During the recent stock market panic some commentators reassured us that the markets were just having “a correction”.

But whatever the ups and downs during the latest episode, Marxism can clearly explain why capitalism causes recurring crises.

The revolutionary Karl Marx explained how capitalism is based on bosses competing to make the most profits by exploiting workers.

Workers’ labour creates value, but they don’t get paid for the full amount. Instead, the boss keeps part of it as surplus value, the source of profit.

Undercut

Competition pushes bosses to constantly try and boost profits. They may sack workers to cut labour costs and invest in new machinery to undercut competitors.

But because value comes from workers’ labour, less value is created compared to the amount of machinery used in the process of production.

Over time, bosses get a lower return on their investments. They are still making billions in profit. But the rate of profit tends to go down—and this underlies the recurring crises in capitalism.

At certain points this tips over into crisis, recession and slump. There are some counter-currents that stave off collapse. And bosses will constantly try new ways to survive and prosper.

But Marx wrote that capitalist solutions to crisis only pave the way for “more extensive and destructive” ones. The falling rate of profit limits the rate of expansion of capitalism and discourages investment.

Bosses can try and get more out of workers for less—increasing hours for no extra pay, or bringing in new production targets. But there are limits to how hard workers can be pushed. And measures such as pay cuts mean people have less cash to buy goods and services, hitting profits elsewhere.

The crash of 2007-8 flowed from bosses thinking they wouldn’t make enough from their investments and therefore pushed them to find new ways of making money.

They put their money in an ever more bizarre series of financial schemes based on an unsustainable expansion of credit.

Eventually these growing debts couldn’t be repaid and banks stopped lending. The value of the debts, which had been sold on, plummeted, spreading crisis throughout the financial system.

Competition and the pressure to maximise profit also leads to overproduction. For example, car makers do not get together, calculate how many cars will be sold, and divide up production among themselves.

Unsold

Instead each tries to grab large parts of the market —and plans production accordingly. Too many cars are produced compared to the ability to buy them and then sit unsold.

Bosses lay off workers and rein in investment. Some firms go bankrupt. Workers overall have less money and the crisis deepens.

Marx noted that capitalism produces ever bigger monopolies over time as bigger firms swallow up smaller ones. Deeper crises are more likely as capitalism ages because the collapse of bigger firms has a more widespread effect on the system as a whole.

Capitalism has produced immense wealth. Yet people go without things they need while “too many” things are produced.

Fortunately Marx identified the power to get rid of this system. Capitalism generates its own “grave diggers” in workers, who have the power to scrap capitalism and create a socialist society based on need not profit.

For earlier columns in this series go to bit.ly/SWMarx200