Shaikh at Greenwich

Professor Anwar Shaikh, author of the new book, Capitalism: competition, conflict, crises, addressed an audience of students and lecturers and some outsiders (including me) at the University of Greenwich, London earlier this week.

This was a great and rare opportunity in the UK to hear Shaikh talk about his magnum opus and answer questions.  And it was very instructive and stimulating.  I have previously reviewed Shaikh’s lifetime work on this blog in a relatively short post and I have just published a much longer and more comprehensive review.  But Shaikh’s Greenwich address is worth reporting because it confirmed in my mind the great merits of the book – and my doubts about aspects of it.

Shaikh first forcefully made the point that to understand the motions of the capitalist economy, we need to analyse real behaviour and not dream up the fictions of neoclassical ‘marginalist’ models.  Indeed, Shaikh reminded us that he was first trained in microeconomics back in the early 1960s by a leading neoclassical economist Gary Becker. 

Becker actually developed a model (that he later dropped) which explains supply and demand in a market economy without marginalist pre-conceptions or models of so-called rational expectations of ‘representative agents’, as neoclassical micro now insists on.  If you start at the level of the aggregate, all the different possible individual motivations and irrational behaviour are averaged out and a pattern of consumption or production ‘emerges’ for an economy.  “The aggregate is transformational”, so we do not need models of individual behaviour.  I quote from my own blog in 2010 along the same lines: “More important, the power of the aggregate and history is completely ignored.  The aggregate irons out the irrational or the unexpected (even if some wrinkles remain) and history, namely empirical data and evidence, provides a degree of confidence for any theory (the goodness of fit).  With the neoclassical EFM, neither part of scientific method is applied.”

Second, Shaikh emphasised that any proper analysis of capitalism must start with the evident point that the driving force of the capitalist mode of production is profit – not output, not income, not technology, but profit.  Yes, capitalism has expanded the productive forces to previously unprecedented levels (and Shaikh showed this with various graphs that are in his book); but the other side of the capitalist coin was rising inequality and recurrent destruction of capital, both in means of production (bankruptcy and closures) and labour (unemployment and loss of wages).  Unemployment is permanent and cannot be removed under a capitalist system.

The main task of his book was to show how profit is created and operates through what Shaikh calls “real competition” in a turbulent and conflicting process. “It’s a war, not a ballet” – a conflicting struggle between capital and labour and between capitals, not some delicate dance of change.

Shaikh showed with a series of graphs from his book how capitalism lurches forward with regular crises, sometimes turning into deep depressions.  Shaikh reminded us that it was mainstream empirical analysis that confirms this.  And the Russian economist Kondratiev revealed the longer waves of capitalist boom and depression.  It was this analysis that led Shaikh to predict back in 2003 that a major slump was coming.  He reckons that another is also due soon.

This is all compelling.  But there are other less compelling aspects to Shaikh’s book that I raised in my review and were confirmed in my mind again after his Greenwich address.

The foundation of my doubts rests with Shaikh’s attempt to reconcile the Marxist ‘critique of political economy’ (as Marx sub-titled Capital) with ‘political economy’ itself – in other words submerging Marx into the ‘classical tradition’ of Smith, Ricardo, Mill etc.  Yes, Marx was very appreciative of Smith and Ricardo’s objective insights into the nature of industrial capitalism.  But he had profound disagreements and criticisms of their labour theory of value, which failed to recognise the dual nature of commodity production – combining use value (output of things and services) and exchange value (pricing in the capitalist market).  That dual nature reveals: first, that it is labour (power) that creates value; and second, that profit is the result of the exploitation of labour.

Moreover, ‘real competition’ means the equalisation of profit rates between sectors and industries as the result of capital flows searching for the highest profit.  So, as Marx explained, market prices move around (ever-changing) prices of production (measured as the cost of capital plus an average rate of profit) not around individual values of commodities measured by the labour time in them.  This was Ricardo’s omission or error in his labour theory of value.

Shaikh recognises this but is still determined to reconcile Marx with Ricardo by showing that the difference in prices when measured in labour value (times) and when measured in prices of production is a just a small percentage over a time series.  So Ricardo “was spot on” and Marx and Ricardo (nearly) agree.

Nearly but yet so far – a miss is as good as a mile.  The difference is crucial because Marx’s theory of value shows that it is the exploitation of labour as a commodity that is at heart of the capitalist mode of production and that the competitive struggle between capital for the share of the surplus value appropriated from labour power leads not only to a tendency to equalise profit rates BUT ALSO to a tendency for the average rate of profit to fall.  This is the result of capitalist competition and the drive to reduce the value of labour power in total value.

This is the fundamental contradiction in the capitalist mode of production and it is Marx’s concept, not Ricardo’s nor Smith’s.  Both the latter recognised that the rate of profit in an economy fell but neither Ricardo not Smith reckoned this was due to the exploitative role of capital over labour or the unintended result of the capitalist drive for more profit.  Their ‘dismal’ explanation for a falling rate of profit was either rising wage costs (Ricardo) or intense competition (Smith).  The Ricardian answer of rising input costs  was followed by the 20^th century neo-Ricardians like Piero Sraffa or the post-Keynesians like Joan Robinson and Michal Kalecki – in opposition to Marx’s value theory and law of profitability.  Their positions cannot be reconciled with Marx – and more important, are not correct.

I have already explained in my recent long review some of these ambiguities that I find in Shaikh’s immense work and some of these were repeated in his lecture.  He tells us that profit has two sources: not only from production but also from the circuit of capital, following James Steuart, the classical economist who talked about two sources of profit: positive profit from production and relative profit from transfers of value from one capital to another.

As Bill Jefferies says in his recent review of Shaikh’s book, “Shaikh blurs the picture further with a reinterpretation of Steuart’s discussion of positive and relative profit. Positive profit adds to the public good. Relative profit is an effect of ‘vibration’ of the existing stock of wealth. Positive profit is real value added, relative profit cannot exist in aggregate, as what is a gain for one is a loss to the other, of the same amount but in the opposite direction, and yet Shaikh says it can. Shaikh uses the strange example of a burglar stealing a TV (p209). What has this got to do with production? Presumably, if capital is no longer a social relationship, then labour need not be the source of all new value.”

Ironically, when you read what Marx says about Stueart’s classification, I don’t think you can agree with Shaikh that Stueart’s two sources of profit meant that Marx agreed that extra value is also created by trade and not just production. Marx says “Before the Physiocrats, surplus-value — that is, profit in the form of profit — was explained purely from exchange, the sale of the commodity above its value.  Sir James Steuart on the whole did not get beyond this restricted view; (but) he must rather be regarded as the man who reproduced it in scientific form.  I say “in scientific form”.  For Steuart does not share the illusion that the surplus-value which accrues to the individual capitalist from selling the commodity above its value is a creation of new wealth.”

And Marx goes on: “This profit upon alienationtherefore arises from the price of the goods being greater than their real value, or from the goods being sold abovetheir value.  Gain on the one side therefore always involves loss on the other.  No addition to the general stock is created.”  But “his theory of “vibration of the balance of wealth between parties”, however little it touches the nature and origin of surplus-value itself, remains important in considering the distribution of surplus-value among different classes and among different categories such as profit, interest and rent. (my emphasis).”

So there is no new profit from trade or transfer.  This relative profit is just that, relative.  Why does Shaikh, however, want to make much of this?  It would seem he wants to find new value from outside the exploitation of labour in production for two reasons: one to reconcile the “classical tradition” with Marx; and second, to explain how in the 20^th century, finance capital can gain extra profit from outside production.  This extra profit comes from ‘revenue’ (i.e. profit circulating or hoarded and now outside production).  Just as a burglar can gain profit from stealing and selling on, so can a banker from extorting extra interest and fees from workers savings and mortgages.

Now finance capital can gain profit from slicing off a bit of workers’ wages in bank interest or from squeezing the profit of enterprise (non-financial capital). But this is not an extra source of profit but merely a redistribution of surplus value or a reduction of the value of labour power.  It does not mean that finance capital ‘creates’ a new source in the circulation of capital.  Shaikh says that profit is gained from ‘unequal exchange’, say with poor parts of the ‘non-capitalist’ world.  But taking hides and gold from the New World off indigenous tribes for little or nothing is not a new source of value; it is the (pre-capitalist) exploitation of the labour of those peoples.

As Joseph Choonara has pointed out: “exploitation in a Marxist sense has a quite specific meaning. It relates to the extraction of surplus value from workers even though the commodity they supply, their labour power, is obtained by the capitalist at its value. The surplus value generated is not a “swindle” as pre-Marxist socialists had argued but a result of the gap between the new value created by labour over a given period of time and the value required to reproduce that labour power (the wage). The mechanisms associated with financialisation do not generate surplus value .  As anyone with an overdraft can testify, it is undeniable that banks make profit out of personal finance.   To the extent that wages rise to account for this, it is a mechanism that shifts surplus value from capitalists concerned with production to those concerned with lending money, just as an arbitrary rise in the price of bread would (if wages rose correspondingly) shift surplus value to bread-producing capitalists. To the extent that wages are held down, it represents an increase in overall exploitation of workers, just as an arbitrary rise in food prices would under conditions of wage repression. And to the extent that workers default on their debts, whether credit cards or subprime mortgages, it represents a decline in a market in fictitious capital, with banks (and others) holding claims over future wage income, some of which turn out to be worthless. Whatever happens, the generation of surplus value within capitalist enterprises remains central to the system as a whole.”

So if the argument is that this an extra source of profit that must be added into economic accounts, then that breaks with Marxist theory or for that matter even with the ‘classical tradition’ as suggested by Stueart.  Shaikh’s assertion concedes to the ambiguities of the modern “financialisation” theories promoted prominently by Costas Lapavitsas or Jack Rasmus, namely that is finance that is now the exploiter, not capital.

I have discussed the theories of Costas Lapavitsas and Rasmus before and see Tony Norfield’s insightful critique of Lapavitsas’ approach.  Sam Williams in his blog considers this attempt to identify sources of profit that are additional to surplus value in the exploitation of labour in production.  “What left-Keynesian economists, supported by the Keynesian-Marxists, really hope to achieve is to replace profits based on surplus value—that is, exploitation—with profits based on buying low and selling dear and on this basis reconcile the interests of the working class and the capitalist class.”

The University of Greenwich runs a political economy school which is clearly dominated by post-Keynesian analysis.  Shaikh is severe in his book about this strain of heterodox economics, because it accepts the neoclassical model of perfect and imperfect competition (Joan Robinson, Kalecki).  The source of exploitation then becomes monopoly power: the ‘mark-up’ over costs that monopolies obtain.  In his book, Shaikh demolishes this view (p234-5), also repeated by the Monthly Review school.

But at the lecture, he seemed to argue that Keynes and Kalecki’s view of profitability could be reconciled with Marx’s – namely that Marx’s law of the tendency of the rate of profit and Keynes’ ‘marginal efficiency of capital’ were equivalent (p577). Shaikh was a pupil of the radical Keynesian economist, the late Wynn Godley, who like Kalecki had a macroeconomic showing that investment and profits moved together.  But the Kalecki-Godley view is back to front.  For them, investment leads or even ‘creates’ profit.  For Marx, and surely for Shaikh (see pp544-545), profit leads or creates investment, not vice versa.  And this is crucial because it shows that profit and profitability is not only key to capitalist production but also the heart of any understanding of crises under capitalism.

For me, Keynesian and post-Keynesian economics are not to be reconciled with Marxist economics.  Shaikh critiques post-Keynesianism on the one hand and on the other tells us that Keynes and Kalecki have the same view of the role of profit as Marx – while Ricardo ‘nearly’ has the same view of the source of profit as Marx.  Can that be right?

I think not.  On this blog and in my new book, The Long Depression, I have argued that that are fundamental differences between Marx’s view of the capitalist process and that of Keynes.  It is not just theory; it is also Keynes’ clear support of the capitalist system and antagonism to socialism.  It is also that Keynesian policies do not work for labour or can even ‘save capitalism’.  Shaikh says that they can ‘dampen’ the effect of a slump for a while but cannot deliver sustained growth in incomes or employment.  I agree.

There is also no reconciliation possible between Marx’s value theory and that of Ricardo and Sraffa.  There is also no unification between Marx’s law of profitability as the underlying cause of recurrent crises and slumps and the post Keynesian/Kalecki view of a ‘profit-wage share’ economy.  And there is no meeting between Marx’s view of profitability and credit in modern capitalism and those who hold that finance creates value and that ‘financial speculation’ lies at the centre of capitalist crises.  Shaikh stands for Marx on most of these issues but seems want to build a bridge to other side too.  But that is not necessary.