by Robert Montgomery 8th September 2021
When I first began studying Marx it seemed self-evident that capitalism suffered from periodic crises of overproduction. Factories choked on back stocks, cars without buyers piled up in lots, workers were laid off, and whole businesses went bust. the slump continued until the glut of goods was sold off at bargain basement prices. Overproduction was endemic in a system based on paying workers less than the surplus they produced. But why didn’t Keynesian policies of pumping money into the economy expand demand enough to restart production? This is the dominant view among Marxist economists today like Richard Wolff.
Marx told us that overproduction is always the very expression of a capitalist crisis. But to say overproduction is the form that a capitalist crisis takes is not to say it is the cause of the crisis. If it were the cause, then capitalism would be in permanent slump because workers can never buy back all the goods they produce. After all, the difference between what the workers get in wages and the price of the goods or services they produce that are sold by the capitalists are the profits. By definition, that value is not available to workers to spend, but is in the hands of the capitalist owners.
In volume 3 of Das Kapital Marx went further. He explained that what determines whether capitalists make purchases to invest in plant or new technology and to buy labour power is the profitability of doing so. “The rate of profit is the motive power of capitalist production. Things are produced only so long as they can be produced with a profit”.
And this is where Marx’s law of the tendency of the rate of profit to fall comes into play. Marx showed that the profitability of capitalist production does not stay stable, but is subject to an inexorable downward pressure, or tendency. This eventually leads capitalists to overinvest or to overaccumulate relative to the profits they can extract from the workers.
At a certain point, overaccumulation relative to profit (ie a falling rate of profit) leads to the total or mass of profit no longer rising. Then capitalists stop investing and we have overproduction, or a capitalist crisis. Investment halts, orders for new materials cancelled, workers are laid off, and unsold goods pileup. So the falling rate of profit (and falling profits) causes overproduction, not vice versa.
But Marx stressed that a falling rate of profit doesn’t lead directly to a crisis as long as the mass of profit continues to rise. it was only when the mass of profit stopped rising that the long recession began in 2008. If a falling rate of profit is the cause of capitalist economic crises and slumps – a falling rate of profit eventually leads to a fall in the mass of profit and thus overaccumulation of investment and overproduction of goods and services that are profitable, then it leads to important policy conclusions.
For example, if we think like Keynesians that a capitalist crisis is caused by overproduction relative to the ability of workers to buy the goods produced, then the policy answer is simply to boost spending by government or to make tax and interest rate cuts (what has been happening for the past 13 yrs). And voila, problem solved by increasing effective demand.
On the other hand, if we think it is caused by lack of profit, then there is only one solution for capitalism: destroying the value of existing capital (plant, machines and employees) in order to cut costs and so restore profitability. Only that will get capitalism going again till the next crisis, but at massive cost to the rest of us. Thus the inherent contradiction of capitalism is exposed. Only its abolition will stop the cycle of boom and slump.
Marx’s Law of Profitability Led By Michael Roberts on Youtube