At its most basic, the class struggle (the resistance to hierarchy in all its forms) is the main cause of the business cycle. As we argued in section B.1.2 and section C.2, capitalists in order to exploit a worker must first oppress them. But where there is oppression, there is resistance; where there is authority, there is the will to freedom. Hence capitalism is marked by a continuous struggle between worker and boss at the point of production as well as struggle outside of the workplace against other forms of hierarchy.

This class struggle reflects a conflict between workers attempts at liberation and self-empowerment and capitals attempts to turn the individual worker into a small cog in a big machine. It reflects the attempts of the oppressed to try to live a fully human life, expressed when the "worker claims his share in the riches he produces; he claims his share in the management of production; and he claims not only some additional well-being, but also his full rights in the higher enjoyment of science and art." [Peter Kropotkin, Anarchism, pp. 48-49]

As Errico Malatesta argued, if workers "succeed in getting what they demand, they will be better off: they will earn more, work fewer hours and will have more time and energy to reflect on things that matter to them, and will immediately make greater demands and have greater needs . . . [T]here exists no natural law (law of wages) which determines what part of a worker's labour should go to him [or her]. . . Wages, hours and other conditions of employment are the result of the struggle between bosses and workers. The former try and give the workers as little as possible; the latter try, or should try to work as little, and earn as much, as possible. Where workers accept any conditions, or even being discontented, do not know how to put up effective resistance to the bosses demands, they are soon reduced to bestial conditions of life. Where, instead, they have ideas of how human beings should live and know how to join forces, and through refusal to work or the latent and open threat of rebellion, to win bosses respect, in such cases, they are treated in a relatively decent way . . . Through struggle, by resistance against the bosses, therefore, workers can, up to a certain point, prevent a worsening of their conditions as well as obtaining real improvement." [Errico Malatesta: His Life and Ideas, pp. 191-2]

It is this struggle that determines wages and indirect income such as welfare, education grants and so forth. This struggle also influences the concentration of capital, as capital attempts to use technology to control workers (and so extract the maximum surplus value possible from them) and to get an advantage against their competitors (see section C.2.3). And, as will be discussed in section D.10 (How does capitalism affect technology?), increased capital investment also reflects an attempt to increase the control of the worker by capital (or to replace them with machinery that cannot say "no") plus the transformation of the individual into "the mass worker" who can be fired and replaced with little or no hassle. For example, Proudhon quotes an "English Manufacturer" who states that he invested in machinery precisely to replace humans by machines because machines are easier to control:

"The insubordination of our workforce has given us the idea of dispensing with them. We have made and stimulated every imaginable effort of the mind to replace the service of men by tools more docile, and we have achieved our object. Machinery has delivered capital from the oppression of labour." [System of Economical Contradictions, p. 189]

(To which Proudhon replied "[w]hat a misfortunate that machinery cannot also deliver capital from the oppression of consumers!" as the over-production and inadequate market caused by machinery replacing people soon destroys these illusions of automatic production by a slump — see section C.7.3).

Therefore, class struggle influences both wages and capital investment, and so the prices of commodities in the market. It also, more importantly, determines profit levels and it is profit levels that are the cause of the business cycle. This is because, under capitalism, production's "only aim is to increase the profits of the capitalist. And we have, therefore, - the continuous fluctuations of industry, the crisis coming periodically. . . " [Kropotkin, Op. Cit., p. 55]

A common capitalist myth, derived from the capitalist Subjective Theory of Value, is that free-market capitalism will result in a continuous boom, since the cause of slumps is allegedly state control of credit and money. Let us assume, for a moment, that this is the case. (In fact, it is not the case, as will be highlighted in section C.8). In the "boom economy" of "free market" dreams, there will be full employment. But in a period of full employment, while it helps "increase total demand, its fatal characteristic from the business view is that it keeps the reserve army of the unemployed low, thereby protecting wage levels and strengthening labour's bargaining power." [Edward S. Herman, Beyond Hypocrisy, p. 93]

In other words, workers are in a very strong position under boom conditions, a strength which can undermine the system. This is because capitalism always proceeds along a tightrope. If a boom is to continue smoothly, real wages must develop within a certain band. If their growth is too low then capitalists will find it difficult to sell the products their workers have produced and so, because of this, face what is often called a "realisation crisis" (i.e. the fact that capitalists cannot make a profit if they cannot sell their products). If real wage growth is too high then the conditions for producing profits are undermined as labour gets more of the value it produces. This means that in periods of boom, when unemployment is falling, the conditions for realisation improve as demand for consumer goods increase, thus expanding markets and encouraging capitalists to invest. However, such an increase in investment (and so employment) has an adverse effect on the conditions for producing surplus value as labour can assert itself at the point of production, increase its resistance to the demands of management and, far more importantly, make its own.

If an industry or country experiences high unemployment, workers will put up with longer hours, stagnating wages, worse conditions and new technology in order to remain in work. This allows capital to extract a higher level of profit from those workers, which in turn signals other capitalists to invest in that area. As investment increases, unemployment falls. As the pool of available labour runs dry, then wages will rise as employers bid for scare resources and workers feel their power. As workers are in a better position they can go from resisting capital's agenda to proposing their own (e.g. demands for higher wages, better working conditions and even for workers' control). As workers' power increases, the share of income going to capital falls, as do profit rates, and capital experiences a profits squeeze and so cuts down on investment and employment and/or wages. The cut in investment increases unemployment in the capital goods sector of the economy, which in turn reduces demand for consumption goods as jobless workers can no longer afford to buy as much as before. This process accelerates as bosses fire workers or cut their wages and the slump deepens and so unemployment increases, which begins the cycle again. This can be called "subjective" pressure on profit rates.

This interplay of profits and wages can be seen in most business cycles. As an example, let's consider the crisis which ended post-war Keynesianism in the early 1970's and paved the way for the "supply side revolutions" of Thatcher and Reagan. This crisis, which occurred in 1973, had its roots in the 1960s boom. If we look at the USA we find that it experienced continuous growth between 1961 and 1969 (the longest in its history). From 1961 onwards, unemployment steadily fell, effectively creating full employment. From 1963, the number of strikes and total working time lost steadily increased (from around 3 000 strikes in 1963 to nearly 6 000 in 1970). The number of wildcat strike rose from 22% of all strikes in 1960 to 36.5% in 1966. By 1965 both the business profit shares and business profit rates peaked. The fall in profit share and rate of profit continued until 1970 (when unemployment started to increase), where it rose slightly until the 1973 slump occurred, In addition, after 1965, inflation started to accelerate as capitalist firms tried to maintain their profit margins by passing cost increases to consumers (as we discuss below, inflation has far more to do with capitalist profits than it has with money supply or wages). This helped to reduce real wage gains and maintain profitability over the 1968 to 1973 period above what it otherwise would have been, which helped postpone, but not stop, a slump.

Looking at the wider picture, we find that for the advanced capital countries as a whole, the product wage rose steadily between 1962 and 1971 while productivity fell. The product wage (the real cost to the employer of hiring workers) met that of productivity in 1965 (at around 4%) — which was also the year in which profit share in income and the rate of profit peaked . From 1965 to 1971, productivity continued to fall while the product wage continued to rise. This process, the result of falling unemployment and rising workers' power (expressed, in part, by an explosion in the number of strikes across Europe and elsewhere), helped to ensure that the actual post-tax real wages and productivity in a the advanced capitalist countries increased at about the same rate from 1960 to 1968 (4%). But between 1968 and 1973, post-tax real wages increased by an average of 4.5% compared to a productivity rise of only 3.4%. Moreover, due to increased international competition companies could not pass on wage rises to consumers in the form of higher prices (which, again, would only have postponed, but not stopped, the slump). As a result of these factors, the share of profits going to business fell by about 15% in that period.

In addition, outside the workplace a "series of strong liberation movements emerged among women, students and ethnic minorities. A crisis of social institutions was in progress, and large social groups were questioning the very foundations of the modern, hierarchical society: the patriarchal family, the authoritarian school and university, the hierarchical workplace or office, the bureaucratic trade union or party." [Takis Fotopoulos, "The Nation-state and the Market," p. 58, Society and Nature, Vol. 3, pp. 44-45]

These social struggles resulted in an economic crisis as capital could no longer oppress and exploit working class people sufficiently in order to maintain a suitable profit rate. This crisis was then used to discipline the working class and restore capitalist authority within and without the workplace (see section C.8.2). We should also note that this process of social revolt in spite, or perhaps because of, the increase of material wealth was predicted by Malatesta. In 1922 he argued that:

"The fundamental error of the reformists is that of dreaming of solidarity, a sincere collaboration, between masters and servants. . .

"Those who envisage a society of well stuffed pigs which waddle contentedly under the ferule of a small number of swineherd; who do not take into account the need for freedom and the sentiment of human dignity. . . can also imagine and aspire to a technical organisation of production which assures abundance for all and at the same time materially advantageous both to bosses and the workers. But in reality 'social peace' based on abundance for all will remain a dream, so long as society is divided into antagonistic classes, that is employers and employees. . .

"The antagonism is spiritual rather than material. There will never be a sincere understanding between bosses and workers for the better exploitation [sic!] of the forces of nature in the interests of mankind, because the bosses above all want to remain bosses and secure always more power at the expense of the workers, as well as by competition with other bosses, whereas the workers have had their fill of bosses and don't want more!" [Op. Cit., pp. 78-79]

The experience of the post-war compromise and social democratic reform indicates well that, ultimately, the social question is not poverty but rather freedom. However, to return to the impact of class struggle on capitalism.

More recently, the panics in Wall Street that accompany news that unemployment is dropping in the USA reflect this fear of working class power. Without the fear of unemployment, workers may start to fight for improvements in their conditions, against capitalist oppression and exploitation and for liberty and a just world. Every slump within capitalism has occurred when workers have seen unemployment fall and their living standards improve — not a coincidence.

The Philips Curve, which indicates that inflation rises as unemployment falls is also an indication of this relationship. Inflation is the situation when there is a general rise in prices. Neo-classical (and other pro-"free market" capitalist) economics argue that inflation is purely a monetary phenomenon, the result of there being more money in circulation than is needed for the sale of the various commodities on the market. However, this is not true. In general, there is no relationship between the money supply and inflation. The amount of money can increase while the rate of inflation falls, for example (as was the case in the USA between 1975 and 1984). Inflation has other roots, namely it is "an expression of inadequate profits that must be offset by price and money policies. . . Under any circumstances, inflation spells the need for higher profits. . ." [Paul Mattick, Economics, Politics and the Age of Inflation, p. 19] Inflation leads to higher profits by making labour cheaper. That is, it reduces "the real wages of workers. . . [which] directly benefits employers. . . [as] prices rise faster than wages, income that would have gone to workers goes to business instead." [J. Brecher and T. Costello, Common Sense for Hard Times, p. 120]

Inflation, in other words, is a symptom of an on-going struggle over income distribution between classes and, as workers do not have any control over prices, it is caused when capitalist profit margins are reduced (for whatever reason, subjective or objective). This means that it would be wrong to conclude that wage increases "cause" inflation as such. To do so ignores the fact that workers do not set prices, capitalists do. Inflation, in its own way, shows the hypocrisy of capitalism. After all, wages are increasing due to "natural" market forces of supply and demand. It is the capitalists who are trying to buck the market by refusing to accept lower profits caused by conditions on that market. Obviously, to use Tucker's expression, under capitalism market forces are good for the goose (labour) but bad for the gander (capital).

This does not mean that inflation suits all capitalists equally (nor, obviously, does it suit those social layers who live on fixed incomes and who thus suffer when prices increase but such people are irrelevant in the eyes of capital). Far from it - during periods of inflation, lenders tend to lose and borrowers tend to gain. The opposition to high levels of inflation by many supporters of capitalism is based upon this fact and the division within the capitalist class it indicates. There are two main groups of capitalists, finance capitalists and industrial capitalists. The latter can and do benefit from inflation (as indicated above) but the former sees high inflation as a threat. When inflation is accelerating it can push the real interest rate into negative territory and this is a horrifying prospect to those for whom interest income is fundamental (i.e. finance capital). In addition, high levels of inflation can also fuel social struggle, as workers and other sections of society try to keep their income at a steady level. As social struggle has a politicising effect on those involved, a condition of high inflation could have serious impacts on the political stability of capitalism and so cause problems for the ruling class.

How inflation is viewed in the media and by governments is an expression of the relative strengths of the two sections of the capitalist class and of the level of class struggle within society. For example, in the 1970s, with the increased international mobility of capital, the balance of power came to rest with finance capital and inflation became the source of all evil. This shift of influence to finance capital can be seen from the rise of rentier income. The distribution of US manufacturing profits indicate this process — comparing the periods 1965-73 to 1990-96, we find that interest payments rose from 11% to 24%, dividend payments rose from 26% to 36% while retained earnings fell from 65% to 40% (given that retained earnings are the most important source of investment funds, the rise of finance capital helps explain why, in contradiction to the claims of the right-wing, economic growth has become steadily worse as markets have been liberalised — funds that would have been resulted in real investment have ended up in the finance machine). In addition, the waves of strikes and protests that inflation produced had worrying implications for the ruling class. However, as the underlying reasons for inflation remained (namely to increase profits) inflation itself was only reduced to acceptable levels, levels that ensured a positive real interest rate and acceptable profits.

It is the awareness that full employment is bad for business which is the basis of the so-called "Non-Accelerating Inflation Rate of Unemployment" (NAIRU). This is the rate of unemployment for an economy under which inflation, it is claimed, starts to accelerate. While the basis of this "theory" is slim (the NAIRU is an invisible, mobile rate and so the "theory" can explain every historical event simply because you can prove anything when your datum cannot be seen by mere mortals) it is very useful for justifying policies which aim at attacking working people, their organisations and their activities. The NAIRU is concerned with a "wage-price" spiral caused by falling unemployment and rising workers' rights and power. Of course, you never hear of an "interest-price" spiral or a "rent-price" spiral or a "profits-price" spiral even though these are also part of any price. It is always a "wage-price" spiral, simply because interest, rent and profits are income to capital and so, by definition, above reproach. By accepting the logic of NAIRU, the capitalist system implicitly acknowledges that it and full employment are incompatible and so with it any claim that it allocates resources efficiently or labour contracts benefit both parties equally.

For these reasons, anarchists argue that a continual "boom" economy is an impossibility simply because capitalism is driven by profit considerations, which, combined with the subjective pressure on profits due to the class struggle between workers and capitalists, necessarily produces a continuous boom-and-bust cycle. When it boils down to it, this is unsurprising, as "[o]f necessity, the abundance of some will be based upon the poverty of others, and the straitened circumstances of the greater number will have to be maintained at all costs, that there may be hands to sell themselves for a part only of that which they are capable of producing, without which private accumulation of capital is impossible!" [Kropotkin, Op. Cit., p. 128]

Of course, when such "subjective" pressures are felt on the system, when private accumulation of capital is threatened by improved circumstances for the many, the ruling class denounces working class "greed" and "selfishness." When this occurs we should remember what Adam Smith had to say on this subject:

"In reality high profits tend much more to raise the price of work than high wages. . . That part of the price of the commodity that resolved itself into wages would. . . rise only in arithmetical proportion to the rise in wages. But if profits of all the different employers of those working people should be raised five per cent., that price of the commodity which resolved itself into profit would. . . rise in geometrical proportion to this rise in profit. . . Our merchants and master manufacturers complain of the bad effects of high wages in raising the price and thereby lessening the sale of their goods at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people" [The Wealth of Nations, pp. 87-88]

As an aside, we must note that these days we would have to add economists to Smith's "merchants and master manufacturers." Not that this is surprising, given that economic theory has progressed (or degenerated) from Smith's disinterested analysis to apologetics for any action of the boss (a classic example, we must add, of supply and demand, with the marketplace of ideas responding to a demand for such work from "our merchants and master manufacturers"). Any "theory" which blames capitalism's problems on "greedy" workers will always be favoured over one that correctly places them in the contradictions created by wage slavery. Ultimately, capitalist economics blame every problem of capitalism on the working class refusing to kow-tow to the bosses (for example, unemployment is caused by wages being too high rather than bosses needing unemployment to maintain their power and profits — see section C.9.2 on empirical evidence that indicates that the second explanation is the accurate one).

Before concluding, one last point. While it may appear that our analysis of the "subjective" pressures on capitalism is similar to that of mainstream economics, this is not the case. This s because our analysis recognises that such pressures are inherent in the system, have contradictory effects (and so cannot be easily solved without making things worse before they get better) and hold the potential for creating a free society. Our analysis recognises that workers' power and resistance is bad for capitalism (as for any hierarchical system), but it also indicates that there is nothing capitalism can do about it without creating authoritarian regimes (such as Nazi Germany) or by generating massive amounts of unemployment (as was the case in the early 1980s in both the USA and the UK, when right-wing governments deliberately caused deep recessions) and even this is no guarantee of eliminating working class struggle as can be seen, for example, from 1930s America or 1970s Britain.

This means that our analysis shows the limitations and contradictions of the system as well as its need for workers to be in a weak bargaining position in order for it to "work" (which explodes the myth that capitalism is a free society). Moreover, rather than portray working people as victims of the system (as is the case in many Marxist analyses of capitalism) our analysis recognises that we, both individually and collectively, have the power to influence and change that system by our activity. We should be proud of the fact that working people refuse to negate themselves or submit their interests to that of others or play the role of order-takers required by the system. Such expressions of the human spirit, of the struggle of freedom against authority, should not be ignored or down-played, rather they should be celebrated. That the struggle against authority causes the system so much trouble is not an argument against social struggle, it is an argument against a system based on hierarchy, exploitation and the denial of freedom.

To sum up, in many ways, social struggle is the inner dynamic of the system, and its most basic contradiction: while capitalism tries to turn the majority of people into commodities (namely, bearers of labour power), it also has to deal with the human responses to this process of objectification (namely, the class struggle). However, it does not follow that cutting wages will solve a crisis — far from it, for, as we argue in section C.9.1, cutting wages will deepen any crisis, making things worse before they get better. Nor does it follow that, if social struggle were eliminated, capitalism would work fine. After all, if we assume that labour power is a commodity like any other, its price will rise as demand increases relative to supply (which will either produce inflation or a profits squeeze, probably both). Therefore, even without the social struggle which accompanies the fact that labour power cannot be separated from the individuals who sell it, capitalism would still be faced with the fact that only surplus labour (unemployment) ensures the creation of adequate amounts of surplus value.

Moreover, even assuming that individuals can be totally happy in a capitalist economy, willing to sell their freedom and creativity for a little money, putting up, unquestioningly, with every demand and whim of their bosses (and so negating their own personality and individuality in the process), capitalism does have "objective" pressures limiting its development. So while social struggle, as argued above, can have a decisive effect on the health of the capitalist economy, it is not the only problems the system faces. This is because there are objective pressures within the system beyond and above the authoritarian social relations it produces (and the resistance to them). These pressures are discussed next, in sections C.7.2 and C.7.3.