Overproduction

During a boom, excess demand pulls up prices, including wages, and there is an overinvestment of capital so that more capital is being invested than can ultimately return the expected rate of profit. 

More workers may also be attracted into the labour force.  This may go on for a long time, with various ups and downs, as the demand for investment goods and services feeds itself, and as credit is stretched.

Each firm can only estimate its market from previous trends and price movements.  It has no "guaranteed buyers" for the same reason that labour does not.  Planning must proceed on the basis of an assumed expansion of markets, and generally that assumption is self-fulfilling. 

The general expansion of investments itself creates a market for the goods produced and allows the expansion to continue.  *Every firm is continuously engaged in a relative overproduction, producing more than it knows it has a market for.  Yet while the economy is expanding generally, the consequences of a miscalculation will only be a local loss of profits and not bankruptcy or market collapse.

As long as business is brisk, capitalism hardly seems to be obstructing the growth of the productive forces at all.  There is no barrier to production beyond the capacity of labour, natural resources and existing plant and stockpiles to produce more goods.  But eventually the shit hits the fan and plant is installed to produce goods and services that just cannot be sold at the expected profit margins.

Then the nice "demand pull inflation" that was stimulating increased production turns into nasty "cost push inflation" with the opposite effect.  It has to, since one firm's costs are another firm's demands.  All that can postpone the equation between input "costs" and output "prices" is continued intensification of the excess demand of the boom, and the same factors that postpone it must intensify the crash when it comes.

It turns out then that there is a barrier to capitalist production, namely profitability.  Goods can only be produced if they can be sold for more than it cost to produce them.  When too many are produced to keep prices at that level, profits disappear and so does production.

It turns out then that for a long time investment has been taking place in the wrong proportions between the sectors producing consumer goods and those producing means of production.  More should have gone to producing the means of production for producing more means of production.  Less should have gone into directly producing consumer goods because the market there is mainly wages and the workers are not very rich.

But this could not have been noticed before, because production was being expanded more or less uniformly on the assumption of uniformly expanded demand.  Why should anyone think that capitalist production has to produce a higher and higher proportion of means of production instead of a balanced output including the final consumer goods themselves?

When the boom stops feeding itself and stops being fed, there is a sudden collapse in the rate of profit and a "crisis of overproduction".  Consumer goods sectors crash because there is not a market for the amount that has been produced (not that we could not benefit from a higher standard of living, but we have not got the money to pay for it).  Sectors producing means of production also crash because nobody is buying means of production to expand their capacity to produce goods that cannot be sold.

In the subsequent "bust", wages are one of the things that have to come down before a new boom can begin, but a lot of other adjustments have to occur too.  The crisis involves destroying or devaluing a large part of the overinvested capital and restructuring the whole economy.

When the crisis is over, capital has been restructured in favour of means of production so that much more productive techniques are used, with a higher organic composition of capital.  This lays the basis for the next boom with a much higher standard of living than the last one.

Monopoly capitalism is much more flexible than laissez-faire capitalism and has mechanisms for relatively smooth variations of output to correspond to demand. 

Minor fluctuations will not produce large price movements or great changes in installed plant capacity, but only changes in plant utilisation, inventory levels, and credit stretching.  As with the labour market and unemployment or labour shortages, these flexible mechanisms have to already be stretched considerably, before disproportions will actually show up as overproduction and reduced profits.

Even more stretching is required before overproduction could result in the sort of market collapse that used to occur quite regularly in the days of laissez-faire.  But since there is no other overall regulator, that stretching is bound to occur, until it does produce the crisis needed to restructure the economy and restore a balance. 

Since the end of laissez-faire capitalism, crises have been much less frequent but far more devastating, when the flexible limits are eventually overstretched.

Are Wages Too High?

In the period between boom and bust, it is possible for the share of wages in GNP, and real wage costs per unit output, to be higher than usual, even while real wages are falling and unemployment is growing.  Conservative economists conclude that this must be the cause of the problem, and the solution must be to push real wages down faster.

But wages appear to be "high" because profits are low.  Real profits are falling because overproduction means the goods cannot be sold at their usual profit margins, even if nominal accounting profits at inflated prices are still "record". 

This alone implies a higher relative share for wages.  The real problem is how to raise profits, and that depends more in this case on prices than wages.

If there was simply a "fluctuation" in demand, with a smooth corresponding adjustment of production and employment, then there would be no problem.  Real wage costs would not depart from their normal trend.  This has been the experience in previous recessions in Australia, such as 1951-52 and 1960-61.  But "overproduction" implies that the unsaleable goods have actually been produced, or the plant capacities to produce them have actually been installed, so that profit levels remain depressed and the ratio of wages to output is changed.

Overproduction implies that the prices of firms' outputs cannot go up fast enough compared with the prices of their inputs, and this is described as "cost-push inflation" rather than the "demand-pull inflation" of the boom.  But it really reflects a situation where there is not a sufficient market for the goods that have been produced.  The result is excess capacity as firms cut back their production to keep prices up, and lower labour productivity since the labour force is not reduced in proportion to the restriction in production.

This lower labour productivity resulting from capitalist anarchy becomes the subject of sermons to the workers on not being too greedy.  The underlying cause of changes in the relative share of labour in the GNP and the real cost of labour per unit output, is the overproduction and overinvestment, not any imbalance in the labour market.  Nevertheless, the effect is similar to labour shortages having driven up wages (which indeed is one of the many things that does happen when overinvestment reaches its peak at the height of the boom),.  The response is a slackening in job creating investment and increased unemployment.  

One feature is that investment can become more capital intensive than normal, based on the apparently high real cost of labour per unit output.  This can destroy jobs faster than they are being created.  The unemployment created in this way can and does produce lower real wages since it implies a "slacker" demand for labour.  The normal operation of the labour market, will bring down wages until this particular source of increased unemployment is no longer operating, even though the apparently high relative cost of labour is due to output restrictions rather than high real wages.

But the more important reason for growing unemployment is that since profit margins are not high enough on the overproduced goods, there is a lack of funds for any investment that would create new jobs at all - whether labour intensive or capital intensive.

Will Lower Wages Reduce Unemployment?

Lower real wages cannot increase employment since high wages were not the cause of investment drying up.  So the apparent imbalances in the labour market continue growing and unemployment continues increasing without being able to produce any equilibrium.

Indeed it is even possible for real wages to rise during a depression, despite mass unemployment.  This can occur because it is not wages, but markets, that are limiting investment and employment.  Firms can continue their (reduced) production levels despite high wages, and will not expand production and increase employment just because wages come down.  Unemployment exerts a downward pressure on wages, but since the employers demand for labour is not highly dependent on wage levels, that pressure can be counteracted.

Wage rates are determined far more by variations in the demand for labour with price than by variations in its supply.  Thus the predictions of orthodox economists have been totally confounded by the simultaneous expansion of female employment together with equal pay, and by the trade unions present capacity to fight for shorter hours and higher wages despite more unemployment. 

In both these situations we have a level of demand for labour that is not sharply dependent on its price.  The first during a boom and the second at the end of one.

Even when the demand for labour is falling, it need not produce a fall in wages unless the demand depends on the wage rate.  A firm that has already cut staff to reduce output and has excess capacity, will not necessarily cut staff further if wages go up.  The same output will still be required to maximise profit, and the same staff will be required to achieve that output, even if profit is further depressed by increasing wages.

Thus even while the total demand for labour is reduced, that demand may become less "slack" - less variable according to wages, and the bargaining position of workers who are still employed may actually improve.  Wages can still rise to the point at which it becomes more profitable to use less labour intensive techniques, or to cut back production and employment further.  Given excess capacity, there may be considerable room for wages to rise before either of those points is reached.

Here the distinction between "slack demand" and "unemployment" as a cause of falling wages becomes important.  Real wages actually rose at times during the last depression, despite mass unemployment.  They also rose sharply during the "wages explosion" of 1974, despite increasing unemployment.  They have still not fallen a great deal.  The conventional conservative theory of wages and unemployment finds it difficult to account for these facts and compensates for this difficulty by hysterical attacks on unions.

Mass unemployment can compel a reduction in real wages, after working class organisation has been smashed.  It can do this by compelling workers to accept wages that are less than the value of their labour power (ie less than the "marginal product" of labour they can obtain as unionists selling at a monopoly price).  But that in itself is not enough to restore equilibrium.  Unemployment will continue until the overinvestment and overproduction has been worked out of the system.  More drastic cuts in real wages will not change the fact that goods are not being sold profitably enough for new investment to absorb the unemployment.

Further cuts in real wages will certainly increase profits, and will be welcomed by employers, but no amount of cuts can make investment profitable when there is no market for more goods.  Even at zero wages, nobody is going to build new car plants, when the cars already produced are piling up unsold, or are being sold at low profit margins.  More cars may be sold because they are cheaper with lower wages, but not enough more to absorb the excess capacity and encourage new investment.  The lower wages will simply increase profits without increasing investment.  By keeping up wages in a depression, unions are not doing the unemployed out of a job, but simply depriving capitalists of surplus profits.

Stimulating Demand

Keynesians argue that excess production capacity implies a "slack" in the economy which leaves room for employment to be increased by government action to stimulate demand, without necessarily pulling up prices.  But this misses the whole point of the adjustment mechanisms that have produced the excess capacity in the first place.

Excess capacity has appeared because market demand does not allow firms to raise their output prices enough to maintain profit margins.  Any stimulation of demand must therefore produce a rise in prices before it will produce an increase in output.  There would be "slack" if plant was being underutilised because of a fluctuation in demand and the normal adjustment to it.  But there is no "slack" when profit margins have already fallen.  There is just "excess capacity".

Once excess capacity has appeared, attempts to stimulate demand by extending credit with the budget deficit, amount to buying up the overproduced goods on the "never-never".  Extending credit means extending debt.  Ultimately there has to be a real market or the postponement of bankruptcy by extending credit only adds to the size of the crash when it finally comes.

That of course may not be such a bad thing.  There is no harm in demonstrating what heights of prosperity could be achieved by the permanent boom of socialism at the expense of a deeper crash by capitalism when it fails to maintain that prosperity.  But we are already at a stage where the credit has been rather fully extended.  While governments should and will continue to extend it as long as they can, that may not be all that long.  Governments go bankrupt too.

Economic Crisis

The next phase of the business cycle, which we have not seen yet, involves market collapses to restructure production and get rid of the overinvestment.  This is not the place to enter into a detailed analysis of the nature of capitalist crisis, and the particular characteristics and timing of the coming one.  This would also involve considering the expansion and contraction of credit, the operation of financial and capital markets and so on.  It would also be necessary to explain inflation and the real and apparent movements of relative prices.  In any case I do not understand it well enough to say much more.

But the implication of all this for unemployment is simple.  The whole world economy is out of balance and only an overall crisis will restore that balance.  It is not just a matter of pushing down wages until the labour market is back in balance.  Nor are there any other easy solutions.

At the moment we have both rising prices and growing unemployment and that is seen as a unique phenomenon different from any previous cycle of boom and bust.  But in fact it is simply a more long, drawn out version of the usual pattern.  The boom has basically ended and unemployment has started to grow.  But the "bust" has not happened yet and we have not yet got a real crisis or massive unemployment.  There is still real economic growth and rising prices and even room for some renewed mini-booms because the next phase of the business cycle has not yet begun.  During the late 1920's unemployment also started to rise while prices were still going up and before the actual crash.

The "price mechanism" we learn about in orthodox economics textbooks does work.  A market economy, a capitalist economy, can develop the productive forces to higher and higher levels without central planning.  But a pool of unemployed fluctuating between small and large is an essential part of how it works.  The price mechanism does not prevent market collapses and economic crises.  Crises are an essential feature of the way it works.  Booms end in busts and busts pave the way for booms because there is no other regulatory mechanism in a market economy.

The "balancing mechanisms" and regulators of a market economy all sound quite neat and clever.  But they are proving extremely destructive.  What an incredibly archaic way to regulate an economy in this day and age!

The Great Depression of the 1930's was the only way that the "roaring twenties" could end.  That depression and the Second World War paved the way for unparalleled prosperity in the 1950's and 1960's.  The post war boom was longer and reached greater heights than any previous boom in the history of capitalism.  The period of teetering on the edge between boom and bust has been longer than any previous such period in history.  We can reasonably expect that the coming crisis and depression, which is certainly not here yet, will be very much deeper than the 1930's.

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