Comparative Advantage, Monopoly, Money, John Maynard Keynes, and Anwar Shaikh

According to Russian Foreign Minister Sergey Lavrov, the “collective West” launched a “total hybrid war” against Russia. The shooting war in the Donbass (1) and Ukraine is only part of it. Thousands of dead Ukrainian and Russian soldiers are bad enough. But this is only the beginning of the story. The disruption of trade as well as grain and fertilizer production — of which both Russia and Ukraine are critical suppliers — is threatening to create global food shortages and, in some areas, full-scale famine. Food shortages bring death to people of the Global South and beyond. Deaths occur not only from starvation but also from weakening immune systems making them more susceptible to COVID and other infectious diseases. But the biggest threat is that it could end in a nuclear war. What has led to this dangerous, disastrous state of affairs in the relationship between the two powers?

Anyone who has taken college-level economic courses has run into the theory that claims that comparative advantage, not absolute advantage, rules international trade. This theory holds that free trade is equally in the interests of all nations regardless of their degree of economic development. Yet the governments of underdeveloped nations showing any independence from imperialism often follow policies neoclassical economists call neo-mercantilist. Comparative advantage supporters claim that such policies are harmful to both developing and developed countries alike.

Left-wing economists who reject neoclassical economics generally support neo-mercantilist policies for developing countries. These economists learned the theory of comparative advantage from neoclassical teachers. But, unlike orthodox neoclassical economists, they admit the law of comparative advantage doesn’t work out as the textbooks say it should.

Left economists claim that if free competition genuinely prevailed, comparative advantage in international trade would work for the benefit of all nations. But they and other heterodox economists believe the growth of capitalist monopoly negates those laws. Anwar Shaikh rejects this analysis. He says monopoly isn’t necessary to explain why comparative advantage doesn’t work the way it is supposed to. He says comparative advantage does not govern international trade under capitalism at all. He also believes the capitalist with the lowest costs wins the battle of competition in the home market as well as in international trade and therefore absolute advantage prevails in international trade as well as domestic.

Shaikh doesn’t agree with Lenin’s theory that imperialism is the monopoly stage of capitalism. He says the whole history of capitalism is imperialism. I have a lot to cover before examining Shaikh’s view that a monopoly stage of capitalism does not exist. I will cover this at a later date.

The concrete history of capitalism is that of wars between capitalist nation-states. Before Lenin developed his theory of imperialism, Marx and Engels used another concept, that of commercial wars. From Lenin’s point of view, modern imperialist wars are a special kind of commercial war. We are not interested in the special case of modern imperialism based on monopoly capitalism. We want to know why wars occur throughout capitalism’s history.

Some eras have seen more commercial wars than others. These more peaceful eras are marked by the domination of one powerful capitalist nation. The period between 1815 and 1914 was an era of domination by Britain. Another relatively peaceful era is the era since 1945. This was marked by the domination of the United States. This relative peace now threatens to come to an end.

Even in relatively peaceful eras, wars between capitalist nations of various degrees of capitalist development never stopped. Are these wars, big or small, the result of evil leaders like Adolf Hitler, or more recently, George W. Bush? Bush ordered the invasion of capitalist, though non-imperialist, Iraq. Or are wars of capitalist countries the result of false political and economic policies, such as those pursued by France and Britain toward defeated Germany after World War I?

If false policies and evil leaders are to blame for wars there is hope the capitalist state can learn from history and avoid policies giving rise both to evil leaders and wars. If wars are the result of capitalist production combined with the nation-state, there is little hope of ending wars between them as long as they continue to exist. The current state of relations of the United States and NATO with capitalist Russia makes a correct answer to this question urgent.

If wars between capitalist states are not inevitable, we might be able to muddle through for a while longer, though the climate crisis makes this dubious. If total hybrid war between U.S.-NATO and Russia is not due to evil Vladimir Putin or evil Joseph Biden, but the result of capitalism and the nation-state, then how much longer can capitalism last before nuclear bombs go off?

The inevitably of war between capitalist states

Long before Russia launched its special military operation on February 24, there was talk about a New Cold War between the United States and Russia. I have never liked the term “New Cold War” to describe the crisis in relations between the two countries. First, we can’t be sure this new war will remain cold. But a more important reason: The original Cold War between the United States and the Soviet Union involved a struggle between two different classes presiding over two different economic and social systems. The U.S. capitalist class vs. the Soviet working class ruled over two different systems. The U.S. capitalist system vs. the Soviet socialist system under construction. (2) That Cold War was a global class war.

Today, the United States and Russia are both ruled by the capitalist class, and the capitalist economic and social system prevails. Even the political systems are similar: Both have federated republics with presidential systems. There are only some minor differences in constitutional details.

But there are important differences between the two, that if ignored, will cause grave political errors. Russia produces raw materials and agricultural commodities it exchanges for consumer commodities. It has a classical colonial or neocolonial relationship within the global capitalist economy. Economically, if not geographically, Russia belongs to the Global South. To paraphrase Malcolm X, the Global South begins at the north pole. (3)

One thing the two countries have in common is that both underwent the process of deindustrialization. The processes have different characters and causes in each country. Large-scale deindustrialization in the U.S. began with the 1979-1982 Volcker Shock. The U.S. deindustrialization has not gone as far as Russia’s. There are similarities between the conditions found in many former Soviet industrial production centers and the rust belt of the United States. But U.S. deindustrialization is fundamentally the product of uneven development, a consequence of capitalism.

Russian deindustrialization began at the end of the 1980s as a consequence of the 1985-1991 political and social counterrevolution (4) restoring capitalist rule in the former Soviet Union republics. This more radical deindustrialization reflected a transition from a higher mode of production to a lower one. This regressive transformation of production’s social relations was achieved with the destruction of the productive forces of former Soviet republics.

Both countries produce raw materials, agricultural commodities and gold bullion. But the United States is the center of world finance capital. The U.S. dollar remains the world’s chief reserve currency. The international monetary system can be called the dollar system. The Russian ruble has never been used as a reserve currency. As Lenin stressed in his book “Imperialism, the Highest Stage of Capitalism” finance capital is dominant over industrial capital. And while both countries have huge arsenals of nuclear weapons, the United States spends about 12 times more than Russia on defense. (Source: Military Spending by Country 2022)

The United States only maintains a high level of military spending because it leads the world in finance capital. The U.S. dollar as the global currency plays a key role. This allows the huge military budget beyond Russia’s financial capacity.

Russia engages only in defensive wars near its borders. In contrast, the United States maintains military bases and fights aggressive wars across the globe. Russia became an oppressed nation in the world capitalist economy due to the 1985-91 political and social counterrevolution. The United States remains the leading oppressor nation in the world, with Britain a distant second, and France and other imperialist powers trailing behind. However, this doesn’t change the fact that both Russia and the U.S. are capitalist countries, politically ruled by the capitalist class.

Since Russia has adopted the U.S. social, economic, and even political system, there’s no basis for a global class war between them. Yet relations are now so bad that a shooting war is at least as close as during the Cold War.

How did we arrive at this state of affairs and what is behind it? During the counterrevolution in the Soviet Union dubbed “perestroika,” its supporters justified their policy of surrender to U.S. imperialism on the grounds it would end the danger of global nuclear war. Newspapers of the time quoted Soviet political scientist Georgi Arbatov, a perestroika supporter, as saying: “We are going to do a terrible thing to you. We are going to deprive you of an enemy.”

Now 30 years later it is clear the claim that the Soviet surrender to global imperialism freed the world from the threat of nuclear war was an illusion. A study of 20th-century history should have proved that Russia’s embrace of capitalism could only increase the threat of nuclear war. Let’s look at the 20th century’s world wars.

During World War II, the United States and Britain went to war against Nazi Germany and Imperial Japan. Both had capitalist economies much like the United States and Britain. Japan had a parliamentary system. In the late 1930s and 1940s, Japan was imperialist, militaristic and repressive, but it wasn’t a fascist dictatorship. This did not prevent Washington and London from claiming World War II was to defeat global fascism represented by Nazi Germany, Fascist Italy, and Imperial Japan.

Going back to World War I, there were no fascist dictatorships. The chief powers involved were Britain, Germany, France, Austria-Hungary, Czarist Russia and the United States. These powers all had similar social, economic and political systems. There were differences concerning the degree of capitalist development and the extent of the lingering elements of feudalism. Instead of feudal remnants, the United States had the aftermath of modern slavery. (5) This existed in the form of the Southern states’ legal Jim Crow system and second-class citizenship for the descendants of the African slaves in all the other states.

France had the least feudalism thanks to the French Revolution of 1789-94, while Japan and Russia had the most. The United States, under racist President Woodrow Wilson, claimed to represent democracy as opposed to autocratic Germany. Germany had an autocratic monarchy and the feudal remnants of the militarist caste of Prussian Junkers. It also had a mass workers’ party, the Social Democratic Party of Germany. Slavery had never existed in Germany. The U.S. Socialist Party was weak. The working class in the U.S. was less well-organized than in Germany. And we shouldn’t forget that none of them, the democratic-republican United States, France, monarchical-autocratic Germany, or Czarist Russia, allowed women to vote.

Differences in political systems did not line up with the alliances of the contending powers. Czarist Russia was allied with republican France!

Today, the Biden administration is embarrassed by the similarities between U.S. and Russian social, political, and economic systems. It is reduced to claiming the current war is about democracy and autocracy, reminiscent of the claims made by World War I’s Wilson administration. In contrast, during the Cold War, there really were differences between the social, political and economic systems of the two countries.

The current struggle is not over forms of government, nor is it ideological. It is not a class war, since the governments and states of both countries have the same class character. This struggle is about the drive of U.S. imperialism to bring Russia’s and Ukraine’s colossal wealth in natural resources under its control.

Both countries are rich in farmlands as well as mineral- and fossil-fuel-bearing lands but this isn’t enough for the economic needs of U.S. imperialism that have long outstripped the resources available within its borders. U.S. imperialism wants the resources of Western Asia, Africa, Latin America, Ukraine, and Russia under its control. Russian capitalists are forced to fight to maintain control of their own natural resources. Russia’s capitalists are too weak to control the resources of the rest of the world. This war now threatens to turn into a global war and a nuclear holocaust.

A total hybrid war can be described as a commercial war. Its ideological content favoring the United States, despite official politician and media-shaped public opinion, is completely forced. For example, U.S. complaints that Russia’s political system is dominated by the autocratic President Putin ignore that the Russian presidency is copied from that of the United States.

More hypocritical are the complaints of U.S. leaders about the wealth and power of Russian oligarchs — rich capitalists. Not as rich as U.S. capitalists, their wealth is the result of the capitalist mode of production. During the Cold War, the U.S. insisted the Soviet Union adopt capitalist production, making the emergence of oligarchs inevitable. Do U.S. capitalist leaders and their media opinion-makers now regret they worked so hard to destroy the attempt to build a society without oligarchs? You can be sure they regret nothing! On the other hand, the claim that Russia is fighting against the collective West’s attempts to dominate the globe has a degree of truth. Russian capitalists would be more than happy to dominate if they could. But they know they can’t.

Since the current war crisis is commercial in character, we turn to economics to understand its roots. David Ricardo’s theory of comparative advantage, later that of neoclassical economics, holds that all capitalist nations have a common interest in world trade. There should be no commercial wars among capitalist nations. Ricardo held that under the capitalist system, comparative advantage, not absolute advantage, rules world trade. This theory depends on the correctness of Ricardo’s quantity theory of money. (6) If this theory is false, the claim that comparative advantage rules world trade is also false. If the law of absolute advantage rules world trade, as Shaikh believes, then commercial wars between capitalist nations are not only possible but inevitable as long as both capitalism and the capitalist nation-state exist.

Shaikh believes there are four outstanding figures in the history of economics: Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes. The last of these had some interesting things to say about the laws governing world trade and the inevitably of war among capitalist countries. Smith, along with the French physiocratic school of political economy, is considered the beginning of economic liberalism. During the late 18th century, economic liberalism replaced mercantilism as the dominant trend in political economy. Ricardo provided economic liberalism and free international trade advocates with their strongest arguments against their mercantilist predecessors.

Marx wrote a considerable amount of material against the quantity theory of money particularly as it applied to the British Bank Act of 1844. (7) The quantity theory of money is vital to Ricardo’s claim that comparative — not absolute — advantage prevails regarding trade between capitalist nations. Marx’s writings on the Bank Act are a polemic against a vital pillar of the Ricardo-neoclassical view that comparative advantage prevails in international trade. If Marx’s writings against the Bank Act are correct, Ricardo’s claim that comparative rather absolute advantage prevails in international trade falls to the ground.

Marx was clear about rejecting the quantity theory of money. There is no way he could have accepted the theory of comparative advantage, despite what some modern Marxists think. Shaikh is very much aware of that fact. But he complains that Marx nowhere put forward a theory of world trade of his own. Marx planned to deal with world trade and crises in a book that would crown his critique of political economy. But this book was never written.

That leaves the last of Shaikh’s great economists, John Maynard Keynes. Keynes had some interesting things to say about mercantilism and comparative advantage. Throughout most of his life, Keynes was a supporter of free trade and the comparative advantage theory. He was trained in neoclassical economics emerging at the time he was a young man. In 1936, under the impact of 15 years of mass unemployment in Britain, Keynes wrote “The General Theory of Employment, Interest and Money.” The book attempted to reconcile the neoclassical system with the reality of the large-scale chronic massive involuntary unemployment of Britain and other capitalist countries in the 1920s and 1930s.

In this post we are interested only in the first part of Chapter 23 of “General Theory,” titled “Notes on Mercantilism, The Usury Laws, Stamped Money, and Theories of Under-Consumption.” Here we’re interested in the first section dealing with the mercantilists from the 16th to the 18th centuries. Keynes explains he is rejecting the Ricardian theory of comparative advantage, though he doesn’t use that term. This change is the result of his movement away from the quantity theory of money.

Keynes quotes from something he wrote in 1923 when he still supported the Ricardian international trade theory: “If there is one thing that Protection can not do, it is to cure Unemployment. … There are some arguments for Protection, based upon its securing possible but improbable advantages, to which there is no simple answer. But the claim to cure Unemployment involves the Protectionist fallacy in its grossest and crudest form.”

Keynes continues, “As for earlier mercantilist theory, no intelligible account was available; and we were brought up to believe that it was little better than nonsense.”

He explains, “So absolutely overwhelming and complete has been the domination of the classical school.”

By classical theory Keynes means neoclassical. This includes the trinity of the quantity theory of money, Say’s law and the law of comparative advantage. But Keynes of 1923 and Keynes of 1936 had different views of mercantilist theory. “Let me first state in my own terms what now seems to me to be the element of scientific truth in mercantilist doctrine. We will then compare this with the actual arguments of the mercantilists. It should be understood that the advantages claimed are avowedly national [emphasis added -SW] advantages and are unlikely to benefit the world as a whole.” These are shrewd observations. In the mercantilist view, the interest of different capitalist nations engaged in world trade is one of antagonism, not harmony, as they are in the Ricardian and neoclassical systems.

Keynes believed the level of investment within a capitalist country is ruled by the number of investment opportunities capitalists expect will yield a profit rate exceeding the rate of interest. The interest rate and the profit rate are two variables determining the volume of investment. But what determines the rate of interest? Smith, Ricardo and Marx all saw interest as a portion of profit, surplus value. The other portion was the profit of enterprise.

Keynes saw interest as rising independently from profit. He believed interest rose from the scarcity of money capital as profit rose from the scarcity of real capital. He avoids exploring the origins of surplus value in the sphere of production. This is in the spirit of the neoclassical school. The Keynes of 1936 remains a defender of capitalism.

As Keynes did not view interest as a portion of profit he renamed the rate of profit the marginal efficiency of capital. This is defined as the profit industrial capitalists expect to earn on new investments. The point of equilibrium toward which the capitalist economy tends is where the marginal efficiency of capital equals the rate of interest.

At this point of equilibrium, competition equalizes the rate of interest accrued by lending money with the rate of profit – profit the industrial capitalist expects – on further investments in industrial businesses. At equilibrium, the economy is neither expanding nor contracting. Economic growth is disequilibrium, the profit rate on real capital is higher than the interest rate on loaned money.

In the days of the mercantilists, capitalist trading nations didn’t have significant gold or silver mines on their territories. Their quantity of money was governed by the balance of trade. To get the highest level of economic growth, it was necessary to maintain the lowest possible rate of interest. To maintain this rate, (8) it was necessary to maintain the highest possible quantity of money within the nation. The mercantilists knew money was not neutral. Keynes observes the main concern of government policy regarding economic policy involved “the domestic rate of interest and the balance of foreign trade.”

These two variables were linked in the minds of the mercantilists. If the foreign trade balance was negative, money would flow out of the country, and the interest rate would rise. Economic activity would be strangled. If the balance of trade was positive, money would flow into the country, and the interest rate would fall, causing investment to rise and the economy to thrive.

By agreeing with the mercantilists on these points, Keynes breaks with neoclassical orthodoxy. According to the neoclassicals, the quantity of money governs the general price level, not the interest rate. But the mercantilists and Keynes in “General Theory” believed the quantity of money governs the interest rate.

Long ago in my history courses, teachers and textbooks explained that mercantilist theory said wealth was gold and silver alone. Then I knew little about economic theory. What a ridiculous theory this mercantilism was, I thought. Everybody knows gold and silver are very valuable. But wealth consists of more than gold and silver. They are beautiful to look at, but food and shelter are more important than either when it comes to maintaining life. Even luxury goods consist of more than gold and silver. How could they have been that stupid! The amazing thing, it seemed to me, was that it wasn’t until the late 18th century that anybody realized it!

Keynes’ 1930s writing explains that the mercantilists were not so dumb after all. Under the capitalist mode of production, mercantilists knew their country needed to accumulate gold and silver if capitalists were to find it profitable to produce the commodities whose use values makeup actual wealth.

To make profits, it is not only necessary to produce surplus value. You have to sell commodities containing surplus value for money to realize the surplus value. Profit is nothing but surplus value realized in money form.

The mercantilists and Keynes weren’t interested in the origins of surplus value in unpaid labor. But they were very interested in the conditions allowing commodities to be sold at profitable prices. And the only way for capitalist nations lacking gold and silver mines, like Britain, to make the realization of surplus value possible was to run a positive balance of trade. This would cause gold and silver to flow into Britain, causing interest rates to fall, and allow business to thrive.

As Keynes rather dryly sums it up: “At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favorable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favorable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment.”

To support a healthy growth rate within a capitalist country, it’s necessary to accumulate gold and silver, but there is the danger that it can pile up into stagnant hoards. This also caught Keynes’s attention. It contrasts with Ricardo and the neoclassical view that all the money in the country will circulate because the capitalists can only make profits on invested money, not hoarded.

Central to Marx’s analysis that Keynes did not explore was the relationship between potential money capital and the presence of a class of people with nothing to sell but their labor power. To create such a class, direct producers must be separated from the means of production. Without this step, money cannot be transformed into industrial capital.

The transformation of money into capital can also be accomplished with chattel slaves. But in a market economy, slaves are not the ideal solution. Proletarians can be discharged (fired) by the capitalist with no capital loss when market conditions prevent surplus value contained in commodities the proletarians produce to be realized. Unlike a capitalist exploiting wage workers, the slave owner must maintain the life of the slave or lose his investment in his slave capital. (9)

The creation of a world market in the 16th century saw the birth of two modes of large-scale production. One was modern chattel slavery carried out with kidnapped enslaved Africans. The other was capitalist wage slavery carried out first largely with European workers and later with all nationalities. If not for modern chattel slavery and wage slavery, the expansion of the quantity of money material beginning in the 16th century would have congealed into stagnant hoards as in India and China. By the end of the 19th century, only one mode of large-scale production was left standing: capitalist production based on wage slavery. Despite their lack of interest in examining the conditions that make the production of surplus value possible, Keynes and the mercantilists were aware that it’s not enough to produce an adequate amount of surplus value. There must also be an adequate quantity of money and the money must circulate.

Keynes wrote: “Schrötter, for instance, employed the usual mercantilist arguments in drawing a lurid picture of how the circulation in the country would be robbed of all its money through a greatly increasing state treasury. … He, too, drew a perfectly logical parallel between the accumulation of treasure by the monasteries and the export surplus of precious metals, which, to him, was indeed the worst possible thing which he could think of. Davenant explained the extreme poverty of many Eastern nations — who were believed to have more gold and silver than any other countries in the world — by the fact that treasure ‘is suffered to stagnate in the Princes’ Coffers’. … The mercantilists were the originals of ‘the fear of goods’ and the scarcity of money as causes of unemployment which the classical theorists were to denounce two centuries later as an absurdity.

“One of the earliest instances of the application of the Unemployment argument as a reason for the prohibition of imports is to be found in Florence in the year 1426. … The English legislation on the matter goes back to at least 1455. … An almost contemporary French decree of 1466, forming the basis of the silk industry of Lyons, later to become so famous, was less interesting in so far as it was not actually directed against foreign goods. But it, too, mentioned the possibility of giving work to tens of thousands of unemployed men and women. It is seen how very much this argument was in the air at the time. …” The need to ensure an adequate quantity of money is available within the nation was understood as far back as the 15th century.

The 15th century saw a shortage of gold and silver relative to the needs of the European economy. This shortage and attempts of various European governments to overcome it led to the great geographic discoveries of the 16th century, resulting in the birth of the world market, what bourgeois historians call the commercial revolution. . With the commercial revolution, the scattered small-scale production of the Middle Ages was no longer adequate to meet the demands of an expanded market.

Large-scale production, employing chattel slaves or wage slaves, became both profitable and necessary. Among the results of the commercial revolution was the genocide of the Indigenous Peoples of the Americas, the rise of the transatlantic slave trade and the birth of the capitalist system based on wage labor. But the increase in the scale of the production of commodities increased the need to find still more markets. These were not always forthcoming.

Keynes: “The best instance to my knowledge of a typically mercantilist discussion of a state of affairs of this kind is the debates in the English House of Commons concerning the scarcity of money, which occurred in 1621, when a serious depression had set in, particularly in the cloth export. The conditions were described very clearly by one of the most influential members of parliament, Sir Edwin Sandys. He stated that the farmer and the artificer had to suffer almost everywhere; that looms were standing idle for want of money in the country, and that peasants were forced to repudiate their contracts, ‘not (thanks be to God) for want of fruits of the earth, but for want of money.’”

Mercantilists realized the interest rate must be lower than the profit rate.

As Shaikh, Keynes and Marx were aware, the need for the interest rate to remain below the profit rate if capitalist production and trade are to proceed normally was understood as far back as the 17th century. Keynes wrote: “How easily the mercantilist mind distinguished between the rate of interest and the marginal efficiency of capital is illustrated by a passage (printed in 1621) which Locke quotes from A Letter to a Friend concerning Usury: ‘High Interest decays Trade. The advantage from Interest is greater than the Profit from Trade, which makes the rich Merchants give over, and put out their Stock to Interest, and the lesser Merchants Break.’ Fortrey (England’s Interest and Improvement, 1663) affords another example of the stress laid on a low rate of interest as a means of increasing wealth.”

Mercantilism and the inevitably of war among capitalist nations

Keynes wrote: “The mercantilists were under no illusions as to the nationalistic character of their policies and their tendency to promote war [emphasis added -SW]. It was national advantage and relative strength at which they were admittedly aiming.” The struggle of the emerging nation states to increase the quantity of money within their borders by striving to run balance of trade and payments surpluses was behind the commercial wars of the mercantilist era.

He says, “We may criticize them for the apparent indifference with which they accepted this inevitable consequence of an international monetary system. But intellectually their realism is much preferable to the confused thinking of contemporary advocates of an international fixed gold standard and laissez-faire in international lending, who believe that it is precisely these policies which will best promote peace.”

Here Keynes blames not the capitalist system and the system of nation-states but what he saw as a faulty international monetary system based on gold. No need to overcome capitalism and its system of nation-states with contradictory interests. We simply have to get rid of the gold standard.

Non-commodity money to the rescue

Keynes’ solution to the inevitably of war among capitalist nation-states is non-commodity money. As long as gold is the basis of national monetary systems any outflow of gold, caused for example by a foreign trade deficit, will cause a fall in the domestic money supply, and rising interest rates, followed by crisis, depression and mass unemployment. An inflow of money means falling interest, meaning good business. Businesses engaged in foreign trade as well as those engaged in trade within the home market benefit from a foreign trade surplus and suffer from a deficit.

Keynes: “Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbors’ as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals. When by happy accident the new supplies of gold and silver were comparatively abundant, the struggle might be somewhat abated. But with the growth of wealth and the diminishing marginal propensity to consume, it has tended to become increasingly internecine. The part played by orthodox economists, whose common sense has been insufficient to check their faulty logic, has been disastrous to the latest act. For when in their blind struggle for an escape, some countries have thrown off the obligations which had previously rendered impossible an autonomous rate of interest, these economists have taught that a restoration of the former shackles is a necessary first step to a general recovery.”

Keynes hopes to avoid future depressions as well as future wars among capitalist nations with his belief — remember this was written in the mid-1930s (10) — that “some countries have thrown off the obligations which had previously rendered impossible an autonomous rate of interest.” The heretofore inevitable wars among capitalist nations stemmed not from the capitalist mode of production combined with the capitalist nation-states, but only with an international monetary system based on gold and silver. Keynes believed that by getting rid of the role of gold in the international monetary system the inevitably of war goes away.

He notes further, “It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment program directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbors at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade.”

Keynes saw non-commodity money as crucial to avoid depression and mass unemployment and necessary to prevent war between capitalist countries. As long as money creation was in the hands of the gold and silver miners and refiners, individual capitalist states had no alternative but to pursue balance of trade and payments surpluses. Only by running a payments surplus, were individual capitalist nation-states without their own gold mines able to grow the domestic money supply and keep the interest rate from rising to where it choked off domestic investment. The most important component of the balance of payments is the balance of trade. This was a game that only some nations would win, and others would lose.

Keynes hoped if money creation could be transferred from the gold miner and refiner to a domestic monetary authority such as the central bank, a balance of trade and payment surplus would no longer be necessary to grow the domestic money supply to hold down the interest rate. The growth of the economy of one capitalist nation would not have to be at the expense of others. All armed with non-commodity money through their monetary authorities would be able to hold their national interest rates below their profit rates. Thanks to non-commodity money created by their central banks, capitalist nation-states could now thrive together in peace. The commercial wars inevitable in the mercantilist era and later during the era of the international gold standard were now avoidable without abolishing the capitalist system and the nation state. Crucially, the non-inevitability of war among capitalist nations depends on the possibility of non-commodity money under the capitalist production mode.

Keynes tried to kill two birds with non-commodity money. Number one, he hoped to reconcile the interests of the capitalist and the working classes through full employment policies financed by state-created non-commodity money. Number two, he hoped to reconcile the interests of competing capitalist nation-states through state-created non-commodity money. Countries would no longer need to run balance-of-trade surpluses to expand their domestic money supplies.

But if non-commodity money is impossible under the capitalist mode of production as long as it and the capitalist nation-state persists, wars between competing nation-states remain inevitable. The wars may take the form of the current conflict between the U.S.-NATO and Russia, or it could take the form of widespread conventional war. Or it may escalate into a limited or full-scale nuclear war. But in the latter case, the capitalist system, the nation-state and our civilization will end.

At first glance, the question of non-commodity money seems rather esoteric, of little practical interest except for devotees to the finer corners of Marxist theory. But this view is mistaken. If non-commodity money is possible we might be able to muddle through with capitalism and the nation-state for a long time by reconciling both the interests of the contending classes and nation-states through the creation of adequate quantities of non-commodity money. But if it is not possible under the capitalist system, we will have to tackle the question of transforming capitalism into socialism or our modern civilization will be destroyed. The clock is ticking. Shaikh’s views on the possibility of non-commodity money under capitalism take on special importance. I will begin my examination of his approach to this crucial question next month.

Karl Marx as a free trader

Many present-day progressives who oppose globalization are surprised to find Marx and Engels were free traders, but with a twist. In late 1847, a Free Trade Congress was held in Brussels, Belgium. At that time free trade was championed by British industrial capitalists. Any person supporting free trade was invited to speak at the Congress, so Marx asked to speak. He was added to the speakers’ list, but congress organizers made sure to close the congress before Marx’s turn came up.

Marx, in the speech he was not allowed to deliver, laid bare the real reason British industrial capitalists were demanding free trade. They wanted to cheapen the commodities going into determining the value of labor power. In 1847 Marx did not yet use this terminology as he did not yet distinguish between labor and labor power. Using Marx’s later terminology, British industrial capitalists wanted free trade because they knew it would increase the rate of surplus value.

Marx did not really need the tools he developed later (distinguishing between labor and labor power, and his developed theory of surplus value) to get to the essence of the matter. If British wage goods, largely foodstuffs, are cheapened through their free importation, workers can be paid lower money wages without the real wage falling below the level of subsistence. Cheapening the price of labor (power) raises the profit rate.

Marx explained: “Ricardo, the apostle of the English free-traders, the most eminent economists of our century, entirely agrees with the workers upon this point. In his celebrated work on political economy, he says:

‘If instead of growing our own corn … we discover a new market from which we can supply ourselves … at a cheaper price, wages will fall and profits rise. The fall in the price of agricultural produce reduces the wages, not only of the laborer employed in cultivating the soil, but also of all those employed in commerce or manufacture.’”

While Ricardo was brutally honest about the aims of the free trade policies he advocated, the same could not be said of the industrial capitalists. This did not prevent the capitalists from claiming their struggle for free trade was motivated by a concern to lower the cost of living for the workers. So why did Marx, the champion of the workers, support free trade?

Marx said: “[The process] of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free-trade competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers, and for the realization of free trade within the same country.

“But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free-trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.”

Marx was for free trade because he believed it would accelerate the development of capitalism and shorten the time remaining before the proletarian revolution leading to the transformation of capitalist society into communist society.

There are subtleties in Marx’s argument needing further development on the national question. The growth rate of the market’s ability to absorb commodities of a given value and price is largely governed by the growth rate of the quantity of money material. The velocity rate of the circulation of individual pieces of money combined with the development of clearing houses also plays a role in determining the level of market demand at a particular time. In clearing houses, payments offsetting each other can be settled through bookkeeping rather than money, thus reducing the quantity of money necessary to support economic activity. (11)

Mercantilist policies focused on the concentration of gold, silver, and monetarily effective demand in geographical regions ruled by nation-states. Capitalism, though dependent on the development of the world market, was based in individual nation-states. In the absence of these states, total global demand might have been too diffuse to achieve the development that occurred during early capitalism. To the extent mercantilism succeeded in accelerating capitalism’s development, it brought the achievement of a global communist society closer.

There is another side to mercantilist policies. Assuming absolute advantage, protectionism often denies capitalists access to the cheapest commodities produced somewhere in the world. These commodities may go into the formation of variable capital, wage goods, or constant capital. Access to the cheapest commodities available is necessary to achieve the highest profit rate and the greatest capital accumulation rate possible.

Mid-19th century British industrial capitalists desperately wanted free trade to import cheap food as well as cheap cotton produced by slave labor in the United States. Cotton was the raw material of Britain’s leading industry of the time — textiles. Assuming the quantity of money and its turnover are fixed, as well as the development of clearing houses, the only way to expand markets is to lower commodity prices. Cotton can not be grown in Britain. Grain can be produced more cheaply in the United States and Russia even after taking transportation costs into account.

The more productive forces advance, the greater protectionism becomes a barrier to the development of productive forces within the capitalist system. Marx wanted the fastest development of productive forces to reach the highest possible level compatible with capitalism as soon as possible. He wanted to accelerate the coming of the socialist revolution and the transition to communism. In this sense, Marx supported free trade.

Of note was Marx’s remark: “[Free trade] breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point.”

In 1936 Keynes realized an individual nation can increase growth rates by following mercantilist policies, but at the expense of other nations. Globally, there is no increase in the overall growth rate of the world capitalist economy. By undermining the international division of labor, protectionist neo-mercantilist policies — and sanctions are a form of protectionism or neo-mercantilism — slow the overall growth of the world capitalist economy. By slowing down the pace of capitalist development, the lifespan of the capitalist system is prolonged and the transition to communist society is postponed.

As became clear to Marx and Engels in the following years, we must make a distinction between newly emerging capitalist nations industrializing through neo-mercantilist policies to secure their home markets as preparation to enter the world market, and the developed capitalist countries using protectionism to prop decaying monopolies. Keynes’ 1920s and 1930s Britain is an example of such a decaying nation. If neo-mercantilist policies are successful in slowing down the decay, it’s done at the expense of the development of other capitalist countries. Such policies only postpone the necessary transformation of capitalist society into communist society once further development of productive forces of a nation has become incompatible with keeping capitalist production. To the extent such policies succeed, they slow the development of global productive forces. The protectionist policies of both the Trump and Biden administrations, as well as their sanctions policies, are thoroughly reactionary.

Next month I will begin the analysis of Anwar Shaikh’s views on money. After that, we will take another look at his defense of Marx’s law of the tendency of the rate of profit to fall and his views on international trade.


(1) The Peoples Republics of Donetsk and Lugansk are located in the Donbass region where most of the ground combat has occurred. These two republics declared their independence from Ukraine in 2014. However, the Ukrainian government continues to insist these two republics are Ukrainian territories.

According to the principle of the right of nations to self-determination, if the people living in a region wish to declare themselves independent or join another state they have a democratic right to do so. This is what the people of Crimea did when they voted to join the Russian Federation in 2014 as a result of the Euromaidan coup.

This is a basic democratic principle — unless an even more basic democratic principle overrides their right of secession. In 1861, in the Southern United States, the white population declared their independence. They did so to preserve the enslavement of the African-American population, negating any right to secession. There is no such overriding principle in the declarations of the peoples of Donbass or Crimea. (back)

(2) The Soviet Union was a political dictatorship of the country’s Communist Party. Through its party, the Soviet working class exercised its political dictatorship. The bureaucratic and political degeneration of the CPSU over the decades, modified but did not negate this fact. Under the workers’ dictatorship, the USSR was in transition from capitalism toward the first stage of communism. Once the first stage of communism is reached, classes, commodity production and money disappear. Under the first stage of communism, people are paid according to the quantity of work they perform, and not according to need.

During the transitional stage from capitalism to the lower stage of communism called socialism by Lenin, classes and class struggle continue. During this transition, the state takes the form of the dictatorship of the proletariat. Since the Russian Revolution failed to spread to industrial Western Europe and the United States, it remained possible for the capitalist class to regain political power and abort the transition. This happened in the Soviet Union during 1985-1991 as a result of the political and social counterrevolution.

Today Russia, Ukraine, and the other former Soviet Socialist Republics are again under the political dictatorship of the capitalist class, expressed in Russia through a presidential federal republic headed by Vladimir Putin. The United States was and remains a political dictatorship of the capitalist class expressed through a presidential federal republic headed at this time by Joseph Biden. (back)

(3) Malcolm X famously said: “If you are Black, you were born in jail, in the North as well as the South. Stop talking about the South. As long as you are South of the Canadian border, you are South.”(source: marxists.org) (back)

(4) The events that unfolded in the Soviet Union between 1985 and 1991 represent a classic political and social counterrevolution. It restored both political power and social and economic domination to a class that had previously exercised it but was overthrown.

This is not to be confused with a process of political reaction within a revolution that does not restore power to the previous class. Most self-identified Trotskyist groups — though not Trotsky — insist Joseph Stalin’s coming to power and the rise of the Stalinist bureaucracy in the 1920s was a counterrevolution. Regardless of your opinion of Stalin as an individual or the bureaucracy as a group, neither ruled Russia before the 1917 October Revolution. The rise of Stalin was neither a political nor a social counterrevolution because it didn’t restore political power to a social class or strata that previously ruled. Rather the reaction represented by Stalin has the same relationship to counterrevolution as reform to revolution.

Another example of such a reaction was in France during the Thermidorian Reaction. This followed a revolution that began with the overthrow of Robespierre on the ninth of Thermidor – July 27, 1794. It did not restore power to the previous ruling class. It ended the reign of terror that had marked Robespierre’s reign. The Jacobin Club, the driving force of the reign of terror, was abolished. The Thermidorian Reaction marked the victory of the new capitalist ruling class over the popular masses. It did not return political power or social dominance to the feudal ruling class.

In the Russian October (Old Style Julian calendar), the ruling capitalist class was overthrown in a political revolution beginning October 25 (Old Style) or November 7 (New Style Gregorian calendar) and was replaced by a new ruling class — the working class. Social revolution followed the shift in political power as Russian capitalism was replaced by a system of state ownership first of land, then of industrial enterprises. Later small-scale agriculture gave way to large-scale collective and state farms, though small-scale agricultural production continued in the form of private plots. These institutions were safeguarded from world market pressures by a state monopoly of foreign trade.

Though there were political shifts, achievements, and reactionary developments over the years, the constant was the dictatorship of the Soviet Communist Party and its safeguarding of the state ownership of land and industry, the planned economy, and state monopoly of foreign trade. After Mikhail Gorbachev’s March 1985 election to General Secretary of the Communist Party Central Committee changes occurred.

Over the next six years, the political power of the CPSU disintegrated and the capitalist class regained the political power lost in 1917. The planned economy was abandoned in favor of market reforms, the state monopoly of foreign trade was abolished, and the role of private enterprise expanded while state enterprise was phased out. In 1992, most remaining large-scale industries and land were privatized, though feudal land ownership was not re-established.

The events of 1985-1991 resemble the French Thermidorian Reaction in one sense. The Russian Revolution was not a pure socialist revolution but a combined socialist and democratic revolution. The overthrow of the Czarist empire, the overthrow of feudal landowners, the nationalization of the land, and granting of the right of self-determination to nations that had been oppressed by Czarism represented democratic not socialist measures.

Though the capitalist class regained political power in Russia, Ukraine, and the other former Soviet Socialist Republics, feudal landowners did not. Czarism was not restored, and Russia hasn’t been able to re-establish rule over non-Russian former Soviet Republics. While the socialist gains of the Russian Revolution were destroyed in the counterrevolution, bourgeois-democratic gains remain intact. It is important to understand what happened — and what did not happen — in the years between 1985 and 1991. (back)

(5) Modern slavery differed from the slavery of classical Greece, Rome, and other ancient societies. Modern slavery grew out of an expansion of the world market, the result of the discovery of vast quantities of gold and silver in the Americas. The consequent increased demand for commodities could not be satisfied by the modes of production of the Middle Ages. A free proletariat, free in the double sense of not being slaves or serfs and free from ownership of the means of production, was still underdeveloped. The increased demand could only be satisfied by slave labor.

Slave labor in Europe had largely vanished after the Western Roman Empire ended in the 5th century. European colonizers turned to enslaved peoples imported from Africa. The ancient slavery of Greece and Rome was not based on skin color. The new slavery was. It was justified on grounds that African peoples were a “lower race” and therefore fit only for slavery. From modern slavery comes modern racism. Eventually, the two modes of production arising from the commercial revolution of the 16th century clashed. This clash was expressed in the United States during the war of the slave-owners rebellion, or Civil War, of 1861-1865. The capitalist mode of production was victorious, but modern slavery’s remnants and ideology, along with the colonial-settler origin of the country, continue to poison the politics of the United States to the present. (back)

(6) According to Ricardo’s quantity theory of money, the level of prices in terms of gold is determined by the quantity of money — gold — relative to the value and quantity of commodities in a given country. (back)

(7) The Bank (re)Charter Act of 1844 divided the Bank of England, Britain’s central bank, into two departments. One department was the Issue Department. It was to issue additional banknotes whenever the gold reserve of the Bank rose and to destroy banknotes when the gold reserve fell. In this way, the number of banknotes was tied to the quantity of gold present in the Bank of England’s vaults. The other was the Banking Department. It was to take deposits from the commercial banks and the government, (re)discount bills of exchange and grant loans to the commercial banks.

Bank Act supporters were called the currency school. They were inspired by Ricardo’s theory of comparative advantage and the quantity theory of money. The currency claimed that by linking the number of banknotes with that of gold in the vaults, prices would rise when gold flowed in and would fall when gold flowed out. This would, according to the currency school, not only allow Ricardian comparative advantage to function, but also prevent a recurrence of the 1825 and 1837 financial crises.

Three years later it was suspended due to the crisis of 1847. The suspension of the Bank of Act gave the Bank of England authority to issue additional banknotes beyond the gold in its vaults if necessary to break the crisis. The mere knowledge that the Bank could issue additional banknotes was sufficient to break the crisis.

In 1857 a new economic crisis hit and the events of 1847 were repeated with the difference that this time the Bank actually had to issue additional banknotes beyond its gold reserves. In 1866, the crisis was halted without having to issue notes, the possibility of more notes was sufficient.

Contrary to the quantity theory of money, it was interest rates, not prices that were sensitive to fluctuations in banknote quantity.. Not only was the Bank Act a failure as an attempt to end economic crises, but its failure is also strong empirical evidence that the Ricardian — neoclassical claims that comparative advantage prevails in international trade as opposed to absolute advantage are false. (back)

(8) The fact that interest rates and not prices respond to fluctuations in money quantity shows the quantity theory of money is wrong. (back)

(9) The slave can be sold if the slaveholder cannot profitably make use of the slave’s labor. The breaking up of slave families as different family members were sold to different masters was one of the worst features of modern slavery. If a slave owner was unable to find a buyer or one who could meet his price, he might have to sell at a loss. In contrast, a capitalist can always discharge a wage worker whenever business conditions warrant without incurring a loss. (back)

(10) Britain left the gold standard in 1931. The United States left it in 1933 but returned to it in a limited way in 1934 when the U.S. fixed the international dollar price of gold at $35 an ounce, though there was no domestic convertibility of the dollar in gold. When Hitler came to power in 1933, the convertibility of the German mark into gold became a dead letter. The gold bloc of France, Belgium, Luxembourg, the Netherlands, Italy, Poland, and Switzerland attempted to maintain the convertibility of their currencies into gold at a fixed rate. The gold bloc collapsed in 1936. (back)

(11) I didn’t mention credit. Credit can permanently expand the market only by accelerating the velocity of money and through the development of clearing houses linked to the banking system. The rise of the modern credit system permanently accelerated the turnover of money.

Assume that a machine lasts 10 years before it has to be replaced. As the machine depreciates through wear and tear, industrial capitalists accumulate a fund of money which at the end of 10 years is used to replace the machine. With no credit system, the money the capitalists plan to use to replace the machine accumulates in a stagnant hoard. But thanks to the credit system, the money can either be deposited in a bank or lent out in some other way, reentering circulation immediately. This process reduces the quantity of money necessary to support a given degree of economic activity.

Under the modern capitalist credit system, monetary hoards are centralized in banks and reduced to a minimum relative to the money in circulation. Bank clearing houses reduce the demand cash has as a means of payment.

Credit can also replace money as a means of purchase. In this case, the act of purchase and payment is separated in time. Credit becomes the means of purchase but money is still necessary to pay off the debts. As long as credit is growing faster than the need to pay off the debts, the expansion credit causes the market to expand. As soon as the payment of debt exceeds the growth of credit, the market contracts as money is diverted from the means of purchase of commodities to a means of payment of debts. We experience this process in every recession.

Monetary hoards stagnate in the banks, especially during recessions when money falls out of circulation causing the velocity of the circulation of money to fall.

Deficit spending by the central government accelerates the velocity of circulation of money. The government borrows some of the money hoarded in banks, increasing the velocity of circulation of money. But the government’s ability to borrow money without crowding out other borrowers is limited by the amount of money lying idle in the banks at the time. During the period of overproduction preceding a recession, the quantity of money lying idle is minimal so government deficit spending cannot prevent crises from breaking out.

Finally, there is credit money. As the term implies, credit money combines some of the functions of money and credit. The expansion of credit money in developed capitalism is mainly imaginary bank deposits created through bank loans and discounts. These imaginary deposits are transferred from buyer to seller by check or electronically. If the banks create too much credit money relative to the cash they hold, the system of credit money is destabilized. The banks then must reduce their loans and the creation of new imaginary bank accounts declines. Existing loans must be paid back by retiring a portion of the credit money created during the previous credit money inflation. We see this happen to a greater or lesser degree in every recession.

The bottom line is, that inflation of the credit system can temporarily expand the market. Credit inflation obliges industrial capitalists to create new productive forces leading to overproduction. Overproduction leads to the contraction of credit and crisis. Or, as Marx put it, new productive forces are created beyond the limits of capitalism. This causes the economic crises that periodically shake capitalist society to its foundation.

A permanent extension of the market, not based on the expansion of the quantity of monetary material, depends on the development of institutions allowing acceleration of the velocity of money, and of clearing houses where money is only necessary to settle payments that do not offset each other. Once the acceleration of money and the development of clearing houses reach their maximum degree of development any further extension of the market depends on the expansion of the quantity of money material through gold mining and refining and the lowering of commodity prices in terms of money material.

Modern Marxists who believe in non-commodity money think money is created through credit. Rather, credit expansion is ultimately dependent on the quantity of money material available at any one time. Money material forming the foundation of the credit system is created through the labor of the workers in the gold-mining and refining industries and indirectly through the labor of the workers creating the means of production used in the gold-mining and refining industries and the means of substance necessary to sustain the life of the worker engaged directly or indirectly in the production of money material. (back)