Essay Sample Dedicated to Economic Crisis and Financial Globalization

Capitalism is the predominant global economic system. The main case for pro capitalists is that capitalism is a system that provides equal opportunity for every individual in the society to thrive economically. It is therefore thought to offer infinite opportunities for success and increase the likelihood for inventions and innovations. Like any system, capitalism faces its own unique challenges according to Nouriel Roubini and Stephen Mihm in their book titled "Crisis economics: A crash course in the future of finance." The challenges were significant enough to plunge the globe into financial crisis at one point in the 21st century. This prompted the authors to examine the implications of capitalism in the economy. The great recession of the American economy in 2008 led to an unprecedented financial contagion across the globe and hence reignited the debate about the dangers of a capitalist economy.

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This paper will discuss the weaknesses of capitalism based on the work of Roubini and Mihm. Within this theme, there is a specific emphasis on the great recession of 2008 by looking at the role played by investment banks, the government, and other financial players in the economy. The next theme of the discussion is about Marxism where the paper will determine whether Marxist views on capitalism are justified. Since there is no other viable alternative to capitalism in the economy, the paper will discuss the role of Keynesian principles in addressing the structural and functional weaknesses exhibited in capitalism.

The financial crisis that was witnessed in the United States ended up spreading and impacting in other economies located all over the world. During this time, the United States was the biggest and leading economy in the world and thus the effects were quickly spread to other economies across the globe especially those that had established economic ties with the US. The effects of the financial crisis were devastating considering the fact that most banks and financial institutions from various parts of the world had invested heavily in the United States and thus the fall of the US economy ended up with cause excessive damage to those who had invested in the US economy. On the same note, a lot of US financial institutions had invested in other countries and thus the fall of the US economy ended up with devastating economic effects in all those countries these financial institution institutions were operating in. Changes thus affected the overall trends that we being used for world trade.

The financial crisis that occurred in 2008 in the United States happens to be the worse since the occurrence of the Great Depression back in the 1930s. The contagion started in 2007, a period during which prices that were indicated for sky-high started falling in the United States and later the decline ended up spreading to other markets that were located overseas. Due to this economic decline, the main losers were the banking sector, insurance companies, enterprises that were being sponsored by the government for mortgage lending and the main commercial banks that operated in the US economy. The situation got worse as banks stooped lending money to business owners and this led to the closure of many businesses that depended on loans to finance most of its business operations. The money that was available in the circulation was thus reduced and this marked the decline of the economic scales not only in the United States but in the entire world. Most of the people ended up being jobless and this increased the poverty levels of the citizens as the cost of living ended getting extremely high.

Huge losses were suffered by those who had invested in shared with numerous losses being reported in 2008. The losses is share markets were experienced in the entire world and thus almost all investors from all over the world ended encountering losses that were so exaggerated to be regained even after measures to counter the crisis were implement by economists. By the end of 2008, 'The National Bureau of Economic Research' described the recession to be one of the largest in the United States tracing the economic performance since World War II which had some considerable negative effects on the US economy. It did not take long for the negative economic effects to spread to other regions such as Japan and China whose economic performance started falling at high rates that the economic stakeholders could not resolve. The main problem was the fact that most of the effects that were being felt in the United States were now getting roots in these regions and thus the economic decline was somehow uncontrollable using the measures that were being used in these individual economies.

Most of the investors from Europe who had invested in real estates in the United States were among the major losers in during this time while Japan and China encountered losses due to the disrupted export channels that were shut down such that trading activities were never conducted as it used to be there before. The less developed countries ended up suffering a lot as they lost most of their markets abroad on which the relied upon to support their growth. The developing countries end up delaying behind in terms of development as the source of their finances became limited as the national government struggled to provide for the basic need to the members of the community. The fact that the effects of recessions were being experienced in the entire world meant that there lacked any state or country that had the capability of initiating an effective process that could have helped to pull out of the devastating recession. Due to the extremities that were being suffered, this forced the US government to work closely with private economists to develop a workable solution that the world could be saved from the negative economic effects. The financial resolutions that were made after the 2008 financial crisis have been maintained by economist and are constantly being improved to make sure that slight deviations are respond to with a lot of urgency such that chances of the crisis occurring again are completely eliminated.

Marxist Theory and Capitalism

The effects of the financial crisis resulted to a decline in value of the financial instruments that were being used in the entire and the disruption of the trade activities an example of the processes that are said to be endemic to any capitalist system being used. In line with this, Marx explains that the surplus value that is indicated for output is always concealed in a monetary form. Financial activities involving hoarding of profits result in unsold inventories which contribute to the reduction of profits in the future.

Marxist crisis theory has a major application when analyzing trends that are involved during the economic crisis. In line with this theory, it is taken that severe effects of economic crisis can end up leading to both the suppression of capitalism and facilitating its transition to socialism. A mechanistic approach is usually used when analyzing cases of an economic crisis to help understand the problems that are associated with the transition from capitalism to socialism. According to this theory, capitalism ends up producing two different kinds of economic crisis that have qualitative properties in the manner they impact on the economic trends. Business cycle recession is one of these economic crises and is easily solved after occurring using the normal processes that are used in a given capitalist economy. Most important to understand is the fact that both monetary and fiscal policies that were developed by the government have continuously been used to fasten the rate at which recession is responded to within a given economy.

The second one is an economic recession that lasts for long and requires high levels of reconstruction to have the recession resolved. The reconstruction process calls for institutional change in cases where the recession is to be solved by manipulation of the capitalism factor and other steps that involves the accumulation of capital. Despite the fact the two types of crises are solved differently, there lacks a clear distinction of the two and this the reason why the long-lasting recession is known as a structural crisis which is a factor of the accumulation of capital used to end the recession that is suffered. The effects of the structural crisis are long-lasting and have severe effects which can end up eliminating capitalism completely. Both Great Depression that occurred in the 1930s and the 2008 financial crisis are examples of structural crises that took a bit longer to find lasting solution meant to save the economies that were worsening during this time. Finding solutions to end both crises required the government to involve institutional changes that led to the development of policies that were used to control the performance of financial institutions to prevent reoccurrence of such crises.

According to Marxist theory, the economic crisis occurs as a result of internal issues that affect a given capitalist system and thus the process of ending it requires that changes are instituted internally. It is for this reason that the Marxist theory outlines several mechanisms that should be used internally to have a given economic crisis solved effectively. The mechanisms also help to determine probable causes of the crisis and thus preventive mechanisms. The causal mechanisms involved in this case are taken to be traditional and normally known as crisis tendencies. Such tendencies include under consumption of the available resources, profit rates falling due to the rising value of production mechanisms comparing them labor-power. Other tendencies include squeezing of profits as a result of the reduction of labor army, over-investment and a variety of other mechanisms.

Keynesian versus Hayekian Theory

Keynesian theory addresses the issues pertaining to the macro-decisions that are made by the government and the decisions that are made to address financial policies, both monetary and fiscal in an effort to streamline the regulations that are used by the banking sector. These regulations are designed in such a way that a control is introduced in financial institutions such that their operations do not get to the extreme ends which is a factor that leads to financial crises in various economies. The theory is opposed to the application of the classical economic theory that makes use of both demand and supply in facilitating full employment. Such a happening ends up using elastic wage demands in terms that are either short-lived to medium-live in free markets. Keynes suggests the use of general economic activities to help in the establishment of total demand in a given market. This strategy is indicated to be a suitable one to help in focusing on total demand as a good way of attaining full employment while at the same time making sure that financial trends within an economy are maintained at normal levels.

Keynesian theory is more effective than Hayekian when analyzing and responding to matters to do with the financial crisis in that it effectively elaborates on the correlation that exists between the total income and the associated expenditure. This comparison is done by paying attention to both employment and changes in the price levels. It is in line with this that Keynesian theory holds that it is important to carry out a deficit financing for the purpose of attaining a real and stable GDP. This helps to tell the specific places where the government should spend ends finances for the purpose of making sure that the economic trends are adjusted in such a manner that it becomes possible to achieve a real GDP.