Three Books on Marxist Political Economy (Pt 7)

“The real net rate of profit,” Shaikh writes, “is the central driver of accumulation, the material foundation around which the ‘animal spirits’ of capitalists frisk, with injections of net new purchasing power taking on a major role in the era of fiat money.” This sentence sums both the strengths and the basic flaw in Shaikh’s theory of crises, and without too much exaggeration the whole of his “Capitalism.”

By “net rate of profit,” Shaikh means the difference between the total profit (surplus value minus rent) and the rate of interest, divided by total advanced capital. This is absolutely correct.

But now we come to the devastating weakness of Shaikh’s analysis. Shaikh refers not to the net rate of profit but the real net rate of profit. “Real” refers to the use value of commodities as opposed to their value—embodied abstract human labor—and the form this value must take—money value. While real wages—wages in terms of use values—are what interest workers, the capitalists are interested in profit, which must always consist of and be expressed in the form of exchange value—monetary value (a sum of money).

In modern capitalism, as a practical matter the money that makes up net profit or profit as a whole consists of bank credit money convertible into state-issued legal-tender paper money that represents gold bullion. The fact that legal-tender paper money must represent gold bullion in circulation is an economic law, not a legal law. (More on this in next month’s post.) When Shaikh refers to real net profit, he does not refer to profit at all but rather to the portion of the surplus product that is purchased with the money that makes up the net profit.

Surplus product, surplus value and profit

Under capitalism, like in other forms of class society, the surplus product is made up of use values that are used as means of subsistence by non-workers plus the use values used to carry out expanded reproduction in physical terms. But reproduction, both simple and expanded, defined in the use values of the commodities that make up the surplus product is exactly what capitalist production is not.

Under capitalism, simple and expanded reproduction in physical terms, is merely a by-product of the simple and expanded reproduction of capital. To think otherwise is to overlook what distinguishes capitalist production from socialist production. Capitalist production is the accumulation of wealth in the form of capital—accumulated value—through the production and transformation of surplus value into additional capital. Therefore, it is surplus value—and the form that surplus value must take—net monetary profit (1)—if capitalist (re)production is to proceed that constitutes the “material and social foundation” that gives rise to the frisky “animal spirits” of capitalism.

As I stated last month, capitalist production is unlike previous modes of production, which produced surplus product for the consumption of a ruling class of non-workers. Capitalist production is production for the sake of production. But it is production for the sake of production of wealth in the specific form of capital. In order to expand their capital to the maximum extent possible—a necessity imposed on individual capitalists and capitalist corporations by competition—capitalists must maximize profit. As far as the capitalists are concerned, that profit must be measured in terms of moneythe form of value—and not in terms of the use values of the commodities that are sold for the purpose of realizing a profit. If I may paraphrase Milton Friedman, profit is always and everywhere a monetary phenomenon. (2)

Marx defined the general formula of capital as M—C—M’. It is the difference between M’ and M that defines profit—including rent. Profit for Marx just as it is for everyday business people is defined in terms of money and not the use values of commodities that contain surplus value that have to be sold to actually make a profit. This has decisive significance for crisis theory. The moment the expansion of the production of wealth does not increase the monetary value of the capitalists’ capital—that is, the moment it is not profitable—the production of use values comes to a grinding halt.

Starting in “Capital” Volume I, Marx had to lay the foundation of his analysis by analyzing the nature of commodities, value, and the various forms of value, which ends with an analysis of monetary value as the fully developed form of exchange value, before he could analyze capital, the main subject of his work. Only after he had completed this task was he able to begin his analysis of capital proper.

The general formula of capital is established in Chapter 4 of Volume I. Again, this formula is M—C—M’. Notice the general formula of capital is not C—C’ but M—C—M’. The capitalist does not start out with a sum of (non-money) commodities and end up with another sum of non-money commodities of greater value. Instead, the capitalist starts out with a sum of money and ends up with a greater sum of money.

Since both sums of money consist of the same use value—gold bullion—and are therefore measured by the same unit of measure—some unit of weight—the capitalists calculate their profit by subtracting M from M’. Once they have calculated their profit they can then divide their profit by the sum of their advanced capital—the starting M—both defined in terms of the use value of the money commodity but not the use values that actually make up their capital in real terms.

The general formula for capitalist production is M—C..P..C’—M’. This is actually a special case of the more general formula for capital M—C—M’. Again, it is not C..P..C’. This is only part of the formula of capitalist production, though of course it is a necessary part. The value of the real capital whose material use values consist of the means of production including labor power that alone produces surplus value is transformed by the act of production—P—into commodity capital. The newly produced commodity capital has a greater value than the commodities labor power plus the means of production did.

However, the formula of capitalist production neither begins nor ends here. The formula begins with money. It doesn’t matter here how the capitalist obtained the money. The industrial capitalists then use the money to purchase means of production and labor power. The capitalists then carry out the act of production, which includes both a physical production process and the production of surplus value.

At this point, the capitalists have a quantity of commodity capital with a different use value than the use values of C—means of production and labor power. But the capitalists must test whether the labor expended to convert C—means of production and labor power—into C’—commodity capital that contains surplus value—is socially necessary labor that satisfies a real need. In order to test this, the capitalists must transform their commodity capital back into money capital M’. The M’ that the capitalists end up with, assuming everything has gone as hoped, is qualitatively identical but quantitatively greater than the M they started out with. Only then have they made a profit—the only point, as far as the capitalists are concerned, of the operation in the first place.

Neo-Ricardianism versus Marxism

Profit, therefore, cannot be defined in real terms unless you mean by real terms the use value of the money commodity—real money. By definition, profit is and must always be a monetary phenomenon. By failing to understand this, Shaikh falls into a “neo-Ricardian” error. Ricardo in his early works attempted to explain profit, rent and wages by assuming that all wealth consisted of a single use value, corn. Why did Ricardo choose corn as opposed to some other commodity? Corn as a use value can function as both a means of subsistence for workers, capitalists and landowners alike and a means of production—seed grain.

Why profit is everywhere and always a monetary phenomenon

Ricardo attempted to demonstrate the essence that underlines the surface phenomenon of profit. Ricardo’s corn models were not original. He followed in the footsteps of the French physiocrats—a school of classical political economy that flourished in 18th-century France. It was the physiocrats who first attempted to analyze the essence that underlines monetary rent (3). They found it in the production of seed grain that is used to produce an additional quantity of grain. The physiocrats, as their name suggests, were the original “physicalists,” to use Andrew Kilman’s terminology in his criticism of neo-Ricardianism.

In their time, the physiocrats’ analysis was a huge advance over the mercantilists, who had dominated economic thought before then. Instead of looking for the origin of what Marx would later call surplus value in the sphere of circulation, as the mercantilists had done—profit upon alienation (sale)—the physiocrats looked for the origin of surplus value in the sphere of production.

The physiocrats were misled in large measure because of the immature conditions in which they worked. They confused the physical biological process of the simple reproduction and expanded reproduction of grain with the social process of the simple and expanded reproduction of capital. This led them to the false view that non-agricultural industrial production was “sterile”—did not produce surplus value.

Ricardo soon realized that his “physiocratic” corn models were inadequate. He was living in an increasingly industrial Britain. Ricardo solved the problem that wealth is divided into qualitatively and therefore quantitatively incomparable use values by measuring the value of all commodities not in use value terms but by the quantity of labor socially necessary to (re)produce them. Again, Ricardo was not original here. Ricardo’s predecessor Adam Smith had begun with the same approach.

Smith was led by his theory of labor value to draw the conclusion that profit arose not from the expanded reproduction of seed grain but from the unpaid labor performed by wage workers. “The value,” Smith wrote in his “Wealth of Nations,” “which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits (4) of their employer upon the whole stock of materials and wages which he advanced.” (Quoted from the chapter on Adam Smith in Marx’s “Theories of surplus value”)

In other words, only part of the work day is paid labor; the other part of the work day is unpaid labor. Without this unpaid labor, there would be no surplus value and no profit.

In drawing these conclusions, Adam Smith made a gigantic advance beyond the physiocrats and their “physicalism.” But Smith soon ran headlong into the “transformation problem.” The transformation problem refers to the contradiction that arose within classical political economy between the determination of “natural prices”—around which market prices fluctuate in response to supply and demand—by the relative quantities of labor socially necessary to produce commodities, on one hand, and the equalization of the rate of profit enforced by competition among the capitalists, on the other.

Because of this contradiction, Smith retreated from the law of labor value. He decided that labor value applied only to the stage of society before the “accumulation of stock”—pre-capitalist simple commodity production. Any further development of Smith’s theory of surplus value based on the unpaid labor of the working class was blocked.

Ricardo, however, plunged ahead and applied the law of labor value to capitalist production despite the transformation problem, which he was well aware of. Ricardo realized that capitalist production was a process of the exchange of the products of labor. His mathematical mind would not permit the eclecticism that characterized Adam Smith’s approach to value. However, Ricardo was not able to solve the transformation problem. As a result, Ricardo’s work was riddled with contradictions that his opponents, eager to dismantle his “system,” pointed out.

In one way or another, the debate has been going on ever since. A whole “profession” of “Marx refuters” has arisen that attacks the Marxist theory of value with the weapons that were originally forged to demolish the Ricardian theory of value. Only the mathematical formalisms are new.

Marx noted that these very contradictions of Ricardian economics made possible the further progress of economic science beyond Ricardo. Ricardo was therefore not the end of economic science. However due to the growing class contradictions of capitalist society, this further progress was possible only on a working-class basis. The contradictions of Ricardian economics are dealt with by Marx in the chapter “Disintegration of the Ricardian School,” found in “Theories of Surplus Value,” which I highly recommend to any reader wishing to further pursue them.

Contradictions of the Ricardian theory of value

Ricardian value theory had two main contradictions. One was its failure to distinguish labor and labor power. Commodity production—and bourgeois notions of equality in general—is based on the exchange of equal quantities of labor. If we exclude cheating and unequal exchanges—which on average cancel out—how can we explain the fact that the capitalists as a class make profits? The capitalists, Ricardo suggested, pay for the “value of labor” when purchasing the labor of the workers and not the quantity of labor that they perform. However, the value of labor does not work, because abstract labor is itself the substance of value and as such cannot have a value. Marx solved this problem by distinguishing between labor and labor power.

The other contradiction of Ricardian economics was the transformation problem, which had defeated Adam Smith before him. The root of Ricardo’s failure in this regard was that he like Smith did not distinguish between the value of a commodity—measured by the quantity of labor socially necessary to produce it under prevailing conditions of production—and the form of value as exchange value—monetary price.

Ricardo, like Smith, was well aware of the difference between market prices determined by supply and demand and natural prices that form the axis around which market prices fluctuate. The transformation problem involves the relationship between the prices of production and the relative quantities of labor that are necessary to produce commodities under the prevailing conditions of production. The contradiction arose because Ricardo, like Smith, defined the value of a commodity as its natural price—price of production. (5)

Ricardo following Adam Smith believed that constant capital could in the final analysis be reduced to wages. According to Smith—and Ricardo—all capital if you go back far enough in the final analysis consists of commodities that make up the real wages of workers. However, Smith and Ricardo observed that capital had very different durabilities. (6) Some capital in the process of its turnover takes the form of fixed capital—buildings and machinery that exist for many years or even decades. If commodities that were produced with larger than average amounts of fixed capital—Marx would say constant capital—were sold at prices proportional to their labor values, such capitals would realize a lower rate of profit than capitals that produce commodities with less than average amounts of fixed capital—Marx would say capitals that had a below average organic composition of capital.

As a result, the prices of production are only approximately proportional to their labor values. Therefore, what does determine the value of commodities? Is it the quantity of labor socially necessary to produce a given commodity under the prevailing conditions of production, or is it the equalization of the rate of profit established through competition? Ricardo like Adam Smith and other classical economists made no distinction between value and exchange value—the forms of value. This prevented either from formulating a correct theory of money and price. Ricardo, like Smith before him, did not understand that the price of production—in which the exchange value of a commodity is measured by a sum of money (weight of gold bullion)—is not identical to the value of a commodity measured in terms of a quantity of labor—measured in terms of some unit of time.

Only in Marx was it established that value is measured by the clock and exchange value is measured by the scale. Under capitalism—and this is a point that even an economist as brilliant as Shaikh, who believes in the possibility of “pure fiat money,” does not understand—it cannot be otherwise. Ricardo was forced to concede that in order to equalize profits among capitals of different durabilities—Marx would say organic compositions of capital—prices of production must deviate from values—direct prices. Since for Ricardo prices of production and values were identical, he could not get away from the implication that some factor other than the quantity of labor socially necessary to produce a commodity under the prevailing conditions was influencing the value of commodities. Modern bourgeois economists sometimes call this Ricardo’s 93% labor theory of value.

The end of classical political economy

After his death, Ricardo’s opponents declared the Ricardian theory of value refuted. The post-Ricardian economists were actually eager to get away from any version of the labor theory of value in light of the sharpening class struggle between the British working class and the exploiting capitalist class that the economists served. From this point on, only the opponents of the economists—the socialists, who sided with the working class against the capitalists—continued to make use of the Ricardian theory of value. And so classical political economy as defined by Marx (but not Shaikh) died.

How Marx solved the contradictions of Ricardian value theory

These two contradictions of the Ricardian theory of value were solved by Marx. Marx used the distinction between labor and labor power—first noted by British philosopher Thomas Hobbes but ignored by the classical economists—to reconcile surplus value based on unpaid labor first established by Adam Smith before he surrendered to the transformation problem—with the “exchange of equal quantities of labor.” With Marx’s epoch-making theory of surplus value, socialism became a science. On this basis, the Second and Third internationals were built.

Marx’s other great discovery, the distinction between value and exchange value (the form of value) has been less well understood in the Marxist movement, or rather with few exceptions, as the example of even a Marxist economist of the stature of Shaikh shows, has not really been understood at all. (7) As a result, “Marx critics” have been able to keep alive the transformation problem handed down from classical political economy and use it to sow doubt in the correctness of the Marxist theory of value and therefore exploitation and surplus value.

I remember in my own youth attempting to make sense of neo-Ricardian economist Ian Steedman’s book “Marx After Sraffa.” The book is full of mathematical formulas that Steedman claimed rigorously disproved Marx’s law of labor value. Steedman concluded that Marxists should abandon the labor theory of value and surplus value. Marx, according to Steedman, had to work with the labor theory of value inherited from Ricardo. But now, according to Steedman, we have the far superior work of Sraffa that definitely replaces both Ricardo and Marx as far as value theory is concerned. However, if Steedman is right, socialism is no longer a science, since Marx’s theory of surplus value is now refuted.

Shaikh and neo-Ricardianism

Anwar Shaikh, who originally trained as an engineer before he switched to economics, is a Marxist economist with a strong neo-Ricardian flavor. This is true despite the fact that Shaikh has made many brilliant criticisms of neo-Ricardianism. I owe much to him in this regard. In fact, without Shaikh, this blog would hardly have been possible.

However, there is weak side of Shaikh that reflects this neo-Ricardian influence. Throughout his work, he exhibits a tendency to slip into a “physicalism” that arises from his failure to fully grasp the difference between Ricardo’s and Marx’s theories of value. In value theory, Shaikh is in many ways more of a Ricardian—not neo-Ricardian (8)—than a Marxist. This is weakness widely shared by today’s Marxists.

Shaikh’s use of the term “real net profit” is the giveaway that Shaikh has failed to fully understand Marx’s theory of value and therefore Marx’s theory of profit. By its very nature, the expression (net) real profit is a contradiction in terms. As we have seen above, and as any real world business person understands, neither profit nor any of its fractions can be defined in real terms.

We can speak about surplus value and a fraction of surplus value, and we can speak about ground rent, profit including interest, and profit of enterprise that represent the division of surplus value among the landowners, the money capitalists, commercial capitalists and industrial capitalists. Or we can refer to the surplus product—the use values of the commodities that are consumed, whether in personal consumption or productive consumption, by those who consume surplus value. But surplus product is not the same as profit as an economic category.

Of all the periodic economic crises that have occurred since 1825, it is the series of crises that occurred in the 1970s and the beginning of the 1980s that are at once the most puzzling and the most instructive of all crises. All the really major crises—and even milder recessions—before 1940 saw drops in the general level of prices and (money) wages. The stagflation of the 1970s and the beginning of the 1980s saw not only continued inflation but a considerable acceleration of inflation. The term “stagflation” had to be coined at the time to reflect the combination of inflation—rising prices in paper money terms—combined with stagnation and high unemployment.

Therefore, I will concentrate on this particular economic episode, just as Shaikh himself does in his “Capitalism.” In next month’s post, I will contrast the analysis developed in this blog of this unprecedented episode in the history of capitalism with the analysis of the same episode developed by Shaikh in “Capitalism.” In order to prepare the ground for this, I will present a general summary of Shaikh’s crisis theory, at least as I understand it, that is developed in “Capitalism.”

Shaikh and the two camps in crisis theory

Today’s Marxists are divided into two great camps in terms of crisis theory. One camp stresses the difficulties that capitalists incur in producing the ever-increasing mass of surplus value that is necessary if capitalism is to continue to exist. It is the difficulties in producing surplus value, this camp holds, that periodically lead to economic crises. As a rule, members of this camp put great emphasis on the tendency of the rate of profit to fall caused by the rise in the organic composition of capital. A variant of this camp emphasizes the fall in the general rate of profit caused by a fall in the rate of surplus value—the ratio of unpaid to paid labor—that occurs during periods of prosperity and brings about a rise in the demand for the commodity labor power.

Many members of the not-enough-surplus value camp keep both factors in mind. As falling unemployment makes labor power increasingly scarce, the price of labor power—wages—rises. The capitalists respond to rising wages and falling rates of surplus value by replacing “expensive” labor power with relatively cheaper machines. The rate of profit comes under pressure from both a falling rate of surplus value and a rising organic composition of capital. Sooner or later, members of this camp emphasize, the falling rate of profit ends in a crisis since capitalist production is only production for profit. No—or not enough—surplus value, no profit, no profit no production.

The other camp, which includes the Monthly Review school, emphasizes the difficulties of realizing surplus value. This camp points out that even if surplus value is produced but isn’t realized, there will be no profit. Crude versions of “under-consumptionism” often assume that the capitalists live on air. Since the workers are unable to buy the entire value of the commodities they produce, periodic commodity gluts—crises—are inevitable. This theory is simple and has agitational value, but it overlooks the fact that not only the workers but the capitalists buy commodities.

In reality, workers when they spend their wages on the means of subsistence enable the capitalists to realize the value of the variable capital—the value of the labor power they purchase from the workers—and not the capitalists’ surplus value at all.

In expanded reproduction—and this is often a point of confusion—it is true that a portion of what was surplus value is realized from the wages of newly hired workers—or those working longer hours. But in this case, the surplus value has already been converted into new variable capital. Therefore, even in a pure capitalist society consisting only of industrial capitalists and productive-of-surplus value wage workers, expanded reproduction does not prevent, as Rosa Luxemburg believed, the capitalists from realizing the entire value of the surplus value in the form of profit, even though workers are not allowed to consume any of the surplus value.

Instead, the wages of newly hired workers—or extra wages earned through expanded hours of work—allow the capitalists to realize the new variable capital—or more precisely, the necessary value that replaces the variable capital that the industrial capitalists have expended, and not surplus value at all. If wages drop below the value of labor power—which happens often enough in the real world—the capitalists might indeed have difficulty selling the means of consumption that constitute the real wages of the workers.

It is possible that increased consumption by the capitalists or their hangers-on might solve this realization problem, but it is not guaranteed. For example, the capitalists or their hangers-on might have no desire to purchase low-quality cheap commodities designed for working-class consumption.

So the problem of realizing the value of commodities involves in reality not only the question of realizing surplus value but the entire value of the commodity. That includes (1) the value that replaces the value of variable capital consumed in the process of production, (2) the constant capital that transfers pre-existing value to the commodities, and (3) the surplus value that is added to the finished product.

When calculating profit, capitalists cannot count any part of the constant or variable capital that has been consumed in production but not realized on the market. Instead, the unrealized value of any part of the advanced capital must be subtracted from the profit.

The big problem with the underconsumption camp, including the Monthly Review school, is that they tend to play down, if not ignore altogether, the productive consumption of surplus value. A portion of the surplus value is consumed unproductively by the capitalists—personal consumption—but another portion is transformed into new capital, both constant and variable. There is no guarantee that once the surplus value has been realized as money capital, the part of the surplus value that is not spent on the personal consumption of the capitalists and their hangers-on will actually be converted into new real capital, whether constant or variable.

The newly accumulated money capital might—and after a crisis largely will for a more or less prolonged time—stagnate in the form of money capital hoarded in the banking system. When this happens, capitalist (re)production stagnates. This is the contradiction that is stressed by the Monthly Review school, as opposed to the problems that arise when C’—M’ fails—the crisis proper. The Monthly Review school is more interested in the stagnation that follows the crisis than the crisis that precedes the stagnation and is the cause of the stagnation.

Overall, Shaikh belongs to the school that emphasizes the difficulties that arise during periods of prosperity of producing a sufficient quantity of surplus value to prevent a fall in the general rate of profit and maintain the boom. However, Shaikh being Shaikh does not ignore the problem of realizing value and surplus value, which many of the not-enough-surplus value camp do ignore.

Shaikh is, of course, well aware of the fact that if the rate of surplus value falls beyond a certain point, it will kill investment. In that case—what Marx in Volume III of “Capital” called the absolute overproduction of capital—the crisis may seem to be caused by an insufficient growth in the market relative to production. Unsold commodities will pile up in warehouses leading to production cutbacks and mass unemployment. But the failure of the market to grow as fast as production in this case is not the real cause but merely the result of the crisis.

The not-enough-surplus value camp, which includes Shaikh, argues that in reality the crisis in this case is at bottom caused by the insufficient production of surplus value. What fails according to this camp is M—LP, the conversion of money capital into labor power—variable capital. This is why most members of this camp, unlike Marx and Engels, avoid describing the periodic capitalist crises as crises of overproduction—where what fails is C’—M’. As long as enough surplus value is produced, most Marxists of this camp argue, the boom goes on and the problem of markets will take care of itself.

The bourgeois counterpart of this argument is found in so-called “supply-side economics,” as it was called during the Reagan years. Today, “supply-side economics” is used by the dominant right wing of the economics profession to justify Trump’s economic proposals—if not Trump’s fake “populist” demagoguery.

Cut taxes for the rich, weaken unions, force more people onto the labor market by repealing and replacing Obamacare, cut sharply or eliminate entirely social programs that help the poor, such as Medicaid and food stamps. Then, many more people will be forced onto the labor market, competition among the sellers of labor power will increase, and the rate of surplus value and rate of profit will rise sharply. And when profits soar, the economy will boom. Of course, supporters of “supply-side economics” don’t use this Marxist terminology, but this is what they mean.

Trump claims that these “pro-business,” “supply-side” policies will boost the rate of growth of the U.S. GDP to over 3 percent and restore the U.S.’s lost industrial glory. This argument was popular among the supporters of Ronald Reagan, considered the most right-wing recent U.S. president before Trump. Whether Trump’s “supply-side” programs will in fact lead to a revival of U.S. industry will be dealt with in my review of John Smith’s “Imperialism.” (9)

However, unlike many other supporters of the not-enough-surplus value camp—and here the superiority of his analysis shows itself—Shaikh, does not deny that an expansion of the market independent of an increase in the rate of surplus value can accelerate economic growth. He sees demand as at least partially independent of the rate of surplus value and the rate of profit. The market can, Shaikh realizes, expand independently of the general level of investment and then react in a secondary movement on the level of investment.

How can the market expand independently of a rise in the production of surplus value? This can occur, Shaikh believes, by an expansion in the rate of growth of the quantity of money—a point either overlooked or denied by most members of the not-enough-surplus value camp.

Shaikh explains in “Capitalism” that this is exactly what Thomas Tooke observed in the wake of the gold discoveries of 1848-51. The rise in the general price level in the years after 1848-1851 was, Tooke realized, far less than the quantity theory of money—accepted by Ricardo—would have predicted. Instead, Tooke observed that the accelerated growth of production absorbed much of the increased monetary demand flowing from the new, rich gold mines of California and Australia. Therefore, Shaikh realizes that any rounded theory of crisis must include both a theory of the production of surplus value and the problem of realizing the value and surplus value contained in the commodities produced by the capitalists.

But as we saw over the last few months, Shaikh also believes “pure fiat money” that does not represent the value of a money commodity is possible under the capitalist system. Can the increased issue of such “pure fiat money” by the monetary authorities create additional demand—expand the market—much as the gold discoveries of 1848-51 did? Shaikh answers this question in the affirmative.

Starting around 1940, according to Shaikh, an age of “pure fiat money” began where the paper money issued by the U.S. Federal Reserve System—and other central banks—replaced gold bullion as the “medium of pricing.” Therefore, since 1940, Shaikh believes, the actions of the open-market committee of the U.S Federal Reserve System plays exactly the same role that the finding of rich gold mines—or cheaper methods of producing gold bullion from existing mines—played before 1940 in expanding the market.

Marx described the 1848 discoveries, which ruined his and Engels’ youthful expectations of an early workers’ revolution in Europe, as a “new 16th century.” During the 15th century, there was an increasing shortage of gold and silver due to the expanding scale of commerce in Europe and the exhaustion of German silver mines. The growing money crunch encouraged the governments of Portugal and Spain to finance expeditions—such as the one carried out by Columbus—to search for new gold and silver. These expeditions led to the “discovery“ of the Americas by the Europeans.

The result was a vast increase in the quantity of money material—gold and silver—in the hands of the Europeans in the course of 16th century. This gold and silver from the mines of the new world provided the initial money—capital, or “seed money”—for the global capitalist system. Just as importantly, it provided the increased demand—markets—that could not be met by the old modes of production but only by large-scale capitalist production employing wage labor—and for a while by plantation slavery as well.

We can never forget that the price of the birth of the capitalist system and its world market was the genocide of the native peoples of the Americas. Their societies and cultures were destroyed. During the “second 16th century” that followed with the discoveries of gold, the genocidal destruction of the native peoples of what the Europeans called “California” was repeated.

Since 1940, if we accept Shaikh’s claim that “pure fiat money” has replaced metallic money, the open market committee of the U.S. Federal Reserve Board can arrange a “16th century” whenever it pleases—and without the genocides that accompanied that earlier period. But why then do “golden prices” continue to show the same up and down patterns that they showed before 1940? This, Shaikh believes, is because gold bullion has retained one monetary function: its role as a “medium of safety.”

However, Shaikh does not see any link between a rise in the dollar price of gold and accelerated inflation. Here the neo-Ricardian side of Shaikh causes him to make a wrong turn. Gold, he explains, is a very minor input in the production of commodities—which is true—so when you plug it into neo-Ricardian-inspired input-output matrices, its effect on dollar prices—and other paper money prices—will be very minor. Here Shaikh is treating gold bullion not as the money commodity or universal equivalent at all but as a production input.

Shaikh believes that when the capitalists facing a fall in the rate of profit due to a falling rate of surplus value combined with an accelerated rate of growth of the organic composition of capital, they begin to flee to gold as a “medium of safety.” This causes the “golden prices” of commodities to fall while their prices measured in the new medium of pricing—pure fiat money—keep on rising. But since, according to Shaikh, the “medium of pricing” is now pure fiat money, prices in terms of “pure fiat money,” not golden prices, are what count. Therefore, after 1940 golden prices play no actual role in the mechanism of crises but are good predictors of the approach of a crisis.

A consequence of Shaikh’s analysis is that capitalism underwent a considerable mutation around 1940. Before 1940, capitalism experienced only three “16th centuries”—the original one in the 1500s that led to the birth of the world market and the capitalist system; the second one that occurred beginning in 1848 that led to the “mid-Victorian boom” between 1849 and 1873; and a third that occurred in the 1890s caused by the discovery of gold in the Yukon and Klondike and the widespread adoption of the cyanide process that makes possible the extraction of gold bullion from poor ores. This last “16th century” led to the great wave of capitalist prosperity of 1896 to 1913 that set the stage for World War I and all that followed—including the Russian Revolution of 1917, the seizure of power by Adolf Hitler in Germany, World War II, and the rise of the U.S. world empire.

But since 1940, we have (if Shaikh is right) been living in a permanent 16th century, which will last as long as the capitalist system. This creates a major contradiction in Shaikh’s thinking. As a “fundamentalist,” he denies the whole concept of stages in the history of capitalism, including the monopoly or imperialist stage of capitalism as developed by Hilferding and Lenin.

If he were consistent, Shaikh should acknowledge that, according to his theory, crises before 1940 perhaps were, as Marx and Engels described them, crises of the generalized overproduction of commodities. But since 1940, thanks to “modern pure fiat money” replacing gold bullion as the medium of pricing, Say’s law has come into effect. As a result, since 1940 crises of generalized overproduction no longer occur, since capitalist governments and their central banks can create as much demand as they like. Under the post-1940 conditions, it is now impossible for the industrial capitalists to produce more commodities than the market can absorb at profitable prices. These are the conclusions that inevitably follow if Shaikh’s claim is correct that since 1940 we have been living in age of “pure fiat money”.

If he did this, Shaikh would at least be consistent. But though Shaikh likes consistency, the “fundamentalist” in him gets the upper hand. The causes of crises before 1940 must be the same as the causes of crises after 1940. And since the central banks can in the age of “pure fiat money” expand the market to any extent necessary to absorb the quantity of commodities produced, the economic crises that have occurred since 1040 cannot be crises of the general overproduction of commodities. Therefore, Shaikh’s “fundamentalist logic” causes him to draw the conclusion that the crises before 1940 must have also been caused by some factor other than the general overproduction of commodities. Indeed, nowhere in Shaikh’s “Capitalism,” though it deals with “real competition and crises,” is overproduction mentioned expect within direct quotes from Marx.

Shaikh’s theory of recurrent ‘great depressions’

Shaikh begins with the observation that during periods of capitalist prosperity the demand for the commodity labor power rises. A sellers’ market develops on the labor market and wages start to rise. The ratio between unpaid to paid labor—the rate of surplus value—starts to fall. In real terms—and the neo-Ricardian in Shaikh likes to calculate in real terms—capital accumulation must come out of surplus value—or as the “physicalist” in him begins to gain the upper hand—out of the surplus product. As the rate of exploitation of the workers falls, Shaikh concludes, sooner or later the portion of the surplus product available to expand the scale of production will become insufficient to prevent a “great depression.” A “great depression,” using Shaikh’s terminology, can be defined as a level of unemployment above the natural rate of unemployment. (More on the natural rate of unemployment below.)

This will be true not only due to the relative decline in the real fund that is available to physically expand production but also due to the fact that the real fund available for expansion will consist increasingly of machines at the expense of means of subsistence that constitute the real wages needed to purchase additional workers. Unemployment will rise as a double squeeze takes effect—declining economic growth and growing automation. A “great depression” occurs.

Shaikh believes this is what occurred in the 1873-1896 “long depression” and the 1929-1940 “Great Depression,” the 1973-1982 “stagflation” crisis, and from 2007 to the present.

At some point, the cause of the “great depression,” the rise in unemployment, will again increase the rate of exploitation of the working class calculated in both value and real terms. This will again increase the size of the fund in real terms—the surplus product not consumed by the capitalists for their personal consumption—that is utilized for expanded reproduction. And due to the high unemployment of the depression, the commodity labor power will now be relatively cheaper relative to machinery, and more of the surplus product available for expanded reproduction will consist of means of subsistence that function as real wages to hire additional workers.

Unemployment will now fall below the natural rate of unemployment due to a combination of faster economic growth and a reduced rate of unemployment. A long wave of prosperity replaces the “great depression.” A long wave of prosperity can be defined as a period in which the rate of unemployment is below the “natural rate of unemployment.”

A feature of his analysis is Shaikh’s tendency to weave between a value and a physical—use value—analysis in a rather confused way, with the physical analysis tending to get in the way. While in Marx and Engels crises are characterized by an inability to sell all the commodities produced at profitable prices, Shaikh’s “great depressions” are characterized by the insufficient production in physical terms of the means of subsistence and new means of production physically necessary to expand the scale of production.

Fluctuations in the rate of interest

An important role is played, according to Shaikh, in capitalism’s constant “turbulent fluctuations” between long waves of prosperity and “great depressions” by changes in the rate of interest. The reason is that the incentive to invest capital in new industrial production as opposed to lending money out at interest is governed not by the rate of profit but by the net rate of profit, defined as the difference between the rate of profit and the rate of interest.

If the rate of interest equaled the rate of profit, there would be no incentive for the capitalists to act as industrial capitalists—as opposed to money capitalists—and the whole system of capitalist production would grind to a halt. Shaikh is well aware that before 1940 when gold bullion still served as the “medium of price” “great depressions” were marked by falling general price levels and interest rates, while long waves of prosperity were marked by rising price levels and interest rates.

According to Shaikh’s interpretation of “Gibson’s Paradox” and my old post on Gibson’s Paradox], interest rates are determined by the cost of provision of finance that is akin to “a price of production.” Shaikh puts great emphasis on the administrative costs that banks incur as a factor determining interest rates. Shaikh is attracted to this theory because these administrative costs can be plugged into neo-Ricardian-inspired input-output matrices. In this way, interest can be treated mathematically just like a production input.

Again, I believe that the neo-Ricardian in Shaikh has caused him to make a wrong turn. As we have already seen in Shaikh, the rate of interest is essentially the price of providing finance. Therefore, Shaikh believes what is important to the determination of interest rates is not the rate of change of prices but their absolute levels. All things remaining equal, the higher the absolute level of prices the higher will be the rate of interest.

Before 1940, rising and falling prices in turn coincided with successive periods of prosperity and “great depressions.” The lower the rate of interest, all other things remaining equal, the higher the (real) net rate of profit will be. The higher the rate of interest the lower the net rate of profit will be, again all things remaining equal. In the pre-1940 period, successive waves of high prices and low prices greatly affected the (real) net rate of profit through their effect on the rate of interest. Shaikh observes that between the early 19th century and 1940 when gold was still, according to Shaikh, the “medium of pricing,” prices experienced successive waves of ups and downs but changed very little in the long term because the ups and downs broadly canceled each other out. The same was true of interest rates.

Before 1940, the long waves of prosperity with rising prices caused interest rates to rise which lowered the net rate of profit independently of the rate of exploitation of the workers. But, following Shaikh’s logic, what about the post-1940 age of “pure fiat money”? Since pure fiat money has brought continuous—with trivial exceptions—rises in prices, shouldn’t interest rates also rise continuously independently of the fluctuations in the overall rate of profit? Shaikh does not believe that golden prices play any role in determining interest rates. Therefore interest rates in the age of “pure fiat money” should rise continuously. But if they did, sooner or later the rate of interest would rise to and then above the rate of profit and the (real) net rate of profit would become negative.

Logically, if we follow Shaikh, this should establish a limit on how high prices can rise in absolute terms in the age of “pure fiat money.” If Shaikh is right, sooner or later the post-1940 rise in prices should end—and it hard to explain why this rise in prices did not end decades ago.

Presumably, once prices stop rising, they will then once again stabilize in the long term just as they were stable in the days when gold functioned as “the medium of pricing.” Then prices will fluctuate around the new stable level in a “turbulent motion”—rising in some years and falling in others—just like they did in the pre-1940 days. Indeed, since Shaikh believes that the long-term tendency of the rate of profit—interest plus profit of enterprise plus rent—is downward, the long-term tendency of prices in the age of pure fiat money should also show a downward bias. The problem with Shaikh’s theories and its implications is that they are at odds with reality.

Between 1940 and 1981, interest rates rose from the record low levels of the Great Depression to the record high levels that prevailed in 1981, in accord with Shaikh’s theory. However, since 1981 interest rates have fallen to levels even lower than those at the end of the Great Depression, while prices in terms of “pure fiat money” have kept on rising, though at a slower rate than during the stagflationary 1970s. This is in complete contradiction to Shaikh’s theory of interest. How does Shaikh explain the gigantic contradiction between his theory of interest, which predicts that interest rates should be at record highs, and the reality that they have been at record lows?

Shaikh’s is forced to conclude that the central banks have somehow been able to override the basic economic laws that according to him determine interest rates. One consequence is that the era of long-term price stability, or even a gradual decline in prices logically predicted by Shaikh’s theory, has been put on hold, for now at least. This is a huge contradiction in Shaikh’s theory.

While basic economic laws can be modified by certain circumstances, an economic law that can be transformed into its exact opposite by the actions of the central bankers is, I believe, no economic law at all. This is especially true because the central bankers themselves know they have little influence over long-term interest rates and only limited influence over short-term rates.

Is there a natural rate of unemployment?

The theory that there is a natural rate of unemployment holds that, just like market prices fluctuate around natural prices—prices of production in classical and Marxist economic theory, the rate of unemployment fluctuates around a “natural rate of unemployment.” Any attempt by the government to lower the unemployment below this natural rate through increasing demand—deficit spending and increasing the issue of “pure fiat money”—will only, according to this theory, temporarily reduce unemployment. After a lag, the rate of unemployment will return to its natural rate but inflation will accelerate. Using this argument, Milton Friedman opposed “Keynesian” government policies aimed at stimulating demand as a way to combat unemployment.

The economist most associated with the concept of the “natural rate of unemployment” is indeed Milton Friedman. Shaikh agrees, as we have seen, with Milton Friedman and other like-minded right-wing capitalist economists that there is indeed a natural rate of unemployment. He agrees with them that any attempt by the government to boost economic growth and reduce unemployment below the natural rate will, after a lag, cause the rate of unemployment to return to its natural rate. In addition, he agrees with Friedman that any attempt to force unemployment below its natural rate will lead to accelerating inflation as economic growth and employment return to their “natural” levels.

Therefore, supporters of the natural rate of unemployment theory—which include both Friedman and Shaikh—believe that the “Keynesian” policies to permanently reduce unemployment by expanding demand through the issuance of increased quantities of “pure fiat money” are doomed to failure and will inevitably lead to accelerating inflation—at least in Shaikh’s case before prices calculated in terms of “pure fiat money” have reached their limit set by the rate of interest and the need for a positive net profit.

In contrast to Friedman, Shaikh believes that since the economy after an injection of demand—produced before 1940 by a major expansion of gold production and since 1940 by an injection of central bank-created “pure fiat money”—will be larger when the natural rate of unemployment falls back to its previous rate than it would have been in the absence of the expansion of the market caused by expansion of the quantity of money. Money is therefore not “neutral” in Shaikh, even in the long run, as it is in Friedman and neo-classical marginalist thought in general.

Therefore, “Keynesian” government policies might after all make society richer in the long run, so Shaikh might in contrast to Friedman support them at least under certain circumstances. Shaikh is, after all, a socialist and not a member of the right wing of the U.S. Republican Party like Friedman was. But Shaikh does agree with Friedman that Keynesian policies, no matter how “well-meaning,” will inevitably fail to achieve a permanent reduction in the rate of unemployment. Only socialism—anathema to Friedman but supported by Shaikh—can achieve a permanent full-employment economy.

Another difference between Friedman’s and Shaikh’s natural rate of unemployment theories is that Friedman’s version is based on neo-classical marginalism while Shaikh’s is based on a combination of Marx’s theory of the role of the reserve industrial army, as being necessary to maintain the rate of surplus value and provide a reserve of potential workers in case of an exceptional increase in the size of the market, and neo-Ricardoism.

Shaikh’s explanation of the 1970s stagflation

In the 1970s, according to Shaikh, the U.S. and other capitalist governments attempted to escape the “great depression” of those years by increasing effective monetary demand. This is the great lesson the capitalist governments of those days and their mostly Keynesian advisors thought they had learned from the 1930s. These policies were bound to fail, according to Shaikh, not because the government cannot increase demand up to the level of the physical limits of production with the help of modern “pure fiat money” but because the great depressions are caused by an insufficient rate of surplus product.

Therefore, according to Shaikh, it was not a shortage of demand—markets—but rather a shortage of the additional means of production and the production of additional means of subsistence for additional workers that was the main problem facing world capitalism in the 1970s, and indeed the other “great depressions.” Armed with this wrong diagnosis, according to Shaikh, the governments in the 1970s applied the wrong medicine. The increased demand created by issuing ever more “pure fiat money” raised the rate inflation and interest rates, which further reduced the real net rate of profit. Therefore, not only was the medicine not curing the disease, it was making things worse. To avoid total disaster, policy had to be changed and it was.

Only when the U.S. government under Ronald Reagan, Margaret Thatcher in Britain, and their counterparts in other countries took action to increase the rate of exploitation of the workers through busting unions and cutting back on social benefits was the stagflationary “great depression” overcome. In addition, since Alan Greenspan managed to dramatically lower interest rates—exactly how he did this in violation of basic economic laws is not explained by Shaikh—the net rate of profit rose as interest rates began their long decline from record highs to record lows.

As the real net rate of profit increased, the Federal Reserve and other central banks continued to create sufficient pure fiat money to take care of the demand side, and prosperity returned. Reagan’s medicine—helped along by Greenspan’s unexplained power to lower interest rates in defiance of basic economic laws—was exactly the right medicine as far as capitalism was concerned.

Shaikh, unlike Friedman, does not believe, however, that the natural rate of unemployment can be reduced to the virtually zero level Friedman and other right-wing neo-classical marginalist believe is possible. Shaikh agrees with Friedman—not the Keynesians—that the only way to reduce the natural rate of unemployment under capitalism is by attacking labor rights. If the workers can be forced to accept a lower real wage, in the long run the natural rate of unemployment will fall.

However, unemployment will continue to fluctuate around the now reduced natural rate of unemployment in a turbulent movement, sometimes exceeding and sometimes falling below it. So the succession of long waves of prosperity and great depressions will continue. But unlike Friedman, Shaikh believes that no matter how high the rate of exploitation of the working class is, there will always be some “involuntary unemployment” and that this unemployment cannot be reduced to workers who have quit their jobs in search of better jobs—frictional unemployment.

One is struck by how much Shaikh is in agreement not with “progressive” bourgeois economists or reformist socialist economists influenced by Keynesian ideas—though Shaikh does respect Keynes as an economic thinker—but with right-wing bourgeois economists such as the 1970s-era supply-side economists and Milton Friedman. It might seem that Shaikh would have been comfortable among Ronald Reagan’s economic advisors—or Donald Trump’s today. However, Shaikh is a socialist. President Trump will not be asking him to join his economic team any time soon—or ever. Shaikh wants to see capitalism gone and deplores the brutal polices of a Reagan or a Trump even if, as he explains, they are necessary for capitalism.

However, like other members of the not-enough-surplus value camp of crisis, Shaikh believes that the only way to minimize unemployment—not eliminate it—under capitalism is to increase the rate of exploitation of the workers. The inevitable corollary is that if workers want to minimize unemployment, they must put up with more exploitation. As long as the capitalist mode of production lasts, Shaikh and other members of the not-enough-surplus value camp believe there is no other way to reduce unemployment in the long run.

One is left uneasy by how much the members of the not-enough-surplus value camp are often in agreement with the most reactionary capitalist economists—and the bosses themselves. Shaikh is telling the workers that short of socialism the only way to reduce unemployment is to accept intensified capitalist exploitation.

Shaikh’s “Capitalism” will therefore never be a best seller in trade union circles and not only because of its obscure style, manner of presentation, and mathematical expressions. The writings of Keynesian economists, post-Keynesian economists, and Marxist-Keynesians are far more palatable in trade union circles and the workers’ movement in general.

Except for Keynes’s support of inflation as a way to hold down real wages, what Keynesian economists support is what most workers naturally desire. These include public works programs to generate government jobs while meeting vital social needs, combined with “easy money policies” to stimulate demand, thereby creating more jobs in the private sector while reducing the burden of debt. What these economists argue is that government economic policies that happen to be good for the immediate economic interest of the workers also happens to be good for the economy and society has a whole. This is a reassuring message to workers who “can’t wait for socialism” to solve their immediate pressing problems.

Any regular reader of this blog will notice many differences between the crisis theory developed in this blog and the one put forward in Shaikh’s “Capitalism.” Next month, I will contrast these theories especially as regards the stagflation crisis of the 1970s and early 1980s and make a final assessment of Shaikh and the strengths and weaknesses of his “Capitalism.” Then I will go on to tackle John Smith’s “Imperialism.”


1 Actually, the term monetary profit—or monetary net profit—is a redundancy because there is no such thing as non-monetary profit. The term real profit or real net profit is a contradiction in terms(back)

2 Friedman when polemicizing during the 1970s against Keynesian economists, who claimed that the high rate of inflation was caused by rising money wages or one-time shocks like the rise in the price of oil, famously stressed that inflation is “always and everywhere a monetary phenomena.” The inflation, Friedman explained, was caused by the Federal Reserve System and other central banks printing too much paper money or its bookkeeping equivalent. (back)

3 Another mistake the physiocrats made was to fail to treat surplus value as a specific category. Instead, they used the name of a fraction of the surplus value—in their case rent—and then used rent to describe the entire surplus value. Later economists made the same basic mistake but instead of rent they used other names that also describe fractions of the total surplus value. For example, surplus value was often described as “profit” or “interest.” No bourgeois economist or socialist critique of the economists used a term to describe surplus value as a whole before Marx used the German word Mehrwert, translated into English as surplus value. (back)

4 Here Adam Smith, who lived in the far more mature conditions that were already coming into being in Britain during the industrial revolution, called surplus value profit rather than rent. But again, he failed to use a specific term to describe the surplus value as a whole. (back)

5 Ricardo also failed to distinguish between concrete labor, which produces use values, and abstract labor, which produces value. As a result, the road to developing a correct theory of money and price was blocked. Ricardo was therefore unable to solve the transformation problem. (back)

6 Adam Smith was greatly influenced by the physiocrats. Perhaps the greatest achievement of the physiocrats was the Tableau Economique created by the French physiocratic economist Dr. François Quesnay (1694-1794). Quesnay’s table inspired Marx’s own analysis and formulas of both simple and expanded reproduction found in Volume II of “Capital.” Together, the work of Marx and Quesnay are the ancestors of today’s input-output matrix’s that are so important in neo-Ricardian and Shaikh’s own work.

Shaikh is impressed by Adam Smith’s reduction of constant capital to wage goods in the “final analysis,” because he sees it as an ancestor to today’s input-output tables. Marx, in contrast, complained that Adam Smith went from “pillar to post.” It is indeed a fine theory that treats capital as consisting in the final analysis of the means of subsistence of the workers. Smith’s analysis that all capital consists “in the final analysis” of wage goods were accepted by all economists between Smith and Marx. This prevented classical political economy from developing the distinction between constant and variable capital, distinguishing between the rate of surplus value and the rate of profit that forms the foundation on Marx’s concepts of the composition and the organic composition of capital and the tendency of the rate of profit to fall.

Lacking the concept of constant capital as not producing surplus value but merely passing its value on to the finished product, the best the economists could do was to distinguish between circulating and fixed capital. In classical economics, fixed capital is distinguished from circulating capital by its greater durability and longer period of turnover. Since the equalization of the rate of profit requires capital of equal quantities to make equal profits in equal periods of time, the classical economists from Adam Smith onward realized that natural prices of commodities would inevitably deviate to some extent from natural prices determined by the quantity of labor socially necessary to produce them. The transformation problem was born. (back)

7 It is tempting to say that the failure to understand that value must take the form of exchange value played a role in the fall of both the Second and Third Internationals, as well as the Soviet Union and its allies. If we don’t understand the form of value, not only are we unable to formulate a correct theory of crisis but the difference between capitalist and socialist production becomes blurred.

For example, the various attempts by Soviet economists to use “the levers of money commodity relations” to improve the workings of the Soviet planned economy—so strongly criticized by Che Guevara—eventually led to the disastrous perestroika economic reforms of the late 1980s. These “reforms” destroyed the Soviet economy and the Soviet state itself. Of course, as historical materialists we should understand that more than bad theories were at work that led to the fall of Second and Third Internationals, the Soviet Union and the socialist countries of eastern Europe. There were very real material interests involved, which ultimately reflected the class struggle between the basic classes of society—the capitalist class and the working class—that led to these disastrous outcomes.

But incorrect theories played a role in disarming the working class vanguard, thereby beheading the working class as whole. The next international will have to be built on the lessons of the collapse of the Second and Third Internationals and the destruction—as well as the achievements of—the Soviet Union and other socialist countries. A firm understanding of what “value” is and is not and the relationship between the forms of value as well as the difference between capitalist and socialist production will therefore have to be built into the foundation of the next workers’ international. (back)

8 Neo-Ricardians are either silent on the question of labor values—Sraffa—or specifically attack labor value—Steedman. What unites the neo-Ricardians is their claim that it is prices of production and not labor values that are the crucial category of their analysis of capitalist economy. The neo-Ricardians essentially determine what prices will equalize the rates of profit among capitals of different organic compositions and turnover periods such that capitals of equal sizes will yield equal profits in equal periods of time. Once you have done this, the neo-Ricardians believe, you have solved the basic problems of economics.

From the neo-Ricardian viewpoint, Ricardo was right when he developed his corn models and should have stuck with that approach rather than develop his concept of labor value, which only involved him in the contradictions of the transformation problem. However, from the Marxist point of view, Ricardo’s development of a far more consistent theory of labor value than found in his predecessors was his greatest achievement. Both Marxism and neo-Ricardianism pay tribute to Ricardo, but they are based on quite different parts of the Ricardian legacy.

Shaikh is a strong adherent of the labor value approach. In terms of value theory, Shaikh is most certainly not a neo-Ricardian. However, his failure to understand the forms of value and consequently the impossibility of “pure fiat money” under capitalism means that he does not fully understand the advances that Marx made that took him far beyond Ricardo. Shaikh remains stuck, at least to some extent, at a “Ricardian” level when it comes to value theory. (back)

9 We shouldn’t forget that Democratic President Bill Clinton “ended welfare as we know it.” However, the Clinton administration used arguments that the revolution in communications represented by the Internet and other computer-based technology meant that the U.S. economy was entering into an era of unprecedented capitalist prosperity that would eliminate poverty, making welfare as we know it unnecessary. Before Clinton, the Democratic administration of John F. Kennedy proposed a huge regressive tax cut that would, the administration argued, greatly accelerate economic growth. This tax cut was actually passed by the Lyndon Johnson administration after Kennedy’s assassination.

A difference between the U.S. Democrats and right-wing Republican ideologues is that while both parties like to propose regressive tax cuts to “stimulate the economy,” the Democrats use Keynesian arguments while Republicans like to use “supply-side economics.”

The Democrats will claim that the regressive tax cuts will stimulate demand and thus “trickle down” to the middle class, the workers and the poor. Republicans prefer to argue that regressive tax cuts will by increasing after-tax profits stimulate investment, which in turn will further increase employment. In this way, the effects will “trickle down” to the middle class, the workers and the poor.

The Democrats are considered “progressive,” however, because they base their arguments on Keynes, who many Republican economists consider to have been a dangerous “socialist” whose ideas undermine the “free enterprise” system. To be fair to him, President Trump has recently used some Keynesian arguments. For example, he claims that his proposed $200 billion public works program—the details of which are still vague—will through the “multiplier effect” lead to a trillion dollars in combined public and private investment. He also explained in a recent interview with The Economist that his programs will “prime the pump,” a Keynesian term preferred by Democrats rather than a supply-side argument preferred by Republican economists.

Perhaps the tendency of the U.S. president to use some “progressive Keynesian” terminology rather than the “conservative terminology” proffered by most Republicans reflects Trump’s past as a Democrat. Though the arguments of the Democrats and Republicans in support of “trickle-down” policies are indeed somewhat different—and Shaikh’s analysis is actually closer to the Republican analysis—the results are the same. (back)