What is Capital Strike

A capital strike is a refusal of businesses to invest in a particular sector of the economy or in the economy as a whole. A capital strike can be compared to a labor strike, in which the labor force refuses to work unless its demands are met. In the case of a capital strike, companies refuse to provide capital for economic growth.

BREAKING DOWN Capital Strike

Unlike a labor strike, a capital strike does not require the organization of companies in order to occur. Generally, an increase in aggregate demand for goods and services should prompt businesses to hire more workers, create more inventory and build up capacity.  A capital strike might result when financial institutions and other companies do not do these things. In this sense, despite increased demand from individuals, companies do not invest.

Several theories exist for the existence of a capital strike. One theory suggests that wealthy individuals and companies can withhold capital from the economy in order to force the government to alter regulations, taxes or other legislation. A capital strike might also occur when banks decide to raise lending standards or minimum loan requirements to individuals and business entities, and decide to sit on cash reserves, rather than take many loan risks, until a later point in time.

Capital Strikes and Government

Capital strikes may sometimes result when governments pursue policies that investors consider "unfriendly" or "inflexible," such as rent control or nationalization. In fact, businesses routinely exert leverage over governments by withholding the resources — jobs, credit, goods, and services, upon which society depends. The capital strike might take the form of layoffs, offshoring jobs and money, denying loans, or even just threatening to do those things, with a promise to relent once government delivers the desired policy changes.

Government officials know this power well, and invest great energy and public resources in staving off fits by malcontent capitalists. The profoundly rotten campaign finance system is just one manifestation of business’s domination over government policy. The real power resides in the corporate world’s monopoly over the flow of capital.

The term can refer to a capital strike by a single investor or a large group such as those who refused to invest in the United States in 1937. A capital strike is the premise of Ayn Rand's novel Atlas Shrugged.

Another theory suggests that companies review economic conditions in order to determine if using capital will result in a positive return. If company executives believe that return on investment will be negative or nonexistent, they will not hire more workers, lend funds or build factories. If enough companies believe that employing capital today will offer poor returns, a significant amount of capital will not reach the broader market.