The business cycle is the term used to describe the boom and slump nature of capitalism. Sometimes there is full employment, with workplaces producing more and more goods and services, the economy grows and along with it wages. However, as Proudhon argued, this happy situation does not last:
"But industry, under the influence of property, does not proceed with such regularity. . . As soon as a demand begins to be felt, the factories fill up, and everybody goes to work. Then business is lively. . . Under the rule of property, the flowers of industry are woven into none but funeral wreaths. The labourer digs his own grave. . . [the capitalist] tries. . . to continue production by lessening expenses. Then comes the lowering of wages; the introduction of machinery; the employment of women and children . . . the decreased cost creates a larger market. . . [but] the productive power tends to more than ever outstrip consumption. . . To-day the factory is closed. Tomorrow the people starve in the streets. . . In consequence of the cessation of business and the extreme cheapness of merchandise. . . frightened creditors hasten to withdraw their funds [and] Production is suspended, and labour comes to a standstill." [P-J Proudhon, What is Property, pp. 191-192]
Why does this happen? For anarchists, as Proudhon noted, it's to do with the nature of capitalist production and the social relationships it creates ("the rule of property"). The key to understanding the business cycle is to understand that, to use Proudhon's words, "Property sells products to the labourer for more than it pays him for them; therefore it is impossible." [Op. Cit., p. 194] In other words, the need for the capitalist to make a profit from the workers they employ is the underlying cause of the business cycle. If the capitalist class cannot make enough profit, then it will stop production, sack people, ruin lives and communities until such as enough profit can again be extracted from the workers.
So what influences this profit level? There are two main classes of pressure on profits, what we will call the "subjective" and "objective." The objective pressures are related to what Proudhon termed the fact that "productive power tends more and more to outstrip consumption" and are discussed in sections C.7.2 and C.7.3. The "subjective" pressures are to do with the nature of the social relationships created by capitalism, the relations of domination and subjection which are the root of exploitation and the resistance to them. In other words the subjective pressures are the result of the fact that "property is despotism" (to use Proudhon's expression). We will discuss the impact of the class struggle (the "subjective" pressure) in the next section.
Before continuing, we would like to stress here that all three factors operate together in a real economy and we have divided them purely to help explain the issues involved in each one. The class struggle, market "communication" creating disproportionalities and over-investment all interact. Due to the needs of the internal (class struggle) and external (inter-company) competition, capitalists have to invest in new means of production. As workers' power increase during a boom, capitalists innovate and invest in order to try and counter it. Similarly, to get market advantage (and so increased profits) over their competitors, a company invests in new machinery. However, due to lack of effective communication within the market caused by the price mechanism and incomplete information provided by the interest rate, this investment becomes concentrated in certain parts of the economy. Relative over-investment can occur, creating the possibility of crisis. In addition, the boom encourages new companies and foreign competitors to try and get market share, so decreasing the "degree of mmonopoly" in an industry, and so reducing the mark-up and profits of big business (which, in turn, can cause an increase in mergers and take-overs towards the end of the boom). Meanwhile, workers power is increasing, causing profit margins to be eroded, but also reducing tendencies to over-invest by resisting the introduction of new machinery and technics and by maintaining demand for the finished goods. This contradictory effect of class struggle matches the contradictory effect of investment. Just as investment causes crisis because it is useful (i.e. it helps increase profits for individual companies in the short term, but it leads to collective over-investment and falling profits in the long term), the class struggle both hinders over-accumulation of capital and maintains aggregate demand (so postponing the crisis) while at the same time eroding profit margins at the point of production (so accelerating it). Thus subjective and objective factors interact and counteract with each other, but in the end a crisis will result simply because the system is based upon wage labour and the producers are not producing for themselves. Ultimately, a crisis is caused when the capitalist class does not get a sufficient rate of profit. If workers produced for themselves, this decisive factor would not be an issue as no capitalist class would exist.
And we should note that these factors work in reverse during a slump, creating the potential for a boom. During a crisis, capitalists still try to improve their profitability (i.e. increase surplus value). Labour is in a weak position due to the large rise in unemployment and so, usually, accept the increased rate of exploitation this implies to remain in work. In the slump, many firms go out of business, so reducing the amount of fixed capital in the economy. In addition, as firms go under the "degree of monopoly" of each industry increases, which increases the mark-up and profits of big business. Eventually this increased surplus value production is enough relative to the (reduced) fixed capital stock to increase the rate of profit. This encourages capitalists to start investing again and a boom begins (a boom which contains the seeds of its own end).
And so the business cycle continues, driven by "subjective" and "objective" pressures — pressures that are related directly to the nature of capitalist production and the wage labour on which it is based.