Marx's theory of economic crisis

By STUART EASTERLING
CAPITALISM IS an economic system that is inherently crisis-prone. It is driven by forces
which cause it to be unstable, anarchic and self-destructive. This is as true today as it
was over 150 years ago, when Karl Marx and his collaborator Frederick Engels described
capitalism in the Communist Manifesto as "a society that has conjured up such gigantic
means of production and of exchange, [that it] is like the sorcerer, who is no longer able
to control the powers of the nether world whom he has called up by his spells." 1
Indeed, todays world of wild stock market booms and slumps, recurring layoffs and
long-term unemployment, corporate scandals and power blackouts, seems to fit their
description better than ever before. The present economic downturn is no exception.
The United States is currently in the middle of the longest period of job losses since the
Great Depression of the 1930s. In fact, the U.S. economy today has 2.6 million fewer
jobs that it did two years ago. Meanwhile, over two million people have lost health
insurance coverage and personal bankruptcies hit a record of over 1.5 million
households in 2002.2 In short, economic crisesrecessions and depressionswere a part
of capitalism at its birth and, despite promises to the contrary, continue to plague the
system to this day.
The importance of crisis theory
Understanding the drive toward crisis is central to Marxs analysis of capitalism and to
his arguments for the possibility and necessity of revolutionary change. For Marx, the
existence of inequality or poverty alone is not what turns workers against the capitalist
system. These problems have always been a part of the everyday workings of any
"healthy" capitalist economy. Of greater social and ideological impact is the insecurity,
instability and ruin that economic crises periodically inflict on the lives of working-class
people. And so in Capital, Marx argues that capitalism dispels all fixity and security in
the situation of the laborerit constantly threatens...to snatch from his hands his means
of subsistence, and...make him superfluous. We have seen... how this [class]
antagonism vents its rage...in the incessant human sacrifices from among the working
class, in the most reckless squandering of labor power and in the devastation caused by
a social anarchy which turns every economic progress into a social calamity.3
In short, crises mean that the very functioning of the capitalist system cannot guarantee
even the crumbs that are thrown to the worker. Crises have an impact on the capitalists
fortunes as well. They break up what Marx called the "operating fraternity of the
capitalist class" and produce an all-out fight for survival between capitalists themselves,
and of capital against the working class.4Because of this, even relatively minor economic
crises can lead to political instability, ideological confusion among the ruling class, an
intensification of the class struggle and war. Marx argues that crises "carry the most
frightful devastation in their train, and, like an earthquake, cause bourgeois society to
shake to its very foundations."5Thus it is out of the impact of capitalist crisis that the
possibility of revolutionary change emerges, not as a guarantee, but as a possibility in
the hands of the working class. As the Russian Marxist Vladimir Lenin once noted,
"oppression alone, no matter how great, does not always give rise to a revolutionary

situation in a country. In most cases it is not enough for revolution that the lower
classes should not want to live in the old way. It is also necessary that the upper classes
should be unable to rule and govern in the old way."6 This condition is created and
furthered by economic crisis, along with the instability, polarization and conflict it
generates.
Moreover, the persistence of crises under capitalism makes revolutionary change not
just possible, but also an urgent necessity. As Marx and Engels argued in the
Communist Manifesto, the class struggle historically was "a fight that each time
ended, either in a revolutionary reconstitution of society at large, or in the common ruin
of the contending classes."7 That capitalism today could produce the "common ruin" of
everyone involved is a distinct reality. The "most fearful devastations" described by
Marx, resulting in poverty, hunger, environmental destruction and war, have only
increased since his time. Because of this, Marx and Engels argued that the crisis-prone
nature of capitalism creates the need for socialism, not just to abolish poverty and
inequality, but to eliminate the recurrent social and economic disasters that are endemic
to the capitalist system.
This article will attempt to lay out the basic elements of the crisis theory found in Marxs
writings on economics, beginning with a review of some of the fundamentals of Marxs
analysis.
Marxs method
Marxs goal was to "lay bare the economic law of motion of modern society."8 What is it
about his economic method that allows it to explain how capitalism works?
The 18th century bourgeois economist, Adam Smith, argued that capitalism and the free
market came from a "propensity in human nature...to truck, barter and exchange one
thing for another."9 Another capitalist economist, Lionel Robbins, contended that
capitalism consists of "a series of interdependent...relationships between men and
economic goods."10 In their view, the economic relationships between different people is
not what is importantit is the relationship between people and products. In other
words, your relationship to a box of Tide is more significant to understanding capitalism
than your relationship to your boss.
In contrast, Marx argues in Capital that "the relation between wage-labor and capital
determines the entire character of the [capitalist] mode of production."11 His goal was to
go beyond just studying the process of exchange (buying and selling), which conceals
what is happening under the surface. As Marx put it, "a worker who buys a loaf of bread
and a millionaire who does the same appear in this act only as simple buyers, just
as...the grocer appears only as a seller. All other aspects here [of the economy] are
extinguished."12 By focusing only on the rules and mechanisms of exchange, bourgeois
economists will claim that we all participate as equals in a capitalist economyeveryone,
whether rich or poor, has the right to buy bread (or a yacht) at a certain price. However,
by analyzing the sphere of production as well"the relation between wage-labor and
capital"Marx is able to expose the underlying class contradictions within the system
that are ignored by the capitalist economists.
Bourgeois economists also view capitalist relations as the natural order of thingsarising

from a "propensity in human nature," as Adam Smith claimed. As a result, for them,
"the world-market, its conjunctures, movements of market-prices, periods of credit,
industrial and commercial cycles, alternations of prosperity and crisis, appear...as
overwhelming natural laws that irresistibly enforce their will over them, and confront
them as blind necessity."13 Marx instead argued that "the capitalist process of production
is a historically determined form of the social process of production in general."14 He
sought to analyze capitalism and the market historically, not as an unchanging product
of "natural laws," but as a dynamic system which, like other class societies, comes into
being at a particular stage in human history, and is regularly undermined by its own
internal contradictions.
According to Marx, at the heart of all human societies was production: the
transformation of nature to produce the things needed to maintain the existence of that
society. In class societies, the key element is that one class in society takes some of the
product of the labor of another class for themselves. Under feudalism, for example,
lords would take some of the product of the serfs labor. The serfs spent a portion of
their workweek producing goods for themselves, and a portion of their labor went to
producing goods for the lord. The serfs could produce more than they consumed, and
the extra went to the nobles. Marx called this extra labor "surplus labor," and the
extraction of it was called exploitation.15
Under capitalism, the two opposites are not lords and serfs, but capitalists and workers.
A central element of Marxs analysis of capitalism is how capitalists are able to obtain
surplus labor from workers. Due to the functioning of the market, the way that
exploitation takes place under capitalism is more disguised than in previous modes of
production. An important tool in uncovering this process is Marxs "law of value" or
"labor theory of value."
The role of the law of value
Every system of production has to regulate how much of peoples labor is spent
producing one thing versus another, so that society does not expend labor on things that
are useless.16 Generally speaking, in pre-capitalist societies people produced things
directly for other people, not for sale on a marketin Marxs language, they produced for
use, not exchange. So they produced for the needs and wants of themselves, their
hunter-gatherer community, their family unit, their lord, their slave master and so on.
They produced because "our tribe needs deer" or "the lord demands potatoes" or "our
household needs firewood."
Capitalism is very different from past modes of production. Under capitalism, nearly all
of the products of human labor are commodities, that is, they are produced for sale.
Marx called this "generalized commodity production"people obtain their needs and
wants by purchasing them on a market, and people produce what other people need
and want by selling things on a market. However, producing things for sale (for
exchange) creates a new dynamic, different from societies that produce directly for use.
Allocating labor in this kind of economy is regulated by the law of value. A few examples
can help explain how this law works.
We can start with a simple example. One of the earliest forms of exchange is of peasant

"handicraft" or household-based production. Although these households were largely

self-sufficient, candles produced in one peasant family might, for example, be
exchanged for a basket produced in another. Residents of different villages might also
exchange these goods at a local market. One can imagine such a market where candle
makers exchange goods with those who weave baskets. Given the technology of the
day, lets say it takes about eight hour worth of work to weave a basket and just an hour
to make a candle. When the peasants go to market, everyone wants to get the most for
their labor-time. No one in their right mind would exchange their dozen candles for a
basket, because they would be trading something that took them twelve hours to
produce for something that could be produced in eight. From the other side, a basket
maker couldnt get away with trying to get 12 candles for his or her basket, no matter
how long it took to weave it. A buyer would get a basket from someone else (or they
might just make it themselves).17
So the outcome of exchanging goods (a marketplace) is that the amount of labor-time
that is necessary to produce something is enforced. Marx called this "socially necessary
labor-time"the standard amount of time deemed necessary to produce a commodity
using the best methods and technology that are currently widely available. And a
commoditys "value," in Marxs terms, was simply the amount of socially necessary
labor-time needed to produce it. In this example, the value of eight candles is equal to
the value of one basket.
But what if people want more of one commodity than another? We can take a more
complex example. Take a community of self-employed artisans who produce for each
other on a market. Hence there are tailors and shoemakers and blacksmiths and so on,
but no capitalists yet. Marx referred to this semi-idealized type of society, which
predates capitalism, as "simple commodity production."18 The producers exchange goods
with each other through barter or using some kind of money. The use of money
becomes necessary as exchange becomes more complexwhen a candle maker wants to
obtain a basket, but the basket-weaver isnt interested in candles, for example. As a
result, some agreed-upon commodity (such as gold) is used as money"as a universal
measure of value," in Marxs words.19 Thus in the marketplace, money is used to
represent the amount of value of the goods you have sold, and also the amount of value
of goods you can buy.
As before, each producer wants to get the most for their labor-time. Lets say a pair of
shoes is the same value as a wool sweater from the tailor (they take the same labortime to produce). These two products will therefore exchange for each other, that is, for
the same amount of money.20 However, if the demand for shoes goes up, their price will
rise, and so you will get more money for selling a pair of shoes than selling a sweater.
The tailors will take note of this. The key is that shoemakers now make more money
than tailors do for the same labor-time. So, more current and future tailors will switch to
shoemaking, which will bring the price back to the point where products that take the
same labor-time to produce will sell for the same price. In this way, the law of value
regulates not just exchange, but social productionwhat gets produced and how peoples
labor is spent.21 Though prices may fluctuate with the market, the key factor in how
goods are exchanged is the amount of labor-time expended on their production. As Marx
writes, "supply and demand regulate nothing but the temporary fluctuations of market
prices. They will explain to you why the market price of a commodity rises above or

sinks below its value, but they can never account for the value itself."22
At a certain point in history, simple commodity production (along with other types of
societies) gives way to capitalism. Sweaters are produced for a market, but the
production process is now controlled by capitalists. The sweaters themselves are made
by workerspeople who have no choice but to work for someone else in order to survive.
(As part of the rise of capitalism, people who historically supported themselves with
their own land or tools have to be stripped of these, in order to create a class of
workers.) The capitalist does not make sweaters, but he has money, so he opens a
clothing factory: he buys tools, and hires some tailors. The sweaters produced by the
tailors are the capitalists to sell. The labor and tools bought by the capitalist are what
Marx calls capital: money invested to make more money. This is different from simple
commodity production, where the aim of exchange is simply to sell things youve made
in order to get the things you need.
But why are capitalists so obsessed with making more money than they started with?
This isnt just due to their greed, but because of competition. Competition forces
capitalists to "accumulate capital"they have to buy more and more labor power and
more and faster machines.23 We can use the example of the clothing factory owner to
explain this process. Like all capitalists, he has an incentive to produce his goods faster
than the standard socially necessary labor-time, so he can undercut his competitors and
increase his share of the market. Lets say that a new loom is invented, which allows
tailors to produce a sweater faster, below its current value. The loom is a tool that
increases productivity. The owner of the clothing factory starts using looms because his
employees can produce more sweaters in a day.
Making the sweater now takes the labor-time of the tailor, and the labor-time of the
person who made the loom. This is why Marx says that machines "pass their value" to
other commoditiesits a metaphor to describe the labor-time involved. Machines dont
do this all at once; they are used up, through wear and tear, over a longer or shorter
period of time. A certain portion of the value embodied in the machine, in this case the
loom, is passed on to each sweater produced, along with the labor newly added by the
tailor working the loom. (The materials used to make the sweater, such as wool from the
shepherd, also pass their value onto the final product. Making the sweater takes the
labor of the shepherd as well.) Most importantly, with the introduction of the loom as
the standard technology, the socially necessary labor-time to make a sweater is reduced
to the pace of the new machine, and now every capitalist has to buy some looms just to
keep up.
If capitalists do not reinvest their money in this wayand hence accumulate capitalthey
will not be able to produce their goods in the ever-decreasing socially necessary amount
of time, and they go out of business. So according to Marx, the capitalist
shares with the miser the passion for wealth as wealth. But that which in the miser is a
mere idiosyncrasy, is, in the capitalist the effect of the social mechanism of which he is
but one of the wheels. [T]he development of capitalist production makes it constantly
necessary to keep increasing the amount of the capital laid out in a given industrial
undertaking, and competition makes the...laws of capitalist production to be felt by each
individual capitalist as external coercive laws. It compels him to keep constantly

extending his capital, in order to preserve it, but extend it he cannot, except by means
of progressive accumulation.24
Thus, the driving goal for the capitalist is not production for use, or production simply as
a means to increase his personal consumption. It is production for the sake of money, as
a means to further accumulationevery capitalist must accumulate capital or go
under.25 As an executive at U.S. Steel once famously declared, "were not in the business
of making steel. Were in the business of making money."26
So how does the capitalist end up with more money than he started with? Its explained
by the fact that under capitalism, workers own ability to work becomes a commodity
something for sale.27 To explain the consequences of this, Marx makes an important
distinction between the terms "labor" and "labor power." Labor power is what the worker
sells on the markethis or her ability to work. Labor is the actual work done once the
worker arrives on the jobthe amount of socially necessary labor-time performed, that
is, the value of the goods produced. Profit for the capitalist is possible when the value of
the goods the worker produces with their labor in a given period of time is greater than
what they are paid in wages. So to make more money than he started with, the
capitalist will attempt to pay as little as possible for the workers labor power, and will
try to get as much labor as possible out of the worker (by intensifying and speeding up
work, or by extending the working day, for example). In a given workday, if a worker
produces the equivalent of his or her wages in four hours, then the rest of the work
performed that day is "unpaid labor," according to Marx. In other words, workers can
produce more value than they consume, and the capitalists get to keep the extra.
This is how exploitation happens under capitalismhow surplus labor, what Marx called
"surplus value," is extracted. Viewing the economy only in terms of exchange (buying
and selling) misses this fact. After all, in the marketplace the capitalist sells his goods
for the best price he can, while the worker tries to get the best price for his or her labor
power. However, Marxs analysis helps to explain the relationship between labor and
capital in a capitalist economy in a way that bourgeois economics does not.28What is
evident when production is viewed in value terms is that the capitalist must always seek
to maximize the surplus value created by the worker at the point of production,
whatever the price might be for his goods. When a capitalist talks to his or her
employee, its usually not about the price of their product, but about how much time it
takes to make it.
Moreover, the capitalists machines and tools do not produce surplus value, as workers
do. A hammer passes its value onto a product, but the capitalist cant order the hammer
to work harder and produce more value (labor-time) than went into making it. Workers
labor power is the only input to the production process that can give the capitalist more
than he paid for, due to the difference between the labor power paid for and the labor
performed. (Put another way, a capitalist who owns a restaurant doesnt look to the
stoves and pots and pans he owns to make him money, but rather the cook who works
them. This is why Marx called tools and machines "constant capital," while "variable
capital" is workers labor power put to use for the capitalist.) Furthermore, in a
competitive market economy, capitalists, generally speaking, cant increase their wealth
by simply "buying low and selling high"this is not the way companies such as Boeing,
General Electric or Microsoft generated their vast fortunes. In short, the amount of value
the capitalist controls (and hence the amount of money the capitalist makes) is
generated from exploitationthe extraction of surplus value from workers. This is why

Marxists argue that the exploitation of workers is the source of the capitalists
profit.29 Most importantly, without this profit and the accumulation of capital, the system
grinds to a halt. This leads us to crises.
The form crises take under capitalism
At the height of every boom, the apologists for capitalism will declare that the bust will
never come, and that the capitalist "business cycle" has been eliminated. So far, they
have always been proven wrong. Because of exploitation, profits and capital
accumulation are possible under capitalism. But it does not make them guaranteed. If
there are no profits and accumulation (or even if they are squeezed) then businesses
close, people lose jobs, debts are not paid, banks collapse, governments run out of
moneyin short, there is an economic crisis.
So what do capitalists have to do in order to turn a profit and accumulate capital? First,
they have to succeed in extracting surplus value from workersobtaining the extra
labor-time. In class societies in the past, this first step was enough. Under feudalism,
the lord took the grain and eggs and potatoes that the serf produced and did what he
wanted with themate them, gave some to his hangers-on, gave some to other lords, to
the church, etc. But under capitalism, theres an extra step, because the capitalist
generally doesnt consume the products the worker makes. Rather, the commodities the
worker produces have to be sold. As Marx put it in Capital: as soon as all the surplus
labor...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 productionthe direct production process. Capital has absorbed so
and so much unpaid labor. Now comes the second act of the process. The entire mass
of commodities, i.e., the total product...must be sold. If this is not done, or done only in
part, or only at prices below the prices of production, the laborer has been indeed
exploited, but his exploitation is not realized as such for the capitalist.... The conditions
of direct exploitation, and those of realizing it, are not identical.30
So the form that economic crises take under capitalism generally fall under two
categories: crises from the inability to extract enough surplus value, and crises from the
inability to realize surplus value. Individual capitalists will often have trouble with one or
both of these. However, when the economy as a whole is affected, the principal way that
realization crises are triggered is due to a phenomenon called "overproduction" or
"overcapacity." Crises resulting from the inability to extract enough surplus value are
produced by a law Marx referred to as the "tendency of the rate of profit to fall." We will
review each of these in turn, starting with a discussion of realization crises.
Crises in realizing surplus value
Surplus value has to be converted into money in order to accumulate capital"the entire
mass of commodities, i.e., the total product...must be sold." But due to the anarchy of
the market, selling your product is not a givenMarx argued in Capital that "violent price
fluctuations...cause interruptions, great collisions, even catastrophes, in the
process."31 The main way crises of this kind develop is due to "overproduction"too
much is produced for the capitalists to sell at a profit.

At the root of this problem is the capitalist drive for accumulation at all costs. It creates
an inherent tendency for capitalists to produce without concern as to who might
consume. As Marx argues, "since the aim of capital is not to minister to certain wants,
but to produce profita rift must continually ensue between the limited dimensions of
consumption under capitalism and a production which forever tends to exceed this
immanent barrier."32 This takes place during every boom: There is a conflict between the
drive to generate as much surplus value as possible in order to accumulate capital, and
the need to realize this surplus value through sale. In 1999, for example, half the U.S.
wheat harvest went unsold, an amount equal to one billion bushels.33 More recently,
according to the Wall Street Journal, "U.S. factory usage is at its lowest level in more
than 20 years; hundreds of jetliners are mothballed and the rest fly more than a quarter
empty; rising apartment vacancies are forcing landlords to cut rents; and
unemployment is at an eight-year high. In short, too much supply is chasing too little
demand."34 The same pattern has been true in other countries: China, for example, in
1997 "manufacture[d] one million mens shirts a day, joining the glut of 1.5 billion
already stashed in warehouses. There [were] also 10 million unsold watches, 20 million
extra bicycles, and 100,000 stockpiled autos and other vehicles."35
Hence, under capitalism, there is a built-in tendency for production to outstrip the
market. This isnt too much production of what people need, but of what people can
afford to buy.36 The system can "overproduce" clothes and wheat, yet people will still be
cold and hungry because they cannot pay for them. According to Marx:
There are not too many necessities of life produced, in proportion to the existing
population. Quite the reverse. Too little is produced to decently and humanely satisfy
the wants of the great mass.... There are not too many means of production produced
to employ the able-bodied portion of the population. Quite the reverse.... [N]ot enough
means of production are produced to permit the employment of the entire able-bodied
population under the most productive conditions, so that their absolute working period
could be shortened.... On the other hand, too many means of labor and necessities of
life are produced at times to permit of their serving as means for the exploitation of
laborers at a certain rate of profit...i.e., too many to permit of the consummation of this
process without constantly recurring explosions.... Not too much wealth is produced. But
at times too much wealth is produced in its capitalistic, self-contradictory forms. 37
In short, "there is a limit, not inherent to production generally, but to production
founded on capital," because distributing goods is not dependent on peoples needs, but
on their ability to buytheir demand.38
Many bourgeois economists still argue that in theory there will always be a demand for
things produced, due to a principle called Says Law.39 Says Law states that everyone
who sells something uses that money to buy something in return. So if a worker sells
his or her labor, or a capitalist sells his products, they will use the money to buy.
Because of this, there will always be enough demand in general.
Marx had several problems with this theory. The first is the case of a capitalist or an
industry which produces too much of a particular product in a particular market. This
happens all the time, simply because demand fluctuates, and every capitalist wants to
corner the market for themselves. Marx argued that overproduction in certain industries
could trigger a general crisis of overproduction in the rest of the economy. As he put it,

"in times of general overproduction, the overproduction in some spheres is always the
result, the consequence, of overproduction in the leading articles of commerce." 40 In
todays economy, the "leading articles of commerce" refers to steel or cars or
computers, rather than umbrellas. If there is overproduction in these leading industries,
they will have to sell at a loss, if they can sell at all. They may have to stockpile
products. The capital accumulation in that industry suffers, and they purchase less
constant and variable capital. All the other industries that depend on supplying these
leading industries are now overproduced. As a result, "the chain of payment obligations
due at specific dates is broken in a hundred places."41 The crisis can then spiral from
there.
There is another situation where Says Law breaks down, in Marxs view. This occurs
when capitalists sell their goods and then refuse to buythey make money and dont
spend it. (Or alternately, when workers sell their labor power and refuse to consume.)
One factor causing this is the role of credit, since capitalists are always in debt: The
level of corporate borrowing in the year 2000 was 74 percent of GDP, a record
amount.42 Capitalists borrow from the portion of societys profits and wages that are
deposited in banks, with the hope of paying for it later from their own profits, with
interest. The role of credit can destabilize capitalist production, however, since it means
that during economic booms, "those cavaliers who work without any reserve capital or
without any capital at all and who thus operate completely on a money credit basis
begin to appear for the first time in considerable numbers."43 As a result,
every individual industrial manufacturer and merchant gets around the necessity of
keeping a large reserve fund [of money] and being dependent upon his actual returns.
[T]he whole process becomes so complicated...that the semblance of a very solvent
business with a smooth flow of returns can easily persist even long after returns actually
come in only at the expense partly of swindled money-lenders and partly of swindled
producers [workers]. Thus business always appears almost excessively sound right on
the eve of a crash.44
The best known contemporary example of this is the Enron Corporation. An indebted
capitalist can thus end up in a difficult situation. He may have produced a heap of
commodities containing lots of surplus value. But the bank does not care how much
surplus value or products he hasthe bank wants money, and so the capitalist must sell
on whatever terms to get that money, even if it means below value, and potentially at a
loss.45 As Marx argued, the capitalist economy is dominated by "a whole series of
payments which depend on the sale ofcommodities within [a] particular period of
time," because of debts, and "these compulsory sales play a significant role in
crises."46 The outcome of these compulsory sales is that the capitalist doesnt realize his
full surplus value, has less money to reinvest, purchases less constant and variable
capital and the crisis can spiral from there.
Another factor in capitalists selling and refusing to buy is the tendency of the rate of
profit to fall (discussed further below). Even if profit rates decline, as long as big
capitalists can expand their investments significantly, they can still maintain or increase
their total profitwhat Marx called the "mass of profit." For example, if a capitalist
makes 10 percent profit on $1 million invested, but only 8 percent profit on $2 million
invested, his mass of profit still grows from $100,000 to $160,000. But a point can be

reached during a boom where a capitalist does not have an incentive to accumulate
further. Imagine if the same capitalist made 10 percent profit on $1 million invested,
and then only 5 percent profit on $2 million invested. His mass of profit stays the same,
at $100,000, despite having invested an additional $1 million. As Marx points out, "at a
point...when the increased capital produces just as much, or even less, [mass of]
surplus-value than it did before its increase, there would be absolute overproduction of
capital."47 Capital available in the marketplace is now overproduced, as capitalists are
increasingly wary of investing their money without a guarantee of a greater return. This
"overproduced" capital could thus mean medical equipment sitting idle while nurses are
unemployed, simply because the equipment and nurses cannot be put to work at a
profit for the capitalist.
A more basic explanation for the phenomenon of selling and not buying is that there is a
general tendency for capitalists and bankers (financial capitalists) to hoard money
during crises. In 2002, for example, Microsoft was sitting on as much as $5 billion in
cash.48 Marx describes this phenomenon as follows: "during crisesafter the moment of
panicduring the standstill of industry, money is immobilized in the hands of bankers,
bill-brokers [speculators], etc.; and, just as the stag cries out for fresh water, money
cries out for a field of employment where it can be realized as capital." 49 In other words,
during periods of capitalist crisis money is tight just at the point when it is most needed.
Hence capitalists refuse to invest money, and so purchase less constant and variable
capital, and again, the crisis can spiral from there.
So rather than the principle of supply and demand producing a smooth course that
determines prices and sales, it is one fraught with instability"a permanently unhealthy
state of affairs," as Engels described it.50 The outcome of this process is often
overproduction and crisis, along with the absurdity of mountains of goods going
unconsumed that people desperately need.
Crises in extracting surplus value
Marx defined the capitalists "rate of profit" as the amount of surplus value extracted
relative to the amount of capital invested in machines and labor. According to Marx, the
rate of profit gets squeezed by the process of capitalist production itself. And when the
rate of profit declines for a capitalist industry or economy, crises can ensue.
How does this occur? One aspect of accumulating capital is that the capitalist has to
invest more and more in machines and tools in order to raise productivity and stay
ahead of the competition. So the capital they invest is composed more and more of
machines ("constant capital") than labor power ("variable capital"). For example, over
time, in a particular industry 50 percent then 55 percent then 60 percent of the total
capital might go into machines.51 Marx called this a rise in the "organic composition of
capital."
Lets use an example from the real world to understand the consequences of this. Take
the case of a commercial blood testing labthe commodity they sell is the testing of
blood. The workers at the lab combine the blood specimens they receive into "pools" of
about 500 samples for testing. Everybody in the industry does this by hand, which is
very slow. Therefore, theres a lot of value (socially necessary labor-time) that goes into

this commodity. Then, one lab buys a new machine called a Tecan Genesis 200, which
pools the blood for you. The same number of workers can pool a much larger number of
blood samples in the same amount of time. This lab produces below the socially
necessary time (maintained by all its competitors), and so the owner makes a lot of
money. This is why capitalists invest in constant capital like a Tecan machine. But
eventually his competitors catch on and also invest in the Tecans. Soon the standard
socially necessary labor-time drops to the pace set by the new machine.
For a different example, we can use the shoe industry. Lets assume that the standard
socially necessary labor-time to produce a shoe is six minutes, and so 10 shoes get
made in an hour. A shoe sells for $10. If one capitalist, with an expensive new machine,
can produce 20 in an hour, then he is has an advantage over his competitors. That is,
until they all get the new machine, and then everyone can produce 20 shoes in an hour.
The standard labor-time to make a shoe is now three minutes, so it is half the value that
it was before, and the price falls to $5 a shoe.
At the end of this process the competitors are back on a level playing field. Their
workers are more productivethey can make more products in the same amount of
labor-time. But the capitalists are left with a much greater investment in constant
capital than they had before, relative to the surplus value the workers produce. For
capitalists, this is a problem. Most of them made the massive investment just to keep up
with their competitionthis is another reason why capitalists invest in constant capital
like a Tecan machine. (In fact, a Tecan Genesis 200 costs over $100,000.) But they cant
make the Tecan machine itself produce surplus value in order to make back the money.
While each worker in the industry can produce a greater number of goods each day,
they still work the same amount of unpaid surplus labor-time each day. Using Marxs
formula, the capitalists rate of profit will suffer, because the amount of total capital
invested has increased, without changing the amount of surplus value generated. 52
Marx called this "the law of the tendency of the rate of profit to fall," and felt it was
crucial for understanding capitalism. He argued that it was "in every respect the most
fundamental law of modern economy, and the most important for understanding the
most difficult relations. It is the most important law from the historical standpoint."53The
reason this analysis is important to Marx is because it establishes that "the real barrier
of capitalist production is capital itself."54 That is, the inherent drive to invest and
increase productivity is the same process that leads the system to crisis.
At the same time, in Marxs view, this law wasnt absolute. He argued in Capital that the
tendency of the rate of profit to fall was "a law whose absolute enforcement is checked,
retarded, weakened, by counteracting causes."55 Some of the counteracting causes Marx
lists are: "increasing the intensity of exploitation" (that is, making workers work
harder), "forcing wages below their value" (cutting workers pay and benefits), "foreign
trade and investment" (seeking captive markets and cheaper labor abroad), "a lowering
of taxes" and "the devaluing of constant capital" (discussed further below). 56 Therefore
the law doesnt claim to be able to predict what the rate of profit for a particular
capitalist or industry will be 10 or 20 years from now. In the real world, the
manifestation of the law is a process where it clashes with its counteracting causes in a
particular place and time. For example, capitalists are forced to fight the law by
increasing the level of exploitation and forcing wages below their value. This can offset a

fall in profits, if they are successful in forcing workers to work longer and harder for
less. This process is the reason why introducing new technology is often coupled with
making workers lives worse, not betterin a sense, they are made to pay for the profit
squeeze the capitalists new investments created.
Marx did not believe that the counteracting causes made the law irrelevant, however.
Despite their effects, the rate of profit can still be forced down for an industry or
economy, and crises will ensue.57 Moreover, Marx saw the manifestation of the law and
its counteracting causes as a source of even more instability for the system, not less. If
workers fight back against increasing exploitation, it can produce an acute intensification
of the class struggle, because the bosses, facing falling profits and competition, have
their backs against the wall. Marx also argued that "from time to time the conflict of
antagonistic agencies [the counteracting causes] find vent in crises. The crises are
always but momentary and forcible solutions of the existing contradictions. They are
violent eruptions which for a time restore the disturbed equilibrium."58
An example of how the action of the counteracting causes themselves can lead to crises
is the process of devaluing constant capital. As already discussed, Marx pointed out that
the increasing investment in tools and machines by capitalists in the drive to keep up
with each other also makes it harder and harder to make profits. But in a capitalist
economy, increasing investment in tools and machines also raises productivity. One
effect of this is that the labor-time necessary to make the tools and machines
themselves is reduced, making these investments cheaper. This is true of all machines
today compared to the past. The value of computers has plummeted in the last 20
years, for examplethey take a lot less labor-time to produce. If the rate of profit is the
amount of surplus value extracted relative to the amount of capital invested in machines
and labor, then as machines get cheaper, the rate of profit will rise. The result is a longterm counteracting force on the tendency of the rate of profit to fall.
This process is not without its consequences, however. We can use the Tecan Genesis
200 to explain this further. Lets assume that a capitalist bought one last year for a
certain amount of money. In the year that follows, increases in productivity at the Tecan
factory mean that the newer Tecan model takes a lot less socially necessary labor-time
to produceand so it is cheaper. But this drop in the machines value doesnt help our
capitalist who bought the machine last yearit actually makes things worse for him.
Doing blood tests with the newer Tecan takes less socially necessary time, because the
machine itself took less socially necessary time to make. A "new" capitalist who buys the
latest Tecans can take advantage of this, and charges less for the blood tests. The "old"
capitalist who bought the machine last year gets squeezed. This may eventually drive
the old capitalist out of business. The new capitalist can obtain the Tecan at a price that
reflects the new (lower) value of the machine. This "devalues" the old capital, a good
thing from the new capitalists perspective. (In a sense, the new capitalist tells the old
one: "Im taking your capital on the cheap, so I can put it to work at a profit, where you
could not.") However, this overall process often happens at a serious cost to the
economywith companies going out of business, workers getting laid off, debts not
getting paid and hence economic crisis potentially breaking out.59
Ultimately, capitalists and the capitalist state can attempt to counteract the tendency of
the rate of profit to fall, even if it involves "forcible solutions of the existing

contradictions." However, many of these means can trigger or exacerbate crises. And as
we will discuss further below, there are limits to the manageability of crises within the
context of the modern capitalist system.
Emerging from crisis
Short of capitalism being overthrown, a capitalist economy will eventually recover from
crisis. As the Russian revolutionary Leon Trotsky once noted,
capitalism does live by crises and booms, just as a human being lives by inhaling and
exhaling. First there is a boom in industry, then a stoppage, next a crisis, followed by a
stoppage in the crisis, then an improvement, another boom, another stoppage, and so
on.... The fact that capitalism continues to oscillate cyclically...merely signifies that
capitalism is not yet dead, that we are not dealing with a corpse. So long as capitalism
is not overthrown by proletarian revolution, it will continue to live in cycles, swinging up
and down. Crises and booms were inherent in capitalism at its very birth; they will
accompany it to its grave.60
To escape from each crisis, however, the economy must emerge at a "starting point"
that is different from the "ending point" where the crisis began.61 As Marx notes,
"the...stagnation of production would have preparedwithin capitalistic limitsa
subsequent expansion of production. And thus the cycle would run its course
anew."62 The new starting point will allow profitable capital accumulation to resume. This
requires raising the rate of profit, usually accomplished when the impact of crisis
sufficiently reduces (depreciates) the price of the inputs to the capitalist production
process: constant and variable capital. Additionally, the crisis will intensify the
competition between capitalists themselves, with each attempting to survive, and
restore their accumulation, at the expense of their rivals. In the end, laying the
foundation for this subsequent expansion of production usually comes at an enormous
human and social cost.
One factor in restoring profitable accumulation is a depreciation in the price of variable
capital (workers labor power)in other words, a reduction in the wages and benefits
paid to workers. Marx summarizes this process as follows: "the stagnation of production
would have laid off a part of the working class, and would thereby have placed the
employed part in a situation where it would have to submit to a reduction of wages even
below the average. This has the very same effect on capital as an increase of...surplus
value at average wages would have had."63 A contemporary example of this process
involves the computer software industry. Technology workers perform an average of 50
hours of work per week, yet with recent increased layoffs, are accepting lower and lower
wages and salaries for their work.64 At the same time, they are producing the same (and
sometimes more) value for their employer. This fact helps restore and increase the
capital accumulation of a section of the capitalist class.
Economic crisis also produces desperate attempts by capitalists to shore up their profits
at the expense of each other. As Marx notes, "as soon as it is no longer a question of
sharing profits, but sharing losses, everyone tries to reduce his own share to a minimum
and to shove it off upon another.... How much each individual capitalist must bear of the
loss, i.e., to what extent he must share in it at all, is decided by strength and cunning,

and competition then becomes a fight among hostile brothers."65 For example, when
facing problems in extracting surplus value from workers, or in realizing surplus value,
capitalists will often prefer to use their "idle money" for purposes of speculation in things
such as stocks or currencies, rather than investing in new capital.66 This occurs at the
end of every business cycle as profits begin to decline; hence the "irrational exuberance"
of the stock market in the late 1990s.67
However, such price speculation among capitalists does not increase the value that the
capitalist class as a whole controls; it simply involves them swindling each other: "one
party can win in exchange what the other loses; all they can distribute among
themselves is the surplus value [produced by the working class]. But these proportions
open a field for individual deception...which has nothing to do with the determination of
value as such."68 In other words, buying a stock "low," and getting another capitalist to
buy it "high," does not create additional wealth, it just distributes it differently among
capitalists. (Stock traders will often refer to this as the "greater fool theory." 69)
Therefore, Marx referred to this speculative wealth as "fictitious capital."70 But if a
particular capitalist is able to gain at the expense of his brothers, he might be the one
most likely to survive the crisis. The most visible result of this stock speculation is the
creation of "a new financial aristocracy, a new variety of parasites in the shape of
promoters, speculators and simply nominal directors; a whole system of swindling and
cheating by means of corporation promotion, stock issuance and stock
speculation."71 The result of such speculation can be a dramatic crash and panic when
the whole process unravels, and no one is willing to buy at a higher price (that is, no
one can find a "greater fool"). Those who sell at the right time will escape, those left
"holding the bag" will likely be ruined.
Another factor in restoring profitable accumulation is a depreciation in the price of
constant capital (tools and machines). Consider, for example, a capitalist who purchased
a computer for $1,000. A couple of years later he goes out of business, and one of his
competitors wants to buy up his assets. By that time the value of the machine has fallen
(it can be produced much quicker) and so the price is only $750. Obtaining the
computer at the new price devalues the capital, as described earlier in the case of the
Tecan machine. However, lets also assume that the bankrupted capitalist is desperate to
unload his assets, in order to pay his debts. Therefore, he sells his computer for only
$500. The machine has therefore also depreciated in price. Most importantly, the
surviving capitalist benefits from this.
In certain circumstances, constant capital can also be depreciated through
overproduction; that is, if computers are heavily overproduced, they can be purchased
on the cheap by capitalists seeking to restore their accumulation. Hence, as Marx notes,
during crises "part of the commodities on the market can complete their process of
circulation and reproduction [purchase and sale] only through an immense contraction
in their prices.... The elements of fixed capital are depreciated to a greater or lesser
degree in just the same way."72 In other cases, capital that can no longer be profitably
employed is simply destroyed: A bankrupt steel factorys machines may just lay idle and
rust, for example. Through this process of devaluation, depreciation and destruction, the
surviving capitalists are able to renew profitable capital accumulation. But which
capitalist wins or loses is again the result of "a fight among hostile brothers":

how is this conflict settled and the conditions restored which correspond to the "sound"
operation of capitalist production?... It implies the withdrawal and even the partial
destruction of capital amounting to the full value of additional capital [that is
overproduced]...or at least a part of it.... [T]he loss is by no means equally distributed
among individual capitals, its distribution being rather decided through a competitive
struggle in which the loss is distributed...depending on special advantages or previously
captured positions, so that one capital is left unused, another is destroyed, a third
suffers but a relative loss or is just temporarily depreciated, etc.73
The outcome of this "competitive struggle" can have severe consequences in todays
economy. This is due to what Marx referred to as the "centralization and concentration
of capital"that is, the units of capital get bigger and bigger, and become fewer and
fewer, as a result of capital accumulation and mergers.74 As of 1983, for example, less
than 3 percent of companies accounted for 77 percent of all sales in the United States,
while Citicorp and Exxon together held more assets than all the small businesses in the
country.75 All capitalist economies eventually become composed of these economic
giants, as the "biggest fish" are the ones most likely to survive each successive crisis.76
It is in the context of crises, however, that the centralization and concentration of capital
creates significant problems for a capitalist economy. First, the bankruptcy of a major
firm, or of a major industry, becomes much more costly. There is the greater possibility
that the collapse of a large corporation, or several significant players within a particular
industry, will bring the rest of a national economy, if not the global economy, into severe
crisis. So in todays economy there is the potential for the busts following the booms to
be much more severe, and much more difficult for the capitalist state to manage. The
recent record-sized bankruptcies of Enron ($63 billion in assets), Conseco ($61 billion in
assets) and WorldCom ($103 billion in assets) highlight the continued development of
this process.77 Constant capital continues to be devalued through bankruptcy or mergers
but at an increasing human cost, while the system more and more becomes composed
of long-standing large and often inefficient corporations.78 They compete with one
another, face profit squeezes and attempt to take advantage of the usual mechanisms to
boost their profit: increasing the intensity of exploitation, forcing wages below their
value, engaging in foreign trade and investment and demanding lower taxes from the
capitalist state. In certain cases, old-fashioned shady accounting comes into play.
Additionally, in times of severe crisis, capitalists will attempt to rob surplus value from
another nations capitalists through war. According to Marx, all this is the fruit of the
inner dynamics of capital accumulation itself.
Conclusion
Capitalism has not changed its crisis-prone nature since Marxs time. It is still doomed to
make the lot of the working class more unstable, insecure and miserable. Indeed, the
promises made by the ideologists of capitalism have not been fulfilled for billions of
people around the world. If anything, crisis has ensured that the opposite is true, as
working people in countries from Argentina to Korea to the United States can attest.
Marx argued in Capital over a century ago that
within the capitalist system all methods for raising the social productiveness of labor are
brought about at the cost of the individual laborer; all means for the development of
production transform themselves into means of domination over, and exploitation of, the

producers; they mutilate the laborer into a fragment of a man, degrade him to the level
of an appendage of a machine, destroy every remnant of charm in his work and turn it
into a hated toil; they estrange from him the intellectual potentialities of the labor
process...they distort the conditions under which he works, subject him during the labor
process to a despotism the more hateful for its meanness.... It follows...that in
proportion as capital accumulates, the lot of the laborer, be his payment [wage] high or
low, must grow worse.... [T]his law rivets the laborer to capital more firmly than the
wedges of Vulcan did Prometheus to the rock. It establishes an accumulation of misery,
corresponding with accumulation of capital. Accumulation of wealth at one pole is,
therefore, at the same time accumulation of misery, agony of toil, slavery, ignorance,
brutality, mental degradation, at the opposite pole.79
For Marx and Engels the only solution was democratic economic planningsocialism:
If the producers as such knew how much the consumers required, if they were to
organize production, if they were to share it out amongst themselves, then the
fluctuations of competition and its tendency to crisis would be impossible. Carry on
production consciously as human beingsnot as dispersed atoms without consciousness
of your speciesand you have overcome all these artificial and untenable antitheses. But
as long as you continue to produce in the present unconscious, thoughtless manner, at
the mercy of chance...crises will remain; and each successive crisis is bound to become
more universal and therefore worse than the preceding one; is bound to impoverish a
larger body of small capitalists, and to augment...the numbers of the class who live by
labor alone.80
Marx and Engels did not believe that capitalism would produce socialism of its own
accord. If the working class accepts the consequences of every crisis, then the capitalist
system will persist until it produces the "common ruin" of all. And so a revolution is not
a given, or simply up to the course of history. As Marx and Engels once argued, "history
does nothing...it wages no battles. It is man, real, living man who does all that, who
possesses and fights; history is not...a person apart, using man as a means to achieve
its own aims; history is nothing but the activity of man pursuing his aims."81 Our aim
must be the overthrow of the crisis-ridden system of capitalism and its replacement with
socialism.
Stuart Easterling is active in the International Socialist Organization in Pittsburgh
Thanks to Paul DAmato, Phil Gasper, Joel Geier, Michal Myers, Lance Selfa and David Whitehouse for helpful
feedback and debate on this article.
1 Karl Marx and Frederick Engels, Manifesto of the Communist Party, Chapter 1, 27. All works cited by Marx and
Engels are available at www.marxists.org, and are indexed here by title, chapter and paragraph number.
2 Tom Lewis, "The growing gap between rich and poor," Socialist Worker, August 1, 2003; Administrative Office of the
U.S. Courts, "Bankruptcy cases continue to break Federal Court caseload records," available online at
www.uscourts.gov/nrarchive.html.
3 Karl Marx, Capital, Volume I, Chapter 16, Section 9, 8.
4 Capital, Volume III, Chapter 15, Section 3, 7.
5 Karl Marx, Wage-Labor and Capital, Chapter 2, 15.
6 Vladimir Lenin, "May Day action by the revolutionary proletariat," Sotsial-Demokrat, No. 31, June 15, 1913,
available online at www.marxists.org/archive/lenin/works/1913/jun/15.htm.
7 Manifesto of the Communist Party, Chapter 1, 2.
8 Capital, Volume I, "Preface to the first German edition," 9.
9 Quoted in Paul Sweezy, The Theory of Capitalist Development (New York: Monthly Review Press, 1970), p. 4.
10 The Theory of Capitalist Development, p. 24.
11 Capital, Volume III, Chapter 51, 3.
12 Karl Marx, Outlines of the Critique of Political Economy (The Grundrisse), Chapter 5, 10.
13 Capital, Volume III, Chapter 48, 28.

14 Ibid., 13.
15 Marx also argued that the development of surplus labor historically created the possibility of human progress,
because human beings were now able to produce more than they immediately consumed.
16 As Marx noted in his letter to Ludwig Kugelmann, "every child knows a nation which ceased to work, I will not say
for a year, but even for a few weeks, would perish. Every child knows, too, that the masses of productsrequire
different and quantitatively determined masses of the total labor of society. That this necessity of the distribution of
social labor in definite proportions cannot possibly be done away with by a particular form of social production but can
only change the mode of its appearance, is self-evident. No natural laws can be done away with. What can change in
historically different circumstances is only the form in which these laws assert themselves." (Marx to Kugelmann, July
11, 1868, 1.)
17 Engels describes this process in more detail: "The little that such a family had to obtain by barter or buy from
outsiders...consisted principally of the objects of handicraft production, that is, such things the nature of whose
manufacture was by no means unknown to the peasant, and which he did not produce himself only because he lacked
the raw material or because the purchased article was much better or very much cheaper. Hence the peasant of the
Middle Ages knew fairly accurately the labor-time required for the manufacture of the articles obtained by him in
barter. The smith and the cartwright of the village worked under his eyes; likewise the tailor and shoemaker.... The
peasants, as well as the people from whom they bought, were themselves workers; the exchanged articles were each
ones own products. What had they expended in making these products? Labor and labor alone: to replace tools, to
produce the raw material and to process it they spent nothing but their own labor-power; how then could they
exchange these products of theirs for those of other laboring producers otherwise than in the ratio of the labor
expended on them? Not only was the labor-time spent on these products the only suitable measure for the
quantitative determination of the values to be exchanged: no other was at all possible. Or is it believed that the
peasant and the artisan were so stupid as to give up the product of ten hours labor of one person for that of a single
hours labor of another?" (Frederick Engels, "Supplement to Capital Volume III," Section 1, 19.)
18 Engels discusses the historical scope of the law of value and the place of "simple commodity production" in more
detail as follows: "In a word: The Marxian law of value holds generally, as far as economic laws are valid at all, for the
whole period of simple commodity productionthat is, up to the time when the latter suffers a modification through
the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed
according to the Marxian law and oscillate around those values, so that the more fully simple commodity production
develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with
values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting
from the beginning of exchange, which transforms products into commodities, down to the 15th century of the
present era. But the exchange of commodities dates from a time before all written historywhich in Egypt goes back
to at least 2500 B.C., and perhaps 5000 B.C., and in Babylon to 4000 B.C., perhaps to 6000 B.C.; thus, the law of
value has prevailed during a period of from five to seven thousand years." (Frederick Engels, "Supplement to Capital
Volume III," Section 1, 23.)
19 Capital, Volume I, Chapter 3, Section 1, 2.
20 A question that often arises is how Marx compares labor of different skill. Surely an hours labor of a blacksmith is
not the same as an hours labor of a gravedigger, after all. Marx measures labor-time in units of what he calls
"abstract, simple labor." An hour of skilled labor consists of more abstract labor than an hour of unskilled labor. This is
true because the labor of the skilled worker also includes the labor of the worker that had to train him or her in that
skill.
21 According to the Bolshevik economist I.I. Rubin, "In a simple commodity economy, the exchange of 10 hours of
labor in one branch of production, for example shoemaking, for the product of eight hours of labor in another branch,
for example clothing production, necessarily leads (if the shoemaker and clothesmaker are equally qualified) to
different advantages of production in the two branches, and to the transfer of labor from shoemaking to clothing
production. Assuming complete mobility of labor in the commodity economy, every more or less significant difference
in the advantage of production generates a tendency for the transfer of labor from the less advantageous branch of
production to the more advantageous. This tendency remains until the less advantageous branch is confronted by a
direct threat of economic collapse and finds it impossible to continue production because of unfavorable conditions for
the sale of its products on the market." (I.I. Rubin, Essays on Marxs Theory of Value (Detroit: Black and Red, 1972)
p. 103.)
22 Marx, Value, Price, and Profit, Chapter 4, 4.
23 This drive to accumulate makes capitalists different from previous ruling classes. As Marx noted, capitalists must
use their money to accumulate capital, "instead of...spending it, like, say, Egyptian kings or Etruscan priest-nobles for
pyramids etc.... [W]ithout accumulation, capital cannot form the foundation of production, since it would remain
stagnant, and would not be an element of progress, required already by the mere increase of population etc. If the
surplus value were simply consumed, then capital would not have realized itself as capital, and not produced itself as
capital, i.e. as value which produces [greater] value." (Marx, The Grundrisse, Chapter 8, 56.)
24 Capital, Volume I, Chapter 24, Section 3, 3.
25 One recent example of this fact is a company called Exodus Communications, which owns the computer hardware
to host Web sites. According to the New York Times, "from the start of this year [1999] to the end of 2000, the
company expects to spend more than $750 millionon 15 more locations, the majority to be erected in this country.
That is quite a feat for a company with only about $200 million in revenue this yearAdam Wegner, vice president and
general counsel... says that without the heavy spending on expansion, Exodus would be profitable today. But he also
points to a Catch-22: Without the expansion, competitors would push Exodus out of the business of managing Web
sites." (Louis Uchitelle, "The $1.2 trillion spigot: Capital spending in the U.S. just keeps keeping on," New York Times,
December 30, 1999.)
26 Quoted on the Hemp Farm Web site, available online at www.hempfarm.org/"Papers/Quotes.html#economics.

27 Marx refers to this as "the commodification of labor power." It means that as a worker under capitalism, you may
have labor to perform that is needed by society (whether as a nurse, teacher, construction worker or almost any other
skill). But you cannot perform that work for society unless you can convince a capitalist to pay you for it. In other
words, in order to work and create use-values for other people, you must go to a capitalist and convince him that he
can make money from your labor.
28 For an insightful discussion of how the law of value applies in state capitalist command economies such as the
former USSR, see Derek Howl, "The law of value and the USSR," International Socialism 49, Winter 1990.
29 Marx points out that the capitalists money "without wage-labor, ceases to be capital." (Marx,Wage-Labor and
Capital, Chapter 8, 11.) In other words, the money the capitalist controls does not turn into even more money
without workers labor.
30 Capital, Volume III, Chapter 15, Section 1, 8.
31 Ibid., 29.
32 Ibid., 17.
33 Martin McLaughlin, "Crisis of overproduction devastating American agriculture," World Socialist Web site, August 7,
1999, available online at www.wsws.org/articles/1999/aug1999/farm-a07.shtml.
34 Quoted in Alan Maass and Joel Geier, "Is the U.S. economy headed for a crash?" Socialist Worker, May 30, 2003.
35 Quoted in Ahmed Shawki, "China: Dengs legacy," International Socialist Review 2, Fall 1997, p. 31.
36 Note, however, that Marx and Engels did not accept the logic of the "underconsumptionist" argument, which states
that crises are simply a result of the fact that workers cannot afford to consume the goods they produce. Engels notes
that this is a fact of all class societies: "the under-consumption of the masses, the restriction of the consumption of
the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as
long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the
masses was particularly favorable, as for example in England in the 15th century, they under-consumed. They were
very far from having their own annual total product at their disposal to be consumed by them. Therefore, while
under-consumption has been a constant feature in history for thousands of years, the general shrinkage of the
market which breaks out in crises as the result of a surplus of production is a phenomenon only of the last 50
years.... The under-consumption of the masses is a necessary condition of all forms of society based on exploitation,
consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The
under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which
has long been recognized. But it tells us just as little why crises exist today as why they did not exist before."
(Engels, Herr Eugen Dhrings Revolution in Science [Anti-Dhring], Part III, Chapter III, 3.)
Moreover, Marx notes that crises of overproduction often occur when wages are at historically high levels: "It is sheer
tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers.... That
commodities are unsaleable means only that no effective purchasers have been found for them...for productive or
individual 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. From the point of view of these advocates of
sound and simple (!) common sense, such a period should rather remove the crisis." [Capital, Volume II, Chapter
20, Section 4, 34.]
37 Capital, Volume III, Chapter 15, Section 3, 18.
38 Marx, The Grundrisse, Chapter 8, 17.
39 First developed by the French economist Jean-Baptiste Say (17671832).
40 Quoted in Thomas Sowell, Marxism: Philosophy and Economics (New York: William Morrow, 1985), p. 102. (From
Karl Marx, Theories of Surplus Value.)
41 Capital, Volume III, Chapter 15, Section 3, 10. Marx points out that another factor exacerbating crises of
overproduction is the common phenomenon of deferred payments between capitalist producers (i.e., "I will pay you
Thursday for a hamburger today"). A supplier to a large company may accept a deferred payment for its goods in part
or in full. If the large company is not able to sell its own goods, then the supplier can also be left unpaid (holding the
bag), not just in the future, but immediately. (Capital, Volume III, Chapter 30, 914.)
42 Joel Geier and Paul DAmato, "The end of the miracle economy," International Socialist Review 16, February
March 2001, p. 38. In Capital, Marx cites the Economist magazine, pointing out the circumstances prevailing with
regards to credit: "Merchants, manufacturers, etc., carry on operations much beyond those which the use of their own
capital alone would enable them to do.... Capital is...the foundation upon which a good credit is built, [rather] than
the limit of the transactions of any commercial establishment." (Capital, Volume III, Chapter 27, Note 87.)
43 Capital, Volume III, Chapter 30, 27.
44 Ibid., 21. For another contemporary example of the role of corporate debt, take again the case of Exodus
Communications: "Exodus has raised $1.52 billion on the bond market, through four high-yield offerings [i.e., they
borrowed $1.52 billion]. These are the securities that in the 1980s were called junk bonds, a term now out of fashion
even though the high risk is the same. The last and biggest offering, $1 billion, took place this month, and Exodus
now faces $100 million a year in interest payments." ("The $1.2 trillion spigot.") Exodus has to sell its service at all
costs, just in order to be able to pay its debts, before it can fulfill Says Law and go out and buy more goods (constant
and variable capital). Exodus finally did go bankrupt in 2001, available online at
www.bankruptcydata.com/"Research/Ch11_2001.htm.
45 Selling "below value" means less surplus value is realizedin other words, the capitalist has less money. His capital
accumulation at minimum begins to slow down, if not being interrupted altogether.
46 Quoted in Sowell, Marxism, p. 101. (From Karl Marx, Theories of Surplus Value)
47 Capital, Volume III, Chapter 15, Section 3, 3.

48 See http://biz.yahoo.com/fin/l/m/msft_qb.html for a concise summary of Microsofts vast idle wealth.

49 The Grundrisse, Chapter 12, 26.
50 Frederick Engels, "Outline of a Critique of Political Economy," in the Deutsch-Franzsische Jahrbcher, 48.
51 Some economists argue that this process is not a necessary part of capital accumulation. For a refutation of this
claim, see Chris Harman, Explaining the Crisis: A Marxist Re-Appraisal (London: Bookmarks, 1987), pp. 2023.
52 Using Marxs formula, where S is surplus value, C is constant capital, and V is variable capital, then the rate of
profit is S / (C+V). If C grows while S remains the same, then the rate of profit falls. The capitalist reacts by doing
everything possible to increase S or reduce the cost of V.
53 The Grundrisse, Chapter 15, 2.
54 Capital, Volume III, Chapter 15, Section 2, 15.
55 Ibid., Chapter 14, Section 1, 5.
56 Marx discusses the counteracting causes in Capital, Volume III, Chapter 14 as well as briefly in The Grundrisse,
Chapter 15, 2, where he enumerates some additional factors: "the fall of the rate of profit can further be delayed by
the omission of existing deductions from profit, e.g. by a lowering of taxes, reduction of ground rent etc...for these
are themselves portions of the profit under another name, and are appropriated by persons other than the capitalists
themselves [i.e., by the state or by the landlord]. The fall [of the rate of profit] likewise is delayed by creation of new
branches of production in which more direct labor in relation to capital is needed." There are other counteracting
causes, discussed elsewhere by Marx, which include military and other "waste" spending. If the state can divert
investment into areas that do not produce more capital goods (Marxs "Department I" and "Department II"), then it
can check the rate of growth of the organic composition of capital. A full discussion of this is beyond the scope of this
article; for more details, see Harman, Explaining the Crisis, pp. 3843.
57 See Harman, Explaining the Crisis, for a more detailed historical discussion of the role of a rising organic
composition of capital in the development of economic crises over the course of the twentieth century. Also see Lewis
Corey, The Decline of American Capitalism (New York: Covici-Friede, 1934), pp. 113129 for a discussion of the
Great Depression.
58 Capital, Volume III, Chapter 15, Section 2, 10.
59 As Marx described it, "the periodical depreciation of existing capitalone of the means immanent in capitalist
production to check the fall of the rate of profit and hasten accumulation of capital-value through formation of new
capitaldisturbs the given conditions, within which the process of circulation and reproduction of capital takes place,
and is therefore accompanied by sudden stoppages and crises in the production process." (Capital, Volume III,
Chapter 15, Section 2, 12.)
60 Leon Trotsky, "The world economic crisis and the new tasks of the Communist International," fromThe First Five
Years of the Communist International, Volume I (London: New Park, 1973) p. 252.
61 This formulation is found in Paul Mattick, Marx and Keynes: The Limits of the Mixed Economy (Boston: Porter
Sargent, 1969), p. 70.
62 Capital, Volume III, Chapter 15, Section 3, 1112.
63 Capital, Volume II, Chapter 15, Section 3, 7.
64 Steve McConnell, Rapid Development (Redmond, WA: Microsoft Press, 1996), p. xvii; Jackie Cohen, "Cutting the
purse strings," Infoworld, June 22, 2001, available online at www.infoworld.com; "Tech industrys job losses may be
slowingstudy," Reuters, October 10, 2002; Tischelle George, "Big bucks dry up: Shrinking bonuses send IT pay down
for the first time in a decade," Information Week, April 29, 2002, available online at www.informationweek.com.
65 Capital, Volume III, Chapter 15, Section 3, 7.
66 Recall that a stock is simply a certificate that indicates that the stockholder is the owner of a percentage of a
particular firm, and is thus entitled to a percentage of its profits. So you might pay $10 for a stock that granted you
10 percent ownership of a company. If their profits are $100 in the next year, you will be entitled to $10, and will
make your money back right away. Put another way, your stock has a good "price/earnings ratio." That is, $10/$10 =
1 (the lower your price/earnings ratio, the better). However, with rampant speculation, price/earnings ratios can be in
the hundreds (in other words, it would take hundreds of years to make back the money spent to buy the stock, given
current earnings). In this case, stocks are purchased not for future earnings, but simply to try and sell to someone
else (or occasionally on the gamble that future earnings will skyrocket).
67 This portrayal of the U.S. stock market is from Federal Reserve Chairman Alan Greenspan; for a transcript of his
1996 speech see www.geocities.com/ecocorner/intelarea/ag1.html.
68 The Grundrisse, Chapter 8, 57.
69 Thanks to Joel Geier for this item.
70 Capital, Volume III, Chapter 29, 12.
71 Ibid., Chapter 27, 15. Marx adds that in the end, "the little fish are swallowed by the sharks and the lambs by the
stock exchange wolves." (Capital, Volume III, Chapter 27, 16.)
72 Capital, Volume III, Chapter 15, Section 3, 10.
73 Ibid., Chapter 15, Section 3, 8.
74 Ibid., Chapter 25, Section 5a, 6.
75 Robert Heilbroner and Lester Thurow, Economics Explained (New York: Simon & Schuster, 1987), pp. 4243.
76 Marx discusses in more detail in Capital some of the reasons why the capitalist "big fish" survive while the "little
fish" do not. Note that even if profit rates decline, as long as big capitalists can expand their investments significantly,
they can still maintain the same amount of total profit. As noted previously, if they make 10 percent profit on $1
million invested, and only 8 percent profit on $2 million invested, they still stay well ahead of the game. As Marx
points out in Capital: "a large capital with a small rate of profit accumulates faster than a small capital with a large
rate of profit." (Capital, Volume III, Chapter 15, 1.) The large capitalists still have a growing mass of profit to
engage in bigger and bigger investments in constant capital and variable capital. Smaller capitalists do not have the
luxury of being able to expand at the same pace. General Electric, for example, recently made a considerable

investment to establish an electronic supply-chain network for its 100,000 suppliers. (Lee Sustar, "The myth of the
new economy," International Socialist Review 14, OctoberNovember 2000, p. 27.) Many of GEs competitors do not
have the mass of profit to undertake (or risk) such an investment, and so they fall behind. Moreover, "even a cursory
examination of competition shows...that under certain circumstances, when the greater capitalist wishes to make
room for himself on the market, and to crowd out the smaller ones, as happens in times of crises...he deliberately
lowers his rate of profit in order to drive the smaller ones to the wall [into the ground].... Compensation of a fall in
the rate of profit by a rise in the mass of profit applies only to the...big, firmly placed capitalists. The new...capital
operating independently does not enjoy any such compensating conditions." (Capital, Volume III, Chapter 23, 32.)
77 See www.bankruptcydata.com/Research/Ch11_2002.htm, and
www.bankruptcydata.com/Research/Ch11_2001.htm.
78 Marx notes that due to their monopolistic position, and because their mass of profit can grow even with a declining
rate of profit, large units of capital lose the capitalistic drive to innovate: "As soon as formation of capital were to fall
into the hands of the hands of a few established big capitals, for which the mass of profit compensates for the falling
rate of profit, the vital flame of production would be altogether extinguished. It would die out." (Capital, Volume III,
Chapter 15, Section 3, 26.) However, as noted previously, they still maintain an advantage over their smaller, often
more efficient rivals.
79 Capital, Volume I, Chapter 25, Section 4, 11.
80 Engels, "Outline of a Critique of Political Economy", 48.