Exam II, Question 1
Foster and Magdoff’s historical perspective of the recent financial crisis is interesting and many points succeed to point out the flaws in our economic system. They believe that the current financial crisis had been building up because of historical events rather than occurring due to a natural cycle. According to the well-known business cycle, a crisis begins to take effect when the economy starts to slump, and is usually evident after a boom period. As evident after the recent boom period, the economy began to stagnate; however, there are many that led to this, in addition to the cycles. In the book, they also discussed the “Financialization of capitalism, where “bubbles” in the economic system are created. A prime example of one these bubbles is the housing bubble. This bubble had been building for quite a while, and had finally “popped” and really impaired the economy. Assets were being financed by banks and properties speculated. This is also an addition to the debt explosion. Debts were taken on by consumers, who could not pay back the debts. In turn they grew further into debt. This helped create the “financial bubble”. All these factors helped create a period of stagnation in the economy, and ultimately result in a crisis.
There are some distinctions between young capitalism and mature capitalism. Young capitalism is much more production based and is based on the market control by big corporations that dominate the price, output, and investment level in the market, and use this to increase the margin profit. On the other hand, mature capitalism is much more dependent on investment and speculation. Mature capitalism is based on excess debt and even more debt is created because of the excess debt, which creates a viscous cycle. To summarize, young capitalism is based on the M-C-M economic model, it uses money to produce goods and earn more money. However, as mature capitalism is based on the M-M economic model, it is uses money to earn more money without production.
The latest economic phase “Monopoly Capital” can forestall action. A Monopoly is to have complete control over one or more products while still trying to cut costs; however, few corporations actually dominate the production process and its market. When a corporation does have the advantage of monopolizing a market, they can manipulate the law of supply and demand by controlling the price and quantity, and therefore, earn a much bigger profit. These large companies may cooperate with some governments, which, in turn, may help these companies create an effective monopoly. Some policies can be passed by the government to help prevent monopolies. This is believed to be passed to prevent exorbitant costs to necessary products and services.
Since, most of the money in the economy is attracted by investment and speculation, there is less money used in circulation. With the debt that was created and therefore used in speculation, stagnation happened. So once a market is overheated and investment is famous, the economy tends to stagnate. The main solution to stop stagnation in the economy is by stimulating consumption. An example of this would be decreasing the interest rates on loans. The general idea is that consumers may use their money rather than to put it in the bank, and take out loans to buy what they need or want. The need from society can encourage production, by increasing demand. Another way to try and stimulate the economy is by increasing the money supply in the market, for example, increasing a worker’s salary. When consumers have more money, they tend to buy more things, so production is encouraged since there is an increase in demand and this helps lead the economy out of stagnation.
The reason for the financial explosion was because there were too many loans. Credit expanded, when the banks borrowed more money from the individual and businesses to invest; and speculative manias, in which investors believed they would earn more by buying more financial assets, therefore, leading them to borrow more. The monopoly in financial capitalism is just a phase rather, than a new stage because, it is the only a kind of capital that continues with no advanced source and is a symbiosis aspect with stagnation. The structure is switched to an M-M model from an M-C-M model.
With the system’s growing reliance, people had become more indebted by taking out loans and investing more, because they initially thought they could get high returns on their investment and therefore, earn more money. So, bubbles started to grow in the market. Then, people cannot payback the banks because the initial investment return as much as they had thought. The financial bubble popped, and crisis ensued.
Getting out of the slump is in need of clarification. Decreasing interest rates and supplying more money into the market can only increase rich people’s asset. They can use debt as an investment and earn more money that way. The money may not be used to stimulate consumption, because large quantities of people will not benefit from it. Therefore, it can be difficult to really encourage reproduction and jumpstart the economy as it is hard to get out of stagnation.