Money and Anwar Shaikh

The U.S. Supreme Court’s decision on June 24, 2022, to strip women of their right to abortion dominates the news. The Court overturned its 1973 Roe v. Wade decision establishing abortion as a constitutional right. The other event dominating U.S. politics was the congressional hearings into the events of January 6, 2021. These issues unfold against a background of high inflation, a looming recession, and disastrously low approval ratings for President Joseph Biden. On July 11, The New York Times/Siena College poll gave Biden a 33% approval rating. The same poll showed only 26% of Democrat voters support his renomination for a second term.

Democrats, appearing likely to lose control of the House and maybe the Senate, hope to recoup power by making abortion a prime issue. A bill to make abortion rights a federal law has gone nowhere. Democratic Senators Joseph Manchin and Kyrsten Sinema refuse to suspend a Senate rule that effectively gives the Republican Party veto power over all legislation, the filibuster rule. Democrats hope the outrage felt by women and many men over the Supreme Court decision will cause them to vote Democratic in the November congressional elections. These elections will determine the makeup of Congress for the final two years of Biden’s term.

However, attempts by Democrats to profit from the outrage over the Court decision were undermined when it was revealed Biden made a deal with Senate Republican leader Mitch McConnell to nominate anti-abortion Republican Chad Meredith to a lifetime federal judgeship. This deal — though it appears to have fallen through — is typical of Biden’s 50-year-long political career. As a young Senator, Biden played a crucial role in securing Senate approval of Republican President George H.W. Bush nominee Clarence Thomas to a lifetime position on the Supreme Court. Thomas joined the Court majority in throwing out the right of abortion as a constitutional right.

Making things worse for the Democrats, the U.S. Conference Board reported on July 21, 2022, that its leading economic indicators index dropped 0.8% in July for the fourth month in a row. According to Conference Board official Ataman Ozyildirim, “A U.S. recession around the end of this year and early next is now likely.” If Democrats are lucky, the recession may not begin until after the November election. However, if the recession is long, severe, or both, it will be difficult for Biden or any other Democrat to win the White House in the 2024 presidential election.

Enter the January 6 hearings. Up to now, polls indicate former-President Trump can prevail in the 2024 Republican primaries. If he wins the nomination, with the help of the current inflation and looming recession, he’ll have a good chance of winning a new term. But the ruling Party of Order doesn’t want Trump back in the White House. And as shown by the January 6 events, Trump doesn’t play by the rules.

Instead, the Party of Order is pushing the right-wing, anti-right-to-choose governor of Florida, Ron DeSantis for the Republican nomination. Unlike Trump, DeSantis is a professional politician of the Republican wing of the Party of Order. He is unlikely to attempt a coup to hold onto power if he were to lose to a conservative Democrat in the 2028 election cycle. The Party of Order figures DeSantis would be better from the viewpoint of maintaining the long-term stability of capitalist class rule than would Trump.

The hope is the revelations of the January 6 hearings will chip into Trump’s popularity among the Republican base causing him to decide not to run in 2024. Or if he does run, he will lose to DeSantis or someone else in the primaries. If that fails, as the last line of defense, they hope Trump will lose to the Democrat candidate.

I’ll deal with the economic and political crisis as it develops over the coming months. For now, I’ll return to Anwar Shaikh’s book, “Capitalism.”

Shaikh and the Theory of Money

Last month I noted that Marx’s theory of money is unpopular among progressives, most modern Marxists, and the left in general. Today it’s reactionaries who believe in metallic money. Many students of Marx’s economic thought are surprised and dismayed to find that Marx was an old-time hard money metalist. Another theory of money gaining influence on the left, based on early 20th-century chartalism, is Modern Monetary Theory or MMT.

The chartalist theory, which holds that money does not emerge spontaneously from barter but rather is established by the state, is the polar opposite of Marx’s theory of money. Except for the MMT theory, most other money theories find the origin of money in barter. Mainstream economic textbooks explain that money rose from the double coincidence of wants. In a world without money, if I produce shoes and desire grain, I have to both find a person who produces grain, and one who desires my shoes. If I can’t find such a person, I am out of luck.

If everybody agrees to accept silver as money, all I have to do is find someone with silver money who desires my shoes. Then I can take the silver and exchange it for grain. According to the textbook, the primary role of money is as a means of circulation.

Marx also finds the origins of money in barter. Instead of starting with the double coincidence of wants (or circulation), Marx starts with money’s role as a measure of value. This is crucial because Marx establishes at the beginning that money must be a commodity. The money commodity measures in terms of its use value the value of all other commodities. In its primal role as the measure of value, money can never be replaced by paper notes, base metal coins, or electronic bookkeeping entries. Marx would not have been a fan of Bitcoin and other cryptocurrencies.

The textbooks and Marx agree that in the beginning money was a commodity. Many commodities served as the measure of value — money — at various times. As trade developed, precious metals like silver and gold emerged as the chief money commodities. Unlike Marx, neoclassical economists do not believe money must remain a commodity — what serves as money must simply be scarce.

Neoclassical theory cares not if they are produced by human labor or nature, objects that meet human needs have economic value to the extent they are scarce relative to subjective human needs. Precious metals were good because of their scarcity. Paper money issued by the state can also function as money but only as long as they remain scarce relative to the public desire to hold part of its wealth in the money form. While the scarcity of precious metals is guaranteed by nature, this is not the case with paper money issued by the state. The more state-issued paper notes exist relative to the public desire to hold part of their wealth in money, the less the individual notes are worth.

A minority of neoclassical economists favoring the restoration of the gold standard say the problem with state-created money is the state cannot be trusted to keep money scarce. Pro-gold economists believe the state is tempted to spend more money than it collects in taxes. If the state is allowed to issue legal tender notes that are not redeemable in gold, the state can fall victim to the temptation to print money to finance its own purchases of goods and labor (power). Neoclassical economists believe capitalist economies under normal circumstances are never far from full employment. They reason that production and employment cannot be increased by increasing monetary effective demand.

Any increase in demand created by state-issued money leads to higher prices. Assuming full employment, the purchasing power the state obtains through the issuance of legal tender means a certain portion of the wealth otherwise purchased by private individuals will be purchased by the state, state employees, and dependents. Pro-gold neoclassicals argue that giving the state power to issue paper notes nonredeemable in gold allows it to levy an inflation tax. These right-wing economists say individual freedom is undermined by taxes in general and the hidden inflation tax in particular.

Instead of production being determined by the wants of private individuals in a free society, an inflation tax means production is determined by the desires of big government and its social engineers. A gold standard is desirable because shifting money creation away from the government to profit-driven gold miners and refiners strips the government of its ability to impose an inflation tax. (1)

Unlike Austrian-school economists, most modern neoclassicals oppose the restoration of the gold standard. If the state wants to spend more money than it collects in taxes, it can be disciplined by an independent central bank. The central bank is independent in the sense it is not democratically controlled by voters who want government handouts. Nor, in the modern neoclassical view, should the central bank be controlled by the parliament, president, or prime minister. The original quantity money theory used by David Ricardo assumed changes in prices and money wages are sensitive to changes in money quantity. The Milton Friedman school of modern money quantity theory holds that prices and wages react to changes in money quantity only with considerable time lags.

The original quantity money theory held that money was neutral in the sense that changes in money quantity do not affect the production of real wealth or real incomes. Only changes in nominal money prices and incomes are affected by changes in money quantity. . The modern quantity theory affirms money as neutral but adds the qualifier: only in the long run. In the short run, the theory concedes fluctuations in money quantity can have a considerable impact on the level of production, employment, and real incomes. Milton Friedman blamed the Great Depression on a one-third reduction in money quantity defined as dollar bills, coins, and checkable bank deposits that occurred between 1929 and 1933.

He blamed the reduction of money quantity in turn on the Federal Reserve Board. In the wake of the Depression, many younger generation economists and the lay public agreed the government had a big role to play in stabilizing an inherently unstable capitalist economy and preventing future Depressions. This view became the reigning orthodoxy. Paul Samuelson (1915-2009), the leading U.S. neoclassical economist after World War II, agreed with it. He called it the grand neoclassical synthesis. (2) Friedman wanted to overthrow the new orthodoxy, viewing it as dangerously socialistic. In the 1970s, Friedman emerged as the leader of the 1970s monetarist counterrevolution against Keynes. But first, he had to explain the Great Depression.

Friedman claimed the Depression was not caused by the orthodox view of the natural instability of capitalist investment, but by government interference in the capitalist economy. This disastrous government intervention was carried out by Federal Reserve Board, a government agency. He argued that due to the well-meaning but incompetent government intervention, the money supply dropped by a third. If the Federal Reserve Board had avoided this even under the then-prevailing gold standard, the Depression would have been avoided. As generally viewed by post-World War II orthodoxy, the Depression demonstrated the need for government intervention in the economy. As opposed to this, Friedman used it as his prime example of the dangers of government intervention.

Friedman conceded that as long as dollars remained payable in gold, the growth in the quantity of money would be dependent on the production of additional gold bullion produced by the gold mining and refining industries. He was aware that the output of the gold industry is subject to fluctuations reflecting changes in the absolute and relative profitability of the industry, as well as the balance between the depletion of old gold mines and the opening of new ones. Friedman and supporters believe as long as new money creation was dependent on the output of gold industries, the capitalist economy was subject to instability in terms of nominal prices and income, but also in terms of production, employment, and thus real income.

Friedman’s solution was a system of fiat money centrally managed by the Federal Reserve Board. (3) However, he believed the Board should be placed in a straitjacket and told to increase the number of dollars it creates by a fixed amount each year. Friedman assumed the quantity of additional money in the form of imaginary deposits created by the commercial banks would expand in proportion to the fiat money created by the central banks, as long as the quantity of new fiat money was fixed and thus predictable. If this policy was implemented, the natural stability of the capitalist economy would assert itself, and major economic fluctuations would disappear.

Shaikh versus Modern Monetary Theory

Progressives and leftists hate Friedman’s ideas almost as much as they hate the gold standard. His theory gives the government little role in improving society. Neoclassical economics holds that all social improvements should be assigned to the actions of private individuals interacting through free markets. In contrast, Modern Monetary Theory holds the opposite view of the role of government within a capitalist society. MMT is an outgrowth both of left-wing or post-Keynesian economics and early 20th-century chartalism. As we saw in our post on Keynes’s comments within the “General Theory” on pre-liberal mercantilist political economy, Keynes himself was sympathetic to chartalism.

Chartalists trace the origin of money to the state itself. It is not private property, commodity production, money and markets that created the state. They believe the state came first. It first created money, and through money, made commodity production and markets possible.

What makes Modern Monetary Theory attractive to progressives and leftists

Conservatives (Republicans in the United States) complain that government spends and borrows too much money. With only so much money available and government spending so much of the limited supply, there is little left over for the rest of us. The government’s constant borrowing and spending mortgages the future of our children who’ll bear the burden of servicing the government debt through increased taxes. The song of the conservatives only lets up when proposals are made to increase war spending. Claims that the government is spending us into ruin reach a crescendo whenever it is suggested that government spend money on anything that will help the working class. The Democrats who represent the left wing of a very narrow capitalist political spectrum in the U.S. make the same points only a little more cautiously. For example, Biden indicated that if Congress passed a Medicare-for-all bill, which the Democratic majority has shown no inclination to pass, he would veto it on grounds that “we can’t afford it.”

Modern Monetary Theory claims there are no monetary restraints on the central government because it creates money by spending it. If it didn’t spend money, there would be no money at all! Their only financial restraints are the physical ability of society to produce. MMT concedes that not even the government can buy things that do not exist.

The existence of unemployed or underemployed workers, as there almost always are in a capitalist economy, shows that the government is not spending enough and thereby does not create enough money. If the government only spent more money, the pace of business would accelerate, leading to greater business profits and more jobs with higher pay for workers. More government spending is in the interests of both the two main classes of capitalist society and is the key to reconciling their conflicting interests. (4) MMT is the ideal economic theory for advocates of cross-class alliances, also known as popular fronts.

MMT is music to the ears of trade unionists, progressives, and leftists. Especially attractive to trade unionists is its proposal that the government serves as the employer of last resort. Every person who seeks employment and can’t get a job from a private employer should be offered one by the government at a living wage. This wage would function as the minimum wage. Conservatives and liberals in the U.S. complain that such a program would involve a ruinous expenditure of money by the government. Where would the money come from? MMT’s answer: It will be created like all money is, and always has been, by central government spending.

Anwar Shaikh versus Modern Monetary Theory

While the academic left is sympathetic to MMT as is Monthly Review Magazine, Anwar Shaikh is scathing in rejecting it. He writes, “A government then spontaneously arises, and in the interest of benefiting the population, imposes a monetary tax on them to get them to work for the fiat money which the government is helpfully printing on their behalf. Since this is fiat money, the government can spend as much as it likes, and taxes only to serve the purpose of getting the natives to work for their own improvement.” Shaikh is describing the liberal-progressive theory of the state which sees the state as a benign force standing above the classes and interested in the improvement of society as a whole. (“Capitalism,” p. 687)

The use of the word natives is not accidental. Shaikh accuses MMT supporters of holding typically first-world colonizing racist attitudes toward oppressed nations as many of their theory proofs involve examples of colonial governments imposing taxes on a colonized population to get them to work for wages paid in the currency of the colonizing nation. Shaikh explains, “This is a most revealing fantasy: passive populations, no classes, a benevolent and neutral state, and both money and taxes imposed for the common good.” He continues, “We know that states arise after money, are never neutral and rarely benevolent, and that taxes are resisted at every stage.” (“Capitalism,” p. 687)

Here he reveals why MMT is so popular among supporters of cross-class alliances. They dream of liberating the state from the control of the capitalist ruling class. Once the state is liberated, the economy can be made to operate as popular-front governments representing the enlightened elements of all classes desire.

The “liberated” state creates money by crediting the bank accounts of its suppliers and employees. It can create enough demand to allow capitalists to mark up the prices of their commodities and assure themselves a fair rate of profit. The working class is guaranteed full employment, social security, and free medical care. The young are assured education as well as employment worthy of their skills after graduation. Inflation will be controlled because the wage the government will pay as the employer of last resort will anchor the wages paid in the private sector. (5) Following Keynes, MMT supporters believe money wages determine the general price level.

If inflation develops due to excess demand, it can be controlled by raising taxes. Taxes are not needed to raise revenue for the government since it creates money by buying things. As the government creates money by spending, it destroys it by taxing it. Higher taxes are needed whenever it’s necessary to reign in inflationary excess demand if it develops in the full employment economy. Shaikh has not made himself popular in progressive circles by his opposition to MMT.

Shaikh supports Marx’s traditional view that money rises out of the exchange of commodities, not state power. He also believes the evolution of money is crowned by the rise of pure fiat money. Shaikh holds that only after a long evolution does modern state money not tied to any money commodity emerge. He writes, “Money arises slowly out of proper exchange, and the historical path from private money to state money is long and torturous. … The state did not invent money, coins, payment obligations, or debts. … The historical path from money-objects to coins, convertible and inconvertible tokens, bank credit, and eventually fiat money is quite complicated.” (“Capitalism,” p. 677) Money begins as a commodity but it ends as pure fiat money (non-commodity) created by the state itself.

Shaikh believes money has three roles. The first is to serve as a medium of price. The second is to serve as a means of circulation (including money’s role as a means of payment). And finally, money serves as a means of safety. Normally capitalists attempt to expand the value of capital, but in times of economic crisis, they are temporarily unable to expand it. During crisis periods capitalists aim to conserve their capital’s existing value until they can expand it again. During these crises, instead of increasing the value of their capital (M—C … P … C’—M’ ), capitalists hold onto M.

Shaikh traces the origin of non-commodity pure fiat money to the paper money issued in the English North American colonies destined to become the United States starting in 1690. But the age of pure fiat money only really begins in 1939-40 when gold loses its role as the medium price. After 1939-40, that role is taken over by pure fiat money.

Shaikh rejects the chartalist MMT view on the origin of money. But he concludes that modern money is pretty much what MMT says it is — non-commodity money created by the state.

Shaikh believes the nature of money underwent a fundamental transformation when gold money was replaced by non-commodity, pure fiat money as the price standard. He describes present-day inconvertible-into-gold paper money as modern money in contrast to old-fashioned commodity money. MMT believes money is what it has always been, a state-issued token that may or may not be a commodity. MMT believes there has been no change in the nature of money. MMT supporters insist that what is modern is their theory of money, an indirect criticism of leftists who do not support MMT.

How did Shaik land in this logical contradiction? Does he consistently uphold the view that post-1940 modern money is a non-money commodity? The answer is no. When it comes to Shaikh’s theory of money we are in a maze of contradictions. The question is how did he land himself in this maze?

In discussing money’s role as a medium of pricing, Shaikh writes, “Hence, we may estimate the value of all the land in Japan as $20 trillion without having to produce a single dollar.” (“Capitalism,” p 183) What Shaikh is illustrating here is the role of money as money of account. Marx viewed this as a separate function of money but Shaikh treats it here as part of money’s role as a medium of pricing.

The problem with this example is that (unimproved) land does not have value because it is not a product of human labor. Since unimproved land does not have value it does not have a true price. Land appears to have a price, but what appears as the price is actually a form of ground rent, nothing but the annual rental on the land divided by the long-term rate of interest.

Perhaps Shaikh is thinking of land improved by human labor when he writes about the value of land in Japan. That he is not is revealed on the page that follows in “Capitalism” where he gives an even more unfortunate example. Shaikh writes, “A Confederate dollar was once money but now it is merely a collector’s item, a commodity.” (“Capitalism,” p. 184) But Confederate dollars, like unimproved Japanese land, are not actual commodities. They are rent factors.

Confederate currency is not an actual commodity because no amount of human labor can reproduce a genuine Confederate dollar any more than it can produce unimproved land in Japan. It is possible to create copies of Confederate dollars or even phony Confederate dollars that are sold by unscrupulous individuals to collectors who believe they are genuine. These phony Confederate dollars passed off as genuine might be sold at prices above their value, or more precisely, their price of production. But a genuine Confederate dollar bill issued by the state created by the slave-owners rebellion between 1861-65 — the kind Confederate dollar collectors seek and pay for — cannot be (re)produced with all the labor in the world.

To produce a copy of the Mona Lisa, for example, or a copy of Confederate currency requires a percentage of the total quantity of labor measured in some unit of time available to society. But not even 100% of the total labor of society working for an infinite quantity of time will ever be able to produce a single authentic Confederate dollar — or the original Mona Lisa. This crucial distinction, so important to both Ricardo and Marx, seems to have slipped through Shaikh’s fingers. In “Capitalism” Shaikh is forced to admit that he really does not understand Marx’s theory of money. He writes, “His elliptical references to those forms of state-issued paper money which do not obey the laws of commodity money remain mysterious to this day.” (“Capitalism,” p. 192)

The laws governing state-issued inconvertible token money are indeed different from the laws which govern the money commodity proper. Let’s assume the money commodity is gold bullion. If there is no change in the value of either gold or non-money commodities, an increase in the quantity of gold will have different effects than an increase in inconvertible into gold monetary tokens issued by the state. A rise in gold from gold mines and refiners — assuming no changes in the labor value of either gold or other commodities — will not increase prices in terms of gold, the quantity theory of money notwithstanding. Gold is a commodity and obeys the laws governing the production of commodities. If assuming capitalist production prices (in terms of gold) did rise, gold production would become less profitable than other branches of production. The increase in gold production would grind to a halt as capital exits the gold industry in search of more profitable investment fields. The fact that the increase in gold production occurs shows there is indeed a demand for extra gold.

The accelerated rate of increase in the growth of the social gold hoard brought about by increased gold production lowers interest rates. The combination of an increase in the quantity of money — gold — in the hands of capitalists, combined with a lower interest rate will cause capitalists to increase investments. The rise in economic activity, increasing the demand for loan money, halts the fall in interest rates as markets expand at an accelerated pace. The faster gold production expands — assuming no change in the value of gold or other commodities — the faster markets will expand. The resulting accelerated turnover of variable capital means an increase in the rate of profit when that rate is calculated on an annual basis. Investment and the growth rate of production, employment, and world trade will rise.

But what happens if production and employment cannot be increased as was often the case under pre-capitalist conditions? For example, when there were not enough potential wage workers. The new gold will be hoarded and interest rates will remain relatively low. This was the situation in old India and China where tremendous amounts of gold and silver were hoarded by the ruling class. But prices will still not rise. The increase in the quantity of money means there is a rise in potential demand. But potential demand is frozen in the increased size of the gold hoards. So, abstracting from the non-monetary uses of gold, rising gold production with no changes in the values of gold or non-money commodities, means there is a demand for additional gold, not as a means of circulation, but as a means of accumulation.

The laws governing an increase in inconvertible monetary tokens are different. Assuming the state owns its own printing press — as in the United States — paper notes or coins made of base metals are not produced for profit and are not commodities. The U.S. mint, a branch of the Treasury, buys the ink and paper as well as base metals for coins from private for-profit companies. It then produces dollar bills and coins without the intention of selling them. The new dollars and coins don’t function as money before they’re thrown into circulation using the banking system. (6)

If a private company prints currency notes for a government, from the viewpoint of the printing company, the notes are not money capital but commodity capital. For the printed currency notes to become money capital the company must first sell the notes to a government or central bank. These entities pay the price of production for the banknotes. Whether the government or central bank prints its own banknotes or buys them from a private company, they do not treat the currency notes and base metal coins as commodities. The currency notes only represent the money commodity when they enter circulation through the banking system. The state realizes no profit when it prints notes or mints base metal coins. The price of purchasing paper, ink, base metal, or printed notes from a private banknote company costs the state or central bank money.

It could be objected that in the past the U.S. Treasury and other governments sometimes directly printed money and used it to purchase commodities. Isn’t the difference between what it costs the state to print the money and commodities the government then bought with the notes constitute a profit? This is an illusion. If the state does not levy a tax, or issue bonds to remove the notes from circulation, the number of paper notes in circulation will increase, and the paper currency will lose value and collapse. In the past, governments have learned this lesson the hard way.

A gold miner or refiner who produces gold bullion as a commodity receives an average rate of profit on the invested capital like any other industrial capitalist. Unlike a state printing paper money, the gold miner-refiner does not have to levy a tax or issue bonds to remove the gold money produced from circulation to prevent it from losing its value. Gold as a commodity follows different laws than paper money representing gold in circulation.

Let’s assume the state doubles the supply of inconvertible paper currency but nothing else changes.

The price of gold in terms of these notes will double. After a period of adjustment, the prices of all commodities, including the labor power commodity assuming it sells at its value, will double in terms of the paper notes, while the commodity prices including that of labor power will remain unchanged in gold terms. Assuming the state then halts the increase in the number of notes, the rate of interest, once the dust settles, will be the same as before. Doubling prices means the purchasing power of society, everything remaining equal, remains the same as before. Currency tokens, made of paper and ink or base metals, obey very different rules than commodity money.

Shaikh is aware that an increase in the quantity of gold — as followed the discoveries of gold in 1848 in California and 1851 in Australia can increase the growth rate of capitalist production, employment, and world trade. He notes that though prices generally rose after 1848, the increase in prices was less than the quantity theory of money implied. The mistake of theorists like Ricardo was their assumption that capitalists utilize all the capital available to them.

This led Ricardo and lesser economists, to falsely believe that all the extra demand from increased gold production would be absorbed by higher prices. In reality, capitalist production is hindered by a lack of market demand causing capitalists to leave a portion of their capital idle, though the extent they do this depends on the phase of the industrial cycle. An increase in gold production, all else remaining equal, causes industrial capitalists to leave less of their capital idle than before, leading to an increase in the capital accumulation necessary to meet increased commodity demand. This results in a rise in industrial production, employment, and world trade and a rise in real incomes.

Shaikh, as a consequence of his failure to understand the difference in the laws governing inconvertible monetary tokens and actual metallic money, believes an increase in the state-issued quantity of monetary tokens has the same effect as an increase in gold production. This is a grave error, which as we will see in future posts, undermines his analysis of capitalist competition, monopoly, and crises.

Shaikh rediscovers commodity money as a medium of price

It would be easy at this point to dismiss Shaikh as just another academic theorist of non-commodity money and Monetary Equivalent of Labor Time (MELT), along with so many others. (7) However, this would be a mistake. Shaikh is very interested in the long cycles or Kondratiev cycles, named after the Russian-Soviet economist Nikolai Kondratiev (1892-1938). Kondratiev, using statistical data, traced long cycles in the history of capitalism of about 50 years. The 50-year Kondratiev cycle has been accepted by some economists but rejected by more. The bourgeois economist and theorist of innovation, Joseph Schumpeter (1883-1950) in his 1939 “Business Cycles” saw Kondratiev’s cycles being fueled by successive waves of development and adoption of new technologies.

Though the idea of long cycles was rejected by Leon Trotsky (1879-1940), (8) it was taken up by Ernest Mandel (1923-1995). Mandel was not only a central leader of the Trotskyist 4th International after World War II, he became one of the most influential Marxist economists outside the socialist block. His influence extended beyond the confines of the Trotskyist movement. Mandel retreated from Kondratiev long cycles after it was pointed out to him that Trotsky himself had rejected the theory. Mandel then replaced long cycles with long waves. Anwar Shaikh, perhaps under the influence of Mandel, has also taken up the idea of long waves. Long cycle-waves play a central role in Shaikh’s “Capitalism.” The crises Shaikh deals with are not the short-term crises that usually last about a year or a year and a half that Marx and Engels meant by crises, but rather the downward phase of the proposed Kondratiev cycle which last for many years.

Kondratiev and other long cycle-wave theorists have attempted to demonstrate long-term cycles of successively faster and slower economic growth of approximately 50 years duration. Put simply, a period of around 25 years of accelerated growth in output, employment, world trade, and incomes is followed by 25 years of slower growth. If we look at the economic history of the years 1790-1940, we see a wave-like movement in prices. The only question is whether this motion is cyclical, as Kondratiev held, or accidental, as Trotsky held. This wave-like motion of prices show up whether we use pounds or dollars as our medium of price.

The concrete history of prices between 1790 and 1940

Between 1790 and 1815 prices rose. Then between 1815-1842 prices showed a falling trend. Between 1848 and 1873 prices rose again, then entered a long-term decline beginning in 1873 and didn’t bottom out until 1896. Prices rose again until 1920. After that, the trend was sharply down until 1932-33. Prices remained low until 1940. But as Shaikh notes, the pattern changed dramatically after 1940. Whether in dollars or pounds, prices rose after 1940 without significant interruption, though the rate of increase varies.

Changes in the general price level are the most obvious phenomena of the Kondratiev cycle wave. Between 1790 and 1940, periods of rising prices are associated with periods of rapid growth in output, employment, and world trade. For example, the mid-Victorian boom between 1849-1873 when the trend of prices was upward, and again between 1896-1920, a period noted for both its rapid price increases as well as — before the outbreak of World War I in August 1914 — great prosperity. In contrast, periods of generally falling prices such as the years between 1815-1842, 1873-1896, and 1920-1940 contain the worst depressions between 1790 and 1940. These depressions were not only deep, they were also prolonged. The long periods of generally falling prices include the worst of all the Great Depression of 1929-1940.

Shaikh believes gold was the medium of price between 1790 and 1940. In those years, pounds and dollars were just names for given quantities (9) — measured by weights — of gold bullion. The quantity that a pound or dollar represented changed little. However, after 1940 the Kondratiev price waves disappear.

Why does the pattern shift from a wave-like pattern with little long-term change, to a pattern of ever-rising prices after 1940? Shaikh believes that after 1940 gold lost its role as a price medium and was replaced by fiat — non-commodity — money. After 1940, the dollar, the pound and other fiat currencies somehow acquired the ability to function as the price medium without representing a particular money commodity. The strongest evidence for this transformation is the failure of prices to fall after 1940. Shaikh’s view stands in opposition to Marx’s theory of value and money. But Shaikh’s is in full accord with academic consensus. (10) This consensus extends from the dominant neoclassical school on the right to the small Marxist academic left. Shaikh appears part of the consensus that modern money is non-commodity money.

But then he does something amazing. He calculates British wholesale prices between 1790 to 2009 in terms of gold ounces. In effect, Shaikh creates a currency of account called the gold ounce to measure prices. When he does this, he uses gold as a price medium after 1940, and the wavy pattern in prices reappears! But he does not seem to realize the full implications of what he has done.

On page 198 of “Capitalism,” Shaikh produces a graph of British wholesale prices from 1790 to 2009. The graph shows prices of the British wholesale price index in terms of gold ounces, with the year 1790 indexed at 100. After 1790, the wholesale index rises and then falls but stays above the 1790 level until around 1830. It then drops and stays below the 1790 level until about 1855. It continues to rise slightly until the 1870s when it begins to drop and for the first time falls below the 1790 level. The index remains below the 1790 level until the beginning of World War I but shows a renewed rising trend after the middle of the 1890s. During World War I, British wholesale prices in gold ounces finally rises above the 1790 level.

In 1920, after World War I, the British wholesale price index in terms of gold ounces reaches the highest level for the period between 1790 and 2009, at the end of the post-World War I aftermath boom. Wholesale golden prices then fall sharply during the reset recession of 1920-21, then stabilize at a level still above the 1790 level during the 1920s. After 1929, British wholesale golden prices decline to their lowest levels since the series began in 1790 during the super-crisis of 1929-32. Wholesale golden prices begin to recover during the rest of the 1930s and their rise accelerates during World War II. But they do not reach the 1790 level again until around 1950. After 1950, British wholesale golden prices continue to rise, peaking in 1970, reaching the second highest level since 1790. But the 1970 peak in golden wholesale prices is still well below the 1920 peak.

After 1970, during the stagflation crisis, golden wholesale prices fall sharply, plunging below the previous low of the early 1930s, reaching an all-time low for the series in the early 1980s. The index then recovers to around the 1790 level in the year 2000. It then falls sharply to a level below the depths reached in the early 1930s, but as of 2009, remains above the lows reached in the early 1980s. The long-term stability of prices when calculated directly in gold characterizing the period between 1790 and 1940 is replaced by a long-term downward trend in golden prices between 1940 and 2009.

Shaikh concludes the Kondratiev cycle-wave after 1940 is very much alive and well in terms of long-term price movements as long as we calculate price in terms of gold, not in terms of pound sterling or dollars. As documented by economic historians, periods of generally rising (golden) prices correspond to periods of capitalist prosperity while periods of falling (golden) prices correspond to periods of sharp crises followed by long depressions.

What Shaikh has done is demonstrate with empirical data that gold retained its role as the medium of pricing after 1940. The change in the pattern after 1940 reflects the repeated devaluations and depreciation of the dollar and even more so the pound that began in the early 1930s.

A theory of non-commodity money is unnecessary to explain the price patterns after 1940. Shaikh notes that commodities (sold outside the United States) have two prices. One is in terms of the currencies of the countries in which they are sold. The other is in terms of the dollar which serves as the world currency and thus the world price standard.

Shaikh also shows that commodities have a third price in terms of the use value of gold. He calls it “golden prices.” He shows that prolonged falls in golden prices before and after 1940 correspond with major economic crises and prolonged periods of sub-par economic growth and high unemployment. The conclusion he should have drawn is that not only does gold retain its role as a means of pricing, but prices in gold terms are the prices that count. This would be in accord with Marx’s theory of value, the form of value, money, and price.

At this point, it appears Shaikh is about to break with the claim that modern money is non-commodity money. But he never takes that step. He insists that the dollar and pound as pure fiat money are now mysteriously serving as the price medium without representing a specific money commodity in circulation. Why does he pull back?

Perhaps the problem is that he has never mastered Hegel’s dialectical logic and method. He was trained as a professional economist, like the young Paul Sweezy, and was exposed to the neoclassical marginalist theory by his early teachers such as Gary Becker. Like Sweezy, Shaikh had a lot to unlearn as well as learn when he turned toward Marx. Shaikh has unlearned better than Sweezy did, but perhaps he has not unlearned enough. Or maybe the atmosphere in the academic left within which he has spent his entire adult life is too strong for him to overcome. One thing is certain. However crude his method may be, it is better to be contradictory than to be consistently wrong. As Marx commented about Ricardo, contradiction contains the seeds of further development. When it comes to monetary theory, it is the contradiction that sets Shaikh apart from the rest of the academic left.

In what medium should profit be measured?

To analyze the Kondratiev cycle-wave, Shaikh finds it necessary to resort to prices measured in terms of the use value of the money commodity. This raises another question. In what medium should we measure profit? Shaikh knows that rate-of-profit rules capitalist production. He realizes that modern money, fiat currencies, are inadequate for the job of measuring profit. Inflation makes profits appear larger than they really are whether we measure the mass or the rate of profit. Shouldn’t profit in terms of mass and rate, like prices, be measured in terms of the use value of gold? If we have to use golden prices to analyze long waves, don’t we also have to use golden profits to measure the mass and rate of profit?

Shaikh believes that prices before 1940 were measured in terms of pounds and dollars representing specific weights of gold. In this period, not only prices but profits as well were calculated in terms of pounds and dollars, representing specific weights of gold. Before 1940, profits in terms of mass and rate were calculated in gold terms.

Social surplus product, surplus value and profit

It seems logical that Shaikh would calculate profit rates in terms of ounces of gold for the post-1940 period at least when analyzing long cycle-waves since he does this with prices. But he doesn’t do this. Instead, he measures the rate of profit, like Sraffa and his followers, in real or physical terms by using price deflators that strip away the profit-enhancing effects of inflation. What he is doing — he isn’t the only one — is confusing the social surplus product with profit. In his analysis of long cycle–waves, Shaikh measures commodity prices in terms of gold ounces but measures profit in terms of the use values of the commodities that make up the social surplus product. Quite a contradiction!

Shaikh crises are actually Bauer-Grossman crises. These are not crises of overproduction but insufficient production of surplus value as well as the use values making up the surplus product. Surplus value forms part of the value of all commodities — or in the case of labor power the commodities that the workers must consume to reproduce their labor power — whether or not their use value will function as part of the social product. For example, work clothes destined to be purchased only by the workers contain surplus value. But these work clothes are not part of the surplus product because that is consumed only by non-workers. Capitalists realize surplus value in the form of money. Surplus value realized in terms of money is profit. With the profit, capitalists and their hangers-on, purchase the commodities whose use values make up the surplus product. Though closely related and mutually dependent on one another, surplus value, profit, and surplus product are distinct categories.

This is how Shaikh believes the Kondratiev cycle unfolds. The basic formula for capitalist expanded reproduction is M—C … P … C’—M’. Under capitalism, this cycle must be repeated continuously on an ever-expanded scale. During the upward phase of the cycle-wave, a combination of a more-or-less fixed rate of surplus value combined with a rising organic composition of capital causes a fall in the profit rate. As a result, there are fewer and fewer profitable fields of investment available to the capitalists. At a certain point the capitalists, fearing losses of capital, begin to hold onto M, bringing the role of money as a means of safety to the fore at the expense of its role as a means of circulation.

In the post-1940 economy, Shaikh believes gold retained only one monetary role, as a means of safety. The withdrawal of M from circulation into monetary hoards as capitalists shift from expanding their capital to conserving its value can cause commodities to begin to pile up unsold. But Shaikh believes this overproduction is a secondary phenomenon of crisis and can be overcome with the help of non-commodity money that has functioned as a medium of pricing and a means of circulation since 1940. Faced with a falling economic growth rate and rising unemployment, the state floods the circuits of circulation with non-commodity money in an attempt to accelerate growth. This prevents commodities from piling up unsold in warehouses, but doesn’t eliminate the problem of insufficient production of surplus value and with it insufficient production of surplus product relative to what would be necessary to prevent a rise in unemployment.

To Shaikh, crises are caused by insufficient production of surplus value and surplus product, not the general relative overproduction of commodities as they are for Marx and Engels and their successors of the second and third Internationals. In a crisis, there is insufficient production of surplus value, which means there is also an insufficient quantity of surplus product that, after the deduction for the personal consumption of the capitalists, is insufficient to maintain the employment growth necessary to prevent the unemployment rate from rising.

Under capitalism, the surplus product consists of the means of personal consumption of the ruling class plus the newly produced means of production, raw materials, and newly employed labor power, plus the additional means of subsistence needed to maintain the newly employed labor power during the current cycle of production. The later part of the surplus product, outside the sphere of capitalist production proper, is transformed into potential additional labor power in the form of the rising generation of workers beyond that necessary to replace the labor powers of the existing workforce. (11)

The existence of a physical surplus product under capitalism is a necessary precondition for profit and economic growth but — what Shaikh does not understand — it’s not a sufficient condition for either profit or economic growth. What ties the surplus value (the unpaid labor of the working class) to the actual physical surplus product, is profit. If the surplus value is not realized in money form called profit – the tie between surplus value and surplus product is broken, and the economy is thrown into crisis.

Confusing profit with surplus products treats capitalist production as socialist production for use. In socialist production, the (money) profit tying together surplus labor performed by all workers, with surplus product is absent, because labor is directly social. In capitalism, because of the private character of labor, profit is vital. If profit disappears, capitalist production ceases. (12)

Shaikh believes the state in the 1970s attempted to escape falling economic growth and rising unemployment by increasing monetary effective demand through deficit spending and inflating the quantity of non-commodity money. This would have worked if the problem was a lack of effective monetary demand relative to total commodity production or overproduction. But it failed because the problem was a lack of sufficient production of surplus labor (value) and a lack of adequate surplus product. The surplus product was too small because the workers were consuming too much net product leaving too little surplus product left over (once capitalist personal consumption was taken into account) to expand production and create the new jobs needed to prevent a rise in unemployment.

The state tried to escape the crisis by increasing monetary effective demand. It resulted in demand exceeding supply at current prices. When this happens demand is equalized with supply through rising prices. The result was a crisis of both rising unemployment and inflation, called stagflation.

Shaikh’s analysis is close to the 1970s right-wing economists, called supply-side economists. Ronald Reagan famously embraced supply-side economics. The supply-side economists and Shaikh agree the only solution within capitalism is increased exploitation of the workers. Only in this way can the size of the physical surplus product be increased to the level necessary to increase employment growth sufficiently to allow unemployment to fall. Shaikh’s supply-side analysis does not make him popular with trade unionists, progressives, or the left in general.

How capitalism gets out of a Bauer-Grossman crisis

A rise in the rate of surplus value necessary to enlarge the surplus product enough to end a Bauer-Grossman crisis might be the result of rising unemployment itself, which drives down wages. The state can help this process by following an anti-labor policy weakening or destroying the power of the trade unions. This was carried out in an extreme form under Adolf Hitler in Nazi Germany after 1933, and in a milder form under Ronald Reagan in the United States in the 1980s. If labor productivity increases fast enough it becomes possible to continue improving the standard of living of the workers while increasing the rate of surplus value and thus the physical size of the surplus product. A sufficient growth rate in labor productivity makes it possible to increase the rate of surplus value without actually lowering workers’ real wages.

The problem is that a faster productivity growth rate implies a faster rise in the organic composition of capital which works in the direction of lowering the profit rate. If the profit rate falls due to a rise in the organic composition of capital, it implies that the portion of the surplus product that must be used to further expand constant capital increases at the expense of the portion of the surplus product necessary to employ more workers as well as the portion of the surplus product necessary to maintain the capitalists. Therefore the only way out of a Bauer-Grossman crisis within the limits of capitalism is the increased exploitation of the working class.

Shaikh grasps the problem of the production of value and surplus value very well. But the problem of the realization of the ever-increasing mass of surplus value in terms of the use value of the money commodity capitalism must produce to continue to exist has escaped him. He also fails to understand that physical surplus product is not the same as profit. Unlike surplus product, profit consists of money alone and must be measured in terms of the use value of the money commodity. As a consequence, Shaikh doesn’t understand that merely increasing the rate of surplus value and the size of the surplus product will not in itself end a capitalist crisis. It only ends when conditions are met that not only enable an increase in the quantity of surplus value produced leading to an increase in the size of the physical surplus product and the conditions are created allowing the realization of increased mass of surplus value in terms of the use value of the money commodity.

Next month I will return to Shaikh’s critique of the Okishio theorem in light of his failure to understand the realization in terms of money of value and surplus value. We will find that correcting Shaikh’s mistakes on this question only strengthens his argument against the Okishio theorem.


(1) Many right-wingers are attracted to Bitcoin and other cryptocurrencies. The computer algorithms governing their creation limit the number of coins that can be mined. The argument claims that if and when these coins became the chief currency, governments will lose their ability to levy an inflation tax. In the meantime, crypto is a useful way to avoid taxes and hide illegal transactions. (back)

(2) Samuelson loved to build mathematical neoclassical economic models where the economy operates at full employment while consumer satisfaction is maximized. But he also agreed with Keynes that in the real world, the capitalist economy was prone to instability and the government had to step in occasionally to correct it. Samuelson attempted to synthesize the neoclassical view that economists had proven that a capitalist economy is both perfectly efficient and stable with the opposite view that a capitalist economy is prone to instability that has to be corrected by timely government intervention. (back)

(3) Friedman’s advocacy of the centralized management of the money supply by a government agency was viewed as a dangerous concession to “socialist planning” by economists to his right. Yes, there are economists to the right of Milton Friedman. These extreme right-wing economists — mostly Austrian school but some neoclassicals — believe the creation of money should be as decentralized and profit-driven as the production of the commodities the money circulates. These economists believe in the gold or silver standard and today also tend to be fans of Bitcoin and other cryptocurrencies. (back)

(4) The question arises: Why weren’t the policies advocated by MMT adopted long ago? MMT believes the reason their policy recommendations have not yet been adopted is that the basic nature of money was misunderstood by most economists before the chartalists came along in the early 20th century. Even today, MMT supporters complain most economists and policymakers still don’t understand that money is created by the central government spending it.

Modern MMT is a throwback to the pre-Marxist Utopian Socialists. The various pre-Marxist socialists — some communists and others not — believed that society was imperfectly organized because the reforms necessary to organize it in an ideal way had not yet been discovered. But now that these Utopians believe the proper way of organizing society has been discovered, it is only a matter of convincing enough people to implement the reforms.

In contrast, the scientific socialism of Marx and Engels begins not with the best way to organize society but instead analyzes the laws governing present-day capitalist society. Marx demonstrated through his criticism of bourgeois political economy that the actual development of capitalism is creating the conditions making the transition to a communist society both possible and necessary. (back)

(5) Under this proposal private employers will not be able to pay a wage less than that offered by the government. If any employer attempted to do so, potential employees would go to the government for employment. Under MMT proposals private employers will have to offer workers a somewhat higher wage to lure them away from secure government jobs. The wage the government pays will function as the minimum wage with private wages representing mark-ups on this minimum. (back)

(6) For example, the Federal Reserve Bank of New York buys Treasury bills from Citibank. The Federal Reserve Bank debits its account for Treasury bills and credits the deposit liability it has created with Citibank. No paper money or coins are created by this purely bookkeeping operation. However, Citibank’s depositors require dollar bills and coins for their daily expenses, and businesses need coins to make change, so Citibank has to keep a certain amount on hand. In meeting the withdrawal requests of its customers, Citibank depletes its supply of bills and coins on hand, called vault cash. To avoid running out, Citibank has to periodically withdraw money from its account with the Federal Reserve Bank of New York in the form of bills and coins.

The withdrawals by commercial banks deplete the supply of coins and bills the Federal Reserve Banks maintain to meet the withdrawal requests of the commercial banks.. To replenish its supply, Federal Reserve Banks have to go to the mint, a branch of the United States Treasury and request new bills and coins. Before the bills and coins can function as legal tender token money representing gold in circulation, it first must go to the Federal Reserve Banks and then be withdrawn by commercial banks from their accounts at the Federal Reserve Banks. (back)

(7) The supporters of the monetary equivalent of labor time (MELT) calculate the number of hours of labor used to produce the total number of commodities in circulation. They then assume that non-commodity money represents the quantity of labor used to produce these commodities. By doing this MELT treats private labor as direct social labor, and capitalist production is treated as communist production. (back)

(8) Trotsky agreed in a letter sent in 1923, later published as “The Curve of Capitalist Development” in “Vestnik Sotsialisticheskoi Akademii,” that the concrete history of capitalism exhibited periods of rapid growth followed by long periods of relative stagnation. He denied this process was cyclical, believing instead that it reflected accidental discoveries and depletion of raw materials combined with political factors such as revolutions and counterrevolution. (back)

(9) The gold value of the pound and dollar was not stable between 1790 and 1940. The pound was temporarily depreciated during the Bank Restriction Act in effect between 1797 and 1821. The dollar was devalued slightly on several occasions. During the U.S. Civil War (the war of the slaveholders’ rebellion) it was considerably depreciated. This depreciation did not disappear before gold payments were resumed in 1879. The British pound depreciated during World War I when gold convertibility was again suspended and wasn’t resumed until 1926. The pound was devalued in 1931 and the dollar in 1933.

Changes in the gold value of the pound and the dollar were minor compared to repeated devaluations and depreciations of these currencies between 1940 and 2009. The pound lost more of its gold value than did the dollar during this period. (back)

(10) Many academic economists give August 1971 when Nixon suspended the convertibility of dollars held by foreign treasuries and central banks rather than 1940 as the date when non-commodity money replaced gold as a medium of price. (back)

(11) In expanded reproduction, capitalists have to pay the workers a little more than would be necessary to maintain their labor power and raise a new generation of workers to replace their labor power when their working lives are over. This additional pay is used to raise the additional children necessary to allow for the expansion of the size of the surplus-value-producing working class. (back)

(12) This explains why the attempts to graft the profit motive onto socialist planned economies in the name of making them more efficient (ending in perestroika) had such meager positive results. Profit in the sense of realized surplus value measured in terms of the use value of the money commodity does not exist under socialism Under socialism, there is surplus labor in the sense that the producers cannot consume, individually or collectively, the entire product created in any given year if there is to be any economic growth. Even in the absence of economic growth, it is still necessary to maintain an insurance fund against natural disasters. Under socialism as well as in capitalism there must be an annual physical surplus product consisting of products above the producers’ personal and collective consumption in any given year. What does not exist in a socialist economy is profit measured in terms of the use value of a money commodity that ties together surplus labor in the form of surplus value with the physical surplus product. Under socialism, the role of profit is replaced by the process of socialist planning. (back)