Anwar Shaikh
The New School for Social Research

COPYRIGHT: American Review of Political Economy; Anwar Shaikh

I have always been a strong believer in the notion that a profession benefits from a pluralism of approaches – most of all the economics profession. I am myself a founding member of the Union for Radical Political Economics (URPE) in 1968, and have long taught in a heterodox economics program at the Graduate Faculty of the New School for Social Research. Robert Heilbroner, Adolph Lowe and Edward Nell were my senior colleagues when I joined the department in 1973; David Gordon and I worked together to sustain and expand the reach of the department, and we were fortunate to work alongside eminent economists such as William Milberg, Thomas Palley, Heidi Hartman, Nancy Folbre, Gita Sen, Rhonda Williams, Gerald Epstein, Willi Semmler, Teresa Ghilarducci, Duncan Foley, Lance Taylor, Sanjay Reddy, and Mark Setterfield, to name just a few. We had shared concerns and particular disagreements. Most of all, I have greatly benefitted from interactions with our graduate students who pushed and prodded me to confront different domains and different frameworks. Some became friends, and some even co-authors on central areas of research:  Ahmet Tonak on the social wage, Rania Antonopoulos on international trade, and Amr Ragab on global inequality.

Pluralism is a broad tent. On the Left, there is the pluralism of concerns, such as race, gender, class conflict, environment, inequality, economic history, the history of economic thought, economic development, and the recurrence of economic crises. There is the pluralism of theories, such as Institutionalist, Classical, Marxian, Feminist, Neoclassical, Keynesian, and Post-Keynesian approaches. And there is the pluralism of politics, ranging from social democratic to anti-capitalist and anti-imperialist. These are familiar dimensions.

How does one incorporate this variety into one’s own thinking about how the world works? One answer, perhaps the dominant answer on the Left, is eclecticism: to use whatever best serves some particular interest. So one can declare opposition to conceptions of “Economic Man”, perfect competition, rational choice in one breath and then turn to game theory and production possibility curves derived from these same foundations. Or one can add in selected “imperfections” and “externalities” in order to explain to particular observed phenomena. This is the dominant position not only on the Left, but within orthodoxy itself. It has the advantage of speaking to the economic orthodoxy on their terms, which is politically easier and certainly wiser in terms of career prospects. But at the same time, it inevitably ties one to the orthodoxy, as point of reference and point of departure for all modifications.

Now I should say that while I strongly favor pluralism of approaches, I equally strongly oppose eclecticism. Consider the notion of externalities which so popular on the Left. Neoclassical economics is premised on the bizarre conception that humans have no feelings for each other only for things (the utility function), and that firms are purely passive servants of such consumers (perfect competition). It is on this basis that optimalities and perfections are derived as “internalities” of capitalism while personal and structural interactions of all sorts are relegated to the category of “externalities”. To focus on bad externalities, as the Left so often does, is to buy into the basic paradigm to which one then becomes tethered.

Theories have a logical structure which acts a discipline on our hopes. They organize our understanding of the world. They are never complete. Rather they force us to consider how new arguments are related to the rest of the structure. One of their important functions is to warn us about what may not be likely even though we may wish it otherwise. For instance, it is sometimes argued on the Left that a rise in wage is not only good for workers but also for business since it raises worker’s consumption and hence aggregate demand: Win-win. Yet the history of wage struggles is written in blood because of the vociferous and sometimes violent resistance of business at both individual and political levels. Is this because capitalists are insufficiently schooled in Post Keynesian economics, or because Post Keynesian economics is insufficiently schooled in the operations of capitalism? I have long argued the second position: the key is the relation of real wages relative to productivity , i.e. movements of the wage share. If the wage share rises, then the profit share falls. While the former raises the consumption demand of existing workers above its prior trend, the latter has the opposite effect on the trends of real property income (rents, interests and dividends) and hence of consumption demand funded from such income, on the profitability of production which can therefore slow down employment growth and hence workers’ consumption demand, and on the profitability of investment which can slow down investment demand. It has been recently admitted in some Post Keynesian dialogues that capitalism can be sometimes subject to a positive wage effect (“wage led”) or sometimes dragged down a the negative profit effect (“profit led”). But these are not independent entities. Rather, these are two sides of a temporal sequence and one has to pay attention to both sets of consequences. In a dynamic context productivity is growing due to technical change so there is room for real wage growth. But if real wages rise faster than productivity for any extended period of time, i.e. if the wage share rises, then the profit share falls and this lowers the rate of profit relative to its trend (hence the importance of the profit rate trend) and triggers the afore-mentioned negative effects.

I would classify my own approach, which grew out of decades of engagement and debates within the Left, as Classical Keynesian Economics. It is meant to be an alternative to both neoclassical and Post Keynesian economics, addressing both microeconomics and macroeconomics without any reliance on rational choice and perfect competition, or on the imperfections which are simply their duals: there no imperfections without perfections. My 2016 book Capitalism: Competition, Conflict, Crises lays out the theoretical and empirical content of my framework. My homepage provides many particular applications.

My work attempts to offer a coherent alternative to neoclassical and post-Keynesian economics. The former begins from perfect competition and the latter from imperfect competition. The book’s focus is instead on real competition, which is as different from perfect competition as war is from ballet. The theory of real competition provides an explanation for Kalecki’s finding on inter-industry pricing and profit margins and a natural foundation for Keynes’ theory of effective demand which he famously insisted had to be founded in competition. Much of what post-Keynesian economics sees as non-perfect (“imperfect”) competition can be shown to be a necessary set of outcomes of real competition, in which price-setting firms seek to undercut their competitors by offering lower prices. The survival advantage in price-cutting goes to firms with lower costs: hence the relentless drive to cut costs, to pursue lower wages, and to develop new lower-cost technologies. The struggles between capital and labor over the length, intensity and remuneration of the working day, the mobility of capital to cheaper national and global regions, and never ending technical change are all grounded here. The corresponding levels and paths of real wages, labor productivity and the capital intensity of production in turn determine those of the average rate of profit rate.

Within this frame, diverse consumers make personal choices based on socially-shaped habits and income and wealth levels. Class, race, gender, ethnicity, family and personal history all play their roles. Markets adapt to consumer choices, but markets also create preferences in multiple ways. It is possible on this basis alone to construct a theory of consumer behavior which derives downward sloping demand curves, particular price and income elasticities of necessary and luxury goods (Engel’s Law), and the Keynesian consumption function.

Real competition provides a theoretical and empirical explanation of relative prices, stock and bond prices, interest rates and exchange rates. At the microeconomic level, firms continue to invest only if their expected return on investment exceeds the safe yield afforded by the interest rate: i.e. only if the expected net rate of return on investment is positive. This same net rate motivates the flow of capital across industries. When the price in a particular industry is high enough to yield an above average rate of profit on investment, then new investment in the industry accelerate until its supply rises relative to its demand. This drives prices and profit rates down. The opposite occurs when profit rates are below average. The end result is a turbulent equalization of industry profit rates on investment around an economy-wide average rate, with the corresponding regulation of actual  market prices by theoretical prices (prices of production) reflecting this economy-wide average rate. The same process operates on banks, since they too are profit-seeking entities. The interest rate is the price of the loans supplied by banks. When banks are making higher than normal rates of return on investment, new capital flows more rapidly into banking until the loan supply expands relative to its demand and drives the interest rate down; the opposite when banks are profit-poor. Thus in the absence of specific interventions, interest rates are regulated by competition. In a comparable manner, real exchange rates (which are relative international prices) are regulated by the relative real costs of exports and imports.  Hence higher cost nations will tend to have persistent trade deficits covered by international debt – just as we find in practice. The notion that free trade leads to balanced trade, i.e. makes all nations equally competitive, is one of the great fallacies of conventional economics.

This approach provides a natural foundation for the theory of effective demand. Like individual investments, aggregate investment driven by the difference between its aggregate expected rate of return (Keynes’ Marginal Efficiency of Capital) and the interest rate. Only now the interest rate is regulated by profit rate equalization and the expectation of profitability is linked to actual profitability in the reflexive manner proposed by Soros. The loop between micro and macro is then closed on the basis of real competition. It should be noted that Keynes insisted that his theory was grounded in “atomistic competition”, not imperfect competition, and that Kalecki’s original formulation of his own theory of effective demand was based on the notion of “free competition”. My book seeks to return the theory of effective demand to its proper ground.

Involuntary unemployment is a self-reproducing feature of capitalism. Neoclassical theory argues that full employment is the normal state of affairs. Keynesian and post-Keynesian theories point to the possibility of persistent unemployment but argue that it can eliminated by appropriate policies. My book argues that there are intrinsic feedback loops that tend to reinstate a persistent level of unemployment unless these loops are explicitly blocked. Once again, profitability plays the key role. When for any reason the labor market becomes tight, real wages tend to rise relative to productivity (i.e. real unit labor costs increase) so profitability falls relative to its trend. The decline in profitability decelerates growth and hence the demand for labor. At the same time, it accelerates the displacement of labor by machines, which further decelerates the demand for labor. Finally, rising unit labor costs increase the incentives of employers to induce more workers to join the labor force or to import them from elsewhere, which accelerates the supply of labor. The net result of these reactions is to restore some level of unemployment.

Lastly, it is important to note that the theory of real competition addresses relative prices. The aggregate price level is separate matter. And here, the striking fact is that secular inflation is a modern phenomenon. In the 165 years from the eve of the US Revolutionary War in 1774 to the eve of World War II in 1939, the US consumer price index went from 8 to 14. In less than half that time, in the 71 years between 1940 and 2011 the price index went from 14 to 225. In the first interval, the annual inflation rate was a mere 0.6 percent; in the second, it was 3.8 percent:  six-and-a-half times higher. The difference is a reflection of the powers, and risks, of fiat money. In the modern era, public and private credit is able to increase aggregate demand by injecting any desired quantity of new purchasing power into the economy. The question is: how does aggregate supply respond? Neoclassical theory says that capitalism always utilizes all effectively available labor, so that the growth of money supply beyond full employment growth will lead to inflation. Keynesians say that capitalism often exhibits persistent unemployment, so a sufficient expansion of aggregate demand will at first raise employment until labor reserves are thinned and only then generate inflation. In both theories, inflation is viewed as a near-full-employment phenomenon. But if the system automatically reduces the employment rate whenever it gets too high, the supply of labor cannot be the immanent limit. Ricardo and von Neumann long ago showed that the (abstract) upper limit to the growth rate is when the whole surplus is reinvested, i.e. when the growth rate of capital is equal to the profit rate. Then the ratio of the actual growth rate to the maximum growth rate is an index of the utilization of the system’s growth potential, the classical equivalent to the utilization rate of labor (the employment rate) upon which neoclassical and Keynesian theory relies. From this growth perspective, the growth of aggregate demand creates a pull on the growth of nominal output, while the tightness of the growth-utilization rate creates a resistance in the growth of real output. The rate of inflation is the difference between the growth rates of nominal and real outputs.  This argument is able to explain modern inflation in a variety of places and times, and to explain the 1970s “puzzle” of unemployment rising alongside inflation (stagflation) throughout the developed world.

This brings up the general role of social and institutional structures. First of all, how can a system whose institutions, regulations, and political structures have changed so significantly over the course of its history still be subject to the same underlying principles? The answer lies in the fact that the profit motive always remains central and its dominance creates the force field that shapes and channels microeconomic and macroeconomic outcomes. This is the proper meaning of the invisible hand . The state can certainly influence the course of events, but it always operates on a turbulent profit-driven stage. Competition and conflict are intrinsic features, and over time the state has responded to struggles about working conditions, unemployment benefits and minimum living standards by socializing benefits and redistributing after-tax purchasing power. Yet government intervention has not abolished recurrent Depressions. In developed countries just over the last eight-five years there have been three such events: the Great Depression of 1930s, the Stagflation Crisis of the 1970s, and the Global Crisis which arrived right on schedule in 2007-2008. Nonetheless, some effects can be moderated: state intervention in the two more recent events restricted their financial impact and kept unemployment rates far lower than those in the Great Depression. These are not unalloyed benefits, since repressing symptoms may also suppress the recovery as happened in Japan in the latter third of the twentieth century. Still, given the cushioning capabilities of institutions and state policies, the bulk of the population may prefer a longer period of stagnation to a sharp collapse. Rising labor productivity due to constant technical change is another characteristic feature of developed capitalism, and here too historical struggles led to institutional mechanisms that strengthened to ability of workers to raise real wages. But as noted, when real wages rise faster than productivity this raises unit labor cost and stiffens the resistance of firms. Then the institutional balance may shift drastically, as it did when the so-called Golden Age of Labor in 1947-1980 with its rising wage share, rising interest rates and reduced inequality gave way to the Golden Age of Capital in 1980-2008 with its rising profit share, falling interest rates and dramatically increased inequality. The State was involved in both eras, first as the welfare state and then as the neoliberal state. Institutions matter, but they are always subject to contending forces.

Finally, profit-making “neither knows limits nor morality” (Piketty, 2014, p. 6). Capitalism’s true efficiency consists of creating profit opportunities and cashing them in. It has created great wealth over the long run, but also great inequality. It drives the absorption of some workers and the displacement of others; the dumping of toxins and the cleanup also; the creation of cancer-curing drugs as well as the production of cancer-causing commodities. Heroin production and sale, pornography, and sex-trafficking are well-organized and highly profitable global activities. In this light, one of the great tricks of orthodox economics is the claim that the benefits are internalities and all consequential social interactions are “externalities”. It is an ideological sleight-of-hand.

My work is primarily about the economic patterns in the center countries. Here, at a concrete level one must account for the influence of transportation costs, taxes, and tariffs on the mobility of commodities and capital, and of history, culture, and national restrictions on the mobility of labor. On a world scale, these factors assume even greater importance. Global capitalism went hand in hand with colonization, violence, slavery, slaughters of native peoples, the targeted destruction of potential competitors, and a huge transfer of wealth into the center countries. It is in this context that post-colonial development strategies sought to confront the world market, and successful modern development has often followed a path similar to the earlier times in which the current center countries rose to prominence through trade protectionism and state intervention. But these only lead to success in the world market if they provide some insulation from the pressures of global competition and a space within which to create cost-competitive products that can prosper in international competition. Free trade does not make all nations competitively equal: as with national competition, it favors low-cost producers in keeping with the laws of real competition.

None of the foregoing arguments require so-called rational choice or its attendant bevy of perfect behaviors and optimal outcomes. Hence there is also no need to attribute actual outcomes to deviations from Edenic states supposedly arising from “imperfections” of various sorts. Perfections and imperfections are yoked pairs, simultaneously abandoned.

This brings me back to the main theme of my brief in favor of a coherent framework: When economists propose policies that do not work out, the penalty is borne by those who suffer the consequences. So it behooves us to make sure that our proposals are theoretically and empirically grounded.