Wednesday, July 15, 2009

Are Depressions Necessary ?

Asks this American Prospect piece.

Perhaps the question is not if they are necessary, but if they are inevitable within capitalism. Tendencies towards aggregate overproduction and underconsumption seem built into a system whose internal mechanics consist of private firms competing against each other, with the goal of maximizing profit. Overproduction, or excess capacity, through the inevitable turf wars that come with attempts to increase market share. Underconsumption, as companies squeeze for profit, and workers do not receive full compensation for the value they create.

While the business cycle is a smaller manifestation of these contradictions, the system also seems to periodically require a mass liquidation of weaker companies, and sectors. The associated liquidation of debt and lower profit investment allows for the market expansion of higher profit companies and industries, ultimately encouraging investment and renewed growth.

What has prevented depression since the 1970’s oil shocks is a binge of deficit spending within the developed world. Governments have run deficits to support consumption and therefore employment, while private households have done so to maintain living standards in the face of stagnant incomes.

It seems likely that this era of deficit spending is at an end. Absent the ability to resurrect the deficit bubble, this period of extended recession, and stagnation, could grind into something even more destabilizing for the current political order.

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