In The Time Of Nick (Rogers) - Part 3

Let me now turn to Nick's charge that I have proposed an underconsumptionist view of crisis. In my article I wrote,

“The basic contradiction of Capitalism is that it expands production faster than it can expand the capacity to consume that production at prices that ensure the capital consumed can be reproduced i.e. at a profit. Marx understood the principle of demand elasticity.”

Is this in any shape or form the underconsumptionist argument? No. The underconsumptionist argument is that crises occur, because wages or other sources of demand in the economy is too low. The solution is then to stimulate aggregate demand by either raising wages, or else stimulating investment, or else via Government Spending to raise both Consumption and Investment via the Multiplier. Now, the question of whether such solutions are appropriate as a means of resolving some economic crises, at some specific times is different to what I actually said in the quote given. As it happens, I do believe, and the facts support it, that at certain times i.e. during a Long Wave Boom, such Keynesian solutions can act to cut short recessions. They did repeatedly during the Post War Boom, and where they were applied in 2008/9, they did so again. The consequence of such solutions is to store up problems for the future. Moreover, precisely because they are only applicable during a Long Wave Boom, means that outside such a situation they do not work, and are likely to be counter-productive. In the 1970's they led to stagflation.

But, the point is that the quote at issue does not even make that argument. It says the opposite. It says that crises of overproduction arise not because of some abstract lack of demand, but because of a very particular, concrete type of lack of demand i.e. lack of demand for available goods at prices that realise sufficient profits to enable the Capital consumed in them to be reproduced! It is NOT saying that such a crisis can be resolved by raising wages, because raising wages would merely reduce profits by raising costs. The same applies to reducing prices. It is NOT saying that such a crisis can be resolved by Government intervention to stimulate demand, because such an intervention requires the State to pay for it by draining Surplus Value via additional Tax (ultimately).

In fact, if it is an underconsumptionist statement then Marx and Engels must have been underconsumptionists too, because it is pretty much exactly what they say on the matter!

Volume I of Capital makes fairly early on the point that the real contradiction at the heart of Capital is that within the commodity itself between Use Value and Exchange Value.   He makes the point that they move in opposite directions. The more productivity rises the more Use Values are produced, but the rise in productivity is manifest in a reduction in the amount of Labour-time required to produce those commodities, so the Exchange Value contained in each commodity falls, at the same time as the number of Use Values rises. Moreover, we have seen that Marx understood the principle of Price Elasticity of Demand for those commodities i.e. the more demand for any commodity is satisfied, the less consumers are prepared to pay add to their existing consumption of that commodity. To encourage them to consume more, suppliers have to lower prices by increasingly larger amounts in order to obtain a given increase in demand. If prices of some commodities fall enough, consumers are likely once they have enough of that commodity to use their savings from those reductions to buy some other commodity. As Marx put it,

“It would seem, then, that there is on the side of demand a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social wants are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money-wages higher, the labourers would buy more of them, and a greater social need would arise for them, leaving aside the paupers, etc., whose demand is even below the narrowest limits of their physical wants. On the other hand, if cotton were cheaper, for example, the capitalists' demand for it would increase, more additional capital would be thrown into the cotton industry, etc.” (Capital Vol III p188)

Marx describes this in terms of socially necessary labour-time. That is, if commodities are thrown on to the market for which there is no demand – which in line with his comment above can only mean at the price determined by the abstract labour used for their production – then the labour-time used in their production was not socially necessary, it was not value creating, and cannot be counted. That does not just mean the amount of living labour used in their production it also means the labour-time embodied in the constant capital too. All of that labour-time that was not socially necessary has to be deducted from the total Value of the produced commodities, so that the Value/Price of each is subsequently reduced. Only when that price has been reduced to the level where there is sufficient demand to clear the production has a situation been reached where those commodities are once again measured in terms of the SNLT (Socially Necessary Labour Time)

However, the cost of production of those commodities in Value terms has not changed. The Value of the Constant Capital consumed is still determined by its current reproduction cost, and so is the Labour Power consumed. It is just as though these inputs have been used less efficiently – which they have from an objective stance because some of their use was not required. The consequence is that Capital in this sphere of production could find that the prices it is able to obtain for its production do not meet its costs – not just the historical costs in the way that the TSSI describes, but current replacement costs of the Capital consumed – and so is unable to reproduce its Capital on the same scale. As Marx describes, these kinds of partial crises of overproduction occur all the time, they are the natural occurrence in the interaction of demand and supply and market prices. But, they only result in a true crisis of overproduction when they become generalised. It does not take much imagination, of course, to see, how such partial overproduction can become generalised, especially in an economy where Credit at the same time as preventing such contagion, also creates the conditions for exacerbating contagion when it does occur.

Capitalists who would not have been able to reproduce their Capital due to falling market prices, are able to do so by utilising commercial credit. Workers whose wages have fallen maintain their consumption by consumer credit. But, if the underlying overproduction is not remedied, if it is widespread, then failures of payments cascade.  Decisions to reduce investment, to lay off workers, cut wages, further reduce demand, which further reduces the ability to realise Surplus Value.

This is what Marx and Engels say,

“Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital...

The same occurs when there is an over-production of commodities, when markets are overstocked. Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production, not vice versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier. Furthermore, capital consists of commodities, and therefore over-production of capital implies over-production of commodities. Hence the peculiar phenomenon of economists who deny over-production of commodities, admitting over-production of capital.”

Capital III, Chapter 15

The statement here,

“a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier”,

is almost identical to the statement I made,

“The basic contradiction of Capitalism is that it expands production faster than it can expand the capacity to consume that production at prices that ensure the capital consumed can be reproduced i.e. at a profit,”

which Nick proclaims is underconsumptionist!

As I said above and in the original article, a decisive factor, in explaining the process, is the conjuncture of the Long Wave.

As a Long Wave decline comes to an end, and a new Long Wave Boom begins, new capital moves into the new areas of production, described in Part 2, and some old Capital moves into them out of the old areas. The 1930's, saw the beginning of these new industries with high profit rates in automobiles, electronics, pharmaceuticals etc., which provided precisely this basis of the Post War Boom. The 1990's, similarly saw the establishment of a similar group of industries and technologies, in microelectronics, biotechnology and so on, which provided the basis of the new dynamic and profitable industries of the Long Wave Boom that began in 1999. The general rate of profit is dragged up, and the expansion of economic activity creates the conditions of the Boom. But, the Long Wave Boom creates the seeds of its own destruction. As Trotsky describes – See: Flood Tide and The Curve Of Capitalist Development – during periods of persistent unemployment , and recession, like the 1920's and 30's, or the 1980's and 90's, the position of workers is weakened. Their morale falls, their organisations fall into decay, their atomisation increases, they are forced into increasing competition with each other.   They may become more embittered, but they become less radical, and fall prey to reformist, syndicalist and even reactionary ideas.  As a consequence they are unable to resist the reduction in their wages that the changed economic conditions necessitates, as the Value of Labour Power falls. By contrast, when the economy revives, workers, as Trotsky puts it, feel firmer ground beneath their feet. Employment rises, and the competition for jobs is reduced. Workers morale begins to improve, their organisations are rebuilt, and so on. The change in economic conditions raises the Value of Labour Power, and the workers are able to win higher wages to reflect it. As Glyn & Sutcliffe demonstrated, in the 1960's this was reflected in a Profit Squeeze on Capital, as the potential for raising productivity began to falter. Moreover, at this stage of the Long Wave, Industrial Capital is being squeezed by higher prices of raw materials, as the slow down in productivity means that higher costs are no longer so easily offset by more efficient use of Capital. Finally, as set out above, the Boom has raised general living standards, more consumption needs have been met, and so increasing demand for existing commodities requires larger and larger reductions in real prices of those commodities. This period of the Long Wave by contrast to the end of the downturn and start of the Boom, is marked by the drying up of potential dynamic areas of production, and a consequent decline in the general rate of profit, and a slowdown in economic growth.

This can be easily illustrated.

Assume there are Four Industrial Spheres. We can designate them as Food, Clothing, Shelter and Transport respectively. For the ease of calculation assume that the Organic Composition of Capital is the same in each. Such that:

1. C 1000 + V 200 + S 200 = 1400, R = 16.6%
2. C 1000 + V 200 + S 200 = 1400, R = 16.6%
3. C 1000 + V 200 + S 200 = 1400, R = 16.6%
4. C 1000 + V 200 + S 200 = 1400, R = 16.6%

Assume, each produces 1000 units of each commodity so the price per unit is £1.40.

Assume each industry employs 10 workers, each worker being paid £20.

Assume that technology remains constant, but assume increasing returns to scale. The first assumption is unrealistic, but improvements in technology would only emphasise the point rather than contradict it. The second assumption is completely realistic and empirically justified, as we see such economies of scale all the time. The £200 Surplus in each industry is accumulated. So,

1. C 1167 + V 233 + S 233 = 1633, R = 16.6%
2. C 1167 + V 233 + S 233 = 1633, R = 16.6%
3. C 1167 + V 233 + S 233 = 1633, R = 16.6%
4. C 1167 + V 233 + S 233 = 1633, R = 16.6%

However, this conclusion is clearly invalid, for the reasons Marx gives above, i.e. elasticity of demand will be different in each sphere. But, we have assumed that there are increasing returns to scale. In other words, although the Value of Constant and Variable Capital has increased by 16.6%, the quantity of Use Values will have risen by a larger proportion than this. Let us assume that the production of Use Values has risen by a third to 1,333 units in each sphere. Then the average price per unit would be £1.225. However, that assumes that there is sufficient demand for all of this production, at this price. There is no guarantee that is the case. Suppose, at the price of £1.225 per unit there is only demand for 1,166 units. In that case, the labour-time consumed in producing 167 units was not socially necessary. It has to be deducted from the Value of the total production in each sphere. In that case the actual Value of Production will fall in each sphere to around £1,429, meaning the Value of Each Unit falls to £1.07.

So, on this basis in each sphere we have:

C 1167 + V 233 + S 29 = 1429, R = 2%

We have essentially assumed that only workers are consumers here. Clearly, Capitalist consumption could soak up some of the additional surplus production, but the aim of Capitalist production is not increased luxury consumption by Capitalists, but the self-expansion of Capital.

As Marx says,

“It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

That, of course, is one of the problems of Nick's position and that of the TSSI, which focusses on a subjective analysis of individual Capitalists and their particular fortunes rather than on Capital itself, and the objective laws of its self-expansion.

Unless, Capitalists were to get together, and conspire to collectively raise their own unproductive consumption, then competition between Capitalists will drive them to continue to accumulate Capital, and to seek to each gain a larger market share. Of course, it is possible to argue that this is precisely what the Capitalist State does on behalf of Capital in general via Keynesian intervention.  Later, I will also show that this basic assumption of Marx does not necesarily hold in the age of Monopoly Capitalism.

So, Capital will try to sell this additional Surplus production, but because beyond the certain “magnitude” described by Marx above, demand does not increase proportionate to falls in price i.e. the demand is price elastic, prices have to fall proportionately more than the desired increase in demand! To use the terms of orthodox economics, the more demand is satisfied, the lower the Marginal Utility of each unit. To put it in Marx's terms, Socially Necessary Labour-time is determined ultimately in the market, it cannot be separated from what the actual level of demand for each product is at any given price. Any surplus production over what is demanded, is not Socially Necessary Labour-time. It cannot be counted as value creating, and the consequence is that the Value of each unit of production is lowered accordingly.

Of course, as it stands this is unrealistic. In fact, the elasticity of demand in each sphere will be different. In order to create sufficient demand to consume the excess Supply of Food, for instance may require only a small drop in price. In order to get people to consume the excess units of Transport (by driving more, taking more or longer train journeys etc) may require a much bigger fall in prices. As Marx and Engels put it in the quote cited above,

“As for the variable capital, the average daily wage is indeed always equal to the value produced in the number of hours the labourer must work to produce the necessities of life. But this number of hours is in its turn obscured by the deviation of the prices of production of the necessities of life from their values. However, this always resolves itself to one commodity receiving too little of the surplus-value while another receives too much, so that the deviations from the value which are embodied in the prices of production compensate one another. Under capitalist production, the general law acts as the prevailing tendency only in a very complicated and approximate manner, as a never ascertainable average of ceaseless fluctuations.”

The workers will continue to spend the same amount of money overall, but its division amongst the different spheres will now be changed as a consequence of the different elasticities of demand. So, the price per unit for food might fall to only £1.15, for clothing to £1.14, whereas for shelter it may fall to £0.98, and to £0.97 for Transport. Yet, its clear that this will then have further consequences. At these prices not only would there be divergent rates of profit in each sphere, but in some spheres if current levels of production were maintained there would be losses. Capital would then move to where the rate of profit was higher. The increased Supply would then cause prices and profits in that sphere to fall, whereas prices and profits in the area out of which Capital has moved would rise. I don't have time to do the maths for now, but its clear from what has been said that the end result will be a new structure of Capital, with more Capital employed in Food and Clothing, and less in Shelter and Transport, until the same price per unit, and the same Rate of Profit is established.

Back To Part 2

Forward To Part 4