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Development after a Financial Crisis and Economic Crisis

Financial Crisis and Economic Crisis

Questions:

Can economic crisis be considered not only as the harmful and destructive event but also as the favorable base for the future development of the whole economy?

What is the mechanism of economic crisis and what is the role of investment fluctuations in the recovery process?

Can globalization as an external factor affect the stability of national economy and cause financial crisis in particular?

The concept of “crisis” came into economics only at the beginning of nineteenth century. Originally it came from the same Greek word which literally means the sentence, the decision about any question or being at any questionable situation. Since the time of Hippocrates this concept has been widely used in medicine whence it spread to other areas of social activity including economic, political and military life.

It was the same nineteenth century that formed the most common definition of economic crisis, claiming that it is a significant brake of equilibrium in the economic system that is often accompanied by breach or loss of normal connections in production and market relations, which eventually leads to misbalance of functioning economic system as a whole.

The emergence of the first economic crisis in 1825 in England led to the development of economic cycles which is nothing else like the movement of production from the beginning of one economic crisis to the beginning of the next one. Therefore, crisis is a period of economic recession, which goes into a a period of depression, where the economy reaches its lowest point but, nevertheless, the most stable one, which is, in turn, the starting point for a gradual recovery. This means the growth of economic power and this ultimately leads to the highest point of economic development in existing conditions: to the rise or the boom point. After the boom point the decline starts again and the cycle repeats. What force the change from the boom to the decline, in fact, are the reasons of economic crisis.

Each economic crisis matures in recovery and rise phases. This is the time of steady expansion of production. During this period the income of population increases that result in the growing of consumer’s overall demand. Such growth of consumer’s demand makes entrepreneurs expand production capacity and increase investments. Thus, this increases the demand for the factors of production. The raise in overall aggregate demand begins to outstrip the growth of social production. The circulation of individual capital flows freely and the sharpness of competition is reducing. For that reason the incentives for new innovations reduce. The re-creation goes on mainly on the extensive basis. Such development continues until the growth of production starts to outstrip the growth of effective demand. When this occurs the overproduction of goods happens and this becomes the reason for the economic crisis. The economic crisis shows the overaccumulation of capital that can take three forms:

overproduction of the commodity capital (the increase of unrealized products);

overaccumulation of the productive capital (the decrease of full-power loading of the production capacity, the raise of unemployment);

overaccumulation of the financial capital (the increase of money that are not invested in the production);

The overall results of overaccumulation of capital are: the increase of production costs, the falling of prices and, therefore, profits.

Nevertheless, economic crisis causes not only harm to the society but it also has favorable economic consequences. Regardless of the destructive effects economic crisis is an impulse in the development of economy. During the crisis the stimulating motives emerge to reduce the costs of production and to increase the profits as well as to reduce the competition. Economic crisis leads to the moral deterioration of means of production that are not capable to maintain the profitable operating of the capital. It also creates the motives to renew capital on a new technical basis. Thus, the crisis gives start mainly to the intensive economic development. It stimulates the transition to the higher technological level of production.

What is more, the crisis is the most important element of the self-regulation mechanism of the market economy. By provoking mass moral deterioration of productive capital, crisis clears the way for mass investment on the advanced technological level.

But the transformation to the expanse of production and its recovery cannot occur immediately. Therefore, the phase of depression changes the phase of crisis. During the time of crisis conditions for intensification of the economy are created. While the depression, these conditions are fixed and a period of intensive development begins covering the whole next phase - recovery. At the end of the recovering phase the stimulus of renewing are exhausted and in the next phase of the cycle, the rise, extensive development begins again.

Furthermore, economic crises make contribution to the development of the whole economy. As an example I can mention the first economic crisis, the Great Depression of 1930s. It had  stimulated the evolution of ownership. Existing forms of ownership couldn’t function effective enough to overcome difficult economic situation. It is due to the crisis the first join-stock companies, a collective form of capitalistic property, were developed. Nevertheless, the evolution of property failed to keep the pace with the scale and rate of socialization of production and labor, which led to a new crisis and the start of a new economic cycle, nowadays joint-stock companies are the most widespread forms of ownership.

The duration and depth of economic crisis are significantly affected by the fluctuations of investments. Crisis forms the basis for the new mass investments. This happens due to several reasons. Firstly, the crisis depreciates fixed capital and thereby creates conditions for renewing of the productive apparatus. Secondly, the crisis forces to restore the capital to a new technical base, which causes a decrease of production costs and recommence the profits to the before-crisis level. Moral deterioration of the fixed capital caused by crisis, forces all businesses to use new equipment in the production. Thus, the crisis clears the way for massive investments. This helps the economy to move into another phase. Therefore, restoration of capital is a material base for periodicity of crises and duration of the economic cycle.

During the entire economic cycle the dynamics of production is closely connected with the movement of capital and, actually, it is based on it. The crisis finishes the period of the turnover of most individual capitals and at the same time gives rise to a new cycle of turnover thereby creating a new material base for the next economic cycle.

To sum up I want to emphasis that any economic crisis is a complex process that has both positive and negative sides and it is a symbolic indicator of social problems that usually lie in the contradiction in the nature of existing forms of property. Regardless of the harm that is raised by the crisis it also stimulates the economic development of any country. Speeding up the dying off of the old economic systems, it is also a vital component that accelerates the technical and technological renewal of production as well as the restructuring of the economy.

Economic crisis usually gives rise to other crises like, for example, financial. Financial crisis is a deep disorder in the state financial system caused by economic and political factors. The economic factors are: the level of material production in the country, the high cost of production of goods and providing of services, which is caused by the high consumption of materials and energy of the production process and high labor costs. This reduces the amount of accumulations in the form of profit in the whole economy. This leads to a reduction in financial resources of most businesses as well as government revenues and therefore the purchasing power of population.

Financial crisis can also be caused by the irrational structure of production, which is mostly characterized by high specific gravity of the military-industrial complex, state dependence on deliveries under cooperative relations of energy, raw materials and fuel. Crisis in finance can be caused by transformation processes in the economy, which means the change model of economic development and loss of economic competitiveness.

Political events have significant influence on the financial system of the country. Such events are: excessive military spendings, inefficient and wasteful spending of the state budget and presence of considerable amounts of debt both internal and external.

Economic and political factors eventually affect the gross domestic product of the country and therefore lead to a reduction of financial resources that serve the entire reproductive process. Such misbalance needs the introduction of tough policy to limit the consumption and expenses at national, business and household level.

All these factors are internal as they arise from the country’s economic conditions. But nowadays modern economic systems are considerably affected by external influences. This happens due to the economic globalization.

Tom G. Palmer of the Cato Institute gives such definition of globalization as "the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result."

In the conditions of globalization world’s national economies become dependent on each other as they are connected through trade, capital flows and foreign investments. It means that the emergence of crisis in one of the country-centers can lead to the wave of crisis situations all over the world. This, in turn, means that the crisis can obtain the global character.

Among the reasons of occurring of the global financial crisis are: more rapid and radical division of the countries on rich and poor, instability in global and national financial markets, a significant accumulation of large financial capital, the emergence of the crisis in the country- centers.

To my mind, the best example of global financial crises is modern financial crisis that had started in 2007 with the liquidity shortfall of United States banking system. This event led to the slump in stock markets all over the world and, in turn, to the world-wide financial crisis. The process of recovery still takes place and is very difficult for some countries to overcome the consequences raised by it.

So, the reasons for financial crisis can be both internal and external. In modern society the influence of external factors grows rapidly. Globalization is one of the external factors that has an impact on the stability of national economy of every country. It is because of the globalization the U. S. financial crisis of 2007th affected the economies of other counties so much. It means that globalization together with other internal factors can really become the reason of financial crisis.

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