Sources of Cyclical Instability

F. Sources of Cyclical Instability

A variety of disturbances are at play in a closed economy, in addition to “over- production,” which end in crisis. It is convenient to have before us a statement pertinent to a broad range of cases, involving stationary as well as growing systems, which generate excess demand for money to hold:

In reproduction, just as in the accumulation of capital, it is not only a question of replacing the same quantity of use values of which capital consists, on the former scale or on an enlarged scale (in the case of accumulation) but of replacing the value of the capital advanced along with the usual rate of profit (surplus value). If, therefore, through any circumstance or combination of circumstances, the market prices of the commodities (of all or most of them, it makes no different) fall far below their cost prices, then reproduction of capital is curtailed as far as possible. Accumulation, however, stagnates even more. Surplus value amassed in the form of money (gold or notes) could only be transformed into capital at a loss. It therefore lies idle as a hoard in the banks or in the form of credit money which in essence makes no difference at all (MECW 32: 125).

This leads to an extension relating to capital shortage of various kinds generat- ing crisis with its various characteristics including the accumulation of idle money hoards: “The same hold up could occur for the opposite reasons if the real prereq- uisites of reproduction were missing (for instance if grain became more expensive or because not enough constant capital had been accumulated in natura). There occurs a stoppage in reproduction and thus in the flow of circulation. Purchase and sale get bogged down and unemployed capital appears in the form of idle money”

(125–6). 20 Seasonal reductions in raw material supplies and the increase in material prices (reflecting higher value) provides a prime example of a disturbance which, by upsetting the regular “reconversion of money into capital,” generates excess capacity, unemployment, low profit rate, and inability to meet fixed interest and rent charges:

. . . a greater portion of the value of the product has to be converted into raw material, thus leaving less for conversion into variable capital. . . . The rate of profit falls because the value of constant capital has risen as against that of variable capital and less variable capital is employed. The fixed charges – interest, rent – which were based on the anti- cipation of a constant rate of profit and exploitation of labour, remain the same and in part cannot be paid. Hence crisis. Crisis of labour and crisis of capital. This is therefore

20 See also: “There are, however, also cases where the overproduction of non-leading articles is not the result of overproduction, but where, on the contrary, underproduction is the cause of

overproduction, as for instance when there has been a failure in the grain crop or the cotton crop, etc.” (MECW 32: 160).

F. Sources of Cyclical Instability

a disturbance in the reproduction process due to the increase in the value of that part of constant capital which has to be replaced out of the value of the product (146). 21

And beyond the direct consequences enumerated above, there are further effects flowing from the increased price of a raw material, including a negative income effect: “in so far as it enters into general consumption, it may result (if its consump- tion is not reduced) in a diminished demand for other products and consequently prevent their reconversion into money at their value, thus disturbing the other aspect of their reproduction – not the reconversion of money into productive capital but the reconversion of commodities into money.” In brief, “[t]he volume of profits and the volume of wages is reduced in this branch of production thereby reducing a part of the necessary returns from the sale of commodities from other branches of production.” (It would seem that prices of the commodity fall below their values though Marx does not say so explicitly.)

Marx also allows for overproduction in the capital-goods sector independently of the “relative” overproduction created by the failure of sales in the consumer-goods sector. Such excessive production was “very probable, [f]or the production of coal and yarn and of all other spheres of production which produce only the conditions or earlier phases of a product to be completed in another sphere, is governed not by the immediate demand, by the immediate production or reproduction, but by the degree, measure, proportion in which these are expanding. And it is self-evident that in this calculation, the target may well be overshot” (160).

Specific mention is made of “excessive” investment in machinery – formally a category of “overproduction” – and here are spelled out similar consequences to those resulting from seasonal raw material shortage:

. . . a shortage of raw material may, however, occur not only because of the influence of seasons or of the natural productivity of the labour which supplies the raw material. For if an excessive portion of the surplus value, of the surplus capital, is laid out in machinery, etc. in a particular branch of production, then, although the [raw] material would have been sufficient for the old level of production, it will be insufficient for the new. This therefore arises from the disproportionate conversion of surplus capital into its various elements. It is a case of surplus production of fixed capital and gives rise to exactly the same phenomena as occur in the first case (146). 22

21 See also: “A crisis can arise: 1) in the course of the reconversion [of money] into productive capital, 2) through changes in the value of the elements of productive capital, particularly of

raw material, for example when there is a decrease in the quantity of cotton harvested. Its value will thus rise. We are not as yet concerned with prices here but with values” (MECW 32: 147). See also note 17. 22 See also: “A very significant part of [the] elements of reproduction, which consists of raw materials, can however rise in price for two reasons: Firstly, if the instruments of production increase more rapidly than the amount of raw materials that can be provided at the given time. Secondly, as a result of the variable character of the seasons. That is why weather conditions, as Tooke [1848: 3–35] rightly observes, play such an important part in modern industry” (MECW 32: 162).

1861–1863 II: Sectoral Analysis, Accumulation, and Stability But whereas raw-material shortage does not involve “overproduction,” the case

just mentioned does – for capital goods are “commodities” – so that “it is quite ridiculous that the same economists who admit the overproduction of fixed capital, deny the overproduction of commodities” (147). 23

We return to “the stoppage in reproduction and thus in the flow of circulation,” due perhaps to material shortage, leading to accumulation of “idle money” (above, p. 344). Marx goes on to spell out the transition from the cyclical peak to crisis, taking for granted an initially high profit rate but sharp fall in the interest rate generating risky speculation – a concept, incidentally, dear to Torrens and J. S. Mill (see Hollander 1985: 497–8) – and ultimately crisis characterized by low wages and unemployment, with resultant depressing effects on expenditure:

The same phenomenon (and this usually precedes crises) can appear when surplus capital is produced at a very rapid rate and its reconversion into productive capital increases the demand for all the elements of the latter to such an extent, that actual production cannot keep pace with it; this brings about a rise in the prices of all com- modities, which enter into the formation of capital. In this case the rate of interest falls sharply, however much the profit may rise and this fall in the rate of interest then leads to the most risky speculative ventures. The interruption of the reproduction process leads to the decrease in variable capital, to a fall in wages and in the quantity of labour employed. This in turn reacts anew on prices and leads to their further fall (126). 24

Elsewhere “crises of speculation” are described as of an international nature, a theme introduced by the important generalization regarding the relation between the production and valorization processes – so central to the Grundrisse as we have seen in Chapter 9 – that “[w]ithin capitalist production, the relationship between the labour process and the valorization process is that the latter appears as the purpose, the former only as the means. The former is therefore stopped when the latter is no longer possible or not yet possible” (MECW 30: 96). By contrast,

it is revealed in times of so-called speculative fashions, of crises of speculation (shares and so forth), that the labour process (actual material production) is only a burdensome requirement, and the capitalist nations are seized by a universal mania for attaining the goal (the valorisation process) without using the means (the labour process). The labour process as such could only provide its own purpose if the capitalist were concerned with the use value of the product. He is, however, only concerned with alienating it by sale as

a commodity, converting it back into money and, since it was money originally, with the increase in this sum of money (96–7). 25

At one point changing productivity is represented as a source of crisis: “. . . uniformity or similarity of reproduction – the repetition of production under

23 See also MECW 33: 114. The argument is referred to in Capital 3 (MECW 37: 255). 24 We recall also that “[c]rises are usually preceded by a general inflation in prices of all articles of capitalist production” (MECW 32: 136; cited above, p. 344). 25 See also the brief remark “In world market crises, all the contradictions of bourgeois production erupt collectively; in particular crises (particular in their content and in extent) the eruptions are only sporadical, isolated and one-sided” (MECW 32: 163).

G. The Recovery Process: Corrective Mechanisims 347 the same conditions – does not exist. Productivity itself changes and changes the

conditions. The conditions, on their part, change productivity. But the divergences are reflected partly in superficial oscillations which even themselves out in a short time, partly in a gradual accumulation of divergences which either lead to a crisis, to a violent, seeming restoration of the old relationships, or very gradually assert themselves and are recognised as a change in the conditions” (MECW 32: 517). Indeed, the time required to complete the “circulation process” made inevitable such changes in productivity and in real value (126). Yet despite all this, strange to relate, Marx maintained with respect to his primary analysis of “overproduction” that “[w]e are entirely leaving out of account here that element of crises which arises from the fact that commodities are reproduced more cheaply than they were produced. Hence, the depreciation of the commodities on the market” (163). Certainly there may be features of crisis peculiar to changing productivity that might legitimately be excluded, but we still remain with the problem noted above (p. 341).

We must also caution that a entire range of issues relating to “over-credit” is set aside by Marx when dealing with his main “overproduction” case. That analysis was partial only (145). 26 Marx goes on to explain that “[i]n so far as crises arise from changes in prices and revolutions in prices, which do not coincide with changes in the values of commodities, they naturally cannot be investigated during the examination of capital in general, in which the prices of commodities are assumed to be identical with the values of commodities.” But we have seen that the main case for overproduction – and other instances of discordance – do entail divergence of market prices from values. In all likelihood the caution is intended to exclude

specifically monetary causes of price fluctuations. 27 And in fact Marx goes on to say that “[t]he general conditions of crises, in so far as they are independent of price fluctuations (whether these are linked with the credit system or not) as distinct from fluctuations in value, must be explicable from the general conditions of capitalist production.”