Capitalism: Competition, Conflict, Crises
Oxford University Press, Oxford, 2016. 1019pp., £35.99 hb
Reviewed by Bill Jefferies
Bill Jefferies' book Measuring National Income in the Centrally Planned Economies; Why the West Underestimated the Transition to Capitalism was published by Routledge in January 2015.
Capitalism is Anwar Shaikh’s magnus opus. It is to be compared with the very greatest works of political economy, not least Marx’s Capital, at least according to the comments on the flyleaf.
Shaikh’s argument, developed and applied as an analysis of the major advanced Western economies, is that a “classical” method of analysis can be distilled from the works of Smith, Ricardo, Marx and critically, Sraffa. This classical theory is able to better explain and interpret the world than any of the contemporary rival theories, stretching from neo-classical orthodoxy to other heterodox rivals, including radical Keynesianism. This is not, then, a work of Marxian political economy, narrowly defined. Shaikh effectively abandons the labour theory of value in favour of a slightly modified version of Sraffa’s physical price theory (22). The rationale behind this is not really explained or discussed, rather it is implied that Sraffa’s theory is not only compatible with, but best defines the “classical” tradition. This is moot, to put it mildly.
This theoretical limitation is combined with an empirical one. The transition of the centrally planned economies to the market, the defining event of globalisation, is barely referred to. China hardly features. By only examining half of world capitalism, the empirical architecture of Shaikh’s argument is compromised. His assertion that the world economy entered a phase of stagnation after 2007/8 is unproven. Moreover, some of his claims, one being, for example, that living standards have stagnated or declined in African and Asian countries, “tangled in the coils of capitalism” for “almost three centuries” (71), are plainly wrong. So in spite of the books length, there are questions about its method, range, and the accuracy of the analysis.
Shaikh’s intimate knowledge of the vagaries of virtually every economic theorist, is the defining feature of the work, most of which is taken up with explaining the ins and outs of various economists and exposing their mistakes when judged against Shaikh’s classical framework. This covers familiar ground to those who have read similar works by Steve Keen or John Weeks, but Shaikh is not limited by the desire of those authors to persuade the non-specialist public. As a result the text is laden with algebra, often to the detriment of exposition.
Shaikh posits the idea that at the level of the aggregate, different laws apply to that of the individual, as the “whole is more than the sum of its parts” (84). Laws are emergent, and when taken together they form the basis for a theory of “real competition”, which is “the theoretical foundation for the analysis in this book” (14). He explains that, “under real competition, individual firms face downward sloping demand curves, set prices, have costs that differ, [so] that the low-cost producers become the regulating capitals whose price of production becomes the industry regulating price, and that profit rates are equalised only across regulating capitals” (545).
Real competition forces everyone to compete against everyone else. Producers lower costs to cut prices. The future is “intrinsically indeterminate”, but it nevertheless creates specific patterns. Prices are equalized within industries, and so are profit rates, roughly. Normal profit is not assured, and should not be included in normal costs. A key source for Shaikh’s analysis of the firm is the Oxford Economic Research Group (OERG) which studied the behaviour of UK firms in the run up to, and in the immediate aftermath of the Second World War. Firms face downward sloping demand or marginal revenue curves. Firms are not passive receivers of prices but active participants in the market. Marginal demand and cost curves need not follow the assumptions of neo-classical economics. Shaikh applies this theory of real competition broadly; various models of production, currency, price and finance are considered in the light of it and much of the discussion is both deep and profound. Shaikh has absorbed key aspects of the classical tradition that frame a truly penetrating and very rich critique of a range of other traditions.
Except, the use of Sraffa’s physical model means that much is lost from the analysis production, trade and profit. Capital is defined as “a thing used in the process of making profit” (206). It could be a tool like a “knife” (207); depending on function (208). How is the function weighed? Although Shaikh refers to Marx’s circuit of production, his definition is not Marx’s. What is the unit of measurement of this capital? Shaikh says it can be money, but what does this money measure?
Shaikh blurs the picture further with a reinterpretation of Steuart’s discussion of positive and relative profit. Positive profit adds to the public good. Relative profit is an effect of vibration of the existing stock of wealth. Positive profit is real value added, relative profit cannot exist in aggregate, as what is a gain for one is a loss to the other, of the same amount but in the opposite direction, and yet Shaikh says it can. Shaikh uses the strange example of a burglar stealing a TV. What has this got to do with production? Presumably, if capital is no longer a social relationship, then labour need not be the source of all new value.
Shaikh compounds the confusion when he applies Sraffa’s physical model to examine prices. Shaikh sets up a two commodity economy, with labour paid in iron and corn (212-217). The workers transform 340 corn and 15 iron to 400 corn and 30 iron. How, when it is impossible to produce iron from corn or corn from iron? All production transforms useless inputs into physically different useful outputs, although Shaikh rejects this too (123). His model sacrifices the material world to maths. Other inputs are necessary for the production of iron or corn, such as iron ore, water, fertiliser, and coal etc. However, these are destroyed during the process of production. Actual production exists to change inputs, but not for Shaikh, who assumes “unchanged” inputs, in order to enable Sraffa’s physical measure, as a replacement for Marx’s value measure.
Newton (the noted alchemist) no doubt assumed it was possible to transmute base metal into gold, but he failed, in spite of a great deal of effort, to achieve his purpose in the real world. Shaikh does not face that problem, so he transmutes matter ideally, to produce something from nothing. This imaginary “surplus” – the assumed increase in output – is measured against the “unchanged” inputs, in order to produce a “rate of profit”. How is the assumption of surplus in Shaikh’s model a step forward from the assumption of surplus in a neo-classical model?
As this is a still nominally Marxist version of Sraffianism, the physical bundles of goods are attached to labour hours, and so a labour version of the physical economy is created and a translation between the physical and value based is made. In Shaikh’s model, positive profits require surplus labour, as there is an identity between the assumed physical increase in iron, coal, and labour hours. But as the physical model can be read in either direction, it could equally be said the surplus labour requires surplus coal or iron, or if labour is replaced with some other physical commodity, Sraffa used pigs at one point, then a surplus of pigs is necessary for a surplus iron and coal.
Shaikh’s application of this model also frames his treatment of trade and comparative advantage. Ricardo applied the labour theory of value to trade, using the example of cloth and wine between Portugal and Britain, to show that, as in the domestic economy, specialisation reduced costs to increase the physical quantity of output for the same quantity of labour inputs. This supposedly saves capital and increasing wealth. Shaikh translates this into a Sraffian two commodity model, in which commodity A produces commodity B and vice versa. This contrasts with Ricardo, who had an unspecified number of other physical inputs necessary to produce cloth and wine. It is therefore critical to note that Shaikh’s model is not Ricardo’s.
Shaikh claims to identify a flaw in Ricardo’s logic that “Portugal’s comparative cost advantage cannot change unless the international relative price changes, but international relative price cannot change unless Portugal loses its comparative cost advantage” (511). Shaikh’s model depends on “the real wage and relative international price” of the two commodities, but Ricardo’s model, in contrast, is also sensitive to changes in prices of every other input. As these commodities are outside of Shaikh’s two commodity model, do Shaikh’s conclusions follow?
Shaikh pays a heavy price for his abandonment of the labour theory of value; it undermines the entire logical coherence of his argument. The limitation of Shaikh’s model to the advanced Western economies and his use of out of date UK data, further means that his assertions about the equalisation of profit rates, and the factors driving cost reductions, feel out of date. Major Western corporations like Apple, Google, Microsoft, Sony etc. no longer produce significant quantities of output, but commission it from separate firms. They maintain their dominance through control of marketing, research and patent development. The resulting, commonly described, “smiling curve” of value distribution means that firms at the end of the curve, who supply the major technological components, like chip design, or sell branded goods, like iPhones, swallow the vast majority of profits. There is no tendency to equalise profit rates, and the ability of suppliers to reduce their margins does not increase their own profit, but the profit of commissioning firms at the end of the value curve. As the distribution of profits is hidden through transfer pricing, off shore accounts or other dodgy financial tricks, it is difficult to see how these trends can be established through official statistical indices. It is tempting to speculate that this, too, is a consequence of Shaikh’s latter day conversion to Sraffa. A key argument of this physical value theory is that Marx’s entire argument about the difference between values and price is redundant. Shaikh scarcely refers to his earlier proposed solutions to the transformation problem, however inadequate he may now find them.
Shaikh has a very interesting discussion about the effect of chained national income measures on the depreciation of the fixed capital stock. His relentlessly downward profit rates seem wrong. However, implying this requires further examination. Shaik’s discussion of the development of money, and his critique of the quantity theory of money, is very rich and stimulating. He carefully examines various theories of the business cycle, and many other issues of contemporary economics. Shaikh’s book is a most definitely a major work from the heterodox school of political economy. However, his abandonment of Marx’s value theory has very serious consequences for the logical thread of his argument. His limitation of the empirical work to the advanced Western economies is one sided, and occasionally mistaken. This is an interesting book then, but is it really the next Capital?
24 August 2016