A capitalist crisis is one of the periodic episodes suffered by a capitalist economic system characterized by deflation, mass unemployment, decrease in economic activity, and stagnation. Crises of capitalism are not the regularly occurring managed events which occur during the business cycle regulated by central banks; they are failure of such management due to capitalism's inherent instability. During a capitalist crisis there is an atmosphere of confusion and uncertainty among capitalist governments and central banks and often poor decisions are made.
The inevitability of capitalist crises
Marx saw recession and depression as unavoidable under free-market capitalism as there are no restrictions on accumulations of capital other than the market itself. Capitalism tends to create unbalanced accumulations of wealth, leading to over-accumulations of capital which inevitably lead to a crisis because productive capacity outstrips the ability of the workers, the producers of the wealth, to purchase the products of their labor due to their low incomes resulting in a crisis of overproduction and falling profits. Major crises are a regular feature of the boom and bust pattern of chaotic capitalist development. Such crises are inevitable and will be increasingly severe until the contradictions inherent in the mismatch between the mode of production and the development of productive forces reach the final point of failure. At which point, the crisis period encourages intensified class conflict and forces societal change.
Regulation and fraud
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Karl Marx was living in London when the Panic of 1866 occurred. It was an an international financial downturn that accompanied the failure of Overend, Gurney and Company in London, and the corso forzoso abandonment of the silver standard in Italy.
The Great Depression
The Great Depression of the 1930s was the worst crisis in the history of capitalism. It was the deepest, most far reaching, and the longest. It was characterized by overproduction, falling prices, bank failures, bankruptcy, mass unemployment, and the helplessness of business and government to prevent or reverse it. In 1930 while the income of workers had fallen precipitously and millions were thrown out of work, corporations reported record profits. Following the initial collapse, a long period of economic stagnation followed which ended only when the production demands of World War II mobilized economic resources.
The Great Recession
Beginning in the summer of 2007 there were signs of stress in credit markets, particularly in the United Kingdom. By Fall, 2008 a major crisis developed in the United States and Europe and many major commercial and investment banks failed or were forced to seek mergers or government support. In the United States massive efforts to stimulate the economy were ineffective. Analysis by capitalist economists showed a global imbalance which resulted in gluts of both capital and labor producing a productive capacity which far outstriped global demand. Their proposed solution was a massive global public works program which far out reached the willingness of political leaders to mount. In Europe, which had a common currency but whose central bank lacked authorization to expand the money supply the crisis took the form of the European sovereign-debt crisis characterized by increased unemployment, falling revenues, and rise in interest rates paid by governments, "sovereign debt". Generally, northern European states, particularly Germany, had stronger economies and were able to borrow at reasonable rates, but southern European states, particularly Greece, had weaker economies and were thrown into crises due to inability to borrow money at reasonable rates. Appealing for aid, troubled economies such as Greece were faced with demands for imposition of austerity which precluded economic stimulus. This put social democratic parties, some of which were in power, for example in Greece, or engaged in attempts to gain power, for example in France in 2012, in a situation where economic stimulus and vital social programs were impossible or difficult to finance. Spain, with a conservative government in 2012 imposed a severe austerity program, was in particular crisis with unemployment over 20% as was also the case in Greece.
Roots of the crisis
In the United States the crisis was associated with an inflated housing market based on an an expansive system of credit supported by mobilization of capital through securitization and government guarantee of mortgages. Collapse of the market resulted in millions of foreclosures and collapse of the construction industry. Commercial investment banks, holders of the mortgage securities, as well as AIG, an insurance company which had insured them, had to be bailed out by the government which offered loans to the firms and purchased massive amounts of mortgages, securities and other debt. In Europe the crisis is associated with creation of a common currency without also creating effective common fiscal and economic management mechanisms.
The economic crisis has resulted in the rise of populist right wing political tendencies in both the United States and Europe and exposed the weakness and disorganization of the left as only social democratic parties without a rigorous revolutionary program have sufficient popular support to form governments, and in many situations, cannot even do that. Increased concentration of wealth has resulted in increased financial support for conservative political tendencies, and in the United States, capture of the Republican Party which strongly resists restructuring of the economy focusing instead on austerity programs which deepen the crisis resulting in political paralysis.
Potential for revolution
Crises of capitalism were believed by Marx to provide opportunities for the working class to overthrow the capitalist system. The people have engaged in mass protests during the Great Recession particularly in Spain where massive protests of unemployed young people took place, 2011 Spanish protests, however the organized working class appears to play a minor role.
The periodic crises of capitalism provide opportunities for education and organizing resistance.
Crises of capitalism result, in the absence of an organized working class able to formulate and enforce an alternative, in sophisticated efforts to analyse and reform the fiscal and monetary underpinnings of capitalism.
Studies of typical financial crises in both developed and undeveloped countries show that they last for several years and are characterized by recognizable historical patterns:
- A collapse in the price of assets such as stocks on the stock market and housing. Prices of housing are reduced by an average of 35% while equities, stock market prices of stock in companies, are reduced by an average of 55%. Recovery of housing prices takes about 6 years, on average; while recovery of stock market prices takes about 3 1/2 years.
- A severe fall in economic activity characterized by low output and high unemployment: unemployment rises an average of 7% while the economy is declining, a phase which lasts 4 years on average; output falls an average of 9% over an average of 2 years.
- Government debt rises an average of 86% due to loss of tax revenue and spending by the government intended to stimulate the economy; bailout expenses are difficult to estimate, but are not a major factor.
A typical household will have contracted consumer and mortgage debt during good times. The economic turndown associated with a financial crisis results in withdrawal of additional credit and reduced ability to repay existing debt, sometimes due to unemployment or reduced hours. Thus households suffer crises as they attempt to deal with existing debts and their consumption of goods and services fall. The combined effect of all households attempting to reduce consumption, or being forced to, reduces aggregate demand in the economy and aggravates the effects of the crisis. Research shows that high household debt during the good times preceding the financial crisis results in a deeper and longer downturn.
Collapse of the Soviet Union
The stagnation which developed in the Soviet Union during the 1970s and 80s and the poor performance of other European socialist states and their eventual collapse resulted in removal of socialist revolution from the alternatives available to the people of developed nations. While this situation is probably not permanent as political scientist Francis Fukuyama suggests in his book The End of History and the Last Man it was, nevertheless, in place during the Great Recession as unemployment rose to record levels without a revolutionary situation developing in Spain and Greece. Nevertheless the same dynamic should also apply to systemic failure of liberal democracy and globalization as years of economic depression drag on.
- ↑ "Fed Misread Fiscal Crisis, Records Show" article by Binyamin Appelbaum in The New York Times February 21, 2014
- ↑ "Killing the Recovery" editorial, The New York Times September 28, 2011
- ↑ Pages 15 to 19, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ “The problem is that nobody knows how this is going to end, including the politicians and policy makers.”, attributed to Ronald D. Simpson of Action Economics in "Italy’s Growing Cost of Borrowing Weighs on Investors" a Reuters article in The New York Times December 14, 2011
- ↑ "The Big Fail" opinion by Paul Krugman in The New York Times January 6, 2012
- ↑ Pages 20 to 27, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ Harman, Chris (2009). Zombie Capitalism: Global Crisis and the Relevance of Marx, p. 143–160, London: Bookmarks Publications.
- ↑ "Former Financial Regulator William Black: Occupy Wall Street a Counter to White-Collar Fraud" Democracy Now October 19, 2011
- ↑ 9.0 9.1 Page 3, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ Page 6, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ Page 5, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ Pages 6 and 7, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ Pages 11 to 14, Toward Soviet America William Z. Foster, Coward-McCann, NY, (1932)
- ↑ "The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness", white paper by Daniel Alpert, Westwood Capital; Robert Hockett, Professor of Law, Cornell University; and Nouriel Roubini, Professor of Economics, New York University October 10, 2011 New America Foundation Complete paper "The Way Forward"
- ↑ "Call for Growth Rises to Counter German Push for Austerity" article by Nicholas Kulish in The New York Times April 23, 2012
- ↑ A "rigorous revolutionary program" is a practical plan of action which would result in a significant restructuring of the relationship between capital and labor. The term is a neologism and is meant to contrast a political program which might, for example, promise more benefits with one that will result in fundamental change.
- ↑ "Plutocracy, Paralysis, Perplexity" opinion by Paul Krugman in The New York Times May 3, 2012
- ↑ "As Scorn for Vote Grows, Protests Surge Around Globe" article by Nicholas Kulish in The New York Times September 27, 2011
- ↑ "Correcting the Abysmal 'New York Times' Coverage of Occupy Wall Street" criticism by Allison Kilkenny in The Nation September 26, 2011
- ↑ Issue 83, Adbusters
- ↑ "Three Years Later: Unfinished Business in Financial Reform" The William Taylor Memorial Lecture, Paul Volcker Washington, D.C., September 23, 2011
- ↑ "Fact-checking financial recessions" survey of 14 leading economists by Moritz Schularick, Alan Taylor, Vox 5 October 2012
- ↑ "The Aftermath of Financial Crises" Carmen M. Reinhart and Kenneth S. Rogoff December 19, 2008
- ↑ "Dealing with Household Debt" International Monetary Research
- ↑ "Prisoners of the Euro" opinion by Ross Douthat in The New York Times June 1, 2013
- "The Crises of Democratic Capitalism" analysis by Wolfgang Streeck in New Left Review volume 71, September-October 2011
- "Occupy Wall Street rediscovers the radical imagination" comment by David Graeber on guardian.co.uk, Sunday 25 September 2011
- Series: Capitalism in Crisis Financial Times
- Carmen M. Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press (September 11, 2009), hardcover, 512 pages, ISBN-10: 0691142165 ISBN-13: 978-0691142166