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The Clock Slows Down

Economic stagnation: drowning in surplus

Harry Magdoff (1913–2006) was coeditor of Monthly Review from 1969 until his death.

This article, adapted from a talk given at the 1995 Socialist Scholars Conference in New York, first appeared in the June 1995 issue of MR. Citations have been added by the editors.

Economists are faced with a simple question: how the hell does this economy work? Millions and billions of diverse transactions are made every day, and yet the system holds together. How does the circular process of production, distribution, and consumption coordinate? Despite differences of interpretation by various schools of economics, there is common understanding about the way the system reproduces itself and grows. Here is a simplified consensus of how it is supposed to hang together. (1) Goods (whether primary materials, intermediate, or finished products) are sold for money. (2) The money payments eventually end up in two main streams: wages to workers, depreciation reserves and profits to the bosses. (3) The workers use their wages to buy consumer goods. (4) The bosses use part of their income to replace worn-out machinery, and most of the rest to expand profits (everything but a small percentage for consumption), their businesses, or to start new ones. With more investment, more people get wages, more is produced, and still more money is available to expand production. In this fashion, a balance is maintained between, on the one hand, the capacity to make producer and consumer goods, and, on the other, the effective demand for the output of each of these industrial branches.

This circular process isn’t always smooth, but disruptions and imbalances get straightened out before long. Some trade with other nations may be needed to get raw materials or food. Apart from occasional disorder and some foreign trade, a closed and pure capitalist economy should be able to grow forever on its own steam.

These are the rudiments of the economic theory that emerged in the early days of capitalism and which, implicitly or explicitly, remain to this day firmly embedded in academic and popular understanding of capitalism.

It is a nice and comfortable theory, but one which makes sense only at the very highest level of abstraction and under hypothetical conditions. At best, it is a starting point for the study of the real world. But when one digs into the theory’s underlying assumptions and the more than 200-plus-year history of industrial capitalism, it becomes clear that the conditions for self-sustaining growth in a closed capitalist economy simply don’t exist in the real world. There are in fact built-in barriers to automatic continuity. Thus, if capitalists invest all their profits in expanding their businesses, a point is reached when there is too much productive capacity. For example, after every family in a country has a refrigerator, reinvesting the profits of that industry to make more refrigerators would be self-defeating. The existing capacity would usually be enough to meet the demand for population growth and replacement of worn-out units. Such limits to endless expansion are typical of all industries. Therefore, all other things being equal, too much investment is a persistent threat to balanced growth. If instead the profits remain idle because of lack of profitable investment opportunities, the demand for producer goods slows down or declines and a chain reaction sets in: the new entrants into the labor market and workers displaced by advancing productivity can’t find jobs, the effective demand for consumer goods shrinks, and the economy stagnates and may go into a tailspin.

And yet, despite the inherent hazard of excess capacity, capitalism is distinguished by the vast, long-run expansion of its productive forces. How come? To answer this we need to move from theory to history. Three roads have been especially significant in providing an escape from the overaccumulation trap. First, the development of new products or radical changes in technology. Second, higher wages—an increase in the value of labor-power, as a Marxist would put it. Militant class struggle leads not only to better wages but to various forms of social welfare, thereby expanding domestic markets. Third, the development and extension of markets for goods and investment in foreign lands. These have been major frontiers of capitalist growth. While they play significant roles in the spread and growth of the capitalist system over the globe, each of them has limitations of its own. Innovations don’t come on demand, nor when they do are they necessarily what the doctor ordered. Some innovations contain the potential to set off a new spurt of growth. Others may not be effective enough to compensate for the sluggish strains in overall investment. As for higher standards of living in support of the domestic market, there is no assurance that it will continue on or that it will be sufficient. The capitalist class and the state make concessions grudgingly, and for the sake of securing and protecting profits will try to restrain this growth and, as in today’s environment, turn the clock back. As for the third escape route for overaccumulation—foreign markets for goods and investment in the periphery—it is always limited by the poverty that goes with underdevelopment, and in addition the nature of capitalist penetration and domination of the peripheral territories creates barriers on this front too.

If, then, self-sustained pure capitalism is insufficient for economic growth, the contours of capitalist development need to be sought in the prospective widening or narrowing of its frontiers. On that score, it is important to take notice of a major sea change that took place after the first hundred years of the Industrial Revolution. In the youth and infancy of industrial capitalism—from the 1760s to the 1870s—it seemed as if future economic growth and expansion were endless. In the last hundred years or so, however, it has become increasingly apparent that the frontiers are not limitless.

Moreover, they have a tendency to shrink and thereby create increasing social distress and intensive competition among nations. These features of mature capitalism have been a primary influence on the course of history since the last quarter of the nineteenth century, and they need to be reckoned with if we want to face up to the issues of the day.

Shortly after the end of the Second World War, J. R. Hicks, a noted British economist, observed at the conclusion of his book Value and Capital: “One cannot repress the thought that perhaps the whole Industrial Revolution of the last two hundred years has been nothing else but a vast secular boom.” Joan Robinson later picked up on that theme, adding a perspective often ignored or overlooked: “Few would deny that the extension of capitalism into new territories was the mainspring of what an academic economist has called the ‘vast secular boom’ of the last two hundred years, and many academic economists account for the uneasy condition of capitalism in the twentieth century largely by the ‘closing of the frontier’ all over the world.”1

Statements of this sort and the hypothesis I am going to present are of course exaggerated to some extent. They are nonetheless relevant as we move from an abstract theory which has become embedded in the dominant ideology to a bird’s eye view of capitalist history. Thus, the contradiction between the expansion of productive capacity and the limits of effective domestic demand arises in the earliest days of the Industrial Revolution. Britain’s speedy development of manufacturing capacity based on the new technology and its impressive increase in wealth depended on expanding frontiers for the export of its surplus production. It was, in fact, as “the workshop of the world” that Britain’s industrial prowess and wealth flourished. Even so, the rapid expansion of industrialism did not provide enough jobs for the growing population.

Technological advances in agriculture and industry produced massive unemployment, resolved in part by waves of emigration to the “new lands.” When domestic markets weren’t large enough to absorb the products of expanding capacity, foreign markets were created by conquest, political influence, and the aid of loans and investment. As other European countries and the lands settled by Europeans took the route of industrial capitalism, they came up against frontier limits as Britain had, and they too sought ways out by conquest and penetration. In 1800, Europe and its possessions, including former colonies, claimed title to about 55 percent of the earth’s land surface: Europe, North and South America, most of India, and small sections along the coast of Africa, But much of this was merely claimed; effective control existed over a little less than 35 percent, most of which consisted of Europe itself. By 1878, an additional 6.5 million square miles were claimed; during this period, with the aid of steamships, the construction of railways, and advanced armaments, control was consolidated over the new claims and over all the territory claimed in 1800. From 1800 to 1878, actual European rule (including former colonies in North and South America) almost doubled, increasing from 35 to 67 percent of the earth’s land surface.2

The technological achievements of the Industrial Revolution, the industrialization of other European countries and the United States, the enlargement of the domestic markets, and the creation of markets and investment opportunities in noncapitalist areas—these fed the hundred-year boom after the birth of the Industrial Revolution. Yet this boom, with so much going for it, ended in a long and at times acute worldwide depression. In 1889, David A. Wells, a former president of the American Social Science Association, described these years of change as follows:

The existence of a most curious, and in many respects, unprecedented disturbance and depression of trade, commerce, and industry, which, first manifesting itself in a marked degree in 1873, has prevailed with fluctuations of intensity up to the present time (1889), is an economic and social phenomenon that has been everywhere recognized. Its most noteworthy peculiarity has been its universality; affecting nations that have been involved in war as well as those which have maintained peace; those which have a stable currency, based on gold, and those which have an unstable currency, based on promises which have not been kept; those which live under a system of free exchange of commodities, and those whose exchanges are more or less restricted. It has been grievous in old communities like England and Germany, and equally so in Australia, South Africa, and California, which represent the new.3

The significant aspect of this major depression is that it was the result of overaccumulation of capital in the midst of a new wave of technology—a second Industrial Revolution marked by mass production of steel, electricity, and synthetic chemicals. It was also a period when the younger industrial powers had expanded sufficiently to challenge Britain’s hegemony in trade, finance, and military prowess. They too needed markets to absorb the output of the new mass-production industries. The intensified competition in the midst of overproduction and limited markets led to sharply declining prices, bankruptcies, and the rise of big business organizations, cartels, and trusts. Out of this major depression came the dawn of the age of monopoly capital and the new imperialism—the sea change referred to earlier.

Two features distinguished the new imperialism. First, the participation of all the industrialized powers, including the United States and Japan. Second, the dash for colonies and conflict over the division of the periphery among the powers. The rate of territorial conquest between the late 1870s and 1914 was three times that of the first three-quarters of the nineteenth century. By 1914 the colonial powers, their colonies, and former colonies stretched over 85 percent of the earth’s surface.4

The secular boom of the first hundred years after the Industrial Revolution led to the development of an international system under the leadership of Britain, the spread of the gold standard managed by the Bank of England, and the rise of international prices for raw materials arrived at in London. But the spread of industrialism in the core nations, and the drive for expansion spurred by the incessant accumulation of capital, led not only to the growth of rivalries for colonial territory but to competition for markets among the powers themselves, the growth of protectionism, and a widening use of foreign loans and investments as aids to domestic economic growth and profits. With this came the challenge to the British Empire’s financial, economic, and trade predominance, an armaments race, and finally the First World War.

The period between the Napoleonic wars and the First World War is generally described as a long era of peace. That it was not. There were local wars in Europe (Franco-Prussian, Crimean wars), the Civil War in the United States, and the brutal wars of conquest in Africa and elsewhere in the periphery.

But within Europe, the center of the international system, the balance of power worked for decades—until the new stage of capitalism arrived. The changes that began with the major depression of 1873-1896 are the prelude to the history of the present century: a period in which there were two world wars, the Great Depression, a brief interlude of U.S. hegemony and boom, followed by the long stretch of stagnation in which we are now wallowing. We still live in a world dominated by the giant corporations, except that more and more power is exercised by financial institutions and the money markets. The new stage of globalization has not diminished the sources of rivalry among the powers, and new features have been added. The strains of excess capacity continue to intensify competition for markets. And even though there is a fabulous new electronic technology, investment in this and its related areas has not been sufficient to reverse the stagnation of the last quarter century.

In sum, a bird’s eye view of the past century shows that the present is far from unique. With all its new features, it belongs to a long-established stage of capitalism. Much has been omitted in this presentation, notably the socialist revolutions, decolonization, and the multitude of wars since the end of the last big one. But these omissions do not invalidate the main theme. In fact, they would go to demonstrate even more forcefully the violent, destructive nature of the monopoly and imperialist stage of capitalism. What is relevant for the discussion at this panel is that the long decline since 1970, the two world wars, the Great Depression, imperialism, the ongoing dependence of all the industrial powers on deficit financing, and today’s turning the clock back are all part of one big picture dominated by the barriers inherent in capitalism.

The welfare state met certain needs following the Second World War: the example of full employment in the Soviet bloc and the desire for popular support of imperialist adventures. But it was only viable as long as there was the unusual wave of prosperity in the early decades after the war. For many years now, the same familiar forces of overaccumulation and rivalry among the powers in the midst a universal economic slowdown have reasserted themselves. The growth of a global financial superstructure has for a time helped to sustain profits and economic viability. Yet the fragility of the financial system has been showing up with increasing frequency. As noted already, the new industries of telecommunication and the new information highway have, at best, so far only served to partially compensate for the decline of investment elsewhere.

And where do each of the powers and the periphery look for a way out? Exports, plus the potential of investment in Eastern Europe and China. But if all are looking for the same way out, in a world of narrowing frontiers, clashes and greater rivalry are bound to come. Why this long sermon of woe and disaster? Because even though it is not a fable, it leads in my opinion to a moral. And that is that we should abandon the illusions and myths that there is a way to restructure capitalism to make it hum again, to reverse the trends of the last hundred years. Some of our comrades talk about a struggle for an improved structure of accumulation. But that accumulation is where the dog is buried.

The reforms that progressives and radicals talk about are ways to increase productivity and straighten out monetary systems—all are geared to getting onto a fast growth track, when it is the fast track itself that is the problem. So many of our progressives and radicals can’t seem to unburden themselves of key elements of bourgeois ideology. To be clear, I am not talking about struggle for protection of the people, for the drive to take from the rich to protect the poor. That struggle is a major priority, of course.

But let us not kid ourselves with false panaceas. We need to use our energies not only for the current struggle but to educate as to how capitalism really works and that there is an alternative. The level of ignorance about economic and social matters is unbelievable. This is why those who understand better have the responsibility to engage—in discussion groups in the neighborhood, in religious and community centers; to distribute leaflets, pamphlets, and books; to move among the people and become educators and missionaries in small and big ways.


  1. Joan Robinson, “Introduction,” in Rosa Luxemburg, The Accumulation of Capital (New York: Monthly Review Press, 1951), 28.
  2. Grover Clark, The Balance Sheets of Imperialism (New York: Columbia University Press, 1936), 5–6.
  3. David A. Wells, Recent Economic Changes (New York: Appleton, 1889), 1.
  4. Clark, The Balance Sheets of Imperialism, 5–6; Harry Magdoff, Imperialism: From the Colonial Age to the Present (New York: Monthly Review Press, 1978), 35, 108.

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