This quote is taken from a footnote to Marx’s Capital Volume II (p. 391 in the Penguin edition). The volume was put together after Marx’s death by his friend and collaborator Engels, drawing on extensive notes. The quote provides inspiration for the analysis of one particular contradiction in the dynamics of capitalism :
“Contradiction in the capitalist mode of production. The workers are important for the market as buyers of commodities. But as sellers of their commodity – labour-power – capitalist society has the tendency to restrict them to their minimum price. Further contradiction: the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production; because the limit to the application of the productive powers is not simply the production of value, but also its realization. However, the sale of commodities, the realization of commodity capital, and thus of surplus-value as well, is restricted not by the consumer needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor.” (my emphasis)
It is important not to take this quote out of context. In addition, despite significant inequality and poverty, Marx was clearly wrong about the majority always remaining poor under capitalism. However, the contradiction described here between the production of surplus value and its realization upon sale, has given rise to plenty of debate among left economists.
Many Marxists follow the man himself by emphasising that capitalism is a profit-driven system. By contrast, Keynesians, particularly the more radical post-Keynesians, see the system as demand-driven and therefore responsive to a policy of demand-expansion during a slowdown or recession.
Marxists make the point that without sufficient profitability, investment will not take place, as it provides both the motive and financial resources for investment. This means that a period of restructuring of the economy, driven either by the private sector, the state, or some combination of the two, may be required prior to a new period of economic growth. Thus recessions or crises are normal under capitalism, even with the most effective policies.
By contrast, Keynes and his followers saw recessions and unemployment as preventable via policies of demand management. Boosting either public or private consumption or investment could mitigate such defects.
The production of surplus value, which is the source of profit, occurs in the labour process. For Marx and most Marxists, labour is the only source of surplus value and is exploited by the capitalists in production.
For other economists on the left, such as the Sraffians, all inputs to production can be ‘exploited’ and be a source of surplus.
Keynesians tend to neglect the production of surplus value as the source of profit and focus on its realization upon sale, which is only one part of the contradiction described by Marx.
Without the production of a surplus and hence of profits, policies which expand demand will have little effect on growth and, as seen in the 1970s, can give rise to a combination of inflation, slowing growth and rising unemployment, known as stagflation.
For Marxist professor David Harvey, this was a crisis in the production of surplus value, and insufficient profit. The right wing policies which were adopted by politicians such as Thatcher and Reagan were one response to this crisis, and stabilized the falling rate of profit by attacking trade union power and labour rights, alongside deregulation and privatization.
For Harvey and perhaps the majority on the left, the crisis of 2008 was more to do with a failure of the realization of the surplus, rather than its production. In other words it was amenable to Keynesian policies which expand aggregate demand. If one takes the quote above as an important part of Marx’s theory, then there is some overlap here between Marxist and Keynesian ideas. Marx’s theory is more complete since it can account for different types of economic crisis, whether in the production or realization of the surplus and profits.
The neoliberal policies of the 1980s led in many countries to a slowdown in the growth of wages relative to productivity and thus to a restoration of profits. This would have weakened demand in the absence of the huge increase in private sector borrowing facilitated by the deregulation of finance. These trends came to a head in 2007 with the onset of the credit crunch and the financial crisis and recession which followed.
A post-Keynesian solution to the current economic stagnation, proposed by a number of economists, would enact policies which lead to wage rises in line with productivity growth. This would raise household income and consumption without necessitating an unsustainable rise in debt.
By expanding private sector consumption demand it could also stimulate private investment via an accelerator effect. This form of economic recovery is known as ‘wage-led’, since in this case it is wages which drive demand and growth, at least for a certain period.
Marxists such as Michael Roberts deny that crises can be wage-led, and argue that all cycles of growth and recession are ‘profit-led’. Thus there can be no realization problem or ineffective demand, if profits are high enough. If this is right, Keynesian policies which boost consumption will not work, but a restructuring of capital is essential to restore profitability, investment and growth.
This is a powerful argument, and Roberts backs it up with plenty of empirical evidence. However, to take one example, it cannot explain recent trends in the German economy. Since the 2000s, wages have stagnated, boosting corporate profits significantly, while investment has not kept up.
The private sector has failed to invest its windfall due to weaker consumption which is a result of the wage stagnation. Exports have boomed due to greater price competitiveness, while domestic demand has been weak, giving rise to a large current account surplus. The resultant excess domestic savings, rather than being invested at home, have been exported to the US, UK and peripheral Europe, financing debt-driven asset-price and consumption bubbles. This goes some way to explaining the genesis of the Great Recession.
It surely cannot be argued that the German economy lacks sufficient corporate profitability. Rather, it has been the weak growth in household income which has reduced domestic investment opportunities. Profits have been healthy in part due to stagnant wage growth alongside booming exports, but there remains an excess of corporate saving over investment. This is a problem of domestic realization of the surplus, rather than its production. Wage rises in Germany are surely part of the solution to the problem of sustaining recovery in Europe and the world.
In sum then, I find the above quote from Marx on the contradiction between the production and realization of surplus value and profit very helpful. It offers tremendous insight into the dynamics of capitalism, which has given rise to periods of growth and crisis throughout its history.
If Marx is right, different kinds of crisis may require different solutions: if the production of surplus value and profitability is insufficient, then some kind of restructuring is required; if its realization is weak due to inadequate demand, then policies which boost investment or consumption may be appropriate.
The Political Economy of Development 