Otto Bauer was born in Vienna in 1881 into a wealthy Jewish family. He studied law and economics at the University of Vienna under Eugen von Böhm-Bawerk, where he was part of an amazing graduate student group that also included Rudolf Hilferding, Ludwig von Mises, Otto Neurath and Joseph Schumpeter. The young Bauer became one of the intellectual and administrative leaders of Austrian social democracy, writing prolifically on a wide range of economic, political and social issues. The nine volumes of his collected works run to a total of more than nine thousand pages. From 1907 to 1914 he was secretary of the Austrian Social-Democratic Party (spö) before serving in the Hapsburg army after the outbreak of war. Captured on the eastern front, Bauer spent three years as a prisoner of war in Russia. In 1918–19 he was Foreign Minister of the new Austrian republic and then spent the next fifteen years in opposition, during which time he was the effective leader and one of the principal theoreticians of the spö. After the 1934 Dolfuss putsch Bauer went into exile, first in Czechoslovakia and then in Paris, where he died from heart failure in 1938.

Bauer’s best-known theoretical work is probably his influential 1907 text on the nationality problem, but he also wrote very extensively on questions of political economy, especially on crisis theory.¹ The 1904 article which follows was his very first theoretical paper, written when he was just twenty-three years old. It has been largely overlooked in the substantial literature on Bauer and his prominent intellectual role in Austro-Marxism. Almost nothing is known of the circumstances that prompted Bauer to write the paper, or the conditions under which it was written. He may or may not have discussed it with his fellow-student Rudolf Hilferding and may or may not have received helpful (or unhelpful) comments from Karl Kautsky, the editor of the German socialists’ theoretical journal Die Neue Zeit in which it appeared.² The editors of the third volume of Bauer’s collected works in which it was reprinted³ have nothing to say on these questions, and we have to assume that there is no relevant manuscript material in either the Bauer or the Kautsky papers.

Marx’s own thinking on the theory of capitalist crisis was powerful and convincing but also seriously incomplete, as Mike Howard and I noted many years ago in a book chapter written long before either of us had read Bauer’s 1904 article but which came to very similar conclusions.⁴ In the twenty years following Marx’s death in 1883 a rather limited critical literature had emerged, which included substantial contributions by Friedrich Engels and Karl Kautsky. There was also a powerful revisionist critique by Eduard Bernstein, who argued that the growth of monopoly capital and the credit system had rendered the capitalist system much less crisis-prone than it had been in Marx’s day.⁵

Bauer cites none of this material in his 1904 paper, but fundamentally agrees with Marx, Engels and Kautsky that the revisionist position is wrong. His aim is to offer an interpretation of Marx’s underdeveloped theory rather than a comprehensive critique of contemporary Marxian crisis theory, and his selection of secondary sources is restricted to Eugen von Bergmann, Albert Eberhard Schäffle and Mikhail Tugan-Baranovsky, none of them Marxists. He draws extensively on Marx’s own published work on crisis theory, which in 1904 was largely restricted to the three volumes of Capital and the Critique of Political Economy.

He begins by noting that, for Marx, the capitalist economy is both decentralised and profit-driven, making it inherently prone to crises. He sets out Marx’s critique of Say’s Law at some length, pointing out that in a monetised economy it is always possible to sell without having any intention to buy. This makes possible what Keynesian economists would later refer to as deficient effective demand and with it a downturn in the level of output and employment, which Marx and his followers referred to as a crisis. Bauer attributes to Marx several reasons to anticipate such a downturn, including underconsumption; an increase in the organic composition of capital that leads to a fall in the rate of profit; a fall in the rate of exploitation when unemployment falls in a cyclical upswing, also reducing the profit rate; and a tendency for prices to fall below labour values in a cyclical downturn, which again reduces profitability. But, Bauer insists, there is for Marx no question of long-term stagnation. The whole process of capital accumulation is inherently cyclical, with each downturn giving way to a renewed upswing after a certain period of time.

Bauer himself is most interested in underconsumption as a cause of crises, correctly attributing it to the imbalance (or ‘disproportionality’) between departments i and ii that Marx had discussed in Volume ii of Capital. Bauer’s most original contribution, but also his least successful, is the algebraic formulation of this problem that comes towards the end of his 1904 article. It is a brave and ambitious but also ultimately an unsuccessful attempt to apply the techniques of the mathematical economists to Marxian crisis theory. Significantly, when Bauer again wrote at some length on crisis theory in 1913, he used no algebra but instead relied on a series of numerical examples.⁶

Bauer continued to write on the theory of capitalist crisis for the rest of his life. In 1905 he published a detailed critique of Tugan-Baranovsky’s analysis, in 1910 criticised Hilferding for saying little about the international dimensions of crises, and in 1911 took on the Russian Marxist Georg von Charasoff. Two years later Bauer developed a new approach of his own in the course of an extended review of Rosa Luxemburg’s The Accumulation of Capital, this time using elaborate numerical examples rather than equations. He concluded that capitalism would indeed bring about its own downfall, albeit not in the way that Luxemburg had supposed: ‘Capitalism will not founder on the mechanical impossibility of realising surplus value. It will succumb to the indignation to which it drives the masses.’⁷

In the final years of his life Bauer dealt with the theory of capitalist crisis in a series of books and articles. The two most important were the unpublished book-length Manuscript on the Economic Crisis and his last major work, Zwischen Zwei Weltkriegen? (Between Two World Wars?).⁸ In the former he set out both a detailed discussion of many non-Marxist authorities on crisis theory and his own knife-edge model in which there was either too much surplus value, in which case an underconsumption crisis would occur, or too little, leading to a crisis induced by a falling rate of profit. In the latter Bauer provided what was probably the first ever mathematical model of underconsumption. After his death an appraisal of this model, sympathetic but also very critical, was made by Paul Sweezy in his Theory of Capitalist Development.⁹

While the 1904 paper does have significant weaknesses it is also a very good read, and it represents a remarkable contribution to the then-available literature on Marxian crisis theory, especially coming from a twenty-three-year-old graduate student.