The crisis next time: the GFC and the continuing fragility of capitalism

Capitalism shows an innate tendency to repeated cycles of boom and bust. Many factors can serve as the proximate cause of these cyclical fluctuations: including supply shocks in production of key resources and other inputs, fluctuations in the sentiment and confidence of business leaders and consumers, volatility in the supply of credit (which fuels spending and expansion) or changes in macroeconomic policy (such as interest rates or government spending). Whatever the immediate cause of each cycle, inherent cyclical instability reflects common features embedded within capitalism, including: Growth and development are led, first and foremost, by profit-seeking capital investments made by private businesses. If they stop investing, output and employment stop growing or start to shrink. But those individual decisions to invest are independent, uncoordinated and subject to volatile shifts in sentiment and expectations. This decentralization facilitates coordination failures, whereby individual investors make seemingly rational decisions that damage the whole economy (and hence the collective of businesses). Inter-sectoral and international flows of production, trade and investment can spread the effects of any initial sectoral downturn into the broader economy – again facilitated by the lack of coordination of the system. Personal consumption is the largest component of total output and spending, but it generally follows economic cycles (rather than leading them) since it depends on the prior existence of employment and labour income. If investment and employment decline, consumer spending also declines – magnifying the resulting shock to total output and employment.