MIA > Archive > Fraina/Corey Archive > Decline of Am. Cap.
THE antagonism between production and consumption is the basic cause of economic instability, and of crises and depressions. It results from the tendency toward an absolute exploitation of the workers, the increasing production of surplus value, and an absolute development of production while simultaneously limiting consumption. But the antagonism is continuous, permanent. How is an equilibrium achieved and maintained? Primarily by an increasing output and absorption of capital goods. These are the outlines of the movement:
1. The production and absorption of capital goods directly promotes the accumulation of capital:
2. The output of capital goods indirectly promotes consumption:
The consumer purchasing power created by the production of capital goods and spent on consumption is a net gain, as it represents no output of competing consumption goods. Thus the capital goods industries contribute to the sustenance of the consumption goods industries. The antagonism between production and consumption is temporarily overcome.
3. The output of consumption goods is active and profitable:
Thus the reaction of one department of industry upon the other creates an increasing production in which the primary factor is the output of capital goods. These goods give profits concrete forms, they embody capitalist ownership and claims to income. Upon these forms depend other forms of capital. While creating consumer purchasing power (wages, part of salaries and profits), the output of capital goods makes no direct demands upon such purchasing power. Demands are made only eventually, when the new capital goods begin to function as productive equipment. Thus pressure upon markets is lessened and an equilibrium is temporarily maintained between production and consumption. There are other factors in the equilibrium, but the output of capital goods is fundamental.
Meanwhile speculation flourishes because profits are high. This increases the output of luxury or variety goods, distributing wages and creating demands for capital goods.
The equilibrium is temporary, is eventually shattered, because of its own underlying causes. One part of capital goods represents consumption of which the workers are deprived. When new capital goods begin to produce there arises an accumulating insufficiency of buyers for their output (and the output of older capital goods). The lag of wages behind profits, a stimulus to the accumulation of capital and the output of capital goods, simultaneously limits the conditions of consumption. New capital goods represent an increase in the productivity of labor and in the scale of production, and a decrease in relative wages, while the output of commodities grows. Excess capacity, overproduction, and competition force down the rate of profit. This for a time promotes prosperity as it means new investment, i.e., creates new demands for capital goods to overcome the fall in the rate of profit. More wages are distributed, more capital absorbed. But as the new capital goods become “procreative,” the forces of production become greater, the conditions of consumption relatively more limited. The equilibrium begins to totter. A minor cyclical depression appears, as in 1927, when the rate of profit in manufactures fell from 12.1 to 10.2 on fixed capital and from 7.1 to 5.5 on total capital, a fall of 15.7% and 22.6% respectively. While not disastrous, the fall was threatening. It stimulated efforts to raise profits by increasing the productivity of labor, and created new demands for capital goods. The index of machinery output rose from 153 in 1926 and 146 in 1927 to 157 in 1928 and 191 in 1929, while the index of total output of capital goods moved from 147 and 143 to 145 and 170. (The index of total capital goods was slightly lower in 1928 than in 1926 because of a lower output of transportation equipment, rising again in 1929.) In consumption goods the rise was smaller, from 125 and 124 to 130 and 131. [1] The upsurge of prosperity was based on the mounting output of capital goods, which sustained the (smaller) rise in consumption. But this meant an enormous exertion of the productive forces – output of manufactures rose from $41,000 million in 1927 to $47,000 million in 1929, an unprecedented rise accompanied by a great increase in the productivity of labor. An enormous burden was placed upon all markets, both for capital goods and consumption goods, particularly as the great increase in output took place in the first six months of 1929: after June production decreased. While the rate of profit and even wages rose slightly [1*], this was bound up with the conditions of approaching cyclical breakdown. For the rise in the rate of profit and in wages was the temporary result of an absolute exertion of the productive forces which set in motion:
1. An overproduction of capital goods (including construction):
2. An overproduction of consumption goods:
3. A decline in industry as a whole:
Overproduction appeared primarily in the industries which had been the major sustaining factors in prosperity: The output of machinery began to fall in June, 1929; new orders for machine tools and foundry equipment had fallen 50% by the end of the year, while employment in the machine industries as a whole fell nearly 10%.
The output of automobiles began to fall in July and had fallen 57% by the end of the year; the output of rubber tires and tubes fell 51%.
Construction began to fall in August and had fallen 52% by the end of the year.
The output of iron and steel began to fall in July and had fallen 42% by the end of the year.
By the end of 1929 the output of manufactures as a whole, which began to decline in July, had fallen 24%. [2]
As output in the heavy industries producing capital goods and materials fell, it restricted the creation of consumer purchasing power among the workers and thus lessened demand and output in the consumption goods industries. [3*] To a certain extent the fall in the output of machinery was retarded, because enterprises made efforts to overcome the falling rate of profit by again increasing the productivity of labor with more efficient equipment. But these efforts, successful in a minor depression, aggravate conditions in the midst of a developing major depression, when markets break down precipitously and extensively. Now the rate of profit fell disastrously – from 13.9 on fixed capital and 7.5 on total capital in 1929 to 3.0 and 1.7 in 1930, a decrease of 78.4% and 77.3% respectively. With the onsweep of the crisis the output of capital goods fell more than that of other goods, and much more than in the 1920-22 depression. In 1932 the output of machine tools was 92.5% lower than in 1929, of foundry equipment 82% lower, of woodworking machinery 96% lower (the decrease in construction was equally great); inability to make profits and convert realized profits into capital led to a drop in investment from $15,000 million in 1929 to $3,000 million in 1932. [3] Prosperity depends upon the production of profit and its conversion into capital, a process which determines whether the workers may work and live.
It was a crisis of overproduction in terms of the limited class conditions of consumption. In the words of Marx:
“If it is said that there is no general overproduction, but that a disproportion grows up between various lines of production, then this is tantamount to saying that within capitalist production, the proportionality of the individual lines of production is brought about through a continual process of disproportionality, that is, the interrelations of production as a whole enforce themselves as a blind law upon the agents of production instead of having brought the productive process under their common control as a law understood by the social mind. ... If it is said that overproduction is only relative, then the statement is correct; but the entire mode of production is only a relative one, whose barriers are not absolute, but have absoluteness in so far as it is capitalist. Otherwise how could there be a lack of demand for the very commodities which the mass of the people want? ... All these objections to the obvious phenomena of overproduction (phenomena which do not pay any attention to these objections) amount to this, that the barriers of capitalist production are not absolute barriers of production itself and therefore no barriers of this specific, capitalist production. But the contradiction of this capitalist mode of production consists precisely in its tendency to an absolute development of the productive forces, a development which comes continually in conflict with the specific conditions of production in which capital moves and alone can move ... It is not a fact that too much wealth is produced. But it is true that there is a periodical overproduction of wealth in its capitalist and self-contradictory form ... Capitalist production comes to a standstill at a point determined by the production and realization of profit, not by the satisfaction of social needs ... The real barrier of capitalist production is capital itself. It is the fact that capital and its self-expansion appear as the starting and closing point, as the motive and aim of production; that production is merely production for capital, and not the means of production mere means for an ever-expanding system of the life process, for the benefit of the society of producers.” [4]
The contradictory forces set in motion by the antagonism between production and consumption are aggravated by other factors, including monetary factors. But these monetary factors are not primary, they are simply effects which react upon the fundamental productive relations. Irving Fisher insists that crises are a result of fluctuations in prices caused by changes in the value of money; that crises can be avoided if there is no change in the general level of prices, wholly possible if the “circulation of goods and the circulation of money ... should keep going at the same even pace ... or both streams grow greater at the same rate or grow less at the same rate.” [5] This is theoretically and historically wrong. Crises and depressions have been preceded by constant prices (1857), by falling prices (1873, 1893), by rising prices (1907, 1920), and again by constant prices (1929). Fluctuations in prices are a factor of instability in the measure that they express and react upon underlying economic forces. They do aggravate disproportions. But these disproportions always develop: price movements merely affect the relation of one disproportion to another and the combinations in which they appear.
Falling prices force efforts to raise profits by an increase in the productivity of labor. But this results in a higher composition of capital, lower relative wages (real wages may rise), greater excess capacity, aggravated competition, a falling rate of profit, speculation, and a drive toward overproduction under conditions of restricted mass purchasing power and consumption.
Rising prices increase profits, although much of the increase is fictitious and depends for its full realization upon lower prices to come. But rising prices negate one of the fundamentals of capitalism, the urge to produce and sell more abundantly and cheaply. Rising prices and profits lower real wages (the productivity of labor rises, if not much), redistribute income and purchasing power, encourage speculation, and restrict mass consumption. The rate of profit tends to rise, but falls again as the crisis develops. Excess capacity rises primarily because markets are restricted by higher prices. Production may be stationary or fall but overproduction develop in terms of rising prices and the falling real value of mass incomes.
In both cases there are disproportions, although the relations and combinations vary. And in both cases the basic disproportion is the maladjustment between production and consumption.
But constant prices are no way out. There was a practically constant price level in 1925-29. Irving Fisher considered this constancy, which he attributed to the “manipulations” of the Federal Reserve Board, a guarantee of continuing prosperity. The outcome was the greatest of all cyclical breakdowns. For the constant price level was itself a factor of instability. Constant prices contributed to an unusual rise in profits because of the great increase in the productivity of labor. This temporarily aided prosperity, under the prevailing conditions, as it stimulated the output and absorption of capital goods. But eventually constant prices hastened the coming of the crisis because they restricted purchasing power and consumption, while falling prices might temporarily have postponed the crisis by increasing consumption. The constant price level was accompanied by rising productivity and profits, practically stationary real wages, accelerated accumulation, and changes in the composition of capital, more excess capacity, a falling rate of profit, aggravated competition, frenzied speculation, and an increasing production within the limits of restricted mass purchasing power and consumption. Prosperity crashed into depression.
Prices affect the demand for capital goods, although other factors are more important. Rising prices may limit demand and thus weaken prosperity by limiting the increase in the output and absorption of capital goods. Falling prices may stimulate demand and hasten the overproduction of capital goods and the breakdown of prosperity. Either one or the other may result from constant prices, depending upon the level of prosperity. But whatever the particular combination of factors, the moment must come when the output and absorption of capital goods begins to fall because consumption has not kept pace with production.
Thus prices act within the limits of the underlying economic factors: these are primary. Cyclical breakdown develops under conditions of falling, rising, and constant prices. The disastrous fall in prices after a crisis, aggravating the cyclical breakdown and depression, is itself an effect of the crisis – an effect which becomes a major cause only in the analyses of the bourgeois economists.
In the pre-1929 era of prosperity everlasting, a whole school of economists, accepting the temporary and incidental as permanent and fundamental, stressed the importance of constant prices, of stabilization. In spite of the demonstration that stable prices do not avert cyclical breakdown, the theory reappears in the proposals of the NRA, and of state capitalism, in general to “fix” prices and “stabilize” the value of money. But the needs of capitalist production are identified with higher output and lower prices, although these simultaneously torment and upset it. Prices may be stable, but not productivity. Profits rise disproportionately. The benefits of improved productive efficiency are not passed on in the form of lower prices. Real wages are adversely affected, as they generally rise only in periods of falling prices. Instability is an element of capitalist growth. Stabilization, along with its twin, the restriction of production, is an element of capitalist decline and stagnation.
The monetary approach appears more substantial in the arguments of John Maynard Keynes, the economist of capitalism in extremis. Accepting the necessity of stabilization, he incorporates it in a larger analysis which recognizes that prosperity depends upon the output of capital goods, upon the increase in profitable investment. But he stresses the monetary aspects and makes the output of capital goods a function of the rate of interest. “It is,” he says, “a large volume of saving which does not lead to a correspondingly large volume of investment (not one which does) which is the root of the trouble”; the slump in 1929 was “initially engendered ... by the deficiency of current investment relatively to saving.” [6] The high market-rate of interest discouraged new investment in capital goods, savings exceeded investment, and the resulting decline in the output of capital goods produced the crisis and depression. If the market-rate of interest had fallen to the level of the natural-rate, i.e., a rate making it profitable for enterprise to borrow money to buy new capital goods, there would have been no crisis and depression. The assumption is that, if there is no divergence between the “market-rate” and the “natural-rate” of interest, and investment equals savings, capitalist production can uninterruptedly absorb a constantly greater output of capital goods and prosperity flourish undisturbed. This ignores the crucial factors:
Oversaving is a factor in the cyclical process. Not because it creates a deficiency in capital investment (and production) but because it creates a deficiency in consumption by diverting to investment income which should go into consumption. Keynes, who slights consumption, does not consider “oversaving” that part of invested savings identified with excess capacity. Yet this part and the part which is not invested at all both tend eventually to create a deficiency in consumption. Assume that a “managed currency” so manipulates the interest rate that investment comes to equal savings. Good. But what of the deficiency in consumption, of a greatly increasing output of consumption goods in the midst of limited markets?
New investment, an increasing output of capital goods, is not primarily a function of the rate of interest. It is a function of industry’s capacity to absorb new capital goods, dispose of consumption goods at profitable prices, and yield a satisfactory rate of profit. Keynes makes a satisfactory rate of profit depend upon the interest rate, investment depend upon the proportion of the expected rate of profit to the current rate of interest. Actually it is, save in exceptional cases, the reverse: the interest rate becomes unsatisfactory or “unprofitable” after the rate of profit itself falls. The rate of profit, which rose slightly early in 1929, began to fall as the crisis approached, and fell disastrously after the crisis. It fell disastrously because of the collapse of demand, prices, and production, not because of the divergence between the rate of profit and the rate of interest. The divergence was itself an effect of the crisis and the fall in the rate of profit.
The monetary approach is responsible for another error. This is Keynes’ insistence that speculation contributed to the cyclical breakdown because “the ‘speculative’ borrowers were borrowing not for investment in new productive enterprise, but in order to participate in the feverish ‘bull’ movement,” [7] thus increasing the deficiency in investment. On the contrary, speculation contributed to postponement of the crisis by encouraging the luxury industries and by preventing an earlier overproduction of capital goods. Most speculative profits are either re-employed in the market or are spent; the part which may be invested in productive enterprises is smaller than the cash and credit tied up in speculation. The “immobilization” of a part of superabundant capital by speculation performs the same function in keeping prosperity going that is performed by destruction and depreciation of capital and waste in general. But while speculation aided prosperity it simultaneously aggravated the instability of prosperity, sharpened the crisis when it came, and deepened the depression.
Of the depression and recovery, Keynes writes:
“Capital goods will not be produced on a large scale unless the producers of such goods are making a profit. Upon what do the profits of the producers of capital goods depend? They depend upon whether the public prefers to keep its savings liquid in the shape of money or the equivalent or use them to buy capital goods or the equivalent ... The fundamental cause of the trouble is the lack of new enterprise due to an unsatisfactory market for capital investment. Lenders were, and are, asking higher terms for loans than new enterprise can afford.” [8]
That is clearly an effect, however, not a cause. Where production and consumption are prostrate, as in a major depression, any large investment in new capital goods may be unprofitable no matter how low the interest rate. It might even be unprofitable if no interest were asked but only safety. For an unusually severe depression is preceded by an unusually large output of capital goods. There is an unusual overdevelopment of plant equipment, and new investment is practically limited to unpostponable replacements, considerably more efficient equipment which might yield competitive advantages to a particular enterprise, and equipment to produce new goods which meet no competition and whose market is assured. Depression is finally overcome, and new investment again becomes profitable, primarily by destruction and depreciation of existing capitals, the piling up of unpostponable replacements, and the development of new industries, thus setting in motion a demand for capital goods and a rise in the rate of profit. At this stage the rate of interest may become an accelerating or retarding factor. But the fundamental factors are the rate of profit itself and the capacity of industry to absorb an increasing output of capital goods. So great was the overdevelopment of productive enterprise in the United States that the government’s efforts to “ease” credit through the loans, or rather grants, of the Reconstruction Finance Corporation, and the pressure on industry to borrow and on banks to lend yielded slight results because industry was tormented by overdevelopment of capacity and lack of markets, not by lack of credit or capital. [4*]
The admission by many bourgeois economists, among them Keynes, that prosperity depends upon capital investment is correct. It is, however, one-sided because it excludes, wholly or in part, the factor of consumption. Capitalist prosperity depends upon an increasing output and absorption of capital goods. But this depends in final analysis upon the capacity of industry profitably to dispose of an increasing output of consumption goods. The constant clash of one with the other is inescapable and decisive. Because he ignores this, Keynes becomes entangled (much like the money cranks) in proposals for monetary manipulations to revive and maintain prosperity. All such proposals emphasize the secondary factors of exchange, not the primary factors of production. While exchange reacts upon production, the relations of exchange are determined by the relations of production. If exchange is emphasized the causes of cycles appear either bewilderingly complex, where the economist is “scientific,” or extremely simple, where the economist is “practical.” In either case effects are transformed into causes. Thus an effect, the deficiency in investment, becomes with Keynes, who is both “scientific” and “practical,” the cause of cyclical breakdown. If it is proposed to prevent crises or save capitalism, effects must become causes: for it is possible to tinker only with effects, not with causes. Prosperity depends upon capital investment. This means that capitalism is a profit economy. No profit – no prosperity. This in turn creates an antagonism between production and consumption: capitalism is unable to develop freely and fully the conditions of consumption. The conclusion is inevitable: crises and depressions are inherent in the capitalist relations of production, they can be avoided only by the abolition of those relations. But this conclusion is either evaded or openly rejected by the bourgeois economists. Even where the conclusion arises logically out of their own analysis, if consistently pursued, they fly off at a tangent and offer “cures” based on secondary factors. They prefer, in theory and practice, to cling to capitalism.
In every cycle, in prosperity, crisis, and depression, there are varying combinations of the secondary factors. An analysis which emphasizes these factors makes every cycle appear unique in itself. This is wrong. For there are primary factors underlying and determining the cyclical process. These factors are always the same. The secondary factors may combine differently in the unstable equilibrium of capitalist prosperity. But the primary factor is the accumulation of capital, an increasing output and absorption of capital goods. The secondary factors may combine differently to produce the onset of crisis and depression. But the primary factor is the deficiency in consumption. The inescapable antagonism between production and consumption is decisive.
Thus the conclusion becomes inescapable that capitalist production is strangled by its own enormous productive forces, which are developed beyond the social forces of consumption. When industry tends to use all its forces, the result is overproduction and crisis. Even then, however, only a part of the productive forces is utilized. Yet this sort of thing is still taught in American colleges: “The one great hope of mankind for greater abundance of goods lies in removing ineffectiveness of labor as a cause of scarcity, or, in other words, in improving the methods of production.” [9] But labor is not ineffective. The methods of production are improved. There is abundance. These conditions are, however, transformed into causes of scarcity, both in prosperity and depression. Capitalist industry is menaced by its power to provide abundance – by the inexorable drive to produce more cheaply and abundantly, by excess capacity, by overproduction. Abundance creates scarcity because abundance becomes relatively unprofitable. Thus under capitalism, production appears as a malevolent fate: man is enslaved and tormented by his own material creations. [5*]
The productivity which torments capitalist industry and the masses is a result of the objective socialization of production. Capital, materials, and labor are concentrated in large-scale enterprises, forms of social property, multiplying the productivity of labor. All the powers of society work toward improving the social methods of production. More and more, industry assumes institutional forms: ownership is separated from management and control, the direction of industry becomes collective. Only ownership and appropriation are individual (although ownership itself acquires measurably social forms in corporate enterprise). This contradiction is the basis of the antagonism between production and consumption. The antagonism can be ended only by the socialization of ownership, appropriation, and consumption: by making consumption, not accumulation, the aim of production. Man, the worker, must produce to consume.
1*. “It is purely a tautology to say that crises are caused by the scarcity of solvent consumers, or of a paying consumption. The capitalist system does not know of any other modes of consumption but a paying one, except that of the pauper or of the ‘thief.’ If any commodities are unsalable, it means that no solvent purchasers have been found for them. But if one were to attempt to clothe this tautology with a semblance of profounder justification by saying that the working class receive too small a portion of their own product, and the evil would be remedied by giving them a larger share of it, or raising their wages, we should reply that crises are precisely always preceded by a period in which wages rise generally and the working class actually get a larger share of the annual product intended for consumption. From the point of view of the advocates of ‘simple’ (!) common sense, such a period should rather remove a crisis. It seems, then, that capitalist production comprises certain conditions which are independent of good or bad will and permit the working class to enjoy that relative prosperity only momentarily, and at that always as a harbinger of a crisis.” Karl Marx, Capital, v.II, p.476. Marx adds: “Advocates of the theory of crises of Rodbertus are requested to make a note of this.” And we might add the American advocates of the “policy of high wages”!
2*. The overproduction of raw materials was an important factor in the breakdown of prosperity, particularly on an international scale. In most raw materials the ratio of world visible supplies to consumption rose sharply between 1923 and 1929, and still more sharply after the crisis. (Robert F. Martin, World Stocks, Prices and Controls of Foodstuffs and Raw Materials, Harvard Business Review, July 1932, pp.437-40.) This was a result of uncontrolled production, excess capacity, and ruthless competition, and of the capitalist exploitation of agriculture in general and of agrarian countries in particular. The buying power of countries producing raw materials was severely restricted by the disastrous fall in demand and prices. There was an unusually large slump in the American export of goods and a total cessation of the export of capital, two of the important factors in prosperity. For several years before the crisis the export of goods was practically at a standstill while the export of capital had become primarly an export of interest, which strengthened the downward pressure on the rate of profit of excess capacity and surplus capital, increased the instability of prosperity, and contributed to the coming of crisis and depression.
3*. “The excess capacity always present in such industries encourages the production of more goods than the market will absorb at any price, and overproduction results. In this manner the peak of production is driven ever upward, dealers’ stocks begin to mount as business recedes, and when the slump comes it is much more severe because of almost complete shutdown of production. This is what happened to the passenger car business, and the same overproduction, followed by collapse of production, took place in other limited industries.” W.W. Hay, Manufacture of New Products an Escape from Effects of Saturated Markets, Annalist, December 12, 1930, p.988.
4*. Keynes, Causes of the World Depression, Forum, January 1931, p.24, sees this overdevelopment of enterprise without appreciating its significance: “In the United States the vast scale on which new capital enterprise has been undertaken in the last five years has somewhat exhausted for the time being – at any rate so long as the atmosphere of business depression continues – the profitable opportunities for further enterprise.” Where art thou now, O rate of interest! In Germany, in 1932, the government of Chancellor Brüning and the Reichsbank lowered interest rates to stimulate industry. Failure was attributed to the fact that only short-time borrowing was affected. But failure also marked the efforts of the government of Chancellor von Papen, which tried to stimulate expenditures on capital goods by giving industry a practical subsidy of 750 million marks at no interest (in the form of certificates discountable for cash and acceptable some years later in payment of taxes). Enterprises receiving the money used it to pay off debts, and there was no revival in the output of capital goods. Gerhard Colm, Why the “Papen Plan” for Economic Recovery Failed, Social Research, February 1934, p.93.
5*. “Things cannot be otherwise in a mode of production where the worker exists to promote the expansion of existing values, as contrasted with a mode of production where wealth exists to promote the developmental needs of the worker. Just as, in the sphere of religion, man is dominated by the creature of his own brain, so in the sphere of capitalist production, he is dominated by the creature of his own hand.” Marx, Capital, v.I, p.685.
1. Frederick C. Mills, Economic Tendencies in the United States (1932), pp.278-80.
2. Department of Commerce, Commerce Yearbook, 1931, pp.5, 324, 415, 417.
3. W.H. Rastall, The Machinery Industry at Grips with the Depression, Mechanical Engineering, February 1933, pp.10-11.
4. Karl Marx, Capital, v.III, pp.293, 301-03.
5. Irving Fisher, The Money Illusion (1928), p.33.
6. John Maynard Keynes, A Treatise on Money (1930), v.I, p.179; v.II, p.381.
7. Keynes, A Treatise on Money, v.II, p.381.
8. Keynes, Causes of the World Depression, Forum, January, 1931, p.23.
9. L.A. Rufener, Price, Profit and Production: Principles of Economics (1928), p.15.
Last updated on 29.9.2007