What is a Capitalism Crisis?

A capitalism crisis is a chain of events in a capitalist economy that precipitates a financial depression or recession. It is a term most associated with Marxian economics, the theories that were put forth by political economist and philosopher Karl Marx. A crisis of capitalism is characterized by a collapse of the capitalist system that occurs gradually over a length of time. Notable capitalism crises include the Great Depression in the 1930s, the economic crises of Mexico in the 1990s, and the global financial crisis of the late 2000s.

The Marxist political economy outlines Marx's ideas on production and commerce, how these acts relate to government, and how they ultimately influence a country's distribution of wealth. The theory illustrates how a crisis results from a capitalist style of political economy. According to Marx, the crisis period is marked by great changes in a society and more clearly defined struggles between various social classes.

Following Marx's crisis theory, a capitalism crisis develops when production has become excessive and the workers who are an integral part of the production process are marginalized. When a select few possess most of the wealth in an economy, this gives rise to a crisis of capitalism. The system, he felt, can not continue under the strain of workers who have been treated poorly — from a financial perspective or otherwise — and a natural breakdown occurs.

Marx identified three key areas of a capitalism crisis. In the first, employment rates are raised with the demand for more goods and services. The workforce gets larger and so too do the wages. It is these factors that, in the end, cause the capitalist system to fail: the rate of profit falters and the system collapses under the weight of too many workers, too many high wages, and not enough profitability.

The second area Marx identified is the age-old theory of "what comes up must come down." When demand for a good or service is at a high, it necessitates the need for more skilled workers and offers of better pay. The rate of profit, however, cannot stay at an all-time high forever, and it will eventually drop, causing a capitalism crisis.

In Marx's third aspect of a capitalism crisis, lowered consumer demand of a good or service becomes a problem. When profits go down, so too do wages, and, in many cases, the size of the workforce. This lack of demand financially spirals out to the economy as a whole, and when too many businesses experience it, a capitalism crisis can result.