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The Profit Crunch

In the 1960s, JKGalbraith warned of two worlds existing side by side: private affluence and public squalor. Now after the neoliberal counter-offensive, more than half of US states struggle with deficits. Private speculative losses were converted into public losses. Without the social contract, we become wolves to one another and the state is only a trough for the rich.

Are Workers Driving Capital into Crisis?

By Ingo Schmidt

[This article part of the series "Crisis Theory and Policy" published in: SoZ - Sozialistische Zeitung August 2010 is translated from the German on the Internet,  http://www.sozonline.de/2010/08/i-die-profitklemme/.]

In the middle class press, news alternates almost everyday between a new upswing and warnings of a new crisis. The uncertainty on the part of the ruling class is reason to focus on the causes of economic crises and crisis policy. With this issue of SoZ, we begin a series on crisis theory and crisis policy.

All the articles of this series follow a strand of Marxist theory underscore its historical and contemporary political relevance. Non-Marxist crisis theories will be presented from a Marxist perspective as far as they play a role in the left debate.

On crises and many other questions, Marx only left behind fragments of theory. The crisis theories built on different aspects of his work are also spotted and inconsistent. This is a disadvantage for seekers of clear answers. Whoever enters the adventure of reality exploration and its imponderabilities will find a rich arsenal of intellectual provocations in Marxist crisis theories and their contradictions.

Marxist crisis theory is not an end-in-itself but part of the search for a promising socialist policy. We will interrupt the series whenever the current crisis reaches its next stage or far-reaching economic changes seem imminent.


When businessmen are asked, everything is clear as daylight. Crises are caused by exorbitant wages, taxes and regulations. High costs devour profit margins and are responsible for declining investments, economic slumps and unemployment. With constant sales, costs could fall and profits could rise along with possibilities for investments. That may even be true from the view of individual firms.

One cannot conclude from individual firms to the general, the capitalist world market. If all businesses lower their costs, sales would not remain the same but fall since the costs of businesses also represent tax revenue and wage income.

Neoliberal economic theory obviously does not know the distinction between particular and general because it adopts the perspective of the particular, the individual who naturally is a businessman and not a worker as the generally applicable law. That wages are seen now and then even in Marxism as a cause of crises is surprising (Goodwin 1967).

The accumulation of capital - as proponents of the theory of profit crunch argue - leads to increasing employment or reduction of the industrial reserve army. Under these conditions, employees should have higher wages and not be afraid of losing their jobs. Redistribution from profits to wages should occur in the whole economy and not only in industrial branches. The profit rate falls, the goal of accumulation is paralyzed and investments sink - this leads to crisis, replenishing the reserve army and therefore a decreasing negotiating power of workers.

The vicissitudes of wages or profit rates gives a cyclical course to the capitalist accumulation process and can only be overcome by abolishing the capitalist production method. The theory of the periodically recurring profit-crunch does not contain strategic starting points for its abolition. The crisis-conditioned rise of unemployment always leads to the weakening of the working class movement and prepares the next capitalist upswing with the new rise of the profit rate.

However in the 1960s the Keynesian economic policy seemingly ended the capitalist crisis cycle and reduced unemployment to a marginal note easily treated in social policy. The theory of the profit-crunch was reinterpreted in view of this prosperity phase (Glyn/Suteliffe 1974). Given the scarcity of workers, further wage demands could always be raised and carried out without fear of job losses. Capital is caught in a long-term profit crunch while the worker movement gradually develops its power position and speeds up the transition to socialism.

Cyclical fluctuations of the wage rate - the share of wage- and salary income in the aggregate national income - can be observed empirically both during the prosperity phase of the 1950s and 1960s and during the incipient phase of lower growth rates. The shift in income distribution also leads to lower growth rates. In the 1970s the wage share rose again despite a series of economic, monetary and fiscal crises in many capitalist centers.

As theoreticians of a long-term profit-crunch predicted, the fighting strength of the workers' movement gained in the prosperity phase had a lasting effect despite the return of crises and mass unemployment. There was one important exception. In the US, the decline in union organization that began in other centers with the turn to neoliberalism in the early 1980s started already in the 1950s - at the peak of postwar prosperity. A long-term rise of the wage share did not take place in America. The generalization of neoliberalism in the 1980s in all capitalist centers initiated a long-term lowering of the wage share.

Cyclical fluctuations are still manifest. However the higher wages accompanying every boom become less and less compared to general economic growth and especially to the development of productivity. Productivity-profits flowed increasingly into the pockets of capital. Businessmen complain about high wages because every low-wage worker is against them. Their problem is a deficiency in profitable investment possibilities, certainly not a lack in profit. Thus a profit-crunch caused by higher wages may have occurred in the past but not in the present,

Still focusing on this theory is important for strategy development in the workers' movement and the socialist left because it was very effective as a subsequent explanation for the supposedly inevitable transition to neoliberalism - independent of its theoretical consistency.

The theory of profit-crunch could predict the crisis but did not consider that the crisis of unemployment would increase with the crisis and union negotiating strength would be undermined. Capital worked specifically for a restoration of the reserve army as a starting-point for a neoliberal offensive.

Theoreticians of the third way and union wage restraint reinterpreted the theory of profit-crunch since then. They held to the argument that wage demands led to falling profit rates and crisis. The conclusion that the crisis triggers the passage to socialism was replaced by the thesis that union wage demands and a Keynesian economic policy inevitably provoke capital to rationalization and location shifts and therefore are not in the interest of dependent employees (Scharpf 1987).

Strategic alternatives of the workers' movement can only be found outside this circle of neo-classicism and profit-crunch Marxism. Strategic alternatives cannot be immediately inferred from one respective economic situation to a political development. With the help of continuous mass unemployment, capital after the 1970s could break the political trend of higher wage rates or falling profit rates. The new trend to ever-higher profits contributed to the outbreak of the great crisis of 2007.

The workers' movement must now oppose a political alternative to this trend strengthened by the crisis. The contradictions of capitalism lead to ever new crises. No automatic machine to socialism arises.

Ingo Schmidt, "Greece - Driven into Crisis." April 27, 2010:
Ingo Schmidt, "Looking for Solutions: Labor and the Crisis of Neoliberal Capitalism," October 28, 2008
Ingo Schmidt, "Wall Street Panic, Main Street Pain and Policy Choices," October 5, 2008:

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