What Causes Boom and Bust?

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Gordon Brown used to endlessly repeat the mantra that, thanks to New Labour's policies, there would be "no return to boom and bust".

That looks laughable given recent events. At least it would be funny if people's lives were not being savaged by recession and cuts.

In reality, the history of capitalism is one of successive expansions followed by collapse. Today's apologists will have to choose their words more carefully given the objective reality of the crisis. Yet during booms when new buildings go up on a grand scale, high street sales increase and unemployment falls, enthusiasm towards the market seems to correspond to an extent with reality.

The key factor generating the boom is the capitalists' drive to maximise profit. If profits appear easy to make in one way or another, companies throughout the system attempt to expand output as quickly as possible. New machinery is bought and workers are employed. This increases trade further for those companies that sell the equipment and services required as well as those selling consumer goods to the growing workforce.

The economy as a whole booms. But the snag is that the whole process is blind. In a "free" market there is no overall coordination between the different groups of capitalists. Each seeks to expand their output as frantically as possibly. So there comes a point in every boom where the pools of raw materials, financial help or skilled labour start to dry up. Growing competition for dwindling resources increases prices, quickly destroying the profit margins, sending many firms towards bankruptcy. Their only defence is to attack workers conditions, postpone investment decisions and in many instances close down sections of the company.

The boom starts to give way to a slump and a crisis of "overproduction" emerges. Unsold commodities stack up and due to attacks on wages or job losses fewer goods can be bought. A cascade is unleashed as fewer goods can be sold and in turn bosses sack more workers. This vicious circle reduces the market size for the goods being produced and the crisis deepens.

Economic crises under capitalism occur not because too little is being produced, as happened recurrently under feudalism, for example. Crises happen today because "too much" is produced. This isn't because people's needs have been met, far from it - there is vast unmet need for everything from food to homes, even in the advanced capitalist countries. But under capitalism such needs are only recognised if matched by spending power. Without that goods go unsold.

The anarchy of the capitalist mode of production constantly leads to such wastage after periodic booms.

For example, during the telecom bubble in the 1990s huge amounts of fibre-optic cable were laid under the ground (in the US alone it amounted to enough to go around the world 1,566 times!). Yet today only a tiny fraction of this is used. Or more recently the opportunity to cash in on the rapid expansion of world trade fuelled by China's economic growth led to a wave of investment in tankers and container ships in the early part of the last decade. The difficulty was that orders placed in 2004 or 2005 are only being delivered this year, in very different economic circumstances. Shipping companies have been left with debts to the tune of $450 billion (further feeding Europe's banking crisis).

The central thrust of Marx's political economy is that the blind drive by competing capitals to accumulate throws the economy into a spasm that cannot be sustained once profits inevitably start to falter.

Each time a crisis hits there are attempts by capitalism's defenders to explain it away as caused by something apparently external to the system. So the return of crisis to world economy in the 1970s after decades of expansion was blamed on the oil price hike that followed the Arab-Israeli War in 1973. Or the economic contraction in the British economy last year was pinned by some on the amount of snow that hit the country. Paul Taylor, the chief executive of the Fitch credit rating agency, was perhaps more honest about the inability to explain why capitalism goes into crises when he proclaimed, "We don't have a crystal ball."

No matter how policies are adjusted or how decisions are made by individual capitalists crises are part and parcel of capitalism. The suffering and huge waste it causes mean it's an incredibly limited system, one to be thrown into the dustbin of history. Ninety years ago Leon Trotsky summed it up aptly: "Capitalism...live[s] by crises and booms, just as a human being lives by inhaling and exhaling... Crises and booms were inherent in capitalism from its birth: they will accompany it to its grave."