Capital III, Chapter 15 - Part 30

There are then, for capitalism, two types of such overproduction. One is where capital is absolutely overproduced. In other words, the capital itself has been so expanded that the additional capital cannot function as capital. No additional surplus value is produced, because none can be extracted. Capital has expanded so much, so much labour is employed that wages rise, the rate of surplus value falls by more than the quantity of variable capital rises. But, the second type of overproduction is relative, where the capital does act as capital, labour is exploited and produces surplus value, but because production has expanded beyond the capacity of the market to absorb it, the surplus value that has been produced cannot be realised, because market prices fall below prices of production.  In fact, the two can go together, because the same boom conditions that lead to labour being employed on this scale, and which lead to higher wages, for that same reason leads to higher levels of consumption, so that demand elasticity rises.  As Marx points out, crises of overproduction usually coincide with periods also of high levels of consumption, not underconsumption.

“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.” (p 251-2)

Its important to listen carefully to what Marx is saying here, about this absolute overproduction, particularly this last part. This overproduction he is making clear, has nothing to do with any long run tendency for the rate of profit to fall. The sharp fall in the rate of profit he describes, is a result of a crisis of overproduction, not vice versa. But, the reason the crisis exists, as an absolute overproduction of capital, has nothing to do with a long run tendency for the rate of profit to fall either. The reason, that surplus value cannot be extracted, he makes clear here, is because wages have risen sharply, the rate of surplus value has fallen, and that is not because of a falling rate of profit, but the opposite. It is high rates of profit that have created exuberance, rapid, large scale investment that has sucked in available supplies of labour-power, pushing up demand and wages.

In fact, this is the situation he described in Chapter 6, where a boom leads to high rates and masses of profits, which causes a sharp rise in demand for labour-power and other inputs, which causes sharp rises in wages and other input prices. Its basically the situation Glynn and Sutcliffe described in “Workers and the Profits Squeeze”, arising in the post-war boom. This is also the situation Marx described in Chapter 6, in relation to the boom period of the 1840's and 1850's, when high rates and volumes of profits led to precisely these kinds of periods of over-exuberance, where new factories were being built, old ones re-opened and so on, precisely because high and rising profits were available, but its precisely this which pushed up the market prices of inputs and wages.

Of course, this kind of absolute overproduction, where surplus value cannot be produced, goes along with relative overproduction where it is produced, but cannot be realised. And again, the process is contradictory. On the one hand, the higher wages of workers, caused by the higher demand for labour-power, means that workers demand for wage goods and even some luxuries, rises. So, the potential to realise produced surplus value increases, as the higher demand tends to raise market prices, or to present less resistance to higher market prices due to higher costs. On the other, as Marx sets out in Chapter 6, the higher costs of materials become harder to pass on into the prices of the end product, because higher market prices tend towards reducing demand. Capital has to absorb some of that higher cost, thereby reducing realised surplus value.

In addition, the more workers wages rise, the more they are able to satisfy their demand for some commodities. As Marx pointed out, there is no reason to buy six knives when one will do, just because the price has fallen. But, similarly, there is no reason to buy six knives when one will do, just because wages have risen. So, some wage goods face an increasing problem of consumer resistance, due to the elasticity of demand. Its one reason workers use their higher wages in such periods to begin to buy some luxury goods. So, capital faces a problem arising from such a boom, of sharply rising wages, squeezing produced surplus value, of sharply rising material prices that cannot be fully passed on, squeezing realised surplus value, along with a further squeeze on realised profits emanating from the limitations of the market imposed by the elasticity of demand for existing products. The lower the profit margin on each commodity unit, imposed by the first cause, the more the production is likely to be unprofitable as it confronts the latter. Both are a consequence of the unrestricted expansion of production, driven by competition and the rise in the productivity of social labour.

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