                 C.7 What causes the capitalist business cycle?

   The business cycle is the term used to describe the boom and slump
   nature of capitalism. Sometimes there is full employment, with
   workplaces producing more and more goods and services, the economy
   grows and along with it wages. However, as Proudhon argued, this happy
   situation does not last:

     "But industry, under the influence of property, does not proceed
     with such regularity. . . As soon as a demand begins to be felt, the
     factories fill up, and everybody goes to work. Then business is
     lively. . . Under the rule of property, the flowers of industry are
     woven into none but funeral wreaths. The labourer digs his own
     grave. . . [the capitalist] tries. . . to continue production by
     lessening expenses. Then comes the lowering of wages; the
     introduction of machinery; the employment of women and children . .
     . the decreased cost creates a larger market. . . [but] the
     productive power tends to more than ever outstrip consumption. . .
     To-day the factory is closed. Tomorrow the people starve in the
     streets. . . In consequence of the cessation of business and the
     extreme cheapness of merchandise. . . frightened creditors hasten to
     withdraw their funds [and] Production is suspended, and labour comes
     to a standstill." [What is Property, pp. 191-192]

   Why does this happen? For anarchists, as Proudhon noted, it's to do
   with the nature of capitalist production and the social relationships
   it creates ("the rule of property"). The key to understanding the
   business cycle is to understand that, to use Proudhon's words,
   "Property sells products to the labourer for more than it pays him for
   them; therefore it is impossible." [Op. Cit., p. 194] In other words,
   the need for the capitalist to make a profit from the workers they
   employ is the underlying cause of the business cycle. If the capitalist
   class cannot make enough surplus value (profit, interest, rent) then it
   will stop production, sack people, ruin lives and communities until
   such time as enough can once again be extracted from working class
   people. As Proudhon put it (using the term "interest" to cover all
   forms of surplus value):

     "The primary cause of commercial and industrial stagnations is,
     then, interest on capital, -- that interest which the ancients with
     one accord branded with the name of usury, whenever it was paid for
     the use of money, but which they did not dare to condemn in the
     forms of house-rent, farm-rent, or profit: as if the nature of the
     thing lent could ever warrant a charge for the lending; that is,
     robbery." [Op. Cit., p. 193]

   So what influences the level of surplus value? There are two main
   classes of pressure on surplus value production, what we will call the
   "subjective" and "objective" (we will use the term profits to cover
   surplus value from now on as this is less cumbersome and other forms of
   surplus value depend on the amount extracted from workers on the
   shopfloor). The "subjective" pressures are to do with the nature of the
   social relationships created by capitalism, the relations of domination
   and subjection which are the root of exploitation and the resistance to
   them. In other words the subjective pressures are the result of the
   fact that "property is despotism" (to use Proudhon's expression) and
   are a product of the class struggle. This will be discussed in
   [1]section C.7.1. The objective pressures are related to how capitalism
   works and fall into two processes. The first is the way in which
   markets do not provide enough information to producers avoid
   disproportionalities within the market. In other words, that the market
   regularly produces situations where there is too much produced for
   specific markets leading to slumps The second objective factor is
   related to the process by which "productive power tends more and more
   to outstrip consumption" (to use Proudhon's words), i.e.
   over-investment or over-accumulation. These are discussed in sections
   [2]C.7.2 and [3]C.7.3, respectively.

   Before continuing, we would like to stress here that all three factors
   operate together in a real economy and we have divided them purely to
   help explain the issues involved in each one. The class struggle,
   market "communication" creating disproportionalities and
   over-investment all interact. Due to the needs of the internal (class
   struggle) and external (inter-company) competition, capitalists have to
   invest in new means of production. As workers' power increases during a
   boom, capitalists innovate and invest in order to try and counter it.
   Similarly, to get market advantage (and so increased profits) over
   their competitors, a company invests in new machinery. While this helps
   increase profits for individual companies in the short term, it leads
   to collective over-investment and falling profits in the long term.
   Moreover, due to lack of effective communication within the market
   caused by the price mechanism firms rush to produce more goods and
   services in specific boom markets, so leading to over-production and
   the resulting gluts result in slumps. This process is accelerated by
   the incomplete information provided by the interest rate, which results
   in investment becoming concentrated in certain parts of the economy.
   Relative over-investment can occur, increasing and compounding any
   existing tendencies for over-production and so creating the possibility
   of crisis. In addition, the boom encourages new companies and foreign
   competitors to try and get market share, so decreasing the "degree of
   monopoly" in an industry, and so reducing the mark-up and profits of
   big business (which, in turn, can cause an increase in mergers and
   take-overs towards the end of the boom).

   Meanwhile, as unemployment falls workers' power, confidence and
   willingness to stand up for their rights increases, causing profit
   margins to be eroded at the point of production. This has the impact of
   reducing tendencies to over-invest as workers resist the introduction
   of new technology and techniques. The higher wages also maintain and
   even increase demand for the finished goods and services produced,
   allowing firms to realise the potential profits their workers have
   created. Rising wages, therefore, harms the potential for producing
   profits by increasing costs yet it increases the possibility for
   realising profits on the market as firms cannot make profits if there
   is no demand for their goods and their inventories of unsold goods pile
   up. In other words, wages are costs for any specific firm but the wages
   other companies pay are a key factor in the demand for what it
   produces. This contradictory effect of class struggle matches the
   contradictory effect of investment. Just as investment causes crisis
   because it is useful, the class struggle both hinders over-accumulation
   of capital and maintains aggregate demand (so postponing the crisis)
   while at the same time eroding capitalist power and so profit margins
   at the point of production (so accelerating it).

   And we should note that these factors work in reverse during a slump,
   creating the potential for a new boom. In terms of workers, rising
   unemployment empower the capitalists who take advantage of the weakened
   position of their employees to drive through wage cuts or increase
   productivity in order to improve the profitability of their companies
   (i.e. increase surplus value). Labour will, usually, accept the
   increased rate of exploitation this implies to remain in work. This
   results in wages falling and so, potentially, allows profit margins to
   rise. However, wage cuts result in falling demand for goods and
   services and so, overall, the net effect of cutting wages may be an
   overall drop in demand which would make the slump worse. There is a
   contradictory aspect to the objective pressures as well during a slump.
   The price mechanism hinders the spread of knowledge required for
   production and investment decisions to be made. While collectively it
   makes sense for firms to start producing and investing more, individual
   firms are isolated from each other. Their expectations are negative,
   they expect the slump to continue and so will be unwilling to start
   investing again. In the slump, many firms go out of business so
   reducing the amount of fixed capital in the economy and so
   over-investment is reduced. As overall investment falls, so the average
   rate of profit in the economy can increase. Yet falling investment
   means that firms in that sector of the economy will face stagnant
   demand and in the face of an uncertain future will be a drag on other
   sectors. In addition, as firms go under the "degree of monopoly" of
   each industry increases which increases the mark-up and profits of big
   business yet the overall market situation is such that their goods
   cannot be sold.

   Eventually, however, the slump will end (few anarchists accept the
   notion that capitalism will self-destruct due to internal economic
   processes). The increased surplus value production made possible by
   high unemployment is enough relative to the (reduced) fixed capital
   stock to increase the rate of profit. This encourages capitalists to
   start investing again and a boom begins (a boom which contains the
   seeds of its own end). How long this process takes cannot be predicted
   in advance (which is why Keynes stressed that in the long run we are
   all dead). It depends on objective circumstances, how excessive the
   preceding boom was, government policy and how willing working class
   people are to pay the costs for the capitalist crisis.

   Thus subjective and objective factors interact and counteract with each
   other, but in the end a crisis will result simply because the system is
   based upon wage labour and the producers are not producing for
   themselves. Ultimately, a crisis is caused because capitalism is
   production for profit and when the capitalist class does not
   (collectively) get a sufficient rate of profit for whatever reason then
   a slump is the result. If workers produced for themselves, this
   decisive factor would not be an issue as no capitalist class would
   exist. Until that happens the business cycle will continue, driven by
   "subjective" and "objective" pressures -- pressures that are related
   directly to the nature of capitalist production and the wage labour on
   which it is based. Which pressure will predominate in any given period
   will be dependent on the relative power of classes. One way to look at
   it is that slumps can be caused when working class people are "too
   strong" or "too weak." The former means that we are able to reduce the
   rate of exploitation, squeezing the profit rate by keeping an increased
   share of the surplus value we produce. The later means we are too weak
   to stop income distribution being shifted in favour of the capitalist
   class, which results in over-accumulation and rendering the economy
   prone to a failure in aggregate demand. The 1960s and 1970s are the
   classic example of what happens when "subjective" pressures predominate
   while the 1920s and 1930s show the "objective" ones at work.

   Finally, it must be stressed that this analysis does not imply that
   anarchists think that capitalism will self-destruct. In spite of crises
   being inevitable and occurring frequently, revolution is not.
   Capitalism will only be eliminated by working class revolution, when
   people see the need for social transformation and not imposed on people
   as the by-product of an economic collapse.

C.7.1 What role does class struggle play in the business cycle?

   At its most basic, the class struggle (the resistance to hierarchy in
   all its forms) is the main cause of the business cycle. As we argued in
   sections [4]B.1.2 and [5]C.2, capitalists in order to exploit a worker
   must first oppress them. But where there is oppression, there is
   resistance; where there is authority, there is the will to freedom.
   Hence capitalism is marked by a continuous struggle between worker and
   boss at the point of production as well as struggle outside of the
   workplace against other forms of hierarchy.

   This class struggle reflects a conflict between workers attempts at
   liberation and self-empowerment and capital's attempts to turn the
   individual worker into a small cog in a big machine. It reflects the
   attempts of the oppressed to try to live a fully human life, when the
   "worker claims his share in the riches he produces; he claims his share
   in the management of production; and he claims not only some additional
   well-being, but also his full rights in the higher enjoyment of science
   and art." [Peter Kropotkin, Anarchism, pp. 48-49] As Errico Malatesta
   argued:

     "If [workers] succeed in getting what they demand, they will be
     better off: they will earn more, work fewer hours and will have more
     time and energy to reflect on things that matter to them, and will
     immediately make greater demands and have greater needs . . .
     [T]here exists no natural law (law of wages) which determines what
     part of a worker's labour should go to him [or her] . . . Wages,
     hours and other conditions of employment are the result of the
     struggle between bosses and workers. The former try and give the
     workers as little as possible; the latter try, or should try to work
     as little, and earn as much, as possible. Where workers accept any
     conditions, or even being discontented, do not know how to put up
     effective resistance to the bosses demands, they are soon reduced to
     bestial conditions of life. Where, instead, they have ideas of how
     human beings should live and know how to join forces, and through
     refusal to work or the latent and open threat of rebellion, to win
     bosses respect, in such cases, they are treated in a relatively
     decent way . . . Through struggle, by resistance against the bosses,
     therefore, workers can, up to a certain point, prevent a worsening
     of their conditions as well as obtaining real improvement." [Errico
     Malatesta: His Life and Ideas, pp. 191-2]

   It is this struggle that determines wages and indirect income such as
   welfare, education grants and so forth. This struggle also influences
   the concentration of capital, as capital attempts to use technology to
   get an advantage against their competitors by driving down prices by
   increasing the productivity of labour (i.e., to extract the maximum
   surplus value possible from employees). And, as will be discussed in
   [6]section D.10, increased capital investment also reflects an attempt
   to increase the control of the worker by capital (or to replace them
   with machinery that cannot say "no") plus the transformation of the
   individual into "the mass worker" who can be fired and replaced with
   little or no hassle. For example, Proudhon quotes an "English
   Manufacturer" who states that he invested in machinery precisely to
   replace humans by machines because machines are easier to control:

     "The insubordination of our workforce has given us the idea of
     dispensing with them. We have made and stimulated every imaginable
     effort of the mind to replace the service of men by tools more
     docile, and we have achieved our object. Machinery has delivered
     capital from the oppression of labour." [quoted by Proudhon, System
     of Economical Contradictions, p. 189]

   (To which Proudhon replied "[w]hat a misfortunate that machinery cannot
   also deliver capital from the oppression of consumers!" The
   over-production and reductions in demand caused by machinery replacing
   people soon destroys these illusions of automatic production by a slump
   -- see [7]section C.7.3).

   Therefore, class struggle influences both wages and capital investment,
   and so the prices of commodities in the market. It also, more
   importantly, determines profit levels and it is the rise and fall of
   profit levels that are the ultimate cause of the business cycle. This
   is because, under capitalism, production's "only aim is to increase the
   profits of the capitalist. And we have, therefore, -- the continuous
   fluctuations of industry, the crisis coming periodically." [Kropotkin,
   Op. Cit., p. 55]

   A common capitalist myth, derived from neo-classical (and related)
   ideology, is that free-market capitalism will result in a continuous
   boom. Since the cause of slumps is allegedly state interference in the
   market (particularly in credit and money), eliminating such meddling
   will obviously bring reality into line with the textbooks and,
   consequently, eliminate such negative features of "actually existing"
   capitalism as the business cycle. Let us assume, for a moment, that
   this is the case (as will be discussed in [8]section C.8, this is not
   the case). In the "boom economy" of capitalist dreams there will be
   full employment yet while this helps "increase total demand, its fatal
   characteristic from the business view is that it keeps the reserve army
   of the unemployed low, thereby protecting wage levels and strengthening
   labour's bargaining power." [Edward S. Herman, Beyond Hypocrisy, p. 93]
   This leads to the undermining of full employment as profit margins are
   placed under pressure (which explains why bosses have lead the fight
   against government full employment policies).

   The process should be obvious enough. Full employment results in a
   situation where workers are in a very strong position, a strength which
   can undermine the system. This is because capitalism always proceeds
   along a tightrope. If a boom is to continue smoothly, real wages must
   develop within a certain band. If their growth is too low then
   capitalists will find it difficult to sell the products their workers
   have produced and so, because of this, face what is often called a
   "realisation crisis" (i.e. the fact that capitalists cannot make a
   profit if they cannot sell their products). If real wage growth is too
   high then the conditions for producing profits are undermined as labour
   gets more of the value it produces. This means that in periods of boom,
   when unemployment is falling, the conditions for realisation improve as
   demand for consumer goods increase, thus expanding markets and
   encouraging capitalists to invest. However, such an increase in
   investment (and so employment) has an adverse effect on the conditions
   for producing surplus value as labour can assert itself at the point of
   production, increase its resistance to the demands of management and,
   far more importantly, make its own.

   If an industry or country experiences high unemployment, workers will
   put up with longer hours, stagnating wages, worse conditions and new
   technology in order to remain in work. This allows capital to extract a
   higher level of profit from those workers, which in turn signals other
   capitalists to invest in that area. As investment increases,
   unemployment falls. As the pool of available labour runs dry, then
   wages will rise as employers bid for scare resources and workers feel
   their power. As workers are in a better position they can go from
   resisting capital's agenda to proposing their own (e.g. demands for
   higher wages, better working conditions and even for workers' control).
   As workers' power increases, the share of income going to capital
   falls, as do profit rates, and capital experiences a profits squeeze
   and so cuts down on investment and employment and/or wages. The cut in
   investment increases unemployment in the capital goods sector of the
   economy, which in turn reduces demand for consumption goods as jobless
   workers can no longer afford to buy as much as before. This process
   accelerates as bosses fire workers or cut their wages and the slump
   deepens and so unemployment increases, which begins the cycle again.
   This can be called "subjective" pressure on profit rates.

   This interplay of profits and wages can be seen in most business
   cycles. As an example, let us consider the crisis which ended post-war
   Keynesianism in the early 1970's and paved the way for the neo-liberal
   reforms of Thatcher and Reagan. This crisis, which started in 1973, had
   its roots in the 1960s boom and the profits squeeze it produced. If we
   look at the USA we find that it experienced continuous growth between
   1961 and 1969 (the longest in its history until then). From 1961
   onwards, unemployment steadily fell, effectively creating full
   employment. From 1963, the number of strikes and total working time
   lost steadily increased (the number of strikes doubled from 1963 to
   1970, with the number of wildcat strike rising from 22% of all strikes
   in 1960 to 36.5% in 1966). By 1965 both the business profit shares and
   business profit rates peaked. The fall in profit share and rate of
   profit continued until 1970 (when unemployment started to increase),
   where it rose slightly until the 1973 slump occurred. In addition,
   after 1965, inflation started to accelerate as capitalist firms tried
   to maintain their profit margins by passing cost increases to consumers
   (as we discuss [9]section C.8.2, inflation has far more to do with
   capitalist profits than it has with money supply or wages). This helped
   to reduce real wage gains and maintain profitability over the 1968 to
   1973 period above what it otherwise would have been, which helped
   postpone, but not stop, a slump.

   Looking at the wider picture, we find that for the advanced capital
   countries as a whole, the product wage rose steadily between 1962 and
   1971 while productivity fell. The growth of the product wage (the real
   cost to the employer of hiring workers) exceeded that of productivity
   growth in the late 1960s, slightly after the year in which profit share
   in national income and the rate of profit peaked. From then on,
   productivity continued to fall while the product wage continued to
   rise. This process, the result of falling unemployment and rising
   workers' power (expressed, in part, by an explosion in the number of
   strikes across Europe and elsewhere), helped to ensure that workers
   keep an increasing share of the value they produced. The actual
   post-tax real wages and productivity in the advanced capitalist
   countries increased at about the same rate from 1960 to 1968 but
   between 1968 and 1973 the former increased at a larger rate than the
   latter (hence the profits squeeze). Moreover, increased international
   competition meant that many domestic companies where limited in their
   responses to the profits squeeze as well as facing a global decrease in
   demand for their products. This resulted in profit shares and rates
   declining to around 80% of their previous peak levels across the
   advanced capitalist nations. [Philip Armstrong, Andrew Glyn and John
   Harrison, Capitalism Since 1945, pp. 178-80, pp. 182-4 and pp. 192-3]

   It must be stressed that social struggle was not limited to the
   workplace. In the 1960s a "series of strong liberation movements
   emerged among women, students and ethnic minorities. A crisis of social
   institutions was in progress, and large social groups were questioning
   the very foundations of the modern, hierarchical society: the
   patriarchal family, the authoritarian school and university, the
   hierarchical workplace or office, the bureaucratic trade union or
   party." [Takis Fotopoulos, "The Nation-state and the Market," pp.
   37-80, Society and Nature, Vol. 2, No. 2, p. 58] In stark contrast to
   the predictions of the right, state intervention within capitalism to
   maintain full employment and provide social services like health care
   had not resulted in a "Road to Serfdom." The opposite occurred, with
   previously marginalised sectors of the population resisting their
   oppression and exploitation by questioning authority in more and more
   areas of life -- including, it must be stressed, within our own
   organisations as well (for example, the rank and file of trade unions
   had to rebel just as much against their own officials as they had
   against the bureaucracy of the capitalist firm).

   These social struggles resulted in an economic crisis as capital could
   no longer oppress and exploit working class people sufficiently in
   order to maintain a suitable profit rate. This crisis was then used to
   discipline the working class and restore capitalist authority within
   and outside the workplace (see [10]section C.8.2). We should also note
   that this process of social revolt in spite, or perhaps because of, the
   increase of material wealth was predicted by Malatesta. In 1922 he
   argued that:

     "The fundamental error of the reformists is that of dreaming of
     solidarity, a sincere collaboration, between masters and servants,
     between proprietors and workers . . .

     "Those who envisage a society of well stuffed pigs which waddle
     contentedly under the ferule of a small number of swineherd; who do
     not take into account the need for freedom and the sentiment of
     human dignity . . . can also imagine and aspire to a technical
     organisation of production which assures abundance for all and at
     the same time materially advantageous both to bosses and the
     workers. But in reality 'social peace' based on abundance for all
     will remain a dream, so long as society is divided into antagonistic
     classes, that is employers and employees. And there will be neither
     peace nor abundance.

     "The antagonism is spiritual rather than material. There will never
     be a sincere understanding between bosses and workers for the better
     exploitation [sic!] of the forces of nature in the interests of
     mankind, because the bosses above all want to remain bosses and
     secure always more power at the expense of the workers, as well as
     by competition with other bosses, whereas the workers have had their
     fill of bosses and don't want more!"
     [Op. Cit., pp. 78-79]

   The experience of the post-war compromise and social democratic reform
   shows that, ultimately, the social question is not poverty but rather
   freedom. However, to return to the impact of class struggle on
   capitalism.

   It is the awareness that full employment is bad for business which is
   the basis of the so-called "Non-Accelerating Inflation Rate of
   Unemployment" (NAIRU). As we will discuss in more detail in [11]section
   C.9, the NAIRU is the rate of unemployment for an economy under which
   inflation, it is claimed, starts to accelerate. While the basis of this
   "theory" is slim (the NAIRU is an invisible, mobile rate and so the
   "theory" can explain every historical event simply because you can
   prove anything when your datum cannot be seen by mere mortals) it is
   very useful for justifying policies which aim at attacking working
   people, their organisations and their activities. The NAIRU is
   concerned with a "wage-price" spiral caused by falling unemployment and
   rising workers' rights and power. Of course, you never hear of an
   "interest-price" spiral or a "rent-price" spiral or a "profits-price"
   spiral even though these are also part of any price. It is always a
   "wage-price" spiral, simply because interest, rent and profits are
   income to capital and so, by definition, above reproach. By accepting
   the logic of NAIRU, the capitalist system implicitly acknowledges that
   it and full employment are incompatible and so with it any claim that
   it allocates resources efficiently or labour contracts benefit both
   parties equally.

   For these reasons, anarchists argue that a continual "boom" economy is
   an impossibility simply because capitalism is driven by profit
   considerations, which, combined with the subjective pressure on profits
   due to the class struggle between workers and capitalists, necessarily
   produces a continuous boom-and-bust cycle. When it boils down to it,
   this is unsurprising, as "industry is directed, and will have to be
   directed, not towards what is needed to satisfy the needs of all, but
   towards that which, at a given moment, brings in the greatest temporary
   profit to a few. Of necessity, the abundance of some will be based upon
   the poverty of others, and the straitened circumstances of the greater
   number will have to be maintained at all costs, that there may be hands
   to sell themselves for a part only of that which they are capable of
   producing, without which private accumulation of capital is
   impossible!" [Kropotkin, Op. Cit., p. 128]

   Of course, when such "subjective" pressures are felt on the system,
   when private accumulation of capital is threatened by improved
   circumstances for the many, the ruling class denounces working class
   "greed" and "selfishness." When this occurs we should remember what
   Adam Smith had to say on this subject:

     "In reality high profits tend much more to raise the price of work
     than high wages . . . That part of the price of the commodity that
     resolved itself into wages would . . . rise only in arithmetical
     proportion to the rise in wages. But if profits of all the different
     employers of those working people should be raised five per cent.,
     that price of the commodity which resolved itself into profit would
     . . . rise in geometrical proportion to this rise in profit . . .
     Our merchants and master manufacturers complain of the bad effects
     of high wages in raising the price and thereby lessening the sale of
     their goods at home and abroad. They say nothing concerning the bad
     effects of high profits. They are silent with regard to the
     pernicious effects of their own gains. They complain only of those
     of other people." [The Wealth of Nations, pp. 87-88]

   As an aside, we must note that these days we would have to add
   economists to Smith's "merchants and master manufacturers." Not that
   this is surprising, given that economic theory has progressed (or
   degenerated) from Smith's disinterested analysis into apologetics for
   any action of the boss (a classic example, we must add, of supply and
   demand, with the marketplace of ideas responding to a demand for such
   work from "our merchants and master manufacturers"). Any "theory" which
   blames capitalism's problems on "greedy" workers will always be
   favoured over one that correctly places them in the contradictions
   created by wage slavery. Ultimately, capitalist economics blame every
   problem of capitalism on the working class refusing to kow-tow to the
   bosses (for example, unemployment is caused by wages being too high
   rather than bosses needing unemployment to maintain their power and
   profits -- see [12]section C.9.2 on empirical evidence that indicates
   that the first explanation is wrong).

   Before concluding, one last point. While it may appear that our
   analysis of the "subjective" pressures on capitalism is similar to that
   of mainstream economics, this is not the case. This s because our
   analysis recognises that such pressures are inherent in the system,
   have contradictory effects (and so cannot be easily solved without
   making things worse before they get better) and hold the potential for
   creating a free society. Our analysis recognises that workers' power
   and resistance is bad for capitalism (as for any hierarchical system),
   but it also indicates that there is nothing capitalism can do about it
   without creating authoritarian regimes (such as Nazi Germany) or by
   generating massive amounts of unemployment (as was the case in the
   early 1980s in both the USA and the UK, when right-wing governments
   mismanaged the economy into deep recessions) and even this is no
   guarantee of eliminating working class struggle as can be seen, for
   example, from 1930s America.

   This means that our analysis shows the limitations and contradictions
   of the system as well as its need for workers to be in a weak
   bargaining position in order for it to "work" (which explodes the myth
   that capitalism is a free society). Moreover, rather than portray
   working people as victims of the system (as is the case in many Marxist
   analyses of capitalism) our analysis recognises that we, both
   individually and collectively, have the power to influence and change
   that system by our activity. We should be proud of the fact that
   working people refuse to negate themselves or submit their interests to
   that of others or play the role of order-takers required by the system.
   Such expressions of the human spirit, of the struggle of freedom
   against authority, should not be ignored or down-played, rather they
   should be celebrated. That the struggle against authority causes the
   system so much trouble is not an argument against social struggle, it
   is an argument against a system based on hierarchy, oppression,
   exploitation and the denial of freedom.

   To sum up, in many ways, social struggle is the inner dynamic of the
   system, and its most basic contradiction: while capitalism tries to
   turn the majority of people into commodities (namely, bearers of labour
   power), it also has to deal with the human responses to this process of
   objectification (namely, the class struggle). However, it does not
   follow that cutting wages will solve a crisis -- far from it, for, as
   we argue in [13]section C.9.1, cutting wages will deepen any crisis,
   making things worse before they get better. Nor does it follow that, if
   social struggle were eliminated, capitalism would work fine. After all,
   if we assume that labour power is a commodity like any other, its price
   will rise as demand increases relative to supply (which will either
   produce inflation or a profits squeeze, probably both). Therefore, even
   without the social struggle which accompanies the fact that labour
   power cannot be separated from the individuals who sell it, capitalism
   would still be faced with the fact that only surplus labour
   (unemployment) ensures the creation of adequate amounts of surplus
   value.

   Moreover, even assuming that individuals can be totally happy in a
   capitalist economy, willing to sell their freedom and creativity for a
   little more money, putting up, unquestioningly, with every demand and
   whim of their bosses (and so negating their own personality and
   individuality in the process), capitalism does have "objective"
   pressures limiting its development. So while social struggle, as argued
   above, can have a decisive effect on the health of the capitalist
   economy, it is not the only problem the system faces. This is because
   there are objective pressures within the system beyond and above the
   authoritarian social relations it produces and the resistance to them.
   These pressures are discussed next, in sections [14]C.7.2 and
   [15]C.7.3.

C.7.2 What role does the market play in the business cycle?

   A major problem with capitalism is the working of the capitalist market
   itself. For the supporters of "free market" capitalism, the market
   provides all the necessary information required to make investment and
   production decisions. This means that a rise or fall in the price of a
   commodity acts as a signal to everyone in the market, who then respond
   to that signal. These responses will be co-ordinated by the market,
   resulting in a healthy economy.

   This perspective is expressed well by right-liberal, Frederick von
   Hayek in his "The Uses of Knowledge in Society" (reprinted in
   Individualism and Economic Order). Using the example of the tin market,
   he defends capitalism against central planning on its ability to handle
   the division of knowledge within society and its dynamic use of this
   dispersed knowledge when demand or supply changes. "Assume," he argues,
   "that somewhere in the world a new opportunity for the use of some raw
   material, say tin, has arisen, or that one of the sources of supply of
   tin has been eliminated. It does not matter for our purpose and it is
   very significant that it does not matter which of these two causes has
   made tin more scarce. All that the users of tin need to know is that
   some of the tin they used to consume is now more profitably employed
   elsewhere, and that in consequence they must economise tin. There is no
   need for the great majority of them even to know where the more urgent
   need has arisen, or in favour of what other uses they ought to husband
   the supply." The subsequent rise in its price will result in reduced
   consumption as many users will economise on its use and so the
   information that tin has become (relatively) scarcer spreads throughout
   the economy and influences not only tin users, but also its substitutes
   and the substitutes of these substitutes and so on. This will move the
   economy towards equilibrium without the people informed knowing
   anything about the original causes for these changes. "The whole acts
   as one market, not because any of its members survey the whole field,
   but because their limited individual fields of vision sufficiently
   overlap so that through many intermediaries the relevant information is
   communicated to all." ("The use of knowledge in society," pp. 519-30,
   American Economic Review, Vol. 35, No. 4, , p. 526)

   While it can be granted that this account of the market is not without
   foundation, it is also clear that the price mechanism does not
   communicate all the relevant information needed by companies or
   individuals. This means that capitalism does not work in the way
   suggested in the economic textbooks. It is the workings of the price
   mechanism itself which leads to booms and slumps in economic activity
   and the resulting human and social costs they entail. This can be seen
   if we investigate the actual processes hidden behind the workings of
   the price mechanism.

   The key problem with Hayek's account is that he does not discuss the
   collective results of the individual decisions he highlights. It is
   true that faced with a rise in the price of tin, individual firms will
   cut back on its use. Yet there is no reason to suppose that the net
   result of these actions will bring the demand and supply of tin back to
   equilibrium. In fact, it is just as likely that the reduction in demand
   for tin is such that its producers face falling sales and so cut back
   production even more. Similarly, a rising demand for tin could easily
   result in all tin producers increasing supply so much as to produce a
   glut on the market. Proudhon described this process well in the 1840s:

     "A peasant who has harvested twenty sacks of wheat, which he with
     his family proposes to consume, deems himself twice as rich as if he
     had harvested only ten; likewise a housewife who has spun fifty
     yards of linen believes that she is twice as rich as if she had spun
     but twenty-five. Relatively to the household, both are right; looked
     at in their external relations, they may be utterly mistaken. If the
     crop of wheat is double throughout the whole country, twenty sacks
     will sell for less than ten would have sold for if it had been but
     half as great; so, under similar circumstances, fifty yards of linen
     will be worth less than twenty-five: so that value decreases as the
     production of utility increases, and a producer may arrive at
     poverty by continually enriching himself." [The System of Economical
     Contradictions, pp. 77-78]

   He argued that this occurred due to the "contradiction" of "the double
   character of value" (i.e. between value in use and value in exchange).
   [Op. Cit., p. 78]

   As John O'Neill argues (basing himself on Marx rather than Proudhon),
   when producers "make plans concerning future production, they are
   planning not with respect of demand at the present moment . . . but
   with respect to expected demand at some future moment . . . when their
   products reach the market." The price mechanism provides information
   that indicates the relationship between supply and demand now and while
   this information is relevant to producers plans, it is not all the
   information that is relevant or is required by those involved. It
   cannot provide information which will allow producers to predict demand
   later. "A major component of the information required for such a
   prediction is that of the plans of other producers which respond to
   that demand. This is information that the market, as a competitive
   system, fails to distribute." It is this "informational restriction"
   which is one of the sources of why there is a business cycle. This is
   because each producer "responds to the same signal the change in price.
   However, each agent acts independently of the response of other
   producers and consumers." The result is "an overproduction of goods in
   relation to effective demand for them. Goods cannot be sold. There is a
   realisation crisis: producers cannot realise the value of their
   products. Given this overproduction, demand falls against supply. There
   is a slump. This eventually leads to a rise in demand against supply,
   production expends leading to another boom, and so on." [The Market,
   pp. 134-5]

   This information cannot be supplied due to competition. Simply put, if
   A and B are in competition, if A informs B of her activities and B does
   not reciprocate, then B is in a position to compete more effectively
   than A. Hence communication within the market is discouraged and each
   production unit is isolated from the rest. In other words, each person
   or company responds to the same signal (the change in price) but each
   acts independently of the response of other producers and consumers.
   The result is often a slump in the market, causing unemployment and
   economic disruption. Thus the market "blocks the communication of
   information and fails to co-ordinate plans for economic action." [Op.
   Cit., p. 137]

   This, it should be noted, is not a problem of people making a series of
   unrelated mistakes. "Rather, it is that the market imparts the same
   information to affected agents, and this information is such that the
   rational strategy for all agents is to expand production or contract
   consumption, while it is not rational for all agents to act in this
   manner collectively." In other words, the information the market
   provides is not sufficient for rational decision making and naturally
   results in disproportionalities in the market. Thus the price mechanism
   actively encourages "the suppression of the mutual exchange of
   information concerning planned responses" to current prices and this
   "leads to over production." So it is not a question of inaccurate
   prediction (although given that the future is unknowable and
   unpredictable this is a factor). Instead, it is "one of individually
   rational responses to the same signal resulting in collectively
   irrational responses." [Op. Cit., p. 135 and p. 197]

   This means that prices in themselves do not provide adequate knowledge
   for rational decision making as they are not at their long-run
   equilibrium levels. This causes a problem for Hayek's account of the
   market process as he stresses that actual prices never are at this
   (purely theoretical) price. As we discuss in [16]section C.8, Hayek's
   own theory of the business cycle shows the negative impact which the
   'misinformation' conveyed by disequilibrium prices can cause on the
   economy. In that analysis, the disequilibrium price that leads to very
   substantial macroeconomic distortions is the rate of interest but,
   obviously, the same argument applies for commodity prices as well. This
   means that the market process, based on the reactions of
   profit-maximising firms to the same (unsustainable) prices for a
   commodity can generating mal-investment and subsequent market
   distributions on a wide level. Simply put, the price mechanism may
   carry information regarding the terms on which various commodities may
   currently be exchanged but it does not follow that a knowledge of these
   exchange ratios enable agents to calculate the future profitability of
   their production decisions (social usefulness is, of course, of no
   concern).

   It is this irrationality and lack of information which feed into the
   business cycle. "These local booms and slumps in production . . . are
   then amplified into general crises precisely through the
   interconnections in the market that Hayek highlights in his example of
   the production and consumption of tin." [O'Neill, Op. Cit., p. 136] The
   negative effects of over-production in one market will be passed on to
   those which supply it with goods in the shape of decreased demand.
   These firms will now experience relative over-production which, in
   turn, will affect their suppliers. Whatever benefits may accrue to
   consumers of these goods in the shape of lower prices will be reduced
   as demand for their products drops as more and more workers are made
   unemployed or their wages are cut (which means that real wages remain
   constant as prices are falling alongside money wages -- see [17]section
   C.9.1 for details). Firms will also seek to hoard money, leading to yet
   more falling demand for goods and so unemployed labour is joined by
   under-utilisation of capacity.

   Which brings us to the issue of money and its role in the business
   cycle. "Free market" capitalist economics is based on Say's Law. This
   is the notion that supply creates its own demand and so general gluts
   of goods and mass unemployment are impossible. As we noted in
   [18]section C.1.5, this vision of economic activity is only suited to
   precapitalist economies or ones without money for money is considered
   as nothing more than an aid to barter, a medium of exchange only. It
   ignores the fact that money is a store of value and, as such, can be
   held onto precisely for that reason. This means that Say's Law is
   invalid as its unity between sale and purchase can be disturbed so
   causing the chain of contractual relationships to be broken. Simply
   put, someone who sells a product need not spend their income on another
   product at the same time. Unlike barter, the sale of one commodity is
   an act distinct from the purchase of another. Money, in other words,
   "brings in time" into the market process and "the possibility of
   hoarding." Time "because a good is usually sold some time after it is
   made, running the risk that its sale price could fall below the cost of
   production, wiping out the capitalist's expected profit." Hoarding
   "because income need not be spent but may merely be kept idle." [Doug
   Henwood, Wall Street, p. 232]

   This means that over-production becomes possible and bankruptcies and
   unemployment can become widespread and so a slump can start. "As any
   Marxian or Keynesian crisis theorist can tell you," Henwood summarises,
   "the separation of purchase and sale is one of the great flashpoints of
   capitalism; an expected sale that goes unmade can drive a capitalist
   under, and can unravel a chain of financial commitments. Multiply that
   by a thousand or two and you have great potential mischief." Thus "the
   presence of money as a store of value, the possibility of keeping
   wealth in financial form rather than spending it promptly on
   commodities, always introduces the possibility of crisis." That is, the
   possibility "of an excess of capital lacking a profitable investment
   outlet, and an excess of goods that couldn't be sold profitably on the
   open market." [Op. Cit., pp. 93-4 and p. 94]

   So when the market prices of goods fall far below their cost prices
   then production and investment stagnate. This is because profits can
   only be transformed into capital at a loss and so it lies idle in
   banks. Thus unemployed labour is associated with unemployed capital,
   i.e. excess money. This desire for capitalists to increase their demand
   for storing their wealth in money rather than investing it is driven by
   the rate of profit in the economy. Bad times result in increased
   hoarding and so a general fall in aggregate demand. Lowering interest
   rates will not provoke a demand for such money hoards, as claimed in
   "free market" capitalist theory, as few capitalists will seek to invest
   in a recession as expected profits will be lower than the interest
   rate.

   However, it should be stressed that disproportionalities of production
   between industries and the separation of production and sale do not per
   se result in a general crisis. If that were the case the capitalism
   would be in a constant state of crisis as markets are rarely in a state
   of equilibrium and sales do not instantly result in purchases. This
   means that market dislocations need not automatically produce a general
   crisis in the economy as the problems associated with localised slumps
   can be handled when the overall conditions within an economy are good.
   It simply provides the potential for crisis and a means of transmitting
   and generalising local slumps when the overall economic situation is
   weak. In other words, it is an accumulative process in which small
   changes can build up on each other until the pressures they exert
   become unstoppable. The key thing to remember is that capitalism is an
   inherently dynamic system which consists of different aspects which
   develop unevenly (i.e., disproportionately). Production, credit,
   finance markets, circulation of money and goods, investment, wages,
   profits as well as specific markets get out of step. An economic crisis
   occurs when this process gets too far out of line.

   This process also applies to investment as well. So far, we have
   assumed that firms adjust to price changes without seeking new
   investment. This is, of course, unlikely to always be the case. As we
   discuss in [19]section C.8, this analysis of the market providing
   incomplete information also applies to the market for credit and other
   forms of external financing. This results in a situation where the
   problems associated with over-production can be amplified by
   over-investment. This means that the problems associated with markets
   creating disproportionalities are combined with the problems resulting
   from increased productivity and capital investment which are discussed
   in the [20]next section.

C.7.3 What role does investment play in the business cycle?

   Other problems for capitalism arise due to the increases in
   productivity which occur as a result of capital investment or new
   working practices which aim to increase short term profits for the
   company. The need to maximise profits results in more and more
   investment in order to improve the productivity of the workforce (i.e.
   to increase the amount of surplus value produced). A rise in
   productivity, however, means that whatever profit is produced is spread
   over an increasing number of commodities. This profit still needs to be
   realised on the market but this may prove difficult as capitalists
   produce not for existing markets but for expected ones. As individual
   firms cannot predict what their competitors will do, it is rational for
   them to try to maximise their market share by increasing production (by
   increasing investment). As the market does not provide the necessary
   information to co-ordinate their actions, this leads to supply
   exceeding demand and difficulties realising sufficient profits. In
   other words, a period of over-production occurs due to the
   over-accumulation of capital.

   Due to the increased investment in the means of production, variable
   capital (labour) uses a larger and larger constant capital (the means
   of production). As labour is the source of surplus value, this means
   that in the short term profits may be increased by the new investment,
   i.e. workers must produce more, in relative terms, than before so
   reducing a firms production costs for the commodities or services it
   produces. This allows increased profits to be realised at the current
   market price (which reflects the old costs of production). Exploitation
   of labour must increase in order for the return on total (i.e. constant
   and variable) capital to increase or, at worse, remain constant.
   However, while this is rational for one company, it is not rational
   when all firms do it (which they must in order to remain in business).
   As investment increases, the surplus value workers have to produce must
   increase faster. As long as the rate of exploitation produced by the
   new investments is high enough to counteract the increase in constant
   capital and keep the profit rate from falling, then the boom will
   continue. If, however, the mass of possible profits in the economy is
   too small compared to the total capital invested (both in means of
   production, fixed, and labour, variable) then the possibility exists
   for a general fall in the rate of profit (the ratio of profit to
   investment in capital and labour). Unless exploitation increases
   sufficiently, already produced surplus value earmarked for the
   expansion of capital may not be realised on the market (i.e. goods may
   not be sold). If this happens, then the surplus value will remain in
   its money form, thus failing to act as capital. In other words,
   accumulation will grind to a halt and a slump will start.

   When this happens, over-investment has occurred. No new investments are
   made, goods cannot be sold resulting in a general reduction of
   production and so increased unemployment as companies fire workers or
   go out of business. This removes more and more constant capital from
   the economy, increasing unemployment which forces those with jobs to
   work harder, for longer so allowing the mass of profits produced to be
   increased, resulting (eventually) in an increase in the rate of profit.
   Once profit rates are high enough, capitalists have the incentive to
   make new investments and slump turns to boom. As we discuss in
   [21]section C.8, the notion that investment will be helped by lowing
   interest rates in a slump fails to understand that "the rate of
   investment decisions is an increasing function of the difference
   between the prospective rate of profit and the rate of interest."
   [Michal Kalecki, quoted by Malcolm Sawyer, The Economics of Michal
   Kalecki, p. 98] If profit rates are depressed due to over-investment
   then even the lowest interest rates will have little effect. In other
   words, expectations of capitalists and investors are a key issue and
   these are shaped by the general state of the economy.

   It could be argued that such an analysis is flawed as no company would
   invest in machinery if it would reduce its rate of profit. But such an
   objection is flawed, simply because (as we noted) such investment is
   perfectly sensible (indeed, a necessity) for a specific firm. By
   investing they gain (potentially) an edge in the market and so
   increased profits for a period. This forces their competitors to act
   likewise and they invest in new technology. Unfortunately, while this
   is individually sensible, collectively it is not as the net result of
   these individual acts is over-investment in the economy as a whole.
   Moreover, unlike the model of perfect competition, in a real economy
   capitalists have no way of knowing the future, and so the results of
   their own actions never mind the actions of their competitors. Thus
   over-accumulation of capital is the natural result of competition
   simply because even if we assume that the bosses of the firms are
   individually rational they are driven to make decisions which are
   collectively irrational to remain in business. The future is unknowable
   and so the capitalist has no idea what the net result of their
   decisions will be nor the state of the economy when their investment
   decisions are finally active. Both of these factors ensure that firms
   act as they do, investing in machinery which, in the end, will result
   in a crisis of over-accumulation.

   The logic is simple and is rooted in the concept of "the fallacy of
   composition." To use an analogy, if you attend a rock concert and take
   a box to stand on then you will get a better view. If others do the
   same, you will be in exactly the same position as before. Worse, even,
   as it may be easier to loose your balance and come crashing down in a
   heap (and, perhaps, bringing others with you). This analogy shows why
   introducing new machinery, which is profitable for an individual
   company, has such a potentially negative effect on the economy as a
   whole. While it is profitable for an individual company in the short
   term, its overall effect means that it is not profitable for all in the
   long run. As Kalecki put it, the "tragedy of investment is that it
   causes crisis because it is useful. Doubtless many people will consider
   this theory paradoxical. But it is not the theory which is paradoxical,
   but its subject -- the capitalist economy." [quoted by Sawyer Op. Cit.,
   p. 156] This paradox applies to the issue of wages as well:

     "What a system is that which leads a business man to think with
     delight that society will soon be able to dispense with men!
     Machinery has delivered capital from the oppression of labour! . . .
     Fool! though the workmen cost you something, they are your
     customers: what will you do with your products, when, driven away by
     you, they shall consume them no longer? Thus machinery, after
     crushing the workmen, is not slow in dealing employers a
     counter-blow; for, if production excludes consumption, it is soon
     obliged to stop itself.

     [. . .]

     "These failures were caused by over-production, -- that is, by an
     inadequate market, or the distress of the people. What a pity that
     machinery cannot also deliver capital from the oppression of
     consumers! What a misfortune that machines do not buy the fabrics
     which they weave! The ideal society will be reached when commerce,
     agriculture, and manufactures can proceed without a man upon earth!"
     [Proudhon, System of Economical Contradictions, pp. 189-90]

   So, if the profit rate falls to a level that does not allow capital
   formation to continue, a slump sets in. This general slump means that
   the rate of profit over the whole economy falls due to excessive
   investment. When one industry over-invests and over-produces, it cuts
   back production, introduces cost-cutting measures, fires workers and so
   on in order to try and realise more profits. These may spread if the
   overall economic is fragile as the reduced demand for industries that
   supplied the affected industry impacts on the general demand (via a
   fall in inputs as well as rising unemployment). The related industries
   now face over-production themselves and the natural response to the
   information supplied by the market is for individual companies to
   reduce production, fire workers, etc., which again leads to declining
   demand. This makes it even harder to realise profit on the market and
   leads to more cost cutting, deepening the crisis. While individually
   this is rational, collectively it is not and so soon all industries
   face the same problem. A local slump is propagated through the economy.

   Cycles of prosperity, followed by over-production and then depression
   are the natural result of capitalism. Over-production is the result of
   over-accumulation, and over-accumulation occurs because of the need to
   maximise short-term profits in order to stay in business. So while the
   crisis appears as a glut of commodities on the market, as there are
   more commodities in circulation that can be purchased by the aggregate
   demand ("Property sells products to the labourer for more than it pays
   him for them," to use Proudhon's words), its roots are deeper. It lies
   in the nature of capitalist production itself.

   "Over-production," we should point out, exists only from the viewpoint
   of capital, not of the working class:

     "What economists call over-production is but a production that is
     above the purchasing power of the worker. . . this sort of
     over-production remains fatally characteristic of the present
     capitalist production, because workers cannot buy with their
     salaries what they have produced and at the same time copiously
     nourish the swarm of idlers who live upon their work." [Kropotkin,
     Op. Cit., pp. 127-128]

   In other words, over-production and under-consumption reciprocally
   imply each other. There is no over production except in regard to a
   given level of solvent demand. There is no deficiency in demand except
   in relation to a given level of production. The goods "over-produced"
   may be required by consumers, but the market price is too low to
   generate a profit and so existing goods must be destroyed and
   production must be reduced in order to artificially increase it. So,
   for example, the sight of food and other products being destroyed while
   people are in need of them is a common one in depression years.

   So, while the crisis appears on the market as a "commodity glut" (i.e.
   as a reduction in effective demand) and is propagated through the
   economy by the price mechanism, its roots lie in production. Until such
   time as profit levels stabilise at an acceptable level, thus allowing
   renewed capital expansion, the slump will continue. The social costs of
   the wage cutting this requires is yet another "externality," to be
   bothered with only if they threaten capitalist power and wealth.

   There are means, of course, by which capitalism can postpone (but not
   stop) a general crisis developing. The extension of credit by banks to
   both investors and consumers is the traditional, and most common, way.
   Imperialism, by which markets are increased and profits are extracted
   from less developed countries and used to boost the imperialist
   countries profits, is another method ("The workman being unable to
   purchase with their wages the riches they are producing, industry must
   search for markets elsewhere." [Kropotkin, Op. Cit., p. 55]). Another
   is state intervention in the economy (such as minimum wages, the
   incorporation of trades unions into the system, arms production,
   manipulating interest rates to maintain a "natural" rate of
   unemployment to keep workers on their toes, etc.). Another is state
   spending to increase aggregate demand, which can increase consumption
   and so lessen the dangers of over-production. However, these have
   (objective and subjective) limits and can never succeed in stopping
   depressions from occurring as they ultimately flow from capitalist
   production and the need to make profits.

   A classic example of these "objective" pressures on capitalism is the
   "Roaring Twenties" that preceded the Great Depression of the 1930s.
   After the 1921 slump, there was a rapid rise in investment in the USA
   with investment nearly doubling between 1919 and 1927. Because of this
   investment in capital equipment, manufacturing production grew by 8.0%
   per annum between 1919 and 1929 and labour productivity grew by an
   annual rate of 5.6% (this is including the slump of 1921-22). With
   costs falling and prices comparatively stable, profits increased which
   in turn lead to high levels of capital investment (the production of
   capital goods increased at an average annual rate of 6.4%). [William
   Lazonick, Competitive Advantage on the Shop Floor, p. 241] The optimism
   felt by business as a result of higher profits was reflected in the
   wealthy sections of America. In the 1920s prosperity was concentrated
   at the top. One-tenth of the top 1% of families received as much income
   as the bottom 42% and only 2.3% of the population enjoyed incomes over
   $100,00 (60% of families made less than $2,000 a year, 42% less than
   $1,000). While the richest 1% owned 40% of the nation's wealth by 1929
   (and the number of people claiming half-million dollar incomes rose
   from 156 in 1920 to 1,489 in 1929) the bottom 93% of the population
   experienced a 4% drop in real disposable per-capita income between 1923
   and 1929. However, in spite (or, perhaps, because) of this, US
   capitalism was booming and belief in capitalism was at its peak.

   But by 1929 all this had changed with the stock market crash --
   followed by a deep depression. What was its cause? Given our analysis
   presented in [22]section C.7.1, it may have been expected to have been
   caused by the "boom" decreasing unemployment, so increased working
   class power and leading to a profits squeeze but this was not the case.
   This slump was not the result of working class resistance, indeed the
   1920s were marked by a labour market which was continuously favourable
   to employers. This was for two reasons. Firstly, the "Palmer Raids" at
   the end of the 1910s saw the state root out radicals in the US labour
   movement and wider society. Secondly, the deep depression of 1920-21
   (during which national unemployment rates averaged over 9%, the highest
   level over any two-year period since the 1890s) changed the labour
   market from a seller's to a buyer's market. This allowed the bosses to
   apply what became to be known as "the American Plan," namely firing
   workers who belonged to a union and forcing them to sign "yellow-dog"
   contracts (promises not to join a union) to gain or keep their jobs.
   Reinforcing this was the use of legal injunctions by employers against
   work protests and the use of industrial spies to identify and sack
   union members. This class war from above made labour weak, which is
   reflected in the influence and size of unions falling across the
   country. As union membership declined, the number of strilkes reached
   their lowest level since the early 1880s, falling to just over 700 per
   year between 1927 to 1930 (compared to 3,500 per year between 1916 and
   1921). [Lazonick, Op. Cit., pp. 249-251] The key thing to remember is
   that the impact of unemployment is not limited to the current year's
   figures. High unemployment rates have a sustained impact on the
   organisations, morale, and bargaining power of workers even if
   unemployment rates fall afterwards. This was the situation in the
   1920s, with workers remembering the two years of record unemployment
   rates of 1921 and 1922 (in fact, the unemployment rate for
   manufacturing workers was close to the overall rate in 1933).

   During the post-1922 boom, this position did not change. The national
   3.3% unemployment rate hid the fact that non-farm unemployment averaged
   5.5% between 1923 and 1929. Across all industries, the growth of
   manufacturing output did not increase the demand for labour. Between
   1919 and 1929, employment of production workers fell by 1% and
   non-production employment fell by about 6% (during the 1923 to 29 boom,
   production employment only increased by 2%, and non-production
   employment remained constant). This was due to the introduction of
   labour saving machinery and the rise in the capital stock. In addition,
   the numbers seeking work were boosted by new immigrants and the
   unwillingness of existing ones to return home due to difficulties
   returning to America. Lastly, the greatest source of industrial labour
   supply came from the American farm -- there was a flood of rural
   workers into the urban labour market over the 1920s. [Lazonick, Op.
   Cit., pp. 252-5] It is interesting to note that even with a labour
   market favourable to employers for over 5 years, unemployment was still
   high. This suggests that the neo-classical "argument" (assertion would
   be more correct) that unemployment within capitalism is caused by
   strong unions or high real wages is somewhat flawed to say the least
   (see [23]section C.9).

   Facing high unemployment, workers' quit rates fell due to fear of
   loosing jobs (particularly those workers with relatively higher wages).
   This, combined with the steady decline of the unions and the very low
   number of strikes, indicates that labour was weak. This is reflected in
   the share of total manufacturing income going to wages fell from 57.5%
   in 1923-24 to 52.6% in 1928/29 (between 1920 and 1929, it fell by
   5.7%). Productivity increased from an annual rate of 1.2% between 1909
   and 1919 to 5.6% between 1919 and 1929. This increase in productivity
   was reflected in the fact that over the post-1922 boom, the share of
   manufacturing income paid in salaries rose from 17% to 18.3% and the
   share to capital rose from 25.5% to 29.1%. Managerial salaries rose by
   21.9% and firm surplus by 62.6% between 1920 and 1929. [Lazonick, Op.
   Cit., pp. 241-2] Any notion that the 1929 crash was the result of a
   rebellious working class is not applicable.

   The key to understanding what happened lies in the contradictory nature
   of capitalist production. The "boom" conditions were the result of
   capital investment, which increased productivity thereby reducing costs
   and increasing profits. The large and increasing investment in capital
   goods was the principal device by which profits were spent. In
   addition, those sectors of the economy marked by big business (i.e.
   oligopoly, a market dominated by a few firms) placed pressures upon the
   more competitive ones. As big business, as usual, received a higher
   share of profits due to their market position (see [24]section C.5),
   this lead to many firms in the more competitive sectors of the economy
   facing a profitability crisis during the 1920s.

   The increase in investment, while directly squeezing profits in the
   more competitive sectors of the economy, also eventually caused the
   rate of profit to stagnate, and then fall, over the economy as a whole.
   While the mass of available profits in the economy grew, it eventually
   became too small compared to the total capital invested. Moreover, with
   the fall in the share of income going to labour and the rise of
   inequality, aggregate demand for goods could not keep up with
   production leading to unsold goods (which is another way of expressing
   the process of over-investment leading to over-production, as
   over-production implies under-consumption and vice versa). As expected
   returns (profitability) on investments hesitated, a decline in
   investment demand occurred and so a slump began (rising predominantly
   from the capital stock rising faster than profits). Investment
   flattened out in 1928 and turned down in 1929. With the stagnation in
   investment, a great speculative orgy occurred in 1928 and 1929 in an
   attempt to enhance profitability. This unsurprisingly failed and in
   October 1929 the stock market crashed, paving the way for the Great
   Depression of the 1930s.

   This process of over-investment relative to consumption is based on
   rising labour productivity combined with stagnant wages or relative
   slow wage growth. This implies inadequate workers' consumption but
   rising profit rates. This is possible as long as aggregate demand
   remains sufficient, which it can as long as high profit rates stimulate
   investment (i.e., money is not saved or sufficient credit is generated
   to ensure that investment spending does not lag consumption).
   Investment creates new capacity and that implies the need for further
   increases in investment, capitalist luxury consumption, and
   credit-based consumption to maintain aggregate demand. This profit-led
   growth is hard to sustain as high profits rates are difficult to
   maintain due to low working class income as both investment and
   capitalist luxury consumption are more unstable. Investment is more
   volatile than consumption, so the average degree of instability
   increases which, in turn, means that the probability of a slump rises.
   Further, this type of growth creates imbalances between sectors of the
   economy as firms rush to invest in profitable sections leading to
   relative over-production and over-investment in those areas (see
   [25]last section). With the rise in unstable forms of demand, an
   economy becomes increasingly fragile and so increasingly vulnerable to
   "shocks." The stock market crash of 1929 was such a shock and the
   resulting panic and reduced demand for luxury goods and investment that
   it produced exposed the underlying weakness of the economy. After the
   Crash, restrictive fiscal and monetary policies and falling demand
   interacted to break this unstable prosperity and to accelerate the
   slump. This was reinforced by wage-cut induced under-consumption as
   well as debt deflation making over-investment worse in relation to over
   demand within the economy. So US prosperity was fragile long before
   late 1929, due to the process of over-investment relative to demand
   which lead the economy to be reliant on unstable forms of demand such
   as luxury consumption and investment.

   The crash of 1929 indicates the "objective" limits of capitalism. Even
   with a very weak position of labour crisis still occurred and
   prosperity turned to "hard times." In contradiction to neo-classical
   economic theory, the events of the 1920s indicate that even if the
   capitalist assumption that labour is a commodity like all others is
   approximated in real life, capitalism is still subject to crisis
   (ironically, a militant union movement in the 1920s would have
   postponed crisis by shifting income from capital to labour, increasing
   aggregate demand, reducing investment and supporting the more
   competitive sectors of the economy!). Therefore, any neo-classical
   "blame labour" arguments for crisis (which were so popular in the 1930s
   and 1970s) only tells half the story (if that). Even if workers do act
   in a servile way to capitalist authority, capitalism will still be
   marked by boom and bust (as shown by the 1920s and 1980/90s).

   To conclude, capitalism will suffer from a boom-and-bust cycle due to
   the above-mentioned objective pressures on profit production, even if
   we ignore the subjective revolt against authority by workers, explained
   earlier. In other words, even if the capitalist assumption that workers
   are not human beings but only "variable capital" were true, it would
   not mean that capitalism would be a crisis free system. However, for
   most anarchists, such a discussion is somewhat academic for human
   beings are not commodities, the labour "market" is not like the iron
   market, and the subjective revolt against capitalist domination will
   exist as long as capitalism does.

References

   1. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc71
   2. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc72
   3. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc73
   4. file://localhost/home/mauro/baku/debianize/maint/anarchy/secB1.html#secb12
   5. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html
   6. file://localhost/home/mauro/baku/debianize/maint/anarchy/secD10.html
   7. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc73
   8. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
   9. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html#secc82
  10. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html#secc82
  11. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC9.html
  12. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC9.html#secc92
  13. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC9.html#secc91
  14. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc72
  15. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc73
  16. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
  17. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC9.html#secc91
  18. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html#secc15
  19. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
  20. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc73
  21. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
  22. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc71
  23. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC9.html
  24. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
  25. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html#secc72
