In my previous post I have written generally of the causes of economic crises in the world. Now let me talk of the present economic crisis in particular.
Economists with high sounding degrees from Harvard, Yale, London School of Economics, etc have made economics a mysterious subject. But it is not so. Let me therefore explain the present crisis step by step:
1. The present crisis is due to slow down in manufacturing production in China. But why is there a slow down in production there ?
2. The Chinese economy is largely export oriented. The slowdown in production in China is because of reduction in exports. But why is there a reduction in exports from China ?
3. The reduction in exports from China is because there is reduction in demand mainly from North America and Europe, where most of the exports go. But why is there a reduction of demand there ?
4. That is because of recession in the Western countries and consequent increase of unemployment there. But why is there a recession in Western countries and increase in unemployment ?
5. That has been explained in detail in the previous post. To face the competition in the market and survive, industries have to become more and more capital intensive, rather than labour intensive, to reduce labour costs.
Cost of labour is a big chunk of the total cost of production, and so by becoming capital intensive ( by introducing new labour saving technology ) industrialists reduce their cost of labour, and thereby their cost of production. Even though they may have to pay interest on the loans taken from banks to buy the new machinery, this cost is far less than the saving in labour costs by laying off workers.
If an industry does not do this ( introduce capital intensive machinery ) its rival will do it and reduce its labour costs, and thereby its cost of production, and eliminate the former by underselling it. So every industry must do it to survive. But in the process it is generating widespread unemployment..
6..As explained in the previous post, the worker is not only a producer he is also a consumer. A steel worker does not consume steel, but he and his family consume food, clothing, shoes, and a host of other articles. If he loses his job he has to drastically reduce his consumption. He will now buy only essentials like food and medicines ( to survive ) but he stops buying most industrial goods.
7. This reduction in spending leads to reduction in sales, which in turn leads to recession
8. The solution to the problem is therefore to increase the purchasing power of the masses. There is no difficulty in increasing production, but how will the goods produced be sold when most people do not have the money to buy ?
The French economist Jean Baptiste Say propounded his well known ' Say's Law ' which says that production will find its own demand, and Adam Smith in his ' The Wealth of Nations ' spoke of ' the invisible hand ' which will lead to unending progress.. But subsequent developments, particularly the Great Depression from 1929 to 1939 have proved these theories false
Hence the only true solution is to raise the purchasing power of the masses.How to do it ? This is the problem to which all serious thinkers must now apply their minds