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Crisis theory is a debate within the Marxian theory of political economy. It is concerned with explaining the business cycle in capitalism, particularly recession, drawing on Karl Marx’s account of value relations. Marx believed he had provided a comprehensive account of the inner dynamics of capitalist social organization.
According to those who understand him to have offered a complete crisis theory, Marx demonstrated that the particular form social investment takes under capitalism, c:v (constant capital : variable capital), works initially to accelerate, but latterly to strangle the long-wave development of mankind’s means of production proportional to our labour power, M:L. Given that the advancement of M:L is the foundation of all material progress and thus social progress for Marx, proving that capitalism retards M:L is all the proof Marx needed that capitalism was becoming obsolete.
The alternative to replacing capitalism would be for its ever-present crisis to drag humanity back to barbarism, destroying the gains that capitalism itself had created. Marx’s precise workings-out, with their reliance on a customized version of the dialectic method Marx salvaged from Hegel, resist summarization. However, the important sections come in Capital Volume 3, particularly in Part 3 – The Law of the Tendency of the Rate of Profit to Fall.
An attempt was made to re-present aspects of them in a mathematical form in the work of Henryk Grossman. Central to the argument is the claim that, within a given business cycle, the accumulation of surplus from year to year leads to a kind of top-heaviness, in which a relatively fixed number of workers have to add profit to an ever-larger lump of investment capital. This observation leads to what is known as Marx’s law of the tendency of the rate of profit to fall.
Unless certain countermeasures are available to be taken, the exponential growth of capital out-paces the growth in labor productivity, so the profits of economic activity have to be shared out more thinly among capitals, i. e. , at a lower profit rate. When countermeasures are unavailable or exhausted, the system requires the destruction of capital values in order to return to profitability.