Anwar Shaikh is a Professor of economics at the New School for Social Research in New York. His ideas, in his own words, draw mainly but not exclusively on the ‘Classical tradition’ of Smith, Ricardo and Marx. Marx himself was a critic of classical political economy, so in some ways Marxist political economy could be considered as a separate school of thought.
In Shaikh’s 2016 magnum opus, Capitalism, he also draws on Keynes and Kalecki, two economists who greatly inspired the post-Keynesian school. For Shaikh, the Keynesian/Kaleckian emphasis on aggregate demand remains important, but so too does aggregate supply, which is emphasised in mainstream neo-classical economics. According to Shaikh, the classical tradition is not so much demand-side, or supply-side, but ‘profit-side’. The rate of profit is central to his work, and it affects both demand and supply in the capitalist economy.
In this post I want to outline Shaikh’s theory of wages and unemployment, which is covered in Chapter 14 of Capitalism. He covers a great deal of theoretical and empirical ground in the book, not least in this chapter, and it makes for stimulating reading. To avoid making this post too long, I will focus on Shaikh’s own particular theory, rather than spending much time comparing it to alternative theories, which Shaikh does in the book. Continue reading →
A nice description of the basis of financial profits under capitalism:
“In a capitalist economy, the prices of most assets are derived from the potential gains to be made from them. Thus, the price of land is based on the rent which it might afford, and as Ricardo long ago showed, this rent is itself based on the profit which might be made through the use of the land. Similarly, the price of equity is tied to the future profits of the issuing company. In this sense, assets such as these are the first derivatives of real capital, bets made by the buyer on its future outcomes. From this point of view, so-called “financial derivatives” are the second derivatives of capital. They are instruments whose value is based on the expected future price of some underlying asset or future outcome (such as the future price of some commodity or currency). These can take the form of insurance against undesired risk, or bets on future gains or losses. They can also be pyramided by making derivatives based on derivatives (ie., third and fourth derivatives of capital, and so on). The calculus of finance has many moments. The end result is an inverted pyramid, with real profits at its base and a rapidly widening volume of financial assets stacked upon it.”
Professor Anwar Shaikh, author of this year’s magisterial Capitalism: Competition, Conflict, Crises, with some brief thoughts on the sustainability of capitalism. For him, its dominant forces, such as the drive for profit, need to be channeled through appropriate policy, and its destructive side effects somehow negated. The aim should be to benefit the many, moreso than in today’s often hugely unequal societies. This is something that I absolutely agree with and I remain hopeful for this kind of outcome, at least in the longer term.
“Capital is a particular form of social wealth driven by the profit motive. With this incentive comes a corresponding drive for expansion, for the conversion of capital into more capital, of profit into more profit. Each individual capital operates under this imperative, colliding with others trying to do the same, sometimes succeeding, sometimes just surviving, and sometimes failing altogether. This is real competition, antagonistic by nature and turbulent in operation. It is as different form so-called perfect competition as war is from ballet.
…Real competition is the central regulating mechanism under capitalism. Competition within an industry forces individual producers to set prices with an eye on the market, just as it forces them continually to try to cut costs so that they can cut prices and expand market share. Cost-cutting can take place through wage reduction, increases in the length or intensity of the working day, and through technical change. The latter becomes the central means over the long run [my emphasis].
…The notion of competition as a form of warfare has important implications. Tactics, strategy, and resulting prospects for growth are central concerns of the competitive firm…In the battle of real competition, the mobility of capital is the movement from one terrain to another, the development and adoption of technology is the arms race, and the struggle for profit growth and market share is the battle itself.”
I am an admirer of the work of New School economics Professor Anwar Shaikh. Here is a wide-ranging discussion with him that covers free trade and its impact on the US over the past 30 years, as well as how both the creative and destructive power of markets should be channelled through appropriate policy.
With regards to trade, Shaikh argues against Ricardo’s theory of comparative cost advantage in favour of Adam Smith’s earlier theory of absolute cost advantage. For Smith, and Shaikh, international trade takes place between businesses rather than nations, which means that there are winners and losers as trade expands. There is also a necessity for interventionist trade and industrial policies to promote development among the poorest nations, if they want to ‘catch up’ with their richer cousins.
Shaikh is pessimistic about the prospects for significant progressive change in American society and more widely, which he sees as a problem of political mobilisation and will, rather than a purely economic one. Having said that, this interview was recorded before the rise of Bernie Sanders, which certainly offered hope to many, at least for a while.
“Many of the central propositions of economic analysis can be derived without any reference to hyperrationality, optimization, perfect competition, perfect information, representative agents, or so-called rational expectations. These include the laws of demand and supply, the determination of wage and profit rates, technological change, relative prices, interest rates, bond and equity prices, exchange rates, terms and balance of trade, growth, unemployment, inflation, and long booms culminating in recurrent general crises…
…I propose that we reject the claim that perfect competition was ever appropriate and refuse the notion that observed outcomes should be attributed to historically arisen imperfections. The economic dynamics of capitalism arise from competition itself. There was never any Garden of Eden, and our current condition does not stem from its loss.”
These passages come from the opening paragraphs of the conclusion to Shaikh’s magisterial work. Drawing on the classical political economists such as Smith and Ricardo, as well as Marx, Keynes and many others, he sets out to construct a comprehensive approach to the economics of capitalism which goes beyond theories of perfection and imperfection. This is very appealing to me. Continue reading →