswing but a crisis of overcapacity/weak demand at the present time. He also claims that Marx's view of the effect of productivity increases is the opposite of mine. These points raise questions of methodology.

Marx did not propose that the inner logic of capitalist crisis unfolds according to a simple, linear chain of cause and effect. Various factors have different effects under different concrete conditions. For example, rising productivity achieved through labour-saving technology, can have opposite effects under different circumstances. In Capital, it is true, Marx's emphasis is generally on the effect to which Matt refers. Investment in labour-saving machinery enables the capitalists to reduce their workforce, which tends to raise the organic composition of capital, ie there is an increase in constant capital (means of production), representing an accumulation of dead labour-power, in relation to variable capital (wages), or living labour-power. Other things being equal (ie leaving aside 'counteracting factors', to which Marx refers in Capital III/ch 14), this tends to lead to a decline in the rate of profit. A fall in the rate of profit, however, is not incompatible with a continuous increase in the absolute amount of surplus value and capital in the process of accumulation, even if at a reduced rate. At the same time rising unemployment (an increase in the 'reserve army of labour') caused by the displacement of workers by machinery, allows the capitalists to push wages down.

Investment in capital goods creates demand, but lower wages and rising unemployment cut workers' demand for commodities. In periods of upswing, growing demand for capital goods may well more than compensate for any decline in workers' spending power. But sooner or later, capital investment reaches its limits (as, for various reasons, sufficient profits can no longer be realised by the capitalists), and then declining demand for capital and consumer goods can push the economy into a slump. That is one chain of cause and effect associated with rising productivity. Marx, however, did not ignore an alternative course of development in periods of prosperity, in which rising productivity can be linked to falling unemployment and rising wages. In chapter 25 of Capital I, The General Law of Capitalist Accumulation, Marx analyses periods of upswing in which capital accumulation takes an extensive, widening form, which can develop with a relatively stable organic composition of capital. In such periods, wider layers of the population (unemployed, rural labourers, women, etc) are drawn into the labour force, reducing the reserve army of labour.

Extensive development, moreover, is not incompatible with continued intensive development, that is, continued investment in labour-saving technology. In such an expansionary phase, rising productivity (as well as cheap imports), as Marx explains in Capital III/ch 14, tends to counteract the rising technical composition of (constant/variable) capital by reducing the organic composition in value terms. This means that while the physical amount of means of production (constant capital) increases, the labour value per unit of constant capital is reduced through higher productivity, tending to stabilise the organic composition. In fact, during the dynamic phase of the post-war upswing, the generally stable output-capital ratio (expressing the relationship of total product/output to capital employed) and the stable rate of surplus value-profit rate suggest a stable organic composition of capital.

If intensive development is combined with extensive growth (expansion of existing industries, appearance of new manufacturing sectors, increased demand for raw materials, transportation, etc) there will be an increased demand for labour in the economy as a whole, outweighing the effects of labour-saving machinery at the point of production.

"In prosperity phases, there is the possibility of the labour market sometimes appearing relatively under-supplied because capital is expanding…" (Capital I/ch 25/790) Under certain conditions, "the price of labour keeps on rising, because its price does not interfere with the process of accumulation…" (Capital I/ch 25/770)

The workers' dependence on capital becomes, for a time, "easy and liberal", there is a temporary loosening of the "golden chain" which binds the wage-labourers to their capitalist exploiters. There is "a quantitative reduction in the amount of unpaid labour the worker has to supply", though this reduction "can never go so far as to threaten the system itself". (Capital I/ch 25/770) In writing Capital, much of Marx's emphasis was on analysing the cyclical crises of the mid-19th century, which were more frequent and deeper than the cyclical recessions of the post-war upswing. His aim was to explain why the capitalist system produced an enormous reserve army of labour (a pool of unemployed) and imposed poverty-level wages on a large section of the proletariat. 

We cannot simply transpose Marx's analysis of that period to an analysis of the post-war upswing of capitalism (1940-73 for the US, around 1950-73 for the other advanced capitalist countries), which was an historically unprecedented 'golden age' of capitalism. Starting from the "general law of capitalist accumulation" set out in Capital I/ch 25, we have to apply the relatively limited points Marx makes about the possibility of expansionary phases (accelerated capital accumulation accompanied by generally rising workers' living standards) to the post-1945 phase of prolonged (but historically temporary) upswing.

The 'golden chain' was loosened, at least in the advanced capitalist countries. Many on the left succumbed to the illusion that the new post-war capitalism could avoid economic crises and maintain full employment and continuous growth. Genuine Marxists recognised the special features of the post-war upswing, but rejected claims that capitalism had overcome its internal contradictions, warning, long before the 1974-75 slump, that upswing would give way to a new period of stagnation and crisis.

A post-war shift in the distribution of wealth?

MATT DOES NOT recognise that there was any increase in the share of the wealth taken by the working class during the post-war upswing (which is a separate issue from the question of a profit-squeeze developing towards the end of the boom period). My article made only brief references to this, which there was no space to explain.

In the post-war period there was a relative strengthening, socially and economically, of the working class, which took a bigger share of the wealth than in previous periods. This was not just a matter of taxation and social spending, though these played a part. In the long historical view, it is true, the shift in distribution was marginal; there was certainly never any question of it leading to a gradual abolition of capitalism's class antagonisms. But for a crucial period there was a shift in the distribution of wealth towards the working class and the so-called 'middle class' (which included skilled- and white-collar workers, professional employees, and small business people) which was an important factor in the upswing.

Marx developed a theory of political-economy, not of pure economics, recognising that economic developments cannot be separated from political factors. After the end of the second world war, Anglo-American capitalism and subsequently the whole of western capitalism, were compelled to make concessions to the working class for social and political reasons. In the aftermath of war in Europe, there was mass radicalisation of the working class in a number of countries, and the capitalists had to take measures to avert social revolution. 

They had to counter the influence of the centrally-planned economies of the Soviet Union and Eastern Europe, which, despite the grotesque distortions of Stalinism, posed political dangers for western capitalism at that time. The ruling class of the US and western European capitalism adopted a strategy of social compromise with the working class, extending the reformist policies pursued by US and British capitalism during the war. High levels of wartime state expenditure were continued, now devoted to reconstructing an economic and social infrastructure for big business, including unprecedented levels of social spending.

Throughout the advanced capitalist countries, there was an historically high and continuously rising level of state expenditure (from around 28% of GDP for the OECD economies in the mid-1950s to around 41% by the mid-1970s). 

Economically, state expenditure was a key factor in sustaining high levels of demand, which in turn supported the high level of capital accumulation, which depends not merely on profits but the prospect of sustained profits. State expenditure (both in terms of benefits in kind, such as health services, education, libraries, etc, and 'transfer payments', i.e. pensions, unemployment pay, child benefits, sickness benefits, etc) played a key role in ensuring that consumption grew at a similar rate to production. 

Sections of the population who would have had little or no income in the 19th century or the inter-war period (unemployed, single parents, and especially the elderly, who formed a growing proportion of the post-war population) were mostly guaranteed a minimum level of income. In Europe, transfer payments and subsidies to households rose from around 8% of GDP in 1955-57 to around 16% by the mid-1970s, while the share of income maintenance expenditure rose from 8.3% in 1962 to 11.4% of GDP in 1972.

A low level of unemployment (with the virtual disappearence of the reserve army of labour for a period) strengthened the bargaining power of the working class. There was a general strengthening of trade union organisation, the development of national pay bargaining, and the spread of shop-floor trade union organisation. Workers' real wages (deflated against consumer prices) rose at an historically high rate. In Britain, for instance, during 1949-59 real wages rose at 2.16% pa compared with 1.68% during 1924-38 and an annual decline of 0.11% during 1895-1913. In Germany, real wages grew 4.66% during 1950-59, compared with 1.51% during 1925-38 and 1.27% during 1895-1913. (E H Phelps Brown, A Century of Pay, 1968, p312).

Figuring out redistribution

THE ISSUE OF the share-out between classes of wealth, in the broadest sense (as opposed to the official definitions of wealth and income), is more complex than Matt suggests. One indicator, for instance, is the relative shares of profits and wages. According to one estimate for Britain, the share of labour's income in GNP rose from 55% in 1910-14 to 75% in 1970-79, while the share of profits/self-employment income declined from 33% to 26% (rent and property income from abroad declined, at the same time, from 19% to 8%). (A B Atkinson, The Economics of Inequality, 1983, p201)

An explanatory note to my October article explained Keynesian policy: "Keynesianism supported… higher levels of welfare expenditure financed from progressive taxation…" "Progressive" is used here in the technical, fiscal sense, meaning graduated taxation which takes an increasing share as it moves up the income brackets. Taxation, however, had very little effect on the distribution of wealth (defined as marketable assets), merely reducing the share of the top wealth holders, mainly to the benefit of the upper-middle groups. Together with underlying economic trends, taxation had a slightly greater effect on the distribution of income. According to one estimate, the pre-tax income of the top 10% fell from 33.2% in 1949 to 26.8% in 1973/74, while their after-tax income fell from 27.1% to 23.6%. The pre-tax income of the bottom 30% was virtually static at around 10.3-10.9%, while their after-tax income rose fractionally from 11.6% in 1954 to 12.8% in 1973/4. (Atkinson, 1983, p63)

In reality, progressive income tax was almost completely cancelled out by regressive indirect taxes, sales taxes, etc, taking bigger shares of lower incomes. Public expenditure, however, was much more progressive in its effects than taxes. Official income distribution statistics, however, do not reflect the effects of benefits in kind (free education, health care, etc) and cash benefits (unemployment and sickness benefits, child allowances, pensions, etc).

Estimates for the redistributive effects of benefits in cash and kind for 1977 (just after the end of the upswing period) are given by H Phelps Brown, Egalitarianism and the Generation of Inequality (1988), chapter 12, The Redistribution of Income. At that time the average original income of the top 10% was £11,079 a year, while the average income of the bottom 10% was £20 a year (p330). For the top 60% taxes exceeded benefits (by £3,188 for the top 10% and by £336 for the 41-50% decile), while for the bottom 40% benefits exceeded taxes (by £120 for the 31-40% decile and by £1,694 for the bottom 10%). Phelps Brown estimated that about 75% of the net contribution of the top 60% paid for the benefits of the bottom 40%, while 25% went to general government expenditure (defence, industrial subsidies, roads, etc, which also stimulated demand in the economy). The top 10% contributed about 22% of their original income to lower income groups, while the top 60% contributed an average 17% of their original income to lower income groups.

Such redistribution did not eliminate class differences or abolish poverty. There was never any question of a long-term, gradual, politically 'progressive' elimination of class differences. Nevertheless, there was a certain redistribution in favour of the working class, which played a crucial role in sustaining a high level of demand and capital accumulation during the post-war upswing.

There is a grain of truth in the arguments of people like Julian Le Grand (whom Matt cites in support of his argument), though he exaggerates his case (see Le Grand, The State of Welfare, in N Barr and J Hills, The State of Welfare: The Welfare State in Britain Since 1945, 1990). For the top 60% in 1977, average direct and indirect benefits in kind ranged from the equivalent of 19.7% of original income for the 41-50% decile to 8.1% for the top 10%, a mildly progressive graduation. But for the next-from-bottom 10% they were 142% and for the bottom 10% they were 3,065% of original income. Under both Thatcher and Blair, Le Grand's arguments have been used to justify a generalised, neo-liberal assault on social benefits and cash payments, not directed primarily against the upper and middle strata, but against those (like single parents) who live near or below the poverty line.

After 1979, under Thatcher, relative levelling of the upswing period was reversed, which is why statistics for wealth and income distribution which include the late 1970s and 1980s show greater inequality than statistics covering the upswing itself (1950 to the mid-1970s).

There are distinct phases, or stages, of capitalist development, and the post-war upswing was a phase of unprecedented growth. One does not have to be a disciple of the 'Regulation School' (which is not logically linked to a particular theory of crisis) to recognise that distinct periods or phases of capitalism developed within a distinct political-social framework, or 'social structure of accumulation', or 'regime', with a characteristic structure of national economies and international economic relationships. My article was based on the idea that the post-war 'Keynesian' framework was undermined by its own internal contradictions in the period leading up to the 1974-75 slump and has been replaced (on the basis of emerging economic trends and new capitalist policies) by a much less stable framework based, to use shorthand terms, on globalisation and neo-liberal policies.

The division of the product

MATT DOES NOT spell out his own view, but his language implies that he rejects on principle any idea that the share-out of the product of the production process can be a cause of capitalist crisis. 

According to Matt, I am confusing appearance and reality. Read out of context, the sentence Matt quotes from Marx's Grundrisse (Foundations of the Critique of Political Economy, Penguin, 1973) might appear to reinforce Matt's point. However, the sentence reads in full: "The profit of the capitalists as a class, or the profit of capital as such, has to exist before it can be distributed, and it is extremely absurd to try to explain its origin by the distribution". (Grundisse, p684) 

The context of this statement makes it quite clear that it refers to the distribution of profit between capitalists ("various capitalists participat[ing] in the general rate of profit"). Marx is answering the false idea put forward by Malthus and others that "circulating capital or fixed capital through some mysterious power [as opposed to value created by the production process] brings a gain" every time its possessors part with it. In other words, Marx is insisting that the process of the circulation of capital and the realisation of profit operates strictly according to the laws of value; he is not referring to the distribution of the product between capitalists and workers.

Matt would surely not dispute that towards the end of the post-war upswing period there was a crisis of profitability, with a tendency of profit rates to decline in the advanced capitalist countries? Whether considered from the standpoint of capitalist accounting or of Marx's value theory, the profit-share/wage-share is one of the determinants of the rate of profit. "The rate of profit", says Marx, "is… determined by two major factors: the rate of surplus-value and the value composition of the capital". (Capital III, ch 3, p161). 

Value composition refers to the organic composition, ratio of constant to variable capital. The rate of surplus value, "an exact expression for the degree of exploitation of labour-power by capital, or of the worker by the capitalist" (Capital I, ch 9, p326), expresses the "division of the value of the product between the capitalist and the worker". (Theories of Surplus Value II, p21)

There is indeed a struggle, an inevitable struggle, between capital and labour at the point of production over the distribution of the product between profits (surplus value) and wages. The essence of capitalist exploitation is the fact that the capitalists pay workers only part of the value created by their labour-power during the production process, expropriating the rest as surplus value (profit). The division of the net product of production, therefore, is a basic arena of struggle between the capitalist class and the proletariat. Isn't the struggle with the bosses in the workplace the primary front of the class struggle?

The rate of profit depends on the respective magnitude of change in the organic composition of capital and the rate of exploitation. The relationships involved are complex. Engels, who edited Marx's unfinished Capital III, adds a footnote to a section (pp161-162) dealing with this issue: "The manuscript also contains further and very detailed calculations on the mathematical difference between rate of surplus-value and rate of profit, a difference which has all kinds of interesting properties, and whose movement presents cases in which the two rates draw apart and cases in which they converge…" Neverthless, it is clear that the rate of surplus value, which is approximately the equivalent of the profit share, is one of the determinants of the rate of profit.

At the end of the post-war upswing, the increased share of wages and reduced share of profits, the 'profit squeeze', was a major factor in the crisis of profitability. From the perspective of his own period, Marx would have no doubt regarded this sharp, quite prolonged profit squeeze, generalised through the advanced capitalist countries, as an exceptional development. But it arose from the special features of the upswing, the historically unprecedented balance of economic, social and political factors outlined above.

The crisis of profitability

WHAT WAS THE inner mechanism of rising profitability during the upswing and the profit crisis in the period leading up to the 1974-75 slump? At the height of the boom (mid-1950s-early 1960s) there was (for the capitalists of the ACCs) a favourable, stable balance between high levels of capital accumulation and output, profits and wages. 

A crucial factor in this balance was the historically high rate of productivity growth. The average annual growth of productivity for sixteen ACCs during 1950-73 was 4.5%, compared with 1.6% for 1870-1913 and 1.8% for 1913-50. (A Maddison, Phases of Capitalist Development, 1982, p96) High productivity growth simultaneously allowed high levels of profits and high levels of real wages. 

Between 1952-70, ACC production increased by 4.5% pa while private consumption increased by 4.2% pa. In other words, during this period of exceptionally fast capital accumulation, there was not what Marx refers to as an increase in relative surplus value. The 'golden chain' of capitalist exploitation was slackened for a period, not on account of purely economic factors but for the social and political reasons already referred to.

In the early 1960s (the height of the boom) hourly productivity rates for manufacturing in the six biggest ACCs increased by 5.4% pa. At the same time, product wages were rising by 5.5% pa. (Product wages, deflated against the price index for the whole GDP, measure the relative value of wages in terms of the total commodities produced by workers, showing their real cost to the capitalists.) Real wages, deflated against consumer prices, were rising at 3.6% pa. Rising wages pushed the capitalists to raise productivity even further, while at the same time (together with the expansion of employment), maintaining high levels of demand for commodities. The profit rate was rising at 2.6% pa, while the share of capitalist profits was rising at 0.7% pa.

Matt asks what is the evidence for a profit squeeze after the late 1960s? The evidence, in my view, is clear, and is presented and analysed by A Glyn, A Hughes, A Lipietz and A Singh (The Rise and Fall of the Golden Age, In S Marglin and J Schor, The Golden Age of Capitalism, 1990), P Armstrong, A Glyn and J Harrison (Capitalism Since 1945, 1991, pp169-220), and Makoto Itoh (The World Economic Crisis and Japanese Capitalism, 1990, pp27-59).

There was clearly a stagnation of growth rates of productivity in manufacturing in the late 1960s in the US and the early 1970s in Europe. This coincided with a growing labour shortage and rising wages. The capitalists had largely used up the available supplies of relatively cheap and malleable workers (from rural areas, women, etc). The influx of immigrant workers from the less developed European countries and from the Third World slowed as it encountered social and political barriers.

At the same time, as a result of a long period of low unemployment, the working class had accumulated enormous strength and combativity. The late 1960s saw a tidal wave of strikes throughout the advanced capitalist countries, the most notable of which was the general strike in France in May 1968. Despite rising inflation, there was a further rise in real wages. In the early 1970s there was also a sharp rise in the prices of raw materials (oil, minerals, agricultural products), as a result of prolonged demand from the ACCs and under-investment in this sector.

This was a crisis of over-accumulation, an excess capital in relation to the employed population. There was no indication, in that time, of a slackening of demand. In the early 1970s, commodities were generally selling in increased quantities and at higher prices than previously, with shortages of various raw materials and semi-manufactured products, which reflected the strong demand.

Net profit share clearly declined in the late stages of the upswing. Net profit share (ie net profits, including rent and interest, divided by net value added) clearly declined. For the G7 advanced capitalist countries, net profit share declined from 24% in 1965 to around 20% during 1970-73, and to 17% in 1974. This was the result of product wages growing faster than productivity. Productivity increased 36.9% between 1965 and 1972, while product wages grew by 142.9%. (Real wages, deflated against consumer goods which indicate the purchasing power of prices, lagged behind product wages, because the consumer price index was rising faster than the index for GDP as a whole.)

At the same time, there was also a fall in the output-capital ratio in the ACCs. For the seven major capitalist countries, there was a fall between the previous peak and 1973 of around 5-10%, while there was a 10-20% fall for the US, Europe and Japan overall. The fall in output (representing living labour-power) compared with capital (dead labour-power) suggests a rise in the organic composition of capital, which contributed to the decline in the profit rate.

M Itoh writes: 

"The compounded effects of reductions in profit share and in the output-capital ratio, both basically due to the over-accumulation of capital, brought about a marked decline of profit rates by 20-40% in manufacturing and business in the major capitalist countries… it is estimated that the profit squeeze, or decline in profit-share, accounted for about three-quarters of the approximately 20% decline in the aggregate profit-rate for seven advanced capitalist countries in 1968-73 and a fall in the output-capital ratio accounted for the other quarter". (Itoh, 1990, p57)

For the major ACCs, the manufacturing profit rate fell from 24.1% in the peak year of 1968 to 19.4% in 1973, a fall of 20%. US capitalism suffered an even bigger decline, with the manufacturing profit rate falling from 36.3% at the 1965 peak to 21.8% in 1973, a fall of 40%. The US profit share fell from 23.6% in 1965 to 17.4% in 1973, a fall of 13.5%.

An important factor behind the profit crisis was the tendency of productivity growth to stagnate. Had the capitalists been able to secure more rapid productivity increases, together with a continued increase of employment through extensive growth, they could have afforded to concede further rises in real wages. In reality, productivity growth began to slow down as the proletariat reached its period of maximum strength following the peak of the upswing. But why did productivity slow? 

It was partly the result of the exhaustion of the productive potential of the technological systems that were at the basis of the post-war upswing in the ACCs. But above all, it was due to the strength of the working class and their resistance to the intensification of exploitation in the factories. This was reflected in the strengthening of national and workplace organisation, the rise of militancy, and successive waves of strikes.

Recognising the effects of working-class strength in that period has nothing in common with laying the blame for crisis on the working class. Marx himself (in the course of answering the crude under-consumptionist idea that crisis could be averted simply by raising workers' wages) commented on this: 

"… crises are always prepared by precisely a period in which wages rise generally and the working class actually gets a larger share of that part of the annual product which is intended for consumption… It appears then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working class to enjoy that relative prosperity only momentarily, and at that only as the harbinger of a coming crisis". (Capital II, ch 20, section 4, pp486-7) 

"Independent of good or bad will" means conditions which unfold as objective processes, according to the inner logic of the capitalist system, for which the working class is not responsible.


MATT ASKS FOR an explanation of the tendency of capital accumulation to outpace the growth of the employed labour force. It was from this deep-rooted tendency that the profits crisis arose. The profits-squeeze, the conjunctural crisis-factor which came to the fore at the end of the upswing, was (in line with Marx's comment) prepared in the previous period. The crisis of profitability was ultimately an expression of over-accumulation, which arises from capitalism's necessity of treating human labour-power as a commodity.

Capitalists are motivated by an inexorable drive: "Accumulate, accumulate! That is Moses and the prophets!" (Capital I, ch 24, p742) For this they need more and more labour-power, the source of surplus value (profit). The cyclical processes involved are dealt with by Marx in Capital I, chapter 25, The General Law of Capitalist Accumulation. 

Periods of accelerated, frenetic accumulation, Marx says, necessitates "the possibility of throwing great masses of men suddenly on the decisive points [of production] without injury to the scale of production in other spheres. Over-population supplies these masses". (p785) But a prolonged burst of accumulation during the post-war upswing exhausted the reserve army (capitalism's 'surplus population'), which resulted in a labour shortage, with capitalists forced to compete for additional workers, forcing wages to rise.

 Over-accumulation is also dealt with in Capital III, chapter 15, Exposition of the Internal Contradictions of the Law, which deals with the underlying process of capital accumulation as much as the law (or tendency) of the rate of profit to fall.

Capitalism treats labour-power as a commodity, subject to the laws of the market (which is why the fundamental aim of socialism, after all, is the abolition of the commodity form of labour-power). But the reproduction of population (the source of labour-power), while undoubtedly affected by economic conditions, is a human and social process, not part of the circuit of commodity production. There is no economic mechanism under capitalism which ensures that the supply of labour-power will match the demands of accumulation.

Towards the end of the upswing, over-accumulation in relation to the labour force (reinforced by social and political factors which developed in the post-war period) strengthened the working class at the expense of capitalist profits, propelling the world economy into crisis.

A complete analysis of the current world crisis of capitalism has to combine interpretation of the basic contradictions of the system (using the theoretical tools provided by Marx) with explanation of the complex contradictions of today's international economy (with respect, for instance, to international capitalist rivalries, inflation/deflation, volatility of the credit system, trade imbalances, together with 'external' shocks such as political upheavals and wars).

A new period of crisis: high profits, overproduction

PREPARED DURING THE closing stages of the upswing, the profits crisis emerged with full force after the slump triggered by the 1973 oil price rise. 

This was the beginning of a new period of generalised crisis, with an upsurge of inflation and the breakdown of the post-war economic order. Faced with this crisis, the bourgeoisie of the advanced capitalist countries turned away from the policies and practices of the post-war period towards a reassertion of neo-liberal, free-market policies. 

They launched an offensive to claw back the concessions which had been granted to the working class during the upswing, which had resulted in a strengthening of the workers' organisations, a general rise in working-class living standards, and a wave of industrial militancy in the late 1960s and early 1970s. If the workers' post-war gains were of no real significance, as Matt implies, why have the capitalists been so determined to roll them back in the 1980s and 1990s?

Promoting full employment was abandoned in favour of acceptance of a relatively high level of unemployment in order to discipline the working class and drive down wages. State expenditure, especially social spending, has been cut back. Beginning in the US and Britain under Reagan and Thatcher, there has been a drive for labour 'flexibility', ie an end to national wage bargaining, casualisation of the workforce, undermining of trade union rights. 

Through privatisation of state industries, the role of the state in the economy has been drastically cut back, opening up nearly every sector to capitalist competition. This process began in the early 1980s, but was taken much further following the collapse of Stalinism after 1989, which removed the counter-pressure of the (bureaucratically-managed) planned economies, the original pressure for western capitalism to adopt reformist policies in the post-war period. As speculative investment has become increasingly dominant, financial markets have been deregulated.

By the late 1980s the neo-liberal assault on the working class had successfully restored profit levels of the advanced capitalist countries to the peak levels of the post-war upswing. The resurgence of profit, however, has not been accompanied by an investment boom. Growth of net capital stock (the approximate equivalent of constant capital) was much slower than during the post-war upswing. The demand for commodities created by the capital goods sector has accordingly been relatively weaker than during the 'golden age'. Higher levels of profit have come not primarily from higher productivity but mainly from intensified exploitation of the working class (through more intensive management regimes, longer hours, lower wages, etc). Large sections of workers have suffered from lower wage levels, reduced benefits, longer hours, and a reduced 'social wage' (because of government cuts in social spending). At the same time, chronic mass unemployment has appeared in most advanced capitalist countries.

My argument is that, as workers' consumption is an important component of the total demand for commodities (and in the long run determines demand for capital goods), the measures taken by the capitalists in the 1980s and 1990s to restore profits have, in turn, cut the capitalist market. Massive cuts in state spending have also cut the market. The appearance of serious excess capacity internationally in major industries such as motor vehicles, micro-chips, textiles, steel, etc, (which, if utilised, would create massive overproduction of commodities) reflects the current weakness of demand on a world scale. Now, overcapacity (under conditions of intensive international competition between giant corporations) is beginning to undermine profitability. Thus the neo-liberal measures to restore profitability (increasing profits at the expense of wages) are, in turn, undermining profits from another direction (ie through the weak growth of demand).

Matt attributes to me the view that "the crisis has been caused by insufficient demand, although the process began with a decision by the capitalists in response to problems of profitability". This is a very simplistic reformulation. Under the impact of growing crisis towards the end of the upswing (working-class militancy, a decline in profitability, accelerating inflation, soaring raw materials prices, volatility of the world money system, etc) the bourgeoisie of the advanced capitalist countries sought a way out. At first, they moved empirically, basing themselves on, and increasingly attempting to reinforce, new economic and social trends which were emerging (a turn away from labour-intensive and energy/material-intensive manufacturing in the ACCs, a surge of financial speculation, the turn towards globalisation following the breakdown of the post-war money system, the growing rebellion of skilled workers and the middle class against the increasing tax burden, etc).

The process did not begin with "a decision". By degrees (and to a varying extent in different countries) bourgeois leaders rejected Keynesian-type policies and adopted free-market policies (under a variety of labels, monetarism, neo-liberalism, etc). Who would deny, for instance, that Thatcher and Reagan fought a political battle within the leadership of the ruling class for a new strategy? The Reagan administration's policy in 1981 of tightening the money supply and forcing up interest rates had a decisive effect internationally in pushing capitalist governments towards neo-liberal policies. Reagan's ruthless smashing of the air traffic controllers' strike also set the trend for an international offensive against the workers' organisations.

The ideas and policies developed by bourgeois leaders in the late 1970s and early 1980s reflected the pressures of that conjuncture. Their ideological campaign in support of neo-liberal policies was enormously assisted by the collapse of Stalinism and the subsequent swing to the right of western social-democratic leaders. Backed by the power of the capitalist state, the new policies accelerated the emergent social and economic trends.

In the short term, the bourgeoisie has had some success in restoring profitability and forcing the working class onto the defensive. Their policy, however, is based on an extremely narrow, short-sighted rationality which reflects their class interests rather than an objective understanding of the situation they face. The logic of their system is driving them into a new contradiction. The bourgeois reason of the 1980s and 1990s is being transformed into unreason by the unfolding of processes (increased polarisation of society, intensified domination of the world market over national economies) which have been accelerated by the policies they have followed.


Capitalism's Economic and Political Crisis - Lynn's original article which sparked this debate, is still very valuable Marxist analysis of the current world situation, reproduced here.


From Socialism Today July-August 1999 | Home | News | Donate | Join