Business Cycles: Marxian Approach

Geert Reuten (University of Amsterdam, Department of Economics)

[2002]

in Brian Snowdon & Howard Vane (eds), Encyclopedia of Macroeconomics, Aldershot: Edward Elgar 2002, pp. 73-80
[Note: this is the text of the typescript; the final printed version can be textually more polished]

Marxian economics sees the capitalist system as driven by the accumulation of capital the latter's generator being the production for profit through the exploitation of labour. Accumulation of capital is the process of appending profits to the initial capital size. Capital in process is necessarily both monetary and physical without prejudice to either. Although from a static point of view, capital may appear as something either monetary or physical, such a one-sided view is an illusion. In fact, any actual stasis of capital means an interruption of the capital circuit and thus bears the germ of an economic crisis. Hence accumulation of capital implies expansion of the circuit of capital. Although, as just indicated, the capitalist system is driven by this expansive accumulation of capital, we see in practice its recurrent negation, that is, phases of expansion alternating with phases of contraction. Because the explanation of this alternation has always been a core of Marxian economics, it should not be surprising that over its one hundred years tradition several strands have developed. Before specifying differences in the second half of this article, I first indicate the similarities of these strands. Their first and most important common characteristic is that cyclical development is seen to be endemic to the capitalist system later on we will see why. The impetus to cycles is endogenous to the system and not something coming accidentally from the outside as a shock. Second, endogeneity applies also to the propagating processes the dynamic repercussions however much these also depend on the structural-institutional development of the capitalist system. Together these generate recurrent cycles, though not inherently regular in either length (top to top) or amplitude (top to trough). Since cycle often implies such regularity, Marxist economists only reluctantly use the term cycle, referring instead to waves or to one phase of the cycle, crisis, i.e. the turn from expansion to contraction. Accordingly, much of Marxian cycle theory bears the heading of theory of crisis. A third common characteristic developed by Marx early on in Capital I is that the general possibility of economic crisis is seen to lie in the elementary form of moneymediated market exchange. Money is not just a convenient medium of exchange. Money is primarily the incarnation of value. This is conditioned by it being a fiduciary store of value. Therefore money can, for various reasons, in principle be withdrawn from circulation, hence interrupt the exchange process so interrupt the circuit of capital alluded to in the opening paragraph above. This is the elementary basis for Marx's, and the current Marxian, rejection of Say's Law.

As preamble to the fourth point it needs to be stressed that Marxian economists make a sharp distinction between profit and interest (and the profit rate versus the interest rate). Structurally (the rate of) profit is larger than (the rate of) interest. Interest is a share of profits distributed to debtors (various forms of loan capital such as bonds or bank loans). Bearing this in mind and notwithstanding the fact that accumulation is largely financed by retained profits the fourth common view is that the accumulation of capital is necessarily accompanied by an expansion of (particularly) bank credit. To put it more strongly: accumulation of capital without any accommodating credit expansion is impossible (profits produced cannot get realised without credit). In phases of expansion, credit accommodates profit increase and accumulation of capital and indeed boosts them; at that time the interest payment is no problem. However, the counterpart is that in phases of contraction when profits may be nullified interest operates as a strangling burden and can only be settled by capital devaluation (amplified upon below). Although the accommodating role of credit is played out in different degrees by the different strands within Marxian economics, it is always seen as core to the propagation of the cycle's impetus, hence to the cycle itself. Fifth, all strands see the development of the profit rate (profits over capital invested) as the crucial constituent for the cyclical unfolding of capitalist economies. The rate of profit is, as explained below, a concentration of many determinants and its (current) development is the key measure for the (current) state of the economy; as such its development is also the key prospect determinant for the accumulation of capital and its finance (both internal through retained profits, and external through especially bank credit). A decreasing rate of profit is seen as the principal determinant of decreasing investment by firms near to the upper turning point of the cycle and eventually the move to economic crisis and contraction. Of course the cardinal question then becomes the explanation of changes in the rate of profit (see below). For example, why is it that the rate of profit starts decreasing halfway through the expansion phase of the business cycle? As is the case for recent cycles in major capitalist economies. Note that this involves controversial theoretical and empirical-statistical measurement issues. For example, the periodisation and the stage/pattern of cycles, or the measurement of profits and capital themselves. Similar problems, of course, apply to any approach in economics and in science generally. A final, sixth, common view although stressed to a different degree is that restructuring of capital' in the crisis and recession phases of the cycle is seen to lay the foundation for a renewed expansion. This restructuring involves a destruction of segments of capital through bankruptcies, closure of plants as well as other reorganisations within companies; it also involves the selling of parts of the company as well as take-overs. Thus, restructuring in this stage of the cycle contributes to the general concentration and centralisation of capital (oligopolisation) the latter not restricted to this cycle stage. This restructuring along with a general devaluation (writing off) of capital restores the rate of profit and so initiates a renewed expansion phase. Note that returning to point five there is not much difference in view as to which are the many determinants of the profit rate: 2

(a) the power of labour in production (or the intensity of work) in relation to the state of technology (the technological trajectory); (b) the wage rate and the capitallabour distribution of income (the so-called rate of exploitation of labour is shorthand for this and the previous factor taken together); (c) the realisation ratio which is a measure for overproduction and/or overcapacity in relation to macroeconomic expenditures (with disagreement over the and/or); (d) relating to (a), tranche-wise steps within a technological trajectory (or in the long run, change of the trajectory itself) and, in relation to that, structural change of the power of labour (shorthand for this is the change in the so-called organic composition of capital). Of course these factors are complex and interrelated. All of them are (at least potential) variables over the course of the cycle. Differences between Marxian strands concern the key impetus(es) to the cyclical changes in rate of profit and their propagation. We now come to these differences. Within the confines of this article I will make no distinction between long and short cycles, because this requires detailed theoretical and measurement discussions (for some researchers a recession, as defined by two quarters of contraction, is simply not the object of enquiry). The same limitation requires a rather schematic account, doing some injustice to those authors referred to, as well as to authors not referred to. (See Clarke 1994, ch. 2 for a concise historical overview of theories; he also describes how in the course of the twentieth century all the theories below have been applied, by different authors, to long and short cycles. For an introductory treatment see Laibman 1997, chs. 8-10.) A. Labour Reserve Profit Squeeze. This comparatively recent approach at least within Marxian economics - originates from work done by Glyn & Sutcliffe and Boddy & Crotty in the early 1970s (a precursor at an abstract theoretical level is the work of Uno in the 1950s); cf. Glyn (1997). A sophisticated recent account is that of Goldstein (1996, 1999) on which my summary statement draws in part. In short this theory holds that the capital broadening aspect of accumulation within a technological trajectory leads to a reduction in the reserve army of unemployed and a relative strength of labour. This results in both increases in the rate of growth of wages (distribution) and decreases in the rate of growth of productivity (labour's power in production), especially in the second half of the expansion phase. The concomitant increase in unit labour costs cannot be fully passed on in prices because of competitive demand constraints along with a rise in capacity utilisation whence the rate of profit declines. With some lag this leads to investment decline and the turn to contraction. Restructuring of capital and lay offs along with contraction, restore the reserve of unemployed so weakening labour's position in the labour market and at the point of production (the reverse of the initial process), and so on. Thus economic crisis and recession/depression disciplines workers. B. Overproduction. Several varieties of this approach developed over the 20th century. There are two main variants of the overproduction impetus to a profit squeeze. In the first (sometimes called underconsumption), profits are squeezed by limited demand.

Briefly, it is argued that in the first segments of the expansion phase the distribution of income (measured as the macro profit share in income) develops in favour of profits. This reduces the ratio of consumption to income, eventually generating a decline in capacity utilisation, and so a decrease in the rate of profit. In the last segment of the expansion, costs rise faster than output so squeezing profits. Wage increases in this segment of the expansion come too late. In the phase of crisis and contraction profits decrease and capacity is cut through restructuring of capital, with the rate of profit restored via the analogous devaluation of capital the foundation is laid for a new expansion. Note that the initial condition only holds with a reserve of labour such that wage increases lag behind productivity increases. Therefore this type of theory is mostly combined with a variant of (A), as in Sherman (1991 see also his succinct 1997) and Sherman & Kolk (1996). In the second variant, the overproduction impetus results in profit squeeze via disproportionality (imbalance between branches or sectors of production). It is inherent to capitalism that the forces of production are perpetually developed in order to appropriate profits. Capitalist firms do not respond to fluctuations in demand by mere quantity adaptation, but by introducing more productive methods of production, in order to reduce costs below those of competitors. Production is expanded in anticipation of undercutting competitors. This impetus cannot be checked by competition because, as Clarke (1994: 281-3) puts it: Competition presupposes overproduction, since capitalists only experience competitive pressure when the product is greater than the amount that can be sold at a price corresponding to the price of production. Competition is simply the form in which overproduction is experienced... Whereas in the long run this process develops in every branch of production, the opportunities for the introduction of new methods of production are unevenly developed between the various branches ... which therefore would tend to expand at different rates. When overproduction in a (major) branch comes to the fore in the market, it soon spirals down into other branches; in this way, a rate of profit fall multiplies around the economy. In the wake of the crisis overproduction is removed through destruction of productive capacity, redundancy of labour and devaluation of capital. C. Rising organic composition of capital. Until about 1970, a third Marxian approach was exclusively applied to long term secular development. Via, amongst others, the work of Mattick, Yaffe, Fine & Harris, Shaikh and Weeks, cyclical approaches have since been developed. Whereas the first theory's focus is on the capital broadening aspect of capital accumulation within a technological trajectory, this third theory focuses on the so-called rising organic composition of capital (capital deepening) either its moderate tranchewise development within a trajectory, or that from one trajectory to another. Both of the latter stem from the continuous force to revolutionise the methods of production in order to extract more profits the expression of which comes to a temporary halt in the early contraction phase. Consider the rate of profit r = R/K, the ratio of profits and capital invested in means of production. Dividing by the sum of wages, wL, we have r = (R/wL)/(K/wL). The numerator measures the macroeconomic distribution of income and the denominator can be taken as a measure of the technique together with the productivity or intensity of

labour. (A more sophisticated presentation would have K/L together with a more complicated numerator; a rise in K/L means that labour works up an increasing mass of means of production). In this theory it is argued that K/wL rises throughout the expansion phase. Then, of course, with a constant distribution of income the rate of profit would decline. Instead, though, R/wL tends to increase in the first half of expansion, with a downward pressure developing in the second half, due to increasing labour strength. Nevertheless, on average the rise in K/wL is greater than the rise in R/wL. The ensuing decrease in the rate of profit, especially in the upper segment of the expansion, leads, with some lag, to decline in investment and the turn to contraction. In this theory much stress is laid on the restructuring of capital in the contraction phase (see above under six) which through devaluation of capital restores the rate of profit, so laying the foundation for a new expansion. Although the analytic part of this theory seems simple, it is really the most complicated theory both in terms of its micro foundations and empirical measurement difficulties. For the micro foundations grounded in a disequilibrium framework the reader is referred to Laibman (1996) and Reuten (1991); the latter also uses this framework to set out the endogenous turn from contraction to expansion. As for measurement problems, a first observation is that the conventional measurement of K in National Account statistics is based on static equilibrium estimates that are difficult to adapt to notions of devaluation of capital. Second, some researchers within this approach differentiate between investments that are strictly capacity increasing and others (unproductive) that have to do with the realisation of output (e.g. Moseley 1991; 1997). D. Synthetic approaches. Already from this schematic summary it can be inferred that there is ample room for synthetic approaches (in fact there is a long standing Marxian tradition of multi-causal approaches, going back to Bauer and Kautsky early in the 20th century). In brief there are two variants of these. A first variant stresses the continuous tendential interaction of all three components (e.g. Reuten & Williams 1989, chs 3-5). A second variant sees different factors as actual in different historical periods, the institutional conditions of which have been variously theorised, especially from the mid 1970s onwards, as Phases', Regimes and Social Structures of accumulation. Albritton et al. (eds, 2001) provide a useful collection of all the latter approaches, with further references. To complete this review it may finally be noted that non-linear dynamic and chaotic models are an area of concern among a number of Marxian economists (see Freeman & Carchedi, eds, 1995). In sum, it has been indicated that amongst Marxian economists there are six major points of common ground about the cyclical development of capitalist economies. There is disagreement about what should count if so as the key factor setting in motion the recurrent decline in the rate of profit. On the other hand, since the various approaches do not seem to be inconsistent, there is room for integrating these into a general theory.

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