EDUCATION SECTION: Capitalism as a system of crises

Oupa Lehulere explains how the capitalist system works, and how the search for profits within this system causes crises.

What is an economic crisis?

In many countries the government counts the goods that have been produced in the country over the whole year. After adding the prices of all these goods the total is called the Gross Domestic Product (GDP). Many people who are allied to the capitalists and their state (they are referred to as “economists” in the newspapers) say that there is a crisis when the GDP of a certain year is smaller than that of the year before. These people also say that if the GDP increases then there is no economic crisis. Although there is a certain amount of truth in what these “economists” say their way of looking at a crisis can be misleading. Let us see how this can be so.

For many workers the first sign that there is a serious problem with the economy emerges when there are fewer and fewer jobs in the country. So growing unemployment is an important sign of an economic crisis. We normally find that people who are looking for work for the first time cannot find work and that those who had work are retrenched. Another sign of an economic crisis, which is also related to unemployment, is that of the closure of factories, farms, mines and shops. Many capitalists go bankrupt and this adds to the unemployment. What also happens during a crisis is that the living standards of many people, including workers, middle class people and even some capitalists, fall sharply. In many cases an important sign of the crisis is also rising inflation. By inflation we mean a situation where the prices of goods (e.g. food, electricity, petrol) are rising continuously, and not only once. As we can see, when these things happen there will be a fall in the amount of goods that the country produces, i.e. a fall in GDP. So it is true that one of the signs of a crisis is the fall in GDP. But it is not true that when the GDP rises there is no longer a crisis.

One of the things the capitalists do on a regular basis is to introduce new and better machines in the factory. Since these machines are powerful they can produce many more goods than before. What can therefore happen is that the total goods that the country produces can increase although all the other signs of the crisis are still there. The number of goods produced (the GDP) can rise while unemployment is still rising since machines are now being used instead of workers. The GDP can rise while some capitalists are still going bankrupt and factories are still closing.

The fact that the state and the “economists” mostly emphasize the growth or the fall of GDP when they are looking at an economic crisis in this way because for the capitalists what matters is an increase in their profit. When GDP is growing it means that more goods are being produced and sold and this means the capitalists, especially the big ones, begin to have an increase in profits. This brings us to a very important point: In capitalist society there are basically two (2) points of view from which an economic crisis can be understood.

For the capitalists, the state and all who support their view, a crisis is when the profits of the capitalists are falling. For the workers and the majority of the people a crisis is when unemployment is growing, when inflation is rising, when factories are closing and living standards are falling.

Why do capitalist economies experiences crises?

As we have said before, in a capitalist economy the factories, mines, farms and shops are owned by a small minority of the population called capitalists. Their main motivation or aim for running all these firms with their money is in order to make more money, or profit. It is this search for profit that lies at the root of all crises in capitalist economies. In other words, the search for profit is the source of all economic crises under capitalism. Let us see how the search for profit leads the economy into crisis after crisis.

The main aim of production under capitalism is to produce profit for the capitalist. This means that the individual capitalist must strive to increase their profit at all times, because if the profits are not increasing there will be no real motivation to invest profits. There are a number of things that a capitalist can do to ensure that his or her profits are increasing at all times. Let us list a few of these measures:

1. The capitalist can try to keep the wages of the workers low so that the costs of the production are kept low.

2. The capitalist can make the workers work hard- er without increasing the wages of the workers

3. The capitalist can introduce new and powerful machines so that the factory can produce much more goods at a faster rate

4. All the measures above will allow the capitalists to sell his or her goods at a much lower price than other capitalists and so more and more of his or her goods will be bought by the people

The big problem for capitalism, however, is that all the capitalists are using these methods of increasing their profits at the same time. As a result of the capitalists doing all these things at the same time, two serious problems for capitalism arise:

The major problem is that since many capitalists are producing the same goods for the same people, it leads to an overproduction of goods and services. This overproduction of goods is also made possible by the fact that the capitalist now uses bigger and more powerful machines in production. We find that there are too many products and too few buyers to consume all the products. Comrades might object and say that there are many poor people who need these goods and so how can it be said that there is overproduction. It is important to remember that under capitalism only those who have the money to buy the goods are regarded as consumers. This is because the aim of the capitalist is not to satisfy the needs of the people, but to make profits. In many cases the capitalist would rather destroy the goods than give them to the poor at prices the poor can afford. For example, in the past the capitalists who produce eggs in South Africa crushed many eggs because they had overproduced, instead of selling them at low prices.

As a result of this overproduction many capitalists, especially the small ones, cannot sell their goods and they go bankrupt. The bankruptcy of these capitalists leads to factory closures and to retrenchments. Although the big capitalists might not often go bankrupt they are also affected by this “crisis of overproduction”. They also retrench workers. What is even more important is that the capitalists no longer invest in building new factories and employing more workers.

The overproduction of goods also leads to overproduction of capital. Competition for markets leads capitalists to accumulate more capacity in the form of machines, buildings, mines, farms and factories. When there is a crisis of overproduction, a lot of these will become idle since capitalist cannot use them to produce for profits. When this happens we talk of overaccumulation. But overaccumulation does not only take the physical form of machinery, factories, farms etc, it also takes the form of money. What this means is that capitalists also find themselves with huge amounts of money without areas to invest it profitably. Historically capitalists and their governments all over the world introduced neoliberalism in an attempt to create profitable areas of investment for the huge amounts of money capital.

Capitalists also began experimenting with ways of making profit without directly engaging in productive investments. Capitalists and their governments undertook a number of changes in the way countries regulated and controlled capital accumulation activities to make it possible for profits to be made without directly investing in the production of goods given the overproduction crisis. Money markets have become important arenas from which capitalists realize profit. This gave rise to large speculative and non-productive investments in which huge amounts of money capital are involved. Capitalists are also able to engage in a range of activities that allow them to extract profits from companies that are profitable without directly engaging in productive investments. Money capitalists are also able to extract money from individuals through their lending activities by charging more interest rates. They can also make money by taking advantage of differences in interest rates between different currencies. It is these kinds of speculative activities that triggered the current global capitalist crisis. The basic cause of the crisis remains the overproduction and overaccumulation of capital.

Although we see that the main source of overproduction and overaccumulation is the competition between the different capitalists, this overproduction is also made worse by the fact that the workers do not earn enough to buy the goods that are produced by the firms. Retrenchments also deepen the overproduction of commodities as it means less and less people have the buying power to consume.

The capitalists respond to this crisis of overproduction by trying to make their goods even cheaper. They do this by again pushing workers wages down, by introducing more machines and producing more goods to try to sell at cheaper prices than their competitors. They also try to discover new areas in which to invest at a profit through initiatives like privatization, deregulation of world trade and deregulation of financial markets. After a period of growth the economy again faces a crisis of overproduction, many factories close, unemployment rises and the capitalists withhold their investment and so there is another period of economic crisis.

What we have tried to show is how the search for profits leads the capitalist system into crises after crises. There are many other reasons why the capitalist system faces crises time after time, but we will not discuss them here. The crisis of overproduction, however, is one of the main sources of capitalist crises. So as long as the capitalist search for profits continues there will always be crises which lead to unemployment, poverty and attacks on the workers’ wages and organisations.