Thanks to mass media, by now most of the people of the world have some idea about the global financial crisis. No one knows exactly how this crisis came about and although there are many explanations, none manage to get to the root of the problem in a convincing way. Moreover, rarely is mentioned that today’s crisis is not unique and that other similar crisis have occurred through history. To explain this a bit better some examples may come in handy:

1857 – The Panic

It was a short economic depression which started in US and also affected major European countries, especially UK. The reasons were multiple, from an already slowing down US economy to land speculations based on railroad expansion and lack of bank liquidity. But the trigger was when the market for railroad bonds collapsed leaving thousands of investors ruined.

1873 – The Great Panic

Again the reasons are multiple from the expansion of cheap imports from US to Europe to the poor financing of urban development and housing and land speculation. The trigger was the collapse of the construction industry in Europe financed by poor lending practices; the situation was almost identical with the recent collapse of the housing market in US.

(1914-1918 ) – World War I

It is important to note the First World War because implications of such a war are far beyond the ones of any financial crisis. Such a war was an economic disaster for most of the world.

1929 – The Great Depression

It is hard to say what or who was to blame for the Great Depression; there are many theories which try to explain it in a way or another, some of which are even contradictory. The underlying problem was that consumer consumption was pushed upwards by cheap credit partially resulted from an uncontrolled expansionary monetary policy lead by the Fed. In other words consumption became artificially much higher than it should be or than what people could afford. Eventually this hit back when the people could not repay their debts and the entire economy tumbled down. The trigger for the crisis was the Wall Street crash on the 29th of October 1929, in just two days the stock market lost almost 20% of its value.

(1939-1945) – World War II

Similar to World War I but much worse.

1973 – Oil Crisis

Although much of the blame for the crisis of 1973 is on OPEC’s oil embargo and its attempt to increase the price of crude oil, some elements of the crisis also have roots in the financial/economic sector. Before the crisis began the US economy was already facing difficulties due to increasing government deficit and net trade deficit. The crisis came at a time when the dollar was weak and US just could not bare to pay an increased price for oil. As a result it just settled for a limited supply and faced an economic depression which affected the entire western world.

(1989-1991) – The Fall of USSR

At that time the Western block had some economic difficulties of its own (e.g. the Black Monday of 1987) but these paled in comparison with the collapse of the Soviet Union. In just a few years the former socialist countries experienced massive unemployment, huge inflation and a decrease in GDP of over 25% (in some countries it decreased by as much as 60%) . By 1996 the former “communist” states were in economic ruin. Although this apparently had little to do with the capitalist system, it did provide a huge new market for its products and its financial expansion.

2008 – ???

One of the major economic and financial crisis of the beginning of the 21st century, its causes are still unknown. The trigger was the collapse of the housing market in US in late 2007 combined with rabid consumerism financed partially by credit and a huge trade deficit. The effects propagated throughout the world affecting every country engaged in the world financial markets.

What do all these examples tell us?

The examples above tell just a broad story of capitalism. Other smaller crises have been ignored, just in the past 20 years there was the Mexican crisis, the Asian crisis, the dot com crisis etc. But the major story remains the same, major economic crisis do happen and what we are living today is not unusual. The question is why we keep reliving these events? After all if they are not something new, leaders and economists should have learned how to avoid them. Is there anything these crises have in common?

The classic economic theories give little insight when it comes to explaining broad events or patterns. However, there is one explanation which has been looked away ever since the fall of the Soviet Union and that is Karl Marx’s critic of capitalism.

There is no point in going into Karl Marx’s theories and concepts as they require at least a few hundred pages of discussion, it is better to concentrate on what is relevant to the case of economic crises.

According to Karl Marx, unless the capitalist system is faced with an external shock like the World Wars or like when in 1973 OPEC decided to skyrocket oil prices, it will experience from time to time crises of its own. According to him, the capitalist system is designed to create so much wealth and so many goods that they eventually surpass the needs of the people. At that point economic downturn begins because the system needs to rebalance itself. This sends the economy into disarray: unemployment rises, inflation rises, public investment slows down, more shortly the standard of living of the population is generally decreasing. For Karl Marx all these crises have something in common: over evaluation and overproduction. In 1857 it was the over evaluation of the railroad bonds and over investment in railroad development. In 1873 it was the overinvestment in the construction industry in Europe. In 1929 it was a general overproduction in almost all sectors. Today it was the overproduction of houses. According to Marx’s ideas, the World Wars and the fall of USSR are just part of the same story. The World Wars avoided any crisis because they were a crisis by themselves, while the fall of USSR meant opening of new markets where capitalism could expand thus avoiding overproduction. But when there was nowhere else to go, capitalism did exactly what Karl Marx predicted, it entered the crisis experienced today.

Karl Marx being the father of communism is a much disputed figure, his ideas and theories have been many times questioned or hard to believe especially in the western world. It is less important at this point what he wrote about communism, but what he wrote in his critique of capitalism. There may be many valuable lessons to be learned from his work even if they may be hard to accept.

copyright goes to Reuters

copyright for the image goes to Reuters

Advertisements