Understanding Business Cycles, Economic Crises, and Capital
Business Cycles
The Business Cycle
A business cycle is a recurring set of economic phenomena occurring over a specific period. The phases of a cycle are:
- Crisis: Many businesses fail, increasing unemployment and underemployment.
- Recession: A relative decline in overall economic activity.
- Depression: A significant fall or collapse of the economy.
- Recovery: Characterized by a revival of economic activities.
- Boom: A period of prosperity and growth in economic activity.
Based on historical studies of economic cycles in capitalist systems:
- Kondratieff Cycles (Long Waves): Last approximately 60 years.
- Juglar Cycles (Medium Waves): Last approximately 15 to 17 years.
- Kitchin Cycles (Short Waves): Last approximately 40 months.
Economic Crises
Economic crises are cyclical, depending on the maturation process of new investment capital. When investment in manpower decreases, new machines and production instruments displace more of the workforce, creating a contradiction that leads to crisis.
Types of Crises
- Crisis of Overproduction
- Financial Crisis
- Crisis of Disproportion
- Chronic Crisis of Realization
- Crisis of the Accumulation Process
- Agrarian Crisis
- Crisis of Capitalism
Theories of Wages
Objective Theory
The socially necessary labor of the entire economically active population creates a social product shared among different social classes.
Subjective Theory (Marginal Theory)
This theory argues that wages are the remuneration of labor, with each factor of production remunerated according to its marginal productivity.
Capital
Capital encompasses everything that enables production—the means of production or capital goods/producer goods. From an accounting perspective:
Capital = Assets – Liabilities
Capital is fundamental to capitalism, and capital accumulation drives capitalist development.
Classifications of Capital
According to the subjective theory’s components of value:
- Constant Capital: Represented by means of production.
- Variable Capital: Invested in purchasing workforce.
Capital is also classified by its sphere of production:
- Commercial Capital
- Fictitious Loan Capital
- Industrial Capital
- Financial Capital
- Money Capital
- Productive Use Capital
Other classifications exist but are not mentioned here.
Return on capital represents the profit a capitalist makes on their investment.
Profit
Profit is the disposable income received by capitalists for their capital investment. Their goal is to make a profit beyond recovering their initial investment.
Profit is categorized by production type and amount. A society’s income can be divided into wages and surplus value.
Investment is made with a portion of the profits, providing savings to savers and investors.
Interest
Interest is the price paid for using borrowed funds, which can be used for purchasing goods or capital in production.
Types of Interest
- Short-Term Interest: For credit not exceeding one year.
- Long-Term Interest: For credit exceeding one year.
Based on the calculation method:
- Simple Interest: Charged for the use of capital over a given period.
- Compound Interest: Accumulates and generates further interest.
Income
Income is the payment for land use—the portion of the harvest paid to the owner for using the land’s inherent powers.
Leasing is one form of income. The landlord (owner) grants property use for a specified time and payment to the tenant, who pays rent.
Income exists in capitalism due to landowners’ monopoly on land, a limited resource of varying quality.
Rent is part of the economic surplus created by productive workers and can be spent on consumption or investment.