Internal Contradictions Of Capital Accumulation
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The internal contradictions of capital accumulation is an essential concept of
crisis theory Crisis theory, concerning the causes and consequences of the tendency for the rate of profit to fall in a capitalist system, is associated with Marxian critique of political economy, and was further popularised through Marxist economics. Hi ...
, which is associated with
Marxist economic theory Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian e ...
. While the same phenomenon is described in
neoclassical economic theory Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, in that literature it is referred to as
systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming th ...
.


The process of economic crises

Economic geographer
David Harvey David W. Harvey (born 31 October 1935) is a British-born Marxist economic geographer, podcaster and Distinguished Professor of anthropology and geography at the Graduate Center of the City University of New York ( CUNY). He received his P ...
argues that the multi-stage process of capital accumulation reveals a number of internal contradictions: *Step 1 – The power of
labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...
is broken down and wages fall. This is referred to as "wage repression" or "wage deflation" and is accomplished by outsourcing and
offshoring Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gov ...
production. *Step 2 – Corporate profits—especially in the
financial sector Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies ...
—increase, roughly in proportion to the degree to which wages fall in some sectors of the economy. *Step 3 – In order to maintain the growth of profits catalyzed by wage deflation, it is necessary to sell or "supply" the market with more goods. *Step 4 – However, increasing supply is increasingly problematic since "the demand" or the purchasers of goods often consist of the same population or labor pool whose wages have been repressed in step 1. In other words, by repressing wages the corporate forces working in congress with the
financial sector Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies ...
have also repressed the buying power of the average consumer, which prevents them from maintaining the growth in profits that was catalyzed by the deflation of wages. *Step 5 – Credit markets are pumped-up in order to supply the average consumer with more capital or buying power without increasing wages/decreasing profits. For example, mortgages and credit cards are made available to individuals or to organizations whose income does not indicate that they will be able to pay back the money they are borrowing. The proliferation of subprime mortgages throughout the American market preceding the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
would be an example of this phenomenon. *Step 6 – These simultaneous and interconnected trends—falling wages and rising debt—eventually manifest in a cascade of debt defaults. *Step 7 – These cascading defaults eventually manifest in an institutional failure. The failure of one institution or bank has a cascading effect on other banks which are owed money by the first bank in trouble, causing a
cascading failure A cascading failure is a failure in a system of interconnected parts in which the failure of one or few parts leads to the failure of other parts, growing progressively as a result of positive feedback. This can occur when a single part fails, in ...
—such as the cascading failure following the
bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal R ...
, or
Bear Stearns The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The c ...
which led to the bailout of AIG and catalyzed the market failures which characterized the beginning of the Great Recession. *Step 8 – Assuming the economy in which the crisis began to unfold does not totally collapse, the locus of the crisis regains some competitive edge as the crisis spreads. *Step 9 – This geographic relocation cascades into its own process referred to as accumulation by dispossession. The crisis relocates itself geographically, beginning all over again while the site of its geographical origins begins taking steps towards recovery.


References


See also

* Accumulation by dispossession *
Bank run A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
*
Crisis theory Crisis theory, concerning the causes and consequences of the tendency for the rate of profit to fall in a capitalist system, is associated with Marxian critique of political economy, and was further popularised through Marxist economics. Hi ...
*
David Harvey David W. Harvey (born 31 October 1935) is a British-born Marxist economic geographer, podcaster and Distinguished Professor of anthropology and geography at the Graduate Center of the City University of New York ( CUNY). He received his P ...
*
Financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
* Glass–Steagall Act *
Macroprudential policy Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole (or " systemic risk"). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policym ...
*
Modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificat ...
*
Monetary economics Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and ...
*
Moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
* Primitive accumulation of capital * Risk modeling *
Systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming th ...
*
Taleb distribution In economics and finance, a Taleb distribution is the statistical profile of an investment which normally provides a payoff of small positive returns, while carrying a small but significant risk of catastrophic losses. The term was coined by jo ...
{{DEFAULTSORT:internal contradictions of capital accumulation Financial crises Marxian economics