DEFINITION of 'Capital Strike'

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. Unlike a labor strike, however, a capital strike does not require the organization of companies in order to occur.

BREAKING DOWN 'Capital Strike'

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.

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.

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