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by Volkhard Mosler
Friday, Oct. 02, 2009 at 8:34 AM
Marx identified the falling rate of profit and the self-destruction of competition as contradictions of capitalism. Wages do not keep up with investments in machinery. Speculation and the explosion of the financial markets were encouraged by deregulation and higher profits.
CAPITALISM CRITICISM 2.0
The crisis theory of Karl Marx is still cogent
By Volkhard Mosler
[This article published in: marx 21, 11/9/2008 is translated from the German on the Internet, http://www.linksnet.de/de/artikel/23848.
Volkhard Mosler is a sociologist and member of DIE LINKE (The Left Party) in Frankfurt.]
The specter reappears. In view of the financial crisis, Karl Marx is rediscovered in many places. The Frankfurter Rundschau recently had him on their front page. Under the heading “The Bankruptcy of Capitalism,” the paper quoted passages from the Communist Manifesto. The Hamburg Morgenpost also asked: “Was Karl Marx Right?” German minister of finance Peer Steinbruck told "Der Spiegel:" “In general, certain parts of Marxist theory are not so perverse.”
In fact, what Karl Marx and Friedrich Engels wrote 150 years ago in the Communist Manifesto reads like a description of today’s conditions. “Modern bourgeois society that devised tremendous means of production and transportation is like a sorcerer who can no longer control the subterranean forces that it provoked.”
In his later work “Das Kapital,” Marx explained the law that drives the capitalist system into crisis. Its central thesis is that the cycle of upswings and downswings are owed to the chaotic nature of capitalism based on competition. Since there is no central planning of the economy, every business tries to corner the largest possible share of the market by producing as many products as possible. More is constantly produced than can be sold which leads to production surpluses. This is reflected in the profits of businesses and forces them to pass on the pressure to their employees. Working hours are lengthened, wages lowered and jobs outsourced or even dismantled. Employees have less money to buy things, which intensifies the crisis until the system goes into recession. Such economic crises come and go in capitalism but become worse with time.
THE FALLING RATE OF PROFIT
Marx discovered that a special mechanism operates behind the process of upswings and downswings of the capitalist economy. He described its functioning as the “law of the falling rate of profit.” He did not mean the revenues would decline. Rather, Marx said, the relation of investments to the profit brought by these investments tends to decline in the course of time. Real value only arises out of human labor. The value that workers produce is always greater than the wage they receive. The businessman appropriates some of the value gained by his employees. This “surplus value” is the foundation of profit.
Competitive pressure drives businessmen to reduce the share invested in labor and wages. Instead they invest in technology with which they can produce just as much with less human labor. A capitalist can enlarge his share of the cake through rationalization of production, increased productivity and constant reduction of employed workers. But the result is disastrous for the whole system because the number of workers does not increase as fast as the investments. However labor is the source of profit and the energy that keeps the system alive. When investments become ever greater without a corresponding expansion of the source of profit, the crisis is already pre-programmed.
Therefore Marx saw the success of capitalism in amassing enormous investments in the form of new assets must cause a falling rate of profit and constantly intensifying crises.
Most recently the micro-electronic- and computer-industry is a classical example for this process. The firms that arrived first on the market make tremendous profits. But the prices dramatically crashed when the branch’s production capacity grew and more rivals entered the arena. The profit rate fell and the weakest firms went under. Individual capitalists believe they can increase their profits through new technology. As individuals, they can do this. But the pursuit of their individual competitive goals undermines the common goal of all capitalists. This is what Marx described as the contradictory nature of capitalism. This does not mean the profit rate continuously fell in the history of capitalism. If this were true, the system would have already come to a standstill. Marx mentioned a series of “contradictory causes.”
An extraordinary increase of the exploitation rate forcing down the living standards of workers is a fact that counteracts the falling profit rate. Access to cheap raw materials through foreign trade is another. The reduced price or “devaluation” of constant capital is most important, according to Marx.
Higher productivity in industrial branches that produce means of production like machines or raw material causes a decline in the value of their products in every branch. This decline means that the means of production becomes cheaper and also brings about what Marx called “moral obsolescence” in the utilization of existing constant capital. Capitalists with older and more expensive machinery in operation face rivals with newer and cheaper equipment. They suffer a competitive disadvantage. The older machinery is subject to a forced devaluation. This diminishes the value of constant capital and counters a tendency to growth with ensuring effects on the profit rate.
This devaluation represents a loss of capital value for the affected firms. Devaluation increases their problems at least in the short term. There are parallels here to the growth of unemployment or the industrial reserve army, as Marx called it. Increasing unemployment helps capitalists in their offensive against the organization of workers in production and in this way contributes to the production of potential surplus value. But unemployment increases the problems of capitalists in selling their products and in realizing surplus value in the short-term perspective.
Thus there is no simple way out for capitalism from its problems. The effect of the “counteracting causes” is strongest in crisis times. If the system quickly expands and the accumulation has a high speed, the growth of the organic composition of capital has the upper hand over the counteracting tendencies. As a result, the profit rate falls. However crises can help capitalism over its problems at least from time to time. To better understand the dynamic of crises, another aspect of the system – the role of the banks – should be emphasized.
BANKS, STOCK EXCHANGES AND THE CREDIT SYSTEM
The surplus value produced by workers does not only create the profits of industrial capitalists. Parts of that surplus value go to landowners as rents or leases, to the state as taxes and to banks and investors as interests. Industrial capitalists are ready to cede a part of the spoils to the banks and other financial institutions because these play a useful role in the system. Capitalists must amass enormous sums of money before they can invest. Until this point is reached, they can deposit their surpluses at the bank. Capitalists who are ready to invest but are without enough money can lend it. The banking system actively helps accelerate the process of accumulation. This happens in that money is transferred from those who hesitate with investments to those willing to invest.
Banks are powerful institutions. They help accelerate the centralization of capital to mammoth monopolies. They also contribute to driving capitalists rich in losses into bankruptcy when they block their credits. When an upswing reaches its peak, the interest rate for loans rises. The demand for investment loans grows. The expectation of future profits encourages speculative businesses on the stock exchanges and in commodity trading. Capitalists rely on higher profits and prices to pay back their debts with interest. The financial market and the stock exchange always depend on producing surplus value in production.
The financial markets represent what Karl Marx described as “fictional capital.” Their activities do not create any new assets or expand production. They play with the profits gained by workers and therefore ultimately depend on the health of the real economy. As exaggerated as the stock prices may be, they are in a relation to the dividends poured out by businesses depending on the profitability of the economy. When the profits fall, businesses reduce their dividend payments forcing down the price of their stocks. Markets can lag behind the development of real profits for a long time. But then they create a speculative bubble that must burst sooner or later. When that happens, there are real effects.
The banks themselves could collapse. They lend the money of other people. When investors all try to get their money back, the bank becomes insolvent. If the state or the central bank does not intervene, the bank cannot survive. The whole financial system can break down as happened most dramatically in 1931. A credit crunch as in the present 2008 financial crisis means money cannot be lent any more even to reliable firms. The possibility of replacing machines or paying their running credits is taken from them. In the worst case, they could be driven into bankruptcy.
THE CRISIS TODAY
The unending worldwide crisis has replaced the earlier ups and downs of the economy, the constant alternation of crisis and upswing. We experience this today. In Germany that likes to pose as the model land of growth, the economy has not really recovered since the crisis of 1974. The economic upswings have become flatter and shorter. They are no longer enough to substantially reduce unemployment. There are not yet sufficient investments to overcome the crisis. This is also true for Britain, France and Japan, not only Germany.
Marx predicted the crises of capitalism must necessarily intensify because the source of profit, labor, does not grow nearly as fast as the investments necessary to hire workers.
At the time Marx was writing, the value of the factories and equipment necessary to employ workers was still fairly low. Since then, it has increased dramatically. Today a job often costs 100,000 Euros or more. Competition has forced firms to build even larger facilities and more expensive equipment. We have arrived at that point at which the acquisition of machinery leads to downsizing the work force in most branches of industry. Jobs in key industrial nations will continue to decrease in the coming years.
Capitalists consider very carefully whether their investments will bring profit or not. If their investments quadruple while their profits only double, they hesitate. This is exactly what happens when industry grows more quickly than the source of profit, labor. Marx predicted a point in time would come when each new investment seemed a dangerous adventure. The expenditures for a new facility and new equipment would then be colossal while profit margins would be lower than ever. Once this point arrived, individual capitalists and/or capitalist states would forge plans for enormous new investments – and at the same time fear realizing these plans because of fear of bankruptcy. The world economy today is nearing this point.
MARX IS NECESSARY
The crisis-charged development shows that the fundamental ideas and concepts of Karl Marx’s “Das Kapital” have not lost any of their significance. Capitalism has grown considerably in its range and changed its form. But it is still based on the daily work of wage earners. Capitalism is still ruled by the sharp and sometimes bloody competition among capitalists themselves. More than ever it tends to chronic crises that reveal the limits of its historical range.
Nevertheless the result of the present crisis period cannot be predicted. Marxism help[s us understand what is happening and serves as guidance for action. It cannot predict the definitive collapse of capitalism. This depends on workers recognizing the world as it is, that their work keeps this system going and that they have the power to end it.
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