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On the Two Contradictions of Capitalism


By James O'Connor






The question has arisen in discussions with co-workers here

and abroad: What is the relationship between the first and second

contradictions of capitalism? Do they compound or offset their

respective effects on profits?

The first contradiction of capitalism may be stated simply:

The rate of exploitation is both a sociological and economic

category. It expresses capital's social and political power over

labor, and also capitalism's inherent tendency toward a

realization crisis, or crisis of capital over-production. If

capital exercises much power over labor, the rate of exploitation

will be high, and the risk of a realization crisis will be great;

hence, the need for a vast credit structure, aggressive

marketing, constant product innovation, and intensified

competition will be greater. The first contradiction of

capitalism is internal to the system; it has nothing to do with

the conditions of production, whether these are interpreted

economically or in socio-political terms.

The second contradiction of capitalism requires a more

complex terminology:[1] the size and value content of the

consumption basket and "basket" of fixed capital; the "costs of

the natural elements entering into constant and variable

capital;" ground rent as a deduction from surplus value; and

"negative externalities" of all kinds (e.g., congestion costs in

cities in so far as these enter into the costs of individual


In the second contradiction, no single term has the

theoretical centrality that the rate of exploitation does in the

first contradiction (which is why there is a plurality of social

movements today, as well as a single labor movement). Yet all of

the above terms are socio-political as well as economic

categories (e.g., absolute rent reflects the power of landed

capital over industrial capital; the costs of congestion reflect

struggles over urban and regional transport systems; the cost of


[1] James O'Connor, "Capitalism, Nature, Socialism: A

Theoretical Introduction," CNS 1, Fall, 1988.










water reflects the power of ecology movements vis a vis capital;

etc.). The point of listing these examples is to suggest that

there is even less justification for an economistic-type theory

of the second contradiction than there is for the traditional

Marxist theory of the first.

The first contradiction strikes at capital from the demand

side. When individual capitals lower costs with the aim of

defending or restoring profits, the unintended effect is to

reduce market demand for commodities, and lower realized profits.

The second contradiction strikes from the cost side. It states

that when individual capitals lower costs, e.g., externalize

costs on to conditions of production (nature, laborpower, or the

urban) with the aim of defending or restoring profits, the

unintended effect is to raise costs on other capitals (and, at

the limit, capital as a whole), lowering produced profits. The

first manifests itself in its purest form as a realization

crisis; the second as a liquidity crisis. In the first case,

there is no problem producing surplus value, hence for that

reason there is a problem realizing values and surplus value. In

the second, there is no problem realizing value and surplus

value, hence for that reason there is one of producing surplus


The basic cause of the second contradiction is capitalism's

economically self-destructive appropriation and use of

laborpower, urban infrastructure and space, and external nature

or environment -- "self-destructive" because costs of health and

education, urban transport, home and commercial rents, and the

costs of extracting the elements of capital from nature will rise

when private costs are turned into "social costs."[2]

In this account, capital and the state today can be

interpreted as totally confused as to the new form of regulation

which might provide a coherent framework for capital accumulation

in the 1990s. Individual capitals continue to lower costs in

every imaginable way; by so doing they inadvertently tend to

raise the costs of capital as a whole, at the same time,

threatening their own markets, as the first contradiction leads

us to believe. Today, capital is faced with both rising costs

and weak market demand, i.e., with both the first and second

contradictions. Is it any wonder that capital is thus obsessed

with both process innovation and product innovation and market

expansion? Any wonder that there occurs both a deterioration of

the conditions of production and equitable wage and salary

income, as well as dangerously inflated credit structures? Any

wonder that both Keynesian-type regulation and neo-classical,

laissez-faire policies seem to be bankrupt?





[2] Frank Beckenbach, "Social Costs in Modern Capitalism," CNS

3, November 1989.