Crisis theory
Encyclopedia
Crisis theory is generally associated with Marxian economics
. In this context crisis refers to what is called, even currently and outside Marxian theory in many European countries a "conjuncture" or especially sharp bust cycle of the regular boom and bust
pattern of what Marxists term "chaotic" capitalist
development, which, if no countervailing action
is taken, develops into a recession
or depression - see, for example, 1994 economic crisis in Mexico
, Argentine economic crisis (1999-2002)
, South American economic crisis of 2002
, Economic crisis of Cameroon
, Financial crisis of 2007–2010, Great Depression
, etc. In terms of historical materialism
, such crises repeat until objective and subjective factors combine to precipitate the transition to the new mode of production
.
Karl Marx
in his many works (published and unpublished) suggested several different theories, none of them free from controversy to explain how this worked out in particular circumstances. In his mature work his theory of crisis is framed as a Law of Tendency for the Rate of Profit to Fall
combined with a discussion of various counter tendencies, which may slow or modify its impact. A key characteristic of these theoretical factors is that none of them are natural or accidental in origin but instead arise from systemic elements of capitalism as a mode of production
and basic
social order
. In Marx's words, "The real barrier of capitalist production is capital itself".
These systemic factors include the classical 3:
However, as stated above, all such factors resolve to the synthetic viewpoint that all such crises are crises of over and/or misappropriated production relative to the ability and/or willingness of the workers who generate the bulk of demand to consume.
reach the final point of failure, determined by the quality of their leadership
, the development of the consciousness of the various social class
es, and other "subjective factors".
Thus the degree of "tuning" necessary for intervention in otherwise "perfect" market mechanisms becomes more and more extreme as the time in which the capitalist order is a progressive factor in the development of productive forces recedes further and further into the past. But the subjective factors are the explanation for why purely objective factors such as the severity of a crisis, the rate of exploitation, etc. do not alone determine the revolutionary upsurge. A common example is the contrast of the oppression of the working classes in France in centuries prior to 1789 which although greater did not lead to social revolution as it did once the complete correlation of forces appeared.
and Henryk Grossman
both rendered inestimable theoretical services by insisting, as against the revisionists, on the breakdown theory.”
More recently David Yaffe 1972,1978 and Tony Allen et al 1978,1981 in using the theory to explain the conditions of the 1970’s and 80’s re-introduced the theory to a new generation and gained new readers for Grossman's presentation of Marx's crisis theory.
An attempt was made to re-present aspects of the working out of the theory in a mathematical form in the work of Henryk Grossman
. Central to the argument is the claim that, within a given business cycle, the accumulation of surplus from year to year leads to a kind of top-heaviness, in which a relatively fixed number of workers have to add profit to an ever-larger lump of investment capital. This observation leads to what is known as Marx's law of the tendency of the rate of profit to fall
. Unless certain countervailing possibilities are available, the exponential growth
of capital out-paces the growth in labor productivity, so the profits of economic activity have to be shared out more thinly among capitals, i.e., at a lower profit rate. When countervailing tendencies are unavailable or exhausted, the system requires the destruction of capital values in order to return to profitability.
Paul Mattick
's Economic Crisis and Crisis Theory published by Merlin Press in 1981 is an accessible introduction and discussion derived from Grossman's work.
François Chesnais
's [1984] chapter Marx's Crisis Theory Today in Christopher Freeman ed. Design, Innovation and Long Cycles in Economic Development Frances Pinter, London, discussed the continuing relevance of the theory.
which attempts a "middle way
" between laissez-faire
, unadulterated capitalism and state guidance and partial control of economic activity, such as in the French dirigisme
or the policies of the Golden Age of Capitalism attempts to address such crises with the policy of having the state actively supplying the deficiencies of unaltered markets.
Marxists and Keynesians approach and apply the concept of economic crisis in distinct and opposite ways. The Keynesian approach attempts to stay strictly within the economic sphere and describes 'boom' and 'bust' cycles that balance out. Marxists, on the other hand, see economic crisis as part of the larger crisis of the social order they wish to supplant.
There is also a Post Keynesian economics debt-crisis theory of Hyman Minsky
.
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
. In this context crisis refers to what is called, even currently and outside Marxian theory in many European countries a "conjuncture" or especially sharp bust cycle of the regular boom and bust
Boom and bust
A credit boom-bust cycle is an episode characterized by a sustained increase in several economics indicators followed by a sharp and rapid contraction. Commonly the boom is driven by a rapid expansion of credit to the private sector accompanied with rising prices of commodities and stock market index...
pattern of what Marxists term "chaotic" capitalist
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
development, which, if no countervailing action
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
is taken, develops into a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
or depression - see, for example, 1994 economic crisis in Mexico
1994 economic crisis in Mexico
The 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....
, Argentine economic crisis (1999-2002)
Argentine economic crisis (1999-2002)
The Argentine economic crisis was a financial situation, tied to poilitical unrest, that affected Argentina's economy during the late 1990s and early 2000s...
, South American economic crisis of 2002
South American economic crisis of 2002
The South American Economic Crisis is the economic disturbances which have developed in 2002 in the South American countries of Argentina, Brazil and Uruguay....
, Economic crisis of Cameroon
Economic crisis of Cameroon
The Cameroonian economic crisis was a downturn in the economy of Cameroon from the mid-1980s to the early 2000s. The crisis resulted in rising prices in Cameroon, trade deficits, and loss of government revenue. The government of Cameroon acknowledged the crisis in 1987. Outside observers and...
, Financial crisis of 2007–2010, Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, etc. In terms of historical materialism
Historical materialism
Historical materialism is a methodological approach to the study of society, economics, and history, first articulated by Karl Marx as "the materialist conception of history". Historical materialism looks for the causes of developments and changes in human society in the means by which humans...
, such crises repeat until objective and subjective factors combine to precipitate the transition to the new mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
.
Causes of crises
In Marxist terms, the economic crises are crises of overproduction and immiseration of the workers who, were it not for the capitalist control of the society, would be the determiners of both demand and production in the first place.Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
in his many works (published and unpublished) suggested several different theories, none of them free from controversy to explain how this worked out in particular circumstances. In his mature work his theory of crisis is framed as a Law of Tendency for the Rate of Profit to Fall
Tendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
combined with a discussion of various counter tendencies, which may slow or modify its impact. A key characteristic of these theoretical factors is that none of them are natural or accidental in origin but instead arise from systemic elements of capitalism as a mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
and basic
Base and superstructure
In Marxist theory, human society consists of two parts: the base and superstructure; the base comprehends the forces and relations of production — employer-employee work conditions, the technical division of labour, and property relations — into which people enter to produce the necessities and...
social order
Social order
Social order is a concept used in sociology, history and other social sciences. It refers to a set of linked social structures, social institutions and social practices which conserve, maintain and enforce "normal" ways of relating and behaving....
. In Marx's words, "The real barrier of capitalist production is capital itself".
These systemic factors include the classical 3:
- Full employmentFull employmentIn macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....
profit squeeze. Capital accumulation can pull up the demand for labor powerLabor powerLabour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
, raising wages. If wages rise "too high," it hurts the rate of profitRate of profitIn economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
, causing a recession.
- The tendency of the rate of profit to fallTendency of the rate of profit to fallThe tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
. The accumulation of capitalCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, the general advancement of techniques and scale of production, and the inexorable trend to oligopolyMonopoly CapitalMonopoly Capital: An Essay on the American Economic and Social Order is an essay from 1966 by Paul Sweezy and Paul A. Baran. It made a major contribution to Marxist theory by shifting attention from the assumption of a competitive economy to monopolistic aspects of giant corporations that dominate...
by the victors of capitalist market competition, all involve a general tendency for the degree of capital intensityCapital intensityCapital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
, i.e., the "organic composition of capitalOrganic composition of capitalThe organic composition of capital is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. Marx first...
" of production to rise. All else constant, this leads to a fall in the rate of profitRate of profitIn economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
, which leads to a slow-down of accumulation and attempts to remedy this either within the circuit of production or by non-production means such as the financializationFinancializationFinancialization is a term sometimes used in discussions of financial capitalism which developed over several decades leading up to the 2007-2010 financial crisis, and in which financial leverage tended to override capital and financial markets tended to dominate over the traditional industrial...
based booms of the 1920s or 1990s and early 2000s. Since only real production can be the basis of sustained accumulation at the macroeconomic and international scale, the failure of such remedies can result in panic and systemic crisis.
- UnderconsumptionUnderconsumptionIn underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by...
. If the capitalists win the class struggleClass struggleClass struggle is the active expression of a class conflict looked at from any kind of socialist perspective. Karl Marx and Friedrich Engels wrote "The [written] history of all hitherto existing society is the history of class struggle"....
to push wages downRace to the bottomA race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...
and labor effort up, raising the rate of surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
, then a capitalist economy faces regular problems of inadequate consumer demandConsumption (economics)Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
and thus inadequate aggregate demandAggregate demandIn macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
.
However, as stated above, all such factors resolve to the synthetic viewpoint that all such crises are crises of over and/or misappropriated production relative to the ability and/or willingness of the workers who generate the bulk of demand to consume.
Application
It is a tenet of many Marxists groupings that crises are inevitable and will be increasingly severe until the contradictions inherent in the mismatch between the mode of production and the development of productive forcesSocial progress
Social progress is the idea that societies can or do improve in terms of their social, political, and economic structures. This may happen as a result of direct human action, as in social enterprise or through social activism, or as a natural part of sociocultural evolution...
reach the final point of failure, determined by the quality of their leadership
Professional revolutionaries
The concept of professional revolutionaries, alternatively called cadre, is in origin a Leninist concept used to describe a body of devoted communists who spend the majority of their free time organizing their party toward a mass revolutionary party capable of leading a workers' revolution...
, the development of the consciousness of the various social class
Social class
Social classes are economic or cultural arrangements of groups in society. Class is an essential object of analysis for sociologists, political scientists, economists, anthropologists and social historians. In the social sciences, social class is often discussed in terms of 'social stratification'...
es, and other "subjective factors".
Thus the degree of "tuning" necessary for intervention in otherwise "perfect" market mechanisms becomes more and more extreme as the time in which the capitalist order is a progressive factor in the development of productive forces recedes further and further into the past. But the subjective factors are the explanation for why purely objective factors such as the severity of a crisis, the rate of exploitation, etc. do not alone determine the revolutionary upsurge. A common example is the contrast of the oppression of the working classes in France in centuries prior to 1789 which although greater did not lead to social revolution as it did once the complete correlation of forces appeared.
Influence
The place of crisis theory within Marx's theory is central and recurs throughout his writings and correspondence. This is one of the abiding and most revolutionary aspects of Marx's work. Alongside Lenin’s complementary study of the "barbarous dynamic" of capitalism, this theory underpins marxists’ understanding of the enduring necessity for systemic change. Its contested treatment is therefore unsurprising, and as Roman Rosdolsky explains … “The assertion that Marx did not propose a ‘breakdown theory’ is primarily attributable to the revisionist interpretation of Marx before and after the First World War. Rosa LuxemburgRosa Luxemburg
Rosa Luxemburg was a Marxist theorist, philosopher, economist and activist of Polish Jewish descent who became a naturalized German citizen...
and Henryk Grossman
Henryk Grossman
Henryk Grossmanalternative spelling: Henryk Grossmann , was a Polish-German economist and historian of Jewish descent....
both rendered inestimable theoretical services by insisting, as against the revisionists, on the breakdown theory.”
More recently David Yaffe 1972,1978 and Tony Allen et al 1978,1981 in using the theory to explain the conditions of the 1970’s and 80’s re-introduced the theory to a new generation and gained new readers for Grossman's presentation of Marx's crisis theory.
An attempt was made to re-present aspects of the working out of the theory in a mathematical form in the work of Henryk Grossman
Henryk Grossman
Henryk Grossmanalternative spelling: Henryk Grossmann , was a Polish-German economist and historian of Jewish descent....
. Central to the argument is the claim that, within a given business cycle, the accumulation of surplus from year to year leads to a kind of top-heaviness, in which a relatively fixed number of workers have to add profit to an ever-larger lump of investment capital. This observation leads to what is known as Marx's law of the tendency of the rate of profit to fall
Tendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
. Unless certain countervailing possibilities are available, the exponential growth
Exponential growth
Exponential growth occurs when the growth rate of a mathematical function is proportional to the function's current value...
of capital out-paces the growth in labor productivity, so the profits of economic activity have to be shared out more thinly among capitals, i.e., at a lower profit rate. When countervailing tendencies are unavailable or exhausted, the system requires the destruction of capital values in order to return to profitability.
Paul Mattick
Paul Mattick
Paul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...
's Economic Crisis and Crisis Theory published by Merlin Press in 1981 is an accessible introduction and discussion derived from Grossman's work.
François Chesnais
François Chesnais
François Chesnais is a member of the Scientific Council of ATTAC-France, the author of several books and numerous articles on economics and a founder of the Marxist journal Carré Rouge.-Books:...
's [1984] chapter Marx's Crisis Theory Today in Christopher Freeman ed. Design, Innovation and Long Cycles in Economic Development Frances Pinter, London, discussed the continuing relevance of the theory.
Difference between Marxists and Keynesians
Keynesian EconomicsKeynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
which attempts a "middle way
The Middle Way
The Middle Way is a book on political philosophy written by Harold Macmillan and first published in 1938 )...
" between laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
, unadulterated capitalism and state guidance and partial control of economic activity, such as in the French dirigisme
Dirigisme
Dirigisme is an economy in which the government exerts strong directive influence. While the term has occasionally been applied to centrally planned economies, where the state effectively controls both production and allocation of resources , it originally had neither of these meanings when...
or the policies of the Golden Age of Capitalism attempts to address such crises with the policy of having the state actively supplying the deficiencies of unaltered markets.
Marxists and Keynesians approach and apply the concept of economic crisis in distinct and opposite ways. The Keynesian approach attempts to stay strictly within the economic sphere and describes 'boom' and 'bust' cycles that balance out. Marxists, on the other hand, see economic crisis as part of the larger crisis of the social order they wish to supplant.
There is also a Post Keynesian economics debt-crisis theory of Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...
.
See also
- Capital, Volume IIICapital, Volume IIICapital, Volume III, subtitled The Process of Capitalist Production as a Whole, was prepared by Friedrich Engels from notes left by Karl Marx and published in 1894...
- Economic collapseEconomic collapseThere is no precise definition of an economic collapse. While some might consider a a severe, prolonged depression with high bankruptcy rates and high unemployment an economic collapse, others would additionally look for a breakdown in normal commerce, such as hyperinfalation, or even a sharp...
- Late capitalismLate capitalism"Late capitalism" is a term used by neo-Marxists to refer to capitalism from about 1945 onwards, with the implication that it is a historically limited stage rather than an eternal feature of all future human society. Postwar German sociologists needed a term to describe contemporary society...
- List of economic crises
- NeoliberalismNeoliberalismNeoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...
- Criticisms of MarxismCriticisms of MarxismCriticisms of Marxism have come from the political left as well as the political right. Democratic socialists and social democrats reject the idea that socialism can be accomplished only through class conflict and a proletarian revolution. Many anarchists reject the need for a transitory state phase...
- MarxismMarxismMarxism is an economic and sociopolitical worldview and method of socioeconomic inquiry that centers upon a materialist interpretation of history, a dialectical view of social change, and an analysis and critique of the development of capitalism. Marxism was pioneered in the early to mid 19th...
External links
- Capital, Volume 1, "Chapter 1" by Karl Marx
- "Crisis of Capitalism" by MIA Encyclopedia of Marxism
- "Crisis and Hope: Theirs and Ours" Noam ChomskyNoam ChomskyAvram Noam Chomsky is an American linguist, philosopher, cognitive scientist, and activist. He is an Institute Professor and Professor in the Department of Linguistics & Philosophy at MIT, where he has worked for over 50 years. Chomsky has been described as the "father of modern linguistics" and...
, 2009
Further reading
- Allen, Tony et al 1978 The Recession: Capitalist Offensive and the Working Class RCP 3, July 1978, Junius
- Allen, Tony 1981 World in Recession in RCP 7, July 1981, Junius
- Bullock, Paul and Yaffe, David 1975 Inflation, the Crisis and the Post-War Boom RC 3/4 November 1975, RCG
- Chesnais, FrançoisFrançois ChesnaisFrançois Chesnais is a member of the Scientific Council of ATTAC-France, the author of several books and numerous articles on economics and a founder of the Marxist journal Carré Rouge.-Books:...
[1984] Marx's Crisis Theory Today in Christopher Freeman ed. Design, Innovation and Long Cycles in Economic Development 2nd ed. 1984 Frances Pinter, London - Clarke, Simon 1994 Marx’s Theory of Crisis Macmillan
- Day, Richard B 1981 The ‘Crisis’ and the ‘Crash’: Soviet Studies of the West (1917–1939) NLB
- Grossman, HenrykHenryk GrossmanHenryk Grossmanalternative spelling: Henryk Grossmann , was a Polish-German economist and historian of Jewish descent....
The Law of Accumulation and Breakdown of the Capitalist System Pluto 1992 - Lenin V.I. Imperialism, the Highest Stage of Capitalism
- Mattick, PaulPaul MattickPaul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...
Marx and Keynes Merlin 1974 - Mattick, PaulPaul MattickPaul Mattick Sr. was a Marxist political writer and social revolutionary, whose thought can be placed within the council communist and left communist traditions...
Economic Crisis and Crisis Theory published by Merlin Press in 1981 - Rosdolsky, RomanRoman RosdolskyRoman Rosdolsky was an important Marxian scholar and political activist. He was born in Lviv in Galicia, at that time in the Austro-Hungarian empire, now in Ukraine, and died in Detroit, MI...
The Making of Marx’s ‘Capital’ Pluto 1980 - Shoul, Bernice The Marxian Theory of Capitalist Breakdown 1947
- Ticktin, Hillel, 'A Marxist Political Economy of Capitalist Instability and the Current Crisis', Critique, Vol.37.
- Yaffe, David 1972 The Marxian Theory of Crisis, Capital and the State, Bulletin of the Conference of Socialist Economists, Winter 1972, pp 5–58
- Yaffe, David 1978 State and the Capitalist Crisis 2nd ed RCG Reprint