Irony and the Marxian trade cycle

Karl Popper summarizes an amended Marxian theory of the trade cycle in The Open Society and Its Enemies:

“The amended theory of surplus population and of the trade cycle may be outlined as follows. The accumulation of capital means that the capitalist spends part of his profits on new machinery; this may also be expressed by saying that only a part of his real profits consists in goods for consumption, while part of it consists in machines. These machines, in turn, may be intended either for the expansion of industry, for new factories, etc., or they may be intended for intensifying production by increasing the productivity of labour in the existing industries. The former kind of machinery makes possible an increase of employment, the latter kind has the effect of making workers superfluous, of ‘setting the workers at liberty’ as this process was called in Marx’s day. (Nowadays it is sometimes called ‘technological unemployment’.)

Now the mechanism of capitalist production, as envisaged by the amended Marxist theory of the trade cycle, works roughly like this. If we assume, to start with, that for some reason or other there is a general expansion of industry, then a part of the industrial reserve army will be absorbed, the pressure upon the labour market will be relieved, and wages will show a tendency to rise. A period of prosperity begins. But the moment wages rise, certain mechanical improvements which intensify production and which were previously unprofitable because of the low wages may become profitable (even though the cost of such machinery will begin to rise). Thus more machinery will be produced of the kind that ‘sets the workers at liberty’.

As long as these machines are only in the process of being produced, prosperity continues, or increases. But once the new machines are themselves beginning to produce, the picture changes. Workers will be ‘set at liberty’, i.e. condemned to starvation. But the disappearance of many consumers must lead to a collapse of the home market. In consequence, great numbers of machines in the expanded factories become idle (the less efficient machinery first), and this leads to a further increase of unemployment and a further collapse of the market.

The fact that much machinery now lies idle means that much capital has become worthless, that many capitalists cannot fulfill their obligations; thus a financial crisis develops, leading to complete stagnation in the production of capital goods, etc. But while the depression (or, as Marx calls it, the ‘crisis’) takes its course, the conditions are ripening for a recovery. These conditions mainly consist in the growth of the industrial reserve army and the consequent readiness of the workers to accept starvation wages.

At very low wages production becomes profitable even at the low prices of a depressed market; and once production starts, the capitalist begins again to accumulate, to buy machinery. Since wages are very low, he will find that it is not yet profitable to use new machinery (perhaps invented in the meanwhile) of the type which sets the workers at liberty. At first he will rather buy machinery with the plan of extending production. This leads slowly to an extension of employment and to a recovery of the home market. Prosperity is coming once again. Thus we are back at our starting point. The cycle is closed, and the process can start once more.

This is the amended Marxist theory of unemployment and of the trade cycle. As I have promised, I am not going to criticize it. The theory of trade cycles is a very difficult affair, and we certainly do not yet know enough about it (at least I don’t). It is very likely that the theory outlined is incomplete, and, especially, that such aspects as the existence of a monetary system based partly upon credit creation, and the effects of hoarding, are not sufficiently taken into account. But however this may be, the trade cycle is a fact which cannot easily be argued away, and it is one of the greatest of Marx’s merits to have emphasized its significance as a social problem.”

What particularly struck me in reading the section leading up to this passage was a) the way that immigration is now utilized to supply the ranks of “the industrial reserve army” and b) the fact that even back in 1962, despite his apparent unfamiliarity with the Austrian School, Karl Popper was aware that “a monetary system based partly upon credit creation” was likely to have some significance on unemployment and the trade cycle.

The Marxian system is incomplete and outdated.  As Popper shows, some of its basic assumptions were incorrect and logically flawed from the start.  But the structural similarities between the domestic industrial exploitations of the 19th century and the international financial exploitations of the 21st century become increasingly apparent when one considers them from the perspective of both Marxian and Misean theories.

It is not clear to me that these apparent polar opposites can genuinely be synthesized in any useful manner; the Hegelian irony of an attempt to do so is not lost on me.  And yet, I suspect there may be something there.