How Capitalism Causes Economic Crises

In “How Capitalism Exploits Workers,” we saw how capitalism distributes wealth away from the many who create it and into the hands of the few. What went unstated was how this causes economic failure.

To keep the economic system running effectively, wages must rise with profits and productivity. Marx stressed, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”[1] Economist Nouriel Roubini writes:

At some point, capitalism can destroy itself. You cannot keep on shifting income from labor to capital without having an excess capacity and a lack of aggregate demand…the firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.[2]

In other words, if corporations (the producers) get wealthier and the common people (the consumers) do not, the natural result is too much production capacity and not enough consumption. The people cannot afford the goods of booming industry, goods created by their own labor! The accumulation of profit without a proportionate rise in wages leads to economic contraction, and with it greater poverty for the masses and lower profits for corporations.

The booms and busts of the economy, times of prosperity (for some at least) followed by times of widespread unemployment, falling wages, foreclosure, homelessness, and hunger, are built into the system. “The history of capitalism is a history of periodic lurches into crisis, into the insanity of unemployed workers going hungry outside empty factories, while stocks of ‘unwanted’ goods rot.”[3] Conservative economists argue crises are caused by government meddling in the free market, such as the swelling of the money supply. While this can indeed have harmful effects (the Federal Reserve printing out billions devalues the dollar and leads to runaway inflation), it is not the cause of economic crises. Neither is government control of bank interest rates, or other forms of State regulation of the free market. The free market puts itself into crisis. It is important to remember there are certain ideologies that are very useful to the wealthy and powerful, and are peddled by them in every sector of society. In an In These Times article, David Harvey writes:

The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes… What was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since”…

Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War II and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand-led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state”… By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor.[4]

Despite the reasons the upper class provides, it is the under-consumption caused by low wages and the competition of capitalists that cause depressions. The competitive spending between firms sets the stage for a terrible collapse. As Einstein wrote, “The profit motive, in conjunction with competition among capitalists, is responsible for an instability in the accumulation and utilization of capital which leads to increasingly severe depressions.”[5]

In years when borrowing rates are low, raw materials cheap, worker wages pitiful, new technology available, capitalists see a chance to increase their profits, expand their businesses and market share, and destroy competitors. They stampede into investment all at once, building new factories, buying new land, technologies, and raw materials, and hiring workers. This is the boom time. Firms benefit from the spending of all other firms. Each firm can sell more to some and buy more from others, and profits rise. Many unskilled workers find employment. Skilled workers often see a rise in wages. Consumers are spending more money. Production takes off, and the economy prospers.[6]

But all good things must come to an end. Massive competitive demand eventually creates shortages in and thus raises the prices of raw materials, technology, land, available loans, skilled employees, and so on, which starts eroding profits. These increased costs raise the prices of consumer goods, and consumers buy less. During the boom time, after all, most of the new wealth and prosperity went to the capitalists at the top of society. The consumer base benefited a little, but not enough to prevent what’s about to occur. Quickly, the capitalists stampede out of investment. They saw the writing on the wall. Production is scaled back. Workers are fired. Rising unemployment then cripples consumption further – winding down production, cutting pay or hours, and letting employees go all deepen the crisis, rather than pull the economy out of it. Things spiral downward. Depression sets in.[7]

The result is a huge waste of both our productive capacity and human talent. During the recession beginning in 2008, about 30% of our industrial capacity stood idle.[8] Excess goods typically go to waste because no profit can be made from them – people cannot afford them. Workers desperately need work, and much work needs to be done to better society, but they will not find it from capitalists. Corporations sit on their money, refusing to invest. National wealth stays with the capitalists, as the pockets of the majority empty to stay alive. More and more people fall into debt, and are forced to compete with millions of others for dismal jobs, forcing down wages further. The larger employers will survive the crises intact, until eventually low interest rates, low worker wages, and cheaper raw materials begin the process again.[9]

A system where the production of wealth is controlled by the profit-driven few causes economic instability. Since industrial capitalism arose 200 years ago, the advanced capitalist nations of the world have been devastated by crises in each decade. So the U.S. saw depressions in the 1810s, 1820s, and 1830s just as it did in the 1980s, 1990s, and 2000s. Obviously, the increasing interconnectivity between national economies meant countries brought each other into crises like a collapsing house of cards. Globalization ensured global meltdowns.

Marx and Engels are famous for criticizing the crises of capitalism. They wrote in The Communist Manifesto that each economic bust put capitalism on trial:

In these crises a great part not only of existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that in all earlier epochs would have seemed an absurdity—the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce.[10]

“And how does the bourgeoisie get over these crises?” he asks. “On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises and by diminishing the means whereby crises are prevented.”[11] Scaling back production, massive layoffs, and pay cuts deepen the crisis, rather than helping pull an economy out of it.

This critique is not at all a relic of Marx’s time. In his 2013 article “What Wal-Mart Could Learn from Henry Ford,” former Secretary of Labor and political economist Robert Reich writes of “the basic economic bargain that lies at the heart of a modern economy”:

Workers are also consumers. Their earnings are continuously recycled to buy the goods and services that they and other workers produce. But if their earnings are inadequate and this basic bargain is broken, an economy produces more than its people are capable of buying.[12]

Reich points out that some executives and owners understood this, like Henry Ford. Socialist Michael Harrington noted the same in his 1989 book Socialism: Past and Future:

Mass production, Ford understood, could not exist unless there was mass consumption. The enormous increase in output made possible by the new technology that he had perfected—the assembly line—simply could not be absorbed by an economy of low-paid workers…

So Ford decided before World War I to pay the incredible wage of five dollars a day and to help buyers finance the purchase of his cars in order to deal with the new challenges of both production and consumption. More than that, Ford tried to persuade his fellow industrialists that, in their own self-interest, they should increase the pay—and the buying power—of their “hands” just as he had done. He succeeded in winning over converts, usually when there was a crisis—the Rockefellers joined the movement when their hired guns outraged the nation by killing strikers’ wives and children in Colorado—and mainly in the ranks of big business…labor historian David Brody called these changes in attitude in the United States “welfare capitalism”…

Ford and welfare capitalism made some prominent recruits—Herbert Hoover, who was something of an avant-garde Republican in the early 1920s, was one of them—but he failed to convince the capitalist class as a whole. Big business was mildly and sporadically receptive, but by and large decency toward the workers, even if it helped stop union organization, was seen as an extra cost, putting firms at a competitive disadvantage. Thus when the crash came in 1929, after a decade that had witnessed an extraordinary rationalization of production, a tremendous increase in capacity and productivity ended, just as Ford had feared, with the masses utterly unable to “buy back” the work of their own hands.[13]

Ford wrote in his book Today and Tomorrow (1926) that

The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers… We increased the buying power of our own people, and they increased the buying power of other people, and so on and on. It is this thought of enlarging buying power by paying high wages and selling at low prices that is behind the prosperity of this country.

Economist Paul Krugman writes in “A Permanent Slump?” (2013) that economists are increasingly accepting what Marx predicted in the late 1800s, that our economy is now “an economy whose normal condition is one of inadequate demand—of at least mild depression—and which only gets anywhere close to full employment when it is being buoyed by bubbles…and unstable borrowing.”[14] Empirical studies support this; for example, a 2014 report from the International Monetary Fund itself confirmed lower inequality is strongly correlated with faster and more stable economic growth.[15] In 2016, the IMF repeated this warning: “Increased inequality…hurts the level and sustainability of growth.”[16] The Congressional Research Service looked at 65 years of data and concluded that tax cuts for the rich have no impact on economic growth. Simply giving more money to the rich does not fuel economic growth, as some claim (it will actually do the opposite if the wealth gap grows too large). Economic growth is fueled by the masses, by consumers. Only enriching the poor can bring about economic stability.



[1] Karl Marx, Capital Volume 3

[2] Economist Nouriel Roubini (2011), from Lee Sustar’s article Why Marx Was Right

[3] Harman, Economics of the Madhouse


[5] Einstein, Why Socialism

[6] Harman, How Marxism Works, 45

[7] Harman, How Marxism Works, 45

[8] Richard Wolff, Occupy the Economy

[9] A People’s History of the World and How Marxism Works, Harman; The Communist Manifesto, Marx and Engels; 23 Things They Don’t Tell You About Capitalism, Chang; Power Systems, Chomsky; Recovery in U.S. is Lifting Profits, but Not Adding Jobs, Schwartz, NY Times 3/3/2013

[10] Marx, Manifesto, 13

[11] Marx, Manifesto, 13


[13] Michael Harrington, Socialism: Past and Future