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

Some recurring themes in Marx versus Keynes: a personal note

Economist John Maynard KeynesToday’s post summarises some of what are for me the most important and interesting topics in economics, in particular those which draw on Marxist and Keynesian thinking. While the approaches and concerns of the two traditions sometimes overlap, they also give rise to tensions.

I have just finished Stephen Marglin’s new book Raising Keynes, which is the Harvard Professor’s attempt to resurrect and reform in modern guise the key ideas of the great man’s General Theory of 1936. On a personal level, the book is my latest foray into what is broadly known as post-Keynesian economics, whose practitioners claim to be the heirs of Keynes and the developers and propagators of his most important ideas. Through his work, Keynes intended to save capitalism by ridding it of some of its most damaging tendencies, such as periodic mass unemployment. This makes his work appealing to progressives and leftists who are uncomfortable with the idea of revolution and are not convinced that socialism, in the form it has taken historically, is the answer to society’s problems. Continue reading

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.

Steve Keen on Marx on capitalism: flawed but exciting

Keen-InterviewIt has been some time since I posted a quote from the economics literature that both informs and inspires me. Here is Professor Steve Keen from the conclusion to his new book on the exciting vision of capitalism offered by Marx, in contrast to that of Say, which continues in some way in today’s neoclassical vision.

“Looking back on the fifty years since I first became aware of its flaws, the word that summarizes my feelings about Neoclassical economics today is that it is, as Marx once described the proto-Neoclassical Jean-Baptiste Say, ‘dull’. Its vision of capitalism at its best is a system manifesting the harmony of equilibrium, where everyone is paid their just return (their ‘marginal product’), growth is occurring smoothly at a rate that maximizes social utility through time, and everyone is motivated by consumption – rather than accumulation and power – because, to quote Say, ‘the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise’.

What a bland picture of the complex, changing world in which we live!

For all it flaws, capitalism was and remains an exciting social system. For all his flaws, Marx put this best, in his own Manifesto. Though it called for the overthrow of capitalism, The Communist Manifesto was also a paean to the creative and transformative nature of capitalism and its distinctive class, whom Marx called ‘the bourgeoisie’, and we might today call ‘entrepreneurs’. For them, the guiding principle is not ‘merchandise for their merchandise’, said Marx, but ‘Accumulate, accumulate! That is Moses and the prophets!’ In contrast to the staid conservatism of the dominant classes of previous social systems, Marx declared that ‘the bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society’:

Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real condition of life and his relations with his kind. (Marx and Engels, 1848, emphasis added).

How did Marx’s exciting portrayal of capitalism lose out to Say’s vapid vision?”

Steve Keen (2021), The New Economics – A Manifesto, Polity Press, p.139-140.

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.

Many Middle Ways – why liberal socialism is an oxymoron

This is the second post in a series on what I have termed the many middle ways of political economic systems. I am mostly concentrating on the mixed economy under capitalism, but today I want to discuss what some authors call liberal socialism, and compare it with social democracy.

For some progressives, it sounds like an unalloyed good: socialism, tasked with ensuring a fairer, more equal and rationally planned society and economy, coupled with liberalism, so that the flaws and horrors of, for example, Soviet Russia, can be avoided. But is it feasible? The crisis of 2008 and its aftermath highlighted the potential instability and inefficiencies inherent in a capitalist economy, while rising inequality of incomes and wealth has brought home to many its lack of fairness and justice. Indeed, the two may well run together, if excessive wealth inequality fuels the unequal distribution of opportunity in society, as well as dampening demand, contributing to sluggish economic growth.

The more recent advent of the pandemic has dramatically forced on many governments a new extended role and activism to attempt to manage or avoid a social and economic catastrophe, with mixed results. So there has been something of a ‘return of the state’, giving rise to some apprehension on the political right, and a desire to make it more permanent on the left. Continue reading

Questioning Modern Monetary Theory: Part 3

This is the third part in my current series which explores certain aspects of Modern Monetary Theory (MMT). Here I want to focus on unemployment and inflation.

Is it possible to create and sustain full employment? What does history show?

Achieving full employment under capitalism is a worthy goal and has been one longstanding aim of economists and policymakers from a variety of schools of thought. It is particularly associated with those influenced by, following and developing the ideas of John Maynard Keynes, at least since the publication of his magnum opus The General Theory of Employment, Interest and Money. However arguments across the political spectrum as to what kinds of policies will get the economy there still differ substantially. Continue reading