Capitalism and Economic Crises

(Quote of the Week)

In the third volume of Capital—published posthumously in 1894 by his close collaborator Friedrich Engels—Karl Marx explained how the capitalist credit system fuels economic crises, a prognosis which has been repeatedly borne out, not least by the current financial meltdown. In the excerpt below, Marx mentions John Law, a Scottish economist and financier whose Mississippi Company scam in the early 18th century fleeced wealthy French investors who were then bailed out by the government. Marx also notes Isaac Pereire, a financier in France whose Crédit Mobilier bank, which engaged in railroad speculation, failed in the mid 19th century. As Marx recognized, the only way to end the boom-bust cycles inherent to capitalism is for the working class to take control of the means of production through socialist revolution.

The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself. This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction—crises—and thereby the elements of disintegration of the old mode of production.

The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Pereire with the pleasant character mixture of swindler and prophet.

—Karl Marx, Capital: A Critique of Political Economy, Vol. III (1894)