An Introductory Explanation of Capitalist Economic Crises

Chapter III: How Are Capitalist Economic Crises Overcome?

(Last update to Chapter III: 8/7/08)

3.1   Overproduction of what?

      What does it mean to say that capitalist economic crises are “crises of overproduction”? Overproduction of what? Well, of commodities, of course, to begin with. This is what usually comes to mind when people talk about overproduction crises. But there is something else besides goods produced for sale that is overproduced—something much more important, and much more essential to overproduction crises. And that is the overproduction of the productive forces, or in other words the overproduction of capital itself.

      Factories and entire companies themselves sometimes become commodities, when they are sold to another company. But conceptually there is still a major difference between the productive facilities and the products of those productive facilities. The two tend to blend into each other, and there are many factories whose products (commodities) include pieces which go to make up other factories. Still, for our purposes here I draw a distinction between commodities and capital.

      An overproduction crisis does result in a great accumulation of commodities that cannot be sold, or at least which cannot be sold at much of a profit (if any at all). But remember that during the whole long boom period the capitalists had huge amounts of surplus value coming into their hands for many years running, and for this long period they used the greatest part of this surplus value to build new factories and buy new equipment. When a crisis breaks out there are limits on the glut of commodities that accumulate because production is soon cut back when sales fall off and the excess starts to appear. But if the cutbacks in production are severe enough, all those excess factories then become exposed, and all that excess machinery in those factories. This “overhang” of excess productive capacity is a far, far bigger problem than any mere short-term excess of final commodities for sale.

3.2   The destruction of excess capital.

      If the basic problem in capitalist economic crises is that there is an overproduction or overabundance of capital, then the basic solution to such crises—as long as we still remain within the capitalist framework—can only be to somehow dispose of, or eliminate, or destroy that excess capital. Only the elimination of this excess capital can clear the ground for a vigorous new expansion.

      In the Communist Manifesto Marx and Engels describe capitalist overproduction crises this way:

In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity—the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.1

From this it is clear that the central method in which overproduction crises are overcome is through the destruction of the excess capital that has been built up. (The expansion of markets will be discussed later in connection with capitalist imperialism.) However, there are many different ways to destroy excess capital, methods which vary from the temporary mothballing of plants and machinery to their total and final physical destruction.

3.3   Physical destruction vs. mere depreciation.

      We now have to discuss to what degree and in what respects capital can be “destroyed” through simple bookkeeping adjustments, i.e., through devaluation or depreciation (as it is more often called in the business world). Clearly capital that is physically dismantled or destroyed has been drastically devalued (though the remnant components may have some residual value, even if only as scrap). But can capital be destroyed simply through devaluation, without physically dismantling or destroying it in any way? This question is a bit tricky.

      In Theories of Surplus Value Marx writes:

    When speaking of the destruction of capital through crises, one must distinguish between two factors.

    In so far as the reproduction process is checked and the labor-process is restricted or in some instances is completely stopped, real capital is destroyed. Machinery which is not used is not capital. Labor which is not exploited is equivalent to lost production. Raw material which lies unused is no capital. Buildings (also newly built machinery) which are either unused or remain unfinished, commodities which rot in warehouses—all this is destruction of capital. All this means that the process of reproduction is checked and that the existing means of production are not really used as means of production, are not put into operation. Thus their use-value and their exchange-value go to the devil.2

      Before continuing with the quotation from Marx, a few comments are in order. Marx is concerned here to emphasize that capital which is not actually being used in the production process is not functioning as capital. It is as if it did not even exist from the point of view of the actual production processes then underway. However, even if they are not presently being used as capital, idle machines and even entire idle factories may later on be used (when a new boom commences, perhaps), and thus then be employed as capital. So from this point of view it is at least misleading to say that “real capital is destroyed” if it is not actually being employed in current production. Perhaps Marx should have talked about “reserve capital” here, or some such thing. (Elsewhere Marx does talk about raw materials that are being held in readiness for the production process as “latent”, “idle”, or “potential” capital.3) And in point of fact, modern capitalist corporations do possess enormous amounts of reserve capital—that is, factories and machinery which are not presently functioning as capital, but which the company maintains for possible employment in the future. As of 2003 the official capacity utilization rate of U.S. industry is a little under 75%, so by that standard one-fourth of American capital is not presently functioning as capital. But since the true capacity utilization figures are vastly lower than official statistics claim, it is probably more accurate to say that less than half of all the capital that exists is currently “real capital” (or capital that is actually functioning as capital in the production process).

      On the other hand, the mothballing of plants and machinery often turns out to be but a prelude to their eventual dismantling and genuine destruction. This is especially apt to be true during a long and severe depression phase of a major overproduction crisis. In a case like this, what appears for a time to be merely idle capital or reserve capital may in reality already be something very close to dead or destroyed capital just waiting for the death certificate to arrive. Moreover, as Marx now goes on to say, capital that is idled due to crises typically must be devalued to a considerable degree, and that devaluation itself formalizes the partial destruction of that capital:

    Secondly, however, the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values. What one loses, the other gains. Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt…. A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.4

      However, the precise process Marx is describing here seems to have been more typical of the pre-monopoly era in which he wrote. Today, in what we usually call the monopoly stage of capitalism, big corporations are normally capable of weathering the fairly frequent mild recessions, and of merely shuttering up plants for a while—without having to write off that capital or sell it at a great loss to another company. And as I mentioned above, even during periods of sustained economic upturn these corporations typically keep a considerable excess of reserve productive capacity around—that is, capital in the form of idle machinery and factories which is not presently functioning as capital, but which is available in reserve.

      The physical destruction of capital always entails the depreciation of values, but the contrary is not necessarily true; the forced depreciation of values in an economic crisis—even when it does occur—does not always result in the physical destruction of the capital in question.

      Even if idle capital is depreciated and sold at a bargain to another company, its use-value remains unimpaired. Because it can be relatively swiftly put into service again, its continued existence remains an obstacle to the creation of any new plants and machinery. From this point of view the mere depreciation of capital is not truly destructive of it. Only the actual dismantling or some other form of physical destruction of excess capital genuinely serves to clear the ground for a major renewed expansion of the productive forces themselves. Depreciation without actual physical destruction is not enough to overcome the “overhang” of productive capacity.

      We see now more clearly why major natural disasters are actually good for capitalism as a system. They involve the destruction of capital as well as the destruction of many consumer goods (houses, cars, furniture, etc.) which then need to be replaced. The consumers may or may not be able to afford to buy replacement commodities, or may or may not be able to borrow money to buy such goods. But the capitalists, considered as a class, have a great excess of surplus value which they need to invest, and the destruction of any plants and machinery by some natural disaster opens up great new investment opportunities.

      The more destruction of capital there is—for any reason whatsoever, including horrible natural disasters and war—the better things are for the overall continued economic health of the capitalist system. This, in part, is why capitalism—especially in its modern imperialist form—leads to such horrendous wars and massive destruction.

Notes for Chapter III

1   Karl Marx & Friedrich Engels, Manifesto of the Communist Party, (1848), section I. This passage is quoted from pp. 60-61 of the Norton Critical Edition of the Manifesto, edited by Frederic Bender (NY: 1988).

2   Karl Marx, Theories of Surplus Value, vol. II, (Moscow: Progress Publishers, 1968), pp. 495-6.

3   Karl Marx, Capital, vol. II, part 1, ch. 5. Some translations of Capital call this “fallow capital” rather than “latent capital”. See also vol. II, part 1, ch. 2. In vol. II, part 3, ch. 13 (which was written later), Marx abandoned the term ‘latent’ and refers instead to “potential capital” or “virtual capital” in these connections.

4   Karl Marx, Theories of Surplus Value, vol. II, p. 496.

Chapter IV: Capitalist Economic Crises in the Imperialist Era
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