Three Books on Marxist Political Economy (Pt 2)

Profit of enterprise and monopoly profit

As we saw last month, Marx’s prices of production are not identical to the marginal cost = equilibrium prices of “orthodox” bourgeois microeconomics. The biggest difference is that prices of production include not only the cost price and interest on capital but also the profit of enterprise. (1) Modern bourgeois microeconomic orthodoxy holds that in “general equilibrium” any profit in excess of interest will be eliminated by “perfect competition.”

In contrast, Marx—and the classical economists before him—did not believe that competition had any tendency to eliminate the profit of enterprise. Instead, they believed that in addition to interest, there is an additional profit of enterprise that is appropriated by the commercial and industrial capitalists. Profit of enterprise is defined as total profit minus interest. The profit of enterprise must not be confused with monopoly profits. The only monopoly necessary for the profit of enterprise is the monopoly of the means of production by the capitalist class.

True monopoly profits do exist. But within the classical-Marxist tradition, monopoly profit is an addition to the profit of enterprise. Anwar Shaikh affirms that monopoly profits exist but he has little to say about them in his “Capitalism.” Instead, Shaikh is interested in “real competition,” which quickly eliminates any profit beyond the profit of enterprise.

Shaikh’s failure to analyze monopoly profit is in full accord with his rejection of the Monthly Review and heterodox post-Keynesian schools, which often treat any profit, or at least any profit beyond interest, as monopoly profit.

Shaikh’s lumping together of these two quite different theories of a monopoly capitalist stage—the Hilferding-Lenin and the “Monopoly Capital” theories—is in my opinion a legitimate criticism of Shaikh’s “Capitalism” and his “fundamentalist school” in general. In “Monopoly Capital,” Paul Baran and Paul Sweezy were quite clear that they were not simply repeating or writing yet another popularization of the Hilferding-Lenin theory of monopoly capitalism. They found that theory inadequate and developed another, quite different theory of monopoly capitalism.

I believe that Shaikh is correct in seeing the influence of the Leon Walras-inspired theory of perfect competition in “Monopoly Capital” and other theories of modern capitalism influenced or inspired by Baran and Sweezy’s “Monopoly Capital.”

Differences between classical and ‘vulgar’ economics

Categories central to Marx’s analysis in Volumes I and II of “Capital” such as value and surplus value are invisible to the capitalists engaged in everyday competition and for that reason to our modern bourgeois economists. In Volumes I and II, Marx did not use a labor theory of price—prices directly proportional to values—because he believed that the labor theory of prices is the most realistic price theory. He did not. Rather, the founder of scientific socialism used a labor theory of prices in the first two volumes in order to lay bare the origins and nature of surplus value.

Prices of production, on the other hand, make it appear that not only variable capital-purchased labor power (2) but constant capital as well produce profit—surplus value. If we assume that competition equalizes the rate of profit, capitals that consist largely of constant capital will yield the same rate of profit as capitals that consist largely of variable capital. It seems to both the capitalists and bourgeois economists that both constant and variable capital produce profit, which bourgeois economists prefer to call “interest.”

Therefore, by their very nature prices of production hide the origins and nature of surplus value as the unpaid labor performed by wage workers. How surplus value is produced even when capitalists pay the workers the full value of their labor power—when there is no wage theft—and the consequences that necessarily follow were the main questions Marx wished to answer in “Capital.”

When Marx arrived at prices of production in Volume III of “Capital,” he broke through to the surface of economic life. It took Marx about two and half volumes to arrive at the point where vulgar economists begin their analysis. This is the point where the study of competition must begin, though Marx did not attempt to do this in “Capital.” He did study competition in his early work “Wage-Labor and Capital,” which he wrote in the 1840s.

“Wage-Labor and Capital” was written before Marx distinguished between labor and labor power. This distinction is vital to explaining how surplus value can arise without violating the exchange of equal quantities of labor. This is so important that Engels in the edited version of the work added the distinction to the text. As originally published, “Wage-Labor and Capital” does not belong to Marx’s mature work.

Despite this, the pamphlet can be used as a starting point to build a Marxist theory of “real competition” by combining Marx’s mature theories of value, money and prices of production with the theory of competition presented in “Wage-Labor and Capital.” In both this and another valuable early work, “The Poverty of Philosophy,” Marx explained that market prices fluctuate around values, or “the cost of production,” a phrase that is replaced by “price of production” in his mature work. In “Poverty of Philosophy,” Marx explains that prices virtually never actually equal values—the cost (prices) of production.

In “Wage-Labor and Capital,” Marx noted that there is competition between sellers and buyers and between different buyers and different sellers. When demand exceeds supply at prevailing prices, competition between the sellers vanishes but flares up as soon as supply exceeds demand.

A situation where demand exceeds supply at the prevailing prices is called today a “sellers’ market.” Conversely, a situation where supply exceeds demand at current prices is called a “buyers’ market.” To use present-day terminology, when a sellers’ market prevails, price competition among sellers will vanish while competition between buyers intensifies. A lack of competition among sellers combined with fierce competition among buyers pushes up prices. In a buyers’ market, the reverse is the case. Competition among sellers intensifies while competition among buyers vanishes. Prices then fall.

However, what will the prices be of various commodities when the balance of forces
is equal, causing competition between sellers and buyers to cancel itself out? Even in the 1840s, Marx realized that to answer this question you need a theory of value. He found the necessary theory in the work of David Ricardo. Ricardo explained that the values of commodities are determined by the quantity of socially necessary labor needed to produce them. The higher the value of a given commodity the higher the price will be when competition cancels itself out. If a pair of shoes takes twice as much labor to produce than a shirt under “average” market conditions, a pair of shoes will sell for twice the price that a shirt sells for.

In the 1840s, Marx had not yet perfected the labor-based theory he learned from Ricardo, but Shaikh demonstrates that even a purely “Ricardian” labor-based theory of price is indeed approximately true.

How does an active capitalist decide in which branches of production to invest?

Capitalist production—and any business person will confirm this—is about making a profit. The capitalist begins with a sum of money M and hopes to end up with a greater sum of money M’. When active capitalists are considering expanding into a new branch of production or enlarging their existing production, this means they have a sum of money—which may be owned by the capitalists or borrowed; it doesn’t matter here—that they are interested in increasing as much as possible. What commodity should our capitalists produce? Active capitalists—management—are experts in determining what investments will have the best chance of being most profitable. No active capitalist is infallible in this regard, of course. They can and do make mistakes. Many a capitalist enterprise has gone out of business because of mistakes in this regard made by its CEO.

Today’s active capitalists do everything they can to increase demand for the particular commodities they produce through advertising—as Baran and Sweezy explain in “Monopoly Capital.” Advertising certainly increases the chances of success but does not itself guarantee it. Only those active capitalists who over time are most successful in this regard survive. Unsuccessful capitalists are eliminated through the brutal battle of competition that Shaikh explains is akin to war.

In my opinion, Shaikh has a far greater understanding of the nature of capitalist competition than Baran and Sweezy did. Indeed, actual shooting wars including World Wars I and II were the continuation of “real capitalist competition” by “other means.”

It is in deciding in what branches of production to invest their capital that the price of production enters the minds of active industrial capitalists. If they believe—the belief may or may not be correct—that a possible investment will not yield any profit at all, or make a loss, the investment will not be made. If an active capitalist believes that a proposed investment will likely make a profit but the profit will be less than, or at best equal to, investing in, say, government securities, the proposed investment will also not be made. For the capitalists to invest in industrial production, the expected profit must exceed the prevailing rate of interest.

Our modern economists understand this much. For example, John Maynard Keynes was very much aware of it. But since according to neo-Walrasian general equilibrium theory there is no profit beyond interest when the economy is in equilibrium, growth will occur only when the economy is not in equilibrium. This is why modern bourgeois economists believe that some disturbing factor must disrupt the equilibrium. A rise in population or revolutionary new products with new use values that destroy the existing equilibrium is necessary if economic growth is to occur.

This belief colors the current debate about “secular stagnation” among bourgeois economists. The two favorite explanations they put forward for periods of “secular stagnation”—both those of the 1930s and today—is declining or negative population growth and a lack of new types of commodities.

This is not the case, however, in the classical-Marxist system, where a profit of enterprise above and beyond the interest on capital is the normal circumstance. Therefore, expanded reproduction—economic growth—is the normal condition for capitalism in the classical-Marxist tradition but not for the neo-Walrasian—perfect competition—school that forms the foundation of today’s orthodox bourgeois economics.

Active capitalists also reject proposed investments where the expected rate of profit is below the average rate on new investments. In the minds of the capitalists, a “hurdle rate” is formed below which an industrial investment will simply not be carried out. The hurdle rate is therefore the minimal rate of profit that capitalists find acceptable on new investments. The hurdle rate therefore exists as a quite definite number in the minds of active capitalists. The price of production consists of the cost price, defined as the price of producing a commodity to the capitalist, plus the hurdle rate, which includes both the interest on capital plus an additional profit of enterprise.

Price of production

A commodity enters the market with a “price tag” already on it—the cost price plus the hurdle rate—the price of production. Again, it must be stressed that the price of production is the price to society if it is to enjoy the commodity and not the price the capitalist pays for producing it. Over time, the average rate of profit or hurdle rate can change, but in a given era it will appear as a given in the minds of capitalists.

The profit of enterprise must not be confused with the wages of superintendence—a favorite dodge of bourgeois economists. An industrial capitalist might retire from any direct role in running a business and hire an expert manager to run it instead. The manager is entitled to the wages of superintendence and acts as a capitalist, but it is the capitalists who collectively own the capital who appropriate both the interest and profit of enterprise.

A capitalist may or may not be the same person as the manager—the active capitalist. It is actually this situation where the capitalist owners—the stockholders—are separated from the active capitalist—the corporate management—that becomes generalized in modern corporations. This separation is called the separation of ownership from management. In either case, the commodity always leaves the factory floor with a price tag—the price of production—that it may or may not realize in the market place.

If the active capitalists are lucky, they will find that the market demand is so great that they can sell all the commodities they produce in a given period of time at their individual price of production and still not meet the demand. In that situation, active capitalists will be more than willing to raise the price to equalize the supply with demand and thus realize a super-profit, which will be added on to the interest on capital plus the profit of enterprise appropriated by the capitalist owners.

In the case of a modern corporation, this takes the form of some combination of increased dividends plus a rise in the value of the stock on the stock exchange. However, it might turn out the active capitalist makes a mistake and the new investment yields a return below the hurdle rate. Any new investments in the given line of production will then be halted.

‘Turbulent movement’ of market prices around prices of production

If the capitalist can sell the commodities at more than the price of production, the capitalist owners—stockholders—will realize a super-profit. In this case, Shaikh explains, other capitalists will invade this branch of production in search of similar super-profits. The result will be that production will expand until supply exceeds demand at the prices that yield super-profits.

At this point, price competition will break out among the capitalists, which lowers the price back to the price of production and indeed will cause the market price to fall below the price of production. Once it is clear that the commodity cannot be sold at the price of production at existing levels of production, capital will begin to flow out of the sector, and production of that commodity will decline until once again demand exceeds supply at the price of production, which will enable the commodity to be sold at a price that exceeds the price of production. Therefore, under what Shaikh calls “real competition,” actual prices—market prices—do not equal the price of production but fluctuate around it in a “turbulent movement.”

Shaikh, who worked as an industrial engineer before he became an economist, points out that Marx’s production prices correspond to the reality of how real capitalists calculate their cost prices and profit. In contrast to marginal cost curves that form smooth lines that professors divorced from the messy world of production dreamed up, real-world active capitalists calculate the quantity of their capital—in terms of money, I would add—and then the estimated profit over a year to determine the expected annual rate of profit.

The practical necessity, Shaikh explains, of industrial capitalists to add an entire shift of workers to increase production—or lay off a shift of workers when production is reduced—precludes the kind of continuous rising and falling curves of production that neo-Walrasian microeconomics and its calculation of “marginal costs” require. In contrast, according to Shaikh—and his background as an engineer means he is in a position to know—the classical-Marxist concept of prices of production corresponds to the reality of the business world.

The price-of-production school versus classical economists and Marx

Shortly after the death of Ricardo, during what Marx called in “Theories of Surplus Value” the “the disintegration of the Ricardian school,” Colonel Robert Torrens (1780-1864) claimed there was no reason to worry about values when all you needed were prices of production that equalize profit rates. Torrens can be considered the founder of the school whose most well-known 20th-century representative was Piero Sraffa.

According to what is usually called the neo-Ricardian school, but I prefer to call here the price-of-production school, all we have to do is create a model where the prices of all commodities are such that all capitals of a given size realize equal profits in equal periods of time. Both commodities that serve as inputs for the production of other commodities and the commodities that are produced must be such that the capital invested in them yield their owners the same rate of profit. On this basis, modern input-output tables arose. It is no accident that Sraffa entitled his best-known work “Production of Commodities by Means of Commodities.”

The reason I prefer “price-of-production school” to “neo-Ricardian school” is that Ricardo refused to give up his theory of labor value. This was the case even though he was well aware of the apparent contradiction between his theory of the values of commodities determined by the quantity of labor necessary to produce them and the tendency of competition to equalize the rate of profit,

The modern price-of-production school either rejects—Ian Steedman—or is at least completely uninterested in—Piero Sraffa—value. While Colonel Torrens, founder of the price-of-production school, saw no need for Ricardo’s labor theory of value with all its contradictions, Sraffa saw no need for the scarcity-marginalist theory of value with all its contradictions. Why bother, Sraffa and Steedman say, with value at all when we have prices of production that equalize profits and regulate real world market prices?

Shaikh, at least in “Capitalism,” defines the present-day price-of-production school represented by such figures as Sraffa and Steedman as the continuation of classical economics, in which he includes Marx. But this is not how Marx, who coined the term “classical political economy,” saw it. Marx divided (bourgeois) economists into two main camps. The classical economists were those who went beneath the surface appearances of prices of production to examine the division of labor where workers are engaged in the production of different types of commodities that are then exchanged for one another by the owners of the commodities—the capitalists. They investigated the social relations of production.

Marx defined “vulgar economics” as the school of economics that analyzes only the surface appearances of the capitalist economy. The vulgar economists confine themselves to describing the equalization of the rate of profit that arises through competition. In this sense, every industrial capitalist is a vulgar economist.

Therefore, the various price-of-production schools that rejected or are indifferent to the analysis of value very much fit, in my opinion, what Marx called vulgar economy as opposed to classical economy. Marx was quite clear that classical political economy ended with Jean Charles Léonard de Sismondi and David Ricardo.

Torrens was grouped by Marx with the post-Ricardian vulgar economists. The 20th-century continuators of the price-of-production school such as Sraffa and Steedman carried on this tradition. They fit Marx’s definition of vulgar economists because of their rejection of value theory and thus the study of the real social relations underlying the capitalist mode of production—Steedman—or indifference toward it—Sraffa.

Value and prices of production

Marxists are—and the classical school before them were—interested in the relationship of the prices of production to underlying labor values. If we look at the real-world capitalist economy, we have hundreds of millions of workers producing commodities day and night. These workers have to produce commodities in more or less correct proportions if production is to continue at all. Yet there is no overall plan. Instead, there is universal competition among the capitalists and workers where every person is pursuing only his or her individual self interest. How can such a system work at all?

This is where value analysis begins. Value is a social relationship of production where value is measured in terms of a quantity of abstract human labor measured in terms of some unit of time. Prices of all types, including prices of production, have to be measured in the quantities of the use value of a commodity that functions as universal equivalent—for example, grams or ounces of gold bullion. This point is crucial, and Shaikh’s failure to fully analysis this in “Capitalism” and his other work, eventually lands him grave trouble in later chapters of his latest work as we will see later.

The snare of the transformation problem

When we fail to follow Marx—Ricardo won’t do—in analyzing the necessary form value must assume—essentially the theory of money—we set ourselves up to fall into a nasty trap called the “transformation problem.” The transformation problem does not consist of the mathematical difficulties of starting with a system of direct prices (corresponding to values) and arriving at a system of prices of production that equalize profits. That problem has long since been solved.

The heart of the transformation problem is that unless we make unrealistically restrictive assumptions—or we assume that all commodities enter the process of production, which means excluding luxury commodities consumed only by the capitalists as well as weapons of war purchased by the state—the rate and mass of profit calculated in terms of prices of production will be approximately but not exactly the rate and mass of profit calculated in terms of values or direct prices.

Does this destroy the Marxist theory of value? Ian Steedman in his “Marx after Sraffa” insists it does. Others trying to defend Marx’s theory of value—such as Ernest Mandel—have insisted that somehow the mass and rate of profit both in terms of prices of production and direct prices must be exactly—not approximately—equal, though both logic and mathematics say otherwise. (3)

Sir James Steuart and his ‘vibrations’

Sir James Steuart (1713-1780) was the leading English economist just before Adam Smith. For his time, Steuart was considered a reactionary, because he was the last representative of the merchantalist school that was to be swept away by the massive tide of economic liberalism engulfing Britain in the late 18th century, represented by Adam Smith and his “Wealth of Nations.” However, Steuart is extensively mentioned in Shaikh’s “Capitalism.” Indeed, we first meet the the old English economist on page 12 of Shaikh’s work.

Steuart noted, Shaikh explains, that there are two sources of aggregate profit. One is the transfer of wealth, while the other arises from production of new wealth and surplus product. Is Shaikh’s view compatible with Marx’s concept of labor value? Economics blogger Michael Roberts wrote based on a recent speech Shaikh gave in Greenwich, UK, he attended—which I haven’t heard—that he doesn’t think so.

The mercantilist economists believed that profit—surplus value—arose in the sphere of circulation. Merchants make their profit by buying cheap and selling dear. This view—which we also find in Malthus, who Shaikh groups with the classical economists but Marx considered a vulgar economist—is called profit upon alienation. Here “alienation” means sale.

However, Marx, who loved to give credit where credit was due, pointed out that Steuart made a crucial advance beyond the traditional mercantilist views, because he realized that no wealth is created in circulation but only in production.

Roberts reproduces the following quote—which appears in Marx’s “Theories of Surplus Value,” sometimes considered Volume IV of “Capital.” Let’s examine Marx’s quote, which I cut and pasted from Roberts’ blog.

“Before the Physiocrats, surplus-value—that is, profit in the form of profit—was explained purely from exchange, the sale of the commodity above its value. Sir James Steuart on the whole did not get beyond this restricted view; (but) he must rather be regarded as the man who reproduced it in scientific form. I say ‘in scientific form’. For Steuart does not share the illusion that the surplus-value which accrues to the individual capitalist from selling the commodity above its value is a creation of new wealth.'”

Roberts further quotes Marx as saying that Steuart described the redistribution of surplus value among buyer and seller as the “vibration of the balance of wealth between parties.”

Steuart was using the English language here as it existed more than 200 years ago. So the use of his term “vibrations” in this context sounds strange for speakers of present-day English dialects. However, Roberts provides a quote from Marx that clarifies what Steuart meant. Marx explained that “his theory of ‘vibration of the balance of wealth between parties’, however little it touches the nature and origin of surplus-value itself, remains important in considering the distribution of surplus-value among different classes and among different categories such as profit, interest and rent.”

Important as the transformation problem and the role Steuart’s “vibrations” play in its solution are, they logically belong later in this extended critical review of Shaikh’s work. I won’t be saying more about this question now because doing so would require explaining my criticisms of Shaikh, which will appear in a later part of this review. Here I want to emphasize what I think he gets right. Until then, the reader can read what I previously wrote here on this subject.

Can a general equilibrium in terms of prices of production actually exist in reality?

The capitalist economy would be in general equilibrium, according to the price-of-production school, when capitals of equal sizes yield equal profits in equal periods of time in all branches of production. Has there ever been a single day in the entire history of capitalism, or could there be a single day in the entire history of the capitalist mode of production, when every capital is realizing exactly the same rate of profit? The answer is no.

To develop a theory of “real competition,” we have to examine how the struggle among the capitalists transforms prices of production into market prices. Marx began with value and prices that are directly proportional to value, what Shaikh calls “direct prices.” Marx then proceeded from direct prices to prices of production, but only in Volume III “Capital.” To complete Marx’s unfinished critique of political economy, we have to proceed from prices of production to everyday market prices. Only then are we in a position to target international trade, the world market, and crises. This is the chief task Shaikh takes on in “Capitalism.” (4)

Bourgeois neo-classical general equilibrium theory and even Marx in places—for example, in his analysis of both simple and expanded reproduction found in Volume II of “Capital”—abstracts technological change, though unlike the “neo-classicals” Marx was able to explain economic growth—expanded capitalist reproduction—in the absence of technological change. In reality, a theory of general equilibrium, whether based on prices of production or marginal costs, is not possible without abstracting technological progress and the development of commodities with new use values. But a theory of “real competition” is unthinkable without putting technological change and the introduction of commodities with new use values at the center of the analysis.

From this point onward, I will divide this extended review of Shaikh’s work into two parts. First, I will examine what Shaikh gets right, and then I will examine where Shaikh falls into errors that ultimately bring his work up short.

Differential rent

Before we proceed from prices of production to market prices, there is one other contribution by Marx we should review. This is his theory of differential rent found in Volume III of “Capital.” I don’t think it is necessary to review Marx’s entire theory of differential and absolute rent, which I did here. Here, I will only examine the part that is relevant to analyzing the effect of introducing new, cheaper methods of production. I will therefore ignore the question of “absolute rent” and the “second case of ground [rent]”—the rising individual price of production of successive capitals on the same land—because they are not relevant to the subject Shaikh is investigating.

Suppose there are five grades of land ranging from most fertile to least fertile. I assume capitalist agricultural production where the term “farmer” refers to an industrial capitalist who employs wage labor. Capitalist farmers are full-fledged industrial capitalists. Let’s examine the case of capitalist farmers whose fields grow wheat. The quantity of wheat as a use value is measured in terms of bushels.

Under our assumptions, the varying—or differential—fertility of land is due to natural conditions and not the application of human labor to the land. (5) We also assume that differences in the individual prices of production among the capitalist farmers is due entirely to the differential fertility of the land being cultivated.

Our capitalist farmers first invest their capital on the most fertile grade of land. The individual price of production is lowest here. This means that a given quantity of capital invested on that land will yield a greater quantity of wheat measured in bushels than it will on any of the other grades of land. However, because the quantity of the most productive land provided by nature is limited, even when all the land of this grade is devoted to raising wheat there will be an insufficient supply to lower the market price to the individual price of production of wheat produced on this land.

Because they are realizing a price in excess of their price of production, our capitalist farmers will proceed to invest their capital on the second grade of land, where the individual price of production is higher than the first grade of land. But again, even when the second grade of land is fully devoted to the production of wheat there will still not be enough wheat on the market to lower the market price to its individual price of production. The capitalist farmers will then start to invest capital on the third grade of land. The total production of wheat rises and market prices fall but are still in excess of the individual price of production on this grade of land.

The capitalist farmers then proceed on to the cultivation of the fourth grade of land. Finally, the market price of wheat falls to its price of production on the fourth grade of land. The capitalist farmers will not proceed to cultivate the fifth grade of land because the individual price of production of that land will be in excess of the market price. Instead of investing their capital on this land, the capitalists farmers, assuming they are fully cultivating the fourth grade of land, would look to another area of production that will yield them at least the average rate of profit—their “hurdle level.” For example, perhaps they will invest their capital in the raising of wool, assuming raising wool will yield at least the average rate of profit on their capital.

Now we can calculate the differential rent. The difference between the market price our capitalist farmer will realize on wheat produced on grades one, two and three and their individual prices of production—lowest for grade one and highest for grade three—represents the differential rent. The individual price of production of wheat on grade four land exactly equals its average market price. Wheat grown on this land, which yields no differential rent, will regulate the market price of wheat. (6)

Grade five land will not be cultivated because such an investment would at best yield a profit below the average rate of profit and would lower the profits that are realized on grades one to four. The rent can be measured both in terms of bushels of wheat or money. Since we are dealing with a capitalist society, both the capitalist farmers and the landowners will calculate their profits and rents in terms of money.

The analysis of differential rent does not get us beyond the price-of-production
equilibrium. We still assume that all commodities outside from those that require the use of rent-yielding land sell at their prices of production. In order to analyze the prices of production that require land, we have to distinguish between individual prices of production of particular enterprises and the prices of production that regulate market prices. In the case of the classical-Marx theory of differential rent, the individual price of production of the commodities produced on the worst land will regulate market price. So far, we have not yet moved beyond “equilibrium.” But to analyze “real competition,” as Shaikh calls it, we have to leave the world of equilibrium behind.

Differential productivity among industrial enterprises

What about differential productivity of capitalist industrial enterprises that arises not from the shortage of means of production that are provided by nature—called “land” in political economy—but rather from human science and technology? The level of science and technology has, especially since the industrial revolution that began in Britain during the second half of the 18th century, progressively grown. The rate of increase, however, varies according to the branch of production and the progress of science. At times, it is revolutionary—for example, the introduction of modern assembly lines in the production of automobiles by Henry Ford in the 1920s. At other times, it is evolutionary, such as the case of small but cumulative improvements in assembly-line production of automobiles after the 1920s.

In addition, the progress of science and technology leads to the production of entirely new types of commodities. For example, railroads in the first half of the 19th century, automobiles in the early 20th century, followed by radios in the 1920s, then television sets in the 1950s, home computers in the 1970s onward, and the pocket-sized computers called smart phones in the early 21st century.

If technological change and the introduction of new products were to cease for a period of several decades, then all but the “best practice,” cheapest method of producing a given commodity of a given use value of a given quality would be eliminated. By definition, there would be no new types of commodities. But this has never been the case in the last 250 years.

Beginning in the late 18th century, industrial capitalists have revolutionized the means of production and introduced new types of commodities. The world would be a very different place if only the commodities known to Adam Smith were being produced, though Marx showed that there would still be expanded capitalist reproduction of the existing types of commodities at existing values. If there had been no technological progress over the last 250 years, the GDP, industrial production, world trade and general population would be much expanded compared to Adam Smith’s day. But we would be living in a world without railroads, steamships, automobiles, airplanes, electricity, radios, TVs, computers and the Internet.

The progressive if uneven growth in the productivity of human labor means that both the values and prices of production of commodities, assuming the value of money is fixed (7)—constantly falls. Another inevitable consequence is that there will be a range of individual prices of production of the same type of commodity just like we found in our wheat example. But not because of a shortage of the better grades of land but rather because of continuous if uneven growth in the productivity of human labor.

Shaikh explains that the rate of profit on new capital that employs the cheapest methods of production based on the latest technology and the prevailing rates of surplus value is the rate of profit actually subject to equalization. (Unfortunately, Shaikh avoids the expression “rate of surplus value” or “rate of exploitation,” presumably the price he had to pay to get his work published by Oxford University Press.)

This also means that the individual price of production of capitals employing the cheapest method will sooner or later govern the market price. However, by then it is quite likely that even cheaper methods of production will be available. The method of production that yields the lowest individual price of production of a commodity of a given use value and quality is now a “moving target.” This also means that the rate of profit on older investments will decline as their individual prices of production rise relative to both the lowest individual price of production, the average price of production, and the price of production that regulates market prices, itself a moving target.

On the other hand, equalization of the rate of profit will be less in evidence in older investments. In these investments, huge amounts of capital are tied up in the form of fixed capital that must be depreciated. The industrial capitalists are effectively stuck with these older investments. Periodically, the active capitalists are forced to write off a portion of the value of the older fixed capital on the books. Write-offs reflect what Marx called the “moral” depreciation on fixed capital. Eventually, moral depreciation may become so severe industrial capitalists may be obliged to write the value of the fixed capital all the way down to zero, often long before it is physically worn out.

If the value of fixed capital is written down to zero, capitalists will take into account only the “prime costs”—circulating capital, which consists of circulating constant capital such as raw materials and purchased labor power, which produces surplus value—when calculating the cost price. Even the prime costs will rise over time relative to the price of production that governs market prices. At some point, this will force the industrial capitalists to close down plants and sell what remains for scrap.

The industrial capitalists hope by the time this occurs the plant will be physically worn out anyway. In effect, “moral” or functional depreciation and the depreciation costs represented by the physical wearing out of the fixed capital are in a race with one another. This is why Marx explained in “Capital” that industrial capitalists will if at all possible keep their plants operating around the clock.

The sooner the value of the fixed capital is transferred to the commodities produced the better. This brings us to a point that really belongs more in the review of John Smith’s book on imperialism rather than the review of Shaikh’s “Capitalism,” but I will mention it here as an anticipation. Technological progress and the growth of the productivity of human labor that accompanies it means that it is very dangerous for capitalists to keep their capital in the form of fixed capital. Fixed capital can have a very long life. During that long life, there is plenty of time for methods of production and with it values and prices of production to change radically. This can have a disastrous effect on the value of the capital that is tied up in the form of fixed capital. Therefore, it is in the interest of the dominant strata of the capitalists to shift the ownership of fixed capital and the risk that goes with it to subordinate layers of the capitalist class.

Unlike the case with the classical-Marx analysis of differential ground rent, which assumes that methods of production in agriculture remain unchanged, we know we have a dynamic situation of constantly changing values and both individual and average prices of production. When a new, cheaper method of production is introduced, it will have an individual price of production that is below the prevailing market price. Enterprises that use it will not at first produce enough commodities of a given use value and quality to force that market price down to their individual price of production. As long as this condition prevails, these new enterprises will make super-profits.

But since all new enterprises will use the new method—or maybe an even better method—the percentage of commodities that are produced by this method—or even cheaper methods—increase rapidly. As this happens, the market price will fall—and because real competition is “turbulent,” as Shaikh puts it—for a a while even below the individual price of production as enterprises using the new cheaper method of production expand their production and market share.

This will cause the moral depreciation of the fixed capital of the enterprises working with the older methods of production, and sooner or later their profit will vanish and they will be forced from the market altogether. How fast this happens will depend on both the rate of technological progress and the fluctuations of the demand both for commodities in general and for the given commodities.

The centralization of capital

In neo-classical marginalist general equilibrium theory, the price of every commodity will equal its marginal cost. So-called “perfect competition” assumes that even the largest firms in every branch of production have a market share approaching the limit of zero. If a firm, according to neo-classical marginalist theory, were to attempt to gain a profit by increasing its prices even by a single cent, it sales would fall to zero. This would occur because its customers would immediately shift to one of its thousands of rivals that offer an identical commodity at lower prices. No firm would ever cut its price below marginal cost because it can already sell all the commodities it is producing at the prevailing price level and would only lose income if it cut prices without gaining additional market share.

This type of market situation is only approximated in agriculture where hundreds or even millions of peasants—small working farmers—are engaged in production. During general capitalist crises of overproduction, the prices of agricultural commodities fall sharply, but there is little immediate effect on the level of agricultural production. In the short run, fluctuations in agriculture production reflect weather far more than they reflect fluctuations in demand. In contrast, in industry dominated by industrial capitalists that control a significant percentage of the market, fluctuations in production are governed by fluctuations in demand.

The small working farmers know that even if they abandon their farms, the impact on the total production of agricultural commodities would be so slight that there would be no measurable effect on prices. They also know they have no choice but to sell their commodities at the prevailing market prices. As long as they do so, they will have no trouble selling their commodities, even if the prices are ruinous to them. They would never think of cutting their prices to capture a greater market share because they are already selling all the commodities they can produce.. Indeed, when the prices of agricultural commodities fall, the small farmer-peasants might even attempt to increase their production in a desperate attempt to gain additional revenue by selling more commodities. (8)

Eventually, even under these conditions the law of value will reduce agricultural production. This will occur not because the individual peasant-farmers cut their production but because a portion of them are forced to give up farming and are transformed into wage workers.

But this is a slow process, because the small agricultural producers desperately attempt to hold on to their means of production and traditional way of life as long as possible. Agricultural overproduction often takes the form of prolonged periods of chronic low prices accompanied by a steady decline of the number of small farmer-peasants. Bourgeois “microeconomic” theorists of “perfect competition” take the laws of the progressively disappearing mode of simple commodity production and very small-scale capitalist production that holds on in agriculture much longer than in other branches production and generalize it to the entire capitalist economy.

Significantly, Leon Walras, the founder of general equilibrium theory based on “perfect competition,” was from France, where the dying mode of production based on small-scale peasant agriculture still played a far more important role at the time than it did in industrial Britain or industrial Germany.

Things are quite different in non-agricultural industry, where even in the 19th century the number of independent enterprises were already far fewer than was the case in agriculture. Suppose that particular industrial capitalists are selling all the commodities they can produce at their individual prices of production. They are realizing the average rate of profit. Now suppose there is a drop in the demand for their commodities due to a general crisis of overproduction that can be expected about every 10 years. Our industrial capitalists now find that they can sell perhaps only 80 percent of the commodities that they produce in a month if they continue to sell them at their individual price of production.

These industrial capitalists have two choices. They can reduce their production by 20 percent or temporarily by an even greater amount to get rid of their excess inventories that have already piled up in their warehouses, or they can cut their prices. The policy of reducing production will only be effective, however, if they control a significantly greater proportion of the market than a portion of the market approaching the limit of zero that is required by “perfect competition.” The same is true of price cuts, since if they control only a portion of the market approaching zero that “perfect competition” requires, they will already be selling all the commodities they can produce at the existing prices. Under these conditions, cutting prices will do them no good. In manufacturing, however, we can assume that each industrial capitalist controls a portion of the market considerably greater than a portion approaching the limit of zero. The industrial capitalist has become a price setter, not a price taker.

Most likely our industrial capitalists will reduce the price somewhat below the price of production but combine this with production cuts and layoffs. A favorite tactic employed by industrial capitalists during demand slumps is to keep the formal price the same. But the (active) capitalist will announce temporary “discounts” or “rebates” in order to clear “excess inventory.” The more centralized the capital is in the given branch of industry the more industrial capitalists will defend their existing prices—which more or less correspond to the price of production—by cutting production rather than prices. The very act of reducing production will begin to shift the relationship between supply and demand and help check the pressure to further reduce prices.

Assuming their fellow industrial capitalists react the same way, the market will clear relatively quickly. Once the market clears, our industrial capitalists will again find that they will be able to sell all the commodities they produce in a given period of time at or near their individual price of production without discounts. (9) But this happy result is achieved at the cost of reduced industrial production and increased unemployment among the industrial workers—which isn’t all bad from the viewpoint of the industrial capitalists. The increased competition among the sellers of the commodity labor power will increase the rate of surplus value and thus the rate of profit realized by the capitalist once the crisis has passed.

In agriculture, where we assume production is far more decentralized, prices will fall far more during the crises while production remains largely unchanged. The fall in agricultural prices is no mere “discount” either. The prices quoted are well below what they were before the crisis. But once the crisis passes, prices recover in agriculture as demand recovers while production is little affected in the short run. As a result, during the crisis the prices of agricultural commodities fall relatively to industrial commodities, but during the recovery phases of the industrial cycle, prices of agricultural commodities will rise relative to industrial commodities, all things remaining equal. And this indeed is what economic history shows actually happens.

Shaikh versus the Monthly Review school

Both Shaikh and the Monthly Review school believe that faced with a drop in demand at existing prices giant corporations will cut their production in order to defend their prices—which Shaikh emphasizes are ruled by the individual prices of production of those corporations. In contrast, general equilibrium theory would deny the very existence of giant corporations and pretend that industrial production is in the hands of tens of thousands, or even hundreds of thousands if not millions of independent firms. Or if it did concede the reality of the giant corporations, it would proclaim that competition is “imperfect” and blame either government policies or trade unions for the monopolistic situation.

But here we come to an important difference between Shaikh and the Monthly Review school. In “Monopoly Capital,” which remains the bible of the Monthly Review school, Baran and Sweezy claimed that the giant corporations would maintain their selling prices even as they cut their cost prices. Baran and Sweezy completely ignored labor values, which both the classical economists and Marx held lay behind the prices of production.

Not so Shaikh. With labor values in mind, Shaikh denies that the giant corporations have such power to maintain their prices while their costs fall. Ultimately, Shaikh never forgets that the rate of profit is determined by the underlying value relationships—the organic composition of capital, the turnover time of variable capital, and the rate of surplus value. The transformation of direct prices into prices of production will modify the rate of profit slightly for reasons I will explore later, but it does not change the fact that the rate of profit in terms of value and rate of profit in terms prices of production will remain approximately equal. Ultimately, value relations rule the prices of production and the rate of profit. No “absorption of the surplus” by the state or any other entity can change this situation as we will see in due course in this extended critical review.

If a giant corporation succeeds for a while in raising its price above its individual price of production it will immediately face competition from other giant corporations who will invade is sphere of production and tend to once again lower the price to—and for awhile below—the corporation’s individual price of production.

This will be true unless the giant corporation has a permanent absolute unregulated monopoly or unless a cartel agreement among the giant corporations engaged in a particular sphere of production can last indefinitely. The history of capitalist production shows that these situations are never permanent. Shaikh is therefore correct, at least in my opinion, on this question against the Monthly Review school.

What can occur is that a few monopolistic corporations can for rather prolonged periods of time maintain super-profits. But such monopolistic super-profits, unlike true rents, are never permanent. Instead of permanent rent-like super-profits, we have periods of prolonged super-profits followed by renewed violent competition leading to the collapse of the super-profits into outright losses. This often though not necessarily involves new competition arising on the international level. Where are the super-profits that were once appropriated by the owners of the steel, rubber and auto factories that were located in what is now the U.S. rust belt?

The transformation of the industrial belt of the United States into the rust belt was completely unforeseen in “Monopoly Capital.” That work portrayed U.S. monopoly capitalism as an “irrational” but rather stable system. Again Shaikh—who in fairness wrote after the collapse of so much of the industrial production of the U.S., Britain and Western Europe—has a far more realistic picture of contemporary capitalism than Baran and Sweezy did. If Baran and Sweezy were alive and writing a “magnum opus” today, they would have to write a very different book than “Monopoly Capital.” (10)

Shaikh, eager to debunk the false concept of permanent super-profits, is in my opinion guilty of playing down the reality that super-profits do exist and can last for considerable periods of time before they vanish amidst renewed cutthroat competition that eventually leads to wars and revolutions. There is a big difference between Baran and Sweezy’s “Monopoly Capital,” and Lenin’s theory of imperialism, which pictured imperialism as a highly unstable system leading to violent crises, wars and revolutions. According to Lenin, monopoly capitalism is a transitional stage between the “old capitalism” based on free—but not perfect—competition and a higher mode of production—socialist production. In this crucial respect, the works of the famed Russian revolutionary, including his pamphlet “Imperialism,” differ with both Shaikh’s “Capitalism,” which sees capitalism little changed from the days of Adam Smith, and Baran and Sweezy’s “Monopoly Capitalism,” which portrayed monopoly capitalism as a rather orderly if irrational system whose further evolution had largely ceased.

Shaikh has throughout his career been a strong defender of Marx’s “law of the tendency of the rate of profit to fall.” This law has been a source of controversy since shortly after Engels published Volume III of “Capital.” One attack was the so-called Okishio theorem, developed by Japanese economist Nobuo Okishio (1927-2003). The Okishio theorem claimed that as long as the “real wage” remains unchanged capitalists will never adopt a method of production that would lower the rate of profit. According to Okishio, the only way the rate of profit will fall would be if real wages rise. Shaikh believes that the Okishio theorem actually assumes “perfect competition.”

I will examine this, but next month I will take a break from my review of this year’s (2016) new books on political economy and examine the results of this year’s U.S. presidential and congressional election cycle and the prospects for the U.S and world economy at the end of the Obama era in light of the growing war threat.


1 Since the death of Ricardo in 1823 bourgeois economic theory has been anxious to explain away surplus value. The view that surplus value arises from the unpaid labor of the workers was inherent in classical theory, though classical political economy never treated surplus value as an economic category separate from its parts, such as interest, profit and rent. When classical economy and even the early Ricardian socialists referred to surplus value, they always used the name of a fraction of it such as interest to describe the entire surplus value.

Marx’s contribution was two-fold. First, he used a separate name—“mehrwert” in German, translated surplus value in English—to describe the value created by the unpaid portion of the total labor as opposed to the paid portion performed by the working class. Second, he showed how the capitalists can make a profit even when the working class receives the full value of their labor power. Not a penny of wage theft is necessary for the capitalists to make a profit. Therefore, the revolutionary conclusion of Marx was that the existence of surplus value does not violate the law of exchanges of equal quantities of labor but is in full accord with it.

Neo-classical marginalism claims that the profit of enterprise does not exist when the economy is in “general equilibrium” and thus banishes a not inconsiderable fraction of the total surplus value that must be explained away. Landed property is then mixed up with landed capital and explained away as the interest on landed capital.

Interest, borrowing from the Austrian school, which is closely related though not identical to the “neo-classical school” is due to the lower subjective valuations people put on commodities that will be available in the future as opposed to the present. Finally, the high incomes of active capitalists is explained as the wages earned by them, since they after all perform the labor of actually running a business enterprise. (back)

2 Labor power is often defined as the money wage used by the capitalists to purchase the labor power of the worker. But labor power is a form of productive capital, while the money the capitalists use to purchase the labor power actually represents money capital to the capitalist, though the same pieces of money represent revenue but not capital in the hands of the worker. Money capital does not produce an atom of surplus value. Surplus value is produced only when the purchased labor power of the workers is put to work by the industrial capitalists. (back)

3 The price-of-production school also attacks Marx’s theory of surplus value using the transformation problem. This school concentrates on the fact that once commodities that do not enter the reproduction process are taken into account the rate and mass of profit when calculated in terms of prices of production will only approximately but not exactly equal the rate and mass of profit when calculated in terms of value or direct prices.

The school then triumphantly proclaims that since the rate and mass of profit in terms of prices of production is not exactly equal to the rate and mass of profit in terms of value, surplus value or profit must be arising from something different than the unpaid labor performed by the working class. Perhaps constant capital defined in physical terms is producing surplus value. I will show later in this extended critical review how the entire quantity of surplus value down to the very last cent can be defined in terms of the unpaid labor performed without violating either the laws of logic or mathematics. (back)

4 Any study of what Shaikh calls “real competition” must begin with prices of production. Just as we pass from value, to the form of value to direct prices and the explanation of surplus value on the basis of direct prices, we must pass from direct prices to prices of production to market prices. Ultimately, we can’t build a theory of capitalist crises—which is so crucial to understanding real-world capitalism—without a correct theory of market prices. For this, we need as Shaikh explains a theory of real competition. (back)

5 If the varying fertility of land was due to the application of human labor to the land we would be dealing with landed capital and not landed property. (back)

6 Here I ignore absolute rent. Indeed, if all the wheat-growing land used in the worldwide wheat market was owned by the state, there would be no absolute rent, so the above assumptions are a theoretical possibility. (back)

7 This is an unrealistic assumption. If we assume the commodity that serves as the measure falls at an equal rate with that of other commodities—money must itself be a commodity—the prices of production would be unchanged. If the commodity that serves as money were to fall at a faster rate than that of the value of other commodities, the fall in the value of commodities would express itself in the rise of prices of production. Finally, if the value of money were to fall at a slower rate or even rise, the prices of production would fall at a faster rate than the value of commodities. (back)

8 Beginning with the New Deal, the U.S. government stepped in to organize working farmers by paying them to refrain from producing certain commodities when their prices fell below a certain level. These policies have been adopted by other capitalist governments as well. In these cases, the power of the state is used—though in a completely reactionary way to defeat the centralization of capital—to hold back agricultural production in order to maintain the prices of agricultural commodities. (back)

9 Shaikh explains the industrial capitalists’ desire to maintain a certain level of excess capacity to meet a sudden or unexpected increase in demand for these commodities at their price of production. In addition if production is pushed beyond a certain limit, machinery can suffer considerable damage. (back)

10 In contrast, there is no reason to think that if Marx were alive and writing today he would write a book that would be much different than the three volumes of “Capital” plus “Theories of Surplus Value” that we have. Of course, the concrete historical examples of capitalist production and explanations that Marx gives would be quite different, and “Capital” written today would be greatly enriched by the actual history of an additional century and half of capitalist development and class struggle. But there is no reason to think that its theoretical foundations would be any different. (back)