(d) The Crises and Possibilities of Adjustment in Modern Economy.

“The contradictions inherent in the movement of capitalist society impress themselves upon the practical bourgeoisie most strikingly in the changes of the periodic cycle through which modern industry runs, and whose crowning point is the universal crisis.” MARX, Preface to the second edition of Capital.

In Socialist circles the most popular explanation of economic crises is their derivation from under-consumption. Friedrich Engels, however, has on several occasions combated this idea sharply – most sharply, probably, in the third part of the third chapter of the polemical treatise against Dühring, where Engels says that under-consumption by the masses may well be “also a condition of crises,” but that it explains their presence to-day just as little as their former absence. Engels illustrates this by the conditions of the English cotton industry in the year 1877, and declares it to be a strong measure in the face of those conditions “ to explain the present total stagnation in the sale of cotton yarns and textile fabrics by the underconsumption of the English masses and not by the over-production of the English cotton manufacturers.”

But Marx himself has also occasionally pronounced very sharply against the derivation of crises from under-consumption. “It is pure tautology,” he writes in the second volume of Capital, “to say that crises rise from a want of consumers able to pay.” If one wished to give this tautology an appearance of greater reality by saying that the working classes receive too small a portion of what they produce, and that the grievance would therefore be redressed if they had a larger share, it can only be observed that “the crises are each time preceded by a period in which the workers’ wages rise and the working classes actually receive a relatively greater share than usual of the yearly produce destined for consumption.” It thus would appear that capitalist production “includes conditions independent of good or evil intentions – conditions which only permit of temporarily relative prosperity for the working classes and then always as a stormy bird of a crisis.” To which Engels adds in a footnote: “Ad notam for the adherents of Rodbertus’ theory of crises.”

A passage in the second part of the third volume of Capital stands in apparent contradiction to all these statements. There Marx says about crises: “The last reason for all social crises always is the poverty and limitation of consumption of the masses as opposed to the impulse of capitalist production to develop the productive forces, as though only the absolute capacity for consumption of the community formed their limit.” That is not very different from the Rodbertus’ theory of crises, for with him also crises are not occasioned simply by under-consumption by the masses, but, just as explained here, by it in conjunction with the increasing productivity of labour. In the passage quoted by Marx, under-consumption of the masses is emphasised even in contradistinction to the anarchy of production – disparity of production in the various branches and changes of prices which produce temporarily general depressions – as the last reason of all true crises.

As for any real difference of conception appearing here from that expressed in the quotation given above from the second volume, an explanation must be sought in the very different times in which the two sentences were written. There is an interval of between thirteen to fourteen years between them, and the passage from the third volume of Capital is the earlier one. It was written by 1864 or 1865, whilst the one out of the second volume must have been written about 1878. In another passage of this second volume, which had been written by 1870, the periodic character of crises -which is approximately a ten-year cycle of production-is brought into conjunction with the length of the turnover of fixed (laid out in machinery, etc.) capital. The development of capitalistic production has a tendency on the one hand to extend the bulk of value and the length of life of fixed capital, and on the other to diminish this life by a constant revolution of the means of production. Hence the “moral wearing out” of this portion of fixed capital before it is “physically spent.” Through this cycle of connected turnovers comprehending a series of years in which capital is confined through its fixed portion, arises a material cause for periodic crises in which the business passes through periods following one another of exhaustion, medium activity, precipitancy, crisis. The periods for which capital is invested are certainly very diverse and do not coincide, but the crisis always forms the starting point of a great fresh investment and therewith – from the standpoint of the whole community-a more or less new material foundation for the next cycle. This thought is taken up again in the same volume in the chapters on the reproduction of capital, and it is there shown how even with reproduction on the same scale and with unchanged productivity of labour, differences in the length of life of the fixed capital which appear temporarily (if, for example, in one year more constituent portions of fixed capital decay than in the previous year) must have as a consequence crises of production. Foreign trade can indeed help out, but so far as it does not remove these differences it only transfers “the conflicts to a wider sphere and opens to them a greater scope. “ A communistic society could prevent such disturbances by continued relative over-production which in its case would be “only the control of the community over its own means of production”; but in a capitalistic society this over-production is an anarchical element. This example of disturbances merely through the differences of length of life of fixed capital is striking. Want of proportion in the production of fixed and circulating capital is one of the favourite arguments of the economists for explaining crises. It is something quite new to them to hear that such a want of proportion can and must arise from the simple maintenance of fixed capital; that it can and must arise with the assumption of an ideal normal production and the simple reproduction of the social capital already in use. In the chapter on “Accumulation and Reproduction on a larger scale,” over-production and crises are only mentioned cursorily as self-evident results of possibilities of combination which follow from the process depicted. Yet here again the idea of “over-production” is very vigorously maintained. “If,” we find on page 499 “Fullarton, the second – namely: (1) whether the enormous extension of the world market, in conjunction with the extraordinary shortening of time necessary for the transmission of news and for the transport trade, has so increased the possibilities of adjustment of disturbances; and (2) whether the enormously increased wealth of the European states, in conjunction with the elasticity of the modern credit system and the rise of industrial Kartels, has so limited the reacting force of local or individual disturbances that, at least for some time, general commercial crises similar to the earlier ones are to be regarded as improbable.

This question, raised by me in an essay on the “Socialist Theory of a Catastrophic Development of Society,” has experienced all kinds of opposition. Among others it has caused Rosa Luxemburg to lecture me in a series of articles published in the Leipzig Volkszeitung of September, 1898, on the nature of credit and the possibilities of capitalism in regard to adaptation. As these articles, which have also passed into other socialist papers, are true examples of false dialectics, but handled at the same time with great skill, it appears to me to be opportune to examine them here.

Rosa Luxemburg maintains that the credit system, far from working against crises, is the means of pushing them to an extremity. It first made possible the unmeasured extension of capitalistic production, the acceleration of the exchange of goods and of the cyclic course of the process of production, and in this way it is the means of bringing into active conflict as often as possible the differences between production and consumption. It puts into the hand of the capitalist the disposal of the capital of others, and with it the means of foolhardy speculation, and if depression sets in it intensifies the crisis. Its function is to banish the residue of stability from all capitalist conditions, to make all capitalist forces in the highest degree elastic, relative, and sensitive.

Now all that is not exactly new to anyone who knows a little of the literature of socialism in general and of Marxist socialism in particular. The only question is whether it rightly represents the real facts of the case to-day, or whether the picture has not another side. According to the laws of dialectic evolution to which Rosa Luxemburg so much likes to give play, it ought certainly to be the case; but even without falling back upon these, one should realise that a thing like credit, capable of so many forms, must under different conditions work in different ways. Marx treats credit by no means from the point of view that it is only a destructive agent in the capitalist system. He assigns to it, amongst other things , the function of “creating the form of transition to a new modus of production,” and with regard to it he expressly brings into prominence “the double-sided characteristics of the credit system.” Frau Luxemburg knows the passage referred to very well; she even reprints the sentence from it where Marx speaks of the mixed character, “half swindler, half prophet”, of the chief promulgators of credit (John Law, Isaac Pereire, etc.). But she refers exclusively to the destructive side of the credit system, and mentions not a word of its capacity for establishing and creating, which Marx expressly includes. Why this amputation, why this noteworthy silence with respect to the “double-sided characteristics”? The brilliant dialectical fireworks by means of which the power of the credit system is represented as a means of adaptation in the light of a “one-day fly”, end in smoke and mist as soon as one looks more closely at this other side which Frau Luxemburg passes by so shyly.

That the credit system makes speculation easier is an experience centuries old; and very old, too, is the experience that speculation does not stop production when industrial circumstances are far enough developed to suit it. Meanwhile, speculation is conditioned by the relation of the knowable to the unknown circumstances. The more the latter predominate the more will speculation flourish; the more it is restrained by the former, the more the ground is cut from under its feet. Therefore the maddest outbursts of commercial speculation come to pass at the dawn of the capitalistic era, and speculation celebrates its wildest orgies usually in the countries where the capitalistic development is youngest. In the domain of industry speculation flourished most luxuriantly in new branches of production. The older a branch of production is under modern forms – with the exception of the manufacture of mere articles of fashion – the more does the speculative momentum cease to play a decisive part in it. The conditions and movements of the market are then more exactly foreseen and are taken into consideration with greater certainty.

Nevertheless, this certainty is only relative, because competition and technical development exclude an absolute control of the market. Over-production is to a certain extent unavoidable. But over-production in single industries does not mean general crises. If it leads to one, either the industries concerned must be of such importance as consumers of the manufactures of other industries, as that their stagnation also stops these industries, or indeed they must take from them, through the medium of the money market – that is, through the paralysis of general credit – the means of carrying on production. But it is evident that there is always a lessening probability of this latter result. The richer a country is, the more developed its credit organisation – which is not to be confused with a more widely spread habit to produce with borrowed capital. For here the possibilities of adjustment multiply in an increasing measure. In some passage, which I cannot find at the moment, Marx said once – and the correctness of the sentence can be proved by the most abundant evidence – that the contractions in the centre of the money market are much more quickly overcome than in the different points of the circumference. But the change of the means of communication brought about in the meantime has more than neutralised the consequences of great distances in this respect.

If the crises of the money market are not quite banished from the world yet, as far as concerns us here, the tightenings of that market by vast commercial undertakings controlled with difficulty are very much reduced.

The relations of financial crises to trade and business crises are not yet so fully explained that one can say with any certainty when both happen together that it was the trade crisis – i.e., over-production – which directly caused the money crisis. In most cases it was quite clear that it was not actual over-production, but overspeculation, which paralysed the money market, and by this depressed the whole business. That is proved from the isolated facts which Marx mentions in the third volume of Capital, taken from the official inquiries into the crises of 1847 and 1857, as well as from the facts which Professor Herkner adduces on these and other crises in his sketch of the history of trade crises in his Handwörterbuch der Staatswissenschaften. Frau Luxemburg deduces on the basis of the facts adduced by Herkner that the crises hitherto have not at all been the right crises, but that they were only infantile illnesses of the capitalistic economy, the accompanying phenomena not of narrowing but of widening the domain of the capitalistic economy-that we “have not yet entered upon that phase of perfect capitalistic maturity which is presumed in the Marxist scheme of the periodicity of crises.” According to her we find ourselves “in a phase where crises no longer accompany the rise of capital nor yet its decline.” This time will only come when the world market is fully developed and can be enlarged by no sudden extensions. Then the struggle between the productive powers and the limits of exchange will become continually sharper and more stormy.

To that one must observe that the formula of the crises in and for Marx was no picture of the future, but a picture of the present day which it was expected would recur in the future in always sharper forms and in greater acuteness. As soon as Frau Luxemburg denies to it the significance which Marx imputed to it for the whole epoch lying behind us, and sets it up as a deduction which did not yet correspond with reality, but was only a logical forecast based on the existence of certain elements in an embryonic state, she immediately questions the whole Marxist prediction of the coming social evolution, so far as this is based on the theory of crises. For if this was not based on experience at the time when it was set up, and has not become manifest in the interval between then and now, in what more distant future can one place its formula as coming true? Its relegation to the time when the world market has been fully developed is a flight into the next world.

No one knows when the world market will be fully developed. Frau Luxemburg is not ignorant of the fact that there is an intensive as well as an extensive broadening of the world market, and that the former is to-day of much greater importance than the latter.

In the trade statistics of the great industrial countries exports play by far the greatest part in regard to the countries longest occupied. England exports to the whole of Australasia (all the Australian colonies, New Zealand, etc.) values less in amount than to a single country, France; to the whole of British North America (Canada, British Columbia, etc.) not so much as to Russia only; to both colonial territories together, which are indeed of a respectable age, not so much as to Germany. Its trade with all its colonies, including the whole of the immense Indian Empire, is not a third of its trade with the rest of the world; and as regards the colonial acquisitions of the last twenty years, the exports thither have been ridiculously small. The extensive widenings of the world market are accomplished much too slowly to allow sufficient outlet for the actual increase of production, if the countries already drawn into it did not offer it an increasing market. A limit to this increasing and intensive amplifying of the world market, along with the extension of its area, cannot be set up a priori. If the universal crisis is the inherent law of capitalistic production, it must prove its reality now or in the near future. Otherwise the proof of its inevitableness hovers in the air of abstract speculation.

We have seen that the credit system to-day undergoes less, not more, contractions leading to the general paralysis of production, and so far, therefore, takes a minor place as a factor in forming crises. But so far as it is a means of a hothouse forcing of over-production, the associations of manufacturers meet this inflation of production in separate countries, and even internationally here and there, ever more frequently, by trying to regulate production as a Kartel, a syndicate, or a trust. Without embarking in prophecies as to its final power of life and work, I have recognised its capacity to influence the relation of productive activity to the condition of the market so far as to diminish the danger of crises. Frau Luxemburg refutes this also.

First she denies that the association of manufacturers can be general. She says the final aim and effect of such associations are, by excluding competition within a branch, to increase their share of the total amount of profit gained in the market of commodities. But, she adds, one branch of industry could only attain this at the cost of another, and the organisation could not possibly, therefore, be general. “Extended into all branches of production it would itself put an end to its effect.”

This proof does not differ by a hair’s-breadth from the proof, long ago abandoned, of the uselessness of trades unions. Its support is even immeasurably more fragile than the wages fund theory of blessed memory. It is the presumption unproven, unprovable, or, rather, proved to be false, that in the commodity market only a fixed amount of profit is to be divided. It presumes, amongst other things, a fixing of prices independently of the movements in the cost of production. But even given a fixed price, and, moreover, a fixed technological basis of production, the amount of profit in a branch of industry can be raised without thereby lessening the profits of another – namely, by the lessening of unproductive expenses, the ceasing of cutting competition, better organisation of production, and the like. That the association of manufacturers is an effective means towards this is self-evident. The problem of the division of profits is the last obstacle of all which stands in the way of a general union of associations of employers.

It stands somewhat better with the last objection of Frau Luxemburg. According to it the Kartels are unsuitable for preventing the anarchy of production because the Kartels of manufacturers as a rule obtain their higher profit rate on the home market, because they use the portion of capital that cannot be applied to this for manufacturing products for foreign countries at a much less profit rate. The consequence is, increased anarchy on the world market – the opposite to the object aimed at.

“As a rule” this manoeuvre can only be upheld where a protective duty affords the Kartel protection, so as to make it impossible for the foreign country to repay it in like coin. Meanwhile we are concerned here neither with denying the harmful effects of the present simple and high protectionist system, nor with an apology for the syndicates of manufacturers. It has not occurred to me to maintain that Kartels, etc., are the last word of economic development, and are suited to remove for ever the contradictions of modern industrial life. I am, on the contrary, convinced that where in modern industrial countries Kartels and trusts are supported and strengthened by protective duties, they must, in fact, become factors of the crises in the industry concerned – also, if not at first, in any case finally, for the “protected” land itself. The question only arises how long the people concerned will be content with this arrangement. Protective tariffs are in themselves no product of economy, but an encroachment on economy by the political power seeking to secure economic results. It is otherwise with the industrial Kartel. It has – although favoured by protective tariffs-grown out of the economic soil, and is a national means of adapting production to the movements of the market. That it is, or can be, at the same time the means of monopolist exploitation is another matter. But it is just as much beside the question that in the former capacity it means an increase of all earlier remedial measures for overproduction. With much less risk than the individual undertaking, it can, in times of a glut on the market, temporarily limit production. Better than this, it is also in a position to meet foreign cutting competition abroad. To deny this is to deny the superiority of organisation over anarchic competition. But we do so, if we deny on principle that Kartels can work as a modifying influence on the nature and frequency of crises. How far they can do so is for the present a matter for conjecture, for we have not sufficient experience to allow of a conclusive judgment in this respect. But still fewer conclusive facts can be given under these circumstances for anticipating future general crises as they hovered before Marx and Engels, repetitions on a larger scale of the crises of 1825, 1836, 1847, 1857, 1873. The mere fact that whilst for a long time socialists generally believed in an increasing contraction of the industrial cycle as the natural consequence of the increasing concentration of capital – a development in the form of a spiral – Friedrich Engels in 1894 found himself driven to question whether a new enlarging of the cycle was not in front of us, and thus to suggest the exact contrary of the former assumption, and he warned us against the abstract deduction that these crises must repeat themselves in the old form.

The history of individual industries shows that their crises by no means always coincide with the so-called general crises. Marx, as we have seen, believed he could establish on the need of an accelerated renewal of fixed capital (implements of production, etc.) a material foundation for periodic crises , and it is undoubtedly true that an important reason for crises is to be found here. But it is not accurate, or not more accurate, that these periods of renewal coincide as to time in the various industries. And therewith a further factor of the great general crisis is done away with.

There remains then only so much, that the capacity for production in modern society is much greater than the actual demand for products determined by the buying capacity; that millions live insufficiently housed, insufficiently clad, and insufficiently nourished, in spite of abundant means at hand for sufficient housing, nourishment, and clothing; that out of this incongruity, over-production appears again and again in different branches of production, so that either actually certain articles are produced in greater amounts than can be used – for example, more yarn than the present weaving mills can work – or that certain articles are produced not indeed in a greater quantity than can be used, but in a greater quantity than can be bought; that in consequence of this, great irregularity occurs in the employment of the workers, which makes their situation extremely insecure, weighs them down in unworthy dependence, brings forth over-work here and want of work there; and that of the means employed to-day to counteract the most visible part of this evil, the Kartels represent monopolist unions on the one side against the workers, and on the other against the great public – which have a tendency to carry on warfare over the heads of these and at their cost with the same kind of monopolist unions in other industries or other lands, or, by international or inter-industrial agreements, arbitrarily to adapt production and prices to their need of profit. The capitalistic means of defence against crises virtually bear within themselves the possibilities of a new and more hopeless serfdom for the working classes, as well as of privileges of production which revive in acute form the old guild privileges. It appears to me to be much more important at present, from the standpoint of the workers, to keep before our eyes the possibilities of Kartels and trusts than to prophesy their “impotence.” It is for the working class a subordinate question whether these combinations will be able, in the course of time, to attain their first-mentioned object – the warding off of crises. But it becomes a question full of importance as soon as expectations of any kind as regards the movement for the emancipation of the working classes are made dependent upon the question of the general crisis. For then the belief that Kartels are of no effect against crises may be the cause of very disastrous neglect.

The short sketch which we gave in the introduction to this chapter of the Marx-Engels explanations of economic crises will suffice, in conjunction with the corresponding facts adduced, to show that the problem of crises cannot be solved by a few well-preserved catch-words. We can only investigate what elements of modern economy work in favour of crises and what work against them. It is impossible to pre-judge a priori the ultimate relation of these forces to one another, or their development. Unless unforeseen external events bring about a general crisis – and as we have said that can happen any day – there is no urgent reason for concluding that such a crisis will come to pass for purely economic reasons. Local and partial depressions are unavoidable; general stagnation is not unavoidable with the present organisation and extension of the world market, and particularly with the great extension of the production of articles of food. The latter phenomenon is of peculiar importance for our problem. Perhaps nothing has contributed so much to the mitigation of commercial crises or to the stopping of their increase as the fall of rent and of the price of food.