The great depression was one of the greatest financial disasters that the world had ever witnessed. In the wake of the catastrophe, many economists and scholars came up with ideas and explanations as to why the problem could have ensued. Many theories were brought up, all in an attempt to ensure that an explanation for the whole issue was found. Even before the theories were brought up, there is the need to identify the fact that there has to be the root cause of the problem. Shaikh (1978) came up with an explanation as to why this could have happened. His findings and explanation are as stated in the essay below.
Shaikh belonged to the school of thought which believed that the crisis could have, to a great extent, been caused by the falling rates of profit. This implies that investors and other business personnel put their money and effects into the respective ventures with the hopes of getting returns. This is where they put their money into a venture and expect returns. This is the aspect referred to as historical materialism by Marx. I t leads to the issue of class since the investors make much which translates into massive profits, hence a change in class. However, they were disappointed since their expectations were not met. They did not get back what they had invested, leave alone the profits. The end result is that the people have nothing to invest and had also lost their morale in business. Whichever the case, the end result is a reduced profit margin and reduced levels of investment.
With that in mind, it is important to look at what could cause the low profit margins. Shaikh (1978) does not run out of ideas or explanations about these. He notes that a leading cause for low profit margins is the reduced consumption or what is termed in economic terms as under-consumption. This is where the product is prepared for the market but the consumers do not move it. This could happen either because the consumers does not have the money to get the product, they have a supplement or the product is not their preference. All these factors point to the fact that there could be low profit margins since the investors prepare the product by pumping their capital into it. What happens is that they do not reap the benefits that they expected. Market mechanisms of demand and supply also come in bringing along the forces of production. When there is excess supply and no demand; there is the possibility of the prices going down so that the people can consume more. This, in turn, translates to the relations of production. As such, the forces of production are the base, leading to the production relations. This sounds like a great idea to the consumers, but in the long run, they put the investors out of business since they cannot retain their initial cost outlay as well as realize the profits.
Shaikh (1978) goes ahead to make a vivid description of the situation he deals with. This is, in other words, referred to as the theory of money. He indicates that when the workers spend all their income or wages, they fail to get all their net income. As a result, they cannot purchase the net assets they need. In order to save the situations and cover the gap, capitalists have to find a way to seal the gap. They do so using their own resources, meaning that they do not re-invest. This sets of the cycle which eventually leads to a crisis.
Low Income
Low savings
Low investment
Mechanization could also be attributed to the reduced profit margins, as explained by Marx’s ideas of technology change. This came up with the idea of neo-liberalism where the people had the free will to choose how they would pursue their ideas. Most of the organizations which adopted the technologies ended up mechanizing their operations. As such, they laid off workers and replaced them with machines that were thought to be more efficient and effective. However, in a twist of ideas, Shaikh (1978) indicates that this move led to the crisis. This is mainly because the cost of acquiring and using the machines is very high. He, therefore, indicates that the mathematical equation for economic growth fails to materialize. From the knowledge of economics, it is indicated that the rate of profit is the total profits divided by the total capital invested and total wages. From the onset, it might be assumed that the machines could reduce the costs and improve the profit margin since they eliminate the expense of wages. Nevertheless, a closer analysis reveals that the cost of capital for the machines is very high and they also have the maintenance costs. As such, for an organization that is not well equipped such as was the situation during the crisis, adopting mechanization could be more of a disadvantage than an advantage. They might increase the surplus production, but they also consume as much.
Shaikh (1978) indicates that the unfortunate fact is that when the profit margins fall, they drag the rates of investment down the drain as well. This results to a total crisis. From the above explanation, it is agreeable that Shaikh (1978) can be acclaimed for dissecting the root-cause of economic crisis.
Work Cited
Shaikh, Anwar. “An Introduction into the History of Crisis Theories.” U.R.P.E, New York, 1978. Web, 25th June 2012, http://freedownload.is/pdf/an-introduction-to-the-history-of-crisis-theories-6689414.html
