Economic Crisis:
Inevitable under Capitalism

Mar 23, 2009

The following is a translation of a section from the December 2008 Circle Leon Trotsky, a public meeting organized by Lutte Ouvrière [Workers’ Struggle] in France.

Since the industrial revolution, the whole history of capitalism has been punctuated by crises, followed by longer or shorter recessions, after which recovery begins slowly and turns into an economic boom, followed by another crisis. These economic cycles "play the same role in the life of capitalism that the cycle of the circulation of blood play in the life of an organism," as Leon Trotsky had observed.

Crises are not anomalies or sicknesses of the capitalist economy. They are in fact the only time when capitalism regulates all the imbalances created by its system of production.

Crisis: Capitalism’s Only Way to Regulate the Economy

The means of production and the distribution of wealth are controlled by private owners–this is what characterizes capitalism. The capitalists are not motivated by a desire to furnish all the goods necessary for the daily life of several billion human beings. They don’t produce food, medicine or automobiles to satisfy human needs, but only because they expect to earn profits from this production.

All the riches of society, including profit, are created in the workshops of production. Human labor is the only force capable of creating value by transforming, for example, steel, plastic and electric wires into cars. Labor power has this extraordinary ability to create more value than it costs to maintain. If the wages that a capitalist pays his workers more or less allow them to pay their bills, these wages are still much less than the wealth the workers create by their work. The part of the wealth created by the workers beyond what they are paid by the capitalists is what Marx called surplus value. It is the source of capitalist profit.

Ultimately, all of capitalist society is organized in order to divide up surplus value. Surplus value sweated from the workers on the automobile assembly lines will be divided among the stock holders, the dealers, the bankers, the insurance companies and other intermediaries.

But if the cars sit in the parking lots of the factory or in the dealer showrooms, the surplus value is unrealized; it is only potential. In order to obtain their profits, the capitalists must sell the cars. It’s a really important phase. For every car, every plasma screen TV, every consumer good on the market, the capitalists must find a consumer with enough purchasing power to buy it. There must be money enough in the market.

But that market is limited. Households all over the world constitute the potential buyers of consumer goods. There is first of all the bourgeoisie and petty bourgeoisie, who consume a lot, and not just private jets or yachts. But much more numerous are the ordinary layers of the population, whose limited purchasing power allows them just to buy life’s necessities even during periods of economic prosperity when the purchasing power of the working class is growing.

Supply, on the other hand, depends on the capacity of production. This grows with scientific inventions and technical innovations. But supply is not the result of a conscious decision taking into account which needs production will satisfy and how to meet them. It results from the decisions of a multitude of individual capitalists, all competing with one another.

These capitalists are engaged in a fierce war. In the automobile industry there are a dozen big companies. If world demand is estimated at about 70 million new vehicles per year, each company wants a bigger part of the market. Each one builds factories to produce more cars than it can ultimately sell. This competition leads to swollen capacity of production, which at some point will surpass demand. This is overproduction.

Inexorably, some companies wind up with too much productive capacity or with inventory they cannot sell. To reestablish equilibrium, the losers brutally reduce production. Some lay off part or all of their workforce, canceling contracts with their suppliers. Others go out of business.

Capital’s Use of Crises

Crisis is the only means of liquidating the built up inventory, of balancing supply, which is too big, with demand, which is limited. The adjustment is made after the fact, suddenly.

Building a car requires materials and parts, like steel, other metals, electric wires, plastic produced from petroleum, tires, and a multitude of different parts, on top of the machine tools, assembly lines and electricity to run them.

Every crisis, every slowdown in automobile production or in other consumer goods industries spreads into those industries that sell them producer goods. Thus ArcelorMittal announced it would close half of its blast furnaces in Europe because of the crises in construction and automobiles. It took the opportunity to eliminate thousands of jobs.

As in every other sector, competition rages between steel or chemical companies to sell the most possible steel or plastic to the consumer goods industries. Competition also rages between various industries, between the producers of metals or steel, and all their customers who build automobiles or housing. Each wants to grab the biggest share of the profits.

This competition is always a source of instability and crisis.

But the imbalance is even greater when investments are great–for example, to build a blast furnace or a chemical plant. It takes a long time to start producing and even longer to pay off their investments.

The French steelmakers after World War II, for instance, delayed their investments in blast furnaces capable of making steel plates for the auto industry or household appliances as long as possible. When they were finally built during the 1960s with massive aid from the state, their new mills at Fos and at Dunkerque were hardly operational before the demand for steel dropped, forcing the permanent closure of numerous blast furnaces. This was one cause of the steel crisis of the 1970s and 1980s that led to tens of thousands of layoffs. It also led to the French state swooping in to help Wendel and Schneider by nationalizing their obsolete and surplus factories.

Crises thus allow equilibrium to be reestablished among the different branches of industry; between the two fundamental sectors of the economy–the industries that produce consumer goods and those that produce machines, raw materials and all the other means of production.

Through crises, the capitalist economy eliminates businesses–because there are too many for the size of the market.

In a rationally organized economy, it would be necessary to regularly adjust the collective work–according to the work time needed to produce whatever products. It is a constant of human economy: as technology and the means of production improve our collective ability to produce wealth, the labor time needed to produce food, clothing, computers and cars tends to decrease.

But in a capitalist economy, this periodic adjustment is made by brutally destroying those businesses where the labor time and cost of production are above average.

Crises and the Rate of Profit

Crises also allow the capitalist economy to reestablish the average rate of profit. Each capitalist always produces more goods in order to increase his share of the profits. If a new machine or new process allows him to produce twice as quickly, twice as cheaply, he will invest in this machine. It will allow him to increase his share of the market and eliminate part of his competition.

But what is good for one individual capitalist is not good for the capitalist class as a whole.

Sooner or later his competition will also invest in this machine, or in an even better one. At the end of the day, there will be too much capital invested in these machines. Because human labor, not machines, produces profit, this endless increase of capital leads to a regular decrease in the rate of profit for the capitalist economy as a whole.

Each capitalist tries to resist this decrease by increasing the exploitation of his workers in all sorts of ways: lengthening the work day, speed-up, cutting wages or eliminating workers. But exploitation ends up running up against human limits and so the rate of profit declines.

By eliminating the least profitable businesses and closing the least productive workplaces, crises destroy capital. This destruction of capital restores the rate of profit in the capitalist economy as a whole.

For the weakest capitalists, crises mean destruction. For the others, crises provide the opportunity to buy up the competition at a low price. The biggest capitalists get a little bit bigger. During each crisis, capital becomes more concentrated.

Crises are the absolutely indispensable moment when the capitalist economy can purge itself of all the imbalances it engendered during the stages of production and distribution of goods.

For the workers, each crisis means a catastrophe of massive layoffs and unemployment, of impoverishment for an additional part of the laboring population. It is harmful for society as a whole as well, since it means the destruction and waste of useful goods that a whole portion of humanity cruelly lacks.

But for the capitalist economy, these are only incidental expenses!

The Role of the Banks, the Stock Market and Finance

The current crisis illustrates the immense burden finance imposes on the capitalist economy. But, contrary to appearances, finance is not only a parasitical growth. It is also the blood that irrigates the capitalist market. The capitalist economy cannot function without the banks.

First, the banks allow production to continue by giving cash advances, which companies permanently need. This applies to small suppliers or parts makers who often have to wait three months or more to get paid for their orders but who have to pay their bills immediately. But it also applies to the big companies. If General Motors had to wait until it had sold its cars to buy raw materials, pay its electricity bills or its workers’ wages, production would be constantly interrupted.

A sudden halt in loans following a loss of confidence in the banking system or a large increase in the rate of interest causes the failure of thousands of businesses, because it deprives them of the credit they depend on. Even a giant auto company like General Motors, whose sales have collapsed in recent months, burns through its reserves to pay the daily expenses of its factories because it cannot borrow from banks or financial markets except at exorbitant rates.

The banks also play a role when the capitalists decide to reinvest their profits. The investment to build a new factory requires a large amount of capital. The capitalists place the money they make from their sales in the banks, so the money will grow. The banks concentrate masses of capital and pool it to put it at the disposal of whichever capitalist needs it at that moment. The banks allow capitalists to invest in anticipation of future profits.

What banks are doing is then no longer simple commercial credit, short-term loans to make business function, but rather long-term loans for investment.

All through the development of capitalism, banks concentrated small and scattered bits of capital coming from small businesses and landlords to put that capital at the disposal of industry. Increasingly decentralized bank branches, savings banks, concentrated the savings of the population, and even of a fraction of workers’ salaries, in their bank accounts. The banks transformed these tiny and unusable sums into capital put at the disposal of the big capitalists who, in crisis after crisis, took control of the bigger sectors of production.

Obviously, the banks don’t play this role as intermediaries just to please the capitalists. They charge interest on every loan they make. Through this interest they take their share of the surplus value created by the workers–and they"re not satisfied with the smallest share.

Over time the banks did not remain modest intermediaries. Situated in the heart of business at the level of the purse, they took control and invested only in what was most profitable.

Parallel with the banks, the capitalists can also raise capital through the stock markets. They created, very early in their history, corporations with many stock holders. Every share represents one fraction of the total capital of a company. The stockholders don’t receive fixed interest like the banks, they receive a dividend instead. These dividends, which vary from year to year, represent one part of the annual profits of the corporation.

Businesses can also raise capital by issuing bonds in the financial markets. These bonds guarantee their owners a fixed annual interest but no right over how the company is run.

The generalized rights of the public, stock-held companies, made it possible to separate the life of the companies from the capital which enables them to function. It especially accelerates the concentration of capital by putting thousands of small shareholders under the control of the big investors, without giving the small shareholders any say in the running of the company. This has facilitated the growth of monopolies and cartels in major sectors of the economy.

Finally, for a long time now the division between the industrialists and the bankers has disappeared. There are not good industrial entrepreneurs on one side and bad bankers on the other. The directors of the big banks sit on the boards of the big industrial companies and vice versa.

The most important U.S. banker, J. P. Morgan, who had more gold in 1900 than the U.S. Treasury, controlled half the rail network of the United States and then bought the biggest steel company in the country.

The weight of financiers in industry and the concentration of capital increases regularly during each crisis.

With the concentration of capital, the extension of capitalism to every country, to every economic sector, then the development of credit and later the direct intervention of the national states in the economy, the crises of one industry are transformed into general and deeper crises as soon as they break out. But, whether in one industry or throughout the economy, crises always happen at more or less regular intervals.

In 1921, Trotsky noted "that during the periods of the rapid development of capitalism, crises are short and have a superficial character .... During the period of decline, crises last for a long time and recoveries are temporary, superficial and based on speculation."