An Introductory Explanation of Capitalist Economic Crises

Chapter I: The Basic Contradictions Underlying Capitalist Economic Crises

(Last update to Chapter I: 08/6/08)

1.1 Dialectical contradictions.

Marx said that economic crises exist because certain dialectical contradictions are inherent in the capitalist mode of production. Speaking of those who deny the possibility of crises, he says:



The apologetic phrases used to deny crises are important in so far as they always prove the opposite of what they are meant to prove. In order to deny crises, they assert unity where there is conflict and contradiction. They are therefore important in so far as one can say they prove that there would be no crises if the contradictions which they have erased in their imagination, did not exist in fact. But in reality crises exist because these contradictions exist. Every reason which they put forward against crisis is an exorcised contradiction, and, therefore, a real contradiction, which can cause crises. The desire to convince oneself of the non-existence of contradictions, is at the same time the expression of a pious wish that the contradictions, which are really present, should not exist.1



To understand capitalist economic crises is therefore primarily to understand the dialectical contradictions which lead to them. However, there are multiple contradictions involved, and their interrelationships are complex.

(A quick note about dialectical contradictions for those who are unsure of the concept: Dialectical contradictions are not the same as what are called contradictions in formal logic (i.e. both the assertion and denial of the identically same statement). Dialectical contradictions are an assemblage of two opposing forces, interlocked in their mutual opposition. An example in geophysics is the movement within the earth of tectonic plates that serves to push up mountains, which is opposed by the weathering forces of wind, rain and ice which (together with gravity) wear down mountains. A better word than “contradictions” here might be “oppositions”, but we are stuck with the former term for historical reasons. The two opposing forces in a dialectical contradiction are often called the “aspects” or “poles” of the contradiction.)

1.2 The fundamental contradiction of capitalism.

The most fundamental dialectical contradiction in capitalist society is that between the social character of production and private appropriation. This same contradiction is the most fundamental explanation for the existence of crises in a capitalist economy.

But keep in mind that contradictions can often be expressed in different ways, and at different levels of abstraction. Or, alternatively, we can say that dialectical analyses at different levels of abstraction form different, but related contradictions. Thinking at high levels of abstraction, or at lower levels—both have their advantages and disadvantages. Usually we need to do both if we are really to thoroughly understand something.

Mitchell Resnick, a researcher in artificial intelligence, remarked that



Understanding something in just one way is a rather fragile kind of understanding. Marvin Minsky has said that you need to understand something at least two different ways in order to really understand it. Each way of thinking about something strengthens and deepens each of the other ways of thinking about it. Understanding something in several different ways produces an overall understanding that is richer and of a different nature than any one way of understanding.2



But the questions then are, “What does it mean to understand something in more than one way?” and “How do you go about doing this?” One of the most important things it can mean is that the thing can be involved in more than one dialectical contradiction, such as ones at different levels of abstraction. The way to really come to thoroughly understand the thing then requires you to think at various different levels of abstraction, and to search out different contradictions which the thing you are investigating is part of.

Talking about the contradiction between the social character of production and private appropriation is speaking at a high level of abstraction. But it is also extremely useful, and quite illuminating, to translate a contradiction like this into more concrete terms. We will be doing this in a moment.

1.3 The contradiction between production and consumption.

There is, however, another substantially different contradiction that is wider in scope than this fundamental contradiction of capitalist society. This is the contradiction between production and consumption that leads to the forced underconsumption by the masses in all economic systems (until we finally get to communist society). However, this important contradiction is changed in one very critical way under capitalism. In all earlier forms of economy, the masses’ consumption was restricted primarily for one reason: the productive forces were incapable of producing enough to meet everyone’s needs and wants. (In pre-capitalist class society—i.e., under slavery and feudalism—there was a secondary reason, namely that the ruling class ripped off a grossly disproportionate share of what was produced. But though this aggravated the situation, the basic problem was still that the productive forces were incapable of satisfying everyone’s needs and wants.)

In capitalist society this general contradiction between production and consumption (or, spelling it out further, between limited production and desired higher consumption) still exists, but its nature is transformed. The new social character of production, together with improved technology (which also creates many of the necessary preconditions for social production), has qualitatively transformed the capability of people to produce goods; there has been a massive qualitative leap in the productive capability of society. The basic problem is no longer that a primitive social technique prevents the forces of production from easily being expanded to meet all the reasonable needs and wants of the people. Instead, the problem is that capitalism has an inherent internal flaw which prevents society from using its new productive capability to the fullest. This inherent internal flaw is the result of the first contradiction I mentioned, the fundamental contradiction of capitalist society, the contradiction between social production and private appropriation. Each time production really begins to soar this internal contradiction in capitalism results in a crisis, and production has to be drastically cut back again—even though the needs of the people are still unsatisfied. The necessary social form of production is in place (at least in rough approximation), but can’t be thoroughly employed. Sufficient technology has long been in place (and continues rapidly to improve), but again it cannot be thoroughly employed. It is the contradiction between social production and private appropriation, or in other words, the capitalist relations of production, which stand in the way of the full employment of this social production and technology to satisfy the needs of all the people. So the end result is the same as before capitalism arose: even though the social and technical productive capability now exists, not enough goods are actually produced and actually put into the hands of all those who need them. (Once again, the problem is aggravated by the capitalists ripping off a grossly disproportionate share of what is produced, but this is still a very secondary factor. The basic problem lies in the contradictions of the economic system itself, not in how greedy the capitalists may or may not be in this country or that, or in this period or that.)

1.4 Crises of overproduction.

Even though capitalist production, like all earlier forms of production, cannot in practice produce enough to satisfy the needs and wants of everyone, it does regularly get into situations (crises) in which it produces much more than it knows what to do with within the framework of its social relations. These are the crises of overproduction, but overproduction in relation to what can be profitably sold, not overproduction in relation to what people need and want.

If the problem is that a significant part of what is produced cannot be sold, the obvious question is “Why can’t it be sold?” And to this you can say, somewhat abstractly, “because of the contradiction between social production and private appropriation”, or you can say, somewhat more concretely (and also with Marx), “because of the poverty and forced restrictions on the consuming power of the masses”.3 These are really two ways of saying the same thing here, just at different levels of abstraction. And in either case, further elaboration is obviously called for. How exactly, does private appropriation lead to this result? How exactly, does the consuming power of the masses come to be so restricted?

1.5 The contradiction between the restricted consumption of the masses,

and the unrestrained expansion of capitalist production.

Notice that we have now pushed the general contradiction between production and consumption into the background, and are focusing instead on a somewhat related but much more specific contradiction, which gets to the essence of the overproduction crises which only develop under capitalism. (And it will not do to confuse these two contradictions as it sometimes seems to me that various Marxist writers have done.) This contradiction specific to capitalism is the one between the restricted consumption of the masses and the tendency of the capitalists to keep expanding production indefinitely. This is where Marx’s famous statement enters the picture, and it does in fact get to the heart of the matter of what capitalist economic crises are all about: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”4

This contradiction is itself a consequence of, or a more concrete expression of, the fundamental contradiction between social production and private appropriation. I find it curious that some Marxists do not understand this point since it seems so obvious. What does it mean to say that there is a contradiction between social production and private appropriation? Well, one aspect of the contradiction here is that the workers come together and produce goods collectively in a very organized manner. The other aspect of the contradiction is that the capitalists then own what is produced, not the workers who actually produced it. True, the capitalists pay the workers something, namely an amount equivalent in value to only a portion of the value of the commodities that they produce. To say that there is a contradiction here is, in part, to say that this situation leads to some serious problems. What problems? Well, this will take some discussion to fully bring out. But as a first approximation, there appears to be one clear problem here in that the workers cannot possibly buy back from the capitalists all that they produce for them. The generated market for the commodities produced (among the workers who produce them) is always smaller than the value of commodities produced. The total market, therefore, among the masses as a whole (including all the workers and their families, as well as the rest of the lower classes), will always be smaller than the total production of the entire working class. How then can these goods be sold? How then can production keep going?

The bulk of the theory of capitalist economic crises is the detailed exploration of this question—how can production be kept going when the capitalists only pay the workers a portion of the value that they produce? There are indeed ways to do this—for a while! The problem is that all these ways eventually lead to other serious problems, so serious in fact that they must inevitably result in major interruptions in the production process, i.e., economic crises.

1.6 Comparing the key contradictions.

(This section is a little difficult. If you start to find it confusing, I suggest you skip the rest of it for now and go on to section 1.7.) Almost all Marxists agree that the contradiction between social production and private appropriation is “the basic cause of crises”. But many of them then turn around and deny that the contradiction between the restricted consumption of the masses and the tendency of capitalists to expand production indefinitely has much, if anything, to do with crises. This amounts to affirming the truth in the abstract, but denying it in the concrete.

To help clarify matters here, let’s write down the three contradictions we have been talking about so far and try to bring out their interrelationships a bit better.

The contradiction between production and consumption in all forms of economy so far in history. (This contradiction may take on a somewhat different character in different forms of economy. In particular, it takes on a special character in capitalist society because—unlike earlier economies—under capitalism the productive forces have become so powerful that they are now capable of producing enough to meet everyone’s needs and wants—or, at least, they would be if it weren’t for another contradiction inherent in capitalism, namely contradiction B.) The contradiction between the social nature of production and private appropriation in capitalist society. The contradiction between the restricted consumption of the masses under capitalism, and the tendency of the capitalists to keep expanding production without limit.

I think that many people have interpreted contradiction C as being a specific form of contradiction A, perhaps the specific form that contradiction A takes in capitalist society. This is not exactly correct. Even in capitalist society, contradiction A is still properly stated as being “the contradiction between production and consumption”. The difference in capitalist society is that this contradiction between production and consumption takes on a different character, and not that it becomes a different contradiction which needs to be rephrased in a different way. We could say, however, that contradiction C is a concrete expression of contradiction A as it applies to capitalist society only. C may therefore be viewed as a subsidiary contradiction to A (but only with regard to capitalist society).

Similarly, I suppose you could say, somewhat loosely, that contradiction B is “implicit” in contradiction A, but only in the sense that A remains true in capitalist society because of the existence of contradiction B.

But the part that people are most apt to miss here is the close connection between contradictions B and C. Of course both contradictions A and C explicitly mention consumption, while contradiction B does not. But what some people apparently don’t understand is that contradiction B also has important implications for consumption, implications which are made explicit in the more concrete expression of contradiction C. As I said earlier, contradiction C really is a consequence of, or a more concrete expression of, contradiction B. I view this as equivalent to saying that C is a subsidiary contradiction of B.

So I would argue that contradiction C is both a subsidiary contradiction to A and to B. How can this be? Simply because C is a more concrete expression of A with respect to capitalist society, and because C is a more concrete expression of B with respect to a major way in which that abstract contradiction plays out in capitalist society. No big mystery here, really.5

Thus, all three of these contradictions are indeed interrelated, but of them contradiction C is the most concrete and therefore the one for us to focus on.

It is also true that there are additional consequences of, or additional concrete expressions of, or additional subsidiary contradictions to contradiction B, including the following:

D. The contradiction between the social nature of production within each enterprise and the anarchy of the overall market which connects all the various capitalist enterprises.

Contradiction D is also a fairly important contradiction from the point of view of fully understanding capitalist economic crises. But it is quite secondary to contradiction C. That is, of these two subsidiary contradictions to contradiction B, the most important one by far is contradiction C, and contradiction D is of only secondary importance. To really understand capitalist economic crises you must focus on contradiction C, not D.

Not everybody agrees with this. In fact, the first, and biggest division among Marxists theorizing on the nature of capitalist economic crises comes over their divergent opinions on this issue. Some, like the RCP and even Lenin in his earlier writings on political economy, have pretty much ignored contradiction C, or have dismissed it as not being of central importance in crisis theory.6 These folks (even the young Lenin!7) have all accepted “Say’s Law”—that the expansion of capital “generates its own demand and markets”, as the RCP expresses it.8 If you accept Say’s Law you must pooh-pooh contradiction C as being either totally incorrect, or at least pretty much beside the point as far as the basic cause of capitalist economic crises is concerned.

Marx attacked and ridiculed Jean-Baptiste Say and his “principle” (now known universally as “Say’s Law”).9 When Lenin wrote his early economic essays most of Marx’s comments on Say were not available to him. The RCP has much less of an excuse. I’m not saying we should never disagree with Marx, but when we do disagree we should openly point out our disagreements and explain the reasons for them. This is the only honest thing to do for people who call themselves Marxists.

We will soon see why “Say’s Law” is nonsense, and we will return to further discussion of contradiction D later on (section 2.13).

1.7 The two aspects of our more concrete contradiction.

We are examining the contradiction between the restricted consumption of the masses and the tendency of the capitalists to keep expanding production indefinitely. So there are two main subsidiary questions to consider now. First, how and why is the consumption of the masses kept so comparatively restricted (even if it does rise a bit during periods of prosperity)? Let’s call this the question of why consumption is so restrained. Second, how and why does the drive of capitalist production to develop the productive forces in such an unrestricted manner come about? Why does it become so manic? Let’s call this the question of why capitalist production is so unrestrained. Before exploring each of these questions in turn, we should consider what we are actually doing here. The basic contradiction between the two is the ultimate cause of crises, not either one of them alone. But we are setting out now to examine separately each of the two opposing aspects of that contradiction.

1.8 Why consumption is so constrained.

Let’s first consider the question of why consumption is so restrained. The basic explanation for this is bound up in the very concept of surplus value. According to Marx, the workers sell their labor-power to the capitalists for a certain period of time, and for a certain sum of money which represents (on average) the value of that labor-power. But the actual labor performed by the workers for the capitalists during that time produces a value in commodities much greater than that for which they are paid. Some of that produced value (once the commodities are sold) will go to pay wages. Some of it will go for raw materials, for the replacement of machinery used up in the production process, and for electric power, heating and other such overhead. But that still leaves a big remaining piece which Marx called surplus value. This is the source of the capitalists’ profits.10

Now what this all amounts to is that the workers produce more value than they are paid for. This means, of course, that the workers and their families cannot possibly buy back all that they produce. This is not necessarily a problem for the continuation of production, however, as long as the capitalists find something else to do with the surplus value. There are two things that they can do with it (once the commodities which contain that surplus value are sold and turned into money): 1) use it for personal consumption goods for themselves and their families; and 2) use it to purchase new factories and machinery and materials, and hire more workers, to expand production. (Putting the money in the bank ordinarily amounts to an indirect way of doing the second thing, since other capitalists will borrow the money to expand production, etc. But if the Bank cannot find a credit-worthy company to loan the money to, this will in itself serve to interrupt the process of accumulation. This is one of the things that often happen on a massive scale when a crisis breaks out, and thus greatly aggravates the crisis.)

We have noted that the workers themselves cannot hope to buy all the goods that they produce since their wages cover only a portion of the value that their labor creates. But capitalist production is so powerful, and constantly grows more powerful, which means that the capitalists and their families also have no personal use for most of what can be and is produced. True, the capitalists as a group live in great luxury, and often have many luxurious homes, many expensive cars, many servants, a yacht, and so forth. But there are limits to how much even they will choose to spend on such extravagances. This means that more and more of the surplus value produced in capitalist production must be funneled into the further expansion of production, if it is to be used at all.

1.9 Why production tends to be so unrestrained.

So let’s turn to that other aspect of the contradiction, the question of why capitalist production tends to be so unrestrained (relative to the actual market), and why and how the capitalists seek to expand it indefinitely.

One answer to this is simply that the capitalists have all this loot, all this surplus value, and don’t know what else to do with most of it except to plow it back into the further expansion of production. Another answer is that the capitalists always want to expand their wealth (even if they don’t really know what to do with what they have already). Their wealth comes from the reproductive process of capital, so they naturally wish to expand this reproduction process as rapidly as possible. The capitalists want wealth not only for the purchase of more luxuries, but also, and much more importantly, for the prestige and power that such wealth brings in their circles. In fact this obsession is usually a far more powerful drive than that springing from any enjoyments they may receive from personal luxuries, no matter how deeply they are piled up. For most capitalists, accumulation itself becomes the main goal in life, and the principal way of increasing the rate of accumulation is through the continual expansion of production.

There are, in addition, many other reasons why capitalists seek to expand production as rapidly as possible. There is the matter of stark, naked fear, for example, the fear of competitors, the fear of being driven bankrupt. Market share is an important factor in the survival of a company. Increased levels of production usually allow for more and more economies of scale, allowing the bigger companies to undercut the smaller ones and force them out of business. Larger companies have more clout against the workers and unions, and more clout with the government. (Although the government is controlled by the capitalists as a class, each of them seeks additional special privileges and benefits from it.) And if a company can expand its own production (and simultaneously absorb its competitors or drive them out of business) to the point where it becomes either a complete, or at least a de facto monopoly in certain markets, it then has the opportunity to increase its profits enormously.

1.10 The capitalist refusal to keep investing.

Now we come to a very curious and fascinating point. Nothing I’ve said so far demonstrates that there must necessarily be crises! So why do they happen? Brace yourself, because the answer may seem flippant at first.

It is only because the capitalists, or a sufficiently large section of them, eventually decide that it no longer makes any sense to keep expanding production and therefore refuse to do so, that we have a crisis of overproduction. This is the real horror of it all for the bourgeoisie (or at least the few among them that have an inkling of the truth): capitalist crises are the result of the conscious refusal to invest in the further expansion of production on the part of those whose whole reason for being is such investment! They refuse for one very good reason: they do not see that they can make a profit through further investment, since they do not see a market for those products (and because they can’t fully utilize the factories that they already have).

Such decisions not to plow back all their collective surplus value (beyond that which they siphon off for their personal extravagant consumption) mean that they are not building new factories, not buying more machinery, not buying raw materials, not purchasing more electricity, not purchasing more labor-power (hiring more workers), and so forth. In other words, they are not buying all sorts of commodities which they otherwise would have bought. Those commodities remain unsold, and the producers of those “Department I” sort of commodities (used to expand production, rather than for personal consumption) must therefore cut back production themselves, lay off workers, and so forth. It is easy to see that such a thing could ripple through the entire economy, which would spiral down into recession or worse.

But given all the reasons for continuing to expand production, why should the capitalists ever voluntarily decide to stop or slow down the process? The reasons can be complicated, but in the end it all comes down to this: It does not make sense to keep expanding production indefinitely when that new capacity is clearly not going to be used.

Nor does it make any sense to keep expanding production indefinitely even if that production is used, provided the only thing it is used for is building more factories whose only product is the parts and machinery for new factories to make more factories, in an absurd, endless spiral!

Amazingly enough, a scheme like this has actually been put forward as a “logical” proof that capitalism need not develop economic crises. A century ago the American bourgeois economist J. B. Clark said there would be no glut (overproduction) if the capitalists simply “build more mills that should make more mills for ever.”11 Another comment along the same lines is that of F. H. Knight who claimed that “there is no reason why the entire productive capacity of society should not be used to construct new capital goods, if the population should decide to save all its income!”12 Actually, however, such schemes could not really work. Maurice Dobb explained, for example, that “J. B. Clark’s picture of building ‘mills to build more mills for ever’ can never be actualized, since in the real world mills are always specialized to a particular current stream of demand connected with consumption in the near future, and not a stream of demand stretching to an indefinite future.”13

While the scheme to build mills whose sole output is more mills for the sole purpose of building yet more mills, ad infinitum, has never been tried, and doubtless never will be, the capitalists have tried (to some degree) something more along the lines of F. H. Knight’s suggestion to simply keep building up the productive capacity in all industries. This is a big part of the reason why capacity utilization percentages are often so low, especially in the imperialist era. Moreover, the capacity utilization figures that the U.S. government publishes are grossly exaggerated. The standards used are changed every once in a while so that the figures don’t look so ridiculously low. For example in December 1976 the Federal Reserve Board succumbed to mounting pressure from the “business community” and other government agencies and revised their capacity utilization rate series drastically upward. What was formerly said to be merely a 73% utilization rate suddenly became 81%.14

Paul Sweezy and Harry Magdoff once remarked (in the course of criticizing the “capital shortage” thesis) that



The history of war production [in World War II] thus demonstrates with crystal clarity that, as far as real capital is concerned, talk about a capital shortage is sheer nonsense. Not only does the United States economy have the latent ability to generate an enormous amount of new capacity, but it can fabricate a great deal more with just the existing capacity. If the standards for getting more production used during the Second World War were applied today [early 1976], we would probably find that only 50%, or maybe less, of existing manufacturing capacity is being used—instead of the official 75-percent figure based on current operating practices.15



In short, over time during each long-term economic cycle, the capitalists build up their real unused productive capacity to an ever greater degree. The standards for capacity utilization are occasionally revised in order to partially hide the capital surplus and over-investment. The over-investment is being carried out partly so that corporations will be able on short notice to rapidly expand production (and thus not miss profit opportunities), but mostly because corporations have all this enormous amount of capital at their disposal that they don’t otherwise know what to do with.

But even the most profligate corporation will not continue to build up unused production endlessly. Eventually its managers will say, “this is ridiculous”, and stop investing. And when this happens in large sections of the economy simultaneously, a major overproduction crisis breaks out.

1.11 Excess capacity hurts profits.

Another thing to consider here is that building up unused productive capacity hurts profits. If a company has two plants to produce the goods that only one plant is actually needed to produce, then its overhead is tremendously increased, and its profits are correspondingly reduced.

It could be argued that this wouldn’t really matter if the rate of surplus value, and thus the rate of profit was sufficiently high to begin with, and/or was expanding rapidly. Even if such things were true, however, what about building a third idle plant… or a fourth? Eventually an ever-increasing stock of unused factories and machinery would be bound to hurt profits significantly, certainly compared to what they might otherwise be.

Moreover, if just one company in an industry builds up its unused capacity more than the others, its rate of profit would fall compared with its competitors. Its stock price would decline and Wall Street analysts would howl. The company would be forced to cut back on the senseless expansion of unused productive capacity—at least to the prevailing industry standard. In other words, the “bloating” of the productive plant in an industry can only occur in an oligopolistic (or monopolistic) situation, and only as long as all the big companies follow more or less the same policy.

While it may be in the interests of the capitalist system as a whole to keep expanding unused productive capacity without end, it is not in the interests of any single company to do so—at least beyond the prevailing industry standards. The necessity to maintain the profits of the individual company means that the whole scheme has severe limits. And even if the few big companies in an industry in one country all simultaneously add unused plant, in this era of more globalized capitalism a competitor in another country may force an end to this extravagance. This has actually happened over the past few decades in many industries. For example, the bloated American car manufacturers in Detroit have had to “restructure” and slim down (including closing a great many excess factories) in order to compete with Japanese and South Korean car companies.

In his famous book, The General Theory of Employment, Interest, and Money (1935), John Maynard Keynes actually lamented that modern capitalism is not as wasteful as he supposed ancient society to be:



Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the “financial” burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.16



Ah, yes, if only all the big corporations could put the masses to work building more and more pyramids, unneeded railroads, or unused factories! This would not only give them jobs, but also give the capitalists something to do with their ever-growing pile of surplus value. But it won’t work—not only because the capitalists are “too sensible” to do such a thing—but also because such make-waste programs destroy profits.

Notes for Chapter I

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