7. What is an economic crisis?

A. Causes of economic crises

One of the main drawbacks of the capitalist system is cyclical instability.

In capitalism, people and companies compete freely for maximum profit without government intervention.

This leads companies to speculate and take risks, purchasing goods or services that they believe they can sell at a profit.

This can lead to large profits for the company. However, if expectations change then buyers or investors sell what they have acquired to minimise their losses. This can cause a sudden drop in the price of goods or services that the company is speculating on.

Therefore, a period of growth is followed by a recession, then another period of growth, and so on.

B. Consequences of crises

Periods of excess usually end in economic crises with serious consequences for thousands of people and profits for a small group of speculators.

Large global crises have a major impact on the welfare of millions of people. People have less money to spend, and this drop in consumption forces companies to reduce production and make some of their employees redundant.

The unemployed do not have enough money to buy the products and services they need, and this further reduces demand, leading to more redundancies and the closure of some companies.

Without any money, families cannot pay off their debts (for example, their mortgages or car repayments).

However, a minority of the population profits from the speculative process. During a crisis, they can buy goods and services that the rest of the population cannot afford, for a lower cost.

C. Is it possible to avoid a crisis?

Some people think that we should change the current economic system and introduce alternative economic models that will ensure the economic, social and political equality of citizens.

In our current economic system, it is impossible to avoid the cyclical fluctuations of the economy. Moreover, it is difficult to anticipate when a crisis will happen due to the complexity of the economic phenomena.

Some international economic and political institutions employ professionals to introduce measures that will soften the effects of these crises globally and in individual countries. Countries can use legislation to reduce the economic and social costs by increasing public spending.

Financial literacy is a challenge for people in developed countries. As consumers, we need to know how to budget, save, manage debt and consume in a sustainable way.

D. Always in crisis