Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 19 of 22

As Marx points out, a money/financial crisis, of the kind of 1847, 1857 or 2008, is completely different to a crisis of overproduction of commodities or capital.

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.”

(Capital I, Chapter 3, note 1 p 137)

A crisis of overproduction of commodities arises because the production of commodities is ramped up, in the expectation of sales and increased masses of profits, faster than the market for these commodities rises. Consequently, the output cannot be sold at the idealised prices. The market price falls below that required to reproduce the consumed capital, and this can apply to some (partial crisis) or all/most commodities (generalised crisis). As Marx puts it in Theories of Surplus Value, Chapter 20,

“The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

And, this can apply not just to knives, but all/most commodities simultaneously.

“At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”

(Theories of Surplus Value, Chapter 17)

A crisis of overproduction of capital arises when, as Marx sets out in Theories of Surplus Value, Chapter 21, and in Capital III, Chapter 15, the economy has expanded to such a degree that the relative surplus population has been used up, the social working-day cannot be expanded further, and so absolute surplus value cannot be increased. Further capital accumulation pushes up wages, reducing relative surplus value, and so squeezing profits. So, even if the mass of profits rises marginally, it is on the basis of a much larger volume of output, so that the rate of profit/profit margin is continually squeezed. Only small changes in conditions are then required to turn these tight profit margins into losses, which on the huge volumes of output amount to large total losses, and an inability to reproduce the consumed capital. That first impacts those smaller capitals operating with the tightest margins.

As I have described elsewhere, this crisis of overproduction, arising from squeezed profits is the diametrical opposite to Marx's Law of the Tendency for the Rate of Profit to Fall, which arises on the back of falling wages and increased profits (from a rising rate of surplus value). It is a measure of the average rate of profit between one long wave cycle and another.

Crises of overproduction are not the consequence of insufficient money/liquidity, as the under-consumptionists believe, but of production expanding faster than the market, either for a few or for all/most commodities. Frequently, they arise because a previous period of economic expansion has, in fact, put more money in consumer's – primarily worker's – pockets enabling them to increase their consumption, including, for many commodities, to a level where they have no reason to expand that consumption further. Marx's example of the demand for knives applies equally where workers' wages have risen, rather than the price of knives falling. It is simply income elasticity rather than price elasticity of demand.

In these conditions of near full employment, where all worker households have satisfied their needs for these basic commodities, they could only demand more if, either, their wages rose by much more, or if prices fell by much more. However, in those cases, they are more likely to use the increased disposable income to demand entirely new types of commodity, which is why, as Marx sets out in Capital II, its during such periods that workers begin to consume some former luxury products, and the range of their consumption expands. Yet, they can, equally, simply hold on to money instead.

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