A Marxist Account of the Great Financial Crisis (GFC)

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The title is probably not entirely accurate. Anwar Shaikh reserves the term Great Depression for the severest among the recurrent crises of capitalism since the 1840s, and the last of these, erupting in 2007/2008, he may not be viewing as primarily a financial crisis. In his reading, the Great Financial Crisis (GFC) is the result of a collapsing rate of profit, a destructive effect routed in capitalism as such, rather than its financial sector—for more watch the first of the two videos below.

Shaikh explains, beginning at time mark 06:00:

Capitalism is driven by the net profit rate—what Marx calls profit rate of enterprise. [Explaining the profit rate, Shaikh suggests:] You put investment in, you get your investment back, and some extra money. And that extra money is your profit ... So the profit rate is the ratio of the profit to the amount of investment, the amount of capital that you have tied up. [What matters in motivating or inhibiting capitalist investment, then, is the degree to which the profit rate exceeds the interest rate, i.e. the opportunity cost of capital.]

So, the driver of accumulation is the difference between the rate of return to enterprise and the interest rate.


Concerning the economic environment of the GFC of 2008 building up since the early 1980s, Shaikh proposes beginning at 20:44:

We saw earlier that the profit rate didn't rise, but the interest rate fell, so the difference between them rose, and that was the fuel for the great boom of the 1989s up to 2008. ... That boom not only fuelled ... accumulation by making the profit rate of enterprise rise, it (also) fuelled the growth of consumer credit [and worldwide expansion of capital] ... The second things was a quite dramatic change in the relationship between wages and productivity ... [The second factor explaining the boom spanning the 1080s to 2008 was] ... the continued rise in productivity [accompanied by a] fall-off in the real wage ...

Without this, says Shaikh, the rate of return to enterprise would not have stabilised and there would not have been a boom.

Beginning at 25:00:

I am arguing that the recurrence of the Great Depression is an intrinsic outcome [of capitalism]. It is is modified in its path and expression by conjunctural factors ... But, in my opinion, it is not determined by conjunctural constellations, but ... driven by the fact that profitability has its own dynamic. In that sense it is intrinsic to capitalism itself, rather than to a particular moment and episode in capitalist history.

Great Depressions have built-in recovery mechanisms.The lowering of real wage relative tio productivity ... is a recovery mechanism. It is a mechanism by which the profit rate is raised.The lowering of the interest rate—that's a recovery mechanism that is in the hands of capitalists ... [A]nd there is the concentration and centralisation of capital, that is: the buying up of weaker capitals by stronger ones. [And these mechanisms play out on a global scale nowadays.]

In the second, below video clip, Shaikh argues beginning at time mark 1:06:00:

... the current crisis was not directly caused by a falling rate of profit. ... [The rate of profit had stabilised ... T]hat stabilisation took place by reducing worker's wages relative to productivity ... 

Investment is determined not just by the profit rate but the difference between the profit rate and the interest rate ... The interest rate was driven down through central bank policy ... You have a falling rate of profit that is then stabilised by an attack on the welfare state and labour—that's Reagan an Thatcher. 

But the interest rate ... was reduced almost down to zero, so that the gap between the two [the rate of profit and the interest rate] widens and you get a boom.

But that boom goes hand in hand with the speculative bubble [in the housing market and other asset prices]because credit is so cheap that people and borrow and speculate and go across the world and lubricate the spread of financial capital across the whole world, but it also sets up the crisis.

At 01:08:44 Shaikh emphasises the difference between the effect of the forces of profitability and the rate of profit, arguing, if I understand him correctly, that those forces (wages, interest rates, profits) determine boom and bust, but not necessarily, however by depressing the rate of profit. If wages and interest rates decline, the rate of profit my stabilise or even improve, even though profits may decrease or remain stable.

See also here and here.