The Marxist theory of crisis (part two)

by Bruce Wallace

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


In part one we looked at a broad outline of Marx’s law of the tendency of the rate of profit to fall  (LTRPF). Let us start this part by stating what the law is not. It is not a law of immanent capitalist collapse. Neither is it a law leading to perpetual crisis or stagnation as the rate of capitalist profit declines towards zero as the system develops. Marx explicitly denied this stating that ‘permanent crises do not exist’. In fact the fall in the rate of profit is actually overcome by period crisis. As we shall see it is the persistent pressure of the falling rate of profit that is the basic crisis mechanism within the capitalist mode of production.

We must clarify exactly what is meant by the rate of profit in capitalism because the term profits can be quite misleading. The rate of profit is determined by the rate of return on the amount of capital invested (advanced in Marx’s terminology).

If a capitalist advances a capital of £100 and the rate of profit is 20% they will get their original investment back plus £20 in profit. The rate of profit is therefore a percentage rate of return on investment. The £20 the capitalist reaps as profit at the end of the production process is what is regarded as the mass of profit.

From this it is easy to see that if the rate of profit falls to say 10% but the capitalist advances £1000 that the mass of profit will be £100. So even with a lower rate of profit the capitalist can recoup a greater mass of profit. This is an important point to remember as we proceed with Marx’s theory.

What is clear is that the rate of profit is what the capitalist expects to make on the investment of their capital based on the existing rate of profit. So caution is required when reading economic literature that refers to the abstract term ‘profits’ as the rate and mass of profit are two distinctly different  things. The rate is the expectation and the mass is the result.

Capital is attracted to the areas of industry which are making the highest rate of profit. This is not based on the independent decision making of individual capitalists. In modern capitalism there is a free flow of capital to the most profitable sectors and this process is automatically governed by the stock market.

Through the coercive force of competition the rate of profit tends to equalize and to fall across the economy as a whole. This applies to the world economy and not just within national economies. The less productive, and hence less profitable, industries go out of business or are absorbed by rivals.

So it is the rate of profit which is the motive force of competition and for a greater and greater concentration and centralisation of capital. There is a growth of larger corporations and monopolies with their integration into banking and finance. This is what Marx means by an increase in the mass of accumulated capital although a fall in the rate of profit means a decline in the rate of accumulation. In other words economic growth slows but the concentration of capital (its mass) increases.

How the LTRPF, in tandem with accumulation, works out in practice to produce crisis is explained by Marx in a chapter in Capital  Volume III titled “Development of the Law’s Internal Contradictions”. Let’s look at how it works?

 How it Works in Practice

The continuous downward pressure on the rate of profit brings forth what Marx called counteracting influences or tendencies and these are the main ones.

  • More intense exploitation of labour (increasing productivity)
  • Reduction of wages below their value (wage cuts)
  • Cheapening of the elements of constant capital (reducing the cost of machinery)
  • The relative surplus population (using unemployment to force down wages and conditions))
  • Foreign trade (the expansion of global capitalism)
  • The increase in share capital (the growth of banking and finance/debt)

I will not address these in detail individually but make some general remarks. The LTRPF is primarily a historical law whose influence is felt over a protracted period of time resulting in major periodic crisis but it also is the underlying reason for ‘normal’ periodic recessions. In this sense the law has two aspects.

Marx analysed   the impact of the counter tendencies on the long term operation of the law. As he explains in relation to increasing the exploitation of the working class either through improving productivity or lengthening the working day:

‘This factor does not abolish the general law. But it causes that law to act rather as a tendency, i.e., as a law whose absolute action is checked, retarded, and weakened, by counteracting circumstances’. (Capital Vol III )

Earlier, in relation to the reduction of surplus value embodied in commodities due to accumulation offsetting a fall in the rate of profit by cheapening the cost of both productive and consumer goods he wrote:

‘But in reality, as we have seen, the rate of profit will fall in the long run. In no case does the fall in the price of any individual commodity by itself give a clue to the rate of profit. Everything depends on the magnitude of the total capital expended in its production’. (Capital Vol III )

All other influences act to ‘moderate’ and ‘hamper, retard and partly paralyse’ the fall in the general rate of profit.


Thus the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced’

 Recourse to credit and finance was a particular feature of the neo-liberal boom. There was a huge growth in both consumer and government debt which extended the period of the boom but it did not negate the general law. Thus recourse to what Marx called fictitious capital laid the basis for a sovereign debt and fiscal crisis. This is fictitious i.e. imaginary value, because it is based purely on paper assets, promissory notes on future profits, yet the root of the crisis lay in production and the long term decline in the rate of profit.

The law appears to operate cyclically and governs the onset of recessions. This has been proven in excellent research by José Granados (2012):

‘‘Data on 251 quarters of the U.S. economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn  to a fall in demand, seems to be a basic mechanism in the causation of recessions.’

 Thus we have periodic booms and slumps. Normally there are recessions approximately every eight years or so that are quickly overcome but the process is also cumulative. As accumulation proceeds the historical operation of the law builds up pressure for major generalised crises over a longer timescale. We have seen this in the history of capitalism where there have been four major generalised crises; the Long Depression of the 1870’s, the Great Depression of the 1930’s, the crisis of the 1970’s and todays Long Depression.

The falling rate of profit is the underlying and indirect force driving these crises all of which have specific and unique features. In some ways this is akin to the movement of the earth’s tectonic plates that build up pressure at fault lines in the earth’s crust eventually causing earthquakes. The LTRPF is exactly like this; an indirect force acting on the dynamics of capitalist development that causes economic earthquakes!

We can actually measure this long term tendency for the rate of profit to fall. Here is the calculation for the decline in the average rate of profit for the US economy by a Marxist economist.


The US rate of profit hit a trough in 1982 and then neo-liberal policies helped it to recover peeking in 1997. It should be noted that it was well below the previous high point of the mid 1960’s. Since 1997 the rate of profit has continued a fall in the average rate. Here is a closer look at the fall in the average rate of profit between 1941 and 2004.

.                                              kliman

Source: A. Kliman

And we can see above the empirical evidence that supports Marx’s theory.

Since the dynamic boom of capitalism after WWII, known as ‘The Golden Age’, there has been a step down fall in the average rate of profit. It is this fall that leads to periodic crises.

When Marx wrote Capital he outlined the general features of the crisis mechanism and it is almost as if these words had been written yesterday:

Part of the commodities on the market can complete their process of circulation and reproduction only through an immense contraction of their prices, hence through a depreciation of the capital which they represent. The elements of fixed capital are depreciated to a greater or lesser degree in just the same way. It must be added that definite, presupposed, price relations govern the process of reproduction, so that the latter is halted and thrown into confusion by a general drop in prices. This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction’ (Capital Vol III)

Major crises occur as sudden shocks and stoppages in the general production process of capital once the counter tendencies against the falling rate of profit exhaust themselves.

If it were just Marxists who argued that this law proves that there is a long term decline in capitalist profitability it could be routinely dismissed by economists as ideologically motivated. Yet the law is completely validated by the most respected capitalist sources.

One outstanding data set identified but neglected by Marxists is from the Shift Index issued by Deloitte’s Center for The Edge headlined as ‘The Most Important Business Study Ever?’ and . Described as:

‘A magisterial study of the performance of 20,000 US firms from 1965 to date shows us not just gossip, froth and bubble, but the underlying drivers of corporate performance in great detail. In an economic downturn, it is all too easy to fixate on cyclical events, and lose sight of the deeper trends of longer-term change.’

This bourgeois project is free of axe grinding and comes up with startling data as was highlighted by a commentator:

‘These studies have followed 20,000 publicly traded firms between 1965 and 2010 to yield a comprehensive measure of profitability. All iterations  (2009. 2010, 2011)  shows that the rate of return on assets (not simply “fixed capital”) has been in dramatic decline for the past 45 years. It moreover demonstrates this decline both with and without integrating the banking sector. However, once the banking sector is included, which now accounts for 60% of total assets (30% in 1965), the decline has been even more pronounced.

More specifically, this comprehensive review found that ‘US companies’ return on assets (ROA) have progressively dropped 75 percent from their 1965 levels despite rising labor productivity’, a near doubling of labor productivity to be more precise.’

As can be seen from the graph below this indicates an even more dramatic decline in the average rate of profit in the US than that produced using Marxist  methodology.


The last peak in this graph is for the start of 2006 and exemplifies the huge temporary upsurge in the rate of profit just prior to the crash. The boom fueled by an orgy of speculation and bad debt in an attempt to reap a higher profit. Against this was the LTRPF acting as a force which led to the inevitable bust. A process exactly described by Marx some one hundred and forty years ago. The previous peak was in 1997, which is almost exactly the same as the computations of Marxist profitability ‘alchemists’ (another favorite term applied to those upholding Marx’s law).

‘This Sucker could go down’


The roots of the financial crisis lay deep in the debt fuelled neo-liberal ‘boom’ that had lasted for nearly fifteen years. The proponents of capitalism had argued that unfettered free market capitalism would guarantee unlimited economic growth across the globe forever. In March 2007 PM Gordon Brown declared, “We will not return to the old boom and bust”.

The recession had already begun before the financial crisis of 2008 and had precipitated it. In 2006 in the US, a quarter of the world economy, there had been a slump in profits. In the 3rd quarter of 2006 the mass of pre-tax profits was $1.865 billion but in the 4th quarter this had collapsed to $861 billion, a fall of more than half. On its own such a catastrophic fall in the mass of profits would have caused a severe recession but the slump in profitability and economic contraction detonated an implosion in the bloated edifice of international finance capital resulting in an acute financial and economic disaster. We can see the actual impact of the Great Recession on the rate of profit for the advance economies in this graph.


Source: M. Roberts Blogging as a Marxist economist.

There was a precipitate fall in the rate of profit of all the advance countries during the crisis and the fall began before the onset of the financial collapse. It was the fall in the rate of profit that led to the financial crisis in the first place but this intensified the severity of the crash.

Officially the Great Recession began in December 2007 and ended in June 2009. The results of the crisis were a world slump in international trade and a dramatic increase in unemployment. In the US between May 2007 and October 2009 7.5 million jobs were lost and the unemployment rate leapt from 4.4 to 10.1%. Internationally growth rates crashed on a scale not seen for nearly eighty years. This was accompanied by the mass destruction of capital value. The cost of the recession was enormous. Some sources suggest that in the US it was $12.8 trillion, more than three quarters of one year’s total economic output.

The working class in the US has been amongst the hardest hit by the crisis. Average family income in the US, fell from $49,600 in 2007 to $45,800 in 2010, and the average American family’s net worth declined from $126,400 to $77,300 from 2007 to 2010 — a drop of almost 40%  which has destroyed 18 years’ worth of accumulated wealth (Federal Reserve). This has meant that a vast amount of the value of constant capital was destroyed in the US and this partly explains why the US has been able to recover somewhat from the Great Recession because a reduction in capital value restores the rate of profit. However government intervention halted a total catastrophic collapse.

On the 25 September 2008 after a ‘verbal brawl’ in the cabinet room of the White House in Washington the US  Treasury secretary went down on his knees., literally, before the Speaker to the House of Representatives and pleaded with her to agree to a $700 billion bailout package for America’s insolvent banks. Republican President George Bush interjected, ‘if money isn’t loosened up, this sucker could go down’?

In the midst of the greatest financial crisis since the Great Depression of the 1930’s the world economy was only 24 hours away from seizing up completely and, had it happened, the ‘sucker’ of international capitalism would indeed have gone down in an economic and social catastrophe  unprecedented in world history.

The US capitalists and their British allies bailed out the banks to save capitalism after decades of condemning state intervention in the economy. This emergency intervention halted a complete catastrophe but only cauterised a gushing wound.

Contraction in capital investment and declines in manufacturing production went global. Between January 2008 and January 2009 industrial output fell in all industrial countries such as: Japan −31%, Korea −26%, Russia −16%, Brazil −15%, Italy −14% and Germany −12%.

As the world’s largest financial center the UK was particularly hard hit. In 2008 the economy contracted by 1.5% but has since gone through a double dip recession by 2012 when, in the final quarter, the economy shrank by 0.3% perhaps heralding an unprecedented triple dip recession. The UK economy is in a parlous state and contracted by 6.4% between the start of 2008 and the middle of 2009, and had only recovered about half of that lost output by the end of 2012.

The economies of several countries that based their growth on easy money, fraudulent banking or the property bubble were devastated. Iceland nearly had to declare national bankruptcy in 2008 as its commercial banking sector collapsed and Ireland’s property boom crashed contracting the economy by 12%. Irish unemployment rocketed from 4.2% in 2007 to 14.6% in 2012, nearly the third highest in the Eurozone.

The epicenter of the crisis shifted to the Eurozone and the periphery of Portugal, Ireland, Spain and. especially, Greece which is experiencing economic and social disintegration. Depression conditions exist in all these countries but Greece and Spain have unemployment rates of over 25%. For Spain this means 5 million workers are jobless, a higher rate proportionally than Germany had during the Great Depression of the 1930’s or almost equal to the entire population of Scotland!

Overall global growth has not recovered from the Great Recession and has been continuing to slow.


At the World Economic Forum held annually at the elite Swiss skiing resort of Davos in January 2013 the cream of capitalist economists and representatives of the financial institutions met to declare that the worst of the crisis was over. The catchphrase emanating from this jamboree was ‘dynamic resilience’ in hope that projections for global growth had improved and because disasters, such as a breakup of the Eurozone, had been averted in 2012.

Far from being dynamic and resilient the world economy is sluggish and fragile. The International Monetary Fund have issued world growth projections of 3% for 2013 but these have already been contradicted by a January 2013  report from the World Bank predicting a more modest rise of  2.4% for 2013 increasing  to 3.1-3.3% for 2014 and 2015 respectively.

Even if these predictions are correct it means the global economy is in a crawl and we are in a long depression that could last for a decade. These predictions also exclude the possibility of another global slump which is a distinct possibility.

The crisis is far from over as more sober economic commentators have pointed out in a world loaded with geopolitical and economic risk.

It is just as Karl Marx predicted for capitalism:

‘Its historical mission is unconstrained development in geometrical progression of the productivity of human labour. It goes back on its mission whenever, as here, it checks the development of productivity. It thus demonstrates again that it is becoming senile and that it is more and more outlived’.  (Capital  Vol III )

Capitalism is senile and outlived because its motive force, the rate of profit, is weak. In order to restore it and usher in a renewed period of dynamic growth there must be the mass destruction of capital value and intensified exploitation of the working class, a renewed major global economic slump is therefore inevitable at some point.

Even a major recovery will sow the seeds for a renewed downturn and these are becoming ever more violent and catastrophic in their effect.

Only One Alternative

Marxists are in favour of revolution not because capitalism is an unjust or unequal form of society. Of course capitalism is just that but there is another more pressing reason. Marx showed that capitalism leads to ever more destructive economic crises. Capitalism’s lust to expand endlessly inevitably hits ever more insurmountable barriers due to the crisis tendency that is inbuilt into the very logic of the system itself. As Marx stipulated the barrier to capital in these terms is capital itself.

Unless capitalism is overthrown the prospects for humanity are grim including the exhaustion of the earth’s natural resources or destructive war but there is an alternative:

‘The contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual capitalists over these social conditions of production, on the other, becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions. This transformation stems from the development of the productive forces under capitalist production, and from the ways and means by which this development takes place’.  (Marx Capital Vol III)

The only alternative to the deepening crisis of capitalism’s ‘creative destruction’  is  its abolition as a social system and its replacement with a socialist plan of production on a global scale.

Other solutions, such as limited nationalisation, state control of the banks and policies aimed at redistributing wealth for example are completely utopian. Provided capitalist production continues i.e. a system which aims at the production of value, of abstract wealth, in favour of a small minority of society and not to meet general human need more destructive crises are inevitable.

Marxists do of course struggle for immediate reforms such as halting the austerity cuts, an increase in wages and a program of public works but only as part of a general strategy towards the overthrow of the capitalist system itself.

To argue otherwise, as some on the left have done, that capitalism has somehow solved its problems in the advanced countries negating the need for revolution is flying in the face of reality. The epicentre of the current capitalist crisis is precisely in the advanced capitalist countries where there is such a historic accumulation of the mass of capital. In the advance countries the prospect for the working class is increasing misery and exploitation and the historic decline of the economy. The  Greek and Spanish crises show the more advanced  European countries an image of their own future as the crisis begins to grip France who’s unemployment has hit 10%. Across Europe more that 20 million workers are jobless and the depression is deepening.

Neither will the rise of capitalism in the emerging markets offer a way out as this will lead to exactly the same working out of Marx’s law. China, the world’s second biggest economy, is preparing a massive slump with its huge growth of constant capital. The interconnectedness of the global capitalist economy heralds further conflagrations of more intensity and depth on a world scale than ever before.

The long term choice for the working class is stark, socialism or barbarism, and only in the works of Karl Marx can a thought out scientific answer to the way forward  be found.

He proved, with mathematical precision, that capitalism is proceeding, eventually, to its inevitable doom!


Deloitte (2012) The Shift Index

Granados, J.T.A (2012) Does investment call the tune? Empirical evidence and endogenous theories of the business cycle Research in Political Economy Emerald

Lebowitz, M. (2012) Following Marx: Method Critique and Crisis

Marx, K. (2013) Capital Volume I Marxist internet archive

Marx, K. (2013) Capital Volume  II Marxist internet archive

Marx, K. (2013) Capital Volume III Marxist internet archive

Marx, K. (2013) Theories of surplus value Marxist internet archive

Marx , K. (2013) Grundrisse Marxist internet archive

Rosdolsky, R. (1977) –The making of Marx’s ‘Capital’ Pluto Press

World Bank (2013) Global Economic Prospects

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