Capital III, Chapter 6 - Part 12

Marx then provides a series of Factory Inspectors' reports which detail these fluctuations in raw material prices and their effects. In the Report of R. Baker, Factory Inspector, of October 1858, it states,

“The state of trade is better; but the cycle of good and bad times diminishes as machinery increases, and the changes from the one to the other happen oftener, as the demand for raw materials increases with it... At present, confidence is not only restored after the panic of 1857, but the panic itself seems to be almost forgotten. Whether this improvement will continue or not depends greatly upon the price of raw materials. There appear to me evidences already, that in some instances the maximum has been reached, beyond which their manufacture becomes gradually less and less profitable, till it ceases to be so altogether.” (p 121)

In short, as machinery improved, the demand for material rose, and so did its price, until it reached a point where further expansion became unprofitable. But, a more extreme case was with the cotton shortage of 1861-5 caused by the US Civil War. In fact, the raw material then may not be available at all. A similar situation existed in the 1970's with OPEC's increase in the oil price and embargo following the Arab-Israeli War. Another example was the shortage of coal as a result of miners' strikes in Britain in the 1970's, that led to the imposition of a three day work week.

This is the kind of economic crisis that Marx describes in Volume II of Capital where he says that a crisis can occur from the circuit of capital stagnating or being frustrated at one of several points.

“Capital describes its circuit normally only so long as its various phases pass uninterruptedly into one another. If capital stops short in the first phase M — C, money-capital assumes the rigid form of a hoard; if it stops in the phase of production, the means of production lie without functioning on the one side, while labour-power remains unemployed on the other; and if capital stops short in the last phase C' — M', piles of unsold commodities accumulate and clog the flow of circulation.” (Capital II, p 50)

Here it is at the first stage of the cycle, where money-capital has to metamorphose into productive-capital. To do so, that productive-capital must be available in the market. If it isn't, or if it is only available at prices that would make production unprofitable, the circuit breaks down at that point, causing it to fail throughout the circuit. For example, if the price of cotton rises to a very high level that price would have to be recovered in the price of yarn, cotton cloth etc. But, at those prices consumers may refuse to buy, switching to wool etc.

But, capitalism relies on being able to produce in large quantities. If demand falls at these higher prices, the costs of all the large scale buildings, machinery etc. have to be spread over a smaller quantity of supply, pushing prices higher yet again. In fact, it may not be possible to continue production with all this capital at all. So a crisis ensues, factories close etc. to adjust the supply to the new level of demand.

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