This diary series is a slightly edited version of Contradictions of Capitalism, a book that I wrote in the early 90's which is still available now on Amazon. I have updated some parts of it to reflect the very important changes in the corporate economy since the mid-1990s with the appearance of a global economy rather than a national, which has important effects which much of the socialist movement has still not fully grasped.
Previous entries in this series can be found here:
Part One: http://www.dailykos.com/...
Part Two: http://www.dailykos.com/...
Part Three: http://www.dailykos.com/...
Part Four: http://www.dailykos.com/...
FIVE: Contradictions and Crises
The most obvious of the stresses and internal conflicts in the monopolist system can be seen in the global scramble for neo-colonies and in the militarization needed to support this scramble. The monopolist who attempts to dominate a foreign comprador regime will be met and opposed by rival international capitalists, who are driven by the same imperatives to expand their own sources of profit. This economic struggle for control of markets is invariably reflected in the military sphere as well, as the respective national states come to the aid of their own monopoly capitalists. Thus, conflicts, wars and tensions will arise over which monopoly nation will dominate this or that neo-colony. The Spanish-American War, both World Wars, and nearly every war since, were all fought over the question of who would control the world’s economic neo-colonies.
After the monopolists have divided up all of the world’s neo-colonies into stable shares (“spheres of influence”), the only possible readjustments take the form of the seizure of one imperialist’s neo-colonies by another. In extreme cases, this may take the form of direct military conquest, as it did when the US seized Cuba and the Philippines from Spain, Germany seized Alsace-Lorraine from France and Japan seized the British and Dutch colonies in Southeast Asia. Conflict and war are inevitable as stronger monopolists attempt to wrest control of desirable areas from weaker imperialists.
Thus, the non-industrialized “Third World” serves unwillingly as the battleground for rival imperialist blocs, who are driven by economic necessity to wage war in order to expand their sources of profit. World peace is impossible under monopoly capitalism—not because the leaders of these nations are aggressive or evil, but because they are the victims of an economic system which must be expansionistic in order to survive.
At the same time, the capitalist system is steadily weakened by stresses and strains which arise within its own structures. We will study these stresses in some detail, since, although their basic roots remain the same, these crises are manifested differently at varying levels of capitalist development.
In early competitive capitalism, crises manifest themselves most often in the form of “disproportionality”. This is a function of the planless, haphazard process of capitalist production. The price of a commodity is determined by the interaction of supply and demand, but, in the capitalist system, each individual producer operates with insufficient knowledge concerning either of these two factors.
In the absence of a planned economy, the capitalist is forced to estimate as best he can the demand for his commodity. This estimate, however, is seldom accurate. And, because each manufacturer produces as an isolated entity, the capitalist has no way of knowing what the total supply of a commodity will be, since he cannot know the amounts of commodities which will be produced by other manufacturers. The result is a constant fluctuation of prices, since the capitalists consistently produce “too much” or “too little” supply for the current demand.
These fluctuations in exchange-value are dangerous to the capitalist, since changes in price directly affect the proportion of surplus value which the capitalist is able to realize. If prices fall too low, the capitalist will be unable to realize any surplus value at all, and will lose a portion of his capital.
The disproportionality crisis results from this inability of the capitalist to rationally match the needed supply with the given demand. Because of this “anarchy of production”, it is a mere happy coincidence when supply does match demand. The normal situation is for prices to fluctuate around the value of the commodity.
Once the stage of monopoly capitalism has been reached and industries are dominated by large oligarchies, however, the character of these crises changes. This new form of crisis is known as “overproduction”.
The machinery and technological progress introduced by capitalism are, it is obvious, greater than those of any other economic system hitherto in existence. The productive abilities of modern monopoly capitalism are astounding, and are capable of turning out commodities at a rate which would astonish our feudal predecessors. As the productivity of human labor continues to be increased by monopolist technology, the capabilities of these productive forces will continue to expand enormously.
Once the production of commodities reaches a certain level, however, it outruns the ability of the market to absorb these commodities. In order for the monopolist to realize all of his surplus value, he must be able to sell all of the commodities which contain it. The monopolist who is able to produce a million toasters, for instance, cannot realize any profit at all unless he is able to sell them.
In classical capitalist economics, total income is assumed to always equal total costs, since every “cost” paid out by the capitalist is somebody else’s “income”. The money paid for raw materials or production equipment, for example, is in turn used as wages for the workers who produce them, allowing these workers to purchase other commodities which the economy produces. In theory, then, effective demand in a capitalist economy is always capable of absorbing the effective supply.
The super-profits of the monopoly system, however, combined with the enormously high productivity of monopolist technology, upset this relationship. When the monopolist receives a higher income from profits and increased surplus value, his effective demand for commodities does not increase at the same rate. This is a function of one of the primary characteristics of the capitalist system—the capitalist does not produce commodities for use-value, he produces only for exchange-value. In other words, the capitalist does not sell products in order to obtain money to buy the things he wants – instead, he sells simply in order to have more money to produce more commodities for sale. Of his profits, only a small portion are used to buy commodities which he wants for their use-value. The majority of the surplus value is instead reinvested back into more productive capability, which in turn produces still higher profits for him.
As more surplus is appropriated by the monopolist, and as the productivity of the economy continues to rise, an inherent contradiction begins to make itself felt. Increased investment in productive ability leads to an increased number of commodities. These commodities are not given away for free, however; they are only exchanged if they can be sold. The capitalist does not produce bread so that starving people can feed themselves; he produces bread to sell for a profit. If people have no money, they get no bread. The capitalist, after all, isn’t in business to feed hungry people – he’s in business to make money.
Since the income of non-capitalists is limited, and since in any case an increasing portion of the wealth goes to the monopoly capitalists, the ability of consumers to buy all of these commodities soon becomes severely limited, and productive capacity soon outpaces the effective demand. This “demand crunch” produces a glut in the market. It is important to keep in mind that this glut does not result from every consumer obtaining as many of these commodities as they need; it is caused by the unwillingness of the capitalist to exchange the commodity with anybody who does not have the money to pay for it.
The monopolist is thus left in a position in which he cannot sell all of the commodities which he is capable of producing. Faced with such a glut, it does no good for him to continue to reinvest his profits into expanded productive capacity, since he already cannot utilize the productive ability he has. Instead, under these circumstances, the monopolist simply chooses to save his capital until it can be reinvested profitably. In other words, this money is taken out of the process of capital circulation.
The effect of this is drastic. As this money is withdrawn from circulation, the purchasing power of workers in the production industries (who use these “costs” as wages) falls, aggravating the demand crunch and leading to further overproduction. This whole situation is caused by the growth of the monopolist’s surplus value at a rate higher than he can find profitable ways to reinvest it. The monopolist quite literally has more money than he knows what to do with. As a result, he simply doesn’t do anything with it.
The only way to restore this situation to profitability is to reduce productive capacity. In this way, the disproportion between supply and demand causes idled productive capacity, layoffs of workers, shutdowns of plants, and increased unemployment—in other words, a recession. The Great Depression resulted, in large part, because of the almost simultaneous appearance of this overproduction problem throughout the capitalist world. The same is true of the economic recession of the early 1990’s. We can see that a progressively lower utilization of productive capacity (and with it a corresponding increase in the unemployment level) is an inherent feature of late monopoly capitalism.
This tendency towards overproduction can perhaps best be illustrated mathematically. The capitalist economy can be divided into two types of industries, those that manufacture consumer-oriented commodities (televisions, automobiles, food, etc.) and those that manufacture production-oriented commodities (factory machinery, computer systems, conveyor belts, etc.). Let us assume that the sector which produces productive machinery is called P, and the sector which produces consumer goods is called K. Then, the total value of the sector P is:
P = Cp + Vp + Sp
where P is the total value of the production sector, Cp is the total constant capital invested in this sector, Vp is the total variable capital, and Sp is the total surplus value produced. The total value of K, in turn, is:
K = Ck + Vk + Sk
where Ck, Vk and Sk are, respectively, the constant capital, variable capital and surplus value invested in consumer commodities.
The interaction of these two sectors is important to the capitalist system. To illustrate this relationship, let us first consider the case of simple reproduction, in which the expansion of productive capacity is not a goal; we assume that all values are merely to be reproduced, not increased. Under these conditions, we can safely assume that all surplus value is used by the capitalist to buy consumer goods.
The value to be created in the productive sector P must equal the total constant capital invested into both spheres of the economy, since all of the machinery and technology utilized in both sectors is produced by the P sector. Or, to put it another way, the total value of P must be enough to replace the depreciation of the total means of production used in the economy:
P = Cp + Ck
The total value produced by the consumer sector K, on the other hand, must be matched by the consumptive ability of the economy, in the form of wages and profits. Thus, the value of K must be equal to the total surplus values and variable capital of both sectors:
K = (Vk + Vp) + (Sk + Sp)
where K is the total consumer output, Vk + Vp is the total wage income for both sectors and Sk + Sp is the total profit income from both sectors.
So far, we have assumed that no expansion is made in the total values of P or K. In reality, however, the capitalist system is driven by a constant need to expand production. This expansion comes from reinvesting a portion of surplus value back into expanded productive ability. Thus, to fully understand this process, we must break down the total surplus value according to its use by the capitalist. Therefore:
Sk = Sk1 + Sk2 + Sk3
where Sk1 represents that portion of surplus value from the consumer sector which is used for the capitalist’s own consumptive needs, Sk2 is that portion of surplus value which is earmarked for the purchase of additional constant capital, and Sk3 is that portion used for increasing variable capital. In other words, Sk1 goes for the capitalist’s personal use, Sk2 is used to buy more machinery, and Sk3 is used to pay more workers. These same divisions are made in the P sector.
In simple reproduction, as we have seen, the productive capacity of P must exactly match the values of constant capital in both sectors. If the economy is to expand, however, the output of the productive sector P must be greater than the depreciation which results in both sectors, or:
P > Cp + Ck
In reality, P will increase according to the amount of new value that is invested in constant capital in both sectors:
P = Cp + Ck + Sp2 + Sk2
This gives the mathematical relationship:
Vp + Cp + Sp = Cp + Ck + Sp2 + Sk2
which can also be written as:
Vp + (Sp1 + Sp3) = Ck + Sk2
The left side of this equation is Vp + (Sp1 + Sp3), where Vp is the production sector’s total variable capital, Sp3 is that portion of surplus value which is reinvested into the production sector’s variable capital, and Sp1 is that portion of the production sector’s surplus value which is used for the capitalist’s personal needs. In other words, it represents the total consumptive ability (demand) of the production sector of the economy.
The right side of this equation, on the other hand, is Ck + Sk2, where Ck is the total constant capital of the consumer section and Sk2 is additional constant capital investment from the consumer sector’s surplus value. In other words, it represents the total productive ability (supply) of the consumer sector.
In its simplest form, then, this relationship indicates that, in order for production between the two sectors of the economy to be in equilibrium, the demand created by the production sector must be capable of absorbing the supply created by the consumer sector.
Since the tendency, under monopoly capitalism, towards the higher use of machinery and technology requires that a greater portion of capital is invested in constant capital rather than variable (in machinery rather than wages), and since the surplus value used for the capitalist’s own consumption increases much more slowly than the total surplus value, the tendency is for the value of Sk2 in this equation to increase faster than either Sp1 or Sp3. This tends to produce the unequal relationship:
Vp + (Sp1 + Sp3) < Ck + Sk2
In other words, the productive ability of the consumer sector tends to grow faster than the consumptive ability of the production sector. This, in turn, upsets the equilibrium between these two sectors, and leads inexorably to the overproduction of commodities.
Given the anarchy of capitalist production, the monopolists have no way of rationally matching supply with demand, and no way of maintaining this equilibrium relationship. Further, since the operations of circulating capital from M to C and from C to M’ (that is, the operations of buying and selling) are completely separated under capitalism, the monopolist has no way of knowing when this equilibrium has been disturbed until it is too late. By this time, the damage is already done—the market is glutted and invested capital can find no profitable outlet.
In fact, the widespread use of credit in the monopolist economy has made it more likely that the capitalist will continue to overproduce for a time. Since the capitalist can borrow the capital he needs for new investments, it is not necessary for him to realize the surplus value or profits from one production cycle before beginning another. Thus, he is able to continue his production despite the fact that he has not yet realized the surplus value from his previous production. This only deepens the overproduction crisis.
The monopolists are faced with a grave situation. Since it is impossible for the capitalist to sell all of his commodities, he must face the fact that a portion of his surplus value will be unrealizable—that is, it cannot be transformed from C to M’. Since capital is now no longer returning the average rate of profit, the monopolist has no choice but to cut back on his capital reinvestment. By bringing to a stop new investment in productive capacity and by idling those resources already present, the capitalist lowers the values of Ck and Sk2. The supply side of the equilibrium relationship now drops in relationship to the demand side, and a temporary balance is restored.
New increases in productivity, however, soon cause consumer output to rise again and eventually leads to another overproduction crisis. Once again, the capitalists are forced to idle productive capacity in order to continue to bring in the average rate of profit. Thus, the long-term tendency of monopoly capitalism is to periodically restrict the productive ability of the economy, and to progressively lower the rates of utilization of productive ability. Rather than producing a steady increase in productive ability, late monopoly capitalism is forced to produce a steady decline.
In order to extract himself from this lethal situation, the capitalist must find ways to increase his market and thus to dispose of those commodities which his productive ability can produce but which his market cannot absorb.
This can be done in several ways. One of the most common is that of “planned obsolescence”, in which commodities are produced which are deliberately designed to wear out or break down quickly so they must be replaced. A commodity that is planned to last only half as long as its predecessor generates twice the effective demand, and twice the sales. This tactic has led to the widespread “throwaway society”, in which everything from diapers to flashlights are disposable, producing a constant demand for replacements.
Another effective manner of expanding demand is through advertising. The entire huge networks of advertising and sales which are set up by the corporations are essentially nothing more than blatant attempts to create demand. By creating new commodities and then, through advertising ploys, convincing consumers that they need these commodities, effective demand is expanded.
As an added bonus, from the point of view of the monopolist, the advertising and sales networks create what could be called “nonproductive consumption”, in which demand for commodities can be increased without a corresponding increase in supply. Advertising and sales people, for instance, do not produce any new commodities, but their salaries and wages can be used to purchase commodities, and thus help alleviate the problem of overproduction.
The largest player in this scheme is the so-called “welfare state”. State programs such as welfare, food stamps and other transfer payments increase the purchasing power of consumers without adding to productive capacity, and thus help to counter the tendency towards overproduction. Non-consumer manufacturing, particularly the huge bloated military procurement network, also pay out huge salaries and wages, but the commodities produced by these networks are not consumer or production commodities, and thus do not aggravate the overproduction cycle.
Another factor that is of growing importance is the expansion of overseas markets. Until the onset of the monopolist overproduction crisis in the 1930’s, the investment of capital overseas was concentrated in high-yield plantation agricultural products and in extractive industries such as oil or ores. Neo-colonies served largely as sources of cheap raw materials, and hardly at all as outlets for the capitalist’s finished commodities.
Modern monopolists, however, faced with a recurring demand crunch, have been forced to turn their neo-colonial emphasis from cheap labor and resources into expanding markets for commodities. The monopolist who wishes to sell his commodities to the underdeveloped neo-colonies, however, quickly runs into an awkward problem—these neo-colonists have no money to spend on the monopolist’s consumer commodities.
Thus, the imperialist monopolists now have no choice but to help these neo-colonies expand their income, thus enabling them to purchase the consumer commodities produced in the monopolist factories. Since the end of the Second World War, the international monetary system has embarked on a program of technical aid and financial backing to establish sources of income in the neo-colonies.
For the most part, this effort has been concentrated in such non-productive enterprises as communications, utilities and transportation. Productive enterprises have for the most part remained in monopolist hands, and thus pose no potential source of competition to the monopolist cartel. (Lately, the monopolists have begun moving productive factories to the neo-colonies on a large scale, but these factories are at all times owned and controlled by the monopolists). These enterprises expand the purchasing ability of the neo-colony (and also allow the monopolists to lower their variable capital investments), and thus help to offset the demand crunch.
Despite these palliatives, the overproduction crisis is never far away. In the 1970’s, when military spending failed to play a large role, the tendency towards stagnation reappeared, as it did again in the early 1990’s. Even in the “boom times”, such as the early 1980’s, full productive capacity is never utilized, and a growing portion of productive forces are idled and un-used (as reflected in the rising rate of acceptable “frictional” unemployment).
In the 1980’s, the US tried to combat the overproduction crisis with a massive campaign of Keynesian debt spending, and succeeded in delaying the demand crunch. Unfortunately for the US monopolists, however, the huge budget deficit produced by this strategy resulted in a currency imbalance which made it easier for Japanese and European monopolists to enter the US market, undersell the US cartels, and snap up most of the demand thus created.
Thus, the continual increases in productive ability which are demanded by the needs of capital expansion routinely fall victim to the inability of the capitalist system to support this increased productive ability. Even during those times when productive ability is steadily increasing, another trend within the capitalist system eats away at this growth and eventually reverses it, returning the economy to its normal state of stagnation. This internal contradiction within capitalism centers around the rate of profit.
In his work Capital, Marx dwells at length on the problems posed to competitive capitalism by the rate of profit. As the capitalist system develops, the crises associated with the rate of profit tend to change in character. It is therefore worthwhile taking a look at how Marx assessed the problem of profit rates in competitive capitalism.
A few definitions are necessary first. The rate of profit is defined as the proportion of surplus value to the amount of capital needed to produce it, or:
P = S / C + V
The rate of surplus value is the proportion of surplus value generated to the amount of variable capital used to produce it, or:
S’ = S / V
The degree of industrialization of the economy is known in Marxian terms as the “organic composition of capital”, and is commonly represented by the letter Q. Q consists of the proportion of constant capital to total capital, or:
Q = C / C + V
From these definitions, we can derive the mathematical relationship:
P = (S / V) (1 - Q)
We are now ready to examine what happens to the rate of profit under varying organic compositions of capital.
In order to expand his productive forces and increase productivity, the capitalist introduces machinery and equipment into the production process. Since heavily-mechanized industries tend to be capital-intensive rather than labor-intensive, the capital invested in machinery tends to increase much more quickly than that invested in labor. The numeric value of Q reflects this increasing mechanization, and rises. For example, if we assume a value of 40 for V and insert amounts for C of 100, 120 and 200, we get for Q:
Q = 100 / 100 + 40 = 100 / 140 = 0.71
Q = 120 / 120 + 40 = 120 / 160 = 0.75
Q = 200 / 200 + 40 = 200 / 240 = 0.83
As the value of Q rises, the rate of profit must fall, assuming that the rate of surplus value remains the same. Assuming a steady value of 20 for S, we obtain for the rate of profit:
P = (20 / 40) (1 - 0.71) = 0.145
P = (20 / 40) (1 - 0.83) = 0.082
Thus, when the capitalist uses increased machinery and mechanization, and invests a higher proportion of his capital in this area, his rate of profit falls accordingly. This should be obvious—the more expensive the machinery and equipment he uses, the more money he must spend in order to produce the same amount of surplus value with it.
We have assumed, however, that the surplus value which is produced is the same for varying rates of Q. This, of course, is an unrealistic assumption, since the capitalist will not invest in new machinery unless by doing so he can increase the productivity of his workers enough to offset the higher costs. If we assume that the new machinery increases the value of S from 20 to 40, we get a new profit rate of:
P = (40 / 40) ( 1 - 0.83) = 0.17
The introduction of new machinery, instead of lowering the rate of profit, has now doubled it.
It is thus apparent that the increasing mechanization of the productive process cannot by itself lead to a tendency for the profit rate to fall. However, the increasing productivity brought about by the process of mechanization is the root cause of the overproduction crisis, which lowers profit levels by reducing the realization of surplus value.
There is also another process which tends to lower the profit rates in the capitalist economy. Since a worker is, in the capitalist system, a commodity like any other, its market price (in the form of wages and compensations) is subject to the same market process of “social necessity” as any other commodity. As labor-saving machinery is introduced at swifter and swifter rates, large numbers of workers find that their labor power is no longer needed by the capitalists. In other words, a portion of the labor force finds itself to be “socially unnecessary”, and the price of labor power (wages) tends to fall.
As profits thus expand and are reinvested into new productive ability, the demand for labor power once again rises, and in practice, during periods of economic growth, the demand for new labor power tends to outpace the number of workers who are idled due to labor-saving machinery. As a result, the demand for labor tends to be higher than the available supply, and wages are forced up as capitalists bid against each other for the increasingly scarce work force.
This steady rise in wages, however, produces a corresponding decline in the profit rate, and this decline will take place faster than the capitalist can counter it by introducing labor-saving machinery. Thus, the capitalist must still spend more capital in order to make a profit, but now his rising costs are in the area of variable capital or wages rather than in constant capital or machinery.
The capitalist is thus faced with an insoluble contradiction, as periods of economic expansion contain within them the seeds of their own demise. As expanding productive forces use up the available reserve of workers, the price of labor power (wages) is driven up. And, as the level of wages rises, that of profits falls.
The inescapable result is recession, in which profits fall below an acceptable level, reinvestment of capital is reduced, and the economic expansion slows and then reverses. As production is cut back, workers are laid off to once again produce an idle reserve of labor power, and wages fall.
As wages fall, it once again becomes profitable to reinvest in production, and the economy begins to expand once again. The cycle starts all over again.
This is the essence of the capitalist “business cycle”, the periodic pattern of boom and bust. These cycles of expansion and recession, it can now be seen, are not the results of incompetence or incorrect decisions made by business or government leaders; they are an integral and intrinsic part of the capitalist mode of production and cannot, within the framework of capitalism, be either fixed or avoided.
In modern monopoly capitalism, the twin trends of overproduction and cyclical profit rates tend to aggravate and reinforce each other. To counter the rising costs of labor, the capitalist introduces labor-saving machinery, and thus eliminates a large number of workers. This, however, produces another awkward problem—eliminating wage income for workers at the same time reduces the market for the capitalist’s commodities, by reducing disposable income and decreasing demand. The problem is best illustrated by a story (perhaps apocryphal) which is told about United Auto Workers President Walter Reuther. One day, it seems, the Ford Motor Company decided to replace all of the workers on an assembly line with robots, and invited Reuther to tour the facility. As they walked along the row of clattering machines, a Ford executive remarked, “Well, Walter, how are you going to be able to get these robots to go out on strike?” Reuther, after a moment, promptly replied, “Well, sir, how are you going to get these robots to buy Fords?”
Thus, despite falling wages levels, it is still not profitable to reinvest in increased productive ability. The economic expansion which had always followed the recession is now uncertain, and the monopolist economy tends to degenerate into a continuous state of idleness, unemployment and stagnation.
The only long-term way out of this lethal situation lies in the development of overseas markets to absorb the monopolist’s productive ability and ease the demand crunch, and this seems to be the direction most monopolists have chosen. This, however, will present an entirely new set of problems. Up to this point, we have limited our economic analysis to the industrialized monopolist nations. Now, in order to understand the full picture, we must turn to the non-industrialized economic neo-colonies.