What is Marx’s theory of crisis?

Marx is much invoked in left discussions of the current economic crisis. But what does Marx say about capitalist crises? His authority has been invoked in relation to rather different theories, and what he says on the subject in Capital has subject to multiple interpretations as well as controversy. The following exposition by Cyrus Bina is clear and straightforward, and agrees (I’ll say it) with my own understanding of what Marx does (and doesn’t) say about crises and their causes.

This is excerpted from a much longer (and rather diffuse) interview which appeared in Radical Notes, and was brought to our attention by Nick Paretsky. (I’ve omitted, however, the discussion of transnational capital and much else, in order to focus on what he says about crisis.) Cyrus Bina teaches at the University of Minnesota and is the author of The Economics of Oil Crisis, Modern Capitalism and Islamic Ideology in Iran (with Hamid Zangeneh), and Beyond Survival: Wage Labor and Capital in the Late 20th Century (with Laurie Clements and Chuck Davis), as well as a number of essays and articles. (All italics in the following are in the original.)

Economic Crises, Marx’s Value Theory, and 21st Century Capitalism

from An Interview with Cyrus Bina

Crises in capitalism are a mechanism for restructuring and renewal and thus, necessarily, a part and parcel of the dynamics of reproduction. That is why we would never envisage a crisis-less capitalism, except in the figment of our imagination…. Another crucial point about the economic crises is that they possibly will not automatically lead to “breakdown” of capitalism. Thus, the so-called breakdown theory (with all due respect to the theorists behind it) is neither adequately informed of Marx’s theory of value nor sufficiently attentive to the role of class struggle in the transformation of history. In other words, all economic breakdowns must be necessarily met with counter-restructuring political struggles that are deeply aware of the across-the-board polarising power of capitalism and that are willing and able to provide a reasonable, feasible and visionary alternative to the post-capitalist future. Consequently, this is the most critical question that would not go away for the radical left across the globe for many years to come.

This crisis is manifold, multi-layered, and universal: it started in the US housing market, then banking system, investment and credit underwriting institutions, asset-backed commercial papers, collateralised debt obligations, credit-swap obligations, before engulfing the visible universe of money, traditional commercial credit underwriting, and individual credit market, among others. Then, the credit-swap derivatives, which were hidden from the public eye and thus floating in the invisible and unregulated side of fictitious capital, have begun to appear on our radio telescope. Why do I say: radio telescope? Since no one, to this date, has seen or been able to calculate precisely the volume or size of these derivatives accurately. This, of course, is half of the story as it is not directly coupled with the origination of surplus value (i.e., the source of profit) and the fast-moving tectonic plates of real capital (i.e., the production process). Moreover, the cauldron of worldwide accumulation, along fast-paced technological change, is not without abrupt, violent and antagonistic frictions in the process of (social) capital’s restructuring. This is the arena in which commodities are produced and up-to-the-minute technology and skills are being created and destroyed in the blink of an eye somewhere around the globe. This is how the new value – hence the importance of Marx’s value theory – is being formed and being destroyed in the battle of competition across the globe. In this arena, time is money, so to speak, as the rapid change in technology sets the pace for both “creative destruction” – (creation and destruction of use-value, a la Joseph Schumpeter [1883-1950]) – and “destructive creation” – (preemptive destruction of exchange value via ever newer technology, a la Bina) – in my (value-theoretic) synthesis of the two, with ever-increasing rapidity.

This is how Karl Marx (1818-1883) is already here in the 21st century with a vengeance. And this is how the engine of change and origin of time-is-money fairly and squarely emerges from the production of surplus value. The role of fictitious capital is to act for the preservation of this existing value (i.e., capital in money form) by churning and stretching it through the sphere of exchange by any means necessary – even by creation of IOU upon IOU in limitless (and unregulated) issuance of fiat credit swap obligations (CSOs). The higher the pace of technological change – and thus the rapidity in the creation and destruction of value in production – the more appetite (and desperation) for preservation of value (of money) in the sphere of exchange. And just because the latter is able to stretch the existing value (i.e., the previously produced value in price terms) in money form, credit form or in notional derivative form, it neither should give finance (capital) an arbitrary “hegemony” over reproduction of capital nor exempt it from the constraint of surplus value production. As a result, despite finance capital’s malleability and semi-autonomous outlook, one should not fall for finance-fetish arguments….

According to Marx, fictitious capital, while real (as you and I who walk to work back and forth), is rather fictitious in that it cannot produce surplus value from thin air; it is only capable of churning, i.e., stretching the time for the fast-evaporating value of capital in circulation. Finance is a sphere in which the representation of a given value changes its form, say, from cold cash to stocks, without adding to productive capacity or wealth of society. It only manages to redistribute wealth similar to a gambling casino, only lager in magnitude and stranger in outcome. That’s why individuals who work in occupations associated with finance are identified as unproductive labour, despite their stressful, say, a 16-hour work day and their likely heart attack at the age of 50 or 52…..

Lastly, capitalist crises are not long-term (contrary to Stagnationist thesis) and thus “permanent,” in Marx’s view of capitalism. Crises are periodic, thus reflecting the break and the continuity, and thus the renewal of the circuit of social capital in the accumulation process.

Now, it would be impossible to speak of a crisis theory without articulating the role of “the law of tendency of the rate of profit to fall” (LTRPF) in Marx’s framework. By all accounts, however, including Marx’s own explicit assertion, this “law” (and its countertendencies) is the most important law in the critique of political economy. The question, therefore, is in what manner and why. Here, the theory of value, as the most distinguishing feature of capitalism, has to be placed at the very centre of analysis, before the role and necessity of crisis in dynamics of value formation can be depicted. Crises provide a window into the periodicity of turbulent capital accumulation through competition, which in turn bring about change in the magnitude of value. That’s why “monopoly capital” view of capitalism (most notably in Paul Sweezy’s writings) has done away with the theory of value (given the lever of competition that goes with it) for developed contemporary capitalism of today. This sadly demonstrates that a wrong turn away from the reality of capitalist competition (as opposed to fictional competition in bourgeois textbooks) can take a prominent figure like Sweezy (1910-2004) – a remarkable mentor of my generation – to a point of no return. This parallel drift away from Marx’s value theory and mistaken interpretation of Marx’s competition have also befallen on many neo-Ricardian/Sraffian scholars, who took the unmediated price of commodities on its face value and consequently, in my judgment, regressed beneath the theoretical standing of their master, David Ricardo (1772-1823).

Capitalist crises are of cyclical in nature in that change in technology – (inclusive of major reorganisation, mergers and acquisition, etc.) – provoked through competition, leads to cost-cutting and rationalisation of the process of production by a few leading capitalists. Of course, in due time this newly-devised technology shall be forcefully generalised throughout the industry. At this initial stage, introduction of the new technique induces a rise in “technical composition of capital” (TCC) – which measures the rise of composition of capital in its material form. However, the rise in material composition, mirrored in value, boosts the value of constant capital, measured by magnitude of the existing value – i.e., the one that has yet to change in magnitude by way of crisis. Marx indentified this as “organic composition of capital” (OCC). Finally, as the new technique finds sufficient emulation in competition and thus being duly generalised throughout the industry, the magnitude of value changes, the restructuring and renewal of accumulation come to pass through crisis and, accordingly, the “value composition of capital” (VCC) is rendered commensurable with the newly-formed value. And as soon as the newly-formed value emerges, any reference to the rise of OCC (the gauge for change in composition of capital related to initiation of the new technique) is not consequential, until the next round of technological change and introduction of new technology by leading capitalists, which once again leads to repetition of the same process toward the formation of newer value.

Marxian competition operates at two distinct, yet intertwined, levels in mature capitalism: (1) the formation of market value in a single industry, via intra-industry competition, and (2) the formation of prices of production, via inter-industry competition. The former leads to different profit rates for the firms in single industry. The latter gives rise to tendency of the uniform rate of profit for all industries. Notwithstanding competition, the price of production of average OCC is the same as the value magnitude. In contrast, the price of production of sectors with higher (lower) OCC must be above (below) the magnitude of value with average OCC. This is known as Marx’s “transformation problem,” an off-putting connotation that, since the early commentaries of Werner Sombart (1894), Eugen von Böhm-Bawerk (1896) and L. J. von Bortkiewicz (1907), clarifies and at the same time obfuscates the real evolution that has led to the transformation of values to prices of production in developed capitalism…. This connotation, in my opinion, must be understood as a transformation procedure in order to shed light on the reality of historical evolution and transformation in capitalism. This amounts to development of capitalism within capitalism, with the emergence and development of credit system, and all the rest. Here, all deviations generated by technological change, changing skills and skill formation, productivity of labour, diverse quality of use-values, etc., are balanced in competition and through socially necessary labour (SNL) time spent in production and measured abstract labour, a common denominator of all commodities. In this manner, ordinarily, the price of production that governs any one sector manifests the most advanced capital in the industry. The exception to this is of course the interaction of capital in the presence of rent, wherein the value formation takes a quite complex excursion beyond present conversation.

Introduction of the new technique increases the initiators’ profit over and above the levels of profit gained by others for a while. This would give these capitalists a weapon of choice in the battle of competition: (1) They produce below the (established) cost of production and still make adequate profit and (2) They take out those who fail to innovate and cut costs quickly enough in order to stay in business. This, as a mechanism within the theory of value, triggers the “tendency of the rate of profit to fall” (LTRPF). And, parenthetically, contrary to many studies, LTRPF is not an empirical law to be used for measuring the actual fall in the profit rate in the long-run; this empirical view, which enjoys popularity in certain Marxist circles, reminds me of the Classical “stationary state,” where the profit rate declines without limit. In my judgment, this fault may have something to do with exegetical reading of Marx, particularly his Grundrisse and his Capital (Vol. 3), in which there is some mention of long-term fall in the rate of profit. I tend to think, along with several well-known Marxist scholars, that what is vitally critical for us is to grasp the centrality of Marx’s method and to let nearly everything in his lifelong and spirited contribution to be subjected to rigorous criticism. This is what true Marxism is all about in both theory and practice.

Returning to main point, just before the generalisation of the new technique, there are many heads that had to be placed on chopping block, along a good deal of the destruction of capital, in mutual mutilation. This, in turn, generates the tendency for the rate of profit to fall within the not-yet-dismantled framework of the old value. In other words, due to fierce competition, so many capitalists cannot afford to hang on to their hat and consequently must file for bankruptcy or worse. As a result, as soon as the new technique will become generalised and the battlefield cleared, the newly-formed value(commensurate, in magnitude, with the new technology, new entrants, and the new rate of profit) will tend to restore the rate of profit as countertendency. Hence both the tendency and countertendency of the falling rate of profit are organically linked with the dynamics of value formation in Marx’s theory of crisis. With the formation of new value, the tectonic plates – so to speak – get ready to move again at the onset of a more intensified competitive build-up in innovative activity, coercive engagement, flourishing and perishing livelihoods, and eventually in the wholesale destruction of capital across the board. In this manner, although actual crises in capitalism are not permanent, nevertheless the spectre of crisis keeps hovering over this mode of production for good.

This is how individual interest (via private appropriation) – even within the capitalist class – works against the collective interest and well-being of the system which, in turn, proves necessary for propagation of the individual capitalist…..

Finally, there are many similarities and differences between the 1929 Great Depression and current crisis that have now been dubbed as the “Great Recession” by some economists. There is no doubt that multiple bubbles that burst, first in the US real-estate market and then sequentially in mortgage institutions, credit-rating and credit-swap institutions, risk assessment and “securitisation” institutions, before being transmitted in wholesale default of major banks and insurance companies, is a reminder of a parallel domino that turned similarly deadly in 1929. The massive bank failures that are still with us across the globe, particularly in the United States, are themselves a universal symptom associated with both crises. For instance, the 1999 repealing of the Glass-Steagall Act of 1933, which proved to have been an effective mechanism for the prevention of conflict of interest between commercial banking and investment banking, points to some underlying consequential similarities. Yet, there are a number of qualitative dissimilarities between this and the 1929 crisis, from the standpoint of scope, speed, and polarising effects, on the one hand, and the manner of response by the various governments, on the other hand. To be sure, in 1929, nearly two-thirds of humanity couldn’t imagine what capitalism was, let alone to live and experience it firsthand. A significant part of humanity was indeed living either in some sort of self-sufficient communities or engaging in petty commodity production, with modest exposure to capitalist market and capitalist social relations. The theory of value (i.e., capital’s social relations), de jure and de facto, had no relevance for this sizable mass of humanity. The 1929 Great Depression coincided with the epoch of imperialism, as Lenin aptly identified it…..

Today’s economic crisis is perhaps the first fully-fledged crisis of global capitalism. It is a crisis that has transmitted in real time throughout the entire globe. This is a crisis that has engulfed nearly an overwhelming majority of humanity for the first time in history. It is a crisis of no-way-out for the majority of inhabitants on the planet. You just look at the simple but tragic massive suicides of many farmers in India alone, and tell me that your country, other than tiny and scattered pockets of pre-capitalist past, is not yet a society under capitalist mode of production. This appears to be contrary to the traditional assessment by some leftists in India and elsewhere; and I sincerely hope that these protagonists shall wake up with the smell of coffee and of worldwide capitalism, before another round of struggle would be lost due to theoretical blunder and misdiagnosis. Lastly, this crisis and this era are manifestly expressing the globalisation of capitalist social relations and universality of the law of value perceptible in profound class polarisation across today’s transnational landscape. And as we move forward, these social relations turn out to be more befitting to what Marx had essentially anticipated in Capital.

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