It is well known that ever since large-scale capitalist industry achieved domination of the world market, its development has assumed a cyclical character, peculiar only to this mode of production, with successive phases of recession, upswing, boom, overheating, crash, depression and so on. Although Marx left no finished theory of the industrial cycle and crises of overproduction, it is possible to derive the broad outlines of such a theory from his most important writings. Marx himself explicitly rejects any monocausal explanation of crises, insisting that they are a combination of all the contradictions of the capitalist mode of production. In this sense the cyclical movement of capitalist production undoubtedly finds its clearest expression in the cyclical movement of the average rate of profit, which after all sums up the contradictory development of all the moments of the process of production and reproduction. An economic upswing is only possible with a rising rate of profit, which in its turn creates the conditions for a fresh extension of the market and an accentuation of the upswing. At a certain point in this development, however, the increased organic composition of capital and the limit to the number of commodities that can be sold to the ‘final consumers’ must lower the rate of profit and also induce a relative contraction of the market. These contradictions then spill over into a crisis of over-production. The falling rate of profit leads to a curtailment of investments which turns the downswing into a depression. The devalorization of capital and increasing rationalization and unemployment (which lift the rate of surplus value) permit the rate of profit to rise once more. The decline in output and depletion of stocks permit a new expansion of the market, which combines with the recovery of the rate of profit to restimulate entrepreneurial investments, and hence to launch an upswing in production.

The cyclical movement of the rate of profit is undoubtedly linked to the uneven development of the various elements of the overall process of production and reproduction. In an upswing, the rate of profit grows more rapidly in Department I than in Department II, thus causing a drain of capital to the former, a substantial increase in investment activity and hence a boom. footnote¹ Conversely: whereas over-production (or over-capacity) makes its first appearance in Department II before becoming manifest in Department I, it will assume its most acute forms in Department I rather than in Department II. The re-stimulation of production during the depression following the crash thus mostly proceeds from Department II, where the rate of profit declines less than in Department I.

The fact that Department I develops more powerfully than Department II is merely an overall social expression of an increase in the organic composition of capital. Conversely, the fact that the production of Department I declines more steeply than that of Department II during recessions is ultimately an expression of a fall in the rate of profit and devalorization of capital. It would be superfluous to pursue here this uneven development between the different components of total capital and each of its value-parts. The important point is that this uneven development—disproportionality—is not merely due to the anarchy of production and the absence of agreements between the capitalists, as was assumed by Hilferding and Bukharin, but is rooted in the inherent laws of development and contradictions of the capitalist mode of production. It stems, among other things, from the antagonism between use-value and exchange-value; from the impossibility of increasing the consumption of the ‘final consumers’ in equal proportion to social production capacity without a substantial reduction in the rate of profit; and from the impossibility of eliminating capitalist competition altogether—investments cannot be throttled at the first sign of over-capacity since firms with a technological lead continue to seek surplus profits and larger shares of the market. footnote² To eliminate this cyclical movement of production there would have to be not only stable growth, and hence a stable rate of investment—in other words, not only a general cartel secure for all time, which would mean the abolition of private ownership and any independence whatever in accumulation and investment activity—but also a complete adjustment of the distribution of the purchasing power of each individual consumer to the dynamic of the production and value of each individual product. Such conditions would involve the abolition of capitalism and commodity production themselves.

So long as capitalism exists, production will continue to follow a cyclical pattern. It is easy to show empirically that this is still the case in late capitalism. The recessions of the us economy in 1949, 1953, 1957, 1960, 1969–71 and 1974–5 are well-known. Since the end of the Second World War similar downswings have occurred in all the imperialist countries. It was long believed that West Germany was an exception, but the 1966–7 recession provided striking evidence to the contrary, in the winter of 1971–2 a second recession followed, and in 1974–5 a third recession. Nonetheless, economic cycles have assumed a specific character in each phase of the capitalist mode of production. The economic crises of 1920, 1929, and 1938 reveal many traits different from those of the epoch before the First World War, not least because the geographical expansion of capitalism had ended with the incorporation of China into the world market, while the victorious Russian Revolution had even contributed to its diminution. In the same way, it is necessary to examine specific features of the post Second World War late capitalist production cycle.

Two decisive factors, in our view, explain the ‘long wave with an undertone of expansion’ which lasted from 1940(45) to 1966. In the first place, the historical defeats of the working class enabled fascism and war to raise the rate of surplus value. In the second place, the resultant increase in the accumulation of capital (investment activity), together with an accelerated rhythm of technological innovation and a reduced turnover time of fixed capital, led in the third technological revolution to a long-term expansion of the market for the extended reproduction of capital on an international scale, despite its geographical limitation.

How is permanent inflation connected with this ‘long wave with an undertone of expansion’? To what extent does it help late capitalism to mitigate the effects of its internal contradictions? Can it do this for an unlimited period? Money, as the universal equivalent of the values of the commodities, is the counter-value of quantities of socially necessary labour. At the same time, therefore, it is a claim over a fraction of the present or future overall labour resources of society. In the context of the labour theory of value, this definition of money immediately shows that a devaluation of money (i.e. an increase of the money-tokens corresponding to a given quantity of labour) cannot have any direct influence on the total sum of labour quantities to be distributed; it can only determine their redistribution. More quantities of labour cannot be distributed than there are to distribute. However, since a crisis of overproduction is characterized precisely by the fact that important forces of production (labour power and machines) are laid idle, the inflationary creation of money can in certain conditions stimulate the accumulation of capital, if it leads to an increase in production, namely in the production of surplus value. It can thus also lead to a growth in the mass of the quantities of labour to be distributed. Under capitalist conditions this will only occur if it promotes an increase in the rate of profit—in other words, reduces the share of wages in the national income. Keynes, more intelligent and cynical than his ‘reformist’ disciples, was quite frank about this.

Because monetary devaluation and credit can to some extent conceal such a state of affairs by an uninterrupted increase in prices (which may well correspond to a reduction in values), they make it necessary to take a searching look at the relationship between inflation, the rate of profit, the real income of wage earners and the accumulation of capital. One of the main functions of permanent inflation is that it provides the large companies with the means for accelerating the accumulation of their capital. This involves a conversion of idle capital into productive capital, in so far as the money capital lent stems from actual deposits in banks. It becomes a conversion of credit money into money capital as soon as the volume of overdrafts exceeds that of the deposits which have autonomously come into being. The discussion as to whether this credit money represents ‘pure’ money capital, credit money or ‘fictitious capital’ seems somewhat byzantine: it is actually money capital advanced and (with the rate of inflation) partly devalued. So long as this money capital is used to purchase labour power and means of production, and is thereby converted into productive capital, an actual increase in the production of value and surplus value takes place—in other words, a real enrichment of capitalist society.