Maksakovsky and “marxian” theories of crisis

A reasonable summary of the two main “marxian” theories of crisis, with an emphasis on the dominant theory based on “Law of the tendency of the rate of profit to fall” is given by Fred Moseley’s entry on Karl Marx in:

Encyclopedia of Business Cycles, David Glasner (ed.), Garland Press, 1997.

This entry is appended to the notes below for reference.

That short Encyclopedia entry provides a good opportunity to contrast Maksakovsky’s systematic synthetic presentation of the theory implicit in the fragments left by Marx with the “marxian” confusion.

Related entry by Fred Mosely is not appended:

“Falling Rate of Profit, Empirical Tests”

See also:

Fred Moseley (auth.)-The Falling Rate of Profit in the Postwar United States Economy-Palgrave Macmillan UK (1991).pdf

(especially chapter 1)

and “The Rate of Profit and the Future of Capitalism” (May 1997):

The same Encyclopedia has a related entry by David Laibman:

This is appended “Falling Rate of Profit”.

Another related entry on “Profit Squeeze” by Michele I. Naples is also not appended as that theory has become less popular with stagnation and decline in wages.

Several other related entries are listed at the end of the entry on Karl Marx including one on “Disproportionality Theories” by Joseph Halevi. This is not appended despite the topic being far more relevant than either of the “marxian” theories discussed here. It is basically hostile to disproportionality theories and claims that Marx instead developed a “profit squeeze” theory (not using that term). It does shed some light on the misunderstanding and consequent neglect of Marx’s disproportionality theory but is not relevant to the dominant “marxian” theories and not useful for contrasting those with Maksakovsky’s systemization of Marx’s theory. Other related entries are also of interest, especially Hilferding.

A related entry on “Oversaving Theories” is closely related to underconsumption and so of little interest.

However another entry, “Overinvestment Theories of Business Cycles”, not listed among the related entries for either Marx or Disproportionality, is highly relevant to both. It does not list either the Marx or Disproportionality entries as related and so confirms that the connection is little known on both sides. Indeed the only overlap between the three entries is that they each have a related entry for Tugan-Baranovsky. That author sided with the Russian Marxists against underconsumptionist theories promoted by the Russian Narodniks and drew attention to Marx’s reproduction schemes that are indeed central to understanding Marx’s disproportionality theory, however the entry itself is only of interest for the history and is not appended here

The entry on Overinvestment Theories documents the best of the bourgeois theories cited by Maksakovsky who overcame their limitations and those of the related Austrian school by carefully systematizing the approach Marx laid the groundwork for, based on the reproduction schemes. This entry is appended below. Its content is fully discussed by Maksakovsky but is not needed for contrasting Marx and Maksakovsky with “marxian” theories as apart from the historical connection via Tugan-Baranovsky,  the theorists cited made no claim to base their work on Marx and appear to be as unknown as Maksakovsky, not to say Marx himself, among “marxians”.

Also appended for reference, is Duncan Foley’s explanation of the two main “marxian” theories, together with his explanation of “Theories of Disproportionality” in “Understanding Capital – Marx’s Economic Theory” (1986) Chapter 9. This is a more useful discussion of disproportionality theory than that provided in the Encyclopedia entry by Halevi although not as close to Marx and Maksakovsky as the mainstream bourgeois theorists discussed in “Overinvestment Theories”.

Marx, Karl Heinrich (1818-1883)

[…introductory paragraphs omitted…]

It was in the Grundrisse that Marx first formulated his theory that the falling rate of
profit is the main cause of economic crises
(Marx 1973, 365-98; Seigel 1978, 304-16).
Toward the end of the Grundrisse, Marx wrote
that this theory “is in every respect the most
important law of modern political economy”
(Marx [1939] 1973, 748). This theory was fur­
ther developed in Marx’s later writings, espe­
cially in volume three of Capital.
According to Marx, the rate of profit de­
clines because technological change causes the
composition of capital (the ratio of constant to
variable capital) to increase faster than the rate
of surplus-value (the ratio of surplus-value to
variable capital). The increased composition of
capital implies a reduced ratio of labor employed
to capital invested; less labor employed reduces
the amount of value produced; and with a con­
stant rate of surplus-value, less value produced
results in less surplus-value produced per unit of
capital invested; in other words, the rate of profit
declines. This decline in the rate of profit might
be offset by an increasing rate of surplus-value,
which also results from technological change.
However, Marx argued (but did not prove) that
the composition of capital would increase faster
than the rate of surplus-value, so that the rate
of profit would tend to decline. “The rate of
profit falls not because the worker is exploited
less, but because altogether less labor is em­
ployed in relation to the capital employed”
(Marx [1905-10] 1968-71,439; see also Marx
[1867] 1967, vol. 1, parts 4 and 7; vol. 3, part
3; and Marx [1939] 1973, 365-98, 745-58).
Marx argued further that a decline in the
rate of profit would eventually reduce the rate of
capital accumulation, which in turn would bring
on a general crisis. One important element in the
development of crises, which Marx discussed on
occasion, but did not fully elaborate, is the in­
creasing indebtedness of capitalist enterprises
during the expansion. Capitalist enterprises can
temporarily overcome the limits of a declining
rate of profit by increased borrowing, but this
temporary expedient increases their vulnerabil­
ity to downturns and thereby intensifies the se­
verity of the eventual depression (Crotty 1985).
The significance of this theory was that it
identified an inherent, endogenous cause of capi­
talist crises and depressions: technological
change which replaces labor with machinery.
Thus, according to this theory, crises and depres­
sions grow out of capitalism’s internal dynamics.
As Marx put it, “the true barrier to capital is
capital itself ’ (Marx [1867-94] 1967, 3:250).
Marx also analyzed the causes of recovery
from depressions, as well as the causes of de­
pressions themselves. Since the main cause of
depressions is a decline in the rate of profit, the
main precondition for recovery is an increase in
the rate of profit. According to Marx’s theory,
the rate of profit can increase in two ways: an
increased rate of surplus-value or a reduced
composition of capital. Marx argued that, al­
though increasing the rate of surplus-value
(through wage cuts, speed-up, etc.) would help
raise the rate of profit, such an increase by it­
self would usually not increase the rate of profit
enough to end the depression. Since the prior
decline in the rate of profit was caused by an
increased composition of capital (not a declin­
ing rate of surplus-value), restoring the rate of
profit required a reduced composition of capi­
tal, or a significant “devaluation of capital.”
This devaluation is accomplished during de­
pressions by means of widespread bankruptcies
of capitalist enterprises. Eventually the devalu­
ation of capital raises the rate of profit enough
to make renewed capital accumulation and a
return to prosperity possible (unless of course
workers have succeeded in overthrowing capi­
talism during the depression). Thus, Marx pro­
vided at least the sketch of a complete theory of
the alternating phases of prosperity and depres­
sion characteristic of capitalist economies
(Mattick 1969, chaps. 5-10).
Marx’s theory of the falling rate of profit
has generated much controversy and debate
over the years. The two main issues in this con­
troversy have been: (1) whether Marx conclu­
sively proved that technological change neces­
sarily increases the composition of capital, and
(2) even if the composition of capital does in­
crease, whether Marx conclusively proved that
it must necessarily increase faster than the rate
of surplus-value. Almost everyone now seems to
agree that the answer to both questions is no.
On the other hand, many would argue that,
although Marx did not provide conclusive
proofs, he did offer plausible arguments that
may be valid under certain historical circum­
stances. Whether Marx’s theory is valid for a
particular historical period is thus an empirical

It is also widely believed that Marx ac­
tually had three different (and perhaps con­
tradictory) theories of crises: (1) the falling-
rate-of-profit theory discussed above; (2) a
profit-squeeze theory; and (3) an undercon­
sumption theory (e.g., Wright 1975, Alcaly
1978). According to the profit-squeeze interpre­
tation, the rate of profit declines because the
rate of surplus-value declines, not because the
composition of capital increases. It is argued
that the rate of surplus-value declines (or wages
increase faster than surplus-value), because the
rate of unemployment declines during an ex­
pansion, which increases the bargaining power
of workers. According to the underconsump­
tion interpretation, a crisis occurs not because
wages increase faster than surplus-value, but
instead the opposite: because wages increase
slower than surplus-value. It is argued that such
an increase in the rate of surplus value results
in turn in an insufficient demand for consumer
goods, which precipitates a crisis.
Although a few quotations from Marx can
be cited to support both of the other interpre­
tations, the main cause of crises in Marx’s
theory (and in Marx’s mind) seems to have been
technological change that increases the compo­
sition of capital. Whether this theory is correct
(or more correct than the other two interpreta­
tions of Marx’s theory) is of course a separate
In conclusion, it should be emphasized that
Marx was among the first to provide a system­
atic theory of crises and depressions in capital­
ist economies. The distinctive features of his
theory are its focus on the rate of profit as the
key variable and its conclusion that the rate of
profit declines due to the inherent cause of la­
bor-saving technological change. Marx’s theory
continues to be debated today and continues to
inspire further investigations into why capital­
ist economies are vulnerable to crises and
Fred Moseley
See also Ba u e r, O t t o ; D is p r o p o r t io n a l it y
T h e o r y; En g e l s, Fr ie d r ic h ; Fa l l in g Rate
o f Pr o f it; Fa llin g R ate o f Pr o fit, Em pir i­
c a l T ests; H il f e r d in g , R u d o l f ; K au tsk y,
K a r l; L u x e m b u r g , R o s a; M a t t ic k, Pa u l;
O v er sa v in g T h eo r ies o f Bu siness C ycles;
Pr o f it Sq u e e z e; R e g u la tio n Sc h o o l ; Sa y’s
L aw ; Sc h u m p e t e r, Jo seph A l o is; So c ia l
Str u ctu r e o f A c c u m u l a t io n ; Sw eezy, Pa u l
M a r l o r ; St a t e-M o n o p o l y C a p it a l ism ;
T u g a n -Ba r a n o v sk y, M ik h a il Iv a n o v ic h
Alcaly, R. E. 1978. “An Introduction to
Marxian Crisis Theory.” In U.S. Capital­
ism in Crisis, prepared by the Crisis
Reader Editorial Collective: B. Steinberg
et al., 15-22. New York: Union for
Radical Political Economics.
Crotty, J. 1985. “The Centrality of Money,
Credit, and Financial Intermediation in
Marx’s Crisis Theory: An Interpretation
of Marx’s Methodology.” In Rethinking
Marxism: Struggles in Marxist Theory,
edited by S. Resnick and R. Wolff, 45-
81. New York: Autonomedia.
Marx, K. [1895] 1964. Class Struggles in
France, 1848-1850. Translation. New
York: International Publishers.
——— . [1905-10] 1968-71. Theories ofSur-
plus-Value. 3 vols. Translation. Moscow:
——— . [1939] 1973. Grundrisse: Founda­
tions of the Critique of Political
Economy. Translated with a foreword by
M. Nicolaus. Baltimore: Penguin Books.
——— . [1867-94] 1967. Capital. Transla­
tion. 3 vols. New York: International
Mattick, P. 1969. Marx and Keynes: The
Limits of the Mixed Economy. Boston:
Porter Sargent.
McLellan, D. 1974. Karl Marx: His Life and
Thought. New York: Harper and Row.
Seigel, J. 1978. Marx’s Fate: The Shape of a
Life. Princeton: Princeton Univ. Press.
Wright, E. O. 1975. “Alternative Perspectives
in the Marxist Theory of Accumulation
and Crisis.” The Insurgent Sociologist

Overinvestment Theories
of Business Cycles
The term “overinvestment” denotes an excess
of investment expenditures over voluntary sav­
ings. Overinvestment arguments played an im­
portant role in pre-Keynesian business-cycle
theories, but after the Keynesian Revolution,
fell into neglect. The overinvestment approach
to crises and depressions is basically different
from, if not opposite to, that of oversaving theo­-
ries. The latter emphasize decisions to save, es­
pecially in the context of an unequal income
distribution, in restricting aggregate demand
and triggering a crisis. The former, on the other
hand, focus on the decisions to invest as the
main cause of an upswing. Overinvestment
theories contend that each crisis is the product
of the preceding boom, which, as the conse­-
quence of overinvestment, is judged a patho­-
logical phenomenon.

Overinvestment must not be confused
with overcapitalization, a situation in which
the existing stock of capital exceeds the pro­-
ductive capacity justified by demand. Very
often, overcapitalization arguments are used to
account for the downturn of a business cycle,
but not for the cycle itself. In fact, overcapital­-
ization is usually considered a consequence of
an overinvestment process that occurred dur­
ing upswing, and only the latter is taken as the
real cause of fluctuations.

One of the first overinvestment theories of
the business cycle was advanced by M. I. Tugan-
Baranovsky in his book Les crises industrielles
en Angleterre, published in Russian in 1894. In
Tugan’s view, the cycle stems from the varying
disproportions between the composition of ag­
gregate demand and that of production. These
disproportions depend on the relative move­
ments of investment expenditures and current
savings. Compared to the investment ratio, the
saving ratio tends to be fairly stable through the
various phases of the cycle. Investments fluctu­
ate violently. Therefore, during depressions, the
savings held as idle balances—termed “free
capital” by Tugan—tend to grow. Then, at the
beginning of the upswing, real capital accumu­
lation can be sustained by the availability of
cheap financial opportunities. The increasing
demand for capital goods in the upswing stimu­
lates both production and employment in the
capital-goods sector. Furthermore, through a
multiplier process similar to that envisaged by
Kahn and Keynes, the increase in demand
spreads to the consumer-goods sector, and the
entire economy prospers. During the upswing,
savings fall short of investment expenditures,
but these can be financed through depleting idle
balances and through credit expansion. How­
ever, liquid balances gradually dry up and credit
facilities become increasingly scarce. The inter­
est rate rises and investments become difficult
to finance. This leads to the upper turning point
of the business cycle. The downturn may also
be triggered by the excess capacity built up
during the upswing, but Tugan did not empha­
size this point.

Tugan’s book inspired several works in the
German-speaking world. In particular, theories
developed by Spiethoff (1902) and by Cassel
([1918] 1932) were built on Tugan’s model.

The major weakness of Tugan’s theory lay
in the explanation of turning points. Though
regarding the investment fluctuations as a real
phenomenon, Tugan, to account for the cycle
turning points, relied heavily on the movements
of such supporting “financial” factors as the
availability of free capital. But these do not
adequately explain why the incentive to invest
changes its sign at the turning points.

Spiethoff tried to fill this gap. Financial
conditions, he argued, represent only a “push”
factor in the fluctuations of investment activity.
But “pull” factors are also necessary. These are V 7
represented by the appearance of new and rel­
evant investment opportunities during the up­
turn, and by the “saturation” of the demand for
capital goods during the downturn. The major
sources of new investment opportunities are
technical innovations and the opening of new
markets. These stimuli do not occur evenly
through time, but intermittently, in the form of
external shocks. A strong enough shock can
start the expansion. In a first stage, the existing
plants rapidly reach full utilization; in a second
one, new plants are built; and in a third one,
they are completed. During these three stages,
a sort of bandwagon process is set in motion.
Demand for capital goods increases and raises
their prices. Furthermore, as investments exceed
savings, the demand for consumption goods
exceeds supply and their prices also rise. Thus,
profits increase in all sectors and investment is
further stimulated. However, when all the new
plants are completed, a fourth stage begins;
capital is saturated, and investment slows down
because of widespread excess capacity. The ef­
fects of the downswing are the opposite of those
of the upswing: prices, profits, employment,
wages, and consumption all decrease, and sav­
ings outstrip the outlets for them.

Cassel, writing several years after Tugan
and Spiethoff, drew heavily on their ideas. Like
Tugan, he stressed the influence of the supply
of funds on investment decisions, and espe­
cially of changes in interest rates. During up­
swings, interest rates rise due to overinvest­
ment. When they rise too high, the downturn
begins. Then underinvestment allows interest
rates to fall, so that, at the end of the crisis, the
financial conditions of the upturn are restored.
The cycle is damped, according to Cassel, but
it does not disappear, because it is continuously
revived by external shocks such as technical
progress, the opening of new markets, and the
growth of population. Cassel contributed two
major advances to business-cycle theory: first,
he brought to light the role played by time lags
such as those between the completion of plants
and the decision to invest and those between the
latter and changes in interest rates; second, he
had a clear intuition of the acceleration prin­
ciple, recognizing that a given fall in consump­
tion causes an even greater drop in the output
of the capital-goods industries.

A particularly interesting business-cycle
theory, one that combines overinvestment ar-

guments and the acceleration principle, is that
of Aftalion ([1908-09] 1987, 1913). Fluctua­-
tions are triggered by changes in consumers’
wants, and the consequent changes in capital
formation necessary to modify productive
capacity in the consumer-goods sector. But
these changes cause overshooting, because
capital construction requires a long “gestation
period,” during which consumption demand is
incompletely satisfied, while investments out­
grow voluntary savings. However, when the
building up of plants is completed, the boom
ends. Consumer goods are overproduced, and
markets and consumers’ wants are saturated.
Consumer-goods prices fall due to the prin­
ciple of diminishing marginal utility, while the
substitution of capital for other factors is lim­
ited by the already high degree of capital inten­
sity. Thus, prospective profitability falls, dis­
couraging investments and triggering the crisis.
The downswing can last for a long time, be­
cause capital goods are durable and the deplet­
ing of excess capacity is a slow process.

A particular emphasis on the role played
by time as a major cause of economic fluctua­
tions can be found in the Austrian theory of
business cycles, developed mainly by Mises and
Hayek. Hayek (1931) borrowed from Wicksell
the idea of a cumulative process, and, on this
ground, maintained that the principal source of
economic fluctuations is a divergence between
the market and the natural rates of interest.
Credit expansion and cheap finance reduce
market rates and encourage investments, thus
increasing—in Austrian terminology—the
roundaboutness of the overall economic pro­
cess. However, the increased investment is not
matched by additional voluntary saving. Over­
investment occurs. But since the production of
consumer goods falls short of demand, their
prices rise, so that forced saving by consumers
during the upswing matches the overinvestment
financed by credit expansion. The process can­
not go on indefinitely. Eventually bank reserves
dry up, while credit facilities shrink, and the
market rates of interest rise. Investments are
discouraged, and the process just described is
reversed and the production process becomes
less roundabout. The crisis brings about a pro­
cess of disinvestment whose ultimate cause lies
in the artificial and pathological overinvestment
of the previous upswing.

In the interwar period, a number of other
economists, like Hawtrey, Robertson, and even
the Keynes of the Treatise, developed business-
cycle theories in which Wicksell’s cumulative
process and forced saving play an important
role. But in their arguments, monetary factors
predominate over overinvestment problems as
a cause of fluctuations. So their theories are
better classified under the heading of monetary
theories of the business cycle.

Ernesto Screpanti

See also Acclera tio n P r in c ip l e; A ft a l io n ,
A lb e r t; Austrian T h eo r y o f Bu sin ess
Cycles; Cassel, Carl G ustav; F o rced
Saving; H aw trey, Ra lph G e o r g e; H a y ek,
F r ied r ic h August [vo n]; M ises, L u d w ig
E d ler v o n; N a tural R ate o f In ter est;
R o ber tso n, D ennis H o l m e; Sp ie t h o f f,
A r th u r; Tugan-Baranovsky, M ik h a il
Ivan ovich; W ic k sell, J oh an G ustav K n ut


Aftalion, A. [1908—09]1987. “La realite des
surproduction generales: Essai d’une
theorie des crises generales et peri­
odiques.” Revue d’economie politique
——— . 1913. Les crises periodiques de sur­
production. Paris: M. Riviere.
Cassel, G. [1918] 1932. The Theory of Social
Economy. 5th ed. Translation. New
York: Harcourt Brace.
Gordon, R. A. 1952. Business Fluctuations.
New York: Harper and Row.
Haberler, G. 1962. Prosperity and Depres­
sion. 4th rev. ed. Cambridge: Harvard
Univ. Press.
Hamberg, D. 1951. Business Cycles. New
York: Macmillan.
Hansen, A. H. 1951. Business Cycles and
National Income. London: Allen and
Hansen, A. H. and H. Tout. 1933. “Invest­
ment and Saving in Business Cycle
Theory.” Econometrica 1:119-47.
Hayek, F. A. 1931. Prices and Production.
London: Routledge.
Mises, L. von. [1924] 1953. The Theory
of Money and Credit. Translation.
2d ed. New Haven: Yale Univ. Press.
Spiethoff, A. 1902. “Vorbemerkungen zu
einer Theories der Uberproduction.”
Jarbuch fur Gesetzgebung, Verwaltung,
und Volkswirtschaft 26:267-305.
Tugan-Baranovsky, M. I. [1894] 1913. Les
crises industrielles en Angleterre. Trans­
lation. 2d rev. ed. Paris: Giard & Briere.

Duncan Foley:

Specific Theories of Crisis

In Marx’s available works there is no systematic, synthetic discus­-
sion of the theory of capitalist crisis. He discusses this issue in a
wide variety of contexts, often as a parenthesis in a discussion of
some other issue and frequently in the course of making a critique
of some earlier writer. The most sustained discussion of the prob­
lem of crisis occurs in Theories of Surplus Value (1963, chap. 17); but
even in this text Marx’s primary aim is to make a thorough critique
of Ricardo’s discussion of Say’s Law, not to put forward a positive
theory of the sources of capitalist crisis.

Thus it seems fair to say that in the strict sense there is no
Marxist theory of capitalist crisis, no model, that is, that we can
reliably view as arising from a fully considered position of Marx
himself. Later scholars, polemicists, and revolutionaries have re­
constructed a variety of theories of crisis in the strict sense, each
one emphasizing one or another aspect of Marx’s unsystematic

There are three broad categories into which these attempted
reconstructions fall. First, some theories locate crisis in the
disproportionalities that arise in the course of capital accumulation.
These theories naturally center on the idea of the anarchy of cap-

italist production within the framework of the two-department
analysis of reproduction in Marx’s work. Second, an influential
group of theories stresses underconsumption, or inadequate aggre­
gate demand, as the source of capitalist crisis. The general idea is
that the distributional inequities of capitalist relations of produc­
tion are inconsistent with system-wide requirements for the growth
of demand and the realization of the product. Finally, some the­
ories approach the problem through the ideas associated with the
law of the tendency for the rate of profit to fall with accumulation. In
these theories the falling rate of profit has to be converted into a
generalized crisis of realization.

[…section omitted on Marx’s Critique of Say’s Law…]

Theories of Disproportionality

Marx’s analysis of simple and expanded reproduction points up
the necessity for a capitalist economy to allocate capital correctly
between the two departments of production. But at the same time
Marx argues that capitalist production is characterized by anarchy
in precisely the area concerned here, that is, the allocation of social
capital. In principle capital is allocated entirely by the decentral­
ized decisions of capitalists. If these decentralized decisions result
in too much capital being allocated in one department, the bal­
ancing conditions for smooth reproduction will be violated. The
overexpanded department will find difficulty in selling its whole
output, and its rate of profit will fall relative to the underexpanded
market. Could the crisis be the method the system uses to resolve
these contradictions?

This story is, of course, the basic theme of the classical econo­-
mists, especially Smith, in praise of the market system. Imbal­
ances of allocation are supposed to be corrected by the
decentralized mechanisms of capital allocation. That is, as profit
rates rise in one department relative to the other, capitalists will
move their capital away from the overexpanded department and
toward the underinvested one in their search for a higher rate of
profit. As a result, the classical argument goes, the imbalance will
tend to be corrected by precisely the anarchic forces that gave rise
to it in the first place.

At this point the Marxist argument takes a different turn. The
Marxist theorist of disproportionality argues that the contraction
of the overexpanded department is not matched by an expansion
of the underinvested department; hence aggregate demand falls
during the adjustment process and a crisis of realization occurs in
both departments. In this version of the theory excessive invest­
ment in one department sets in motion a sequence of events that
leads to a fall in aggregate demand and thus triggers off a general
crisis in the process of reallocating capital from the overexpanded
to the underinvested department.

As discussed in the preceding section, a fall in aggregate de-

mand must involve a change in the rate of turnover of money
capital in one or both departments. Another aspect of proportion­
ality in the theory of crisis is the question of distribution of capital
among its various forms-money capital, productive capital, and
commercial capital. Smooth reproduction of the capitalist system
requires the correct allocation of capital both between the two
departments and among the forms of aggregate capital. If capital­
ists slow down the rate of turnover of money capital by refusing to
spend it on capital outlays at the normal rate, they reduce work­
ers’ incomes and their own demand for means of production and
thus reduce aggregate demand. As a result, inventories of finished
commodities grow as well; or, to put it another way, the rate of
turnover of commercial capital also falls. In this situation both
holdings of money and inventories of finished commodities are
disproportionately large in relation to productive capital. Marx
describes this situation in these terms (1963, p. 494): “Surplus
value amassed in the form of money (gold or notes) could only be
transformed into capital at a loss. It therefore lies idle as a hoard in
the banks or in the form of credit money, which in essence makes
no difference at all.”

In this version of the disproportionality theory, the initial dis­-
turbance – the disproportion between the social capital allocated
to Departments I and II – is transformed into a disturbance in the
relations of the various forms of capital throughout the system.
The symptoms of capitalist crisis then appear-the emergence of
unsold inventories, cutbacks in production and employment, and
a cumulative fall in aggregate demand.

[…section omitted on Underconsumption Theories of Crisis…]

Falling Rate of Profit Theories of Crisis

Marx’s views emphasize the technically progressive character of
capitalist production. As we noted in Chapters 4 and 8, this theme
emerges first in his discussion of relative surplus value, where
technical progress permits a fall in the value of labor-power de­
spite possible increases in workers’ real consumption, and second
in his discussion of the tendency for the rate of profit to fall with
capitalist development because the increase in the rate of surplus
value from relative surplus value creation is offset by increases in
the ratio of constant to variable capital. It is tempting to try to
ground the theory of crisis in this grand theme of Marx’s work, to
use the falling rate of profit as an explanation of capitalist crisis. In
this perspective crisis is linked decisively with the most funda­
mental and the historically most progressive aspects of capitalist
production-its technical progressiveness and its ability to mobi­-
lize enormous productive forces.

At first glance this path seems extremely promising. We have
seen that capitalist crisis involves a slowing of capitalist spending.
It seems quite plausible that a fall in the average rate of profit
could produce exactly such a fall in capital outlays. But a closer
analysis reveals some deep questions about this argument. Notice
that, on the basis of the circuit of capital analysis, continued ac­
cumulation is possible at any positive rate of profit, no matter how
small it may be in absolute terms. A lower rate of profit certainly
implies a lower growth rate for the system of capitals as a whole,
given the rate of turnover of productive capital, money capital,
and commercial capital and the proportion of surplus value that is
reinvested in capitalist production. But a lower absolute rate of
growth of the capitalist system does not carry with it any obvious
problems for the internal consistency of that system. If the rate of
profit were indeed falling consistently, why would the capitalist
system not adapt to this fall through a gradual reduction in the
rate of accumulation? Such a gradual reduction might not be wel­
come to capitalists, but it is not obvious that it must lead to the
characteristic phenomena of capitalist crisis that we examined ear­
lier. In other words, this explanation for capitalist crisis has to
produce some systematic reason why a fall in the rate of profit
leads at certain moments to sharp and discontinuous adjustments
in economic activity.

But if we grant that such a mechanism (though Marx does not
suggest one explicitly) exists in capitalist economies, perhaps
involving the credit system and finance, then we also face the
problem of specifying which factors produce the fall in the rate of profit
and thus are the ultimate causes of the crisis. Here two schools of
thought contend. Some scholars, following Ricardo’s thinking
about the profit rate, emphasize the idea that rising real wages
reduce the rate of surplus value and in this way lower the rate of
profit. For example, some twentieth-century analysts emphasize
the tendency for profit margins to fall near the peak of a boom and
for money wages to rise more rapidly than money prices when
employment becomes very high. In this view, the boom phase of
the business cycle comes to an end because accumulation exhausts
the reserve army of labor and as a result competition for jobs
becomes much less severe; hence wages rise. The result is a profit
squeeze, in which the rate of surplus value falls and the profit rate
declines. The crisis creates mass unemployment and thus
replenishes the reserve army of labor. Competition for jobs increases and
wage increases moderate as a result. After some time these
processes restore the level of rates of surplus value and profitability
and permit accumulation to resume. As we noted earlier, Marx
argued that crises were usually preceded by periods of high and
rising wages. But in another discussion in Capital (1867, p. 620) he
argues that it is a mistake to see rising wages as the cause of crises:
“To put it mathematically: the rate of accumulation is the
independent, not the dependent, variable; the rate of wages, the
dependent, not the independent, variable.”

In contrast, other writers, while not disputing the empirical
importance of the exhaustion of the reserve army of labor at the peak
of some booms, emphasize the more classically Marxian idea that
the accumulation process itself changes technology and tends to
increase the value of constant capital more rapidly than it increases
the value of variable capital. In this approach accumulation is seen
as gradually altering the technological base of production by
increasing the capital investment required to produce. Marx
describes this process in these terms in Capital (1894, pp. 250-251):
“A drop in the rate of profit is attended by a rise in the minimum
capital required by an individual capitalist for the productive
employment of labour; required both for its exploitation generally,
and for making the consumed labour-time suffice as the labour-
time necessary for the production of the commodities, so that it
does not exceed the average social labour-time required,” At some
point this cumulative change becomes inconsistent with the profit
plans capitalists have made in undertaking investments, and the
result is a crisis. The crisis in this view is purgative because it
involves the destruction of old capital, an event that raises the
average productivity of labor and permits accumulation to resume,
albeit at a lower average rate of profit.

David Laibman

todo fix with LaTeX

Falling Rate of Profit

Declines in the rate of return on capital are cen-­
tral to Marxian theories of the business cycle
and of long-term trends in the capitalist
economy. While similar concepts can be found
outside the Marxian tradition, this article fo­-
cuses on views developed within the Marxian
and Marxian-influenced literature.
To sort out these views, we use a canoni­-
cal equation of the sort developed by Weisskopf
(1979). Define:
x =
Z 55
K 55
D 55
private-sector realized inside rate
of profit
private-sector realized inside profit
private-sector inside capital stock
private-sector outside capital stock
private-sector realized total (inside
plus outside) profit
private-sector realized total output
(net of raw materials consumption
and depreciation)
gross (including public-sector)
realized total output
full-capacity gross total output
total private-sector capital stock
outside/inside capital ratio,
KJK t (1 + D = U K }
The terms “inside” and “outside” corre­
spond roughly to Marx’s distinction between
entrepreneurial (industrial) capital and interest-
bearing capital. Realized output and profits are
goods produced and sold; the unrealized por­
tion is unproduced, and represents the gap be­
tween actual production, X, and capacity, Z.
We now define the strategic behavioral
variable r :
In the second line of equation (1), r. is de­
composed into six items, which are arranged in
two groups: the first predominantly cyclical, the
second secular (i.e., shaping the underlying
trend). The cyclical group contains an inside-to-
total profits ratio, P-/P, which is thought to
move cyclically, and in particular to fall rapidly
at the peak of a boom when money is tight and
interest rates rise (Itoh 1978); and an output-
to-capacity ratio, X/Z, reflecting the effective-
demand constraint. This latter ratio may con­
tribute independently to profit-rate cycles via
swings in investment demand caused by chang­
ing expectations over the cycle; these may of
course be pro- or countercyclical, depending on
how they are specified.

However, the primary role in Marxian
cycle theory goes to the profit share, P/Y. The
classic argument is in Marx ([1867-94] 1967,
vol. 3). See also Sweezy (1942). A particularly
fruitful modern formulation using simultaneous
nonlinear differential equations has been pro­
vided by Goodwin ([1967] 1983). In this appli­
cation to economics of the Volterra-Lotka,
predator-prey paradigm, tight labor markets
force wages to rise. This encroachment on prof­
its reduces the profit and growth rates, causing
the employment rate (the ratio of employed
workers to the total labor force) to turn down.
This, in turn, produces a peak and fall in the
wage (which thus, like the fox preying on the
rabbit, gobbles up its prey and induces its own
decline). Falling wages restore profits and
= Il = ElLL2L^A.
T { ~ K’~ P Y X Z K K j
r, = I
p ,^ I
*,■= I
«,s I
P = I
y = i
igrowth, and employment subsequently hits
bottom and begins to rise, returning the cycle
to its starting point. The falling rate of profit,
then, is what limits periodic wage increases; ris­
ing wages, in turn, follow profit booms and
prevent them from exceeding the bounds of
systemic reproduction. The cycle therefore re­
flects the shifting balance of class forces be­
tween capitalists and workers.

The Goodwin cycle is a smooth, closed
limit cycle; once started, it persists. Its explana­
tory power therefore exceeds that of cycles
based on multiplier-accelerator interactions
which, barring unbelievable accident, either
disappear or explode over time. The Marxian
cycle, however, is not smooth; periodic crises
followed by rapid decline are essential mo­
ments, and a falling rate of profit is invoked to
explain their onset. One classical argument
holds that the existing profit rate is regarded as
customary, with a threshold of perception of
variations around that rate. When r falls out­
side that threshold, a liquidation crisis ensues,
in which capitalists seek to protect their assets
by rushing into liquidity, triggering a collapse
of demand and reinforcing the original panic.
This story, while evocative, is vague and hard
to formalize.

A similar approach refers to the problem
of effective demand. If the profit share is rising
in a boom, the supply of consumer goods will
progressively outrun the demand. When this
gap crosses a threshold of perception, the mar­
ket for investment goods will collapse as well.
While investment could conceivably fill the gap
between consumption demand and production,
in this conjuncture it cannot do so, and a sud­
den and general collapse ensues. This argument,
however, rests on a rising profit share, and thus
seems incompatible with the “profit-squeeze”
conception of the boom found in the Goodwin
cycle approach. A possible reconciliation (Laib-
man 1992, chap. 10) sees the profit rate and
share falling as employment rises; even though
the wage share is rising, the growth rate of de­
mand falls suddenly when the employment rate
stabilizes at its cyclical peak, and this causes a
collapse in the investment rate and an ensuing
crisis initiating the depression phase. Finally, the
financial sector [represented by the term P/P in
equation (1)] is subject to sudden swings in
mood and catastrophes induced by bankrupt­
cies and breaks in the chains to credit relations,
and is therefore another potential source of cri­
sis (Itoh 1978).
The predator-prey cycle incorporates these
and other complexities, and explains the persis­
tence of cycles, as noted. But does it adequately
explain their necessity; or their amplitude and
evolution over time? Marx’s industrial reserve
army of unemployed is, in fact, a dynamic con­
cept (Marx [1867-94] 1967, vol. 1; Boddy and
Crotty 1974). If the unemployment rate were
constant over time—the economy happened to
be at the stable point of the Goodwin cycle—
the working class would learn to cope with the
known burden of the threat of joblessness. For
the threat to be real, employed workers must
periodically experience rising rates of unem­
ployment, and the reserve army must therefore
ebb and flow. A similar point holds for the rate
of profit. If it is constant, its expectation be­
comes less and less uncertain over time, under­
mining the rationale for differing inside and
outside rates of return. To keep ri from eventual
precipitous collapse, cyclicality is necessary. All
this suggests that the amplitude of the cycle is
more than mere historical accident. Marx ex­
pected cyclical crises of increasing intensity as
capitalism’s inner contradictions became more
severe. This raises the issue of the long-term
trend of the profit rate.
In canonical equation (1), the second set of
terms relates directly to this issue. The rise of
government spending and production (the pub­
lic sector) is represented by the term Y/X; a
massive literature (e.g., Foster 1986) points to
an inexorable rise in state activity and corre­
sponding decline in Y/X, a proximate cause of
a falling r.. Recent experience in the United
States suggests a rising trend in the outside-to-
inside (or debt-equity) ratio, D, which may
counteract the falling-r tendency. Attention,
however, has mainly been focused on the last
term, Z/X, representing Marx’s organic compo­
sition of capital, the expression of the capital-
intensity of output and thus in some sense of the
level of the production forces.
Marx’s law of the rising organic composi­
tion of capital corresponds in our notation to
a law of falling Z/K, clearly a factor depressing
r over time. Since Z/K = (Z/L)/(K/L) (where L
represents current labor input), the postulated
law requires the degree of mechanization, K/L,
to rise more rapidly than labor productivity, Z/
L. Marx ([1867-94] 1967, lichaps. 24-25)
asserted (but notoriously failed to demonstrate)
that this would be the case (Sweezy 1942,
Robinson 1942). Subsequent Marxian work
has either avoided the issue altogether, rejected

the theory and built on other aspects of Marx’s
thought, defended the orthodox view by repro­-
ducing its assumptions while failing to address
the problems raised in the critical literature
(Weeks 1981), or proposed novel formulations
to surmount the objections. Along with the
problem of indeterminacy of the trend in Z/K,
the most salient point has been that capitalists
would avoid any technical change that reduced
the profit rate, making it necessary for falling-
r theory to come to terms with “micro-rational”
behavior (Okishio 1961).

Novel formulations are too numerous to
summarize here. Three categories stand out,
however: theories that assume rising unpro­
ductive expenditures or waste; those that rest
on diminishing returns to non-renewable re­
sources; and one that posits that, in the com­
petitive struggle for survival, capitalists will
sacrifice their profit rate for a higher profit
margin (the amount or mass of profit). (The
latter theory rescues the falling rate of profit by
depriving it of relevance.)

Is a rigorous formulation of a falling-/*
theory possible? Given atomistically competi­
tive firms, acting independently for momentary
advantage, technical changes would be chosen
to maximize the momentary (innovator’s) rate
of profit. These changes are constrained by a
function relating obtainable increases in pro­
ductivity to the associated increases in the capi-
tal-to-labor ratios. It can be shown (Laibman
1992) that reasonable conditions may obtain in
which optimally chosen technical change results
in increasing capital intensity (falling Z/K), af­-
ter the innovator’s advantage is lost and the new
technique generalized. This, in turn, and with
the other elements in equation (1) unchanged,
entails either a falling r. or a rising profit share,
P/Y, either of which may lead to structural cri­-
sis. While far from an iron-clad law of falling
r; this approach preserves the falling Z/K-fall­
ing r path as a potentially important component
in the analysis of capitalist growth. (The other
trend factors—D, Y/X, and possibly some as­
pects of X/Z as well—deserve further study.)
What unifies the diverse Marxian literature
is an emphasis on the rate of profit as the cen­-
tral strategic-behavioral variable: the ever­
present target of capitalist accumulation, the
barometer of the capitalist economy’s health
and capacity for reproduction, and the trigger
of periodic cyclical crises. The Marxian view of
the cycle as inherently critical has been a fruit­
ful source of theoretical insight and empirical
research. The trend analysis, in turn, may illu­
minate structural transformations, provided
all of the determinants of r and r- trends are
brought into the analytical picture.

David Laibman

See also Ba u e r , O t t o ; B u s in e s s C y c l e s;
D is p r o p o r t io n a l it y T h e o r y ; Fa l l in g
R a t e o f P r o f it , E m p ir ic a l T e s t s; M a r x ,
K a r l H e in r ic h ; P r o f it Sq u e e z e
Boddy, R. and J. Crotty. 1974. “Class Con­
flict, Keynesian Policies, and the Business
Cycle.” Monthly Review 26:1-17.
Foster, J. B. 1986. The Theory of Monopoly
Capitalism. New York: Monthly Review
Goodwin, R. M. [1967] 1983. “A Growth
Cycle.” Chap. 14 in Essays in Economic
Dynamics. London: Macmillan.
Itoh, M. 1978. “The Formation of Marx’s
Theory of Crisis.” Science and Society
Laibman, D. 1992. Technical Change, Profit
and Growth: Explorations in Marxist
Economic Theory. Armonk, N.Y.: M. E.
Marx, K. [1867-94] 1967. Capital. 3 vols.
New York: International Publishers.
Okishio, N. 1961. “Technical Change and
the Rate of Profit.” Kobe University
Economic Review 7:86-99.
Robinson, J. 1942. An Essay on Marxian
Economics. New York: St. Martin’s
Sweezy, P. M. 1942. The Theory of Capitalist
Development. New York: Monthly Re­
view Press.
Weeks, J. 1981. Capital and Exploitation.
Princeton: Princeton Univ. Press.
Weisskopf, T. E. 1979. “Marxian Crisis
Theory and the Rate of Profit in the Post­
war U.S. Economy.” Cambridge Journal
of Economics 3:341-78.


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