Capitalism, far from being a system of smooth, upward progress, is a system riddled by fits and starts, booms and slumps. But why is this? The boom and slump cycle occurs only in capitalist production; never in slavery or feudalism, nor in pre-class societies. That's because each system had its unique characteristics, none of which included the competitive drive for profit - the central feature of capitalism.
Media pundits, Wall St. mouthpieces, school text books and "common sense" blame the slumps on all sorts of things: natural disasters, government mismanagement, this or that politician, greedy workers or even higher oil prices. But the slumps are caused by nothing of the sort.
People under capitalism are employed only when, directly or indirectly, it assists in generating (or rather, extracting) profits. The overall level of employment at any time is inextricably linked together with the average rate of profit across industry as a whole. When this rate of profit is high, capitalists are investing, launching new operations, expanding old ones and creating new jobs. When the average rate of profit is low, capitalists are reluctant to invest; old industries become out of date and uncompetitive for lack of new plants and new industries fail to take their place.
But what makes the rate of profit or low in the first place? What decides whether the bubble is blown or burst asunder?
There are two processes at work here. The first is cyclical.
As the demand for labor power goes up, this drives the price of labor power up (remember supply and demand?). Companies hire more workers, build new plants, make massive investments, all on the assumption that these will bring profits in the future. The more workers that are hired, the larger the market for goods. The demand for labor power pushes wages up - to the point where they begin to cut into profits. The rate of profit falls, the boom falls into a slump. In slump, the demand for labor power falls and the bargaining power of workers decreases until wages are lowered and the rate of profit is restored. The slump turns into a boom.
More fundamentally, there is a conflict between how goods are produced and how they are exchanged, or distributed. Under capitalism, production occurs without a plan. Ford and GM both have plans for production and for expanding production, often times stretching years into the future, but they do not plan in cooperation with eachother. Goodyear and Michelin don't plan their tire output with GM and Ford; the latter don't plan their car production with the production of the steel necessary to construct their car frames. GM and Ford pump out as many cars as possible; the problem is that people can only buy so many cars. GM and Ford can only guess what sales will be like in the future, since whether or not goods are bought comes only after the goods have been produced. Soon enough, there are too many cars - there is a crisis of overproduction. Car sales drop, GM's and Ford's profit margins fall. They slow down production, lay off workers, close plants, in an attempt to raise their profit margins.
Laying off workers shrinks the market for cars. The slowdown in car production means a slowdown in the sales of the rubber and steel companies. They lay off their workers, close their plants, etc. The market for cars shrinks even further. The crisis which affected only one section of the economy spreads into every section of the economy. Thus, in the rush for more profits, individual units of capital undermine the stability of the entire capitalist system.
The second process is a long term tendency for the rate of profit to fall.
As we all know, capitalism is competitive, and so each capitalist unit tries to produce as much as possible in order to grab as large a share of market as it can. One way to do this is to undercut your competitor's prices by producing more and producing cheaper than them. This means that capitalists have to continually reinvest their profits back into production, buying more machines, better machines, and machines that make machines. In short, they must reinvest their profits back into the means of production. This works as long as it produces profits.
Yet, this reinvestment in the means of production itself contributes to the long term tendency for the rate of profit to fall. The reason is that profit is derived from the exploitation of human labor power, the living labor of workers and not from the accumulated labor represented by machines. As capitalists buy more and more machinery, the proportion of what is spent on living labor to accumulated labor grows ever smaller.
The result is that the rate of profit has a tendency to fall, over long periods of time. Capitalists will try to counterbalance this by squeezing workers harder and for longer hours. But the fact remains that the amount of profit in relation to the total outlay of the capitalist has fallen.
Once the rate of profit falls below a certain level, there is no incentive to invest and the system faces a crisis of overproduction as means of production go unsold - machinery collects dust, factory buildings and offices stand empty. This recession spirals into slump: firms go bankrupt, workers are laid off, banks collapse, peoples' savings are wiped out and unemployment soars.
There are a number of factors that can offset this tendency for the rate of profit to fall in the long term. For example, during the high point of British imperialism, huge amounts of capital were exported to pre-capitalist countries - since there was less capital to invest in British industry, there was less danger of overproduction. The destruction of even larger amounts of capital, like during a war, or by permanent high level arms spending during peacetime, can also stave off, but not completely prevent, the growth of capital in relation to labor power. A good example of this is WWII and the 25 year period afterwards.
Economic crises themselves destroy large of amounts of capital by closing weaker firms, leaving the strongest behind. That makes more profits possible for the remaining competitors. This is why capitalism alternates between boom and slump and why the system was capable of sustained growth in the 1880s and 1890s and even more so in the period following WWII up to the early 1970s.
Today's units of capital are both larger and more concentrated than ever. This means that it makes it much more difficult for them to go bankrupt without reaking havoc on the economy. Before Microsoft, software companies could go bankrupt to the advantage of their competitors. But now the economy cannot allow Microsoft, who controls over 80% of the market in PC operating systems, to go under. At least without irreparable damage to the economy, that is.
The result? Capitalism finds it more and more difficult to use short, sharp crises to destroy sections of capital and restore rates of profit. Instead, the crises are less sharp, but drag on longer, run deeper and become ever more difficult to recover from.
The fact that capitalism is thrown into periodic crises, shows concretely that capitalism has become a fetter upon human development, it has become obsolete. The internal contradictions of capitalism itself are to blame for the slumps and the mass unemployment. Only when production is is for human need, not profit, will humanity be free of economic crises and the misery they cause.