This is a cleaned up and clarified version of what was posted yesterday. It's still a work in progress, but, stylistically, this is an improvement.
Marxian economics still provides a very good guide to how things work, even if it doesn't adequately cover the cultural sphere. The assertion of some, that culture actually creates the economy, is something I consider to be absurd. Piero Sraffa, the Italian Marxist economist, made great breakthroughs in reframing just what Marx was trying to accomplish with his economic theory. I've used some Sraffa’s ideas here to talk about the economic downturn, through picturing speculation as a misallocation of social resources that was bound to lead to trouble.
Say you have an agricultural economy where most people work the land and exchange what they make with each other. Each household isn't self sufficient, though, there's an economy, even though there are a few small industries on the side to provide things that are very essential. Everyone works, and society as a whole has enough to eat. Now, let's say that someone comes up with an innovation that lets people produce the same amount of food with only half the work. That means that everyone in society can be fed with only half of society working, and consequently many people become unemployed.
Some of the folks who are unemployed get the idea to get food by making trinkets to sell to the farmers. They make their trinkets, the farmers buy them, the trinket makers get their food. Other people follow suit, and some decide to make a different sort of trinket, which they now trade with both the farmers and with the first trinket makers, because the people who make the new ones want some of the first trinkets too.
Let's say that now in this economy, the folks who farmed made many things for themselves, like clothing and possibly some farm implements, as well as coming together as a community to build houses. Some of the folks who are unemployed get the idea that they can specialize in making clothing, or building houses, in exchange for their food. This not only works, but frees time up for the farmers to devote to farming, thereby making it even easier for them to grow the food and feed people. Soon, people begin to think of all sorts of useful objects from regular life that can be independently produced or improved, and that can be exchanged for food.
At this point, it has become burdensome to exchange all of these goods with food or products in kind, so a generic marker of goods is produced, money. Money, although in this case apparently based on food, is actually based on the amount of labor needed to produce the food, since the price of the food is determined by how productive agriculture is, with the price going down the less labor is needed to produce the food. Through this, money serves as an indicator of labor put into making a product, and buying and selling becomes the exchange of tokens of labor for goods of an equivalent amount of labor.
However, while money itself appears here as an independent thing, as something you can pile up and spend any way you want, the underlying economic structure of society still exists and determines how that money will likely be spent. The economy is still highly intertwined under the surface and provides food, products that improve quality of life or are generally useful, like clothing and transportation, and only after that non essentials like trinkets, that are basically just enjoyable shiny things that provide no added productivity to a person's life.
For society to function properly, the money a person gets from work needs to be fed back into the structure of society. The farmers need to be paid, the folks who provide transportation have to be paid, clothing has to be produced, or else what supports a high quality of life will collapse. In fact, this path of spending is reflected in most people's budgets: what gets priority are things like food, rent, electricity, water, phone, internet, transportation, clothing, car insurance. All of these facilitate the process of productive life and work. It's only when these have been provided for that people, in an ideal world, spend money on items that are non-productive, that constitute pure consumption.
It works the same way on the other side of the production fence as well, in the decisions that businesses make, only the surplus that exists after the essentials are paid for is either given to owners or reinvested.
When the two sides of production and consumption agree, when what is bought supports what is produced, and both buying and selling serve a productive purpose, the market hopefully clears, achieving a stable state that can accommodate less essential production.
Now, what would happen if a lot of people in society decided not to spend their money on essentials, but instead chose to spend it on pure consumer goods? These people would soon be without housing, without transportation, and without food, but with lots of shiny trinkets. On a social level, if it was possible to sustain such a thing, the trinket makers would prosper, but the rest of society would suffer, because the essentials would not be bought. That would put many people out of work. Funds would be redirected to pure consumption that were necessary for the maintenance of other parts of society, that were indeed ultimately necessary for goods that served the purpose of pure consumption to be made at all.
That would be a terrible thing, but, usually, really sustaining such a situation would be very difficult. But what would happen if all of the sudden people found that they could invest in trinket making, and get lots of money back, without having to support the normal, productive, economy? You'd get lots of money, markers of value, produced, without any actual useful production behind it In the short term this money could indeed be used just like any other, because of its face value. The money would be there, but as more and more funds that should have been going to build up the real economy are spent investing in trinkets, weaknesses in the economy would start to emerge, and society as a whole would become more and more dependent on the money from the profitable trinket making industry for its sustenance.
One day, the trinkets that generate money without productive labor suddenly aren't there anymore. What happens then? What's now exposed, is what now needs to support everyone: the underlying structure of the economy previously masked by the glut of money from an unproductive source. Businesses that geared themselves to the dynamics of the trinket dominated economy as opposed to meeting the productive needs of society are now out of luck, and either have to retool very quickly or find themselves out of business, including boutique businesses that were only made possible by this influx of money.
The lack of investment in the productive industries will now show itself in the form of a generally weakened economy, one that needs basic investment to fix it and get it up to par with how it was before. On top of all of that, since the trinkets provided so much money, if society wants maintain its standard of living as before, it will have to build enough industry based on true productive needs to equal it, which is a much different and more difficult job to do than trinket making.
This is my take on what happened with the collapse of the housing market in 2008 that lead to the general economic collapse. We had our own non-productive trinket sector that made money while provideding neither anything essential to individuals or to society itself, no real goods or services. Instead, the only thing that the housing bubble produced was bare money. Marx often said that the money economy, and the status of money itself, was an illusion that masked the true productive life of society, and that by paying attention to the money economy instead of to the productive infrastructure of society people missed the point. I think the economic crisis demonstrated that the illusion of money created by non-productive ultimately has to be against that underlying productive reality, and that that reality will always win. While people might think that everything is fine simply because the cash is rolling in, the actual life of the economy can be anything but steady.
Milton Friedman, neoliberal economist, coined the term TANSTAAFL, or There Ain't No Such Thing As A Free Lunch, and while his take on economics is different from what's described here, the acronym can easily be applied to the disjunction between the money economy and the real economy. If the action of the money economy strays from real production and becomes based on non-productive activity, if it goes further and further away from supporting the industries that meet the needs of the real economy, there will eventually be a crisis. The real economy will then reassert itself, with all the consequences that follows.