The Nature of an Economic Crisis

The Nature of an Economic Crisis
[Analysis] Why the discrepancy between ends and means?
Alfredo Ascanio (askain)
Published 2008
Edited by Carlos Arturo Serrano

Several years ago a dissident economist of the classical school, Thorstein Veblen, predicted the current crisis of capitalism. While classical economists were arguing for free competition among businesspeople who would make the best use of scarce resources to meet human needs, Veblen countered that these needs were not being met as society expected. Accordingly, today the UN reports that more than 963 million people suffer from hunger.

T:VEBLEN

Veblen said that man had two behaviors: constructive and destructive. Production of goods and services is a constructive behavior, but using the stock market as a casino just to make money is a destructive one. That is why the production system is not efficient: while some work at making things, others wish to seize them. Whether or not these confrontations are won by those who want to make money without providing to society, crises appear. According to Veblen, there are no perfect competitors.

What a pity that he died in 1929, just a few months before the Great Depression. Veblen could not verify his hypothesis, but Keynes was able to promise a solution for the depression: economic institutions cannot agree to achieve a harmonious result. Another dissident from the classical school, Karl Marx, said that capitalism cannot reform itself, but Veblen said: the problems can be corrected.

Depression as a problem of the economic cycle was better studied after the crisis of 1930. English John Maynard Keynes and American Wesley Mitchell were the best economists that studied the problem of depression. Classical economists used to see it as a normal imbalance correctable by itself, but for Keynes depression is not solved within a laissez-faire economy. There is no automatic adjustment. It is therefore necessary that the government takes several measures, because a new equilibrium has emerged, albeit with unemployment and low consumption. A better distribution of income must be sought by using taxes.

But there is also the need for investment in capital goods. It is not desirable that savings do not go into investments. If the interest rate is low, investments will rise.

To Keynes these decisions were not miraculous. Society needs high government expenditure and investment. Economists Kahn and Keynes pointed out that investments could be reproduced three times in society, which is known as the multiplier effect. An example of this during the Roosevelt government was the New Deal in 1934.

Now Keynes appears as a prophet, although many neo-Keynesians are now his critics. Care should be taken with high inflation and the costly audits, as well as with the slowness of the Legislative and the courts to enforce decisions on deficit spending, tax-cyclical and non-balanced budgets. Several people and institutions have much to gain and little to lose, and are thus not interested in solving depressions, usually for political reasons. Business cycles can last on average 4 years.

A leader who feels uneasy facing a crisis will take decisions to seek solutions and he will do well if he knows better the problems. The problem is always human behavior. Many are unwilling to pay the full price for solving a crisis, and prefer palliatives instead. But as the basis of individual freedom is money, and money makes all men dependent on one another in a cash economy, crises must be resolved in a timely manner.

Banks tend to dominate economic crises and even may keep their debtors' properties, whether or not they have been ruthless and exploitative by providing impossible loans only for irresponsible speculation in the stock market.

Man determines institutions, which in turn determine him. They complement each other. Man is the central figure of economic science, which seems to echo Pascal's words:

"What a chimera is man! ... what a contradiction... what a prodigy!"


Alfredo Ascanio is a professor of economics at Simon Bolivar University in Caracas, Venezuela.
©2008 OhmyNews

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