underconsumption and overproduction

6 10 2012

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.

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5 responses

11 10 2012

“That money is the form of value that is labour time & that credit is claims on future labour time that may not be realised.”

I presume by this you mean if I buy product A on credit I am giving up my future labour time to buy the product? Whereas if I buy product A with money I am buying it with completed labour time. So doesn’t buying products on credit affect how much money I have? So if we imagine 2 months, if I have £100 to spend in each month and in month 1 I spend £100 with money and buy £50 of goods on credit, that means I only have £50 to spend in month 2. Isn’t this a zero sum game?

What do increases and decreases in credit tell us? For example household debt has risen sharply over recent decades, what does this tell us?

On realisation of value, doesn’t this occur later than value creation in almost every case?

And also, what are the reasons that claims on future labour times may not be realised?

I also don’t quite see the tie up between crisis and long term fall in the rate of profit from what you said above. The way you described the rate of profit fall was as a sympton of the over-production, so in effect, not really different to why workers can’t buy the product. Underconsumption is a sympton of the crisis.

12 10 2012


Thanks for your comment.

I’m not dealing with the long term falling rate of profit due to capital accumulation itself (the rise in the organic composition of capital).
From a theoretical point of view I think this is separate to the boom & bust business cycle.

Stephanie doesn’t mention this difference, she sees crisis as being the business cycle, not the end of capitalism. This is not that surprising as most Marxists are not clear about the theoretical difference, with many arguing that it’s a case of a particular bad downturn coinciding with better worker’s organisation that will result in revolution.

So as for the business cycle, Stephanie portrays Marx as an underconsumptionist. I was trying to show that although Marx would accept that a crisis of underconsumption was possible, that it really is credit/debt that lies behind the overproduction (too many commodities relative to the amount of money) which results in the rate of profit being artifically supported & then collapsing. This is totally separate from the falling rate of profit caused by the rise in the organic composition of capital, at least from a theoretical perspective. In reality it may well be that the falling rate of profit due to the rise in the organic composition of capital actually led to the creation of the current fiat money regime & the subsequent financialisation (credit boom).

As regards your example, I think I agree. Eventually individuals have to pay off their debts with money. Organisations, whether they are corporations or governments, can only borrow a certain percentage of their income. The important point is lenders may not get their money back. Individuals & organisations can go bankrupt. Banks lent people money to buy houses, which when they couldn’t pay their mortgage resulted in them losing their house & the bank reposessing a house that was worth less than the money they lent. And remember the banks mostly didn’t have this money to lend, they either borrowed it from other financial organisations or conjured it into being through fractional reserve banking. It’s fictitious capital – capital that has no basis in production. It artifically supports profit rates for a while, but eventually the bubble bursts.

Although there was a big fall in asset prices after Lehmans, QE has reflated the bubble, but not the productive economy. The adjustment (collapse) is still to happen, I believe.


23 11 2012

hi! i found this article very helpful. until recently i thought overproduction theory was just another term for underconsumption theory. this has helped me distinguish between them. is this the standard/typical explanation of crisis from an overproduction theory perspective? or is there another version of overproduction theory that’s more common

my reason for wanting to know if this is the standard overproduction theory isn’t because i will accept or reject your explanation based on its popularity. it’s because, before i make up my mind about which crisis theory makes the most sense to me, i want to give a fair investigation into each of them.

but so far, your explanation does make sense to me!

anyways, i’m wondering what your take is on “breakdown” theory, i.e. whether capitalism’s inherent economic contradictions will cause it to fall into a crisis so big that it can’t recover? and do you have any posts about this? if you do, please link to them here!

thanks :)

24 11 2012


I recommend you have a look at Sam Williams’ blog http://critiqueofcrisistheory.wordpress.com/ he offers a comprehensive overview of Marxist crisis theory.

If you are on facebook there’s a group called Marxist Crisis Theory you could join.
There’s also a group with the same name on zsocial (the non-commercial facebook for political activists).

I refer to breakdown in my post http://thecommune.co.uk/2012/09/02/crisis-a-unifying-theory/

It’s all a very complex subject to master & I don’t pretend I have.


13 12 2013
Klas Wirholm

Good points in the blog. I would like to recomen this book:



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