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<title> C.7 What causes the capitalist business cycle?</title>
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<h1>C.7 What causes the capitalist business cycle?</h1>

<p>
The business cycle is the term used to describe the boom and slump nature
of capitalism. Sometimes there is full employment, with workplaces producing
more and more goods and services, the economy grows and along with it 
wages. However, as Proudhon argued, this happy situation does not last:
<blockquote></p><p><i>
"But industry, under the influence of property, does not proceed with such 
regularity. . . As soon as a demand begins to be felt, the factories fill 
up, and everybody goes to work. Then business is lively. . . Under
the rule of property, the flowers of industry are woven into none but
funeral wreaths. The labourer digs his own grave. . . [the capitalist] 
tries. . . to continue production by lessening expenses. Then comes the 
lowering of wages; the introduction of machinery; the employment of women 
and children . . . the decreased cost creates a larger market. . . [but] the
productive power tends to more than ever outstrip consumption. . . To-day
the factory is closed. Tomorrow the people starve in the streets. . . In
consequence of the cessation of business and the extreme cheapness of
merchandise. . . frightened creditors hasten to withdraw their funds [and]
Production is suspended, and labour comes to a standstill."</i> [<b>What is 
Property</b>, pp. 191-192]
</blockquote></p><p>
Why does this happen? For anarchists, as Proudhon noted, it's to do with 
the nature of capitalist production and the social relationships it creates 
(<i>"the rule of property"</i>). The key to understanding the business cycle is
to understand that, to use Proudhon's words, <i>"Property sells products to
the labourer for more than it pays him for them; therefore it is impossible."</i>
[<b>Op. Cit.</b>, p. 194] In other words, the need for the capitalist to make a 
profit from the workers they employ is the underlying cause of the business
cycle. If the capitalist class cannot make enough surplus value (profit, 
interest, rent) then it will stop production, sack people, ruin lives and 
communities until such time as enough can once again be extracted from working 
class people. As Proudhon put it (using the term <i>"interest"</i> to cover all 
forms of surplus value):
</p><p><blockquote><i>
"The primary cause of commercial and industrial stagnations is, then, interest 
on capital, -- that interest which the ancients with one accord branded with 
the name of usury, whenever it was paid for the use of money, but which they 
did not dare to condemn in the forms of house-rent, farm-rent, or profit: as 
if the nature of the thing lent could ever warrant a charge for the lending; 
that is, robbery."</i> [<b>Op. Cit.</b>, p. 193]
</blockquote></p><p>
So what influences the level of surplus value? There are two main classes of 
pressure on surplus value production, what we will call the <i><b>"subjective"</b></i> and 
<i><b>"objective"</b></i> (we will use the term profits to cover surplus value from now on
as this is less cumbersome and other forms of surplus value depend on the
amount extracted from workers on the shopfloor). The "subjective" pressures 
are to do with the nature of the social relationships created by capitalism, 
the relations of domination and subjection which are the root of exploitation 
and the resistance to them. In other words the subjective pressures are 
the result of the fact that <i>"property is despotism"</i> (to use Proudhon's 
expression) and are a product of the class struggle. This will be discussed
in <a href="secC7.html#secc71">section C.7.1</a>. The objective pressures are related to how capitalism works
and fall into two processes. The first is the way in which markets do not 
provide enough information to producers avoid disproportionalities within the
market. In other words, that the market regularly produces situations where
there is too much produced for specific markets leading to slumps The second
objective factor is related to the process by which <i>"productive power tends 
more and more to outstrip consumption"</i> (to use Proudhon's words), i.e. 
over-investment or over-accumulation. These are discussed in sections <a href="secC7.html#secc72">C.7.2</a> 
and <a href="secC7.html#secc73">C.7.3</a>, respectively.
</p><p>
Before continuing, we would like to stress here that all three factors 
operate together in a real economy and we have divided them purely to 
help explain the issues involved in each one. The class struggle, market 
"communication" creating disproportionalities and over-investment all 
interact. Due to the needs of the internal (class struggle) and external 
(inter-company) competition, capitalists have to invest in new means of 
production. As workers' power increases during a boom, capitalists innovate 
and invest in order to try and counter it. Similarly, to get market 
advantage (and so increased profits) over their competitors, a company 
invests in new machinery. While this helps increase profits for individual 
companies in the short term, it leads to collective over-investment and 
falling profits in the long term. Moreover, due to lack of effective 
communication within the market caused by the price mechanism firms rush 
to produce more goods and services in specific boom markets, so leading
to over-production and the resulting gluts result in slumps. This 
process is accelerated by the incomplete information provided by the 
interest rate, which results in investment becoming concentrated in 
certain parts of the economy. Relative over-investment can occur, increasing
and compounding any existing tendencies for over-production and so creating the 
possibility of crisis. In addition, the boom encourages new companies and 
foreign competitors to try and get market share, so decreasing the <i>"degree 
of monopoly"</i> in an industry, and so reducing the mark-up and profits of 
big business (which, in turn, can cause an increase in mergers and 
take-overs towards the end of the boom). 
</p><p>
Meanwhile, as unemployment falls workers' power, confidence and willingness 
to stand up for their rights increases, causing profit margins to be eroded
at the point of production. This has the impact of reducing tendencies to 
over-invest as workers resist the introduction of new technology and techniques. 
The higher wages also maintain and even increase demand for the finished goods 
and services produced, allowing firms to realise the potential profits their 
workers have created. Rising wages, therefore, harms the potential for 
<b>producing</b> profits by increasing costs yet it increases the possibility 
for <b>realising</b> profits on the market as firms cannot make profits if 
there is no demand for their goods and their inventories of unsold goods 
pile up. In other words, wages are costs for any specific firm but the wages
other companies pay are a key factor in the demand for what it produces.
This contradictory effect of class struggle matches the contradictory 
effect of investment. Just as investment causes crisis because it is 
useful, the class struggle both hinders over-accumulation of capital and 
maintains aggregate demand (so postponing the crisis) while at the same 
time eroding capitalist power and so profit margins at the point of 
production (so accelerating it). 
</p><p>
And we should note that these factors work in reverse during a slump,
creating the potential for a new boom. In terms of workers, rising 
unemployment empower the capitalists who take advantage of the 
weakened position of their employees to drive through wage cuts or 
increase productivity in order to improve the profitability of their
companies (i.e. increase surplus value). Labour will, usually, accept 
the increased rate of exploitation this implies to remain in work.
This results in wages falling and so, potentially, allows profit 
margins to rise. However, wage cuts result in falling demand for goods 
and services and so, overall, the net effect of cutting wages may be 
an overall <b>drop</b> in demand which would make the slump worse.
There is a contradictory aspect to the objective pressures as well
during a slump. The price mechanism hinders the spread of knowledge 
required for production and investment decisions to be made. While
collectively it makes sense for firms to start producing and investing 
more, individual firms are isolated from each other. Their expectations 
are negative, they expect the slump to continue and so will be unwilling
to start investing again. In the slump, many firms go out of business
so reducing the amount of fixed capital in the economy and so 
over-investment is reduced. As overall investment falls, so the average 
rate of profit in the economy can increase. Yet falling investment means
that firms in that sector of the economy will face stagnant demand and
in the face of an uncertain future will be a drag on other sectors. In 
addition, as firms go under the <i>"degree of monopoly"</i> of each industry 
increases which increases the mark-up and profits of big business yet 
the overall market situation is such that their goods cannot be sold. 
</p><p>
Eventually, however, the slump will end (few anarchists accept the notion
that capitalism will self-destruct due to internal economic processes). 
The increased surplus value production made possible by high unemployment
is enough relative to the (reduced) fixed capital stock to increase the 
rate of profit. This encourages capitalists to start investing again and 
a boom begins (a boom which contains the seeds of its own end). How long 
this process takes cannot be predicted in advance (which is why Keynes
stressed that in the long run we are all dead). It depends on objective 
circumstances, how excessive the preceding boom was, government policy 
and how willing working class people are to pay the costs for the 
capitalist crisis. 
</p><p>
Thus subjective and objective factors interact and counteract with each 
other, but in the end a crisis will result simply because the system is 
based upon wage labour and the producers are not producing for themselves. 
Ultimately, a crisis is caused because capitalism is production for
profit and when the capitalist class does not (collectively) get a 
sufficient rate of profit for whatever reason then a slump is the result. 
If workers produced for themselves, this decisive factor would not be 
an issue as no capitalist class would exist. Until that happens the 
business cycle will continue, driven by "subjective" and "objective"
pressures -- pressures that are related directly to the nature of capitalist
production and the wage labour on which it is based. Which pressure will
predominate in any given period will be dependent on the relative power
of classes. One way to look at it is that slumps can be caused when working
class people are "too strong" or "too weak." The former means that we are
able to reduce the rate of exploitation, squeezing the profit rate by
keeping an increased share of the surplus value we produce. The later
means we are too weak to stop income distribution being shifted in favour
of the capitalist class, which results in over-accumulation and rendering
the economy prone to a failure in aggregate demand. The 1960s and 1970s
are the classic example of what happens when "subjective" pressures 
predominate while the 1920s and 1930s show the "objective" ones at work.
</p><p>
Finally, it must be stressed that this analysis does <b>not</b> imply that 
anarchists think that capitalism will self-destruct. In spite of crises 
being inevitable and occurring frequently, revolution is not. Capitalism 
will only be eliminated by working class revolution, when people see the 
need for social transformation and not imposed on people as the by-product 
of an economic collapse.</p>

<h2><a name="secc71">C.7.1 What role does class struggle play in the business cycle?</a></h2> 

<p>
At its most basic, the class struggle (the resistance to hierarchy in all
its forms) is the main cause of the business cycle. As we argued in sections
<a href="secB1.html#secb12">B.1.2</a> and <a href="secC2.html">C.2</a>, capitalists in order to exploit a worker must first 
oppress them. But where there is oppression, there is resistance; where there 
is authority, there is the will to freedom. Hence capitalism is marked by a 
continuous struggle between worker and boss at the point of production as 
well as struggle outside of the workplace against other forms of hierarchy.
</p><p>
This class struggle reflects a conflict between workers attempts at
liberation and self-empowerment and capital's attempts to turn the 
individual worker into a small cog in a big machine. It reflects the 
attempts of the oppressed to try to live a fully human life, when 
the <i>"worker claims his share in the riches he produces; he claims 
his share in the management of production; and he claims not only 
some additional well-being, but also his full rights in the higher 
enjoyment of science and art."</i> [Peter Kropotkin, <b>Anarchism</b>, pp. 48-49] 
As Errico Malatesta argued: 
</p><p><blockquote><i>
"If [workers] succeed in getting what they demand, they will be better 
off: they will earn more, work fewer hours and will have more time and 
energy to reflect on things that matter to them, and will immediately 
make greater demands and have greater needs . . . [T]here exists no 
natural law (law of wages) which determines what part of a worker's 
labour should go to him [or her] . . . Wages, hours and other 
conditions of employment are the result of the struggle between 
bosses and workers. The former try and give the workers as little 
as possible; the latter try, or should try to work as little, and 
earn as much, as possible. Where workers accept any conditions, or 
even being discontented, do not know how to put up effective resistance 
to the bosses demands, they are soon reduced to bestial conditions of 
life. Where, instead, they have ideas of how human beings should live 
and know how to join forces, and through refusal to work or the latent 
and open threat of rebellion, to win bosses respect, in such cases, 
they are treated in a relatively decent way . . . Through struggle, 
by resistance against the bosses, therefore, workers can, up to a 
certain point, prevent a worsening of their conditions as well as 
obtaining real improvement."</i> [<b>Errico Malatesta: His Life and Ideas</b>, 
pp. 191-2]
</blockquote></p><p>
It is this struggle that determines wages and indirect income such as 
welfare, education grants and so forth. This struggle also influences
the concentration of capital, as capital attempts to use technology to 
get an advantage against their competitors by driving down prices by 
increasing the productivity of labour (i.e., to extract the maximum 
surplus value possible from employees). And, as will be discussed in 
<a href="secD10.html">section D.10</a>, increased capital investment also reflects an attempt to 
increase the control of the worker by capital (or to replace them with
machinery that cannot say "no") <b>plus</b> the transformation of the 
individual into "the mass worker" who can be fired and replaced 
with little or no hassle. For example, Proudhon quotes an <i>"English 
Manufacturer"</i> who states that he invested in machinery precisely to 
replace humans by machines because machines are easier to control:
</p><p><blockquote><i>
"The insubordination of our workforce has given us the idea of dispensing
with them. We have made and stimulated every imaginable effort of the mind
to replace the service of men by tools more docile, and we have achieved
our object. Machinery has delivered capital from the oppression of labour."</i>
[quoted by Proudhon, <b>System of Economical Contradictions</b>, p. 189]
</blockquote></p><p>
(To which Proudhon replied <i>"[w]hat a misfortunate that machinery cannot
also deliver capital from the oppression of consumers!"</i> The over-production
and reductions in demand caused by machinery replacing people soon destroys 
these illusions of automatic production by a slump -- see <a href="secC7.html#secc73">section C.7.3</a>).
</p><p>
Therefore, class struggle influences both wages and capital investment, 
and so the prices of commodities in the market. It also, more importantly, 
determines profit levels and it is the rise and fall of profit levels that 
are the ultimate cause of the business cycle. This is because, under 
capitalism, production's <i>"only aim is to increase the profits of the 
capitalist. And we have, therefore, -- the continuous fluctuations of 
industry, the crisis coming periodically."</i> [Kropotkin, <b>Op. Cit.</b>, p. 55]
</p><p>
A common capitalist myth, derived from neo-classical (and related) ideology, 
is that free-market capitalism will result in a continuous boom. Since the 
cause of slumps is allegedly state interference in the market (particularly
in  credit and money), eliminating such meddling will obviously bring 
reality into line with the textbooks and, consequently, eliminate such
negative features of "actually existing" capitalism as the business cycle. 
Let us assume, for a moment, that this is the case (as will be discussed 
in <a href="secC8.html">section C.8</a>, this is <b>not</b> the case). In the "boom economy" of 
capitalist dreams there will be full employment yet while this helps 
<i>"increase total demand, its fatal characteristic from the business view 
is that it keeps the reserve army of the unemployed low, thereby protecting 
wage levels and strengthening labour's bargaining power."</i> [Edward S. Herman, 
<b>Beyond Hypocrisy</b>, p. 93] This leads to the undermining of full employment
as profit margins are placed under pressure (which explains why bosses have
lead the fight against government full employment policies).
</p><p>
The process should be obvious enough. Full employment results in a situation
where workers are in a very strong position, a strength which can undermine 
the system. This is because capitalism always proceeds along a tightrope. If 
a boom is to continue smoothly, real wages must develop within a certain 
band. If their growth is too low then capitalists will find it difficult 
to sell the products their workers have produced and so, because of this, 
face what is often called a <i>"realisation crisis"</i> (i.e. the fact that 
capitalists cannot make a profit if they cannot sell their products). If 
real wage growth is too high then the conditions for producing profits are 
undermined as labour gets more of the value it produces. This means that
in periods of boom, when unemployment is falling, the conditions for 
realisation improve as demand for consumer goods increase, thus 
expanding markets and encouraging capitalists to invest. However, 
such an increase in investment (and so employment) has an adverse effect 
on the conditions for <b>producing</b> surplus value as labour can assert 
itself at the point of production, increase its resistance to the demands 
of management and, far more importantly, make its own.
</p><p>
If an industry or country experiences high unemployment, workers will put
up with longer hours, stagnating wages, worse conditions and new technology 
in order to remain in work. This allows capital to extract a higher level of 
profit from those workers, which in turn signals other capitalists to invest 
in that area. As investment increases, unemployment falls. As the pool of
available labour runs dry, then wages will rise as employers bid for scare
resources and workers feel their power. As workers are in a better position 
they can go from resisting capital's agenda to proposing their own (e.g. 
demands for higher wages, better working conditions and even for workers' 
control). As workers' power increases, the share of income going to capital
falls, as do profit rates, and capital experiences a profits squeeze and so 
cuts down on investment and employment and/or wages. The cut in investment 
increases unemployment in the capital goods sector of the economy, which in 
turn reduces demand for consumption goods as jobless workers can no longer 
afford to buy as much as before. This process accelerates as bosses fire 
workers or cut their wages and the slump deepens and so unemployment 
increases, which begins the cycle again. This can be called "subjective" 
pressure on profit rates.
</p><p>
This interplay of profits and wages can be seen in most business cycles. 
As an example, let us consider the crisis which ended post-war Keynesianism 
in the early 1970's and paved the way for the neo-liberal reforms of Thatcher 
and Reagan. This crisis, which started in 1973, had its roots in the 1960s boom
and the profits squeeze it produced. If we look at the USA we find that it 
experienced continuous growth between 1961 and 1969 (the longest in its history 
until then). From 1961 onwards, unemployment steadily fell, effectively creating 
full employment. From 1963, the number of strikes and total working time lost 
steadily increased (the number of strikes doubled from 1963 to 1970, with the 
number of wildcat strike rising from 22% of all strikes in 1960 to 36.5% in 
1966). By 1965 both the business profit shares and business profit rates peaked. 
The fall in profit share and rate of profit continued until 1970 (when unemployment 
started to increase), where it rose slightly until the 1973 slump occurred. 
In addition, after 1965, inflation started to accelerate as capitalist firms 
tried to maintain their profit margins by passing cost increases to consumers 
(as we discuss <a href="secC8.html#secc82">section C.8.2</a>, inflation has far more to do with capitalist 
profits than it has with money supply or wages). This helped to reduce real 
wage gains and maintain profitability over the 1968 to 1973 period above what 
it otherwise would have been, which helped postpone, but not stop, a slump.
</p><p>
Looking at the wider picture, we find that for the advanced capital countries
as a whole, the product wage rose steadily between 1962 and 1971 while 
productivity fell. The growth of the product wage (the real cost to the employer 
of hiring workers) exceeded that of productivity growth in the late 1960s, 
slightly after the year in which profit share in national income and the rate 
of profit peaked. From then on, productivity continued to fall while the product 
wage continued to rise. This process, the result of falling unemployment and 
rising workers' power (expressed, in part, by an explosion in the number of 
strikes across Europe and elsewhere), helped to ensure that workers keep an 
increasing share of the value they produced. The actual post-tax real wages and 
productivity in the advanced capitalist countries increased at about the same 
rate from 1960 to 1968 but between 1968 and 1973 the former increased at a
larger rate than the latter (hence the profits squeeze). Moreover, increased 
international competition meant that many domestic companies where limited in 
their responses to the profits squeeze as well as facing a global decrease in
demand for their products. This resulted in profit shares and rates declining 
to around 80% of their previous peak levels across the advanced capitalist 
nations. [Philip Armstrong, Andrew Glyn and John Harrison, <b>Capitalism 
Since 1945</b>, pp. 178-80, pp. 182-4 and pp. 192-3]
</p><p>
It must be stressed that social struggle was not limited to the workplace.
In the 1960s a <i>"series of strong liberation movements emerged among women, 
students and ethnic minorities. A crisis of social institutions was in 
progress, and large social groups were questioning the very foundations 
of the modern, hierarchical society: the patriarchal family, the 
authoritarian school and university, the hierarchical workplace or 
office, the bureaucratic trade union or party."</i> [Takis Fotopoulos, 
<i>"The Nation-state and the Market,"</i> pp. 37-80, <b>Society and Nature</b>, 
Vol. 2, No. 2, p. 58] In stark contrast to the predictions of the right,
state intervention within capitalism to maintain full employment and 
provide social services like health care had <b>not</b> resulted in a <i>"Road
to Serfdom."</i> The opposite occurred, with previously marginalised sectors
of the population resisting their oppression and exploitation by questioning
authority in more and more areas of life -- including, it must be stressed,
within our own organisations as well (for example, the rank and file of 
trade unions had to rebel just as much against their own officials as they
had against the bureaucracy of the capitalist firm).
</p><p>
These social struggles resulted in an economic crisis as capital could no 
longer oppress and exploit working class people sufficiently in order 
to maintain a suitable profit rate. This crisis was then used to discipline 
the working class and restore capitalist authority within and outside the
workplace (see <a href="secC8.html#secc82">section C.8.2</a>). We should also note that this process of 
social revolt in spite, or perhaps because of, the increase of material 
wealth was predicted by Malatesta. In 1922 he argued that:
</p><p><blockquote><i>
"The fundamental error of the reformists is that of dreaming of solidarity, 
a sincere collaboration, between masters and servants, between proprietors
and workers . . . 
</p><p>
"Those who envisage a society of well stuffed pigs which waddle contentedly
under the ferule of a small number of swineherd; who do not take into account
the need for freedom and the sentiment of human dignity . . . can also imagine
and aspire to a technical organisation of production which assures abundance
for all and at the same time materially advantageous both to bosses and the
workers. But in reality 'social peace' based on abundance for all will remain
a dream, so long as society is divided into antagonistic classes, that is 
employers and employees. And there will be neither peace nor abundance.
</p><p>
"The antagonism is spiritual rather than material. There will never be a 
sincere understanding between bosses and workers for the better exploitation 
[sic!] of the forces of nature in the interests of mankind, because the 
bosses above all want to remain bosses and secure always more power at 
the expense of the workers, as well as by competition with other bosses, 
whereas the workers have had their fill of bosses and don't want more!"</i> 
[<b>Op. Cit.</b>, pp. 78-79]
</blockquote></p><p>
The experience of the post-war compromise and social democratic reform 
shows that, ultimately, the social question is not poverty but 
rather freedom. However, to return to the impact of class struggle on 
capitalism.
</p><p>
It is the awareness that full employment is bad for business which is the
basis of the so-called <i>"Non-Accelerating Inflation Rate of Unemployment"</i> 
(NAIRU). As we will discuss in more detail in <a href="secC9.html">section C.9</a>, the NAIRU is 
the rate of unemployment for an economy under which inflation, it is 
claimed, starts to accelerate. While the basis of this "theory" is slim 
(the NAIRU is an invisible, mobile rate and so the "theory" can explain 
every historical event simply because you can prove anything when your 
datum cannot be seen by mere mortals) it is very useful for justifying 
policies which aim at attacking working people, their organisations 
and their activities. The NAIRU is concerned with a <i>"wage-price"</i> 
spiral caused by falling unemployment and rising workers' rights 
and power. Of course, you never hear of an <i>"interest-price"</i> spiral 
or a <i>"rent-price"</i> spiral or a <i>"profits-price"</i> spiral even though 
these are also part of any price. It is always a <i>"wage-price"</i> spiral, 
simply because interest, rent and profits are income to capital and 
so, by definition, above reproach. By accepting the logic of NAIRU, the
capitalist system implicitly acknowledges that it and full employment 
are incompatible and so with it any claim that it allocates resources
efficiently or labour contracts benefit both parties equally.
</p><p>
For these reasons, anarchists argue that a continual "boom" economy is an 
impossibility simply because capitalism is driven by profit considerations, 
which, combined with the subjective pressure on profits due to the class 
struggle between workers and capitalists, <b>necessarily</b> produces a continuous
boom-and-bust cycle. When it boils down to it, this is unsurprising, as
<i>"industry is directed, and will have to be directed, not towards what is
needed to satisfy the needs of all, but towards that which, at a given
moment, brings in the greatest temporary profit to a few. Of necessity, 
the abundance of some will be based upon the poverty of others, and the 
straitened circumstances of the greater number will have to be maintained 
at all costs, that there may be hands to sell themselves for a part only 
of that which they are capable of producing, without which private 
accumulation of capital is impossible!"</i> [Kropotkin, <b>Op. Cit.</b>, p. 128]
</p><p>
Of course, when such "subjective" pressures are felt on the system, when
private accumulation of capital is threatened by improved circumstances
for the many, the ruling class denounces working class "greed" and
"selfishness." When this occurs we should remember what Adam Smith 
had to say on this subject: 
</p><p><blockquote><i>
"In reality high profits tend much more to raise the price of work than high
wages . . . That part of the price of the commodity that resolved itself into
wages would . . . rise only in arithmetical proportion to the rise in wages. But
if profits of all the different employers of those working people should be
raised five per cent., that price of the commodity which resolved itself into
profit would . . . rise in geometrical proportion to this rise in profit . . . 
Our merchants and master manufacturers complain of the bad effects of
high wages in raising the price and thereby lessening the sale of their
goods at home and abroad. They say nothing concerning the bad effects 
of high profits. They are silent with regard to the pernicious effects of
their own gains. They complain only of those of other people."</i> [<b>The 
Wealth of Nations</b>, pp. 87-88]
</p><p></blockquote>
As an aside, we must note that these days we would have to add 
economists to Smith's <i>"merchants and master manufacturers."</i> Not 
that this is surprising, given that economic theory has progressed 
(or degenerated) from Smith's disinterested analysis into apologetics 
for any action of the boss (a classic example, we must add, of supply 
and demand, with the marketplace of ideas responding to a demand for 
such work from <i>"our merchants and master manufacturers"</i>). Any "theory" 
which blames capitalism's problems on "greedy" workers will always be 
favoured over one that correctly places them in the contradictions 
created by wage slavery. Ultimately, capitalist economics blame every 
problem of capitalism on the working class refusing to kow-tow to the 
bosses (for example, unemployment is caused by wages being too high 
rather than bosses needing unemployment to maintain their power and 
profits -- see <a href="secC9.html#secc92">section C.9.2</a> on empirical 
evidence that indicates that the first explanation is wrong).
</p><p>
Before concluding, one last point. While it may appear that our analysis
of the "subjective" pressures on capitalism is similar to that of mainstream
economics, this is not the case. This s because our analysis recognises
that such pressures are inherent in the system, have contradictory effects
(and so cannot be easily solved without making things worse before they get 
better) and hold the potential for creating a free society. Our analysis 
recognises that workers' power and resistance <b>is</b> bad for capitalism (as 
for any hierarchical system), but it also indicates that there is nothing 
capitalism can do about it without creating authoritarian regimes (such as 
Nazi Germany) or by generating massive amounts of unemployment (as was the 
case in the early 1980s in both the USA and the UK, when right-wing 
governments mismanaged the economy into deep recessions) and even this 
is no guarantee of eliminating working class struggle as can be seen, for 
example, from 1930s America. 
</p><p>
This means that our analysis shows the limitations and contradictions 
of the system as well as its need for workers to be in a weak bargaining 
position in order for it to "work" (which explodes the myth that capitalism 
is a free society). Moreover, rather than portray working people as victims 
of the system (as is the case in many Marxist analyses of capitalism) our
analysis recognises that we, both individually and collectively, have the 
power to influence and <b>change</b> that system by our activity. We should
be proud of the fact that working people refuse to negate themselves or
submit their interests to that of others or play the role of order-takers 
required by the system. Such expressions of the human spirit, of the
struggle of freedom against authority, should not be ignored or 
down-played, rather they should be celebrated. That the struggle 
against authority causes the system so much trouble is not an argument 
against social struggle, it is an argument against a system based on 
hierarchy, oppression, exploitation and the denial of freedom.
</p><p>
To sum up, in many ways, social struggle is the inner dynamic of the 
system, and its most basic contradiction: while capitalism tries to turn 
the majority of people into commodities (namely, bearers of labour power), 
it also has to deal with the human responses to this process of objectification
(namely, the class struggle). However, it does not follow that cutting wages
will solve a crisis -- far from it, for, as we argue in <a href="secC9.html#secc91">section C.9.1</a>, cutting 
wages will deepen any crisis, making things worse before they get better. 
Nor does it follow that, if social struggle were eliminated, capitalism would 
work fine. After all, if we assume that labour power is a commodity like any 
other, its price will rise as demand increases relative to supply (which will 
either produce inflation or a profits squeeze, probably both). Therefore, 
even without the social struggle which accompanies the fact that labour power 
cannot be separated from the individuals who sell it, capitalism would still 
be faced with the fact that only surplus labour (unemployment) ensures the 
creation of adequate amounts of surplus value.
</p><p>
Moreover, even assuming that individuals can be totally happy in a capitalist 
economy, willing to sell their freedom and creativity for a little more money, 
putting up, unquestioningly, with every demand and whim of their bosses (and 
so negating their own personality and individuality in the process), capitalism 
does have "objective" pressures limiting its development. So while social 
struggle, as argued above, can have a decisive effect on the health of the 
capitalist economy, it is not the only problem the system faces. This is 
because there are objective pressures within the system beyond and above 
the authoritarian social relations it produces and the resistance to them. 
These pressures are discussed next, in sections <a href="secC7.html#secc72">C.7.2</a> 
and <a href="secC7.html#secc73">C.7.3</a>.
</p>

<h2><a name="secc72">C.7.2 What role does the market play in the business cycle?</a></h2>

<p>
A major problem with capitalism is the working of the capitalist market
itself. For the supporters of "free market" capitalism, the market
provides all the necessary information required to make investment and
production decisions. This means that a rise or fall in the price of a
commodity acts as a signal to everyone in the market, who then respond to
that signal. These responses will be co-ordinated by the market, resulting
in a healthy economy. 
</p><p>
This perspective is expressed well by right-liberal, Frederick von Hayek
in his <i>"The Uses of Knowledge in Society"</i> (reprinted in <b>Individualism and 
Economic Order</b>). Using the example of the tin market, he defends capitalism
against central planning on its ability to handle the division of knowledge
within society and its dynamic use of this dispersed knowledge when demand 
or supply changes. <i>"Assume,"</i> he argues, <i>"that somewhere in the world a 
new opportunity for the use of some raw material, say tin, has arisen, or 
that one of the sources of supply of tin has been eliminated. It does not 
matter for our purpose and it is very significant that it does not matter 
which of these two causes has made tin more scarce. All that the users of 
tin need to know is that some of the tin they used to consume is now more 
profitably employed elsewhere, and that in consequence they must economise 
tin. There is no need for the great majority of them even to know where the 
more urgent need has arisen, or in favour of what other uses they ought to 
husband the supply."</i> The subsequent rise in its price will result in reduced 
consumption as many users will economise on its use and so the information
that tin has become (relatively) scarcer spreads throughout the economy and 
influences not only tin users, but also its substitutes and the substitutes 
of these substitutes and so on. This will move the economy towards equilibrium 
without the people informed knowing anything about the original causes for 
these changes. <i>"The whole acts as one market, not because any of its members 
survey the whole field, but because their limited individual fields of vision 
sufficiently overlap so that through many intermediaries the relevant 
information is communicated to all."</i> (<i>"The use of knowledge in 
society,"</i> pp. 519-30, <b>American Economic Review</b>, Vol. 35, No. 4, , p. 526) 
</p><p>
While it can be granted that this account of the market is not without
foundation, it is also clear that the price mechanism does not communicate
all the relevant information needed by companies or individuals. This
means that capitalism does not work in the way suggested in the economic
textbooks. It is the workings of the price mechanism itself which leads to
booms and slumps in economic activity and the resulting human and social
costs they entail. This can be seen if we investigate the actual
processes hidden behind the workings of the price mechanism. 
</p><p>
The key problem with Hayek's account is that he does not discuss the
<b>collective</b> results of the individual decisions he highlights. It is
true that faced with a rise in the price of tin, individual firms will
cut back on its use. Yet there is no reason to suppose that the net 
result of these actions will bring the demand and supply of tin back
to equilibrium. In fact, it is just as likely that the reduction in
demand for tin is such that its producers face falling sales and so
cut back production even more. Similarly, a rising demand for tin could
easily result in all tin producers increasing supply so much as to
produce a glut on the market. Proudhon described this process well 
in the 1840s:
</p><p><blockquote><i>
"A peasant who has harvested twenty sacks of wheat, which he with his 
family proposes to consume, deems himself twice as rich as if he had 
harvested only ten; likewise a housewife who has spun fifty yards of 
linen believes that she is twice as rich as if she had spun but 
twenty-five. Relatively to the household, both are right; looked at 
in their external relations, they may be utterly mistaken. If the 
crop of wheat is double throughout the whole country, twenty sacks 
will sell for less than ten would have sold for if it had been but 
half as great; so, under similar circumstances, fifty yards of linen 
will be worth less than twenty-five: so that value decreases as the 
production of utility increases, and a producer may arrive at poverty 
by continually enriching himself."</i> [<b>The System of Economical
Contradictions</b>, pp. 77-78]
</blockquote></p><p>
He argued that this occurred due to the <i>"contradiction"</i> of  <i>"the double 
character of value"</i> (i.e. between value in use and value in exchange). 
[<b>Op. Cit.</b>, p. 78] 
</p><p>
As John O'Neill argues (basing himself on Marx rather than Proudhon),
when producers <i>"make plans concerning future production, they are 
planning not with respect of demand at the present moment . . . but
with respect to expected demand at some future moment . . . when their
products reach the market."</i> The price mechanism provides information 
that indicates the relationship between supply and demand <b>now</b> and
while this information <b>is</b> relevant to producers plans, it is not 
<b>all</b> the information that is relevant or is required by those involved.  
It cannot provide information which will allow producers to predict 
demand later. <i>"A major component of the information required for
such a prediction is that of the plans of other producers which 
respond to that demand. This is information that the market, as a
competitive system, fails to distribute."</i> It is this <i>"informational
restriction"</i> which is one of the sources of why there is a business
cycle. This is because each producer <i>"responds to the same signal 
the change in price. However, each agent acts independently of the
response of other producers and consumers."</i> The result is 
<i>"an overproduction of goods in relation to effective demand for
them. Goods cannot be sold. There is a realisation crisis: producers
cannot realise the value of their products. Given this overproduction,
demand falls against supply. There is a slump. This eventually leads
to a rise in demand against supply, production expends leading to
another boom, and so on."</i> [<b>The Market</b>, pp. 134-5]
</p><p>
This information cannot be supplied due to competition. Simply 
put, if A and B are in competition, if A informs B of her activities and B 
does not reciprocate, then B is in a position to compete more effectively 
than A. Hence communication within the market is discouraged and each
production unit is isolated from the rest. In other words, each person or
company responds to the same signal (the change in price) but each acts
independently of the response of other producers and consumers. The result
is often a slump in the market, causing unemployment and economic disruption. 
Thus the market <i>"blocks the communication of information and fails to
co-ordinate plans for economic action."</i> [<b>Op. Cit.</b>, p. 137]
</p><p>
This, it should be noted, is not a problem of people making a series of
unrelated mistakes. <i>"Rather, it is that the market imparts the same
information to affected agents, and this information is such that the 
rational strategy for all agents is to expand production or contract
consumption, while it is not rational for all agents to act in this 
manner collectively."</i> In other words, the information the market provides
is not sufficient for rational decision making and naturally results in 
disproportionalities in the market. Thus the price mechanism actively
encourages <i>"the suppression of the mutual exchange of information 
concerning planned responses"</i> to current prices and this <i>"leads to
over production."</i> So it is <b>not</b> a question of inaccurate prediction 
(although given that the future is unknowable and unpredictable this 
is a factor). Instead, it is <i>"one of individually rational responses 
to the same signal resulting in collectively irrational responses."</i> 
[<b>Op. Cit.</b>, p. 135 and p. 197]
</p><p>
This means that prices in themselves do not provide adequate knowledge 
for rational decision making as they are not at their long-run equilibrium 
levels. This causes a problem for Hayek's account of the market process 
as he stresses that actual prices never are at this (purely theoretical) 
price. As we discuss in <a href="secC8.html">section C.8</a>, Hayek's own theory of the business 
cycle shows the negative impact which the 'misinformation' conveyed by 
disequilibrium prices can cause on the economy. In that analysis, the 
disequilibrium price that leads to very substantial macroeconomic 
distortions is the rate of interest but, obviously, the same argument 
applies for commodity prices as well. This means that the market process, 
based on the reactions of profit-maximising firms to the same (unsustainable) 
prices for a commodity can generating mal-investment and subsequent market 
distributions on a wide level. Simply put, the price mechanism may carry 
information regarding the terms on which various commodities may currently be 
exchanged but it does not follow that a knowledge of these exchange ratios 
enable agents to calculate the future profitability of their production 
decisions (social usefulness is, of course, of no concern).
</p><p>
It is this irrationality and lack of information which feed into the
business cycle. <i>"These local booms and slumps in production . . . are 
then amplified into general crises precisely through the interconnections 
in the market that Hayek highlights in his example of the production and 
consumption of tin."</i> [O'Neill, <b>Op. Cit.</b>, p. 136] The negative effects of
over-production in one market will be passed on to those which supply 
it with goods in the shape of decreased demand. These firms will now 
experience relative over-production which, in turn, will affect their
suppliers. Whatever benefits may accrue to consumers of these goods 
in the shape of lower prices will be reduced as demand for their products
drops as more and more workers are made unemployed or their wages are
cut (which means that <b>real</b> wages remain constant as prices are falling
alongside money wages -- see <a href="secC9.html#secc91">section C.9.1</a> for details). Firms will also
seek to hoard money, leading to yet more falling demand for goods and so
unemployed labour is joined by under-utilisation of capacity.
</p><p>
Which brings us to the issue of money and its role in the business cycle. 
"Free market" capitalist economics is based on Say's Law. This is the 
notion that supply creates its own demand and so general gluts of goods 
and mass unemployment are impossible. As we noted in <a href="secC1.html#secc15">section C.1.5</a>, this 
vision of economic activity is only suited to precapitalist economies
or ones without money for money is considered as nothing more than an aid 
to barter, a medium of exchange only. It ignores the fact that money is a 
store of value and, as such, can be held onto precisely for that reason. 
This means that Say's Law is invalid as its unity between sale and purchase 
can be disturbed so causing the chain of contractual relationships to be 
broken. Simply put, someone who sells a product need not spend their 
income on another product at the same time. Unlike barter, the sale of 
one commodity is an act distinct from the purchase of another. Money, 
in other words, <i>"brings in time"</i> into the market process and <i>"the 
possibility of hoarding."</i> Time <i>"because a good is usually sold some 
time after it is made, running the risk that its sale price could fall 
below the cost of production, wiping out the capitalist's expected 
profit."</i> Hoarding <i>"because income need not be spent but may merely be 
kept idle."</i> [Doug Henwood, <b>Wall Street</b>, p. 232]
</p><p>
This means that over-production becomes possible and bankruptcies and 
unemployment can become widespread and so a slump can start. <i>"As any 
Marxian or Keynesian crisis theorist can tell you,"</i> Henwood summarises, 
<i>"the separation of purchase and sale is one of the great flashpoints of 
capitalism; an expected sale that goes unmade can drive a capitalist 
under, and can unravel a chain of financial commitments. Multiply that 
by a thousand or two and you have great potential mischief."</i> Thus <i>"the 
presence of money as a store of value, the possibility of keeping wealth 
in financial form rather than spending it promptly on commodities, always 
introduces the possibility of crisis."</i> That is, the possibility <i>"of an 
excess of capital lacking a profitable investment outlet, and an excess 
of goods that couldn't be sold profitably on the open market."</i> [<b>Op. Cit.</b>, 
pp. 93-4 and p. 94] 
</p><p>
So when the market prices of goods fall far below their cost prices
then production and investment stagnate. This is because profits can
only be transformed into capital at a loss and so it lies idle in 
banks. Thus unemployed labour is associated with unemployed capital,
i.e. excess money. This desire for capitalists to increase their
demand for storing their wealth in money rather than investing it is 
driven by the rate of profit in the economy. Bad times result in 
increased hoarding and so a general fall in aggregate demand. Lowering 
interest rates will not provoke a demand for such money hoards, as 
claimed in "free market" capitalist theory, as few capitalists will 
seek to invest in a recession as expected profits will be lower than 
the interest rate. 
</p><p>
However, it should be stressed that disproportionalities of production
between industries and the separation of production and sale do not 
<b>per se</b> result in a general crisis. If that were the case the capitalism 
would be in a constant state of crisis as markets are rarely in a state of 
equilibrium and sales do not instantly result in purchases. This means that 
market dislocations need not automatically produce a general crisis in the 
economy as the problems associated with localised slumps can be handled 
when the overall conditions within an economy are good. It simply provides 
the <b>potential</b> for crisis and a means of transmitting and generalising 
local slumps when the overall economic situation is weak. In other words, 
it is an accumulative process in which small changes can build up on each 
other until the pressures they exert become unstoppable. The key thing to 
remember is that capitalism is an inherently dynamic system which consists 
of different aspects which develop unevenly (i.e., disproportionately). 
Production, credit, finance markets, circulation of money and goods, 
investment, wages, profits as well as specific markets get out of step. 
An economic crisis occurs when this process gets too far out of line.
</p><p>
This process also applies to investment as well. So far, we have assumed 
that firms adjust to price changes without seeking new investment. This
is, of course, unlikely to always be the case. As we discuss in <a href="secC8.html">section C.8</a>, 
this analysis of the market providing incomplete information also applies to the 
market for credit and other forms of external financing. This results in a 
situation where the problems associated with over-production can be amplified 
by over-investment. This means that the problems associated with markets 
creating disproportionalities are combined with the problems resulting from 
increased productivity and capital investment which are discussed in the 
<a href="secC7.html#secc73">next section</a>.
</p>

<h2><a name="secc73">C.7.3 What role does investment play in the business cycle?</a></h2>

Other problems for capitalism arise due to the increases in productivity which
occur as a result of capital investment or new working practices which aim
to increase short term profits for the company. The need to maximise 
profits results in more and more investment in order to improve the 
productivity of the workforce (i.e. to increase the amount of surplus
value produced). A rise in productivity, however, means that whatever 
profit is produced is spread over an increasing number of commodities. 
This profit still needs to be realised on the market but this may prove
difficult as capitalists produce not for existing markets but for expected 
ones. As individual firms cannot predict what their competitors will do, it 
is rational for them to try to maximise their market share by increasing 
production (by increasing investment). As the market does not provide the 
necessary information to co-ordinate their actions, this leads to supply 
exceeding demand and difficulties realising sufficient profits. In other 
words, a period of over-production occurs due to the over-accumulation of 
capital.
</p><p>
Due to the increased investment in the means of production, variable capital 
(labour) uses a larger and larger constant capital (the means of production). 
As labour is the source of surplus value, this means that in the short term 
profits may be increased by the new investment, i.e. workers must produce
more, in relative terms, than before so reducing a firms production costs
for the commodities or services it produces. This allows increased profits 
to be realised at the current market price (which reflects the old costs of 
production). Exploitation of labour must increase in order for the return 
on total (i.e. constant <b>and</b> variable) capital to increase or, at worse, 
remain constant. However, while this is rational for one company, it is not 
rational when all firms do it (which they must in order to remain in business). 
As investment increases, the surplus value workers have to produce must 
increase faster. As long as the rate of exploitation produced by the new 
investments is high enough to counteract the increase in constant capital 
and keep the profit rate from falling, then the boom will continue. If,
however, the mass of possible profits in the economy is too small 
compared to the total capital invested (both in means of production,
fixed, and labour, variable) then the possibility exists for a general fall 
in the rate of profit (the ratio of profit to investment in capital and 
labour). Unless exploitation increases sufficiently, already produced 
surplus value earmarked for the expansion of capital may not be realised
on the market (i.e. goods may not be sold). If this happens, then the 
surplus value will remain in its money form, thus failing to act as 
capital. In other words, accumulation will grind to a halt and a slump 
will start.
</p><p>
When this happens, over-investment has occurred. No new investments are made, 
goods cannot be sold resulting in a general reduction of production and so 
increased unemployment as companies fire workers or go out of business. 
This removes more and more constant capital from the economy, increasing 
unemployment which forces those with jobs to work harder, for longer 
so allowing the mass of profits produced to be increased, resulting 
(eventually) in an increase in the rate of profit. Once profit rates 
are high enough, capitalists have the incentive to make new investments 
and slump turns to boom. As we discuss in <a href="secC8.html">section C.8</a>, the notion that 
investment will be helped by lowing interest rates in a slump fails to
understand that <i>"the rate of investment decisions is an increasing function
of the difference between the prospective rate of profit and the rate of 
interest."</i> [Michal Kalecki, quoted by Malcolm Sawyer, <b>The Economics of
Michal Kalecki</b>, p. 98] If profit rates are depressed due to over-investment
then even the lowest interest rates will have little effect. In other words, 
expectations of capitalists and investors are a key issue and these are
shaped by the general state of the economy.
</p><p>
It could be argued that such an analysis is flawed as no company would
invest in machinery if it would reduce its rate of profit. But such an 
objection is flawed, simply because (as we noted) such investment is
perfectly sensible (indeed, a necessity) for a specific firm. By investing
they gain (potentially) an edge in the market and so increased profits 
for a period. This forces their competitors to act likewise and <b>they</b>
invest in new technology. Unfortunately, while this is individually 
sensible, collectively it is not as the net result of these individual 
acts is over-investment in the economy as a whole. Moreover, unlike the 
model of perfect competition, in a real economy capitalists have no way 
of knowing the future, and so the results of their own actions never mind 
the actions of their competitors. Thus over-accumulation of capital is 
the natural result of competition simply because even if we assume that
the bosses of the firms are individually rational they are driven to make
decisions which are collectively irrational to remain in business. 
The future is unknowable and so the capitalist has no idea what the net
result of their decisions will be nor the state of the economy when their
investment decisions are finally active. Both of these factors ensure that 
firms act as they do, investing in machinery which, in the end, will result 
in a crisis of over-accumulation.
</p><p>
The logic is simple and is rooted in the concept of <i>"the fallacy of 
composition."</i> To use an analogy, if you attend a rock concert and take 
a box to stand on then you will get a better view. If others do the 
same, you will be in exactly the same position as before. Worse, even, 
as it may be easier to loose your balance and come crashing down in a 
heap (and, perhaps, bringing others with you). This analogy shows why 
introducing new machinery, which is profitable for an individual company, 
has such a potentially negative effect on the economy as a whole. While 
it is profitable for an individual company in the short term, its overall 
effect means that it is <b>not</b> profitable for all in the long run. As
Kalecki put it, the <i>"tragedy of investment is that it causes crisis 
because it is useful. Doubtless many people will consider this theory
paradoxical. But it is not the theory which is paradoxical, but its 
subject -- the capitalist economy."</i> [quoted by Sawyer <b>Op. Cit.</b>, p. 156]
This paradox applies to the issue of wages as well:
</p><p><blockquote><i>
"What a system is that which leads a business man to think with delight 
that society will soon be able to dispense with men! <b>Machinery has 
delivered capital from the oppression of labour</b>! . . . Fool! though the 
workmen cost you something, they are your customers: what will you do 
with your products, when, driven away by you, they shall consume them 
no longer? Thus machinery, after crushing the workmen, is not slow in 
dealing employers a counter-blow; for, if production excludes consumption, 
it is soon obliged to stop itself. 
</p><p>
[. . .]
</p><p>
"These failures were caused by over-production, -- that is, by an 
inadequate market, or the distress of the people. What a pity that 
machinery cannot also deliver capital from the oppression of consumers! 
What a misfortune that machines do not buy the fabrics which they weave! 
The ideal society will be reached when commerce, agriculture, and 
manufactures can proceed without a man upon earth!"</i> [Proudhon, <b>System 
of Economical Contradictions</b>, pp. 189-90]
</blockquote></p><p>
So, if the profit rate falls to a level that does not allow capital formation
to continue, a slump sets in. This general slump means that the rate of profit 
over the whole economy falls due to excessive investment. When one industry 
over-invests and over-produces, it cuts back production, introduces cost-cutting 
measures, fires workers and so on in order to try and realise more profits. These
may spread if the overall economic is fragile as the reduced demand for industries 
that supplied the affected industry impacts on the <b>general</b> demand (via a fall
in inputs as well as rising unemployment). The related industries now face 
over-production themselves and the natural response to the information supplied 
by the market is for individual companies to reduce production, fire workers, 
etc., which again leads to declining demand. This makes it even harder to 
realise profit on the market and leads to more cost cutting, deepening the 
crisis. While individually this is rational, collectively it is not and so 
soon all industries face the same problem. A local slump is propagated 
through the economy.
</p><p>
Cycles of prosperity, followed by over-production and then depression 
are the natural result of capitalism. Over-production is the result of 
over-accumulation, and over-accumulation occurs because of the need to 
maximise short-term profits in order to stay in business. So while the 
crisis appears as a glut of commodities on the market, as there are 
more commodities in circulation that can be purchased by the aggregate 
demand (<i>"Property sells products to the labourer for more than it pays
him for them,"</i> to use Proudhon's words), its roots are deeper. It lies 
in the nature of capitalist production itself. 
</p><p>
"Over-production," we should point out, exists only from the viewpoint of 
capital, <b>not</b> of the working class: 
</p><p><blockquote><i>
"What economists call over-production is but a production that is above
the purchasing power of the worker. . . this sort of over-production 
remains fatally characteristic of the present capitalist production,
because workers cannot buy with their salaries what they have produced
and at the same time copiously nourish the swarm of idlers who live
upon their work."</i> [Kropotkin, <b>Op. Cit.</b>, pp. 127-128]
</p><p></blockquote>
In other words, over-production and under-consumption reciprocally imply
each other. There is no over production except in regard to a given level
of solvent demand. There is no deficiency in demand except in relation to
a given level of production. The goods "over-produced" may be required 
by consumers, but the market price is too low to generate a profit and so 
existing goods must be destroyed and production must be reduced in order 
to artificially increase it. So, for example, the sight of food and other
products being destroyed while people are in need of them is a common one 
in depression years.
</p><p>
So, while the crisis appears on the market as a <i>"commodity glut"</i> (i.e. as a
reduction in effective demand) and is propagated through the economy by the 
price mechanism, its roots lie in production. Until such time as profit levels 
stabilise at an acceptable level, thus allowing renewed capital expansion, the 
slump will continue. The social costs of the wage cutting this requires is yet 
another "externality," to be bothered with only if they threaten capitalist 
power and wealth. 
</p><p>
There are means, of course, by which capitalism can postpone (but not stop) 
a general crisis developing. The extension of credit by banks to both 
investors and consumers is the traditional, and most common, way. Imperialism, 
by which markets are increased and profits are extracted from less developed 
countries and used to boost the imperialist countries profits, is another method 
(<i>"The workman being unable to purchase with their wages the riches they are 
producing, industry must search for markets elsewhere."</i> [Kropotkin, <b>Op. Cit.</b>, 
p. 55]). Another is state intervention in the economy (such as minimum wages, 
the incorporation of trades unions into the system, arms production, manipulating 
interest rates to maintain a <i>"natural"</i> rate of unemployment to keep workers on 
their toes, etc.). Another is state spending to increase aggregate demand, which
can increase consumption and so lessen the dangers of over-production. However, 
these have (objective and subjective) limits and can never succeed in stopping 
depressions from occurring as they ultimately flow from capitalist production 
and the need to make profits.
</p><p>
A classic example of these "objective" pressures on capitalism is the 
"Roaring Twenties" that preceded the Great Depression of the 1930s. After
the 1921 slump, there was a rapid rise in investment in the USA with 
investment nearly doubling between 1919 and 1927. Because of this investment 
in capital equipment, manufacturing production grew by 8.0% per annum between 
1919 and 1929 and labour productivity grew by an annual rate of 5.6% (this is 
including the slump of 1921-22). With costs falling and prices comparatively 
stable, profits increased which in turn lead to high levels of capital investment 
(the production of capital goods increased at an average annual 
rate of 6.4%). [William Lazonick, <b>Competitive Advantage on the Shop Floor</b>, 
p. 241] The optimism felt by business as a result of higher profits was 
reflected in the wealthy sections of America. In the 1920s 
prosperity was concentrated at the top. One-tenth of the top 1% of families 
received as much income as the bottom 42% and only 2.3% of the population 
enjoyed incomes over $100,00 (60% of families made less than $2,000 a year, 
42% less than $1,000). While the richest 1% owned 40% of the nation's wealth 
by 1929 (and the number of people claiming half-million dollar incomes rose 
from 156 in 1920 to 1,489 in 1929) the bottom 93% of the population 
experienced a 4% drop in real disposable per-capita income between 1923 and 
1929. However, in spite (or, perhaps, because) of this, US capitalism was 
booming and belief in capitalism was at its peak. 
</p><p>
But by 1929 all this had changed with the stock market crash -- followed by a 
deep depression. What was its cause? Given our analysis presented in 
<a href="secC7.html#secc71">section C.7.1</a>, it may have been expected to have been caused by the "boom" decreasing 
unemployment, so increased working class power and leading to a profits squeeze
but this was not the case. This slump was <b>not</b> the result of working class 
resistance, indeed the 1920s were marked by a labour market which was 
continuously favourable to employers. This was for two reasons. Firstly, the 
"Palmer Raids" at the end of the 1910s saw the state root out radicals in the 
US labour movement and wider society. Secondly, the deep depression of 1920-21 
(during which national unemployment rates averaged over 9%, the highest level 
over any two-year period since the 1890s) changed the labour market from a 
seller's to a buyer's market. This allowed the bosses to apply what 
became to be known as <i>"the American Plan,"</i> namely firing workers who belonged
to a union and forcing them to sign <i>"yellow-dog"</i> contracts (promises not to
join a union) to gain or keep their jobs. Reinforcing this was the use of 
legal injunctions by employers against work protests and the use of industrial 
spies to identify and sack union members. This class war from above made labour 
weak, which is reflected in the influence and size of unions falling across the 
country. As union membership declined, the 
number of strilkes reached their lowest level since the early 1880s, falling to 
just over 700 per year between 1927 to 1930 (compared to 3,500 per year between 
1916 and 1921). [Lazonick, <b>Op. Cit.</b>, pp. 249-251] The key thing to remember 
is that the impact of unemployment is not limited to the current year's figures. 
High unemployment rates have a sustained impact on the organisations, morale, 
and bargaining power of workers even if unemployment rates fall afterwards. This 
was the situation in the 1920s, with workers remembering the two years of record 
unemployment rates of 1921 and 1922 (in fact, the unemployment rate for 
manufacturing workers was close to the overall rate in 1933). 
</p><p>
During the post-1922 boom, this position did not change. The national 3.3%
unemployment rate hid the fact that non-farm unemployment averaged 5.5%
between 1923 and 1929. Across all industries, the growth of manufacturing
output did not increase the demand for labour. Between 1919 and 1929, 
employment of production workers fell by 1% and non-production employment
fell by about 6% (during the 1923 to 29 boom, production employment
only increased by 2%, and non-production employment remained constant). 
This was due to the introduction of labour saving machinery and the rise 
in the capital stock. In addition, the numbers seeking work were boosted 
by new immigrants and the unwillingness of existing ones to return home
due to difficulties returning to America. Lastly, the greatest source of 
industrial labour supply came from the American farm -- there was a 
flood of rural workers into the urban labour market over the 1920s.
[Lazonick, <b>Op. Cit.</b>, pp. 252-5] It is interesting to note that even 
<b>with</b> a labour market favourable to employers for over 5 years, 
unemployment was still high. This suggests that the neo-classical 
"argument" (assertion would be more correct) that unemployment within 
capitalism is caused by strong unions or high real wages is somewhat 
flawed to say the least (see <a href="secC9.html">section C.9</a>).
</p><p>
Facing high unemployment, workers' quit rates fell due to fear of loosing
jobs (particularly those workers with relatively higher wages). This, 
combined with the steady decline of the unions and the very low number 
of strikes, indicates that labour was weak. This is reflected in the share 
of total manufacturing income going to wages fell from 57.5% in 1923-24 to 
52.6% in 1928/29 (between 1920 and 1929, it fell by 5.7%). Productivity
increased from an annual rate of 1.2% between 1909 and 1919 to 5.6% between
1919 and 1929. This increase in productivity was reflected in the fact 
that over the post-1922 boom, the share of manufacturing income paid 
in salaries rose from 17% to 18.3% and the share to capital rose from 
25.5% to 29.1%. Managerial salaries rose by 21.9% and firm surplus by 
62.6% between 1920 and 1929. [Lazonick, <b>Op. Cit.</b>, pp. 241-2] Any notion 
that the 1929 crash was the result of a rebellious working class is not 
applicable.
</p><p>
The key to understanding what happened lies in the contradictory nature of
capitalist production. The "boom" conditions were the result of capital
investment, which increased productivity thereby reducing costs and
increasing profits. The large and increasing investment in capital goods 
was the principal device by which profits were spent. In addition, those 
sectors of the economy marked by big business (i.e. oligopoly, a market 
dominated by a few firms) placed pressures upon the more competitive ones. 
As big business, as usual, received a higher share of profits due to their 
market position (see <a href="secC5.html">section C.5</a>), this lead to many firms in the more 
competitive sectors of the economy facing a profitability crisis during 
the 1920s. 
</p><p>
The increase in investment, while directly squeezing profits in the more
competitive sectors of the economy, also eventually caused the rate of 
profit to stagnate, and then fall, over the economy as a whole. While the 
mass of available profits in the economy grew, it eventually became too 
small compared to the total capital invested. Moreover, with the fall in the
share of income going to labour and the rise of inequality, aggregate demand
for goods could not keep up with production leading to unsold goods (which
is another way of expressing the process of over-investment leading to
over-production, as over-production implies under-consumption and vice
versa). As expected returns (profitability) on investments hesitated, a decline 
in investment demand occurred and so a slump began (rising predominantly 
from the capital stock rising faster than profits). Investment flattened out 
in 1928 and turned down in 1929. With the stagnation in investment, a great 
speculative orgy occurred in 1928 and 1929 in an attempt to enhance 
profitability. This unsurprisingly failed and in October 1929 the stock 
market crashed, paving the way for the Great Depression of the 1930s.
</p><p>
This process of over-investment relative to consumption is based on rising 
labour productivity combined with stagnant wages or relative slow wage growth. 
This implies inadequate workers' consumption but rising profit rates. This is 
possible as long as aggregate demand remains sufficient, which it can as long 
as high profit rates stimulate investment (i.e., money is not saved or 
sufficient credit is generated to ensure that investment spending does not 
lag consumption). Investment creates new capacity and that implies the need 
for further increases in investment, capitalist luxury consumption, and 
credit-based consumption to maintain aggregate demand. This profit-led growth 
is hard to sustain as high profits rates are difficult to maintain due to low 
working class income as both investment and capitalist luxury consumption are 
more unstable. Investment is more volatile than consumption, so the average 
degree of instability increases which, in turn, means that the probability of 
a slump rises. Further, this type of growth creates imbalances between sectors 
of the economy as firms rush to invest in profitable sections leading to 
relative over-production and over-investment in those areas (see 
<a href="secC7.html#secc72">last section</a>). With the rise in unstable 
forms of demand, an economy becomes increasingly fragile and so increasingly 
vulnerable to "shocks." The stock market crash of 1929 was such a shock and 
the resulting panic and reduced demand for luxury goods and investment that 
it produced exposed the underlying weakness of the economy. After the Crash, 
restrictive fiscal and monetary policies and falling demand interacted to 
break this unstable prosperity and to accelerate the slump. This was 
reinforced by wage-cut induced under-consumption as well as debt deflation
making over-investment worse in relation to over demand within the economy.
So US prosperity was fragile long before late 1929, due to the process of 
over-investment relative to demand which lead the economy to be reliant on
unstable forms of demand such as luxury consumption and investment.
</p><p>
The crash of 1929 indicates the "objective" limits of capitalism. Even with 
a very weak position of labour crisis still occurred and prosperity turned
to "hard times." In contradiction to neo-classical economic theory, the events 
of the 1920s indicate that even if the capitalist assumption that labour is
a commodity like all others <b>is</b> approximated in real life, capitalism 
is still subject to crisis (ironically, a militant union movement in the
1920s would have postponed crisis by shifting income from capital to labour,
increasing aggregate demand, reducing investment and supporting the more
competitive sectors of the economy!). Therefore, any neo-classical "blame 
labour" arguments for crisis (which were so popular in the 1930s and 1970s) 
only tells half the story (if that). Even if workers <b>do</b> act in a servile 
way to capitalist authority, capitalism will still be marked by boom and
bust (as shown by the 1920s and 1980/90s). 
</p><p>
To conclude, capitalism will suffer from a boom-and-bust cycle due to the
above-mentioned objective pressures on profit production, even if we
ignore the subjective revolt against authority by workers, explained 
earlier. In other words, even if the capitalist assumption that workers 
are not human beings but only "variable capital" <b>were</b> true, it would 
not mean that capitalism would be a crisis free system. However, for most 
anarchists, such a discussion is somewhat academic for human beings are 
not commodities, the labour "market" is not like the iron market, and the 
subjective revolt against capitalist domination will exist as long as 
capitalism does.
</p>

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