The worldwide economic crisis of 2008 began in mid-2007. Investors have lost all faith in the value of mortgages with securities in nations such as the United States, resulting in liquidity confusion. The rate at which assets and capital are converted to cash has increased. As a result, the United States Federal Reserve was compelled to significantly infuse money into the economy via financial markets. The global stock market fell, and economies began a period of increasing instability. Banks, insurance companies, and mortgage lenders all failed in the months that followed. The crisis led to significant effects in real estates and banking sector which in turn affected economic activities such as investment. The crisis also led to the tightening of credit facilities whereby financial institutions such as the commercial banks made it harder for the creditors to get money from them. The stock exchange markets of various countries declined, and therefore, it led to problems of liquidity in the equity as well as hedge funds. Lastly, it resulted in the devaluation of currencies and assets which affected the terms of insurance contracts. There was also increased public debt as nations had to borrow from the World Bank and the IMF to deal with the devalued currencies.
Menger’s Contribution to the 2008 Economic Crisis
The experiences of the 2008 economic crisis pressured the intervention of various schools of thought in the development of the best policies that could be employed to manage it. Carl Menger from the Classical Economist school of thought pointed out defects in the theories of Adam Smith about collectiveness of each of the units of economics. He insisted that there was a need to trace the economic value of each of the factors of production to the root. His ideas also refuted the Labor theory which stated that the cost of goods and services depends on the amount of labor required to produce them. He showed that the economic value of products and services depended on factors such as needs, preferences, and tastes. Using the concept that amount depends on the objective of the good in ensuring the survival of persons, he arrived at the idea of marginal utility. Menger through the Marginal Utility theory solved the inconsistency that existed in the arguments of early classical economists. The classical economists rather than focusing on the individual economic units, they concentrated on collectivity. Therefore, the nations and their economies were analyzed as single entities.
Carl Menger in his contribution on the Capital theory discussed the production process and distinguished production and consumption and different orders of goods. He brought to light to the topic of division labor which is one thing that improves the welfare of the people. The rules of production take three steps which are consumption goods is the first one followed by products that help in the production of other goods. Higher order goods according to Carl include the raw materials, machinery, and tools which in most cases are heterogeneous and occupy different orders during the process of production. As such, Menger made the production a complicated process. According to his point of view, economic growth can only occur if people extend more concentration to the higher order goods. Therefore, his discussion on the value of assets he covered consumption goods as well as the formation of more top products. Menger showed capital as wealth which can be dedicated to the acquisition of income. In the 2008 crisis, money had lost its value, and its rate of liquidity was high. Menger death with this theory since it was applicable in Germany at the time when he was writing. As such, it is worthy to note that he gives a critique of the Irving Fisher theory on capital.
Menger also critiqued the stand of other economists that capital is a means of production. He believed that it is not all about the classification of wealth when it comes to the creation of economic goods. He argued that there is nothing unique about the capital goods, but its combination with other products is what is necessary. The first order goods do not necessarily qualify as capital goods since there are a lot of assets which are free such as water and wind but they are not classified as one. Secondly, he argues that private households use different classes of goods in varying ways. For instance, some people use unprocessed food and firewood which implies that means of production used at the raw level don not add value in the acquisition of wealth. Thirdly, the other classification is that consumer goods in the hands of producers as well as retailers are capital goods in that they help them in the acquisition of wealth. Being the founder of the Marginal Utility theory, he expounded on the unit change in the satisfaction that people get from consuming an extra unit of a good or a service. Carl Menger did not believe in the concept that goods did not have the utility function. He instead argued that products have a value which varies from one individual to another. He illustrated this idea using water whereby he said that a bail of water could be used to satisfy basic wants, but it can as well be used in meeting more essential desires. Menger used this theory on criticizing and overturning the neocolonialism theory that Adam Smith had adopted. The insight on the varying values of goods provided an idea to solve the 2008 crisis. He offered an insight that the importance that people attach to products varies and therefore the prices do not remain constant (Baptiste 340).
Menger also contributes to the solving of the 2008 depression crisis as he cited that factors of labor add to the value of goods and services which neo-classical theorists assumed. He showed that the cost of goods increase when their ability to satisfy human wants improves. As such, Menger was of the idea that the amount of labor used in the production of a good does not contribute to the value of a good. Further, he added that since the worth of the goods and services depends on their ability to satisfy human wants, it affects units of other products and services used in the production of the good to achieve maximum satisfaction. Inputs used in the production of goods have a high capability of increasing the utility of a good leading to the theory of demand.
Marxist Theory on the 2008 Economic Crisis
The 2008 economic crisis plays an essential role in the Marxist theory. One of the main reasons is that severe financial crises play a crucial role in suppressing capitalism which leads to transitioning of economies towards socialism. Early Marxists had tried to develop a breakdown on the stages through which an economic crisis happens. In the process of breaking down the financial crisis, there was the identification of a direct barrier to the re-arising and reproduction of capitalist ideas. One is required to follow the Marxism approach to the economic crisis to identify it as the leading cause of socialism. Disasters that are severe and long-term create conditions that are favorable for transitioning from capitalism although it is not a guarantee.
Different Marxists concluded that capitalism leads to two economic crises that are qualitative. The first crisis is the recession of the business cycle which happens in a short period brought about by the capitalist mechanism. After the World War II governments applied the fiscal as well as monetary policies to bring an end to the cycle recession. The second economic crisis is long-term, and it requires the restructuring of financial institutions to solve it under the capitalist regime, and the process of capital accumulation continues. There is the widespread recognition of the two types of crisis, but there is no agreed upon terminology that can be used in distinguishing the two. Therefore, in this case, we are going to use the phrase structural accumulation to refer to the long-term economic crisis and cycle recession to refer to the short-term downturn.
From history, it is clear that the structural accumulation can be severe. We will use the Marxist theory in determining the fundamental factors that lead to the 2008 economic crisis as it led to the demise of capitalism during the same period. It leads to the conclusion that the 2008 financial crisis was more or less structural. It would also appear that the 1970 crisis was less severe compared to the one of 2008.
Marxists identify causes of economic crises in the in a capitalist system which reflects on the internal mechanisms as well as factors that lead to it. The causal mechanisms are regarded as tendencies in the Marxist analysis. Some of the interior behaviors include under consumption of goods and services and a reduction in the rate at which businesses make a profit due to the rise in the price of the factors used in the production process. The other mechanism refers to the reduction in the reserves of labor which Marxism relates to unemployment of the people willing and able to work. Lastly, it involves the arrangement of over investment or rater over-accumulation of capital by individuals as well as companies (Kotz, 145).
The above-listed tendencies give rise to literature used in pointing out the causative factors of structural economic crisis. Marxism brought the idea that severe crises rise from the capitalist nature of institutions. The analysis of capitalism, in general, that is giving the public characteristics then the tendencies can be derived, but it would be hard to determine them systematically. For instance, it would be hard to decide on whether a trend leads to the long-term or short-term economic crisis.
Marxists used the social accumulation concept to discuss how they lead to economic crisis. The use of social factors is more of external rather than internal. He uses the idea that Capitalism cannot exist on its own but takes the form of an institution. The typical school of thought on the accumulation of capital argues that individual capitalism and global capitalism takes the form of permanent structures of organizations that have lasted over an extended period. Such institutional arrangements are known as the Social Structures of Accumulation (SSA). The SSA according to existing literature refer to coherent institutions which over an extended period have tried to promote Capitalism or rather capital accumulation. The contradictions that exist in the SSA increase to the point that it does not support the accumulation of capital any longer and therefore leading to a new era of structural crisis. The crisis would continue until further social structures for the collection of wealth are constructed.
The Marxist theory on SSA appears to explain the causes of structural crisis but the 1970 crisis identified in the literature does not fit in the concept of severe crisis. Many analysts in countries with high income and encourage capitalism, the performance of their macroeconomic such as employment, inflation and the balance of payments worsened. The United States, for instance, in the first quarter of 1973 experienced a sharp recession whereby there was a 2.5% decline in the Gross Domestic Product (GDP). The other quarters of 1973 were characterized by low economic growth accompanied by high inflation and low employment. There was also increased instability in the monetary systems of the United States. The period that the US went through in 1973 can be referred to us as stagnation and uncertainty in the economy.
The 1970 economic crisis is not a typical example of the structural crisis as compared to the 1930 and 2008 financial crises. The GDP of the United States in 3 years had dropped to 30.5% in 1930. The 2008 crisis turned out to be more of the 1930s. The real recession in the United States started in July 2008 although a decline in the GDP did not begin immediately. The financial crisis gained momentum which reached a point of economic collapse. Financial institutions such as the commercial banks were on the verge of becoming insolvent, and most of them had already become insolvent.
The unemployment rates rose from 4.8% in the year 2008 to 10.3% in 2009 which is quite high compared to the 1970 economic crisis. The SSA convention theory in the 1930s and 1970s does not offer explanations on the causes of structural capital accumulation. The SSA theory mainly focuses on explaining the role of institutions on in enhancing capitalism.
The SSA theory argues that any institutions formed after the happening of a crisis only come at a particular time. The Capitalist structures fall into two main categories which include the liberal and the regulated institutions. One of the main features of the fixed systems is that the state is actively involved in the control of the economy. The government also actively regulates the behaviors as well as the finances of the economy. In the regulated institutions, the relationship between labor and capital in any working place has the effect of compromising the social as well as the economic sides of the economy. Big businesses such as companies engage in companies with low or restrained competition. The benefit of SSA emphasizes the benefit of government regulation and cooperation between capital and labor in a market with civilized competition.
Liberal institutions, on the other hand, have features such as little or no regulation of the economy by the government. Capital institutions regardless of their size strive to dominate the use of labor in the market. Large companies engage in competition that is not restrained. They advocate for free markets. The 2008 economic crisis arose in the United States, and it emerged from the neoliberal institutions. The structure of the liberal organizations led to the severe financial crisis in the US. There was increased inequality between the wages and the profits in different households. There was a series of bubbling in the considerable assets. The financial sector, on the other hand, became absorbed in speculative as well as risky activities (Hicks 123).
During the liberal era, there was increased inequality brought about by a reduction in the aggregate demand. Increases in profits usually stimulate accumulation of capital and produce. Declining wages limit the growth of benefits as well as the market. The concentration of income on a particular group also has the effect of limiting economic growth as the rich people in the society do not spend a significant share of their income in buying consumption goods.
Institutions that are liberal pose features which in most cases limit the realization of the crisis. The rapidly increasing profits lead to an increase in the rate at which people invest which mainly constitutes the large part of the demand. The increased benefits can perpetuate expansion of industries, but it only acts as a mechanism for realizing problems. There would also be an improvement in the production as people work towards the realization of high inputs (Smith 90).
Rise in consumer spending in collaboration with increased income while postponing the process of realizing the crisis would eventually make the crisis worse. The speculative financial industry which invested in risky activities is the one which led to the 2008 economic crisis. The United States commercial sector engaged in speculative activities that were dangerous in the year 2000. The price of household goods increased which contribute to the expansion of the economy. The financial sector worked towards providing huge mortgages on loans to the owners of homes who had poor rating regarding credit. The commercial industry also made it possible for the expansion of the economy through an increase in the consumer spending. The result of the increased economic sector lending is that it led to the fragility of the economy. The United States financial lending led to the creation of trillions of money that was used in the buying of bad assets. The United States sector had to increase its borrowings to pursue its profitable activities that were speculative. The debts of the three primary industries in the United States also increased drastically. The ratio of the household debt to the Gross Domestic Product doubled in the year 2007. In the year 2008, the level of the obligations had become unbearable.
The Marxist theory suggests that there is a necessity to go further in the analysis of capitalism other than the use of the general method. To be useful in analyzing the contribution of Capitalism in the 2008 crisis, there should be an analysis of the single institutions and their features in the current situation as well as place.
Keynes’ Contribution to the 2008 Economic Crisis
Keynes theory of General Employment, Interest and Income tried to deal with the economic crisis of 2008. The post-Keynesian economics increased the understanding of the financial crisis and its causes. The 2008 crisis was a crisis of the macroeconomic theory. The theory had the flaws of not predicting the origins of the crisis. The approach would also not provide the solutions to the consequences of the crisis. The post-Keynesian macroeconomists offered a coherent explanation of what happened in the 2008 economic crisis. Minskyan, one of the Keynesian economists, gave an insight on capitalism which makes the economy slightly unstable. In his economic theories, he assumed that the financial markets must be in a state where they are destabilizing for a crisis to take place. His arguments imply that regulators of finance such as the Federal Reserve should design rules aimed at achieving stability in the economy (Keynes 77). Financial instability according to the Keynesians only applied to banks and other financial institutions. The institutions are the only ones with the power to deal with excessive credit in the society either to the positive or to the negative side. He did not realize that the statistical hypothesis also applies to the income and spending of the households. It seems in his process of developing the economy he did not know that there was evidence of increasing ratio between the Gross Domestic Product and the national debt. Speculations in the real estate as well as the stock market lead to the high 2008 great depression proceeded by the crash of real properties. As such, Minsky one of the Keynesian economics wrote about the typical relationship between financial stability and the housing debts. The debts were assumed not to be essential factors in the process of initiating a downturn in the income as well as employment levels in the economy. Christopher Brown, one of the youngest Keynesian economists, was left with the responsibility of examining the link between credits of the consumers and the real estate. He was also to explain the relationship between the increasing income inequality and the decreasing rates of household savings (Marx 454). The problems that the young economists were to address were later uncovered in the 2008 economic crisis.
During the era of Keynesians, mortgages were issued on the basis that there was an increasing price in the prices of the houses. As the cost of the homes went up, banks had to increase their lending rates, and therefore, borrowers of banks could easily refinance their loans. The prices of the estates are not guaranteed to improve forever since there would come a time when there would be no qualified buyers in the market. The Federal Reserves during the 2008 economic crisis had little or no control over the stocks of money that other institutions could hold. The policies of the Keynesian economists had to introduce rules and regulations aimed at reducing the cash that companies would old. The supply of money during the period of Keynesian economists was considered as an endogenous variable which the central bank could determine.
Conclusion
Carl Menger, Marx, and Keynes' policies had tried to address the 2008 economic crisis. There was the use of the Marginal utility, employment, interest rates as well as neoliberalism in trying to offer solutions to the crisis. All of the listed economists considered capitalism of institutions as the leading cause of the crisis.
Works Cited
Keynes, John M. The general theory of employment, interest and money. CreateSpace. ISBN-13: 978-1448673025
Marx, Karl. Capital. Volume 1. Penguin Classics. ISBN-13: 978-0140445688
Smith, Adam. Wealth of nations. University of Chicago P. ISBN-13: 978-0226763743
Kotz, David M. "The financial and economic crisis of 2008: A systemic crisis of neoliberal capitalism." Review of Radical Political Economics 41.3 (2009): 305-317.
Hicks, John and Wilhelm Weber. Carl Menger and the Austrian school of economics. Clarendon Press, 2003.
Naudé, Wim. The financial crisis of 2008 and the developing countries. No. 2009/01. WIDER Discussion Papers, World Institute for Development Economics (UNU-WIDER), 2009.
Baptiste, Ian. "Educating lone wolves: Pedagogical implications of human capital theory." Adult Education Quarterly 51.3 (2001): 184-201.
