Overproduction and capitalist crisis

I have recently had a few emails that have asked me whether the Great Recession that we have just been through (and previous economic recessions) was caused by overproduction or by the falling rate of profit.  It would be churlish for me to answer by saying: read my book!  After all, that is what a sizeable part of the book deals with.

see The Great Recession available from Lulu.com http://www.lulu.com/product/paperback/the-great-recession/6079458,

But I won’t be so curmudgeonly and instead try and answer in shorter fashion.

Overproduction is when capitalists produce too much compared to the demand for things or services.  Suddenly capitalists build up stocks of things they cannot sell, they have factories with too much capacity compared to demand and they have too many workers than they need.  So they close down plant, slash the workforce and even just liquidate the whole business.  That is a capitalist crisis.

Overproduction is the very expression of a capitalist crisis.  Before capitalism, crises were ones of underproduction (namely famine or scarcity).  But to say overproduction is the form that a capitalist crisis takes is not to say it is the cause of the crisis.  If it were the cause, then capitalism would be in permanent slump because workers can never buy back all the goods they produce.   After all, the difference between what the workers get in wages and the price of the goods or services they produce that are sold by the capitalists are the profits.  By definition, that value is not available to workers to spend, but is in the hands of the capitalist owners.

Marx devastatingly criticised those capitalist economists who claimed that there could never be a crisis of overproduction because every sale that a capitalist makes means that there will be purchaser.  As Marx said, that there is purchaser for every seller is a tautology, the very definition of exchange. Sure, “no one can sell unless someone else purchases.  But no one is forthwith bound to purchase just because he has sold”. The money from a sale can be hoarded (saved) and not used to buy.  That alone raises the possibility of overproduction and crisis.

But the possibility of crisis in the process of capitalist exchange using money does not mean it will happen and provides no explanation of when or  how.  So Marx went further and explained that what will decide whether capitalists make purchases for investing in plant or new technology and to buy labour power to produce is the profitability of doing so.  “The rate of profit is the motive power of capitalist production.  Things are produced only so long as they can be produced with a profit”.

And this is where Marx’s law of the tendency of the rate of profit to fall comes in. Marx shows that the profitability of capitalist production does not stay stable, but is subject to an inexorable downward pressure (or tendency).  That eventually leads to capitalists overinvesting (overaccumulating) relative to the profits they get out of the workers.

At a certain point, overaccumulation relative to profit (ie a falling rate of profit) leads to the total or mass of profit no longer rising.  Then capitalists stop investing and producing and we have overproduction, or a capitalist crisis.  So the falling rate of profit (and falling profits) causes overproduction, not vice versa.

But a falling rate of profit does not directly lead to a crisis as long as the mass of profit can rise.  As I show in my book, it was precisely when the mass of profit stopped rising that the Great Recession ensued.  In my blog of 19 January, The mass of profits and economic crisis, I brought more evidence to bear on that argument of Marx’s with the latest data from the US.

If this is right as the cause of capitalist economic crises and slumps – namely a falling rate of profit eventually leading to a fall in the mass of profit and thus overaccumulation of investment and overproduction of goods and services (that are profitable), then it leads to important policy conclusions.

For example, if we think capitalist crisis is caused by overproduction relative to the ability of workers to buy the goods produced, as Keynesians do, then the policy answer may be just to boost spending by government or make tax and interest rate cuts (what has been happening now).  Problem solved.

On the other hand, if we think it is caused by lack of profit, then there is only one solution for capitalism: destroying the value of existing capital (plant, machines and employees) in order to  cut costs and so restore profitability.  Only that will get capitalism going again (for a while), but at the expense of the rest of us.  Thus the inherent contradiction of capitalism is exposed.  Only its abolition will stop the cycle of boom and slump.

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