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. His ...

, which is associated with Marxist economic theory. While the same phenomenon is described in neoclassical economic theory, 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 the ...

The process of economic crises

Economic geographer David Harvey 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 Outsourcing is a business practice in which companies use external providers to carry out business processes that would otherwise be handled internally. Outsourcing sometimes involves transferring employees and assets from one firm to another ...

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 gover ...

production. *Step 2 – Corporate profits—especially in the

financial sector Financial services are economic services tied to finance provided by financial institutions. Financial services encompass a broad range of service sector activities, especially as concerns financial management and consumer finance. The financ ...

—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

have also repressed the

buying power Bargaining power is the relative ability of parties in a negotiation (such as bargaining, contract writing, or making an agreement) to exert influence over each other in order to achieve favourable terms in an agreement. This power is derived f ...

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 In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...

throughout the American market preceding the

Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009.

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 interconnection, 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 singl ...

—such as the cascading failure following the

bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers, also known as the Crash of '08 and the Lehman Shock, 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 i ...

, or

Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...

which led to the bailout of

AIG American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core ...

and catalyzed the

market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value.Paul Krugman and Robin Wells Krugman, Robin Wells (2006 ...

s 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 Accumulation by dispossession is a concept presented by the Marxist geographer David Harvey. It defines neoliberal capitalist policies that result in a centralization of wealth and power in the hands of a few by dispossessing the public and p ...

. The crisis relocates itself geographically, beginning all over again while the site of its geographical origins begins taking steps towards recovery.

The process of economic crises

References

See also