The recurrence of major depressions in the world economy has been a subject of studies by many economists. The first theory of economic crisis was provided by Jean Charles Leonard De Sismondi (1773-1842) in a critique of classical political economy’s assumption of equilibrium between demand and supply. Karl Marx devoted much of his time trying to develop an economic crisis theory. According to Marx, a general theory of economic crisis doesn’t exist.
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As a result of this, Marx developed different and generally contradicting theories economic crisis namely; underconsumptionist approach, the theory of capital over accumulation and approach of tendentially falling profit rate. However, Marx advocated over accumulation approach which is described as capital over accumulation under action of “absent causes”. This approach views economic crisis as capital over accumulation which is not brought about by a single systematically acting cause. Instead it views economic crisis as an outcome of capitalist development. The above theories give rise to different interpretation of classification of Marxian critique of political economy. However, many people find these theories as useful tools for understanding the mechanism of capitalist economic crisis.
In capitalist system, flourishing operating business entities pay their workers less money than the value they realize from sale of those commodities produced by those workers. Therefore, profits go up significantly which are later used for investment purposes. In the long run, the aggregate economic activity of all profitably operating businesses lead to surpluses of goods produced. This is brought about by payment of low wages to the mass of the population (workers). The payment of low wages to workers reduces their disposable income and detrimentally affects their purchasing power.
As businesses increase their capital base their also enhance their production capacities by adopting efficient and effective technologies. In addition the competition for the available market becomes stiff because businesses have more goods to offer for sale while on other end few customers are able and willing to purchase these commodities. The excess of goods over demand lead to a general fall in their prices causing a fall in rate of profits (Foley, Duncan).
Though capital over accumulation approach offer more insight to economic crisis, its viability is largely dependent on main factors: Firstly, the extent to which is able to mop up excess liquidity from businesses. This can be done through imposition of heavy taxes and then returning it back to the mass of people in form of family, welfare benefits and education and health spending. Another factor which capital over accumulation theory is dependent on is proportion of population who are workers and not investors or and business owners.
Businesses can mitigate the effects of capital over accumulation by investing in projects which require huge capital expenditure. Because of heavy investment required, few businesses will venture in those projects leaving big room for the smarter ones to thrive and prosper further. Some of these projects which require exemplary huge investment expenditure include: airline transport, tourism, chemical production.
Despite many researches, economists have not clearly understood the impending catastrophes which leading industrial nations are facing and will be facing at the end of the long economic cycle which started after the oil crisis of 1973. It is imperative that businesses adopt best practices which balance realization of short-term goals and long-term objectives. It is also important for businesses to balance between profitability and sustainability of worker’s purchasing power. Therefore businesses should not aim at maximizing profits by lowering workers’ pay but instead seek for other ways which are likely to have few side effects.
Foley, Duncan. Lineages of Crisis Economics from the 1930s: Keynes, Hayek, and Schumpeter. Eastern Economics Association Meetings, 2010. Web.