A talk by Tom O'Lincoln, 1991.

PEOPLE'S LIVELIHOOD has always been affected by crises but initially these were natural rather economic disasters, say when a fire killed the animals you hunted or the crops you grew. Even where trade began to develop, at first a crisis was likely to be the result of natural disaster. True economic crisis only became possible with the development of money.

To understand this let's consider the simplest form of trade, which is barter. A community initially has to produce everything it consumes, then one day labour productivity rises to the point where it has a surplus of something which it can trade to another community for a desired item, say stone axes in exchange for sweet potatoes, to take a New Guinea example. The two communities are immediately faced with the issue of what is a fair rate of exchange: how many sweet potatoes for an axe. And anthropology tells us they work it out on the basis of how much time it takes to make an axe and to grow sweet potato. Here you have a simple application of the labour theory of value. Goods are exchanged on the basis of value comparisons measured in labour time.

Later the goods might get more complicated. Tools are needed, raw materials have to be got hold of to make them. Naturally, people will include the time needed to make the tools and get the materials as part of the equation. Values are still directly based on labour time.

But barter is awkward. If an axe is worth fifty sweet potatoes, what happens if you want to buy just twenty sweet potatoes from community A and you want to go on and buy peanuts from community B, and all you have to trade is an axe? Half an axe is useless, and that's why we have money: it brings liquidity into exchange.

Once you have money, it soon becomes the measure of wealth, and this is where the trouble starts. I can start to lose track of the labour which is the real source of value. Prices can get out of whack with values, they can be driven up by sudden shortages caused by hoarding, then driven down when the hoards are released. The economy gets complex and people lose control of the processes at work in the market place. This is when the first real economic crises begin.

But still, they are a superficial phenomenon. There is no clear pattern to them, and also they are external to how most people spend most of their working lives. The slaves on a Roman estate or the serfs on a feudal manner worked directly for their rulers. Production relations were simple and transparent. The exploitation was explicit, and there was an ideology which bluntly justified it, as god's will or whatever. There was no occasion for economic crisis. Crises occurred in the realm of trade, of exchange of goods, which was carried on by merchants external to the production process. And there was no clear pattern to them.

It is with capitalism that economic crisis became a pattern, and also became something deeply rooted in the process of production itself.

Capitalism is a system of generalised commodity production. That is, production for the market. The inability of the system to keep the interaction of production and the market in equilibrium unleashed a pattern of regular booms and busts that are still with us today, in fact we have a recession right now which is apparently about to give way to a recovery. In addition, for the first time, capitalism created a form of exploitation that was not simple, not transparent, not explicit. It pretends to offer everyone a fair deal, a fair days' wage for a fair day's work. And that's not just some cynical lie, it's part of the ideology of the system, the legal principles underlying arbitration and so on. The reality of exploitation is mystified, so that bourgeois economics can never get to grips with the fundamental problems. The fundamental problem is that while in practice capitalist production is a collective activity with millions and millions of people all over the world interacting to produce wealth, the resulting profits and the power rest with a minority, for whom the ultimate objectives are not production of useful things but profits and power. So there are contradictions within production itself, and that is why we not only can have crises, and not only are the crises frequent, but crisis is built systematically into the system, and in a way that is very closely tied to those profits which are so central for the bourgeoisie.

********

IN OUTLINING a Marxist theory of crisis, I'm going to identify several levels of analysis, several kinds of crisis if you like, but in practice they overlap. The first is the phenomenon of regular booms and busts, peaks and troughs--what bourgeois economists call the business cycle. The way this works is fairly simple.

If an economy is experiencing prosperity, profits will rise. Capitalists will be encouraged to expand production, and some of them will engage in new investment to do that: new plants, new equipment. They will hire more labour. The new investment will mean higher profits for their makers of factory equipment, so they will expand and hire more labour. The expanding workforce will be able to consume more, so industry can sell more goods, so they make more profits, expand further, and you get a very happy process, and at this stage people tend to think the boom will go on forever. Banks are lending money hand over fist to capitalists for investments and to workers who want to buy cars or houses.

But it doesn't go on forever. As businesses keep expanding, they meet resource constraints. Materials run short, labour is short, the people making equipment can't keep up. So the price of labour, materials and equipment rises. Workers have bargaining power, they go on strike and win wage rises. All this starts to put a squeeze on profits. With everybody expanding production, sooner or later they go too far, some markets suddenly become oversupplied, let's say the market for TVs. Everybody's bought their new TVs and they're hardly going to buy a second one, and prices for TVs start to fall.

So the TV manufacturers start to cut back production and sack workers. This reduces demand for TV components and for the consumer goods those workers used to buy, that leads to further cutbacks and sackings, and the boom unravels into a bust.

The whole affair is very painful, yet it has a positive side for the system. The least efficient firms go broke, and their capital and workforce is taken over by more efficient companies. The working class is frightened into industrial passivity and forced to accept lower wages. The cost of supplies to industry goes down, and the bottlenecks go away. As a result industry starts to be profitable again, it starts to expand and the economy starts booming its way towards the next slump.

How this works is not really controversial and in itself it doesn't prove very much. Naturally we make a great play about how it demonstrates the anarchy of capitalism, but if this was all Marxism had to say about capitalist crisis it wouldn't be very interesting. After all, the system recovers from recession just as regularly as it goes into it, and the pain also helps make the system more efficient. If this were our whole theory, we could draw reformist conclusions: the Keynesian approach of increasing government spending to cushion recessions, for example. So our understanding of the business cycle is only the beginning, and we need to move along to another issue that is currently very topical: the problem of unemployment.

Unemployment is partly a matter of the business cycle: it goes up in recessions, and down in recoveries. But that is not the whole story. First of all, it is what the economist call a lagging indicator: for some time into the recovery phase, unemployment persists. The bosses are making profits again, but they hold off hiring workers until they're sure it's going to last. This fact will be important for our propaganda as Australian capitalism enters a recovery phase in the coming six to twelve months, because people out there will be saying, what recovery? I'm still out of a job? And we will probably run headlines in the paper saying: it's a recovery for the bosses.

However we have more profound and more enduring things to say, too. Unemployment is a normal feature of the system. Even during the high point of the economy in the 1980s, unemployment was still about 6 percent. This is because the system needs it. If a new market comes along, and some capitalist wants to set up a factory and manufacture goods to cash in on it, they need workers. They want them now. Where do they get them if there isn't a pool of unemployed? And this pool is created by technological change and economic restructuring. Each round of automation throws people out of work. So does a flow of capital from old industries into new ones. And while the automation and the new industries eventually create more jobs, there is a lag once again, and in practice there is always what Marx called a "reserve army" of unemployed, because the system needs them.

********

NOW I WANT to turn to a third component of our theory, which is the phenemonon of combined and uneven development.

It is obvious that different industry sectors grow at different rates. So do different national economies. What's more, because capital flows around the world you can get advanced industries located in otherwise backward countries, such as the steel industry in India. And because of protectionism you can get backward industries in otherwise advanced countries: for example the textile, clothing and footwear industries in Australia. So economic development is not only uneven, but you get all kinds of combinations, and the result is a series of economic contradictions which can lead to crisis.

One important area is the disproportionalities which develop between industry sectors. Suppose the sector making means of production, what Marx called Department One, grows too slowly to keep up with the requirements of the consumer goods sector, or Dept Two. This can choke off investment in Dept Two. On the other hand if its growth outpaces the needs of Dept Two, it will have problems in unloading what it produces. These imbalances can contribute to recessions. To take an important Australian example, it is common in periods of upswing for Australian industry to run short of key inputs, and to be only able to fill the gap with massive importing, which leads to big trade deficits. This was one of the problems Paul Keating was wrestling with a couple of years ago.

This second part of our theory is not really controversial either, as far as economics is concerned. It is true that we are potentially capable of addressing these issues better than conventional economics because we try to analyse the world dialectically -- so we should be good at grasping a process of combined and uneven development, contradictory development.

But taken on their own, our differences here with conventional economics are once again mainly political. Mainstream economics tries to work out how to protect the Australian national economy from the adverse consequences of combined and uneven development, while helping it benefit from the beneficial effects. We on the other hand stress the international nature of the system and its problems.

But both the business cycle and the problem of disproportionality, or combined and uneven development, are very important to us as building blocks, as a foundation on which the specifically Marxist theory of crisis does rest. I'll address that in a second, but first let me remind you that these first two aspects are basically about the realm of exchange: oversupply and undersupply, over and under pricing, and so on. But what distinguishes Karl Marx's economic theory is that the centre of the analysis is the production process. Exchange remains important, in fact it is the context without which the dynamics of capitalist production would make no sense at all, but nevertheless, production is the core of the theory.

********

AS CAPITALIST industry grows, something tends to happen which the theorists of Marx's time were already aware of: the rate of profit tends to fall.

Not the total amount of profit. That rises over time, although of course companies can make losses in a recession. But the rate of return per dollar invested tends to fall, and that is decisively important, because that's what investors look at. Do I get a five percent, or ten percent, or fifteen percent return? If the rate of profit falls, investment will decline and the system will stagnate.

Marx's accomplishment was not to discover the labour theory of value or the falling rate of profit, both were already known, but to connect the two things up. He does this through his analysis of exploitation. To explain this I'll have to put a few symbols and numbers up.

The names Marx uses are meaningful, though. He argues that only living labour, represented by V, can create new values. Certainly the raw materials contribute to the value of a product, but only in so far as the value previously incorporated in them by labour is transferred into the new product. Similarly, machinescontribute to the value of commodities, but only insofar as the value incorporated in them through previous labour is transferred to the product, and this occurs progressively as the machinery wears out.

So the amount of value in existence is not altered by the application of materials or machines, the amount of value remains constant, hence the term constant capital. By contrast living labour creates a variation--normally an increase, though of course a totally incompetent worker can create a decrease. Workers create enough value to pay for their own wages, then they create additional, added values, new values--surplus value, represented by S. This fact, that only living labour creates new values, is decisively important for the rate of profit.

S is surplus value, that amount of value workers produce above and beyond their own wages. According to the theory, it can only increase if V increases, since only V can produce new values. And V does increase over time as the workforce grows. But it does not grow as fast as C.

The relationship between C and V is known in conventional economics as the "capital-labour" ratio, and we know that companies are all driven by the pressures of competition to automate their facilities, so that the "capital-labour" ratio tends to rise. Marx uses different terms, most importantly the term "organic composition of capital", to mean much the same thing. He argues that over time the organic composition of capital tends to rise, C grows faster than V.

If so, what happens to the rate of profit?. Simple arithmetic tells us that if C rises faster than V, and if S can only increase along with V then the total investment which is represented by C+V will grow faster than the surplus value which is produced. If that happens, then the rate of profit will fall.

********

SOME OBJECTIONS traditionally arise at this point. The first and most obvious one is: why would capitalists automate their factories if it's going to lower their profits? The answer is that the process operates at the level of the system as a whole, not the individual enterprise. The first capitalist who brings in new machinery will be able to produce much cheaper than their rivals, so they'll clean up. At this stage it's the rivals who end up copping the reduced profits. But these competitors are of course forced to follow suit with new machinery of their own, and the end result is a lower average rate of profit across industry as a whole.

Then there are the famous "countervailing" factors raised by Marx himself. New machinery makes labour more productive, so you can squeeze more S out of that V. Automation in Department I, where factory equipment is made, will reduce the cost of factory equipment. The cost of C goes down. And these factors do operate; the question is whether they're enough to counteract the falling rate of profit. Marx's answer, and ours, is that they're not, that there is a process of diminishing returns with these countervailing factors. Unfortunately, to go through all the arguments would take too long.

It is also argued that the growth and modernisation of industry involves not only labour-saving innovations, but also capital saving innovations: for example, modern photocopying eliminates the need to use big printing machines for many tasks. And thatshould hold down the cost of C. But there is a simple answer to this too: if photocopiers are so efficient, companies will soon have one on every floor. Same with computers: they become cheap so capitalists invest in lots and lots of them. The end result, which nobody really disputes out there in industry, is that both the mass and the value of capital in industry rises relative to living labour.

There are two more countervailing factors mentioned by Marx which we need to devote more attention to. He mentions that there are parts of the world that are not yet industrially developed. If the system expands into these areas, it can establish new labour-intensive industries which allow high rates of profit. This is true, and is important in understanding the role of imperialism in the 19th century.

He also says that economic crises like the current recession can restore the rate of profit for companies that survive. They wipe out the least productive enterprises, and the survivors can acquire their capital on the cheap. In other cases machinery and raw materials actually rot. This destruction of capital, both in physical and value terms, drives down the total value of C in the system, and restores the rate of profit. So the problem of falling rates of profit can, in principle and in practice, be resolved for a time by destroying wealth. War will do it too: the winners get their profits restored by the destruction of the losers' capital. This is clear indication that we're dealing with an irrational system, but nevertheless it is also an indication that the system can overcome the tendency of the rate of profit to fall.

Here we come to the crux of the issue. Can these factors keep bailing the system out over and over again? And if so, does that make socialism perhaps still desirable but no longer essential? Or are there reasons why the system cannot keep finding escape routes--in which case the only alternative to socialism in the long run is barbarism, and our case for socialism becomes one of historical necessity--not in the sense that socialism is inevitable, but in the sense that without it only horrendous alternatives arise.

********

WE CAN only answer this by looking at how the system has actually developed. At the time Marx began writing Capital, it was possible with some oversimplification to describe the system as one in which individual capitals were all relatively small compared to the size of the market, and the state did not intervene very much in the workings of the market. Under these circumstances, the business cycle took the system through regular booms and busts in textbook fashion. You will find references to regular crises every five or ten years. They called them crises then; later on this word sounded alarming, so they decided to say, well, the economy is just depressed. In the thirties, of course, the word depression took on frightening implications, so after the war we started hearing about recessions, and when the experiences of the seventies and early eighties made this term frightening in its turn, the language began to change again, so you got Alan Greenspan of the US Federal Reserve last year saying the American economy was entering a "meaningful downturn".

Anyway, they had these regular crises, and eventually the system would always come out of them again, so for a long time the predominant philosophy was for relatively little government intervention. But by the end of the century, nagging problems were making themselves felt. In the 1880s several European countries experienced major, deep crises which were associated with serious, sustained falls in the rate of profit. The tendency which Marx had noted was becoming an important reality.

The way the system got out of those crises was very important for both economics and politics. On the one hand, you got the merger of capitals into large blocks. A wave of mergers can operate like a wave of bankruptcies, if it allows the resulting company to achieve major economies in the use of capital. Making capital cheaper can solve that problem we discussed about the organic composition of capital. In addition, the large firms which resulted from the mergers were often closely linked to the state, which was prepared to prop them up, either by assisting them in some financial form or by using its political and military muscle to help them compete in world markets. This was the trend to what Lenin called state monopoly capitalism, and Germany was the classic case.

One the other hand there were countries, and particularly Britain, which expanded their economies into their third world empires. By starting up new, labour-intensive enterprises abroad they could also solve the problem of the organic composition of capital. This was, of course, the phenomenon of imperialism: the final carve up of the globe around the end of the 19th century.

In the early twentieth century, the two trends started to merge. British industry went through a series of mergers, and Germany developed a hunger for colonies. The problem was, there wasn't room on the globe for everyone's imperial appetites to be satisfied and the result was World War 1.

So the things that Lenin and Bukharin wrote about in their works on imperialism -- state monopoly capitalism and the struggle for colonies, with the imperialist states increasing driven to war -- was also the culmination of a process of economic restructuring in response to the crises of the late 19th century. Like all capitalist solutions, they contained the seeds of more trouble, and World War 1 was only the beginning.

The war was followed by revolutions, and then by new economic crises. Britain and Germany were depressed for much of the twenties. Then in the thirties you got a major new depression,

In the depression, the old problems came together with new ones arising out of the solutions initially provided by state monopoly capitalism and imperialism. The business cycle created a rather artificial boom, particularly in the stock market, in the mid-twenties, then boom gave way to bust. Initially the experts of the system thought it was just another recession, and that if the economy was left alone, it would recover. Let the weak firms go under, then the strong will revive. It was on this basis that US president Herbert Hoover kept saying that prosperity was "just around the corner".

But prosperity didn't arrive. One reason was that the system had experienced a major reduction in the rate of profit world wide, though there are arguments about just when and how this occurred, but you'll see from the table below that something along these lines did happen.

Rate of profit in US manufacturing

1889 26.6%

1899 20.5%

1909 18.1%

1919 16.2%

A second reason has to do with that business I mentioned before about combined and uneven development: the process of competition over decades, combined with the merger of capitals in the late 19th and early 20th centuries, had created a situation where you had a smaller number of large capitals, and these were interdependent. If some went bankrupt, they dragged down others with them, and the whole system crashed into deep depression.

That is why economic policies couldn't solve the depression. What ended it was the second world war: huge levels of government expenditure and then the destruction of vast amounts of capital on a world scale, which lowered the organic composition of capital, and allowed the rate of profit to revive once more.

You see that the crises were getting worse, and the level of drastic restructuring and destruction required to overcome them, to shake out the system, was getting greater. No wonder that Marxists in the thirties and forties, like Trotsky, were convinced that the final death agony of capitalism was at hand. But of course they were wrong, the decades after World War 2 saw a long boom.

********

THE DESTRUCTION of the war had made recovery possible, and then the institutionalisation of a cold war arms economy -- war without the shooting -- made it possible to sustain that recovery for two decades or so. The theory about how this worked is complicated, and the arguments about the theory add all sorts of further complications, but the gist is simple.

First let me comment briefly on what the theory does not argue. There are other theories about arms spending which we call underconsumption theories. This is the idea that the problem with capitalism is that there is not enough consumer demand for products. Arms spending creates more consumer demand, because it creates a lot of jobs for workers, and in this way it can create a short-lived boom on a purely artificial basis, by injecting demand into the economy. But we're not talking about a short-lived boom, we're talking about two decades of expansion, and for that to be possible something has to overcome the problem of the falling rate of profit. Our theory attacks the problem from this angle, and essentially the argument is that if the government spends money on arms, this is effectively a waste-- a destruction -- of capital. That means the organic composition of capital rises more slowly, and the tendency for the rate of profit to fall is restrained. The waste means the system grows more slowly, but the impact on profitability means that the boom can be sustained for a longer period.

This was our explanation for the postwar boom. But in making the explanation our theorists, most importantly a man named Michael Kidron in the sixties, also argued that the permanent arms economy couldn't prop up the system for ever. He made two points in particular that were very important:

1. That the PAE and the boom associated with it would be undermined by a process of combined and uneven development. The boom was world wide, and the capitalists of all countries benefitted, but the costs were borne very unevenly. America, Britain and France in the west, and Russia in the east, paid the price. Germany and Japan, specifically denied the right to thoroughly rearm by the settlement at the end of World War II, could devote all their investment to productive activities. Therefore, said Kidron, the Japanese and the Germans would race ahead, and this would force the military superpowers to begin scaling back their military budgets, not in absolute terms, but as a proportion of GNP. As they did so, the impact of the permanent arms economy would lessen.

2. That in any case the PAE was a matter of diminishing returns, and that while it could slow down the rise in the organic composition of capital and the consequent fall in profit rates, it could not postpone the problem for ever.

Well, this is pretty much the way it worked out. Germany and Japan did start to catch up and then outstrip the British and American economies, and Britain and America -- and the Russians -- began looking for ways to reduce arms spending. This was one reason for the era of detente in the sixties. But as the level of arms spending declined relative to GNP, and as the process of diminishing returns made itself felt, the world economy began to slow down in the mid-sixties. After a temporary upturn caused by spending on the Vietnam war the world economy became unstable and then went into recession in the early seventies.

By 1973 or 1974 the world recognised that the postwar boom was over. Recessions, serious ones with high unemployment, were back. And by about 1974 the experts were also discovering that there was a falling rate of profit. The postwar boom had finally pushed up the organic composition of capital -- the ratio of capital goods to living labour--to the point where profit rates were undermined. If you look at the graph you will see that the economic crisis years of 1973-83 were associated with a falling rate of profit.

Once again there were many on the left, including us, who saw this as the final crisis of the system, though we were careful to be less categorical and apocalyptic about it than Trotsky in the thirties. But of course the system did recover--not entirely, it didn't revive to the level of the boom years, but there is no denying the fact that production levels rose internationally, that there was no major recession between 1984 and 1990, and that the system managed to cope fairly easily with a dramatic stock exchange crash in 1987. We found this a little disconcerting, and our initial explanations for this phase of recovery were inadequate. We tried to explain it in terms of a new spurt of arms spending by America during the Reagan years--you'll remember that before Gorbachev there was a phase sometimes called the New Cold War when the arms race intensified. But this wasn't really satisfactory, because after all, we had previously explained how arms spending had reached its limits as a solution to capitalism's problems. Reagan's arms spending could explain a couple of years of growth, but not the sustained growth of the eighties.

And so we are now entering on much more difficult ground. Because analysing the economic events of your own time, applying the theoretical tools I've outlined to current events, is always going to be a difficult business, especially since our small organisation has limited information available to it.

Having said that, here are my opinions. The recovery of the eighties was stronger than we expected because the 1982 recession achieved some of the things recessions used to achieve for the system. Coming on top of the recession of the seventies, it wiped out enough capital to reduce the organic composition of capital. It also disciplined the working class, and this is quite important. Whereas the recessions of the seventies forced wages down for a time, as soon as things picked up in 1979-81, the so-called resources boom, the unions took the offensive and were able to claw back big wage rises. By contrast, after the 1982 recession, they were much more battered, workers were much less confident, governments including our own were able to smash individual unions in some key battles: PATCO in America, the British miners, the BLF here. So wages could go on being held down throughout a long recovery phase.

What's the result? if you look again at the graph you see a revival in profitability in the early years under Labor, which almost certainly continued up to 1988 or 1989. Not back to the levels of the boom years, but enough that finally toward the end of that phase you got some sustained investment in manufacturing for the first time in a long time. I suspect Australia is broadly representative of what happened in the world economy.

So, the recession restored profit rates, the system recovered, but only to a degree. Then at the end of the eighties, some major economies, and also Australia, again moved into recession. There is relatively little we can say about this recession as yet, the information is too fragmentary. But we can say some things, and they do show the continuing relevance of the key elements of Marxist crisis theory I've outlined.

1. The business cycle continues to operate: boom turns to bust. The arms-economy based boom of the postwar years took the edge off these cycles, but they are once again a normal part of the system.

2. They are much more dangerous for the system than in the 19th century because of the size of the capitals involved: you could see that right here in Victoria where the State government has had to bail out major financial institutions rather than let them collapse and drag down other players with them. In America the same happened with the savings and loans outfits. BUT: if governments don't let them go broke, the beneficial side of recessions is minimised, too, and the system will have trouble recovering fully. Already the experts are saying that the recovery from this recession will be very sluggish.

3. The problem of combined and even development is very important. America is very good at making bombs, and increasingly uncompetitive at making cars. Therefore we have America able to dominate the Middle East while its economy nosedives and Japan maintains relatively healthy growth. This imbalance puts pressures on both America and Japan. Closer to home, the Australia economy went into recession partly because of high interest rates, resulting from this country's inability to make its industry competitive. We sell minerals and agricultural produce, and the importance of such goods in the world is in decline.

4. Lurking behind all the other issues, and as yet impossible to pin down, is the problem of the rate of profit. We suspect the nineties will be an era of relative economic stagnation, perhaps not as bad as the seventies but certainly worse than the eighties. This implies that the recovery in profitability shown on the right hand side of graph number two has been, or will be reversed in the nineties. Certainly profits are down right now, but what we are watching for is a longer term trend.

You can see that the Marxist theory of crisis has considerable explanatory power. Now I need to return to a question I raised much earlier. The theory of the falling rate of profit is the most important, and the most distinctively Marxist aspect of the argument, and its greatest importance rests in the fact that the cause of the crisis is located in the process of capitalist exploitation and profit-making itself. The system, by its own dynamic, must eventually undermine itself.

This means tinkering with it, fixing it through reforms, isn't good enough. It has to be replace with a more rational system, which is based not on profits but on human need. A system where technological progress and rising labour productivity is a source of prosperity rather than crisis. In other words, it is this part of the theory that is the argument for revolution.

We have also said that the system can recover from major breakdowns associated with declining profitability, and you might say this is an argument against the necessity of revolution. Eventually, things get fixed up. But consider the cost: World War 1, World War 2, the nuclear arms race, the smashing of unions in the early eighties.. That's the kind of radical adjustment the system has needed to recover, and never for morethan a couple of decades -- and usually much less. The war in the Gulf, which arises out of the economic weakness of the United States, is a warning of what is yet to come. And as the units of capital keep getting bigger, the ultimate consequences of having them come crashing down get more and more terrifying to contemplate.

Thus the necessity of revolution remains, and that is the reason we have discussions of this kind.