The BBC economics editor, Stephanie Flanders, recently presented an overview of Marx & his views on capitalism & crises – http://www.bbc.co.uk/iplayer/episode/b01n6z4s/Masters_of_Money_Marx/ According to duvinrouge, she essentially described Marx as an underconsumptionist (there was just a small bit on profit-squeeze). Worse still, there was no explanation of how capital accumulation itself puts downward pressure on the rate of profit, the key part of Das Kapital.
Stephanie is a Keynesian. The Keynesian explanation of the business cycle rests upon the ‘animal spirits’ of entrepreneurs. Sometimes they don’t invest & hoard their money. This causes a deficiency in aggregate demand & the economy goes into recession. The underconsumptionist argument is similar: workers don’t get paid enough so they don’t have enough effective monetary demand to buy all the commodities produced & there is a recession. For Keynesians the solution is lower interest rates, but if there is a ‘liquidity-trap’ it doesn’t matter how low interest rates go entrepreneurs will not be persuaded to invest & the government will have to intervene directly through fiscal stimulus, e.g. building new infrastructure. For the underconsumptionists the solution is increases in real wages for workers.
Marx was clearly on the side of the workers in their struggle with the capitalists for more pay & better conditions, but he was not an underconsumptionist. That’s not to say he didn’t believe that a crisis caused by underconsumption couldn’t happen. Because of money, Say’s Law (supply creates its own demand) doesn’t hold. Commodities are produced for sale, to be exchanged for money. If money is hoarded then commodities will go unsold. But it wasn’t workers who would hoard money, it was capitalists & the reason for hoarding money would be a low rate of profit. Marx understood that it was the rate of profit that was all important. But why would the rate of profit fall? Was it simply because workers weren’t paid enough & so couldn’t buy the commodities produced? We must remember that the workers are not the only consumers. Capitalists consume as well, be it expensive restaurant meals, jewellery, luxury cars, holiday homes, etc, etc. They can also reinvest their profits by buying more means of production, e.g. factories, offices, machines, etc. So is there something else that is determining the rate of profit & so the business cycle?
When profit rates are good & business is booming, credit is easy to obtain. The issue of credit actually supports reported profit rates because people & businesses are purchasing not just with money but with the credit issued. This causes a bubble, particularly in asset prices such as shares & property. As we saw in recent decades as house prices increase an expectation of constant increases develops. Credit fuels prices & profits which fuels more credit & so on. Banks & other finance capitalists over-lend. Chuck Prince, the CEO of Citigroup, famously said, ““When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” This captures the essence of the theory of overproduction. It is credit that enables production to get ahead of the market, or in otherwords, supply to get ahead of demand. As debt saturation is reached & financiers realise they may not get their money back, there’s a credit crunch & financial crisis. High rates of profit turn negative & capital is devalued. The capitalist survivors get bankrupted businesses at rock-bottom prices. It is this capital devaluation – the recession – that restores the rate of profit & lays the foundation for the next boom.
This theory of overproduction is quite different to underconsumptionism. It requires a mastery of money to know that money & credit are two different things. That money is the form of value that is labour time & that credit is claims on future labour time that may not be realised. Marx was a master of money. Unfortunately, many so-called Marxists are not & fall into the underconsumptionist trap, just as Flanders did.