The policy-based and conjunctural causes of the 2008 crisis

Abstract

This chapter argues that while the conjunctural and policy-based factors played an important role in the 2008 crisis, the systemic causes of crisis should not be ignored. Prior to the crisis, for example, the United States economy was already unsustainable, not only because of the large current account deficits but also due to the stagnant real wages which had been compensated by excessive lending to workers to offset insufficient demand. Based on Marx’s reproduction schemes, and by emphasizing the distribution of income between capitalists and workers, and the time gap between the production of means of production and consumption, this chapter develops a new theoretical model to explain the cyclical nature of capital accumulation and crisis. The model shows that even when the shares of profits and wages in total output remain the same, problems associated with insufficient demand and crisis can occur, since different stages of capital accumulation require different levels of wages and profits to avoid insufficient demand. The dynamics of capital accumulation process necessitates radical changes in income distribution to maintain sufficient demand which is near impossible to achieve. When there is a large reserve army of labor (unemployment), lower wages bring about faster accumulation of capital; and once the reserve army of labor declines substantially, demand deficiency starts which requires capitalists to radically increase either their consumption or wages. Both are very difficult adjustments for capitalists.