Perfect Competition

In January of this year, the U.S. government and its media claimed an invasion of Ukraine by Russia was imminent. One version of the media reports raised fears that Ukraine is only the initial target — first crush Ukraine, then march all the way to the Atlantic. In rhetoric akin to that of the Cold War, when it was said the Soviet army was threatening to invade Western Europe, now Russian President Vladimir Putin is cast as the aggressor.

We know this isn’t true. The Russian economy, devastated by 30 years of capitalist counterrevolution and only partially recovered from capitalism’s restoration in the 1990s, is in no position to support aggressive military campaigns. Russia may have moved about 100,000 troops closer to the Ukrainian border. This would be a defensive move to prevent increased warfare from spilling over into Russia proper. If not for an invasion, what explains the Russian troop movements?

The real story: U.S. imperialism is moving to consolidate domination of Ukraine. Ukraine is rich in agricultural lands and fossil fuels. Adolf Hitler had his eyes on the country as a key to his vision for an Eastern European empire. Ukraine is an important acquisition for a U.S. world empire as well.

The United States established its current domination by orchestrating the 2014 EuroMadian coup, spearheaded by Ukrainian fascists. This overthrew the corrupt capitalist, but elected, government of Ukrainian President Viktor Yanukovych (1950- ). But two areas in eastern Ukraine refused to accept the coup. They are now under control of the Donetsk People’s Republic and the Luhansk People’s Republic. Another region that escaped is Crimea. Ignoring this region’s real history, the U.S. media paints a completely false picture of what really happened there.

In 2014 Crimea was a Ukrainian region inhabited predominately by ethnic Russians. Historically it was never part of Ukraine. After the victory of the 1917 October revolution, Crimea was part of the Russian Soviet Socialist Republic, not the Ukrainian Soviet Socialist Republic. That continued until 1954, when the First Secretary of the Communist Party of the Soviet Union, Nikita Khrushchev (1894-1971), (1) struggled to consolidate his newly won position as the CPSU’s central leader. Khrushchev was Ukrainian and had headed the Ukrainian Communist Party while Stalin was in power.

On the 200th anniversary of Ukraine’s annexation by the Russian Empire under Empress Catherine the Great, Khrushchev proposed Crimea be made a gift to the Ukrainian SSR, to the people. Both the RSSR and the Ukrainian SSR were then part of the Union of Soviet Socialist Republics.

After the overthrow of the entire USSR in 1991, the now independent Ukraine Republic — no longer socialist — retained control of Crimea. By mutual agreement Russia retained a naval base at Sebastopol, Russia’s only warm-water port. But when the virulently anti-Russian EuroMadian government came to power in 2014, Crimeans refused to accept the coup government’s authority. With the support of Russian forces already stationed in the area, a referendum was held. By an overwhelming majority, the people of Crimea voted to return to Russia. This was then falsely reported in the West as a Russian invasion of Ukraine.

Washington wants the Kiev government to join NATO. It has also been urging its client to launch a military offensive to crush the two Russian-speaking peoples’ republics in eastern Ukraine. Eventually Washington hopes to strengthen its Ukrainian puppets to aid them in conquering Crimea and deprive Russia of its port and make the Black Sea a NATO lake.

However, Ukrainian President Volodymyr Zelensky’s government has become increasingly unpopular. Ukraine is now the poorest country in Europe, falling to the lowest standard of living on the continent. The government is having trouble gaining support to launch the military offensive that Washington demands. Anti-Russian Ukrainian nationalism is a minority trend. Most Ukrainians have no desire to fight a war against Russia. The two eastern Ukrainian peoples’ republics enjoy broad support among Russians. For its part the Zelensky government says it sees no sign of an imminent Russian invasion.

If Kiev launches a military offensive as early as this spring, pressure will be on the Russian government to help repel the attack. If the government refuses to get involved, private Russian citizen groups would be expected to extend aid. This would be presented in the United States as the predicted Russian invasion. In such an event, Washington threatens to launch a full-scale economic — not military — war. (2)

Growing tensions between Washington and Berlin

The current war scare has an additional target — Germany. Germany has so far refused to yield to Washington’s demands to tear up the Nord Stream 2 pipeline deal with Russia through which Germany buys natural gas. The United States has complained this is making Germany as well as Western Europe dangerously dependent on Russia. What this really means is that Germany’s growing economic relations with Russia are making Germany less dependent on Washington. The United States went to war with Germany twice in the 20th century to encourage such dependency.

The United States wants Germany and other Western European countries to buy natural gas in liquid form shipped directly from the United States or from U.S. proxies in the Middle East. This not only means more profits for U.S. energy companies but would reaffirm the subordinate status of German imperialism in the U.S. world empire. Growing tensions between Washington and Berlin were revealed by the forced resignation of the head of the German Navy after he said he saw no sign of a Russian invasion. (See “German navy chief resigns over controversial Ukraine comments”)

Another factor involved in the current war scare concerns last summer’s U.S. military withdrawal from Afghanistan under humiliating circumstances with the Taliban literally at their heels. (“Afghanistan – Past, Present and Future, a Marxist Analysis”) This forced retreat gives the impression of an empire very much in decline. U.S. President Joseph Biden (Democrat) is eager to reverse this impression. Though indeed in decline, the U.S. world empire remains extremely powerful and dangerous.

If Ukraine joins NATO, the United States will be bound by treaty to go to war against any alleged Russian attack. This would be even if it were simply a defensive move by Russia to defend Russian Crimea. Even if Biden has no desire to launch World War III, (3) his policies make such an outcome all too likely sooner or later. Despite the Biden administration’s attempts to project a picture of an invincible U.S. empire — regardless of Afghanistan — the U.S. empire is facing huge problems, including financial ones.

The dollar’s role

These problems center on the role of the U.S. dollar as the world’s chief currency. The dollar’s role is the financial foundation of the U.S. world empire. If the dollar loses its dominant position in the international monetary system, the U.S. world empire is over. As I explained last month, the U.S. Federal Reserve System is now attempting to rein in the COVID aftermath boom. (“COVID’s Long Economic Shadow”)

The bull party (4) on Wall Street believes the Federal Reserve has a “put” (5) on stock market prices. Under this put, at the first sign of a serious decline of prices, the Fed is supposed to pump an amount of new dollars into the economy necessary to rally the stock market. More importantly the Fed has a put against any repeat of the Great Depression. But these puts periodically come into conflict with the Fed’s need to prevent a run against the U.S. dollar that could bring down the empire’s financial foundations.

This conflict generally appears at the top of the industrial cycle. For example: the initial money market crisis announcing the Great Recession centered on derivative securities backed by subprime mortgages. It broke out July-August 2007. (6) The stock market initially slumped. But stock market bulls bought on the dip and pushed the stock market back into record territory. They bet that the Fed would pump vast amounts of money into the banking system to rescue Wall Street and the real economy. This is what the Fed did in 1998 when the near collapse of the Long-Term Capital Management hedge fund threatened to trigger a massive credit collapse. That would have crashed not just Wall Street stock market prices but the entire world capitalist economy.

However the Wall Street bull party overlooked an important difference between 2007 and 1998. In 1998 the U.S. dollar was very strong against gold and there was no surge in primary commodity prices. The Federal Reserve System was in a very strong position. But in 2007 the dollar price of gold was high and rising, as were oil and other primary commodity prices. In 2007, serious inflation and indeed stagflation was threatening. The Fed didn’t dare flood the U.S. banking system with dollars because that could have led to a run against the dollar. That could whip inflation into a frenzy threatening the entire dollar-centered international monetary system.

Only a year later, September 2008, the collapse of the Lehman Brothers investment bank and near bankruptcy of many other banks and insurance companies sent the demand for the U.S. dollar as means of payment soaring. The Federal Reserve System was finally able to flood the financial system with dollars without triggering a run on the dollar. But an enormous amount of damage had already been done to the stock market and — more importantly from the viewpoint of the workers and their allies — to the real economy. As a result, millions of workers across the globe lost their jobs. This was the price to be paid to save the dollar system, the financial foundation of the U.S. world empire.

Today the Fed is facing a similar dilemma involving not a normal peak in the industrial cycle but the inflationary COVID aftermath boom I examined last month. If the Fed continues to flood the banking system with dollars, a major slump on Wall Street will be staved off – for now. But a major run on the U.S. dollar, taking the form of a sharp rise in the dollar price of gold, will be triggered. Gold has recently been threatening to break out, in the language of the market place, but has so far been pushed back when the Fed talks tough. (7)

If the Fed tightens quickly, a run on the dollar can still be avoided. But the stock market will likely crash and the real economy will fall into what could turn out to be a very deep recession. Such a recession would have incalculable political effects. This could also be very dangerous to the U.S. world empire. If the dollar is allowed to collapse and bring down the dollar system, the political and military aspects of the U.S. world empire — which costs money to maintain — will crumble. The Fed is trying to find a middle and achieve a soft landing from the COVID aftermath boom. It remains to be seen whether such a middle way exists.

Biden, Trump and the Party of Order

Related to this is the unpopularity of the Democratic Administration of President Joseph Biden and the possible return of Donald Trump to the presidency on January 20, 2025. Trump is viewed as a problem on the part of the ruling class I called the Party of Order because of his refusal to admit defeat in the November 2020 presidential election. Instead of playing by the rules of the game and conceding, a defeated Trump attempted to remain in office by encouraging a mob to storm the U.S. Capitol. He wanted to stop Congress from certifying Biden’s electoral college victory. He hoped the election would then be thrown into the House of Representatives, handing the presidency back to Trump. The problem confronting the ruling class is how to use Trump’s reactionary base against the workers and their allies without destabilizing and delegitimizing the government in the eyes of the majority of the people.

Biden and the Democrats in recent months have sunk quite low in the polls. Biden’s approval rating hovers around the low 40s and the Democrats are polling quite low as well.

Due to the alliance of West Virginia Senator Joseph Manchin and Arizona Senator Kyrsten Sinema with the Republican Party on expanding voting rights — and on other issues — a Democratic proposed law to protect voting rights has been blocked. This is a familiar pattern in U.S. politics over the decades. The Democratic Party promises progressive legislation, rallies its progressive base and wins control of both the presidency and both Houses of Congress. But somehow there are just enough conservative Democrats who side with Republicans and the promised progressive legislation is never passed. (8)

In the old days it was Dixiecrats — openly racist segregationist Southern Democrats — who blocked with Republicans against any progressive legislation. Today it’s corporate Democrats blocking progressive legislation. The result is the same. In the absence of mass social movements like those of the 1930s, or the Civil Rights movement, the promised progressive legislation is never passed. This happened under Clinton, Obama, and is again happening under Biden.

Under Biden, as under Trump, workers are forced return to work even as the pandemic rages on. Vaccines thankfully have helped by reducing the chances of severe disease and death. But even those fully vaccinated and boosted are forced to return to work at lower real hourly wages once inflation is factored in. If progressives continue to put their hopes in pushing the Democrats to the left when they are clearly moving to right, they will share the massive defeats the Democrats have fully earned.

Now I want to continue my critique of the work of Marxist economist Anwar Shaikh, who I believe is the best economist of his generation.

The neoclassical system and its perfect competition

Anwar Shaikh observes that the most popular left-wing critique of neoclassical theory in academic circles is the theory of imperfect competition. But something can only be imperfect relative to perfection. In the case of left-wing academic economics, competition is imperfect relative to the perfect competition that is an integral part of neoclassical theory.

The theory of imperfect competition is built on the foundation of neoclassical marginalist economics. Since the so-called Keynesian revolution, bourgeois economics has been divided between macroeconomics and microeconomics. Macroeconomics deals with stabilization theory. Microeconomics is neoclassical economics in its pure form. Neoclassical theory assumes that a capitalist economy, unless subject to some massive outside shock, is extremely stable. Neoclassical economics implies that government and central bank stabilization policies are unnecessary and do more harm then good.

What is the relationship between the neoclassical school dominating university economic departments with the classical political economy of Adam Smith (1723-1790) and David Ricardo (1772-1823), and Marx’s critique of the classical school? Are these three economic theories more or less the same, merely using different terminology? Do they paint a similar picture of capitalism in the age of free competition that existed from the late 18th century until the late 19th century? Or are they fundamentally incompatible? Do they draw radically different conclusions?

Paul Sweezy, founder of Monthly Review, held that classical political economy, Marx’s critique of classical political economy, and neoclassical microeconomics were compatible. The problem, according to Sweezy, is that the assumption of competition that was “free” or “perfect,” was more or less valid before the late 19th century, but since has been completely undermined by the growth of monopoly. So the growth of monopoly requires a new analysis based not on free or perfect competition but rather on the domination of monopoly with old-style free — or perfect — competition confined to a subordinate non-monopoly sector of the economy.

According to Sweezy, Marx’s great work, “Capital,” was going out of date about the time he stopped working on it in the early 1880s. The classical political economy of Adam Smith and David Ricardo as well as the work of the creators of neoclassical theory are also out of date for the same reason. To understand modern monopoly capitalism, Sweezy said, a radically new economic theory is needed, putting monopoly at the very center of the analysis. This is what co-authors Sweezy and Paul Baran attempted to do in “Monopoly Capital,” published in 1966.

According to Sweezy and Baran, Rudolf Hilferding (1877-1941) and V.I. Lenin (1870-1924) began analyzing a post-competitive monopoly capitalist economy. Hilferding began this process in his book “Finance Capital,” published 1910. Lenin developed it further in his pamphlet “Imperialism,” published in 1916. However, Sweezy claimed neither Hilferding nor Lenin went far enough in breaking with Marx’s assumption of free competition.

Sweezy said that Marx, in “Capital” and his other economic works, set out to describe the laws of motion governing a competitive capitalist economy. Sweezy and Baran’s criticism of Hilferding and Lenin is that they failed to realize that laws of motion analyzed by Marx, correct for a competitive capitalist economy, no longer apply to contemporary capitalism. The work of Hilferding and Lenin was therefore out of date even before they began work on it. This is why Sweezy’s work is often described as neo-Marxist, because Sweezy believed that the laws of motion described in Marx’s “Capital” do not describe the workings of modern capitalism.

Sweezy believed that in analyzing competitive capitalism, Marx and the neoclassicals were accurately describing the laws governing competitive capitalism, though they used different terminology and emphasized different aspects of the system. While Marx certainly developed a far more profound sociological analysis of capitalism than anything found in neoclassical writings, neoclassical microeconomics developed techniques describing the workings of a competitive capitalism with far more mathematical rigor than anything in Marx. Sweezy believed if you combine the two — Marx’s deep sociological analysis of competitive capitalism with the mathematical techniques of neoclassical economics — you get an analysis of capitalism as it operated from the late 18th century until the late 19th century.

In university circles, much of today’s left or radical political economy — whether self-described as Marxist, neo-Marxist or post-Keynesian — follows the path pioneered by Baran and Sweezy. They take the neoclassical marginalist system as the starting point, then modify it by replacing the concept of perfect competition with imperfect or monopolistic competition. This is then combined with Marx’s sociological insights, describing present day monopoly capitalism. I will examine these proposed modifications of the neoclassical system in future posts.

Anwar Shaikh’s critique

Anwar Shaikh rejects the “Monopoly Capital”-imperfect competition approach to analyzing present day capitalism. Shaikh, like Baran and Sweezy, also criticizes Hilferding and Lenin, but from the opposite direction. According to Shaikh, the two assumed something like perfect competition until the late 19th century. They then believed that perfect competition gave way to imperfect competition by the turn of the 20th century, an analysis further developed by Baran and Sweezy. Shaikh seems to believe that Hilferding and Lenin accepted the basic conclusion of neoclassical economics as being valid for the competitive phase of capitalism.

Sweezy studied economics at Harvard in the early 1930s. He, like Shaikh, was trained in neoclassical economics before he became acquainted with the work of Marx and his classical forerunners. Sweezy never really unlearned neoclassical economics. But it seems unlikely that Hilferding, let alone Lenin, could have been seriously influenced by neoclassical economics. Unlike Sweezy, neither Hilferding nor Lenin were professional economists. The founder of the neoclassical school is considered to be the French economist Léon Walras (1834-1910). (9) Walras was originally an engineering student and knowledgeable in mathematics. He developed the notion of perfect competition and general equilibrium as mathematical concepts.

Rudolf Hilferding studied medicine not economics. He was not a professional economist. Neoclassical economics was barely coming into existence when he was a student. And Lenin studied law not economics. Hilferding and Lenin learned economics from Marx and his followers in the workers’ movement. The mature Hilferding was familiar with and opposed marginalist economics (the Austrian school).

Shaikh on perfect versus real competition

Shaikh believes the four great classical economists — Adam Smith, David Ricardo, Karl Marx, and John Maynard Keynes — understood real, as opposed to perfect, competition. Of these four, Adam Smith, David Ricardo and Karl Marx lived and worked before the mathematical concept of perfect competition was developed. Only Keynes would have been familiar with it.

Shaikh describes real world capitalist competition as different from perfect competition. In contrast to the Monthly Review school, Shaikh believes capitalist competition today is much the same as it has always been. Shaikh rejects Sweezy and Baran’s “Monopoly Capital” as well as Hilferding’s and Lenin’s works on finance and monopoly capitalism. Lenin defined imperialism as the monopoly stage of capitalism. Shaikh holds that a monopoly stage of capitalism does not exist, though he does not deny capitalism is imperialist.

A problem for the lay person unfamiliar with academic economics is that the concept of perfect competition makes little sense outside of a mathematical mindset. Before you can understand perfect — and its derivative imperfect — competition you have to understand the basics of neoclassical economics.

The origins of neoclassical economics

In the 19th century there were two main theories of value. One, the concept of labor value, holds that the value of a commodity is the quantity of labor socially necessary to produce it. David Ricardo, of the bourgeois camp, was the its most consistent champion. His work was the apex of classical political economy. By the end of the century, this was replaced by the Marxist critique of classical political economy and by neoclassical economics. Marxism was the theory of the workers’ movement of the Second International. The other theory — Walras’s neoclassical marginalism — became the economic theory of the ruling class.

After Ricardo’s death in 1823, the class struggle between the capitalists and the working classes intensified. This class struggle caused capitalism’s socialist critics to begin to use the Ricardian theory of labor value. Capitalism, far from obeying the exchange of equal quantities of labor principle, violated that principle. The socialists wanted to bring it into practice. (10)

If labor alone produces value, where does the income of capitalists and landowners come from? Pre-Marxist socialists argued it must come from workers earning less than the value of the labor they perform. The key, socialists argued, was to ensure that the workers receive their labor’s full value. Then the economy would operate according to the law of labor value. Once this was put into effect, landowners could not live off ground rent nor capitalists live off interest on capital.

Karl Marx solved the contradictions in Ricardian value theory. Marx did not call himself a political economist. He thought himself a proletarian revolutionary making a critique of bourgeois political economy. The Marxist theory of labor value has been central to this blog, to all Marxist economics. But we must first examine neoclassical economic theory. I will hit on the basics. Then we’ll be able to understand what Shaikh means by perfect competition.

Political economy abandons the law of labor value

In the view of post-Ricardian bourgeois political economy, the biggest problem with the law of labor value was that it led to the view that surplus value — ground rent + interest + profit of enterprise and their derivative incomes — derives from the unpaid labor of the working class. The pre-Marxist socialists believed the very existence of unpaid labor, Marx’s surplus value, meant there must be some type of violation of the equal exchange principle. Marx’s contribution was to show this is not the case. Marx demonstrated that surplus value can only be explained by beginning with the Ricardian assumption that equal quantities of labor always exchange for equal quantities labor. No one, not even Marx, had been able to make this point before the late 1850s.

Marx made this breakthrough by making the distinction between labor and labor power. The term the “value of labor” is a false expression. False because labor is the social substance of value and cannot itself have value. Frederick Engels later explained that to talk about the value of labor is as nonsensical as talking about the temperature of heat — heat is an energy process while temperature is a measure of hotness or coldness. The English philosopher Thomas Hobbes (1588-1679) made the distinction between labor and labor power, but this was ignored by political economy. Marx explained that the industrial capitalist buys the workers’ labor power or ability to work.

If the industrial capitalist pays workers the full value of their labor power, the worker will be required to perform a greater quantity of labor than is represented by their labor power. Part of the day, the worker works for themselves and replaces the value of their labor power. The other part of the day, the worker works for the boss and other surplus value consumers. The unpaid or surplus labor becomes surplus value as it is added into the commodities that worker is producing. There is no violation of the principles of equal quantities of labor exchanging for equal quantities of labor. But under pain of starvation, workers indeed perform unpaid labor for the boss as well as the non-industrial capitalists, the landowners, and their hangers-on.

Bourgeois political economy could not itself follow Marx’s path without admitting capitalism’s exploitative character. The alternative that political economy adopted was to shift the view of value as human labor embodied in commodities to the view of value as the scarcity of use values. This is called called the marginalist revolution in economics.

Marginalism itself is a mathematical tool to analyze scarcity. For example, according to the marginalists, air, which is necessary for human life, has no economic value because it is not scarce. Therefore, additional air beyond the human need to breathe has no subjective value to them. But diamonds, not necessary for humans as is air, are scarce relative to the desire for them. So marginalists conclude that diamonds have a great deal of economic value, unlike air.

The entire neoclassical system is built on higher mathematics. Early marginalist Walras, with a grounding in engineering mathematics, went the furthest in attempting to consistently describe the operations of the economy, based on scarcity producing economic value. With Walras, neoclassical economics was born. The neoclassical system based on a different foundation from the classical system or the Marxist system. It would be remarkable if systems based on different principles came to the same conclusions. (11)

The factors of production and the value of their marginal products

Neoclassical theory sees three factors of production. These are land created by nature, labor, and capital. Each one makes a contribution to the value of a good proportional to the value of its marginal product. How do we calculate the value of the marginal product of labor? Suppose an industrial capitalist hires a worker of a given degree of skill. Everything else remaining equal, the production of our industrial capitalist will rise by a certain amount because there is now one more additional worker employed. Because this capitalist produces more products, their revenue stream increases.

Let’s assume the increase in revenue on an annual basis of hiring an additional worker comes to $30,000 U.S. The neoclassicals say that if the industrial capitalist offers a wage of $30,000 per year to the additional worker it will match the value of the marginal product of the worker’s labor. But let’s say the extra revenue is not $30,000 but $40,000. In that case the industrial capitalist can hire an additional worker, since they will be getting $40,000 in exchange for an expenditure of only $30,000. But according to neoclassical economics the more workers hired, the less value each additional worker adds. This law of diminishing returns means the extra revenue flowing to the capitalist will eventually fall to only $30,000. This is the point, according to neoclassical economists, where there will be a halt to additional hiring.

Our industrial capitalist is now spending $30,000 for labor at the margin and receiving $30,000 in return. Our new, or marginal worker, and all other workers of the same skill can be considered marginal workers since they will all receive a wage of $30,000 a year, the full value their labor creates. The neoclassical economists claim there is no exploitation here.

But what’s to prevent the industrial capitalists from exploiting the worker by offering a wage of only $25,000 a year when the worker’s labor creates $30,000 in value? Even neoclassical economists have to concede that the worker is being exploited. But, assuming perfect competition, such a situation will not persist.

According to the neoclassicals, it will be in the capitalist’s interest to hire additional workers at $25,000 a year and receive $30,000. But doing this increases the demand for workers of a given skill. For simplification, if the value of the marginal product of newly-hired workers remains unchanged at $30,000, the capitalist will keep hiring additional workers until the wage rises to $30,000 per year. At this point the hiring will stop. However, competition must be perfect. Meaning no collective bargaining, labor unions, or state interference like minimum wage laws.

What prevents exploitation, according to the neoclassicals, is not the trade unions, working class political parties, or interference of the state through legislation. It is competition — as long as it is perfect, that will not allow the worker to be exploited.

Is there danger that the worker can exploit the boss? Yes, say neoclassicals. If a worker whose marginal product is $30,000 a year can get a boss to hire them at a wage of $35,000 the boss loses $5,000 a year. The boss is a victim of exploitation. But again perfect competition comes to the rescue. If a boss hired a worker by mistake for $35,000 a year but receives only $30,000 the boss will either cut the worker’s annual wage down to $30,000 or discharge the worker entirely and find another who will work for less.

If a worker willing to work for $30,000 for that type of labor can’t be found, then the marginal disutility of that type of labor is greater than the utility of an annual income of $30,000 for the worker. Does this cause unemployment? Not really, the neoclassical explains, because the worker who would work for a higher, but not a lower, income is voluntarily choosing leisure over the disutility of labor. In a society without chattel slavery, people are free to choose leisure over labor. Perfect competition prevents involuntary unemployment where workers will work for less than the prevailing wage for that type of labor but cannot find a boss who is offering work at that lower wage. For example, if a worker will work at a wage of $10 but minimum wage laws require a wage of not less than $15, the worker will be involuntary unemployed. But in that case it’s the suppression of perfect competition by state interference that’s to blame for involuntary unemployment.

Neoclassical economists oppose trade unions and collective bargaining and any state intervention in the economy leading to higher wages in the name of keeping competition perfect. Not because they represent the interests of capital, they say, but because they are concerned about the best interests of the workers!

According to this theory, the chronically unemployed are mostly people of low skill. This is not their fault. It is the fault of the state, fallen under the influence of well-meaning socialists, or of the power of the labor unions using monopoly power to set wages above the value of marginal product values of poor, low-skilled workers. So, the poor unskilled person will not be able to find a job. The solution? The unions should be busted, minimum wage laws and other labor legislation should be abolished, all in the interests of fighting poverty!

If these demands happen to coincide with the demands of the rich, that’s not the their fault, according to the neoclassicals. They merely use knowledge of (neoclassical) economics to help the poor! They argue: once perfect competition is established and poverty-breeding involuntary unemployment is abolished even the most unskilled people will acquire good work habits and improve their skills. Perfect competition then insures the wages of previously unskilled workers will rise to match their rising skill levels acquired through work. Then, involuntary unemployment and poverty will be eliminated.

Explaining away profit through the marginal productivity of capital

The biggest concern of neoclassical economics, as for the related Austrian school, is to explain away profit. Suppose an active capitalist works entirely with borrowed, or stock, capital but does not own any of the capital invested in the business they manage. For example, a business owner decides to hire a professional manager to run the business and the owner concentrates instead on being active in the country club.

The person performing the labor of managing a business will earn a salary or wage, like any other worker in the business. Assuming perfect competition. the manager’s wage will equal the value of the marginal product of their managerial labor. But why will the manager earn so much more than any other worker? Because the work of a manager creates more value than the labor of other, less-skilled workers. But the manager, again assuming they don’t own any of the capital invested in the business, won’t receive any income beyond the value of the labor as a manager. What guarantees this will be the case? Again, it is perfect competition.

Suppose the capital’s owner invested in business and actually runs the business. In this case the owner is entitled to two incomes. One income is the wage or salary the boss receives through their managerial labor. The other income is the interest on the capital invested in the business. Where does the interest income come from? Does it come from unpaid labor of the workers? No.Interest on capital, according to the neoclassical and the Austrian school, arises from the fact that we subjectively value a commodity higher that we can consume now, as opposed to a commodity we will get to consume at some future date. The value of a sum of capital is its future value discounted at the rate of interest. Suppose I deposit $100 at a bank. The bank pays an interest rate of 1% on the deposit. Looking a year ahead, the value of my bank account is $101. But it is discounted at a rate of 1% a year, so its current value is only $100. I have the choice of keeping the $100 in the bank for a year and be rewarded at the end of the year by getting to consume $101 worth of commodities, or I can withdraw the $100 and spend it on commodities I can consume immediately. This gives rise to interest on capital.

Because I am choosing to consume less in the present I am rewarded by the interest paid by the bank. Thus industrial capitalists are able to produce additional means of production because the demand for consumer commodities will be less than it would be if interest rates were lower. The $1 I earn in interest over the year is my reward for saving. I am acting as a capitalist rather than a consumer by spending the $100 immediately. Because some people choose to act as capitalists, society can grow richer over time.

Skilled workers are capitalists according to neoclassical economics

Another way I might act as a capitalist is I could decide not to sell by my labor immediately but go to a trade school to increase the value of my labor. This way I accumulate human capital. When I do this, I am choosing to defer my current consumption so in the future I will earn a higher income and will be able to consume more. The higher wages I earn in the future is interest on my human capital.

Why machines are capital according to neoclassical economists

A machine that an industrial capitalist purchases to produce commodities to be sold for money at a future date is another from of deferred consumption rewarded by interest income. Instead of purchasing the machine, the money could be spent on consumer goods for the here and now. But if instead the choice is to defer consumption by purchasing a machine instead of consumer goods, the investor is entitled to interest on bank deposits. Or a skilled worker is entitled to interest on their human capital. The industrial capitalist is entitled to interest on capital invested in machinery.

But the industrial capitalist withdraws from the bank when the goods the machine helps to produce are sold for more money than the purchase price of the machine.

How do we calculate the value of the marginal product produced by a particular machine. Add the value of the additional quantity of goods produced by the machine when it is installed in the factory. How do we know the amount of extra money our industrial capitalists acquire as a result of deploying the machine will coincide exactly with the value of the marginal — marginal because it has just been installed in the factory — machine’s product?

To guarantee this, we must rely on perfect competition. If our industrial capitalists were to receive a greater sum of money by using a particular machine than the value of its marginal product — the cost of the machine depreciated over a number of years plus interest — on the capital represented by the machine, other capitalists will purchase the same type of machine to realize profits beyond the interest. This assumes perfect competition will increase the quantity of commodities produced by that type of machine. Then the price of the goods falls back to the level dictated by the value of the marginal product produced by that machine.

As long as competition is perfect and the economy is in perfect equilibrium — when competition is itself perfect — our active industrial capitalists will be rewarded by the value produced by the marginal product of the capital invested in the business plus the value of the marginal product of their labor. If land is necessary to conduct the business, the landowner receives the value of the marginal product produced by the land as well.

No profit of enterprise under perfect competition

As long as the capitalist economy is in perfect equilibrium, profit of enterprise or economic profit, will be zero. That’s right zero! All incomes will consist of wages, interest income including the interest on the human capital of skilled workers, and ground rents on scarce land. But perfect competition eliminates any profits beyond that.

According to neoclassicals, entrepreneurs like John D. Rockefeller, Henry Ford, Bill Gates, Jeff Bezos, or Elon Musk — by creating new products and new needs — might be able to realize economic profit for a while. This is a good thing. These entrepreneurs brought us radios, automobiles, TV’s, smartphones, modern computers running Windows, the Internet, jet planes flying over oceans and continents in a few hours, and the advantages of modern medicine among other things our 19th century predecessors had to do without.

However the neoclassical economists are less interested in innovation and progress than they are in examining the mathematical beauty of the unchanging perfection of their imagined capitalist economy in unchanging eternal perfect equilibrium. Such an economy knows neither growth, contraction, innovation or any other change.

Conditions necessary for perfect competition

The most important condition needed to achieve perfection is that the number of independent capitalist enterprises in a particular line of business approaches the mathematical limit of infinity. But the history of capitalism shows a tendency for a reduction of this number. Marx called it centralization of capital. The neoclassicals assume the opposite, a tendency for capital’s decentralization.

For competition to be perfect, each individual capitalist must control such a tiny percentage of the total output of a commodity that the percentage of that commodity’s total production approaches the mathematical limit of zero. Even if a capitalist were to halt production entirely, this will have little effect on the commodity’s total quantity on the market. Increasing production to the industry’s physical limit also has no effect on the commodity’s total quantity on the market. No individual capitalist can have influence on the price of any commodity. Decentralization of capital is the condition for competition to be perfect.

The capitalist is a price-taker, not a price maker. They have no control over the commodity’s selling price. But they do have control over production costs. This includes wage costs — including the wage of whoever manages the business — plus interest on capital invested in the business.

As a capitalist increases the enterprise’s production to its physical maximum, a U-shaped cost curve is formed. At first the cost of the next commodity produced will decline as production is increased. But at a certain point costs rise again as the plant reaches its physical limits. Then the pressure of perfect competition compels production to be set at the point that the cost of producing the last — the marginal commodity — is cheapest. Any commodity produced, taken in isolation, can be viewed as the marginal commodity. The level of production yielding the lowest marginal cost represents the lowest total cost and the most efficient way to produce that product.

Marginal cost consists of the cost of labor, the depreciation of the fixed capital, raw and auxiliary materials plus interest on capital invested in the business. With perfect competition, the marginal cost equals the price of the commodity.

If the commodity’s price is higher than its marginal cost, it yields profit to the capitalists producing it. With perfect competition, more capitalists enter the business and the price falls back to marginal cost. If the commodity price is lower than marginal cost, that price will not fully cover the costs. Some capitalists leave that line of production. This reduces that commodity’s quantity on the market, causing the commodity’s price to rise to its marginal cost. Perfect competition does not allow market prices to deviate far from marginal costs. An economy in equilibrium, market prices will equal production’s marginal cost.

Price of production versus marginal cost

The neoclassical concept of marginal cost resembles classical natural price, production cost, or production price — the term Marx finally settled on. Marx said cost price is the cost to the capitalist of carrying out production of a commodity, while the production price is the price society pays the capitalist to receive the commodities. To society, the difference between the production price and the cost price to the capitalist is the capitalist’s profit.

Does this mean neoclassical’s marginal cost, and classical’s — as well as Marx’s — production price are just differences in terminology? No, because production price includes profit of enterprise, while neoclassical marginal cost does not. Cost plus interest, neoclassical’s marginal cost, and cost plus interest plus profit of enterprise are two different prices.

More on this next month.

Shaikh claims what he calls the classical economists — including Marx — assume that before deciding to enter a new line of production or expand an existing one, the capitalist adds up the costs, calculates the cost price, then adds the average rate of profit on to it. This includes both interest on capital invested in the business plus profit of enterprise.

If a capitalist believes they can sell the commodities produced at cost price plus average profit they go ahead with the investment assuming they cannot find a product yielding a higher profit rate. The average rate of profit appears as the minimal profit rate below which a new capital investment will not be considered.

In both the classical and Marxist systems, if the capitalist believes the commodities can be sold as the result of new investment at a price at least as high as the production price, the capitalist makes the investment, unless they see an alternative yielding an even higher profit rate.

If the capitalist decides they cannot sell the extra commodities at production price they won’t make the investment. They will instead look for a more profitable area to invest their capital. If not available, the industrial capitalist turns into a money capitalist. They throw the money capital into the money market so it earns interest until more profitable investment opportunities open up.

The capitalist may be right or wrong about new investment profitability. But unless the commodity is of a type which has never existed before — like personal computers in the mid-1970s (12) — the capitalist is guided by profit rates of similar commodities already being produced. Again in both the classical and Marxist view, capitalists are price makers not price takers.

Flat versus downward slopping demand curves

The demand curve measures the changes of commodity price as the commodity’s quantity offered for sale on the market changes. If the supply of a commodity being offered increases, the price must fall if total sales of commodities produced is to keep pace with increased production. If a single capitalist controlled 100% of a commodity’s production, the capitalist takes into account not only changes in production costs at different production levels, but also price changes at which the commodity could be sold. If this monopolist sets the price too high, the sales rate is less than production rates. The result is a growing pile of unsold commodities in warehouses, earning no profit or interest. If prices are set too low, inventories of the commodity are exhausted as sales exceed production levels and the monopolist realizes less than maximum profit.

Even if no single capitalist controls the entire production of a single commodity but only a percentage, even 5% or 10%, they face a downward sloping demand curve. The capitalist is aware that increasing production requires reducing the selling prices of their extra output.

But perfect competition cannot allow this. It assumes each capitalist controlling an infinitesimal percentage of total production. Building the mathematical model requires a flat demand curve.

Capitalists cannot control prices, so they must control costs. To maximize income the capitalist must choose methods and production levels minimizing costs. In perfect competition, capitalists choose the same production methods. Perfect competition guarantees that all goods will be produced in the most efficient — cheapest — way, according to the neoclassical economists. Perfect competition leads to perfect efficiency, resulting in maximum consumer satisfaction.

One way to criticize the neoclassical system is to drop the assumption of perfect competition. In the real world, demand curves slope downward. A degree of monopoly, to use Michael Kalecki’s terminology, means a downward sloping demand. Therefore, a commodity’s market price will be above its marginal cost. The more imperfect the competition is, the greater the gap between marginal cost and market price. Thus, there’s economic profit above the interest on capital. This is akin to the classical as well as the Marxist analysis.

But with this crucial difference. In those analyses, profit of enterprise does not appear due to monopoly, but is normal profit. Only persistent profit above the profit of enterprise represents monopoly. (13) Classical economics and Marx analyzed one case of monopoly profit in detail, the monopoly profits arising in agriculture known as ground rents.

Not all radical economists in academia are Marxists. But if you consider yourself a Marxist and build your analysis on neoclassical foundations but assume imperfect competition, you assume compatibility of the neoclassical system with the Marxist analysis. This line of thinking says that if competition is “free,” or “perfect,” the result is basically the same whether Marx or Walras are used as the starting point.

Shaikh rejects this. He claims that the classical economists — he includes Marx — and Keynes assumed real, not perfect competition. While perfect competition is a mathematical concept — like a perfect circle — the cut-throat competition that prevails in the real capitalist world is entirely different. Rather than modifying perfect competition by assuming imperfect competition — like an imperfect circle — Shaikh says the concept of perfect competition should be scrapped.

Next month I will compare the findings with Marx’s analysis, rooted in the classical school but going beyond it, with the neoclassical system’s conclusions. Is Marx, and the classical analysis, really compatible at all with the neoclassical system? Can Marx’s findings be restated in neoclassical terms or are the two systems completely contradictory. If they are contradictory, which system reflects the capitalist system’s concrete reality?

To be continued

(1) Nikita Khrushchev was First Secretary of the Soviet Communist Party from 1953 until 1964, and Chairman of the Council of Ministers (Soviet prime minister) from 1958-1964. In October 1964, Khrushchev was forced to resign from both these posts. He’d lost support of the Central Committee of the Communist Party. Leonid Brezhnev (1906-1982) followed in the post as CPSU’s First Secretary, making him the central leader of the Communist Party; later, Alexei Kosygin (1904-1980) became the new USSR’s Chairman of the Council of Ministers. (back)

(2) Russia’s and Ukraine’s only effective response to U.S.-NATO aggression is to restore the USSR. This requires a new workers’ revolution led by a rebuilt Communist Party that’s learned the lessons of the political and social counterrevolution of 1985-1991 that bought down the old CPSU and the USSR with it. By refusing to establish decent relations with capitalist Russia, capitalist Ukraine and the other now-capitalist republics of the USSR, Washington is inadvertently working for this very outcome. In this blog we are analyzing the contradictions of the capitalist system that obliges Washington act the way it does regarding Russia, Ukraine and the other former, and future, Soviet Republics. (back)

(3) World War III is not the only type of war that could grow out of the Ukrainian crisis. The United States promises not to send ground troops to Ukraine. But it’s arming the increasingly unpopular Kiev government as it drives toward increased war with the peoples republics in the east and eventually the Russian Crimea. CIA agents with their own paramilitary forces will increasingly be involved. And there are the U.S. special forces and military advisers. When this proves insufficient, regular combat troops may follow. This is how the U.S. war in Vietnam developed.

For years Washington swore it would never send regular troops to Vietnam. It claimed its military personnel were only non-combat advisers. Their role was to help the South Vietnamese fight the Vietnamese resistance, called the Viet Cong, in the West. Between 1961 and 1965 the Pentagon insisted its military personal were not involved in combat. In reality, U.S. personnel increasing were involved in combat. Later, regular combat forces were sent.

Could a similar scenario unfold in Ukraine? Like Vietnam, Ukraine has a guerrilla, or patisan, war tradition. Washington may swear it is not considering sending combat troops and air power but they are already well along that path. (back)

(4) At any given time stock market speculators are divided between those betting stock market prices will rise, called the bull party, and those betting stock market prices will fall, the bear party. (back)

(5) In stock market lingo, a put is a contract in which a share’s owner has the right to sell the share at a given price. This protects the put’s owner against a share price decline. When stock market bulls claim the U.S. Federal Reserve System has a put on the stock market, they mean Fed will not allow the stock market to fall significantly. During the bull market preceding the 2007-2009 crisis many on Wall Street were convinced that then-Fed chief Allan Greenspan was a genius who never allowed the stock market to fall. The bulls called it the Greenspan put. (back)

(6) Sub-prime mortgages were those granted by banks and other mortgage lenders to individuals lacking the ability to pay the interest and principle on these mortgages. These were balloon mortgages where the interest payments started low then rose. Banks made these loans because the mortgages could then be sold to investment banks or other entities that in turn sold these so-called derivative securities that were backed by unpayable mortgages. (back)

(7) This is an example of what Marx meant by commodity fetishism. It’s as though gold, a mere thing, has a will of its own and can break out if the “monetary authority” does do what “gold” wants. (back)

(8) The census showed a rise in the population of Republican-dominated red states at the expense of Democrat-dominated blue states. (back)

(9) Most present day neoclassical economists are extreme reactionaries. Walras however was a socialist. In neoclassical economics, the workers, including active capitalists, are paid the full value of their labor. The pure, or idle, capitalist whose only economic activity is collecting dividends and interest payments, make creation of additional wealth possible by postponing personal consumption to a future date. For this they are rewarded by interest and dividends.

What about the landowners? Why do they deserve a reward? Land in economics refers to wealth created by nature, not labor. The landowner does not create land. What gives the landowner the right to collect rent? Walras’s socialism made no attempt to justify the landowner’s income. He believed land should be nationalized. Lenin did not consider the nationalization of land taken by itself to be a socialist measure but a radical bourgeois measure. It was so because it allowed more of the surplus value created by the working class to be concentrated in the hands of the capitalists who then transformed the surplus value into new capital. Landowners in contrast, merely consumed the surplus value unproductively. Therefore the nationalization accelerates the development of capitalism. In Lenin’s sense, Walras was a bourgeois radical but in no sense a socialist. Today, most of Walras’s neoclassical successors support private ownership of the land which makes them bourgeois reactionaries. (back)

(10) Marx explained that socialists misunderstood Ricardo. Ricardo used the assumption of equal exchange not to describe an ideal society but capitalism as it actually was. Still the socialists’ error was a fruitful one because it paved the way to Marx’s theory of surplus value which finally made socialism a science. (back)

(11) Some neoclassical economists are pure theoreticians, interested only in studying the mathematical properties of an imaginary economy where competition is perfect and in constant general equilibrium. Other more realistic neoclassical economists claim the real economy approximates general equilibrium to the extent that competition approaches perfection.

These more practical economists concede that in the real world the economy is never in perfect general equilibrium. But the closer we get to the platonic ideal of perfect competition the closer we get to general equilibrium where consumers receive maximum satisfaction. What pushes the economy away from the ideal of general equilibrium is government, central bank or trade union interference. Therefore, to move real-world competition closer to the perfect competition’s platonic ideal, union-busting policies, labor legislation repeal, and as little government regulation of business as possible is advocated. In the United States most neoclassical economists favor the Republican party over the Democrat party. (back)

(12) Established industrial capitalists generally avoid investing in the production of new products because they don’t know the profit rate on the capital invested in producing them. They leave it to new aspiring capitalists like the young John D. Rockefeller, Henry Ford or Steve Jobs. These aspiring capitalists start with little capital and little to lose. If the business fails, as happens in the majority of cases, they have lost little.

If a business produces a new type of commodity, e.g., cheap automobiles in the early 20th century or cheap personal computers in the late 20th century, that turn out to be very profitable, established money capitalists begin to invest large amounts of capital in the new businesses and established industrial capitalists enter that line of business. A classic example of the latter was the decision of International Business Machines (IBM) to enter the personal computer business at the beginning of the 1980s.

Once established industrial capitalists enter the new line of business, a period of fierce competition ensues. Most pioneer small industrial capitalists and some of the large ones entering the business are driven out as initial super-profits give way to losses. Once the dust has settled, a few of the established industrial capitalists plus a handful of the new ones end up dominating the business as the profit rate settles down to the average profit rate. The business world then says the new industry has reached maturity. (back)

(13) Even under free competition — the classics and Marx never used the term perfect competition, it only has meaning within the neoclassical’s system of mathematical analysis — Marx pointed out one very important monopoly. That is the capitalists’ monopoly in the means of production. Without this monopoly the capitalist mode of production cannot exist. (back)