Taking a hard look at the crisis afflicting Western economies in recent years, Manuel Castells suggests that the very structures that fostered economic growth since 1945 are the same structures that are now undermining these economics. Pinpointing the new forms of the capitalist mode of production and the contradictory nature of its class relations as the root of the problem, he offers a comprehensive critique of American society and its economy.
Originally published in 1980.
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The Economic Crisis and American Society
By Manuel Castells
PRINCETON UNIVERSITY PRESSCopyright © 1980 Princeton University Press
All rights reserved.
Toward a Social Theory of Economic Crises in Advanced Capitalism
The crisis shaking the capitalist world in the 1970s is multidimensional, political and ideological as well as economic. Consequently, the only useful explanatory framework is one able to integrate these different levels of social reality within the perspective of a contradictory historical development. The Marxist tradition is, to our knowledge, the only one that even attempts to put together the movement of capital and the process of social change as jointly determined by class struggles over production, consumption, power, and cultural values. Therefore, we will rely on this tradition to construct a tentative theoretical scheme capable of providing us with an understanding of current historical trends. But our reliance on it will not be unqualified: we reject any dogmatic position that tries to preserve the whole theory in its original form in spite of later historical experience. Accordingly, we will suggest modifications of the conceptual apparatus when required, and we will consider the Marxist tradition as a whole and not just as a particular fragment of Capital by Marx. We must embrace social reality in its entirety and treat the dynamics of class struggle in all its ramifications, which obviously include the contradictions of capital accumulation, but without reducing society to the narrowest expression of its dominant pole.
The Marxist theory of economic crises is usually associated with the Marxian theory of the tendency of the falling rate of profit. In fact, as we shall see, this theory summarizes an overall historical trend. But, as it has been presented in its simplest form, in rather plain economistic terms and within a context of religious belief in the inevitability of a general and sudden breakdown of capitalism, this tradition had led both to the repetition of unsustainable dogmatic statements and to the dismissal of the explanatory value of the Marxist theory of crises. Both positions leave us without a valuable tool to understand and transform our world, since most critics are unable to propose any alternative beyond ad hoc interpretations of specific situations. While this pragmatism certainly represents a safe way of avoiding intellectual pitfalls, it has a negative effect on the value of theory as a tool of social change because it means that we are only able to explain social events after they have happened instead of being able to predict tendencies and act on them in order to change the trend.
That is why we would rather risk exposing ourselves to criticism by trying to use and develop the Marxist theory of crises than use its obvious weaknesses as a pretext to withdraw from any attempt at explanation. Since the production of knowledge is a collective process, our proposition will be just one element in it, finding its fruitfulness through the necessary rectification that will emerge from other theoretical efforts as well as from future historical experience.
We will start with a summary of the Marxian theory of crisis both because the theory of the falling rate of profit has a strong tradition and because it contains some structural elements crucial to understanding capitalist crises. We will then proceed to a brief examination of the debate surrounding this theory in the recent literature. We will examine both its theoretical coherence and its empirical adequacy. Next we will discuss the meaning of the few empirical tests that have been made on the theory and the hypothetical interpretations that can be supported by these data. Turning then to a revision of the theoretical framework, we will propose an alternative scheme, which, while relying on the general Marxist theory and incorporating some elements of the law of the falling rate of profit, will try to provide additional theoretical tools to explain both the new social trends appearing in advanced capitalism and the forces that have led to the current structural crisis.
1. THE THEORY OF THE FALLING RATE OF PROFIT AND ITS CRITICS
The theory of the falling rate of profit as originally proposed by Marx in Volume III of Capital is presented in the form of an apparent paradox: the more capitalism develops, the more the average rate of profit for capital declines. Falling profit rates result in a surplus of capital because the increasing mass of capital accumulated by the growing extraction of surplus value finds fewer and fewer possibilities for investment with an adequate return. There follows a decline in productive investment, which leads to a decline in employment and to a concomitant reduction of wages paid by capital. As wages decline, demand shrinks in a parallel way, provoking a crisis in the selling of the already stocked commodities. Thus, a crisis of overproduction occurs because even the restricted productive capacity cannot be absorbed by the existing solvent demand since demand in turn has been reduced by falling investments. The inability to realize its commodities induces capital to halt production, increasing unemployment and depressing markets. Because capitalism is organized on a world scale the crisis spreads throughout many nations in a highly interconnected spiraling process. Since capitalist production is interested in creating use value only as a support for exchange value, the economy can only be restarted when mass unemployment allows very low wages, when the bankruptcy of many firms has devaluated fixed capital, creating demand for new means of production, and when the state intervenes or there is a sudden event (such as a war) that increases substantially the outlets for profitable capital investment.
This mechanism of crisis production is widely accepted by most non-Marxist economic theorists, particularly Keynesians. What is specific to Marxian thought is the relationship between the falling rate of profit and the dynamics of capitalist accumulation. Why must the average rate of profit decrease in the long term? Because, Marx says, an increasing organic composition of capital is the result of the process of capital accumulation. The organic composition of capital is the relationship between the value (the amount of social labor) used in the production of means of production, raw materials, and other work objects (constant capital) and the value used in the reproduction of the labor power put into work in the process of production (variable capital). Marx often refers to the organic composition as the relationship of "dead labor" (machines, buildings, raw materials, etc.) to "living labor" (workers). But it is important to keep in mind that this relationship is a relationship of values and should be entirely differentiated from the technical composition of capital, which is the relationship between the material means of production and the mass of workers organized in the process of capital production or, more precisely, the relationship between fixed capital and labor.
The tendency of the organic composition to rise with the process of capital accumulation leads to a tendency for the rate of profit to fall because "living labor," the only source of value, tends to be replaced by "dead labor," which is able to transmit into the commodities only the same amount of value already embodied in the means of production. Therefore, in spite of an increasing mass of surplus value produced by capitalism, the relationship between the value invested and the surplus value will be less and less favorable to the latter. Since the rate of profit depends ultimately on the rate of surplus value, profit rates will tend to fall in the long run. Using the traditional Marxian presentation of the relationship between the different elements of the process of production of surplus value and profit, we have:
Q = c/v e = s/v p' = s/[c + v]
where Q: organic composition of capital
c: constant capital
v: variable capital
s: surplus value
e: rate of surplus value
p': rate of profit
If we divide both terms by v,
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
Therefore, p' is a direct function of e and an inverse function of c/v. So, for a given e, p' will vary according to the evolution of c/v: the greater Q is, the more p' decreases.
But why does the organic composition of capital increase with the development of the capitalist mode of production? It is not a question here of a natural mechanism but of a historical process, which as Marx unveils it is marked by the development of class struggle and is therefore not inexorable. It is a result of the combined effect of three phenomena:
1. Intercapitalist competition leads each capitalist to try to surpass his rivals by introducing more technologically advanced means of production that allow him to reduce production costs and raise profits. Nevertheless, while replacing "living labor" with "dead labor" increases the profit for individual capitalists, it reduces the total rate of surplus value appropriated at the global level. Moreover, the competition leads little by little to the concentration and formation of monopolies. Even then, however, competition is not suppressed. It simply changes scale and becomes intermonopolistic competition on a world scale. Economic political decisions made by large firms are primary factors in their strategy to dominate the markets because in order to develop they must invest in large administrative apparatuses and in other operations that are not productive. Monopoly corporations push toward a fast growth of investments in constant capital, and owing to their interrelations and uninterrupted penetration into all sectors of the economy, they are able to dissolve the outmoded sectors with a low organic composition in order to replace them with units of a higher organic composition.
2. The development of productive forces demands direct as well as indirect investments that are more and more costly. Because this development accelerates the process of obsolescence of fixed capital, the rate of turnover of constant capital also accelerates. Then, as a consequence, its relative importance in relation to variable capital increases by the same amount over the long run.
3. The fundamental element of this tendency toward the rise in the organic composition of capital is nevertheless the predisposition of the capitalist to save the greatest amount of variable capital and to replace it progressively with constant capital. And this is due essentially to the development of the labor movement, to the emphasis on class struggle, to the deterioration of capital's power vis-à-vis labor.
Although this third structural cause is not explicitly laid out in Volume III of Capital, it is a clear consequence of the whole analysis developed by Marx in Volume I. This is a crucial point, and we will return to it in the final presentation of our general framework.
Now, at the same time that Marx presented the law of the tendency of the rate of profit to fall as a consequence of the secular trend toward a rising of organic composition of capital, he also referred to the existence of countertendencies that would stop or even reverse the structural tendency. These tendencies are: the increasing intensity of exploitation; the depression of wages below the value of labor power; the cheapening of elements of constant capital; relative overpopulation; foreign trade; the increase of stock capital. No specific prediction about the domination of the tendency or of the countertendencies over time is included as an essential part of the theory. Why, then, is the falling rate of profit called the tendency and the opposite forces the countertendencies? The terminology is certainly not arbitrary. The reason stems from the theoretical hierarchy of the elements of the explanation and not the historical sequence. This will become clearer at the end of our analysis.
To summarize, the Marxian theory of the economic crisis in the process of capital accumulation caused by the falling rate of profit can be presented as follows:
1. Capitalist accumulation leads to an increasing organic composition of capital (namely, replacement of "living labor" by "dead labor" in the process of production). This happens as a consequence of intercapitalist competition, the development of productive forces, and workers' resistance to exploitation.
2. The increasing organic composition of capital necessarily produces a falling rate of profit for a given rate of surplus value.
3. Falling rates of profit lead to declining investment, provoking overaccumulation of capital, overproduction of commodities, and massive restriction of demand.
4. The tendency of the organic composition of capital to rise in the process of accumulation can be halted by counteracting influences.
5. The tendency of the rate of profit to fall can be reversed, in spite of the increasing organic composition, if the rate of exploitation rises faster than the organic composition.
This formulation of the theory is not a made-up version of it but is, we believe, consistent with the original Marxian writings. We do not want to enter into a Marxological discussion here, particularly because, as we shall see, a reorganization of the theory is required in order to be able to understand the crises in advanced capitalism. The point of presenting the argument in this way is to emphasize that most of the criticism addressed to the theory of the falling rate of profit refers, in fact, to the rather simplistic and mechanistic version circulated during the thirties by some "theoreticians" of the Third International. These formulations presented both tendencies (the rise in the organic composition and the fall in the rate of profit) as necessary and almost natural trends intrinsic to capitalist accumulation. The counteracting influences, for these messianic believers, did not more than delay the process that would necessarily lead to a catastrophic breakdown of the capitalist economy. The obvious practical lesson that could be drawn from this view was that a revolutionary coup had to be prepared in order to duplicate the assault on the Winter Palace in the aftermath of a general collapse similar to that in Czarist Russia.
This political background explains most of the violence of the current controversy over the theory of the falling rate of profit. In fact, what many of the critics of the theory are actually attacking is intellectual dogmatism and political Stalinism. In this sense, the debate represents a healthy reaction against the remnants of a pseudo-Marxist interpretation of human history that sees it as subject to some kind of natural or technological determinism.
While we certainly agree with most of the intellectual and political meaning of the current reaction, it is important to consider the relevance of the theory itself purged of the connotations generated by its historical use.
Viewed in this way, the intellectual trends in France are certainly very different from those in the Anglo-Saxon world. In France the overwhelming majority of Marxist economists (from Paul Boccara and the Communist group of Economie et Politique to the pro-Fourth International group of Critiques de l'économie politique) rely to a great degree on the theory of the falling rate of profit as presented previously, even though different groups have totally contradictory approaches to the relationship of this tendency to the class struggle and the role of the state.
In the United States and Great Britain there is, on the contrary, a very powerful trend toward dismissing this theory as inadequate for interpreting the crisis under the conditions of monopoly capitalism. This has been brought about partly because of the major criticism developed by the most respected and most respectable of American Marxist economists, Paul Baran and Paul Sweezy. For Sweezy, "it is an absurdly untenable notion that the capital accumulation process necessarily implies a runaway organic composition of capital increasing without assignable limit and much more rapidly than the rate of surplus value."
Excerpted from The Economic Crisis and American Society by Manuel Castells. Copyright © 1980 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
- FrontMatter, pg. i
- CONTENTS, pg. vii
- List of Tables, pg. x
- List of Figures, pg. xii
- Acknowledgments, pg. xiii
- Introduction, pg. 1
- CHAPTER 1. TOWARD A SOCIAL THEORY OF ECONOMIC CRISES IN ADVANCED CAPITALISM, pg. 14
- CHAPTER 2. WHAT HAPPENED: THE ROOTS AND THE DEVELOPMENT OF THE ECONOMIC CRISIS IN THE UNITED STATES, pg. 78
- CHAPTER 3. CAPITALIST CONTRADICTIONS AND CLASS RELATIONSHIPS IN THE AMERICAN SOCIAL STRUCTURE, pg. 138
- CHAPTER 4. CLASS INTERESTS, POLICIES FOR THE CRISIS, AND THE POLITICAL PROCESS, pg. 215
- CONCLUSION. TWILIGHT OF AMERICAN CAPITALISM?, pg. 255
- Notes, pg. 265
- Index, pg. 279