Marx’s Theory of Economic Crisis

November 27, 2011

Political economy

What comes in our minds when we think about Marx and Marxism is an understanding of politics and society which flourished during the middle of the 20th century, but lost its advocates in the last few decades to a degree that people believe it to be a dead theory and its supporters to be socially misfit. Its etymology is sometimes mistakenly related to Communism, dictatorships as Cuba and North Korea and even violence. Marx’s work however, almost totally neglected the aspects of what later became Communism, but fully concentrated on Capitalism, what it is and how it harms our society. Besides analyzing Capitalism, he also offered an alternative understanding of how the economy works and how some of our economic problems can be solved.

His economic theory is based on an idea, which had been developed before his time, by classical economists like David Riccardo and Adam Smith, namely the so called “Labor Theory of Value”. This theory argues that the value of a commodity is related to the labor needed to produce or obtain that commodity. Humans however, distinguish themselves from other commodities by having the ability not just to own a certain “use value” but to be able to create value. During the Industrial Revolution this feature victimized especially lower class people to a large extend, transforming them into the main input factor of the companies owned by an emerging group of entrepreneurs, the later bourgeoisie, who exploited human labor to a disproportionate extend, mainly to become  rich.

In his theory about economic crisis Marx considered the average working day of a single worker to comprise two components. In the first part of the day the worker produces a value which equals his wage, in the second part, where the value of production starts exceeding the wage, the worker starts producing a surplus till the end of a working day. The surplus produced in the latter period however, is the gain of the entrepreneur and is not returned to the worker. From the entrepreneurs point of view we can think of the working day as being divided into V and S, where V stands for variable capital and S indicates surplus value. The variable capital contains the wage payed to the workers and the surplus value is the source of profit for the company. At point T of the timeline  the worker will have produced a value equal to the wage he earns. After T he starts creating surplus for his company in the amount of S.

An economic crisis occurs when the rate of profit falls over time. This is the case when high competition among the companies forces entrepreneurs to reinvest their surplus s instead of using it for their own pleasure. Together with the improvement of production (meaning c has increased) the ratio of constant capital per worker c/v increases, too. In order to make clear what effect this has on the rate of profit, we can divide the whole expression by v.

If  s/v increases at a slower pace than c/v , the fraction gets smaller, meaning that the rate of profit gets smaller. A smaller rate of profit obviously makes it impossible for some companies to compete and forces them to go bankrupt, thus increasing the unemployment rate and finally leading to a recession. Marx argues that improvements in technology, financing and academic knowledge about the economy can help delaying or changing the tendency of this mechanism but its essence will remain the same.

The only way to get out of the crisis is to wait until a sufficient amount of companies go bankrupt, decreasing the amount of c (constant capital) in the economy. Together with a high unemployment rate, which forces people to offer their labor force to much lower wages, companies start to make profit again.

The part of the population which suffers most from this economic fluctuation is obviously the working class. They first lose their jobs and then have to accept a new job for much lower wages.

The reason why I decided to write about Marx’s Crisis Theory is because it plays a major role in explaining why the working class eventually ends up revolting against the bourgeoisie. Because crises mean that the very functioning of the capitalist system cannot guarantee even crumbs that are thrown to the worker. In his own words Marx says:

..(crises)…dispels all fixity and security in the security of the constantly threatens….to snatch from his hands his means of subsistence, and…make him superfluous. We have seen….how this (class) antagonism vents its rage…in the incessant human sacrifices from among the working class, in the most reckless squandering of labor power and in the devastation caused by a social anarchy which turns every economic progress into a social calamity.(Capital, Marx)













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