Karl Marx
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The Great Depression and Recovery

Beginning in September of 1929 and peaking on October 29th of the same year, the United States entered a period known as the Great Depression. During this time period, unemployment would rise, corporate profits would fall, and government would seem to have no answers for the perils faced by a once booming economy fresh off from a period of rapid industrialization. For over a decade, the effects of the depression would be felt by the citizens of the United States.

However, in 1941 the tides would appear to be turned for the economy. 1941 would see the United States enter into WWII. It would see an apparent miraculous recovery of sorts from the depression of the previous decade. With this, it is necessary to understand how entry into WWII could essentially flip the script of the American economic scene.

With this, it is necessary to analyze the reasons for the occurrence of the Great Depression, and how one should view WWII and its relationship to the American economy. One way that this can be viewed is through the lens of a Marxist economist. The post will focus on the explanation of the period of the Great Depression through WWII through the lens of Marxist Crisis Theory. In doing so, it will rely on a litany of secondary sources alongside numbers from the 2012 report from the Bureau of Economic Analysis.

What is Crisis Theory?

The Marxist school of thought has long held that the system of capitalism is one that is volatile and prone to crises. These crises play themselves out in the manner of a recession and/or depression. What is it that leads to the volatility of capitalism, and makes it so susceptible to seemingly cyclical periods of economic downturn? In seeking to explain this, it is necessary to look at the problem identified by Marx and fellow German Marxist that identifies the idea of overproduction and under-consumption alongside the methodology of the falling rate of profit.

Overproduction occurs as too much capital is produced by the industrial class, as a means of seeking to maximize profit. The industrial power sees an ever growing amount of capital in the form of investment and consumption of produced goods by the means of labor, but fails to see any signs that notify that the market has become saturated and there is no more room for economic growth. The rate of production continues steady despite a declining rate a consumption. The rate must continue in order for the capitalist to continue to seek a rate of profit that is appealing to them. [1]

With this, the crisis referred to by Marx would occur when the materials being produced in order to bring forth a rising rate of profit, are not being bought by the market. There is no need for the product and funds are not being spent on materials created by industry.

The Great Depression as a Crisis

Marxists would argue that the Great Depression was an inevitable crisis and one that had been coming for some time due to the focus on machinery and non-living capital. As industry invests profits into machinery instead of labor, the profit rates naturally fall. Such statistics showing this rate of decline come from Th Socialist Voice in their analysis of Crisis Theory applied to the Great Depression. The growth of capital stock in the United States continued to shrink as rapid industrialization continued. Between 1869-1889, the growth of capital stock rate was 60.8%. 1889-1909 saw a slight dip to 59.4%. 1909-1929 saw a steeper decline in the growth rate, down to 43.3%. 1929-1955 saw an abysmal growth rate of 29.6%. [2]

From this, the Marxist can recognize a downward trend in the economy, that would be argued was ignored in the seeking of further profit by the capitalist powers. Despite the economic signs of a crisis upcoming, production would continue to increase. This would lead to the overproduction and underconsumption problem that was seen throughout the entire period of the depression. This lack of consumption due to saturation of the market can be seen when looking at the real disposable income in the United States during the depression. In 1929, the onset of the depression, the real disposable income (RDI) in the United States, adjusted for inflation was 791.6 billion dollars. [3] With the depression, one would expect this amount to drop off throughout the depression until the United States entered into WW2. However, that trend is not present.

While there is an initial dip in the real disposable income of Americans, by 1936, the number surpasses the point that it was at at the onset of the depression. 1936 saw a RDI of 814.8 billion. This number would continue to grow through the entry in WW2 to a level of 1055.8 billion in 1941. [4] Despite an noticeable increase that began in 1936, the economy would not seemingly recover until 1941. This can be used to argue that even though Americans had more money in their pockets, they were still not buying products. Industrialization and production had outpaced the demand of the labor force. It had done this in the search for a continued profit, in the belief that the public would continue their high rate of consumption.

Solidifying the thought process regarding the chasing of increased rates of profits leading to overproduction, one can use the information surrounding profits of companies in the United States from the time period. in 1929, the profit of industry in America, adjusted for inflation, was 9.2 billion dollars. This number would not be reached again until 1942 [5]. Between 1929 and 1941, corporations were left with a great deal of product that had been produced, with nobody to sell to which led to decreasing profit rates. How then, did WW2 bring forth a change in the economic life of America?

Did WW2 End The Great Depression?

While the typical story told is one that identifies the entry of the United States in WW2 being the “shot in the arm” that ignited the United States economy, it should instead be viewed as a transition to a point in which the United States began the inflation of a fictitious balloon under the guise of guise and economic strength. The guise was one fueled by overvaluation, speculation, the foundation of imperial markets, in place of sound economic investments. [6]

The seemingly momentous gains found from entry into WW2, were brought on due to investments in military spending by the United States government. While Adam Smith held that capitalism is able to function via the “Invisible Hand” dictating the flow of the economy, entry into WW2 saw a more active hand by the government in the form of regulations calling for defense production from industries that typically produced something else [7]. The “Invisible Hand” of capitalism was not able to self-correct and it was instead necessary for the government to intervene in order to change from a state of overproduction to a state of production within a field of demand.

Marxists would point to the fact that the American economy had to direct money to an outside sector in order to generate what would appear as a recovery from depression. This outside sector would be defense spending. Without the interference of the government to direct corporations towards defense production, the problem of overproduction would have continued. While investment in an external sector that does not aid the internal state of the nation not being a sustainable method of growth when carried on for a short period of time, the focus on military spending has had to continue to be a portion of the growing US budget and national debt.

As defense spending decreases, the seeds of destruction that were sown in the wake of WW2 begin to show and manifest themselves as a recession and/or depression. With a lack of focus on exogenous or conjunctural
stimuli (mainly internal infrastructure) as defense spending decreases, the need for bailout of these infrastructure mainstays are needed due to a previous lack of investment. This guarantees that any movement away from defense spending while continuing to a purely capitalist state will lead to a period of stagnation.[8]

Conclusion

The Great Depression is was one of many predictable cycles that are part of the system of capitalism. While the downward trends are predictable, a system fueled by the “bottom line” and “profit margins” fail to recognize these signs making the economic impact on the citizens much worse. The capitalist system of the United States post Great Depression finds itself living on a bubble of fictitious capital, with the heart being the astronomical defense spending. While reasons such as protection and policing the world are often given to justify ever increasing defense budgets, the Marxist can identify the fragile state of the economics of the country.

Notes

[1] John Milios, “Marx’s Theory and the Historic Marxist Controversy on Economic Crisis (1900-1937),” Science & Society 58, no. 2 (1994): 176.

[2] “Karl Marx and the World Crisis,” The Socialist Voice, 1983, 19 edition, 22.

[3] US Department of Commerce, The Bureau of Economic Analysis, GDP and Other Major NIPA Series, 1929–2012:II, 203.

[4] Ibid., 203.

[5] Ibid., 208.

[6] “Karl Marx and the World Crisis,” 23.

[7] Bill Dunn, “Marxist Crisis Theory and the Need to Explain Both Sides of Capitalism’s Cyclicity,” Rethinking Marxism 23, no. 4 (2011): 532.

[8] Thanasis Maniatis, “Marxist Theories of Crisis and the Current Economic Crisis,” Forum for Social Economics 41, no. 1 (2012): 7.