erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

The Profit Rate-Interest Rate Relation for the Study of Financial Crises

Mark Lautzenheiser (University of Utah, USA)
Yavuz Yaşar (University of Utah, USA)

Abstract

The current paper employs a profit rate-interest rate framework, which has not been appriciated and developed enough in the literature, to study financial crises. Economists writing on Marxian crisis theory have traditionally concentrated on the _real_ side of the economy; e.g. falling rate of profit, wage squeeze, disproportionality between industrial sectors. However, during the past two decades there has been a renewed effort to study Marx_s monetary theory and calling for an incorporation into the literature of the crisis theory . On the other hand, mainstream economists have continued to focus sole attention on financial variables, especially in relation to asymmetric information, moral hazard, imcomplete contracts, and credit rationing. The current paper argues that Marxists and mainstream economists have only grasped one side in understanding a financial crisis. The paper begins from a Marxist perspective but extends the literature along with Keynes and Post Keynesian approach by incorporating money, banking, and fictitious capital as key components. The relationship between the real and monetary sides of the economy can then be studied in order to demonstrate the dual causation leading to a financial crisis. In that sense, the relationship between the profit rate and interest rate is used as a framework to demonstrate the more basic relationship between the real and monetary sides of the economy. Although the main objective of the paper is to begin to build a Marxian framework to analyze financial crises at a theoretical level, some illustrations are drawn from recent financial crises in order to highlight the possibilities for the proposed framework.

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