Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

Quote of the week: Anwar Shaikh on opposing capitalism

Anwar-InterviewThis week’s quote comes from the New School’s Anwar Shaikh, whose work I have discussed on this blog a number of times. Working in what he has called the ‘Classical Keynesian’ tradition, his efforts to synthesise the work of Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes culminated in his 2016 magnum opus Capitalism. Although he is both highly critical of and well outside the broadly neoclassical mainstream, he remains an independent spirit and has clearly forged his own path through his research and writing.

The extract below is taken from a volume of interviews with leading heterodox economists, and considers the importance of understanding the world as part of the basis for changing it in a progressive direction, with capitalism being the dominant economic system in the world today. Shaikh’s own book is proffered as a contribution towards that endeavour.

Although I have sympathies with Keynesian economists arguing for policies which achieve and sustain full employment, I can also see where Shaikh is coming from when he argues that the sustaining of it under capitalism has been historically problematic. Sooner or later, economic crises occur, either from within the system itself, or through policy responses to, say, high inflation, which undermine its achievement. However, in Capitalism Shaikh does argue that a social pact between government, business and trade unions can mitigate inflation even in the presence of a tight labour market and high employment rates. Historically, this has been achieved in certain countries at certain times, and for reasonably sustained periods. For me, this is worth shooting for as part of a progressive policy package for improved economic and social performance, and, yes, this would be taking place within capitalism.

At the same time, a combination of reforms to, and the evolution of, the capitalist system itself, may ultimately take it beyond its particular limits and towards something else. What exactly that might be, and what it might be called, may be beyond any one individual’s capacity to imagine. I prefer to leave this problem open for now.

“Many people change the world without understanding, but there are consequences of not understanding it, too. I have done my share of demonstrations and marches. I was a founding member of the Union for Radical Political Economics also. But it seemed to me that providing a space for people to oppose capitalism is not the same thing as providing a framework in which this opposition can be located and which the consequences of opposition can be located also. And some of those consequences are consequences people on the left don’t like to hear. They don’t like to hear that Keynesian policy cannot just provide full employment. Well, I happen to believe that capitalism will not sustain full employment and that’s an uncomfortable belief. But I can’t reject it merely because I don’t like that outcome, so I have to deal with the fact that if that’s the case then that’s the limits of capitalism. Where can you go within those limits? And then it also leads you naturally to ask where do you go beyond capitalism, even though my work is not about that. But it seems to me that understanding the limits helps you think about the fact that you can’t go beyond those limits without leaving the system because these are system limits, not human limits.”

‘Anwar Shaikh’, Ch.13 in A. Mearman, S. Berger and D. Guizzo (2019), What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.219.

Different questions, different answers: seeking an alternative economics

“I was working in the desert myself alongside workers from all over the Middle East and India and Pakistan in searing brutal heat and they were paid minimally. And as an engineer you think: well, things could be done much better. So I thought that economics would have an answer as to why there was inequality and poverty and all that, answers to them. It seemed to me that that’s what I should study. When I got to graduate school I realised that economics doesn’t even have the question let alone the answer. That was a big shock.”

This quote from an interview with New School Professor Anwar Shaikh about his decision to study economics and his early experiences brings to the fore some of the concerns of today’s heterodox economists. I can certainly sympathise. My own experiences in studying economics at school and of beginning to read around the subject in books and newspaper commentary generated enthusiasm for a particular approach to the subject, which gives a primacy to the importance of economic policymaking designed to improve the workings of the economy and society and the well-being of its members. I was attracted by left-Keynesian ideas, what I now recognise as post-Keynesianism, which argued for a government commitment to full employment, secured by judicious macroeconomic management, with any resulting tendency towards rising inflation to be mitigated by incomes policies involving negotiated consensus between the state, employers and workers. Of course, such policies reflected the post-war consensus in many advanced economies, which by what was then the mid-1990s had long been abandoned by the Thatcher governments in favour of a focus on controlling inflation as the main target of macroeconomic policy, while the liberal economy in the form of deregulation and privatisation became the focus of microeconomic policy, ostensibly to improve economic performance and raise living standards. Continue reading

The current inflation: a Marxist approach

Inflation-1024x681I have posted a couple of times this year on inflation, but a dissatisfaction with both mainstream and a variety of Keynesian approaches (including Modern Monetary Theory or MMT) to the subject have recently led me to revisit some more radical, but also richer and, I think, more realistic Marxist approaches. I started with Robert Rowthorn, a professor at Cambridge University, whose key contribution on inflation goes back to the 1970s. At the time many of the advanced economies were experiencing stagflation (unemployment and inflation rising together). The Keynesian-social democratic consensus on economic policy was being undermined, both by economic events, but also theoretically, with the rise of pre-Keynesian neoclassical ideas which took the form of Milton Friedman’s monetarism and then the new classical macroeconomics incorporating rational expectations.

It is not the purpose of this post to review all the alternative theories of inflation. I merely want to set out a Marxist approach, drawing on Rowthorn, but also on Anwar Shaikh’s ideas from his 2016 book Capitalism, as well as some other Marxist economists such as SOAS’ Ben Fine and Alfredo Saad-Filho of King’s College, London. There is a substantial overlap between these authors’ ideas on inflation. Continue reading

Anwar Shaikh on successful macroeconomic stimulus

Anwar-InterviewHere is a link to a short but interesting paper by Anwar Shaikh on the conduct of successful macroeconomic stimulus. Shaikh is the author of the magisterial Capitalism: Competition, Conflict, Crises and works in the tradition of ‘classical’ economics, being greatly inspired by Adam Smith, David Ricardo and Karl Marx, but also by John Maynard Keynes. His book is an attempt to integrate ideas and theories from these four greats into a comprehensive modern analysis of capitalism as an economic system.

The paper notes some historical examples of successful (the US during WWII, Germany in the 1930s) and unsuccessful (many countries during the 1970s, Brazil in the 2000s) application of macroeconomic stimulus intended to accelerate economic growth and reduce unemployment. He comes to the conclusion that if such policies are not to be derailed by rising inflation and/or falling profitability for the economy as a whole, then an incomes policy is necessary to ensure that wages increase in line with productivity; an industrial policy is also needed to sustain rising productivity. Continue reading

Anwar Shaikh on the contrasting approaches of classical and neoclassical economics

9780199390632In this extract from Anwar Shaikh’s work Capitalism, he draws a striking contrast between the theoretical approaches of his own adopted classical economics, and neoclassical approaches, which dominate the mainstream. He highlights how the classics (and Marx, who he counts as part of this group) more satisfactorily address the real nature of capitalism, starting from its observed patterns and behaviour. Neoclassical economics starts from an idealized vision, a long way from the reality of the economy, in order to act as an apology for capitalism with all its flaws, and then adds “imperfections” to bring the theory closer to the real world. As Shaikh says, this is certainly a strange approach.

“Classical political economy attempted to get underneath the tempestuous surface of capitalism to identify the central tendencies of the actual system. Neoclassical economics took the opposite tack. From the very start, it was focused on the task of constructing a vision of perfect capitalism, optimal, efficient, and thoroughly idealized – all under the guise of “analytical refinement.” Real competition was replaced by perfect competition, the aggressive cost-cutting firm turned into a passive price-taker, and the turbulent movement of real markets was substituted with the smooth path of equilibrium-as-bliss. In the midst of the Great Depression of 1873-1896, Jevons and Edgeworth were refining the list of requirements for “perfect competition,” while Walras was weaving these elements into the general equilibrium model which still dominates orthodox macroeconomics. It is a particular historical irony that Walras, a French socialist who looked to the state for “proper guidance” on the installation and maintenance of “free competition”, would become the patron saint of conservatives who defend corporate capitalism and revile the state…[E]ven those who seek to return to the task of analyzing the actual system generally begin from the Walrasian framework in order to introduce selective “imperfections” here or there.

What a strange manner of proceeding! First, one invents a fictitious idealized world, a veritable Garden of Eden where even the snake of scarcity works for the general good. Most of the effort is then dedicated to explicating the properties of this paradise, although sometimes it becomes necessary to address the clamorous multitudes outside the gates. Then the intellectual problem becomes one of positing particular “imperfections” that can be used to account for otherwise inexplicable behaviors of the obdurate masses. This is the modus operandi of all orthodox economics after Keynes, with differences among the schools arising from disputes about specific attributions of imperfections. Proceeding in this manner ensures that orthodox theory can never be deemed to be wrong: it is only a matter of finding the right set of imperfections to explain each particular “deviation” from the ideal. I do not subscribe to this procedure because I reject its very starting point. I would argue that real macro dynamics is just as different from Walrasian general equilibrium as the classical theory of real competition is from perfect competition. The difference between classical and neoclassical approaches is not about abstraction itself, but rather about the method of abstraction. Abstraction-as-typification begins from the real in order to identify typical patterns and their underlying drivers; abstraction-as-idealization begins from the ideal and inevitably ends up with a vision of the real as a catalogue of imperfections.”

Anwar Shaikh (2016), Capitalism: Competition, Conflict, Crises, Oxford University Press, p.540-541.

Anwar Shaikh on economics and the real world

The video below features Anwar Shaikh discussing the basic framework he uses in his 2016 magnum opus Capitalism: Competition, Conflict, Crises. Shaikh describes his approach as working in the tradition of classical political economy, and draws in particular on the ideas of Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes, integrating them into a coherent form. He emphasis the importance of profitability under capitalism as a motivating and regulating force, and what he terms ‘real competition’ in the marketplace, in contrast to theories of so-called perfect or imperfect competition. He also explains how his theory can explain the failure of Keynesian policies to deal with the stagflation of the 1970s, which led to the widespread abandonment of demand management as a tool to achieve full employment.

Managing inflation today

Contando_Dinheiro_(8228640)Inflation is determined in the interaction of demand and supply for the economy as a whole. Today’s inflation may call for intervention by governments if it is deemed to be “excessive”. While there are a range of policy responses which can help, there are limits to what states under capitalism are able to achieve. Continue reading

Looking back, looking forward: blogging in 2022

img_0372I have resisted posting my top ten most viewed posts over the last twelve months; nevertheless this post takes a longer view back in time to assess the content and direction of this blog, and looks forward to the year ahead in the worlds of economics and political economy. The Political Economy of Development is perhaps a bit of a mouthful and not very catchy as a blog title, but it was in fact the name of my masters degree course at SOAS in London which, although my studies there finished 20 years ago, continues to inspire my thinking and writing. This blog is an outlet for both. The economics department at SOAS is well known for its focus on development, and on political economy and heterodox or non-mainstream approaches to it in particular.

Despite the blog’s title, I do not focus exclusively or even mostly on development, developing countries or emerging markets. As something of a get-out, I take the view that the process of economic and social development is ongoing and does not stop if or when countries ‘graduate’ to ‘advanced’ status and relatively high levels of income and wealth. Successful development is also more than a simple rise in GDP or national income. It is a process of socioeconomic transformation, encompassing technological progress, rising productivity and living standards, creative destruction a la Schumpeter (as old industries decline and new ones expand), and social and political change. If such processes are to be successful, we now realise that they need to be sustainable, economically, socially and environmentally, or they will undermine the very basis of human progress. Continue reading

Anwar Shaikh on his “real” economic analysis

Below is an interesting recent talk by Professor Anwar Shaikh, organised by the Cambridge Society for Economic Pluralism, a student-run body which champions a pluralist and interdisciplinary approach to economics. The video is quite long, so if you don’t have the time to watch it all, the first thirty minutes sees Shaikh introduce the ideas in his 2016 magnum opus Capitalism: Competition, Conflict, Crises, and explain the rational behind his original approach.

Shaikh is critical of both neoclassical economics and post-Keynesian alternatives, and instead makes the case for a modern classical approach drawing on Smith, Ricardo, Marx and Keynes, in which the economy is turbulently driven by the forces of “real” competition and profit equalisation. For Shaikh, profit-making is the key aim of business, and it regulates both demand and supply. While neoclassical economics tends to be supply-side, and post-Keynesian approaches demand-side, his classical theory is “profit-side”.

One point he makes that really resonated with me is the notion that one’s theoretical framework must be consistent, even if it gives you results that you dislike. An example of this is the post-Keynesian idea that full employment can be achieved and sustained given the right policies. In his book, Shaikh argues that the historical evidence shows this not to be the case, or at least to be very difficult. I have long wrestled with contrasting Keynesian and Marxist ideas on this issue, and admit that I see full employment as a desirable policy goal under capitalism. I will also admit that the evidence shows that it is hard to sustain for the long term.

I applaud Shaikh’s intellectual honesty, and find it inspiring. Capitalism is not all good, even if it has driven rising living standards for a huge number of the planet’s population. Its evolution tends to be uneven over historical time and across geographical space, giving rise to winners and losers, to inequality and entrenched poverty as well as massive wealth and technological advance. I highly recommend his book, aspects of which I have written about on this blog over the last few years.