In fact, the two things go together. As output expands, a growing mass of surplus value is spread across a growing mass of units, with the profit per unit/profit margin becoming ever small. At a certain point any change in market conditions can turn this small profit margin per unit into a loss, thereby, turning a large mass of profit into large losses. When capital is reaching a point of being overproduced, wages rise as the demand for labour increases. Workers begin to satisfy their demand for a range of products. They can only be persuaded to buy more of the increased production of them, if their market price falls significantly. Sellers of these commodities find difficulty in selling their rapidly increasing output at prices that will now realise a profit for them, even as demand increases, but at this diminishing rate. In other words, even though the surplus value may have been produced, as workers increase their consumption of these goods by a diminishing amount, and either begin to consume some former luxury goods, or else simply save a part of their increased wages, firms find it increasingly difficult to realise as profit that produced surplus value.
“The creation of this surplus-value makes up the direct process of production, which, as we have said, has no other limits but those mentioned above.* As soon as all the surplus-labour it was possible to squeeze out has been embodied in commodities, surplus-value has been produced. But this production of surplus-value completes but the first act of the capitalist process of production — the direct production process. Capital has absorbed so and so much unpaid labour. With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e., the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital. The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society.”
(ibid)
* These limits referred to by Marx are,
“Given the necessary means of production, i.e., a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”
(ibid)
What is more, as Marx says demand/consumption is also based upon antagonistic relations within distribution. If workers wages are low, then their ability to expand their consumption is restricted, and this creates one problem in realising the produced surplus value. The rate of surplus value is high, but a high rate of profit arising from it, is, then also one reason why firms will seek to accumulate additional capital, rather than the high profits being used for additional consumption by capitalists, landlords, money-capitalists and so on. As more capital is accumulated, so more labour is employed, and the conditions described above arise.
“And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. 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...
...the consumer power (is) based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin. The market must, therefore, be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law working independently of the producer, and become ever more uncontrollable. This internal contradiction seeks to resolve itself through expansion of the outlying field of production. But the more productiveness develops, the more it finds itself at variance with the narrow basis on which the conditions of consumption rest. It is no contradiction at all on this self-contradictory basis that there should be an excess of capital simultaneously with a growing surplus of population. For while a combination of these two would, indeed, increase the mass of produced surplus-value, it would at the same time intensify the contradiction between the conditions under which this surplus-value is produced and those under which it is realised.”
(ibid)
Although workers buy some former luxury goods, as their wages rise, along with the increased demand for labour, as part of this process of the continual expansion of the market, what Marx in The Grundrisse describes as The Civilising Mission of Capital, their demand does not compensate for the fall in the demand for those luxury goods from capitalists and other exploiters, who see their own revenues squeezed as the other side to the rise in wages. Moreover, as wages rise, as part of this growing economy, capitalists are forced, by competition, as Marx describes above, to devote an increased proportion of profits to accumulation, rather than their own consumption.
“But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption.”
(Capital II, Chapter 20, p 414-5)
So, profits are squeezed, as wages rise, due to the booming economy, and high demand for labour. Workers increase their demand for necessaries, but by a diminishing amount. As Marx points out in Theories of Surplus Value, Chapter 20, there is no reason to buy five knives just because you can buy them for the same price you previously paid for one. If you only need the one knife, you buy it and pocket the rest of your money to use to buy other commodities, or to save it. The same is true if your wages rise, giving you additional spending power. The first is determined by the price elasticity of demand, the latter by the income elasticity of demand. Firms engaged in knife production have to produce on an expanding scale, to reduce the individual value of their own output in this rising market, in order to try to undercut their competitors, but this increased output, requiring additional labour, pushes up wages further, whilst requiring them to sell their output at lower and lower prices, so as to create the demand required to absorb it.
Meanwhile, the capitalists having their profits squeezed, whilst needing to use a greater proportion for accumulation, rather than their own luxury consumption, reduce demand for luxury goods, which is not compensated by a demand for such goods from workers out of their higher wages. Even higher wages do not allow them to buy the more expensive goods, for example. And, the wage of any individual worker never rises in absolute terms by as much as the fall in the profit of an individual capitalist. A capitalist that employs 1,000 workers, for example, might see their profit fall by £1 million, reducing their consumption by this amount, which they might have spent, buying say a yacht, but wages rise by £1 million, which is divided amongst the 1,000, giving them an additional £1,000 each, only a thousandth of the amount required to buy the yacht, unless they bought it collectively.
(ibid)
(See my book – Marx and Engels' Theories of Crisis)
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