Marxism and the Economic Crisis

By Nicky Dempsey

All societies based on social classes tend to produce surplus value, to a greater or less extent. The character of the society may be determined by which class receives the bulk of the surplus.

The economic and financial crisis that became apparent in 2007 and 2008 was located primarily in the imperialist centres, led by the United States. The crisis was engendered by a crisis of profitability, a reduction in the surplus available to the capitalist class. Economic policy since that time has been designed to restore as far as possible the greater proportion of that surplus to the capitalist class in the imperial centres.

Marxist analysis

While terms such as ‘sub-prime lending’, ‘special purpose vehicles’, ‘collateralised debt obligations’, and so on are recent inventions, Marx, analysing the repeated contemporary financial crises of his own period, was able to reveal their connection to the repeated crises of capitalism in general.i

Further, the main origins of the current crisis and the bourgeoisie’s response to it have included a series of features that are all anticipated in Marxist analysis. These include a rapid and accelerating accumulation of capital in the later stages of the prior boom, a consequent decline in the profit rate, a financial panic including collapsing asset prices and financial institutions dependent on them, the ‘hoarding’ of capital by the capitalist class as a whole (now led by its dominant section, finance capital), and an attempt to restore the rate of profit by driving down wages and other measures.

In addition, there has been a rapid increase in the volume of what Marx termed ‘fictitious capital,’ that is purely financial capital unrelated to the production process. In this instance it has been created by the central banks of the United States, Britain, Japan and (by slightly different means) the European Central Bank in order to rescue their respective banking systems.

The origins of the crisis

There is a widespread determination in bourgeois circles and beyond to explain the current crisis as a failure of the state, where, it is alleged, spending ran out of control.

The fact that the crisis was instigated in the US under a Republican presidency (which cut non-military spending in real terms) and that it was manifested in the private, banking sector that would have collapsed without a state-organised bailout has not impinged on the popularity of this ‘explanation’ of the crisis.

Even so, there is near unanimity even in bourgeois explanations of the crisis that it was preceded by a business cycle in which there was continuous, even accelerating growth in all the leading economies. Since the world’s leading economies – with the important exception of China – are all capitalist economies this means there was a prolonged period of capital accumulation and that it reached a crescendo just before the collapse. That this is true of every significant international crisis of capitalism since before Marx alone tends to suggest is a property of capitalism itself.

Marx identified that property of capitalism and the reason for the economic collapse, which is that – at a certain point – the capitalists refuse to invest. The capitalist economic rationale for that is worth examining in a little detail.

Falling profits

A single firm making widgets invests £1m in plant and machinery in the course of the year and has labour costs of £3m. It also has other costs, primarily the raw material costs and bank charges and interest of £1m each. Business is good and the income, the value from widgets sold is £7m.

Correctly speaking the surplus value realised is £2m; that is the £7m in revenues minus £1m in raw materials’ costs, £1m in machinery and £3m in labour costs. While the fact that labour is biggest single cost to the capitalists is a source of never ending complaint by them, the reality is that all the value created in the production process is created by labour itself. No matter how highly automated the process is, the capitalist will wait a long time before the raw materials and the machinery will create widgets on their own.

The profit rate in the process is 40%, £5m in outlay versus £2m in additional return, or surplus value.ii This is the purpose of the capitalist. Their raison d’etre is not the creation of widgets – another year they might diversify into tin cans or steel plates. Capital exists to accumulate capital, or as Marx calls it the ‘self-expansion of capital.’

Business is good, the economy is expanding and the capitalist feels sure that he can sell more widgets especially if he can steal a march on his competitors by investing in the latest high-speed machinery. In the next year, he has spent £2m on plant and machinery, £3m on labour and £1m on raw materials. He also still has bank charges of £1m. Sales have also risen by £0.5m to £7.5m, validating the additional investment.

As far as the capitalist is concerned the investment is a great success, with a 50% return on the additional £1m in the first year alone and more anticipated. But what has happened to our widget-makers’ rate of profit? Now he has deployed £2m in fixed capital, £1m in raw materials and £3m in labour while his total sales are £7.5m. The capital he has circulated amounts to £6m, while the value realised is £7.5m. The profit rate has fallen to 25%, £1.5mn compared to £6m.

This seems to be of little consequence since the widget-maker expects that he will realise total value of at least £7.5m for years to come, and the investment is a one-off. Unfortunately for him, his rivals have also seen his new machinery and they too invest in the latest technology, some of it now faster than his own. Unless the demand for widgets expands exponentially the first widget-maker is faced with an uncomfortable choice; either he must invest further to see off his rivals (and render obsolete his prior investment) or he must accept that his rivals will win market share from him and his sales decline back towards £7m, or even lower. In either case, his profit rate must falliii.

Marx described the law of Tendency of the Profit Rate to Fall (TPRF) as the most important law of capitalist production. This is the determining feature of all generalised economic crises of capitalism since its inception. Since the purpose of capital is its own self-expansion, the continual decline in the profit rate, without countervailing tendencies, will inevitably lead to a refusal to invest at all. When that occurs the firms making the new widget-making machinery, which was initially so sought after, suffer not just a decline in the profit rate but a catastrophic decline in their own sales or total value realised, resulting in plant closures, lay-offs and bankruptcies. A host of other firms, from suppliers to the machinery maker, to sellers of goods to their unemployed workers, all suffer a consequent sharp declines in sales so that they too stop investing, lay off workers, and so on.

What are the countervailing tendencies? While Marx designated the TPRF as a law of capitalism, there are tendencies which can operate to counteract it. These primarily include lengthening the working day without increased pay, that is increasing the rate of exploitation of the workforce, or reducing the amount of pay for the same hours, which amounts to the same thing. Removing or curtailing any benefits to workers (overwhelmingly provided, if at all, by employers, not the state, in Marx’s day) has the same effect.iv To ensure that wages are lowered requires all sorts of attacks on any forms of organisation by the workforce into trade unions, but especially political parties, the use of scab labour and violence against any strikes. Strategically, it also requires what Marx called the existence of a ‘reserve army of labour’; a mass of unemployed workers willing to work at almost any price to meet necessities and who can be used to lower wages generally. In the OECD only one third of the working age population is in work.

Returning to the current crisis, it is clear that all its main features conform to Marx’s analysis. v The boom which preceded the crisis necessarily entailed a rapid accumulation of capital, that the profit rate fell and the capitalists responded by refusing to invest. In the OECD economies as a whole investment contracted in 2007, a year before the recession itself began, and the total decline in investment (gross fixed capital formation) accounts for 96% of the entire decline in the economy.

Politics and economics

This struggle is not simply confined to the capitalists and the workers. In the capitalist economies, the governments will always seek to defend and promote the interests of the capitalist class as a whole. Therefore the entire drive towards ‘austerity’ policies is in reality the capitalist governments using fiscal, legislative and other means to pursue the same agenda as the capitalist class – the restoration of the rate of profit.

The reduction in social welfare benefits, the job losses and pension cuts in the public sector, reductions in services, privatisations, and increase in unemployment are all aimed at generally lowering wages and bolstering the ranks of the ‘reserve army of labour’. Indeed bourgeois economists have a different term for the same policy objective, the ‘demonstration effect’, where lower wages and higher unemployment in the public sector is meant to ‘demonstrate’ to private sector workers the futility of attempting to defend their living standards against the drive towards lower real wages.

In addition, taxes are cut on corporate profits, even as profits recover once more, allowing the capitalists to retain a greater proportion of surplus, but necessitating further cuts in public spending.

The global economy

Although the crisis is located in the imperial centres, it has affected the entire global economy in an uneven fashion. The exceptional creation of fictitious capital via ‘quantitative easing’ capital by the central banks has not led to a restoration of productive lending in their economies. Instead, combined with other factors such as the refusal to invest and a diversion of production away from food towards fuel (eg ethanol), this creation of money has led to a global acceleration in inflation, including food prices. This in turn is creating enormous hardship and economic dislocation in the colonial and semi-colonial world, which is also the basis for the political upheavals that are becoming increasingly widespread and whose recent high point is the Arab Revolution.

No country is immune from the effects of the crisis. However in those countries where the working class has achieved state power there are a series of levers to hand so that these negative global trends can be offset or ameliorated to an extent. The most adept use of these levers has been by the leadership of the Chinese workers’ state, where increased state-directed investment offset an initial fall in exports and declining investment by local capitalists, and where now monetary policy is aimed at the control of prices pressures.

Western European welfare

The crisis in Western Europe is a specific combination of these global trends. Specifically, to avert revolution and as one of the most effective means of rapidly rebuilding exhausted economies, the post World War II settlement in Western European included the creation of a welfare state model of social provision. In the subsequent ‘Cold War’ between the United States and the Soviet Union, punctuated by repeated political alarms and economic downturns, the maintenance of that welfare state was the best guarantor that no movements arose in Western Europe which strategically challenged the existence of capitalism.

However, it was a long cherished ambition of the capitalists in the US and increasingly in Western Europe itself that the Western European social welfare model be abolished, to be replaced by something much more like the US deregulated, de-unionised, minimal state model.

In the words of former Republican Congressional majority leader (and possible presidential hopeful) Newt Gingrich, “the European social welfare model is a Cold War construct, and following the end of the Cold War, it will have to go.”

This replacement would have a number of direct benefits for capital (including US capital operating in Europe, or hoping to):

• Whole sectors of the economy would be privatised and now available for profit (from telecoms, energy suppliers and transport, to health and education)

• Minimising welfare provisions reduces the ‘social wage’ and thereby reduces wages more generally

• This in turn can serve to reduce wages in unrelated private sector enterprises, and thereby boost profits

• The aggregate lower spending by the state can be used to lower taxes for businesses (even while increasing them for workers via indirect taxes such as VAT)

There is no logic to these plans if they are viewed outside of the drive to increase the rate of profit, since their effects may well be both to lower the growth rate of those economies and certainly to make crises more, not less likely.

To illustrate the latter point it is necessary only to recall that the largest job losses for any of the major economies during the crisis was in the US, where only the most minimal social welfare provision exists, where the state’s activity comprises a far smaller proportion of the economy than in Western Europe and where there are the most minimal job protection laws.

For the former point, that growth is likely to be lower as a result of the drive to lower wages, it is necessary to recall that approximately two thirds of all spending in the Western industrialised economies is consumer spending, the main support for which is either wages or transfer payments to the poor. There would have to be an extraordinary growth in the consumption of luxury goods by the extremely wealthy in order to compensate for the loss of consumption of more basic goods and necessities by workers and the

Response to the crisis

Both economically and politically there are three main actors in this drama – the working class and its allies, the bourgeoisie and government (which in all the capitalist economies acts in the interests of the bourgeoisie).

Outside of crisis, the usual functioning of any market economy is that workers’ savings (deposited in banks) are borrowed by capitalists for investment purposes. Governments can choose whether to borrow or save from the combination of their spending and taxation policies.

In a crisis, the capitalists no longer borrow to invest – they stop investing and hoard capital. They too become ‘savers’. Government deficits are caused by this fact – every transaction of saving requires a borrower. Governments become borrowers as unemployment and poverty rise and they are obliged to increase spending in these and other areas.

The almost unanimous response of the capitalist governments now is to lead the process of boosting profits by wage reduction, cuts to public sector services, jobs and pensions, privatisations and tax cuts for the bourgeoisie.

A socialist response is diametrically the opposite. Since the cause of the crisis is the refusal to invest and capitalist hoarding of capital, the policy is to increase investment on the government’s own account – that is to socialise whole sectors of the economy in order to direct investment in them. This would both meet social need (eg housing, transport, education and so on) and create employment.

Therefore, the slogan ‘investment, not cuts’ encapsulates the objective requirement to address the primary source of the economic crisis. State intervention in these sectors would remove them from the hands of the capitalists for perhaps a generation or more. The surpluses that can be generated from these state investments could be used to bolster the material well being of workers and the poor through further investment and job creation.

How this government intervention is to be financed is a function of the objective situation and the radicalism of the government or party concerned. Given low borrowing costs in many countries, there is certainly scope for a left government to increase borrowing to fund investment. Many on the left in Britain and Europe pin their hopes entirely on increased taxation. Increased corporate taxation can make a contribution. However, given very high government deficits it is unfeasible to imagine that higher taxes alone could eliminate government deficits and in any event would not address the capitalists’ investment strike. No matter how punitive the taxes, not a single new investment or new job would necessarily follow without a commitment to investment in key areas of the economy.

A socialist government would simply seize control of the capital being hoarded by the bourgeoisie and direct it towards productive investment. That solution is not currently on the agenda anywhere in Europe. However, the disastrous state of the banking system means that governments can effectively direct the banks to invest where they currently remain determined to hoard capital. Against their will, in many European countries the state now owns large swathes of the banking sector. The banks could simply be instructed to invest in key areas.

Historically, the European left adopted a position in favour of nationalising key industries, including the banks. Now, via state guarantees, capital requirements ECB loans and even direct ownership, the question is posed what is to be done with the banks now that so many are effectively under state control? The answer must be to increase investment, and to oppose the cuts.




i Marx wrote extensively on the nature of capitalist crises, particularly in Volume III of Capital. A partial reading of these extensive writings allows a series of different interpretations of the analysis presented of the causes of the crisis. Generally these misinterpretations fall into three main categories, although there are others: ‘underconsumption’, where goods are left on the shelf because consumers are unwilling to purchase them; ‘overproduction’, where capitalists produce more goods than are needed to satisfy wants, ‘technological crises’ which are caused by the introduction of some new technology causing bankruptcy to existing, uncompetitive capitalists. A recent example of this confusion was offered by Bernard Kuenkel writing in the London Review of Books.

A fully rounded understanding Marx’s writing on crises shows that these are frequently (even ‘always’) symptoms of crises, not their cause. The cause is the rise in the ‘organic composition’ of capital. That is the proportion of fixed capital in the production process, which lowers the rate of profit. This is an inherent tendency of capitalist production both within the business cycle and over its long-term development, and also forms part of the objective, scientific basis for its replacement by socialism.

ii Of course that is not how the capitalist sees it, since he has an array of other costs in order to conduct business the main one being bank charges and interest (but also administrative fees, licenses, etc.) Therefore he will report a profit level of just £1m, after he has paid those charges. In this case his reported profit rate is just £1m, from a capital outlay of £5m. In addition, he will tend to report his profit rate as £1m of total sales of £7m, a ‘profit rate’ of just 14%. This is how the bourgeois statisticians, following the capitalists’ lead, report profit rates, which is really the profit margin on total sales, not the profit rate on capital employed. The important point to note is all value is created by labour, and that is the source of all value and of all surplus value, whether it lands in the pocket of the capitalist directly, or his bank.

iii The position of private monopolies is different. While they too are subject the law of the TPRF unless a different good or service can be substituted for their monopoly supply, they can raise prices and cut services to maintain profits. This explains the enthusiasm of capital for the privatisation of formerly state-held monopolies.

iv In addition, Marx described bankruptcy as the ‘great conjuring trick’ of capitalism, where it is pretended that the whole previous accumulation of capital by the individual capitalist no longer exists so that the surviving capitalists might seize the values realised for themselves and boost their profits rates.

v Among Marxist economists, there is a current of thought, led by Dumenil and Levy, who argue that the current crisis is unique in that it is a function of the new phenomenon of ‘financialisation’, the overwhelming preponderance of the financial sector whose own crisis caused the more general crisis of capitalism. There is not space here to address those ideas properly, but two points should be noted. It is correct that finance has risen to an ever greater position within capitalism, and that an increasing proportion of all surplus value goes to the financial sector, certainly in the US. But the downturn in investment in the leading capitalist economies was already taking place as the decline in asset prices began. In countries such as the US, Ireland and Portugal, construction investment contracted in 2006. Secondly, the decline in asset prices which so thoroughly undermined the financial sector would not have taken place without falling demand for them, caused by the prior underlying decline in key sectors of the economy.

vi It has become commonplace now in financial circles to pin hopes for rising stock markets precisely on this trend, a rise in the consumption of luxury goods to offset the expected slower growth of demand for basic goods. So, Goldman Sachs, Citibank and others refer to ‘Plutonomy’, a new plutocracy whose increasing consumption leads to recommendations to purchase shares in Louis Vuitton, Hermes, makers of private jets, champagne producers and luxury car makers.