Trend and Cycle: Causal Mechanisms

C. Trend and Cycle: Causal Mechanisms

John Stuart Mill recognized the regular periodicity of cycles in his “Of the Influence of Consumption on Production,” composed 1830–31 and first published in 1844 (Mill 1963–91 [1844] 4: 275). As for causality, Mill had alluded several years earlier to the implications for “speculation” of a low rate of profit: “the Corn Laws . . . by lowering the rate of ordinary mercantile profit, really produce that tendency to hazardous speculation which is so erroneously, though so commonly, imputed to the system of our currency” (Mill 1963–91 [1826]: 109–10). And this is the general line followed in the Principles to account for the cyclical pattern: “By the time a few years have passed over without a crisis, so much additional capital has been accu- mulated that it is no longer possible to invest it at the accustomed profit,” investors turning increasingly to “speculative” ventures, from which follows the inevitable “revulsion”; while the loss of capital values during the subsequent “stagnation” – the depression characterized by the closure of factories and unemployment – acts to raise the profit and interest rates thereby “mak[ing] room for fresh accumulations” so that the “same round is recommenced” (Mill 1963–91 [1848]: 741–2; emphasis

added). 6 In this manner “[p]rofits are prevented from reaching the minimum by commercial revulsions,” a “counteracting” principle amongst others (741). The ceteris paribus compound upon which the downward trend is predicated therefore includes the absence of capital wastage of various sorts – unsustainable capital projects during speculative periods and “unproductive” consumption and capital export during the depression that follows (see Hollander 1985: 465–6).

5 The two periods are conflated into one in the text on MECW 37: 487, namely a period encompassing “recovery” and “improvement” prior to “overexertion.”

6 In Mill’s account of 1844 an imminent rise in prices at some stage during the depression based on a normal price level also plays a part in encouraging the upturn (Mill 1963–91 [1844]:

The Cyclical Dimension

Now Marx, in Chapter 15 of Capital 3 on “Internal Contradictions of the Law of the Tendency of the Rate of Profit to Fall,” maintains a position close to Mill’s in its broad outlines, though the rationalization of the downward profit-rate trend of course differs. For Marx, as for Mill, the decline constitutes a “threat” to the capital- ist production process thereby breeding “overproduction” – in Mill’s terminology investment in factories and equipment “beyond what the market requires” – “spec- ulation, crises and surplus capital alongside surplus population”; but one feature in particular distinguishes Marx’s account – the “concentration” and “centralization” of capital “through expropriation of minor capitalists”:

Accumulation . . . hastens the fall of the rate of profit, inasmuch as it implies concen- tration of labour on a large scale, and thus a higher composition of capital. On the other hand, a fall in the rate of profit again hastens the concentration of capital and its centralisation through expropriation of minor capitalists, the few direct producers who still have anything left to be expropriated. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the rate of profit.

On the other hand . . . the rate of profit, being the goad of capitalist production . . . its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds overproduction, speculation, crises, and surplus capital alongside surplus population” (MECW 37: 240; emphasis added). 7

These trends are further elaborated by reference to their impact on “the adven- turous road of speculation . . . and crises,” and confirm – the preceding passage is a little ambiguous in this respect” – that this consequence relates specifically to the minor or “small dispersed capitals”:

A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour. . . . Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises (249; emphasis added).

This outcome is in fact part of the intensified “competitive struggle” generated by the falling return on capital, again with reference for the most part to small

firms(255; cited Chapter 4, p. 133). 8 And the intensification of competition takes the form of the adoption of “new methods,” but increasingly of an “adventurous” sort:

7 “Concentration” is defined elsewhere as “employment of capital on a larger scale,” and “cen- tralization” as “the swallowing up of the small capitalists by the big and their deprivation of

capital” (MECW 37: 245). The few “direct” producers are “independent” firms contrasting with large enterprises under specialized management divorced from ownership (see e.g., 350). 8 Marx here insists in effect against Smith that the profit-rate fall calls forth a competitive struggle

C. Trend and Cycle: Causal Mechanisms 141 If the rate of profit falls, there follows, on the one hand, an exertion of capital in order that

the individual capitalists, through improved methods etc., may depress the value of their individual commodity below the social average value and thereby realise an extra profit at the prevailing market price. On the other hand, there appears swindling and a general promotion of swindling by recourse to frenzied ventures with new methods of production, new investments of capital, new adventures, all for the sake of securing a shred of extra profit which is independent of the general average and rises above it (257–8; emphasis added).

There are too the graphic descriptions in Chapter 30 of the period of “overexer- tion” – or “production at high pressure” in Capital 1 (above, p. 135) – which follows “prosperity,” a period of “great expansion of fixed capital in all its forms, and the opening of new enterprises on a vast and far-reaching scale” coupled with the appearance of “cavaliers” or speculative investors who “operate completely on

a money credit . . . ” (487).

There is a tendency to think of Marx’s rising c/v as proceeding continuously and this may be valid as a first approximation in general accounts of secular tendencies; but net investment incorporating novel capital-intensive technologies is also more specifically represented as occurring in a bunched fashion at certain times during the cycle, particularly “periods of average activity” (above, p. 135) or “the phase of prosperity” (above, p. 136) – corresponding perhaps to Mill’s “quiescent” periods of “a few years [which] have passed without a crisis” – and during periods of “overexertion” or “production at high pressure.” Capitalists’ motivation, governing the timing of the investment program during the upswing, becomes the key issue. The evidence, we shall suggest, points to such investment as motivated by the promise of a high profit rate – as with Malthus (Hollander 1997: 531, 1003).

Statements to the effect that the “self-expansion of capital” is the “only pur- pose” of the capitalist (MECW 37: 240; Chapter 4, p. 130), or that “the production of . . . surplus value” and its “reconversion . . . into capital” is “the immediate pur- pose and compelling motive of capitalist production” (242) imply, certainly, a drive to accumulate unrelated to any expected rate of return; and this is a fortiori the case of the statement regarding restricted consumption by labor in the face of “the drive of capitalist production to develop the productive forces . . . ” (483; above, p. 134). But these occur in the context of secular underconsumption pressures. When the emphasis is on the cycle the perspective seems to alter. Thus, we have the explicit statements – and Marx proceeds to cyclical implications – that “the rate of accumu- lation falls with the rate of profit” and that the rate of profit is the “goad of capitalist production” (240; above, p. 140); that “an increased rate of profit causes a greater demand for labour” (247); and that “the expansion or contraction of production” – we again note the cyclical tone – “are determined by . . . profit and the proportion of this profit to the employed capital, thus by a definite rate of profit . . . ” (257). 9

9 Marx refers to “barriers at a certain stage of production” and the system coming to a “standstill”: “It is for this reason that the capitalist mode of production meets with barriers at a certain

The Cyclical Dimension

And we shall encounter an allowance in the cyclical context that capitalists also have an eye on consumption (303–4; below, pp. 149) which is consistent with the need for a compensatory stimulus to save at the margin of decision making.

We recall here the qualification explored in Chapter 2 (p. 68) that the positive relation between accumulation and the return on capital applies largely to the traditional industrial capitalist, rather than the large stock company. This latter feature would suggest that our reading whereby investment occurs predominantly at periods of the cycle promising relatively high returns, rather than at a steady or even increasing pace irrespective of the return, applies to the traditional capitalist sector comprising independent factory owners. For all that, it is difficult to believe that Marx intended by the “opening of new enterprises on a vast and far-reaching scale” which occurs during “overexertion” (above, p. 138), to exclude the large stock companies. (The railways come to mind; below p. 147). In any event, once the profit rate comes under threat as a result not only of rising c/v but also growing material and labor shortages – the subject of the following sections – “speculative” activity becomes increasingly significant, reinforcing – as with Mill – the conditions for crisis.

We turn now to the aftermath of the crisis, or the period of “stagnation.” As with Mill, this stage is characterized by “glutted markets or fallen prices, a super- abundance of industrial capital . . . but in a form in which it cannot perform its function. Huge quantities of commodity capital, but unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant reproduction” (MECW 37: 481–2). Again: “Factories are closed, raw materials accumulate, finished products flood the markets as commodities” (482). 10

Now Mill had it that during periods of stagnation the “destruction” (or loss abroad) of “a considerable amount of capital,” reverses the (cyclical) profit-rate decline, “mak[ing] room for fresh accumulations” so that “the same round is recommenced” (above, p. 139). This is rehearsed by Marx without due credit, when

he too elaborates the restoration of equilibrium by way of the “destruction of capital values” following the sharp fall in the profit rate that occurs near the upper turning point (248, 252–3). “Ultimately,” runs the conclusion, “the depreciation of the elements of constant capital would itself tend to raise the rate of profit. The mass of

been altogether inadequate. It comes to a standstill at a point fixed by the production and realization of profit, and not by the satisfaction of requirements” (MECW 37: 257). The terms “barriers” and “standstill” need not refer to some sort of stationary state; temporary crisis and depression seem intended. (See on this matter Sowell 2006: 169.) 10 Here Marx points out the error of blaming depression conditions on “a scarcity of productive capital,” considering that it is “precisely at such times that there is a super-abundance of pro- ductive capital, partly in relation to the normal, but temporarily reduced scale of reproduction, and partly in relation to the paralysed consumption” (MECW 37: 482). He does not here name the culprits. He allows that a “real lack of productive capital, at least among capitalistically developed nations, can be said to exist only in times of general crop failure, either in the

D. The Raw Material Constraint and Upper Turning Point 143 employed constant capital would have increased in relation to variable, but its value

could have fallen. The ensuing stagnation of production would have prepared – within capitalistic limits – a subsequent expansion of production” (254). As with Mill, the “tendency” to a fall in the profit rate itself encourages the “counteracting force” (see Hollander 1992: 261).

Also to be emphasized is the affirmation (encountered above, p. 139) that the cyclical pattern must be understood as superimposed upon an expanding system: “And thus the cycle would run its course anew. Part of the capital, depreciated by its functional stagnation, would recover its old value. For the rest, the same vicious circle would be described once more under expanded conditions of production, with an expanded market and increased productive forces” (MECW 37: 254).

In addition to the various pressures mentioned above as tending to halt and reverse the falling profit rate characterizing depression, Marx mentions “growing confidence” (488). This amounts to the counterpart of Mill’s reversal of expecta- tional mood which plays a part in the recover process (see note 6). 11