By Bill Dunn
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Can Marxism explain the crisis?

This article is over 10 years, 9 months old
Recent panic in the stock markets has led some commentators to ask whether Karl Marx might have been right after all. Bill Dunn explains some of the core ideas at the heart of Marx's understanding of capitalism and shows how they can be used to explain the system's current crisis
Issue 363

Worries that banks might not get the returns they expected from lending to Greece and other states have provoked a fresh round of stock market panic. The International Monetary Fund (IMF) has downgraded its global growth forecast for 2012 to 4 percent. By coincidence, this is exactly the same figure that in October 2008 it predicted for 2009. It had no idea, even after it had begun, that we were in for a spectacular contraction.

The IMF was not alone. The story of the queen asking the director of research at the London School of Economics why nobody saw the crisis coming is now familiar. Because mainstream economics celebrates capitalism it cannot anticipate its problems or provide lasting solutions. Its claims to be an objective science repeatedly collapse.

Such mainstream thinkers – sometimes referred to as “neoclassical” economists – teach that there cannot be systematic misjudgements. The millions of individual choices in the market balance out. Unfortunate losses are matched by unanticipated gains. It is an imaginary world where bankruptcy protection and government bailouts simply do not exist. Outside interference is typically blamed for any inefficiencies in the market. The free market is self-correcting, or would be if only it were really allowed to run free.

The return of Keynes?

A smaller, but better, group of economists acknowledge major problems in the global economy. In particular, interest has revived in the tradition of John Maynard Keynes, the British economist who among other things advocated government spending as a response to the Great Depression of the 1930s. Writers like Joseph Stiglitz and Paul Krugman have called for renewed economic stimulus and have opposed austerity. They also identify a number of systemic causes of the crisis.

Three things stand out. Firstly, they identify a recurring logic to financial bubbles. Speculation took new forms encouraged by financial deregulation both within countries and between them. With assets repackaged and passed on, financial institutions from around the world grabbed a piece of the action and accordingly went belly-up in 2008. So finance needs to be reined in.

Secondly, many writers identify “global imbalances”. Huge US trade deficits were matched by surpluses in China, oil-exporting countries and Japan and Germany. The surplus countries accumulated reserves of US dollars and financial flows ran in the opposite direction back to the US.

Thirdly, the Keynesian tradition points out problems in the relative lack of demand. Cuts in wages, at least as a share of total national incomes, exacerbated this and increased pressure on workers to borrow.

These are important observations with which socialists can agree. The last has recently, if mistakenly, been taken as the very essence of Marx by several mainstream commentators suddenly rediscovering him. However, the valid insights are misleading unless they are linked to deeper social processes. They can portray the crisis as just a ghastly mistake. Writers like Stiglitz and Krugman, and Keynes before them, support capitalism, but imagine a gentler, humanised version.

Capitalism’s recurrent crises are not aberrations. Financial deregulation and shifts of income between and within countries were achieved by powerful capitalist interests responding to the crisis of the 1970s, which Keynesian-inspired state regulation failed to prevent. To understand the real problems we need to go beyond the criticism of neoclassical economists or Keynesians. We need to examine the dark underworld of exploitation within capitalist production.

Marx’s understanding of capitalism

Capitalism is centred on the exchange of commodities. Commodities have to be useful (they must have a “use value”) but crucially they also embody “exchange values” – they are the repositories of value that can be compared and traded directly with all other commodities on the market. But what is it that creates this exchange value in the first place? Marx argued that value is originally derived from labour-time – the amount of time workers spend working to produce commodities. This is known as the labour theory of value.

Money masks the fact that capitalism is based on exploitation – and exploitation is at the heart of capitalist production. Capitalists invest their money in order to produce commodities, which they then sell to get money again. The reason they do this is because at the end of the process they are left with a surplus which forms the basis of their profit.

This is what Marx called “surplus value”. This surplus value arises because of the difference between the value of the workers’ labour power (wages sufficient for them to buy the necessities of life) and the value they actually create. This is called exploitation.

So workers must work for longer or work harder than is needed simply to reproduce themselves. In other words, they spend part of the working day reproducing the value of their wages, and the rest of the day they spend working for the capitalist for free. The exchange value of the commodities they produce exceeds that of the labour power. This surplus value gets divided between the capitalists through competition.

The possibility of crisis

Because everything is made to make money, and only indirectly to satisfy human needs, the possibility of crisis is ever present. Of course, products must have a use value or they won’t sell. But the product could just as well be cheese or nerve gas. And, if the demand today is for nerve gas, by the time the factory gets going the demand might well have shifted to cluster bombs.

Sometimes workers can reduce the rate of exploitation by winning wage rises which eat into profits. This was a part of what happened in the crisis of the 1970s. Sometimes workers lose and exploitation increases. This can happen directly, through cuts in wages or an intensification of work. This increases the extraction of what Marx called “absolute surplus value”. It can also be an indirect result of innovation. If the goods that workers consume – food, clothes and so on – can be made more efficiently, this reduces the value of labour power. In other words, workers can be paid less because the cost of the goods they have to buy has been reduced. Real incomes can be maintained even while a greater share of production goes to the capitalists.

Both processes have been at work over recent decades. Obviously capitalists celebrate increases in exploitation. But lower wages, even in relative terms, can produce the demand problems the Keynesians identify, as workers have less to spend buying commodities produced in the economy. This creates problems for capitalists in the consumer goods industries and in turn for those sectors supplying them – for the clothes makers but also for the sewing machine makers, for the personal computer makers but also the semiconductor manufacturers.

Competition makes capitalism uniquely dynamic and productive but also leads to “everlasting uncertainty and agitation”. On pain of extinction, firms must expand. That means capturing and creating new markets. It means throwing new products onto the market, which people may not want or may not be able to afford. Expanding operations require new supplies, which may not be available or may only be available at increased cost.

Expansion in any one firm, industry or section of the economy requires all sorts of readjustments elsewhere. There is no organisation to make this happen. “In the long run,” as mainstream economists like to say, price mechanisms push towards equilibrium. Perhaps, says Marx, but “only by passing through extreme dissonance”.

The rate of profit

Competing firms invest in new technologies and new equipment – what Marx calls “constant capital”. The innovators steal a march on their competitors and capture a greater share of profits. As others follow, the new techniques become generalised and the leaders’ advantages are lost. Moreover, capitalists overall are now investing more in constant capital than in labour, or “variable capital”. While they must continue to pay the machine-making capitalists for the full value of the capital they purchase from them, it is only the workers they can exploit.

So, Marx argued, even as the total surplus being extracted from labour increases, this can fall relative to the overall amount being spent on constant and variable capital. There is a tendency for the rate of profit to fall.

This need not be an inexorable process. The point of innovation is to increase productivity. So a greater physical mass of new equipment might not mean greater capital in terms of the work needed to make it. Again, falling relative wages can offset falling profits. It is a dynamic relationship. What seems clear is that during the long post-war boom investments in constant capital did rise, and that from the late 1960s the rate of profit fell. Capitalism went into deep crisis in the 1970s with profit rates probably hitting a low around 1980. Much of the subsequent decades since then can be read as a consequence of capitalist strategies for recovery.

The simplest way to restore profits is to cut wages, either directly or through cuts in welfare. The attack was particularly savage in the US. People were also forced to work longer and harder. Millions were forced into second jobs and, of course, into debt. Across the rich countries the wages share of national income, if not absolute wages, fell substantially, on average from about 75 percent to 66 percent between 1975 and 2006. Meanwhile restored profits and higher salaries for the rich increased the financial supply. They had more money to lend in financial markets.

Socialists can certainly find common cause with Keynesians who see falling relative wages as an economic problem. But for individual firms, and competing national economies, wage repression made perfect sense. So reversing the trend would mean forcing capital to make concessions, something it would resist ferociously.

Demand problems can also, in principle, be met by capital. This time, even while falling wages restored profits, firms remained reluctant to invest. Of course, some seized the opportunity provided by others’ inertia. Some sectors like the semiconductors and telecoms leapt ahead. Overall, however, the earlier overaccumulation meant demand could be met, if necessary, by working existing machinery and equipment harder rather than through innovation.


World Bank figures indicate that, across the established rich countries, capital formation fell from 22.5 to 20.7 percent of national income between 1990 and 2007. This sounds unspectacular. But the figures combine real investment with unproductive, socially useless activities. Military spending is an obvious example, which adds to measures of GDP but not to human well-being. The same could be said of most financial activity and of rubbish like advertising.

Because capitalists share the common surplus, there is little incentive for any one of them to engage in economically or socially useful activities that might increase the size of the pot. In the US, by 2007, just 7 percent of investment went to manufacturing and 40 percent to real estate.

So firms sat on or speculated with their increased cash. Some of the money found its way, either directly on indirectly, to lower-cost locations of production. A caricature sees globalisation as a “race to the bottom”, with firms rushing around the world to exploit the cheapest available labour. Most foreign investment actually goes to other rich countries. It is more likely to be taking over existing operations than setting up new ones.
Nevertheless, a switch from strategies of intensive accumulation to more extensive ones based on lower wages also shifted the geography of production. Financial deregulation was a vital part of this process. Notably, the abolition of international capital controls was Margaret Thatcher’s first act on taking office in 1979. It allowed money in to feed the City of London, but also out, to exploit workers elsewhere.

Forced integration

Many poorer countries had global integration forced upon them. This was the point of the notorious IMF structural adjustment policies. Like the current austerity, this involved cutting domestic consumption, both wages and public spending, while increasing exports to get the hard cash to pay debts. Elites in poorer countries usually signed up only more or less unwillingly. They too liked the idea of cutting pay and state spending and many countries took a similar turn without any foreign imposition.

Most importantly, China grew spectacularly. This lifted real incomes but in China too wages fell as a share of total wealth. This meant more profit to invest. This was possible without hitting demand problems because so much production was oriented towards foreign, rich country, markets. By 2007 China’s trade surpluses topped $300 billion.

Even this was less than half the size of the US’s deficit. There falling investment, particularly in manufacturing, meant greater reliance on imports, paid for through increasing debt. Smaller economies like Britain and Spain were in a similar position but mattered much less in terms of the world economy.

The US’s ability to suck in imports from around the world was sustained in part by the international role of the dollar. Most trade is conducted in dollars. So the US paid for its deficits in its own currency. Surplus countries accumulated reserves of dollars and a vested interest in sustaining their value and propping up this system. Their dollar reserves were not stored in vaults like gold but reinvested. In particular, dollars were lent back to the US where they helped keep interest rates low and stoked speculation.

Therefore, although the crisis had all sorts of new and strange characteristics, it was the result of low demand, global imbalances and financial speculations, themselves basically symptoms of deeper processes of restructuring of capital–labour relations. This also points to some obvious difficulties when it comes to strategies for recovery.

Making workers pay is the only strategy capitalists really know. Austerity can work for firms, even smaller national economies. It is hard to see it working now for capitalism as a whole. It exacerbates the basic causes of the crisis. Mass unemployment and further wage cuts have reduced US consumption (and therefore imports) as well as the trade deficit, but this simultaneously increases demand problems at a global level. Where financial confidence is restored, new bubbles emerge. Massive property speculation is being reported in China.

Magnificent resistance

Against this, there have already been some magnificent fights. The wave of general strikes in Greece is the proudest example. Many of those fighting rightly insist there are better ways to recover government deficits – taxing the rich for example. They point out that there are more important priorities than tackling government deficits and repaying the bankers.

Financial speculation can and should be restrained. Whether in the US or China, increasing wages and reorienting the economies to productive investments would be a better way of addressing the imbalances. Yet these reforms seem unpalatable to the ruling class.

Ultimately, the fight against austerity quickly forces us to face the need for a systemic transformation – the overthrow of capitalism.

Bill Dunn’s most recent book is Global Political Economy: A Marxist Critique published by Pluto Press

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