The Breakdown of Capitalism

Historical Materialism

Marxist sees human history as being based upon production.
This is different to idealism, which sees human history as a battle of ideas, but gives these ideas no material base.
Humans do not just collect their means of subsistence, but transform nature with tools, & so evolving from hunter-gather societies to agricultural & industrial ones.
The agricultural & industrial societies are based upon minority class rule through a state, exploiting the majority who do the work.
Capitalism arose because of the development of the forces of production, not through human will.
The class struggle of capitalism is based upon the material forces of production.

“The mode of production of material life conditions the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness. At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or—what is but a legal expression for the same thing—with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution. With the change of the economic foundation the entire immense superstructure is more or less rapidly transformed. In considering such transformations a distinction should always be made between the material transformation of the economic conditions of production, which can be determined with the precision of natural science, and the legal, political, religious, aesthetic or philosophic—in short, ideological forms in which men become conscious of this conflict and fight it out. Just as our opinion of an individual is not based on what he thinks of himself, so can we not judge of such a period of transformation by its own consciousness; on the contrary, this consciousness must be explained rather from the contradictions of material life, from the existing conflict between the social productive forces and the relations of production. No social order ever perishes before all the productive forces for which there is room in it have developed; and new, higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society itself. Therefore mankind always sets itself only such tasks as it can solve; since, looking at the matter more closely, it will always be found that the tasks itself arises only when the material conditions of its solution already exist or are at least in the process of formation.”

Marx, preface to “A Contribution to the Critique of Political Economy,” 1859

Breakdown & Periodic Crises

“Socialist theory up to now declared that the point of departure for a transformation to socialism would be a general and catastrophic crisis. We must distinguish in this outlook two things: the fundamental idea and its exterior form. The fundamental idea consists of the affirmation that capitalism, as a result of its own inner contradictions, moves toward a point when it will be unbalanced, when it will simply become impossible. There were good reasons for conceiving that juncture in the form of a catastrophic general commercial crisis. But that is of secondary importance when the fundamental idea is considered.”
Rosa Luxemburg, Reform or Revolution, 1900

The recurrent crises of capitalism, with its unemployment & hardship, demonstrate that capitalism is not working in a harmonious way.
Labour power & machines lie idle, preventing the full development of the means of production for humanity.
Capitalism is based upon free-market competition, yet tends to monopoly, with greater & greater centralisation of capital, which inhibits the law of the equalisation of the rate of profit.
Periodic crises drive some companies out of business, & the survivors increase their market share & can in some cases buy up the devalued capital of those that collapse.

Marx’s Reproduction Schema

Marx’s Volume II of Capital was published in 1885.
It appeared to show that capitalist reproduction could go on forever if the correct proportions were maintained.
People like Bernstein argued there was to be no breakdown of capitalism & that socialism would come from the growing organisation & political consciousness of the working class.
Luxemburg predicted that the world market would be permanently exhausted once capitalism was global, & surplus value could not be fully realised.
This would force the working class to make a revolution.
Henryk Grossman rejected Luxemburg’s theory, arguing that there was no limit to capitalism’s ability to realise surplus value.
It was the production of surplus value that was the problem, due to the falling rate of profit, that itself was brought about by the increase in the organic composition of capital.
Under such conditions the capitalists would be forced to attack working class wages & conditions & sharpen the class struggle.
This is what will cause a revolution.

We must remember Marx makes simplifying assumptions in his use of the reproduction schema:
1. The whole world is capitalist & there are only two classes: capitalists & workers
2. There is no technological progress – no increases in the organic composition of capital & so no declining rate of profit
3. No ‘prices of production’ (equalisation of the rate of profit) – all commodities sell at their values

Hence there are no historical limits or cyclical crises in his schema.
If money is abstracted from the schema we fall into Say’s Law & there can be no generalised crises of overproduction, just partial crises of disproportion.
Although Marx didn’t abstract money away, he put the money material, gold, into Dept I – it is treated as part of the production of means of production.
This was for simplicity, as the explanation of capitalism’s crises was not part of his book on capital; he planned to write about it separately, but never succeeded.

Luxemburg argued that in a pure capitalist world expanded reproduction cannot occur as there are no ‘third’ consumers to provide the additional monetary demand.
N.I. Bukharin in “Imperialism and the Accumulation of Capital,” (1924) pointed out that Luxemburg built her entire argument by applying the conditions that apply to simple reproduction to expanded reproduction.
Of course, if we assume in advance the conditions of simple reproduction, we can “prove” that expanded reproduction is impossible.
But we see expanded reproduction all around us.

Grossman noted in 1929 that Bukharin offered nothing to replace Luxemburg’s theory & argued that if capitalism could expand forever, socialism ceased to be a necessity & became utopian once again.
Grossman made use of Otto Bauer’s reproduction schema that incorporated technological change & so increases in the organic composition of capital causing a fall in the rate of profit (the faster development of Department I relative to Department II).
Bauer assumed a 10 percent rate of accumulation for constant capital and a 5 percent rate of accumulation for variable capital.
He also assumed an unchanging rate of surplus value of 100 percent.
Or what comes to exactly the same thing, the workers work half the time for themselves and half the time for their bosses.
Bauer further had the working population grow at a rate of 5 percent per year.
Therefore, a 5 percent rate of accumulation for the variable capital is necessary to maintain full employment.
Since constant capital grows faster than variable capital, the rate of accumulation actually accelerates.
Or to put in everyday language, despite a growing level of “automation,” full employment is maintained because the rising rate of economic growth exactly compensates for the increasing level of automation.
Grossman asked, shouldn’t the rate of accumulation fall with the rate of profit?
And if it does, won’t the rate of the accumulation of variable capital fall below the rate of growth of the working population?
And won’t this lead to a rising unemployment—not full employment?
Like Marx, Bauer brought his diagrams forward only four years.
In terms of value, the wages of the workers remain constant.
But in terms of use values, a steady rise in real wages is implied.
The workers get to consume an unchanging amount of value every year, but with a higher productivity of labour, the same amount of value means a rise in the real wages of the workers.
While the living standard of the workers increases in proportion with labour productivity, the living standard of the individual capitalist will grow at a somewhat slower rate assuming the population of the capitalists grows at the same rate as the workers.
The difference between the living standard of the workers and that of the capitalists will therefore gradually narrow over time.
Therefore, the implication of Bauer’s model is that class antagonisms should gradually soften as capitalism develops.
This is exactly the same conclusion that the bourgeois marginalist economists, including Keynes, arrived at.

“According to Marx, the rebellion of the workers, the class struggle, is only the ideological reflection of the objective historical necessity of socialism, resulting from the objective impossibility of capitalism at a certain economic stage.”
Luxemburg, The Accumulation of Capital, 1913

But according to Bauer a cyclical crisis develops not because there is a relative overproduction of commodities but when the demand for the commodity labour power exceeds the supply.
In otherwords because of a shortage of labour.

Grossman extended Bauer’s schema & demonstrated that by the 36th year his model mathematically does breakdown!
This is true even if with Bauer we tactically accept Say’s Law.
Bauer had the rate of profit decline steadily, though the absolute mass of profit rises.
The capitalists, therefore, have to invest more and more of their profits productively in order to maintain a rate of accumulation necessary to maintain full employment.
Or what comes to exactly the same thing, they must consume relatively an ever lower percentage of the surplus value in the form of items of personal consumption.
But the capitalists can never invest—consume productively—more than 100 percent of the total surplus value.
If the rate of profit is 30 percent, the rate of accumulation cannot be higher than 30 percent.
Therefore, the rate of investment and thus full employment can be maintained in the face of a fall in the overall rate of profit only for a limited period of time.
Eventually, the fall in the rate of profit must lead to a fall in the rate of investment and, assuming an unchanged rate of population growth, the appearance of unemployment.
The harmonies of Bauer’s diagram come to an end or, to use Grossman’s favoured expression, result in a “breakdown.”
By year 36 the rate of profit falls to 8.7 percent.
There is simply not enough total surplus value—profit—even if the personal consumption of the capitalists has fallen to below zero—if that were possible—to maintain full employment without increasing the rate of surplus value.
Either unemployment keeps growing progressively or the rate of surplus value must rise.
The result will be class struggle.

One objection is the model has constant capital grow twice as fast as variable capital in order to have the model “breakdown” as early as year 36.
In the real world, constant capital doesn’t grow at anywhere near that rate.
Also, in the real world, the capitalist class will never allow itself to starve to death.
Long before the capitalists starve, they will reduce the level of accumulation and use the resulting unemployment to raise the rate of surplus value far above 100 percent.
In Marx’s volume III where he describes a hypothetical crisis, the cause of the crisis is an absolute overproduction of capital, not a relative overproduction of commodities.
Marx’s capitalists have gotten themselves into quite a jam, because they have temporarily run out of labour power, and as result no increase in investment can increase the production of surplus value.
Indeed, the competition among the capitalists for the existing labour power only reduces the rate of surplus value and therefore actually reduces the production of surplus value further.
The absolute contraction of profits—not only the fall in the rate of profit—causes production to collapse and unemployment to soar!
We have the paradoxical situation of mass unemployment caused by a shortage of labour.
Without an increase in population, any attempt by the capitalists to resume expanded capitalist reproduction will simply cause the crisis to erupt anew.
Once the maximum numbers of workers that can ever be employed are employed, a further rise in surplus value is only possible through the rise in the rate of exploitation—the rate of surplus value.
At some point, in light of the limits that the material world places on the growth of the human population and consequently on the production of surplus value, capitalist production must break down—not just temporarily but for good.
It is a historically limited process that had a beginning and must sooner or later come to end.
Once it is no longer possible to increase the mass of surplus value any further—which is inevitable at some point thanks to the restraints of the material world we live in—capitalism must come to an end.
This is no temporary cyclical crisis; capitalism breaks down for good.

Does the World Market have a Limit?

Grossman & Paul Mattick see no limit, so long as enough surplus value can be produced.
But they forget that commodities have to be paid for with money.
They fall into Say’s Law.
The growth of the market is determined by the growth in the production of the money material – gold.
Have we reached, or are we approaching Peak Gold?
Peak gold would imply a situation where no changes in prices—that is, no fall of commodity prices measured in terms of gold—would be able to increase the production of gold.
Even if “peak gold” turns out to be far distant, the gold mining companies will be forced to find new gold in increasingly inaccessible places—perhaps the ocean bottoms as well as ever-deeper shafts within the Earth.
This will tend—besides doing enormous damage to the natural environment and risking the lives of large numbers of workers—to increase the value of gold relative to the value of other commodities.
As gold rises in value relative to most other commodities, the prices of these commodities expressed in the use value of gold will tend to decline.
This will mean a tendency for economic crises to grow more intense and prolonged.

Three basic laws of the capitalist system:

1. The tendency of the rate of surplus value to rise
The whole point of capitalist production is to increase the amount of unpaid as opposed to paid labour performed by the working class.
The more the productivity of labour increases, the more the ratio of unpaid labour to paid labour can rise without reducing the standard of living of the working class below the level that would prevent it from being able to reproduce itself.
Indeed, as labour productivity develops, the living standard of the working class can actually rise even as the rate of exploitation—the ratio of unpaid to paid labour—increases.

2. The rise of the organic composition of capital
Competition means that the capitalists will introduce machines to replace workers whenever the rate of surplus value threatens to fall.
The replacement of living labour by dead labour means that the ratio of constant to variable capital grows.
Since only living labour—variable capital—produces surplus value—the rate of profit tends to decline despite the rise in the rate of surplus value.

3. The growth in the total amount of profit
Although the rate of profit tends to decline, the mass of profits grows progressively with the development of capitalist production.
To maintain the growth in the mass of profit in the face of a decline in the rate of profit, capital must first exploit the existing workers more intensely—something that is made possible by the rising productivity of labour—and by transforming ever more people into surplus value producers.
However—even leaving aside the resistance of the workers—since no worker can work more than 24/7, the amount of surplus value that a given number of workers can create is limited by both biological and mathematical laws.
Therefore, if capitalism is to wring enough surplus value out of the working class to keep the system going in the long run, the size of the population must grow relentlessly over time.
The “population explosion” of the last few centuries reflects the need of capitalist production to exploit an ever growing number of workers.

A falling rate of profit leads to the centralization of capital.
Competition begins to devour itself and gives birth to capitalist monopoly.
A low rate of profit is an obstacle to capitalist “innovation.”
A very low rate of profit kills the incentive to produce surplus value, no matter how large the mass of profit is.

The Depletion of Raw Materials and the Rate of Profit 

Marx showed that the tendency of the rate of profit to fall is rooted in the rising organic composition of capital.
While the main cause of this rise is the growing role of machinery, the value of raw and auxiliary materials also plays an important role in the determination of the organic composition of capital.
Like fixed capital, raw and auxiliary materials form part of the constant capital.
The more that mines, oil wells, natural gas fields and so on are depleted—all other things remaining equal—the higher will be the value of these commodities and the higher will be the organic composition.

The Centralization of Capital & Breakdown

Each crisis, in turn, gives a new impulse to the centralization of capital and further socialization of labour.

“Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labour at last reach a point where they become incompatible with their capitalist integument. [This] integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.”
Marx, Capital

The reckless inflation of credit and its associated over-trading, which pushes production far beyond its capitalist limits and precedes each successive crisis.
The development of the credit system, far from being “a means of adoption” of the capitalist system, as Eduard Bernstein thought, instead pushes the contradictions of capitalist production to the point where they explode in the form of a crisis of the generalized relative overproduction of commodities.
The increasing socialization of labour and centralization of capital will force the working class under pain of its own destruction to organize itself and finally overthrow the rule of capital long before it reaches the ultimate limits set by the maximum amount of surplus value that can ever be produced—given the limits set by our material world.

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