Reproduction (economics) - Economic Reproduction, Economic Equilibrium and Economic Crises

Economic Reproduction, Economic Equilibrium and Economic Crises

Marx's models of economic reproduction in capitalism have often been interpreted as stating the conditions for economic equilibrium, or balanced economic growth. After all, there are certain "necessary proportions" between different branches of production, which have to adjust their output levels to each other. If those proportions do not reach a minimum acceptable level, then products remain unsold, or producers cannot get the inputs they require, in which case production begins to slow down or break down. So there are some necessary proportions between production, distribution and consumption which must be maintained if society is to survive and grow. In this sense, Marx distinguishes between the production of means of production, consumer goods, and luxury goods and he considers the commercial interactions between the sectors producing them.

If the growth of different sectors of production occurs very unevenly for some reason, "bottlenecks" can occur, so that a supply or demand cannot be met. In the worst case, an interruption in the normal reproduction process triggers a sequence of disturbances, a chain reaction which spreads from some branches of production to the whole economy, meaning that products are left unsold, and that producers receive insufficient income to pay their bills. The result is rising unemployment, productive capacity which is not utilized, and a drop in output and productive investment. That means lower economic growth.

• Disproportionality theories. This idea was the basis for numerous Marxist crisis theories devised in the first three decades of the 20th century, most famously by Rudolf Hilferding, Rosa Luxemburg, Nikolai Bukharin, Otto Bauer and Henryk Grossmann. The argument is that balanced economic growth is only a temporary phenomenon, because a private enterprise economy is incapable of sustaining the necessary proportionalities it requires for that. It cannot do so, because there is no overall, conscious coordination of production activities in an economic system where producers compete to cut costs, increase sales and increase profits. There has been much dispute about which disproportionalities exactly are of decisive importance, and why those specific disproportionalities would occur and recur, but all the theorists agree that some disproportionalities must necessarily occur, making recurrent crises inevitable.

• Uneven development theories. Other theorists such as Ernest Mandel and Roman Rosdolsky argued that capitalist economic development is always an "imbalanced" rather than "balanced" development in space and time. At most an approximate balance of supply and demand is achieved in particular areas. In that case, an economic equilibrium never exists in reality (it is only a theoretical abstraction) - there are constant market fluctuations all the time, as producers adjust to each other without being able to determine how much others will produce for sale. At most one could say that in times of strong economic growth, when markets strongly expand, all producers can make gains from increasing output, even if the gains are unequal. But after a certain time, productive investment will "overshoot" a by now saturated market demand, causing the economy to spiral into a crisis again.

The basis for this alternative interpretation is that as long as simple reproduction is at least accomplished, expanded reproduction permits a lot of variations, possibilities and flexibilities (elasticities) - the gross profit income of enterprises can, within certain obvious limits, be utilised or reinvested in many different ways, without causing any critical disturbance of the economic reproduction process as a whole. The greater labor-productivity is, and the larger the surplus product, the more discretionary wealth exists. The less that basic necessities (food, clothing, housing, cellphones) cost as a fraction of the disposable household budget, the more funds are available which can be spent optionally or saved. In addition, the extension of credit can compensate for temporary supply-demand imbalances. So, while certain minimal quantitative conditions do exist for the proportionalities of outputs among different branches of production, these proportionalities can be maintained, even if the output growth rate per year drops from (say) 4% to 2%. Provided that the capitalist relations of production are stable and secure, capital accumulation will continue, despite constant market fluctuations, at a slower or faster pace. Society will reproduce itself anyway, but at a lower or higher standard of living.

In that case, models of economic reproduction are not a very useful guide to understanding economic crises, because (it is argued) Marx only intended them to show how it was possible for the whole economic reproduction process to be accomplished on the basis of the circulation of capital, by stating what would be the minimum requirements (not equilibrium conditions) for it. If certain quantitative assumptions are made about the growth rates of different sectors and about capital compositions, it can be proved that certain disproportions must necessarily develop. But in reality, the economic reproduction process could be interrupted or break down for all kinds of reasons (including non-economic causes such as wars or disasters). And if disproportions occur, the economic system can also adjust to them, within certain limits. If vastly more capital assets are created than are actually invested in production, one cannot explain economic crises simply in terms of disproportions happening in the sphere of production - one has to look at the process of capital accumulation as a whole, which includes the financial system (capital finance), non-productive assets and real estate. This becomes particularly important when very large debt crises occur. These debt crises signal that very serious misallocations of capital have occurred, which impact negatively on economic reproduction.

• Financialization theories. A third, more recent interpretation is that the reproduction process (both the material reproduction processes and the reproduction of capital) is nowadays completely dominated by capital finance. Hence, to explain economic crises, critical disproportions between the developments of branches of production, or unutilized capacity, ought to be viewed as emerging out of specific financial and monetary regimes pursued by financial institutions and the state. The gigantic funds commanded by these organizations are thought to shape the whole character of the reproduction process. Just as Marx noted a progression from natural economy to "money-economy" and then "credit economy", it is argued that the reproduction process has nowadays become dominated by the supply, demand or withdrawal of credit-money. However, there is a lot of theoretical controversy about just exactly how the relationship between the "real economy" (the direct involvement with the production and consumption of goods and services) and the "financial economy" (the circuit of trade in financial claims) should be understood.

Arguably, a lot of the confusion in the debates about economic reproduction is attributable to two basic errors:

• Definition of capitalism: scholars often confuse Marx's idea about what is required for the reproduction of the capitalist mode of production (bringing together the factors of production to make money) with what is required for the reproduction of capitalist society as a whole. Abstractly it is assumed that the economy consists only of capitalist production and that the capitalist economy is equal to capitalist society. But in reality this is not the case at all. Capitalist society contains all sorts of non-economic processes and non-capitalist processes as well. It remains a society of human beings, who have some requirements or needs which cannot easily be met through a commercial business.

• Physical/social distinction: scholars often conflate the (expanded) physical reproduction of goods and services necessary for human survival with the (expanded) reproduction of capital. They assume that a certain market balance or market proportionality is essential for an equilibrium growth path. In reality Marx never argued that capitalist society is "held together" or "balanced out" by the market itself, and he denied that equilibrium ever existed anywhere, other than as a momentary coincidence. Instead, "what held society together" was the compulsion to produce and reproduce for a living, given a system of property rights enforced by the state. Marxists call this viewpoint Marx's historical materialism.

Once the basic needs of all could be met and organized capitalistically, the further development of capital accumulation could take directions quite unrelated to the direct requirements of economic reproduction. Indeed, that was also part of Marx's critique of capitalism; enormous funds could be invested in ways which did not really benefit society at all, with the effect that activities and assets essential to maintain society's wellbeing might be starved of funds. That is to say, within certain absolute limits, the requirements for physical reproduction and for capital accumulation might not be the same at all. Capital would be invested for profit, but basic necessities might be ignored. An example might be the 2007–2008 world food price crisis which indicates that insufficient capital has been invested in food production.

That might seem very strange, since food is a basic requirement of human life. But, as Marx would presumably argue, what makes a profit is not necessarily what people really need, and therefore the possibility exists, that profit-making may actually undermine the most basic conditions for economic reproduction, including the supply of food and clean water, sanitation, adequate shelter, schooling, health care, etc. They are undermined, not because capitalists hate investing in these things - they might love to invest in them, if they could - but simply because it is difficult to make a secure profit from doing so. The required investments may be very large and long-term (capital is tied up for a number of years), but either there is no possibility for private profit, or it is uncertain whether a sufficient profit can and will be made. If, for example, money was invested in the essential infrastructure of a country by foreign investors, a falling currency exchange rate some years later might wipe out the profits they could get. And therefore, such investments could occur, only if foreign or local government authorities (and ultimately the tax payers) would subsidize those investments (or at any rate if they act as a guarantor for the investments); or, if financial institutions can find sufficient financial insurance to protect the value of investment capital, through various constructions which reduce financial risk to investors.