Law of Value - Law of Value in Capitalism - Law of Value and Crises

Law of Value and Crises

In serious economic crises, Marx suggests, the structure of market prices is more or less suddenly readjusted to the evolving underlying structure of production values. The economic crisis means that price and value relationships have gotten badly out of kilter, causing a breakdown of the normal trading process. Another way of saying this is, that the law of value will ultimately assert itself, by forcing a change in relative prices, in conformity with real production costs. In turn, this implies that although production values and market prices can diverge significantly from each other (in particular, because there exists no "perfect competition" - competition involves also blocking competitors), there are also limits to the possible discrepancies (because ultimately competitors will bring down artificially inflated prices, and goods sold further and further below value would eventually put producers out of business, when incomes could no longer cover costs).

According to Marx, the basic meaning of crises for capitalists was, that they could not longer invest their capital at an adequate profit income, which usually meant also that their capital lost part of its value. For workers, crises meant an increase in unemployment, and wage-cuts. Some output and assets might also be destroyed, because they could not be sold, or because they did not make money. Solving the crisis meant reorganizing production and trade, to meet the new requirements for profitable sales. Usually, crises were happening all the time "somewhere" in the capitalist economy, but those crises were limited to specific industries going bust - such crises normally did not spread to the whole economy. However, at some point, the crisis of particular branches of activity could set off a chain-reaction which would spread to the whole economy.

Marx himself never developed a substantive theory of capitalist crises, beyond commenting about the economic crises he was able to observe himself. His main claim was that the crises are system-immanent (due to endogenous causes), and not an accidental aberration, i.e. they are a necessary feature of capitalist development. That is, capitalism is unable to maintain the necessary proportions for balanced economic growth, because of the institutions of private property and business competition. Obviously, there are all kinds of possible economic reasons why the profitability of investments could suddenly suffer a large drop, and they might not be exactly the same factors in every crisis that occurs. But Marx's main idea about capitalist economic crises was that at a certain point capitalist private property becomes an obstacle to itself - capitalist crises occur not because too little is produced (a situation of absolute scarcity), but because more is produced than can be sold at an adequate profit (a situation of excess capacity). In the crisis, unsold goods, idle capital assets and unemployed workers exist side by side.

A large Marxist literature on "crisis theory" nowadays exists, in which different authors defend various ideas about the "ultimate" causes of capitalist crises (see also crisis theory) - basing themselves on a few scattered comments by Marx on the topic. Such theories are very difficult to prove scientifically, for five reasons:

• the theories are very abstract, making it difficult to test them convincingly.
• even if reliable data is available, the data can be "read" in different ways.
• there exist a very large number of different factors which can influence business profitability, investments and market sales, while it is difficult to prove how these factors are all related, or to prove which ones are the most important ones in an overall sense (since different kinds of business operate in different circumstances).
• the final causes of crises might not be exactly the same in every crisis occurring in the last two centuries, except if particular causes are accepted as the main ones "by definition".
• Marx's ideas about crises were based on the kind of capitalism that existed in the mid-19th century, without it being very clear what the continuities and discontinuities are with present-day capitalism.

Even today, economists are still debating about what really caused the 1930s depression, proposing a range of different and incompatible theories - even although that was eighty years ago.

According to a popular Marxist interpretation, crises are the necessary result of the falling profitability of production capital, which, according to Marx, was an effect of rising overall productivity (raising the organic composition of production capital, and lowering the value of commodities). But supposing that we can prove definitely that profitability did gradually decline across (say) 25 years, it is still not proved why a serious economic crisis would occur precisely at the end of that period, rather than (say) after 5 years, or 10 years, or 15 years. That is, by demonstrating an empirical profitability trend, the main causes and effects of the trend are not yet proved. In addition, production capital is a smaller and smaller fraction of the total mass of capital accumulated, and thus, it is not proved how the reduced profitability of only a minor part of the total capital can, by itself, throw the whole of capitalist society into crisis.

What can be definitely proved, is that slumps have happened fairly regularly in the history of industrial capitalism from the 1820s onward, some being more severe than others. In the real economic history of capitalism, there is therefore no evidence of a spontaneous tendency toward economic equilibrium: capitalism develops spasmodically, through booms and slumps. Every crisis is supposed to be the last one, until a new crisis occurs. That was, for Marx, a good reason for doing away with the capitalist system, and bringing production under planned, collective control by the freely associated producers. Why should the whole of society have to suffer only because already wealthy capitalists could not extract enough profit? The modern reply to this argument is that if there is insufficient profit, the value of savings, benefits and pensions cannot be sustained; the whole financial system begins to break down. Yet individuals have almost no control over what is done with the money or how much is paid out, even if they have some choice in how to invest their savings. Their savings can be quickly wiped out, and even the house they own can suddenly lose much of its value. The question then is, whether people should have to live with risks which they never created, or whether society should ensure that preventable risks are eliminated or reduced.

Yan Wang and Yudong Yao argue, in a 2001 paper for the World Bank, that capitalist crises are "just a fact of life" that one has to learn to cope with. But if many people's lives are ruined by the crisis, or if they risk death, people don't think about it in the same way anymore; normally people want sufficient order, security and predictability in their lives, so that they can indeed "make a life", beyond merely surviving, or living in fear of dying. In rich countries nowadays, few people die because of economic crises, but David Graeber argues that the 40% health-budget cuts in Greece in 2012 mean that patients unable to afford life-saving medication and treatment will die. Historically speaking, a serious capitalist crisis, shifting the balance of power, is typically followed by one or more wars - the intensified international business competition in due course spills over into military competition. However, historians do not necessarily agree on the exact chronology of events, the causal sequence, or whether there is a provable recurrent pattern of crises and wars. In reality, there was hardly a year during the 20th century when there was no war going on somewhere in the world, but - this is the point - sometimes the conflicts escalated and broadened, and sometimes they did not. Economic crises can cause wars, but wars can also cause economic crises.