What is an Economic Crisis?

Photo: Flickr/Scurzuzu 

It goes undisputed – from newsrooms to academia to the world’s living rooms – that there has recently been a major global economic crisis. In fact, according to some, the economic crisis is not even finished; for others we are suffering from its after-effects; among still others – with startling Panglossian assurance – the whole thing has been one great opportunity. Despite the apparent consensus, however, it remains difficult to pin down what exactly an economic crisis is.

On the Left, economic crises tend to be roughly defined as any medium to large market downturn. Yet this clearly over-generalizes the term. Most recessions do not lead to severe crisis in any meaningful sense. It doesn’t help that economists across the political spectrum refer to different kinds of market panics – from the 1998 Asian financial crisis to the sub-prime mortgage crisis of 2007 – as “crises.” Thus most people’s working definition of an economic crisis is of a market panic and subsequent liquidity trap. With little financial movement in the system, lending doesn’t happen, companies experience collapsing sales, and – the main symptom in the public’s eyes – unemployment goes up. It would seem that the easiest way to identify a crisis is to look for its symptoms. Yet that doesn’t mean we all agree on what a crisis really is. For that we have to look at the causes of crisis, and these are hotly disputed.

Historically, those on the Left have found it convenient to use a simplified Marxist mantra about economic crises. The argument goes something like this: crises are what happen when the contradictions inherent in capitalist accumulation reach a point of intensity after which capitalism is subjected to system-wide pressure from within. Yet the argument fails to specify what the contradictions are or why they must intensify over time. Not only is this mantra a bit vague, it’s also transhistorical: it can be used anywhere, at any time, to talk about any downturn. Marx’s original intention was, in fact, to root a concept of crisis in a scientifically demonstrable cause and thereby prove the inevitability of crisis in a capitalist system. But as we’ll see the mechanism by which Marx explained economic crises – his law of the general “tendency for profit-rates to decline” – has been quite seriously challenged.

Without a consistent response emanating from Marxist economists, the economic-reductionist argument about crises has been shaken. But crises have always been much more than mere market downturns. They are major processes of social and economic disruption, with widespread destructive effects. As we’ll see, the challenge to Marx’s “scientific” system by no means removes the grounds for Marxist critique.

Marx’s theory of declining profit-rates

The tendency for profit-rates to decline comes about, in Marx’s thinking, when one capital (imagined until this point as a self-contained movement – running through production, exchange, circulation, distribution, and consumption) comes into conflict with other capitals. Seeking to increase her competitive power over other capitalists, the owner of the capital will attempt to produce more commodities to dominate the market. In Marx’s theory, workers are made to produce more not just by working longer hours (what he called “absolute surplus value”) but also by producing more in the same amount of time (“relative surplus value”). Capitalists do this by, among other things, increasing productivity through investments in machinery and technology (“means of production”) at the expense of labour. Marx called the “technical composition of capital” the ratio by which the means of production outstripped the deployment of physical labour; and he called the ratio by which investment in machinery outstripped investment in the labour force the “organic composition of capital.” For Marx increasing “organic composition” – of ever greater amounts of capital invested in plant, machinery and tools (constant capital) relative to the wages given over to reproduce the labour force (variable capital) – follows necessarily from the coercive laws of capitalist competition.

If, as Marx believed, the source of value in the capitalist production process was labour (i.e. human labour inputs, conceived here on the widest possible basis – filing is just as much form of labour as bashing steel into shape, economic circumstances depending), the increasing capital investment (the amount spent on stuff to produce other stuff) would grow more rapidly than the total value produced. As mass production becomes ever more pervasive and means for acquiring it ever easier to access, the actual value created by labour per commodity declines. As capitalists continue to invest, the share of profits relative to overall capital investment (amount of machinery and factories and so on) decreases. But to compete on the market capitalists must continue to invest to produce more (so called “over capacity”). As the amount of labour time required on average to produce a commodity (“socially necessary labour time”) decreases, so does the overall amount of value produced by labour in the system as a whole. Thus more production reduces real value in the economy – and inevitably drives down profit-rates.

Marx’s theory of declining profit-rates can be pictured as a near equivalent to Darwin’s mechanism of natural selection. For Marx the answer to the question “What is a capitalist crisis?” could only be arrived at by describing how a capitalist crisis comes about – and demonstrating that such crises are logical outcomes of the system’s functioning. Thus in a classically “scientific” and typically Victorian way, Marx “discovered” a demonstrable cause of economic crisis, using it to ground a conception of the system as a whole. What was peculiar about Marx’s “dialectical” description of the capitalist social system was that he defined that system through a guarantee of its (at least partial) failure. Thus crisis took on the character of both necessary and sufficient condition for defining what capitalism as a social system actually was. This conceptual leap would allow him to demonstrate how social change and conflict (namely class conflict) were the result of the internal dynamics of the system itself. Yet today Marx’s central mechanism – the theory of the tendency of profit-rates to decline – is widely challenged.