by DJAMIL LAKHDAR-HAMINA
The 2007–2008 financial crisis was the most severe crisis since the Great Depression. The crisis was global and its consequences destructive for the international working class. Neoclassical economists found themselves in an embarrassing situation. They had neither foreseen, nor even suspected, the crisis. Anwar Shaikh reports that Robert Lucas, a leading proponent of neoclassical orthodoxy, stated in 2003 “that the central problem of depression prevention has been solved.”
Against the confusion of the mainstream, a few radical economists did notice signs of things to come. Anwar Shaikh, professor at the New School, provided a classical Marxist explanationof crisis, and on that basis predicted the timing of the 2007–2008 recession, stating that it occurred “quite on schedule.” Capitalist accumulation is a turbulent process which exhibits patterns of boom and slump. But there is a long-term dynamic underlying these cycles. As Carchedi and Roberts write in their opening chapter, it is the Marxist hypothesis that “the key to understanding the sequence of booms and busts is the movement of . . . profit rates.” In fact, it is the long-term, seculartendency of the rate of profit to fall that was the most important cause of the financial crisis of 2007–2008.
In the war against labor and market competitors, capitalist firms increasingly invest more in means of production relative to labor. Automation becomes a critical weapon in the drive for profit. Increased labor productivity (roughly volume of output produced in a given amount of labor time), decreases the amount of value created per unit of output, and hence decreases profitability. The basis of capitalist accumulation is undermined, and crisis ensues. Capitalist crisis is a recurrent outcome of the constant imperative for profit. Counteracting factors can cancel the effect of rising labor productivity on profitability. Yet over the long term, given an increase in the productivity of labor, the rate of profit will fall.
World in Crisis is an ambitious series of essays, with contributions from economists around the globe, dedicated to providing empirical support for the hypothesis that the tendency of the rate of profit to fall is behind the global financial crisis of 2007–2008. The authors also intervene in the much-debated issue of “financialization” in order to articulate how this phenomenon contributed to the financial crisis.
The destruction of World War II made possible the economic expansion known as the Golden Age of capitalism. The evidence suggests that overall, on a global scale, profitability was at its highest after the war. Then from 1965 to 1982 profitability fell. In the middle of this period was a severe recession that began in 1973. From 1982 to 1997, capitalist firms and states responded to the crisis of profitability by changing the terms of production and reorienting investment towards nonproductive sectors. This ad hoc strategy and outcome was retrospectively named “neoliberalism.”
At the level of production, neoliberalism meant activating a series of countertendencies against falling profitability. Technical change and “new” methods of pumping out surplus labor, like lean production, increased the rate of exploitation and cheapened means of production. One also cannot underestimate the effect of “globalization.” Capitalist investment in the Global South and the incorporation of populations of noncapitalist laborers into the labor market allowed for a situation of “super-exploitation.”
However, given the malaise of productive capital, investment shifted to unproductive sectors (e.g. real estate, finance). In other words, “if the capitalists cannot make enough profit producing commodities, they will try making money by betting on the stock exchange or . . . buying . . . other financial instruments.” Financialization—substitution of credit for money and increased investment in fictitious as opposed to productive capital—promoted by a history of low interest rates and deregulation, is a strategy of capital to boost profits. Hence, in the past thirty-five years, “the expansion of global liquidity in all its forms (bank loans, securitized debt, and derivatives) . . . has been unprecedented.”
Credit and debt can be used as instruments to counteract decreasing profitability. That is why “before the crash of 2008 there [was] a massive buildup of private sector credit in the United States reaching over 300% of GDP.” As expected, the largest component is for productive capital. Non-financial corporate debt in 2011 for the advanced capitalist economies was at 113 percent of GDP. In the same vein, investment in fictitious capital, such as derivatives and the famous sub-prime mortgages, allowed capitalist firms to deploy speculative and hedging tools to deal with uncertainty of exchange and weak profitability.
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