To what extent is there a crisis in capitalism or a crisis of capitalism?

International Political Economy and Global Development

The financial crisis of 2008 sent shockwaves across the global economy. It had implications, not just on the living standards of people around the world, but also on the ideological perspectives in which we view and understand the economic system. In academic circles and ‘Occupy’ protest movements, the thoughts of Marx – previously considered outdated and irrelevant – became fashionable once again. In governments, policymakers saw that the cure to the crisis would be found not in the laissez-faire economics of Milton Friedman, but by stimulating the economy as suggested by John Maynard Keynes. After decades of ‘neoliberal consensus’ (Cerny 2004: 5) – free markets, liberalized global trade, deregulated capital – the prevailing ideology began to be questioned. But what does this suggest as far as the future of capitalism is concerned? The purpose of this essay is therefore to examine whether capitalism is a liable to occasional glitches which can be corrected, or whether the inevitable, systemic faults of capitalism mean it is beyond repair.

Marxists would suggest that the inherent faults of capitalism mean that it is a system prone to crisis such as the one created in 2007-08. Due to profit motive, and the nature of competition in the free market, ‘firms undertake a level of investment which temporarily exceeds existing output’ (Harman 2009: 61). As a consequence, firms will have to borrow to support such investment, and so credit is an ‘indispensable part of capitalist production’ (Harman 2009: 62). In terms of the 2008 financial crisis, the availability of credit encouraged a construction boom in the US housing market whereby the prices were on a consistent upward trend. That subprime mortgages were issued to people who had limited chances of paying them back ‘didn’t really matter’ (Krugman 2008: 167) to the financial institutions as troubled borrowers could always refinance by selling their house. A profitable exercise so long as house prices kept increasing, but considering houses were ‘overvalued by 50 percent’ (Krugman 2008: 168), ‘inevitably a point is reached when the drive for financial profits leads to levels of lending above what can be paid back out of the expansion in real output’ (Harman 2009: 64). As defaults increased, the financial institutions which had invested in the housing market reported losses, and began to hold back credit. The Marxist argument therefore is that ‘greed, aggression (and) mindless hedonism’ (Eagleton 2011: xi) will encourage the capitalist, in competition with others, to seek higher profits by pumping out ‘surplus value in order to further pump out yet more surplus value’ (Harman 2009: 62). The profit motive means that ‘someone is always willing to stick his neck out just a little farther than the next guy’ (Sorkin 2009: 555). Ultimately however, in the long run, whenever debts cannot be repaid through expanding output, economic ‘crash’ is inevitable. The result was a tightening of global credit, falling investment and consumer confidence, spread further because of the interconnected nature of the world economy. Marx warned that the capitalist ‘need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe’ (Marx and Engels 1848: 223) and would multiply the effects of crises. It is this ‘developmental tendency’ (Cap 2002: 242) of capitalism to broaden economies – through open markets, free trade and the transnationalisation of capital – that no doubt allowed the shocks of a crisis which began in America to spread across the globe.

This Marxist critique has certainly earned a hearing in light of the global crisis, however is capitalism troubled to the extent that it is in need of replacing? The liberal perspective suggests otherwise. Crises may occasionally occur, but following the Great Depression – the largest economic crisis as yet – the world experienced ‘sustained economic growth…during which recessions were short and mild, recoveries strong and sustained’ (Krugman 2009: 15). Furthermore, Marxist suggestions that globalisation worsened the credit crunch might be correct, but the overall fruits of globalisation are clear to see; in ‘countries where new export industries took root, there has been unmistakable improvement in the lives of ordinary people’ (Krugman 2009: 26). Critics of capitalist transnational corporations might criticise the low pay and poor conditions which they provide to workers in developing countries, but ultimately such companies must provide prospective employees with a more attractive offer than they were previously capable of receiving. Krugman concludes that progress in the developing world was due to becoming ‘as integrated as possible with global capitalism’ (Krugman 2009: 28). Perhaps then, rather than abandoning capitalism, it simply needs to be occasionally corrected.

The liberal approach suggests that the fundamentals of the free market are sound; rather than a zero-sum game as Marxists suggest, global capitalism is a positive-sum game as ‘individuals in pursuit of self-interest will maximise the benefits of economic exchange for society’. Even still, most liberals realise that ‘market operations are not always optimal’ (O’Brien and Williams 2004: 19) and thus ‘light touch’ regulation can ensure good practice. Krugman defends the effectiveness of regulation by arguing that it did not fail in 2008 as such; instead a ‘shadow banking system’ – comprised of de facto institutions such as hedge funds – developed which was ‘never regulated in the first place’ (Krugman 2009: 163). The implication therefore, is that with the right kind of regulation and safeguards, crises in capitalism can be prevented. When John Maynard Keynes – attempting to explain the cause of the Great Depression – wrote “we have magneto (generator) trouble”, he was not calling for a radical overhaul of the capitalist system. He saw ‘certain problems with the unfettered operation of the free market’ (O’Brien and Williams: 20) but insisted that ‘we need not assume that we shall soon be back in a rumbling wagon and that motoring is over’ (Keynes 1930). By this he implied that ‘motoring’ – capitalism – was progress on what had preceded it, but that like a car with a faulty engine, it simply needed a push start. Essentially, when crises in capitalism do occur, they can be fixed. His prescription of government spending to increase aggregate demand in the economy – a Keynesian stimulus – was popular during the 1930s, and enjoyed a resurgence in the aftermath of 2008. Britain and the United States, with support from the IMF and the United Nations, were at the ‘forefront of efforts to coordinate fiscal policies among the world’s major economies so as to boost global demand’ (Farrell and Quiggin 2012: 25). That British Chancellor at the time Alistair Darling later wrote that like ‘most governments dealing with the fallout from the crisis’ he was ‘influenced hugely by Keynes’s thinking’ (Darling 2011: 177) suggests Keynes’ influence among policymakers at the time was strong.

However, the ‘Keynesian revival was relatively short-lived’ (Farrell and Quiggin 2012: 32). Krugman decries the size of the fiscal stimulus in the US, arguing that a fiscal stimulus of 4% of GDP rather than 1% would have had much greater effect (Krugman 2009: 183), but there is a school of thought within the liberal perspective that believes there is neither a crisis in or of capitalism, but a lack of capitalism. Ayn Rand argued that ‘no politico-economic system…has ever been attacked so savagely, viciously, and blindly’ (Rand 1967: viii) as capitalism, and that by abandoning the core principles of the free market ‘businessmen have served as the scapegoat for statist movements of all kinds’ (Rand 1967: 42). Perhaps then, the ‘crises of capitalism’ originate not from capitalism but an altogether different source, namely the state? The argument is that government intervention does not prevent market failure, it is the cause. ‘Readjustments occur quite swiftly’ in a pure free market economy, argues Branden, ‘temporary recession is not harmful but beneficial; it represents an economic system in the process of…curtailing disease and returning to health’ (Branden 1963: 81). Rather than reducing the effects of crises, governments end up extending them. Similar to the case in the 1920s prior to the Great Depression, Alan Greenspan’s Federal Reserve, intending to stimulate growth at the turn of the century, set ‘unusually’ low interest rates which meant that the world began to ‘flood with money’ (Sorkin 2009: 4). Those in this school of thought argue that a market system of supply and demand would have ‘put the brakes on this process of runaway speculation’ (Branden 1963: 83). In both the Great Depression and the financial crisis of 2008 there appears to be a ‘common denominator…government manipulation of the money supply’ (Branden 1963: 85). Furthermore, that financial institutions became ‘too big to fail’ encouraged risk-seeking behaviour in the knowledge that governments would bail the banks out were they to fail. A US Congressional watchdog concluded that the decision to bailout insurance giant AIG had a ‘poisonous’ effect on the marketplace and ‘demonstrated the Treasury and Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions’ (Congressional Oversight Panel 2010: 10). Marxists would argue that the conditions of the free market and global capital allowed such institutions to grow so greatly, and they would be right. But ultimately, the decision to bail out the failing banks was one taken by the state. In this case, it could be argued that the global system is not a capitalist one, but a corporatocracy. Ironically, this might be one critique where Marxists and Hayekians share common ground.

In conclusion, the paradigm that there is either a crisis of or in capitalism seems a flawed one. In suggesting this we ignore the argument that it is statism, rather than capitalism, which has been the source of recent economic woes. The question should instead be whether it is capitalism or statism which caused the global financial crisis? Considering we have arguably an unhealthy mix of the two, this is a difficult question to answer. No doubt, in the short run – the timespan within which politicians and electorates are most concerned – to have allowed the banks to collapse would have caused greater damage. That being said, it is entirely right to shift the terms of the debate away from simply a critique of capitalism towards a more balanced analysis which also takes into account the role played by the state in creating and failing to prevent the crisis.


Branden, Nathaniel (1963) ‘Common fallacies about Capitalism’, in Rand, Ayn (1967) Capitalism: The Unknown Ideal New York: Signet.

Cap, Chu Van (2002) ‘Marx and Engels on Economic Globalization’, Nature, Society, and Thought, 15/2: 241-245.

Cerny, Philip G. (2004) ‘Mapping Varieties of Neoliberalism’, , date accessed 16/03/13.

Congressional Oversight Panel (2010) ‘June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy (10/06/13)’,, date accessed 17/03/13.

Darling, Alistair (2011) Back from the Brink London: Atlantic Books.

Eagleton, Terry (2011) Why Marx Was Right New Haven & London: Yale University Press.

Farrell, Henry and Quiggin, John (2012) ‘Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism during the Economic Crisis (09/03/12)’,, date accessed 17/03/13.

Harman, Chris (2009) Zombie Capitalism: Global Crisis and the relevance of Marx London: Bookmarks Publications.

Keynes, John Maynard (1930) ‘The Great Slump of 1930 (12/11/08)’,, date accessed 17/03/13.

Krugman, Paul (2008) The Return of Depression Economics and the Crisis of 2008 London: Penguin Books

Marx, Karl and Engels, Friedrich (1848) The Communist Manifesto, translated from German by Moore, Samuel (1888), with introduction and notes by Jones, Gareth Stedman (2002), London: Penguin Books Ltd.

O’Brien, Robert and Williams, Marc (2004) Global Political Economy: Evolution and Dynamics Basingstoke: Palgrave Macmillan.

Rand, Ayn (1967) Capitalism: The Unknown Ideal New York: Signet.

Sorkin, Andrew Ross (2009) Too Big to Fail: Inside the Battle to Save Wall Street London: Penguin Books Ltd.


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