Why do crises happen; why are we stagnating?

Two good posts from Sam Williams.

In the first he compares and contrasts three theories of crisis (within Marxism).

1. The underconsumption/Monthly Review school of thought
2. The tendency of the rate of profit to fall (FRP for short)
3. The generalised overproduction of commodities relative to the market.

Williams identifies David Harvey and Michael Heinrich as belonging to the first school, Michael Roberts and Andrew Kliman as proponents of the second, while he himself adheres to the third school of thought.

Sam reminds us of Marx's (Capital, Volume 2) analysis of the discrete steps in capitalist reproduction. Crises can occur at any point in the process and the schools of thought differ as to which dysfunction is most critical. Here's a flavour of his piece:

"Crises can occur at any point in the process of expanded reproduction.

To further clarify this point, let’s examine the basic formula for capitalist production

M—C…P…C’—M’.

Reproduction consists of a series of these cycles. In the case of expanded capitalist reproduction—and capitalist reproduction can only exist in in the long run as expanded reproduction—the numbers represented by the algebraic quantities M, C, P, C’, and M’ get bigger with each successive production cycle. A crisis in the process of capitalist expanded reproduction can occur at any place in this formula, from M on the extreme left to M’ on the extreme right.

Let’s start on the extreme left. If there is not enough M available, the circuit does not even get off the ground. Historically, it was no accident that the “rosy dawn” of capitalist development, as Marx ironically called it in the chapter on the primitive accumulation of capital in Volume I of “Capital,” began with the search for gold and silver in the Americas.

The conquistadors found gold aplenty in Peru. While to the natives of Peru gold had a largely artistic use value, to the conquistadors it was money. This money material in the form of gold and silver stolen from or extracted with the labor of the enslaved natives toiling in the mines of the Americas in no small measure formed the initial M that launched the process of capitalist expanded reproduction in the first place.

Assuming enough money is available, we next come to C. The industrial capitalists must find commodities on the market to carry out the production of commodities containing surplus value. These include the elements of fixed capital—buildings and machines. In addition, the industrial capitalists must find sources for motive power, lighting in factories, and so on. These are called auxiliary materials. And they must find raw materials. If they cannot find the appropriate commodities in the necessary quantities, or adequate substitutes, capitalist (re)production will suffer a crisis.

Most importantly, the capitalists must find the commodity labor power in the form of “free wage labor,” which alone actually produces surplus value. If they cannot, capitalist expanded reproduction will suffer a crisis caused by the absolute overproduction of capital. In its earliest days, this was perhaps the biggest problem for capitalism.

All the gold and silver of the Americas would not in and of itself have made capitalism possible if the problem of finding an adequate supply of wage labor had not been solved. It was also necessary to separate the producers from their means of production. Only in this way would the producers be forced to offer their labor power to the capitalists on the market in exchange for wages.

This task was solved—not without the massive intervention of state violence and coercion. The FRP school of crisis theory believes that cyclical crises that mark the history of capitalism since 1825 occur at this point, the point where the capitalists convert or attempt to convert money into variable capital. I disagree.

We then come to P, the production of commodities that contain surplus value. It is at P that C is transformed into C’. The constant part of C transfers its value to C. The variable portion of C—labor power—replaces its own value. Most importantly, the labor power in addition to replacing its own value produces an additional value, the surplus value. C’ differs from C in two ways. One is that C’ has a different use value than C. Two, C’ has a value quantitatively larger than C. The difference, C’ minus C, is the surplus value.

Crises can and sometimes do occur at this point in the process of capitalist reproduction. For example, if there is a workers’ strike, reproduction breaks down at this point because the striking workers withdraw their labor and no surplus value is produced as long as the strike continues.

In the case of agriculture, unfavorable growing conditions or diseases might cause P to fail. Workers perform unpaid labor but the use value of C’ fails to emerge because mother nature doesn’t cooperate. For example, as sometimes happens in my native New York State, a late spring frost destroys the flowers in an apple orchard owned by a capitalist farmer. Since no apples appear on the trees, the physical use value of C’ is not produced. P has failed. And when we have no use value, we have no value.

Assuming, however, all goes well for them—and we can see this is not guaranteed—the industrial capitalists will possess C’, commodities that contain surplus value. But unless they happen to produce the commodity that serves as money material, they are not yet home free. A dangerous step lies ahead. They must find buyers with the ability to pay for the commodities that contain surplus value.

Let’s assume they do find buyers. They now posses M’, or a sum of money greater than amount of money they started with. They are now in a position to carry out another cycle of production M—C…P…C’—M’ on a yet larger scale. Expanded capitalist reproduction proceeds. But if they fail, expanded reproduction is halted at this last and most dangerous point in the cycle of capitalist expanded reproduction.

Experience had already shown by the time of Marx and Engels that it is at this last point where capitalist expanded reproduction is most vulnerable to a general breakdown or crisis. It is important not to confuse this type of crisis with other types of crisis that can and inevitably do occur at other points in capitalist expanded reproduction—and indeed in any system of economic reproduction—with this particular type of crisis unique to highly developed capitalism. This is an error that I believe the FRP theory of crisis falls into."

Incidentally, I'm not as worried as some people about the existence of crises; it's akin to exploratory behaviour under uncertainty. Something similar would be a feature of any future mode of production although one would hope with diminishing amplitude.

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In the second post he talks about why it's so hard to recover from crisis. A critical distinction is the overproduction of commodities (the ones piled high in warehouses) vs. the overproduction of manufacturing equipment (fixed capital). The latter linger on in zombie fashion for many months, if not years, leading to spare capacity and acting as a drag on new growth. Here's an excerpt:

"Fixed capital can be very difficult to transform quickly into money capital in a crisis. Commodity capital [e.g. finished goods waiting to be sold] can often be quickly transformed into money capital by selling it below the price of production or even at a loss if capitalists due to a crisis have to quickly raise cash in order to pay off pressing debts. In this case, our capitalists may lose a portion of the value of their capital but not all of it. The capitalists can often survive as capitalists—though not always—and go back to the accumulation of capital once the crisis has passed.

However, it is far more difficult to sell factory buildings, machinery and so on used to produce commodity capital, let alone sell it quickly under crisis conditions. Though fixed capital can be transferred from the ownership of one capitalist to another, it is not really designed to be “sold” but rather used up over a series of turnover cycles. One of the great perils confronting any industrial business is finding itself with a lot of fixed capital but very little money capital when a crisis hits. In this situation, the owner(s) of industrial capital can very easily lose all their capital, because though they have a great deal of capital, they do not have capital in the form demanded by their creditors—money.

Overproduction of fixed capital

When commodity capital is overproduced, this by definition means that the fixed capital used to produce those commodities was also overproduced. Every generalized crisis of overproduction therefore involves the overproduction—or over-accumulation—of fixed capital. The overproduction of commodity capital can be overcome fairly quickly by reducing or halting production of that particular type of commodity or by selling it at a loss. It is much harder—and takes far longer, often many years—to overcome the overproduction of fixed capital. During this period, little new additional fixed capital will be produced. This is shown by the stages of the industrial cycle.

The history of industrial cycles has shown that the crisis proper rarely lasts more than a year and half. Even the super-crisis of 1929-1933 lasted less than four years in the United States and about three years in most of the other capitalist countries. The end of the crisis phase of the industrial cycle, when industrial production reaches its lowest point and begins to rise once again, corresponds to the overcoming of the overproduction of commodity capital.

However, the period of stagnation or slow growth lasts for several years beyond the actual crisis and sometimes considerably longer. The stagnation or semi-stagnation phase of the cycle corresponds to the period between the overcoming of the overproduction of commodity capital that occurred during the preceding boom and the overcoming of the overproduction of fixed capital that accompanied the boom, or sometimes several preceding booms.

While the crisis proper is marked by “excess inventories” piling up unsold in warehouses, the period of post-crisis stagnation is marked by a high level of excess capacity, with large quantities of factories and machines—fixed capital—lying idle, not able to function as capital.

Only gradually is this excess capacity overcome. (3) It is overcome by being gradually reactivated as demand for commodities rises once again in the wake of the crisis, on one hand, and by being physically destroyed, [in value terms, which could mean made obsolete or disposed of] on the other. Only when excess capacity has fallen to a certain point can a new investment boom occur. As long as excess capacity remains high—the preceding overproduction of fixed capital has not been overcome—no fall in the rate of long-term interest rates can trigger a new investment boom. This is the phase of the industrial cycle that Keynesian economists call a liquidity trap. Such a liquidity trap represents the period between the overcoming of the preceding overproduction of commodity capital and the far longer process of overcoming the overproduction of fixed capital."

Worth reading both posts to get a feel for the dynamics of our age.