Crisis theory

Crisis theory, concerning the causes and consequences of the tendency for the rate of profit to fall in a capitalist system, is now generally associated with Marxian economics. Earlier analysis was provided by Jean Charles Léonard de Sismondi who provided the first suggestions of its systemic roots. John Stuart Mill in his "Of the Tendency of Profits to a Minimum" which forms Chapter IV of Book IV of his Principles of Political Economy and Chapter V, "Consequences of the Tendency of Profits to a Minimum", provides a conspectus of the then accepted understanding of a number of the key elements, post David Ricardo, but without the theoretical working out that Marx wrote, and Engels published, subsequently in Capital, Volume III. A survey of the competing theories of crisis in the different strands of political economy and economics was provided by Anwar Shaikh in 1978.

Marx's crisis theory was only partially understood among leading Marxists at the beginning of the twentieth-century. A relatively small group including Lenin and Rosa Luxemburg attempted to theoretically defend the revolutionary implications of the theory, while others, first Eduard Bernstein and then Rudolf Hilferding, argued against its continued usefulness. It was Henryk Grossman who most successfully rescued Marx's theoretical presentation ... ‘he was the first Marxist to systematically explore the tendency for the organic composition of capital to rise and hence for the rate of profit to fall as a fundamental feature of Marx's explanation of economic crises in Capital.'

Following the extensive setbacks to independent working class politics, the widespread destruction both of people, property and capital value, the 1930s saw attempts to reformulate Marx's analysis with less revolutionary consequences, for example in Joseph Schumpeter's concept of creative destruction. In this context "crisis" refers to an especially sharp bust cycle of the regular boom and bust pattern of what Marxists term "chaotic" capitalist development, which, if no countervailing action is taken, develops into a recession or depression.

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