What's behind the boom bust cycle PDF Print E-mail
Saturday, 28 June 2008 08:27

For the purpose of explaining economic crises, there are two central features of capitalism – profits arise from the exploitation of labour, and capitalist competition.

So, what is exploitation? The term evokes images of women bent over sewing machines in Vietnamese sweatshops working twenty hours a day under threat of their children being shot. But for Marxists, exploitation is about more than just bosses crossing a moral line in pursuit of profit. Rather it is a scientific term to describe the economic and social relationship that exists between bosses and workers everywhere, from the slums of Jakarta to the gleaming complexes of Silicon Valley.
In his extensive study of capitalism, Karl Marx identified exploitation as the basis of capitalist production.                    
Workers produce all the wealth but only receive a small proportion of it back in the form of wages. The surplus is kept by the boss, part of which becomes profit. In this way capitalist production involves bosses appropriating, or stealing, the products of workers' labour in order to generate a profit.
So instead of wages being equivalent to the value produced in a working day, or fair compensation for a day's work (as most high school economics textbooks will tell you), wages actually represent the cost of ensuring workers return to work and remain productive. That is, they cover the cost of feeding, clothing, educating and caring for the working class in order that they can return to work and continue generating profits for the capitalist class. The less bosses can get away with paying in wages, and the greater a cut in living standards they can force workers to accept, the wider their profit margins become.

Competition

Alongside this is the second point: Capitalists are constantly in competition with one another.
Competition forces capitalists to constantly reinvest their profits into more efficient means of production. More and more of their investment has to go into technology and machinery and less and less into human labour. Just think of a modern steelworks – multi-million dollar plant and equipment and a few hundred workers at most.
In Marxist literature the machinery, and materials that go into creating the end product are called the constant capital. The labour-power from the workers is called the variable capital.
Now this constant capital makes labour much more productive than it would be otherwise. A labourer with a wheelbarrow can move a much bigger weight than someone carrying things on their back. But  machines and tools don't just magically appear – the wheelbarrow which aids the worker is its self the product of the labour of a metal worker. That's why Marxists often refer to this constant capital as dead labour. So the value of the finished product still depends on the labour that goes into it, although some of it is past (or dead) labour and some of it present.
The important thing here is that machinery can't add to the value of production without being worked on by living labour. A machine its self does nothing. It is the human being operating the machine that causes it to turn out new goods, with an increased value.

Technology

This is why I referred to machinery before as constant capital – because no matter how much of it you have, it's only the human labour that adds value to the product.
That does not mean that all work is of equal value. Intel with their brand new state-of-the-art fabrication plant can make a far more valuable computer than some dude with a rock and a lump of copper.
The first capitalist to get a particular piece of technology can often greatly increase their profits. And this is what prompts innovation. But as soon as one player gets that advantage, everyone else in the market also needs to keep up. So they get the technology as well – or go bankrupt.
This means that over time, the perceived value of the product will fall, and the increase in profit realised by the new technology will all but disappear. This perceived value is called the socially-necessary value of a product because it reflects the amount of labour that on average across society goes into the product.
A good recent example of this can be seen in the consumer electronic market. Ten years ago digital cameras were the just becoming mainstream. And there was a race to fabricate smaller and smaller photoelectric cells – to produce cameras with more megapixels than the competition.

Falling rate of profit

So when everyone was selling one megapixel cameras, the first company to bring in two megapixel cameras could cash in on being the best in the market, and realise the profits from their new technology. But then, of course, pretty soon everyone was selling two megapixel cameras – then three megapixels, and the price fell. Nowadays everyone wants a three or four megapixel camera in their cell phone, and the perceived value has dropped accordingly.
This leads to another phenomenon that Marx referred to as the tendency for the rate of profit to fall.
Even  though they can't make the same profits, the camera manufacturers still have to buy the big four megapixel fabrication plants. They still have to spend millions of dollars on that constant capital even though the profit they get for it is the same as when everyone was making the crappy old one megapixel cameras.
Marx observed that this was a general tendency over time – as the market evolves, the amount of constant capital required to compete increases, but the profit is still limited by the amount of surplus labour that can be exploited.
The absolute size of the surplus and of profits can continue growing, but the rate of profit, which is what capitalists are really interested in, depends upon the ratio of profit to the total amount outlaid. So if more and more is invested in machinery in order to stay competitive, but the amount invested in labour grows at a slower rate, then the amount of surplus or profit extracted from the whole process will be growing at a slower rate than the increase in investment - the rate of profit will have fallen.
And it's this tendency of the rate of profit to fall that brings us back to the idea of Crises.

The boom and bust cycle.

Capitalism has always experienced a periodic pattern of boom and bust - what capitalist economists call the business cycle. Almost every decade since the late 1700s has witnessed such a pattern of rapid growth followed by widespread stagnation or recession.
During boom times, profits are running high and the owners of capital are confident to undertake large-scale investment. Existing factories are expanded, new ones built, more workers are taken on, new mines go down as office blocks and hotels go up.
Every enterprise is run at close to full capacity as the bosses seize the good times with both hands.
In these boom times there becomes a crisis of overproduction, with  competition forcing down prises, and markets flooded with goods,  the capitalists become less confident that they can make sufficient profits. They hesitate to invest in a new round of production, and scale back their existing operations. Workers are sacked and wages undermined by rising unemployment. Some capitalists go bankrupt. A slump sets in. Sometimes the "slowdown" becomes a full-blown recession, as unemployment and lack of investment spark a downward spiral - after all, who will buy the capitalists' output under these conditions?
“In these crises”, writes Marx, “there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of over-production.”
Capitalism has produced too much! Not too much to satisfy the world's population - poverty and starvation persist - but too much to be sold for an acceptable profit.
At some point the downturn bottoms out. As output and production costs fall, profit margins begin to recover. The capitalists who have survived the slump now rush to buy up their stricken rivals' assets at bargain-basement prices. Productive investment rises and the cycle begins all over again.
The boom-bust cycle is an inevitable result of the internal contradictions of capitalist social relations. Each individual capitalist is compelled by competition to relentlessly accumulate in a way which, when all taken together, results in mutual economic collapse.

Chris B