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by Volkhard Mosler
Monday, Dec. 18, 2017 at 10:39 AM
"Capitalism contains crisis as rain clouds contain rain" (Jean Juares, 19th century socialist). Profits increase in the neoliberal model, not investment (Nicolas Krowall). The competitive pressure drives businessmen to reduce investments in labor and wages.
CAPITALISM CRITICISM 2.0
Karl Marx' Crisis Theory is More Actual than Ever
By Volkhard Mosler
[This article published on 11/9/2008 on Marx 21 is translated from the German on the Internet, www.linksnet.de.]
A specter goes about again. In view of the financial crisis, Karl Marx is being rediscovered everywhere. The Frankfurt Rundschau journal recently had him on its front page. "The Bankruptcy of Capitalism" was announced on another front page. The Hamburg Morgenpost newspaper asked, "Was Karl Marx right?" Even finance minister Peer Steinbrueck told "Spiegel": "Certain parts of the Marxist theory are not inverted."
In fact, what Karl Marx and Friedrich Engels wrote 150 years ago in The Communist Manifesto seems like a description of contemporary conditions: "The modern middle-class society that generates enormous means of production and transportation is like a wizard or sorcerer that cannot control the underground subterranean forces that it created."
In a later work "Das Kapital," Marx described the law driving the capitalist system into crisis. As his central thesis, the cycle of upswings and downswings is due to the chaotic nature of capitalism based on competition. Since there is no central planning of the economy, every business tries to gain the largest possible share of the market by producing as many products as possible. This leads to constant production surpluses where more is produced than can be sold. This is reflected in the profits of businesses. Working hours are lengthened, wages lowered and jobs shifted or completely eliminated. Then the 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 and become worse with time.
The Falling Profit Rate
Marx discovered a special mechanism that operates behind the process of the upturns and downturns of the capitalist economy. He described this as the "law of the falling profit rate." He did not think the revenues would be lower. Rather, the relation of their investments to the profits would be reduced in the course of time. Real value arises from human labor. The value produced by workers is always greater than the wage they receive for their labor. Therefore, the businessman appropriates some of the value that his employees gain. This "surplus value" is the basis of the profit.
The competitive pressure drives businessmen to reduce the share invested in labor and wages. Instead, they invest in technology so they can produce just as much with less human labor. A capitalist can enlarge his piece of the cake by rationalizing production, increasing productivity and the constant reduction of employed workers. However, the result is disastrous for the whole system. The number of workers does not increase as fast as the investments. Still, labor is the source of profit, the energy that keeps the system alive. The crisis is already pre-programmed – if the investments become greater and greater without a corresponding expansion of the source of profit.
Marx saw that the success of capitalism in making enormous investments in the form of new assets must entail a fall in the profit rate and constantly intensifying crises.
Recently, the micro-electronics- and computer industries gave a classic example of this process. The firms that were first on the market made gigantic profits. But the prices collapsed dramatically when the productive capacity of the branch grew and more rivals entered the arena. The profit rate fell and the weakest firms like Nixdorf, for example, went under. Individual firms believe they can raise their profits through new technologies. They could do this as individual firms. However, pursuing their individual competitive goals produced the opposite effect since the common goals of all capitalists were undermined. That is what Marx meant by the contradictory nature of capitalism. This does not mean the profit rate falls continuously in the history of capitalism. If that were the case, the system would have come to a standstill long ago. Marx himself mentioned a series of "counter-veiling forces."
An extraordinary increase in the exploitation rate depresses the living standards of workers. This is an example of a fact that counteracts the fall of the profit rate. Access to cheap raw materials through foreign trade is another. The price reductions or "devaluation of constant capital" are most important, according to Marx.
Increased productivity in industrial branches that produce products like machines or raw materials causes a decline in the value of their products in every branch. This decline means more than the means of production becoming cheaper. It also brings about what Marx called the "moral wear-and-tear" in the use of capital. Capitalists with older and more expensive machinery face rivals with newer and cheaper equipment and have a competitive disadvantage. The older machinery is subject to a forced devaluation. This reduces the value of constant capital and counteracts its tendency to grow.
Still, this devaluation represents a loss of value for the impacted firms. For that reason, it increases their problems at least in the short term. There are parallels here to the growth of unemployment or the reserve industrial army, as Marx described. Higher unemployment helps the capitalists in their offensive against the organization of workers in production and in this way contributes to the production of potential surplus value or profit. However, unemployment in the short term magnifies the problems of capitalists in selling their products or realizing a profit.
So there is no simple way out of these problems for capitalists. The effect of "counter-veiling forces" is strongest in crisis times. This is important to understand. When the system expands quickly and the accumulation multiplies, the growth of the organic composition of capital has the upper hand over the counteracting tendencies. As a result, the profit rate falls. Nevertheless, crises can at least temporarily help capitalism get over its problems. Considering another aspect of the system – the role of the banks – is rewarding to better understand the dynamic of the crises.
Banks, Stock Exchanges, and the Credit System
The profit of industrial capitalists does not only result from the surplus value produced by the workers. Parts of that profit go to landowners as rents, to the state as taxes and to banks and investors as interests. Industrial capitalists are ready to hand over a part of the bounty to banks and other financial institutions since they play a useful role in the system. Great sums of money must be accumulated before they can invest. Until this point is reached, they can deposit their surpluses at the bank and borrow capital if they do not have enough money.
The banking system actually helps accelerate the process of accumulation. This happens by redirecting the money from those hesitant in investing to those willing to invest.
Banks are powerful institutions and aid in accelerating the centralization of capital into great monopolies. They also help drive weak capital in the red into bankruptcy when they block their credits. The interest rate for loans rises when the upswing reaches its peak. The demand for investment loans grows. The exploitation of future profits nourishes speculative businesses on the stock exchange and in the commodity trade. Capitalist are ready to bet on increasing profits and prices enabling them to repay their debts with interests. However, the financial market and the stock exchanges are always dependent on profit or surplus value generated in production.
The financial markets represent what Karl Marx called "fictional capital." Their activities do not create any new assets or expand production. Therefore, they ultimately depend on the health of the real economy while playing with the profits gained by the workers. While the stock prices may be exaggerated, they stand in a relation to the dividends poured out by the businesses which depend on the profitability of the economy.
When profits fall, businesses reduce their dividend payouts and this lowers the price of their shares. Markets create speculative bubbles that must burst sooner or later. This has real effects.
The banks could collapse. They lend "the money of other people." The bank becomes insolvent when all the investors try to get back their money. The bank cannot survive this if the state or Central Bank does not intervene. The whole financial system can collapse as happened most dramatically in 1931. A credit-crunch as with the current 2008 financial crisis means even reliable firms cannot borrow money anymore. The possibility of revitalizing their machines or paying for their credits is taken from them. In the worst case, they could be driven into bankruptcy.
The Crisis Today
What we witness today is that the unending worldwide crisis replaces the earlier ups and downs of the economy, the constant change of upswings and downswings. The German economy has not recovered from the 1974 crisis though the country likes to present itself as an exemplary or model country of growth. The economic upturns have become flatter and shorter. They are no longer enough to substantially reduce unemployment. There are still not enough investments to overcome the crisis. This is true for Britain, France and Japan and not only for Germany.
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