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Capitalism and the Fallacy of Crude Underconsumptionism

As indicated in Jan Toporowski’s article in this issue, the question of “underconsumptionism” is a tangled one—due not only to the commonplace fallacy associated with what is known as “crude underconsumptionism,” but also because the term has been used at various times to refer to what Joseph Schumpeter in his History of Economic Analysis called “non-spending” or effective demand theories (the second in a typology of underconsumption theories designated by Schumpeter). Underconsumption in this sense, however, would encompass theorists like Keynes and Kalecki who focus not on underconsumption per se, but on underinvestment. Hence, the term is no longer applied to theories of this type (except by some Marxian critics of “underconsumptionism”). Because of these confusions Paul Sweezy, who had famously advanced an underconsumptionist analysis (related to Schumpter’s type 2) in The Theory of Capitalist Development (1942), abandoned the term altogether in the 1950s, substituting the term “overaccumulation” to describe his perspective, and subsequently modifying his approach further under the influence of Michal Kalecki, as explained in Toporowski’s article.

In the following exchange with Jonathan Penzner published in the April 1982 issue of Monthly Review, Harry Magdoff and Paul Sweezy, then editors of the magazine, pointed to the fallacy of crude underconsumptionism, while also emphasizing that the accumulation process under capitalism is ultimately affected by the relation between Department 1 (investment) and Department 2 (consumption). Sweezy’s final development of this argument is to be found in his Four Lectures on Marxism (1981).

—The Editors

1. The Classic Contradiction of Capitalism

The April 1981 issue of MR included an article entitled “Marxism” by Bertell Ollman which in a very small space sums up Karl Marx’s theory of capitalism. It was awe-inspiring to find so much said so concisely. I had a problem, though, with this paragraph (p. 41):

Paradoxically, the amount of surplus value is also the source of capitalism’s greatest weakness. Because only a part of their product is returned to them as wages, the workers, as consumers, cannot buy a large portion of what they produce. Under pressure from the constant growth of the total product, the capitalists periodically fail to find new markets to take up the slack. This leads to crises of “overproduction,” capitalism’s classic contradiction, in which people are forced to live on too little because they have produced too much.

The second sentence—about workers and what portion of their product they can afford to “buy back”—reminded me of what my father told me when I was a kid. Capitalism can’t work, he’d say, because the worker can’t buy back his product. Using the silverware at the dinner table, he’d explain about surplus value and point to the growing pile of forks, knives, and spoons which the workers couldn’t afford to “buy back” because of their “incomplete” wages.

I recently found another version of this idea in a Soviet textbook called Political Economy written by A. Leontiev in the late thirties (International Publishers, no date). Explaining capitalism’s drive for profit via the unlimited expansion of production, Leontiev says that capitalism meets “impassable barriers. These barriers have their roots in the fact that the consuming power of the broad masses is limited because of their exploitation by capital.” (p. 183)

In my not extensive reading of old Karl himself, it seems incorrect to say, as Ollman implies by the juxtaposition of the four sentences cited above, that because workers cannot buy “a large portion” (how large?) of what they produce, there is “overproduction.” While Ollman never goes as far as my father did in claiming that this is the reason capitalism can’t work, yet that idea was (and perhaps still is, in some circles) a popularized version of what Marx said. At least Leontiev indicates that the barriers to capitalist expansion “have their roots in” but are not caused by capital’s lust for robbing labor of as much as possible.

Am I splitting hairs or is this still an oversimplification? My purpose here is not to attack Ollman for being too simple. A reader totally innocent of Marx will gain valuable insights. Isn’t there something missing, however, from Ollman’s statement, my father’s proposition, and Leontiev’s position too? Hasn’t something been left out?

—Jonathan Penzner

2. Editors’ Comment

We agree that something is missing from all three of the formulations cited by Jonathan Penzner.

The fallacy of the theory of the workers’ inability to buy back their whole product is apparent if we reflect that a large part of this product takes the form of means of production (raw materials, buildings, machines, etc.) which workers do not and could not consume and which, under capitalism, can be put to productive use only by capitalists. A portion of this output of means of production replaces what is used up (raw materials) or worn out, and the latter is paid for from depreciation charges. The remainder, constituting a net addition to the stock of means of production, is paid for out of the capitalists’ surplus value.

This does not mean, however, that overproduction is impossible or that Ollman is wrong to call it capitalism’s “classic contradiction.” The problem is, in truth, an extremely complicated one, which accounts for the fact that it has been the center of heated and voluminous debates ever since the early days of capitalism.

Marx divided production into two categories, Department I producing means of production and Department II consumption goods. As already noted, the demand for the output of Department I comes entirely from capitalists. Capitalists also contribute part of the demand for the output of Department II, but a much larger share comes from workers. Given the nature of capitalists as profit-maximizers and unremitting capital accumulators, they “naturally” seek to pay workers as little as they can get away with, and continually to raise their (the capitalists’) own rate of accumulation. This means that normal capitalist behavior acts continuously to restrain the increase in demand for consumption goods (Department II) and at the same time to enlarge the demand for means of production (Department I).

Many economists (including some Marxists) have argued that there is no contradiction here, that no necessary relationship exists between the feasible growth rates of the two departments. Put in other terms, what they are saying in effect is that capitalists can successfully and profitably build up Department I (production of means of production) regardless of what is happening to consumption. The Russian Marxist Tugan-Baranowsky, who wrote around the turn of the century, went so far as to contend that capitalism could function smoothly even with a steady decline in the volume of consumption: all that would be necessary would be that means of production should be used to produce even larger quantities of means of production, thus taking up the slack generated by the shrinkage of Department II.

Other economists—including, we believe, a large majority of Marxists—have rejected this line of reasoning, holding that for the system to work smoothly the two departments must in the long run grow in tandem. They agree that for a while Department I can expand as though it were independent and that this can and repeatedly does give capitalists the illusion that the more profits they make and the faster they accumulate, the more prosperous the economy will be. (Reaganomics is based squarely on this illusion!) But the reality is that these are periods of overproduction which cannot be sustained. Sooner or later—many factors, technological as well historical in a broader sense, affect the length of time—the weak growth of final demand for consumption goods works its way through the system and brings the boom to an end. Understood in this sense, overproduction is indeed a very real consequence of the normal functioning of capitalism and can appropriately be called the system’s “classic contradiction”—though it is of course far from being the only, or even the main, contradiction of capitalism.

Marx himself did not spell out a theory along these lines in any detailed or systematic way. But there are numerous passages scattered through his writings which are fully consistent with such a theory and, so far as we are aware, none which contradict it. But the final test of the validity of the theory is not what Marx or any other economists have said or implied, but the last two hundred years of capitalist history. And in this respect it seems to us that the verdict in favor is quite clear and unambiguous.

—Harry Magdoff and Paul M. Sweezy

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