Where is the U.S. Economy Going?

In January, the U.S. Labor Department estimated that the non-farming sector of the economy created 517,000 new jobs on a seasonally adjusted basis. Reading the fine print, you see these new jobs exist only on the statistician’s worksheet. The estimate is that on a non-seasonally adjusted basis, the economy lost 2.5 million jobs. Just before the holidays, additional workers are hired to meet the extra demand and are laid off at the season’s end.

The variations are taken into account and smoothed over to reveal the underlying trend. This year, they figured about 3 million workers would be laid off. But these are estimates. Since only 2.5 million were let go on a seasonally adjusted basis, the economy created about half a million additional jobs. But how to make the seasonal adjustment is a complex subject. We are still in the aftermath of a collapse in the hotel and restaurant industries caused by COVID-19. Employment numbers tanked when people stopped traveling and eating out and have yet to return to pre-pandemic levels. Perhaps fewer workers than usual were hired this holiday season, so fewer workers were laid off when it ended.

Another factor was the unusually mild weather that occurred over the country in January. With little snow on the East Coast and Midwest, major storms were limited mainly to California. Wind-driven rain ravaged most of the state, except for higher elevations in the thinly populated Sierra Nevada and Cascade mountain ranges. The economy was disrupted less by winter storms than usual. Weather is not accounted for in making seasonal adjustments.

A picture of the economy is emerging. The U.S. economy showed signs of slowing in the fourth quarter, and inflation ebbed late in the year. Hopeful that interest rates were peaking, financial markets rallied. In response to the signs of a slowdown, the Federal Reserve System cut the rate it’s been increasing – the federal funds rate – causing a stock market rally. Equally important, the interest rate on long-term government bonds began to fall. Hope grew on Wall Street that a “soft-landing” where a major recession is avoided grew.

On October 21, the interest rate on the government ten-year bond was 4.213%, the highest since the early period of the 2008-10 Great Recession. By January 20, the interest rate had dropped to 3.484%. Unlike stock market price fluctuations that have little effect on the real economy, fluctuations in long-term government bond interest rates have a big impact. Mortgage, auto, commercial and industrial loan interest rates are tied to those of long-term government bonds.

When the multiplier and accelerator effects have not reversed, a premature drop in interest rates will momentarily revive the boom. This is premature in the sense that commodity overproduction, the force pushing the economy toward recession, has not been liquidated. Liquidating overproduction is the only basis for a sustainable rise in the industrial cycle. The short-term fluctuations we’re seeing now often occur when the capitalist economy transitions between boom and recession.

Since the end of the gold standard, the dollar price of gold is often elevated just before the recession, then falls sharply as the recession sets in. As sales collapse and credit is called in, there’s a scramble for the U.S. dollar as a means of payment. Gold is dumped on the market as its owners build up dollar reserves. This is yet to happen in the current situation. On September 23, the price of an ounce of gold was $1651.70, the lowest for some time. It seemed a move out of gold into dollars — such marks the onset of a recession — was beginning. But then the price of gold rose again. On November 31, gold rose to $1943.00, and in January, inflation was accelerating. Rising retail sales and industrial production confirm the trend.

Since then, interest rates have reversed direction. The rate on ten-year government bonds reached 3.949% on February 24, and the dollar price of gold fell back to $1818.00 the same day. When will interest peak? Nobody knows. It’ll peak once recession takes hold but not before — at least not for long.

The chances of a soft landing where the economy slows down over the next few years without falling into deep recession are unlikely, partly because the Fed has lost credibility. The danger of a hard landing — a deep recession with mass unemployment — is rising. The longer the recession is staved off by premature interest rate drops that encourage borrowing and buying that keeps overproduction going, the worse the downturn will be.

The current situation creates the ideal background to examine Anwar Shaikh’s theory of interest.

The nature of interest

Ricardo’s theory of labor value demonstrated that ground rent and profit on capital — what Karl Marx later called surplus value — was produced by the unpaid labor of the working class. Ricardian socialists began turning Ricardian economic theory against the capitalist system. However, Adam Smith and David Ricardo hadn’t treated surplus value as a separate economic category. They used the term rent or interest to describe surplus value. It fell to Marx to explain that rent and interest describe fractions of surplus value.

The reaction by bourgeois economists against the Ricardian theory of labor value made impossible the further examination of the nature of surplus value and its constituent parts on the basis of capitalist political economy. (1)

In the mid-19th century, bourgeois economists claimed that interest rose due to the scarcity of capital relative to the population’s needs. This continues to be the view of modern bourgeois economists. Post-Ricardian economists believe that as capital grew in quantity, it became less scarce relative to the needs of the population, causing interest rates to fall over time.

Here’s the paradox. The first cyclical crisis of overproduction hit the capitalist economy in 1825. Interest rates rose prior to this crisis and on the eve of each successive crisis, the interest rate was the highest since the one before. (2)

This remains true in the 21 st century. Just look at the last industrial cycle. On September 25, 2004, the yield rate on Treasury ten-year bonds was 4.03%. Three years later, the yield was (on June 22) 5.228% but soon fell back below 5%. A year later, in June-July 2007, it rose above 5% again. But then on March 3, 2009, in the wake of the September 2008 crisis, the yield had fallen to 2.625%. (3)

On April 4, 2020, with the COVID-19 global pandemic, large sectors of the world’s economy shut down, effectively preventing a huge amount of the world ’s productive forces from acting as capital; the yield on the ten year government was just 0.5870%. (4)

As the COVID aftermath boom increased the quantity of real capital, interest rates rose to their highest level since the eve of the 2007-09 crisis. Periods of rapid accumulation of capital mean the overproduction of capital and commodities. Such periods are always accompanied by rising interest rates. Periods of low or negative accumulation of capital feature falling interest rates. The bourgeois economists’ expected result for interest rates caused by a scarcity of capital are the opposite of what we observe in the real world.

Nevertheless, economists pressed ahead with the idea that interest rates are the price of scarce capital. During the marginalist revolution in bourgeois economics beginning in the 1870s, the notion that interest is the price of scarce capital was formalized, that is, expressed mathematically. The marginalists of the Austrian or the neoclassical schools were determined to deny that income from property — surplus value — is produced by the unpaid labor performed by the working class.

Neoclassical economists hold that the price of labor, or wages, is determined by its scarcity. Marginalists hold that with perfect competition, the workers are paid their labor’s full value, which is equal to the value their labor creates. Perfect competition sees no exploitation of the sellers of labor by the owners of capital.

Ricardian socialists held that workers are paid less than their labor’s value. If workers were paid the full value of their labor, they believed income from property, whether called rent or interest, would disappear. There would no longer be a class of non-workers living off the unpaid labor of the working class. (5)

By distinguishing between labor and labor power (the ability to work), Marx showed that workers could be paid the full value of their labor power — and still perform unpaid labor for the capitalists and the landowners. For Marx, surplus value doesn’t depend on what’s called wage theft, where workers are paid less than the value of their labor power. Wage theft means capitalists pocket some of the value of the worker’s labor power, leading to super-profits. Wage theft is, however, widespread is not necessary for the production of surplus value.

To refute the socialists, especially Marx, marginalist economists tried to create a mathematically consistent system where interest, or surplus value, can exist while the workers are paid the full value of what their labor creates. Profits beyond interest are explained away as either wages of the active capitalist or as a reward the entrepreneur earns by meeting unmet needs or creating new human needs.

Neoclassical economists hold that when the economy is in equilibrium, there are no profits beyond interest other than the wage earned by the entrepreneur. Léon Walras, considered the founder of neoclassical economics, did not attempt to defend the ground rent pocketed by landowners. Rents arising from the scarcity of land should go to the state, he argued. Marginalist economists, including Walras, are determined to defend the interest appropriated by a class of non-working capitalists.

The neoclassical system holds that when the economy is in equilibrium due to perfect competition, no changes in the proportions of production and consumption can be made without reducing the total consumer satisfaction of the members of society. Since labor and capital are scarce even in equilibrium, both scarce labor provided by workers has a price — wages — and scarce capital provided by the capitalists has a price — interest. The active capitalist — the working as opposed to the idle money capitalist — deserves a wage because they’re workers like any other. If the wages of active capitalists are higher than those of others, it’s because the labor of active capitalists is scarce relative to demand.

Interest, according to the economists, is the income idle money capitalists earn because capital is scarce relative to the population’s needs. Capital has a scarcity price called interest. Interest is justified by claiming that if capital had no price (zero interest), there would be no incentive for anyone to save rather than consume their entire income immediately. In the absence of interest, capital and the productive forces of society would disappear. The neoclassical and Austrian economists alike conclude: money capitalists deserve their interest income as much as workers deserve their wages.

Marx’s theory of interest

In analyzing interest, Marx analyzed the interest industrial and merchant capitalists pay to bankers and other money lenders. He distinguished capitalist interest from pre-capitalist money-lender interest. Interest on usury capital is older than capitalist production. Marx knew that under capitalism, workers could become indebted to money lenders, for example, pawnshop owners, forcing them to pay interest from their wages.

The founder of scientific socialism considered this a secondary form of capital’s exploitation of the working class. The chief form is the extraction of surplus value through wage labor that occurs even if the workers are paid the full value of their labor power. This is Marx’s theory of surplus value. Interest is only part of the total surplus value that appears once it takes the form of profit after the commodities that have absorbed surplus value are sold at their value or prices of production.

Marx considered the development of the modern banking system (banks replaced pre-capitalist money lenders) as the subordination of interest-bearing loan capital to the needs of the capitalist mode of production. This transition was accompanied by a fall in the interest rate. The exploitation of workers by lending them money at interest and pocketing part of their wages has grown with the development of modern consumer credit. It remains a secondary means to exploit the wages of workers. This doesn’t prevent all kinds of petty-bourgeois economists and demagogues from treating interest as the main form of exploitation. (6)

Marx’s chief concern in analyzing interest under capitalism involved the competition in appropriating surplus value that occurs between the money capitalists on one side and the industrial and merchant capitalists on the other. As described in a previous post, surplus value is divided between profit on capital and ground rent. Profit proper — total surplus value minus rent — is divided between interest and what Marx termed profit of enterprise. Even if the capitalist economy is in perfect equilibrium, competition will not eliminate the profit of enterprise.

Imagine a situation where every industrial and merchant capitalist retired from active business and hired professional managers to run their businesses. This has been a powerful tendency in modern capitalism — the separation of ownership from management. Brought to its logical conclusion, it means that the wage of active capitalists is separate from the ownership of capital. (7)

Capitalists who own industrial as well as merchant enterprises earn a higher income than capitalists who loan money to businesses. The profit of enterprise refers to the portion of the surplus value appropriated by the owners of capital as opposed to lenders of money, not the wage of the active capitalist.

The owners of corporate stocks receive not only dividend payments — interest on their capital — but increase their wealth through the rise of the price of their stocks on the stock exchange over time as the amount of capital represented by the companies in whose ownership they share grows. This explains why the capitalist media is obsessed with the ever-changing corporate stock prices on the stock exchanges. Corporate stock owners grow richer over time relative to those who invest only in corporate bonds. The income the stock owners get through the rise of the stock prices — called capital gains — represents the profit of enterprise going to them as owners, not managers, of capital invested in the business.

Accumulated profits of enterprise are realized when the stock is sold at a gain. However, corporate stock owners run a risk because stock dividend payouts can be cut during bad times, and the owners can be wiped out if the corporation is liquidated due to bankruptcy. When a corporation goes bankrupt and is liquidated through the sale of its assets, bondholders are paid back out of the liquidation proceeds. Only if there is money left over — there usually isn’t — do the stockholders get back any of the money they invested.

At the opposite extreme, imagine capitalists working entirely with their own capital, not borrowing any money. If all capitalists were in this position, there wouldn’t be a division between the profit of enterprise and interest, only profit and ground rent. Most capitalists work with both borrowed capital as well as their own capital. As regards the capital they own, the capitalists separate in their minds the interest income from the the profit of enterprise. Interest is not considered a different portion of surplus value like ground rent but is a subdivision of profit defined as total surplus value realized in money form minus rent.

The crucial importance of the profit of enterprise

The capitalist class appropriates part of its share of the total surplus value — the part not going to the land owners — as interest and part as the profit of enterprise. The rate of profit, defined as interest plus profit of enterprise, must be higher than the interest rate. If they’re equal, it wouldn’t make sense for capitalists to make risky investments when they could realize the same income with less risk. But if every capitalist did this, no surplus value would be produced! There would be no profit, interest, or ground rent. Of course, this doesn’t rule out the possibility that, due to a crisis, the interest rate might rise or exceed the rate of profit for a while. But as soon as such a situation arises, some capitalists will convert themselves into money capitalists.

Such a situation occurred at the end of the stagflation crisis in the early 1980s. As soon as a significant portion of the industrial and merchant capitalists convert into money capitalists, large quantities of money capital are withdrawn from the circuits of M-C-M’ — and moved into M-M’ circuits — the formula for loan money capital. Expanding the amount of money capital offered for loans lowers the interest rate. This continues until the interest rate is again below the profit rate. We saw this during the period of financialization following the end of the stagflation crisis in the early 1980s.

The rate of interest and length of the loan

The longer a loan runs, the higher the risk. Over time the values of commodities, money, and prices change. Technological revolutions can wipe out whole industries, and new ones arise. Horse-drawn carriages gave way to automobiles, pens to typewriters, giving way to word-processing machines, giving way to personal computers. Also, the longer the term, the greater the chance of war or revolution. Under average conditions, interest rates are lower for short-term loans compared to long-term. Before a crisis, when loan capital is in short supply, the demand for short-term loans to finance growing quantities of unsold commodities is driven into a frenzy, causing the demand for short-term loans to rise above long-term. In financial press language: the yield curve becomes inverted. An inverted yield (like the one now in February 2023) signals the approach of recession. Once in recession, overproduced commodities are liquidated, and short-term interest rates fall below long-term ones.

Anwar Shaikh’s theory of interest

Anwar Shaikh, in “Capitalism: Competition, Conflict, Crises,” emphasizes the need for a positive profit of enterprise. It is not so much a positive profit rate that provides the incentive to capitalists to produce surplus value but rather a positive profit of enterprise. If the profit rate is 25%, but the interest rate is also 25%, there’s no incentive to produce surplus value. If the profit rate is 10% and the interest rate is 2%, that’s a different story. In this case, the profit rate of enterprise is 8%. In the former case, while the profit rate is a higher 25%, the profit rate of enterprise is zero. Shaikh is on firm ground here. He understands that the profit of enterprise and interest are different fractions of total surplus value.

He takes a wrong turn when it comes to the question of what determines the interest rate within the limits of zero on the downside and the profit rate on the upside. His mistake in analyzing interest rates is his failure to realize that money is a commodity that itself must be produced for profit. There is no such thing as pure fiat or non-commodity money. Under capitalism, the accumulation of money capital in the form of the commodity gold proceeds independently of the accumulation of real capital. Real capital consists of fixed capital (factory buildings, farms, mine pits and tunnels, machinery, rolling stock, tracks, planes, satellites, raw and auxiliary materials, and so on) plus the purchased labor power of the workers. The latter alone produces surplus value.

If the accumulation of the money material — gold — is slower than the accumulation of real capital, the interest rate rises. This situation must end in crisis if only because the interest rate can’t rise to or above the profit rate without destroying the incentive to produce surplus value. If money accumulation is below the rate of real capital accumulation, the interest rate falls. A low interest rate encourages capitalists to act as industrial or merchant — rather than money — capitalists collecting interest. The key to a healthy economic recovery after a crisis is a rising rate of profit combined with low and stable or slowly rising interest rates.

Comparing the quantity of money capital with the amount of real capital

How do we compare the quantity of money capital with the amount of real capital? Money material consists of gold, a single use value. As a use value, gold is measured by some unit of weight such as ounces, grams, or metric tons. Real capital consists of the most diverse use values measured in terms of various units of measurement. Marginalists, including the neoclassicals, hold that interest rate determines capital’s value. If long-term interest rates rise, the price of bonds drops. The value of a perpetual bond, like the British consol (consolidated stocks), is the interest income divided by the rate of interest. But if capital’s value is determined by the interest rate, then the interest rate is determined by the value of capital — a perfect circle. To measure the interest rate, it’s necessary to measure the total quantity of capital independently of the interest rate.

In the 1960s, what’s become known as the Cambridge Capital Controversy occurred. Between the time of Walras and the 1960s, neoclassical economists claimed they’d developed a mathematically consistent theory of capitalism while rejecting the concept of labor value. Neoclassical economists claim economic value arises out of scarcity. Using this concept in a mathematically rigorous way, they claimed to have finally proven that interest — their term for surplus value — does not rise from unpaid labor performed by the working class but from the scarcity of capital relative to the needs of the population. Through the use of higher mathematics, Marx was finally refuted, the neoclassicals declared.

The capital controversy pitted economists from Cambridge, Massachusetts, led by U.S. economist Paul Samuelson (1915-2009), against those based in Cambridge, England, led by the neo-Ricardian Italian economist Piero Sraffa (1898-1983). Sraffa was an anti-fascist and friend of Antonio Gramsci (1891-1937), founder of the Italian Communist Party.

Though on the left, Sraffa was unwilling to commit himself to Marxism. He fled from fascist Italy in 1927. With the support of Cambridge University economics professor John Maynard Keynes, Sraffa moved to Britain, where he spent the rest of his life. He was a scholar of Ricardo, and he developed what can be called an intermediate position between Marxism and the neoclassical school, sometimes called the neo-Ricardian school. Sraffa’s most important work is considered to be the “Production of Commodities by Means of Commodities,” first published in 1960. In this work, Sraffa exposed the mathematical contradictions of neoclassical marginalism.

The Cambridge, Massachusetts, Institute of Technology economics professor Paul Samuelson (hence the Cambridge Controversy) is considered the leading U.S. neoclassical economist of the post-World War II period. Samuelson defended the mathematical consistency of neoclassical theory, including the need to measure the quantity of capital independently of the interest rate. He claimed you could overcome the capital measurement problem by assuming that all (constant) capital consists of a single good, or use value. The problem is that constant capital does not consist of a single good. Neither he nor anyone else has ever been able to solve this or the other problem that Sraffa found in neoclassical theory, the double re-switching of techniques. Samuelson was forced to concede defeat. (8)

If neoclassical marginalism was a theory in natural science like Newton’s theory of gravity or Einstein’s general theory of relativity that replaced it, it would have been abandoned in the mid-1960s. So why, then, is neoclassical marginalism still taught in the universities 65 years after it was mathematically disproved? (9) The answer is that bourgeois political economy, with its class-determined need to deny that surplus value rises from unpaid labor performed by the working class, has not been able to come up with anything better than the now disproved neoclassical theory.

With Marx, we have no such measurement-of-capital problem. Capital, whether money gold, or real capital, is measured by the quantity of abstract human labor measured by some unit of time necessary to (re)produce it under the prevailing conditions of production. More practically, total capital can be measured by the sum of the total prices of the commodities making up capital calculated in terms of the use value of the money commodity.

For example, the amount of capital represented by a lathe in a factory can be calculated by the calculated in the weight of gold that it would fetch if sold on the market. The same is true of the value of the labor power of the worker who operates the lathe, the electricity running the lathe and other factory machines, the building itself, the machines that make up the assembly lines, the parts used to assemble the product, and the electricity running the machines can be measured against one another as long as the comparison is made in terms of their golden prices — not their individual use values. The quantity of the total real capital can be measured by adding up the prices in terms of the use value of gold measured by the unit of weight of the commodities that make up the total real capital.

John Maynard Keynes’ theory of interest rates

By the time of his 1936 “General Theory,” Keynes knew the abundance of money capital relative to real capital played a crucial role in determining the level of interest rates. He was aware that periods of high interest rates are those when money capital is scarce relative to real capital, while periods of low interest are those when money capital is abundant relative to real capital. Keynes was still partially a prisoner of the notion that the total quantity of money capital is a passive reflection of the total amount of real capital.

This view arises from the quantity theory of money. Though Keynes came to reject the quantity theory of money, he never broke with the view that, in the long run, the abundance of capital relative to the population’s needs for use values determines the interest rate.

Keynes followed most other economists (except Marx) in his belief that the more abundant capital was relative to the population’s needs for commodities produced by capital, the lower would be the rates of profit and interest. Keynes believed that the interest rate was equal to the profit rate in equilibrium. He knew the economy was not necessarily in equilibrium. He also knew that capitalist production would shrink if the interest rate exceeded the profit rate. He believed that capitalist production would expand as long as the interest rate was below the profit rate. Both expansion and contraction (recession) were signs that the economy was in a state of disequilibrium.

The point of equilibrium is where the interest rate equals marginal efficiency capital, defined as the profit rate the industrial capitalist believes will be yielded on an additional unit of capital. At this point, capitalist production neither expands nor contracts. Keynes believed that as society gets richer in capital and population growth slows, profit and interest rates fall until they reach zero. At this point, all material human needs will be met with no need for further economic growth. After 19 th century John Stuart Mill, Keynes was one of the earliest supporters of what today is called degrowth.

In “General Theory,” Keynes was aware that in the short run, the interest rate equalizes the supply and demand for money — not real capital. Keynes drew the conclusion that if the profit rate is falling — or expected to fall — due to the rising quantity of use values produced relative to human needs, then the monetary authority should increase the amount of money to lower the interest rate to a point below the lower expected profit rate. If interest rates aren’t lowered, or even rise, when the capitalists expect the profit rate to fall, interest rates will rise above the expected profit rate. The result will be recession — falling production — and rising unemployment. As we saw last month, Keynes advocated that central banks create whatever additional money necessary to lower interest rates whenever recession threatens. In the real world, central banks raise interest rates when recession threatens, which is what the Federal Reserve System is doing now. (10)

Keynes saw the need for the central bank to raise interest rates when recession looms as a technical problem tied to the gold standard. In his view, when the central bank faces pressure on its gold reserves, it can only relieve it by increasing interest rates even when the prospect of falling profit rates dictates that it should do the opposite. Keynes’ solution was to end the monetary role of gold and establish currencies such as the British pound and the U.S. dollar as non-commodity money.

After this reform was carried out, Keynes believed the monetary authority would be able to determine the interest rate. If it was too high — creating recession — or too low — creating inflation — the monetary authority could either cut or raise interest to whatever level that would lead to full employment with stable prices. The proper level of interest rates that was determined by the quantity of capital relative to the need for more commodities on the part of the population. Once these needs were fully met, the interest rate ensuring full employment at stable prices would be zero.

Like Keynes, modern progressives who base themselves on his economics hate gold. In the late 1960s and early 1970s, recession loomed. Capitalist central banks tried to put his advice into effect. They attempted to end the monetary role of gold once and for all and establish a non-commodity money whose quantity they would control. Then they’d be able to set interest rates at whatever level necessary to ensure near-to-full employment and stable prices. The result?

Economists predicted the dollar price of gold would drop as gold lost its use value as money. Much of the demand for gold rises from its role as money. The end of gold’s monetary role would reduce its demand. But the opposite happened.

Issuing vast amounts of paper money not backed by gold drove demand for gold into a frenzy. The additional demand for gold developed because, with paper currencies rapidly falling against gold, the only way to preserve the value of capital was to convert it into gold. Far from being “de-monetized,” demand for gold as money was whipped into a frenzy. Profits in terms of the gold’s use value turned massively negative, though profits in terms of dollars and, to a lesser extent, in real or commodity terms remained positive. The rate of surplus value didn’t fall. Instead, it rose sharply. The only problem for the capitalists was that the huge amounts of surplus value they were producing were not being realized in the use value of the money commodity, gold bullion.

Economists believed that gold-measured profits didn’t matter now that gold was de-monetized and just another commodity. They insisted that what mattered was profits in terms of the use value of commodities. Marx’s theory of value indicated otherwise. As long as capitalist production is retained, profits must be measured in terms of the money commodity’s use value.

The problem in the 1970s was not that sufficient surplus value was not being produced. It was that surplus value, due to the overproduction of commodities relative to gold, was not being realized in terms of gold. In dollar terms, the most profitable investment around was owning gold. Once we recognize that profits must be measured in terms of the gold’s use value, we know that the profit rate on hoarded gold is zero by definition, negative once storage costs are taken into account. As the dollar plunged against gold, inflation in terms of dollars and other paper currencies accelerated, as did market interest rates.

The economists explained that, at first, it was only nominal interest rates — interest rates in terms of dollars and other paper currencies that were increasing. Real interest rates — measured in terms of commodities — were negative, and recession was being minimized or avoided. Keynes’ supporters blamed inflation on either special factors such as the OPEC oil cartel, rising nominal wages, or wages measured in terms of depreciating dollars and other paper currencies. Keynes believed wages ruled the general price level. The capitalist media spoke of the wage-price spiral, ignoring that nominal wages rose only in response to the rising cost of living. Real wages were falling behind the cost of living, causing the first sustained drop in real wages since World War II.

While monetarist supporters of Milton Friedman advocated traditional tight money policies by the central bank to halt inflation — though he knew that would cause a recession — Keynes supporters claimed wage-price controls could stop inflation without a recession. The Republican Nixon administration implemented this economic snake oil by imposing wage-price controls in 1971. The controls worked in the sense that wages lagged ever further behind rising prices, increasing the rate of surplus value. But inflation continued and intensified. Then Paul Volcker forced the Federal Reserve System to allow interest rates to rise to the highest level in the history of capitalism as the only way to stave off hyperinflation.

Under Volcker’s brutal — but from the interests of the capitalist system essential — policies, interest rates rose not only in nominal but also in real terms as well as in gold terms to the highest levels in history. The U.S. and British industrial economies were devastated. In the U.S., the Rust Belt was born. U.S. manufacturing employment, after growing throughout the history of the U.S. despite recessionary interruptions — the most serious being the Depression of the 1930s — has tended downwards since 1979. After Paul Volcker (1927-2019) was nominated to head the Federal Reserve System in 1979 by his fellow Democrat, President James Carter, U.S. manufacturing employment has never again approached the levels of 1979. (11)

At the time, and today as well, progressives claimed Volcker’s policies were a horrible mistake. But they offered no alternative except the failed wage-price control policies because within the limits of the capitalist system because such alternative policies did not exist.

In reality, interest rates equalize the demand with the supply of money material. During a normal industrial cycle, the growing relative scarcity of gold during the upward phase of the cycle leads to higher interest rates. By reducing the quantity of real capital as measured in terms of gold’s use value relative to gold itself, periodic recessions lower the interest rate again. If recessions didn’t occur, nothing would prevent interest rates from rising above the profit rate, wiping out the profit of enterprise. But if this happened permanently, instead of temporarily during a crisis, the result would be the end of capitalist production. Periodic recessions under capitalism are necessary to prevent interest rates from permanently rising above profit rates.

Anwar Shaikh on the determination of interest rates

When Shaikh feels he’s on shaky ground, he defaults to the views of Piero Sraffa’s neo-Ricardian followers, who he considers the modern-day heirs of the classical economics of Adam Smith, David Ricardo, and Karl Marx. Unable to explain real-world fluctuations in interest rates because of his incorrect theory of money, Shaikh falls back on the work of neo-Ricardian economist Carlo Panico. Let’s see what Shaikh came up with and why it doesn’t work.

Shaikh writes, “In capitalism, the provision of finance is undertaken by financial businesses seeking to make as much profit as they can. Competition from other financial capitals then causes the profit rate of the regulating financial capitals to gravitate around the general rate of profit. It is natural to view the competitive rate as the ‘price of production’ of finance.” [page 443, “Capitalism”]

But providing finance that’s lending money at interest is different than producing commodities and surplus value. The capital of the merchant capitalist consists of money capital plus commodity capital, but not productive capital. The merchant buys commodities from industrial capitalists — whose capital consists of money capital, productive capital, and commodity capital — with money below the price of production. They then sell them to the final consumer at the price of production. The difference between the price the merchant pays the industrial capitalists and the price the merchant sells the commodities to consumers represents the merchant’s profit.

This is merchant capital in its pure form. In the real world, the merchant capitalist maintains an office and office equipment. In addition, the merchant purchases the labor power of office employees. To the extent the merchant engages in transporting and storing commodities, they act as industrial capitalists.

In addition to the expenses as a buyer of commodities, the merchant has office expenses to consider. The merchant tries to minimize these expenses — finding the cheapest office equipment and paying low wages to the employees — but can’t reduce these expenses to zero. This doesn’t change the fact that price of production regulates market prices.

Can this analysis be extended to the commercial banker? If the merchant is the middleman between the industrial capitalist and the final consumer, then the banker is the middleman between the owners of money and the industrial and merchant capitalists who transform the money into capital.

Shaikh believes that the interest rates bankers charge their borrowers are governed by equalization of the profit rate. Shaikh reasons that capital invested in banking must make the same profit as capital invested in any other business. He quotes Marx to this effect, and he’s correct. A commercial bank is a borrower — it borrows money in the form of deposits, then lends it to industrial and merchant capitalists. The commercial bank calculates its profit on the capital its stockholders own by subtracting from the interest income it earns the cost of the interest it pays to its depositors, called the spread. In addition, they must subtract the cost of office equipment and employees’ salaries from interest income and thus calculate the net profit rate on the ban k’s shareholder capital.

If the cost of commodities purchased from industrial capitalists is the primary cost of the merchant capitalist, bankers’ primary cost is the interest rate paid to depositors. The difference between what the merchants pay the industrialists and what the merchants charge the final consumer is regulated by the average profit rate. The spread between the interest rate the bank pays on deposits and the interest rate the banker charges capitalists is regulated by the average profit rate. In both cases, office expenses are taken into account as well in calculating the profit rate. If the profit rate is higher than average on bank capital, some capitalists will enter banking to make higher profits. If the profit rate on bank capital is lower than average, capital will leave banking in favor of other businesses.

Shaikh writes, “Interest rates depend on the costs of financial provision and hence on the general price level.” [page 479, “Capitalism”] He argues that if prices are high in a given epoch (extending over several industrial cycles) compared to an earlier one, production prices will be higher as well. This increases the costs in terms of currency in running a bank. True enough. For Shaikh, interest rates are the price of production of providing finance. He assumes an epoch of high prices will be an epoch of high interest rates.

When calculating the profit rate on bank capital, we refer to the capital owned by the bank’s stockholders, not that of the depositors. If the industrialists’ capital consists of money capital, productive capital, and commodity capital, and the merchants’ capital consists of money capital and commodity capital, the bankers’ capital — aside from office expenses — consists of money capital plus the bank’s industrial and merchant debtors loan obligations.

When you deposit money into your bank account, you’re lending money to the bank. The bank has the power to borrow small amounts of money from people who own small amounts of money that are far too low to function as capital. The bank combines these small sums into a large money capital controlled (not owned) by the bank. This money capital created by combining deposits is borrowed money capital from the point of view of the bank’s shareholders. The capitalists who own the bank — shareholders — are only interested in the profit rate on their own paid-in capital.

If the profit rate on bank (shareholder) capital is lower than average, capital flows out of banking into more profitable industrial or commercial businesses and out again if the opposite occurs. Banking is subject to the tendency of the profit rate to equalize. But appearances are deceptive.

The stockholders and depositors of commercial banks divide the interest income the bank receives on loans among themselves. The bank may pay 1% on the few hundred dollars I have deposited. In a year, I might earn a penny in interest. At the same time, it might charge industrial and commercial borrowers 5%. The difference between the 5% the bank charges on its loans and the 1% that I am paid as a depositor is the basis of the bank shareholders’ profits. The larger the spread, the higher the profits on the shareholders’ capital. While the bank’s profits appear to be a combination of interest and profit of enterprise, as with industrial and commercial businesses, in reality, the entire income earned by the shareholders on their capital is only of the interest. Even the wages of the bank’s employees are paid out of interest. The primary income (assuming for simplicity that the bank loans only to merchant and industrial capitalists) is interest income that’s redistributed in bank employees’ wages.

A commercial bank has office expenses plus the labor power of office employees. The same is true of merchant capitalists and industrial businesses. These incidental expenses play a secondary role, but in Shaikh’s analysis of interest, they play the primary one. Industrial businesses have interest expenses, but we usually abstract them, though a complete analysis must take them into account. In treating interest as the price of production, Shaikh promotes secondary office expenses to prime place. This puts them on the same plane or above the actual costs of producing commodities..

In addition, not all money lenders are bankers. Shaikh distinguishes between what he calls the base rate paid to depositors or other lenders to the bank and the out rate charged by bankers to their debtors. What about the interest earned by bank depositors and bondholders? Even if we consider the office costs of running a bank as comparable to the cost prices incurred by industrial capitalists in commodity production and commercial capitalists in purchasing commodities from industrial capitalists, not all moneylenders have office costs.

Shaikh doesn’t account for individuals who purchase bonds as opposed to industrial and commercial company stocks. These individuals don’t have to rent offices, purchase equipment, or hire employees, yet they realize interest on the money capital they loan out. (I don’t have any office costs when I deposit my money for safekeeping into my bank or credit union account, even if I earn interest of perhaps a few pennies a year). Here Shaikh resorts to a circle. Having established that interest rates are determined by the price of production of the provision of finance, he claims base rates can also be set by the price of production of providing finance because the base rates are determined by the banks’ out rates. Through this circle, Shaikh can treat the base rate itself as the price of production. (“Capitalism” p. 479)

Now we’ll look to the British economist Thomas Tooke (1774-1858), the 19th-century historian of prices. Tooke observed that periods of rising prices are periods of rising interest rates, while periods of falling prices are those of falling interest rates. Shaikh concludes that in an epoch of high prices, interest rates are higher than in those of lower prices. However, this is not necessarily true, as we will see below. I use the term “epoch” to represent a series of industrial cycles because I’m not interested here in prices and interest rate fluctuations over short periods but rather in comparing longer periods.

Where Shaikh goes wrong is his false view that modern money is non-commodity money. He believes money starts as a commodity produced by private individuals. But he believes that money evolves at a certain point into non-commodity money — which he calls pure-fiat money created by the state. The question of what determines the interest rate comes down to what determines the division of the surplus value — once it takes the form of profit — between the money capitalists and the industrial and merchant capitalists.

While other forms of capital can be lent or leased, it is capital in the form of money that’s most easily loaned. Bankers easily loan money at interest without loaning capital. This happens when a bank loans money to industrial capitalists but requires collateral. For example, the industrial capitalist might borrow a million dollars from the bank but be required to deposit (loan to the bank) a million dollars of capital in the form of securities with the bank. Thus there’s no net loan of capital from the bank, only a loan of money.

The downward interest rate is bound by zero and upward bound by the profit rate. If the profit rate is 10%, interest rates can’t fall much below zero or rise much above 10%. But interest rates can still be 1%, 5%, or 8%. If the rate of interest is 5%, why is it 5% rather than 8% or 1%? Adam Smith assumed that about half the profit goes to the profit of enterprise and the rest to interest. But why half? Shaikh complains that neither Marx nor Keynes gives a satisfactory account of how profit is divided between the profit of enterprise and interest. Shaikh has then diverted down the false path that interest is the price of production of the finance provider.

How much of the profit (interest plus profit of enterprise) goes to the money capitalist as opposed to the industrial and commercial capitalists depends on the relative amount of the capital consisting of money capital versus the relative amounts of the total capital composed of real capital — means of production, raw and auxiliary materials and commodity capital. If the quantity of commodity money is growing slower (as measured in the use value of the money commodity) than the quantity of real capital, the interest rate(s) will rise.

During the upward phase of the industrial cycle, real capital grows faster than the quantity of money capital. The balance prevailing between the depletion of old gold mines and opening up new rich mines plays an important role in determining how quickly the interest rate rises during the upward phase of the industrial cycle. If many new gold mines go into production, the rise in interest rates will be slower than when old mines are depleted at a faster rate than the new ones come into production.

In periods of relatively rapid growth of the money material, the multiplier and accelerator effects can produce either a longer or more powerful boom before overproduction leads to a new crisis compared to times when money material grows slowly. Once a crisis erupts, it can be overcome faster when the quantity of money capital grows faster due to the discovery of new mines than when a few new mines are opened while depleted ones are closed.

During the upward phase of the industrial cycle, the balance of power in the money market shifts in favor of the money capitalist causing interest rates to rise. During the downward phase, when the quantity of money material grows relative to the quantity of real capital, interest rates fall.

As capital is measured in the use value of the money commodity, a shift in favor of money capitalists that results in higher interest rates is caused either by an increase in the quantities of the use values of non-money commodities measured in a unit appropriate for each type of non-money commodity with prices unchanged or by a rise in the prices of non-money commodities, assuming that quantity, as measured in their own use values, remains unchanged. This explains Tooke’s observation that periods of rising prices are periods of rising interest rates, while those of declining prices are of falling rates.

In an average industrial cycle, increasing production and increasing quantities of non-money commodities measured in terms of their own use values and rising commodity prices play a role in rising interest rates. As a rule, the rise in the amount of non-money commodities measured in their use values plays a more significant role than the increase in the prices of commodities, though both play some role.

We zero in on where Shaikh’s analysis goes wrong

Shaikh is aware that a rise in prices leads to a rise in interest rates. He’s aware of the distinction between prices calculated in currency terms such as U.S. dollars, British pounds, etc., and gold when analyzing long waves of faster and slower growth. Still, he fails to do this when he analyzes interest rates. Here he ignores golden prices. He fails to understand that the accumulation of money capital and real capital proceed independently from one another. Crises are necessary periodically to prevent the accumulation of real capital from completely outrunning the accumulation of money capital. By not understanding this, Shaikh remains a prisoner of the view of most economists, except Marx, that the accumulation of money capital is a passive reflection of the accumulation of real capital. Shaikh fails to understand that despite all attempts to establish non-commodity money, central banks exercise little control over interest rates. This is a grave error.

To analyze the effects of changes in prices on interest rates, we distinguish between a rise in prices in the use value of the money commodity versus a change in prices that reflects the change in the quantity of money material a currency unit (like the dollar) represents. Let’s compare two epochs, each one in gold terms. The second epoch is a period of high prices in gold terms. We’re not interested in what happens in the transition between the two periods. We assume the epoch of high prices follows one of lower prices. In the high-price epoch, the value of gold is lower relative to the value of non-money commodities than during the low-price epoch.

The relative values of gold compared to the values of non-money commodities determines the general price level. Therefore, in the high-price epoch following and low-price epoch, the amount of abstract labor needed to produce a given quantity of gold has fallen faster than the abstract labor necessary to produce a given quantity of use value of most non-money commodities.

As we’ve shown elsewhere, the industrial cycle is a mechanism through which, in the long run, an adequate amount of gold is produced to circulate all the non-money commodities produced while leaving enough idle money available to meet a sudden expansion for additional means of circulation. Such a sudden rise in the needs of circulation can be brought about by an increase in the number of commodities produced, a rise in their price in use value terms, or a combination of both. One consequence, whether prices are high or low, is there will be enough gold to keep the average interest rate below the average profit rate. The epoch of high prices needs more gold measured in use value to circulate a given quantity of commodities than the low price epoch. The mechanism of the industrial cycle sees to it that in the high-price epoch, the additional quantity of gold necessary to circulate commodities will be available. In a high-price epoch, the costs of these articles will be higher in gold than in the low-price epoch. But there’ll also be a greater quantity of gold available in the high-price epoch relative to that of low prices. The upward pressure on interest rates of higher prices is canceled out by the greater quantity of money available for lending.

Things are simpler when the differences in prices between two epochs reflect not differences in the value of gold relative to non-money commodities but that the unit of currency represents a smaller amount of gold in the period of high prices compared to the earlier period of low prices. The individual dollar is devalued because it has been issued in greater quantities relative to the available quantity of gold.

The bank will have greater dollar expenses when it comes to purchasing or renting office space, office equipment, and the labor of power of its office employees. But it will also have more dollars available to pay these expenses because each dollar represents a smaller amount of real money — gold. Though individual dollars represent less in terms of office expenses, this effect is canceled out by the greater number of dollars available. Again when we’re not interested in the transition between the epoch of pre-devaluation of low-dollar prices and post-devaluation of high-dollar prices. As long as new devaluations are not expected, the amount of gold a dollar (or other paper currency) represents at a different time will not affect interest rates. If it is otherwise, interest rates would be higher in Japan because the Japanese yen represents less gold than the U.S. dollar. It takes more yen to buy a commodity in Japan than the dollar to buy the same. At current (early 2023) exchange rates, it takes a little more than 130 yen to buy a dollar. Though the price of a given commodity is larger in the Japanese yen than in dollars, this has no effect on relative interest rates in the two countries. Interest rates are lower in Japan. Shaikh’s price of production theory of interest fails the empirical test.

Technical progress, especially computer technology, reduces the effect of office expenses. The price of computing has declined dramatically in recent decades. In addition, payments, whether wage, salary, social security, etc., are automatically deposited into customers’ accounts. Debit and credit cards increasingly replace cash, even in petty retail transactions, making trips to the bank to withdraw money increasingly unnecessary. And when trips do occur, it often amounts to little more than a visit to an automatic teller machine. There are now banks that operate entirely online. The cost for the banks that don’t go away is that of interest paid on deposits. Regarding bank costs, we can increasingly leave out office expenses almost entirely when analyzing the interest rate on bank capital.

Shaikh’s theory that interest rates are the price of production of the provision of finance fails the empirical test in other ways as well. He believes that under modern money based on pure fiat money currency, units like dollars and not gold are the medium of price. Between the crisis of 2007-2009 and the 2020 COVID shutdown, the general price levels in dollars and most other currencies were at record highs, even if the inflation rate was low. According to Shaikh’s theory, interest rates should have been at all-time highs. While market prices, and prices of production, were high in dollar terms, interest rates were at the lowest levels in the history of capitalism.

Shaikh is aware of the contradiction between the level of interest rates his theory predicts — the highest in history — for the period between the Great Recession and the COVID shutdowns and the opposite situation in reality. It’s hard to imagine a more significant mismatch between theory and reality. When facts oppose our theory’s predictions, we must discard the theory because we can’t discard the facts.

Shaikh solves the contradiction by claiming that the central banks led by the Federal Reserve System have the power to set interest at will regardless of the price of production of the provision of finance. He clings to his theory of interest rates by claiming that it predicts the interest rates that would prevail if central banking was abolished. He believes that the central banks (through the creation of huge quantities of pure fiat money) were able to transform a situation that favored record-high interest rates into a situation of record-low interest rates. An economic law that can be transformed into its opposite so easily is no economic law.

The 1970s show in practice what happens if the central bank tries to keep the interest rate from rising at the end of the upward phase of the economic cycle, as Keynes advocated in the “General Theory.” The demand for gold soars. This causes the currency to depreciate against real money — gold. This wipes out profits in gold terms even though profits remain positive in paper currency terms and, to a lesser extent, in real terms. As explained in earlier posts, the profit rate must be measured in terms of the use value of the money commodity. Shaikh doesn’t understand this and makes the mistake of calculating profits in terms of the use values of non-money commodities in “Capitalism.”

Soaring inflation in terms of paper currency created not by supply exceeding demand, but the decline of the quantity of gold an individual currency unit represents drives up interest rates as prices rise faster than the growth rate of the amount of additional token money (what Shaikh imagines is pure fiat money) created by the central banks. If the central banks try to check and reverse the rise in interest rates by making more token money, this only whips the demand for gold into a greater frenzy, causing the inflation rate to accelerate even more, leading to higher nominal interest rates.

Eventually, if hyperinflation (which would destroy the currency and credit systems) is to be avoided — or when currency and credit are to be restored if such hyperinflation occurs — interest rates must rise more to reestablish the credibility of the currency and the central banks that issued it. At this point, high interest rates become high in real commodity terms and higher in terms of gold, with all its consequences. Keynes was correct that interest rates equalize the demand and supply of money. But contrary to what he hoped, the money supply must be equalized with demand, though the interest rate is not non-commodity money created by the monetary authority, but gold created by private, for-profit industrial capitalist miners and refiners. When central banks try to achieve a soft landing after a period of overproduction by lowering interest too soon or by resisting the rise, they whip up demand for gold. By increasing the demand as a means of safety, as Shaikh put it in “Capitalism,” interest rates must rise even higher to reduce the demand for gold to its supply.

We see these contradictions unfolding in real-time as I write these lines in February 2023. Progressives, Democratic Party economists and politicians, and labor unionists all beg the Federal Reserve System to stop increasing or lowering its federal funds’ target. The rate of inflation progress is fading as the frenzied demand for commodities of the COVID aftermath boom fades. If the Fed eases now, these progressives predict, a soft landing will be at hand, and a recession with mass unemployment will be avoided. Then the Democrats may win the congressional and presidential elections in 2024, and Donald Trump might fade from the political scene.

Far more importantly, from the ruling class’ viewpoint, is the fact there is an increasing interest in socialist ideas that both the Republicans and the Democrats fear (both parties just passed a resolution in the House of Representatives denouncing socialism).

But the Federal Reserve leaders can’t forget what happened in the 1970s. The last thing U.S. imperialism needs now as it attempts to defend its monopoly in semiconductors against Chinese competition while consolidating control over Ukraine while moving to weaken further and hopefully break up Russia is a new run on gold that would financially cripple the government and Pentagon at this critical time. A recession later this year and into 2024 would liquidate the overproduction of the COVID aftermath boom while restoring a healthy — from a capitalist’s view — degree of unemployment and strengthening the dollar. This is the U.S. capitalists’ preferred outcome, though a return to mass unemployment creates political problems for the Democratic Party as well as accelerated growth in the popularity of socialist ideas.

Faced with these contradictions, Jerome Powell insists that while inflation is declining, the job is not done. Capitalism is again running up against the metal barrier — the danger of a runaway demand for gold triggering stagflation and soaring interest rates that end in deep recession. But the metal barrier itself, at the fundamental level, is the barrier capital itself represents to production. The productive forces are again in conflict with capitalist relations of production, whose legal expression is the private ownership of the means of production. As long as society continues evading the only positive solution to this contradiction, it will continue to be punished by periodic recession/depressions, mass unemployment, and all the political crises and wars that recession/depression leads to until the contradiction is resolved. It will either be resolved by the rise to political power of the working class leading to a transition from capitalist to socialist production, or the mutual destruction of our modern productive forces and the mutual ruin of contending classes. Which will it be?

There is a growing threat of a wider war around the Russo-Ukraine war and the threat of a shooting war between the U.S. and China over the control of the Chinese island of Taiwan, maybe a world war. And this is not even to mention the simmering crises in the Middle East, Latin America, Africa, and worldwide that can explode into large-scale warfare at any time. And there are also the dangers to our civilization posed by global warming.

Shaikh might have been expected to explain the contradictions that find an outlet in periodic crises of the relative overproduction of commodities. But he’s been unable to break through the academic dogma that modern money is non-commodity money. In certain sections of “Capitalism,” he’s come close only to turn away from the correct conclusions at the last minute. His attempts to explain interest rates and stock market prices are thus hopelessly flawed.

Finally, we will next get to Shaikh’s claim that there is no such thing as the monopoly stage of capitalism. He states that capitalism is today what it always has been and always will be. This will be the final section of our review of Shaikh’s monumental “Capitalism.”

(1) In the 19th century, before scientific socialism, or Marxism, emerged, students of the capitalist system were divided into two broad camps. The first was political economists interested in studying capitalism as it was. The other group, socialists, developed plans for alternative ways to organize society that they believed would eliminate the evils of capitalism. Scientific socialism, founded by Karl Marx and Frederick Engels, explains that the development of productive forces by capitalism is a process governed by definite economic laws. These economic laws give rise to the class struggle waged between the two main classes of capitalist society, the proletariat, and the capitalists. This class struggle can only be resolved by the conquest of political power by the working class. This conquest leads to the transformation of capitalist production into communist production. Against the will of the capitalists, it lays the foundations of a future classless communist society of the future. Unlike the utopian socialists preceding them, neither Marx, Engels, nor their later followers are interested in making detailed prescriptions on how a future society will be organized. (back)

(2) This is the situation as of February 2023. After years of very low interest rates, these rates are now the highest since 2007-2009. During the COVID shutdown, the scarcity of capital increased. It led not to a rise in interest rates but to the lowest levels in the history of capitalism. Once the shutdowns were replaced by the COVID aftermath boom, that greatly increased the quantity of capital and recovery to levels not seen since the capital-destroying crisis of 2007-09. (back)

(3) The ten-year Treasury bond is considered the best measure of long-term — more than one year — interest rates. All other interest rates are scaled up from the ten-year because there’s little chance the U.S. Treasury would default on obligations owed in its own currency. The same cannot be said of local governments, private corporations, and individuals, so the interest rates on ten-year loans paid by entities other than the U.S. federal government are higher than those on the ten-year government bond. (back)

(4) These swings would be more extreme if we looked at the movement of short-term interest rates. During periods of overproduction just before the crisis, short-term interest rates are often higher than long-term rates as industrial and merchant capitalists scramble to finance their growing inventories of unsold commodities. Once overproduction is halted by the crisis, short-term interest rates fall back below the long-term rates. (back)

(5) Ricardian socialists believed that the existence of unpaid labor showed that the Ricardian principle of equal quantities of labor exchange for equal quantities of labor was being violated in practice. If the principle were implemented in practice, the classes of land owners and capitalists would disappear. Marx later showed through his distinction between labor and labor power that unpaid labor — surplus value — arises even when the principle of equal exchange is not violated. Ricardo was a better economist than the Ricardian socialists. Ricardo was a political economist; the Ricardian socialists represented the interests of the working class. By using Ricardo against capitalism, though they used Ricardo imperfectly, prepared the way for Marx. (back)

(6) Changes in consumer interest rates as well as those paid by national and local governments, are tied to changes in the rates paid by industrial and commercial capitalists. When the rates paid by the industrial and merchant capitalists go up or down, so do those paid by other borrowers. (back)

(7) If the separation between ownership and management existed in pure form, the persons who manage businesses would be mere workers whose work happened to be to represent the capitalist in the economic sense, like the U.S. president represents capital in the political sense, whether or not they are capitalists. In practice, managers and directors of large businesses are also large stockholders and bondholders, even if they own only a tiny portion of the total shares outstanding. Though the inactive capitalists who own most of the shares play no role in managing the business, they receive the bulk of the interest and dividend payments. The rise of the price of corporate stocks over time on the stock exchange enriches them. The huge incomes bond and stock owners receive while performing no labor, not even managerial, allow them to live in luxury. A large portion of the whole society’s labor time is performed producing the commodities that make the luxurious lifestyles of the inactive capitalists possible. The primary way to join the ranks of inactive capitalists is through inheritance. The growth of the idle portion of the capitalist class relative to its active part shows capitalism’s increasing parasitic nature. (back)

(8) As the rate of surplus value falls, capitalists shift from variable capital to constant capital. Sraffa showed that under certain circumstances — which Shaikh considers unlikely to arise in the real world — it would be cheaper for the capitalist to shift back to variable capital — labor power — as the rate of surplus value continues to fall. This is enough to destroy the neoclassical claim that the providers of a factor of production earn the value of the additional products — called the marginal product — that the employment of the final unit of that factor production makes possible. (back)

(9) Of some interest, just as Sraffa and his supporters were proving that the neoclassical analysis is not mathematically consistent, neoclassical marginalism was taking over the Soviet economic profession under the guise of the mathematical school. The theories of the mathematical school provided the theoretical basis of Mikhail Gorbachev’s perestroika, that were put into effect 20 years later. The economic and political disaster of perestroika provides empirical support — though at a tragic cost to more than a hundred million people as well as the working class and oppressed peoples of the world — to Sraffa’s seemingly arcane arguments that the economic analysis of neoclassical marginalism is mathematically inconsistent and thus false. (back)

(10) At present, progressives, trade unionists, and the Democratic party’s left-wing demand that the Federal Reserve System halt and reverse its campaign to raise the U.S. federal funds rate. They claim that if it doesn’t, the result will be an unnecessary recession and mass unemployment. This is in the spirit of John Maynard Keynes. These progressives don’t explain that the current recession threat shows the need to eliminate the basic contradiction of capitalism, the contradiction between the socialized nature of production and the private appropriation of the product. Instead, Keynes-influenced progressives insist that false policies pursued by central bankers cause recessions/depressions and that these wrong policies can be changed without transforming capitalism into socialism. (back)

(11) It would be a mistake to believe that the attempt to follow Keynes’ advice on monetary and interest rate policy from the 1936 “General Theory” was the fundamental cause for the industrial decline of the U.S., Britain, and Western capitalism as a whole. But the high interest rates that rose by the early 1980s above the rate of profit accelerated the transformation of the U.S. industrial heartland into the Rust Belt. As old factories were scrapped, the question arose: where would new factories be built once high interest rates fell back below the profit rate? The decision of China’s new Deng Xiaoping leadership to open China to foreign capital provided the answer.

If a few years earlier, the Nixon administration and the Federal Reserve, then under Nixon ally Arthur Burns had followed the correct capitalist policies, there would have been a much deeper recession in the early 1970s with much higher unemployment. As a result, Nixon would probably have been a one-term president as Jimmy Carter was later in the decade. But interest rates would have fallen back to low levels by the middle of the decade rather than rising above the average profit rate. Many of the factories that were scrapped would have continued to operate. And new factories would have been built when the old ones were scrapped. Chairman Mao lived until 1976. It’s unlikely that the capitalists would have built new factories in Mao’s China. In the long run, the industrial decline of the U.S. and the West, in general, would have been much slower, as would have been China’s subsequent industrial rise.

From the viewpoint of U.S. imperialism, the decision to impose wage-price controls rather than raise the Federal Funds rates in 1971 to check the run against the dollar turned out to be a costly mistake. Ironically things would have worked out better personally for Richard Nixon if he had followed the correct capitalist policies. Nixon would have almost certainly been a one-term president if the Federal Reserve System had responded to the run against the dollar in 1971 by sharply increasing the federal funds rate and if the Nixon administration had rejected wage-and-price controls. Nixon would also have avoided the disgrace of being the only U.S. president ever to resign. As a result, in his later years, Nixon would have more successfully been able to play the role of an influential elder statesman of U.S. imperialism. (back)