Why does Capitalism go into crisis?

Written by Nelson Wan Friday, 04 April 2014

Capitalism is a chaotic system of production beyond the contol of humanity. It is doomed to plunge society into ever greater crises. But why does it enter a crisis and what is the alternative?
2007-08 saw the beginnings of a world economic crisis unlike any other we have seen. Since the end of the Second World War there have been seven official recessions, but each of these was followed by a period of relatively fast recovery. This time the situation is different though. There is no recovery or growth to be seen. All over Europe (including Britain), wages are stagnating, unemployment is rising, and the cost of living is rapidly increasing. All of this is occurring simultaneously with government austerity and spending cuts to public services. There is no other option we are told; we’re all in it together, and must therefore share the burden.
But it isn’t all bad news – if you’re rich! At the other end of the social scale wealth is increasing at an exponential rate. A report from Oxfam estimates that globally, the incomes of the top 1% have increased 60% over the past two decades. The contradiction here is enormous. How can this be the case when life for the vast majority of people is getting harder? The question goes to the very root of the capitalist system, and to date, there has only been one form of economic analysis that can fully explain it, and that is Marxism.
Marx explained that economic crises are not simply the result of a mechanical cycle of boom and bust, like a pendulum that swings one way and then the other, as many bourgeois economics would have us believe. Rather, crises occur because of the contradictions inherent in the capitalist system. In Marx’s own words: “The real barrier of capitalist production is capital itself” (Capital vol.3).

The labour theory of value

In order to understand the reasons for crises, we must look at the Labour Theory of Value – a theory that Marx developed and built upon from the classical economists of Adam Smith and David Ricardo.
The Labour Theory of Value explains that the value of a commodity is determined by the amount of labour put into producing that commodity; the “socially necessary labour” required. Labour is the most accurate expression of value as it is the common social substance for everything that is produced in society. Labour goes into everything.
Exchange value is a crystallisation of the labour that is needed for society’s current levels of technology, and with the average skill of a worker in that field. The market price of a commodity is only the monetary expression of that value (money itself being a commodity). The market forces of supply and demand only account for the fluctuations in the price of a commodity, but do not in any way explain this exchange value at the point when supply and demand are in equilibrium.

Overproduction

The basis of the capitalist system is production for the sake of profit. This profit is derived from surplus value, which is the unpaid labour of a worker. But how is this possible when all workers are paid wages? The answer, in short, is that workers are not paid the full value of what they produce.
The working day can be split into two parts: a part of the day in which the worker produces the value of their own wages; in the rest of the working day, which is effectively unpaid, the worker produces a “surplus” of value – value that the capitalist gets for free. This surplus is then either re-invested into production, or pocketed for the consumption of the capitalist.
The wage that the worker is paid gives the illusion of a decent day’s work for a decent day’s pay, but in actual fact the wage is only the amount of money needed to sustain that worker; the amount needed to feed, clothe, shelter, and educate the worker, etc., and thus allow the continuing exploitation of labour.
The fact that capitalism produces for profit – that workers produce more value in a day than they are paid back in the form of wage - means that the wages of workers can never exceed the value produced in society. As a result, workers will never be able to buy back the full value of what they collectively produce. This is not to say that small “luxuries” like TVs, laptops, and cars can’t be bought by individual working families. But as a class, workers – i.e. ordinary households - cannot afford to buy the sum total of commodities that the capitalist system produces.
Anyone that has to sell their labour power for a wage is classed as a worker, part of the working class. This class makes up the vast majority of the population, and therefore also accounts for a large part of the market for commodities. These facts alone leave the capitalist system prone to overproduction – to produce more than the market can absorb. Multiply this by the amount of other capitalists competing with each other over this limited market and we get a more accurate picture of the scale of this problem.
Contrary to what capitalist economists would argue, capitalism does not produce on the basis of what is needed in society, but on the basis of what is profitable. The capitalist is unable to consider the limitations of the market, which arise as a result of production for profit. In order to survive, each capitalist must make profits, and therefore an endless stream of commodities must be pumped into the market. Eventually the market reaches a breaking point as it becomes saturated by commodities that cannot be sold; the system ends up in crisis – crises of overproduction.

Countervailing factors

But the question must be asked: if overproduction is inevitable, why is capitalism not always in a state of crisis? China, for example, seems to be doing relatively well in comparison to Europe (although the economy is slowing down there also). Despite the economic laws explained above, which explain how overproduction and crises are inevitable under capitalism, there are countervailing factors to be considered too –ways in which capitalism avoids and delays the onset of crisis, but only by paving the way for a bigger crisis in the future.
In the past few decades, the main solution for the ruling class has been credit. Credit can allow a greater amount of consumption to take place – for the capitalists to artificially expand the market in the short term at the expense of creating a bigger crisis in the future. This current crisis is so deep precisely because the credit boom that preceded it laid down the foundations for an even worse crisis, as debt must be paid off eventually. The availability of credit only stretches the market beyond its natural limits, thus it can only postpone an inevitable crisis.
Globalisation and world trade has also allowed capitalism to temporarily continue expanding. “The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere.” – The Communist Manifesto. But again, the world market has finite limits; expansion cannot continue forever, and capitalism comes up against the limits of the nation state.
Capitalists continually attempt to increase profits by increasing the absolute  and relative surplus value that workers produce - that is, by lengthening the working day or increasing productivity, thus producing more surplus value with the same level of wages. The development and application of technology, due to investment, also allows them to sell their commodities at a cheaper price, reducing the amount of human labour required, and thus making goods cheaper and easier to produce by reducing wage costs.
The paradox about the increasing use of technology, however, is that as less and less labour becomes necessary, two things happen: the machines, which replace waged labour, cannot consume, therefore the “effective demand” in the market – i.e. the ability for workers to buy - is further reduced; meanwhile, since it is only human labour that creates value, as machines replace workers the capacity to make profit is actually reduced over the long term.

Capitalism at an impasse

When Marxists say that capitalism has reached an impasse we do not mean that it cannot recover. Capitalism will always find its way out of the deepest of crises. But stating that the economy will pick up again tells us absolutely nothing. The real questions are: how long will recovery take? And at what cost? The cost this time around appears to be too great for society to bear.
War has historically been a very efficient means of  eliminating ‘overexcess capacity’ – i.e. overproduction – in the system, through the destruction of the productive forces. However, in modern times, war is off the cards for the foreseeable future. With weaponry reaching an ever deadlier level of development, a global conflict would risk the annihilation of the human race - which is not what the capitalists want. And who would such a war be between? Therfore, rather than the war between nations, the perspective is for a war between the classes – class war between the 1% and the 99%.
Keynesian economics – the idea of government investment and stimulus to maintain demand – cannot solve the crisis either; the state simply does not have the money to spend. Indeed, the financial markets are telling governments to do precisely the opposite – to cut back on public spending. Short bursts of state investment can only serve as a short term alleviation. Ultimately the government can only spend by either taxing the capitalists, and thus reducing their profits, or by taxing the workers, and thus biting into demand, or by running a deficit and further building up public debts – debts that must be paid back and are already at their limits.
On the opposite end of the economic scale, monetarist policies – of “balancing the budget” and “flexible labour markets” - will not help either. Heavy restrictions on state spending will only result in decreased consumption, and worsen the crisis, not to mention the mass unemployment and social malaise that such monetarism causes. One need only look at the early Thatcher years and her monetarist experiment. Between 1979 and 1981 inflation actually increased, along with unemployment, all while the economy continued to slump. Growth only occurred after the monetarist policies were eased up. Today, interest rates are already at rock-bottom levels, so central banks cannot decrease them to encourage borrowing - unless the banks want to pay people to take out loans!
A popular option among reformists these days seems to be that of “taxing the rich”. But as the French President François Hollande has found out, taxing the rich at high rates is impossible, as the bosses will simply close their factories and move elsewhere. This is what is known as a flight of capital, and the last thing that crisis ridden nations want is even less investment.
The US, UK and EU are currently employing a tactic known as “quantitative easing”, more commonly known as printing money. But this is a process of diminishing returns. Like the heroin addict, they must administer increasingly large doses of narcotics in order to get the same buzz; pumping money into the economy without increasing the amount of value produced, eventually leads to massive inflation that ultimately solves nothing.

The socialist alternative

Austerity seems to be the solution under capitalism, and so we see nothing but cuts across the world. We are told that ordinary people must pay for the crisis. Even the serious commentators of the capitalist class are predicting at least 10 years of austerity, possibly even 20. But there is only so much that society can take.
There is one seldom spoke of alternative though. If production in society was placed under control of workers and rationally planned, then the wealth in society could be distributed on the basis of social need and desire rather than profit. The vast social and economic problems that the world faces could easily be solved.
Under capitalism, with the current crisis of overproduction, there exists the contradiction of “poverty amidst plenty”. Enough food is produced to feed the world‘s whole population, yet millions of people starve to death each year. Empty houses sit alongside homelessness. There are millions unemployed, yet millions more who work 50-60 hours per week.
Under a socialist, rational and democratic plan of production, we could provide full employment with significantly reduced working hours, a living wage, housing and education for all, free healthcare and a decent pension. Achieving this would require taking over the key levers of the economy – the banks, infrastructure, and major multinationals - and running them in the interests of the vast majority of society, rather than in the interests of the capitalists – a tiny minority.
The capitalist system sows the seeds of its own destruction, creating ground that is ripe for revolution. With a revolutionary movement of the masses, a Marxist programme and a socialist alternative, capitalism and class society could be abolished. The human race could be propelled into a new epoch, and for the first time fully realise its potential. Socialism will not be the end of history, but merely the beginning.