Three Books on Marxist Political Economy (Pt 10)

History of interest rates

A chart showing the history of interest rates over the last few centuries shows an interesting pattern — low hills and valleys with a generally downward tendency. During and immediately after World War I, interest rates form what looks like a low mountain range. Then with the arrival of the Great Depression of the 1930s, rates sink into a deep valley. Unlike during World War I, interest rates remain near Depression lows during World War II but start to rise slowly with some wiggles through the end of the 1960s.

But during the 1970s, interest rates suddenly spike upward, without precedent in the history of capitalist production. It is as though after riding through gently rolling country for several hundred years of capitalist history, you suddenly run into the Himalaya mountain range. Then, beginning in the early 1980s, interest rates start to fall into a deep valley, reaching all-time lows in the wake of the 2007-09 Great Recession. Clearly something dramatic occurred in the last half of the 20th century.

As we saw last month, the events of the 1970s and early 1980s proved once and for all that the laws governing the capitalist mode of production don’t allow the capitalist state and its central bank to create monetarily effective demand out of “thin air.” Regardless of the legal nature of the monetary system, a sufficient amount of gold — the chief money during the era of capitalist production — must exist if capitalist expanded reproduction is to proceed without crisis.

The threat of hyper-inflation and monetary collapse

A general overproduction of commodities relative to the money commodity sooner or later leads to a situation where gold becomes scarce at the prevailing level of “golden prices” (1) of commodities. If the central bank — or other monetary authority — persists in issuing additional monetary tokens in an attempt to expand the market without the necessary gold backing, the currency price of gold will rise, indicating the depreciation of the currency against “real” — that is, commodity — money. This will whip demand for gold bullion into a frenzy.

The frenzied demand for gold will cause inflation of prices in terms of the currency tokens to outrun the rate of growth of the quantity of tokens, measured in terms of standard currency units such as U. S. dollars. That is, the quantity of currency in real terms — its aggregate buying power — will contract. This creates a shortage of loan money capital causing the rate of interest calculated in terms of standard currency units to rise.

If the monetary authority attempts to resist the rise in interest rates in order to “keep the expansion going” by accelerating the rate of growth of monetary tokens, or their electronic equivalent, the currency price of gold will increase at an accelerating rate. The “printing presses” then enter into a deadly race with currency prices that if not halted will lead to a hyper-inflationary collapse of the currency and the credit system built on top of it.

So far, hyper-inflations have involved currencies that have subordinate roles in the international monetary system. They have not involved general crises of overproduction but rather were tied to lost wars and revolutions and their aftermaths. The international monetary system has never—up to this writing—experienced a hyper-inflationary collapse. However, the current international monetary system based on the U.S. paper dollar, which replaced the gold-dollar exchange standard in the late 1960s and early 1970s, is not immune from such a collapse.

Need for reserve fund of money capital

Let’s examine how the rate of interest evolves over a normal industrial cycle under some form of gold or gold-exchange standard. Under typical capitalist conditions — average prosperity — capitalists have a margin of surplus productive capacity — potential constant capital — and a surplus population that is a source of additional labor power — variable capital. These reserves can be brought into motion in the event of a sudden expansion of the market such as occurs when average prosperity gives way to an economic boom.

The need for reserves of potential constant and variable capital is well recognized by Marxist economists. What is often ignored — though not by Marx (2) — is that capitalism needs a reserve fund of potential money capital as well. If such a reserve fund does not exist, an expansion of the market cannot occur.

As capitalist enterprises — whether in Department I or Department II — carry out expanded reproduction, they need additional money capital. This money capital is drawn from existing monetary reserves. As a rule, these reserves exist in the form of “retained earnings” that are part of their bank balances or perhaps short-term government securities that can be converted into cash on the money market.

It is possible that for a particular business its accumulated monetary reserves will not be sufficient. In that case, they either have to find additional investors by selling new stock or issuing new bonds or else borrow from the banks. For such financing to be successful, there has to be a reserve of surplus money capital in the hands of money capitalists.

These surplus hoards of money cannot in the final analysis be created arbitrarily by the monetary authority or the banking system through making loans but rather by the workers in the gold mining and refining industries. Only then will the monetary authority be able to convert a sufficient quantity of government securities into additional monetary tokens (or their electronic equivalent) that the banks use to back the additional credit money they create through loans without the currency depreciating and setting off a self-defeating inflationary spiral. In other words, it is only through a growing global gold hoard that the global money supply can be expanded in real—purchasing power—terms.

Centralization of gold hoards

Therefore, at the base of the monetary reserves that are centralized in the hands of the banking system lies the global hoard of gold bullion. In early capitalism, these gold (and in those days, silver) reserves were often in the hands of individual merchant and industrial capitalists. But over time, gold reserves were increasingly centralized.

First, the metallic hoard was centralized in the commercial banking system. Later, the hoard was shifted to national banks that were thereby transformed into central banks. By the time of Marx and Engels, the Bank of England had concentrated most of Britain’s gold in its hands and evolved into the world’s most powerful central bank.

In the U.S., early attempts to establish a national cum central bank modeled on the Bank of England found expression in the First and Second Banks of the United States. These institutions, whose centralizing influence tended to increase the power of the federal government, were strongly opposed by the Southern-based slave-holding interests and finally discontinued. As a result, the gold and silver reserves were concentrated in commercial banks and to some extent the U.S. Treasury, rather than a central bank.

The crisis of 1907 demonstrated that once the U.S. had emerged as a leading industrial nation its lack of a central bank posed a severe threat to the stability of the entire world capitalist economy. The result was, despite the opposition of farmers and small business people, the creation of the Federal Reserve System, which began operations in 1914.

The centralization of the U.S. gold hoard did not stop here. In 1933, the Roosevelt administration obliged the 12 regional banks that make up the Federal Reserve System to sell their gold reserves to the U.S. Treasury in exchange for gold certificates. This shifted control of the huge U.S. gold hoard from the Federal Reserve System to the White House.

Centralization versus decentralization of the world gold hoard

In principle, gold reserves don’t have to be centralized, whether by the commercial banking system, the central bank, or the state treasury, to exercise their vital role in the capitalist economy. Let’s assume that gold is entirely in the hands of private hoarders. In this case, there will be no gold or gold-exchange standard but some kind of paper money standard.

If our private hoarders believe that the currency price of gold will fall, they will be sellers of gold at prevailing currency prices. The gold offered will drive down the currency price of gold bullion. With currency gold prices falling — which would usually be accompanied by falling primary commodity prices in terms of the currency — the central bank can increase and even be forced to increase the quantity of currency tokens it creates under pain of avoiding deflation.

This will be true even if gold has no legal role in the monetary system. The higher the level of gold production is — all other things remaining equal — the more likely this will be the situation and exactly what central bankers and capitalists desire, whether or not they understand what is actually happening.

It then seems that the economy is expanding because the central banks are following “expansionary policies” that allow governments to run larger deficits — also expansionary — without fear that “private sector” borrowers will be crowded out. Central bankers, politicians and economists all like to take personal credit for such a favorable economic conjuncture even though they had nothing to do with it.

Falling gold production

This is the situation that prevails when the golden market prices of commodities fall below their golden prices of production. Soon, however, capitalist prosperity causes demand to exceed supply at prevailing market prices, eventually causing golden market prices to rise above the golden prices of production. This, in turn, leads to falling levels of gold production owing to falling profitability in that industry.

Gold hoarders and speculators now expect that the currency price of gold is likely to rise. When this happens, gold hoarders reduce the amount of gold being offered for sale at the prevailing currency price of gold. This drives the currency price of gold upward, putting upward pressure on commodity prices in terms of currency independently of any increase in the quantity of currency. The result is rising interest rates and “tight money.”

The government in order to relieve the pressure on the private sector caused by the developing money crunch is now under pressure to restrain its spending and raise taxes to reduce the quantity of bonds and notes it issues in order to reduce the upward pressure on interest rates. It therefore seems that “recessionary policies” followed by the central bank and the government are responsible for the recession that inevitably follows. In reality, it is the low level of gold production caused by golden market prices that are “too high” relative to the prices of production.

Therefore, far from smoothing out the “business cycle,” the central bank through its monetary policy, and the government through its fiscal policy, are merely following the cycle. (3) The central bankers, politicians, and government are blamed for the recession when in reality they have little control over the situation.

But what happens if the government and central banks ignore the rising price of gold, as they did in the 1970s? In response, private gold hoarders and speculators withdraw gold from the market at current currency prices for gold bullion, thereby increasing the currency price of gold. In other words, they respond to attempts to artificially maintain the expansion by devaluing the currency. This, in turn, leads first to higher inflation in terms of the devalued currency and then to higher interest rates.

The inescapable conclusion: Any attempt to fight the rise in interest rates by the monetary authority once the industrial cycle has reached its critical stage will only result in higher, not lower, interest rates.

Why allowing a decentralized gold hoard is bad policy for the capitalist class

The disadvantages of allowing the gold reserve of society to become decentralized do not appear during prosperity. Rather, they appear in the crisis or rather during the critical stage of the industrial cycle that immediately precedes the crisis proper. If the supply of gold is centralized in the hands of the state — even without a gold standard — when the demand for gold rises the government can fight the approaching crisis in two main ways.

One, it can sell some of its gold reserve, increasing the quantity of gold on the market at existing currency prices of gold and thereby stave off depreciation of the currency. Or, two, it can raise the rate of interest by withdrawing from circulation a certain quantity of its monetary tokens — or their electronic equivalents. Finally, it can pursue a combination of both policies.

The central bank can thus moderate the developing crisis by providing the market with the gold it craves while reducing the demand for gold by curbing the central bank’s issuance of additional currency. The greater the size of the gold reserve centralized in the state’s hands, the more ammunition both the government and the central bank will have to fight the crisis.

A large centralized gold reserve is therefore the strongest weapon against crisis that the capitalist state and its central bank can possess. Therefore, the greater percentage of the world gold supply that is centralized in the hands of the state, the more the government will be able to combat crises.

Indeed, the very knowledge that the central bank or treasury possesses a large reserve of gold that it can dump on the market greatly reduces the demand for gold that will develop during the critical stage of the industrial cycle. Therefore, the need for the central bank to tighten credit as the industrial cycle peaks is minimized.

However, the more decentralized the gold hoard becomes the more the central bank will have to push up interest rates — or allow them to rise — in order to break the demand for gold during the critical stage of the industrial cycle. The greater the decentralization of the gold hoard, the higher interest rates will have to rise to break the demand for gold and the more the crisis will be intensified, everything
else remaining equal.

The central bank will still be able to break the back of the demand for gold — and the inflation this generates — if it raises interest rates — or allows them to rise — high enough. But in this case, the rate of interest will have to rise much more than it would with a centralized gold hoard.

‘Pure fiat global money’

Economists and policymakers in the 1960s believed they could and should establish the U.S. dollar as a “pure fiat global money.” Trained in the marginalist theory of value, they saw no reason why gold could not be demonetized. They believed that if the government stopped treating gold as money, it would lose its monetary character. Milton Friedman took this idea to its logical extreme, advocating the complete sell-off of gold in the hands of government treasuries and central banks.

Marginalist economists like Friedman believed that if this were done gold would completely lose its main utility — use value — to serve as global money. As a result, these economists predicted that the dollar price of gold would drop sharply. But even if that didn’t happen, or the dollar price of gold even rose, it wouldn’t matter because gold was “just another commodity,” and not a very important one at that.

If Friedman’s suggestions had been fully carried out, the global gold hoard would have become thoroughly decentralized. As a result, capitalist governments would have been stripped of their most powerful weapon against crises. Private gold hoarders, like all private individuals under capitalism, are obliged by the economic laws that govern capitalism to “look out for number one.” They increasingly demand gold to protect themselves from the consequences of a currency crisis. This intensifies the currency crisis, whips inflation into a frenzy, and ultimately leads to astronomical interest rates. The crisis proper that follows the critical stage of the industrial cycle is greatly intensified.

The only advantage in Friedman’s proposal was that it would increase the chances of an early downfall of capitalism. But that was hardly what Friedman wanted to accomplish.

While the policymakers did not completely carry out Friedman’s suggestion, they did allow the global hoard to become increasingly decentralized. Not only Friedman but virtually all Keynesian economists — Friedman’s main rivals in the field of bourgeois macroeconomics — also believed in the “demonetization” of gold.

Starting in August 1971, the U.S. Treasury stopped buying and selling gold at a rate of $35 an ounce. The U.S. government also pressured other central banks to stop buying gold even at “free market prices” in order to drive down — or at least prevent a sharp rise — in the U.S. dollar gold price. Under these polices, as new gold was mined the world gold hoard became increasingly less centralized, further reducing the ability of capitalist governments to fight crises.

Interest rates in a classic industrial cycle

In a classic industrial cycle, where the gold standard is in effect, interest rates reach their lowest point at or near the bottom of the industrial cycle. This reflects the large amount of money that in the course of the recession has fallen out of circulation and accumulated in idle hoards in the banking system. Low interest rates are further encouraged by the cyclical rise in gold production. At the same time, the contraction of real capital means there is less real — productive plus commodity — capital measured in terms of their current prices. The contraction of real capital occurs through a combination of lower prices and the physical destruction of a portion of means of production no longer able to function as capital, as well as the running down of inventories at more or less reduced prices.

As a result, the relationship of forces on the loan capital market shifts sharply in favor of the owners of real capital and against the owners of loan money. The supply and demand of loan money can only be equalized at increasingly low rates of interest. Short-term interest rates drop more than long-term rates in the course of the recession. This reflects the contraction of commodity capital and the reduced need for credit to finance inventory.

The recovery begins in Department II — the department that produces items of personal consumption — as these enterprises begin to rebuild their inventories. Short-term interest rates now hit their lowest point of the cycle and begin to rise. However, there is little capital investment until excess capacity in the enterprises of Department II falls sufficiently to force them to expand their capacity. Only then does the recovery spread to industrial machinery and factory construction industries. Therefore, long-term interest rates remain at the low levels of the depression longer than short-term rates.

During the first phase of the recovery, profits rise rapidly because rising sales cause the turnover of (variable) capital to accelerate. The crisis has also improved the conditions for the production of surplus value. Wage cuts that started during the recession continue through the depression — defined as the early stages of the recovery before industrial production reaches its previous peak. Therefore, not only is the rate of profit rising but the net rate of profit — the profit of enterprise — rises faster than the rate of profit as a whole because of the combination of sharply rising rates of profit and continued low interest rates.

The rapidly rising net rate of profit — defined in terms of money material — therefore brings back to life the “animal spirits” of the industrial capitalists. (4) The combination of a still very low rate of interest —especially long-term interest rates —  encourages the capitalist owners of money to become active industrial and commercial capitalists entitled to profit of enterprise and not simply the continued low rate of interest.

Since during most of the rising phase of the industrial cycle, there is a considerable excess of the physical capacity to produce relative to the actual level of production, commodity capital accumulates much faster than productive capital. As a result, the yield curve — the relationship between long-term and short-term interest rates — flattens and in the final stages of the industrial cycle may become inverted as the quantity of unsold commodities rises just before the industrial cycle peaks.

As unsold commodities — inventories — increase, the business press claims that inventories are “very low,” pointing to the falling ratio of sales to inventories. So it doesn’t appear as though overproduction is occurring. However, the quantity of unsold commodities measured in terms of their prices is growing faster than the growth of the global gold hoard. This leads to a growing shortage of money and eventually a credit crisis or credit squeeze. Therefore, the crisis at first appears as a credit crisis rather than a crisis of overproduction. (5)

But when the credit crunch causes sales to suddenly contract, the underlying overproduction is revealed as the inventory-to-sales ratio suddenly rises, causing industrial production, world trade, and employment to fall. At this point, interest rates start to fall, with short-term rates falling faster than long-term rates as commodity capital—inventory—is liquidated.

This classical interest rate cycle points to another “service” that general crises of overproduction perform in the interest of allowing capitalist expanded reproduction to continue in the long run at the price of momentarily disrupting it. As long as prosperity continues, the rate of interest will rise. Unless the overall rate of profit rises indefinitely, which is excluded by the very nature of the production of surplus value and the rising organic composition of capital, the net rate of profit will fall even if the overall rate of profit does not fall—or even rises but at a slower rate than the rate of interest.

If a timely—for capital—crisis does not reverse the rise in interest rates, it will be only a matter of time before the rate of interest rises to the rate of profit—and beyond—destroying the motive to actually produce surplus value. And surplus value that is not produced can never be realized. Therefore, just like the crisis lowers the demand for additional labor power before an absolute overproduction of capital can develop, so crises by periodically lowering interest rates, keep the rate of interest well below the average rate of profit, and the net rate of profit positive in the long run.

The classic industrial cycle—which assumes a gold standard in some form—therefore does not include a serious currency crisis. The rules of a gold—or gold-exchange standard—prevent the monetary authority from attempting to resist (6) the rise in interest rates during the critical phase of the industrial cycle that precedes the crisis proper by increasing the quantity of the currency. Therefore, unlike the situation under the present dollar system, a sharp rise in the demand for gold bullion during the critical stage of the industrial cycle can often be avoided under a gold standard.

In last month’s post, we saw that the attempt by capitalist governments to maintain the economic expansion beyond the critical point in the industrial cycle led to the “great inflation” of the 1970s. More importantly, it destroyed the golden rate of profit (7) because it caused a negative profit in terms of gold bullion. The law of value dictates that profits must be “golden” under the capitalist mode of production. The collapse of golden profitability led straight to the dollar-gold crisis of 1979-80, which finally forced the U.S. government to abandon “expansionary polices” and initiate the “Volcker Shock” and the “neo-liberal” era that followed.

The Volcker Shock finally halted and partially reversed the depreciation against gold of the U.S. dollar—and its satellite currencies—and even more importantly, from the viewpoint of the capitalists, restored a positive rate of profit in terms of gold bullion.

Aftermath of the stagflationary crisis

At the end of 1982, the global industrial cycle was at its low point. But unlike the low point in classic industrial cycles, interest rates, though somewhat below their high point, were still in double digits! As a result, while overall positive golden rates of profit had been restored, the net rate of profit, thanks to the very high interest rates, were still negative.

As a result, just as Marx predicted in “Capital” if this ever happened, a portion of industrial capitalists converted themselves into money capitalists. For example, the General Electric Company, long a leading U.S. industrial corporation—mentioned in Lenin’s “Imperialism”—converted largely, though not completely, into a financial—money lending—company.

As money capital was diverted from M—C..P..C’—M’ into M—M’ circuits, the result was an explosion in the quantity of money loan capital, much greater than would be expected in a classic industrial cycle. This process continued for a period of decades, causing the rate of interest to fall to record low levels. As a result, positive net profits—in terms of gold bullion—were restored.

Recently, General Electric moved to shed some of its financial business and shift back to now more profitable industrial business. It is important to understand—as Shaikh does not—that the fall in the rate(s) of interest was not the result of the Federal Reserve System—or Alan Greenspan—somehow suspending the economic laws that govern interest rates but was in full accord with them.

Let’s briefly review the mistake Shaikh makes on the determination of interest rates. (8) Shaikh realizes that interest is merely a portion of surplus value, and he correctly emphasizes that the rate of interest must be below the rate of profit. But he incorrectly believes that the interest rate fluctuates around a price of production of finance akin to a price of production of commodities. This incorrect theory is convenient when using neo-Ricardian input-output tables where rate(s) of interest can be treated as both a price and cost.

Shaikh puts a great deal of emphasis on administrative costs of commercial banking, seeing these costs as forming part of the cost price of the providence of finance. And it is true that administrative costs in terms of U.S. dollars of banking has increased with the rise in the dollar prices of commodities in general. But the much higher dollar prices of virtually all commodities today compared to the pre-inflation era of the 1960s has not led to higher interest rates. Instead, interest rates today are lower than they were then.

For commercial banks—or rather commercial banking arms of today’s universal banks—the rise in nominal dollar prices of paper, ink, computers, salaries of banking personal, and so on is made up by a much greater quantity of money in nominal dollar terms. However, in “golden terms,” the bankers’ administrative costs are considerably lower, not higher, than they were before the great inflation of the 1970s. This is the impact of the computer revolution on office work. These days, banks hire far fewer tellers, for example, than they did in the 1960s.

Each dollar a commercial bank handles represents at any point in time a definite quantity of gold bullion measured in some unit of weight. This gold bullion, in turn, represents a definite quantity of abstract human labor—value—measured in some unit of time. Therefore, the administrative costs that a commercial bank incurs, like all costs (9) under the capitalist mode of production, are ultimately reduced to a definite quantity of abstract human labor measured in some unit of time.

So measured by the quantity of abstract human labor that has to be spent, the administrative costs of commercial banking have not increased but rather have fallen relative to the pre-inflation era. From the banks’ point of view, each dollar compared to the pre-inflation era represents a vastly smaller amount of money capital in terms of both money material—gold bullion—and value.

In mathematical terms, the rate of interest, unlike a price, is a ratio of two numbers. The numerator measures the mass of interest and is divided by a denominator that measures the mass of capital.

In contrast, the value of a commodity with a given use value—an automobile, for example—and its value form, or price, is not a ratio but a single number that represents a definite quantity of money material—weight of gold bullion. If a U.S. dollar represents a much smaller quantity of gold bullion, everything else remaining equal, the dollar price of a car, chewing gum, pair of shoes, cup of coffee, and so forth will be higher. Therefore, it is not surprising that the prices of most items are much higher today in terms of devalued U.S. dollars than in the 1960s.

If, in the future, a new dollar crisis were to inflate the dollar price of gold bullion a hundred times, once the crisis is over and the dollar is more or less stabilized the higher nominal dollar administrative costs would also have no effect on future interest rates, since both numerator and denominator in any interest rate calculation would also be inflated a hundred times.

Therefore, there is no reason to invoke the alleged super-natural power of Alan Greenspan—as Shaikh does in “Capitalism”—to explain the movements of interest rates in the wake of the “stagflationary great depression” of the late 20th century.


“Financialization”—the abnormal expansion of the quantity of loan money capital brought about by a period of abnormally high interest rates—involved by definition an abnormal (relative to what would have occurred under a gold or gold-exchange standard) inflation of credit.

This is in some ways reminiscent of the huge amount of debt created during and after World War I. But the reasons for the abnormal inflation of credit in the two eras were quite different.

In the World War I case, occurring when it did during the industrial cycle, the war caused an unprecedented rise of golden market prices above the underlying golden prices of production. This did not happen during World War II, which began at the end of the 1930s Great Depression.

Despite its much greater destructive scope, the starting point of golden inflation (10) that occurred during World War II, the golden market prices of commodities were, thanks to the Depression, well below their prices of production. The World War II-era golden inflation only brought golden market prices more or less up to their prices of production. Related to this was the fact that, in contrast to World War I, on the eve of World War II the world was awash in idle cash backed up by the ultimate form of hard cash—gold bullion. These conditions were the opposite of those that prevailed on the eve of World War I.

As a result, the economic outcomes of the two post-war periods were radically different. The high golden market prices of the post-World War I era relative to the prices of production of commodities meant a world gold shortage, a low level of production of new gold, and a strong trend toward price deflation. Therefore, credit inflation was driven by the need to replace money backed by gold with credit money and credit in order to circulate commodities.

This “solution” worked for a while until the cyclical crisis that began in 1929 brought the whole “house of cards” crashing down, transforming a cyclical crisis into the super-crisis that bred the Great Depression. The super-crisis/Depression, however, put the U.S. and ultimately the global capitalist economy back on a cash basis, laying the foundation of the era of great capitalist prosperity that followed World War II.

At no point since World War II has there been a golden price inflation comparable to that of the World War I era. The Vietnam War did trigger the end of the great postwar prosperity by, along with the cyclical boom of the 1960s, causing the golden prices of commodities to rise above their prices of production. However, the gap between golden market prices and golden prices of production was far less than during World War I.

Therefore, if the U.S. government and Federal Reserve System had followed the policies necessary to save the Bretton Woods System, there is reason to think the resulting classic deflationary depression, though severe, would not have been on the scale of the super-crisis and resulting Great Depression of the 1930s. Nor have any of the numerous wars since the Vietnam War—though they have had disastrous consequences for those countries, peoples, and countless individuals directly affected—been “big enough” to cause golden price inflation on a scale anywhere near the inflation of even the Vietnam War era, let alone World War I.

The growth in debt that we now call “financialization” has made it virtually impossible for the world capitalist economy to return to a “normal” rate of economic growth. The reason is that the world capitalist economy has come to depend on low rates of interest. Whenever the global economy accelerates, the rise in the rate of interest on the swollen debt quickly slows it down.

A new “great inflation” won’t really get rid of this debt because while inflation wipes out old debts it creates new ones as rising nominal prices force both capitalists and consumers to borrow increasing amounts of devalued currency. Inflation therefore creates new debts as it wipes out old ones.

Only old-fashioned deflation will wipe out the debt

It seems that only an old-fashioned debt deflation will wipe out this mountain of debt. During a classic deflation, such as last occurred in the early 1930s, falling prices and bankruptcies stop the creation of new debt for a period of time while old debts are either repaid or wiped out through bankruptcies. Once this happens, the capitalist system, further helped by the lower price levels and a greater quantity of hard cash due to increased gold production, shifts back from a credit system to a “cash system.” Or, as the capitalist press puts it, the banking and financial system is once again put on a “sound basis.”

Therefore, to restore the global capitalist economy to the degree of health that would allow a return to normal economic growth for a period of decades there is reason to think that a classic price and debt deflation will be necessary. However, the scale of the necessary debt deflation implies a period of severe depression accompanied by astronomical rates of unemployment and the political consequences. Therefore, the reigning economic orthodoxy continues to hold that policymakers must do everything they can to prevent this from happening.

There are good reasons—from the point of view of those trying to preserve the capitalist system—for this “orthodoxy,” however wrong it may be in the purely economic sense. The Great Recession did accomplish some of the hellish “work” of classic debt deflation necessary to restore the world capitalist economy to health. However, the low rate of overall growth during the current upswing—accompanied by occasional recessions in many industries and countries—shows that it was not nearly enough to restore the world capitalist economy to “health.” But though the “Great Recession” was inadequate in this respect, it was “great” enough to lead to the political crisis now gripping the U.S.—and therefore the whole U.S. world empire—in the shape of the increasingly disastrous presidency of Donald Trump. (11)

An economic crisis that would put capitalism back on a “sound footing” would liquidate the debt—and more profoundly the cumulative overproduction of commodities and productive capital—but would lead to a political crisis that is far worse than the current one. Even as it is, the current political crisis is already not only raising fascism from its grave but more importantly—alarmingly for the U.S. ruling class—leading to a rapid growth of the U.S. left in reaction to Trump’s “strong-man tactics,” his brazen racism, and the still modest growth of fascist forces that he has encouraged.

A crisis on the scale necessary to restore capitalism to “health” for a few decades points toward a worldwide workers’ revolution on one side and fascism and world war on the other that would very likely end human civilization for good. No wonder policymakers are doing all they can do prevent the one “solution” for the current ills of world capitalism that would actually work—for a few decades, that is. (12)

Pending such an economic/political crisis, the abnormal level of debt has made the capitalist system dependent on the maintenance of very low rates of interest. Any significant rise in rates threatens to bring the whole house of cards crashing down. This explains why the U.S. Federal Reserve System did not expand the monetary base after the preliminary money-market freeze-up that broke out in global credit markets in August 2007. A new dollar crisis would have raised interest rates, which meant that as soon as the dollar was stabilized the whole credit system would have imploded much more violently than it actually did in 2008.


But there was another, even more important consequence of the rise of the rate of interest above the rate of profit in the wake of the dollar crisis. The period of extremely high but declining interest rates that followed the Volcker Shock led to a massive destruction of heavy industry in the U.S., Great Britain and to a lesser extent Western Europe. Then as interest rates fell, and positive net profits returned, capital in the form of money and loan money capital was free to invest in new areas. It chose to do this not in the old industrial areas of Britain, the United States and Western Europe but in areas where the rate of profit was far higher, leading to what has come to be known as “globalization.”

Two political changes that occurred during the 1980s and 1990s played a crucial role in making this possible.

First, the counterrevolutionary destruction of the Soviet Union and its Eastern European socialist allies meant that capitalists of the U.S., Britain and Western Europe became much more confident that capital invested outside the imperialist countries would be safe. Indeed, it even raised expectations among many capitalist leaders—such as George W. Bush—that something like pre-World War II colonialism could be restored. But this time it would be the U.S. empire rather than the British empire that would be the chief jailers of the colonized peoples. George W. Bush and his ilk believed, unlike leaders of the British empire of old, who always faced rivals in the form of the French, Russian, German, and Japanese empires and the still modest U.S. empire, the modern U.S. empire would tolerate no rivals.

The second crucial development was the outcome of the great Chinese Revolution of the 20th century. With the rise of Deng Xiaoping to power in 1978, the revolution had finally run its course. Unlike in the Soviet Union, however, in China while there was political reaction—epitomized by Deng’s “it is glorious to get rich” slogan—there was no counterrevolution.

When the dust finally settled after decades of revolution, civil war, counterrevolution, Japanese occupation, still more civil war, the liberation of 1949 when China “stood up,” and finally the Cultural Revolution, China emerged with a strong central government independent of imperialism. The new government was eager to attract foreign capital and willing to respect bourgeois private property rights in order to achieve rapid economic development along capitalist lines—but on its own terms.

Handed down from the pre-revolutionary past, the new China possessed a gigantic peasantry numbering in the hundreds of millions accustomed to a very low standard of living and hard manual labor. This peasantry served as the source for an industrial proletariat willing to put up with a much higher rate of surplus value than the workers of North—and even Latin—America, Western Europe or modern Japan.

Beyond China, capital is now looking towards areas where the value of the commodity labor power is even lower. This includes Vietnam, which also went through a great revolution in the last century; Cambodia; the Indian sub-continent; and ultimately, Africa.

Marx’s critique of political economy shows that capital is interested not in developing the productive forces as such but in appropriating surplus value in the form of profit and converting it into new commodity money and productive capital in order to appropriate still more surplus value so as to accumulate still more capital. The colossal development of the productive forces that occurs is only a “coincidental consequence” from the viewpoint of the capitalists. However, from the viewpoint of the human species, this development of the productive forces is capitalism’s most important consequence because it creates the material pre-conditions for socialist society.

As a result of the convergence of historical forces described above, including the failed attempt of capitalist governments and central banks to solve the problem of periodic crises of general overproduction through issuance of paper money, in a shockingly short period of time China emerged as the country with the highest absolute level of industrial production—though not on a per capita basis. Meanwhile, the imperialist countries of the U.S., Britain and Western Europe have become increasingly de-industrialized as result of the operation of the same economic laws.

In the U.S., manufacturing employment peaked in 1979—almost 40 years ago—and not so coincidently the year the dollar-gold crisis that ended with the Volcker Shock broke out. The 1979-80 currency crisis marks the failure in practice—though Marx’s theory of value explains why this failure was predetermined—of the attempt to use paper money as a means to solve the problem of periodic crises of overproduction within the limits of capitalism.

Did imperialist policymakers make a mistake?

This raises an interesting question. Did the imperialist policymakers make a mistake in allowing the Bretton Woods System to collapse? If U.S. policymakers of the late 1960s and early 1970s had somehow been able to understand Marx’s economic theories, and drawn from them what could be drawn in the service of reaction, could they have avoided a historic mistake?

Imagine that U.S. policymakers had followed policies that could have saved the Bretton Woods System. This would have meant that a classic deflationary crisis/depression would have broken out at the end of the 1960s or the beginning of the 1970s. It would probably have been less severe than that of the 1930s. Unlike in the 1920s, there had been nothing like the World War I golden inflation that boosted market prices above the prices of production for such a prolonged period. And though there was a cyclical credit inflation, financialization had not occurred.

At the end of the 1960s, the economic situation was more like that on the eve of World War I than it was like that following World War I. By the mid or late 1970s, a new capitalist upswing would have begun and the capitalist system would have been back on a “sound” cash basis with low rates of interest.

Perhaps the deflationary depression would have led to revolutions if the capitalist governments and central banks had followed policies needed to save the Bretton Woods dollar-gold exchange standard. Indeed, the workers’ organizations included the Soviet state, the most powerful workers’ organization that up to this writing has ever existed. But the leadership of these potentially powerful workers’ organizations—with some exceptions, such as that of revolutionary Cuba—was uninspiring to say the least.

And it is a fact of history that the existing leaderships of the workers’ organizations of those days did not accomplish socialist revolutions, despite what Shaikh calls the stagflationary “great depression of the late 20th century.” Would they have led successful revolutions if there had been a classic deflationary depression instead? In any case, the existing leaderships of the mighty workers’ organizations that existed in the 1960s and 1970s did not lead revolutions against the crisis-ridden capitalism of the late 20th century. On the contrary, the late 20th-century capitalist crisis was followed by a disastrous capitalist counterrevolution that destroyed the Soviet state and greatly weakened virtually all other workers’ organization—whether state party or trade union—throughout the world.

Also, the capitalists would hardly have willingly shifted their industrial production to China as long as Chairman Mao lived. And the Chinese leadership under Chairman Mao would probably not have allowed them to do so, even if they had wanted to. Chairman Mao lived until September 1976. Then the radical leftist faction called the “Gang of Four” by its enemies was overthrown within weeks of Chairman Mao’s death by the “centrist” Hua Guofeng grouping.

However, the Hua leadership was less enthusiastic than the right-wing faction around the veteran Chinese revolutionist Deng Xiaoping about opening China to foreign capital. The definitive victory of the Deng faction, which was the political pre-condition for the large-scale movement of foreign capital into China and the resulting stunning economic revolution that has transformed that country and the world, did not occur until 1978.

Loan money capital

The relatively long period of time when the rate of interest exceeded the rate of profit meant that a much greater quantity of the world’s supply of money capital took the form of highly fluid money loan capital than would have been the case in a normal industrial cycle. Unlike productive capital—such as factories—which are hard to move from one physical location to another, money capital can easily flow from one continent to another.

Working in the same direction was the fact that the golden prices of commodities due to the great currency crisis of 1979-80 had fallen much further below the prices of production than would have been the case in a classic deflationary crisis. This caused a greater increase in gold production than would have been the case with classic deflation. The extra money capital that was created in the form of the increased production of gold bullion combined with the period of high interest rates caused a large portion of the industrial capitalists to convert themselves into money capitalists. The huge quantity of loan money capital—finance capital—created played a vital role in financing China’s astonishingly rapid industrialization.

Therefore, assuming that the classic depression had not led to socialist revolution, the new wave of capitalist investment—expanded capitalist reproduction—that would have followed and would have largely taken place in the United States and Western Europe occurred in China and to a lesser extent in other countries of the “global south” instead.

We shouldn’t exaggerate, however. Even if the Bretton Woods System had been saved through a classic deflationary depression in the late 1960s and early 1970s, the shift of industrial production away from the United States, Britain and Western Europe towards China, India, and eventually Africa would have still been a historic tendency as we will see when we review John Smith’s “Imperialism in the Twenty-First Century.” I will examine these questions as treated in Smith’s book—the other great book on Marxist economics published in 2016—beginning next month.

Shaikh’s strengths and weaknesses

In “Capitalism,” Shaikh contrasts “real competition” to the monopoly price theory built on top of the Walrasian theory of “perfect competition” that has largely dominated left-wing and Marxist economics since the Depression of the 1930s. Marx had intended to write a book on the world market, competition, and crises but did not live to do so. Shaikh has therefore made a valuable contribution towards completing Marx’s work.

However, Shaikh has gone only part of the way. He stumbles badly on value theory—not understanding the necessity of the form of value—money—and accepts the claim that “modern money” is pure fiat money that no longer represents gold—or any other money commodity—in circulation. This causes him to incorrectly believe that governments and central banks now have the power to create as much monetarily effective demand as possible, not understanding that the 1970s proved the opposite to be true.

It is true that when monetarily effective demand exceeds the engineering limits of production, demand will exceed supply at current prices. The market will then “correct” this situation through higher prices—inflation. This is the process that drives “golden inflations.” But this is not what happened in the 1970s, when “golden deflation” was hidden behind a paper money inflation.

In his crisis theory, Shaikh sees the cause of capitalist crises not in the inability of the market to expand as fast as production under the capitalist mode of production but rather in the limits on the quantity of labor power—workers. These ultimately in Shaikh’s view create engineering limits to further increases in production.

During the 1970s, according to Shaikh, policymakers made the mistake of seeing the “great depression” of that time as being caused by a lack of effective demand rather than what in Shaikh’s view was an engineering jam-up of production caused by the fact that the rate of unemployment had fallen below its natural rate. Policymakers then made the mistake of using “pure fiat money” to create additional demand that under the circumstances could only express itself in the form of higher prices—inflation. Thus, as Shaikh’s crisis theory fails, he flees from economics to industrial engineering.

However, Shaikh’s criticisms of post-Keynesian economics and the mixture of Marx, Keynes and Kalecki that is the Monthly Review School retains its full validity. All these schools, Shaikh explains, accept the marginalist Walrasian theory of perfect competition as their starting point. Building on this false foundation, they then see “monopoly capitalism” as an “imperfect” version of Walrasian “perfect competition.”

However, because Shaikh has not fully understood Marx’s theory of value, he is unable to fully develop a modern Marxist theory of prices—whether competitive or monopoly. More work will have to be done in this regard.

While Shaikh admits that monopoly prices do exist, he basically ignores them. Our criticism of Shaikh, however, has revealed the real limits of monopoly pricing ignored by the influential Baran and Sweezy theory of monopoly prices.

Let’s assume that the gold mining and refining industries are more monopolistic than the economy as a whole. This will mean that, as far as golden prices are concerned, monopoly will actually lower golden prices. If we then assume that the “degree of monopoly” (to borrow a term from Kalecki) in the gold industry is equal to the average in the economy as a whole, this will mean that monopoly will have no influence on the general golden price level.

Even if we assume that the degree of monopoly is lower in the gold industry than the economy as a whole, the ability of non-gold producing capitalists to use their monopoly to raise golden prices above production prices will still be bound by the need for the gold capitalists to make a profit. If golden prices were to rise to the point that gold capitalists cannot make a profit, gold production will cease and the inevitable money squeeze/crisis that follows will bring golden prices crashing down. Therefore, the law of value imposes strict mathematical limits on how high golden monopoly prices can rise above prices of production in any lasting way.

But the law of value imposes no such limitations on how far prices can rise in terms of arbitrary currency units such as dollars, euros, yen, yuan, and so on. If the U.S. dollar—or any other currency unit—represents a variable rather than a fixed quantity of gold, the set of currency prices that express the given golden prices of commodities is infinite. Therefore, the law of value puts no limit on how far commodity prices can rise in terms of arbitrary currency units.

But rising prices in terms of depreciating currency is hardly unique to the monopoly stage of capitalism or even unique to capitalism. Inflation caused by currency depreciation against money metals is almost as old as coinage itself.

We should never confuse high (golden) prices caused by monopoly with high currency prices caused by the depreciation of the currency units against the money commodity. This is essentially what the Monthly Review School does.

This brings us to what many would consider the weakest part of Shaikh “Capitalism” and his work in general. That is Shaikh’s rejection of the theory of monopoly capitalism-imperialism. Shaikh lumps Lenin’s 1916 pamphlet “Imperialism” and Hilferdings “Finance Capital” in with Baran and Sweezy’s “Monopoly Capitalism,” dismissing all three classic works as fatally flawed because they are based on Walrasian “perfect competition.” Shaikh correctly states that the tendency of profits to equalize does not disappear even when capital becomes highly centralized. Super-profits inevitably attract equal or even more centralized capitals, which leads to the collapse of the super-profits.

In the early 1960s, Belgian Marxist economist Ernest Mandel proposed that monopoly capitalism has two rates of profit, one for the competitive sector and a higher one for the monopoly sector. I think it is more accurate to say as Mandel did in his later works that powerful monopolies can resist the equalization of the rate of profit for a greater period of time than firms in the “competitive sector.” But eventually monopoly profits will disappear.

When monopoly profits do disappear they give way to massive losses as new competition emerges, especially from, but not only from, the international arena. This is what happened to the once powerful U.S. steel monopoly and other U.S. monopolistic basic industries that had such an iron grip on the world market during the early and middle 20th century. The view that monopoly profits can last for considerable periods of time but are not permanent is also found in “Imperialism” by Lenin, who, unlike Baran and Sweezy, stressed that monopolies inevitably decay.

The fact that monopoly prices and profits eventually disappear doesn’t mean that monopoly and monopoly prices are unimportant and can be ignored, as Shaikh is inclined to do. On the contrary, this process is very much a part of the “real competition” that Shaikh seeks to analyze. Indeed, the outbreak of wars and revolutions in no small measure reflects the rise and decay of monopolies as profits equalize over periods extending over many decades.

What is incorrect is the claim advanced in Baran and Sweezy’s “Monopoly Capital” that monopoly capitalists have learned to avoid price competition. Baran and Sweezy, using the monopoly price theory developed on Walrasian foundations in the 1930s, paint monopoly capitalism as an orderly and potentially stable system. In Baran and Sweezy, in contrast to Lenin, where monopolies not only rise but decay, monopolies are permanent and the system despite its tendency to stagnation—which can however be corrected by government spending—is quite stable.

The actual history of prices during the period of monopoly capitalism—not to speak of the entire history of wars and revolutions—gives no support to the Monthly Review School at all. For example, Baran and Sweezy believe that the stage of monopoly capital began as early as 1870 and certainly was in effect by 1900—Lenin’s date. Lenin saw the period from the crisis of 1873—not 1870—to the turn of the 20th century as the transitional period between capitalism based on “free competition”—which Shaikh wrongly equates with Walrasian “perfect competition”—and monopoly capitalism. By 1900, virtually the entire world was divided between a handful of imperialist countries that exploited all other nations of the Earth.

Let’s for the sake of argument accept 1900 as the date generally when monopoly capitalism definitely replaced “competitive capitalism.” It happens that in the period after 1900 the two most dramatic price declines seen in the entire history of prices (in terms of currency as well gold) occur. These price deflations occurred in 1920-21 and 1929-33, respectively. Perhaps the monopoly capitalists only learned to avoid price competition after 1929-33. But in that case, the origins of the monopoly stage of capitalism should be dated from 1929-33, much later than Baran and Sweezy and Lenin, who didn’t even live to witness the 1929-33 price deflation.

But dating the beginning of the monopoly stage of capitalism from 1933 won’t save “Monopoly Capitalism” either, because it is only through periodic dollar devaluations against gold that new drastic deflations in dollar prices have been avoided up to now. Indeed, since 1920, golden prices have shown a strong downward tendency, including dramatic declines during the 1970s and lesser declines associated with the crisis of 2007-09.

Though the price theories advanced in “Monopoly Capital” are not tenable, either in terms of theory or in the actual history of prices, this doesn’t mean that increasing centralization of capital has no significance. Shaikh does observe in “Capitalism” that when demand recovers, prices rise less in the branches of production where capital is highly centralized than where it is more decentralized. Therefore, Shaikh draws the conclusion that over time the centralization of capital has little effect on prices.

However, as far as crisis theory is concerned, there is an important conclusion to be drawn. The sectors of highly centralized capital will react to any fall in demand at existing prices by slashing production rather than prices. One consequence, is that sectors of industry where capital is less centralized will find that their costs will drop only slightly during a crisis insomuch as their costs consist of inputs produced by the monopolistic sectors. This leads to a severe squeeze on the profits—and bigger losses—in the “competitive” sectors during the crisis.

Centralized—monopoly—capital achieves a relative stabilization of prices in sectors of industry in proportion to its “success” in making employment more unstable. Workers employed in the monopoly sector are subject to higher levels of unemployment during crises. It is precisely the growing centralization of capital that drives capitalism forward “through its own economic agencies,” as Marx put it, toward a socialist society.

Or as Engels explains in his description of the industrial cycle in his “Socialism Utopian and Scientific,” the industrial cycle forms not a circle but a spiral. A circle can go on forever, but a spiral in the real material world must end sooner or later. This crucial insight with all its revolutionary conclusions that is so central to Marx and Engels is missing in Shaikh’s “Capitalism.”

Shaikh defends Marx’s work from bourgeois critiques in many areas. He has defended effectively the law of labor value from neo-Ricardian critiques based on the “transformation problem.” Shaikh has also defended Marx’s law of the tendency of the rate of profit to fall against relentless criticism from many academic Marxists and semi-Marxists as well as the Monthly Review School.

In “Capitalism,” Shaikh also makes a valuable criticism of the so-called Okishio theorem, which is often used against Marx’s law of the tendency of the rate of profit to decline. The Okishio heorem holds that a capitalist will never adopt a method of production that will actually lower the rate of profit. Therefore, the theorem claims, only a rise in “real wages” can cause the rate of profit to fall. Shaikh shows that the Okishio theorem assumes and is dependent upon the presence of Walrasian perfect competition.

One of Shaikh’s most important contributions is his demonstration that the “law of comparative advantage” does not and cannot operate within a capitalist economy. Comparative advantage, which was first advocated by Ricardo, is often used to prove that all countries regardless of their different levels of productivity benefit equally from international trade. However, just as the Okishio theorem depends on Walrasian perfect competition, the law of comparative advantage depends on the quantity theory of money. Without the quantity theory of money, there is no mechanism that can convert the law of absolute advantage, which actually rules capitalism, into comparative advantage.

Today, comparative advantage is used by pro-imperialist economists to “prove” underdeveloped—that is, oppressed—capitalist countries should follow free-trade policies that in practice are ruinous to their development but benefit a handful of oppressor countries.

Shaikh’s biggest mistake

There is one important area where Shaikh does not defend Marx from the Marx critics, and that involves the theory of value. Shaikh defends the law of labor value but has failed to grasp the importance and even understand Marx’s discovery that value must have a value form where the value of a commodity is measured by the use value of another commodity. This leads to Shaikh’s acceptance of the claim, supported by virtually all present-day bourgeois economists, that modern money is “pure fiat money” backed by commodities as a whole rather than by a special money commodity.

When Shaikh attempts to analyze “modern money,” he stands closer to the MELT—monetary expression of labor time—theory of labor-based value, price and money than to the perfected labor-based theory of value put forward by Marx. Indeed, Shaikh sinks lower than many MELT theorists when he holds that what concerns the capitalists is the level of prices that prevail when a commodity is sold rather than when capital is advanced. This later claim is straight out of the quantity theory of money, which claims that changes in the quantity of money affect only nominal prices and wages but otherwise have no real effects on the capitalist economy.

Fortunately, Shaikh rejects the quantity theory of money in the scientific parts of his work in general and “Capitalism” in particular—for example in his critique of “comparative advantage.”

This leads Shaikh to his single biggest mistake, which is that the motive of capitalist production is the real net profit—measured by the use values of the commodities that are produced—rather than to maximize the accumulation of capital by striving for the highest possible rate of profit. Shaikh completely fails to grasp that profit—and its fractions such as interest and profit of enterprise—must always be measured in terms of money material and not real terms. To be fair to Shaikh, so do most other economists.

Shaikh’s analysis, so brilliant up to this point, disintegrates completely because it effectively abstracts everything that is specifically capitalist in production. Why does Shaikh end up committing “theoretical suicide” at this point rather than bringing his work to the brilliant conclusion it seemed to be heading towards?

Struggle of ideas a key arena of the class struggle

The late historic leader of the Cuban Revolution Fidel Castro, especially in his later years, stressed the importance of the battle of ideas. But this battle does not occur in a vacuum. It both reflects the class struggle and is one of the most important theaters in which the class struggle is waged.

The class struggle has less direct effect on the development of natural sciences, since the subjects that natural sciences deal with exist independent of us humans and our relations among ourselves. However, the class struggle is central to the development of the social sciences, which deal with social relations among us humans. This is why, in my opinion, the concepts of “Marxist physics” or “Marxist biology” make no sense, though Marx’s materialistic dialectics do have implications for these and other natural sciences. Marx, however, was neither a physicist nor a biologist.

But things are quite different in the social sciences, especially in the queen of social sciences, the science that deals with relationships among humans engaged in production. This is, of course, the science of political economy. Marx developed what he called his critique of (mostly classical) political economy in complete opposition to the bourgeois social and economic science of his day. That is why Marx called his work not political economy but the critique of political economy.

In his youth, Marx had intended to become a university professor. But his early revolutionary activity quickly barred this career path, both in his native Germany and in other countries. Later generations of Marxists operated within the organized workers’ movement, represented first by the Second and then the Third Internationals. These later Marxists did not enjoy the freedom that Marx had, since they were subjected to the complex politics of these Internationals. During the political terror of the 1930s, Soviet economists, just like other Communist (Third International) party members, were in danger of execution—and some were executed.

But the economic thinkers of the Second and Third Internationals did enjoy considerable independence from “official” bourgeois economics. Supported as they were by the mass organizations of the workers, these economists were generally able to carry out their work under more comfortable material conditions than the 19th-century London slum in which Marx had to perform much of his work.

Shaikh has lived and worked in an era dominated by the reaction—the back side so to speak—of the Great Russian Revolution, whose one-hundredth anniversary we celebrate this year (2017). In the United States, where Shaikh works and lives, there has been no socialist organization that was either capable or willing to support the great work that Shaikh has performed. This stands in contrast to the eras of the Second and Third Internationals. As a result, Shaikh has had to earn his living as a professor of economics at the New School. And the New School should be complemented for allowing a man of Shaikh’s stature to perform his work.

This has enabled Shaikh to earn a living and live in relatively comfortable material conditions—at least compared to that of Marx. And he has been free from the kinds of political pressures that existed in the Second and Third Internationals. But the price he has paid for this is that he is subjected to the pressure of “official” economics. Under the “publish or perish” pressure that dominates the academy, he has to show that he is a “real economist”—unlike the writers who produce articles on basic Marxist economics that occasionally appear in the small newspapers published by the small U.S. socialist organizations.

As a result, “Capitalism” is written in such a way that few political activists—even those who specialize in economics—will be able to understand. Instead, “Capitalism” is directed at Shaikh’s fellow economists, who won’t be able to understand it either—though for quite different reasons.

It is also reflected by Shaikh’s definition of “the classical school” of economics, in which he includes Marx, the neo-Ricardians, and his own work. This differs radically from the definition of classical economics as defined by Marx.

In contrast to Shaikh, Marx saw classical economics as something already in the past in his own day as a result of the growing intensity of the class struggle. In contrast to Shaikh, he also put himself outside of all political economy, seeing it as a “bourgeois science” that he was critiquing as an outsider serving the working class.

Modern universities, though they support “free thought” up to a point, cannot but help but be organs in the final analysis of the capitalist ruling class. As such, they are the chief sponsors of “official economics,” which has done and continues to do great harm to the working class and other exploited people. In recent decades, unlike in the past, university economics departments have been willing to hire a few Marxists, but they not surprisingly show a strong preference to those Marxists who concentrate on criticizing aspects of Marx’s work—especially those who have the effect of stripping away all its revolutionary implications.

Neo-Ricardian-inspired critiques of the law of labor value that invalidate Marx’s theory of surplus value, and criticisms of the falling tendency of the rate of profit, which imply that capitalism can last forever, are much appreciated. This is all the more true since the great majority of bourgeois economists are trained only in neo-classical marginalism and are therefore so profoundly ignorant of Marx’s work that they are incapable of criticizing it. Therefore, an economist or two who are familiar enough with Marx’s work that they can critique its most revolutionary conclusions are considered in many university departments a valuable addition to a department otherwise consisting entirely of marginalists—most of whom are allied with the right wing of bourgeois politics.

Almost all professional economists, whether of the right or left, “know” that gold plays no important role in the modern monetary system, though strangely enough operators in the financial markets who are obsessed with every movement of the dollar price of gold have failed to get the message. And the economists also “know”—especially “progressive economists” but not only them—that getting rid of the role gold formerly played in the national and international monetary systems is key to the capitalist state’s alleged “successes” in avoiding “depressions,” which are now defined only as downturns on the scale of the 1930s or greater. Indeed, any attempt to return to a gold standard under current circumstances would have appalling consequences.

While upholding some version of the labor theory of value can be barely tolerated in university economics departments, it generally can’t be Marx’s version but some “MELT” or MELT-like version of labor value. The revelation of all the contradictions of accepting Marx’s full theory of value is simply too revolutionary.

Shaikh’s work is all the more remarkable considering the political environment in which he has been obliged to work. However, it cannot in its current form be accepted as a finished product. It is more like a semi-finished product that is almost there but needs a little more work—the most important of which was fortunately done more than a century before the time of Shaikh by Marx himself. Once Shaikh’s MELT-like theory of value is replaced by Marx’s full theory of value, Shaikh’s work will come fully into its own. Correcting and completing Shaikh’s work will be a key task for Marxist economists in the coming years, whose primary job is to wage the now rapidly intensifying class struggle in the field of ideas.

Next month I will begin my review of Smith’s book.


1 I borrow the term “golden price” from Shaikh. Golden price is measured in terms of gold bullion, measured in terms of some standard measure of weight, as opposed to currency units. (back)

2 Marx makes this clear in his analysis of reproduction, both simple and expanded, in Volume II of “Capital.” However, in analyzing reproduction it became popular to abstract money. This is sometimes done for purposes of simplification, which is permissible as long no attempt is made to explain crises of the general relative overproduction of commodities omitting the role of money.

Once money is excluded, Say’s Law is implied. At most, such models are able to illustrate an overproduction of commodities in Department II backed by an underproduction of commodities in Department I or an overproduction of commodities in Department I relative to an underproduction of commodities in Department II. This type of overproduction of some commodities backed up by underproduction of other commodities is allowed by Say’s so-called “law.”

While simplification is one reason that money is often left out of reproduction models, another is the widespread belief that “modern money” is created by the monetary authorities outside the production of commodities. In that case, leaving out money is no longer a permissible simplification but a fundamental economic error. (back)

3 This doesn’t mean that the faulty government and/or central bank policies and legislation cannot sharpen the fluctuations of the industrial cycle. They certainly can. The art of so-called “stabilization policies” involves avoiding policies that actually increase the amplitude of fluctuations of the industrial cycle. (back)

4 Remember that Shaikh correctly explains in “Capitalism” that net profits—total profit minus interest—is what stimulates the “animal spirits” of the capitalists but then incorrectly defines profits in “real terms”—the various use values that the industrial capitalists produce—rather than in terms of the use value of the money commodity—gold bullion—and ultimately in terms of the essence that lies behind the form of exchange value—value, abstract human labor. (back)

5 This why, as Marx pointed out, that bourgeois economists have tended to look for problems in the credit system for causes and cures for crises and advocate various reforms that they believe will eliminate crises. Today, economists having tried virtually every possible reform have largely given up and instead adopted the more modest aim of developing policies aimed at avoiding another “super-crisis” of the 1929-33 type. (back)

6 This is exactly why Keynes wanted to get rid of the gold standard. (back)

7 By “golden rate of profit,” I mean the rate of profit calculated in terms of gold measured in standard units of weight as opposed to units of currency. (back)

8 Shaikh’s theory of interest is borrowed from the Italian neo-Ricardian economist Carlo Panico. (back)

9 Environmentalists point out the damage to the environment—for example, global warming—represents tremendous costs that cannot be reduced to cost measured in terms of value and its form exchange value. This is quite true. The Hurricane Harvey disaster in Texas was made far more likely by rising temperatures in the Gulf of Mexico, which is a consequences of global warming. As if to drive home the point, a few days after Harvey’s floods began to recede, normally clement coastal California was hit by a record-breaking heat wave that transformed the “golden state” into a baking oven. This was followed by formation of Hurricane Irma, the most powerful and destructive tropical cyclone ever observed in the Atlantic basin.

Until the damage to the environment forces capitalists to consume human labor—whether living (variable capital) or embodied in existing commodities (constant capital)—such costs are not costs at all to the individual—and corporate—capitalist. This is why capitalism is such an obstacle to dealing with the environmental crises that now confront our species—and all other species on the planet. (back)

10 By “golden inflation,” I mean a general rise in the golden prices of commodities, as opposed to a general rise in currency commodity prices caused by a fall in the value of the currency against gold. (back)

11 I am tempted to describe these events. But besides the fact that any attempt to do so would considerably inflate this already too long post, events are unfolding at such speed that it is simply impossible to keep up with them. I will therefore not attempt to do this in the current post. (back)

12 In the historical sense, this would therefore be no solution at all. (back)