Capitalists do not produce simply to make enough profit to live comfortably. Capital must grow.
Capital must accumulate
Part of the surplus value produced by workers is spent by the capitalist. Another part is turned back into capital — used to buy more machinery and materials, hire workers and expand production. Marx called this the accumulation of capital.
A capitalist economy therefore cannot simply reproduce itself year after year on the same scale; capital is driven toward expanded production. Competition makes this drive unavoidable for each individual capitalist. A company that introduces more productive machinery, lowers its costs and expands can undersell its rivals and take their markets, and other capitalists must follow or risk being driven out of business. But competition is not the original cause of accumulation. It is the force that makes every capitalist obey a deeper law of the system: capital exists to expand.
Accumulation creates a reserve army
The result is a constant transformation of production. Factories become larger. New machinery replaces old. Productivity rises. Smaller capitals are swallowed by larger ones. Wealth and control over production become concentrated in fewer hands. And technological development lets a given amount of production be carried out with fewer workers than before.
Capital therefore produces a contradiction. Accumulation can increase the total number of workers employed while at the same time continually producing workers whom capital does not presently need. Marx called this the industrial reserve army — the unemployed and underemployed workers who are available when production expands and pushed aside when it contracts. This is not simply an accidental result of bad economic policy; capital itself continually creates this reserve of labor as it expands and changes the methods of production.
The market connects everything after the fact
But accumulation contains another problem. Capitalist production is social: millions of workplaces depend on one another. Steel producers depend on mines and energy. Auto plants depend on steel, electronics, transportation and thousands of suppliers. Workers throughout society depend on the production of food, housing, clothing and other necessities.
Yet there is no social plan determining how much of each commodity should be produced. Each capitalist decides privately what to produce and how much, according to the prospect of profit, and the market has to connect all these separate decisions after the commodities have already been produced.
Nothing guarantees the goods will sell
Marx had already discovered the possibility of crisis when he examined commodities and money. A sale and a purchase are connected, but they do not have to happen at the same moment: someone can sell a commodity and hold the money instead of immediately buying another. That separation is necessary for a developed market economy — it allows trade to extend across enormous distances and periods of time — but it also means there is no automatic guarantee that everything produced will be sold.
Capitalist economists have often claimed that production creates an equal demand for what has been produced: one person’s sale must be another person’s purchase, so a general crisis of overproduction should be impossible. Marx rejected this. The fact that every commodity must eventually find a buyer does not guarantee that it will find one at the expected price, at the expected time, or at all.
Under capitalism, production expands because capitalists expect to realize a profit. Factories are enlarged, new machinery is installed and more commodities pour onto the market — and nothing guarantees that the different parts of this expanding system will remain in the proportions necessary for all of them to be sold profitably. Credit can carry the expansion further: businesses borrow to expand production, merchants buy on credit, and debts accumulate on the expectation that commodities will later be sold. For a time, this can make the system appear more secure than it really is.
Then the connection breaks. Commodities remain unsold. Prices fall. Credit contracts. Businesses cannot pay their debts. Production is cut. Factories close and workers are laid off. What appeared during the boom as independent acts of production, buying, selling and borrowing suddenly reveals how dependent they were on one another. That is a capitalist crisis.
Too much to sell, not too much to need
The contradiction is especially stark because a crisis of overproduction does not mean society has produced more than people need. People may desperately need housing while construction workers sit unemployed. Families may need food while crops cannot be sold profitably. Factories can stand idle while people need the goods they could produce. Capitalism has produced too much to be sold at a profit, not too much to satisfy human need.
The boom and the crash are one process
The crisis destroys or devalues part of the accumulated capital. Businesses fail, inventories are sold off, machinery sits idle and millions of workers may be thrown out of work. By reducing production and destroying weaker capitals, the crisis can eventually create the conditions for accumulation to begin again. Then expansion starts anew — and with it the contradictions that prepare the next crisis.
The boom and the crash are therefore not two different systems. They are different phases of the same process of capitalist accumulation. Capitalism has enormously developed humanity’s productive powers, but because production remains privately controlled and driven by the accumulation of capital rather than human need, those productive powers periodically turn against the people who created them. Social ownership and planning would make it possible to replace this blind cycle with the conscious use of society’s productive resources to meet human needs.
Additional reading
Capital, Volume I, Chapter 24: Conversion of Surplus-Value into Capital — by Karl Marx (1867). Marx explains how surplus value is turned back into capital and how capitalist production reproduces itself on an expanding scale.
Capital, Volume I, Chapter 25: The General Law of Capitalist Accumulation — by Karl Marx (1867). Marx examines the concentration of capital, technological change and the creation of an industrial reserve army as accumulation proceeds.
Capital, Volume I, Chapter 3: Money, or the Circulation of Commodities — by Karl Marx (1867). Marx shows why the separation of buying and selling makes economic crisis possible.