CHAPTER 9
THE CAPITALIST SYSTEM OF PRODUCTION
All of us, black, white, women, men, children, elderly, whichever part of the planet we inhabit live in a world dominated by the productive relationships of industrial, commercial and financial capital. Although the modern capitalist system is in many ways different from that analysed by Karl Marx, in its basic characteristics it is essentially the same. For example, the struggle of the working and oppressed classes against capitalists and their political and military allies, which was extensively analysed by Marx, continues to this day. This class struggle still simmers at an international as well as national level and periodically erupts in one country or another. The working and oppressed classes are still required by their circumstances to try to improve their situation, campaign against their living and working conditions, or in other ways rebel against the system oppressing them.
The technological level of production under the capitalist system may have changed, but the social structure introduced by Capital has remained unchanged. The social composition of the ruling capitalist class may have changed somewhat but as a class its members remain in positions of affluence and power. The type of commodities, which embody the surplus production of workers, may have altered, but the capitalists' profits are still extracted from that surplus production. The savings and pensions of the working classes, in the advanced countries, have been incorporated into the dealings of the financial sector of Capital but that sector uses them to enrich itself. It does so even if their speculation undermines the future welfare of working people. In short, the process of capitalist production still reproduces Capital.
There have been countless books from the political left and the right arguing that the capitalist method of production has fundamentally changed from its old style anarchy of trade cycles and degrading exploitation, to a new style of planning controls and welfare support. From James Burnham in the 1940's, through Samuelson in the 1950's, to Schonfield and Donaldson in the 1960's and 70's, there was a concerted attempt to undermine the relevance of Marx's devastating criticism of Capital. They argued that capitalists and their political allies had modified their social and political system sufficiently to make Marx's analysis and criticism superfluous. For a period this hypothesis seemed plausible, if only superficial developments were considered. Changes, such as the growing public sector and government planning in the capitalist economies of the Western World, were deemed to be sufficient evidence. However, despite this 'liberal' tinkering with certain aspects of capitalist process, in the decades after the second world war, its basic structure remained intact. The development of Thatcherism in Britain, Reaganism in the USA, and the European equivalents in the 1970's and 1980's removed the flimsy veil of political consensus concealing the naked capitalist exploitation of resources and people in the advanced capitalist countries. A generation of liberal and neo-liberal pro-capitalist propaganda requires us to consider this system in a little more detail before relating the many problems of modern life to its existence.
9.1 What is Capital?
The term Capital (or capitalism) is used within the anti-capitalist tradition to identify the system of producing goods and services which is dominated by the owners of a form or wealth known as capital and their desire to accumulate more wealth in the form of capital. However, very often among the left, the term 'capitalism' has been used more as a general form of abuse than a description of a complex social and economic system which is constantly in motion. This is perhaps not surprising since the most profound criticism of Capital is also amongst the most comprehensive. Capital, written by Karl Marx (Vol.1 1867), comprises three large volumes which are elaborate, detailed and according to Marx, incomplete. Not many anti-capitalists, particularly those drawn from the working class, have the time, or the experience needed to read Capital and perhaps what is just as important, to read it again after an interval of time. Nevertheless a reasonable understanding of the capitalist system is necessary to appreciate the contradictions of capital and how these might work themselves out. This chapter cannot replace the study necessary for a thorough understanding of Capital, but it can perhaps try to provide an overview and something of a structure. An overview may help the reader to better comprehend capital as a process and any basic structure provided could be built upon by additional reading.
Capital is the term for that part of wealth which under the capitalist method of production is set aside for the use of further production. Thus Capital can be in the form of raw materials (cotton, oil, metals etc.; with which to make commodities) instruments of labour (tools, machines, factories etc.; with which the raw materials are fashioned into commodities), money (wages salaries etc.) which are needed so that the working people who use the instruments of labour can feed themselves, and stocks of unsold commodities. In other words Capital can be all those things which are needed to produce new raw materials, new tools, new means of subsistence and commodities. In one sense those things now known as capital have always been necessary. We have seen that all forms of human society have required raw materials to work upon, instruments of labour to work with, and necessities, to live off whilst people are producing other useful items.
However, these basic requirements of production haven't always been described as Capital because although they existed prior to the process of Capital formation they did not exist in the general form of money or capital. For example, in hunter gatherer societies, the raw materials were just raw materials, (plants, wood, bones, rocks etc.) available to all who collected or gathered them. The instruments of labour were just simple tools (digging sticks, spears, bows and arrows, flint knifes, baskets etc.) again available to all who could make them or exchange them for other things. The things necessary to live (food, clothing shelter) while producing other items were also available to all those who gathered or hunted in their social groups.
Under slave societies the raw materials, the instruments of labour and the necessaries of existence also existed, however, they were controlled by the owners of slaves. It was the slave owners who set production in motion, it was they who appropriated the whole of the surplus produce of that society, and decided on its distribution. Between slavery and the rule of capital, various forms of servile labour, in semi-slave societies such as feudalism, were developed in which the basic instruments of labour - the land for example - were owned by the feudal aristocracy. The productive workers known as serfs and/or peasants were required to provide themselves with necessaries, some of the instruments of labour and raw materials and in addition to give up a proportion of their produce (or a percentage of time) to the owners of the land. In each of these latter cases a relatively small elite ruled the vast majority of the population and appropriated the surplus wealth produced by that population. In all such periods a machine, for example, was considered as just a machine, or a building just a building, however, under capitalist relations of production (and only under such conditions) both these to the capitalist who owns them can be treated as capital Or to put it another way only under capitalist relations can machines, buildings or useful articles become considered as 'capital'.
The basic requirements of production, outlined above have obviously been improved over thousands of years of social and technological development. They have become steadily larger and more complex. Immediately prior to the domination of Capital the raw materials, instruments of labour, and necessaries required to satisfy people had already become so complex that they required international trade, large-scale agricultural production and extensive handicraft production to satisfy the needs of the feudal aristocracy and their supporters. This level of economic activity had become so extensive and complex that means of exchange, such as barter (mentioned in the previous chapter) no longer sufficed to allow the exchange of the many useful items being created. Over long periods of time money became more and more established as a means to exchange surplus goods, and in time it became the dominant form of exchanging this surplus production. Because we now take money for granted, it will be necessary to say some fairly obvious things about it in the following section in order to develop the critique of the capitalist system.
9.2 The circulation of commodities
If we simplify the complexity of exchanges of useful items between people we can see that under a system of barter someone who, for example, produced more chairs than they needed could go to a market a try to exchange a surplus chair for some other item they wanted. Their problem, however, would be to not only find someone who wanted a chair but who also had something they wanted (and which they hadn't or couldn't make themselves). If successful they could exchange useful item A (a chair) for useful item B. However, the chances of this type of coincidence happening on a regular basis is unlikely. An extra problem would be to find out to what extent both items were comparable in value. It is obvious that if it took a full day to make a chair the chair-maker would be unlikely to exchange it for something which perhaps only took half a day to make. Similarly the chair maker would hardly be likely to find someone with a useful item which took a week to produce, exchanging this for a chair, which only took a day to make. Under normal circumstances (and other circumstances being equal) they would aim to exchange things which were approximately equal in terms of the amount of labour that it took to create the useful item. With the development of money the problem of exchanging surplus production was simplified. The chair maker then only needed to find someone who wanted a chair. It didn't matter if the purchaser of the chair had nothing that the seller wanted as long as they had money. The chair maker could then exchange the chair for money and go to someone else for the other useful items he or she actually wanted. Thus whilst under a system of barter;
Item (A) exchanged for Item (B) or
ITEM (a) = ITEM (B)
Under a system involving the use of money (M) we would have:
ITEM (A) = M = ITEM (B)
or an exchange on one day of:
ITEM (A) = M (an amount of money)
and then a further exchange (on the same day or a later day) of:
M (an amount of money) = ITEM (B)
It was during a long period of developing trade in which money became the usual and dominant means of exchange that it became possible for the Capitalist system to expand, long before it came to dominate. At this point we should introduce Marx's terms in order not to confuse those who wish to go on and study Das Capital. Marx described those useful items produced under the capitalist process as commodities. Thus when commodities are exchanged under this system the above noted exchange process can be abbreviated as;
Commodity = M = Commodity
or further simplified as
C - M - C
Commodity exchanged for money; and then money exchanged for a further commodity. This was the basic form of exchange which existed immediately prior to the development of Capital and which still exists to day for most of the population. Of course, in order to take part in this type of exchange commodities must have two values. First, they must be useful commodities or else no one would want them. They must therefore, have a 'value in use', or a use value. Secondly, they must have a 'value in exchange' or an exchange value in order to know how much or how little to exchange them for. The producers of commodities exchange them for money and then re-exchange the money for further commodities. This is obvious because no one can eat money, nor wear it nor live in it.
Money, although seemingly indispensable in our modern age is still only useful to most of us as a means to obtain useful products or services. In itself money is of little or no value. It's only value is when it is in a socially acceptable form of currency and only then as a method of exchanging commodities. Once social acceptance has been removed from it, money is of hardly any value. In times of exceptional difficulties such as war where social confidence in money deteriorates then barter re-emerges or a substitute for money is found in a widely useful commodity such as cigarettes, food or a metallic substitute such as gold. We can also judge the arbitrary nature of currency when travelling to a foreign country, where the socially accepted type of money is in a different form. The traveller has to abandon their own currency in favour of that region's acceptable form, and of course the earlier point remains valid. Francs or Dollars are no more edible than Marks, Pounds, Lira or even gold. Money can be also be devalued. Returning to the abbreviated transaction above it is obvious that the exchange is not exhausted by a single exchange such as C - M - C. There was (and is) an almost continuous cycle of exchanges going on every day, so the process was more like C - M - C - M - C - M etc.
Each phase of the cycle started with the sale of an existing commodity and ended with the purchase of a different commodity. The vast majority of the population start with commodities and end with commodities. The process of creating commodities went on repeatedly as did the process of exchanging them for other commodities through the medium of exchange - money! However, once this circulation process was in regular operation it became possible for more rich people to enter this continuous cycle at a different point from everyone else. It became possible for a merchant class to develop which intervened in the exchange process by using their surplus money to buy useful items in order to sell them at a profit. They entered the circulation process with M (money) and bought C (commodities) in order to resell these for more M. Thus for this merchant class the phase of the cycle they were concerned with was;
M - C - M
And of course the merchant class looked at the circulation process as a continuous cycle of M - C - M - C - M - C - M -, etc. In other words they had the opposite motivation to the vast majority of people. They didn't sell in order to buy; they bought in order to sell. But while the vast majority of transactions which involved exchanges of commodities were intended to exchange roughly equal values, the merchant did not want the same value of money back for the money outlayed. This would make no sense to a capitalist. The merchant wanted and expected more money back than the amount which he or she used to purchase commodities. Thus the real intention for the merchant class was;
M - C - M+
where M+ was a new sum of money which was larger than the original M. A sum of money made up of the equivalent of the original amount plus an extra percentage added on. In this way there became for the merchant class as a whole, a more or less rapid accumulation of money, as each outlay was returned with an additional amount attached to it. It was this merchant class in Europe which began the first stage of colonial expansion. It was also this merchant class, which through its accumulation of money in the form of merchant capital, was to become the new industrial capitalist class (or the funders of that class) once technological and social developments had matured sufficiently for this to happen. Under the capitalist system the progress of technology became exceptionally quick. The instruments of labour became so large and complex that they were rarely available to any ordinary individual or small group. The instruments of labour to produce textile materials, building materials and forms of transport required large factories and large complex machines. The raw materials required to supply such instruments of labour were needed in such vast quantities, that they were beyond the scope of small groups of people to acquire. The food and clothing necessary to feed the vast armies of people who staffed these instruments of labour could no longer be produced in the same way.
It required lots of money and time to build and develop these new methods of production. The situation prompted and promoted an economic and social transformation. The period of localised manufacture was giving way to a period dominated by industry. The money capital of the merchants came to be used as the industrial capital of the newly emerging industrial capitalist class. Yet the motive behind industrial capital was essentially the same as the merchant class. They put money into circulation (M - C) in order to draw more out of circulation (C - M+) than they put in. Indeed, it is this process which distinguishes money (as means of payment) from money (as capital). To do this they had to organise and dominate production in one area after another. In other words the Capitalist method of production became the new way of producing sufficient raw materials, instruments of labour, and the necessaries for the population, with the surplus production going to the new capitalist class. From all we have said so far we can conclude that the term Capitalism - when used in this general sense - doesn't just refer to a collection of the above material things - it is, like every other society, a definite relationship (a social relationship) of people to these things and to a process of production. The capitalist system comprises both a relationship and a process. It involves the continuous interaction of people who are distributed throughout its economic and social system on the basis of their relationship to the means of production and who in this way become part of a class. It is (for as long as it lasts) a continual process during which the capitalist class puts money capital into the production of commodities in order to withdraw more money capital out of circulation.
9.3 The essential elements of the Capitalist production process
The Capitalist method of production, distribution and exchange, can exist within different cultures and geographical location but it nonetheless requires four essential humanly activated elements for it to exist and to continue to produce goods and services.
1. A Capitalist Class. The Capitalist system produces a relatively small group (compared to the rest of the population) of people who have sufficient money to live on (revenue), together with a large amount left over (capital) which they use to purchase or increase their existing instruments of labour and the other means of production. It doesn't matter how this extra money capital (or commodity capital) is obtained, whether by inheritance, theft, savings, loans or profits, it is merely necessary to have it in order that they can use it to invest. They generally must also want to increase the amount of money they already have otherwise they would not use it to produce goods and services or offer to loan it to other capitalists who will produce goods and services. It is usual to distinguish between Industrial, Commercial and Finance capitalists. That is to say that there are some Capitalists who tend to invest their capital in direct production (Factories, Mines, Industrial Farming) in order to make profits. On the other hand there are those who operate commercially and invest in Transport, Warehousing and Retailing. As already noted for this class of people in society the circulation they are most interested in is M - C - M+. Another group are those capitalist who finance other capitalists and they make their profits from Banking, Insurance, Stocks and shares etc. The circulation process of this latter group appears to be M - M+. They lend money out without buying commodities and get their money back plus an extra amount. However, in fact they are lending their money to other capitalists who put this money through the circulation process of M - C - M+, the profits of which are then shared between them. Under the economic and social system of capital not everyone can be a capitalist, for as we shall see the surplus value and profits of capitalists are derived from the productive capacity of working people. Capitalist production is based upon the separation of working people and the means of production. Some must own capital and therefore the means of production (a capitalist class) and others (the working class) must produce.
2. A Working Class. Capital requires an enormously large group of people who have insufficient resources to live on without working. It is essential to the formation of capital that this group of workers have no other means of subsistence than working for someone else. This is because if working people had the means to produce sufficient necessaries of life for themselves, they would be unlikely to want to work for a capitalist. Therefore, it is essential under production dominated by capital, that working people not only have insufficient to live on without working, but that they have insufficient means to work for themselves. In other words they are separated from the instruments of labour (land, machines, tools of production, raw materials) and therefore must ask those who do have these resources for work. This situation leaves the working classes with essentially no other commodity than their labour power which they must sell to the capitalist owners of the instruments of labour. They exchange (when they can) their ability to work (their labour power) for the necessities of life which are paid for by a wage. In this way as we have noted in chapter five their labour is estranged, it belongs to someone else - the capitalist! Thus the working class sell their labour power as a commodity C in exchange for money M (their wage or salary) in order to buy other necessary commodities C for themselves and their families. Therefore, the circulation process for working people is the basic one of C - M - C. We shall see later that the wages of working people are pitched at around a level sufficient to purchase only those necessities which keep them, and their families alive and sufficiently well to be able to sell their labour power again each day, each week, or in the case of salaried workers, each month.
3. A Market Economy. There must be in existence a place (market) for the capitalist to purchase the necessary materials for production and also to sell the goods and services produced. Thus a market economy will have places to obtain; raw materials (often called commodity markets), machinery (industrial markets), people to work (labour markets) places to sell goods (general markets) and places to store or borrow extra money (money markets). A wide variety of markets must be available within a market economy for the Capitalist class to buy and sell commodities and services and to realise their profit. From the capitalist perspective it is useful for the markets to be free from all restraints except those restraints imposed by individual capitalists or groups of capitalists themselves. Hence their fondness for the so-called 'free market economy'.
4. The realisation of Profit. The relatively small group of people (the Capitalists) who have large amounts of spare money are generally not interested in producing goods and services simply because these things are needed by others. They will only use their capital for production if they can reasonably expect to make a profit. If a Capitalist invests a spare million pounds, (or dollars, francs, marks, yen etc.), it is in the expectation of getting back the one million plus a substantial amount in addition. Of course sometimes things don't go according to plan for individual capitalists, and they get back less, or even on rare occasions lose the lot, but this is by way of exception. In general the Capitalist Class increase their wealth by advancing their capital and getting back the original amount plus an expected rate of profit.
The system of capitalist production has become so powerful and so extensive that it dominates the process of circulation of commodities. The necessary form of circulation, C - M - C - M - C - M - C etc., was in the early period dominated by commodities and money was simply the medium of circulation, so that people could eat, clothe and house themselves. This circuit is now dominated by the capitalist intervention and control of money (M). The circulation process has become distorted by capitalist domination into M - C - M - C - M - C - M etc., where money dominates the circulation of commodities and determines the type and quality of those commodities. Money (M) is now needed in large quantities to enable the circulation of commodities to take place, but capitalists will only release money Capital into the circuit if they are reasonably convinced that they can withdraw more money out of the circulation than they put in. If they withhold money from the circulation process, (for whatever reason) then everyone else suffers as the essential production and circulation of commodities is interrupted.
Something as simple as a crisis in confidence within the capitalist class can have devastating consequences for all classes of society. It can lead quickly to a cessation of production and distribution. This in turn, (through unemployment and poverty), can lead to starvation and premature death among the working classes and it can lead to bankruptcy and destitution (through collapse of small businesses and savings plans) among the middle classes. The whole functioning of modern society has become absolutely dependant upon the whims and fancies of a powerful group of individuals who belong to the capitalist class. A group incidentally who are no more intelligent than the average person in the street, no more capable than the average person in village, town or city and who are distinguished from the average intelligent person only by their insatiable greed and lack of morality. The factors which lead to capitalist crisis will be returned to later, meanwhile let us look further at the capitalist circulation process when not in crisis.
9.4 Unpaid labour and surplus value
It is important to understand the link between the profits of capital and the wages paid to the worker, for the link is not immediately obvious. Capitalist profit arises from the same source as the wealth of previous ruling classes - surplus production. The difference is that the capitalists realise this surplus production in the form of money and this process often masks the real source of profit. The capitalists pay the workers a wage which is based upon the average amount required to feed, clothe and house the worker and his family. In exchange for this wage the worker works for a set period of time for the capitalist. If the worker simply worked for a length of time which was equal to the time necessary to replace his or her wages, the capitalist would have no surplus production and thus no profit. In such a case production would just repay the capitalist for the wages he had given to the worker. What really happens is that the worker works part of the time to replace the value of his wages, but then works on for a further period of time to produce for the capitalist. Take, for example, a basic eight hour working day and envisage the worker working the whole eight hours producing commodities which only realise the equivalent of the workers wage. In this case then the capitalist would on average only get back the same amount as he or she paid the worker. If on the other hand the worker only worked four hours to create commodities to a value equal to his or her wages, the capitalist would insist that the worker carry on producing commodities for another four hours without pay. All the eight hours worth of products belong to the capitalist but four hours worth of products he or she would get for free. They are free because the capitalist has only paid the wage equivalent of four hours and has paid no wage equivalent for the other four.
As Marx put it 'Wage labour always consists of paid and unpaid labour.' (Grundrisse). The products made during the first four hours are sold and the money they bring goes to pay the wages of the workers. This period of work is what Marx calls necessary labour. It is work which is necessary to replace the value of the wages received to feed, clothe and house the worker and his or her family. The products made during the second four hours are also sold and these contain the 'unpaid labour' or surplus labour embodied in the surplus products which then goes to the capitalist in the form of a surplus money value. This surplus value in money form after deductions becomes - the profit! Therefore, the goose that lays the golden egg for the capitalist class is the unpaid labour or surplus labour performed each and every day by working people. Instead of receiving the value they create for society they receive only the value of their wages - and these two values are not the same! The value of wages for daily or weekly labour was clearly stated by the capitalist economist, David Ricardo;
"The natural price of labour, therefore, depends on the price of the food necessaries and conveniences required for the support of the labourer and his family." (Ricardo. 'Principles of Political Economy and Taxation' Pub. J.M. Dent. page 52)
Ricardo's general terminology is somewhat dated but the meaning here is quite clear. The price of labour is not derived from the value which he or she produces but from what it costs to keep the worker and his or her family alive. There is of course no such thing as a natural price of labour. Ricardo was merely reflecting the common prejudice of capitalists that social relations under the domination of capital were the result of 'natural' developments rather than being socially constructed and historically determined. Marx later countered this line of reasoning in Capital when he noted;
"Nature does not produce on the one side owners of money and commodities, and on the other men possessing nothing but their own labour power. This relation has no natural basis, neither is its social basis one that is common to all historical periods. It is clearly the result of a past historical development, the product of many economic revolutions, of the extinction of a whole series of older forms of social production." (Marx. Capital Vol. 1 page 169)
Absolutely! Yet Ricardo was right in the sense that the 'normal' price of working peoples wages under capital is determined, not by the value of what they themselves produce, but by how much it costs in any given capitalist country to keep themselves and their families alive. This was not just Ricardo's opinion either, for the relationship between wages and the cost of keeping workers alive was made clear also by an earlier capitalist economist called Adam Smith. Smith, however, added that an increasing demand for labour could raise the wages of workers above this 'natural' level just as a decreasing demand could lower them. Marx developed this point further and pointed out that the minimum wage under the system of capital was often below the amount needed to survive adequately and therefore labour power could be maintained only in a crippled state. However, let us stay with Ricardo on the price of labour for a little longer;
"It is when the market price of labour exceeds its natural price that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family....When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries." (Ricardo. 'Principles of Political Economy' page 53)
Marx considered Ricardo an important figure in 19th century economics, for he was perhaps the last of the most honest advocates of the capitalist process. Most subsequent supporters of capital amongst economists were (and still are) just self-seeking apologists for the existing system of oppression. They omit to deal with what they cannot justify and gloss over or ignore the contradictions inherent in capital. Ricardo (and Adam Smith before him) did not. In the above quote Ricardo suggests that when the price of labour (or wages of workers) exceeds its normal price the worker is happy and willing to rear a numerous family. The reader should appreciate that Ricardo considered the continued existence of a numerous and healthy work-force an important factor for the continued existence of capital. He and Smith did not question the right of capitalist to exploit the working classes and to extract surplus labour from them, they merely reminded the capitalist class to take care of this valuable commodity called labour power.
Ricardo disclosed his complete ignorance of working people and the actual conditions of labour at the time, when he suggested that a rise in wages would make workers happy. The conditions of working people in the 19th century when Ricardo was writing his economic works is amply described by Engels in 'The condition of the working class in England'. Engels lists, (and substantiates using official reports), deformities, crippling, maiming, occupational diseases, premature ageing, accidents and many other problems associated with wage labour. It is impossible to imagine that a slight rise in wages above the normal rate would make the workers happy and flourishing under such appalling conditions. In contrast to this Ricardo accurately points out the misery, wretchedness and poverty when wages fall below the normal price. It is apparent from contemporary events that these cycles of high wages and low wages indicated by Ricardo, Smith and to an even greater extent by Marx, in the 19th century, are not problems which were long ago sorted out. They are still with us in the 20th century - because we still live under the economic and social system dominated by capital.
The 1920's and 1930's in Europe and America were a period of unemployment and low wages for working people. The post Second World War period (1958 - 1968) was a time when wages for workers in these same countries were above the 'normal' for the capitalist system. Many working people were able to experience a more comfortable level of existence than previously. However, the period was soon over and a combination of economic downturn and political reaction in the 1970's to 1980's has led to the position that the market price of labour has been driven down below its normal price. The evidence for this is in the many schemes to supplement low wages by benefit payments from the state in order to bring the income level of working people above the absolute minimum for existence. Income support, supplementary benefits, housing benefit etc.,would not be needed if working people's income from work was sufficient to feed, clothe and house themselves and their families. As Adam Smith had earlier commented;
"...there is, however, a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages of even the lowest species of labour....wages must at least be sufficient to maintain him. They must even on occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation. (Adam Smith. 'Wealth of Nations.' Pub. University Press. Vol. 1 page 76)
Note the reference to the 'race' of workers and 'species' of labour to mark our class out from the gentry. It echoes the very terminology which the capitalists and their supporters used to classify the non-white inhabitants of foreign countries during the period of imperialist expansion. Modern capitalist apologists wouldn't dare to de-humanise working people these days - or would they! It is interesting to note that Adam Smith couldn't envisage wages falling below a certain minimum level, yet as we have noted they have under modern capitalist conditions. Smith was reckoning without a capitalist state coming to the rescue of the capitalists and bolstering up their profits by subsidising wages, so he cannot be blamed for the above assumption.
9.5 Necessary labour and surplus labour
We have seen that working people work only a part of the working week or day to replace their wages and the rest of the remaining (unpaid labour) time to produce surplus labour for the owners of capital. It follows from this that it is in the interests of the capitalists to shorten the time needed to replace the workers wages and therefore lengthen the time the worker works entirely for the capitalist. The technological developments of the means of production and the organisation of labour under the capitalist system are all aimed at reducing the amount of time necessary to replace the value of the workers wages and thus increasing the time left to produce surplus value for the capitalist. Increases in efficiency and the development of machinery all press in the direction of reducing the time needed to replace the value of wages. It is worth considering Marx's graphical representation of how the time at work is divided between the worker and the capitalist.
If the line A to C represents the length of the working day; say 8 working hours, then when the surplus labour created for the capitalist is at 25% the workers work six hours (i.e. from A to B) to replace the value of their wages and work two hours for the capitalists (i.e. B to C). This provides a significant amount of surplus labour particularly when a capitalist has dozens or even hundreds of workers creating this free labour. In the above example a hundred workers all working two hours per day of surplus labour would create 200 hours of surplus labour each day or 1,000 hours worth of free labour per five day week Over a 50 week year this would provide the capitalist who employed 100 workers with a considerable 50,000 hours of free labour each year. Of course this 50,000 hours surplus labour time is spent in producing goods or services for the capitalist so it must be converted by the capitalist into money by selling the goods produced or the services rendered. However, it is obvious, as noted earlier, that it is in the interests of the capitalist class to reduce the time spent in recovering the value of the workers wages and thus leaving even more free labour time for the capitalist. This is done by improving efficiency and introducing machinery. Suppose that by a combination of efficiency and new methods or machinery the capitalist was able to reduce the time spent on necessary labour to four hours. The graphic representation would then look like the following.
The line A to B would now be the time spent in replacing the value of the workers wages and the line B to C would represent the time given to the capitalist for free. The capitalist would now get four hours free labour per worker, which in the previous example would represent 400 free hours per day, 2,000 free hours per week and 100,000 free hours every year. Under the capitalist process each new advance in machinery and efficiency (other things being equal) pushes the necessary labour time closer and closer to point A and increases the amount of free time B to C given to the capitalist. Marx draws attention to the fact that capitalists do not introduce machinery to ease the burden of labour for working people or in order to shorten the length of the working day. On the contrary, he notes that machinery more often than not makes work more, hazardous, arduous, boring and lengthy. He adds;
"Capital employs machinery, rather, only to work a larger part of his time for capital, to relate to a larger part of his time as time which does not belong to him, to work longer for another." (Marx. Grundrise. Pub. Pelican. page 701)
The 'another' being the capitalist. Let us take the concept and the above example one step further. If certain capitalists were able to introduce such a high level of automated and mechanised machinery and methods into their factories that the workers necessary labour time was reduced to two hours, then the line representing the working day would look like the following.
The most striking thing about this progression is the rapid growth in the surplus labour for each reduction of the necessary labour time. In the final example given above, each of the 100 workers would provide 6 hours of surplus labour per day, making in this case a total of 600 free hours per day; 3,000 free hours per week and 150,000 free hours per year. If these workers only produced the equivalent of one item or commodity per hour then the capitalist would have 150,000 items yearly for which he had paid nothing. If those items were only valued at £1 (or one Dollar, Mark, Franc, Yen etc.) then the surplus value extracted from the workers would be £150, 000 (or $ - F - M - Y etc.) per year if they were all sold. Of course we know that many capitalist industries employ many thousands of workers and sell items valued at thousands of pounds - car manufacturers for example. We can see in these cases that the amount of surplus labour extracted from working people must be phenomenal. Take for example a very moderate assumption of 1,000 workers producing 1,000 surplus commodities per year (i.e. only two per day each) sold at a price of £1,000 (or Dollars, Marks, Yen, Francs etc.). This would create the staggering figures of one billion (1,000,000,000) of pounds (or Dollars, Francs etc.) of surplus value. Figures which anyone accustomed to reading or hearing about from financial press or media will not come as a surprise. Of course this surplus value needs to be shared out among the other sections of the capitalist class. The bank would take it's share, the landlord (where applicable) would have a share, as would the government in the form of taxes and any shareholders in the company. We should recognise that the productiveness of labour allied to modern machinery is so prolific that the amount of surplus value created is quite staggering. It must be, for once transformed into monetary form, surplus labour provides the basis of the income of all unproductive labour such as Royalty, Armed Forces, Civil Service, Politicians, Clergy, Lawyers, Artists, Sports people etc. In short all those who do not produce the necessaries of life or any surplus value must be fed, clothed and housed by those who do produce them.
We should remember also that Capitalist method of production is international and that multinational companies are employing working people all over the world, so workers all over the world are making enormous contributions to the surplus labour and surplus value of these companies. In the context of global production it is useful to note that surplus labour is extracted at the point of production whilst the surplus value this represents is realised at the point of exchange. Thus surplus labour can be extracted from the workers in one country but the surplus value is realised and pocketed by the capitalist class in another country. This vast international network of working people, employed in industry, agriculture and commerce, throughout the globe provides the fundamental basis of all life. It is they, not the capitalists, (nor the Royalty, Armed Forces, Civil Service, Politicians, Clergy, Lawyers, Artists, or Sports people) who produce the food, the water, the clothing, the housing and energy which all the world's citizens require. Indeed, it is the working classes which not only produce and distribute the thousands of items of food, clothing, housing, mechanical, electrical goods, water and energy resources needed by everyone, but are also the basis of the surplus value which all other groups live off.
Before leaving the question of the division of the working period into necessary labour and surplus labour we should note the almost impossible struggle which the working class has had to achieve a shortening of the working day and the working week. It is in the interests of the capitalist class to lengthen the working day and to resist shortening it because this effects the amount of surplus labour which they obtain. Shorten the working day by one hour and it is not the necessary labour which is effected, but the surplus labour. Lengthen the working day by an hour by means of overtime or shortening the meal breaks and the capitalist gains another portion of unpaid surplus labour. Despite all the colossal advances in machinery and efficiency which have occurred over the last 100 years the working day has only gone down 'officially' from 10 hours to 8 hours. Officially is placed in inverted commas because for many workers the working day still often is 10 hours or more due to shift working and overtime and when we understand the function of surplus labour as the source of surplus value and profit we can see why.
We have considered how machinery can help to increase the amount of surplus labour accruing to the capitalist class, by shortening the time necessary to reproduce the workers wages, but the introduction of machinery affects the process of capital in another way. Machinery costs money and large complex machines cost large amounts of money capital. This money capital comes out of the total capital which the capitalists have available and so it leaves less of this capital available to pay wages. Thus capitalist investment in machinery can and often does lead to a reduction in the number of workers necessary for the production of an increased amount of commodities and services. The transition from manufacture (early capitalist forms) to modern machine industry has produced what Marx called a reserve army of labour. That is to say a large section of working people who no matter how much they are educated or trained cannot be employed profitably by capital and who must therefore exist without paid employment. Since as workers they lack their own means of production, and since the capitalists don't want them employed on their privately owned means of production these workers are thrown upon their own resources. Their income generation possibilities are reduced to crime, begging, charity or in the advanced countries, to receiving welfare payments of one kind or another.
At this point we should remind ourselves that it isn't that there aren't useful jobs to do in modern capitalist society. The amount of slum housing, decrepit schools, crumbling hospitals, collapsing sewers, disintegrating roads, leaking reservoirs in the advanced countries and massive deficiencies in basic amenities in what are known as the third world countries, all cry out for improvement by the application of labour and materials. All the materials and instruments of production needed to do these jobs also exist, but again where they cannot be used for profitable purposes, they too will be left unemployed - or stockpiled as it is often called. Any rational and humane society would employ its redundant workers and redundant materials to do the much needed repairs and renewals, but capital has its own rationale and this is the pursuit of profit, so all else can just go to waste. The reason that these types of jobs are not done sufficiently is because it is difficult to directly obtain surplus production from a hospital, school or road. It is easier to obtain surplus products and then surplus value from cars, televisions, toys and even guns, bombs and land-mines (and the means to deliver them), than many of the things that really need doing. The capitalist class not only 'rips off' the working class, stealing and accumulating the additional (surplus) value it creates, but it stands in the way of a more rational use of resources and it leaves large numbers of our human resources to exist in squalor and poverty, as a permanent army of unemployed workers.
All that has been said so far with regard to the capitalist system of production serves to indicate that the process of capitalist production is a system built upon contradiction. I don't merely mean the moral contradiction between the existence of a value-creating sector of society (the workers) which live either a basic existence on 'normal' wages (or a 'below normal' existence on charity or benefits), and a wealth-accumulating section (the capitalists etc.) who live in obscene splendour. I refer here to the economic contradiction noted earlier between the circulation of commodities C - M - C - M - C etc., and the capitalist control of it and interference with it, to make profits and their dislocation of it when they can no longer make profits. Withdraw 'M' from the above cycle (or even large amounts of it) and the whole cycle is thrown into chaos.
The essential social mechanisms for exchanging goods and services in a complex society have become subject to the control of a relatively small group of elite capitalists and have become subject to their perceived investment needs. When capitalists can no longer make sufficient profit they abandon production or investment and abandon the workers (who have provided them with years of surplus value) to their fate. Even without a capitalist crisis, which we shall consider later, individual capitalists can simply take their accumulated profits and move on to invest their capital elsewhere. The workers and their families, however, having created the wealth for the capitalists are generally in no position to move elsewhere and are thus forced to try to exist without a wage or salary. This conflict between the interests of the workers for regular work, safe conditions of production, decent wages, job security, humane treatment and the interests of the capitalists for profit is a fundamental contradiction within the economic and social system of capital. However, this is not the only contradiction within the capitalist process.
9.6 The falling rate of profit
It has been demonstrated that over periods of time, with improvements to machinery and production methods, the amount of surplus value rises along with the productivity of labour. But, the larger and more complex the means of production become, the more they cost the capitalist class to obtain. Thus the amount of capital they have to set aside for machinery, raw materials etc., increases in relationship to the total amount of capital they have at their disposal. Marx uses maths equations to explain this process in Capital, we shall attempt a more visual form. If, in the early stages of the development of capital, a capitalist spends one quarter (25%) of his or her capital on machinery and three-quarters (75%) on wages, then the amount of surplus production available is based upon that 75% since that represents the wages of workers who produce the surplus production after they have replaced the value of their wages. If the total capital available to a capitalist for investment purposes is envisaged as a circular cake then in the example now suggested, a quarter of that cake will be used for machinery, materials, buildings etc., whilst the remaining three quarters of the cake would be available for wages.
This 75% portion of the capital for wages is then used to employ workers who will work, as we have seen, part of the time for their own wages and part of the time producing surplus products for the capitalist. However, as the technical level of production rises and machinery becomes more complex the competition among the capitalists themselves means that sooner or later they will purchase the new machinery, production methods, materials, buildings etc. Therefore the proportion of the total capital they need for machinery will rise. Let us say that in a certain industry, the proportion of capital needed for machinery etc., rises over the years from 25% to 50%. Then in this industry only 50% of the total capital is available for wages. The diagram would then look like the following.
Whatever the actual total amount of the capital, as the capitalist increases the proportion of his or her capital spent on machinery etc., the proportion available to employ workers is reduced. In this case the proportion spent on machinery etc. has gone up from 25% to 50% whilst at the same time the proportion on wages has gone down from 75% to 50%. If the technical level of production rises further, to a point in which the capitalist, in order to compete, has to allocate 75% of his or her capital on machinery and materials and only 25% on wages, then the proportion of his or her capital producing surplus value is even further reduced as in the following diagram.
The inherent tendency of large-scale capitalist production to increase the amount and complexity of machinery leads to an automatic decrease in the proportion of capital left to employ workers. Since the proportion given over to workers as wages is the only part of capital which produces new surplus value, this part is constantly reducing. In one industry after another, this leads to a fall in the rate of profit for the capitalist class. In other words the rate at which they can accumulate surplus value or profit is constantly going down. Of course to offset this reduced rate, the more advanced machinery will produce more commodities using fewer workers and so produce more profit for the capitalist. To understand this we must remember the previous point about the capitalist continually gaining surplus production and converting it back into money capital. Remember the process for the capitalist is M - C - M+. He or she then starts the production process over again not with the same money capital M this time but with M+. The original money capital plus the extra amount created by the workers. So the second circuit is actually M+ - C - M++, and so on. In other words in normal circumstances, the total amount of capital is constantly growing, not static as was shown above. If we look again at the circular cake analogy we see that in the above case over periods of time what is actually happening is more like the progression below.
It can be seen from the above diagram, that because the capitalists' cake (i.e. their disposable capital) is actually increasing in size, the fact that the proportion going to wages (and thus surplus value) reduces doesn't mean that the slice going to make profits is getting smaller. One quarter of the large circle is greater than three quarters of the small circle. It is the same principle as recognising that 25% of 1000 (i.e. 250) is greater than 75% of 100 (i.e. 75). This increase in the mass of profit compensates to a great extent for the reduced rate of profit.
"....a fall in the rate of profit connected with accumulation necessarily calls forth a competitive struggle. Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital and to the big, firmly placed capitalists." ( Capital. Vol. 3 page 251)
But this reduction in the rate of profit and the competitive struggle between capitalists has real consequences for working people. If the rate of profit falls below the expectation of the capitalists (or they are ruined in the competitive struggle) they may (and often do) cease production and move their capital elsewhere. It is often moved to where there is an actual or potential work-force whose 'normal' wage rate is lower and therefore their necessary labour is accomplished in a much shorter part of the working day. As noted, when this happens whole communities of workers, who have created the capitalists' profits, from their surplus labour, are then abandoned. The fact that such withdrawn capital is often transferred abroad and the effect this has on the welfare of working people is only touched upon here and has been left to the next chapter.
So far in the above example we have concentrated on the wages side and the production of surplus value. In doing this we have treated the total capital as belonging 'naturally' to the capitalist. He or she decides to spend 25%, 50%, or 75% on machinery etc., a decision which appears to deal only with inanimate objects, objects which belong to him or her. But if we think more closely about the portion going to the means of production (machinery, materials, buildings, etc.) we find that this too is in reality intimately connected with working people. The raw materials for production, the machinery and the buildings which have been purchased are not made by the capitalist, nor do they magically appear in the night. They are all produced by working people. The buildings, machinery and raw materials are all themselves the products of labour, of people working with other machinery, using other materials on other sites of production. They are all products of previous labour. So in the production process the capitalist is actually bringing together the previous labour of the working class and the present labour of the working class.
The capitalists' only economic function is to bring together the products of previous labour and the skills and energy of present labour in order to produce new commodities or services. To do this the capitalist class uses the accumulated surplus value (transformed into money capital) created by present and previous generations of workers. In this way the money capital (along with the personal wealth) of the capitalist class arises not out of their personal work or production, but out of the work and effort of thousands or millions of others. From this we can see that in actual fact the capital and wealth of the capitalist class has been socially produced, but because of its historical origins in merchant capital, as yet remains individually owned and controlled.
g) How surplus value is divided up.
Before moving on let us look again at the production of surplus value by working people for there remains the interesting question of how it is divided up by the capitalist class. If we take, as an example, the equal division of a working day between necessary labour and surplus labour, then four hours will go to replacing the value of the workers wages and four hours will go to surplus labour for the capitalist. The rate of surplus value will be 100%. Four hours of paid labour will produce four hours of unpaid labour. Ten commodities produced by dinner time will leave ten commodities for the afternoon. Or to put it another way £1,000 in wages, replaced by dinner time, will result in £1,000 of surplus value completed by the end of the day. This is simply a development of one of the examples explored earlier when a line was used to represent the length of the working day but now it will be developed further. Thus if a capitalist has an available capital of £100,000 and uses 75% (i.e. £75,000) for machinery etc., and 25% (i.e. £25,000) for wages, then this £25,000 of wages will replace itself say during a year of mornings and go on to produce a further £25,000 of surplus value during a year of afternoons.
The capitalist invests £100,000 and employs workers and raw materials which materialise in finished products - say commodities. The commodities are sold or exchanged for money at their value and the costs of the raw materials, wages etc., are returned to the capitalist, together with an extra amount (surplus value) created out of the surplus production. The circuit M - C - M+ in this case translates into £100,000 - C - £125,000. Of course the full amount of the capital spent in machinery and buildings will not always be returned within one cycle of production but may take a number of production cycles (or years) to fully return. However, this does not effect the return of surplus labour. Every hour of surplus labour, produces surplus value once the products or services are sold. If the industrial capitalists were the only members of the exploiting classes then in the example above, the £25,000 of surplus value would belong to the one (or ones) who began the capitalist production process. However, hovering around the industrial capitalists are the land owners, finance capitalists and government tax collectors. So out of each portion of yearly surplus value they all want a slice. Still using the above example, the surplus value of £25,000 created by the workers, would be divided up along the following lines.
The slices in the above diagram do not represent the exact proportions of taxes, interest and rents etc., as these will vary from country to country and vary over time but it does allow us to see the origin of much of the income of all the non-productive classes in Capitalist society. The 'shareholders' of companies get a share of the surplus value created by the workers as do the Banking or Financial sector which get 'interest' on their loans and the land owners who receive rents. The government takes taxes from those companies who don't manage to avoid paying them and use this share to employ politicians and other state employees. Looking at the above diagram gives no idea of the colossal amounts of surplus value created by the combined efforts of the working class of each country. Indeed, as with individual capitalist concerns, there is no desire by governments to reveal such figures.
However, two socialist writers in the 1960's found a sympathetic statistical expert who made the attempt in America using government figures. They calculated the surplus value every year from 1929 to 1963 and in no year did it fall lower than $22.6 billion and by 1963 had risen to just over $327.7 billion. Let's write that 30 year old figure for the United States of America out in full so we can see the real enormity of it. $327,725,000,000 was the estimated surplus over and above the wages of American workers - in one year! Out of that surplus £5.3 billion went to landowners; $24.3 Billion in interest payments; $168 billion in government taxes; $7.7 billion to advertising and $74. 8 billion in distributed profits; the remainder in legal and distribution costs. Although the authors used the concept of national surplus rather than surplus value it comes closer than any other figures to revealing the true extent of the surplus value created by the working people of the U.S.A.
Of course surplus value isn't just created in America. Surplus value of comparable magnitude is created and realised in every capitalist country in the world, particularly in the advanced capitalist countries of Europe and Japan. When the ruling class and their supporters (and apologists) talk about insufficient money for adequate pensions, decent wages, good quality housing and modern schools and sufficient hospital beds it is now easy to see what utter nonsense they are talking. There is enough surplus value produced by working people in every country for all these essential services to be upgraded far beyond the current level. What they really mean but refuse to be honest about is that they are determined to continue allowing most of the surplus value created to go to landowners, Industrial-capitalists, finance-capitalists and those government agencies which serve the ruling class.
Having worked part
of the day to replace their wages, and a further part of the day to produce
surplus value, the workers exit the factories and offices, with their
wages and salaries further reduced by direct government taxation. They
then have to pay out a further portion of those wages and salaries to
other capitalists in the form of rent or mortgage interest, purchases
from other capitalist companies in exchange for the commodities they need
and, in most cases, the government again in indirect taxes on commodities.
In this way the combined working classes in each country support a whole
network of middle-class people, in advertising, the legal professions,
government employees, as well as the finance capitalists, the land-owning
capitalists, commercial capitalists and the industrial capitalists. All
of whom think they are essential to society but in fact they are only
essential to capitalist society and its functioning. This is why they
are loyal to it and uphold its continued existence despite its injustices
and oppression. If we look again at the division of surplus value and
put the names of the groups who feast at the banquet
of surplus value we will see the pro-capitalist enemies of working people
and anti-capitalists.
Despite the fact that these groups may squabble from time to time over who gets the biggest slice of the surplus value, they are all (revolutions apart) united in wanting the system to continue in its present form. This is because under the present capitalist system, year after year, they obtain the majority of the wealth produced by the combined efforts of the international working classes. The above groups will oppose anti-capitalist struggles, because this would remove the need for the existence of their lucrative occupations. They will also unite to oppose serious campaigns for wage increases and a reduction in working hours under the capitalist regime, because these measures will reduce the amount of surplus value to be shared out amongst them. In contrast the post-capitalist society envisaged by Marx and genuine revolutionary humanists, would enable the working classes to distribute this surplus in a very different way. Such is the tremendous productivity of labour and the size of the surplus under modern industry and technology, that a very real shortening of the working day and week could be introduced and still produce a massive surplus. That surplus could be used to employ people in constructive pursuits rather than in the many current destructive ones. The hangers-on who contribute nothing of value to the producers, but consume so much could be released to start doing something useful and consume less. The remnants of the British feudal-relics of aristocracy spring to mind here. All those who are currently employed in activities which are only necessary to the capitalist process and nothing else (capitalists, landlords, real estate lawyers, advertisers etc.) could thus be freed of their parasitic existence to exercise their talents in other more socially useful ways once they had undertaken a period of suitable re-training. The concept of surplus value and the question of who produces it, who controls it and who gets it, is absolutely vital to understanding what is happening in any given society. It explains who is in control and it identifies the economic and political motivation behind the systems of slavery and serfdom as well as capital. This is probably why it is still not taught in schools, colleges and universities.
h) Capital and Crisis.
So far we have drawn attention to the circulation of commodities under the process of capitalist accumulation, in order to show how the capitalists extract surplus value from working people. The existence of several contradictions in this process has simply been noted in passing. It is now time to look more closely at these contradictions because these are what cause the economic system dominated by capital to enter into periodic economic crises of various magnitudes. It is these crises which, depending upon their severity, shake the very foundations on which the capitalist social system is built. A thoroughgoing economic crisis not only drastically disrupts the circuit of essential commodities, bringing hardship to all classes of society, but by doing so, calls into question the whole existence of the system of capitalist exploitation and control.
To recap. We have previously introduced the basic capitalist process of Money - Commodity - Money (plus surplus value) but in the shortened form used by Marx of (M - C - M+). We noted that the capitalist class use money as capital to purchase those commodities (machinery, raw materials etc.) needed for production, including the workers required to produce these commodities. The workers then produce the commodities including surplus commodities and the capitalist sells them and receives in exchange more money than he or she started with. Once the capitalist has parted with his or her initial money capital, the materials bought are combined together in the production process until they are completed commodities and then they move forward again into the process of circulation in order to be sold. The commodities then move forward into the hands of the consumer and the money travels backwards to the hands of the industrial capitalist. The process (M - C - M+) is not complete until the enhanced money has returned to the industrial capitalist. However, this process is not always one smooth operation. The stages of this process are separated by time and distance and it is this separation which together with the unlimited desire of capitalists for surplus value, gives rise to potential (and actual) problems or crises. Between the outlay of money (M) and the production of commodities (C) there is the production process itself, which can take time and is often separated by many intermediate stages. Each stage and each transformation of the raw materials through the process of production can be disrupted with the results that commodities are not produced or not produced properly. The struggle of the workers engaged in production is merely one factor which can and does interrupt the production of commodities and services. Yet general crises rarely occur within the production process even though they often originate there. More of that later.
Meanwhile, even when the commodities have been produced satisfactorily they still have to be sold and the sales process itself is often protracted. A division of labour among the capitalist class has created separate stages in that part of the circulation process between commodity production and final sale. Commercial capitalists (wholesalers, stockists etc.) often buy all or a large part of the production of the industrial capitalists in exchange for a share of the surplus value - from which comes commercial profit. Retail capitalists then buy from wholesalers. In such cases the industrial capitalist completes M - C, while the merchant capitalist also exchanges money for these commodities or M - C, again. The retail capitalist also completes a M - C. These short part-stages seem at first glance to contradict the M - C - M process, but the start of the merchant capitalists involvement (M) completes the industrial capitalists process; the start of the retail process completes the merchant capitalists process and so on. How this works out is easier to see if the separate activities are put into sequence as (M - C) - (M - C) - (M - C) - etc. If the brackets denoting the separate activities of the industrial, merchant and retail capitalists, are removed we are left with the basic form M - C - M - C - M - C noted earlier in the chapter. Such intermediate stages solve the problem of selling commodities for the industrial capitalist in that this method disposes of the products in large batches and brings in money in larger single amounts, but it also extends the time and number of stages to the circuit. Lets look at the possible stages in the process of circulation diagrammatically.
At each stage in the above chain of events leading from production to final payment interruptions can take place or the link be severed. If for any reason a sale does not take place, then the forward movement of the commodities fails and the commodities pile up unsold. When this happens the money does not return along the chain but stays at the point of interruption. For example if the retail capitalists fail to buy in sufficient quantity then the merchant capitalist has parted with money capital but has not got it all back. In its place he has quantities of unsold items which must be stored or sold below value before they deteriorate too far. On the other hand if the retail capitalist cannot sell to the consumer then he or she cannot, or will be unwilling, to order more goods from the merchant capitalist. The merchant in turn may then have to order less from the industrial capitalist. If this continues beyond a certain point then the industrial capitalist may have to lay off workers and order less raw materials etc. and so there will be even less demand in the circulation process. In other words a chain reaction can take place. In extreme cases such crises mean retail shops may close down, merchant capitalist may go bankrupt and industrial firms may close. To some extent a collapse of this kind can be delayed or lessened by the use of credit and deferred payments, but this only delays the need to pay, it does not remove it. If one link in the chain of credit or deferred payments is broken by a credit default, then this can also set up the chain reaction of defaults, failures to pay and bankruptcies. Marx sums up this situation in the following manner;
"...the crisis occurs not only because the commodity is unsaleable, but because it is not saleable within a particular period of time, and the crisis arises and derives its character not only from the unsaleability of the commodity, but from the non-fulfilment of a whole series of payments which depend on the sale of this particular commodity within this particular period of time. This is the characteristic form of money crises." (Marx. Theories of Surplus Value. Vol. 2. page. 514. Emphasis as original)
The problem of payment within a set period of time has been overcome to some extent by extending credit or the re-scheduling of debt, but it has not removed the problem entirely. We have earlier considered Marx's prediction that the capitalist tendency to increase the technological level of production would not only produce a falling rate of profit but over time would also increase the concentration of capital in larger and larger units. He did not live to see the development of the 'oil baron' and 'steel tycoon' monopolies of the 1930's nor the multinational globalised companies which are commonplace today. However, he perfectly anticipated their general development because this flowed not only from the logic of capital uncovered by his analysis but also from what had happened and was also developing further at the time he was writing. For example, Marx stated;
"In any given branch of industry centralisation would reach its extreme limit if all the individual capitals invested in it were fused into a single capital. In a given society the limit would be reached only when the entire social capital was united in the hands of either a single capitalist or a single capitalist company. Centralisation completes the work of accumulation by enabling industrial capitalists to extend the scale of their operations." (Capital Vol. 1 page 627)
Monopoly firms, cartels and multinational organisations are just the particular ways capital develops over time in order to extend the scale of its operations. Social pressures, not least from within the capitalist class itself, would resist and oppose the extreme limit of concentration which Marx describes as the logic of capital accumulation and concentration. A single capitalist company controlling all the capital available is therefore unlikely except in science fiction movies, nor, we should add, did Marx expect the extreme limit to be reached. However, the process of concentration and accumulation has seen capital grouped together in ever larger concentrations as Marx predicted. Monopoly and multinational companies may be able to tinker with prices lifting them above or below the value of the commodities when and where they see fit, but they do not and cannot alter the basic underlying principles of capital that have been outlined above. This means, as we shall demonstrate later, that Marx's prediction of Capitalist crises is no less valid then when he outlined them in the 19th century, even if the capitalist class has learned how to deal with many lesser ones somewhat differently.
The tendency of the rate of profit to fall through the development of machinery, leads capitalists to seek compensation in the increased mass of profit due to extended production of commodities. Making more commodities and selling them increases the mass of profit even if the rate of profit is falling. There is, therefore, an even greater incentive for capitalists to increase production by further application of machinery and methods. As the resulting production increases there comes a point at which more commodities exist than there are customers to buy them at the price which realises the surplus value in them. This condition is called relative over-production. Under the process of capitalist production over-production doesn't mean that more commodities have been produced than people want (which would be absolute over-production), but that more commodities have been produced than can be sold at a profit (i.e. relative over-production). In this connection Marx develops the point and makes the following comment;
"Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production, not vica versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier. Furthermore, capital consists of commodities, and therefore over-production of capital implies over-production of commodities." (Capital. Vol. 3. page. 251.)
This was written over 100 years ago by Marx and has had many attempted (and failed) refutations by capitalist economists since that time so it is interesting to note that a right-wing economist in 1998 was forced to conclude that;
"The Asian crisis reflected a realisation by international investors that the amount of industrial capacity being created was greater than that which could profitably produce goods for the world market. The crisis of over-investment resulted in a sharp outflow of the capital that had previously supported the process of industrial development" (D. Smith. Sunday Times. 11/10/98.)
This statement expresses in slightly different words exactly the rift, noted by Marx, between the limited dimensions of consumption and the productive capacity created for profit. This contradiction is one side of the tyranny of economic and social domination by capital. On the one hand there can be people in dire need of certain commodities and on the other these very same commodities may be piled up in huge quantities somewhere unsold. In recent times the grain and butter mountains, cold storage depots and wine lakes of the European Economic Community are the notorious tip of an enormous iceberg of unsold basic commodities within the EEC. Unsold not because these commodities are not needed but because they cannot be sold at a profit on the open market.
Ironically this situation of relative over-production has been hastened by the very increase in the proportion of capital spent on machinery, materials and buildings etc., in proportion to the amount spent on wages. Those workers made redundant by the new methods of production are then unable to purchase anything but the absolute necessities of life. Markets for these surplus commodities must be found elsewhere, but once these alternative markets are saturated, the same problem re-occurs. When a severe crisis point arrives the commodities must be sold below their value or just dumped and left somewhere. In either case the surplus labour embodied in them cannot be realised and expected profits disappear. Since the realisation of surplus value and the accumulation of capital is the sole purpose for the capitalist to be involved in manufacture and commerce, then, if the situation is prolonged and the individual capitalist has not been made bankrupt in the process, their capital will be quickly removed elsewhere. Where such a crisis of over-production extends to other capitalists (and when it occurs alongside extended credit facilities) then the crisis can be even more severe.
"This confusion and stagnation paralyses the function of money as medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciation's, to actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction." (Capital. Vol. 3. page. 249.)
There have been many such crises of stagnation and paralysis in the history of the capitalist system. The last general and considered by many to be the most severe one occurred in the years between the two great world wars of 1914/1918 and 1939/1945. Severe dislocation of production and capitalist accumulation led to an enormous 'depression' or downturn of production in the capitalist world and this in turn led to many seemingly bizarre situations. Germany witnessed a bout of accelerated inflation, which led to working people being paid twice per day in sack loads of currency which would hardly buy the few essential commodities available. Throughout Europe the prolonged economic crisis led to a massive popular discontent with the domination of capital which eventually began to flow in two disparate political directions, Fascism and Stalinism. We need to recall that it was these developments, which combined with others, led directly to the Second World War. In terms of humanity's struggle for a better life the ultimate results of this inter-war economic collapse were catastrophic. Millions upon millions of ordinary people were killed in the battle for and against Fascism, many millions more were injured and their lives totally disrupted. The nature of the human and social costs due to the triumph of Stalinism were indicated in Chapter 2, however, in terms of Capital's struggle to exist, these results had beneficial, if unplanned effects. Many capitalists on all the warring sides were able to switch to war production and continue making profits - the level of which were then guaranteed by their respective capitalist governments. Such was the devastation, deterioration and disruption to the basic fabric of society (roads, housing, industry etc.), after the war, that capital augmented by war profits, was once more able to move into production in these areas and again create sufficient profit to begin another boom.
The reaction to a massive over-production of capital and commodities and the consequent contraction of economic activity is popularly called a slump or depression. However, it is best understood as a period of extensive under-production which is merely a counterbalance to the previous period of over-production. The two world wars accelerated, amplified and extended the destructive tendencies of capital but wars are not inevitable outcomes of slump, depression and stagnation because the very downturn itself prepares the conditions for a capitalist revival. In a severe downturn, Capital values fall, commodity production is reduced, fixed capital (machinery buildings etc.) is depreciated or is 'written off', some capitalists are bankrupted and mass unemployment reduces wages. All these factors prepare the ground for a new period of profitable production. Lower wages mean less time spent in necessary labour and thus more surplus labour or value is created; fewer commodities in circulation mean there is scope for more after a short period of time; fewer capitalists mean less competition for the remaining capitalists.
This periodic correction by crisis is one reason why a post-capitalist society is not inevitable in any immediate or automatic sense, simply because of the contradictions of the capitalist system. For such an outcome something more is required, as will be discussed in chapter 12. The process of capitalist crisis and revival, if not interrupted by revolution or war can, therefore, start again. The pattern of capitalist economic activity noted by Marx is 'inactivity - revival - prosperity - over-production - crisis - stagnation - inactivity (once again) repeated over and over again. This pattern still exists even though the tempo and duration of its elements may have altered for various reasons. In Europe after the second world war a revival took place, then came a period of prosperity, followed by over-production, crisis and then stagnation (or stagflation as it was then popularly termed).
The symptoms of this stagnation in terms of the working class were large scale unemployment and reductions in real wages. The interesting development in the 1980's and 1990's is that while there have been mini-revivals there has been no return to general prosperity. Large-scale, long-lasting unemployment, together with low wages has again become a permanent feature of the modern capitalist system. So advanced is the technological level of 20th century production that even in periods of revival, capital in the advanced countries, cannot employ more workers without simultaneously over producing commodities. The result has been the increase in all capitalist countries of the reserve army of labour or as modern capitalist apologists have termed it - an 'underclass' .
In the struggle to prevent the further reduction in the rate (and in some cases the mass) of profit in the latter part of the 20th Century, the response of the representatives of large-scale capital has been twofold. Firstly, capitalist firms have characteristically sought new markets for their products adjusting the price where necessary. Secondly, capitalist firms have increasingly moved their production processes to areas of low wages, such as Asia, China, South America and former eastern-bloc countries. This has provided them with a cheap and flexible work force. The growth of Export Processing Zones (EPZ's) in these areas ensures low-wage labour and light or absent tax demands from supportive governments. In some cases the low wages and flexibility are conveniently guaranteed by military style governments subsidised and armed by one or other of the governments of the advanced capitalist countries .
The effect of employing cheap labour is, of course, a reduction in the time needed to replace the workers wages and this, as we have seen, increases the amount of surplus labour and value available to the capitalists. Profits for these companies have risen in the short to medium term and will continue to rise for some time, yet this very strategy inevitably leads to a compounding of the problem of over-production. Moving production away from high wage countries leaves unemployment behind and therefore even less buyers for the overall products of capitalist production. Such tactical 'globalisation' of production has only delayed the hour of reckoning for capitalist crisis, not removed it. It is now probable that as we have entered the new millennium there is already a simmering crisis-level of over-production in many sectors but particularly with cars, steel, computers, petrochemicals, aircraft and of course food. It is a growing level of over-production that will eventually be too large for even the combined capitalist governments to control or mediate and which sooner or later will trigger a global financial crisis.
The increasing unwillingness of capital to employ the available work-force has tremendous implications for the kind of 'welfare capitalism' and its 'social services' which has developed in the advanced countries since Marx's time. With rising unemployment and tax breaks to capitalists, the amount of tax revenue going to the government becomes insufficient to maintain all its welfare expenditure. Long-term and rising unemployment along with low wages and poverty, therefore, bring about an increasing crisis situation in government circles. Governments are faced with a choice of cutting back on welfare benefits or some other item of expenditure or increasing taxation. Increasing taxation from capitalist sources means increasing the share of surplus value going to government. Those sections of the capitalist classes sharing the surplus value (diagram page 309) exert powerful (and successful) pressure on their governments to limit the share of surplus value going to the government by taxation. Increased taxes, they argue, will cause them to withdraw capital from industry and create even more unemployment.
The governmental response to this dilemma caused by the capitalist mode of production quickly indicates the true colours of its politicians. A vaguely left-wing government would protect the working classes, the unemployed, pensioners, single parents, disabled, etc., and reduce expenditure elsewhere. A right wing government would protect industry, the financiers, the armed forces, police, its own pay and lower the real benefits to the working classes. A liberal government would probably reduce expenditure all round but take most from the working classes and low paid. In Europe, America and Japan, whatever the political complexion of the pro-capitalist governments, the combined efforts of the ruling capitalist classes in all their political shades is to cut welfare and benefits to the victims of capitalist economic development. This social dimension together with its financial and economic instability means that the modern capitalist system is permanently hovering on the edge of crisis.
i) The domination of Finance Capital.
One other aspect of the capitalist process which has increased in size and scope whilst remaining essentially the same since Marx wrote Das Capital, is the field of Finance Capital and speculation. Marx in Capital volume 3 described the development of large-scale industry and noted how it had brought about a development of money-capital in its purest form. That is to say in its interest-bearing form, a form which is separate from industry yet gains a share of the surplus value created in industry by charging interest. Interest is the technical means by which interest-bearing capital gains a part of the surplus value created by industrial-capital. The development of money-capital and its increasing concentration in banks brought about a change in the power relationships between capitalists. Just as industrial capital was parasitic on the working classes in extracting unpaid labour, interest-bearing capital became parasitic on industrial capital by taking an increasing share of surplus value irrespective of the level of profits. In addition, as Marx noted, the bankers, as custodians of this money-capital, obtained positions on the boards of directors of industrial firms with the object of their own self-enrichment irrespective of the well-being of the industry or firm. This still goes on. Thus we can read of a section of the British financial capitalists in the 1970's, that;
"Investment banking is an euphemistic cloak for a peculiarly brutish form of activity which has become prominent in the City in recent years. It effectively means deploying the bullying power that can be used with a sizable equity stake in a company to force that company, often against the will of its own management, into merging with another company, disposing of its assets or some other major departure from its normal course of action. (R Spiegelberg, 'The City' Pub. Quartet. page 244/245)
This 'jiggery pokery' as the author later describes it is known as 'asset-stripping' and has nothing to do, as he says, with industrial logic but it has everything to do with finance capitalists making a quick profit before moving on. Yet there is an even more problematic aspect to the development of interest-bearing capital. In addition to its dominance over industrial capital, its owners have a propensity to create imaginary or fictitious capital. Let us consider Marx again on this question.
"With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this 'money-capital' is purely fictitious." (Marx. Capital, Volume 3, page 460.)
It sounds incredible that a system of political economy, which millions of people rely upon to obtain the essentials of life, can operate with such a category of imaginary or fictitious capital. The process of creating fictitious capital is varied but a spectacular way is through what is termed capitalisation. Here is how it works. Every income which is regularly received can be considered as being the equivalent of coming from the interest on a larger sum of money. Marx gives the example of someone receiving £100 per year income. If the current interest rate is 5% per year, then this £100 is the equivalent of having £2,000 in the bank and getting the interest from it. Even if the person doesn't actually have £2,000 in the bank, they can claim this is what they are worth because of the £100 income. In other words the £100 has suddenly become linked to an amount twenty times bigger by this theoretical calculation. Instead of having a value of £100 per year the person can claim to be worth £2,000 and claim this for each year they have this income.
Take for example, a worker in regular employment receiving £10,000 (or Dollars, Francs etc.) per year. This income from work of £10,000 is the equivalent of receiving the interest (at 10%) upon £100,000. No sensible worker would therefore claim and act as if he or she had a capital equivalent of £100,000. The 100,000 dollars. pounds, francs, or marks etc. are just a hypothetical calculation. Yet the capitalist class do exactly the same sort of multiplication and have a means to actually get their hands on some or all of this imaginary or fictitious money.
Here's how this bit works. Say for example two partners in business have an income after taxes, expenses etc. of £50,000. They decide to go public with their business and have the business valued at 20 times earnings. Their business is then valued at a 'fictitious' level of £1,000,000 (yes £1 million) and they print share certificates to that amount. Say one million shares at £1 each. They keep some shares themselves and offer some for sale to the public or 'float' some on the share market as it is called. If the buyers of shares on the stock exchange take up the flotation offer then the partners pocket the money from this sale of shares. If for example they float (and sell) half the shares, then they get an extra £500,000 or £250,000 each if they are equal partners.
The partners receive 'real' money for these pieces of paper (share certificates) representing 'imaginary' capital. Every time one of the partners wants to buy a boat or another house they can just peel of some more shares and sell them on the stock exchange. The buyers on the stock market may bid the shares up beyond their face value of £1 to say £2 per share so if the partners want they can sell some more and get twice the amount of cash for each £1 unit of their imaginary capital. In contrast the shareholders don't get a 'share' of the actual capital of the business, just a share of the imaginary capital and a 'share' of any declared profits from the surplus value left over at the end of the year.
The process of capitalisation takes place on a huge scale and so when all the imaginary capital is added up it appears that there is considerably more wealth in society than there actually is. When the stock-market crashes in a crisis, all this invented money disappears and share certificates can fall as low as 1p (or a few cents, or francs etc.). If this happened to the partners in our example above their pseudo capital of £1,000,000 would fall to 1 million pence or £10,000, which would probably be a more realistic valuation of their business. When a stock-market crash does happen, all or most of the accumulated fictitious capital is wiped out - precisely because it is fictitious. At one time capitalists and well-to-do middle class persons bought shares with a view to getting a share of the annual surplus value. However, with the fall in the rate of profit and increased taxation, the income from this source has become less and less. Few people now invest in share certificates for the 'income' they produce annually. Most capitalists and capitalistic institutions (insurance companies, pension funds etc.) 'play' the stock market for the selling price of the shares. They try to buy shares cheap, sell them dear and make money from the difference. This is usually termed 'speculation' since they speculate on the future price of shares. In other words they gamble their money (and other peoples') on the outcome of the fluctuating pattern of share prices as these prices move up and down. When speculative activity on the various capital markets goes on for a period of time and some of the purchases are done on credit it can seem like the world is awash with money and times have never been so good. But these good times can be just as much an illusion as the imaginary capital they are based upon. For example in discussing the speculative activity of the stock exchange the economist J.M. Keynes remarked that;
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." (Keynes 'The General Theory of Unemployment, Interest and Money.' Pub. Macmillan. page 159)
Keynes was a liberal economist and as such was an apologist for capital, so when he refers to the stock-market in such disparaging tones we can be sure he is not simply being alarmist or inventing a problem that didn't exist. Indeed Keynes was motivated to put forward many reforms aimed at preventing the worst crises of the capitalist system. The above words were written in 1935, and were no doubt influenced by the experience of the 1929 Wall Street Stock-Market Crash which revealed the illusion of prosperity which fictitious capital had given to the capitalist world. In the days before the 1929 crash the illusion of well-being was still being perpetuated by none other than the President of the United States. On October 25 of that year President Herbert Hoover imagined and publicly declared that; '..the production and distribution of commodities, is on a sound and prosperous basis'. Four days later disaster struck and we read that;
"In the five hours the market had gone mad on 29 October, it was later estimated that almost as much money in capital vanished into thin air as the United States had spent on the First World War....On the day the bubble burst, the land was dotted with houses bought on part payments; cars bought on credit; clothes, jewellery, holidays, luxury goods of every kind acquired on the promise to pay in the future - often when stock profits came in. For too many, the money would never come....Faced with a sudden decline in buying, manufacturers cut back on production; workers were laid off in droves. On Friday, 1 November, the $20,000,000 Foshey enterprise of Minneapolis collapsed." (G. Thomas & Morgan-Witts 'The day the Bubble Burst.' Pub. Hamish. page 387/8)
How can money vanish into thin air? Well real capital or currency cannot disappear in this way, but fictitious capital can. If the reader were to write out ten sheets of paper containing his or her name and address and bearing the words 'I promise to pay the bearer 1 million dollars (or pounds etc.) in 9 months time.', and then tried to exchange them at the bank for cash, he or she would find they are just worthless pieces of paper. However, a merchant bank could do exactly the same and declare the pieces of paper were 'bonds' to the total value of $10 million and could trade them on the money market. They would then be counted in among the accumulated value of financial transactions. However, in a financial crisis merchant banks, firms, brokers etc., also find out, like you or I, that many such pieces of paper are actually worthless and this value has vanished into thin air. In the above instance of 1929, almost immediately ten billion dollars of the fictitious capital was wiped off the stock market and eventually the figures were estimated at $50 billion loss.
Of course it was not really a loss in one sense since this amount had never been there in the first place. The 'real' capital, the commodities, the factories, the machinery, the warehouses, the transport systems were all still there after the paper crash on wall street, but the fictitious or imaginary capital had disappeared - the illusion swept away. Yet the effect was world wide. As we have already noted the period was already one of slump and crisis but this stock-market crash deepened the crisis and where some capitalist countries were beginning to climb out of crisis, the stock market crash threw them back into it. We should note that in the time between Marx writing in the 1890's and Keynes in the 1930's four decades had past and nothing 'essential' had changed in the system of capitalist production and exchange. Crisis, stagnation, inactivity, revival, prosperity and over-production were still the pattern and they still are. Keynes tried to bring about some changes and many governments actually carried out a number of his policies but they (and he) all wanted to deal with the symptoms rather than the causes. The causes of capitalist crisis are always to be found ultimately in the restricted consumption of the masses of working people who cannot purchase the surplus products they and others produce. This results in relative over-production and in turn creates the consequent frantic search by the capitalist class for every atom of profit and by whatever means possible.
The next example of the instability and domination of finance capital concerns the above noted use of what is generally termed 'Commercial Paper'. Since the early days of capital, capitalists have given each other various pieces of paper which contained words to the effect of promising to pay each other on a specific date certain amounts of money or goods to the value of a certain amount. There are various types, such as 'bills of exchange', 'promissory notes' 'bankers' drafts' etc., they all differ in some ways but they are all similar in certain essentials. They are all commercial paper and they are all glorified I.O.U.'s although they are often superficially honoured with the collective name of 'financial instruments'. These 'instruments' say that such and such a company promises to pay the holder of the paper in thirty days (or sixty or ninety days) the amount stated on the paper. The amounts stated on the papers are not small. They vary from thousands to millions of pounds, dollars, francs, marks etc., depending on the country they originate in. Firms, pension funds, banks etc., buy them at a discount (i.e. for less than the amount stated) and then sell them on again or present them for payment in full on the due date. This can bring the buyer of commercial I.O.U.'s a profit in a relatively short time. When times are in boom or prosperity this commercial paper, in various forms, flourishes. When bank loans are restricted for whatever reason, then even more of them are used in the money market. The results of this speculative activity, when things go wrong, are revealed by another example also taken from America.
"With the banks tight and their ability to sell bonds limited, American corporations sold IOU's, commercial paper. From 1966 to 1970, the amount of outstanding commercial paper more than quadrupled from $9 billion to nearly $40 billion... By June of 1970 the sixth largest enterprise in the United States and the largest railroad in the country, the Penn Central, was busted.. It was having trouble renewing, or rolling over, its maturing commercial paper, and had $200 million outstanding." (Adam Smith. 'Super Money' Published by Michael Joseph. page. 37.)
We can see from this that in the 1970's, in the heart of the largest capitalist country in the world, a large organisation, one of the largest, had no cash to pay its debts. It had written out I.O.U.'s for a total of $200,000,000, used the cash to speculate and was caught out. This collapse and a number of other defaults and bankruptcies at the time did not trigger off a general world wide crisis, but sooner or later similar problems will. A similar pattern was revealed in the case of the American giant Enron, in 2002, which similarly overtraded, hid losses and went into rapid free-fall and bankruptcy. Such repeated occurrences clearly indicate the basic instability of the capitalist economic system which cannot escape the contradictions maturing within it. For well over 100 years crises have periodically rocked the advanced capitalist countries despite all the efforts of the reformers to study the last crisis and to learn from it and they will continue to do so. Essentially the same type of crisis, outlined above by someone, perhaps jokingly, calling themselves 'Adam Smith', was anticipated by Marx when he wrote;
"It is clear that there is a shortage of the means of payment during a period of crisis. The convertibility of bills of exchange replaces the metamorphosis of commodities themselves, and so much more so exactly at such times the more a portion of the firms operate on pure credit." (Capital Vol 3 page 478)
When credit collapses, real payment comes due and I.O.U.'s just revert to pieces of worthless paper which no one wants. Where possible capitalist governments help to prevent a crisis in one area developing into a general crisis by organising or taking part in rescue operations, but this can only happen for a short time and for a few key capitalist concerns, such as banks and large-scale industries. This form of rescue is limited because the governmental share of surplus value, (which in such cases is used as grants, loans, purchases etc.) although huge, is insufficient to match the inflated fictitious capital or mop up the whole of the surplus product. However, a considerable number of past capitalist crises have been mitigated by the concerted efforts of capitalists and their governments. For example in 1984 the American government put $4.5 billion into the failed Continental Illinois bank and in 1988 the First Republic Bank of Texas was rescued by a $4 billion payout. In such cases a knock-on effect is staved off and a general crisis avoided - but for how long? Hailed as the post-war miracle industrial economy and by 1989 as a new financial power, Japan in 1997, saw the collapse of the Hokkaido Takaushoku Bank, Tokyo City Bank and Yamaichi Securities. Easy credit had allowed the creation of fictitious money to surge ahead and the results were an increasing accumulation of debts without the real means to pay. Collapse was inevitable - only the timing was uncertain. It is not the appearance of financial swindles such as the copper price rigging of Sumitomo's Yasuo Hamanaka, the futures dealing of Barings Nick Leeson, the £6.2 million derivitives loss by John Ho Park, or the John Rusnak implicated loss of $750 million at Allied Irish Banks in 2002, which are the cause of capitalist crisis. The process of capital accumulation is essentially an immoral system of exploitation and so always has its army of rogues and swindlers even in normal times. They are merely the visible tip of a very dangerous iceberg of capitalist speculation. However, the period of over-production tends to increase the amount of swindles and more of them come to light. As we have indicated they not only affect the sphere of finance capital but also that of industrial production. For these reasons, after the 1929 crash, capitalist governments placed a number of controls upon the activities of finance capital.
Yet short memories and the absolute domination of finance capital have been vividly demonstrated by the removal of these financial controls in the 1970's and 1980's and the emergence of a global neo-liberal financial network. This period also led to the development and expansion of new forms of speculative activity and creation of additional methods of fictitious capital. These included the rapid expansion of 'futures' markets where capitalists and their agents speculate on the 'future' price of commodities, which now also include currencies and the future value of various financial 'instruments'. Another closely associated form is the 'derivatives' market which creates more speculative large denomination I.O.U's which themselves are 'derived' from other forms of commercial I.O.U's such as shares or government bonds. There now exist numerous examples of unstable financial instruments betting on unstable financial instruments and I.O.U.'s piled upon I.O.U.'s.
The advent of the computer and computerised dealing has not introduced any fundamental changes into the contradictions in interest-bearing capital but now the sheer size of the finance involved and the speed with which it can now be moved from place to place creates even more uncertainty, confusion and speculative instability. In a book subtitled 'The manic logic of global capitalism', William Greider estimated that the total face value of such financial instruments in 1991 was equal to $17 trillion dollars, or $17,000,000,000,000. They have grown even further as we have entered the new millennium. This vast inflation of fictitious capital ensured that when the financial crisis eventually broke out again in 1998 it was all the greater and its effects all the more profound. It brought the capitalist system dangerously close to collapse. By the summer of 1998 more than a third of the world economy was in decline. The financial crisis in Asia and Russia had a knock-on effect as speculators rapidly withdrew their money in large quantities and Banks found that 'good' loans had turned into 'bad' debts that couldn't be repaid on time. It was revealed by the Financial Times that speculative activity had pushed the 'paper' valuation of Russian companies from $14 billion in 1994 to $100 billion in 1997 before they collapsed in 1998 to a value of $10 billion. In other words the $100 billion valuation of Russian stock market shares was overwhelmingly fictitious capital and as such 'vanished' immediately a crisis in confidence occurred. But also the rapid withdrawal of those funds which could be rescued from Asia and Russia, flooded into the rest of the world's financial markets and slopped about like water in the lower decks of the Titanic, causing further financial panic and instability. Equity shares fell rapidly in the 'advanced' capitalist countries as money deserted these speculative pieces of paper and sought security in government bonds. Meanwhile the financial tremors continued as a report in the British paper, the Sunday Times revealed.
"The global financial system came perilously close to total collapse last week over the failure of an American investment fund, it was revealed in New York yesterday. Investigators examining the affairs of Long Term Capital Management, the fund rescued last week by a consortrium of banks..revealed it had $1.25 trillion in outstanding contracts, more than three times previous estimates. Had the fund been allowed to fail, reneging on its contracts, stock markets would have plunged on a scale not yet seen in the previous crisis....The amount of money it was able to borrow - about the size of Britain's gross domestic product - has staggered bankers and government officials, who confess they knew nothing about its unregulated operations." (Sunday Times. 27/9/98. page. 30.)
Alan Greenspan the chairperson of the Federal Reserve bank of America and senior spokesperson for the capitalist class in America orchestrated the above noted rescue and commented that in terms of such investment 'mistakes', "there will be many more". Sooner or later an investment fund such as the ineptly named Long Term Capital Management will be allowed to fail because no one will be willing or able to stop it. With such a financial crisis a rapid collapse in production due to relative over-production, will reveal to all the real underlying connection between economics and social life. Meanwhile Bill Clinton the American President, at the time, in response to this near collapse could only comment that "..the industrial world's chief priority today is plainly to spur growth." So much for the intellectual ability of the leader of the world's largest single capitalist country. The crisis he was referring to had been prepared by precisely the relative over-production of capitalist-inspired growth. This growth in turn was accompanied by a massive over-production of capital, in particular fictitious capital. The financial crisis was triggered off by a collapse in the various forms of credit as the $1.25 trillion debt became due for payment. .
Sooner or later such a financial crisis will lead to a rapid collapse and disruption of production due to the persistent phenomena of relative over-production. This in turn will reveal to all, the real underlying connection between capitalist domination of economic life, the resulting degradation of humanity and the instability of economic and social life. In the advanced capitalist countries of America, Europe and Japan, the middle-classes who have been tempted by the illusory security of stock exchange-linked investments and good pensions will lose nearly everything when firms increasingly fail and the stock market finally really collapses. They are likely to become angry, volatile and start to ask questions. In the interim, structural unemployment will continue to rise among the working and middle classes, as production is transferred to low wage economies. Falling government taxes will translate into fewer and lower paid state employees.
Some advanced capitalist countries will become (and, as in the case of Britain and America to a less extent, are already becoming) low wage economies themselves. In the newly emerged part-industrialised countries of Asia and South America the new working classes, frustrated by truncated expectations and extreme levels of exploitation, will become even more active in opposing capitalists and their political or military representatives. In contrast, the defeated and demoralised workers who fought exhausting battles in the 1970's and 1980's to defend wage levels in some advanced countries, may take longer to recover and become galvanised into action - but recover they will.
This chapter has tried to equip the reader with a basic understanding of how capital creates wealth for the capitalist class on the one hand and unemployment and low pay for working people who create that wealth on the other. I have tried, using the concepts developed by Karl Marx, to indicate how the economic contradictions within the process of capitalist production cause crisis after crisis and threaten to bring the system to an end. This alone should be sufficient reason for putting an end to the capitalist method of production. There are, however, many more. It is time now to look at the social and ecological effects of the capitalist system of production and to explore some additional reasons why capital and capitalists should be overthrown and humanity move on.