Marxist economist Anwar Shaikh has written a monumental book. His thousand-plus page work Capitalism. Competition, Conflict, Crises is anything but a textbook and presupposes a basic knowledge of neoclassicism, Keynesianism and Marxist theory. It is also enriched with a sophisticated mathematical apparatus, which, however, proves to be anything but an end in itself.
At first glance, the history of the developed capitalist world is characterized by steady growth in terms of living standards, productivity, and welfare, and this constitutes the order aspect of the economic system. However, the closer one looks, the more one encounters poverty, migration and class antagonism, and this marks the disorder of the economic system. Anwar Shaikh, who throughout the book confidently oscillates between neoclassical, Keynesian, post-Keynesian, and finally classical economics (among whose proponents he counts himself; Smith, Ricardo, and especially Marx), first summarizes the positions of the first two doctrines regarding the relationship between order and disorder.
Neoclassicism asserts that the economic system equalizes all prices for comparable goods, all wages for comparable labor, and all rates of profit for comparable risks. All available resources are used including factories, labor and equipment. Only as a consequence of this ever already valid and established conception can deviations occur. Heterodox economics, especially Keynesian economics, takes the opposite position. Instead of perfect neoclassical competition, we are dealing with imperfect competition. Instead of full employment, we register unemployment – market outcomes appear to be conditional – they depend on politics, opportunity, history, and last but not least, power, be it class power, oligopolistic power, or state power. What neoclassicism conceives of as ordered patterns or patterns, Keynesianism sees as contingent and dependent on the play of forces. There is always a negotiable space here to close the gap between current and desired events. What neoclassicism promises with the action of the invisible hand of the market, Keynesian and post-Keynesian economics seeks to achieve through the visible hand of the state. Now for Shaikh, the irony is precisely that both sides agree in looking at economic reality through a-perfect glasses. While neoclassicism assumes a perfect order and introduces deviations as possible modifications of an underlying theory, heterodox economics wants to recognize the perfect stage only for an early phase of capitalism, while imperfect rules dominate the contemporary economic world.
Shaikh tells a very different story, an economo-fiction, but one that always remains grounded in empiricism. He is concerned with a theory that is adequate to the real development of capital from the first moment until today. The object of investigation is neither the perfect nor the imperfect, but the real. Therefore, the theoretical arguments developed by Shaikh must permanently face empirical analysis. The economic system of capital generates powerful and ordered patterns and patterns that transcend historical and local particularities, that is, they channel the historical paths of the main economic variables, the shaping forces being themselves results of certain immanent imperatives. This is not a matter of confronting ahistorical laws with historically contingent events; rather, agents and laws exist within a multidimensional structure of influences, the structure being hierarchically ordered, that is, certain forces, such as the profit motive, are more powerful than others. The resulting systemic order is generated in-and-by continuous disorder, the latter being the intrinsic mechanism of economics. If order cannot be equated with optimum, disorder cannot be equated with the absence of order. For Shaikh, a wide range of economic phenomena can be explained by a small set of operational principles, with current events revolving around centers of gravity, each already in motion. This Shaikh calls the systemic mode of turbulent regulation, whose characteristic expression takes the form of the repetition of patterns.
The turbulent regulation and the repetition of patterns are considered as the gravitational tendencies of the economic system. The first is the determination of commodity prices, profit rates, wage rates, interest rates and exchange rates. These processes have two tendencies: 1) Balancing tendencies through the restless search of individual capitals for monetary advantages, the unintended result of which is the adjustment of the differences that in turn motivate that search. 2) Shaping tendencies that determine the path around which the equalizing movements operate. Thus, the equalizing tendencies cause individual wages and profit rates to gravitate around the average. While average wage rates depend on productivity, profitability, and class struggles between workers and capitalists, average profit rates depend on wages, capital intensity, and productivity. These averages are the result of the microeconomic projects and interactions of individual capitals, with competition playing the decisive role. Shaikh subsumes both processes under the concept of real competition, in which again the profit motive plays the central role. The second set of gravitational tendencies comprises the turbulent macrodynamics of the system including its processes of growth and also those of stagnation. Again, the profit motive is the dominant factor responsible for the regulation of investments, growth, cycles, employment and inflation in the last instance.
The centrality of the profit motive has several implications. 1) The theory of profit and wages. 2) The role of profitability in real competition, insofar as all aspects of firms are affected, leading to the theory of competitive price and the theory of endogenous technical change. 3) In addition, the expected rate of profit regulates investment as well as growth, and also affects the relationship between aggregate demand and aggregate supply. Profit regulates supply and demand.
Regarding the empirical evidence of his position, where empiricism never consists of a collection of pre-existing facts, Shaikh notes that theory intervenes here not so much by interpretation but by representation of empirical events. Shaikh divides his 1000+ page book into three Parts: The Foundations of Analysis, Real Competition Theory, and Turbulent Macrodynamics Theory. Each Part is in turn divided into five chapters.
In the first chapter, Shaikh first examines the empirical evidence of the long-run patterns of developed capitalist economies, and this in terms of the persistent growth of outputs, productivity, profit, and employment; processes that took place in and through repeating cycles and periodic great depressions; he examines the socially influenced relation of wages to productivity, the influence of the state on underemployment, the return of the golden long waves, the implications of growth in the long-run paths of profitability, the turbulent rebalancing of profitability through all industrial sectors, the structural determination of industrial prices, and finally the rising inequality of income and wealth distribution.
Shaikh then deals with the corresponding methodological problems. The conventional view of economic equilibrium as a stage of tranquility is replaced by the view of turbulent regulation, in which equilibrium is achieved only through repetitive undershoots and overshoots of equilibrium. This raises the problem of temporality and nonlinearity of processes, as well as the question of how repetitive patterns and patterns can persist over long periods of time, when they are composed of a multitude of prohjects and interactions of individual capitals embedded in social structures and struggles. The neoclassical response is to construct an immutable representative agent that provides for particular economic outcomes through hyperrational choice. Here, all agents in a group have to be considered identical. Nonlinear behavior does not emerge. Shaikh has to prove that aggregated outcomes have emergent properties, i.e. the whole is more than the sum of its parts. Law-like patterns can emerge from heterogeneous entities – be they individuals or firms operating with different strategies and conflicting expectations – precisely because macroeconomic outcomes are robustly indifferent to microeconomic behavior. The neoclassical representative agent thesis, which states that individual behavior can be modeled as rational and that aggregate outputs can be treated as the behavior of a representative, rational agent is false, or it holds only under specific, unlikely conditions. With respect to consumption functions, all participants would have to have identical utility functions and the same income. With respect to production functions, all firms would have to have the same capital-labor ratio and the same wage and profit rates. This is untenable. Thus, one has to substantiate – against neoclassicism the microeconomics – by macroeconomics. With respect to formative macroeconomic structures, it is necessary to show how they operate and what stable aggregates they can lead to. Thus, consumption behavior can be traced back to two shaping structures: A given level of income that constrains choice, and a minimum level of income required for necessary goods. Accordingly, firms depend on a whole set of shaping conditions, as will be shown.
Diversity, on the other hand, generates statistical distributions of outcomes, with averages realized through social and economic structures. For example, aggregate consumption behavior (downward sloping demand curves, elasticities with respect to necessary goods and luxury goods, the nonlinearity of the Engels curve) can be derived without reference to a particular model of consumption behavior.
Furthermore, Shaikh examines the structures of socio-economic production. Neoclassicism presents the exchange of equivalents as the centrally organizing principle, with production appearing as the means of an indirect exchange between the present and the future. For Shaikh, who represents the classical position here, production always takes time; it precedes the exchange of products. It is in production that the struggle for higher wages and for the reduction of labor intensity takes place. Shaikh contrasts these features against the timeless input-output methodologies of most other economic traditions. Furthermore, the distinction between circular and fixed investment holds great significance for economic dynamics. This involves showing how the uses of material, fixed capital and labor are related to the length and intensity of the working day (there are differential levels of use), thus deconstructing the neoclassical microeconomic production function. The inclusion of social components indicates that neither variable nor fixed coefficient models representing only technological conditions can be assumed. The cost curves presented by Shaikh differ significantly from those in microeconomic textbooks. The U-cost curve favored in neoclassics is no good; rather, changes in costs from one level to the next indicate large swings in variable costs and sharp jumps in marginal costs. Thus, a given price can cut marginal cost curves several times, so the rule p=mc gives no indication of the profit-maximum point of production.
Each firm anticipates profit with respect to the sale of a planned product and, at the same time, the purchase of other products that serve as future inputs or are available for consumption. Neoclassicism now claims that individual production planning is exquisitely consistent with social necessities. This claim culminates in general equilibrium. In contrast, the turbulent order that emerges from real markets is generated in-and-through disorder, with money acting as the “general agent.” Exchange should not be confused with reciprocal gifts. In exchange, each party seeks to get more than it gives away. A unilateral obligation to pay (taxes) should not be confused with debts. These are repayment obligations, i.e., a return of interest and amortization. Barter is the first form of exchange in that it establishes multiple exchange relations and rates between commodities, with money appearing precisely when the dispersion of exchange is so expanded that it becomes necessary to convert the many exchange rates of a given commodity with other commodities into a single rate and a single reference commodity; for example, salt may be this single commodity and all other commodities within its sphere then receive a salt price. Shaikh conventionally refers to this exclusive commodity in Marxist terms as a money commodity. Price is the monetary expression of the quantitative value of a commodity.
Shaikh traces the historical development of money, which leads him toward a statement of the three functions of money: Unit of account, store of value, and means of circulation. For Marx, there are two determining moments in the determination of the national price level: the competitively determined relative prices of commodities with respect to a historically chosen money commodity such as gold, and the price of the money commodity determined by monetary and macroeconomic factors. Further, Shaikh examines the treatment of fiat money in a system with a money standard commodity (gold), and this with respect to Sraffa’s treatment of the relative prices of output. But what happens when fiat money is no longer tied to a money commodity? Under the conditions of modern fiat money, the national price level is then directly determined by macroeconomic and monetary factors, but differently than the Keynesians, monetarists and post-Keynesians imagine.
The analysis of profit and capital first requires the conceptual definition of capital and the determination of aggregate profit. In this regard, even Keynes refers to Marxformula G-W-G as a useful representation to identify capital. Capital is not about the quality of a thing, but about a social process in which it operates to get out of it increased. Capital is also not characterized by its duration. Circulating capital may remain tied up in the production process for only a few days, but fixed capital for years. Some durable goods are parts of personal wealth, such as a car, while for an automobile salesman they function as capital. Neoclassical economics mixes capital and durable goods because it defines capital as the wealth that lasts longer than a year. National income accounting supports neoclassicism insofar as it treats private homeowners as individuals who rent their homes to themselves.
Further, Shaikh shows that there are two sources of aggregate profit, the first referring to the transfer of wealth (mercantile capital) and the second referring to the production of new abstract wealth in the form of surplus value (industrial capital). Surplus product, however, can be produced only when the length of the working day exceeds the labor time necessary to reproduce the average standard of living of the workers. Aggregate profit is zero (regardless of relative prices) when the surplus product is zero. Positive aggregate profit exists only if surplus product and surplus labor exist, in which case a doubling of the price level leads only to a doubling of costs, leaving the level of profit unaffected. In the case of a given positive surplus product, a change in relative prices can then change aggregate profit. Profit then still refers to surplus labor, but now circulation comes into play. For Shaikh, therefore, there is a transformation problem. In a very classical way oriented to the labor theory of value, Shaikh explains that aggregate profits vary as one moves from prices to be considered proportional to labor value to prices of production. And the same can be said when moving from production prices, which are always theoretical constructs, to market prices or monopoly prices. Moreover, the change in the relative prices of commodities leads to the change in the relationship of the circuits of capital and revenue. Although the sums of values remain the same, changes lead to those of aggregate profits. This is also where Shaikh locates financial profit. If the rate of profit is written as the ratio between the monetary value of the total product and the current cost of materials, depreciation and labor, then it is the real rate of profit. Deflating the numerator or denominator by a common price index does not affect the rate itself. Shaikh goes into the various methods of measuring the rate of profit in the various appendices. His own method, unlike conventional methods of measurement, concludes that in the U.S. the maximum rate of corporate profit has been falling steadily since 1947, with technological change also causing the average productivity of capital to fall. Net operating surplus also falls slightly from 1947 to 1982, before beginning to rise again due to neoliberal policies that lower the wage rate.
In the second part of the book, Shaikh presents his theory of real competition. The profit motive is inherently expansionist. Investors try to get more money out of their projects than they put in, and when they succeed, they do it again at a higher level, colliding with other investors doing the same thing. Some succeed, some just survive, and some lose. This process characterizes real competition, which is antagonistic per se and turbulent in its operations. For Shaikh, this is the central mechanism of capital, which is as different from perfect competition as war is from ballet. Competition forces firms to set prices that keep them in the game, and to cut costs so that they in turn can cut prices in such a way that they remain competitive. Costs can fall first by lowering wages or lengthening the workday or increasing labor intensity, or at least by lowering wages relative to productivity. Because one must expect worker reactions, technological change will be the central means for a company to reduce costs in the long run. In this context, companies make their plans with respect to an intrinsically uncertain future. Shaikh sums up: Competition is the war of all against all.
Real-world competition generates specific patterns and patterns. The prices set by different suppliers in the same industry roughly equalize – measured by the mobility of customers – and the profit rates on new investments in different industries are also roughly equalized – measured by the mobility of capital aiming at higher profits. Both processes inherent movements around a corresponding common center. This conception of turbulent equilibrium contradicts the common doctrine that equilibrium is a stage of quiescence. While supply and demand play a role, they do not do so fundamentally, insofar as both components are affected by price-setting (relative to costs) and entry and exit of firms. The equalization of prices and profit rates inheres emergent properties; they are unintended results of a constant struggle for higher profits.
Naming this competition as war contains crucial implications. Any competitive enterprise must be concerned with tactics, strategies, and assessments of the future. Therefore, one can neither assume a normal profit, nor introduce the interest as part of the costs. The division between debt and equity determines the division of net operating profit into interest and profit. The interest rate here acts as an indicator of the gap between active and passive investment. Companies are price-setting organizations that must align their prices with those of the price leaders. Extra profits in an industry stimulate the adaptation of the most efficient methods by insiders and outsiders, with new firms tending to undercut prices and thus eliminate extra profits. This competitive behavior indicates that significant differences exist in the costs of the respective firms. More profitable industries have five times more new firm entry than averagely productive industries, according to studies by Bryce and Dyer. The most productive firms operate with the best technologies, although there is always some range of technologies in an industry. According to Salter, changes in relative prices can mostly be explained by changes in relative labor productivity, with the latter stimulated by technological change. The profit rate falls with the size of the firm, but the risks and the cost of capital also fall. Research shows that for these firms, on average, the output-capital rate increases, while the cost-capital rate remains roughly constant. At the same time, new firms have higher scales and lower costs per unit of output, which allows them to set lower prices. Larger firms face an increasing cost-capital rate, which has consequences for the path of the rate of profit.
Classical theory assumes that new investments are made in more efficient factories and equipment. Because each firm uses a variety of technologies and models, the average profit rate of a firm cannot be understood as an approximation for its regulating rate. A similar problem emerges at the industry level: The relevant measure here is the rate of return relative to new investments, or the real incremental rate of return relative to capital, which appears as the change in real profit relative to investment. In the empirical study, Shaikh demonstrates that average profit rates tend to remain different while incremental profit rates equalize.
Further, Shaikh examines how the regulating or dominant capitals seek to shape competition through their choice of respective techniques. This involves making current decisions based on current and expected future market prices (distinguishing output prices and market prices that gravitate around the former). In doing so, firms must choose the lowest possible costs for materials, depreciation and wages. Since markets are turbulent, this choice must be robust, that is, efficient under normal fluctuations in costs, prices, and profit rates. Here, the choice of techniques is stochastic, not deterministic. For example, if lower unit operating costs are achieved through higher unit costs of capital (technology that causes the capital-cost ratio to rise), then this leads to a fall in the average profit rate for given real wages (contrary to Okishio`s assumptions).
Marx` conception of competition emphasizes the anarchic character of gravitational fluctuations. That the conditions of production dictate the market price, Marx takes from Ricardo, and extends his thesis beyond agriculture to all industries. In this framework, firms are to be understood as actively setting prices and aggressively lowering costs, with the creation of new techniques with lower production costs requiring a higher investment of fixed capital per unit. In contrast, neoclassicism posits the firm as a passive price-taker and competition as equality qua equilibrium (Jevons and Walras). Shaikh shows that the assumption of perfect competition is irrational. If all firms are assumed to be equal, then they must take the same actions, i.e., any signal that one firm calls on to increase output must be picked up by all firms, which then also increase output, so that supply increases significantly and prices fall. Moreover, if firms in perfect competition are perfectly informed, then it would be quite irrational for a firm to assume that it could sell as much as it wants at a price of its own choosing. But this is precisely what the theory of perfect competition and the macroeconomics based on it demand. It follows that the theory of rational expectations cannot be substantiated by the theory of perfect competition. Indeed, firms face falling demand curves rather than horizontal ones.
Going further on these Topics, Shaikh examines the Austrian school around Schumpeter and the post-Keyesian theories, especially those of Kalecki. First, Kalecki affirms the theory of perfect competition, but further points out that in the course of the centralization of capital, monopolization has to be taken into account. The first point of reference here is, of course, Hilferding, whose theory was adopted and extended by Lenin. Kalecki’s monopolistic price theory became the basis for the Marxist school around Baran/Sweezy and for most of the post-Keynesian theories. The standard neoclassical theory is to be made more “realistic” here by refuting some of its basic assumptions. Perfect information is replaced by uncertainty, barriers to entry, disturbing externalities, and monopolitical mark-ups are pointed out, while the principle of profit maximization is maintained. The condition p=mc is replaced by mr=mc (Sraffa). Kalecki correctly assumes that firms set prices, and firms with low costs set lower prices. However, he attributes this to price setting by monopolies, with long-run profit rates differing among market leaders, and this due to their respective market power. Shaikh, on the other hand, is concerned with showing that in the context of real competition, market prices revolve around output prices, with the deviations of prices and profit rates around their regulating centers playing a crucial role.
Shaikh distinguishes between perfect, imperfect, and real competition. In the concept of perfect competition, there are a large number of firms identical in size and cost structure facing a horizontal demand curve. They are passive price takers, the technology is given, and the uniform price results from the relationship between supply and demand. The firms have the same profit rate. Imperfect competition theory uses these conditions as a benchmark. The key point here is that the ability of market leaders to set prices is considered an indicator of monopoly power (relative to size, capital intensity, and market share). In real competition, the intensity of the fights does not depend on the number of firms, their size, or their market share. Price setting, cost reduction and technological variation are considered intrinsic factors of real competition. Within certain limits, market prices differ, with firms responding to changes in supply and demand by adjusting prices. New firms tend to have higher economies of scale and lower costs in order to fight market share battles by lowering prices, while older firms adjust. One expects a positive correlation between selling prices and unit costs and a negative one between that correlation and firm size and capital intensity. If more efficient firms tend to be larger and more capital intensive, then concentration rates are correlated with entry barriers.
While the theory of perfect competition assumes identical profit rates, the theory of imperfect competition assumes different profit rates, the equalization of profit rates in the theory of real competition implies that the regulating firms with high capital-output rates have higher profit margins. In real competition, the profit rates of regulating capitals in different sectors are equalized. Equalization of profit rates implies that capital intensity is then no longer necessarily correlated. However, insofar as the profit rate denotes the rate between profit margin and capital intensity, the last two parameters are related.
For Shaikh, production prices are competitive relative prices associated with three processes: Sales prices adjusted by sellers, wage incomes adjusted by labor, and average profit rates adjusted by regulating capitals. Thereupon, Shaikh shows that the relevant dispersion of the labor-capital rate is not that which can be observed directly in an industry, but it is the integrated rates, the weighted average of the labor-capital rate in a given industry plus its inputs, and the inputs of the inputs, etc.; the output price of each industry depends, first, on the integrated unit labor time and, second, on the integrated labor-capital rate (the average of the industry and the rates of other industries that supply). Since the latter is very narrowly distributed, Shaikh infers a close relationship between output prices and integrated labor hours. Based on empirical analysis, Shaikh conjectures a certain relationship between market prices, production prices, and direct prices (price proportional to integrated labor time.) Shaikh here proves to be a representative of a labor value Marxism, albeit an elaborate one.
Shaikh then analyzes the statistical correlations between prices in the U.S. in the period 1947-1988. The difference between direct prices and market prices is 15%, that between production prices and direct prices is 13%, and that between production prices (at a constant rate of profit) and market prices is 15%. The fact that market prices have the same distance to production prices as to direct prices seems strange if one assumes the classical hierarchy direct prices – production prices – market prices. But since production prices fluctuate with changing profit rates, above figures have to be put into perspective. Shaikh assumes that Sraffa’s standard prices are integrated versions of Marx’s transformed values. Ultimately, he argues, the differences between the various forms of prices are small, so that they converge at an aggregate level. Prices of production arising from the distribution of surplus value generate, in monetary terms, aggregate marginal capital equal to the rate of profit at each switching point.
Shaikh also places the analysis of finance under labor value theory. In doing so, he assumes that the rate of interest is the price of finance. Finance firms operate in a profit-oriented manner, with competition causing the rate of profit of the regulating finance firms to revolve around the general rate of profit (of all industries). From this perspective, the competitive rate of interest for financial firms is linked to the general rate of profit like any other competitive price. For financial and non-financial firms, the rate of interest is considered the benchmark for an investment. Marx and Keynes assume that investment depends on the difference between the rate of profit and the rate of interest. In this context, the interest rate must generally be lower than the profit rate if the loan is to be realized. Shaikh defines the rate of profit of a bank as the rate between the profit (difference between interest income and the cost of operation) and the capital stock (sum of reserves and fixed capital). The alignment of the bank’s profit with the general profit rate implies that for any desired reserve-deposit rate and deposit-credit rate, the interest rate is determined by two aspects: The general profit rate and the price level related to the cost of inputs (computers, buildings, office space, labor time, etc. ). Loans with longer maturities involve greater risks and therefore require higher reserves and deposit-credit rates, so the interest rate in this case must be higher to realize the general rate of profit. While the rate of interest is determined in the short run by the relationship between the supply and demand for money, it is structural factors in the long run.
Shaikh, like many Marxists, assumes that financial enterprises do not produce value, but merely appropriate value produced elsewhere. Nevertheless, financial enterprises do operate with capital, or more precisely, with money capital. The main assets of banks are specific amounts of money capital (including reserves) and tradable derivatives that can be exchanged for money. Banks use both to grow their capital, making both components capital. In addition, the banks’ potency to create money must be taken into account. Finally, in functioning capital markets, all varieties of revenue, income, and debt, no matter where they come from (government bonds, derivatives, illicit money, etc.), are capitalized and thus function as capital. All this is ignored by Shaikh when he unilaterally emphasizes the cost side of banks without paying sufficient attention to the capitalization (supply side) aspect.
Shaikh assumes an equalization of the rate of profit also in stock prices, i.e., the equalization of the real rate of profit of stocks (sum of the rate of increase of real stock prices and dividend profit) with the real incremental rate of profit. This determines the path of real stock prices in a dynamic context. In the case of bond prices, the arbitrage between the different financial instruments balances the profit rates of bonds with the interest rates of the same maturity, and since these are lower than the profit rate, the profit rates of bonds are also lower than the general profit rate. And since the profit rates of stock prices are equal to the profit rate (incremental), the profit rates of bonds are lower than those of stocks. According to Shaikh, empirical studies confirm these theses. In particular, the co-movement between the rate of profit of stocks and the incremental rate of profit of companies is evidence for Shaikh that, for example, Shiller’s claim that stock prices are extremely volatile due to investors’ irrational expectations is nonsense. Schiller arrives at this view because he takes the Efficient Market Hypothesis model as a benchmark; this assumes that over long periods of time, expected rates of return on stocks are constant. Because the current stock market is highly volatile, any comparison between it and the constant rate of return indicates excess.
Finally, Shaikh analyzes Marx’s position on the determination of the rate of interest and concludes that he held two different positions. On the one hand, the rate of interest is determined by the respective price level and the relation of supply and demand; on the other hand, Marx assumes that financial capital also enters into the equalizing movements of the rate of profit and, moreover, that financial profits consist of the difference between the interest rates at which banks lend money and those at which they lend money. Neoclassicism and Keynes treat finance as if it were a non-capitalist activity, requiring neither operating costs nor capital. Thus, there can be no price of finance, so that the rate of interest is determined solely by expectations and preference structures. Keynes here invokes liquidity preference, which leads to the IS-LM apparatus of Hicks, which in turn is somewhat modified by neoclassics to construct full employment as the outcome of a general equilibrium. Keysenians reply that today the central bank determines the interest rate.
The traditional theory of international trade is based on two fundamental theses: 1) Free trade is governed by the theory of comparative costs. 2) It leads to full employment in every nation. The first thesis states that a nation benefits from international trade when it exports a portion of goods produced at comparatively low cost and imports an equally weighted package of production from abroad. In this process, the values of imports and exports equalize, i.e., trade deficits and surpluses are always eliminated, and this is true for rich and poor countries. Empirically, of course, this is completely untenable, considering that currently large parts of the proletarian class, which currently comprises about three billion people worldwide, are unemployed (well over one billion). Moreover, in today’s global capitalism, trade imbalances are the rule, not the exception. Keynesians therefore modify the standard positions of comparative cost theory by bringing into play oligopolies, economies of scale, differential elasticities in demand, technology and technological knowledge. This, in turn, gives some room for government intervention. For Shaikh, however, the foundational evil of bourgeois theory is already inherent in Ricardo’s theory of comparative costs. Indeed, in real competition within a nation, firms seek to lower costs and prices in order to beat their competitors. Firms with low costs appear as winners, firms with high costs appear as losers. Smith and Ricardo agree, with Ricardo going further to show how certain international trade patterns emerge when profit-seeking individual capitals operate in different countries.
The Ricardo example is well known: If the single capitals in Portugal record lower costs than the single capitals of England (for all goods), they dominate both markets. Now, as money flows from England to Portugal, costs and prices rise in Portugal, and vice versa in England. Eventually, Portuguese single capital will fall from the profit to the loss side with the commodity that has the smallest cost advantage over its competitor in England. Conversely in England, there the individual capital with the lowest cost disadvantage will move to the profit side. This process will continue successively until it reaches a certain equilibrium, that is, Portuguese individual capitals will concentrate on the production of goods in which they have comparative cost advantages, which they will exchange – for the same amounts – with goods that achieve comparative cost advantages in England. Ricardo’s conflation of trade equilibrium and balance of payments is important here. A country’s balance of payments includes the net amounts flowing into a country, exports minus imports, direct investment by foreigners at home minus that by domestic firms abroad, short-term capital inflows, e.g., bonds purchased by foreign investors minus bond purchases by domestic investors abroad, and so on. Ricardo paradoxically assumes that trade flows of goods are separate from financial flows, with a balanced trade balance being identical to a balanced balance of payments. This is because money appears only as a means of circulation, never as financial capital. And this is strange because the exports and imports of financial capital qua credit are intrinsically linked to the export and import of goods. Thus, trade in commodities is completely separated from money capital flows in Ricardo, which Marx sufficiently criticized.
Shaikh also writes a different economo-fiction at this point. In the theory of real competition, the price leader or regulating individual capital in each industry is the one with the lowest unit cost (cost as the sum of expenditures on materials, wages, and depreciation). Shifts in the relative prices of goods lead to changes in the relative costs of those goods. This is the logical consequence of Sraffa’s assumption that costs and prices are intertwined. For all possible real changes in exchange rates, comparative costs need not change at all, so that, for example, the strongest individual capitals in all industries can remain Portugal’s price leader and eliminate the English individual capitals. Thus, absolute cost advantages are not overturned by effects in real exchange rates; indeed, comparative costs may evolve in such a way that the advantages of Portugal’s individual capitals over those of England become even greater. As long as real costs (real wages and productivity) are determined at the national level, comparative costs will not move in the direction Ricardo assumed. The movement of comparative costs (linear function of international relative prices) is ultimately determined by the relative structures of production, that is, international competitiveness remains tied to efficiency, real wages, and technical proportions of individual capitals, and there is nothing about free trade that can prevent absolute cost advantages and disadvantages for particular individual capitals.
When trade imbalances arise, real exchange rates need not change. Marx argued that a country with a trade surplus experiences an inflow of liquidity that lowers the rate of interest, while for a country with a trade deficit, liquidity shrinks and the rate of interest increases; these are the normal functions of capital markets. In international real competition, regulating capitals have the lowest integrated unit labor costs. If a country exports goods produced at the lowest cost, then the terms of trade depend on the rate of the real integrated cost of the exported goods relative to that of the producers from whom they receive imports. The terms of trade are determined by national real wages and cost structures, so they do not automatically move in the direction assumed by Ricardo. Finally, for Shaikh, the terms of trade and comparative costs are determined by relative real wages, the relative productivity of regulating capitals, and the effects of traded and nontraded goods. Thus, the direction of a nation’s trade movement is determined by its absolute cost advantages, while the size is also determined by relative national incomes. The latter can affect trade but not radically alter costs. Trade imbalances inevitably lead to payment imbalances, which affect the interest rate and induce international capital flows in the short run: Countries with absolute cost advantages will recycle their trade surpluses through foreign lending, while countries with deficits will rely on borrowing.
In the third part of his book, Shaikh examines the turbulent dynamics in the macroeconomy. In real competition, firms face downward sloping demand curves, set prices and have differential costs, and divide into price leaders and price followers. Money is endogenous and not neutral, and aggregate demand and aggregate supply are based on profitability. At an aggregate level, the ex ante excess demand can be written as follows:
ED=D-Y= ((C+I)-(Y-T)+(G-T))+(EX-IM)=(I-S)+(G-T)+(EX-IM)
where D stands for aggregate demand for domestic goods, and this is equal to the sum of consumption (C), investment in fixed capital and equipment (I), government spending (G), and exports (EX). T represents the total taxes of households and firms, Y= the national supply (including imports (IM)). In the most general case, excess demand is reduced to the equality of savings and investment: ED: I-S
Conversely, if excess supply is reduced by clearing firms’ inventory, then the corresponding ex post identity in the national accounts can be derived by substituting the unplanned changes in inventory ΔINVu for excess demand ED to obtain: ((I+ΔInVu)-S)+(G-T)+(EX-IM)=0
ED can be zero, but can also take negative or positive values: (I-S)+(G-T)+(EX-IM) ≠ zero. Neoclassical economics, on the other hand, promises instantaneous and continuous equilibrium: Ed(I-S). While investment generates demand for lendable funds, savings provide the funds, and both respond to the real rate of interest. Equilibrium in the market for lendable funds ensures that I=S and ED=0. Output is produced, leading to full employment and the corresponding demand to consume the supply.
Keynes, on the other hand, disagrees with the assertion that the real wage equals full employment and that the real rate of interest automatically leads to a corresponding aggregate demand. For Keynes, on the other hand, the movement is as follows: Firms need to invest and the only motive is to realize a certain rate of profit (expectations on the rate of profit, which is volatile), which is correlated with expected demand. Conversely, aggregate household demand is correlated with current income. There is no guarantee that aggregate demand of households is identical to expected demand of firms, so that precisely disequilibrium is the normal condition. Since Keynes considers investment to be stable, at least in the short run, the necessary adjustments must be made through savings to reach equilibrium. Savings are the part of income that is not consumed, and consumption in turn depends on income generated in production. In the end, production, and therefore employment, must ensure that savings equal investment. This is Keynesanswer to Says law. Keynes assumes that savings is a stable part of income. If investment increases by 100 and savings are one-fifth of income, then output must be 500 for the return on savings to equal investment. This is the Keynesian multiplier. An increase in the rate of return on savings now causes savings to rise above investment, so output and employment must fall for investment and savings to rebalance. However, this is true only for short-run investment. Keynes, like Marx, determines expected net profitability as the difference between the expected rate of profit (the marginal efficiency of investment) and the rate of interest. A fall in employment dampens expected profits and raises the rate of interest because of growing risks, so that investment falls further. While Keyes was clear that a fall in real wages would raise the rate of profit, a fall in demand would lead to a further fall in prices, raising real wages again but ending up further depressing profit expectations.
Keynes focuses on comparative statics, so the time reference is largely omitted at this point. The rate of interest is determined by the relationship between the supply and demand for money. While the supply of money is determined by the state, the demand for money depends on income, and the interest rate is considered a reward on holding the money, which may be invested later. All of this in turn requires reliance on the future, with a loss of confidence in the crisis leading to withdrawal from financial securities to cash and an increase in the interest rate just when a reduction is needed, so that it is ultimately more effective for the government to provide aggregate demand through deficit spending in the crisis.
Keynes’ assumptions were quickly incorporated into Hicks’ IS-LM model. For Keynes, equilibrium output is determined by investment and the multiplier (IS), and investment depends on the excess of the volatile expected rate of profit over the rate of interest. Hicks now eliminates the expected rate of profit so that investment mutates into a simple passive function of the rate of interest. But what if, as is visible in the current crisis, a low interest rate does not lead to new investment? Hick’s treatment of the demand for money (LM) again marginalizes volatility so that it becomes a stable positive function of current income and a negative function of the interest rate (a higher interest rate on financial assets induces investors to hold less cash). The IS-LM equilibrium requires a specific combínation between income (output) and the interest rate. Via government intervention and exports, demand should be increased, i.e. an expansionary fiscal policy should raise the equilibrium level of output. And an expansionary monetary policy should increase the money supply and shift the LM curve, i.e. increase output but lower the interest rate, so that the government can always achieve full employment by means of its fiscal and monetary policies without changing the interest rate and the price level. The price level then rises only when aggregate demand exceeds output at full employment. Joan Robinson assumed that prices rise before the critical point, which is why Keynesianism introduced an inflation-underemployment curve (Phillips), in which there is a negative correlation between inflation and underemployment, but this became obsolete when we had to deal with the phenomenon of stagflation in the early 1980s.
Shaikh devotes a chapter to post-Keynesian economist Michal Kalecki. (Kalecki can be counted among the European group of post-Keynesians around Robinson, Kaldor, Kahn, and Harcourt, who, coming from Sraffa, care little about financial economics). Kalecki, like Keynes, assumes that investment is given in the short run but responds in the long run to the difference between the future rate of profit and the rate of interest. A given level of the rate of profit implies a given level of investment. The rate of interest is determined by monetary factors and the rate of profit by capacity utilization and the level of wages. Kalecki, in his late phase, adds a kind of class analysis by dividing total income into that of capitalists and workers and assuming that both have a fixed (marginal) propensity to save. The multiplier is the same as Keynes’, but the propensity to save depends on the ratio of wages to profits, which in turn are characterized by monopolistic profit markups and are added by firms to their primary costs. Inflation is based on real wage increases. In his early phase, Kalecki still assumes that real wages and the wage share cannot be affected by either class struggles or the unemployment rate, while in his late phase he claims that workers’ struggles can lead to a reduction in profit markups, while higher real wages are in prospect in the case of a reduction in the unemployment rate.
Like Keynes, Kalecki disagrees with the view that a rise in real wages per se lowers profitability and raises unemployment, since the rise in real wages has two contradictory effects on the current rate of profit: it lowers the normal rate of profit, but it also increases the capacity utilization of firms, when it is precisely the effective demand of workers that rises. In this context, Keynesians assume that the effect of an increase in demand is greater than in the case of a fall in the rate of profit, although, according to Shaikh, it should be noted that the establishment of capacity utilization at a lower level of the rate of profit leads to a reduction in growth. Capacity utilization is given the status of a free variable, and this means that excess capacity can never be completely eliminated, which again makes no microeconomic sense. For Keynesians, one thing is clear: Fiscal policy can then increase output and employment, while monetary policy eases the pressure on the interest rate.
In general, post-Keynesianism follows the following theses: Aggregate demand determines output, money is endogenously created by the banking system, and government can produce full employment at an appropriate level of inflation. If demand drives output, then for investment this means that it remains independent of the supply of private savings, so that it is financed by bank credit alone. Existing savings are thus no obstacle to investment. With respect to the multiplier, the growth of investment must entail a certain growth of output, in which case Ponzi financing for new investment may occur. The fact that savings are not linked to the requirements of financing the investment seems empirically untenable. The following should be further noted: If investment depends on the difference between the expected rate of profit and the rate of interest, then a given level of the rate of profit implies a given level of investment. With the multiplier, a given level of investment leads to a given level of output. If investment increases, then the capital stock increases, so capacity must also increase. Capacity utilization (rate between output and capacity) must then fall. Traditional multiplier theory is inconsistent with respect to the stock-flow problem. One can help oneself by relating the rate of accumulation (ratio of investment to capital) to the expected net profit rate, but the resulting rate of capacity utilization will swing relative to the normal rate. On the other hand, if one assumes that accumulation is equal to the normal rate of capacity utilization, then the rate of accumulation will be affected by the rate of savings. The problem resolves itself if one abandons the assumption that business savings are independent of investment.
A number of other contradictions can be found in Keynes, according to Shaikh. While on the one hand Keynes claims that the supply of money would be regulated by government authorities, on the other hand he says that the difference between savings and investment could be closed by bank credit (at any given rate of interest), thus making the supply of money directly dependent on the demand for credit. Thus, Keynes would correctly assume the endogeneity of money. And this, in turn, conflicts with his LM function, because liquidity preference then determines the interest rate, since money is endogenous.
A post-Keynesian who, like Minsky for instance, is more concerned with financial economics is Paul Davidson. The latter states the following basic theorems. 1) Demand is thought to be autonomous in the short run due to the possibility of consumer credit, however investment remains the important autonomous and paradigmatic variable based on net income. 2) The capital economy is driven by money. Firms invest money in materials, labor, and machinery to achieve More Money, with the entire process bridged and guided in the form of money contracts for present and future supplies. These explanations are close to Marx’s cycle G-W-G`. 3) Money is endogenous insofar as it is driven by credit and has real effects on production, growth and employment. 4) There is no guarantee that expected economic events will materialize, since the future is fundamentally uncertain. Uncertainty implies that there are many unpredictable events to which probabilities cannot be assigned. Risk theory, therefore, cannot be based on probability theory. In neoclassical rational probability theory, on the other hand, the future must be ergodic (average futures equal average pasts) and the subjective distribution of future events must equal the objective one. Because of the fundamental uncertainty of the future, liquid assets are important and the demand for liquidity increases when the fear of an uncertain future increases. (We define liquidity as the nominal relation between maturity and value. If liquidity means money that is virtual or latent in a financial asset, this is only possible if the asset is not currently in monetary form. If liquidity is actualized or transformed into money, then the asset’s liquidity is liquidated. Consequently, the asset can never remain perfect in its liquidity, and in this sense liquidity appears as the intensive consequence to the extensive property of the security denoted in money. Thus, liquidity is a functional relation between a time of delay and the time of realization of the asset).
Shaikh, of course, also endeavors to reconstruct macroeconomics through classical economics, and here the notion of real competition plays a central role. The important thesis is that the growth rate of capital is determined by the expected net rate of profit (the difference between the expected rate of profit and the rate of interest). Unlike Keynesianism, where the rate of profit hangs in the air, so to speak, the expected rate of profit is tied to the current rate of profit, and this in turn remains tied to average rates of profit. In a boom, the expected rate of profit rises above the current rate; in a recession, the reverse is true. Both rates fluctuate around each other in a turbulent manner. When the rate of profit in the financial sector is greater than in the industrial sector, capital flows into the financial sector at an accelerated rate. In this process, expectations afflict current prices, which in turn afflict fundamentals, while expectations are in turn afflicted by movements in current prices and fundamentals. Thus, current prices oscillate in a turbulent manner around gravity-oriented values. Since the expectations can afflict the fundamentals, that is why the gravity-oriented centers must themselves be path-dependent. Thus, the future is not a stochastic reflection of the past, but it is non-ergodic. Nevertheless, expectations cannot generate any reality, which they themselves only confirm; rather, the gravity-oriented centers, such as the general rate of profit, continue to act as regulators of current economic events, so that booms turn into recessions, and vice versa. Shaikh further assumes that there are two distinctions to consider, namely that between the average rate of profit and that of new capital, and that between the rate of profit of financial firms and rates of return on financial speculation. Competition leads to the turbulent equalization of profitability or rates of return in all sectors. However, this is to be doubted in the case of the interest rate and the rates of return on speculation. Interest has no necessary relation to profit, except that total net interest must be lower than surplus value.
In the context of a growing economy, it is then necessary to consider the relation between supply and demand. Output growth is not driven by demand; rather, an exogenous increase in demand will cause growth to fall (Harrod). The relationship between supply and demand is also regulated by profitability: Production supply is based on profit, while demand or consumption depends on wages and the interest rate; dividends are parts of profit; and demand for investment is regulated by expected profits. Classical macroeconomics, Shaikh summarizes, is neither supply nor demand oriented, but rather profit oriented. Further, corporate savings are not independent of investment because both variables belong to the same entity. If savings increase in such a way that they can be used to finance any increase in investment, then there is no multiplier. Any rate of corporate savings responds to the difference between investment and current savings. This rate is endogenous.
In the simplest Classical macroeconomic model, the rate of accumulation (growth rate of capital) responds to the expected net profit rate (expected profit rate minus interest rate), and the savings rate relates to the difference between investment and savings. In the short term, the interest rate will increase when the financial difference is positive, but in the long term, the financial situation of enterprises will correlate with the balance of profit rates, and the normal interest rate will correlate with the price level and the normal profit rate. Furthermore, bank credit offers the possibility that expenditures can exceed given revenues. Banks can generate new purchasing power so that investment rises faster than savings, and consumption rises faster than income. For Skaikh, however, the rate of profit remains the linchpin of the system, although banks can influence the relationship between expected and current rates of profit, between supply and demand, and between output and capacity. In a growing system, the nominal growth rate increases when demand exceeds supply, the growth rate of the capital stock increases when output exceeds capacity, and capital flows more into the financial sector when the current rate of interest exceeds the normal rate of interest. This always takes place in the context of turbulent equilibrium movements, with supply and demand dominating in the short run, and the relationship between capacity and output, between current and normal interest rates, and between current and expected profit rates dominating in the long run. This synthesizes Keynes’ remark that demand can be relatively autonomous with respect to the generation of purchasing power with the classical and Keynesian thesis that accumulation depends on net profitability, and the classical thesis that expected profitability depends on normal profitability, and that current capacity utilization fluctuates around normal utilization. The level of savings and investment depend on the rate of interest and the level of output, where the rate of interest is in turn determined by the rate of profit, and the rate of savings is linked to the rate of investment. Because current growth rates fluctuate around equilibrium, the level of output will have a stochastic and a deterministic aspect; it is path dependent. Even a temporary increase in the rate of profit will raise the level of output and employment. This is the classical answer to Keynes multiplier.
In examining the relationship between wages, employment, profitability and growth, Shaikh concludes that competition and flexible real wages always lead to a certain unemployment rate. Regarding the issue of full employment, Marx stated that under capitalism one ever already finds a certain rate of unemployment. Goodwin formalized Marxs argument by relating the real wage first to productivity and the normal unemployment rate. The growth of productivity and employment open spaces for the increase of the wage share and real wages. When unemployment falls below a certain level, workers' fighting power may increase. It follows that the rate of change in real wages relative to productivity is a negative function of the unemployment rate. This in turn depends on the level of output, productivity, and the power of workers. The rate of growth of output depends on the normal net profitability that drives accumulation. As growth in productivity and employment correlate with unit labor costs, their rise forces firms' efforts to increase productivity. The mutual influence of output and productivity growth is known as Verdoons Law.
If a stable wage share (ß) reflecting the strength of the working class is related to national income (net output per worker (y) equals the sum of real wages and profits per worker), then the following relation is obtained: yt=At x kt to the power of 1-ß. This looks like an aggregate Cobb-Douglas function, although it is derived from the class struggle theory of workers in terms of real wages. In the long run, the wage share is positively correlated with the initial wage share and the employment rate, and negatively correlated with productivity and the growth of the labor force. An increase in aggregate demand may increase employment and output growth in the short run, but will not eliminate unemployment in the long run because there are internal mechanisms that restage unemployment. Shaikh relates this statement to the Phillips curve. Phillips studied the effects of unemployment on wages. His answer related to the change in money wages and largely affirms Keynes’ perspective. Shaikh believes that the struggle for real wages is waged relative to the general level of productivity, so the corresponding Phillips curve must reflect the change in nominal wages relative to productivity growth and inflation. A stable real wage exists only if productivity growth is constant, and a stable money wage exists if inflation is constant. Empirical investigations follow.
Going further, Shaikh examines the causes of inflation under conditions of modern fiat money. For Shaikh, the state did not invent money, it only expanded its base at a certain historical stage, and only at a late historical stage did it monopolize money, that is, it took over private functions, while private banks continue to create most of the money as a means of circulation and payment. To be sure, the state exercises some control over the banks, a control whose intrinsic limitations, however, become apparent with each financial crisis. For Shaikh, fiat money (inconvertible sign money) is the modern form of money. The history of money shows that private money circulation enables sign money once its function as money and, at the same time, its inconvertibility are accepted. Keynes, on the other hand, applauds the Chartalist Knapp, who extols the power of the state and the passivity of private agents, while the neoclassicals define money as the creation of private markets. Keynesians and neo-Chartalists assume that the state can create fiat money indefinitely, with no inflation or increase in the interest rate. Fiat money at least frees the state from certain budget constraints. It has been the oxygen for various revolutions, but has also repeatedly led to hyperinflations. For example, the treasury of modern states had to introduce certain regulations prohibiting the direct creation of money to make up for financial deficits, for example. The state can only issue money in a certain proportion to its tax revenues and to the issuance of government bonds; however, the central bank can create money when it directly buys government bonds, although the debt capacity of the state must still be taken into account.
Regarding the issue of inflation, Shaikh first assumes that competition determines relative prices through the equalization movements of profit rates. Growth in aggregate demand can be fueled by new purchasing power, and the modern credit system can, at least virtually, fuel purchasing power indefinitely, raising the question of limits to supply. For Shaikh, the limits arise from the fact that no economy can produce a rate of accumulation greater than that at which all economic surplus is reinvested (greater than the rate of profit): Shaikh here equates Ricardo’s grain-grain model with Marx’s schemes of extended reproduction and von Neumann’s and Kaldor’s models. The issue is how to utilize the maximum growth potential of an economy (growth-use index). The case of increased demand qua new purchasing power with limited supply has to be considered. Since the rate of profit is the rate of profit to capital, and the rate of accumulation is the rate of investment to capital, the growth-use index is the share of investment in profit.
An increase in demand will be expressed in expanded output and/or higher prices, i.e., a nominally higher gross amount. The GDP growth rate is then a function of new purchasing power relative to GDP. On the supply side, it is then important to note that real growth is increasingly dampened as the current growth rate gradually reaches the maximum growth rate. This is consistent with Keynes’ statement that at full employment, new demand is less absorbed by new output and price increases occur. These statements are used by Shaikh for his theory of inflation. If real growth is positively correlated with net purchasing power and net profitability (marginal net profit rate, profit on new investment) and negatively correlated with the degree of utilization of growth, and at some point reaches a critical point, then we are always dealing with a nonlinear function in the relation between the two moments. If the inflation rate is equal to the difference between the growth rate of nominal and real output, and the former is a function of new relative purchasing power, then inflation is positively correlated with new purchasing power and net profitability and negatively correlated with unutilized growth potential. A possible fall in net profitability can be compensated to some extent by an increase in demand, so that the growth rate falls less than the profit rate. A fall in the growth rate leads to unemployment, while a rise in the growth capacity rate makes the economy more vulnerable to inflation. This is the secret of stagflation. In this process, rates can vary only within certain limits, but in a system with fiat money, there seem to be no limits at all to the growth of purchasing power. If the rate of growth of purchasing power is relatively low, then the impact on inflation is still small; at high rates, it becomes different. Thus, inflation can be defined as a function of new borrowing (demand from consumer credit), net profitability and the degree of unused capacity utilization. Empirically, one can now register a strong relationship between credit growth and nominal GDP growth, with GDP growth lower than credit growth at peak points, indicating that increased demand is leading to inflation in securities and bond prices and currency speculation.
Shaikh conceives of the 2007 crisis as the first major recession of the 21st century, which, like all major crises, was indicated by a financial collapse and, in the case of the United States, by the subprime crisis. But for Shaikh, that was not the root cause of the crisis. Shaikh first examines the long waves to determine the crisis; he assumes three to five-year cycles based on inventory, seven to ten-year cycles based on fixed capital, and longer structural cycles. All of these cycles are punctuated by accelerated and decelerated capital accumulation. The Great Depression of the 1930s was characterized by high unemployment and prices; in the stagflation crisis of the 1970s, as a result of Keynesian policies, there was unemployment halved from the Great Depression and high inflation rates. Starting in the 1980s, we are dealing with a new boom; a permanently low interest rate increased the net rate of profit on capital (the net difference between the interest rate and the rate of profit). Falling interest rates led to a widely dispersed distribution of capital around the globe and a rise in consumer credit, and eventually to intensifying financial crises and bubbles. At the same time, there were the neoliberal attacks on real wages, which fell relative to productivity. The fall in interest rates and real wages led to a rise in net profit rates. Normally, this should have led to a stagnation of consumer demand, but the fall in interest rates allowed consumer credit to be extended on an enormous scale, and so consumer demand continued to rise on the back of debt until the Great Crisis. So capital’s response to the stagflation of the 1970s was to attack real wages and drastically lower interest rates, which had a positive effect on net profit rates. This, for Shaikh, is the secret of the boom since the 1980s. But this boom was inherently inconsistent. The expansion of cheap finance led to high levels of debt in all sectors of the economy; in particular, households compensated for the decline in real wages by taking out consumer loans.
Empirically, Shaikh then examines the major Kondratieff waves from 1790 to 2010 in the U.S. and the U.K. (the price level is referenced to gold). Almost always, a crisis begins in the middle of the downturn, and for Shaikh, the 2007 recession is no exception. In general, technological innovation has a negative impact on the normal rate of profit, but this is compensated in the neoliberal period by falling real wages to the extent that at least the fall of the maximum normal rate of profit can be arrested. The average net profit rates and the marginal profit rates are structurally related to the combinations of the paths of the profit rates and the interest rates.
Shaikh’s few comments on Piketty’s influential bestseller “Capital in the 21st Century” lead to the debate on the problem of the fall of the general rate of profit. One of the central theses in Piketty’s book is that under capitalism there is a tendency for wealth and income inequality to increase (interrupted only by the two world wars, revolutions, and depressions), so that those who live off the income from wealth and returns accumulate faster than wage earners. Moreover, the rate of return on capital/profit (r) tends to exceed the overall economic growth rate (g), although Piketty emphasizes that r > g is an empirical tendency, but is precisely not deterministic at all.
Piketty’s research is largely based on the results of neoclassical economics, i.e. the existence of aggregate production functions and the proposition that the rate of profit is determined by the marginal product of capital, and that the latter falls when the capital stock rises. However, the assumption of an aggregate or economy-wide production function and the existence of a defined quantity of capital is inconceivable independently of the determination of the prices of heterogeneous capital goods and the rate of profit. In this context, the prices of the heterogeneous capital goods must be known in order to be able to aggregate an aggregate capital stock. As Sraffa has shown, the prices of heterogeneous capital goods cannot be determined without the knowledge of the rate of profit, ergo, the prices of capital goods and the rate of profit must be determined simultaneously.
Piketty calculates the profit rate as the product of the profit rate and the capital income rate. Over time, the rate of profit falls because the marginal product of capital falls due to the increase in the capital stock, so that it takes an increase in the capital income rate to slow the fall in the rate of profit. Thus, a falling rate of profit can be offset by a rising rate of capital income, so what really matters here is the use of technology. Piketty empirically observes an increase in the profit rate and the capital-income ratio, assuming a CES production function with an elasticity of substitution greater than one; if a CES production function with an elasticity of production not equal to one is used, then capital intensity exerts an influence on the level of income ratios.
For Shaikh, from the empirical side, income inequality can be explained by the ratio of the rate of income from returns to wage income, which he classically attributes to the division of value into wages and profits and to the degree of the resulting financialization of income flows. On the theoretical side, the wage share is defined by the unemployment rate and the ratio between the power share “capital versus labor” and the profit share; the rate of capital utilization is determined by the choice of techniques, which in turn remains related to the imperative of cost reduction to which firms are subject qua competition. The rate of profit is determined by both aspects. Here, the normal rate of profit is always higher than the normal rate of growth, since the former includes the rate of surplus to the capital stock, while the latter includes the reinvestment of the share of surplus to the capital stock. In Shaik’s position, the rate of profit is the ratio of the rate of the share of profit to capital intensity, and an increase in the latter is an important reason for the fall of the rate of profit. The rate of profit determines the rate of interest, and the difference between the two rates determines the rate of growth.
Piketty subsumes under wage income salaries and wages, but also transfers, unemployment benefits, and income from stocks, securities, etc., while income from wealth includes profits, interest payments, pensions, royalties, real estate, and financial instruments. In particular, Shaikh considers Piketty’s measurement of the rate of profit to be inconsistent because the latter cites the capital stock in the denominator, which, however, includes not only equipment, machinery and factories, but also land, real estate and financial assets (net), while excluding pensions, interest payments, profits on financial assets and liquidation gains in the numerator. Therefore, for Piketty, the rate of profit falls in the boom after the 1980s. For Shaikh, when financial assets are included in the denominator of the rate of profit, it is double counting. We think this is incorrect not so much because of what Piketty says, but because of Alan Freeman’s explanations.
(The problem with Piketty is yet another, because his definition of capital treats it as a thing rather than as a process in which money becomes more-money. Piketty defines capital as the stock of all assets held by corporations, the government, and households that can be traded in the market, whether they are used or not. This includes real estate holdings, property rights and, for example, art ownership. To assume a rate of profit r here, one must somehow value the initial capital. It can only be valued in the context of production, the rate of profit, and market prices. For neoclassicism, to which Piketty refers here, the rate of profit on capital is based on the rate of growth because capital is defined by what it produces and not by what goes into its production. Money, land, real estate, and equipment, if not put to productive use, are not capital. What remains decisive here is profitability or the rate of profit).
Almost all Marxists use enterprise profit and fixed capital stock in the numerator and denominator of the (general) rate of profit as approximations to surplus and capital employed. Fred Moseley, for example, claims that enterprise profit in the non-financial sector is the crucial ratio, subtracting from enterprise profits the profits from the so-called unproductive financial sector and that of commercial capital. Shaikh argues that corporate profit (the rate of profit on industrial investment after subtracting all other claims on profit) is the measure that is relevant to investment decisions. There are disputes about whether the net or gross profit rate is relevant to measurements of the profit rate, or profits before or after deducting taxes. Kliman calls for measuring fixed assets by historical rather than current costs.
Alan Freeman demands (insofar as financial instruments are taken into account, here in line with Piketty) that only so-called fixed assets should be considered in the denominator of the general rate of profit. However, the value of the spent capital in the phases of the capital cycle is not only bound in machines, raw materials, energies and equipment, but also in money stocks and inventories as well as in financial investments. Money is no different in this respect from unsold goods, inventory, and the capital stock. Now, what happens to the rate of profit when tradable financial instruments are included in the advanced capital or denominator of the rate of profit? (Of course, profits on financial assets are also included in the numerator of the rate of profit). In the U.S. and UK, then, according to Freeman’s own empirical analyses, contrary to Shaikh’s assumptions, we have also been dealing with a fall in the average profit rate since the 1980s.
Financial firms do not function without capital, and this is money capital. They need capital in the “physical” sense (machines, computers, buildings, software, etc.) and labor, but their main assets are sums of money or tradable financial instruments that can be exchanged for money: These can be reserves, currency holdings, bonds or derivatives – the bank uses them to generate profit, they are its capital. They should therefore be included in the denominator of the (general) profit rate.
In general, in contrast to Shaikh, we assume that capital and finance overlap or superpose in various ways. Finance is the authoritative form of capital today. Changes in the course of profit rates have consequences for the development of finance, but these are not unidirectional, nor do they transform the modes of operation of finance. Finance today is more than the accumulation of liabilities and rising debt. It involves increasing investment in research and financial innovation and is based on institutional developments, economic strategies, and government regulations, all of which have their own histories and temporalities. In this sense, the history and structure of finance cannot be reduced to a reflection of the historical patterns of the rate of profit. The developments of finance do not occur simultaneously.
translated by deepl.