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What Is Crisis Theory?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 08 November 2016
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Crisis theory is a topic of study in Marxian economics focusing on the causes of economist crises, based on the discussions of crises in the works of Karl Marx and his contemporaries. In his criticisms of capitalism, Marx discussed the tendency of boom and bust cycles to arise, and proposed a crisis theory rooted in the failings of capitalism as an economic system. Some theorists agree with Marx, while others engage with crisis theory from other perspectives and find it an interesting topic of discussion even if they think that it's ultimately incorrect.

According to Marx, economic crises can all be tied to a falling rate of profit. Since the core of a capitalist system is steady and ideally increasing profits, a fall in their rate can set off a domino effect throughout the system. Crisis theory involves his discussions about rate of profit and the role it plays in capitalist economies. Marx argued that when workers do not control demand and the means of production, a falling rate of profit is inevitable.

In a capitalist system, when profit rates fall, unemployment starts to rise because companies cannot support their current staffing levels. This in turn creates even more of a decline in profits, as unemployed workers have a lower demand for goods and services, leading to underconsumption. A snowball effect occurs and can trigger an economic crisis. Crisis theory explores this chain of events and the way it contributes to economic busts.

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Some supporters of Marxian economics believe that capitalism is inherently not sustainable, in part because of the findings of crisis theory. This theory suggests that economies will become trapped in a looping boom and bust cycle, and this makes failures inevitable. Within that system, individuals may be able to profit from both downturns and upturns, but society as a whole may suffer. The study of crisis theory also includes discussions of interventions to correct failing markets, like government assistance in the form of nationalization.

Economists may study crisis theory and other aspects of Marxian economics during their training, even if they do not ultimately adopt this approach to economics. It can be important to understand competing economic theories and the logic behind them. This information may help researchers when they analyze various schools of thought and the influences that political systems can have on economies. When government officials subscribe to Marxian economics and use it as the guiding philosophy for their fiscal decisions, for instance, this will have a distinct impact on the economy.

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