Breakdown part 1: Theory of breakdown; Theories of crises

Breakdown theory: a crisis in Marxist thought

In 1892 the famous theorist of the German Social Democratic Party (SPD), Karl Kautsky wrote that “The capitalist social system has run its course; its dissolution is now only a question of time.”¹ Over 120 years since Kautsky’s proclamation, the clock is still ticking, but we have had no shortage of those proclaiming that each second it counts will be the last.

Prophesies of capitalism’s collapse, often and preferably immediate, have been a commonplace in Marxist literature and politics since the publication of the third volume of Marx’s Capital in 1894². It is not hard to see, in the face of so many failed prophets, why the view that Marxism requires a breakdown theory of capitalism has largely become the domain of dogmatism and vulgarism, with most mature Marxisms treating it as an inconvenient part of the movement’s history.

That this represents a crisis for Marxist thought is perhaps less obvious. To explain why it does, we need to burrow down into the detail of the theory first, beginning with a general exposition.

Marx and the breakdown of capitalism

Though some Marxists attempt to suggest that Marx does not have or require a theory of capitalist breakdown – Anton Pannekoek³, for example – to save Marx from those who followed him, this a fundamentally dishonest or naïve approach. That Marx both held and required such a theory is clearly expressed by his famous 1859 preface to A Contribution to the Critique of Political Economy. This is the only part of his work which Marx referred back to as a general exposition of “the materialistic basis of [his] method”⁴. Within it, Marx makes a clear statement embedding the need for a theory of capitalist breakdown in his general theory of history:

“At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.”⁵

Often referred to as “the fetter thesis”, this section of Marx’s preface gives his understanding of the basis for political revolution and the transformation of one mode of production into another. This process of transformation stems from a contradiction between the way that work is organised and the property relations this operates under. It implies that human development inevitably generates such contradictions. Whilst Marx’s framework here is not disproven by the absence of such a theory, it is proven by a such a capitalist breakdown, and thus strongly suggests a theoretical account. Moreover, Marx does, in fact, provide such a breakdown theory in his theory of the falling rate of profit.

The theory of the law of the tendency of the rate of profit to fall, to give it its full and exhausting name, requires an understanding of much of the rest of Marx’s critique of capitalism. We will attempt an outline here, but I want to stress that it is only an outline.⁶ Reading Capital for yourself is absolutely necessary to grasp the detail behind these summary points.

The source of profit in a capitalist economy is the commodity form of labour: labour-power. As the only thing all commodities hold in common is that they are products of human labour, the amount of average labour it takes to produce them must determine their value – the basis for their comparison and exchange on the market. The capacity of humans to work is no different, requiring a given amount of consumption (food, housing, clothing etc.), all of which requires labour, to reproduce. It is the distinction between the value of a workers’ capacity to work, which is what is sold to the capitalist, and how much value a worker can produce from which all profit in a capitalist economy is derived. To put this in a crude example for illustration: the worker needs to eat less bread in one day than they can bake. What a worker is determined to need is, for Marx, not determined by simply natural limits, but a social question. Nevertheless, it is this difference between the reproduction of labour-power and the productive power of labour which produces value above that which the capitalist has invested, a surplus-value.

Capital and capitalists’ capacity to take hold of this peculiar, value-producing commodity of labour-power is derived from their ownership of the means of production: the tools, machinery, premises and materials of labour – collectively, constant capital. In a fully formed capitalist economy, this ownership compels the workers to sell their capacity to work as no other options are generally available. At the same time, it forces capitalists into competition with each other, each attempting to gain a greater market share. Combined with a drive to gain greater control over the workplace⁷ in order to speed up production, this leads to greater investment in machinery and greater mechanisation. Here, the core contradiction which the falling rate of profit results from reveals itself. Whilst early adopters benefit from the increased productivity of their means of production, as this mechanisation becomes more generalised, the average price of the commodities produced falls, as each of them contains less labour on average. More fundamentally, the greater the mechanisation of any given productive process, the greater the capital outlay it requires in raw materials and instruments of production and the less labour it involves in the productive process. As labour is the source of value, this leads the ratio of profit relative to investment to decline.

This is a simplified overview of the rationale behind Marx’s theory. However, it’s already pretty complex for those new to it. As such, we’ll provide a crude example to illustrate it further, before turning to consider the complexities behind it and the consequences which flow from it.

Let’s assume that three capitalists make up the total capital of a closed capitalist economy. Each begins owning a factory, with raw materials to produce cloth, and hires forty workers to carry out the work. Each worker produces one cloth a day, which sell for £1 each. The factory and raw materials account for £10, and the workers’ wages come to £10 in total. This gives a rate of profit of 100%, £20 received for each £20 invested. All of this is depicted on the slide here.

The first capitalist invests in new machinery, which doubles the output of his workers, but can only staff 30 of them. It raises his investment on means of production by £2.50 and lowers his wage bill by the same amount. As he is the first to do this, he is able to sell the commodity at the same rate. He benefits, his rate of profit rising to 200%.

The other two capitalists follow suit, doubling the output of their workers, firing ten, raising their investment on means of production and lowering their wage bill. However, as the amount of cloth available on the market has increased considerably, the price of cloth falls by half in consequence. Each of them now has a rate of profit of 50%.

Hopefully, this crude illustration makes the core dynamics in Marx’s theory of why the rate of profit falls clear. With this understood, we can now consider the consequences of the falling rate of profit, and why this amounts to a breakdown tendency in Marx’s thought.

The first significant consequence of a low rate of profit is a breakdown in capitalist production, most thoroughly explored by the Polish Marxist Henryk Grossman⁸. As the rate of profit falls, the lower rate of productivity leads capitalists to withdraw their money from capital investment, to preserve it as a money hoard. Some brief examples illustrate the reasons for this reaction. Firstly, as productive capital is the only form of capital which may produce new value, this form is divided up among other capitalist property owners in the form of rent and debt obligations, or the share of profits eaten up by the merchant capitalists who sell the goods produced. A low rate of profit, therefore, does not only offer a small return on investment, but also risks the original capital invested to these obligations. Secondly, more complex mechanisation in production carries more risk in general, with the value embodied in a machine not returning to the capitalist until the end of its average lifespan, often a period of around ten years. Faced with a falling rate of profit, such long-term investments appear rather unwise. This reaction, where capitalists hoard money in the face of an insufficient rate of profit, is often referred to as a crisis of overaccumulation.

The second significant consequence of the falling rate of profit is a social crisis of mass unemployment, sometimes referred to as the immiseration thesis. As capitalists requires less and less labour as mechanisation progresses, the working class are turned out of production. This is what led Marx to conclude that “The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labour, the greater is the industrial reserve army [of unemployed workers]”⁹. As misery and deprivation accumulates among the workers, they are eventually forced into a revolt against the capitalist system, overthrowing it. The falling rate of profit here operates as an inevitable process of unification among the working class. This interpretation of the breakdown of the capitalist system was that most strongly held by early Marxist communists like Kautsky.

Both of these consequences clearly lock capital into a crisis. However, that either represents a breakdown process within capitalism is perhaps less clear. With regard to the second consequence, it is plain that a dispossessed proletariat, however vast, may be defeated – this is a matter of strategy and struggle. The money hoarding resulting from a low rate of profit is more difficult to dismiss. However, Marx himself does not view this as an absolute process, outlining four counter-tendencies to the falling rate of profit. The rate of profit may be raised or stabilised by:

• Lowering the wages of the workers, thus lowering the amount of capital invested, but not the profits derived from it, or increasing the intensity of work, thus wringing more labour and profit from the labour-power purchased;

• Devaluing or destroying the overaccumulated capital embodied in the means of production. This can be achieved by market mechanisms – for example, increases in the productivity of machine production – or through war;

• Increasing the productivity of the means of production yet further. As we have already seen, this counter-tendency can only be seized upon by those capitalists who seize it first, as when this productivity becomes generalised, prices fall and the fall in the rate of profit reasserts itself;

• Exporting capital abroad when wages and land prices are lower, thus increasing the profit derived from labour on the one hand and decreasing the amount to be paid in rent (and thus the risk of a low rate of profit) on the other. It is this tendency which Lenin situates as central to the development of capitalist imperialism in the late 19th and early 20th Centuries¹⁰.

The combination of these crisis vectors and counter-tendencies provides us with an elastic theory of breakdown, where the falling rate of profit can be staved off. For some theorists – Anton Pannekoek¹¹ or Slavoj Zizek, for example – this means that Marx did not have a theory of the breakdown. Rather, he held a theory of periodic crises, which lead to inevitable class struggle. This class struggle alone embodies the transitory nature of capital to such thinkers. For others – for example, Ted Reese¹² – what this misses is that each of the “counter-tendencies” re-establish the falling rate of profit at a higher level, the crisis deepening with each occurrence. At a certain point, this leads to developments which simply cannot be accommodated by capital’s property relations, with full automation abolishing the source of value standing as the “classical” example.

Before delving further into the distinction between these positions, we will consider both vulgar Marxist approaches to breakdown theory and disavowals of it to grasp some of the political stances tied up with the theory. This is necessary to disentangle Marx’s theory from its complicated political history. The first of such vulgarisms is the notion that the falling rate of profit stands as an explanation for all crises in a capitalist economy. This is contradicted by Marx himself numerous times. For example, the separation between productive and merchant capitalists means that a producer may make goods for the market whilst those that they previously produced remain unsold, leading to a glut in the market and a crisis of overproduction¹³. Other examples also illustrate this point.