Some political groups argue that capitalism since the first world war is in a state of economic collapse due to its inability to find new markets on which to sell its products at a profit. The basic theoretical assumption is that by 1914 capitalism had become “decadent” as an economic system in the sense that it had become unable to develop the forces of production any further. This view is based on Rosa Luxemburg's The Accumulation of Capital.
Luxemburg admitted her theory conflicted with Marx at the end of Volume II of Capital which implied that long-term growth (accumulation) was possible under "pure" capitalism. She therefore tried to show where Marx had gone wrong, that there was a flaw in Marx’s Capital, in that he had failed to recognise that a lack of purchasing power was built-in to capitalism and that therefore it had to rely on external markets to expand and once these had been exhausted then capitalism would enter a period of economic stagnation and breakdown.
According to her, under "pure" capitalism (an economy where there are only capitalists and wage workers) market demand was determined by consumption (what the workers spend on consumer goods plus what the capitalists spend on consumer goods). If the capitalists were to consume all their surplus value, so her argument ran, there would be no problem, but as soon as they re-invest a part of it – which, the accumulation of capital, is after all the purpose of production under capitalism – market demand is no longer equal to what has been produced. For, the consumption of the capitalists having been reduced, so, according to Luxemburg, has market demand. The result, she concluded, was that there was nobody to buy the products in which the re-invested profits were embodied (new machinery, raw materials and consumer goods for the extra workers taken on). As she wrote: “as capital approaches the point where humanity only consists of capitalists and proletarians, further accumulation will become impossible”.
This argument makes accumulation impossible under "pure" capitalism. It led to her conclusion that for capital accumulation to take place there must be non-capitalist areas to buy the part of the surplus product not consumed by the capitalists. It followed then that capitalism would collapse at the point when there were no more non-capitalist areas left in the world. On this theory, the crisis of capitalism is a permanent one and is reflected in a global saturation of markets that can only be temporarily broken through world war and the reconstruction that would follow such a war.
Luxemburg made the mistake of assuming that the level of market demand was determined exclusively by consumption (the spending of workers and capitalists on consumer goods) whereas in fact it is determined by consumption plus investment (capitalist spending on new means of production). Thus, when a part of the surplus value is re-invested rather than consumed, market demand is not reduced; it is merely re-arranged: what the capitalists formerly spent on consumer goods they now spend on means of production. Marx had made no mistake. Her argument was based on a complete misreading of Marx's reproduction schemas for both "simple" and "extended" reproduction. Marx himself furnished the theoretical disproof of this view that growth in "pure" capitalism would be impossible, in Chapter 49 of Volume Three of Capital. Capitalism is not, as Luxemburg intended, simply determined by the combined consumption of the workers and capitalists. Overall demand is not determined by the consumption of the workers and capitalists but by this plus the investment of the capitalists (what they spend on new means of production rather than on consumer goods for themselves).
External markets did play a key role in the birth and early growth of capitalism and to say that there is no permanent underconsumption built-in to the capitalist system is not to say that there is therefore always a smooth crisis-free accumulation of capital. Accumulation under capitalism proceeds by fits and starts, but these crises are caused by other reasons than underconsumption: by disproportions between the different branches of production leading to a fall in the rate of profit or, at times, to a temporary retraction of the market demand for consumer goods.
Those who have accepted Luxemburg put the view that capitalism became a world system around the start of the First World War and that ever since it has struggled to find markets in which the surplus product can be realised in the ever-diminishing non-capitalist periphery of the world. However, fundamentally the disproof of this theory is practical rather than just theoretical, based on the actuality of capitalist development this century. If growth in "pure" capitalism or at least something near to "pure" capitalism is impossible, the system just wouldn't have been able to expand the forces of production in the way that it has been doing. If capitalism has been in a state of market saturation for decades ( as far back as 1914) its long-term growth in the years since would have been impossible. And, although its rate of expansion has slowed in recent years, it has still continued to enjoy considerable long-term growth ever since Luxemburg wrote--and without selling sizeable quantities of commodities to undeveloped non-capitalist areas of the planet .