Because of the fetishistic character of capital production, the capitalist system in all its phases and in all its details may in a way be considered to be in a “permanent” condition of crisis. Depression is a precondition for prosperity; prosperity comes to an end in a new depression. They are, so to speak, two sides of the same coin. Since capitalists operate as individual concerns in a social production of world-wide scope, and are not able to comprehend the real possibilities and limitations of the “system as a whole,” over-expansion in some spheres of production, or in some nations, may lead to over-expansion in other industries and nations and may finally affect the world at large. Both the force of competition and the desire to profit by a boom turn an upward trend in business into a self-propelling expansion which can drive investments to a point where the profits demanded of them are no longer forthcoming.

Over-production of capital demands a fairly well developed capitalism. It is not a real issue in the early stages but becomes an increasingly greater problem as capital accumulates. In a certain sense, each crisis is more severe than the one preceding it because of the growing interdependence of production and of social life generally. In another sense, each successive crisis faces greater opportunities because the breadth of structural changes required for capitalism’s further expansion becomes ever greater. Past a certain point, however, capital expansion’s need to extend geographically runs into the national barriers within which capitalism developed. The nations in crisis attempt to bridge these difficulties at the expense of other nations. Economic opportunities shift from one country to another, from one continent to another; and the economy now requires not only the rationalization of industry but a general reorganization of the economic, social and political structure of world economy.

The crisis lays bare the discrepancy between material and value production: its approach is signaled by a slackening rate of accumulation, an over-production of commodities, and an increase in unemployment. So the way out of the depression is effected by closing the gap between expansion and profitability, by new investments and the “normalizing” of the commodity and labor markets. A crisis does not just start, it starts in specific industries, even though it is caused by the total situation. Like the crisis, the upswing, too, starts in specific industries and cumulatively affects the whole of the economy. Because capital accumulation is the enlarged reproduction of the means of production, the upswing and decline, although general, are first and foremost noticeable in the manufacture of production goods.

The crisis does not, however, reflect the real situation. Just as the upswing exaggerates profit expectations, so the crisis exaggerates declining profitability. To speak in Keynes’ subjective terms, the unrealistic “optimism” of prosperity leads to the unrealistic “pessimism” of depression. In either direction, the competitive process tends to extremes: it hastens both the over-production of capital and the reorganization of the capital structure. A depression may “sneak” into existence by a gradual slowing down of economic activity, or it may be initiated by a dramatic “crash” with sudden bank failures and the collapse of the stock market. The crisis itself is merely the point at which the reversal of business conditions is publicly recognized.

Whatever the circumstances surrounding the reversal of the economic trend, it is accompanied by an over-production of commodities. Even the last phases of the boom preceding the crisis are, viewed in retrospect, already unprofitable; but recognition of this fact has to await the verdict of the market. Commitments made on the assumption of a continuous upward trend cannot be met. The conversion of capital from commodity to money form becomes increasingly more difficult. The crisis of production is at the same time a financial crisis. The need for liquid funds and the attempt to avoid losses intensify the fall of securities and commodity prices. Competition becomes cutthroat competition and for some businesses prices are forced down to the point of ruin. Capital values are rapidly depreciated, fortunes are lost, incomes are wiped out. Social demand declines further as the number of unemployed grows: the commodity-glut is checked only by the still faster decline of production. The crisis extends into all spheres and branches of production. Its general form reveals the social interdependence of the capitalist mode of production despite the private property relations which control it.

After a period of panic, however, the capitalist economy reorients itself towards a new stability under changed conditions. The ensuing stagnation or depression, while destroying many businesses, improves the profitability of the survivors by presenting them with larger markets. A more concentrated capital now commands a larger sphere of business operations. It defends and consolidates its newly-won position, cutting labor-costs by investing anew in technological innovations. To a greater or lesser degree competition forces all surviving capitals to do the same, and a new wave of investments, altering the relationship between profit and wages, initiates a new period of capital production. The problems of capitalism, coming to the fore on the market, find their solution in the sphere of production, though the solution is not complete until it also affects market relations.

Not only the conditions of capital production but also its circulation improve and ease the realization of surplus-value. As the upward trend gains momentum, demand increases and the over supply of commodities diminishes. Prices begin to rise under conditions of a greater volume of business, for the concentration process affects the sphere of circulation, too. To be sure, wages also begin to rise and the average rate of productivity of labor declines because of the greater number of workers employed, including less productive workers laid off during the depression. But as long as profitability can be raised through new methods and means of production faster than it falls due to the improvement of labor conditions, the rate of accumulation remains unaffected.

Despite intermittent periods of depression, each upswing brings capital production to a higher point and wider extension than its previous level of development. There are fewer capitalists relative to the increased capital but more in absolute numbers. There are fewer workers employed relative to the accumulated capital but more in absolute numbers. Capital develops in a manner that may be described as three steps forward and two steps backward. This type of locomotion does not hinder the general advance; it only slows it. When capitalist development is seen and steady process, quite apart from the hectic fluctuations of expansion and contraction, the rate of capital accumulation is quite moderate and gives no indication of the many upheavals and social struggles it involves.

To speak, then, of the capitalist crisis or the business-cycle is merely to refer to the specific manner in which capital accumulates under competitive market conditions where the interrelations of capitalist production as a whole are left to enforce themselves by way of crisis. Any mechanism in capitalism which regulates any thing at all must first regulate the relations between production and profitability. With the self-expansion of capital as the determining developmental factor, the “law of value” asserts itself less and less in terms of price changes in everyday market activity; it requires, instead, an all-embracing economic crisis. The “equilibrium tendencies” of the competitive market come to the fore not in their actualization but in the expansion and concentration of capital. And just because it requires a crisis to reestablish the type of proportionality necessary for a further capital formation, the various crisis-elements accumulate undetected and unchallenged in each expansion period.

For Marx, each period of crisis and depression is a manifestation of the workings of the “law of value,” a “healing-process” on which the continued life of capital depends. The “equilibrium” forces of the market operate within a mechanism which “equates” the rate of accumulation with the rate of profit and to this end demands recurrent crises. The type of market equilibrium of which bourgeois economy speaks cannot be brought about. The only equilibrium possible is a “dynamic equilibrium” which implies a successful accumulation of capital and, therewith, a steady increase of the disequilibrium between “social demand” and actual social needs, between the profit-determined expansion of production and the expansion and organization required for the satisfaction of social needs.

The capitalist crisis validates the general theory of capital accumulation, as it is here that Marx’s abstract value analysis of capital production finds its observable verification. The rise of the organic composition of capital is an incontestable development. The fall of the rate of profit as a consequence of the rising organic composition of capital is, however, experienced only in periods of crisis and capital stagnation, as expanding capitalism compensates for the fall of the rate of profit by a rise in the mass of profits on the larger total capital.

No specific data exist for the organic composition of total capital. According to the state of industrialization, it is high in some nations and low in others. Even for a particular nation, the organic composition of capital can only be vaguely calculated from insufficient, unsuitable, and largely unreliable data, which yield not much more than the obvious; namely, that the increasing productivity of labor manifests itself in the continuous expansion of capital. A hundred years after the writing of Capital, it must still be said that not even for a single country, America in this instance, can “past performances with respect to capital formation and financing be studied in adequate detail, because of lack of data.”^[1] However, what data exist do verify Marx’s expectations as to the course of capital development.

As regards capital formation in America, Simon Kuznets relates that during the period 1869 to 1955 “there was a marked growth of capital per person and per number of the labor force. Net capital stock per head rose, over the period as a whole, to about four times its initial level ... at a rate of about 17 per cent per decade.”^[2] To be sure, capital formation per head of population and even per head of labor force is not related to the rise of the organic composition of capital in the Marxian sense. It shows nonetheless that capital increased constantly and, for the period under consideration, rose four times faster than population. Kuznets summarizes the growth in the volume of capital formation in terms of dollar values in constant (1929) prices. He distinguishes between gross- and net-capital formation, the latter being the actual additions to the existing capital after the deductions of the “consumed” fixed capital are made. “The annual value of gross capital formation rose from $3.5 billion in 1869-1888 to $19 billion in 1929-1955, and to $30 billion in 1946-1955. This long-term rise over some three quarters of a century was thus about nine times the original level. Capital consumption (depreciation) charges also rose rapidly, from an annual level of about $1.5 billion in 1869-1888 to over $14 billion in 1929-1955 and slightly over $19 billion in 1946-1955. The rise here was, therefore, to about thirteen times the initial level. Net capital formation also grew appreciably, from $2 billion per year in 1869-1888 to $4.7 billion in 1929- 1955, and to about $10.5 billion in 1946-1955. The rise was over five times the initial level.”^[3]

Data somewhat more relevant to the organic composition of capital exist for selected industries. For instance, for America’s 100 largest firms, employing 5 million persons and having combined assets of $126 billion, the average amount of assets per worker grew from $12,200 in 1949 to $20,900 in 1959 and to $24,000 in 1962. ^[4] There were wide variations between different industries, as the following table shows:^[5]

Average Total Assets per Employee, by Industry, of the largest Manufacturing Corporations in 1959
NUMBER OF COMPANIES	INDUSTRY	AVERAGE INVESTMENT PER EMPLOYEE (DOLLARS)
21		Petroleum Products	62.000
3		Distilling	53.400
3		Tobacco Products	50.100
8		Nonferrous Metals	28.200
8		Chemical Products	24.700
9		Iron and Steel	21.200
3		Pulp and Paper	18.800
3		Autos and Trucks	14.800
11		Machinery and Equipment	13.000
6		Food Products	10.500
4		Tires, Rubber Products	10.300
5		Electrical Equipment	10.100
7		Aircraft	7.600
9		Other Manufacturing	17.700
Total = 100		Average =	20.900

With all their imperfections, including their failure to distinguish between capitalistically-productive and unproductive labor in the amalgam “head of labor,” Kuznets’ figures suggest nonetheless that capital formation does proceed in accordance with the value character of capital production, which requires a faster increase of the constant than of the variable part of capital. Leaving periods of depression aside, the overall rate of capital formation indicates a sufficient rate of profit by the very fact of the accumulated capital. Only a decline of the rate of accumulation causes the latent tendency of the rate of profit to fall to manifest itself. This can also be expressed in reverse: a decline of profitability comes to the fore as a reduced rate of capital formation which, in turn, arrests the rise of the organic composition of capital.

Now, one of Marx’s “countertendencies” to the fall of the rate of profit is precisely a slowing down of the rise of the organic composition of capital through cheapening the elements of constant capital. It is made possible by technological changes increasing the productivity of labor so that relatively less surplus-value is converted into additional capital. While labor-saving devices foster the more rapid increase of capital investments relative to wages, capital-saving devices diminish to some extent the widening gap between the money invested in labor and that invested in capital. This could not be otherwise because the increasing productivity of labor also affects the production of the means of production. Capital-saving and labor-saving innovations are actually one and the same, meaning that, relative to the quantities of commodities produced, less and less labor is employed in all branches of production and thus also in the manufacture of capital goods.

To accumulate capital, the mass of capital must increase despite and because of the cheapening of the means of production. The cheapening of constant capital is thus a “countertendency” to the fall of the rate of profit only in so far as it allows for a more rapid capital accumulation. This is already made obvious by the fact that crises and depressions accompanied capitalist development under conditions of a low as well as a high organic composition of capital. Since only conditions of rapid capital formation bring forth a social demand large enough to employ all, or nearly all, productive resources, capital must accumulate irrespective of the state of its organic composition. Because capital is not only a production relation but also a value relation, the mass of capital in any one cycle of production must be larger in value terms than it was in a previous cycle.

Returning to Kuznets’ observations, we learn that during last three decades the organic composition of American capital has not risen as it did previously. Over some sixty years, prior to 1920, capital stock per worker grew at high rates; from then on, however, capital stock per worker declines drastically. It is true, Kuznets writes period beginning in 1929 includes the Great Depression; on the other hand, it includes also the expansion years of World War II and a decade of a particularly high level of capital formation following the conclusion of the war. If we view the average in 1929-1955 as an approximation of long-term secular levels, we can hardly escape the conclusion that substantial changes have occurred in the factors that determine capital formation. ^[6]

The lowering of the rate of capital formation in the United States, in Kuznets’ view, appears to be the result of a growing rate of capital depreciation and capital-saving inventions. Whereas in the period from 1869-1888 “it took $1.7 of gross capital formation to provide $1 of net capital formation,” in the decade between 1946-1955, “it took almost $3 of gross capital formation to do so.” Gross capital formation itself, relative to gross national product (in constant prices), declined from “22.6 per cent in 1869-1888 to 21.5 per cent in 1909-1928 and to 17.6 per cent in 1946-1955.” With gross capital formation declining in proportion to gross national product, and with “the rate of capital consumption to gross capital formation rising appreciably, the ratio of net capital formation to national income (or national net product) shows a distinct down ward trend. Its share declined from 14.6 per cent in 1869-1888 to 11.2 per cent in 1909-1928 and to 7.0 per cent in 1946-1955.”^[7]

The rise of capital “consumption,” with its depressing effect upon net capital formation is explained not by a quicker physical deterioration of capital but by the quickening of its competitive obsolescence. On the other hand, the more productive capital replacements tend to be of a capital-saving type, combining higher efficiency with a lower supply of capital per worker. The growing “wealth” of America expresses itself as a growing wealth of marketable commodities rather than of capital investments. Whereas in times past the net effect of technological changes was an increase in both out put and capital, in more recent times real production per capita has grown with a declining rate of capital formation.

Not infrequently, then, it is said that “capitalism is in crisis because it produces too much surplus-value for its ultimate realization in the progressive accumulation of capital.”^[8] Qualitative changes in the technology have supposedly brought forth the “possibility of producing additional surplus-value without corresponding additions to the invested capital, [and] the chief form of realization, that of its conversion into capital becomes [therewith] impaired.”^[9] The result is that the national product grows faster than does capital.

This is not, however, a novel situation. According to Marx, as we have seen, production and the productivity of labor always grow faster than the value of capital. At all times and by all means, capitalists try to trim capital-costs and labor-costs in their search for the greatest amount of profit possible. Throughout every economic depression, moreover, surplus-value in the form of unsalable commodities cannot be converted into additional capital, and gluts the market as an apparent abundance of surplus-value. To go back once again to fundamentals: the rising organic composition of capital does not reduce the actual rate of profit on capital so long as capital accumulates faster than the rate of profit falls. If capital accumulates without a corresponding rise in the organic composition of capital, that is, if new capital of low organic composition constantly enters the market economy through the spread of the capitalist mode of production and thereby lowers the average composition of capital, the mass of surplus-value and the rate of profit will rise. Capital-saving innovations which lower the organic composition of capital should have the same effect; indeed, according to Gillman, in twentieth century capitalism they have led to a super abundance of surplus-value. In Gillman’s view this surplus-value cannot be realized as new capital, and also cannot be realized in the form of consumption because of capitalism’s antagonistic system of distribution. Capitalism’s difficulties are here shifted from the sphere of production into the sphere of distribution. Not production but realization of surplus-value accounts for the capitalist crisis. This is a flat rejection of Marx’s theory of capital accumulation and, by implication, of the labor theory of value itself. Furthermore, this “shift” has nothing to do with the social conditions peculiar to twentieth century capitalism, because the production problem of capital could at all times be read as a realization problem. Even in the nineteenth century, Malthus, for instance, saw the crux of the capitalist dilemma in the realization problem. And at the turn of the century, the Marxist Rosa Luxemburg saw in the difficulties of surplus-value realization the objective reasons for crises and wars and for capitalism’s eventual demise.

All this has little to do with Marx, who saw that the actual world of capitalism was at once a production and a circulation process, to be sure, but who held nevertheless that nothing circulates unless it is first produced, and for that reason gave priority to the problems of the production process. If the production of surplus-value is adequate to assure an accelerated capital expansion, there is little reason to assume that capitalism will falter in the sphere of circulation.

Because of the tendential fall of the rate of profit there can never be an abundance of surplus-value in relation to the accumulation needs of capitalism. Of course, due to market disproportionalties, particular industries may experience a realization problem; however, these same disproportionalties will overcome the problem by re-allocating labor and capital in accordance with the principle of profitability. A general overproduction of capital and commodities, affecting all spheres and branches of production at once, cannot be explained by market disproportionalties. It impairs the realization of surplus-value for total capital, affecting individual capitals to varying degrees; and this general impairment cannot be resolved by a mere reallocation of the existing labor and capital.

In theory, according to Marx, a sufficient increase of surplus-value will change a period of capital stagnation into one of expansion. The relative stagnation of the American economy, for instance, could be considered a prolonged crisis situation which, in fact, it is. There is nothing in Marxian theory which excludes the resumption of an enhanced capital expansion, though the actual situation in which American capitalism finds itself may preclude such an event. Capital stagnation is a crisis situation. Within this crisis situation attempts are made to increase the profitability of capital. If these attempts do not result in accelerated accumulation, this does not indicate that there is too much surplus-value for purposes of capitalization; rather it indicates that for this end the surplus-value is not sufficient, whatever it may be. If this particular situation continues for long, it would point to the insolubility of crisis conditions, for a continuous increase of production without capital accumulation is no longer true capitalist production. An increasing part of surplus-labor would lose its value character and to that extent decrease the profitability of capital. In that case, one could speak of a “permanent crisis” of capital production, which is to say that the crisis mechanism fails to restore the conditions for an expanding capitalist economy.

Marx did not concern himself with the individual firm or country save in so far as a description of either would throw light upon the character of the capitalist system as such. He used England for demonstrative purposes, and pointed out that the “country that is more developed industrially only shows, to the less developed the image of its own future”;^[10] but this image relates only to the capitalist conditions of production and exchange, and does not exclude variations between nations in other respects. British capitalism substantiated Marx’s general theory of capital accumulation, but this theory, once evolved, was independent of any particular country. Just as the fortunes of individual capitals vary in the general competitive accumulation process, so do the fortunes of individual nations. But for the world as a whole, the capitalist accumulation process remains determined by the increase or decrease of surplus-value relative to the growing mass of total capital. Stagnation of capital in one nation may allow for a more rapid accumulation in another. But it is the unknown quantity of total capital and its relation to total surplus-value which determine the fortunes of capitalism as a whole. This implies that some nations will experience a general shortage of surplus value in the particular form of a shortage of investment funds, while other nations may experience the same situation as an “abundance” of unrealizable surplus value But the peculiarities of the distribution of surplus-value do not affect its quantitative relations to total capital. In any case, unrealizable surplus-value ceases to be surplus-value, so that the lack of profitability becomes a general phenomenon.

It is not that a disproportionality of the market supply and demand issues in the simultaneous inability to sell and buy. An actual shortage of surplus-value creates this disproportionality if capitalism as a whole could develop faster than it actually does, surplus value would possibly be convertible into additional capital. Yet even if the unsalable part of the surplus-labor could be fully realized in additional capital, the rate of profit would nevertheless fall with the rising organic composition of capital, which would lead once more to overproduction and the transformation of a production problem into a realization problem.

From a Marxian point of view, the various existing theories of crises which categorize the problem as either underconsumption or the overproduction of commodities – the one implying the other and both involving the realization problem – only describe the externals of the capitalist crisis mechanism. The periodic overproduction of the means of production and of commodities prevents the realization of surplus-value is, in Marx’s view, only an overproduction of means of production that cannot serve as capital, that is, cannot serve for the exploitation of labor at a given degree of exploitation. And though the overproduction of commodities is an obvious fact, Marx’s theory is not a theory of underconsumption. According to Marx, capitalist production is, and must always be, at variance with the consuming power it brings forth – in periods of prosperity as well as in periods of depression.

It is not a “consuming power” growing in proportion to production which explains the increasing social demand for consumption goods in the upswing period of capital development; it is merely the greater number of workers now employed. In periods of expansion, prices rise faster than wages and reduce individual workers’ incomes while enlarging the income of the class, or increase individual incomes only in so far as they are based on steady and prolonged work. Furthermore, it is not the rising consumption of the non-working population which narrows the gap between social production and social consumption, since the increasing surplus-value is now largely reinvested. It is the rapidly increasing demand for production goods which explains the increasing demand for consumption goods and allocates social labor accordingly. At the beginning of a depression, prices fall faster than wages, and the individual worker’s lot improves while that of his class, which embraces the unemployed, worsens. With the development of a new stability within the depression, the situation changes and even the employed worker’s wages decrease in terms of buying power. But this is already n aspect of a new upward trend. Similarly, at the height of prosperity, wage-increases which keep pace with, or even outrun, the rise in prices, are largely a sign of the approaching crisis. In short, the business-cycle is not caused by variations in social consuming power, particularly not in that of the workers; rather the cycle determines these variations.

Aside from these considerations, however, the ultimate cause of all real crises “remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way that only the absolute power of consumption of the entire society would be their limit.”^[11] For in view of actual productive capacity and the restricted consuming power of the broad masses, the observable cause of crisis is the obvious inability to consume what has been produced. That this is a condition of capitalist existence does not alter the fact that it is also a contradiction between production and consumption. In the real crisis, apart from the hidden crisis-mechanism of capital production, the mass of unsalable commodities faces a steadily declining buying-power and a productive capacity designed for an increasing demand. In capitalist theory, this means that demand does not equal supply in terms of prices, which will lead to market changes in price relations that will eventually close the gap. For Marx, however, the gap can only be temporarily closed by an enhanced capital accumulation, which then enlarges the permanent gap between production and consumption. In his view, the crisis cannot be eliminated by a reduction of production, or by an increase of consumption, or by the co-ordination of both. To do the last would be equivalent to ending the capitalist system itself. Neither underconsumption nor overproductions are self-explanatory. They can be understood only in the context of capital production.

---

1. S. Kuznets, Capital in the American Economy, New York, 1961 p. 33

2. Ibid., p. 66.

3. Ibid., p. 394.

4. First National City Bank, Economic Letter, New York, June, 1963.

5. Ibid., August, 1960.

6. Capital in the American Economy, p. 68.

7. Ibid., p. 395.

8. J. M. Gillman, The Falling Rate of Profit, New York, 1963, p. 126.

9. Ibid., p. 61.

10. Capital, Vol. I, p. 13.

11. Capital, Vol. III, p. 568.