Paul Mattick 1937
Source: International Council Correspondence, Vol. 3 No. 5-6. June, 1937, pp. 23-28;
Transcribed: by Revolution's Newsstand.
Accumulation of unsold commodities is generally looked upon as the cause of unemployment and crisis. People who have little or no understanding of the economic forces within society, merely see the ever-growing output and believe that by raising the purchasing power of the masses, the existing disparity between production and consumption could be overcome. They believe higher wages and shorter working hours would bring the desired result; overproduction would disappear and supply and demand balance once more.
By putting the word ‘overproduction' in quotation marks, we indicated already our opposition to this 'common sense’ theory. We hold the opinion that the cause for every crisis is to be found in the relationship between capital and labor. We know already that capitalism derives its profits from the unpaid labor of the working class. A crisis sets in when profits become insufficient to satisfy the needs of the capitalist class and its tools (the state, army and navy, judiciary system, church, etc.) and to finance costly competitive struggle among the capitalist groups themselves. Comparing both theories, we agree that the first one sounds logical to anyone, while our conception might require a deeper knowledge of the economic structure. Without unduly complicating things, we must deal with the economic forces that lead to overproduction and crisis in order to show the fallacy of the 'common sense’ theory.
During periods of normal development, production and consumption are more or less in equilibrium. Production does not grow faster than consumption; everything the factories produce is being consumed by society. (This is true notwithstanding the fact that, especially during the years after 1921, the production of coffee, rubber, sugar, wheat, due to natural influences, greatly exceeded the demand, but in relation to the total commodity output these exceptional cases had no influence upon the general development.) Aside from these exceptions, it is also a fact that more and more Commodities are produced from year to year, and every year this 'more' finds consumers. Who buys these commodities? Answer: The capitalists themselves!
As we have seen before, each year more money is thrown onto the market for profitable investment. The new capital acts as buyer of means of production, raw materials and labor power. The new wage laborers draw their means of subsistence from the market in form of commodities. Prosperity is therefore dependent on the extent and pace with which new capital is invested profitably. The greater demand for commodities is not the expression of larger needs of the masses, but a consequence of the addition of new capital which, in order to make new profits, buys machinery, raw materials and means of subsistence. The higher the profits, the faster they will be capitalized, being the driving motor in economic life. It is an erroneous conception to believe overproduction arises thru under-consumption on the workers’ part because the wages are too low. If profitability of capital is the pre-requisite of production, than every increase in wages must be a contributory factor to the stagnation of production, and every decrease in wages must be looked upon as a means to stimulate business activity.
To understand 'overproduction,' it must be remembered that the flourishing of enterprises, the production that is growing from year to year, finds its cause in the realization of extracted and reinvested profits. In other words, the growing demand for commodities is nothing but the indication of new capital to be absorbed in profitable transactions. Consequently, accumulation of large stocks will result as soon as no more additional capital is available in the economic process, Commodities which were intended for the expansion of production will not be taken out of the market and will, in a very short time, cause an apparent 'overproduction'. Hence, overproduction is nothing but the interruption of the expansion process (of the accumulation). Looking at the situation superficially, it conveys a picture of unbalanced production and consumption. The equilibrium seems suddenly disrupted and production now exceeds consumption.
Statistics of 60 important commodities well illustrate this sudden transformation to 'overproduction.' Looking at the year 1929, and taking 1923-25 as the index 100, we see that up to June 1929 a gradual but steady increase in production took place. The limit was reached with index 126. From this time on, production decreased slowly until in Sept.1929 it stood at 121. Since this means only a decrease of about 4% within three months, and since such small fluctuations are not unusual, seems reasonable to assume that production within those three months did not vary considerably. In the middle of October, when there was no indication yet of a disruption of the economic phase, the stock market crash occurred, and the actual collapse of industry took place.
What caused this terrific crash and how could such a sudden end disrupt the prosperity period so unexpectedly? The explanation is to be found in the fact that from June 1929 on, practically no capital accumulation took place, and for this reason production could not be expanded. Commodities intended for the expansion of production could not be taken out of the market. Within three months, the situation presented itself as a tremendous 'overproduction.' It did not yet exist when the expansion of production stopped in June, which is illustrated by statistics on stocks. Newspapers remarked in this respect: “The strange phenomenon that production does not recede when stocks are large, but only when they are low.” This “strange phenomenon" is easily explained if we consider the economic life as a function of capital looking for investment, 'overproduction' being formed when no new capital for the expansion of production is available. A considerable part of the commodities–that part which was intended for the expansion of production–remains in the market and grows continuously. This, in turn, causes a situation which makes it impossible for capitalists to continue production under the old conditions. The accumulated stocks will have, finally, to be disposed of as the producers have, after all, to fulfill their financial obligations. Large quantities of commodities, however, which are to be sold at any price cause a general fall of prices. This fall of prices causes the collapse of the whole economic system, and 'overproduction' appears in all industries because their total output was based on the 'customary' expansion speculation. In this way, production will be restricted extensively, making millions of workers unemployed.
A resume of the various conditions gives us the following picture: A continuous expansion of production takes place in prosperity periods by capitalizing the extracted profits. This is known as the accumulation process. Suddenly, accumulation stops while production remains almost at the same level, thus causing growing stocks of commodities which were formerly absorbed in the accumulation process. Unsold stocks threaten the financial position of enterprises and therefore commodities have to be sold at any cost. A fall in prices results, followed by a sharp competitive struggle which, in turn, restricts considerably the economic development. As a last resort, the opportunity of exporting is seized, only to be repelled by the capitalistic groups of those importing countries and counterbalanced, in their favor, by high walls of tariffs and restriction schemes. The longer a crisis continues, the more violent the struggle for new markets.
The general conception of a planless production until warehouses are filled to capacity lacks experimental proof, in our opinion. If we focus our attention to the measures taken by capitalists to overcome a crisis, we see that they attempt to do away with the difficulties by starting anew on a higher level of production. In other words, capitalists try to overcome a crisis by new methods of production which not only make possible a larger output, but which simultaneously. duce the cost of production. When dealing with 'over-production,' we do not, in this respect, consider single industries that have produced too many commodities in their respective line. If, for instance, cotton has been partly substituted by artificial silk, and if, as a consequence, the production of cotton is not restricted, too much cotton will be available. A crisis will occur in this case thru disproportion; i.e., the production of a particular commodity has exceeded its limit in proportion to all other commodities. However, this situation cannot cause a general crisis since 'overproduction' is limited to one particular commodity and the crisis can be overcome by balancing again supply and demand. But the general 'overproduction' is rooted much deeper.
We know already that the disruption of the accumulation process leads to a crisis, but this fact does not explain the nature of stagnation. As illustrated by statistics of production and stocks, the latter ones were low when the expansion process was interrupted. Thus there existed no difficulty in disposing of the produced goods. We can explain this disruption process only thru the economic forces of the capitalistic system which no capitalist is capable of escaping. It is caused by the same 'natural laws' as 'over-production.' If and when in a crisis capitalists have found a new profit basis thru lower wages, rationalization, new methods of production, and devaluation of capital, a new economic development sets in. The demand for commodities increases, capital produces again sufficient profits, and at this period the accumulation process continues. A lively demand for new capital is the result of its upswing period. But the same laws that regulate the prices of commodities, i.e. supply and demand, also regulate the price of money and, after all, there are only limited resources of money available for expansion purposes. A struggle of the capitalists for additional capital to be used in the accumulation process sets in, and whoever is able to pay the rates of interest demanded by banks and financing concerns will profit most However, a stage will be reached where the demand for capital is larger than the supply; not enough money is finally at hand to satisfy the growing needs for loans. Enterprises that still desire to borrow additional capital for expansion of their productive apparatus will find, eventually, that money is so dear on account of the large demand–(as well as credit-money also for the continuation or production in general) that the largest part of the profits made by the capitalists goes to the banks in form of interest. We know that profits are derived from the surplus labor time of the workers. A part of these profits goes to the consumption fund of the capitalists, and the less a capitalist is consuming, the more is added to that part which goes as additional capital to the expansion of the productive apparatus, for the continuation of the accumulation process. But, altho the workers are exploited to the limit, not enough surplus value, or profit, is produced to finance a continuous expansion. Production becomes unprofitable under these conditions; the lack of capital causes automatically the disruption of the accumulation process.
We have already dealt with the decreasing rate of profit of capital and the smaller mass of profit in relation to the growing total capital, economic factors that are leading to the collapse of the capitalistic system. (Notes on ‘Productivity in C.C. #4). We do not intend to discuss it here again, but only want to warn against forming an opinion based on data statements of the press and superficial knowledge. On the surface, a crisis appears in the stock market and banking system as the result of lack of credit and need of capital. Taking this situation without closer analysis, one might arrive at the conclusion that we have to deal with a money-crisis and not with a production-crisis, and that a change in organization of the monetary system will do away with all difficulties. Planned accumulation of capital and proper distribution of credits is to prevent all crises. However, the determining factor in capitalist society is the competitive struggle of capital which will set time and degree of the expansion needs in the productive system, when credits and loans are needed. A planned supply of capital would therefore be identical with disregarding this struggle of capital and the dissolution of private property of the means of production in general. Planned supply of capital under private property relationship–as a theoretical abstract assumption–must result in a complete destruction of the technically weaker capital because these would be incapable of maintaining their profitability. For this very reason, it is an impossibility for the capitalist class to avoid crises thru planned production.
In conclusion, we like to say that the usual conception, according to which a crisis arises thru 'over-production' of various commodities, reverses the actual picture and does not explain the fundamental laws of the situation. The apparent overproduction is regarded as causing difficulties in disposing of the produced goods, which in turn leads to a decrease in profitability. In reality, the constant capital grows faster than the profits, limiting the profitability and leading, as a consequence, to a disruption of the expansion of production, the accumulation process. Only at this stage, 'over-production' becomes visible and conveys the erroneous picture that there exists an under-consumption. Overproduction is only an accompanying factor of a crisis, not the cause; it sharpens the crisis insofar as it causes a fall in prices. Even if the capitalists were capable of disposing of all 'surplus' commodities, they could not eliminate crises. The cause is to be found in a different direction: economic forces are determining the degree of exploitation and the prevalent stage of technique, which can be brought in proper (profitable) relation to the exploiting capital only if fundamental changes in the composition of capital can be effected.