The capitalist system is passing through its deepest crisis since the 1930s and the Great Depression. The apologists of capitalism – including those in the labour movement – had completely ruled out such a scenario. After all, they explained, capitalism has changed and governments are now able to over-come any deficiencies experienced by the markets. They have learned the lessons of the 1930s.

“Never again will we experience the horrors of the inter-war period”, the apologists of capital claimed. “We have abolished boom and slump”, was their confident boast. Consequently, they declared that the ideas of Marxism were completely out of date.

Now these people are being forced to eat their words. “Today, they are struggling with the deepest recession since the 1930s, a banking system on government life-support and the danger of deflation. How can it have gone so wrong?” These are the words of Martin Wolf, economic strategist at the ‘Financial Times’. “Most of us – I was one – thought we had at last found the Holy Grail. Now we know it was a mirage.” (FT, 6/5/09)

“We have gone to the edge of an abyss that few thought was ever possible”, stated Stephen Roach, chairman of Morgan Stanley, Asia. “If the world pulls together, we can avoid the Armageddon endgame.” According to Bernie Sucher, head of Moscow operations at Merrill Lynch, “Our world is broken – and I honestly don't know what is going to replace it. The compass by which we steered as Americans has gone.” (FT, 10/3/09)

Marxism long ago predicted this deep crisis. “In the coming epoch”, wrote Ted Grant and Alan Woods, “a new depression on the lines of 1929-31 is inevitable.” (World Perspectives, 1994) It was not possible to establish the precise timing of this eventuality as economics is not an exact science. However, while Marxism cannot provide a timetable of events, it can analyse and explain the general processes and contradictions unfolding within capitalism.

Ever since its origins, the boom and slump cycle has been an inherent feature of the capitalist system. It is equivalent to the normal inhaling and exhaling of a human being. However, capitalism has piled up contradiction upon contradiction, which at a certain point, was always destined to produce a massive collapse of the productive forces. Over a sustained period, in an attempt to escape from these contradictions, astronomic amounts of fictitious capital and credit were artificially pumped into the capitalist system. The Federal Reserve made three interest rate cuts to boost consumer spending in 1998, to levels not seen since the 1950s. As a result, the personal consumption share of real GDP rose from 67% in the late 1990s to 72% in the first half of 2007. The booming housing market – a classic speculative bubble - also allowed extensive borrowing on the increased paper value of property. This created the biggest credit bubble in history. Credit, which allows capitalism to go beyond its limits by temporarily expanding the market, exploded. Nevertheless even cheap credit has its limits. Debts have to be repaid with interest sooner or later. House prices can fall. The “credit crunch” was an expression of this limit as borrowers began to default on a massive scale. All the factors which served to fuel the boom have now dialectically turned into their opposite, causing a mighty crash.

World capitalism is experiencing a deep slump - indeed in many ways the present crisis is potentially even more serious than that of 1929-33. Its scope is much wider than the thirties and its impact has been far swifter.

Between 1929 and 1933, the decline of industrial production in the United States was more than 48%. The decline in the current crisis has been similar, with US industrial production falling by 12.5% over the last 12 months. In Japan, the situation has been more serious with industrial production falling by 37% in 2008 and a projected fall of 25% this year, making the decline over two years more than 60%. In the Euro zone the fall in industrial production over the last year was in the order of 20%. In Eastern Europe and the Baltic States the situation is extremely grave, with Hungary chalking up a fall of 29% in industrial production over the last year. The exposure of Western banks in the region is a massive $1,600bn, a significant proportion held by Austrian banks, an ominous reminder that it was the collapse of the Austrian Credit-Anstalt bank that further intensified the slump in 1931.

Despite all the talk of “green shoots” of recovery, the situation remains extremely serious for capitalists internationally. According to two leading economists, Barry Eichengreen and Kevin O'Rourke, the recent slide of global industrial output tracks the decline in output during the Great Depression “horrifyingly closely”. Within Europe, the decline in the industrial output of France and Italy has been worse than at the same point in the crisis as in the 1930s. In Britain, Germany, USA and Canada, the fall has been very similar.

The collapse in the volume of world trade, at around 10%, has been far worse than was the case during the first year of the Great Depression. Despite the recent bounce, the fall in world stock markets is far larger than during the corresponding period of the Great Depression. The conclusion of both economists is posed starkly: “Globally we are tracking or doing even worse than the Great Depression... This is a Depression-sized event.”

What we are experiencing is a fundamental crisis of capitalism, with collapsing markets and over-production, leading to mass unemployment and cuts in living standards across the world. Apologists of capitalism today talk glibly of the crisis being caused by various things, such as “de-regulation”, speculation (‘short-term’ selling), lack of credit, bad luck and so forth. We would say that these are nothing more than the appearances of crisis as opposed to the real causes of the crisis. While there are many secondary causes of capitalist crisis inherent in “the real movement of capitalist production, competition and credit”, Marxists have always explained that in the final analysis real capitalist crisis is always a crisis of over-production. This means general over-production, both of consumer and capital goods for the purposes of capitalist production. This in turn, is caused by the market economy, and the division of society into mutually conflicting classes. Such a phenomenon is peculiar to capitalist society alone.

“The ultimate reason for all real crises”, explained Marx, “always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute [physical] consuming power of society constituted their limit.” In other words the capitalists are constantly revolutionising production, throwing enormous amounts of commodities onto the world market, which periodically come into conflict with the limits of consumption caused by the exploitation of the masses who are unable to buy the goods they produce, having been robbed of the full fruits of their labour by the bosses.

Capitalists do not simply sell commodities, but aim to sell them at a sufficient profit to accumulate wealth for themselves. In a slump, they cannot continue to sell their commodities at a price that guarantees the necessary average rate of profit for the bosses. Prices are reduced. The surplus-value contained within the commodities cannot be realised as before, resulting in a collapse of profits. Factories are therefore closed and workers made unemployed, further reducing demand for consumer and capital goods in an ever downward spiral.

“In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production”, explained Marx.

Capitalist economists do not like referring to “over-production”, but prefer the term “over-capacity”, which is basically the same thing and expresses the limits of the market. “The world is awash with goods…” explained ‘Newsweek’.

“For economists, over-capacity is a tricky concept. Human wants are unlimited, so how could the world ever produce too much of a good thing? The key is what people can pay: In many goods sectors, prices still aren't low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance.” (Newsweek, 4/2/09)

This crisis of over-production has been unfolding on a world scale. As the ‘Newsweek’ article continues, “That's not to say the Obama Administration is on the wrong track with its nearly $900 billion-plus stimulus plan. But it's important to have realistic expectations. The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global over-capacity is the most extreme. The world is able to make 90 million vehicles a year, but at the current rate of production, it's making only about 66 million, according to estimates from market researcher CSM Worldwide. Global production of semiconductor wafers is running at only about 62% of capacity, estimates market researcher iSuppli.”

In relation to car production, ‘Business Week’ makes the following observation: “Having indulged in a global orgy of factory-building in recent years, the industry has the capacity to make an astounding 94 million vehicles each year. That's about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.” The article continues, “To become profitable, according to Michelle Hill of consulting firm Oliver Wyman, U.S. automakers will need to close at least a dozen of their 53 factories in North America in the next few years.” (Business Week, 31/12/08)

As we can see, we are not simply dealing with a normal cyclical crisis of capitalism. Such crises will continue periodically until the death of capitalism itself. Today we are seeing a cyclical crisis exacerbated by what Marxists refer to as an organic crisis of the capitalist system itself. Capitalism has become a barrier to the development of society, where the productive forces – industry, technique and science – are increasingly constricted and hemmed in by the nation state and private ownership of the means of production. This organic crisis is graphically illustrated today by the inability of capitalism to fully utilise the productive forces it has brought into being. It has become a fetter and drain on the productive forces, which are the key to the development of society. In times of boom, capitalism can only use 80% of productive capacity and in times of slump only 65%. In other words, 20%-35% of production cannot be utilised profitably. This clearly shows the impasse of the modern capitalist system and the unprecedented degree to which it is holding back society. “The world's productive capacity is simply too big”, explains ‘Newsweek’. “That means prices need to fall further, or more factories need to close in the US and abroad, or some combination of the two.” (Newsweek, 4/2/09)

This organic crisis, which emerged with a vengeance during the inter-war period, was temporarily overcome by the massive development of world trade following the Second World War. This development in turn had a dramatic beneficial effect on world production. The whole system of capitalism, where every factor interacts on every other factor, requires rising production, investment and an increased market in an upward spiral. With growing living standards, this provided the system with relative social stability. The 1974-75 world recession signalled the end of the upswing and ushered in a new period of crisis where capitalism could no longer reach the figures of growth, investment, profitability, etc., of its so-called Golden Age.

While they were able to put off a deep crisis in the 1980s and 1990s and even into the new century, capitalist crisis has now returned with a vengeance. Today, all the fundamental contradictions have re-emerged and have served to intensify the crisis at all levels. World trade has collapsed, dragging down production. The development of the productive forces has reached a complete impasse as production tumbles in one country after another. The anarchy of the capitalist system itself has become a barrier to the progress of society, with millions losing their jobs, workplaces closing down and living standards falling. After a protracted delay of some 50 years, the capitalist system is returning to its “normal” state of chronic instability. It is what Lenin and Trotsky called the “historical crisis of the whole capitalist system.”

A further contradiction that bears down upon capitalism and aggravates the crisis has been the tendency of the rate of profit to fall. The massive development of the productive forces following the war meant a colossal increase in investment. As the source of surplus value comes from the unpaid labour of the working class, the more spent on capital investment (constant capital) in proportion to that employing workers (variable capital) eventually results in a falling rate of profit. Marx referred to this double-edged “law” as a tendency due to the fact that there were a whole series of counter-veiling factors, such as the increased exploitation of the working class, which could neutralise or reverse its effects – for a time anyway.

Throughout the post-war period, this tendency for the rate of profit to fall intensified the pressures on the capitalist class. After a period of high profitability throughout most of the 1950s, the rate of profit began to fall steeply by the mid-1960s. This decline carried on until the 1980s, when after a series of defeats for the working class, the capitalists began an all-out offensive to drive up profitability. The election victories of Thatcher and Reagan were the signal for this onslaught and a “counter-revolution” on the shop-floor. Down-sizing, multi-skilling, short-term contracts and other techniques were introduced. This squeezing of the working class resulted in an increase in absolute and relative surplus value. In Marxist terms, this reduced necessary labour-time and increased surplus labour-time, and so increased the rate of surplus value.

In the last decade, despite the loss of a million jobs, workers in British manufacturing have increased production by 50%. In other words, the capitalists have squeezed more unpaid labour from fewer workers. Other factors, such as pressure on real wages, the cheapening of commodities, globalisation and the intense exploitation of world markets also served to increase the rate of profit.

Between 1989 and 1997, US corporate profits increased by about 82% and the corporate rate of profit by 27.8%. By 1997 profitability in the corporate sector had returned to within 15% of its 1960’s high. The non-manufacturing sector had recovered to above its 1969 level to within 15-20% of its heights in the post-war boom.

Despite a dip in profitability during the recession of 2001, profits went on rising until the financial crisis hit in 2007.

Today, with the world slump, the rate and mass of profit have collapsed. This is directly linked to the collapse of markets and the emergence of over-capacity and over-production. As Marx explained, “It [capitalism] comes to a standstill at a point fixed by the production and realisation of profit, and not the satisfaction of requirements.”

The credit boom allowed capitalism to artificially escape serious crisis for a whole period of time, but by using such measures to extend the market – and therefore boost their profits - during a time of upswing rather than downturn, like pouring petrol on a blazing fire, they in turn laid the grounds for a massive collapse of the financial framework propping up the whole world capitalist edifice. The virtual disappearance of bank lending, as the world banking system rushed to try and shore up their wildly overstretched finance, left many firms unable to cope with even a small blip in their profits hence the cascade of closures and downsizing. That which had aided capital in the past is now having a reverse effect.

This has resulted in a massive attack on the workers in Britain and elsewhere in an attempt to make them pay for the crisis of capitalism. British Airways workers were asked to take wage cuts or to work for one month without pay! The bosses are still intent in cutting wages and propose the sacking of some 6,000 workers “to save the company”. More than half of British workers have experienced a cut in pay or hours or benefits since the recession began. Now six million public sector workers are being threatened with a pay freeze to help plug the swollen budget deficit.

This is the real meaning of capitalist crisis for millions of workers. But despite the difficulties workers are not simply accepting these attacks lying down. Workers in Royal Mail, London Underground, Visteon, Vestas, the construction industry and many other sectors, have taken industrial action, and even occupied their workplaces, in defence of their livelihoods. There is enormous anger in the ranks of the working class that is threatening to explode. Even the capitalists are very worried about this increasing anger.

“There are many questions hanging over global financial markets, but none more pertinent, perhaps, than the following: will the global economy rebound in time to quell rising discontent among the millions of workers who have turned – violently in some cases – against capitalism?” asks Joe Quinian, a strategist at the Bank of America.

“The capitalist global order was under attack even before the current crisis began, but the virulence against free enterprise has become more intense in the last year. And with the global economy in the midst of the deepest declines since the Great Depression, the backlash is bound to intensify.” (Financial Times, 12/5/09)

As a result, the capitalists are desperately looking for an economic recovery. But they are concerned that the present green shoots may well be no more than a false dawn. However, even when the recovery comes, as is inevitable, it will be very slow, painful and shallow. There is a dread that the world economy will go the way of Japan in the 1990s, with weak growth punctuated by periods of contraction. “Empirical evidence of the effect of past crises shows … that the economy will not return to its pre-crisis expansion path but will shift to a lower one. In other words, the crisis will entail a permanent loss in the level of political output”, states the recent European Commission report (FT, 3/7/09).

The massive overhang of debt - personal, business and state - will be a colossal lead weight on the economy. The move to reduce the unprecedented levels of government deficits will result in massive cuts to public spending in the years that lie ahead. The British Treasury thinks that there will be a permanent loss of output amounting to 5% of national income, making households worse off by around £75bn every year - forever. Government finances are spiralling out of control. The Institute of Fiscal Studies believes that public finances, which will require more than £20bn cuts each year for at least the first parliament, will not return to “normality” for another two decades. This means 20 years of austerity! Trish Haines, head of the Society of Local Authority Chief Executives, stated: “People are talking about possible reductions in public spending of 10 to 15%, even of up to 30%.” These will be draconian cuts whoever wins the next election.

The capitalist system has now become an enormous fetter on human society. The re-emergence of this organic crisis has enormous implications for the working class: a socio-economic system which proves incapable of developing the productive forces enters into steep decline. A new era of social revolution has opened up on a world scale, an era of revolution, counter-revolution and profound instability at all levels. Such a period will repeatedly propel the working class internationally to look for a way out of the crisis. It will place the socialist reconstruction of society on the order of the day as the only answer to capitalist crisis and the ills that go with it.