Indeed, today’s world of wild stock market booms and slumps, recurring layoffs and long-term unemployment, corporate scandals and power blackouts, seems to fit their description better than ever before. The present economic downturn is no exception. The United States is currently in the middle of the longest period of job losses since the Great Depression of the 1930s. In fact, the U.S. economy today has 2.6 million fewer jobs that it did two years ago. Meanwhile, over two million people have lost health insurance coverage and personal bankruptcies hit a record of over 1.5 million households in 2002.² In short, economic crises–recessions and depressions–were a part of capitalism at its birth and, despite promises to the contrary, continue to plague the system to this day.

Understanding the drive toward crisis is central to Marx’s analysis of capitalism and to his arguments for the possibility and necessity of revolutionary change. For Marx, the existence of inequality or poverty alone is not what turns workers against the capitalist system. These problems have always been a part of the everyday workings of any "healthy" capitalist economy. Of greater social and ideological impact is the insecurity, instability and ruin that economic crises periodically inflict on the lives of working-class people. And so in Capital, Marx argues that capitalism

dispels all fixity and security in the situation of the laborer…it constantly threatens...to snatch from his hands his means of subsistence, and...make him superfluous. We have seen... how this [class] antagonism vents its rage...in the incessant human sacrifices from among the working class, in the most reckless squandering of labor power and in the devastation caused by a social anarchy which turns every economic progress into a social calamity.³

Crises have an impact on the capitalists’ fortunes as well. They break up what Marx called the "operating fraternity of the capitalist class" and produce an all-out fight for survival between capitalists themselves, and of capital against the working class.⁴ Because of this, even relatively minor economic crises can lead to political instability, ideological confusion among the ruling class, an intensification of the class struggle and war. Marx argues that crises "carry the most frightful devastation in their train, and, like an earthquake, cause bourgeois society to shake to its very foundations."⁵ Thus it is out of the impact of capitalist crisis that the possibility of revolutionary change emerges, not as a guarantee, but as a possibility in the hands of the working class. As the Russian Marxist Vladimir Lenin once noted, "oppression alone, no matter how great, does not always give rise to a revolutionary situation in a country. In most cases it is not enough for revolution that the lower classes should not want to live in the old way. It is also necessary that the upper classes should be unable to rule and govern in the old way."⁶ This condition is created and furthered by economic crisis, along with the instability, polarization and conflict it generates.

Moreover, the persistence of crises under capitalism makes revolutionary change not just possible, but also an urgent necessity. As Marx and Engels argued in the Communist Manifesto, the class struggle historically was "a fight that each time ended, either in a revolutionary reconstitution of society at large, or in the common ruin of the contending classes."⁷ That capitalism today could produce the "common ruin" of everyone involved is a distinct reality. The "most fearful devastations" described by Marx, resulting in poverty, hunger, environmental destruction and war, have only increased since his time. Because of this, Marx and Engels argued that the crisis-prone nature of capitalism creates the need for socialism, not just to abolish poverty and inequality, but to eliminate the recurrent social and economic disasters that are endemic to the capitalist system.

This article will attempt to lay out the basic elements of the crisis theory found in Marx’s writings on economics, beginning with a review of some of the fundamentals of Marx’s analysis.

Marx’s goal was to "lay bare the economic law of motion of modern society."⁸ What is it about his economic method that allows it to explain how capitalism works?

The 18th century bourgeois economist, Adam Smith, argued that capitalism and the free market came from a "propensity in human nature...to truck, barter and exchange one thing for another."⁹ Another capitalist economist, Lionel Robbins, contended that capitalism consists of "a series of interdependent...relationships between men and economic goods."¹⁰ In their view, the economic relationships between different people is not what is important–it is the relationship between people and products. In other words, your relationship to a box of Tide is more significant to understanding capitalism than your relationship to your boss.

In contrast, Marx argues in Capital that "the relation between wage-labor and capital determines the entire character of the [capitalist] mode of production."¹¹ His goal was to go beyond just studying the process of exchange (buying and selling), which conceals what is happening under the surface. As Marx put it, "a worker who buys a loaf of bread and a millionaire who does the same appear in this act only as simple buyers, just as...the grocer appears only as a seller. All other aspects here [of the economy] are extinguished."¹² By focusing only on the rules and mechanisms of exchange, bourgeois economists will claim that we all participate as equals in a capitalist economy–everyone, whether rich or poor, has the right to buy bread (or a yacht) at a certain price. However, by analyzing the sphere of production as well–"the relation between wage-labor and capital"–Marx is able to expose the underlying class contradictions within the system that are ignored by the capitalist economists.

Bourgeois economists also view capitalist relations as the natural order of things–arising from a "propensity in human nature," as Adam Smith claimed. As a result, for them, "the world-market, its conjunctures, movements of market-prices, periods of credit, industrial and commercial cycles, alternations of prosperity and crisis, appear...as overwhelming natural laws that irresistibly enforce their will over them, and confront them as blind necessity."¹³ Marx instead argued that "the capitalist process of production is a historically determined form of the social process of production in general."¹⁴ He sought to analyze capitalism and the market historically, not as an unchanging product of "natural laws," but as a dynamic system which, like other class societies, comes into being at a particular stage in human history, and is regularly undermined by its own internal contradictions.

According to Marx, at the heart of all human societies was production: the transformation of nature to produce the things needed to maintain the existence of that society. In class societies, the key element is that one class in society takes some of the product of the labor of another class for themselves. Under feudalism, for example, lords would take some of the product of the serfs’ labor. The serfs spent a portion of their workweek producing goods for themselves, and a portion of their labor went to producing goods for the lord. The serfs could produce more than they consumed, and the extra went to the nobles. Marx called this extra labor "surplus labor," and the extraction of it was called exploitation.¹⁵

Under capitalism, the two opposites are not lords and serfs, but capitalists and workers. A central element of Marx’s analysis of capitalism is how capitalists are able to obtain surplus labor from workers. Due to the functioning of the market, the way that exploitation takes place under capitalism is more disguised than in previous modes of production. An important tool in uncovering this process is Marx’s "law of value" or "labor theory of value."

Every system of production has to regulate how much of people’s labor is spent producing one thing versus another, so that society does not expend labor on things that are useless.¹⁶ Generally speaking, in pre-capitalist societies people produced things directly for other people, not for sale on a market–in Marx’s language, they produced for use, not exchange. So they produced for the needs and wants of themselves, their hunter-gatherer community, their family unit, their lord, their slave master and so on. They produced because "our tribe needs deer" or "the lord demands potatoes" or "our household needs firewood."

Capitalism is very different from past modes of production. Under capitalism, nearly all of the products of human labor are commodities, that is, they are produced for sale. Marx called this "generalized commodity production"–people obtain their needs and wants by purchasing them on a market, and people produce what other people need and want by selling things on a market. However, producing things for sale (for exchange) creates a new dynamic, different from societies that produce directly for use. Allocating labor in this kind of economy is regulated by the law of value. A few examples can help explain how this law works.

We can start with a simple example. One of the earliest forms of exchange is of peasant "handicraft" or household-based production. Although these households were largely self-sufficient, candles produced in one peasant family might, for example, be exchanged for a basket produced in another. Residents of different villages might also exchange these goods at a local market. One can imagine such a market where candle makers exchange goods with those who weave baskets. Given the technology of the day, let’s say it takes about eight hours worth of work to weave a basket and just an hour to make a candle. When the peasants go to market, everyone wants to get the most for their labor-time. No one in their right mind would exchange their dozen candles for a basket, because they would be trading something that took them twelve hours to produce for something that could be produced in eight. From the other side, a basket maker couldn’t get away with trying to get 12 candles for his or her basket, no matter how long it took to weave it. A buyer would get a basket from someone else (or they might just make it themselves).¹⁷

So the outcome of exchanging goods (a marketplace) is that the amount of labor-time that is necessary to produce something is enforced. Marx called this "socially necessary labor-time"–the standard amount of time deemed necessary to produce a commodity using the best methods and technology that are currently widely available. And a commodity’s "value," in Marx’s terms, was simply the amount of socially necessary labor-time needed to produce it. In this example, the value of eight candles is equal to the value of one basket.

But what if people want more of one commodity than another? We can take a more complex example. Take a community of self-employed artisans who produce for each other on a market. Hence there are tailors and shoemakers and blacksmiths and so on, but no capitalists yet. Marx referred to this semi-idealized type of society, which predates capitalism, as "simple commodity production."¹⁸ The producers exchange goods with each other through barter or using some kind of money. The use of money becomes necessary as exchange becomes more complex–when a candlemaker wants to obtain a basket, but the basket-weaver isn’t interested in candles, for example. As a result, some agreed-upon commodity (such as gold) is used as money–"as a universal measure of value," in Marx’s words.¹⁹ Thus in the marketplace, money is used to represent the amount of value of the goods you have sold, and also the amount of value of goods you can buy.

As before, each producer wants to get the most for their labor-time. Let’s say a pair of shoes is the same value as a wool sweater from the tailor (they take the same labor-time to produce). These two products will therefore exchange for each other, that is, for the same amount of money.²⁰ However, if the demand for shoes goes up, their price will rise, and so you will get more money for selling a pair of shoes than selling a sweater. The tailors will take note of this. The key is that shoemakers now make more money than tailors do for the same labor-time. So, more current and future tailors will switch to shoemaking, which will bring the price back to the point where products that take the same labor-time to produce will sell for the same price. In this way, the law of value regulates not just exchange, but social production–what gets produced and how people’s labor is spent.²¹ Though prices may fluctuate with the market, the key factor in how goods are exchanged is the amount of labor-time expended on their production. As Marx writes, "supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself."²²

At a certain point in history, simple commodity production (along with other types of societies) gives way to capitalism. Sweaters are produced for a market, but the production process is now controlled by capitalists. The sweaters themselves are made by workers–people who have no choice but to work for someone else in order to survive. (As part of the rise of capitalism, people who historically supported themselves with their own land or tools have to be stripped of these, in order to create a class of workers.) The capitalist does not make sweaters, but he has money, so he opens a clothing factory: he buys tools, and hires some tailors. The sweaters produced by the tailors are the capitalist’s to sell. The labor and tools bought by the capitalist are what Marx calls capital: money invested to make more money. This is different from simple commodity production, where the aim of exchange is simply to sell things you’ve made in order to get the things you need.

But why are capitalists so obsessed with making more money than they started with? This isn’t just due to their greed, but because of competition. Competition forces capitalists to "accumulate capital"–they have to buy more and more labor power and more and faster machines.²³ We can use the example of the clothing factory owner to explain this process. Like all capitalists, he has an incentive to produce his goods faster than the standard socially necessary labor-time, so he can undercut his competitors and increase his share of the market. Let’s say that a new loom is invented, which allows tailors to produce a sweater faster, below its current value. The loom is a tool that increases productivity. The owner of the clothing factory starts using looms because his employees can produce more sweaters in a day.

Making the sweater now takes the labor-time of the tailor, and the labor-time of the person who made the loom. This is why Marx says that machines "pass their value" to other commodities–it’s a metaphor to describe the labor-time involved. Machines don’t do this all at once; they are used up, through wear and tear, over a longer or shorter period of time. A certain portion of the value embodied in the machine, in this case the loom, is passed on to each sweater produced, along with the labor newly added by the tailor working the loom. (The materials used to make the sweater, such as wool from the shepherd, also pass their value onto the final product. Making the sweater takes the labor of the shepherd as well.) Most importantly, with the introduction of the loom as the standard technology, the socially necessary labor-time to make a sweater is reduced to the pace of the new machine, and now every capitalist has to buy some looms just to keep up.

If capitalists do not reinvest their money in this way–and hence accumulate capital–they will not be able to produce their goods in the ever-decreasing socially necessary amount of time, and they go out of business. So according to Marx, the capitalist

shares with the miser the passion for wealth as wealth. But that which in the miser is a mere idiosyncrasy, is, in the capitalist the effect of the social mechanism of which he is but one of the wheels…. [T]he development of capitalist production makes it constantly necessary to keep increasing the amount of the capital laid out in a given industrial undertaking, and competition makes the...laws of capitalist production to be felt by each individual capitalist as external coercive laws. It compels him to keep constantly extending his capital, in order to preserve it, but extend it he cannot, except by means of progressive accumulation.²⁴

Thus, the driving goal for the capitalist is not production for use, or production simply as a means to increase his personal consumption. It is production for the sake of money, as a means to further accumulation–every capitalist must accumulate capital or go under.²⁵ As an executive at U.S. Steel once famously declared, "we’re not in the business of making steel. We’re in the business of making money."²⁶

So how does the capitalist end up with more money than he started with? It’s explained by the fact that under capitalism, workers’ own ability to work becomes a commodity–something for sale.²⁷ To explain the consequences of this, Marx makes an important distinction between the terms "labor" and "labor power." Labor power is what the worker sells on the market–his or her ability to work. Labor is the actual work done once the worker arrives on the job–the amount of socially necessary labor-time performed, that is, the value of the goods produced. Profit for the capitalist is possible when the value of the goods the worker produces with their labor in a given period of time is greater than what they are paid in wages. So to make more money than he started with, the capitalist will attempt to pay as little as possible for the worker’s labor power, and will try to get as much labor as possible out of the worker (by intensifying and speeding up work, or by extending the working day, for example). In a given workday, if a worker produces the equivalent of his or her wages in four hours, then the rest of the work performed that day is "unpaid labor," according to Marx. In other words, workers can produce more value than they consume, and the capitalists get to keep the extra.

This is how exploitation happens under capitalism–how surplus labor, what Marx called "surplus value," is extracted. Viewing the economy only in terms of exchange (buying and selling) misses this fact. After all, in the marketplace the capitalist sells his goods for the best price he can, while the worker tries to get the best price for his or her labor power. However, Marx’s analysis helps to explain the relationship between labor and capital in a capitalist economy in a way that bourgeois economics does not.²⁸ What is evident when production is viewed in value terms is that the capitalist must always seek to maximize the surplus value created by the worker at the point of production, whatever the price might be for his goods. When a capitalist talks to his or her employee, it’s usually not about the price of their product, but about how much time it takes to make it.

Moreover, the capitalist’s machines and tools do not produce surplus value, as workers do. A hammer passes its value onto a product, but the capitalist can’t order the hammer to work harder and produce more value (labor-time) than went into making it. Workers’ labor power is the only input to the production process that can give the capitalist more than he paid for, due to the difference between the labor power paid for and the labor performed. (Put another way, a capitalist who owns a restaurant doesn’t look to the stoves and pots and pans he owns to make him money, but rather the cook who works them. This is why Marx called tools and machines "constant capital," while "variable capital" is workers’ labor power put to use for the capitalist.) Furthermore, in a competitive market economy, capitalists, generally speaking, can’t increase their wealth by simply "buying low and selling high"–this is not the way companies such as Boeing, General Electric or Microsoft generated their vast fortunes. In short, the amount of value the capitalist controls (and hence the amount of money the capitalist makes) is generated from exploitation–the extraction of surplus value from workers. This is why Marxists argue that the exploitation of workers is the source of the capitalist’s profit.²⁹ Most importantly, without this profit and the accumulation of capital, the system grinds to a halt. This leads us to crises.

At the height of every boom, the apologists for capitalism will declare that the bust will never come, and that the capitalist "business cycle" has been eliminated. So far, they have always been proven wrong. Because of exploitation, profits and capital accumulation are possible under capitalism. But it does not make them guaranteed. If there are no profits and accumulation (or even if they are squeezed) then businesses close, people lose jobs, debts are not paid, banks collapse, governments run out of money–in short, there is an economic crisis.

So what do capitalists have to do in order to turn a profit and accumulate capital? First, they have to succeed in extracting surplus value from workers–obtaining the extra labor-time. In class societies in the past, this first step was enough. Under feudalism, the lord took the grain and eggs and potatoes that the serf produced and did what he wanted with them–ate them, gave some to his hangers-on, gave some to other lords, to the church, etc. But under capitalism, there’s an extra step, because the capitalist generally doesn’t consume the products the worker makes. Rather, the commodities the worker produces have to be sold. As Marx put it in Capital:

as soon as all the surplus labor...possible to squeeze out has been embodied in commodities, surplus value has been produced. But this production of surplus value completes but the first act of the capitalist process of production–the direct production process. Capital has absorbed so and so much unpaid labor…. Now comes the second act of the process. The entire mass of commodities, i.e., the total product...must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the laborer has been indeed exploited, but his exploitation is not realized as such for the capitalist.... The conditions of direct exploitation, and those of realizing it, are not identical.³⁰

So the form that economic crises take under capitalism generally fall under two categories: crises from the inability to extract enough surplus value, and crises from the inability to realize surplus value. Individual capitalists will often have trouble with one or both of these. However, when the economy as a whole is affected, the principal way that realization crises are triggered is due to a phenomenon called "overproduction" or "overcapacity." Crises resulting from the inability to extract enough surplus value are produced by a law Marx referred to as the "tendency of the rate of profit to fall." We will review each of these in turn, starting with a discussion of realization crises.

Surplus value has to be converted into money in order to accumulate capital–"the entire mass of commodities, i.e., the total product...must be sold." But due to the anarchy of the market, selling your product is not a given–Marx argued in Capital that "violent price fluctuations...cause interruptions, great collisions, even catastrophes, in the process."³¹ The main way crises of this kind develop is due to "overproduction"–too much is produced for the capitalists to sell at a profit.

At the root of this problem is the capitalist drive for accumulation at all costs. It creates an inherent tendency for capitalists to produce without concern as to who might consume. As Marx argues, "since the aim of capital is not to minister to certain wants, but to produce profit…a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier."³² This takes place during every boom: There is a conflict between the drive to generate as much surplus value as possible in order to accumulate capital, and the need to realize this surplus value through sale. In 1999, for example, half the U.S. wheat harvest went unsold, an amount equal to one billion bushels.³³ More recently, according to the Wall Street Journal, "U.S. factory usage is at its lowest level in more than 20 years; hundreds of jetliners are mothballed and the rest fly more than a quarter empty; rising apartment vacancies are forcing landlords to cut rents; and unemployment is at an eight-year high. In short, too much supply is chasing too little demand."³⁴ The same pattern has been true in other countries: China, for example, in 1997 "manufacture[d] one million men’s shirts a day, joining the glut of 1.5 billion already stashed in warehouses. There [were] also 10 million unsold watches, 20 million extra bicycles, and 100,000 stockpiled autos and other vehicles."³⁵

Hence, under capitalism, there is a built-in tendency for production to outstrip the market. This isn’t too much production of what people need, but of what people can afford to buy.³⁶ The system can "overproduce" clothes and wheat, yet people will still be cold and hungry because they cannot pay for them. According to Marx:

There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.... There are not too many means of production produced to employ the able-bodied portion of the population. Quite the reverse.... [N]ot enough means of production are produced to permit the employment of the entire able-bodied population under the most productive conditions, so that their absolute working period could be shortened.... On the other hand, too many means of labor and necessities of life are produced at times to permit of their serving as means for the exploitation of laborers at a certain rate of profit...i.e., too many to permit of the consummation of this process without constantly recurring explosions.... Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.³⁷

Many bourgeois economists still argue that in theory there will always be a demand for things produced, due to a principle called Say’s Law.³⁹ Say’s Law states that everyone who sells something uses that money to buy something in return. So if a worker sells his or her labor, or a capitalist sells his products, they will use the money to buy. Because of this, there will always be enough demand in general.

Marx had several problems with this theory. The first is the case of a capitalist or an industry which produces too much of a particular product in a particular market. This happens all the time, simply because demand fluctuates, and every capitalist wants to corner the market for themselves. Marx argued that overproduction in certain industries could trigger a general crisis of overproduction in the rest of the economy. As he put it, "in times of general overproduction, the overproduction in some spheres is always the result, the consequence, of overproduction in the leading articles of commerce."⁴⁰ In today’s economy, the "leading articles of commerce" refers to steel or cars or computers, rather than umbrellas. If there is overproduction in these leading industries, they will have to sell at a loss, if they can sell at all. They may have to stockpile products. The capital accumulation in that industry suffers, and they purchase less constant and variable capital. All the other industries that depend on supplying these leading industries are now overproduced. As a result, "the chain of payment obligations due at specific dates is broken in a hundred places."⁴¹ The crisis can then spiral from there.

There is another situation where Say’s Law breaks down, in Marx’s view. This occurs when capitalists sell their goods and then refuse to buy–they make money and don’t spend it. (Or alternately, when workers sell their labor power and refuse to consume.) One factor causing this is the role of credit, since capitalists are always in debt: The level of corporate borrowing in the year 2000 was 74 percent of GDP, a record amount.⁴² Capitalists borrow from the portion of society’s profits and wages that are deposited in banks, with the hope of paying for it later from their own profits, with interest. The role of credit can destabilize capitalist production, however, since it means that during economic booms, "those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers."⁴³ As a result,

every individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund [of money] and being dependent upon his actual returns. [T]he whole process becomes so complicated...that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers [workers]. Thus business always appears almost excessively sound right on the eve of a crash.⁴⁴

The best known contemporary example of this is the Enron Corporation.

An indebted capitalist can thus end up in a difficult situation. He may have produced a heap of commodities containing lots of surplus value. But the bank does not care how much surplus value or products he has–the bank wants money, and so the capitalist must sell on whatever terms to get that money, even if it means below value, and potentially at a loss.⁴⁵ As Marx argued, the capitalist economy is dominated by "a whole series of payments which depend on the sale of…commodities within [a] particular period of time," because of debts, and "these compulsory sales play a significant role in crises."⁴⁶ The outcome of these compulsory sales is that the capitalist doesn’t realize his full surplus value, has less money to reinvest, purchases less constant and variable capital and the crisis can spiral from there.

Another factor in capitalists’ selling and refusing to buy is the tendency of the rate of profit to fall (discussed further below). Even if profit rates decline, as long as big capitalists can expand their investments significantly, they can still maintain or increase their total profit–what Marx called the "mass of profit." For example, if a capitalist makes 10 percent profit on $1 million invested, but only 8 percent profit on $2 million invested, his mass of profit still grows from $100,000 to $160,000. But a point can be reached during a boom where a capitalist does not have an incentive to accumulate further. Imagine if the same capitalist made 10 percent profit on $1 million invested, and then only 5 percent profit on $2 million invested. His mass of profit stays the same, at $100,000, despite having invested an additional $1 million. As Marx points out, "at a point...when the increased capital produces just as much, or even less, [mass of] surplus-value than it did before its increase, there would be absolute overproduction of capital."⁴⁷ Capital available in the marketplace is now overproduced, as capitalists are increasingly wary of investing their money without a guarantee of a greater return. This "overproduced" capital could thus mean medical equipment sitting idle while nurses are unemployed, simply because the equipment and nurses cannot be put to work at a profit for the capitalist.

A more basic explanation for the phenomenon of selling and not buying is that there is a general tendency for capitalists and bankers (financial capitalists) to hoard money during crises. In 2002, for example, Microsoft was sitting on as much as $5 billion in cash.⁴⁸ Marx describes this phenomenon as follows: "during crises–after the moment of panic–during the standstill of industry, money is immobilized in the hands of bankers, bill-brokers [speculators], etc.; and, just as the stag cries out for fresh water, money cries out for a field of employment where it can be realized as capital."⁴⁹ In other words, during periods of capitalist crisis money is tight just at the point when it is most needed. Hence capitalists refuse to invest money, and so purchase less constant and variable capital, and again, the crisis can spiral from there.

So rather than the principle of supply and demand producing a smooth course that determines prices and sales, it is one fraught with instability–"a permanently unhealthy state of affairs," as Engels described it.⁵⁰ The outcome of this process is often overproduction and crisis, along with the absurdity of mountains of goods going unconsumed that people desperately need.

Marx defined the capitalist’s "rate of profit" as the amount of surplus value extracted relative to the amount of capital invested in machines and labor. According to Marx, the rate of profit gets squeezed by the process of capitalist production itself. And when the rate of profit declines for a capitalist industry or economy, crises can ensue.

How does this occur? One aspect of accumulating capital is that the capitalist has to invest more and more in machines and tools in order to raise productivity and stay ahead of the competition. So the capital they invest is composed more and more of machines ("constant capital") than labor power ("variable capital"). For example, over time, in a particular industry 50 percent then 55 percent then 60 percent of the total capital might go into machines.⁵¹ Marx called this a rise in the "organic composition of capital."

Let’s use an example from the real world to understand the consequences of this. Take the case of a commercial blood testing lab–the commodity they sell is the testing of blood. The workers at the lab combine the blood specimens they receive into "pools" of about 500 samples for testing. Everybody in the industry does this by hand, which is very slow. Therefore, there’s a lot of value (socially necessary labor-time) that goes into this commodity. Then, one lab buys a new machine called a Tecan Genesis 200, which pools the blood for you. The same number of workers can pool a much larger number of blood samples in the same amount of time. This lab produces below the socially necessary time (maintained by all its competitors), and so the owner makes a lot of money. This is why capitalists invest in constant capital like a Tecan machine. But eventually his competitors catch on and also invest in the Tecans. Soon the standard socially necessary labor-time drops to the pace set by the new machine.

For a different example, we can use the shoe industry. Let’s assume that the standard socially necessary labor-time to produce a shoe is six minutes, and so 10 shoes get made in an hour. A shoe sells for $10. If one capitalist, with an expensive new machine, can produce 20 in an hour, then he is has an advantage over his competitors. That is, until they all get the new machine, and then everyone can produce 20 shoes in an hour. The standard labor-time to make a shoe is now three minutes, so it is half the value that it was before, and the price falls to $5 a shoe.

At the end of this process the competitors are back on a level playing field. Their workers are more productive–they can make more products in the same amount of labor-time. But the capitalists are left with a much greater investment in constant capital than they had before, relative to the surplus value the workers produce. For capitalists, this is a problem. Most of them made the massive investment just to keep up with their competition–this is another reason why capitalists invest in constant capital like a Tecan machine. (In fact, a Tecan Genesis 200 costs over $100,000.) But they can’t make the Tecan machine itself produce surplus value in order to make back the money. While each worker in the industry can produce a greater number of goods each day, they still work the same amount of unpaid surplus labor-time each day. Using Marx’s formula, the capitalists’ rate of profit will suffer, because the amount of total capital invested has increased, without changing the amount of surplus value generated.⁵²

Marx called this "the law of the tendency of the rate of profit to fall," and felt it was crucial for understanding capitalism. He argued that it was "in every respect the most fundamental law of modern economy, and the most important for understanding the most difficult relations. It is the most important law from the historical standpoint."⁵³ The reason this analysis is important to Marx is because it establishes that "the real barrier of capitalist production is capital itself."⁵⁴ That is, the inherent drive to invest and increase productivity is the same process that leads the system to crisis.

At the same time, in Marx’s view, this law wasn’t absolute. He argued in Capital that the tendency of the rate of profit to fall was "a law whose absolute enforcement is checked, retarded, weakened, by counteracting causes."⁵⁵ Some of the counteracting causes Marx lists are: "increasing the intensity of exploitation" (that is, making workers work harder), "forcing wages below their value" (cutting workers’ pay and benefits), "foreign trade and investment" (seeking captive markets and cheaper labor abroad), "a lowering of taxes" and "the devaluing of constant capital" (discussed further below).⁵⁶ Therefore the law doesn’t claim to be able to predict what the rate of profit for a particular capitalist or industry will be 10 or 20 years from now. In the real world, the manifestation of the law is a process where it clashes with its counteracting causes in a particular place and time. For example, capitalists are forced to fight the law by increasing the level of exploitation and forcing wages below their value. This can offset a fall in profits, if they are successful in forcing workers to work longer and harder for less. This process is the reason why introducing new technology is often coupled with making workers’ lives worse, not better–in a sense, they are made to pay for the profit squeeze the capitalist’s new investments created.

Marx did not believe that the counteracting causes made the law irrelevant, however. Despite their effects, the rate of profit can still be forced down for an industry or economy, and crises will ensue.⁵⁷ Moreover, Marx saw the manifestation of the law and its counteracting causes as a source of even more instability for the system, not less. If workers fight back against increasing exploitation, it can produce an acute intensification of the class struggle, because the bosses, facing falling profits and competition, have their backs against the wall. Marx also argued that "from time to time the conflict of antagonistic agencies [the counteracting causes] find vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium."⁵⁸

An example of how the action of the counteracting causes themselves can lead to crises is the process of devaluing constant capital. As already discussed, Marx pointed out that the increasing investment in tools and machines by capitalists in the drive to keep up with each other also makes it harder and harder to make profits. But in a capitalist economy, increasing investment in tools and machines also raises productivity. One effect of this is that the labor-time necessary to make the tools and machines themselves is reduced, making these investments cheaper. This is true of all machines today compared to the past. The value of computers has plummeted in the last 20 years, for example–they take a lot less labor-time to produce. If the rate of profit is the amount of surplus value extracted relative to the amount of capital invested in machines and labor, then as machines get cheaper, the rate of profit will rise. The result is a long-term counteracting force on the tendency of the rate of profit to fall.

This process is not without its consequences, however. We can use the Tecan Genesis 200 to explain this further. Let’s assume that a capitalist bought one last year for a certain amount of money. In the year that follows, increases in productivity at the Tecan factory mean that the newer Tecan model takes a lot less socially necessary labor-time to produce–and so it is cheaper. But this drop in the machine’s value doesn’t help our capitalist who bought the machine last year–it actually makes things worse for him. Doing blood tests with the newer Tecan takes less socially necessary time, because the machine itself took less socially necessary time to make. A "new" capitalist who buys the latest Tecans can take advantage of this, and charges less for the blood tests. The "old" capitalist who bought the machine last year gets squeezed. This may eventually drive the old capitalist out of business. The new capitalist can obtain the Tecan at a price that reflects the new (lower) value of the machine. This "devalues" the old capital, a good thing from the new capitalist’s perspective. (In a sense, the new capitalist tells the old one: "I’m taking your capital on the cheap, so I can put it to work at a profit, where you could not.") However, this overall process often happens at a serious cost to the economy–with companies going out of business, workers getting laid off, debts not getting paid and hence economic crisis potentially breaking out.⁵⁹

Ultimately, capitalists and the capitalist state can attempt to counteract the tendency of the rate of profit to fall, even if it involves "forcible solutions of the existing contradictions." However, many of these means can trigger or exacerbate crises. And as we will discuss further below, there are limits to the manageability of crises within the context of the modern capitalist system.

Short of capitalism being overthrown, a capitalist economy will eventually recover from crisis. As the Russian revolutionary Leon Trotsky once noted,

capitalism does live by crises and booms, just as a human being lives by inhaling and exhaling. First there is a boom in industry, then a stoppage, next a crisis, followed by a stoppage in the crisis, then an improvement, another boom, another stoppage, and so on.... The fact that capitalism continues to oscillate cyclically...merely signifies that capitalism is not yet dead, that we are not dealing with a corpse. So long as capitalism is not overthrown by proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave.⁶⁰

To escape from each crisis, however, the economy must emerge at a "starting point" that is different from the "ending point" where the crisis began.⁶¹ As Marx notes, "the...stagnation of production would have prepared–within capitalistic limits–a subsequent expansion of production. And thus the cycle would run its course anew."⁶² The new starting point will allow profitable capital accumulation to resume. This requires raising the rate of profit, usually accomplished when the impact of crisis sufficiently reduces (depreciates) the price of the inputs to the capitalist production process: constant and variable capital. Additionally, the crisis will intensify the competition between capitalists themselves, with each attempting to survive, and restore their accumulation, at the expense of their rivals. In the end, laying the foundation for this subsequent expansion of production usually comes at an enormous human and social cost.

One factor in restoring profitable accumulation is a depreciation in the price of variable capital (workers’ labor power)–in other words, a reduction in the wages and benefits paid to workers. Marx summarizes this process as follows: "the stagnation of production would have laid off a part of the working class, and would thereby have placed the employed part in a situation where it would have to submit to a reduction of wages even below the average. This has the very same effect on capital as an increase of...surplus value at average wages would have had."⁶³ A contemporary example of this process involves the computer software industry. Technology workers perform an average of 50 hours of work per week, yet with recent increased layoffs, are accepting lower and lower wages and salaries for their work.⁶⁴ At the same time, they are producing the same (and sometimes more) value for their employer. This fact helps restore and increase the capital accumulation of a section of the capitalist class.

Economic crisis also produces desperate attempts by capitalists to shore up their profits at the expense of each other. As Marx notes, "as soon as it is no longer a question of sharing profits, but sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another.... How much each individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers."⁶⁵ For example, when facing problems in extracting surplus value from workers, or in realizing surplus value, capitalists will often prefer to use their "idle money" for purposes of speculation in things such as stocks or currencies, rather than investing in new capital.⁶⁶ This occurs at the end of every business cycle as profits begin to decline; hence the "irrational exuberance" of the stock market in the late 1990s.⁶⁷

However, such price speculation among capitalists does not increase the value that the capitalist class as a whole controls; it simply involves them swindling each other: "one party can win in exchange what the other loses; all they can distribute among themselves is the surplus value [produced by the working class]. But these proportions open a field for individual deception...which has nothing to do with the determination of value as such."⁶⁸ In other words, buying a stock "low," and getting another capitalist to buy it "high," does not create additional wealth, it just distributes it differently among capitalists. (Stock traders will often refer to this as the "greater fool theory."⁶⁹) Therefore, Marx referred to this speculative wealth as "fictitious capital."⁷⁰ But if a particular capitalist is able to gain at the expense of his brothers, he might be the one most likely to survive the crisis. The most visible result of this stock speculation is the creation of "a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance and stock speculation."⁷¹ The result of such speculation can be a dramatic crash and panic when the whole process unravels, and no one is willing to buy at a higher price (that is, no one can find a "greater fool"). Those who sell at the right time will escape, those left "holding the bag" will likely be ruined.

Another factor in restoring profitable accumulation is a depreciation in the price of constant capital (tools and machines). Consider, for example, a capitalist who purchased a computer for $1,000. A couple of years later he goes out of business, and one of his competitors wants to buy up his assets. By that time the value of the machine has fallen (it can be produced much quicker) and so the price is only $750. Obtaining the computer at the new price devalues the capital, as described earlier in the case of the Tecan machine. However, let’s also assume that the bankrupted capitalist is desperate to unload his assets, in order to pay his debts. Therefore, he sells his computer for only $500. The machine has therefore also depreciated in price. Most importantly, the surviving capitalist benefits from this.

In certain circumstances, constant capital can also be depreciated through overproduction; that is, if computers are heavily overproduced, they can be purchased on the cheap by capitalists seeking to restore their accumulation. Hence, as Marx notes, during crises "part of the commodities on the market can complete their process of circulation and reproduction [purchase and sale] only through an immense contraction in their prices.... The elements of fixed capital are depreciated to a greater or lesser degree in just the same way."⁷² In other cases, capital that can no longer be profitably employed is simply destroyed: A bankrupt steel factory’s machines may just lay idle and rust, for example. Through this process of devaluation, depreciation and destruction, the surviving capitalists are able to renew profitable capital accumulation. But which capitalist wins or loses is again the result of "a fight among hostile brothers":

how is this conflict settled and the conditions restored which correspond to the "sound" operation of capitalist production?... It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital [that is overproduced]...or at least a part of it.... [T]he loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed...depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, a third suffers but a relative loss or is just temporarily depreciated, etc.⁷³

The outcome of this "competitive struggle" can have severe consequences in today’s economy. This is due to what Marx referred to as the "centralization and concentration of capital"–that is, the units of capital get bigger and bigger, and become fewer and fewer, as a result of capital accumulation and mergers.⁷⁴ As of 1983, for example, less than 3 percent of companies accounted for 77 percent of all sales in the United States, while Citicorp and Exxon together held more assets than all the small businesses in the country.⁷⁵ All capitalist economies eventually become composed of these economic giants, as the "biggest fish" are the ones most likely to survive each successive crisis.⁷⁶

It is in the context of crises, however, that the centralization and concentration of capital creates significant problems for a capitalist economy. First, the bankruptcy of a major firm, or of a major industry, becomes much more costly. There is the greater possibility that the collapse of a large corporation, or several significant players within a particular industry, will bring the rest of a national economy, if not the global economy, into severe crisis. So in today’s economy there is the potential for the busts following the booms to be much more severe, and much more difficult for the capitalist state to manage. The recent record-sized bankruptcies of Enron ($63 billion in assets), Conseco ($61 billion in assets) and WorldCom ($103 billion in assets) highlight the continued development of this process.⁷⁷ Constant capital continues to be devalued through bankruptcy or mergers but at an increasing human cost, while the system more and more becomes composed of long-standing large and often inefficient corporations.⁷⁸ They compete with one another, face profit squeezes and attempt to take advantage of the usual mechanisms to boost their profit: increasing the intensity of exploitation, forcing wages below their value, engaging in foreign trade and investment and demanding lower taxes from the capitalist state. In certain cases, old-fashioned shady accounting comes into play. Additionally, in times of severe crisis, capitalists will attempt to rob surplus value from another nation’s capitalists through war. According to Marx, all this is the fruit of the inner dynamics of capital accumulation itself.

Capitalism has not changed its crisis-prone nature since Marx’s time. It is still doomed to make the lot of the working class more unstable, insecure and miserable. Indeed, the promises made by the ideologists of capitalism have not been fulfilled for billions of people around the world. If anything, crisis has ensured that the opposite is true, as working people in countries from Argentina to Korea to the United States can attest. Marx argued in Capital over a century ago that

within the capitalist system all methods for raising the social productiveness of labor are brought about at the cost of the individual laborer; all means for the development of production transform themselves into means of domination over, and exploitation of, the producers; they mutilate the laborer into a fragment of a man, degrade him to the level of an appendage of a machine, destroy every remnant of charm in his work and turn it into a hated toil; they estrange from him the intellectual potentialities of the labor process...they distort the conditions under which he works, subject him during the labor process to a despotism the more hateful for its meanness.... It follows...that in proportion as capital accumulates, the lot of the laborer, be his payment [wage] high or low, must grow worse.... [T]his law rivets the laborer to capital more firmly than the wedges of Vulcan did Prometheus to the rock. It establishes an accumulation of misery, corresponding with accumulation of capital. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, mental degradation, at the opposite pole.⁷⁹

For Marx and Engels the only solution was democratic economic planning–socialism:

If the producers as such knew how much the consumers required, if they were to organize production, if they were to share it out amongst themselves, then the fluctuations of competition and its tendency to crisis would be impossible. Carry on production consciously as human beings–not as dispersed atoms without consciousness of your species–and you have overcome all these artificial and untenable antitheses. But as long as you continue to produce in the present unconscious, thoughtless manner, at the mercy of chance...crises will remain; and each successive crisis is bound to become more universal and therefore worse than the preceding one; is bound to impoverish a larger body of small capitalists, and to augment...the numbers of the class who live by labor alone.⁸⁰

Marx and Engels did not believe that capitalism would produce socialism of its own accord. If the working class accepts the consequences of every crisis, then the capitalist system will persist until it produces the "common ruin" of all. And so a revolution is not a given, or simply up to the course of history. As Marx and Engels once argued, "history does nothing...it ‘wages no battles.’ It is man, real, living man who does all that, who possesses and fights; ‘history’ is not...a person apart, using man as a means to achieve its own aims; history is nothing but the activity of man pursuing his aims."⁸¹ Our aim must be the overthrow of the crisis-ridden system of capitalism and its replacement with socialism.

Stuart Easterling is active in the International Socialist Organization in Pittsburgh

Thanks to Paul D’Amato, Phil Gasper, Joel Geier, Michal Myers, Lance Selfa and David Whitehouse for helpful feedback and debate on this article.