Since the financial crash of 2007–08, the state of mainstream economics—already faced with incipient revolt from students, economic commentators and, increasingly, economists themselves—has become an open scandal.The debacle itself was preceded by hubristic self-congratulations at the end of major macroeconomic instability, a Great Moderation attributed to the felicity of neoliberal ‘reforms’ and to the wisdom of central bankers. One sign of growing impatience with all of this was the widespread welcome received by Thomas Piketty’s studies of inequality which, notwithstanding his overly simplistic explanations of it, make a telling contrast with reigning macroeconomic models of a ‘dynamic, stochastic general equilibrium’—mostly mathematically sophisticated Robinsonades based on a single, ‘representative’ agent that are useless for exploration either of social inequalities or of that other prominent feature of the contemporary financial landscape, default. Another is the foundation of the Institute for New Economic Thinking whose nearly one thousand researchers include many of the most interesting and original minds in the discipline, spanning a political spectrum from the Marxist left to right of centre.
In this conjuncture, Anwar Shaikh’s Capitalism offers the prospect of an intellectual renewal more comprehensive than any so far attempted. Both the range and the depth of his book, covering in detail mainstream and heterodox, micro- and macroeconomics, are without parallel in contemporary literature. Its ambition is not confined to a critique of prevailing doctrines. Shaikh advances corrected or contrasting views, supported by statistical evidence, of each central problem with which he deals, to construct an alternative account of the workings of capitalism and recent economic developments, particularly in the United States.
Capitalism is divided into three parts. The first stakes out preliminary methodological observations; the second covers the microeconomics of the firm, of prices and competition; the third, building on the first two, analyses the macrodynamics—laws of motion—of this form of socio-economic organization. Central to Shaikh’s enterprise is the combination of empirical and conceptual theses in the first section, where he argues that orthodox economics fails not because it is abstract but because its abstractions are of the wrong kind, hypostasizing a notion of equilibrium in which economic processes are seen as essentially orderly. The currently dominant, ‘post-Keynesian’ challenge to this orthodoxy, on the other hand, which ‘emphasizes the inefficiencies, inequalities and imbalances generated by the system’, sees most economic outcomes as contingent, neglecting the evidence of order within the disorder of capitalism—the ‘turbulent’ convergence of prices on costs, the anarchic but nevertheless rule-governed allocation of capital across industries, and the recurrence over time of recognizable patterns in the growth and fluctuations of the system as a whole. In seeking to capture more accurately this order amidst turbulence, Shaikh takes the ‘classical’ economists—above all Marx, but also Smith, Ricardo and such figures as James Steuart and Thomas Tooke—as models in their grasp of both the rule-governed and the unruly nature of a capitalist economy. For in his words, ‘it is important to distinguish between the conventional notion of equilibrium as an achieved state and the classical notion of equilibrium as a gravitational process.’ He labels himself and most other theorists with a similar outlook as ‘classical economists’, although it seems likely that most of these colleagues would characterize themselves as Marxist, which he does not.
A key prop of Shaikh’s construction is his dissenting view of aggregation. Whereas conventional economists use the notion of a representative agent to join micro- and macroeconomic planes, he insists on the difference between the two. Some factors of great importance at the level of the individual worker or enterprise cease to be so at the aggregate level. For individual cases are always heterogeneous, and the distribution of economic variables across them ensures that the whole is not the sum of the parts—there are emergent properties as one moves to the aggregate level. Criticizing the current fixation on micro-foundations, Shaikh argues that the same aggregate relation may often be compatible with several different explanations of individual behaviour, a point he illustrates with the example of a standard market relationship, a downward-sloping demand curve where a reduction in price leads to an increase in demand. He uses the same example to show that there is no need to postulate any ‘hyper-rationality’—full understanding of the economy as a whole, accurate anticipation of future developments, successful optimization in decision-making—to derive basic economic results. One consequence is a rejection of the ‘analytical Marxism’ associated with Gerry Cohen and John Roemer that accords explanatory primacy to the individual agent; but there is practically no significant development in economic theory over the last two centuries that escapes his survey of different doctrines, debates and schools of thought.
The final chapter in the first part of the book introduces Shaikh’s view of capital, profits and prices. The driving force of the capitalist economy, governing both supply and demand, is profit, and the source of profit is surplus labour. However, the rate of profit does not depend on the quantity of surplus labour alone—it is affected by changes in relative prices determined by the (always ‘turbulent’) equalization of rates of profit across sectors with different ratios of capital intensity. This is the classic ‘transformation problem’, addressed because Shaikh uses ‘prices of production’ as the central points around which market prices gravitate, although of course the prices of production are themselves always fluctuating because of technical change and other forces. He interprets the difference between ‘direct prices’—those corresponding only to the labour time necessary to produce each good or service—and ‘transformed prices’—those where goods produced by more capital-intensive methods have higher prices, equalizing the rate of profit across the economy—as the result of a kind of transfer of value. The transfer takes place between the ‘circuit of capital’, which includes the flow of profits, and the ‘circuit of revenue’, which concerns only the payment of wages and purchase by workers of consumer goods. One could think of this transfer as the flow of investment away from capital-intensive sectors until prices in them have risen relative to those elsewhere, so equalizing rates of return.
In a survey of the whole literature bearing on this question, Shaikh rejects the recently influential approach to it by Duncan Foley and Gérard Duménil as no more than an accounting device. He also provides empirical evidence that, as suggested by Ricardo, the quantitative departure of prices of production from direct prices is limited, so that taking the transformation into account does not add much explanatory power to the simple labour theory of value (the Chicago economist George Stigler used to refer ironically to Ricardo’s ‘93 per cent labour theory of value’). It must be said that it’s not clear why Shaikh, or indeed other Marxists, regard this issue as so important. Apart from the question of relative prices, there do not seem to be any propositions in Marxist economics in general or in Shaikh’s own version which depend upon it. It was Eduard Bernstein who suggested that the labour theory of value projected relations which are completely valid for the capitalist economy as a whole onto microeconomic relations which are in fact differentiated according to capital intensity. A century of obsessive theoretical analysis has hardly disturbed this judgement. Shaikh’s preliminary analysis further includes definitions of capital and profit, and the development of empirical measures of both, with impressive expertise and scholarship. He also argues convincingly that ‘classical’ concepts correspond more closely to standard accounting practices—notably in the treatment of profit margins—than do those of neoclassical economics, indicating the greater realism of the former.
The second part of Capitalism sets out Shaikh’s microeconomics in the form of a theory of ‘real competition’—which is ‘antagonistic by nature and turbulent in operation . . . as different from so-called perfect competition as war is from ballet’—and a fully elaborated, and empirically supported, alternative to both standard price theory and the standard theory of the firm. The ‘law of one price’, linked to market equilibrium as an achieved state, gives way to the ‘law of correlated prices’ in a never-complete process of competitive equilibration around gravitational attractors which themselves are in motion. Although it is anarchic, real competition is rule-bound. From Ricardo and Marx, Shaikh develops a notion of ‘regulating capital’. In each industry, this is the capital with ‘the best generally reproducible conditions of production’, that with lowest costs can attack the market share of other capitals in the same sector. That will not bring about full price convergence, but will force their prices down. As this happens, price equalization drives profit rates apart, since older or less efficient production units suffer a decline in profitability. ‘Reproducible’ conditions of production, however—that is, conditions not dependent on factors like particularly fertile land or exceptionally rich mineral deposits—turn the regulating capital itself into a target, as the industry it dominates attracts invasion by newcomers using technical advances to undercut its prevalent cost structure, in the pursuit of profit which motivates the system as a whole. Success in such invasion will not be a matter of marginal differences in cost. Its risks and difficulties require the cost advantages of the incomer to be ‘robust’.