What causes recessions?

By Allen Myers

Only a few years ago, the economic “experts” quoted in the commercial media were assuring us that major recessions were a thing of the past. The economists had figured out how to manage the economy, and as long as governments followed their advice, there would be nothing more serious than the occasional statistical blip. Then the real world intruded.

Capitalism has experienced recessions ever since it came into existence. Called by different names — panic, crisis, depression — these involved a major disruption of production because goods could not be sold profitably. Throughout the 19th century, these events occurred at fairly regular 7-10 year intervals. As capitalism attained its highest stage (imperialism), these disruptions became more complex and less regular. For example, major wars (especially the two world wars) can be viewed economically as taking the place of a recession by causing a major cutback in production of (civilian) goods. Because of competitive successes or failures, different major economies might suffer a recession at different times instead of simultaneously, and a country that was not synchronised with most of the others might avoid a recession by exporting to them.

Despite such changes in their form, recessions such as the one the world is now experiencing are not fundamentally different from those of the 19th century. They are crises of overproduction: companies have produced more goods than can be sold at a profit. This happens, unavoidably, because of some underlying contradictions that capitalism cannot escape.

Major contradictions

One contradiction is that between capitalist profit and workers’ ability to consume. Capitalist firms produce to make a profit, which means that the value of their product must be greater than what they pay for it. It follows necessarily that the workers employed by any capitalist firm could not buy all of what they produce. And what is true for the workers of any one firm is true for the workers and businesses of the system as a whole: if the workers could buy the entire production, there would be no profit and no capitalists.

Therefore, capitalists must find at least some customers who are not workers. Partly, they can be their own customers, by consuming luxury goods. Partly, they seek out new customers, but the world is finite, and competing for customers in other countries may solve the problem for one country’s capitalists but can’t do it for the whole world. Partly, they use the difference between production and immediate consumption to expand future production by buying more means of production (machinery, raw materials) but that only reproduces the problem on a larger scale. Hence capitalist profit implies a constant tendency to overproduce.

A second important contradiction is that competition forces capitalists to seek to lower the price of their product, by lowering their costs. One way of doing this is reducing wages, which exacerbates the problem of finding buyers. Another is through replacing workers with machines, which destroys the purchasing power of the displaced workers. More significantly for the capitalists as a whole, it increases the ratio between the total investment and the total profit (which depends on the number of workers). That is, it reduces the average rate of profit, making it more likely that any given decline in sales will make a business unprofitable.

No social control

These contradictions interact with another: that between planned production in the firm and the anarchy of social production. Producers in a capitalist society normally cannot know whether there will be a buyer for their products. No-one determines beforehand how many potatoes, buckets, machine tools or machine guns can be sold. Hence imbalances and disproportions — too much of one commodity, too little of another — are inevitable. Industries that have produced too much lay off workers, who therefore reduce their spending, which may mean that other industries suddenly have goods they can’t sell.

This is, of course, a very simplified outline. Many other factors interact with these contradictions to determine the timing and features of particular recessions. However, it indicates why recessions are not an accident, but an inherent characteristic of capitalist economies. No matter how many regulations or safeguards governments put in place, the current crisis will not be the last — unless we get rid of capitalism before the next one strikes.