Crisis (economic)

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In economics, crisis is an old term in business cycle theory, referring to the sharp transition to a recession. It is still used as part of Marxist political economy. It refers to a period in which the normal process of the reproduction of an economic process over time suffers from a temporary breakdown. This crisis period encourages intensified class conflict or societal change -- or the revival of a more normal accumulation process.

Many or most observers of Karl Marx's theoretical work argue that Marx himself did not come to a final conclusion about the nature of crises under capitalism. Instead, his many works (published and unpublished) suggested several different theories, none of them free from controversy. A key characteristic of these theories is that none of them are natural or accidental in origin but instead arise from the nature of capitalism as a society. In Marx's words, "The real barrier of capitalist production is capital itself."[1]

These theories include:

The tendency of the rate of profit to fall. The accumulation of capital involves a general tendency for the degree of capital intensity, i.e., the "organic composition of capital" of production to rise. All else constant, this leads to a fall in the rate of profit, which leads to a slow-down of capitalism and perhaps a crisis.

Underconsumption. If the capitalists win the class struggle to push wages down and labor effort up, raising the rate of surplus value, then a capitalist economy faces regular problems of inadequate consumer demand and thus inadequate aggregate demand.

Full employment profit squeeze. Capital accumulation can pull up the demand for labor power, raising wages. If wages rise "too high," it hurts the rate of profit, causing a recession.

In theory at least, these different views may not contradict each other and may instead be complementary parts of a synthetic crisis theory.