Is Capitalism Doomed? Karl Marx on Economic Crisis

Will the contradictions of capitalism lead to its downfall? What is the source of these contradictions? Karl Marx is often seen as prophesizing capitalism’s downfall, yet no systematic account of this idea exists in Marx’s work. This article explains a theory that certain Marxists favor, and which has been developed from the fragmentary account in Marx’s own work. It begins by stressing the insufficiency of focusing on the account of crisis in the Communist Manifesto. It then moves on to discuss the relationship between crisis and overaccumulation. Various Marxist concepts—including the exchange/use value distinction and that of surplus value are introduced to develop an account of crisis in Marx, before relating it to the origins of modern-day economic crises.

There is a popular approach to Marx’s theory of crisis which emphasizes some of the more polemical, scattered remarks made in the Communist Manifesto. The conception of Marx as merely prophesizing capitalism’s end or gesturing towards its instability, rather than as someone with an extensive, coherent theory of why capitalism might be prone to crisis, is probably a mistake.

In contrast, we find an extensive analysis of crisis in capitalism throughout the work of one of the most prominent intellectuals of the past fifty years: the geographer, historian, and Marx scholar David Harvey. It is worth clarifying at the outset that Harvey conceives of his project as drawing out a theory of crisis that is latent in Marx’s work, albeit in a fragmentary, disunified kind of way.

Harvey defines the Marxist conception of crisis as surplus capital and surplus labor existing side by side, with no way of putting them back together. This state of over-accumulated capital is one of the unifying concerns that run through Harvey’s work. He locates in it the source of crisis within capitalism.

Crisis and Accumulation

So is crisis just overaccumulation? Well, not exactly. The state of overaccumulation is a kind of crisis. The definition of overaccumulation is that it is the state of capital which realizes either a loss or a lower rate of profit than expected. This definition of overaccumulation in Marx makes the relationship between overaccumulation and crisis in general clear (namely that overaccumulation is a species of crisis).

Capital, in this context, refers to a variety of factors of production—money, labor, infrastructure, and anything else that goes into producing something else, which can then be sold for a profit. When there is a crisis of overaccumulation, the capital can only be used at either a loss or to generate less profit than expected, and given that there are various forms of capital, the consequences of overaccumulation are similarly various. Overaccumulation might manifest as liquid assets being hoarded, workers being let go or going underemployed, infrastructure and machinery going unused, and so on.

As Benjamin Kunkel points out in his essay on Harvey, overaccumulation reflects a major contradiction that Marx identified in capitalism: namely, the contradiction implied by the difference between use value and exchange value.

That is, the problem of overaccumulation is not the problem of producing too much wealth. Indeed, periods of overaccumulation are often marked by material desperation. Rather, overaccumulation is a consequence of an inability to generate things that are of exchange value. The consequences of overaccumulation are potentially extremely serious—asset prices go down, firms go bankrupt, wages go down, and unemployment rises.

To repeat, what is at issue here is not productive capacity as such, and so all of this turbulence can go on and on until it becomes profitable to start producing things for the purpose of exchange. From a Marxist point of view, this represents one of the chief absurdities of capitalism: that people could, in an extreme case, go without basic necessities not because it is impossible or even technically difficult to provide them, but because doing so cannot itself generate wealth for others.

Part of the innovation of Harvey’s way of thinking is to characterize overaccumulation as a risk that is intrinsic to the capitalist pursuit of “surplus value.” The paradox of surplus value is one of the most well-worn economics analyses of the Marxist tradition, and also contains a powerful implicit critique of capitalism as an economic system.

Surplus value is the price of a given thing minus the cost of producing it. Surplus value is sometimes misunderstood as a technical synonym for profit, which it is not. Surplus value is only realized in profit if the thing is sold. Costs are typically divided into two categories: fixed costs, which include things like infrastructure, machinery, and raw materials, and variable costs, which are basically labor costs.

In the classic Marxist formulation, C (fixed costs) + V (variable costs) are the total cost of production. But of course, one wouldn’t sell something for no reason. What is the reason to go through the effort of producing something? In a capitalist system, it is—of course—profit. To create profit, one claims for a certain thing a surplus value (S), which is so claimed when a certain thing is given a price that is a certain amount more than the cost of producing it. The equation C+V+S represents what is required for a commodity to be produced in a capitalist system.

The Problem With Surplus Value

The issue with surplus value can be neatly conveyed by imagining (for simplicity’s sake, and following Kunkel again here) that the entire economy is represented by a single firm.

Let us say that the firm pays $100 in total on infrastructure, raw materials, labor, and so on to produce some goods. In other words, C+V = $100. But the firm, as we’ve established, will not produce the goods it produces for no reason. It expects something back. It expects to extract surplus value from all of this. Let’s say the firm hopes to make a profit of 10%, and so S = $10. So the firm will sell all of its inventory for $110 total.

Of course, if this firm represents the entire economy, then the only money which is present in that economy is that which the firm has spent on labor, infrastructure, and so on (namely, $100). To labor the point, those who provide the fixed and variable capital required to make a certain thing are simultaneously the consumers of that thing. So how exactly is it that profit is created? How could those consumers have enough money to buy this product? The answer in this example, as well as in reality, is debt—what Marx famously referred to as “fictitious capital.”

There are various kinds of puzzling irrationality to this. One is the simple fact that money is being created based on nothing but future expectations—in other words, there is no simple, direct relationship between the money exchanged in a system and the value of the stuff which actually exists in that system.

Another is the fact that, by the logic of this system, there will be no point at which all debts can be settled. Let us imagine that some bank is created, which injects $10 into the system. Now the firm has $110 to spend, and let us imagine it invests this into a little more productive capital. Now, the firm has spent $110 producing its total inventory and expects another 10% profit—so, $121. Not only is more debt required, but more debt is required than before ($11 rather than $10!).

There are a number of consequences of this feature of capitalism, many of which Harvey spells out in detail, but can be summarized succinctly as follows. For one thing, growth is essential, because the demands of financing production are always going to be dependent on future profitability (when debt is being accrued on the supply side, in whatever form).

The pursuit of surplus value is used to explain the widening and deepening of capital’s reach as an imperative of the system. Widening here means the pursuit of new markets, while deepening means the attempt to extract yet more surplus value from existing customers. Moreover, given that debt is inescapably important for the functioning of the capitalist system as a whole, there is an ever-growing tendency for modern-day financial crises to emerge as a result of problems in the financial sector.