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<html>
<HEAD>

<TITLE> C.7 What causes the capitalist business cycle?</TITLE>
</HEAD>
<BODY>
<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:
<p><blockquote><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> [P-J Proudhon,
<b>What is Property</b>, pp. 191-192]
</blockquote><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 profit, then it will stop
production, sack people, ruin lives and communities until such as enough 
profit can again be extracted from the workers.
<p>
So what influences this profit level? There are two main classes of pressure
on profits, what we will call the <i><b>"subjective"</b></i> 
and <i><b>"objective."</b></i> The objective
pressures are related to what Proudhon termed the fact that <i>"productive power
tends more and more to outstrip consumption"</i> and are discussed in sections
<a href="secC7.html#secc72">C.7.2</a> and <a href="secC7.html#secc73">C.7.3</a>. 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). We will 
discuss the impact of the class struggle (the "subjective" pressure) in 
the <a href="secC7.html#secc71">next section</a>.
<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 increase 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. However, due to lack of effective communication within 
the market caused by the price mechanism and incomplete information provided 
by the interest rate, this investment becomes concentrated in certain parts of 
the economy.  Relative over-investment can occur, 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). Meanwhile, workers power is increasing, causing profit margins
to be eroded, but also reducing tendencies to over-invest by resisting the
introduction of new machinery and technics and by maintaining demand for
the finished goods. This contradictory effect of class struggle matches the 
contradictory effect of investment. Just as investment causes crisis because 
it is useful (i.e. it helps increase profits for individual companies in the
short term, but it leads to collective over-investment and falling profits in 
the long term), the class struggle both hinders over-accumulation of capital 
and maintains aggregate demand (so postponing  the crisis) while at the 
same time eroding profit margins at the point of production (so accelerating 
it). 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 when the capitalist class does not get a 
sufficient rate of profit. If workers produced for themselves, this 
decisive factor would not be an issue as no capitalist class would 
exist.
<p>
And we should note that these factors work in reverse during a slump,
creating the potential for a boom. During a crisis, capitalists still try
to improve their profitability (i.e. increase surplus value). Labour is 
in a weak position due to the large rise in unemployment and so, usually,
accept the increased rate of exploitation this implies to remain in work.
In the slump, many firms go out of business, so reducing the amount
of fixed capital in the economy. 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. Eventually this increased surplus value production 
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).
<p>
And so the business cycle continues, 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.
<p>
<a name="secc71"><h2>C.7.1 What role does class struggle play in the business cycle?</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 
<a href="secB1.html#secb112">section B.1.2</a> and 
<a href="secC2.html">section 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>
This class struggle reflects a conflict between workers attempts at
liberation and self-empowerment and capitals 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, expressed 
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>Kropotkin's 
Revolutionary Pamphlets</b>, pp. 48-49] 
<p>
As Errico Malatesta argued, if workers <i>"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>Life and Ideas</b>, pp. 191-2]
<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
control workers (and so extract the maximum surplus value possible from
them) and to get an advantage against their competitors 
(see <a href="secC2.html#secc23">section C.2.3</a>). 
And, as will be discussed in section D.10 (<a href="secD10.html">
How does capitalism affect technology?</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 "English 
Manufacturer" who states that he invested in machinery precisely to 
replace humans by machines because machines are easier to control:
<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>
[<b>System of Economical Contradictions</b>, p. 189]
</blockquote><p>
(To which Proudhon replied <i>"[w]hat a misfortunate that machinery cannot
also deliver capital from the oppression of consumers!"</i> as the over-production
and inadequate market 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>
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 profit levels that are the 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>
A common capitalist myth, derived from the capitalist Subjective Theory 
of Value, is that free-market capitalism will result in a continuous boom, 
since the cause of slumps is allegedly state control of credit and money. 
Let us assume, for a moment, that this is the case. (In fact, it is not the 
case, as will be highlighted in <a href="secC8.html">section C.8</a>). In the "boom economy" of 
"free market" dreams, there will be full employment. But in a period 
of full employment, while it 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]
<p>
In other words, workers are in a very strong position under boom conditions,
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 <b><i>"realisation crisis"</i></b> (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>
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>
This interplay of profits and wages can be seen in most business cycles. As 
an example, let's consider the crisis which ended post-war Keynesianism in 
the early 1970's and paved the way for the "supply side revolutions" of
Thatcher and Reagan. This crisis, which occurred in 1973, had its roots 
in the 1960s boom. If we look at the USA we find that it experienced
continuous growth between 1961 and 1969 (the longest in its history). 
From 1961 onwards, unemployment steadily fell, effectively creating
full employment. From 1963, the number of strikes and total working
time lost steadily increased (from around 3000 strikes in 1963 to nearly
6000 in 1970). The number of wildcat strike rose 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 below,
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>
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 product wage (the real cost to the employer of hiring 
workers) meet that of productivity in 1965 (at around 4%) -- which was 
also the year in which profit share in income and the rate of profit peaked . 
From 1965 to 1971, 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 the actual 
post-tax real wages and productivity in a the advanced capitalist 
countries increased at about the same rate from 1960 to 1968 (4%). 
But between 1968 and 1973, post-tax real wages increased by an average 
of 4.5% compared to a productivity rise of only 3.4%. Moreover, due to 
increased international competition companies could not pass on wage 
rises to consumers in the form of higher prices (which, again, would
only have postponed, but not stopped, the slump). As a result of these 
factors, the share of profits going to business fell by about 15% in 
that period. 
<p>
In addition, outside the workplace 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> p. 58, <b>Society and Nature</b>, Vol. 3, 
pp. 44-45] 
<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 without 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><blockquote>
<i>"The fundamental error of the reformists is that of dreaming of solidarity, a
sincere collaboration, between masters and servants. . . 
<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. . . 
<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>Life and Ideas</b>, pp. 78-79]
</blockquote><p>
The experience of the post-war compromise and social democratic reform 
indicates well that, ultimately, the social question is not poverty but rather
freedom. However, to return to the impact of class struggle on capitalism.
<p>
More recently, the panics in Wall Street that accompany news that unemployment
is dropping in the USA reflect this fear of working class power. Without
the fear of unemployment, workers may start to fight for improvements in their
conditions, against capitalist oppression and exploitation and <b>for</b> liberty
and a just world. Every slump within capitalism has occurred when workers 
have seen unemployment fall and their living standards improve -- not a 
coincidence. 
<p>
The Philips Curve, which indicates that inflation rises as employment
falls is also an indication of this relationship. Inflation is the situation
when there is a general rise in prices. Neo-classical (and other pro-"free 
market" capitalist) economics argue that inflation is purely a monetary 
phenomenon, the result of there being more money in circulation than is 
needed for the sale of the various commodities on the market. However, 
this is not true. In general, there is no relationship between the money 
supply and inflation. The amount of money can increase while the rate 
of inflation falls, for example (as was the case in the USA between 
1975 and 1984). Inflation has other roots, namely it is <i>"an expression 
of inadequate profits that must be offset by price and money policies. . .  
Under any circumstances, inflation spells the need for higher profits. . ."</i> 
[Paul Mattick, <b>Economics, Politics and the Age of Inflation</b>, p. 19] 
Inflation leads to higher profits by making labour cheaper. That is, 
it reduces <i>"the real wages of workers. . . [which] directly benefits 
employers. . . [as] prices rise faster than wages, income that would 
have gone to workers goes to business instead."</i> [J. Brecher and 
T. Costello, <b>Common Sense for Hard Times</b>, p. 120] 
<p>
Inflation, in other words, is a symptom of an on-going struggle over
income distribution between classes and, as workers do not have any
control over prices, it is caused when capitalist profit margins are 
reduced (for whatever reason, subjective or objective). This means 
that it would be wrong to conclude that wage increases "cause"
inflation as such. To do so ignores the fact that workers do not 
set prices, capitalists do. Inflation, in its own way, shows the 
hypocrisy of capitalism. After all, wages are increasing due to "natural" 
market forces of supply and demand. It is the capitalists who are trying 
to buck the market by refusing to accept lower profits caused by 
conditions on that market. Obviously, to use Tucker's expression, 
under capitalism market forces are good for the goose (labour) but 
bad for the gander (capital).
<p>
This does not mean that inflation suits all capitalists equally (nor,
obviously, does it suit those social layers who live on fixed incomes and 
who thus suffer when prices increase but such people are irrelevant in the
eyes of capital). Far from it - during periods of inflation, lenders tend to 
lose and borrowers tend to gain. The opposition to high levels of inflation 
by many supporters of capitalism is based upon this fact and the division 
within the capitalist class it indicates. There are two main groups of 
capitalists, finance capitalists and industrial capitalists. The latter can 
and do benefit from inflation (as indicated above) but the former sees high
inflation as a threat. When inflation is accelerating it can push the real
interest rate into negative territory and this is a horrifying prospect 
to those for whom interest income is fundamental (i.e. finance capital).
In addition, high levels of inflation can also fuel social struggle, as 
workers and other sections of society try to keep their income at a steady
level. As social struggle has a politicising effect on those involved, a
condition of high inflation could have serious impacts on the political 
stability of capitalism and so cause problems for the ruling class.
<p>
How inflation is viewed in the media and by governments is an expression 
of the relative strengths of the two sections of the capitalist class and
of the level of class struggle within society. For example, in the 1970s, 
with the increased international mobility of capital, the balance of power 
came to rest with finance capital and inflation became the source of all 
evil. This shift of influence to finance capital can be seen from the rise
of rentier income. The distribution of US manufacturing profits indicate
this process -- comparing the periods 1965-73 to 1990-96, we find that 
interest payments rose from 11% to 24%, dividend payments rose from 
26% to 36% while retained earnings fell from 65% to 40% (given that
retained earnings are the most important source of investment funds,
the rise of finance capital helps explain why, in contradiction to the
claims of the right-wing, economic growth has become steadily worse 
as markets have been liberalised -- funds that would have been resulted
in real investment have ended up in the finance machine). In addition, 
the waves of strikes and protests that inflation produced had worrying 
implications for the ruling class. However, as the underlying reasons 
for inflation remained (namely to increase profits) inflation itself was 
only reduced to acceptable levels, levels that ensured a positive real 
interest rate and acceptable profits. 
<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). This 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>
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>"[o]f 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>
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><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]
</blockquote><p>
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 to 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. Proudhon summed by capitalist
economic theory well when he stated that  <i>"Political economy -- that 
is, proprietary despotism -- can never be in the wrong: it must be the 
proletariat."</i> [<b>System of Economical Contradictions</b>, p. 187] And 
little has changed since 1846 (or 1776!) when it comes to economics 
"explaining" capitalism's problems (such as the business cycle or 
unemployment). 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 second explanation is the accurate one).
<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 is 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 deliberately caused deep recessions) and even this 
is no guarantee of eliminating working class struggle as can be seen, for 
example, from 1930s America or 1970s Britain. 
<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, exploitation and the denial of freedom.
<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>
Moreover, even assuming that individuals can be totally happy in a capitalist 
economy, willing to sell their freedom and creativity for a little 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 problems 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>
<a name="secc72"><h2>C.7.2 What role does the market play in the business cycle?</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. For example, a rise in the price of a commodity will
result in increased production and reduced consumption of that good, and
this will move the economy towards equilibrium. 
<p>
While it can be granted that this account of the market is not without
foundation, its 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>
When individuals and companies make plans concerning future production,
they are planning not with respect of demand <b>now</b> but with respect
to expected demand at some <b>future time</b> when their products reach
the market. The information the price mechanism provides, however, is the
relation of supply and demand (or market price with respect to the market
production price) at the current time. While this information <b>is</b>
relevant to people's plans, it is not <b>all</b> the information that is
relevant or is required by those involved. 
<p>
The information which the market does <b>not</b> provide is that of the
plans of <b>other</b> people's reactions to the supplied information. This
information, moreover, 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. 
<p>
For example, lets assume a price rise due to a shortage of a commodity.
This results in excess profits in that market, leading the owners of
capital to invest in this branch of production in order to get some of
these above-average profits. However, consumers will respond to the price
rise by reducing their consumption of that good. This means that when 
the results of these independent decisions are realised, there is an
overproduction of that good in the market in relation to effective demand
for it. Goods cannot be sold and so there is a realisation crisis as
producers cannot make a profit from their products. Given this
overproduction, there is a slump, capital disinvests, and the market 
price falls. This eventually leads to a rise in demand against supply,
production expands leading to another boom and so on.
<p>
Proudhon described this process as occurring because of  the <i>"contradiction"</i> of
 <i>"</i>the double character of value"</i> (i.e. between value in use and value in exchange).
This contradiction results in a good's <i>"value decreas[ing] as the production
of utility increases, and a producer may arrive at poverty by continually enriching
himself"</i> via over-production. This is because a producer <i>"who has harvested
twenty sacks of wheat. . . believes himself twice as rich as if he had harvested
only ten. . . Relatively to the household, [they] 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 as half as great."</i> [<b>The System of Economical
Contradictions</b>, p. 78, pp. 77-78]
<p>
This, it should be noted, is not a problem of people making a series of
unrelated mistakes. Rather, it results because the market imparts the same
information to all involved and this information is not sufficient for
rational decision making. While it is rational for each agent to expand 
or contract production, it is not rational for all agents to act in this
manner. In a capitalist economy, the price mechanism does not supply all
the information needed to make rational decisions.  In fact, it actively
encourages the suppression of the needed extra information concerning 
the planned responses to the original information.
<p>
It is this irrationality and lack of information which feed into the
business cycle. These local booms and slumps in production of the 
kind outlined here can then be amplified into general crises due to the
insufficient information spread through the economy by the market. However,
disproportionalities of capital between industries do not <b>per se</b> result
in a general crisis. If this was that case the capitalism would be in a
constant state of crisis because capital moves between markets during periods 
of prosperity as well as just before periods of depression. This means that 
market dislocations cannot be a basis for explaining the existence of 
a general crisis in the economy (although it can and does explain localised
slumps).
<p>
Therefore, the tendency to general crisis that expresses itself in a 
generalised glut on the market is the product of deeper economic changes.
While the suppression of information by the market plays a role in producing 
a depression, a general slump only develops from a local boom and slump 
cycle when it occurs along with the second side-effect of capitalist 
economic activity, namely the increase of productivity as a result of 
capital investment, as well as the subjective pressures of class struggle.
<p>
The problems resulting from increased productivity and capital investment 
are discussed in the <a href="secC7.html#secc73">next section</a>.
<p>
 <a name="secc73"><h2>C.7.3 What role does investment play in the business cycle?</h2>
<p>
Other problems for capitalism arise due to 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 the profits contained in the
produced commodities. In other words, a period of over-production occurs 
due to the over-accumulation of capital.
<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 must 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. 
<p>
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. 
If the mass of available profits in the economy is too small compared to 
the total capital invested then any problems a company faces in making 
profits in a specific market due to a localised slump caused by the price 
mechanism may spread to affect the whole economy. In other words, a fall 
in the rate of profit (the ratio of profit to investment in capital and labour) 
in the economy as a whole could result in already produced surplus value, 
earmarked for the expansion of capital, remaining in its money form and 
thus failing to act as capital. 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. 
<p>
It could be argued that such an analysis is flawed as no company would
invest in machinery if it would reduce it's 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.
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. 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, nevermind the actions of their competitors. Thus 
over-accumulation of capital is the natural result of competition 
simply because it is individually rational and the future is unknowable. 
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>
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>
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.
<p>
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). 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. 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%). 
<p>
Unsurprisingly, in such circumstances, in the 1920s prosperity was concentrated
at the top 60% of families made less than $2000 a year, 42% less than $1000.
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 $10000. 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 
1489 in 1929) the bottom 93% of the population experienced a 4% drop 
in real disposable per-capita income between 1923 and 1929.
<p>
However, in spite of this, US capitalism was booming and the laissez-faire 
capitalism was at its peak. But by 1929 all this had changed with the stock 
market crashing -- followed by a deep depression. What was its cause? Given
our analysis presented above, 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.
<p>
This slump was <b>not</b> the result of working class resistance, indeed the
1920s were marked by a labour market which remained 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%) combined with the use of legal 
injunctions by employers against work protests and the use of industrial 
spies to identify and sack union members made labour weak and so the 
influence and size of unions fell as workers were forced to sign "yellow-dog"
contracts to keep their jobs.
<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 high productivity associated with
farming resulted in a flood of rural workers into the urban labour market.
<p>
Facing high unemployment, workers' quit rates fell due to fear of loosing
jobs (particularly those workers with relatively higher wages and employment
stability). This combined with the steady decline of the unions and the very
low number of strikes (lowest since the early 1880s) indicates that labour 
was weak. Wages, like prices, were comparatively stable. Indeed, 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%). 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" 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>
The key to understanding what happened lies 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>
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>
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 1980s).
<p>
To take another example, America's 100 largest firms, employing 5 million
persons and having assets of $126 billion, saw their average amount of
assets per worker grow from $12,200 in 1949 to $20,900 in 1959 and to
$24,000 in 1962. [First National City Bank, <b>Economic Letter</b>, June 1963]. 
As can be seen, the rate of increase in average assets per worker falls off
over time. The initial period of high capital formation was followed by a
recessionary period between 1957 and 1961. These years were marked by a
sharp increase in unemployment (from 3 million in 1956 to a high of 5 
million in 1961) and a higher unemployment rate after the slump than 
before (an increase of 1 million from 1956 figures to around 4 million 
in 1962). [T. Brecher and T. Costello, <b>Common Sense for Hard Times</b>, 
chart 2]
<p>
We have referred to data from this period, because some supporters of
"</i>free market"</i> capitalism have used the same period to argue for the
advantages of capital investment. This data actually indicates, however,
that increased capital formation helps to create the potential for
recession, because although it increases productivity (and so profits) for
a period, it reduces profit rates in the long run because there is a 
relative scarcity of surplus value in the economy (compared to invested
capital). This fall in profit rates is indicated by the decrease in
capital formation, which is the point of production in the first place
within capitalism, as well as by the increase of unemployment during that
period. 
<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 is usually started by
overproduction for a specific commodity, possibly caused by the process
described in <a href="secC7.html#secc72">section C.7.2</a>. If there are enough profits in the economy, 
localised slumps have a reduced tendency to grow and become general. A slump 
only becomes general when the rate of profit over the whole economy falls.
A local slump spreads through the market because of the lack of information 
the market provides producers. When one industry over-produces, it cuts
back production, introduces cost-cutting measures, fires workers and so on
in order to try and realise more profits. This reduces demand for industries 
that supplied the affected industry and reduces </b>general</b> demand due to 
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 because the
capitalist economy does not communicate enough information for producers to
make rational decisions or co-ordinate their activities.
<p>
"Over-production," we should point out, exists only from the viewpoint of 
capital, not of the working class: 
<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></i> [Peter Kropotkin, <b>Op. Cit.</b>, pp. 127-128]
</blockquote><p>
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 
production must be reduced in order to artificially increase it. So, for 
example, the sight of food being destroyed while people go hungry is 
a common one in depression years.
<p>
So, while the crisis appears on the market as a "commodity glut" (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 such cost cutting is yet another 
"externality," to be bothered with only if they threaten capitalists' power 
and wealth. 
<p>
There are means, of course, by which capitalism can postpone (but not stop) 
a general crisis developing. Imperialism, by which markets are increased and
profits are extracted from less developed countries and used to boost the 
imperialist countries profits, is one 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 
manipulation of credit and other economic factors (such as minimum wages, 
the incorporation of trades unions into the system, arms production, 
maintaining a "natural" 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. Or 
the rate of exploitation produced by the new investments can be high enough 
to counteract the increase in constant capital and keep the profit rate 
from falling. However, these have (objective and subjective) limits and 
can never succeed in stopping depressions from occurring.
<p>
Hence 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>was</b> true, it would 
not mean that capitalism was 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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