Crisis theory

Crisis theory, concerning the causes[1] and consequences of the tendency for the rate of profit to fall in a capitalist system, is associated with Marxian critique of political economy, and was further popularised through Marxist economics.

[6] Rosa Luxemburg and Henryk Grossman both subsequently drew attention to both Sismondi's work on the nature of capitalism, and as a reference point for Karl Marx.

[7][8] John Stuart Mill in his Of the Tendency of Profits to a Minimum which forms Chapter III of Book IV of his Principles of Political Economy and Chapter V, Consequences of the Tendency of Profits to a Minimum, provides a conspectus of the then accepted understanding of a number of the key elements, after David Ricardo, but without Karl Marx's theoretical working out of the theory[9] that Frederick Engels posthumously published in Capital, Volume III.

[15] Henry Hyndman had written a short history of the crises in the 19th Century in 1892,[16] attempting to present, popularise and defend Marx's theory of crisis in lectures delivered in 1893 and 1894 and published in 1896.

[24] Following the extensive setbacks to independent working class politics, the widespread destruction both of people, property and capital value, the 1930s and '40s saw attempts to reformulate Marx's analysis with less revolutionary consequences, for example in Joseph Schumpeter's concept of creative destruction[25][26] and his presentation of Marx's crisis theory as a prefiguration of aspects of what Schumpeter, and others, championed as merely a theory of business cycle.

[29] There have been attempts particularly in periods of capitalist growth and expansion, most notably in the long Post-War Boom[30] to both explain the phenomenon and to argue that Marx's strong statements of its 'lawlike' fundamental character under capitalism have been overcome in practice, in theory or both.

[32] It continues to be argued in terms of historical materialism theory, that such crises will repeat until objective and subjective factors combine to precipitate a resolution of the underlying class struggle in a social transition to the new mode of production either by sudden collapse in a final crisis, or gradual erosion of the basing on competition and the emerging dominance of cooperation.

[citation needed] The concept of periodic crises within capitalism dates back to the works of the Utopian socialists Charles Fourier and Robert Owen and the Swiss economist Léonard de Sismondi.

"[38][39] A key characteristic of these theoretical factors is that none of them are natural or accidental in origin but instead arise from systemic elements of capitalism as a mode of production and basic social order.

This work explains the connection between crises and regular business cycles based on the cyclical dynamic disequilibrium of the reproduction schemes in volume 2 of Capital.

But on the most important counter-tendencies, that is, the effects of increasing productivity at home in cheapening commodities and of foreign trade in providing both cheaper goods and greater profits, Marx and Mill are in accord.

Thus, according to this theory, the degree of "tuning" necessary for intervention in otherwise "perfect" market mechanisms will become more and more extreme as the time in which the capitalist order is a progressive factor in the development of productive forces recedes further and further into the past.

A common example is the contrast of the oppression of the working classes in France in centuries prior to 1789 which although greater did not lead to social revolution as it did once the complete correlation of forces[55] appeared.

"[56] David Yaffe, in his application of the theory in the conditions of the end of the Post War Boom in the early 1970s, made an influential link to the expanding role of the state's interventions into economic relations as a politically critical element in attempts by capital to counteract the tendency and find new ways to make the working class pay for the crisis.

Rosa Luxemburg lectured on the 'History of Theories of Economic Crises' at the SPD's Party School in Berlin (possibly in 1911, since the typescript includes a reference to statistics from 1911).

[66] Guglielmo Carchedi and Michael Roberts in their edited collection World in Crisis [2018] provide a valuable review of the empirical analyses that support and defend the thesis, with contributions from authors in the UK, Greece, Spain, Argentina, Mexico, Brazil, Australia and Japan.

So that for Marx the crisis is, and can only be, resolved by expanding profitable production and accumulation, while for Keynes, it can supposedly be remedied by increasing 'effective demand' and this allows for government induced-production.