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A blog of Post-Capitalist critique in general, economic, philosophical and political analyses, Post-Capitalist poetry and prose, Post-Capitalist philology, book reviews, Postcapitalist news, interviews, praxis, art and much more! For the record, Davide Ferri is a Postcapitalist, who graduated with a B.A.Economics(Honours) degree from Shri Ram College of Commerce, Delhi University, India. He currently lives and works in Mumbai.

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Wednesday, 18 January 2012

REALISATION CRISES, OVERPRODUCTION AND THE TRANSFORMATION PROBLEM

REALISATION CRISES, OVERPRODUCTION AND THE TRANSFORMATION PROBLEM


"...if the rate of investment actually does increase, the output of consumption goods will display a continuous tendency to outrun the demand." 
[P. Sweezy, Theory of Capitalist Development, page 189]

Written by: Davide Ferri
B.A.Economics(Honours)
SRCC, Delhi University
First published on: January 18, 2012
Lastly modified on: March 6,2012


What are realisation crises?

Realisation crises occur whenever the owner of the means of production (call him/her a Capitalist/boss/entrepreneur or the way you want) does not manage to realise his/her own commodities on the market, namely, s/he doesn't manage to sell them and get a profit out of them.
These realisation crises are peculiar to Capitalism; where we find inter-conflicting opposites such as Capital-WageLabour, Financial Capital-Industrial Capital, Money as a means of Value-Money as a means of payment, Exchange value-Use value and so forth.
This article is not going to dwell upon these contradictions in a detailed way, as I already did elsewhere, in my blog "The Growing Relevance of Postcapitalism".
This article is just going to show you that realisation crises are crises of overproduction; insofar as they have to do with problems regarding the production dynamics within Capitalism; and not crises of underconsumption.
I wish to generally point out that Neo-marxism  —   in ironic terms the "Keynesian moment of Marxism" —   and its underconsumptionist approach are not very convincing for various reasons grounded in political economy, which I will discuss below.

UNDERCONSUMPTIONISM

What is underconsumptionism?

Before talking about realisation crises in a more detailed way, let us focus on the wretched underconsumptionist approach. The first question that may arise whilst analysing Underconsumptionism


What is Underconsumptionism, whether Marxist or non-Marxist?
It is a politico-economic doctrine for which Capitalism doesn't generate enough demand for what all it produces. According to underconsumptionism, Capitalism brings along an inherent demand gap.


What is a Demand Gap?
It is that amount of demand which - if existing - would allow Capitalism to avoid realisation crises.

Why can't Capitalism generate enough demand for what all it produces?

Let us come to the facts.
According to underconsumptionism, as the social product is shared between workers and capitalists; a part of social production is used for production-related replacement issues and the remaining part is shared between workers and capitalists.
There would be no crisis if both workers and capitalists could wholly consume this "redistributed" part of the social product.
But this process, of course, would represent an impossible scenario.
In fact, Capitalism cannot exist without accumulation generated by inter-capitalist and/or inter-oligopolist competition.
Assuming the workers spend more or less all of their income in consumers' goods, the wealthy capitalists don't do. Within modern-day Financial Capitalism, Capitalists, apart from investing, usually save large amount of money. A general equilibrium occurs whenever investment is offset by an equal amount of saving. According to underconsumptionists, saving constitutes a dangerous "drain" of wealth.
[This concept of drain is often used by Keynesians too.]
The more investors save, the worse it is for the stability of Commodity production.


The demand gap is filled only in case capitalists spend their whole surplus value on their individual consumption; within an impossible scenario in which there is no expansion of production through investment; and therefore no growth.


In brief, the whole production cannot find compensation in enough consumption.


Capitalism is perpetually stagnant for this reason; according to under-consumptionist a' la Sweezy.
Even assuming that wages are wholly expended on consumers' goods, this wage-labour consumption would not correspond to the whole net product; capitalist consumption is also needed, so as to fill the demand gap
It must be remembered that Cycles of booms and busts have always been accompanied by impressive growth in capitalist economies over centuries; these dynamics clash with the logic of underconsumptionism; which regards Capitalism as inherently stagnant.*
What all the underconsumptionist logic implicitly suggests is that realisation crises allegedly exacerbates whenever the State fails to intermediate in an appropriate fashion between the contradictions of Capital and Wage-Labour, that is to say, either when it doesn't provide enough State spending (e.g. in the form of workers' benefits, transfer payments or social bonuses) so as to boost consumption or it doesn’t stimulate enough Private spending (in the form of lesser taxation), or it fails to provide Capitalists with a good source of surplus value through pro-Capitalist trade union negotiations.
Needless to say, these realisation crises end up worsening whenever State spending is carried out by means of national debt with fictitious money transactions -a modern-day trend - which are more than detrimental in the long run.

As we may notice, the underconsumptionist approach a' la Paul Sweezy, leads us to the conclusion the crisis problem is merely "external" and not internal to Capitalist production.
An intermediating State could, theoretically, solve all the problems, according to the wretched underconsumptionist logical conclusions.

Why?
Let us deepen this matter.

ON GROWING REAL WAGES

Real wages may grow by means of pro-workers unionisation and pro-workers state action.
Growing real wages - sheer external forces - allegedly endanger the Capitalist rate of profit, whose formula is

[s/(c+v)] 

where: s =surplus value (socially necessary labour time appropriated by production ownership)
c =constant capital (socially necessary labour time objectified in machines, tools etc)
v = variable capital (workers' socially necessary labour time)

It is true that growing real wages decrease the rate of profit.
According to Sweezy e.g., growing real wages as fostered by external factors are the dominant factors behind the falling rate of profit in Monopoly Capitalism. In particular, according to Sweezy, the growth of real wages lagging behind the growth of surplus is the reason behind crises.
Marx, conversely, regards the growing size of constant capital as the dominant factor, whilst accepting the fact that growing real wages lead to the falling rate of profit too. Further, Marx also hints that the consuming power is restricted by the tendency to accumulation.
However regards growing real wages as a subordinate external factor, not as important as the growing size of fixed Capital; whilst underconsumption being an effect of overproduction.
In fact, if growing real wages were the main problem hindering accumulation  - whether in competitive or monopoly capitalism - why e.g. couldn't the Capitalists "politically cartelise" and come to an agreement with trade unions and Capitalist States for a redistribution of surplus value so as to avoid realisation crises?
Because "they don't know" ?
As previously discussd, the problem is implicitly(and naively) reduced to mere 'State intermediation' by the extreme conclusions of under-consumptionists.
I would even add that economic redistribution have been carried out, like in the second half of the XX century in most advanced countries, and yet crises occurred the same, from the 50's to the 70's. Crises kept occuring, even after Capitalism generally dropped its Keynesian character, and with growing intensity. Capitalist crises are more and more frequent and intense.
Sweezy, unlike Shaikh e.g. says little on the dynamics whereby the growing size of Capital -  as a dominant force - leads to the falling rate of profit overtime.
Underconsumption implicitly comes to the conclusion that a state-level planned or Keynesian Capitalism could harmonise Capitalism and make it work with not so many problems of accumulation.
This neo-harmonist logic, however, does not hold.

Why?

Because even "Redistributionist" Capitalist nations witnessed crises of accumulation during the early years of "neo-harmonist Capitalism".
"Redistributionist Scandinavia" had also big problems in the 2000's, with double digit unemployment and slumps.
Capitalist nations with important routine fiscal policies experienced realisation crises just like their "more neoclassic" predecessors, not to mention that in the 70's, the terrible economic failure of Keynesianism - in the form of Stagflation - dialectically led to the rise of Neo-liberalism, its pro-capitalist counterpart.

Whether you have Keynesian or non-Keynesian Capitalism crises occur the same.


It must be remembered that one can increase social consumption with fiscal policies, true, but these policies draw "fiscal" value from pre-existing surplus-value and, alas, marginal propensity to consumption cannot even be "accumulated" over years.
Further, in "Keynesian Monopoly Capitalism", an increase in Government spending (or a decrease in taxation) produces inflation.
Whenever aggregate demand rises due to fiscal policies, Monopoly Capital increases its profit by increasing price rather than output, creating an inflationary spiral.

The realisation problem necessarily comes from Commodity Production itself and not from "underconsumption"; a mere effect of overproduction. The problem is inherent to the Capitalism's anarchy of production. Crises, in Capitalism, have to do with problems in production, like those relative to the fact the falling rate of profit leads to overproduction of constant Capital and then to underconsumption once the crisis has already started; and the movements of market variables are fully dialectical.
Production dynamics- it goes without saying - precede consumption. I will explain overproduction in a detailed way later..

Sweezy (1970), among other things, claims that more Capital will have to be directed into the production of Capital Goods, as the organic composition of capital [c/(c+v)] growingly increases, in favour of constant capital.
Hence, the rate of growth of Capital is higher than the rate of growth of the consumer goods sector. This is - in broad terms - Sweezy's theory of underconsumption, as there is inequality between department I (producers' goods such as machines, tools et cetera) and department II (consumers'goods in general).
On the other hand the demand for output of consumers' goods on the part of the capital goods sector (department I) itself is neglected by Sweezy.
Further, it is dubious whether the scale of capital goods' and consumer goods' production causes both realisation crises and a falling rate of profit.
One question, at this point, may arise:

How does the crisis of overproduction take place?


OVERPRODUCTION

The perpetual cost-reducing drive of competing Capitalists — who have to wait for the writing off of purchased Capital, due to the narrow limits of private profit** — doesn't help accumulation.
It is important to point out that the necessarily growing size of constant Capital  —  a department I overproduction problem based on anarchic expectations  —  reduces the rate of profit [s/(c+v)] and the investors' positive expectations; giving rise to dangerous under-investment.
Whenever the rate of profit falls because of growing constant capital - which is sheer overproduction in-the-state-of-becoming - private investment is held back by investors - who base their expectations on the average rate of profit. Hence realisation crises are generated in department I and then spread to department II, leading to lay-offs and ultimately underconsumption.
As economist Anwar Shaikh brilliantly shows in his "The Falling Rate of profit and the crisis in the US", American profit rates drastically fell throughout the XX century.
In 1950 the average profit rate was circa 0.15 to then fall up to circa 0.04 in 1982!
Again, it is important to emphasise for a reader that may get confuse with terminologies that rate of profit does not mean "mass of profit", which can even increase.
An increase in the rate of profit through the  increasing size of Capital may get the end of Capitalism nearer than a decreasing surplus value; which can be offset by the growing political labour strength of Capitalists.
As I emphasis in my article on "mechanised political labour" ideas realised through individuals working in Capitalist administrations e.g. are mechanically anti-revolutionary ideas, that is to say, ideas carried out through individuals that have labour and commodities at their disposals.
These individuals are, in broad terms, mechanised politicians/reactionaries, who makes it quite difficult for a progressive fall in surplus value to be sustainable, perhaps by means of trade union activities.
Austerity measures e.g. could be easily carried out thanks to the (reactionary) mechanised political labour of these queer human historical products, as imposed over trade unions and labourers.
Media, militias, police, pro-consumerism policies and propaganda of any kind play a major role within this framework. Mechanised political labourers may have all this at their disposal, to be used against progressive people's revolution.

It is important to point out that all the above mentioned dynamics — from overproduction to the extensive use of what I personally call mechanised political labour — are peculiar the anarchy of Commodity production, within a process through which use-values are destroyed in the most dangerous way or merely not developed for the sake of waste, like in the case of military Capitalism. 
Within military Capitalism, labour creates commodities whose use-values are only relative to warfare, as if arms' use-values could satisfy people's wants and not only those of few Capitalist fanatics, for the sake of their banking accounts.
These war commodities — whose labour could be productively employed for productive use by the people — are a drain of human use and represent a dangerous inflationary risk, insofar as a rise in the price level (and therefore a fall in real wages) can occur if employment increases through war Capitalism and consumers' goods production is not increased. I argue that in this case, Capitalists would raise the price of existing production to absorb the values from the war-induced employment rise.
This is what can be called as "inflation-based profit".
These dynamics would offset the alleged societal "benefits" of "war Capitalism" —  unlike what  underconsumptionism envisions with its extreme logical conclusions —  not to mention what all the increase in profit, and therefore investment, creates in the long run through the dynamics of a falling rate of profit;
and not to mention what all price distortions may further create, especially within Financial Capitalism where the contradictions of Money as a means of payment and Money as a means of value may send commodities use-values to the devil.
For the general dynamics discussed above, it is not surprising that no Capitalist country has ever achieved total employment.
I will not dwell upon the dynamics of profit in a detailed way within this article, perhaps by discussing, for instance, how much rate of profit accrues to value transfers between first and third world countries, given e.g. unequal exchange, and by how much the surplus value spur in developing countries (such as China, Indonesia or India) compel Capitalists from advanced countries to invest more and more in what I call mechanised political labour, for the sake of their survival.

SOME CONCLUDING REMARKS ON SWEEZY'S TREATMENT OF MARX'S TRANSFORMATION PROBLEM

The transformation problem lies in the belief that Marx's transformation from values to prices  for department I,II,III — respectively producers', consumers', capitalists' goods — is allegedly wrong. 
Prices are proportional to the value of labour, as monetary reflections of socially necessary labour time.
Marx carries out this transformation procedure in Capital volume III, by taking into account constant organic composition of capital for all departments.
Marx - whilst doing the conversion from values to prices - takes for granted the organic composition of capital [c/(c=v)] is constant among department I, II and III and therefore even the inter-department rate of profit.
Regarding Sweezy's comments on Marx's transformation procedure in his work Theory of Capitalist Development, I must point out that Sweezy, of course, is right when it points out that this inter-branch equality is impossible in reality and that real prices, for this very reason, show a derivation from those calculated by Karl Marx.
Sweezy is definitely rigorous in his mathematical reasoning.
Taking into account these premises, he is also right emphasising that Marx's transformation procedure is mathematically wrong. But only taking into account his premises.
In fact, Sweezy is wrong when he says Marx mistook his calculations, insofar as Marx merely calculated the average price for every branch, based on the assumption of competitive Capitalism for this procedure; in which where there is an inter-departmental average rate of profit, with all its political economy implications.
Marx did not live in modern-day monopoly Capitalism and did not live enough to see that monopoly practices entail strong inter-branch price deviations from value-price fixed proportion; due to the differences of inter-branch profit rates, a modern humbug. Hence, it is important to point out that when Marx talks about the dynamics in "reality", talks about "his reality".

Leaving aside this petty remark, I shall point out that Marx never talked about heterogeneous prices of single commodities within this framework and, further, he emphasised that during the transformation from values to prices numerical distortions may arise.
Marx himself, aware of the possible ambiguity behind his personally chosen procedure, says:

We had originally assumed that the cost-price of a commodity equalled
the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities.Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it.
[Karl Marx - Capital Vol III, ch.9, emphasis added]

Sweezy's underconsumptionism and witty considerations on Marx's transformation problem fail to falsify Marx's Labour theory of value, even after decorating his book with rhetoric a' la "Marx doesn't satisfactorily dwells upon this and that".
Similarly, professor Bortkiewicz's attempt to communicatively discredit Marx's LTV with his hostile jargon —  based on that the exchange value of Gold used in money production may vary, unlike what Marx assumes for the sake of simplicity —  is also quite weak.
The spectre of Marx — pestering both Marxists, NeoMarxists and Liberals — still lies there, waiting for being productively chased away.

END OF THE ARTICLE 

*[I would suggest an amazing reading on this matter: Anwar Shaikh - An Introduction to the History of Crisis Theories, 1978! Amazing stuff!]

** Unlike in post-Capitalism 
—  in which Investment is going to be carried out whenever it is socially necessary —  within Capitalism society has to wait for one Capitalist's investment to have exhausted all of its value before seeing investment and therefore a rise in wanted commodities happening in society, through which people satisfy their objective needs.

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