Crisis Theory and Socialism

Since the Second International, there has been a major cleavage within Marxian political economy. This initially emerged as a theoretical dispute regarding the precise cause of capitalism's chronic economic crises. Karl Marx's theory of crisis is premised on the notion that capitalist crises occurs within production itself, arising as a result of the tendency of the rate of profit fall. Critics, however, contend that crises occur due to the inequitable distribution of wealth capitalism engenders, which inevitably leads to large scale overproduction.

According to the orthodox Marxist position, the only means by which economic crises can be overcome is through the wholesale destruction of existing value. In practice, this would entail a prolonged period of mass unemployment, bankruptcies, and deflation until the point is reached wherein the few individuals with capital to invest are presented with an environment conducive to profitable investment in production. Those who adhere to the Marxian/left-Keynesian hybrid interpretation, on the other hand, argue that, since crises are essentially an issue of effective demand, a radical redistribution of wealth or restructuring of remuneration is sufficient enough to end an economic depression.

This dispute is relevant to socialism because one of the utilitarian arguments activists present in favor of changing modes of production is that, unlike capitalism, socialism is immune to endogenous economic crises. Yet, if the orthodox Marxist theory is correct, exponents of market socialism (i.e., workers' self-management within a market context) are basically advocating a system which is just as susceptible to crises as capitalism itself. The only conceivable way to eliminate crises, then, is through the establishment of a planned economy. If the underconsumptionist school is correct, however, market socialism is fundamentally immune to economic crises.

The arguments in favor of socialism, its ultimate ascendancy, and its developmental trajectory, go beyond whether or not it is capable of overcoming economic crises, in my opinion. Nevertheless, I'd be interested in reading whatever thoughts the rest of the forum might have on this subject.

I wouldn't say that market socialism is just as susceptible to crises as capitalism. The socialisation of capital means the government has some control over the market and the behaviour of companies, so I think the boom/bust cycle would be muffled in its impact. Planning is still better, especially since, as David Harvey pointed out, the rich often draw immense profit despite (or because of?) economic crises.

I agree, however, that socialism is bigger than the desire not to be satisfied with an economic system that periodically and quite thoroughly breaks itself.

RedSun wrote:The socialisation of capital means the government has some control over the market and the behaviour of companies, so I think the boom/bust cycle would be muffled in its impact.

Not necessarily. If the labor theory of value is correct (and there is ample empirical evidence suggesting it is), as production becomes more capital intensive, there is a corresponding loss in profitability because prices are proportional to labor inputs. And even if the orthodox Marxian labor theory of value were incorrect, automation within a competitive market economy still leads to a decline in profitability over time. So, unless a market socialist economy were to remain in a state of technological stasis—which is not feasible or desirable—there would eventually be a decline in revenue available for investment, thereby creating unemployment, stagnation, and crisis. Crises would undoubtedly be shorter in a socialist market economy, and the affects most likely wouldn't be as severe, but if the tendency for the rate of profit to fall is the true source of crises (as opposed to underconsumption), then we could expect them to occur under market socialism.

Planning is still better, especially since, as David Harvey pointed out, the rich often draw immense profit despite (or because of?) economic crises.

They do in certain instances, such as buying assets cheaply and reaping the profits therefrom once the economy recovers, or forcing governments to privatize public services. This phenomenon, however, wouldn't occur in a socialist market economy.

Celtiberian wrote:Crises would undoubtedly be shorter in a socialist market economy, and the affects most likely wouldn't be as severe, but if the tendency for the rate of profit to fall is the true source of crises (as opposed to underconsumption), then we could expect them to occur under market socialism.

I apologise for the confusion; that's essentially what I was trying to say, that market socialism would still have crises with the same frequency (although I had that misconception about production), they just wouldn't be as severe.

While the Keynesian introductions to Marxism are superficially appealing, I do not believe that they possess nearly as much clout as their (rather few serious Marxist) proponents propound. The demand side theory of Keynesian economics was not conceived by Keynes but was rather consolidated and articulated by him. Underconsumptionist theories of economic crisis extend to the earliest period of modern economic thought, asserted in Bernard Mandeville's The Fable of the Bees as a source of social malaise in the early 18th century. In the 19th, it was debated between David Ricardo and Thomas Malthus and explicitly submitted as a cause of bust cycles by Jean Charles Léonard de Sismondi and Robert Owen. It was also criticized by Marx for its tautological inadequacy.

It is quite apparent that capitalism results in overproduction and a squandering of social resources, but this alone is insufficient to explain the emergence and recurrence of crises. It is production, not consumption, which provides both capitalists and workers with purchasing power; it is the former which determines the latter. Marx argued that the capitalist drive to reduce variable capital (human labor) relative to constant capital results in a declining rate of profit (ratio of surplus value to total capital invested) over time, which incites crisis if left unrestrained. In other words, as the organic composition of capital (capital intensity) of production rises, the labor time involved necessarily decreases, and since living labor is the only source of value, the subtraction of variable capital corresponds to a proportional diminution of surplus value. This "excess" in the organic composition of capital translates into dwindling production and eventual failure.

I would contend that production for exchange value in general is subject to a falling rate of profit. Despite the fact that market socialism would not suffer such spectacular failures as capitalism and lead to its obscene levels of unemployment, waste of resources, curtailment of social services, and needless protraction of human misery, the market economy would nonetheless face pressures to replace human labor with machine labor. This would invariably occur unless the economy were perpetually stagnant, which is unpalatable in its own right. Therefore, production for exchange value is unstable and unsustainable regardless of ownership rights or lack thereof. The market breeds injustice and impedes human progress, and I would support its abolition in spite of any efficiencies attributable to market socialism.

For an excellent analysis of the history of crisis theories and support of Marx's hypothesis for the tendency of the rate of profit to fall, I offer two papers by Anwar Shaikh.