Monday, November 20, 2017

Marx on the Crises of Capitalism

     Marx saw capitalism as being subject to swings of prosperity followed by recessions or even depressions.   He was one of the first people to try to explain the business cycle, as it is now called.  There were two different explanations given by Marx.

     One of Marx’s explanations involved the uncoordinated nature of the market (Marxists call this the anarchy of the market.)  Company A sees a profitable opportunity.  To take advantage of it, Company A buys some new machinery or builds a new factory in order to be able to increase production.  What it does not realize is that many other companies are doing the same thing.  When they all increase production, there is now too much production!  This causes the period of recession.  Some companies go out of business.  Others decrease their production.  When production falls enough, the recession is over.  The periodic recessions and depressions (Marx called them “crises”) that result under capitalism are one reason that Marxists have so strongly supported government planning. 

     The second of Marx’s explanations involves under-consumption.  To Marx, capitalism acts to keep wages at the socially-determined subsistence level so that profits can expand.  But wage earners usually spend all of their incomes while profit earners can afford to save a portion of their incomes.  By transferring income from spenders to savers, capitalism sets up a process by which companies produce goods but consumers do not have enough income to buy them.  Goods that are produced go unsold; this is the recession (crisis).  Eventually, companies are able to eliminate their surplus inventories and the recession is over. 

     One of Marx’s important predictions was that these crises would become increasingly severe.  This was a result of the increasing concentration of capital.  Early crises may cause the failure of small companies; this would have only minor overall effects.  Later crises would cause the financial ruin of giant companies.  The repercussions of this would be much more severe.  To Marxists, the Great Depression of the 1930s seemed to prove this part of the theory.

     Keep in mind that Marx’s description was contrary to the general view of the day.  In that view, recessions could not occur for long.  If recessions did occur, there were built in forces to eliminate them quickly.  (These were falling prices, falling wages, and falling real interest rates)  Everything that could be produced would be bought!  (This statement is usually stated as “supply creates its own demand” and is called “Say’s Law”.)

     Since World War II, there have indeed been periodic recessions in the United States.  The country went ten years without a recession (March 1991 to March 2001) but then experienced a recession in 2001 and then a most severe recession beginning in 2008.  But these recessions have been much less severe than the Great Depression or than the “crises” described by Marx.  That they have been less severe is partially the result of increased government intervention in the economy, a point that was not predicted by Marx.

For more on Karl Marx and Marxism: