The wave of reactionary racist economic nationalism represented by the British “Brexit” and election of Donald Trump to the U.S. presidency has drawn attention to the question of world trade. Most capitalist economists are supporters of “free trade.” So-called free-trade policies have been protected and encouraged by what this blog calls the “U.S. world empire”—and what the economists call “the international liberal order”—since 1945. These policies followed an era of intense economic nationalism among the imperialist countries that led to, among other outcomes, Hitler’s fascism and two world wars within a generation.
Bourgeois economists who support free trade—the majority in the imperialist countries—claim that international trade is governed by an economic law called “comparative advantage,” first proposed by the great English economist David Ricardo.
The “law” of comparative advantage makes two basic claims about world trade.
The first is that the less role capitalist nation-states and their governments play in international trade the more the international division of labor will maximize labor productivity.
The second is that regardless of the relative degree of capitalist development among capitalist nation states, all such states benefit equally if they engage in free trade. In terms of government policy, this means that regardless of their degree of capitalist development, the best policy is no protective tariffs, no industrial policies, and no interference in the movement of money from one capitalist country to another.
In contrast, economic nationalists in the imperialist countries both right and left, though they sometimes claim to have nothing against free trade, insist that it must be “fair trade.” For example, President Trump insists that since 1945 global trade has been increasingly unfair to the United States, leading to the collapse of much of U.S. basic industry. Trump promises to change this and wants more government intervention in international trade, such as border taxes and other tariffs to make sure that trade is “fair.” This will, the Trumpists claim, lead to re-industrialization of the United States and the return of good-paying industrial jobs.
Anwar Shaikh is a native of Pakistan, a country oppressed by imperialism that has a very low level of capitalist development. Many economists from such countries—among them Shaikh—claim that free trade prevents their countries from developing along capitalist lines.
Shaikh, however, is not simply a “pro-development” economist from a capitalistically underdeveloped country advocating high protective tariffs, industrial policies, and neo-mercantilist capital controls that aim to accelerate national capitalist development. He is a Marxist who wants to see the whole global capitalist system replaced by a world socialist economy.
In his “Capitalism,” Shaikh develops a Marxist critique of the neo-classical marginalist theory of “prefect competition” and contrasts it to what Shaikh calls real competition. Shaikh is a strong opponent of the Ricardian and neo-classical theory of comparative advantage.
Shaikh’s treatment of world trade and competition is found in the chapter entitled “International Competition and the Theory of Exchange Rates.” Despite the dry title, the subject is loaded with tremendous political implications for the world today. While the U.S. has long lectured oppressed nations about the necessity to follow free-trade polices, Shaikh points out that neither Britain, the dominant capitalist country in the 19th century, nor the United States, which played the same role in the 20th century, practiced free trade in the period leading up to their emergence as leading capitalist industrial nations. “In the heyday of its [Britain’s] development from the early 1700s to the mid-1800s,” Shaikh writes, “it used trade and industrial policies similar to those subsequently used by Japan in the the late nineteenth and twentieth centuries, and by [South] Korea in the post-World War II period.” (p. 493)
The same is if anything more true of the United States, the world’s great champion—at least before Trump—of free trade after 1945. Shaikh quotes Korean economist Chang Ha-Joon, who writes, “Criticizing the British preaching free trade to his country, Ulysses Grant, the Civil War Hero and US president between 1868-1876, retorted that ‘within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.'” [p. 493]
Indeed, Chang points out that between 1860, the year that saw the election of the first Republican president, Abraham Lincoln, and the end of World War II, which saw the rise of the American world empire, the U.S. “was literally the most heavily protected economy in the world.” Therefore, protectionist policies didn’t work out so badly for the Britain and the United States during their rise.
But what about the countries that follow free-trade polices at the insistence of the U.S. and its subordinate agencies such as the IMF? Have such policies led to better results than the “faulty” policies followed by Britain and the United States when they were rapidly developing capitalist nations? Shaikh explains and backs it with data that not a single capitalist country since World War II has done well following free-trade policies.
Have the policies insisted upon by what is sometimes called “the Washington consensus” (1) of avoiding “neo-mercantilist” capital controls encouraged capitalist development among the oppressed countries? Shaikh quotes Turkish economist Dani Rodrik that eliminating capital controls “leaves the real exchange rate [the relationship between prices in different nations when the prices are measured in terms of a common currency—SW] at the mercy of fickle short-term capital movements.” [p. 494].
Translated from academic language, the sudden withdrawal of money capital from capitalist nations leads to soaring interest rates and sudden contractions in their home markets, resulting in deep recession-depressions that create massive unemployment and wreck their economies. Contrary to the teaching of most economists, concrete history shows successful capitalist development requires protectionist policies that assure local industry a monopoly on the home market, subsidies to the most promising industries—industrial policies—as well as “neo-mercantilist policies” that prevent the removal of money from the country. This is true despite the preaching of the virtue of free trade and “fallacies” of mercantilism that anybody who takes an introductory economics course in high school or college is exposed to. (2)
Concrete real-world economic history shows that it is actually “pro-development” economic policies that combine protective tariffs or other measures designed to give local industry as much of a monopoly on the home market as possible, as well as neo-mercantilist policies designed to prevent the removal of money from the country, resulting in a home market representing a larger fraction of the world market—though at the expense of other capitalist countries—that enables capitalistically backward countries to make the transition to capitalistically developed countries.
In contrast, capitalistically backward countries that have chosen to follow the advice of “economic orthodoxy”—or in reality have been forced to follow this advice—by tearing down their tariffs walls and making their currencies “convertible,” thus allowing money and money capital to flow freely in and out of the country, have remained capitalistically backward and even retrogressed.
Today, as regards the level of capitalist development, the countries of the world can be divided into three categories. First are the old imperialist capitalist countries that are past—often well past—their industrial peak. Britain, the former workshop of the world, is the leading example of an imperialist country that once dominated global industrial production. Its industrial production has largely collapsed, leaving ruined lives and despair in its wake. But the list of countries past their industrial peak also include the United States, the countries of West Europe, with the partial exception of Germany, and increasingly Japan.
The second category are countries that have retained many of the features of oppressed countries but in the last few decades have experienced rapid spurts of capitalist development through a combination of protective tariffs, industrial policies, and neo-mercantilist capital controls. (3) These countries include but are not limited to China, though there are now signs that the period of the rapid development of Chinese capitalism is now past its peak; India; and South Korea, where rapid capitalist development also seems to have peaked.
A third category is comprised of the severely oppressed countries that have a very low level of capitalist development and are not catching up with the advanced capitalist countries but on the contrary are falling further behind. This category includes many countries that retain numerous pre-capitalist features and have never experienced more than a very limited and stunted capitalist development. One way or another, the majority of countries on the planet fall into this category.
Included in this category are the countries that had been building socialist economies before 1989 but then suffered political and social counterrevolutions that brought a return to capitalist property relations accompanied by massive declines in industrial and agricultural production. These countries also have failed to achieve much in the way of capitalist development.
This raises an important question about countries like Britain and the United States that have experienced decades of industrial decline. Could a combination of a return to protective tariffs and other trade restrictions, industrial polices and perhaps even neo-mercantilist capital controls give capitalism in these countries a second “industrial youth”? The new U.S. president, Donald Trump, and other economic nationalists of both the right and left give an affirmative answer to this question.
What would be—and we may soon have a real-world experiment if Trump and the other economic nationalists in his administration succeed in implementing them—the consequences of policies designed to encourage re-industrialization of the capital-rich but industrially decaying imperialist countries? This will be a question that I will examine at the end of my extended reviews of Shaikh’s “Capitalism” and John Smith’s “Imperialism.”
The capitalist nation-state as an economic category
The nation as an organizational unit of human society has its origin in pre-history. It began as a group of tribes that have a real or mythical common ancestor. In its origins, the nation is the the ultimate extended family. With the transition to class society, the nation was transformed into a group of people living in a common territory. In antiquity, however, this did not take the form of a large common territory inhabited almost exclusively of people who shared a common nationality as is the case with the modern bourgeois nation-state. Rather, it constituted people living in a city state. Well-known examples are Athens, Rome and Jerusalem.
Some of these city-states, such as Rome, for example, conquered territories comparable in size to a large modern nation-state. But these states were empires where people from the ruling city-state oppressed peoples of other nationalities. For example, the people who lived in the Roman Empire, unlike the citizens of a modern capitalist nation-state, did not speak a common language or share in Roman citizenship (4).
Here I am not dealing with the various non-capitalist forms of the nation but only with capitalist nation-states. What are characteristics of a modern capitalist nation-state?
First, a capitalist nation-state occupies a large contiguous territory that is far larger than the area occupied by city-states—though not necessarily empires—of antiquity. In addition, unlike ancient empires the people of a capitalist nation-state share a common nationality. They speak a common language, which facilitates the exchange of commodities—carrying on business. Within the capitalist nation-state, there is a common currency and a lack of internal trade barriers. It must be large enough both in territory and population so that the home market can support capitalist industry.
A sense inherited in part from the earlier pre-capitalist forms of the nation and preserved among the citizens of a capitalist nation-state is that we are a “common people”—a kind of extended family. (5) A sense that “we are all in this together” is cultivated. Patriotism or “love of country” is defined as the highest virtue while treason to “country”—the capitalist nation-state—is seen as the greatest of crimes.
Not all modern capitalist states are pure nation-states. Great Britain arose as a mini-empire that consisted of four nations—England, Wales, Scotland and Ireland. Originally, these nations had four separate languages. However, the English nation oppressed the other three and gradually imposed its language on all of them.
This did not prevent Ireland developing a strong national movement in opposition to English oppression and eventually breaking away. Speaking for the Bolsheviks, J.V. Stalin in his famous 1913 work “Marxism and the National Question” expressed the view that Wales, Scotland and England had become a single British nation while Ireland with its strong nationalist movement was a separate nation.
However, the current strong movement for an independent Scotland, now invigorated by the Brexit vote, casts some doubt on Stalin’s 1913 assertion that Scotland and England along with Wales had in fact merged into a single British nation. Though this seemed to be true in 1913, the demise of the English empire and overall weakening of British imperialism have led to today’s resurgence of national feeling in Scotland and growing resistance to English domination. Like all things, a sense of nationality among people living in a certain territory isn’t something fixed for all time but is subject to development, decline and even reversal as circumstances change.
The world market and the capitalist nation-state as economic categories
In principle, the rise of the world market, beginning with the discoveries of gold and silver—money material—in the 16th century, could in theory have led to the emergence of one political entity—a true world capitalist state to match the emerging world market. However, conditions that prevailed during that time, and even today, did not allow such an optimum development—at least not on this planet.
Under the concrete historical circumstances prevailing back then, the world market splintered into various national “home markets.” These home markets to varying degrees walled themselves off by protective tariffs and mercantilist policies that aimed at maximizing the quantity of money—gold and silver—in the home market so that it would constitute as large a percentage of the world market as possible, while at the same time assuring the dominant position of local capitalist industry within the home market.
The capitalist nation-state as an engine of economic development
In this way, the development of capitalism was greatly accelerated within the territories of the most powerful emerging capitalist nation-states but greatly retarded elsewhere. From the beginning, the capitalist nation-state was, like all states, an organization of force and violence. During the mercantilist era, the capitalist nation-states used force to separate the direct producers—mostly peasants—from their means of production, thus forming the proletariat that gave birth to capitalist production. Marx stressed the central role that violence played in the birth of the capitalist mode of production, debunking bourgeois falsified history to the contrary.
Force also played no small role in the formation of the capitalist home markets. For example, tough laws were passed that greatly restricted the ability of individuals to take gold and silver coins out of the country, while stiff protective tariffs, government trade monopolies, and other trade restrictions were implemented to ensure national industry had as much of a monopoly of the home market as possible. Wars were often fought among emerging capitalist states with the aim of further expanding the home market while contracting the home markets of rivals.
The difference between political and military competition between capitalist nation-states and economic competition between capitalists
Shaikh points out that “orthodox economists” treat competition between capitalists located in different capitalist countries as though it is competition between capitalist nation-states. This is a very important point. Economic competition between capitalist nation-states is always in the final analysis economic competition between the capitalist enterprises that happen to be located in the different nation-states.
In the study of competition, however, it is extremely important to distinguish between the political and military—war-making—competition between capitalist nation-states and economic competition between capitalists. An example of confusing these two types of competition is N.I. Bukharin’s concept, strongly colored by World War I, of capitalist nation-states in the age of imperialism as state-capitalist trusts.
Within an economic trust, all enterprises that belong to the trust are controlled by a single capital, which eliminates economic competition within the trust. However, even in the imperialist epoch competition between capitalist enterprises continues within each individual capitalist nation-state. On the other hand, the political and military competition that occurs between capitalist states, whose “highest” form is a shooting war, is by no means identical to economic competition among capitalist enterprises.
Economic competition—the main subject of Shaikh’s “Capitalism”—is inherent in all commodity production. Capitalism is defined as the highest form of commodity production where labor power has become a commodity. Economic competition in a capitalist economy occurs on many different levels.
There is the competition between individual capitalist enterprises. These range from individually owned enterprises—in this case the competition between individual enterprises is also competition between individual capitalists—as well as competition between the collective capitalists known as corporations. Even if individually owned capitalist enterprises disappeared—which is the historical trend—and only corporations existed, there would still be competition between individual capitalists on the stock exchange, where all traders aim to relieve their fellow traders of a portion—or all—of their capital.
In capitalist society, we have competition between buyers and sellers and between buyers and between sellers. And as every trade unionist knows, even in a fully capitalist society made up only of capitalists and wage workers, competition between buyers and sellers and between buyers and between sellers is not limited to competition among capitalists. We also have economic competition between workers for jobs. Indeed, anybody who has ever applied for a job has engaged in this type of competition. Trade unions aim at eliminating economic competition between the sellers of the commodity labor power among union members. And these days, we shouldn’t forget that the whole racist phenomena of “white” workers voting for far-right politicians in the U.S. and Europe is ultimately rooted in the economic competition between owners of the commodity labor power for jobs.
Competition between nation-states
Capitalist nation-states, which are above all organizations of force and violence, do not primarily function as commodity owners. Competition between capitalist nation-states therefore involves a form that is different than the competition among the owners of commodities. This is true despite that fact that the non-economic competition between different capitalist nations is ultimately driven by economic competition between groups of capitalists that control the various nation-states for markets, raw materials, money material and, not least, cheap labor power.
The main function of the capitalist state, like all other types of state that preceded it, is holding down by force the oppressed class that produces the surplus product, which under capitalism takes the form of surplus value. A secondary function of the modern capitalist state is to regulate the competition among individual capitalists by keeping it within the channels of economic competition. That is, the capitalist state acts to prevent individual capitalists from using violence against their competitors. In order to achieve this, the state must keep the most powerful means of destruction in its hands and out of the hands of the individual capitalists and their direct agents.
In order to accomplish this task, states set down certain rules of the game of competition that all capitalists operating in its territory must obey. Very important in this regard is the enforcement of contracts. Suppose capitalist Y refuses to pay a debt to X, claiming that the alleged debt is not a valid contract. Instead of hiring a thug that makes Y an offer that cannot be refused, X sues Y in court. Let’s assume the court decides in X’s favor. Faced with the overwhelming force of the state power, capitalist Y pays capitalist X. If, however, the court decides in favor Y, it is now X who is faced with the overwhelming state power. X has no alternative but to write off the debt and move on.
No matter what the decision of the court, the potential for violent conflict between X and Y is avoided. If the state did not play this role, the risk of doing business would be high indeed. It would not only be the capital of contending capitalists but their very lives that would be at risk. In that case, individuals who now function as capitalists would in many cases prefer to hoard gold coins rather than invest profits in their various enterprises and carry out expanded capitalist reproduction.
There is one case where the state does not play the role of enforcing contracts and regulating competition among the competing capitalists. That is the case of capitalists who are engaged in illegal activities. These illegal business activities are called “organized crime” or “the rackets.” Remember, however, that what is a legal or illegal branch of activity can change over time.
I will use organized crime in 20th-century New York City as an example, since much of this history is well documented. I spent my young adulthood in late 20th-century New York City. In those days, it was a rare day that the newspapers did not report the finding of a body of a slain “mobster” in the trunk of an automobile or dug out of an empty lot. Mobsters are actually aspiring capitalists engaged in their own process of primitive capital accumulation who are forced by various circumstances to operate outside the protection of the law. The aim of each mobster is to accumulate enough capital through illegal means that will later enable them or at least their children to “leave the life” and enter into legal or “legitimate” branches of business.
Back in the 1920s, the outlawing of the production and sale of alcoholic beverages in the U.S.—known as Prohibition—suddenly opened vast opportunities for young aspiring would-be capitalists from the lower classes. A certain number of young candidate members of the capitalist class were willing to take exceptional personal risks in order to become full-fledged members of the capitalist class. In the 1920s, unlike before—or since—thanks to Prohibition they could enter into very profitable but at the time illegal business dealings—the production and sale of alcoholic beverages.
These young capitalists—and would-be capitalists—who engaged in illegal businesses were called by the newspapers owned by “legitimate” capitalists “the mob.” Without the protective functions of the state that limited the competition that raged among them to economic competition, the young booze capitalists of the Prohibition era engaged in widespread “armed struggle”—mob wars—as they battled for territory— markets—for the illegal commodity they dealt in—booze.
Eventually, one of these “mobsters,” Charles “Lucky” Luciano and his boyhood friend Meyer Lanksy (6) organized a “commission” that established certain rules of the game and attempted to end the mob wars so that the “mobsters” could concentrate on business.
The commission, just like a proper state, had an enforcement arm that acted as an internal “mob” police force. This “mob police” was dubbed “Murder Incorporated” by the sensationalist New York press, which loved to cover “the mob” and its wars. If the commission decided it was necessary, “Murder Incorporated” would carry out a “hit” on—murder—individual mobsters who violated the “laws” established by the commission. Unlike a “real” capitalist state, there was no practical way for the commission to imprison offenders beyond short-term kidnappings, so liberal use had to be made of the death penalty. (7)
The U.S. world empire has since 1945 worked on exactly the same principles the New York “mob” employed in the days of Luciano and Lansky. Each individual capitalist nation-state is analogous to an individual crime “family” or gang. The families or gangs “organized” as individual street-level criminals can be compared to capitalist nation states. The street-level criminals can be compared to individual capitalists and corporations. The “commission” can be compared to the World Trade Organization and the Security Council of the United Nations, while NATO and various UN “peacekeeping operations” can be compared to “Murder Incorporated.”
The big difference between the 1930s-era Murder Incorporated and NATO and UN “peacekeeping operations” today is one of scale. The residents of “mob-ridden” 1930s New York City never had to worry about not waking up in the morning because some mob war had led to the detonation of a nuclear bomb overhead that transformed the city and every living creature in it into lifeless radioactive nuclear ash during the night.
Competition between capitalists in the same country versus international competition between different countries
We therefore have to distinguish between economic competition between the capitalists and the political and military competition among different capitalist states that represent different “families” or “gangs” of competing capitalists. In his “Capitalism,” Shaikh is interested in economic competition between industrial capitalists and not political and military competition among various capitalist nation-states. He correctly criticizes bourgeois economics for forgetting that economic competition is always in the final analysis competition between different individual capitalist enterprises, with each capitalist motivated by the need to maximize the rate of profit on his or her capital.
The question that Shaikh is interested in is whether the economic competition between capitalists located in different nations is governed by the same laws that govern competition between capitalists located in the same country—as Adam Smith thought—or whether the laws that govern economic competition between capitalists located in different nations are fundamentally different, as David Ricardo and most modern bourgeois economics believe. Shaikh comes down firmly on the side of Smith.
Adam Smith believed that economic competition between capitalists located in the same country and capitalists located in different countries is governed by what Shaikh calls absolute advantage. Absolute advantage is determined by a combination of the conditions of production—which ultimately comes down to the quantity of labor (individual value) that an industrial capitalist requires to produce a commodity of a given use value of a given quality and the price the capitalist must pay for the commodity labor power—wages.
According to the theory of comparative advantage, first advanced by David Ricardo and supported by the majority of economists today, a different economic law prevails in international trade, called comparative advantage. According to comparative advantage, capitalists of a nation that can produce commodities of a given use value and given quality at higher cost prices in the absence of international trade will still win the battle of competition in the branches of production where in the absence of international trade the differences between their cost prices and the cost prices of the capitalists of the more favored nations is least. (For a more detailed explanation, see here.)
Comparative advantage depends on the quantity theory of money
The supporters of comparative advantage—if they are consistent—hold that this happy result comes about because of the alleged determination of the general price level, including wages, by the ratio of the quantity of money within a given country and quantity of commodities. It is this alleged economic law—the quantity theory of money—that transforms the law of absolute advantage into comparative advantage. Keynes, who was a very intelligent man, late in life came to reject the quantity theory of money. Shaikh points out in “Capitalism” that Keynes also rejected the law of comparative advantage. Indeed, in his “General Theory” Keynes criticized free trade and openly defended the mercantilists, who had long been subjected to ridicule by official British economic orthodoxy.
The element of truth in the theory of comparative advantage
There is an important element of truth in the theory of comparative advantage. The law of comparative advantage would operate if the global economy functioned like a factory that employs workers of different skills and whose manager is instructed by the factory owner to employ all the factory’s workers—nobody can be fired because of their low level of skill. Within this constraint, the manager is then instructed to maximize the productivity of the workers and thus the physical output of the factory. Unfortunately, for the claims of comparative advantage, the world capitalist economy does not operate on the principles of such a factory. (8)
As mentioned above, the claim that comparative advantage governs international trade in a capitalist country depends in the final analysis on the truth of the quantity theory of money. Without the quantity theory of money, there is no mechanism that can transform absolute advantage into comparative advantage.
Quantity theory of money
The quantity theory of money holds that virtually the entire money supply of a nation is fully absorbed into circulation as currency and circulates at the maximum velocity that the given development of the banking system within the nation allows.
Ricardo argued that it would be irrational for an individual capitalist to ever hoard money, since a capitalist gets rich by employing capital in an active business—producing and appropriating surplus value—as opposed to hoarding it in the form of money. Hoarding money at best preserves the value of capital. (9) But under capitalist production, the whole point is to expand the value of one’s capital.
Therefore, Ricardo reasoned, capitalists gets rid of any money they get hold of as soon as possible. As for workers, they are forced to spend the money they receive in wages as soon as possible, otherwise they would starve. Following Ricardo’s reasoning, competition—or starvation in the case of workers—will quickly eliminate any persons that attempt to hoard money.
Therefore, Ricardo believed that we can be pretty sure that all the money in a country is drawn into circulation. Making these assumptions, the quantity theory of money claims if you double the quantity of money within a nation, without changing the quantity of commodities in circulation, the level of nominal prices including the price of labor (power)—wages—will double, but nothing else will change. If you halve the quantity of money without changing the quantity of commodities in circulation, nominal prices including wages will fall by 50 percent, but nothing else will change. (10) The claim associated with the quantity of theory of money that changes in the quantity of money only effects changes in nominal prices and wages but has no effect on real wealth is called by the economists “the neutrality of money.”
Closely associated with the quantity theory of money among modern economists is the claim that there can be no general overproduction of commodities because the price mechanism, which is allegedly very sensitive to any lack or excess in effective demand, will guarantee that prices will always gravitate to a level where supply and demand equalizes.
The law of absolute advantage
On average—not in individual cases—dead labor, labor already objectified in means of production, is fully paid for. This is not the case with living labor, however. The industrial capitalists pay for only a fraction of living labor—namely the amount they pay for the labor power of the workers and not the actual labor the workers perform for the capitalists. If the workers’ do not perform additional unpaid labor that produces surplus value, their labor power has no use value for the capitalists. This is why even under ideal conditions trade unions cannot eliminate capitalist exploitation as long as they operate within the capitalist system, as opposed to acting as levers to overthrow the system.
The industrial capitalists who win the battle of competition as a rule are therefore those who can produce a commodity of a given use value and quality at the lowest cost-price. The cost price consists of the price of labor power—wages—plus the cost of those elements of circulating constant capital—raw and auxiliary materials— plus the quantity of fixed capital that are used up, but not the total quantity of fixed capital that must be set in motion to produce a unit of a given commodity.
How Ricardo used the quantity theory of money to transform absolute advantage into comparative advantage
Suppose that the world monetary system consists of circulating full-weight gold coins. To further simplify, let’s also assume that the wages of labor—the value of labor (power)—are equal in all countries. Therefore, Ricardo assumed that the countries where the industrial capitalists who produce commodities with the least quantity of labor—the lowest (national) value—will have an initial advantage and will run trade surpluses while countries that produce commodities at the highest national values will be at an initial disadvantage and will run trade deficits.
The countries that run trade surpluses, according to Ricardo’s assumptions, will experience an inflow of gold coins, which will result in a rise in their money supplies. As their money supplies increase, according to Ricardo’s assumptions, general price levels rise, which will include a rise in the price of labor (power)—wages. Countries that are disadvantaged will experiences trade deficits, which will cause gold coins to flow abroad. As their money supplies decline, so will their prices and wages. These flows of gold coins will continue until a distribution of gold coins—money—is achieved where trade is balanced among all nations engaged in international trade. Thanks to the quantity theory of money, absolute advantage has been transformed into comparative advantage.
As Britain achieved an overwhelming absolute advantage due to the industrial revolution, Ricardian comparative advantage and its associated free-trade doctrine that the government should play as little role as possible in foreign trade banished mercantilism from “official” British political economy.
The ‘currency school’
In Ricardo’s time (11), banknotes convertible into gold were increasingly replacing actual gold in circulation. After the death of Ricardo in 1823, the “currency school,” which based its ideas on Ricardo’s teachings on the quantity theory of money and comparative advantage, arose. The currency school insisted that the Bank of England—which was increasingly monopolizing (12) the issue of banknotes—should behave exactly like the quantity of gold coin would in a pure gold coin system. This meant that when gold flowed into its vaults, the Bank of England should increase the quantity of its notes, and when gold flowed out it should contract its note circulation. The currency school was victorious with the passage of the Bank Act of 1844, which obliged the Bank of England to carry out its monetary policy according to the currency school’s teaching.
The “currency men” as they were called—there were no currency women, apparently—claimed that the severe gold drains that accompanied the crises of 1825 and 1837 would not be repeated once their proposed reform was carried out. The reason they gave was that Britain’s trade would be almost perfectly balanced at all times because what is now called comparative advantage would operate perfectly. Therefore, the currency school claimed, the severe gold drains of 1825 and 1837 and the accompanying financial and economic crises would not recur.
Why it didn’t work
In Volume III of “Capital,” Marx compared actual price movements with fluctuations in the quantity of gold in the Bank of England’s vaults. The figures show that commodity prices were actually quite insensitive to fluctuations in the quantity of gold in the vaults. Instead, it was interest rates that were very sensitive to the fluctuations of the quantity of gold in the vaults and resulting changes in the quantity of banknotes in circulation.
A drop in the Bank of England’s gold reserve always raised the rate of interest, while an increase in the gold reserve always led to a drop in the rate of interest. When the Bank of England experienced a gold drain, the rise in interest rates on the London money market would draw “hot money” in search of a higher rate of interest from abroad. Instead of British prices and wages dropping, thus correcting the British trade deficit—like the currency school expected—Britain borrowed money from abroad and went increasingly into debt. This continued until the arrival of a global crises of overproduction contracted global credit. Then, Britain’s balance of trade was adjusted by forcing Britain to export more of its crisis-shrunken total production while importing less. The working class and poor in general paid the price through mass unemployment.
The Bank Act of 1844, however, did have this virtue: It put the theory of comparative advantage to the test. The results were in within a few years. During the crisis of 1847, the gold drain was so severe that the Bank Act had to be suspended. The “experiment” was repeated during the crises of 1857 and 1866, with the same results. However, British economists, instead of dumping Ricardo’s theory that comparative advantage ruled capitalist world trade, preferred to dump the really scientific part of Ricardo’s work such his theory of labor value. It was left to Marx to develop this part of the Ricardian theory.
As Shaikh shows with concrete figures in “Capitalism,” the theory of Ricardian comparative advantage continues to fail the test of practice, but with few exceptions the economists cling to the theory. Anybody who has any doubt about this should read Shaikh’s book. Instead of giving up on comparative advantage, today’s economists prefer to salvage the failed theory by appealing to “imperfect competition” or the failure of the capitalist nations to follow the proper monetary or free-trade polices.
Comparative advantage in the age of paper money
When the Bretton Woods gold-dollar exchange international monetary system unraveled at the end of the 1960s and beginning of the 1970s, various proposals were floated among the bourgeois economists on what should replace that system. Among the would-be reformers of the international monetary system was Professor Milton Friedman, then a professor of economics at the University of Chicago.
The future Nobel Prize winner was a strong supporter of both comparative advantage and the quantity theory of money. In this at least, he was consistent. Friedman proposed that instead of trying to fix exchange rates as had been the practice under both the classical international gold standard and the post-World War II dollar-gold exchange system, there should be a “free float.” Friedman explained that exchange rates are the price of one currency in terms of another. As a consistent marginalist economist, he believed that governments and central banks should play no role in determining prices, including exchange rates.
Friedman claimed that the dollar-gold exchange standard had prevented comparative advantage from operating properly in the post-World War II period because it prevented currency rates from reaching levels that would actually balance international trade and thus allow the law of comparative advantage to operate with maximum efficiency. He advanced a series of proposals for a new international monetary system based on these principles that would finally allow competitive advantage to come into its own.
Friedman believed that “supporting” the price of gold at $35 an ounce was the same as agricultural price supports that he opposed on the same marginalist grounds that any government interference with price formation leads to economic “inefficiency.” Since gold coins had ceased to circulate, Friedman believed gold was no longer money. Gold was simply just another commodity, and not a very important one at that.
Therefore, under Friedman’s proposed international monetary system, governments and central banks would no longer play any role in determining the currency price of gold or exchange rates. This would eliminate the need for government treasuries or central banks to maintain reserves of either gold or foreign currencies. Under Friedman’s proposed reform, governments and central banks would sell off their entire reserves of both gold and foreign currencies.
How the ‘free-float’ system would transform absolute advantage into comparative advantage, according to Friedman
According to Friedman, a reserve-less free-float system would automatically balance world trade and prevent balance of payments crises, much like the 19th-century “currency men” claimed that their policies would.
Suppose country X is running a deficit with country Y. Friedman and like-minded economists argued that under a free float, country X’s currency will decline in value against currency Y. This will make X’s commodities cheaper in terms of country Y’s currency. Since country X’s currency will be able to buy less of country Y’s currency, the price of imports from country Y will rise in terms of country X’s currency. This will cause consumers in country X to shift away from higher-priced country Y commodities to now cheaper commodities of country X. At the same time, consumers in country Y will notice that commodities produced in country X are now cheaper than locally produced commodities of the same use value and quality. They will start buying more commodities produced in country X and less in their own country.
As a result, country X’s exports to country Y will rise, while country X’s imports from country Y will drop. Country X’s currency will continue to depreciate against country Y’s currency until trade is balanced between the two countries. At this point, the rate of exchange between country X and country Y will have reached a new equilibrium.
The result will be that any trade imbalances between X and Y will be quickly corrected, transforming absolute advantage into comparative advantage. In this way, according to Friedman, the exchange rates that would emerge between currencies will be exactly such that will exactly balance international trade, and the law of comparative advantage will finally come into its own. Another victory for the free market!
Friedman’s reform proposals were dubbed a “clean float” as opposed to the dollar-centered “dirty float” that actually replaced the Bretton Woods System. Contrary to Friedman’s recommendations, governments and central banks continued to hold reserves of gold and foreign currencies and continued to intervene in currency and gold markets through buying and selling of foreign currencies and gold, though currency exchange rates and currency prices of gold were no longer fixed within narrow bands of fluctuation as they were under classic international gold standard or the Bretton Woods gold-dollar exchange standard.
Friedman’s theory like Ricardo’s depended on the quantity theory of money to transform absolute advantage into comparative advantage in international trade. And happily, Friedman like Ricardo was a champion of the quantity theory of money. Friedman therefore assumed that the change in the exchange rate between one paper currency and another will have no effect on the overall domestic price level. Any rise—in the event of a devaluation—or fall in the event of revaluation—in the price of imported items would be offset elsewhere. The reason that Friedman believed that this would be true was his belief that domestic prices including wages will change in a given nation only in response to changes in the quantity of money, the level of commodity production and exchange being given.
Unlike the case of the currency school, whose proposals were actually adopted as policy and put to the test, where they failed miserably, Friedman’s reforms have never been put into effect. So we have to do a thought experiment to see what would happen if a reserve-less Friedmanite clean-float international monetary system was actually implemented.
Suppose a paper currency is devalued against foreign currencies due to balance of trade deficits—not inflationary over-issue by the monetary authorities. Everything else remaining unchanged, the price of gold in terms of the devalued currency will also rise. According to Milton Friedman, this will make no difference whatsoever, and in this respect almost all modern economists, including many Marxists, would agree.
However, according to the Marxist theory of value the change in the quantity of gold represented by a given currency should affect prices expressed in gold-devalued currency. The price of non-money commodities in terms of the money commodity is not arbitrary but ruled by the relative values between them.
Here I assume gold bullion is the money commodity. But the argument works perfectly well if another commodity serves as the money commodity. It is a basic law of commodity production that a commodity must emerge as the money commodity. Gold is therefore not the money commodity because governments have established it as such. Rather, governments must treat gold—for example hold it as a reserve—because it is the money commodity. As a marginalist, all this was far beyond Friedman’s economic understanding. However, as long as capitalism exists no economic reform, including Friedman’s proposed reforms of the world monetary system, can repeal this basic economic law.
Therefore, if a currency is devalued against the money commodity due to a negative balance of trade, prices expressed in terms of the devalued currency will start to rise. The domestic money market will tighten as higher interest rates draw more money into circulation. Indeed, Shaikh notes that the English economist Thomas Tooke (1774-1858) noted this important law back in the 19th century. The rise in interest rates will attract “hot money” from abroad causing the country to go into debt. In this respect, the devaluation of the currency due to a deficit in the balance of trade and payments will have an effect on interest rates similar to a gold drain under the classic gold standard.
The inflow of “hot money” into the devaluing country—assume the monetary authorities in the devaluing country do not increase the quantity of paper money—which if they are following Friedman recommendations, they will not do—will then halt or reverse any further devaluation of the currency but at the price for the devaluing country that it will now be in debt. This is, as documented by Shaikh, exactly what is observed in the real world. Countries that devalue their currencies go increasingly into debt with countries that do not devalue their currencies.
The opposite will occur in a country that experiences a rising currency. If the currency is revalued, commodity prices calculated in terms of the revalued currency will tend to fall, with commodity production again assumed as given. The velocity of circulation of the revalued currency will drop and interest rates in the revaluing currency will fall. The lower interest rates will cause a flow of “hot money” out of the revaluing country in search of the highest possible interest rates. The outflow of “hot money” will halt or reverse the revaluation of the currency—assuming the monetary authorities of the revaluing do not contract the currency, which would be in accord with Friedman’s recommendations—but now the country will be a creditor to the countries it is running a trade surplus with. The result will be that instead of trade being brought into balance, international debts will pile up.
The only thing that will eventually achieve balance more or less will be a general crisis of overproduction that destroys international credit allowing a re-balancing of international trade according to the law of absolute—not comparative—advantage at the price of mass unemployment. Again, it is the workers and the oppressed who will bear the brunt of the burden. There will be no other way out as long as we retain the capitalist mode of production. The alternative is the world socialist revolution, but here we are going far beyond anything Professor Friedman would have recommended!
Currency devaluation and the wages of labor
There is one extremely important difference between competition on the home market and on the world market. For purposes of simplification, when Marx illustrated economic laws that govern capitalism he assumed that industrial capitalists pay workers the full value of their labor power. He also assumed that either the industrial capitalists were operating within the same nation, or the entire capitalist world was a single nation where labor powers of identical skill had the same value—and wages. While this assumption is approximately true within a given capitalist nation—leaving aside the effects of racism and sexism—it is not even approximately true when competing capitalists are located in different nations where the value of labor power is very different.
Marx explained that the value of labor power consists of two elements. One is the biologically determined wage below which the work force will not be able to reproduce itself. A second portion is determined by the history of and class struggle within a given nation.
If the wage falls below the minimal biological level, the working class will start to die out, resulting in a shortage of labor power that will again raise wages. Therefore wages cannot fall below this level—at least not for very long. If the wage falls below the level of the historically determined value of labor power, workers will tend to drop out of the labor market—the participation rate of the population will start to drop—or go on strike until the resulting shortage of labor power forces wages to return to something like the historically determined value of labor power in the given country.
The capitalists are forced by the pressure of competition among themselves to drive wages down toward the biologically determined minimal value of labor power. The workers always attempt to first defend the historically determined value of labor power and under favorable circumstances increase it. These are the economic laws that govern the purely economic—trade union—aspect of class struggle.
Capitalists located in a nation where the value of labor power is drastically lower than it is in another country may be able employ far more labor power than in a nation where the value of labor power is higher and still have lower labor costs. Even if the productivity of the disadvantaged workers is well below the global average—which means that an hour of labor of these workers will represent less than an hour of average labor on the world market—the capitalists of the disadvantaged nation can still win the battle of competition if, thanks to their lower labor costs, they enjoy a lower cost price.
Cost price is a function of both the productivity of labor and the price of labor power. This is an important difference between the laws that govern the competition between capitalists within a given nation and between capitalists located in different countries. Within a given capitalist nation-state, we can assume at least as a first approximation that competing capitalists have to pay the same price for labor power.
However, internationally we cannot make this assumption even as a first approximation. Within a given capitalist nation-state, we can assume that the capitalists who produce at the lowest individual value will win the battle of competition. We cannot make this assumption on the world market. Instead, the battle of competition will be won by the capitalists who pay the least for labor—both dead and living—and produce at the lowest cost price.
What is true, however, is that as “globalization” proceeds and the world market acts increasingly as a single market, the national values of commodities, including the value of the commodity labor power, will tend to converge. As far as labor power is concerned, the countries where the national value of labor power is lowest will increasingly determine the value of labor power on the world market. This is the well-known “race to the bottom” that has in recent decades increasingly dominated the labor market across the globe.
As long as the national value of labor power in the countries where it is cheapest does not govern the value of labor power in the world market as a whole, the capitalists that produce surplus value with the “cheap labor” power will, everything else remaining equal, be able to undersell the capitalists that produce with higher valued labor power. The results will be, all else remaining equal, that the commodities produced with “cheap labor” will have lower prices. This tends to lead to the illusion that, contrary to Marx, wages govern prices.
However, as the low value of labor power in the countries where labor is “cheap” comes to dominate the international value of labor power, the growing use of “cheap labor” arising from the growing transfer of industrial production from the imperialist countries to the oppressed countries will no longer be low prices for consumers in the imperialist countries but rather high profits for the capitalists—just as Marx—and Ricardo—would predict. I will return to this crucial point in the course of my extended review of Shaikh and Smith.
A weakness in Shaikh’s presentation
Capitalist economists use “unit labor costs” for purposes of analyzing the effects of different wages paid by capitalists for comparable labor powers. Assuming wages are equal, the higher the productivity of labor the lower will be unit labor costs needed to produce a given commodity. But the lower the wage, assuming productivity is equal, the lower unit labor costs also will be. So capitalists might enjoy lower unit labor costs than rivals simply because they pay far lower wages even if they employ far more workers.
It would, however, be far more accurate to say that the capitalists who win the battle of competition are the capitalists who have the lowest cost price. Like all other prices, cost prices—a term Shaikh does not use—are measured in terms of money. Here Shaikh becomes confused. On the world market, there is more than one currency. U.S. capitalists pay workers in U.S. dollars, British capitalist pay workers in pounds, German capitalists in terms of euros, Chinese capitalists in terms of yuan, and Japanese capitalists in terms of yen, and so on.
Shaikh solves this problem by comparing real wages—wages measured in terms of the use value of commodities that workers must buy to reproduce their labor power. This assumption worked well enough in Ricardo’s early “corn models,” where Ricardo assumed corn was the only commodity—an assumption the great English classical economist later dropped in favor of measuring the value of commodities in terms of the labor socially necessary to produce them—Ricardian labor value. In this way, Ricardo was able to construct far more realistic models of the economy. He therefore avoided the problem of attempting to compare qualitatively different use values quantitatively. This problem of comparing different qualities in quantitative terms is captured by the saying, “you can’t compare apples and oranges.”
So-called “neo-Ricardian” economists who have greatly influenced Shaikh—not always to his benefit—have retreated from labor value to the method of Ricardo’s early corn models. They often begin, “Assume an extremely simple economy that produces one wage good … ,” or something to that effect. This solves the problem of comparing apples to oranges through what Marx called a “violent abstraction.”
In a real economy, especially at the level of the world economy, the real wages of workers in different countries cannot be rigorously compared to one another. The reason is that in the real world “wage goods” consist of somewhat different commodities with different use values. For example, workers located in a tropical country do not need to spend money on heating in winter. Even workers in the same country will have different individual tastes and needs and will choose somewhat different baskets of wage goods.
Ricardo, despite the fact that he wasn’t entirely successful in developing a logically air-tight theory of value based on human labor, took a giant step forward when he replaced his early corn models with models based on labor value. Shaikh has done much to defend Marx’s theory of value against neo-Ricardian-inspired criticisms based on the so-called “transformation problem.” [link to posts which deal with this] Claiming alleged difficulties of Marx’s theory of value involving the transformation problem and perhaps the pressure of working in an academic environment where criticizing Marx will do more to advance your career than defending him, neo-Ricardians prefer the Ricardo of the early corn models than the later Ricardo of labor value models.
Unfortunately, however, we can see a little neo-Ricardian influence in Shaikh. It seems that Shaikh has not grasped fully Marx’s theory of value and how it advances beyond Ricardo’s theory of value. He nowhere seems to have dealt with Marx’s concept—not found in Ricardo—that value must take the form of exchange value, where the value of one commodity must be measured in terms of the use value of another. This is a weak side that runs through Shaikh’s work in general and “Capitalism” in particular. In the coming months, this will become increasingly clear as I examine the weak side of Shaikh’s “Capitalism.”
How to correctly compare wages in different countries
The correct solution to comparing wages paid in different currencies used to buy packets of wage goods with different use values is found in Marx’s concept of gold as “world money.” If you calculate money wages not in terms of local currencies but in terms of weights of the money commodity gold, the problem of comparing real wages that are not qualitatively the same completely disappears. Gold as the world market commodity par excellence has the same value—represents the same quantity of abstract human labor in all countries at any given moment in time—leaving aside extraordinary conditions such as the value of gold in California at the height of the 1849 gold rush.
Like for all commodities, the value of labor power must take the form of exchange value. In practice, this means that the value of labor power must be measured in the use value of the money commodity gold. As a commodity, labor power like all other commodities must represent a certain quantity of a qualitatively identical “social substance,” abstract human labor. But this social substance must take the form of a physical substance such as gold bullion measured in terms of weight. The value of gold like all other commodities is measured in terms of the quantity of a social substance—abstract human labor. However, the abstract human labor that constitutes the social substance of the value of gold differs in one sense from abstract human labor embodied in non-money commodities—it is directly social. Therefore, money can be defined as human labor in the abstract that is directly social and that is embodied in the use value of the money commodity.
Cost price, which is preferable to “unit labor costs,” is measured in terms of weights of gold bullion in all countries. This makes both wages and cost prices qualitatively identical and thus quantitatively comparable in all countries at any given point of time. The supreme aim of every industrial capitalist is therefore to produce a given commodity of a given use value at the lowest possible cost price. The industrial capitalist can achieve this either by increasing productivity of labor or paying the lowest possible wage. In the real world, the industrial capitalists, especially those engaged in world trade, employ a combination of both methods.
When a currency is devalued against other currencies, assuming that the gold value of the other currencies is unchanged, the immediate effect is that the wages of workers in the devaluing currency in terms of world money—gold—are cut. Therefore, everything else remaining unchanged, the capitalists of the devaluing country have gained an advantaged. Marx showed in “Value, Price and Profit” that a general rise or fall in wages has no effect on the general level of prices. But here Marx is assuming the wage rise or fall in general. If particular capitalists were to succeed in cutting the wages they pay their workers, they would indeed be able to undersell their competitors. But within a country, if individual capitalists cut wages below “the going rate,” their workers will quit their jobs and sell their labor power to other capitalists offering a higher wage. It is far more difficult (13) for workers to do this on the international level, however.
Indeed, in criticizing the euro system, capitalist economists have coined the new term “internal devaluation.” Since both Germany and Greece use the same currency, Greece cannot cut the wages of Greek workers by devaluing the Greek drachma like they could in the days before the euro. However, they engage in an “internal devaluation” by cutting the wages of Greek workers in terms of euros—in other words, by engaging in old-fashioned wage cutting. Of course, if you have two capitalists who produce under otherwise identical conditions of production—individual value—but one pays less for labor power than another, the capitalists who pay less have a lower cost price and can undercut the capitalists who pay more. The new term “internal devaluation” lays bare the dirty little secret of currency devaluations as a form of disguised wage cutting.
Next month, I will examine Shaikh’s theories of rate of profit on bank capital and the rate of interest.
1 When I refer to “Washington” in this context, I am referring to pre-Trump Washington. However, there is no reason to believe that economic nationalists like Trump are any more inclined to be friendly to developing capitalist countries that make use of protective tariffs, industrial policies, and neo-mercantlist capital controls to accelerate their development than their free-trade opponents. (back)
2 I remember when in high school I learned that mercantilists believed that gold and silver were the only forms of wealth. Fortunately, Adam Smith came along and explained what every child knows, that wealth consists of things that are really useful, not bars or coin made of gold and silver stored in bank vaults doing absolutely nothing. (back)
3 A sudden large outflow of money capital from a capitalist nation invariably leads to a massive contraction of the home market, crippling its industry and causing massive unemployment. (back)
4 Latin, the language of Rome, was widely used as the official language only in the western part of the empire while Greek continued to be used as the official language in the east. Numerous other languages were spoken by peoples who lived under Roman rule. This is in contrast to the situation of modern bourgeois nation-states. For example, the standard Italian used in modern Italy is understood by all Italians, standard German throughout Germany, English in the United States, Russian throughout Russia, and so on. (back)
5 In the United States, George Washington is sometimes referred to as the “Father of the Country,” and he together with other early U.S. leaders are called the “Founding Fathers,” as though they were the actual ancestors along the paternal line of all current U.S. citizens. (back)
6 The “mob” was generally made up of people who were not the descendants of the English settlers, who make up the core of the “American” nationality. Instead, they were often first-generation European immigrants who were not—or not yet—considered real “English” Americans. These included Irish immigrants—the original “mob”—Italians, made famous by the “Godfather” novel and movies and the later “Sopranos” TV series, and east European Jewish immigrants. Luciano was an Italian immigrant while his close friend Lanksy was an east European Jewish immigrant. Eventually, Luciano was deported to Italy, where he died in 1962.
In later life, Lansky became notorious for his ownership of Cuban casinos, hotels and night clubs that catered to wealthy U.S. tourists while the overwhelming majority of the Cuban people lived in deep poverty. Cuban dictator Fulgencio Batista was a close associate of Lanksy and protected the U.S. mobster’s Cuban investments. Lansky lost much of the fortune he had accumulated as a mobster when the Cuban Revolution closed down his casinos and expropriated his empire of night clubs and hotels.
Not surprisingly, Lansky was no fan of the Cuban Revolution, which he denounced as “Communist” as soon as his friend Batista fled Cuba. Late in life, he attempted to find refuge in Israel but was refused entrance at the insistence of the U.S. government. He eventually died in the U.S. in 1983.
There were also a few African-American mobsters in 20th-century New York, but their activity was confined to Harlem. Mirroring the racist structure of U.S society in general, these mobsters played a role subordinate to the mobsters of Irish, Italian and Jewish origin. (back)
7 This analogy is not the whole story, because the “mob” also made use of the official police. Even in the late 20th century, different mob families often controlled or had friendly relations with the police that operated in their territories. Naturally, the men in blue expected to be paid for the services they rendered their mob employers.
In addition, the New York mob wielded great influence within New York City’s Democratic Tammany Hall political machine, which dominated the city’s politics
through most of the 19th and 20th centuries. The mob, therefore, not only created its own parallel state structures but also enjoyed influence within the official state structures. But as long as their political influence was not enough to get their “rackets” legalized, there was always the chance that competition between the various mobsters would break out into open warfare in the streets, which happened quite often.
An example of mob “rackets” being legalized is provided by the city of Las Vegas, Nevada. The small Nevada town was converted into “sin city” by Luciano and Lansky’s boyhood friend, the professional hit man Benjamin “Bugsy” Siegel. According to biographers, Siegel had tried to go “legitimate” in the late 1920s but was frustrated by the large stock market losses he suffered as a result of the “crash of ’29.” Instead, he became a leading figure in “Murder Incorporated” during the 1930s before moving to the West Coast.
After World War II, Siegel founded the Pink Flamingo hotel in Las Vegas, becoming in effect the founder of modern Las Vegas. However, Siegel, though a talented hit man, proved to be an inept businessman. As a result, he couldn’t repay his debts to his mobster bankers. According to some mob historians, a “commission” meeting that included both Lanksy and Luciano held in Havana, Cuba, in 1946 authorized a “hit” on Siegel. In any event, in 1947 Siegel was “hit”—murdered—while he was staying at the Beverly Hills mansion of his mistress—he was cheating on his wife—Virgina Hill.
Today, the gambling “racket” is perfectly legal in Las Vegas, and the city is thriving. The capitalists who operate the hotels and the gambling “racket” in Las Vegas are perfectly legal “legitimate businessmen” these days. If any of them were to face bankruptcy and be unable pay their debts, they would at worst face foreclosure not murder. (back)
8 Ricardian comparative advantage, though it paints a false theory of the operations of capitalist world trade, will certainly be taken into account in the future when general plans are drawn up for the world socialist economy. The theory of comparative advantage is therefore an example of a tendency—noted by Marx—of bourgeois economists assuming that the capitalist economy is actually a socialist economy. This is done, whether consciously or unconsciously, to cover up the contradictions of the capitalist system. (back)
9 In Ricardo’s time, virtually all active capitalists were men. (back)
10 Ricardo assumed that all this would occur quickly without major friction. Modern champions of the quantity theory of money such as the late Milton Friedman, who in spite of mountains of evidence to the contrary still defend the theory, claim it is true only in the “long run” though, they say, there can considerable frictions in the short run. Among these “frictions,” according to Friedman, was the 1930s Great Depression. (back)
11 Under the Bank Restriction Act of 1797-1821, the convertibility of the Bank of England’s notes into gold was suspended, making these notes in effect paper money, much like the Bank of England’s notes are today. However, the convertibility into gold of the Bank of England’s notes was restored beginning in 1821, and this convertibility formed the foundation of the classic international gold standard that dominated the world monetary system from the 1870s down to the outbreak of World War I in August 1914. (back)
12 Since the banknotes issued by commercial banks other than the Bank of England were more and more backed by Bank of England notes rather than gold directly, the Bank of England in the final analysis exercised decisive influence on the total quantity of banknotes in circulation even before the note-issuing authority of the commercial banks began to be phased out under the 1844 Bank Act. (back)
13 This brings us straight to the question of immigration and the rise of right-wing demagogues such as Donald Trump and his European counterparts. I will explore the immigration question when I review John Smith’s work later this year. (back)