A systematic theory of economic crisis

IN 2002 the journal Historical Materialism published a translation of a previously unknown work of Marxist economic theory by a young Bolshevik, Pavel Maksakovsky. The article came out three years later in book form with an introduction by Richard Day, a professor of political economy. Day wrote of Maksakovsky: “His name and his work have been all but lost. He appears in none of the standard encyclopedias; there seems to be no trace of him on the Internet; and apart from my own book on Soviet economic theory from 1917–1939, I am not aware of any secondary source that mentions him.”

Historical Materialism and Brill did a great service in rescuing this text from obscurity. And kudos to Haymarket Books for making it even more accessible in paperback form in 2009. Maksakovsky’s contribution to the Marxist theory of crisis is invaluable, sharp, and original.

Maksakovsky was born in 1900 in the factory town of Ilevo, son and brother to metalworkers. In 1917 he was recruited to Bolshevik-inspired underground work and he joined the party shortly thereafter. He served in the Red Army, and in October 1919 was taken prisoner by the counterrevolutionary forces of General Denikin and sentenced to death for being a “Bolshevik commissar and spy.” He eluded the sentence after convincing the soldiers who were escorting him to defect to the Bolsheviks.

A bout of typhus in 1920 cut short his activity in the Red Army, and he spent the next eight years of his life working as an instructor at party schools. In 1927 he participated in a seminar at the Institute of Red Professors dealing with Marxist economic theory. The notes from the seminar became “The Capitalist Cycle: An Essay on the Marxist Theory of the Cycle,” which was published posthumously after he died at the young age of 28.

As A.S. Mendel’son, the leader of the seminar wrote:

The book’s impressive theoretical vitality, the militant revolutionary sprit that pervades this deeply theoretical work, and its excellent form—all of these attributes cause me to regard The Capitalist Cycle as one of the very best works recently written on questions concerning the general theory of reproduction.

In the person of comrade Maksakovsky, who died at such a young age, we have lost a major Marxist theoretical force.

At the time when Maksakovsky delivered his seminar, a popular theme among mainstream economists was to analyze capitalism’s “conjuncture,” a broad term reflecting the intersection of economic forces that define conditions at any given moment.

“Bourgeois economics,” writes Maksakovsky,

was incapable of comprehending the crisis. Its theoretical arsenal lacked an appropriate method, the necessary objectivity, and a proper sociological grounding. In these circumstances, bourgeois economics turned all the more readily to study the total dynamic, lumping together the various processes under one general term—‘the conjuncture.’ The theoretically unresolved problem of crises was simply carried over into the new problem of the conjuncture. The crisis came to be regarded as merely a ‘minor’ component of the commercial-industrial cycle.

Bourgeois economists proposed that all economic fluctuations were normal and looked for ways to understand these dynamics, in order to contain and neutralize them. Their central tenet was then, as it is now, that capitalism tends towards general equilibrium. Deviations from that equilibrium can be analyzed, measured, and corrected.

Yet the failure of economists to acknowledge the fundamental contradictions of capitalism and its tendency to periodically and violently bust has left them ill equipped to understand either the crisis or the conjuncture.

“Bourgeois economics,” writes Maksakovsky, “usually begins with empirical phenomena and with things as they appear on the surface. . . . It is no surprise, therefore, that [it] usually finds the motivating forces of the conjunctural cycle in the sphere of monetary circulation and credit—areas that superficially appear to exert a decisive influence on the course of the cycle.”

Examination of the economy’s surface movements are necessary, argues Maksakovsky, in order to develop concrete analysis. However, that concrete and empirical analysis must be linked to a more deductive understanding of the fundamental laws of capitalism, which drive it to periodic crisis.

Fusing concrete analysis with the structural axioms of the system not only allows Maksakovsky to refute bourgeois economics, but also to develop further the Marxist theory of crisis.

Marx provided all the analytical tools necessary to the movement of the capitalist cycle, argues Maksakovsky. “In [Marx’s] treatment of the problem of crises, he demonstrated the inevitability of capitalism’s cyclical development. Nevertheless,” he argues, “Marx’s works do not provide a comprehensive theory of the conjuncture. . . . Hence, the theory of the conjuncture is the final stage of the Marxist economic conception, the ‘dynamic’ version of Marx’s theory of reproduction, its second and final chapter.”

In Volume I of Capital, Marx uses a highly abstract model of capitalism in order to excavate the central laws of the economic system. Volume II provides similarly abstract models of reproduction—which explain the cyclical processes that govern the system’s economic activity. Marx’s reproduction schemes purposely excluded prices, changes in technology, the role of credit, and other concrete alterations to a crisis-less version of capitalism in which stable growth continues permanently.

“The reproduction schemes,” explains Day, “assumed, in other words, that all commodities exchange according to their values. . . . Only in Volume III of Capital were these assumptions systematically lifted. But since Volumes II and III were both incomplete works, edited by Engels and published after Marx’s death, Maksakovsky undertook to write a final chapter in the Marxist theory of expanded reproduction.”

Maksakovsky set himself the task of transitioning the general resolution of social reproduction to its functioning in the real world. He does this by “systematically lifting, one by one, the limiting assumptions that Marx built into the abstract schemes of reproduction.”

To enter the real world of the capitalist economy, values must first be converted to “prices of production” by adjusting for an average rate of profit, and then second to market price, reflecting the impact of supply and demand.

This movement of prices away from values is a result of market competition, as the search for a higher rate of profit moves capital from one branch of industry to another. Lastly, competition between capitalists implies a need to constantly adapt to technological change. The development of capitalism therefore brings with it a necessarily dominant role to be played by machinery and technology, known as “fixed capital”—capital, which unlike “circulating capital” is not used up immediately in production.

Maksakovsky explains: “The specific attribute of circulating capital is that it is entirely replaced with each turnover of capital. Any disturbance resulting from its overproduction or underproduction was not drawn out or ‘preserved.’ It found expression in price fluctuations and, in response to those pressures, any disturbance was overcome in the next stages of reproduction.”

Fixed capital, on the other hand, is relatively immobile and implies a built-in time lag to any market adjustments. The more developed is the capitalist mode of production, the more dependent it is on fixed capital, and the more inevitable and regular the onset of crises that result from the inability of the market to adapt to fluctuations in supply and demand.

Rooting a concrete investigation of capitalism’s cyclical movements within the fundamental laws laid out by Marx, Maksakovsky provides a potent and dynamic exposition of the theory of crisis.

Maksakovsky begins his explanation of the capitalist cycle with the massive renovation of fixed capital that follows crises. During periods of crises, reduced demand for means of production and consumer goods lead to lower prices in the markets. Technologically backward enterprises, which can only produce commodities at high prices, are driven out of business, while those corporations that survive the crisis can only find their way out of falling profitability by reducing costs through raising the productivity of labor, buying out failed capitals, and investing in the next level of technology. These are the means by which capitalists can lower the prices of their own goods and start to regain any ground lost due to the contraction of the market.

This very process sets in motion the expansion of the economy as demand rises for new means of production in every industry. Yet the expansion is not rapid enough to satisfy capital’s demands.

“Whatever capitalism’s capacity for significant expansion might be,” argues Maksakovsky,

it is not able “suddenly” to satisfy the massive demand that results from moral wear of existing equipment. As a result, the available supply of commodities lags behind the growing demand, and the tendency towards “equilibrium” comes to a halt. It is not possible to “rectify” production speedily as the disruptions occur. On the contrary, the further the expansion develops, the more aggregate supply lags behind demand, and the greater is the detachment of market prices from values.

Rapid expansion is impossible not because of a shortage of capital, but because on the one hand the high level of capital’s technical composition creates ever greater demand, and on the other hand the lengthening period required for construction of the means of production makes it difficult to keep pace.

Increased demand and lagging supply during the expansion create higher prices that become increasingly detached from actual values of commodities. This, in turn, increases capitalization as higher prices lead to greater profits and therefore a greater incentive to invest. The critical point here is that for capitalism what sets the rate of production is not demand, but market prices.

Maksakovsky writes:

Market prices prevail up to the end of the expansion. They are the actual regulator that “manages” the movement of capitals. . . . By guaranteeing super-profits, it creates pressures for massive additional capitalizations up to the very end of the expansion. As construction of the necessary production enterprises approaches completion, this “super-capitalization” then results in the production of “overproduction.” High prices are transformed at a certain stage of the expansion into a false and irrational indicator.

That is to say that when supply does eventually catch up with demand, this moment of “equilibrium” in production does not express itself in a decline in market prices.

“The cyclical movement,” explains Day, “necessarily arises from the fact that today’s prices, leaving aside speculation, are merely a ‘snapshot’ of the consequences of past actions. Even more irrational is that fact that today’s prices, in determining today’s investments, also determine tomorrow’s production.”

Worse still, the further a given branch of industry is from consumer demand, the more easily can supply become detached from demand. Personal consumption can never keep up with the massive expansion of production, as working-class income is limited by the needs of capital to maintain low labor costs.

As Maksakovsky puts it, “The growth of consumer demand can be compared to throwing a stone into the water, causing ripples to spread continuously outward. The further the ripples spread, the further removed from consumption are the production branches that are affected.” And so in those branches of industry that produce the necessary materials for other industries, “there are no norms of expansion to give direct ‘instructions,’ for the control of consumer demand is far away and there are much greater profits being realized.”

Underproduction thus easily becomes overproduction in the main branches, eventually growing over into a crisis.

Overproduction now results in the reverse process. Supply exceeds demand, leading to a drop in prices and diminishing rates of profit. Industry then curtails production, which leads to greater unemployment and declining wages. This, in turn, only further limits demand, thus leading to a vicious circle. The only way out is for profitability to return through a reduction of costs, which necessitates a massive renovation of fixed capital by those corporations that remain.

This brings us back to where we started. Depression gives way to an expansion, inevitably culminating in overproduction, which leads to a crisis, a depression “and so on,” writes Maksakovsky, “until reaching capitalist ‘infinity.’”

Maksakovsky takes up a number of other important issues as well, such as the role of credit and financial markets. He also touches, at least in passing, on a number of debates—from Luxemburg’s theory of imperialism, to Tugan-Baranovsky’s disproportionality theory, to the role of underconsumption, to Bukharin’s criticism of Stalinist industrialization, and more.

For readers who have a good grasp on the fundamentals of Marxist economic theory, The Capitalist Cycle will make for a challenging and worthwhile read. It is an important contribution to the development of a systematic Marxist theory of crisis.

Issue #103

Winter 2016-17

"A sense of hope and the possibility for solidarity"

Interview with Roxanne Dunbar-Ortiz
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