We will explain here some concepts of Marx like capital, capitalist society and over production crisis. Then we will look at the critics against those concepts and counter arguments to those critics too.
Marx proposed that capitalist class and its profit maximizing motivation control the capitalist society. Capital is defined as money used with the intention of making more money (whether the intention is realized or not does not matter). And when capital controls a society the society is called capitalist society.
(Capitalists can gain profits from looting, trading and producing. In case of production capital, the capitalists buy labour power from the workers at fixed wages and make them work with machines owned by themselves. The final products are owned by the capitalists who then sell them at maximum possible profit. In this article we will not deal with surplus value appropriation or theory of exploitation. We will deal it in a separate article in part-3. We will concentrate mainly on the theory of Over Production Crisis.)
Critic: In a society where production is done for maximizing profit, capitalist class may not have full control. This is because there are other important elements in any capitalist state e.g. military, bureaucracy, judiciary, different interest groups of a society like workers, farmers, petty traders & producers (those who trade or produce for fulfilling needs), women, men, other genders, religious/ racial/ national institutions, etc. They will bargain for more money and power too. Capitalists cannot control the society as the mentioned social elements will compete against capitalists' complete control.
Counter to Critic: Profits of capitalists are the ultimate source of income of a capitalist society. So capitalist class will ultimately prevail over other social elements. Military, bureaucracy, judiciary have their income from state revenue and profits of capitalists are main source of state revenue. So these three powerful social elements cannot prevail over capital.
Power of genders vary with capital's requirement of production and reproduction. Religious/ racial/ national institutions are important in determining the power of genders, military, bureaucracy and judiciary. We will see later how capitalists' interests, interests of genders and religious/ racial/ national institutions can contradict each other. This is the least touched portion of Marx. We will explain it in details later in part-2.
But first let us explain how capitalists prevail over farmers, petty traders & producers and workers who earn independently.
Capitalists socialize production within market and within workplace.
Let us explain socialization of production within market. Before capitalists emerged, all individuals used to farm fields and make clothes simultaneously. But capitalists tend to socialize production within market when one individual began to concentrate in farming land and another individual concentrate in making clothes. Then the two individuals traded in the market. Both gain from this trade if one can do one job better than the other (absolute advantage) and even if one does both jobs better, the trade will benefit both as cost of production of the other individual will be less (comparative advantage).
Similarly, capitalists also socialize production within workplace. It means several factories making same product tend to merge together for reducing per unit cost of production. Socialization of production within workplace results in concentration of capital. Thus few big capitalists out compete numerous small capitalists in every sector of production. Socialization of workplace continue by forward and backward linkages as well.
(We will deal with socialization of production separately in part-4.)
So we can say that socialization of production within market convert need based life into money driven life as trade is beneficial and essential for daily necessities while socialization of production within workplace force numerous small capitalists, farmers, petty traders and producers out of business and become force them to become workers.
Big capitalists use higher wages to attract workers from small capitalists, petty traders and producers. Thus as capital concentration grow, wages of workers tend to grow as well. So capitalists use automation in the production process to reduce demand for workers. As demand for workers fall, real wages (wages net of inflation) tend to fall as well.
So socialization production tend to increase the supply of workers while automation tend to reduce the demand for workers. As a result real wages will fail to grow at the rate of growth of real profit. So few big capitalists will earn a lot of profits while the majority of society i.e. workers will not earn as much. Since profits are money only to be used for making more money by capitalists, we can say that rise in profits mean rise in supply capacity of the society. Similarly, workers use wages mostly for consumption and so less growth of wages mean less rise in demand capacity of the society. This leads to supply greater than demand. We call it over production crisis or over supply crisis. Since huge amount of supply of products cannot be sold profitably, capitalists reduce the production resulting in more outlay of workers and hence even lower real wages and hence even lower demand. The cycle continues and it ultimately results in massive unemployment among workers with low real wages and capitalists end up with huge money nowhere to invest profitably. Marx assumed that such a hopeless condition will force workers to revolt against capitalists. Workers have to seize the control of the workplaces by degree according to various conditions of different countries and time-period. Marx further thought that workers will be investing the excess profits (that cannot be invested profitably due to lack of demand) non profitably. This non profitable investments will grow as socialization of workplaces and automation will rise and ultimately a stage will be reached when all necessary but disliked activities will be automated and humans will do voluntary activities only. This ultimate stage is called communist society while the journey from revolt against capitalists to communism is called socialist transition stage.
Critic 1: Joseph Schumpeter pointed out that entrepreneurs come to market with new products, production processes, managements, markets. Thus entrepreneurs keep creating new areas for profitable investment. New products, markets tend to raise the demand for workers and hence tend to raise real wages too. This continuously act as a counter weight to over production crisis.
Counter to Critic 1: As a capitalist country develops. more and more industries are there to be automated and new industries play a marginal role. While during the initial years of capital accumulation, less industries are there for automation and new industries have more prominent role. Hence we can say that as a capitalist country develops the impact of automation begins to outweigh the impact of new industries. Thus tendency for over production crisis rises. But new industries indeed helps to lower the intensity of over production crisis.
Critic 2: Lenin pointed out that capital's development is not equal across the globe. Today North America, Europe, East Asia are industrialized to a great extent, but most of Latin America, Africa and most of Asia remain under developed. In Lenin's time only US, UK, Germany, Belgium, Netherlands, France and Japan were considered developed. Lenin said that Marx's analysis of over production assumed a closed developed economy or a completely developed world. Since in reality capital's development is not equal across the globe, excess profit in a developed country can be invested profitably in an undeveloped country where capital accumulation is low with no chance for over production. In this way, capital can solve the over accumulation crisis in a world with unequal capital accumulation across countries. This process also helps a developed country's industries by having access to raw materials and cheaper wages of under developed countries which further increases the country's competitiveness in the global market.
Lenin further said that different developed countries colonize less developed countries to export its excess capital and raise its competitiveness. This leads to rivalry among developed countries for control of colonies which then lead to imperialist wars among developed capitalist countries. Lenin's theory explained the two world wars brilliantly.
Counter to Critic 2: The lower the development level of a country, lower will be its productivity and income and so lower will be its capacity to absorb investment. In fact, undeveloped countries never attract significant amount of capital from developed countries. On the contrary, more developed countries have more capacity to absorb investment. Capital flow between developed capitalist countries is always more than capital flow from developed to undeveloped countries. So export of capital from developed economies to undeveloped economies cannot solve the over accumulation crisis. But colonizing undeveloped countries to acquire competitiveness in global economy still holds true.
Critic 3: Global trade and investment are very important for every capitalist country. So is global currency associated with global trade and investment. A country's currency represents its production value, asset value and military might. Usually a dominant capitalist country rules the global capitalist economy using its production value, asset value and military might. So whenever the dominant capitalist country whose currency acts as global currency faces challenge from another country (may be capitalist, may be not) a global market disequilibrium is created. This is because the challenger initially gains upper hand in production value but its military might while is still lagging behind. This results in over production in the challenger country and the dominant country's currency continue to dominate the global economy. This create inflation in the dominant country. High inflation in dominant country pushes the asset price and production cost higher. This resulted in foreign exchange flight from other nations to the dominant country. Thus dominant country's currency value rises more making its production further uncompetitive while creating asset price bubble. So unemployment from over production becomes the character of the challenger country, inflation with unemployment becomes common in rest of the world and weak economies face the extra problem of foreign exchange shortage. So these crises are more a result of the transition in the world geopolitical order. Two world wars happened mainly because British domination was challenged by Germany and then by USA and then by USSR and Japan. Today also we can see that China is becoming most dominant country in production while military might continues to rest with USA. So transition in world order is the main cause of economic crisis. Leninist theory of export of excess capital and Marxian theory of over production crisis may not that much vital..
Counter to Critic 3: This theory does not contradict with Marxian theory of over production. Instead it adds momentum to the over production theory. It shows while challenger capitalist country has to face over production crisis, dominant country has to face high inflation and asset price bubble resulting in less production and high consumption based on debt. Again when we compare 1900-1914 challenger country Germany and 1918-1929 challenger country USA with the present era challenger nation China, we find that while Germany and USA faced massive over production crisis, socialist China which has huge non profitable investment faces no over production crisis at all. So non profitable investment indeed reduces chance of over production crisis significantly. Moreover, when US led new geopolitical order was finalized replacing UK led one by 1944 (Brettonwoods Agreement), then most of the economic problems were solved.
Critic 4: Neo Classical economists claim that capital is a commodity with its own price known as interest rate. Supply of capital rise if interest rate is raised and demand for capital rise if interest rate is lowered. Similarly supply of capital fall if interest rate is lowered and demand for capital fall if interest rate is raised. So whenever there will be excess profits, supply of capital will be more than demand for capital and as result interest rate (price of capital) will fall resulting in rise in demand for investment. This will make many previously thought unimaginable investments possible. Thus flexibility of interest rate will counter over production crisis.
Counter to Critic 4: After 1929 Great Depression, John Maynard Keynes came with Liquidity Trap theory. The theory says that when interest rate is too low, asset price is too high (due to compound interest rate equation). Thus people anticipate share price fall in future resulting in capital loss. So they refuse to invest in capital market. Thus private investment dries up. This can be compensated by increasing government spending through fiscal deficit financing only. So Keynes indirectly accepts Marxian over production theory. Keynes was accepted soon by all capitalist countries and academia resulting in indirect victory of Marxian over production crisis.
It is further identified by economists like Hayek and Paul M. Sweezy that when interest rate is too low, risky ventures become less costly and this leads to asset price speculation which ultimately creates asset price bubble only to burst after a certain point of time. This burst only transforms over production crisis into financial crisis.
An important point is after the Great Depression of 1929, capitalist world accepted that Over Production crisis is indeed a system problem. Capitalist governments and academia try to solve it through expansionary fiscal policies and expansionary monetary policies. Expansionary fiscal policies mostly went to direct cash in hand to targeted segments of the society to riase consumption, appease the discontent masses and disunite the working class in the name of historically privileged section and historically downtrodden section. Thus came identity politics which put women working class against men working class, white working class against non white working class and so on. Expansionary monetary policies helped capitalist economies to create asset price bubble and raise consumption of working class by distributing debt through collateralizing the inflated assets. Thus emerged a new Financial Neo Liberal Capitalist society based on Identity Politics and debt led consumption.
Conclusion: We can say that Marx was correct to notice the over production crisis in a capitalist economy. But there are counter tendencies like continuous development of new industries, capital flow from one country to another, interest rate flexibility, asset price speculation, finalization of a new geopolitical order and currency revaluation associated with it. Even non profitable investments by state was accepted by capitalist academia and governments. Thus we find different capitalist countries with different intensity of economic crisis. In Japan we find three decades of economic stagnation and in US we find a declining but steady growth rates over three decades. European Union has shown declining steady growth in first two decades but gradually became crisis ridden in the last decade. We can clearly identify that if a capitalist country has strong currency like US Dollar, then the country can generate continuous asset bubbles even after several bursts while maintaining low interest rate on average. But if the capitalist economy has weak currency like Yen then one single asset bubble and burst will lead the economy to continuous stagnation. European Union can be considered somewhat middle between the two extremes.
Author: Saikat Bhattacharya
