The Marxist Theory of Crisis (part 1)

by Bruce Wallace

This article originally appeared on Bruce’s own blog and is republished here with the author’s kind permission.


As global capitalism continues to be gripped by a long depression there is renewed interest in the ideas of Karl Marx who produced the only thorough critique of capitalist production in his masterpiece Capital published over one hundred and thirty years ago. Marx set out in his brilliant critique to explain the laws of motion of the capitalist system of production. Although there are a plethora of books, articles and academic papers on the reasons for the present crisis of capitalism few take the approach of Marx which was to lay bare the inherent contradictions at the heart of the system.

As the UK government implement savage cuts, also being carried out by the pro big business SNP in Holyrood in Scotland, and areas of the Eurozone are being devastated by austerity why exactly is all this happening? We are given a range of explanations from the Con/Dem ‘there is no alternative’ (TINA) school arguing that the public deficit must be reduced to the calls of the Keynsian economists arguing that the crisis is continuing because governments are not spending enough! Both approaches are fundamentally false.

The reason why we are in the greatest economic crisis since the 1930’s is due to the laws of capitalism that Marx discovered so long ago. He has returned from the grave to haunt the ideologists of the system that is creating misery for millions of ordinary working people.

This article is an extract from a pamphlet I’m writing on ‘The Marxist Theory of Crisis’ and introduces the basic theoretical ideas and laws that Marx discovered. I will follow up with a second part to explain how the theory works out in practice but this initial part will give the basic outline of the theory. Some of the language and terminology may appear archaic to the new reader but we must remember that Marx was writing in the 19th century. However nothing is more worth the effort than to grapple with the ideas of Karl Marx the most relevant critical thinker of the twenty first century!

 ‘Official political economy is dead. Real knowledge of capitalist society can be obtained only through Marx’s Capital’ (Trotsky Marxism in Our Time 1939)

Profit and Profit Alone!

Marx did not believe in absolute economic laws that existed outside of the historical context of specific modes of production. He regarded capitalism as only one transitory historical mode of production which was the outcome of a whole series of social revolutions that had supplanted one mode with another. This has been well covered elsewhere, particularly in Marx’s Grundrisse notebooks.

Under capitalism however Marx held by one absolute law for that system. The absolute law of capitalism was the extraction, through exploitation, of greater and greater amounts of surplus value from the working class.

Surplus value (S) is the source of profit under capitalism and in this system:

‘Things are produced only so long as they can be produced with a profit’ (Marx CapitalVolume III).

Under capitalism absolutely nothing is produce unless it makes a profit. Some people argue that capitalism is a system of production that aims to produce goods for sale and consumption. This does of course happen but it is not the reason for capitalist production. Capitalist production is not a rational process:

‘It must never be forgotten, that in capitalist production what matters is not the immediate use-value but the exchange-value and, in particular, the expansion of surplus-value. This is the driving motive of capitalist production, and it is a pretty conception that—in order to reason away the contradictions of capitalist production—abstracts from its very basis and depicts it as a production aiming at the direct satisfaction of the consumption of the producers (Marx Theories of surplus value).’

Capitalism does not exist to meet need or demand. To argue otherwise, in any way, completely misunderstands the nature of the system. Marx continuously re-emphasises this point throughout his work:

‘The capitalist’s immediate object in selling, is to turn his commodity, or rather his commodity capital, back into money capital, and thereby to realise his profit. Consumption—revenue—is by no means the guiding motive in this process, although it is for the person who only sells commodities in order to transform them into means of subsistence. But this is not capitalist production, in which revenue appears as the result and not as the determining purpose ( Marx Theories of surplus value).

Capitalist production is only for profit and profit alone, its entire purpose is to achieve this aim:

‘The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit (Marx Capital Volume III)’.

Expand or Die

As Marx clearly emphasises the purpose of the system is to expand capital through the theft of surplus value which is transformed into profit. . Profit is nothing more than another form of value and, as such, is capital. This capital is actually the congealed labour of the working class extorted in the form of surplus value and transformed into money through market exchange. It is then, if not consumed by the capitalist, stockpiled and accumulated in the form of more factories and machinery, more and more means of production. The important point he makes here is that capital is self-expanding value in material form.

The individual capitalist and their class as a whole are merely servants of this process. They are, as Marx put it, the embodiment of capital. The internal laws of capital govern its servants and not vice versa. Any political actions by the capitalist class are dictated by the laws of capital and ultimately are in the defence of their system of exploitation.

This brings us to our second crucially important Marxist law, the law of capitalist accumulation. This law is very simple indeed. However unlike the absolute law of the extortion of surplus value this is a ‘tendential’ or conditional law. By this Marx meant that the law can be checked by other influences or circumstances despite it being integral to, or an organic part of, the system.

Marx presents this law in Volume I of Capital and it is very straight forward indeed.

Marx calls that part of value which is advanced by the capitalist for production, in the form money, which buys means of production constant capital (C) and variable capital (V).

Constant capital is the machines and raw materials necessary for production and variable capital is the wages the capitalist pays to the worker.

The capitalist only pays the worker for their labour power which alone is capable, not only of paying for itself, but also of producing more value than its cost. Living human labour can produce value but capital cannot. Capital has value but this value was itself the product of living human labour in the past. Capital is dead human labour congealed in material form.

Through the process of production workers transform raw materials into commodities for sale. However while production appears to be a technical process, where human labour manufactures material products, what is actually happening is that capital is consuming human labour. This is a social process whereby dead labour, in the form of capital, absorbs living labour to emerge with a higher value at the end on the process. Living human labour has, therefore, increased the total value of the capital advanced by imparting surplus value to the outputs of the process in material form.

The commodities produced must then be sold on the market for the capitalist to transform the surplus value contained within them into profit in money form. The capitalist can then pocket a greater amount of capital than they advanced.

The capitalist will not be satisfied with merely making a one off profit and they are compelled to advance their capital again to renew the production process. On the next cycle of production the capital advanced will be greater still.

It is a law of the capitalist mode of production that the capitalists will reinvest their capital so that it can expand on an extended scale. This inevitably leads to the exponential or progressive accumulation in the mass of constant capital in relation to variable capital or wage labour.

In order to truly bring out the essence of the dehumanising and horrific nature of this social process or relation Marx alludes to the supernatural:

“Capital is dead labour which in the same fashion as the vampire, can come to life only by sucking the live labour, and its life is all the more animated when its supply is increased.” (Capital, Vol. I).

Marx elaborates on the process at work:

‘With the advance of accumulation, therefore, the proportion of constant to variable capital changes. If it was originally say 1:1, it now becomes successively 2:1, 3:1, 4:1, 5:1, 7:1, &c., so that, as the capital increases, instead of ½ of its total value, only 1/3, 1/4, 1/5, 1/6, 1/8, &c., is transformed into labour-power, and, on the other hand, 2/3, 3/4, 4/5, 5/6, 7/8 into means of production. (Capital Volume I).’

This is a crucial but very simple law to grasp. A progressive growth in the accumulation of capital means that the proportion of living labour to it declines proportionally. This means that as living labour alone can create surplus value, which is the source of profit, as constant capital grows the given amount of labour power that it can turn into surplus value also reduces progressively.  This law is scientifically proven in Volume I of Capital.

If, for any reason, capital ceases to expand it dies and its value is destroyed. As Marx makes very clear in his Theories of surplus value:

‘In so far as the reproduction process is checked and the labour-process is restricted or in some instances is completely stopped, real capital is destroyed. Machinery which is not used is not capital. Labour which is not exploited is equivalent to lost production. Raw material which lies unused is no capital. Buildings (also newly built machinery) which are either unused or remain unfinished, commodities which rot in warehouses— all this is destruction of capital.  All this means that the process of reproduction is checked and that the existing means of production are not really used as means of production, are not put into operation. Thus their use-value and their exchange-value go to the devil’.

We often hear of the term ‘excess capacity’ in bourgeois economics. The argument is that this is due to the ‘lack of demand’ or because there are too few customers to pay. Currently in the US only seven out of ten productive machines are in use while the rest lie idle and rusting and fifteen million workers are unemployed. It is estimated that utilisation of existing capacity could produce $1 trillion worth of goods annually. Now this ‘appears’ to be because there is an inability to sell the output of production but this assumption is inherently false.

The reason why capital lies idle and dies or goes to the devil is because capital cannot consume enough labour power to produce surplus value and not because there is a lack of available consumers. There is too much dead labour piled up in relation to living labour. This is a bit more complicated but it will be explained later.

Crises are therefore bound up with a breakdown in the continuous growth in the accumulation of capital. Yet how does this occur?

What is missed by many readers of Volume one of Capital is that the law of accumulation is a mirror image of the law of the tendency for the rate of profit to fall to which we shall now turn.

The Rate of Profit Must Fall

Before we look at the law of the tendency of the rate of profit to fall or LTRPF we should remember the exposition of the law of accumulation. As Marx wrote above in relation to constant capital (C) ‘if it was originally say 1:1, it now becomes successively 2:1, 3:1, 4:1, 5:1, 7:1’.

In Volume three of Capital Marx now presents the LTRPF. We see below that the rate of profit p’ progressively falls as constant capital rises in proportion to variable capital by 1:2, 1:1, 2:1. 3:1 and 4:1. This could be extended to 5:1. 7:1 and so on,

If c = 50, and  v = 100, then p’ = 100/150 = 66⅔%;
c = 100, and  v = 100, then p’ = 100/200 = 50%;
c = 200, and  v = 100, then  p’ = 100/300 = 33⅓%;
c = 300, and v = 100, then p’= 100/400 = 25%;
c       =       400,    and         v       =        100,       then       p’  =        100/500                   =      20%.

So the fall in the rate of profit is practically a mirror image of the law of capital accumulation.

Indeed Marx makes this point explicitly:

‘A fall in the rate of profit and accelerated accumulation are different expressions of the same process only in so far as both reflect the development of productiveness. Accumulation, in turn, hastens the fall of the rate of profit, inasmuch as it implies concentration of labour on a large scale, and thus a higher composition of capital. On the other hand, a fall in the rate of profit again hastens the concentration of capital and its centralisation through expropriation of minor capitalists, the few direct producers who still have anything left to be expropriated. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the rate of profit (Marx Capital Vol III)’.

The law of accumulation and the law of the tendency of the rate of profit to fall are essentially the same thing! Poles within a unity as Marx explained and just different expressions of the development of capitalist production.

The most common mistake in approaching the issue of the validity and importance of the law of the tendency of the rate of profit to fall is to see it as a separate law apart from the law of capital accumulation. Now why is this?

The most obvious reason is that readers of Capital misunderstand the structure of Marx’s critique of capitalism. Marx does not present capitalism as broken up into separate processes with their own specific laws but as a unified whole in order to convey the way capitalism works. Marx’s plan for his critique of capitalism was originally designed to be in four parts. The best account of how Marx went about structuring his masterpiece  can be found in Rosdolsky (1977) The Making of Marx’s Capital.  Originally Marx envisioned four parts:

Volume I: Production process of capital

Volume II: Circulation process of capital

Volume III: Forms of the process as a whole

Volume IV: The history of theory (later published in three volumes as Theories of surplus value)

Marx’s method is to build up an explanation of how capitalism develops from production, through the process of circulation and then onto how it functions as a unified whole. So while Marx explains the law of accumulation in Volume I we have to wait until Volume III to understand how this law works out in practice through the fall in the rate of profit.

It should be obvious from the basic law as laid out by Marx that if capital accumulation continues to grow progressively like this eventually the rate of profit will fall towards zero. If that were the case then capitalist production would, and could not avoid, total collapse because it can only exist as a social system if it makes a profit. If the rate of profit falls to such an extent that there is an insufficient amount of capital available for reinvestment for continued reproduction and expansion then the system would literally die.

Now this does not happen in practice because there are counter tendencies or influences which act to slow down or check the fall in the rate of profit and even increase it. These will be dealt with in the proceeding article. However a few remarks are necessary about the attitude towards the validity and importance of Marx’s law.

Zealots and Fundamentalists

In the history of economic thought never has an economic law come under such ferocious criticism and attack as the tendency for the rate of profit to fall. In the forefront of the attack have been the bourgeois economists and this has been exhaustively documented. This is unsurprising as bourgeois economics is not a ‘science’ but an ideological front of the capitalist exploiters. The capitalist ideologues will sink to any depths to ‘disprove’ the theoretical validity of Marxism in order to disarm the working class politically.

Unfortunately some of the most vehement and persistent critics have come from within, various economists and theorists claiming to work within the tradition of Marxism have joined the attack.

For example the American Marxist Mark Lebowitz in a recent book Following Marx: Method Critique and Crisis has this to say about the LTRPF:

‘Certainly there has been much written about Marx’s argument with respect to the falling rate of profit. It has been buried, (complete with prominent obituaries) and resurrected (amidst exultation that it lives) with the frequency that suggests that we are dealing here with a religious phenomenon rather than an analytic proposition.’

Firstly Marx was not proposing an ‘argument’ but a scientific theory that is integral to his whole system. Lebowitz joins others in trying to suggest that belief in the validity and real operation of Marx’s law is the equivalent of belief in the supernatural. It has long been a feature of the debate over the place of the law that supporters of Marx’s theory are referred to as ‘zealots’ or ‘fundamentalists’.

Another distinguished culprit is Michel Husson, a leading French economist, and spokesperson for the bankrupt Unified Secretariat of the Fourth International. He refers to the LTRPF as being part of the Marxist ‘Vulgate’, the Vulgate being the 4th century Latin translation of the bible. Always the same religious references and pejorative jibes instead of a scientific analysis of the law.

If an engineer were to state he believed in the basic tenets of Issac Newton’s law of gravity and he were called a ‘fundamentalist’ the response would only provoke laughter.

Belief in the fundamental propositions of a theory is a basic first step in applying the scientific method to real world phenomena. Therefore a proper understanding and belief in the proven scientific fundamentals of Marx’s law is absolutely essential to understanding how and why capitalism goes into periodic crisis. Understanding a scientific law is the very opposite of religious faith. Such ‘criticisms’ of the work of the founder of scientific socialism are beneath contempt and echo the worn out denials of the bourgeois economists who tremble as their social system disintegrates about them.

Yet what was Marx’s attitude towards his own theory? It was completely unequivocal. In his Grundrisse notebooks which form the rough draft of Capital he wrote:

‘This is in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated’. (Marx Grundrisse)

David Ricardo 1772- 1823 English Classical Political Economist who discovered the empirical existence of the Law of the falling rate of profit that was to be elaborated upon and its mechanism explained by Marx through the discovery of surplus value.


Moreover he again emphasizes in Capital  Volume III that he thought that this law, originally discovered by the English bourgeois economist David Ricardo, was ‘of great importance to capitalist production’ and asked why Ricardo’s followers were  in ‘dread of this pernicious tendency’? Further that the bourgeoisie saw in the fall of the rate profit their ‘day of judgement’? That the tendency caused a deep sense of disquiet amongst the bourgeois economists and a state of ‘terror’? The reasons for this is obvious as it proves that capitalism is not the end point of the development of the productive forces of society and that it showed there was an inherent flaw in the social relations of production built into the very logic of the capitalist system itself.

Was Marx making all this up? Of course not, because the tendency of the rate of profit to fall is an empirical fact and not just a theoretical proposition. We shall see shortly just how correct Marx was.

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