Karl Marx The Origin of Business Crises

Karl Marx The Origin of Business Crises

One anomaly of Marx's analysis of capitalism is that although he repeatedly referred to business crises under capitalism (what today we call depressions), he had no clearly formulated theory of a business cycle. His entire analysis of the causes of fluctuations in the general level of economic activity is included within his more general description of the contradictions inherent in the capitalist system. It is therefore incorrect to refer to Marx's own theory of a business cycle, as opposed to the theories of his followers. He suggested a number of causes of economic fluctuations, but these suggestions were never clearly delineated in his writing. There can be no question, however, but that Marx contended that one of the major contradictions between the forces and relations of production under capitalism is the periodic depressions that are inherent in a capitalist economy. Although Marx himself did not clearly distinguish among his various insights into the source and nature of economic fluctuations, for the sake of clarity we will do so here.

Marx's view that periodic fluctuations are an integral part of the capitalist process is a definite departure from his usual adherence to the classical model and its assumptions. As one of its major premises, classical economics accepted Say's Law: that apart from minor fluctuations in total output, a capitalist economy tends to operate at a level of full employment. Marx attacked this classical position, alleging that it presents a distorted and unhistorical view of capitalism. Marx maintained that in a simple barter economy, people produce goods either for the use value they achieve by directly consuming these com­modities or for the use value they obtain by bartering the produced goods. Under these circumstances, production and consumption are perfectly synchronized. A household produces shoes for its own use or to trade for food that it will consume. The entire motive behind economic activity or production, then, is to obtain use values. Introducing money into such an economy does not necessarily change the orientation of production away from use value. In a money economy, people produce commodities that they exchange for money; money is in turn exchanged for commodities that render use value to the consumer. Money in such an economy is merely a medium of exchange that facilitates the division of labor and trade. These two economies can be schematically represented as follows:

Simple economy C-----> C C = commodities
Money economy C-----> M-----> C M = money

But according to Marx, capitalism is not just a simple, or barter, economy to which money as a medium of exchange has been added. Capitalism represents a change in the orientation of economic activity from the production of use values to the production of exchange values. The capitalist, who directs the production process, wants to make profits. He enters the market with money, purchases the various factors of production, and directs their activities toward the production of commodities. He then exchanges these commodities for money in the market. His success is measured by the surplus value he makes, the difference between the amount of money he begins with and the amount he ends with. A capitalist economy is represented as M-----> C-----> M' The difference, AM, between M' and M is the surplus value realized by the capitalist. Marx repeatedly stressed the orientation of economic activity under capitalism toward exchange value and profits. He criticized Ricardo's acceptance of Say's Law on the grounds that Say's Law implies that there is no basic difference between a barter economy and a capitalist economy and that money is merely a medium of exchange that facilitates the division of labor and trade. In a barter economy or an economy in which money is only a medium of exchange and in which economic activity is oriented toward producing use values, there can be no problem of overproduction. People will produce goods only when they want to consume these goods or to trade them and consume other commodities. Under capitalism, which is oriented toward exchange values and profit, overproduction becomes a possibility. Marx's basic approach to a study of economic fluctuations was to examine the capitalist's reactions to changes in the rate of profits, that is, to changes in the ratio of AM/M or P. Marx concluded that changes in the rate of profit will result in changes in investment spending, and he cited this volatility of investment spending as the major cause of fluctuations in the total level of economic activity. Marx's interest in invest­ment spending is shared by many modern macroeconomic theorists.