Three Books on Marxist Political Economy

The year 2016 will be remembered for an exceptionally toxic U.S. election
cycle. More positively, it will also be remembered for a series of new books
on Marxist political economy. Among these, two stand out. Oxford
University Press published “Capitalism, Competition and Crises” by
Professor Anwar Shaikh of the New School. Monthly Review Press published
John Smith’s “Imperialism in the Twenty-First Century.” Smith, unlike
Shaikh, has spent most of his adult life as a political activist and trade
unionist in Britain.

This year also marks the 50th anniversary of the publication of Paul Baran
and Paul Sweezy’s “Monopoly Capital.” Monthly Review writers, led by
editor John Bellamy Foster, treat this book as a modern-day classic playing
the role for monopoly capitalism that Karl Marx’s “Capital” played for
classical competitive capitalism. Monthly Review magazine devoted its
special two-month summer edition to marking the anniversary.

Shaikh’s “Capitalism,” published 50 years after “Monopoly Capital,” can be

viewed, at least in part, as the “anti-Monopoly Capital.” In sharp contrast
to the Monthly Review school, Shaikh has held throughout his career that
the basic laws of motion governing today’s capitalist economy are the same
as those that governed the capitalism of Adam Smith, David Ricardo and
Marx. This is what Shaikh attempts to prove in his “Capitalism” and what
Baran and Sweezy denied. We can expect that Shaikh’s “Capitalism” and
Baran and Sweezy’s “Monopoly Capital” will be dueling it out in the years
to come.1

1 If the laws of motion of monopoly capitalism are radically different than the laws of motion
of competitive capitalism, why call it “monopoly capitalism”? Shouldn’t it be treated as a
whole different mode of production? I think so. So if Baran and Sweezy are right, it would
mean that Marx’s prediction that capitalism would be succeeded by socialism has been
effectively refuted for more than a century. Instead of socialism-communism succeeding
capitalism, a new exploitative mode of production unforeseen by Marx, called by Baran and
Sweezy “monopoly capitalism,” came instead.
While Marx treated the industrial working class as the revolutionary class destined to transform 1
capitalism into socialism, Baran and Sweezy specifically denied the revolutionary nature of the
industrial working class under monopoly capitalism. Since they can point to no other
revolutionary class as an agent of revolutionary change, “Monopoly Capital” implies that
modern society has effectively reached a dead end. While Marx’s work brims with
Monopoly stage of capitalism, reality or myth?

Shaikh rejects the idea that there is a monopoly stage of capitalism that
succeeded an earlier stage of competitive capitalism. He rejects Lenin’s
theory of imperialism, which Lenin summed up as the monopoly stage of
capitalism. According to Shaikh, the basic mistake advocates of this view
make is to confuse real competition with “perfect competition.”

Real competition, according to Shaikh, is what exists in real-world

capitalism. This was the competition Adam Smith, Malthus, Ricardo and
Marx meant when they wrote about capitalist “free competition.” The
concept of perfect competition that according to Shaikh is taught in
university microeconomic courses is a fiction created by post-classical
bourgeois marginalist economists. Nothing, according to
him, even approximating perfect competition ever existed or could have
existed during any stage in the development of capitalist production.

In this month’s post, I will take another look at Baran and Sweezy’s
“Monopoly Capital” and contrast it with Shaikh’s “Capitalism.” I will hold off
on reviewing John Smith’s book, since his book is in the tradition of
Lenin’s “Imperialism” published exactly 100 years ago, which Shaikh
considers severely flawed. There are other important books on Marxist
economics that have recently been published, and I hope to get to them
next year, which marks the 100th anniversary of the Russian Revolution.

First, I want to warn the unwary reader about difficulties they will encounter
before they attempt to tackle Shaikh’s book.

Some difficulties

“Monopoly Capital” and Smith’s “Imperialism” do not require their readers

to be professional economists, but the same unfortunately cannot be said
of Shaikh’s “Capitalism.” Shaikh’s book is by a modern university-educated
economist written for other modern university-educated economists.
Economics blogger Michael Roberts in his review says Shaikh’s “Capitalism”

revolutionary optimism about the future of humanity, the Monopoly Capital school has been
characterized by an ever-increasing pessimism about our future as a species.

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is more difficult than Marx’s “Capital.” I agree with Roberts on this point,
and I think it is important to examine why this is so.

One reason is that Shaikh’s book demands a thoroughgoing knowledge of

Marx’s work, including all three volumes of “Capital.” But it also requires a
thoroughgoing knowledge of modern orthodox bourgeois economics—
neoclassical marginalism. While parts of the book use Marxist language, the
bulk of it is written in both the language of English and mathematics in a
way that will be familiar only to those well grounded in orthodox bourgeois
economics.

Shaikh provides some “translation” between the terminology employed by

Marx and that used by modern economists, but it is hardly sufficient. In
addition, where in the many places Shaikh uses the jargon of neo-classcal
marginalism in place of basic Marxist concepts, it renders his language
imprecise. Marx’s terminology was designed to describe in precise terms
his analysis of capitalism. The terminology of neo-classical marginalism was
developed for quite different purposes, to say the least, though it’s always
possible to see what Shaikh is getting at provided the reader is sufficiently
fluent in both “languages.”

Shaikh does provide a useful appendix listing the meaning of symbols he

uses in his mathematical equations. The list is a long one.

Marxist political activists, even if they are highly educated Marxists but lack
knowledge in today’s bourgeois economic orthodoxy, will have trouble
understanding the book. But professional economists thoroughly grounded
in modern bourgeois economics will be if anything in even greater trouble.
The reason is that trained as they are in present-day bourgeois economics,
they will also have a great deal of difficultly with the book unless they also
have a thorough grounding in Marx. Though they will feel “more at home”
with much of the terminology than will Marxist political activists, the Marxist
foundations of the book will escape them.

The professional economists who will have the least difficulty with
“Capitalism” are those familiar with the work of the Italian-British
economist Piero Sraffa. For those somewhat familiar with Shaikh’s work,
this will be no surprise. Much of Shaikh’s work has revolved around the
“transformation problem”—the problem of transforming Marx’s values—or
direct prices—into prices of production.

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Shaikh has spent a considerable part of his career in refuting the suggestion
by various critics of Marx that Sraffa’s work has both refuted Marx’s theory
of value and surplus value and rendered it unnecessary. Essentially, these
critics—also mostly university-educated economists—hold that the
capitalist economy can best be described in terms of prices of production.
According to them, analyzing capitalism in terms of “value” merely gets in
the way.

But even professional economists familiar with Sraffa, unless well grounded
in Marx, will not find “Capitalism” an easy read. I would most certainly not
recommend Shaikh’s “Capitalism” as an introduction to modern Marxist
economic thought.

None of this detracts from the importance of this work, however. Shaikh is
undoubtedly one of the most important economic thinkers of our time.
What it does mean is that it may take many years—or decades—for the
arguments in this book to be assimilated into the understanding of the
workers’ movement. I hope to contribute to this process in this extended
review and critique.

The title of Shaikh’s book includes the words “competition” and “crises.”
This is no accident. Marx intended to write a book—not the four volumes of
“Capital,” including “Theories of Surplus Value”—on the world market and
crises, but as far as we know he never did. Shaikh’s “Capitalism” is his
attempt to fill this important gap in Marxist theory.

Baran and Sweezy’s critiques of Hilferding and Lenin

Baran and Sweezy in “Monopoly Capital” were also critical of Rudolf

Hilferding and his “Finance Capital,” as well as of Lenin, who was greatly
influenced by Hilferding. However, their criticism came from the opposite
direction. The problem with Hilferding and Lenin—as economic writers, not
political leaders—according to Baran and Sweezy was that they were
merely extending Marx’s “Capital” when what was necessary was
to replace it with a work that uncovered the allegedly different laws of
motion that govern monopoly capitalism. Therefore, Baran and Sweezy and
Shaikh can be said to represent polar opposites that exist within modern
Marxist economist theory. Most present-day writers on Marxist economics
lean towards one pole or the other.

Supporters of the “Monthly Review school” view Shaikh and his supporters
as the “fundamentalist school” of Marxist economics. From the viewpoint of

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the Monthly Review school, the “fundamentalists” deny that there have
been any fundamental changes in the nature of capitalism since the days
of Marx—or even Adam Smith, who Shaikh, by the way, holds in high
regard.

Leon Walras and perfect competition

Shaikh, as we have seen, believes that the common mistake made by

Hilferding, Lenin and Baran and Sweezy is that they hold a view of
competition that is quite different from that held by figures Shaikh calls the
classical economists—Adam Smith, Thomas Robert Malthus, Ricardo, and
Marx.2 The classical economists all believed that capitalism was driven by
what Shaikh calls “real competition.” In contrast, according to Shaikh,
Hilferding in his book “Finance Capital,” Lenin in his pamphlet “Imperialism,
the Highest Stage of Capitalism,” Baran and Sweezy in “Monopoly Capital”

2Marx would not have approved of Shaikh’s list of “classical economists.” First, Marx did not
consider Thomas Robert Malthus to have been a classical economist, even though he was a
contemporary of Sismondi and Ricardo, whom Marx considered to be the last of the classical
economists.

Marx defined the classical economists as those economists who sought the truth about the
actual laws of motion that governed emerging capitalist society. In contrast, Malthus was,
according to Marx, a vulgar economist and apologist for the landowning class and the state-
supported clergy of which Malthus was personally a member. Malthus, Marx held, sided with
the landlords against the capitalists and with the capitalists against the working class.

Marx also would have denied that he was a “classical economist.” The classical economists
worked during the period when the capitalist class was carrying out a progressive and at times
revolutionary struggle against the champions of the old semi-feudal landowning class. This
enabled them to produce work of real scientific value despite their defense of an exploitative
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capitalist system they saw as the final form of human society never to be transcended. The
scientific work of the classical economists formed the foundation of Marx’s own work.
Marxism as we know it would not have been possible without the classical economists.

Marx viewed himself as an opponent of capitalism and a representative of the working class
whose victory would end all forms of oppression and exploitation. That is why he described
his work not as political economy—the science of capitalism—but as the critique of political
economy—aimed at arming the working class with the tools necessary to overthrow the
capitalist system.
all believed that 18th- and 19th-century capitalism was dominated by the
purely fictional “perfect competition.”

The concept of perfect competition, which dominates university

microeconomics to this day, was developed by the greatest economist of
all time—at least according to Joseph Schumpeter—Leon Walras (1834-
1910). Most readers will probably think “Leon — who? I never heard of the
guy.” Who exactly was Walras and what did he accomplish that enabled
him, if we believe Shaikh, to lead even Lenin astray?

In terms of “pure theory,” Leon Walras was indeed probably the most
influential of the marginalist economists. Walras developed the first
mathematical model of today’s “general equilibrium” theory. His work,
suitably perfected and extended, forms the foundation of what is now called
“microeconomics.”

As I have explained elsewhere, during the Great Depression, under the

influence of Keynes, bourgeois economics split into two main branches.
One, called microeconomics, is essentially the theory of Walras suitably
“improved.” Microeconomics is highly abstract and makes heavy use of
mathematical models. The second branch, called macroeconomics, far
more familiar to non-economists, is based largely on the work of Keynes,
also suitably extended and perfected. Macroeconomics by its nature is
highly pragmatic and deals with such real-world problems as trade and
balance of payments imbalances, unemployment, inflation, booms and
recessions.

Macroeconomists are interested in figuring out policies government and

central bank leaders should pursue in light of current economic conditions.
For example, should the U.S. Federal Reserve System raise interest rates
at its December (2016) meeting to head off the danger of “overheating”
and accelerating inflation over the next few years, or should it keep rates
near zero to prevent a relapse into recession? This question is currently
being hotly debated in the media.

In contrast, microeconomists are not concerned with these kinds of

questions at all. They are only interested in “pure theory.” Today, a person
who becomes a professional economist will as a rule specialize in either
microeconomics—pure theory—or macroeconomics—advising bourgeois
governments and central banks on what economic policies they should
pursue.

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Marx and Walras

What is relationship between the work of Walras and his successors—

modern microeconomics—and Marx’s “Capital”? Do the theories of Marx
and Walras simply describe different aspects of the same reality—19th-
century competitive capitalism? Or are they profoundly incompatible with
one another? Shaikh, on one hand, and Sweezy, on the other, give
essentially different answers to this question.

I remember when reading something by Sweezy many years ago my

surprise when he suddenly lapsed into marginalist terminology. I believed
at the time that Marxist economics and marginalism were totally different
theories. How could a leading Marxist economist like Paul Sweezy employ
marginalist language and concepts?

Sweezy explained, perhaps with readers like my young self in mind, inclined
to
Marxist “fundamentalism,” that there is no reason to think that
microeconomics did not retain its validity even though his real interest
clearly lay in macroeconomics. But I held to the “fundamentalist” view that
Marx’s labor theory of value is completely at odds with the marginalist,
“scarcity” theory of value that forms the foundation of modern bourgeois
microeconomics.

Sweezy and the Monthly Review school

Paul Sweezy was a brilliant professional economist who majored in

economics at Harvard, which as head of the “Ivy League” is considered the
leading university in the U.S. At the time Sweezy was attending Harvard in
the early 1930s, bourgeois economics had not yet split into microeconomics
and macroeconomics. What Sweezy would have learned at Harvard would
have been Walrasian economics.

At first, the young Sweezy intended to major in journalism, a profession he

eventually did get to practice to a certain extent as founder and editor
of Monthly Review magazine. However, the early 1930s was the time of
what I call in this blog the super-crisis, which formed the first stage of the
Great Depression. Journalism didn’t answer the question of what was
causing the unfolding economic and social catastrophe engulfing the world.
Still less, journalism had no answers to what might be the solution to the
disaster.

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Sweezy, in search of an answer, switched his major from journalism to
economics. This was the field that logically would explain both cause and
cure of the Depression that was engulfing the world beyond Harvard Yard.
But to his dismay, the young Sweezy was to find that he was no closer to
understanding the causes of the debacle than he was before he began his
economic studies.

His professor would have begun his lecture with the statement “assuming
full employment,” which allegedly had been rigorously proven to be the
inevitable result of “perfect competition.” Then the learned gentleman
would have proceeded to write on the blackboard mathematical equations
or geometric graphs based on the assumptions of “perfect competition.”
Meantime, outside the classroom the capitalist world was experiencing the
greatest mass unemployment in history, and the Soviet Union was
engaging in its first five-year plan.

In Germany, the country hit hardest by the Depression with the possible
exception of the United States, Adolf Hitler’s Nazis were steadily gaining
support in both polling and in the streets.

The young Sweezy must have asked himself, could the professor actually
be talking total nonsense? Well, maybe the professors in the theology
department might have done this. Sweezy’s father, Everett, was a
“freethinker”—and it is a pretty safe assumption that even the conservative
young Sweezy never believed in God. But wasn’t economics, unlike
theology, a genuine science, much like physics, chemistry, biology and
astronomy? This was Harvard, after all, one of the greatest universities in
the world, and certainly its economics department must have been one of
the best if not the very best. Certainly the Harvard economics department
had attracted some of the best minds in the field. There had to
be something in what the professor was saying.

Perhaps, Sweezy might have mused, what the professor was saying was
true only if perfect competition actually existed. But what would happen if
competition was less than perfect?

There is good reason to suspect such a thought might have crossed

Sweezy’s mind as he sat through what must have been some extremely
boring lectures. His father, after all, had been vice president of a major
Wall Street bank, the First National Bank of New York. This bank was
heavily involved in the organization of the giant “trusts,” corporations that

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were increasingly dominating the U.S. economy by the early 20th century.3
The head of First National—his father’s boss—was no less than George F.
Baker. Baker, besides being a banking titan in his own right, was considered
a close ally of the private banking firm J.P. Morgan and Company, whose
very name symbolized monopoly in the early 20th-century U.S.

Perfect competition according to the microeconomists

If Walras-inspired microeconomics can be reduced to a single theorem, it

would be that given perfect competition the price of a commodity will equal
the marginal cost necessary to produce it. Walrasian economic theory
assumes that the number of competing firms in each branch of industry is
virtually infinite. Under these assumed conditions, the percentage of the
total production of a given commodity of a given quality in a typical branch
of production approaches the limit of zero.

As a result, if one firm were to go out of business—perhaps because the

owner retired and didn’t have a son with any interest in continuing the
firm—the effect on total supply would for practical purposes be zero. The
shutdown of even the largest firm in a typical branch of production would
have virtually no effect on total supply and consequently no effect on
market prices. In such a situation, in the language of the economists, the
individual firm is a “price taker” as opposed to a “price maker.”4

3 Paul Sweezy’s father, Everett B. Sweezy, was a vice president of the First National Bank of
New York, one of the corporate ancestors of today’s Citibank. It did no business with the public
but only with large corporations. It was considered a close ally of the private banking house of
J.P. Morgan and Company, which was considered the very symbol of monopoly in the early
20th-century U.S.
4 What the economists assumed was that capital was so decentralized in industrial production
that industrial production operated exactly like a peasant or small farmer economy. We know
that if the demand for cars suddenly declines, auto factories slash production and lay off
workers while the prices of automobiles remain unchanged.
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However, if farm prices drop, small farmers or peasants in the absence of government crop
controls have no choice but to lower their prices. If an individual small farmer/peasant closes
down the farm, the effect on the supply of the agricultural commodities he sells indeed
approaches the limit of zero and will have virtually no effect on prices. Automobile companies
react to falling demand by cutting production, the small farmer often tries to increases
production so that the fall in the price of his individual commodities is compensated by an
increase in the number of commodities his tiny farm produces.
Each individual firm, just like everybody else in the Walrasian world of
perfect competition, seeks to maximize its income. As the firm increases
its production, its cost curve will be expected first to fall and then at a
certain point start to rise. As the marginal cost falls, the average cost also
falls. Then when the marginal cost starts to rise but is still below the
average cost, the average cost will continue to fall for a while but at a
decreasing rate. At some point, the rising curve of the marginal cost will
cross the curve of average costs.

This will be point where our firm’s total costs will be at the lowest, the point
of maximum efficiency. The firm will also find that at this exact level
of production the market price of the firm’s commodity—which under
conditions of perfect competition the firm has no influence over—will
exactly equal its costs, including the wage the owners earn through their
own labor of supervising the firm and the interest on the capital they have
invested in the firm.5

Since competition is perfect, it is assumed that every firm uses exactly the
same method of production—the cheapest available. Therefore, perfect
competition will see to it that every firm has exactly the same marginal and
total costs. Perfect competition will also see to it that market prices exactly
coincide with these costs. Therefore, we arrive at the conclusion that,
assuming perfect competition, the market price of a commodity of a given
use value and quality will equal its marginal cost.

Walras improves on Say

While Jean-Baptiste Say with his “Say’s law” denied the possibility of a
generalized glut, he did not deny the possibility of overproduction in some
sectors of production matched by underproduction in other branches.
Walras and his successors take Say a step further. In the Walrasian model,
there is neither underproduction nor overproduction in any branch of
industry. Instead, within the limits of the economic resources available to

Or, he might finally quit—or be forced to quit—farming altogether. Assuming no recovery in

demand at current prices, it is only when enough small farmers or peasants are forced to quit
farming that the fall in prices will finally be checked.

5 There will not be, according to this logic, any income beyond the wages of the owner and the
interest on the owner’s capital. An income above and beyond the rate of interest would imply
something other than “perfect competition.” Students who are forced to take microeconomics 10
courses in college are amazed to discover that the profit-driven capitalist system, when it works
best, generates no economic profit.
society, production is carried out in such proportions that any change in the
proportions of production will reduce the satisfaction—or utility—that
individual members of society receive.

This state is called “general equilibrium.” General equilibrium abstracts

technological change, new products, and not least economic growth itself.6
Walras assumed that the proportions of production are such that costs are
minimized and satisfaction of members of society within the limits of
“scarcity” are maximized before trading is allowed even to begin.

The ‘auctioneer’

But how does perfect competition actually achieve these wonderful results?
In the Walras model, an invisible ‘auctioneer’ determines the appropriate
proportion of commodities and prices before trading begins. The auctioneer
represents the pure spirit of “perfect competition.” The “auction” proceeds
through a period of what Walras called “groping.” It might be a messy
process with price wars and so on, but Walras wasn’t interested in any of
that. As long as competition approached perfection, he apparently believed
the groping would not be too messy.

The model of perfect competition was illustrated by Walras through a series

of linear algebraic equations. Microeconomists have improved and
extended Walras’s mathematical model into todays perfected general
equilibrium model. They somehow imagine that the process of real-world
competition, as long as the suitable “neo-liberal” economic polices are
followed, will obtain results that do not depart very far from the lifeless
mathematical model that Walras and his successors have developed.

6 Anybody familiar with Baran and Sweezy’s “Monopoly Capital,” knows that the authors
claimed that the normal condition of monopoly capitalism is zero growth or Depression.
However, in Walrasian economics the normal condition of an economy based on “prefect
competition” is also zero growth, as the economy is already in a perfect general equilibrium.
You simply can’t improve on perfection, not even through growth. Indeed, bourgeois
economists trained in neo-Walrasian economics assume that it is only
some disequilibrium such has an innovation that creates some new type of commodities that 11
causes economic growth, even under perfect competition.
Walras the socialist

I have explained elsewhere in this blog that the term “socialism,” unlike
“communism,” is imprecise. The Bolshevik Party of Lenin used the term
“socialist,” but so did the bourgeois centrist Radical Socialist Party 7, which
dominated the French Third Republic, which existed between 1871 and
1940. It was also used by Adolf Hitler and his extreme-right National
Socialists—the Nazis. Could Leon Walras, the economist whose ideas more
than any other form the basis of present-day neo-liberalism, also be a
socialist? Yes! Indeed, Walras considered himself a “democratic socialist.”

Like certain radical followers of David Ricardo and Henry George and his
followers in the United States, Walras believed that the land should be
nationalized. The government would then depend on ground rent alone for
its revenue. Walras was especially opposed to taxes on wages. If wages
were not taxed and land was nationalized, Walras believed, wage workers
would be able to transform themselves into self-employed individual
businesspeople if they so desired. If the government followed these
“democratic socialist policies,” Walras believed, the number of independent
business people would explode, creating the conditions that would allow an
approximation of perfect competition to be achieved in practice.

Today’s neo-liberal microeconomists, though their theoretical foundations

are “Walrasian,” do not advocate the nationalization of the land nor do they
oppose taxes on wages. On the contrary, they are both staunch supporters
of private property in land just as they support private ownership of capital.
And they support policies that attempt to shift the balance of taxation onto
the shoulders of workers.

Marginal prices versus prices of production

People with a limited knowledge of Marxist economics often believe that

Marx held that prices are determined by the quantity of labor socially
necessary to produce them. Marx indeed makes this assumption in the first
two volumes of “Capital.” The more lightweight bourgeois critics of Marx—
the kind who don’t know what they are talking about—assume that Marx
held that under capitalism prices are determined by the socially necessary
labor required to produce a commodity and then proceed to refute Marx on
that basis. This could be called the labor theory of price.

7 It was said that the French Radical Socialist Party, which can be compared in some ways with
the Hillary Clinton wing of the U.S. Democratic Party, was neither radical nor socialist.
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Virtually everybody who studies Marxist economics for the first time—it was
true in my case—assumes this was Marx’s price theory. I remember my
shock one day when I was looking at Volume III of “Capital” and found
Engels’ introduction explaining that prices under capitalism are notequal to
values. What?! Had old Fred gone off his rocker? I couldn’t believe my eyes.
There must be some mistake, a typographical error! But there was no such
error.

Every educated Marxist—which I was not at that time—knows that in

Volume III of “Capital” Marx assumes that prices correspond with what he
calls prices of production, or sometimes production prices for short. That
is, the market prices of commodities will fluctuate around levels such that
capital invested in every branch of industry will yield equal profits in equal
periods of time—with the exception of the commodity in whose use value
all prices are reckoned, which by definition doesn’t have a price, though
this commodity also participates in the equalization of the rate of profit.8

Marx preferred the term “price of production” to “cost of production,”

because the price of production, which Marx borrowed from bourgeois
economists like Jean Charles Léonard de Sismondi and Ricardo—
includes the average rate of profit. The difference between a commodity’s
price of production and its cost price—a term Marx borrowed from common
business terminology—is the profit the capitalist receives on each
commodity sold. Or as is said in today’s business world, it is the all-
important “margin” that a business earns on each item sold.

This terminology, unlike the term cost of production, clearly distinguishes

between the cost of producing a given commodity to society (the price of
production) and the lesser cost of the commodity to the capitalist (the cost
price).

In our exploration of Shaikh’s “Capitalism,” we will see that the term “price
of production” comes up again and again. It is important that the reader
grasp the meaning of the term at this point. Marx assumes that market
prices fluctuate around prices of production according to changes in supply
and demand. This is Marx’s actual theory of price.

Sweezy evidently assumed that Marx’s price of production is essentially the

same as marginal cost is to the neo-Walrasian microeconomics he had

8 We will see later in this review-critique that even Shaikh eventually gets confused on this
crucial point.
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learned in his university studies. Therefore, Sweezy drew the conclusion
that once we reduce the degree of abstraction from that which Marx used
in Volumes I and II to what he used in Volume III, Marx’s description of
capitalism under (perfect) competition is the same as the price theory
Sweezy learned in his university studies. Therefore, Sweezy assumed that
since Marx and Walras assumed perfect competition, there is no reason
why Marxists cannot employ the tools Walrasian microeconomics
developed as long as they are describing the competitive phase of
capitalism.

However, we should note right here one crucial difference between

marginal cost and the price of production. The price of production includes
not only the costs capitalists incur when carrying out production and the
interest on capital but also the profit of enterprise.

Shaikh throughout his writings—and “Capitalism” is no exception—puts

great emphasis on the profit of enterprise, but in most other present-day
Marxist writing the distinction between interest and the profit of enterprise
is mostly ignored. Modern bourgeois microeconomics denies the profit of
enterprise altogether, or confuses it with the “wage” of the active capitalist
while seeing the costs of fixed capital as being a form of the interest on
capital, much as the price of land is a form of ground rent. Therefore, the
Marxist price of production and the neo-classical “marginal cost” are really
quite different from one another.

However, there are enough similarities between the concepts of marginal

cost and price of production to cause confusion. A Walrasian economist
would assume that market prices in the real world where competition is not
quite “perfect” will fluctuate around marginal cost, much like a Marxist
assumes that market prices fluctuate around prices of production.
Therefore, somebody who learned Walrasian economics before studying
Marx would tend to assume that once Marx reduces his level of abstraction
from that in Volumes I and II of “Capital” to the level of Volume III, the
differences between Marxist economics and Walrasian economics largely
disappear, making the use of tools of microeconomics permissible.

Now let’s briefly review the Monthly Review school, whose conclusions are
more or less shared by various “heterodox” schools of economics.9

9Heterodox economics essentially stands somewhere between the bourgeois macroeconomics

orthodoxy based on the work of Keynes and the Monthly Review school.
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The thesis of Baran and Sweezy

In the 1930s, the younger generation of economists trained in their

university studies in the, by then, dominant Walrasian school of economics
could not but notice what they had learned had little or nothing to do with
the real world. This generation of economics students were graduating
straight into the Great Depression.

It was also hard to be unaware that the capitalist economy had for decades
before the Depression been dominated by giant corporations. In response,
the younger generation of economists, with Paul Sweezy playing a leading
role, developed the theory of “monopoly competition,” or “imperfect
competition.” The main theorem of Walrasian economics—marginal cost
equals price—was supplemented by the theorem that under “perfect
monopoly”—without any competition—price would instead equal marginal
revenue. We will take a close look at this next month.

Under conditions of oligopoly—a few firms each of which controls a

significant percentage of the total production of a given commodity—it was
assumed that a situation intermediate between prices determined by
marginal cost and prices determined by marginal revenue would prevail. In
contrast to “perfect competition,” or “perfect monopoly,” we have
“imperfect competition.” This forms the starting point of what was to evolve
into the Monthly Review school.

Since the founders of this school believed that the mathematical model of
perfect competition was reconcilable with Marx’s analysis of capitalism in
Volume III of “Capital,” they saw no problem building a theory of monopoly
capitalism on the Walrasian—microeconomic—foundations they had
learned in their university studies. There was no need to go back to Marx
in order to go beyond him in the way that Marx went back to the classical
economists in order to transcend them. And since Walrasian
microeconomics is so elegant mathematically, why not employ the basic
concepts of conventional microeconomics suitably modified and extended
to take account of monopoly? The resulting models, though going beyond
Walras, were still built on Walrasian foundations.

The assumption that monopolistic competition rather than perfect

competition prevails had a series of consequences for economic minds
trained in Walrasian economics. First, it is no longer true that monopolistic
firms will choose the most efficient of production. Nor is there any reason

15
to assume that the mix of commodities produced will maximize consumer
satisfaction under conditions of scarcity.

Most importantly, the assumption

of full employment of factors ofproduction including labor no longer holds.
Involuntary unemployment is now perfectly possible and not necessarily
due to the “monopoly” imposed by labor unions in the labor market.
Involuntary unemployment can just as easily arise due to the monopolistic
power of the giant corporations themselves. We arrive at the basic
assumptions of the Monthly Review school as well as the heterodox school
of economics.

Therefore, Baran and Sweezy’s “Monopoly Capital” is based not on the

foundation of Marx’s economic works but rather on the foundations of
Walras and the marginalists. The work differs from orthodox modern
economics because it assumes that under modern capitalism imperfect
competition rather than perfect competition prevails.

Baran and Sweezy believed that from the late 18th to mid-19th century—
from the time of Adam Smith to Marx—an approximation of Walrasian
perfect competition actually existed. They assumed that Marx held the
same views of competition that Walras did, though without the
mathematical rigor that characterized Walras’s work. Anwar Shaikh, in
addition, believes Hilferding’s “Finance Capital” and Lenin’s 1916
“Imperialism, the Highest Stage of Capitalism” are also based on the
assumption that Walrasian perfect competition prevailed in the earlier stage
of capitalism.

When Lenin wrote about capitalism characterized by free competition,

Shaikh assumes he was referring to, or at least had in the back of his mind,
perfect competition. As result, Shaikh holds that all theories of the
monopoly stage of capitalism, whether by Hilferding, Lenin or Baran and
Sweezy, are based on the same false foundations of Walrasian economics.

In the stage of competitive capitalism, Baran, Sweezy and Shaikh all agree
that the main weapon deployed by the capitalists in their competition
against one another was price cutting. For believers in Walrasian
economics, price cuts are part of the process of “groping” that must occur
before general equilibrium is approximated. Each individual firm attempts
to cut its costs—cost price—below those of its competitors. The key to
avoiding bankruptcy is to produce commodities of a given use value and

16
quality at the lowest cost prices. Those who cannot achieve the lowest
possible cost are excluded from the heaven of general equilibrium.

Exit the auctioneer

Baran and Sweezy believed, however, that by the turn of the 20th century
monopoly competition had replaced Walrasian perfect competition. The
capitalists in what Baran and Sweezy called the “monopoly sector” had
learned that to fight the battle of competition with price cuts was a game
in which all players lose. As a result, the Walras groping mechanism, which
approximates the “auctioneer,” no longer works. This doesn’t necessarily
mean that the capitalists form cartels—agreements to divide the market
and maintain existing prices—though this certainly occurs at times.

However, according to Baran and

Sweezy even in the absence of suchcartel agreements the giant
corporations of the monopoly sector have learned to (almost) never cut
prices in situations where supply exceeds demand at existing prices. The
corporations are, however, more than willing to raise them in market
situations where demand exceeds supply at existing prices.

According to Baran and Sweezy, the managers10 that control the giant
corporations figure that if they cut prices their rivals will also cut them.
They therefore correctly believe that if they cut prices they will not gain
additional market share. The only thing that will happen is that all the rival
corporations that constitute the competition will experience a fall in the rate
and mass of profit. Therefore, if a giant corporation faces a situation where
it cannot sell all the commodities it is producing at the existing level of
prices, it will cut its level of production, not prices.

The tendency of the surplus to rise

Returning to Baran and Sweezy, the giant corporations even in the age of
monopoly capitalism still do all they can to slash their costs—cost prices.
Indeed, the modern giant corporation with its huge scale of production and

10 In “Monopoly Capital,” Baran and Sweezy expressed the view that large stockholders and
banks had by the Depression decade largely lost control over the corporations to the top
corporate managers. Since “Monopoly Capital” was published, in 1967, the Monopoly Capital
school has believed that the role of the banks and the financial sector have greatly expanded
due to “financialization,” which the school sees as yet another way to “absorb the surplus.” In
order to capture this change in capitalism, John Bellamy Foster uses the term “monopoly-
finance capital” to describe the leading strata of the capitalist class. 17
deep pockets allowing it to carry out research and development is a far
better cost cutter than its tiny predecessors in the age of Walrasian
competitive capitalism. Over time, according to Baran and Sweezy, giant
corporations will combine falling costs with constant or rising prices. If this
is true, it means that the prices charged by these corporations lose all
relationship with labor values. It is therefore hard to reconcile the analysis
presented in “Monopoly Capital” with any version of Marx’s law of labor
value and surplus value.

Simple bookkeeping leads to the conclusion that if production costs fall

while selling prices are either stable or rise, there will be a tendency for the
rate of profit to rise. There is no room in the “Monopoly Capital” model for
a tendency for the rate of profit to fall that might or might not have existed
in Marx’s “Walrasian” world.11 Instead, there is a tendency for “the
surplus”—the rate and mass of profit—to rise.12

11 Even in his earlier “Theory of Capitalist Development,” Sweezy displayed great hostility to
Marx’s law of the tendency for the rate of profit to fall. In that work, which in my opinion is
Sweezy’s best book, he examined and critiqued Marx’s work. There, Sweezy held that the law
of the tendency of the rate of profit to fall was invalid because it was indeterminate. The rising
rate of surplus value might or might not compensate for the rise in the organic composition of
capital. The rate of profit, Sweezy held in his “Theory of Capitalist Development,” was as
likely to rise as it was to fall.

In “Monopoly Capital,” which is based on the theory of monopolistic or imperfect competition,

any tendency of the rate of profit to fall that might have existed disappears in the face of the
monopoly pricing power of corporations.

The editors of Monthly Review continue to display great hostility to Marx’s law of the tendency
of the rate of profit to fall. Recently, the magazine published a book by the German Marxist
economist and Marx scholar Michael Heinrich, though his ideas are not particularly in line with
the Monthly Review school. However, like Monthly Review, Heinrich is a strong opponent of
18
the Marx law of the tendency of the rate of profit to fall. Heinrich objects to Marx’s law for
much the same reason that Sweezy did in his “Theory of Capitalist Development.”

Heinrich claims that Marx himself in his later work was moving away from the view that the
rate of profit has a long run tendency to fall. He blames Engels for editing Marx’s Volume III
of “Capital” in a way that gives the false impression that Marx continued to hold to this law
during the final years of his life.

12Marx did believe that the mass of profit would rise. Indeed, he believed the rising mass of
profit was no mere tendency but an absolute pre-condition for the continuing existence of the
capitalist mode of production. However, he believed that the rate of profit, defined as the mass
of profit divided by the total capital, tended to decline over long periods of time. This should
This is perhaps the most important thesis of the Monthly Review school
and one its supporters are especially proud of. If Marx considered the
“tendency of the rate of profit to fall” to be the most important economic
law of capitalism, the Monthly Review school considers the discovery of an
alleged tendency of the rate of profit—now dubbed “the surplus” in their
peculiar terminology—to rise to be the most important economic law that
governs monopoly capitalism. The economic laws governing capitalism
discussed in Marx’s “Capital” have not only been modified, they have been
turned on their head!

This doesn’t mean Baran and Sweezy held that there is no competition
between monopoly capitalists. It simply means that there is
no pricecompetition between them. Under monopoly capitalism, according
to them, each individual giant corporation—outside of cartel agreements,
which Baran and Sweezy like Shaikh largely ignore—do all they can to
increase their market share at the expense of the competition—rival giant
corporations. The main weapons under monopoly capitalism that replaces
price cutting is, according to Baran and Sweezy, advertising and packaging.

In the 1950s and 1960s, automobile companies would change the chrome
decorations on automobiles in hopes of winning customers away from their
rivals and keeping the public buying their new cars. If you lived in the time
when “Monopoly Capitalism” was written, you would be bombarded with
the message that you had to replace your car, even if it got you from point
A to point B just as well as this year’s model. However, you still had to
replace it because, the commercials suggested, your current car was, well,
ugly. The car was ugly because it didn’t have the right chrome decorations,
or it had or did not have tail fins and so on. In addition, commercials of
General Motors would convey the notion that their chrome decorations were
far superior to Ford’s decorations, while Ford’s commercials would say that
their chrome decorations and tail fins or lack thereof were far superior to
General Motors’ or Chrysler’s.

The chrome decorations did not improve the car in its function of getting
you from point A to point B at a given cost. However, chromium has to be
mined and combined with other metals to produce chrome decorations. The
labor time of society devoted to the production of chrome is pure waste.
Therefore, the monopoly phase of capitalism in contrast to the competitive

not be confused with the decline of both rate and mass of profit seen during crises of
overproduction that are caused by the temporary inability of the capitalists to fully realize the
value including the surplus value contained in their commodities.
19
capitalism analyzed by Marx—and Walras—means an ever-increasing
production of waste.

The biggest problem giant corporations face is that they tend to price
themselves out of the market. In the old-fashioned competitive capitalism
of Marx and Walras—and in sectors of the economy where small enterprises
still dominate—the capitalists react to a situation where supply exceeds
demand at current prices by cutting prices until markets “clear.”

This is exactly what does not occur under monopoly capitalism. Faced by a
situation where they are producing more commodities than they can sell at
existing prices, monopoly corporations will reduce their level of production
and not their prices. The result is a strong tendency toward increasing
excess capacity, unemployment and secular stagnation. However, if “the
surplus” is not realized, according to the authors of “Monopoly Capital,” it
will not continue to be produced. Indeed, the normal condition—outside of
crises—under monopoly capitalism is not economic growth—expanded
reproduction as was the case of under competitive capitalism—but rather
1930s-type Depression conditions.

While, according to Baran and Sweezy, competitive capitalism needs no

special mechanism to assure economic growth, this is not the case under
monopoly capitalism. For the tendency of the surplus to rise to be realized,
some factor external to the economic system must intervene. We might
add here that it is a strange tendency that needs external factors to
intervene in order for it to materialize in reality.

Absorbing the surplus

Marx explained how the capitalists after they have realized the surplus
value contained in the form of money—profit—then have to spend their
profits if (expanded) reproduction is to proceed. The capitalists will spend
part of their profit on necessities like food, water, shelter, and so on that
every human being including capitalists need to live. Another portion is
spent on luxury commodities that normally only the capitalists are expected
to purchase. In Marx’s time, these would have included such commodities
as fine wines aged for long periods in old oak chests, carriages, expensive
clothes, mansions and so on. Today, fine carriages are replaced by luxury
automobiles and private jets.

The rest of the profit, Marx explained, will be spent on expanding capitalist
production. This includes the expansion of old factories by adding additional

20
machines, the building of new factories, the opening of new mines, the
expansion of existing capitalist farms, or the creation of new capitalist
farms. New types of commodities may well, and in practice will be,
produced, though in Marx’s system they are not absolutely necessary to
explain expanded reproduction. Expanded reproduction can just as well
continue on the existing technological basis, producing the existing types
of commodities on an ever-expanding scale.

In order to do this, the part of the profit that is not spent by the capitalist
class on necessary or luxury goods must be transformed into new capital.
The new capital like the existing capital is divided into two great portions.
One part is converted into new variable capital—the labor power of
additional hired workers—which will produce additional surplus value. This
part of the capital alone produces new jobs and additional profits. The other
part of the profit is converted into new constant capital—machines
additional raw and auxiliary materials, factory buildings and so on.

Baran and Sweezy in “Monopoly Capital” lumped the quite different ways
that the giant corporations spend their profits under the all-encompassing
term “absorption of the surplus.” If “the surplus” is fully absorbed—spent
one way or another—there will be “full employment.” If not, there will to
one degree or another be “stagnation,” defined as unemployed machines
and workers.

As was the case with competitive capitalism, monopoly capitalists who own
large amounts of corporate stock in or manage the giant corporations, still
need food, clean water and shelter to live. And even more than the
competitive capitalists of the past, they need to consume tremendous
amounts of luxury goods—the demands of “society” allow nothing less.
However, Baran and Sweezy assume that modern monopoly capitalism is
so productive that no matter how hard they try monopoly capitalists are
only capable of consuming an ever smaller proportion of the total potential
surplus in the form of luxury goods. How is the rest to be “absorbed”?

Possible solutions to absorbing the surplus

Can’t the capitalists invest the surplus in enlarged factories, new factories,
railroads, additional mines—expanded reproduction—as Marx explained in
“Capital”? Baran and Sweezy believed that while this worked under perfect
competition it doesn’t generally work under the monopoly phase of
capitalism. The reason is that monopoly capitalists increase the surplus
by refraining from production, not expanding it. If the monopoly capitalists

21
engaged in old-fashioned expanded reproduction, the Baran and Sweezy
surplus would disappear.

According to Baran and Sweezy, there is one exception. That is the

appearance of a truly revolutionary innovation that creates a new type of
commodity or commodities that can indirectly increase demand for existing
types of commodities as well. Examples given by Baran and Sweezy are the
railroad and the automobile. If this happens, demand for commodities
explodes. The giant corporations will now be able to reinvest the surplus in
expanded (re)production without having to cut prices. But this happy result
will occur only if the right kind of innovation comes along. But what if it
doesn’t?

You would think the computer and the Internet revolution was the kind of
radical innovation that would absorb the Baran and Sweezy surplus for
years to come. Indeed, in the 1990s many economists—and even some
Marxists—proclaimed that decades of great prosperity lay ahead due to the
computer revolution and the Internet. Would 21st-century capitalism be
prone to recession, unemployment and periodic stagnation as was often
the case in the 19th and 20th centuries? Forget it, that is so 20th century.

This view was particularly widespread during the second Bill Clinton
administration. But recession and stagnation has so far largely dominated
the 21st century despite the computer revolution and the Internet. Monthly
Review writers counter that the computer revolution and the Internet
simply do not hold a candle to the railroad at the dawn of monopoly
capitalism or the automobile during the “Roaring Twenties” of the 20th
century.

The bourgeois economist Robert J. Gordon (1940- ) has written a book

explaining that it is actually innovation and growth that is “so 20th century.”
Gordon sees the period from 1870 to 1970—which includes the Great
Depression—as a golden age of growth and innovation never to return.
Presumably, all the most dramatic innovations that are possible had pretty
much run their course by the year 1970. The rise of “high tech” is changing
life far less than the innovations such as electrification and the automobile
did between 1870 from 1970. Gordon doesn’t believe that there are
stagnation-busting revolutionary innovations like the railroad and
automobile lurking in the future.

Does this mean that the only choice we have is Depression-like conditions
with massive and secular rising unemployment in the future until socialist

22
revolution finally intervenes? Not according to the Monthly Review school.
There is a way to absorb the surplus and indeed ensure “full employment”
without abolishing capitalism. That is to use the surplus-absorbing power
of the capitalist government.

Internal Revenue Service to the rescue

All that is necessary to absorb the surplus, according to the Monthly Review
school, is to have the government tax away the surplus and then spend the
money on something. Such expenditures will be in the interest of the
monopoly capitalists themselves. Since the surplus that is not spent will not
continue to be produced, the monopoly capitalists will gladly hand it over
to the government, which will spend and consume it for them.

Textbook “Keynesian” policies depend on what is called the multiplier. The

government borrows a sum of money, whether by selling bonds or shorter-
term treasury bills. It then spends the money. It is assumed that for every
dollar it borrows, a multiplied amount of demand is generated. For
example, when the government or its dependents spend a dollar, a dollar’s
worth of additional commodities must be produced. The newly employed
workers necessary to produce these additional commodities are able
to spend additional dollars on commodities they were not able to afford
when they were unemployed.

If, however, the government uses taxed money, many economists assume
that no additional demand is generated. Instead of somebody in the
“private sector” spending the surplus, the money is spent by the
government or its dependents. In this case, the multiplier, or incremental
increase, would be zero.

Keynesian economists traditionally argue that during a recession or

stagnation the government should run a deliberate deficit in order to “prime
the pump.” Once a recovery becomes self-sustaining, the government
should move toward a balanced budget.

However, the more “radical” Keynesians assume that there is a “balanced

budget multiplier.” They hold that some additional demand will be created
even if the government borrows no money, though the multiplier will be
considerably less than if the government spends borrowed money. The
assumption here is that the government will spend all the taxed money in
a given period while the private sector, especially if taxes fall on the

23
capitalists, will spend only a portion of the money in the same period of
time.

Usually, it is assumed that the “balanced budget multiplier” is fractionally

less than one. For example, for every dollar spent using taxed money as
opposed to borrowed money, an additional 25 cents of additional demand
might be generated, for a multiplier of .25. If borrowed money is used, the
assumption is that for every dollar spent an additional three or four dollars’
worth of demand will be generated, right up to “full employment.”

That is why textbook Keynesian macroeconomic theory emphases deficit

spending as a tool to fight recession and stagnation. Once near to “full
employment” is restored, the government should move to balance its
budget, since additional demand will only lead to inflation. In addition, by
balancing the budget across the “business cycle,” a long-term rise in the
public debt—and the cost of servicing the debt, which ultimately has to be
paid for in taxes and will reduce future demand—will be avoided.

However, in “Monopoly Capital,” Baran and Sweezy claimed further that the
balanced budget multiplier is one. For every dollar of taxed revenue that is
immediately spent, an additional dollar of demand is created right up to
“full employment.” The tendency of monopoly capitalism toward
Depression, which would seem to doom it at first glance, can, according to
“Monopoly Capital,” always be turned into “full employment” as long as the
capitalist government is willing to tax and spend at a sufficient rate. If it
isn’t, only then will the monopoly capitalist economy in the absence of
revolutionary innovation on the scale of the railroad or the automobile
experience a degree of unemployment and excess capacity—stagnation.

Let’s take a look at the claim that there is a balanced budget multiplier of
one. If the tax directly or indirectly falls on the working class, this would
seem highly unlikely. Workers in general have no choice but to spend their
wages immediately as they “live from paycheck to paycheck.” In this case,
the balanced budget multiplier will be zero or even below zero—negative—
if the government spends the money more slowly than the workers would
have. In addition, the real wages of the workers would be lower than they
would be without the government spending unless the government spends
the taxes on something that benefits the workers collectively.

But what will happen if the surplus is taxed away from the monopoly
capitalists, which Baran and Sweezy seem to be assuming? After all, it is
the absorption of the surplus and not the absorption of wages that is,

24
according to the Monthly Review school, the problem monopoly capitalism
faces. If we assume that 1) the monopoly capitalists would have
spent none of the surplus if they had not been taxed, and 2) if taxed, they
will not reduce their own investments by a single cent despite the lower
after-tax rate of profit, then Baran and Sweezy’s assumption of a balanced
budget multiplier of one would be correct. Outside of that restrictive—and
extremely unrealistic—assumption, it is false.

But even if Baran and Sweezy are correct and the government taxes away
sufficient surplus to ensure that it is fully “absorbed,” there still will be no
economic growth unless the government spends the money on the creation
of new enterprises—expanded reproduction. But then we would in effect
have a government willing and able to build a socialist economy. Baran and
Sweezy did not expect this from a capitalist government.

Therefore, if capitalists refuse to spend any of their surplus net of the

surplus spent on their expenditures of personal consumption, having the
government spend the surplus on public unproductive of surplus value
consumption will result in only simple reproduction—no economic growth.
Therefore, if we follow the logic of “Monopoly Capital,” government
spending no matter how extensive will not be able to turn monopoly
capitalist stagnation into growth short of the socialist reorganization of
society, though it would be able to eliminate idle machines and plants.
Whether such spending—if for a moment we assume the fantastic
assumptions of “Monopoly Capital” were actually true—would be able to
achieve “full employment” of all those who desire a job if one were available
is another matter entirely.

The pessimism of ‘Monopoly Capital’

Of all the articles praising and in some cases criticizing “Monopoly Capital”
that Monthly Review magazine published in its 50th-anniversary issue, the
most interesting in my opinion was by Prabhat Patnaik, professor emeritus
at the Center for Economic Studies and Planning at Jawaharlal Nehru
University, New Delhi.

Professor Patnaik writes: “While establishing that monopoly capitalism,

afflicted by a tendency towards a rising economic surplus relative to output,
could offset this tendency through growing state expenditure, especially
military expenditure, the book did not discuss the contradictions in this
arrangement that could disrupt the functioning of the system and therefore
bring about a change in it. The book shifted the critique of capitalism onto

25
a moral-ethical plane, away from any economic contradictions that might
afflict it, thereby implicitly suggesting that the system had successfully
manipulated its economic contradictions to a point where they were no
longer threatening to its stability.”

In other words, according to Professor Patnaik, while Marx had transformed

socialism from a utopia based on moral-ethical ideas into a science based
on economic necessity, Baran and Sweezy’s “Monopoly Capital”
transformed socialism back into a utopia based on moral-ethical ideas. It is
no accident that “Monopoly Capital” specifically rejects the revolutionary
role of the industrial working class.

If the economic analysis of “Monopoly Capital” is correct, that is the way

things are and no amount of quotes from Marx can change reality. But what
if the analysis of “Monopoly Capital” is wrong—which I believe it is—and
Marx was correct after all? This is the question I will explore in my review
and critique of Shaikh’s “Capitalism.”

_______

26
 Three Books on Marxist Political Economy
(Pt 2)
Profit of enterprise and monopoly profit

As we saw last month, Marx’s prices of production are not identical to the
marginal cost = equilibrium prices of “orthodox” bourgeois
microeconomics. The biggest difference is that prices of production include
not only the cost price and interest on capital but also the profit of
enterprise.13 Modern bourgeois microeconomic orthodoxy holds that in
“general equilibrium” any profit in excess of interest will be eliminated by
“perfect competition.”

13 Since the death of Ricardo in 1823 bourgeois economic theory has been anxious to explain
away surplus value. The view that surplus value arises from the unpaid labor of the workers
was inherent in classical theory, though classical political economy never treated surplus value
as an economic category separate from its parts, such as interest, profit and rent. When classical
economy and even the early Ricardian socialists referred to surplus value, they always used the
name of a fraction of it such as interest to describe the entire surplus value.

Marx’s contribution was two-fold. First, he used a separate name—“mehrwert” in German,

translated surplus value in English—to describe the value created by the unpaid portion of the
total labor as opposed to the paid portion performed by the working class. Second, he showed
how the capitalists can make a profit even when the working class receives the full value of
their labor power. Not a penny of wage theft is necessary for the capitalists to make a profit.
Therefore, the revolutionary conclusion of Marx was that the existence of surplus value does
not violate the law of exchanges of equal quantities of labor but is in full accord with it.
27
Neo-classical marginalism claims that the profit of enterprise does not exist when the economy
is in “general equilibrium” and thus banishes a not inconsiderable fraction of the total surplus
value that must be explained away. Landed property is then mixed up with landed capital and
explained away as the interest on landed capital.

Interest, borrowing from the Austrian school, which is closely related though not identical to
the “neo-classical school” is due to the lower subjective valuations people put on commodities
that will be available in the future as opposed to the present. Finally, the high incomes of active
capitalists is explained as the wages earned by them, since they after all perform the labor of
actually running a business enterprise.
In contrast, Marx—and the classical economists before him—did not believe
that competition had any tendency to eliminate the profit of enterprise.
Instead, they believed that in addition to interest, there is an additional
profit of enterprise that is appropriated by the commercial and industrial
capitalists. Profit of enterprise is defined as total profit minus interest. The
profit of enterprise must not be confused with monopoly profits. The only
monopoly necessary for the profit of enterprise is the monopoly of the
means of production by the capitalist class.

True monopoly profits do exist. But within the classical-Marxist tradition,

monopoly profit is an addition to the profit of enterprise. Anwar Shaikh
affirms that monopoly profits exist but he has little to say about them in
his “Capitalism.” Instead, Shaikh is interested in “real competition,” which
quickly eliminates any profit beyond the profit of enterprise.

Shaikh’s failure to analyze monopoly profit is in full accord with his rejection
of the Monthly Review and heterodox post-Keynesian schools, which often
treat any profit, or at least any profit beyond interest, as monopoly profit.

Shaikh’s lumping together of these two quite different theories of a

monopoly capitalist stage—the Hilferding-Lenin and the “Monopoly Capital”
theories—is in my opinion a legitimate criticism of Shaikh’s “Capitalism”
and his “fundamentalist school” in general. In “Monopoly Capital,” Paul
Baran and Paul Sweezy were quite clear that they were not simply repeating
or writing yet another popularization of the Hilferding-Lenin theory of
monopoly capitalism. They found that theory inadequate and developed
another, quite different theory of monopoly capitalism.

I believe that Shaikh is correct in seeing the influence of the Leon Walras-
inspired theory of perfect competition in “Monopoly Capital” and other
theories of modern capitalism influenced or inspired by Baran and Sweezy’s
“Monopoly Capital.”

Differences between classical and ‘vulgar’ economics

Categories central to Marx’s analysis in Volumes I and II of “Capital” such

as value and surplus value are invisible to the capitalists engaged in
everyday competition and for that reason to our modern bourgeois
economists. In Volumes I and II, Marx did not use a labor theory of price—
prices directly proportional to values—because he believed that the labor
theory of prices is the most realistic price theory. He did not. Rather, the

28
founder of scientific socialism used a labor theory of prices in the first two
volumes in order to lay bare the origins and nature of surplus value.

Prices of production, on the other hand, make it appear that not only
variable capital-purchased labor power14 but constant capital as well
produce profit—surplus value. If we assume that competition equalizes the
rate of profit, capitals that consist largely of constant capital will yield the
same rate of profit as capitals that consist largely of variable capital. It
seems to both the capitalists and bourgeois economists that both constant
and variable capital produce profit, which bourgeois economists prefer to
call “interest.”

Therefore, by their very nature prices of production hide the origins and
nature of surplus value as the unpaid labor performed by wage workers.
How surplus value is produced even when capitalists pay the workers the
full value of their labor power—when there is no wage theft—and the
consequences that necessarily follow were the main questions Marx wished
to answer in “Capital.”

When Marx arrived at prices of production in Volume III of “Capital,” he

broke through to the surface of economic life. It took Marx about two and
half volumes to arrive at the point where vulgar economists begin their
analysis. This is the point where the study of competition must begin,
though Marx did not attempt to do this in “Capital.” He did study
competition in his early work “Wage-Labor and Capital,” which he wrote in
the 1840s.

“Wage-Labor and Capital” was written before Marx distinguished between

labor and labor power. This distinction is vital to explaining how surplus
value can arise without violating the exchange of equal quantities of labor.
This is so important that Engels in the edited version of the work added the
distinction to the text. As originally published, “Wage-Labor and Capital”
does not belong to Marx’s mature work.

Despite this, the pamphlet can be used as a starting point to build a Marxist
theory of “real competition” by combining Marx’s mature theories of value,

14Labor power is often defined as the money wage used by the capitalists to purchase the labor
power of the worker. But labor power is a form of productive capital, while the money the
capitalists use to purchase the labor power actually represents money capital to the capitalist,
though the same pieces of money represent revenue but not capital in the hands of the worker.
Money capital does not produce an atom of surplus value. Surplus value is produced only when
the purchased labor power of the workers is put to work by the industrial capitalists. 29
money and prices of production with the theory of competition presented
in “Wage-Labor and Capital.” In both this and another valuable early work,
“The Poverty of Philosophy,” Marx explained that market prices fluctuate
around values, or “the cost of production,” a phrase that is replaced by
“price of production” in his mature work. In “Poverty of Philosophy,” Marx
explains that prices virtually never actually equal values—the cost (prices)
of production.

In “Wage-Labor and Capital,” Marx noted that there is competition between

sellers and buyers and between different buyers and different sellers. When
demand exceeds supply at prevailing prices, competition between the
sellers vanishes but flares up as soon as supply exceeds demand.

A situation where demand exceeds supply at the prevailing prices is called

today a “sellers’ market.” Conversely, a situation where supply exceeds
demand at current prices is called a “buyers’ market.” To use present-day
terminology, when a sellers’ market prevails, price competition among
sellers will vanish while competition between buyers intensifies. A lack of
competition among sellers combined with fierce competition among buyers
pushes up prices. In a buyers’ market, the reverse is the case. Competition
among sellers intensifies while competition among buyers vanishes. Prices
then fall.

However, what will the prices be of various commodities when the balance
of forces
is equal, causing competition between sellers and buyers to cancel itself
out? Even in the 1840s, Marx realized that to answer this question you need
a theory of value. He found the necessary theory in the work of David
Ricardo. Ricardo explained that the values of commodities are determined
by the quantity of socially necessary labor needed to produce them. The
higher the value of a given commodity the higher the price will be when
competition cancels itself out. If a pair of shoes takes twice as much labor
to produce than a shirt under “average” market conditions, a pair of shoes
will sell for twice the price that a shirt sells for.

In the 1840s, Marx had not yet perfected the labor-based theory he learned
from Ricardo, but Shaikh demonstrates that even a purely “Ricardian”
labor-based theory of price is indeed approximately true.

30
How does an active capitalist decide in which branches of
production to invest?

Capitalist production—and any business person will confirm this—is about

making a profit. The capitalist begins with a sum of money M and hopes to
end up with a greater sum of money M’. When active capitalists are
considering expanding into a new branch of production or enlarging their
existing production, this means they have a sum of money—which may be
owned by the capitalists or borrowed; it doesn’t matter here—that they are
interested in increasing as much as possible. What commodity should our
capitalists produce? Active capitalists—management—are experts in
determining what investments will have the best chance of being most
profitable. No active capitalist is infallible in this regard, of course. They can
and do make mistakes. Many a capitalist enterprise has gone out of
business because of mistakes in this regard made by its CEO.

Today’s active capitalists do everything they can to increase demand for

the particular commodities they produce through advertising—as Baran and
Sweezy explain in “Monopoly Capital.” Advertising certainly increases the
chances of success but does not itself guarantee it. Only those active
capitalists who over time are most successful in this regard survive.
Unsuccessful capitalists are eliminated through the brutal battle of
competition that Shaikh explains is akin to war.

In my opinion, Shaikh has a far greater understanding of the nature of

capitalist competition than Baran and Sweezy did. Indeed, actual shooting
wars including World Wars I and II were the continuation of “real capitalist
competition” by “other means.”

It is in deciding in what branches of production to invest their capital that

the price of production enters the minds of active industrial capitalists. If
they believe—the belief may or may not be correct—that a possible
investment will not yield any profit at all, or make a loss, the investment
will not be made. If an active capitalist believes that a proposed investment
will likely make a profit but the profit will be less than, or at best equal to,
investing in, say, government securities, the proposed investment will also
not be made. For the capitalists to invest in industrial production, the
expected profit must exceed the prevailing rate of interest.

Our modern economists understand this much. For example, John Maynard
Keynes was very much aware of it. But since according to neo-Walrasian
general equilibrium theory there is no profit beyond interest when the

31
economy is in equilibrium, growth will occur only when the economy is not
in equilibrium. This is why modern bourgeois economists believe that some
disturbing factor must disrupt the equilibrium. A rise in population or
revolutionary new products with new use values that destroy the existing
equilibrium is necessary if economic growth is to occur.

This belief colors the current debate about “secular stagnation” among
bourgeois economists. The two favorite explanations they put forward for
periods of “secular stagnation”—both those of the 1930s and today—is
declining or negative population growth and a lack of new types of
commodities.

This is not the case, however, in the classical-Marxist system, where a profit
of enterprise above and beyond the interest on capital is the normal
circumstance. Therefore, expanded reproduction—economic growth—is the
normal condition for capitalism in the classical-Marxist tradition but not
for the neo-Walrasian—perfect competition—school that forms the
foundation of today’s orthodox bourgeois economics.

Active capitalists also reject proposed investments where the expected rate
of profit is below the average rate on new investments. In the minds of the
capitalists, a “hurdle rate” is formed below which an industrial investment
will simply not be carried out. The hurdle rate is therefore the minimal rate
of profit that capitalists find acceptable on new investments. The hurdle
rate therefore exists as a quite definite number in the minds of active
capitalists. The price of production consists of the cost price, defined as the
price of producing a commodity to the capitalist, plus the hurdle rate, which
includes both the interest on capital plus an additional profit of enterprise.

Price of production

A commodity enters the market with a “price tag” already on it—the cost
price plus the hurdle rate—the price of production. Again, it must be
stressed that the price of production is the price to society if it is to enjoy
the commodity and not the price the capitalist pays for producing it. Over
time, the average rate of profit or hurdle rate can change, but in a given
era it will appear as a given in the minds of capitalists.

The profit of enterprise must not be confused with the wages of

superintendence—a favorite dodge of bourgeois economists. An industrial
capitalist might retire from any direct role in running a business and hire
an expert manager to run it instead. The manager is entitled to the wages

32
of superintendence and acts as a capitalist, but it is the capitalists who
collectively own the capital who appropriate both the interest and profit of
enterprise.

A capitalist may or may not be the same person as the manager—the active
capitalist. It is actually this situation where the capitalist owners—the
stockholders—are separated from the active capitalist—the corporate
management—that becomes generalized in modern corporations. This
separation is called the separation of ownership from management. In
either case, the commodity always leaves the factory floor with a price
tag—the price of production—that it may or may not realize in the market
place.

If the active capitalists are lucky, they will find that the market demand is
so great that they can sell all the commodities they produce in a given
period of time at their individual price of production and still not meet the
demand. In that situation, active capitalists will be more than willing to
raise the price to equalize the supply with demand and thus realize a super-
profit, which will be added on to the interest on capital plus the profit of
enterprise appropriated by the capitalist owners.

In the case of a modern corporation, this takes the form of some

combination of increased dividends plus a rise in the value of the stock on
the stock exchange. However, it might turn out the active capitalist makes
a mistake and the new investment yields a return below the hurdle rate.
Any new investments in the given line of production will then be halted.

‘Turbulent movement’ of market prices around prices of production

If the capitalist can sell the commodities at more than the price of
production, the capitalist owners—stockholders—will realize a super-profit.
In this case, Shaikh explains, other capitalists will invade this branch of
production in search of similar super-profits. The result will be that
production will expand until supply exceeds demand at the prices that yield
super-profits.

At this point, price competition will break out among the capitalists, which
lowers the price back to the price of production and indeed will cause the
market price to fall below the price of production. Once it is clear that the
commodity cannot be sold at the price of production at existing levels of
production, capital will begin to flow out of the sector, and production of
that commodity will decline until once again demand exceeds supply at the

33
price of production, which will enable the commodity to be sold at a price
that exceeds the price of production. Therefore, under what Shaikh calls
“real competition,” actual prices—market prices—do not equal the price of
production but fluctuate around it in a “turbulent movement.”

Shaikh, who worked as an industrial engineer before he became an

economist, points out that Marx’s production prices correspond to the
reality of how real capitalists calculate their cost prices and profit. In
contrast to marginal cost curves that form smooth lines that professors
divorced from the messy world of production dreamed up, real-world active
capitalists calculate the quantity of their capital—in terms of money, I would
add—and then the estimated profit over a year to determine the expected
annual rate of profit.

The practical necessity, Shaikh explains, of industrial capitalists to add an

entire shift of workers to increase production—or lay off a shift of workers
when production is reduced—precludes the kind of continuous rising and
falling curves of production that neo-Walrasian microeconomics and its
calculation of “marginal costs” require. In contrast, according to Shaikh—
and his background as an engineer means he is in a position to know—the
classical-Marxist concept of prices of production corresponds to the reality
of the business world.

The price-of-production school versus classical economists and

Marx

Shortly after the death of Ricardo, during what Marx called in “Theories of
Surplus Value” the “the disintegration of the Ricardian school,” Colonel
Robert Torrens (1780-1864) claimed there was no reason to worry about
values when all you needed were prices of production that equalize profit
rates. Torrens can be considered the founder of the school whose most
well-known 20th-century representative was Piero Sraffa.

According to what is usually called the neo-Ricardian school, but I prefer to

call here the price-of-production school, all we have to do is create a model
where the prices of all commodities are such that all capitals of a given size
realize equal profits in equal periods of time. Both commodities that serve
as inputs for the production of other commodities and the commodities that
are produced must be such that the capital invested in them yield their
owners the same rate of profit. On this basis, modern input-output tables
arose. It is no accident that Sraffa entitled his best-known work “Production
of Commodities by Means of Commodities.”

34
The reason I prefer “price-of-production school” to “neo-Ricardian school”
is that Ricardo refused to give up his theory of labor value. This was the
case even though he was well aware of the apparent contradiction between
his theory of the values of commodities determined by the quantity of labor
necessary to produce them and the tendency of competition to equalize the
rate of profit,

The modern price-of-production school either rejects—Ian Steedman—or is

at least completely uninterested in—Piero Sraffa—value. While Colonel
Torrens, founder of the price-of-production school, saw no need for
Ricardo’s labor theory of value with all its contradictions, Sraffa saw no
need for the scarcity-marginalist theory of value with all its contradictions.
Why bother, Sraffa and Steedman say, with value at all when we have
prices of production that equalize profits and regulate real world market
prices?

Shaikh, at least in “Capitalism,” defines the present-day price-of-

production school represented by such figures as Sraffa and Steedman as
the continuation of classical economics, in which he includes Marx. But this
is not how Marx, who coined the term “classical political economy,” saw it.
Marx divided (bourgeois) economists into two main camps. The classical
economists were those who went beneath the surface appearances of prices
of production to examine the division of labor where workers are engaged
in the production of different types of commodities that are then exchanged
for one another by the owners of the commodities—the capitalists. They
investigated the social relations of production.

Marx defined “vulgar economics” as the school of economics that analyzes

only the surface appearances of the capitalist economy. The vulgar
economists confine themselves to describing the equalization of the rate of
profit that arises through competition. In this sense, every industrial
capitalist is a vulgar economist.

Therefore, the various price-of-production schools that rejected or are

indifferent to the analysis of value very much fit, in my opinion, what Marx
called vulgar economy as opposed to classical economy. Marx was quite
clear that classical political economy ended with Jean Charles Léonard de
Sismondi and David Ricardo.

Torrens was grouped by Marx with the post-Ricardian vulgar economists.

The 20th-century continuators of the price-of-production school such as
Sraffa and Steedman carried on this tradition. They fit Marx’s definition of

35
vulgar economists because of their rejection of value theory and thus the
study of the real social relations underlying the capitalist mode of
production—Steedman—or indifference toward it—Sraffa.

Value and prices of production

Marxists are—and the classical school before them were—interested in the

relationship of the prices of production to underlying labor values. If we
look at the real-world capitalist economy, we have hundreds of millions of
workers producing commodities day and night. These workers have to
produce commodities in more or less correct proportions if production is to
continue at all. Yet there is no overall plan. Instead, there is universal
competition among the capitalists and workers where every person is
pursuing only his or her individual self interest. How can such a system
work at all?

This is where value analysis begins. Value is a social relationship of

production where value is measured in terms of a quantity of abstract
human labor measured in terms of some unit of time. Prices of all types,
including prices of production, have to be measured in the quantities of the
use value of a commodity that functions as universal equivalent—for
example, grams or ounces of gold bullion. This point is crucial, and Shaikh’s
failure to fully analysis this in “Capitalism” and his other work, eventually
lands him grave trouble in later chapters of his latest work as we will see
later.

The snare of the transformation problem

When we fail to follow Marx—Ricardo won’t do—in analyzing the necessary

form value must assume—essentially the theory of money—we set
ourselves up to fall into a nasty trap called the “transformation problem.”
The transformation problem does not consist of the mathematical
difficulties of starting with a system of direct prices (corresponding to
values) and arriving at a system of prices of production that equalize
profits. That problem has long since been solved.

The heart of the transformation problem is that unless we make

unrealistically restrictive assumptions—or we assume that all commodities
enter the process of production, which means excluding luxury commodities
consumed only by the capitalists as well as weapons of war purchased by
the state—the rate and mass of profit calculated in terms of prices of

36
production will be approximately but not exactly the rate and mass of profit
calculated in terms of values or direct prices.

Does this destroy the Marxist theory of value? Ian Steedman in his “Marx
after Sraffa” insists it does. Others trying to defend Marx’s theory of value—
such as Ernest Mandel—have insisted that somehow the mass and rate of
profit both in terms of prices of production and direct prices must be
exactly—not approximately—equal, though both logic and mathematics say
otherwise.15

Sir James Steuart and his ‘vibrations’

Sir James Steuart (1713-1780) was the leading English economist just
before Adam Smith. For his time, Steuart was considered a reactionary,
because he was the last representative of the merchantalist school that was
to be swept away by the massive tide of economic liberalism engulfing
Britain in the late 18th century, represented by Adam Smith and his
“Wealth of Nations.” However, Steuart is extensively mentioned in Shaikh’s
“Capitalism.” Indeed, we first meet the the old English economist on page
12 of Shaikh’s work.

Steuart noted, Shaikh explains, that there are two sources of aggregate
profit. One is the transfer of wealth, while the other arises from production
of new wealth and surplus product. Is Shaikh’s view compatible with Marx’s
concept of labor value? Economics blogger Michael Roberts wrote based on

15 The price-of-production school also attacks Marx’s theory of surplus value using the
transformation problem. This school concentrates on the fact that once commodities that do
not enter the reproduction process are taken into account the rate and mass of profit when
calculated in terms of prices of production will only approximately but not exactly equal the
rate and mass of profit when calculated in terms of value or direct prices.

The school then triumphantly proclaims that since the rate and mass of profit in terms of prices
of production is not exactly equal to the rate and mass of profit in terms of value, surplus value
or profit must be arising from something different than the unpaid labor performed by the 37
working class. Perhaps constant capital defined in physical terms is producing surplus value. I
will show later in this extended critical review how the entire quantity of surplus value down
to the very last cent can be defined in terms of the unpaid labor performed without violating
either the laws of logic or mathematics.
a recent speech Shaikh gave in Greenwich, UK, he attended—which I
haven’t heard—that he doesn’t think so.

The mercantilist economists believed that profit—surplus value—arose in

the sphere of circulation. Merchants make their profit by buying cheap and
selling dear. This view—which we also find in Malthus, who Shaikh groups
with the classical economists but Marx considered a vulgar economist—is
called profit upon alienation. Here “alienation” means sale.

However, Marx, who loved to give credit where credit was due, pointed out
that Steuart made a crucial advance beyond the traditional mercantilist
views, because he realized that no wealth is created in circulation but only
in production.

Roberts reproduces the following quote—which appears in Marx’s “Theories

of Surplus Value,” sometimes considered Volume IV of “Capital.” Let’s
examine Marx’s quote, which I cut and pasted from Roberts’ blog.

“Before the Physiocrats, surplus-value—that is, profit in the form of profit—

was explained purely from exchange, the sale of the commodity above its
value. Sir James Steuart on the whole did not get beyond this restricted
view; (but) he must rather be regarded as the man who reproduced it in
scientific form. I say ‘in scientific form’. For Steuart does not share the
illusion that the surplus-value which accrues to the individual capitalist from
selling the commodity above its value is a creation of new wealth.'”

Roberts further quotes Marx as saying that Steuart described the

redistribution of surplus value among buyer and seller as the “vibration of
the balance of wealth between parties.”

Steuart was using the English language here as it existed more than 200
years ago. So the use of his term “vibrations” in this context sounds strange
for speakers of present-day English dialects. However, Roberts provides a
quote from Marx that clarifies what Steuart meant. Marx explained that “his
theory of ‘vibration of the balance of wealth between parties’, however little
it touches the nature and origin of surplus-value itself, remains important
in considering the distribution of surplus-value among different classes and
among different categories such as profit, interest and rent.”

Important as the transformation problem and the role Steuart’s “vibrations”

play in its solution are, they logically belong later in this extended critical
review of Shaikh’s work. I won’t be saying more about this question now

38
because doing so would require explaining my criticisms of Shaikh, which
will appear in a later part of this review. Here I want to emphasize what I
think he gets right. Until then, the reader can read what I previously
wrote here on this subject.

Can a general equilibrium in terms of prices of production actually

exist in reality?

The capitalist economy would be in general equilibrium, according to the

price-of-production school, when capitals of equal sizes yield equal profits
in equal periods of time in all branches of production. Has there ever been
a single day in the entire history of capitalism, or could there be a single
day in the entire history of the capitalist mode of production, when every
capital is realizing exactly the same rate of profit? The answer is no.

To develop a theory of “real competition,” we have to examine how the

struggle among the capitalists transforms prices of production into market
prices. Marx began with value and prices that are directly proportional to
value, what Shaikh calls “direct prices.” Marx then proceeded from direct
prices to prices of production, but only in Volume III “Capital.” To complete
Marx’s unfinished critique of political economy, we have to proceed from
prices of production to everyday market prices. Only then are we in a
position to target international trade, the world market, and crises. This is
the chief task Shaikh takes on in “Capitalism.”16

Bourgeois neo-classical general equilibrium theory and even Marx in

places—for example, in his analysis of both simple and expanded
reproduction found in Volume II of “Capital”—abstracts technological
change, though unlike the “neo-classicals” Marx was able to explain
economic growth—expanded capitalist reproduction—in the absence of
technological change. In reality, a theory of general equilibrium, whether
based on prices of production or marginal costs, is not possible without
abstracting technological progress and the development of commodities
with new use values. But a theory of “real competition” is unthinkable

16Any study of what Shaikh calls “real competition” must begin with prices of production. Just
as we pass from value, to the form of value to direct prices and the explanation of surplus value
on the basis of direct prices, we must pass from direct prices to prices of production to market
prices. Ultimately, we can’t build a theory of capitalist crises—which is so crucial to
understanding real-world capitalism—without a correct theory of market prices. For this, we
need as Shaikh explains a theory of real competition. 39
without putting technological change and the introduction of commodities
with new use values at the center of the analysis.

From this point onward, I will divide this extended review of Shaikh’s work
into two parts. First, I will examine what Shaikh gets right, and then I will
examine where Shaikh falls into errors that ultimately bring his work up
short.

Differential rent

Before we proceed from prices of production to market prices, there is one

other contribution by Marx we should review. This is his theory of
differential rent found in Volume III of “Capital.” I don’t think it is necessary
to review Marx’s entire theory of differential and absolute rent, which I
did here. Here, I will only examine the part that is relevant to analyzing the
effect of introducing new, cheaper methods of production. I will therefore
ignore the question of “absolute rent” and the “second case of ground
[rent]”—the rising individual price of production of successive capitals on
the same land—because they are not relevant to the subject Shaikh is
investigating.

Suppose there are five grades of land ranging from most fertile to least
fertile. I assume capitalist agricultural production where the term “farmer”
refers to an industrial capitalist who employs wage labor. Capitalist farmers
are full-fledged industrial capitalists. Let’s examine the case of capitalist
farmers whose fields grow wheat. The quantity of wheat as a use value is
measured in terms of bushels.

Under our assumptions, the varying—or differential—fertility of land is due

to natural conditions and not the application of human labor to the land. 17
We also assume that differences in the individual prices of production
among the capitalist farmers is due entirely to the differential fertility of the
land being cultivated.

Our capitalist farmers first invest their capital on the most fertile grade of
land. The individual price of production is lowest here. This means that a
given quantity of capital invested on that land will yield a greater quantity
of wheat measured in bushels than it will on any of the other grades of
land. However, because the quantity of the most productive land provided
by nature is limited, even when all the land of this grade is devoted to

17If the varying fertility of land was due to the application of human labor to the land we would
be dealing with landed capital and not landed property.
40
raising wheat there will be an insufficient supply to lower the market price
to the individual price of production of wheat produced on this land.

Because they are realizing a price in excess of their price of production, our
capitalist farmers will proceed to invest their capital on the second grade of
land, where the individual price of production is higher than the first grade
of land. But again, even when the second grade of land is fully devoted to
the production of wheat there will still not be enough wheat on the market
to lower the market price to its individual price of production. The capitalist
farmers will then start to invest capital on the third grade of land. The total
production of wheat rises and market prices fall but are still in excess of
the individual price of production on this grade of land.

The capitalist farmers then proceed on to the cultivation of the fourth grade
of land. Finally, the market price of wheat falls to its price of production on
the fourth grade of land. The capitalist farmers will not proceed to cultivate
the fifth grade of land because the individual price of production of that
land will be in excess of the market price. Instead of investing their capital
on this land, the capitalists farmers, assuming they are fully cultivating the
fourth grade of land, would look to another area of production that will yield
them at least the average rate of profit—their “hurdle level.” For example,
perhaps they will invest their capital in the raising of wool, assuming raising
wool will yield at least the average rate of profit on their capital.

Now we can calculate the differential rent. The difference between the
market price our capitalist farmer will realize on wheat produced on grades
one, two and three and their individual prices of production—lowest for
grade one and highest for grade three—represents the differential rent. The
individual price of production of wheat on grade four land exactly equals its
average market price. Wheat grown on this land, which yields no differential
rent, will regulate the market price of wheat.18

Grade five land will not be cultivated because such an investment would at
best yield a profit below the average rate of profit and would lower the
profits that are realized on grades one to four. The rent can be measured
both in terms of bushels of wheat or money. Since we are dealing with a
capitalist society, both the capitalist farmers and the landowners will
calculate their profits and rents in terms of money.

18 Here I ignore absolute rent. Indeed, if all the wheat-growing land used in the worldwide
wheat market was owned by the state, there would be no absolute rent, so the above
assumptions are a theoretical possibility.
41
The analysis of differential rent does not get us beyond the price-of-
production
equilibrium. We still assume that all commodities outside from those that
require the use of rent-yielding land sell at their prices of production. In
order to analyze the prices of production that require land, we have to
distinguish between individual prices of production of particular enterprises
and the prices of production that regulate market prices. In the case of the
classical-Marx theory of differential rent, the individual price of production
of the commodities produced on the worst land will regulate market price.
So far, we have not yet moved beyond “equilibrium.” But to analyze “real
competition,” as Shaikh calls it, we have to leave the world of equilibrium
behind.

Differential productivity among industrial enterprises

What about differential productivity of capitalist industrial enterprises that

arises not from the shortage of means of production that are provided by
nature—called “land” in political economy—but rather from human science
and technology? The level of science and technology has, especially since
the industrial revolution that began in Britain during the second half of the
18th century, progressively grown. The rate of increase, however, varies
according to the branch of production and the progress of science. At times,
it is revolutionary—for example, the introduction of modern assembly lines
in the production of automobiles by Henry Ford in the 1920s. At other
times, it is evolutionary, such as the case of small but cumulative
improvements in assembly-line production of automobiles after the 1920s.

In addition, the progress of science and technology leads to the production

of entirely new types of commodities. For example, railroads in the first half
of the 19th century, automobiles in the early 20th century, followed by
radios in the 1920s, then television sets in the 1950s, home computers in
the 1970s onward, and the pocket-sized computers called smart phones in
the early 21st century.

If technological change and the introduction of new products were to cease

for a period of several decades, then all but the “best practice,” cheapest
method of producing a given commodity of a given use value of a given
quality would be eliminated. By definition, there would be no new types of
commodities. But this has never been the case in the last 250 years.

Beginning in the late 18th century, industrial capitalists have revolutionized

the means of production and introduced new types of commodities. The

42
world would be a very different place if only the commodities known to
Adam Smith were being produced, though Marx showed that there would
still be expanded capitalist reproduction of the existing types of
commodities at existing values. If there had been no technological progress
over the last 250 years, the GDP, industrial production, world trade and
general population would be much expanded compared to Adam Smith’s
day. But we would be living in a world without railroads, steamships,
automobiles, airplanes, electricity, radios, TVs, computers and the Internet.

The progressive if uneven growth in the productivity of human labor means

that both the values and prices of production of commodities, assuming the
value of money is fixed19 —constantly falls. Another inevitable consequence
is that there will be a range of individual prices of production of the same
type of commodity just like we found in our wheat example. But not
because of a shortage of the better grades of land but rather because of
continuous if uneven growth in the productivity of human labor.

Shaikh explains that the rate of profit on new capital that employs the
cheapest methods of production based on the latest technology and the
prevailing rates of surplus value is the rate of profit actually subject to
equalization. (Unfortunately, Shaikh avoids the expression “rate of surplus
value” or “rate of exploitation,” presumably the price he had to pay to get
his work published by Oxford University Press.)

This also means that the individual price of production of capitals employing
the cheapest method will sooner or later govern the market price. However,
by then it is quite likely that even cheaper methods of production will be
available. The method of production that yields the lowest individual price
of production of a commodity of a given use value and quality is now a
“moving target.” This also means that the rate of profit on older
investments will decline as their individual prices of production rise relative
to both the lowest individual price of production, the average price of
production, and the price of production that regulates market prices, itself
a moving target.

19 This is an unrealistic assumption. If we assume the commodity that serves as the measure
falls at an equal rate with that of other commodities—money must itself be a commodity—the
prices of production would be unchanged. If the commodity that serves as money were to fall
at a faster rate than that of the value of other commodities, the fall in the value of commodities
would express itself in the rise of prices of production. Finally, if the value of money were to
fall at a slower rate or even rise, the prices of production would fall at a faster rate than the 43
value of commodities.
On the other hand, equalization of the rate of profit will be less in evidence
in older investments. In these investments, huge amounts of capital are
tied up in the form of fixed capital that must be depreciated. The industrial
capitalists are effectively stuck with these older investments. Periodically,
the active capitalists are forced to write off a portion of the value of the
older fixed capital on the books. Write-offs reflect what Marx called the
“moral” depreciation on fixed capital. Eventually, moral depreciation may
become so severe industrial capitalists may be obliged to write the value of
the fixed capital all the way down to zero, often long before it is physically
worn out.

If the value of fixed capital is written down to zero, capitalists will take into
account only the “prime costs”—circulating capital, which consists of
circulating constant capital such as raw materials and purchased labor
power, which produces surplus value—when calculating the cost price. Even
the prime costs will rise over time relative to the price of production that
governs market prices. At some point, this will force the industrial
capitalists to close down plants and sell what remains for scrap.

The industrial capitalists hope by the time this occurs the plant will be
physically worn out anyway. In effect, “moral” or functional depreciation
and the depreciation costs represented by the physical wearing out of the
fixed capital are in a race with one another. This is why Marx explained in
“Capital” that industrial capitalists will if at all possible keep their plants
operating around the clock.

The sooner the value of the fixed capital is transferred to the commodities
produced the better. This brings us to a point that really belongs more in
the review of John Smith’s book on imperialism rather than the review of
Shaikh’s “Capitalism,” but I will mention it here as an anticipation.
Technological progress and the growth of the productivity of human labor
that accompanies it means that it is very dangerous for capitalists to keep
their capital in the form of fixed capital. Fixed capital can have a very long
life. During that long life, there is plenty of time for methods of production
and with it values and prices of production to change radically. This can
have a disastrous effect on the value of the capital that is tied up in the
form of fixed capital. Therefore, it is in the interest of the dominant strata
of the capitalists to shift the ownership of fixed capital and the risk that
goes with it to subordinate layers of the capitalist class.

Unlike the case with the classical-Marx analysis of differential ground rent,
which assumes that methods of production in agriculture remain

44
unchanged, we know we have a dynamic situation of constantly changing
values and both individual and average prices of production. When a new,
cheaper method of production is introduced, it will have an individual price
of production that is below the prevailing market price. Enterprises that use
it will not at first produce enough commodities of a given use value and
quality to force that market price down to their individual price of
production. As long as this condition prevails, these new enterprises will
make super-profits.

But since all new enterprises will use the new method—or maybe an even
better method—the percentage of commodities that are produced by this
method—or even cheaper methods—increase rapidly. As this happens, the
market price will fall—and because real competition is “turbulent,” as
Shaikh puts it—for a a while even below the individual price of production
as enterprises using the new cheaper method of production expand their
production and market share.

This will cause the moral depreciation of the fixed capital of the enterprises
working with the older methods of production, and sooner or later their
profit will vanish and they will be forced from the market altogether. How
fast this happens will depend on both the rate of technological progress and
the fluctuations of the demand both for commodities in general and for the
given commodities.

The centralization of capital

In neo-classical marginalist general equilibrium theory, the price of every

commodity will equal its marginal cost. So-called “perfect competition”
assumes that even the largest firms in every branch of production have a
market share approaching the limit of zero. If a firm, according to neo-
classical marginalist theory, were to attempt to gain a profit by increasing
its prices even by a single cent, it sales would fall to zero. This would occur
because its customers would immediately shift to one of its thousands of
rivals that offer an identical commodity at lower prices. No firm would ever
cut its price below marginal cost because it can already sell all the
commodities it is producing at the prevailing price level and would only lose
income if it cut prices without gaining additional market share.

This type of market situation is only approximated in agriculture where

hundreds or even millions of peasants—small working farmers—are
engaged in production. During general capitalist crises of overproduction,
the prices of agricultural commodities fall sharply, but there is little

45
immediate effect on the level of agricultural production. In the short run,
fluctuations in agriculture production reflect weather far more than they
reflect fluctuations in demand. In contrast, in industry dominated by
industrial capitalists that control a significant percentage of the market,
fluctuations in production are governed by fluctuations in demand.

The small working farmers know that even if they abandon their farms, the
impact on the total production of agricultural commodities would be so
slight that there would be no measurable effect on prices. They also know
they have no choice but to sell their commodities at the prevailing market
prices. As long as they do so, they will have no trouble selling their
commodities, even if the prices are ruinous to them. They would never
think of cutting their prices to capture a greater market share because they
are already selling all the commodities they can produce.. Indeed, when
the prices of agricultural commodities fall, the small farmer-peasants might
even attempt to increase their production in a desperate attempt to gain
additional revenue by selling more commodities.20

Eventually, even under these conditions the law of value will reduce
agricultural production. This will occur not because the individual peasant-
farmers cut their production but because a portion of them are forced to
give up farming and are transformed into wage workers.

But this is a slow process, because the small agricultural producers

desperately attempt to hold on to their means of production and traditional
way of life as long as possible. Agricultural overproduction often takes the
form of prolonged periods of chronic low prices accompanied by a steady
decline of the number of small farmer-peasants. Bourgeois
“microeconomic” theorists of “perfect competition” take the laws of the
progressively disappearing mode of simple commodity production and very
small-scale capitalist production that holds on in agriculture much longer
than in other branches production and generalize it to the entire capitalist
economy.

Significantly, Leon Walras, the founder of general equilibrium theory based

on “perfect competition,” was from France, where the dying mode of

20Beginning with the New Deal, the U.S. government stepped in to organize working farmers
by paying them to refrain from producing certain commodities when their prices fell below a
certain level. These policies have been adopted by other capitalist governments as well. In these
cases, the power of the state is used—though in a completely reactionary way to defeat the
centralization of capital—to hold back agricultural production in order to maintain the prices
of agricultural commodities. 46
production based on small-scale peasant agriculture still played a far more
important role at the time than it did in industrial Britain or industrial
Germany.

Things are quite different in non-agricultural industry, where even in the

19th century the number of independent enterprises were already far fewer
than was the case in agriculture. Suppose that particular industrial
capitalists are selling all the commodities they can produce at their
individual prices of production. They are realizing the average rate of profit.
Now suppose there is a drop in the demand for their commodities due to a
general crisis of overproduction that can be expected about every 10 years.
Our industrial capitalists now find that they can sell perhaps only 80 percent
of the commodities that they produce in a month if they continue to sell
them at their individual price of production.

These industrial capitalists have two choices. They can reduce their
production by 20 percent or temporarily by an even greater amount to get
rid of their excess inventories that have already piled up in their
warehouses, or they can cut their prices. The policy of reducing production
will only be effective, however, if they control a significantly greater
proportion of the market than a portion of the market approaching the limit
of zero that is required by “perfect competition.” The same is true of price
cuts, since if they control only a portion of the market approaching zero
that “perfect competition” requires, they will already be selling all the
commodities they can produce at the existing prices. Under these
conditions, cutting prices will do them no good. In manufacturing, however,
we can assume that each industrial capitalist controls a portion of the
market considerably greater than a portion approaching the limit of zero.
The industrial capitalist has become a price setter, not a price taker.

Most likely our industrial capitalists will reduce the price somewhat below
the price of production but combine this with production cuts and layoffs.
A favorite tactic employed by industrial capitalists during demand slumps
is to keep the formal price the same. But the (active) capitalist will
announce temporary “discounts” or “rebates” in order to clear “excess
inventory.” The more centralized the capital is in the given branch of
industry the more industrial capitalists will defend their existing prices—
which more or less correspond to the price of production—by cutting
production rather than prices. The very act of reducing production will begin
to shift the relationship between supply and demand and help check the
pressure to further reduce prices.

47
Assuming their fellow industrial capitalists react the same way, the market
will clear relatively quickly. Once the market clears, our industrial capitalists
will again find that they will be able to sell all the commodities they produce
in a given period of time at or near their individual price of production
without discounts.21 But this happy result is achieved at the cost of reduced
industrial production and increased unemployment among the industrial
workers—which isn’t all bad from the viewpoint of the industrial capitalists.
The increased competition among the sellers of the commodity labor power
will increase the rate of surplus value and thus the rate of profit realized by
the capitalist once the crisis has passed.

In agriculture, where we assume production is far more decentralized,

prices will fall far more during the crises while production remains largely
unchanged. The fall in agricultural prices is no mere “discount” either. The
prices quoted are well below what they were before the crisis. But once the
crisis passes, prices recover in agriculture as demand recovers while
production is little affected in the short run. As a result, during the crisis
the prices of agricultural commodities fall relatively to industrial
commodities, but during the recovery phases of the industrial cycle, prices
of agricultural commodities will rise relative to industrial commodities, all
things remaining equal. And this indeed is what economic history shows
actually happens.

Shaikh versus the Monthly Review school

Both Shaikh and the Monthly Review school believe that faced with a drop
in demand at existing prices giant corporations will cut their production in
order to defend their prices—which Shaikh emphasizes are ruled by the
individual prices of production of those corporations. In contrast, general
equilibrium theory would deny the very existence of giant corporations and
pretend that industrial production is in the hands of tens of thousands, or
even hundreds of thousands if not millions of independent firms. Or if it did
concede the reality of the giant corporations, it would proclaim that
competition is “imperfect” and blame either government policies or trade
unions for the monopolistic situation.

But here we come to an important difference between Shaikh and the

Monthly Review school. In “Monopoly Capital,” which remains the bible of

21Shaikh explains the industrial capitalists’ desire to maintain a certain level of excess capacity
to meet a sudden or unexpected increase in demand for these commodities at their price of
production. In addition if production is pushed beyond a certain limit, machinery can suffer
considerable damage.
48
the Monthly Review school, Baran and Sweezy claimed that the giant
corporations would maintain their selling prices even as they cut their cost
prices. Baran and Sweezy completely ignored labor values, which both the
classical economists and Marx held lay behind the prices of production.

Not so Shaikh. With labor values in mind, Shaikh denies that the giant
corporations have such power to maintain their prices while their costs fall.
Ultimately, Shaikh never forgets that the rate of profit is determined by the
underlying value relationships—the organic composition of capital, the
turnover time of variable capital, and the rate of surplus value. The
transformation of direct prices into prices of production will modify the rate
of profit slightly for reasons I will explore later, but it does not change the
fact that the rate of profit in terms of value and rate of profit in terms prices
of production will remain approximately equal. Ultimately, value relations
rule the prices of production and the rate of profit. No “absorption of the
surplus” by the state or any other entity can change this situation as we
will see in due course in this extended critical review.

If a giant corporation succeeds for a while in raising its price above its
individual price of production it will immediately face competition from
other giant corporations who will invade is sphere of production and tend
to once again lower the price to—and for awhile below—the corporation’s
individual price of production.

This will be true unless the giant corporation has a permanent absolute
unregulated monopoly or unless a cartel agreement among the giant
corporations engaged in a particular sphere of production can last
indefinitely. The history of capitalist production shows that these situations
are never permanent. Shaikh is therefore correct, at least in my opinion,
on this question against the Monthly Review school.

What can occur is that a few monopolistic corporations can for rather
prolonged periods of time maintain super-profits. But such monopolistic
super-profits, unlike true rents, are never permanent. Instead of
permanent rent-like super-profits, we have periods of prolonged super-
profits followed by renewed violent competition leading to the collapse of
the super-profits into outright losses. This often though not necessarily
involves new competition arising on the international level. Where are the
super-profits that were once appropriated by the owners of the steel,
rubber and auto factories that were located in what is now the U.S. rust
belt?

49
The transformation of the industrial belt of the United States into the rust
belt was completely unforeseen in “Monopoly Capital.” That work portrayed
U.S. monopoly capitalism as an “irrational” but rather stable system. Again
Shaikh—who in fairness wrote after the collapse of so much of the industrial
production of the U.S., Britain and Western Europe—has a far more realistic
picture of contemporary capitalism than Baran and Sweezy did. If Baran
and Sweezy were alive and writing a “magnum opus” today, they would
have to write a very different book than “Monopoly Capital.”22

Shaikh, eager to debunk the false concept of permanent super-profits, is in

my opinion guilty of playing down the reality that super-profits do exist and
can last for considerable periods of time before they vanish amidst renewed
cutthroat competition that eventually leads to wars and revolutions. There
is a big difference between Baran and Sweezy’s “Monopoly Capital,” and
Lenin’s theory of imperialism, which pictured imperialism as a highly
unstable system leading to violent crises, wars and revolutions. According
to Lenin, monopoly capitalism is a transitional stage between the “old
capitalism” based on free—but not perfect—competition and a higher mode
of production—socialist production. In this crucial respect, the works of the
famed Russian revolutionary, including his pamphlet “Imperialism,” differ
with both Shaikh’s “Capitalism,” which sees capitalism little changed from
the days of Adam Smith, and Baran and Sweezy’s “Monopoly Capitalism,”
which portrayed monopoly capitalism as a rather orderly if irrational system
whose further evolution had largely ceased.

Shaikh has throughout his career been a strong defender of Marx’s “law of
the tendency of the rate of profit to fall.” This law has been a source of
controversy since shortly after Engels published Volume III of “Capital.”
One attack was the so-called Okishio theorem, developed by Japanese
economist Nobuo Okishio (1927-2003). The Okishio theorem claimed that
as long as the “real wage” remains unchanged capitalists will never adopt
a method of production that would lower the rate of profit. According to
Okishio, the only way the rate of profit will fall would be if real wages rise.

22In contrast, there is no reason to think that if Marx were alive and writing today he would
write a book that would be much different than the three volumes of “Capital” plus “Theories
of Surplus Value” that we have. Of course, the concrete historical examples of capitalist
production and explanations that Marx gives would be quite different, and “Capital” written
today would be greatly enriched by the actual history of an additional century and half of
capitalist development and class struggle. But there is no reason to think that its theoretical 50
foundations would be any different.
Shaikh believes that the Okishio theorem actually assumes “perfect
competition.”

I will examine this, but next month I will take a break from my review of
this year’s (2016) new books on political economy and examine the results
of this year’s U.S. presidential and congressional election cycle and the
prospects for the U.S and world economy at the end of the Obama era in
light of the growing war threat.

——-

51
 Three Books on Marxist Political Economy
(Pt 3)
The election of Donald Trump as the 45th president of the United States, combined
with the rise of similar right-wing demagogues in Europe, has prompted a
discussion about the cause of the decline in the number of relatively high-wage,
“middle-class,” unionized industrial jobs in the imperialist core countries. One view
blames globalization and bad trade deals. The European Union, successor to the
(West) European Common Market of the 1960s; the North American Free Trade
Area; and the now aborted Trans Pacific Partnership have gotten much of the
blame for the long-term jobs crisis.

This position gets support not only from President Trump and his right-hand man
Steve Bannon and their European counterparts on the far right but also much of
the trade-union leadership and the “progressive” and even socialist left. The
solution to the problems caused by disappearing high-paid jobs in industry,
according to economic nationalists of both right and left, is to retreat from the
global market back into the safe cocoon of the nation-state. Economic nationalists
insist that to the extent that world trade cannot be entirely abandoned, trade deals
must be renegotiated to safeguard the jobs of “our workers.”

Most professional economists have a completely different explanation for the jobs
crisis. They argue that changes in technology, especially the rapid growth of
artificial intelligence in general23 and machine-learning in particular, is making

23 The term “artificial intelligence” was coined by computer scientists back in the 1950s. A rather loose
term, artificial intelligence refers to any computer program that gives a computer the appearance of
possessing human-like intelligence. In the early years of digital computers, many pioneering computer
scientists believed that it would be relatively easy to simulate virtually all the functions of the human
mind on a digital computer. For all practical purposes, machines would achieve human and then super-
human intelligence. Those computer scientists who believe that virtually all the functions of the human
mind can be simulated on digital computers are known as the “hard AI school.”

Since the 1950s, the computing power—measured by the number of computations a computer can
perform in a given period of time—has grown exponentially while the physical size of computers and
the cost-value or quantity of labor necessary to produce a computer has fallen so far that we now carry
around computers many times more powerful than the super-computers of just a few decades ago in our 52
pockets. We call these powerful computers smart phones. However, hard AI has proved stubbornly
elusive.

This has not prevented specialized forms of AI from being extremely useful in fields ranging from
beating the best human chess players and more recently beating skilled humans in the much more
difficult—for a computer—at the board game Go to the use of “expert systems” in making medical
diagnoses and the ever-growing role of computer-controlled industrial robots in factory automation.
These forms of “soft AI,” however, make no attempt to simulate the human mind in general, though
human labor increasingly unnecessary in both industrial production and the
service sector. Last year—though it now seems like centuries ago—when I was
talking with one of this blog’s editors about possible new topics for future blogs, a
suggestion was made that I take up a warning by the famous British physicist
Stephan Hawking that recent gains in artificial intelligence will create a massive
jobs crisis. This is a good place to examine some of the subject matter that might
have been in that blog post if Brexit and Donald Trump had been defeated as
expected and the first months of the Hillary Clinton administration had turned out
to be a slow news period.

It is a fact that over the last 40 years computers and computer-controlled

machines—robots—have increasingly ousted workers from factories and mines.
The growth of artificial intelligence and machine learning is giving the “workers of
the brain” a run for their money as well. This has already happened big time on
Wall Street, where specially programmed computers have largely replaced
humans on the trading floors of the big Wall Street banks. No human trader can
possibly keep up with computers that can run a complex algorithm and execute
trades based on the results of the computation in a fraction of a second.

Wall Street traders are not the only workers of the brain whose jobs are
endangered by the further development of AI. Among these workers are the
computer programmers themselves. According to an article by Matt Reynolds that
appeared in the February 22, 2017, edition of the New Scientist, Microsoft and
Cambridge University in the UK have developed a program that can write simple
computer programs.

He writes: “Created by researchers at Microsoft and the University of Cambridge,

the system, called DeepCoder, solved basic challenges of the kind set by
programming competitions. This kind of approach could make it much easier for
people to build simple programs without knowing how to write code.”

The ability of “DeepCoder” to create programs is very limited today. However,

Reynolds indicates that in the future the successors to DeepCoder’s ability to write
programs will increase enormously. “Ultimately,” Reynolds quotes Marc

they may appear to be doing so to the lay public when they are used in very specific domains such has
board games like chess and Go and beating contestants on the TV game show Jeopardy.

Recently, however, the rise of “machine learning”—for example, teaching a computer-controlled car to
drive safely on the highway without any human intervention—has revived speculation about the
possibilities of achieving “hard AI” in the coming decades.
53
BrockSchmidt, one DeepCoder’s creators, “the approach could allow non-coders
to simply describe an idea for a program and let the system build it.”

“The potential for automation that this kind of technology offers,” Reynolds quotes
MIT computer scientist Armando Solar-Lezama, “could really signify an enormous
[reduction] in the amount of effort it takes to develop code.”

In economic terms, an enormous reduction in the amount of effort means that

companies like Microsoft will be able to spend less money hiring programmers to
do “routine” coding tasks that are today done by human programmers. Everything
remaining equal, the development of this AI technology capable of writing
computer programs will radically reduce demand for computer programmers, just
like factory mechanization and automation have been reducing the demand for
factory workers since the industrial revolution.

Machine learning is actually a catch-all term that refers to a variety of computer

programming techniques. Instead of having the computer follow a fixed series of
instructions like is the case with traditional computer programs, the program
modifies the instructions it executes in response to its data. As a result, the
computer and the “robots” it controls seem to learn, much like an animal or even
a human, through practice and experience.

For example, if a computer making trades for a Wall Street bank makes a “bad
trade,” it will “learn” to avoid making the same mistake again. If the computer
wins big, it will learn from that as well, much as a human trader would. Machine
learning is not confined to Wall Street trading. Anybody who uses the Internet
experiences the effects of machine learning every day. The computers that feed
advertisements to your computer browser program “learn” from the websites you
look at what your interests are and base advertisements they send accordingly.

And now computer-controlled automobiles are learning to navigate crowded

highways. It is widely predicted that in the near future truck driver and taxi jobs
will be replaced by self-driving vehicles controlled by computers that have
“learned” and continue to “learn” to drive better and safer than human drivers
can.

As a result of the rapid progress now being made in machine learning, it is argued
by some that in the not-too-distant future there will be virtually no task now
performed by humans that machines will not do better and faster.

54
Science fiction scenarios

Some computer scientists predict and indeed fear that within a few decades
computer-controlled machines will have become more intelligent than humans in
every sense of the word. As a result, humans will be replaced not only in the
sphere of work but in every other area of human activity. The best that we flesh-
and-blood humans can hope for is that the information encoded in our brains will
be translated into huge strings of 1’s and 0’s that will be downloaded into
computers. Our minds will migrate from the biological entities in which they
developed into machines. In that sense we will “live” on. That’s the best case.

In the worst case, the intelligent machines in the spirit of Frankenstein’s monster
will decide on their own to purge the world of the very humans that brought them
into existence. It should be pointed out that many computer scientists think these
scenarios are pure fantasy, while others are on the fence.

Even if we leave aside the science fiction-sounding scenarios of “hard AI,” where
machine intelligence replaces humans entirely, most economists agree that flesh-
and-blood workers have little future in industrial production. They argue that even
if President Trump and his fellow economic nationalists succeed in vastly
increasing the share of global industrial production being carried out within the
U.S.—and other imperialist countries—the “middle-class” industrial jobs of the
1950s and 1960s will not come back. Assuming that new factories spring up in the
“rust belts” of the U.S. and Europe, these economists argue, they will be filled
with intelligent machines with hardly a human worker in sight.

Not a new process

The process by which factory workers are replaced by increasingly powerful

machinery is hardly new. It has been going on since the industrial revolution that
began in England and Scotland in the last half of the 18th century. By the early
19th century, fears were being expressed that the growth of steam-powered
mechanization would soon render most of the working class redundant. In Britain,
movements arose among workers called Luddites, led by a mythical King Lud. The
Luddites attempted to destroy the new factory machinery taking their jobs and
rendering their skills economically useless. While some machines were destroyed,
the movement was futile, since there was no stopping the creation of ever more
job-destroying machinery, which has continued right down to the present.

The (bourgeois) economists of the time argued, however, that things were not as
grim for workers as they appeared. They claimed that while ever more powerful
machinery would indeed eliminate some jobs, the machines were actually creating

55
more jobs than they were destroying. The future of the working class under
capitalism was bright because the new jobs that were created by the progress of
science and technology would be far more pleasant and better paying than the
jobs eliminated.

The economists catch up with Ricardo

Among the economists arguing that the growing mechanization was good for
workers was David Ricardo. However, upon thinking about this question more
carefully the great English classical economist, who was to exercise great influence
on Marx, reversed himself. Ricardo came to the conclusion that there was no law
that dictated that increasingly powerful machines would create more jobs than
they were destroying. The truth-loving Ricardo admitted that the introduction of
the process of replacing workers with machines could indeed work against the
interests of the working class.

In the last few years, with a lag of only 200 years, our economists in the age of
Trump, who so valiantly defend “free trade and globalization,” seem to be finally
catching up with Ricardo. These economists insist that industrial jobs of the past
are gone for good and that many other types of jobs are doomed to disappear as
“intelligent machines” begin to take over from the “workers of the brain.” They
seem to have quietly dropped their claim that powerful machines create more and
better jobs than they destroy.

What are the limits of automation?

There are really two aspects to the question of how far the replacement of workers
of both the hand and brain by machines can go. On one side, the question is a
matter of science and engineering. Can “hard AI” ever be achieved, and if the
answer is no as many computer scientists believe, what will be the limit beyond
which no “intelligent machine” can go? The other side of the question is economic.
What are the economic limits on automation that are imposed not by science or
technology but by the capitalist system? Though economists may deny it, these
are two very different questions.

What is capital?

From the viewpoint of our modern economists, capital is simply another name for
the the means of production. The very primitive stone tools made by our pre-
human ancestors more than 3 million years ago are an early form of “capital,”
they argue. The accumulation of capital, from primitive stone tools right up to the
CPUs—central processing units—that form the “brains” of our intelligent machines

56
that are increasingly capable of learning from their own mistakes, are all examples
of capital. Even specialized skills—as opposed to the general ability to work
possessed by all normal human beings—are also, according to these economists,
examples of “capital.”

According to the economists, our pre-human ancestors of 3 million24 and more

years ago—as they learned from the previous generation to make what to the
eyes of their remote descendants were crude stone tools—were accumulating
human, or in this case perhaps we should say “pre-human,” capital. (For post that
discusses “human capital,” see here.) If we go by this definition, the limits of
capital are identical to the limits of human skill and its highest manifestations in
science, engineering and technology.

In contrast to the bourgeois economists, especially those of the various

marginalist schools that have dominated the profession since the late 19th
century, Marx defined capital not as a thing or collection of things but as a social
relationship of production. This relationship has dominated production only during
a specific and relatively short period within what we now know as the more than
3-million-year history of production. In the not too distant future, this relationship
is doomed to disappear, because it is becoming a greater and greater hindrance
to the further development of production.

A century ago, during the Russian Revolution, Lenin defined socialism as soviet
power—the political power of the working class—plus electrification. At the time
Lenin coined this slogan, electricity was replacing steam power as the main motive
force in industrial production.25 A century later, we might define socialism as the
working class in power plus artificial intelligence and machine learning.

24Recently, what are believed to be extremely primitive stone tools dating back 3.3 million years have
been found in Africa. These tools were presumably made by members of the extinct genus
Australopithecus—which means southern ape because the first fossils of this genus were found in South
Africa. It is believed that one of the species of Australopithecus evolved into the genus Homo—human
beings.

It is extremely unlikely that the oldest stone tool will ever be found, so stone tool production extends
even further—nobody knows by much—into the past. Tools made of materials such as wood by
members of the genus Australopithecus or an even earlier genus that have not been preserved may be
considerably older. The history of production has deep roots that extend through human pre-history and
57
into the pre-human animal world that eventually gave rise to humanity.

25 Just as today’s machine learning and computer technology operates on top of

“electrification,” electrification operates on top of steam power. Electricity is generated by
steam-driven turbines that use electromagnetism to transform energy in the form of steam
Many visionary bourgeois figures, including the famous U.S. industrial capitalist
Elon Musk, foresee a situation arising in the near future where there will be so few
jobs that society will be forced to provide an income for all people. Musk writes:
“There will be fewer and fewer jobs that a robot cannot do better. I want to be
clear. These are not things I wish will happen; these are things I think probably
will happen. And if my assessment is correct and they probably will happen, [then]
we have to think about what are we going to do about it. I think some kind of
universal basic income is going to be necessary.”

If this happens, Musk worries it will no longer be possible for a class to exist that
has a monopoly ownership of the means of production while another class exists
that is forced to sell its labor power to the owners of the means of production.
Instead, the fruits of production will have to be distributed to the population more
or less according to their needs. Economic distribution according to human needs
will not simply become an economic possibility, it will be an economic necessity.

Whatever such a society will be, it will not be capitalist. Musk in his own way,
though we can assume he is not a communist, is admitting, though he really
doesn’t wish it, that the end of capitalism is now in sight.

What is capitalist production?

Capitalist production is a process of the accumulation of capital. Capital is a social

relationship of production that is quantitatively measured in terms of value—
accumulated abstract labor embodied in the means of production. Since value is
measured in terms of abstract human labor measured in terms of some unit of
time, capital itself is measured in terms of human labor measured in terms of
time. However, this cannot be done directly. Instead, value that is embodied in
capital, just like the value that is embodied in a simple commodity, must take
the form of exchange value—money—which is quantitatively measured in terms
of some unit of gold bullion—or other money commodity—which in turn is
measured in terms of some unit of weight. In everyday language, this means that
capital is measured in terms of dollars and cents, though only a small portion of
the total social capital consists of actual money.

The class that owns no means of production besides its ability to work—labor
power—sells its labor power to the class that has a monopoly on all other means
of production. Once the workers have sold their labor power to the capitalists, the
capitalists own all the means of production.

power into electrical energy. As far as the laws of physics are concerned, electricity is simply
a way of using steam power more efficiently.
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Under the “wages system”—another name for capitalism—the workers sell their
labor power for sums of money called wages. During part of the work day, the
workers reproduce the value of their wage but then must perform additional
unpaid labor—that is, produce surplus value.26

Even if we assume that the capitalist pays the workers the full value of their labor
power27—because the workers are fully protected by their union—the capitalist
pays for only a part of the labor the workers perform. If all labor were paid, the
capitalist would have no incentive to buy the workers’ labor power. This is the
reason that no matter how powerful and well organized the unions are, they
cannot end the exploitation of the workers by the capitalists as long as
the capitalist system lasts. At best, they can end the super-exploitation of the
working class where the capitalists fail to pay the full value of the workers’ labor
power.

The three forms capital assumes within circulation

Capitalist production is a unity of production and circulation. If there is no capitalist

circulation, there is no—at least not for very long—capitalist production. In the
course of its circulation, capital takes on successively three forms. These are (1)
money capital, (2) productive capital—the means of production, including the
purchased labor power of the workers, and (3) commodity capital, the finished
products before they are sold. A common error made by Marxist writers is to

26 A common error is to define chattel slavery as a situation where the workers—slaves—are

not paid, while free wage workers are paid for their labor. In reality, the slaves too must be
paid something or else they will perish, which would cost the slave owner the wealth invested
in the slave. The real difference between chattel slavery and the “wages system” is that under
chattel slavery the workers in their entire persons are the private property of the boss—the slave
owner—while under the wages system the workers retain ownership of their persons but are
obliged to sell for a period of the time their ability to work to a capitalist buyer.

27 Bourgeois economists and bourgeois trade unions such as the “Gomperite” trade union leadership of
the AFL-CIO define exploitation as a situation where the workers are paid less than the value of their
labor power. This occurs, for example, in the all-to-common cases where “wage theft” occurs. In the
case of wage theft, workers are exploited in the sphere of circulation. They receive less value in the
money they are paid than the value of their labor power. Marxists call such cases super-exploitation,
and we must of course strongly oppose and fight against all such cases. 59

However, even assuming the workers receive the full value of their labor power, they are still obliged
to perform unpaid labor for the capitalists. This exploitation does not occur in the sphere of circulation—
the workers receive the full value of their labor power—but rather in the sphere of production. Trade
unions, insomuch as they confine their struggle to improving the position of the workers within the
capitalist system, can at best eliminate super-exploitation but cannot end the exploitation of the workers
by the capitalists.
confuse commodity capital—inventories in everyday business language—with the
means of production the capitalist uses to produce the finished product.

It is true that industrial capitalists have to purchase the means of production—

except for labor power, which they must purchase from workers—from other
industrial capitalists or from merchant intermediaries. From the viewpoint of the
sellers of the means of production, unsold finished products, which in their
material use value later on after they have been sold are destined to function as
productive capital, are commodity capital. However, from the viewpoint of their
industrial capitalist purchasers, these same commodities once they have been
purchased and put to use are productive capital.

Industrial capitalists can only complete the cycle of (re)production by selling their
finished commodities at profitable prices. If this cannot be done, the whole process
of capitalist circulation and production—reproduction—comes to a screeching halt.
When industrial capitalists do successfully sell their commodities at their prices of
production, they have successfully transformed their commodity capital into
money capital. Only then have the capitalists made a profit. The industrial
capitalists are then in a position to start another cycle of (re)production on an
enlarged scale.

The forms of productive capital

Marx called the part of productive capital that preserves its value—though not its
use value—in the process of production constant capital. Constant capital,
however, does not create an atom of additional value, and therefore it creates no
surplus value. Physical examples of constant capital include raw and auxiliary
materials, factory buildings and machinery, farm machinery, seed, animals,
growing plants, fertilizers, mines and mine machinery. Variable capital, or sold
labor power of workers, does create value. Variable capital both replaces the value
of money capital that industrial capitalists use to pay their workers and creates an
additional value, a surplus value, which is the value produced by the unpaid labor
workers are obliged to perform for the capitalists buying their labor power.

A portion of the surplus value is then converted into

new productivecapital. According to Marx, this portion of the surplus value
converted into new constant capital grows at a faster rate than the portion
converted into variable capital. Therefore, in absolute terms on a global basis the
number of workers employed in industrial production—broadly defined—grows
absolutely but shrinks in relation to the growing scale of production.

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This does not preclude that even outside of crises the absolute number of industrial
workers might shrink in particular branches of industrial production and even in
particular countries. However, an absolute decline in the number of industrial
workers worldwide—and here industrial worker is defined broadly as all workers
that produce surplus value—must grow if capital as the fund of accumulated
abstract human labor is to grow.

The general law of the growth of industrial production, employment and

the rate of surplus value

The process by which productive workers are replaced by machines has an upper
bound set by the growth of science and technology. Not every task can be
mechanized at a given level of technology—at least not yet. It also has a lower
bound, set by the profit needs of the capitalists. The industrial capitalists are not
interested in fully utilizing existing science and technology to replace as many
workers as possible. Rather, they are only interested in realizing the highest
possible rate of profit on their capital.

Therefore, at any given level of science and technology industrial capitalists have
a “choice of technique” to use, in the bloodless terminology of the economists.
However, this choice of technique is not arbitrary, since the industrial capitalists
must always choose the technique that yields the highest rate of profit.

The workers find themselves in an increasingly desperate competition with ever

more powerful machines. The workers can only win against these machines by
agreeing (in effect) to work for the capitalists for free for an ever greater
percentage of the working day. The general law of industrial production and
employment under the capitalist mode of production, therefore, is that both
industrial production—outside of crises—and employment must grow on a global
scale, though not necessarily in every branch of industry or even in every country.
But industrial production grows faster than industrial employment.

In the competition between machines and workers, the workers must do well
enough to keep their number growing absolutely on a global basis. The more
capitalism and the productivity of human labor grows, the higher the rate of
surplus value can grow, because a given amount of value represents more
material use values. The rate of surplus value must rise so that the workers remain
sufficiently in the running in their competition against the machines so that the
value of the total capital keeps growing.

Therefore, the growing chasm between the profits, not to speak of the
accumulated wealth, of the largest capitalists, on one hand, and the rest of the

61
population, on the other, so obvious today, is not an unfortunate accident but the
inevitable result of the economic laws that govern the capitalist system. These
laws can be modified for periods of time by the class struggle, but they cannot in
the long run be negated as long as the class struggle does not lead to the
overthrow of the capitalist system.

The tendency of the rate of profit to fall

The general law of the growth of industrial production, employment and

exploitation is expressed by the tendency of the rate of profit to fall. In developing
this law, Marx was not interested in temporary effects on the rate of profit brought
about by problems involving the realization of value and surplus value in money
form. These problems are very real and periodically find expression and resolution
in the periodic crises of overproduction.

Marx considered the falling tendency of the rate of profit to be the most important
law of political economy because it points toward the inevitable end of the rule of
capital over production. Capitalist production is production for profit. Capitalists
as the necessary agents of capitalist production are—and must be—obsessed with
the rate of profit on their investments. However, the very development of
capitalism undermines the rate of profit. The law of the falling tendency of the
rate of profit implies that capitalism must with the further growth of production,
and growth in the productivity of human labor, itself driven ever forward by capital
itself, come to an end. These were Marx’s revolutionary conclusions.

Marxist economists are actually divided on Marx’s law of the tendency of the rate
of profit to fall. Many Marxists over the decades have disagreed strongly with Marx
on this point, but other Marxists have strongly defended Marx. Among the
strongest contemporary defenders of Marx’s law of the tendency of the rate of
profit to fall is Anwar Shaikh. Perhaps the most important Marxist critic of the law
of the tendency of the rate of profit to fall was Paul Sweezy, the founder of the
Monthly Review school.

Though Sweezy died in 2004 after a long and productive life, his successors at
Monthly Review have actually hardened their position in opposition to the law that
Marx considered the most important of all in political economy. In his “Theory of
Capitalist Development,” Paul Sweezy rejected Marx’s law of the tendency of the
rate of profit to fall on grounds that it was indeterminate whether the rising organic
composition of capital—which all else remaining equal lowers the rate of profit—
would be offset by the rising rate of surplus value, which all else remaining equal
raises the rate of profit.

62
Other critiques of Marx’s law of the tendency of the rate of profit to fall have
attacked the claim that capitalist development actually causes the organic
composition of capital to tend to rise. These critiques have claimed that
technological innovations are just as likely to be (constant) capital saving as
(variable capital) labor saving.

While nobody can deny the growing role of machines compared to human labor—
referred to as the technical composition of capital since the latter half of the 18th
century—it is also true that the value of machines and raw and auxiliary materials
that make up that constant capital are themselves lowered as the productivity of
human labor advances. These critics claim, therefore, that the direction of the
evolution of organic composition of capital is itself indeterminate and with it the
direction of the rate of profit.28

28 Marx was well aware that the rise in labor productivity tends to lower the value of the constant capital
and thus hold in check the growth of the organic composition, which is a ratio of values and not a
technological ratio. Marx assumed that while the value of individual machines of a given power would
fall, the total value of machinery and other forms of constant capital would grow causing the rate of
profit to fall assuming a constant rate of surplus value. The claim that the rise in labor productivity
lowers the value not only of individual machines but of the total constant capital ignores the way
technology advances in practice.

For example, when machinery was first introduced in industry the machines themselves continued to
be produced by the old handcraft methods of production. Only later was machine production of
machines themselves introduced. As a rule, new more powerful types of machines are themselves
initially produced by the old, more labor-intensive method of production.

There is also an economic reason that makes unlikely the development of the productive forces such
that the value of constant capital is lowered in such a way that the rise of the organic composition of
capital is nullified or even reversed. A fall in the value of the total constant capital relative to the total
variable capital would lead to extremely severe crises as result of the devaluation of huge amounts of
fixed capital. The severity of these crises would drive unemployment to extremely high levels. 63
The resulting increase of competition for the remaining jobs among the workers would sharply lower
wages and increase the rate of surplus value, which would slow once again the rate of growth of the
productivity of labor.

The rising rate of surplus value, therefore, along with the rate of scientific and technological change
regulates the rate of growth of the productivity of labor. The faster the potential rate of growth in the
productivity of labor the higher the rate of surplus value must be to prevent the growth in the
productivity of labor from reaching the point where it would destroy the capitalist system.

A rate of growth of labor productivity therefore emerges that is actually much slower than the rate of
growth allowed by science and technology alone. This fact shows the increasingly reactionary nature
of the capitalist mode of production. Economists and non-economists who predict that revolutionary
progress of science is about to eliminate jobs wholesale—and such predictions have been made since
the industrial revolution—don’t realize that capitalism is not about the accumulation of the means of
Okishio theorem

Another well-known attack on Marx’s theory of the tendency of the rate of profit
to fall involves the Okishio theorem, put forward by Japanese economist Nobuo
Okishio. Okishio observed that no capitalist would knowingly choose a method of
production that would lower the rate of profit. This is, of course, true. Therefore,
the only thing that would lower the rate of profit, according to the Okishio
theorem, is a rise in real wages. The Okishio theorem has never been very popular,
to say the least, among Marxists who support Marx’s law of the tendency of the
rate of profit to fall.

From a Marxist point of view, there are many problems with Okishio’s argument.
Marx never attempted to show that the rate of profit would fall if real
wages remained unchanged or even fell. Instead, in his demonstration of the law
in Volume III of “Capital,” Marx held wages in terms of value—not real wages—
steady. He showed that if the organic composition of capital rises while the value
of wages and the rate of surplus value remains unchanged, the rate of profit falls.

Marx sharply distinguished between the rate of surplus value—the calculation of

the mass of profit over the total variable capital—and the rate of profit, which
measures the mass of profit over the total capital. Therefore, Marx and Okishio
are talking about different things. Indeed, since a rise in the organic composition
of capital implies a rise in the productivity of labor, Marx’s demonstration of the
falling rate of profit implicitly assumes a rising wage in terms of use values—that
is, a rising real wage. So in a certain sense, Okishio and Marx are talking past one
another.

This, however, is not the question that interests Shaikh in his “Capitalism,” though
he does take note of it. The reason is that Shaikh’s book is about capitalist
competition. Marx had intended to write a book that would specifically deal with
competition, but as far as we know it was never written. Shaikh’s “Capitalism”
therefore, unlike Marx’s “Capital,”29 is a book about capitalist competition. In it,

production but about the accumulation of capital. And these are, as Marx knew but our modern
economists don’t, two quite different things.

29In Marx’s original vision, “Capital”—three volumes plus a book about the history of theories
of surplus value, sometimes considered Volume IV of “Capital,” was to be only one book of a
multi-book critique of bourgeois political economy. Other books forming Marx’s total critique 64
of bourgeois classical political economy would deal with such subjects as landed property and
rent, wage-labor, and the world-market, competition and crises. Each of these books was also
to have the history of the theory on their respective subjects. Shaikh observes that Marx’s
Shaikh contrasts “perfect competition” of marginalist orthodoxy with what Shaikh
calls the “real competition” of the “classical economists”—and, more importantly,
the real world. Shaikh attacks the Okishio theorem on grounds that it assumes
“perfect competition.” Shaikh demonstrates that once the theory of “perfect
competition” is dropped in favor of the “classical” theory of real
competition, Oksihio’s so-called theorem falls to the ground.

A note on terminology

Marx used very precise terminology. Unfortunately, as a rule Shaikh in

“Capitalism” does not use Marx’s precise terminology—though he does in places.
Often, Shaikh uses the vaguer terminology used by his fellow economists that
often covers up as much as it reveals.

For example, bourgeois economists talk about capital and labor as “factors of
production” as opposed to constant capital that preserves its value and variable
capital that alone produces value and surplus value. The economists, as I
explained above, define capital to be all non-human means of production plus the
skills of workers that are beyond the ability to work possessed by all normal
humans. This is doubly wrong because not only does it transform capital into an
eternal category of production but it overlooks the fact that once the labor
(power) has been sold by the worker to the industrial capitalist, it is very much a
form of capital—indeed the most important form of capital because it alone
produces surplus value. On this point alone, the vast superiority of Marx’s
terminology should be obvious to the reader.

Anybody who is familiar with Shaikh’s work knows that Shaikh is highly fluent in
both Marx’s terminology and the terminology of “modern” orthodox economics as
well as “Sraffian neo-Ricardian” economics. However, to get his work published
by Oxford University Press, Shaikh had to use terminology that would make the
work understandable to his fellow economists, who as a rule are uneducated in
Marx’s economic writings or indeed the work of the classical economists or even
Sraffian neo-Ricardian economics. The price he had to pay for this was to make
himself obscure not only to Marxist political activists, who are as a rule not
professional economists, but also in terms of clarity more generally.

In order to illustrate Shaikh’s arguments as clearly as possible—assuming I

understand them correctly—I will use Marxist terminology not only because it is

ambition far exceeded his ability to complete more than a relatively small part of it. Shaikh’s
“Capitalism” is an attempt to fill part of the gap with a book on competition and crises.
65
more familiar to most of our readers but because it is far more precise than the
economic vernacular Shaikh was obliged to employ in his “Capitalism.”

Fixed and circulating capital

In order to understand Shaikh’s attack on Okishio, we have to return to the

circulation of productive capital. During its circulation, capital must successively
assume three forms—money, productive capital and commodity capital. As far as
productive capital is concerned, classical political economy, following Adam Smith,
ignored the division of productive capital into constant and variable capital. Adam
Smith believed that constant capital could in the “final analysis” be reduced to
variable capital if you go back far enough. However, the classical economists were
very much aware of the difference between fixed and circulating capital.30

It is important, therefore, to avoid confusing the distinction between fixed and

circulating capital of the classical economists with Marx’s division between
constant and variable capital. Another common error is to imagine that circulating
capital is a reference to money capital. At least the way Marx used the terms, the
distinction between fixed and circulating refers only to productive capital.

The circulation of variable capital

Under capitalist production based on “free” wage labor, all variable capital is
circulating capital. During the paid portion of the working day, the workers on a
social scale must replace the value of the commodity capital in the form of “wage
goods” they must consume to reproduce their labor power. The portion of
the commodity capital destined to function as wage goods is commodity capital as
long as it is in the hands of the industrial capitalists—and merchant
intermediaries—but then becomes means of personal consumption in the hands
of the workers and their families.

The act of personal consumption transfers the value embodied in the wage goods
to the labor power of the workers. Unlike the capitalists, who destroy not only the
use value but the value of the commodities they use as means of personal
consumption, the workers preserve the value—though not the use value—of the

30 Marx considered Adam Smith’s claim that constant capital can be reduced to variable capital
in the final analysis to have been a major error that held back the progress of classical political
economy. However, Shaikh, who is a great admirer of Adam Smith, sees a more positive side
to Smith’s analysis on this point, because it foreshadowed the input-output models employed
by 20th-century economists. These input-output models have played an especially important
role in the work of Sraffa and other neo-Ricardian economists that Shaikh has greatly admired 66
as well as criticized throughout his career.
commodities they personally consume. The value of the workers’ labor power,
however, disappears when the industrial capitalist buyer of the labor power
productively consumes—puts to work—the labor power of the workers. However,
the workers replacethe value destroyed when the industrial capitalist consumes
their labor during the paid portion of the working day.

The circuit of variable capital is therefore money capital->variable capital->

commodity capital->money capital. Because the full value of the variable capital
is replaced with each turnover of the variable capital, variable capital forms part
of the circulating capital. Since variable capital alone produces surplus value—
though this fact is hidden from both the capitalists and the capitalist economists
by equalization of the rate of profit and consequent transformation of direct prices
into prices of production—the rate of profit on an annual basis is greatly affected
by the number of turnovers of variable capital over a year. In contrast, the rate
of profit on constant capital—once prices of production are (re)transformed back
to direct prices—is zero. No matter how many times you multiply the number zero,
you get zero.

Constant circulating capital is somewhat different than variable circulating capital.

Constant circulating capital consists, in use value terms, of both raw and auxiliary
materials. An example of auxiliary material is electricity used to power factory
machines and factory lighting necessary if industrial production is to be carried
out. The electricity, however, does not as a material use value enter physically
into the body of the commodities it helps produce. In contrast, raw material—for
example, yarn used to produce textiles—enters both physically and in terms of
value into the commodity. What raw and auxiliary materials have in common is
that they transfer their entire value in a single turnover cycle into the commodity
they help produce. Hence, they are both constant capital—they produce no value
themselves but pass on their value in a different use value form into the
commodity they are being used to produce—and circulating capital.

Fixed and circulating capital and the rise of the space capitalists

In the case of fixed constant capital, the value is transferred to the commodity
capital over more than one turnover cycle. To illustrate the difference between
fixed and circulating capital, we can look at the first attempts being made to
transform rockets used to launch satellites and the resupply of the astronauts (or
cosmonauts as the Russians called them) in space stations and exploration of
extraterrestrial bodies into a private for-profit business. A new layer of industrial
capitalists that for lack of a better term I will call “space capitalists” is beginning
to emerge, though this process is still in its earliest stages.

67
Before the coming of the “space capitalists,” rockets were used only by
governments, which were not acting as capitalists. For example, the rockets used
in the Apollo moon shots carried out by the U.S. government between 1969 and
1972 were designed to prevent the socialist Soviet Union from being the first
nation to land on and return humans from the moon. If the Soviet Union had done
that first, it would have been another political mark against capitalism in the wake
of Sputnik and the Soviet successes in sending the first man and then the first
woman into Earth orbit.

In addition, many scientists were interested in learning more about the moon and
its origins, though this was very far from being a chief interest of the U.S.
government. None of these motives, whether those of the U.S. government or the
scientists and astronauts, involved making a profit on invested capital. The rockets
used in space launches, whether the motive was political as in the case with the
Apollo launches or military such as is the case with “spy satellites,” were
discarded.

If these rockets had been used in a capitalist for-profit business—for example,

mining the moon and returning the ore to earth for refining—the rockets since
they were used once and then discarded would have functioned as circulating
capital. The entire value of the very expensive rockets would be transferred in
each shot to the commodity capital produced—in the form of ore returned from
the moon. This would have meant that “moon ore” would have a very high
individual value. In reality, the individual value of any “moon ore” would have
been so high that it would quickly be driven out of the market by far cheaper ores
obtained from the Earth’s crust by traditional mining techniques.

This is one of the reasons, much to chagrin of science-fiction writers and other
space enthusiasts, that after landing astronauts on the moon the U.S. government
suspended the program, and as of this writing almost half a century has passed
without any further human landings on the moon.

Today, however, some adventurous industrial capitalists, such as Elon Musk of

SpaceX and a few similar companies, are trying for the first time to extend
capitalist production for private profit beyond the Earth. However, if this is to
succeed, Musk and other would-be “space capitalists” must transform rockets,
which are very expensive pieces of equipment, into fixed capital that transfers
only a small portion of their value to their payload on each launch. In order to do
this, the rocket must be reusable. Only when this can be done with some degree
of reliability will the mining of asteroids and other extraterrestrial bodies have any
chance of becoming a private profitable capitalist business.

68
Calculating cost prices and the rate of profit

The rate of profit yielded by a capitalist enterprise is calculated by dividing the

profit—interest plus the profit of enterprise—over the enterprise’s total capital.
The cost price is the value of the entire circulating capital plus the portion of the
fixed capital that actually transfers its value to the commodity during one
production cycle. The cost price differs from the price of production in that cost
price is the cost that industrial capitalists incur in carrying out production, while
the price of production is the cost that society and the individual buyer of the
commodity must pay if they are to enjoy the use value of a commodity.

The difference between the price of production—assuming that it coincides with

the actual selling price—and the cost price is the profit realized on the commodity
once it is sold. This is why the terms cost price and price of production are
preferred over the term “cost of production,” which blurs this vital distinction. It
must be kept in mind that the cost price includes only the value of fixed capital
that is transfered to the commodity produced and not the total capital. In other
words, the cost price does not include the portion of the value of the fixed capital
that is not used up in production.

The rate of profit is calculated by dividing the profit by the total capital including
the portion of the fixed capital that does not transfer its value to the commodities
that are produced in a given cycle of production. From the viewpoint of the
capitalists, the value locked up in fixed capital is not really that different than
capital locked up in a long-term bank account, since the capitalist measures the
quantity of capital in terms of money—that is, exchange value.

Keeping this in mind, Shaikh gives a numerical example on page 315 of

“Capitalism” showing that if the price is high enough, the method of production
with a higher cost price but requiring less capital per commodity produced will
yield a higher rate of profit. However, as the price falls towards the cost price, the
one that has the lowest cost price becomes the more profitable method.

Shaikh assumes two methods of production, which he calls C and D2, that are
used to produce what I will call commodity X. He also assumes that commodity X
sells at 100, but let’s call it $100. Keep in mind that I am using Marxist terminology
throughout and not necessarily Shaikh’s terminology.

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While neo-Ricardians assume the method of production that is always the most
profitable regardless of selling price, Shaikh modifies his example making this
assumption to show that this is not necessarily true. Shaikh assumes the individual
cost price or unit price of our commodity X produced by method C is $78 and the
individual cost price of the same commodity produced by method D2 is $75.
Should the industrial capitalist producing commodity X use method C or method
D2?

Since the cost price with method C is $78 and with method D2 is $75, you would
think that the capitalist would choose the method with the lower cost price—
method D2. Not so fast! Remember, capitalists should always adopt the method
that yields the highest rate of profit on the total capital, which is not necessarily
the cheapest method. Is this necessarily the method with the lowest cost price?
Shaikh begins by assuming that X has a selling price of $100.

Method C has a higher cost price of $78 per unit of X as opposed to method D2’s
cost price of $75 per unit. However, method C has one advantage over D2: It is
capital saving, which we can assume is because this method has a lower organic
composition of capital than method D2. How much capital do we need to produce
a unit of commodity X with method C as opposed to method D2?

It turns out that if we produce a unit of X with method C, we need $137.50 of

capital, but with method D2 we need $157.89. Using method C, the industrial
capitalist “saves” $20.39 worth of capital for each unit of X produced. This
compensates for the higher cost price of method C—$78—versus $75 with method
D2.

Using the “capital wasting” method D2, the rate of profit is calculated by dividing
the total profit per unit, which is $25, over the total capital set in motion to produce
the profit, which is $157.89—yielding a rate of profit of 15.83 percent. But if we
used the “capital saving” method C, despite its higher cost price, the total profit
is $22 per unit and overall rate of profit is 16 percent.

It turns out that with a selling price of $100, method C yields a higher rate of
profit than method D2. Therefore, the industrial capitalist should use method C
rather than D2 because its capital saving virtues more than compensate for the
cheaper but “capital wasting” method D2.

But our assumption of a $100 selling price is after all purely arbitrary. Suppose
that C is the long-established method of producing commodity X and that every
industrial capitalist that produces commodity X makes use of it. But then an
adventurous industrial capitalist enters the market and starts producing

70
commodity X using method D2. In order to grab market share from the incumbent
capitalists that use method C, he decides to sell commodity X at a price of $84.
Buyers of X are now offered an identical version at $84 as opposed to $100.00.
Capitalists producing commodity X with method C start losing market share to
their competitor who produces with method D2. Soon all the capitalists that are
producing with the capital-saving method with the higher cost price of method C
must lower their selling price to $84 or be driven from the market.

Now which method will be the most profitable? Will the capital-saving but higher
cost price method C or the capital-wasting but cheaper in terms of cost price
method D2? At the new selling price of $84, it is now method D2 that yields the
highest rate of profit (5.70 percent) as opposed to method C’s 5.09 percent. In
terms of the rate of profit on total capital, C and D2 have changed places. Now it
is method D2 that must be adopted by all the industrial capitalists, though the
overall rate of profit has fallen from 16 to 5.70 percent. But 5.70 percent is still
better than 5.09 percent.

We should note that the cost price of using method C regardless whether the
selling price is $100 or $84 is $78, while the capital-wasting—and thus lower rate
of profit, all else remaining equal—method D2 has a cost price of $75. This means
that if the price were to fall to the cost price of D2, which is $75, D2 would break
even while C would make a loss of $3 per unit. Therefore, at a price of $84 or
lower, down to a mathematical limit of $75, cost price method D2 will yield a
higher rate of profit than method C. Indeed, at any selling price between $78 and
$75, method D2 still makes a profit while method C makes losses.

To generalize, as the selling price of any commodity falls towards the cost price,
the method no matter how capital-wasting that has the lowest cost price always
wins.

According to Shaikh, who assumes real competition, sooner or later capitalists

eager to expand their market share will adopt method D2, while according to the
Okishio theorem, which assumes “perfect competition,” capitalists will keep selling
at $100 and therefore shun the capital-wasting method D2 in favor of the capital-
saving but more profitable method C. Instead of 16 percent on their capital as
before, our poor capitalists now have to settle for a mere of 5.70 percent. In a
world where everybody after calculating his or her cost price gets to add a 16
percent “normal profit” or “interest,” why would any capitalists spoil everything
and introduce a method D2 that lowers everybody’s profit to 5.70 percent?

Before I read Shaikh’s “Capitalism” in criticizing the Monthly Review school theory
of monopoly prices, I noted that the Monthly Review school based its theory of

71
monopoly prices—imperfect competition—on the work of the marginalists—perfect
competition. While Sweezy and Baran upheld the law of labor value in the abstract,
when they got down to their concrete analysis of the economy they made no
attempt to connect prices with values.

Instead, they simply reverted to the marginalist methods they learned in their
university studies, which Baran and Sweezy assumed is compatible with Marx’s
law of (labor) value, which as we know does not directly determine prices.
According to the marginalists, the capitalists simply add the prevailing interest
rate to their cost price, which will, assuming they adopt the most efficient method
of production available, coincide with the prevailing market prices, assuming
“perfect competition.”

If competition is “imperfect,” as Baran and Sweezy assume is the case in their

“Monopoly Capital,” the capitalists are in a position to add an extra “rent” onto the
interest, which will coincide with the selling price in a market where competition
is imperfect. I believed—and now having read Shaikh’s “Capitalism” believe even
more than before—that a theory of real world concrete competition and prices
must be based on the foundations of Marx—labor value—and not the “perfect
competition” of the marginalists. In other words, how does the law of labor value
assert itself in the real world?

As Shaikh shows in “Capitalism” and his other writings, changes in labor values
explain about 80 percent of changes in prices of production using realistic
assumptions. It does so precisely through the process of real competition and not
the fantastic theory of “perfect competition” of the marginalists.

Unfortunately, in the last and weakest part of Shaikh’s “Capitalism” mistakes

he makes on money and price—the form of value—causes Shaikh to fall short in
his analysis. But here we see the real strength of Shaikh’s arguments—once we
correct for Shaikh’s errors we will see that his case against perfect-imperfect
competition in favor of real competition is vastly strengthened.

Foreign trade

Next month, I will deal with Shaikh’s views on foreign trade. Shaikh completely
rejects bourgeois economic orthodoxy, which is based on the theory of
“comparative advantage.”

The economists use the supposed law of comparative advantage to show that free
trade is in the interests of all nations. According to the theory of comparative

72
advantage, to put a nation first—like U.S. President Donald Trump does with his
“America First” slogan—makes no economic sense.

Shaikh, however, rejects the theory of comparative advantage, holding that it is

absolute not comparative advantage that determines which capitalists emerge
victorious in the battle of competition, whether this battle is fought out within the
borders of the nation state or on the world market where the competing capitalists
belong to different nation states.

If Shaikh is correct, then international trade is a highly antagonistic process.

Perhaps President Trump—and other economic nationalists like Bernie Sanders—
do have a point if we assume that we are operating in the cutthroat world of
capitalist competition as opposed to a socialist world based on international
cooperation. I will deal with this crucial subject and its implications in next month’s
post.

_______

73
 Three Books on Marxist Political Economy
(Pt 4)
The wave of reactionary racist economic nationalism represented by the British
“Brexit” and election of Donald Trump to the U.S. presidency has drawn attention
to the question of world trade. Most capitalist economists are supporters of “free
trade.” So-called free-trade policies have been protected and encouraged by what
this blog calls the “U.S. world empire”—and what the economists call “the
international liberal order”—since 1945. These policies followed an era of intense
economic nationalism among the imperialist countries that led to, among other
outcomes, Hitler’s fascism and two world wars within a generation.

Bourgeois economists who support free trade—the majority in the imperialist

countries—claim that international trade is governed by an economic law called
“comparative advantage,” first proposed by the great English economist David
Ricardo.

The “law” of comparative advantage makes two basic claims about world trade.

The first is that the less role capitalist nation-states and their governments play
in international trade the more the international division of labor will maximize
labor productivity.

The second is that regardless of the relative degree of capitalist development

among capitalist nation states, all such states benefit equally if they engage in
free trade. In terms of government policy, this means that regardless of their
degree of capitalist development, the best policy is no protective tariffs, no
industrial policies, and no interference in the movement of money from one
capitalist country to another.

In contrast, economic nationalists in the imperialist countries both right and left,
though they sometimes claim to have nothing against free trade, insist that it
must be “fair trade.” For example, President Trump insists that since 1945 global
trade has been increasingly unfair to the United States, leading to the collapse of
much of U.S. basic industry. Trump promises to change this and wants more
government intervention in international trade, such as border taxes and other
tariffs to make sure that trade is “fair.” This will, the Trumpists claim, lead to re-
industrialization of the United States and the return of good-paying industrial jobs.

Anwar Shaikh is a native of Pakistan, a country oppressed by imperialism that has

a very low level of capitalist development. Many economists from such countries—

74
among them Shaikh—claim that free trade prevents their countries from
developing along capitalist lines.

Shaikh, however, is not simply a “pro-development” economist from a

capitalistically underdeveloped country advocating high protective tariffs,
industrial policies, and neo-mercantilist capital controls that aim to accelerate
national capitalist development. He is a Marxist who wants to see the whole global
capitalist system replaced by a world socialist economy.

In his “Capitalism,” Shaikh develops a Marxist critique of the neo-classical

marginalist theory of “prefect competition” and contrasts it to what Shaikh calls
real competition. Shaikh is a strong opponent of the Ricardian and neo-classical
theory of comparative advantage.

Shaikh’s treatment of world trade and competition is found in the chapter entitled
“International Competition and the Theory of Exchange Rates.” Despite the dry
title, the subject is loaded with tremendous political implications for the world
today. While the U.S. has long lectured oppressed nations about the necessity to
follow free-trade polices, Shaikh points out that neither Britain, the dominant
capitalist country in the 19th century, nor the United States, which played the
same role in the 20th century, practiced free trade in the period leading up to their
emergence as leading capitalist industrial nations. “In the heyday of its [Britain’s]
development from the early 1700s to the mid-1800s,” Shaikh writes, “it used trade
and industrial policies similar to those subsequently used by Japan in the the late
nineteenth and twentieth centuries, and by [South] Korea in the post-World War
II period.” (p. 493)

The same is if anything more true of the United States, the world’s great
champion—at least before Trump—of free trade after 1945. Shaikh quotes Korean
economist Chang Ha-Joon, who writes, “Criticizing the British preaching free trade
to his country, Ulysses Grant, the Civil War Hero and US president between 1868-
1876, retorted that ‘within 200 years, when America has gotten out of protection
all that it can offer, it too will adopt free trade.'” [p. 493]

Indeed, Chang points out that between 1860, the year that saw the election of
the first Republican president, Abraham Lincoln, and the end of World War II,
which saw the rise of the American world empire, the U.S. “was literally the most
heavily protected economy in the world.” Therefore, protectionist policies didn’t
work out so badly for the Britain and the United States during their rise.

But what about the countries that follow free-trade polices at the insistence of the
U.S. and its subordinate agencies such as the IMF? Have such policies led to better

75
results than the “faulty” policies followed by Britain and the United States when
they were rapidly developing capitalist nations? Shaikh explains and backs it with
data that not a single capitalist country since World War II has done well following
free-trade policies.

Have the policies insisted upon by what is sometimes called “the Washington
consensus”31 of avoiding “neo-mercantilist” capital controls encouraged capitalist
development among the oppressed countries? Shaikh quotes Turkish economist
Dani Rodrik that eliminating capital controls “leaves the real exchange rate [the
relationship between prices in different nations when the prices are measured in
terms of a common currency—SW] at the mercy of fickle short-term capital
movements.” [p. 494].

Translated from academic language, the sudden withdrawal of money capital from
capitalist nations leads to soaring interest rates and sudden contractions in their
home markets, resulting in deep recession-depressions that create massive
unemployment and wreck their economies. Contrary to the teaching of most
economists, concrete history shows successful capitalist development requires
protectionist policies that assure local industry a monopoly on the home market,
subsidies to the most promising industries—industrial policies—as well as “neo-
mercantilist policies” that prevent the removal of money from the country. This is
true despite the preaching of the virtue of free trade and “fallacies” of mercantilism
that anybody who takes an introductory economics course in high school or college
is exposed to.32

Concrete real-world economic history shows that it is actually “pro-development”

economic policies that combine protective tariffs or other measures designed to
give local industry as much of a monopoly on the home market as possible, as
well as neo-mercantilist policies designed to prevent the removal of money from
the country, resulting in a home market representing a larger fraction of the world
market—though at the expense of other capitalist countries—that enables

31 When I refer to “Washington” in this context, I am referring to pre-Trump Washington.

However, there is no reason to believe that economic nationalists like Trump are any more
inclined to be friendly to developing capitalist countries that make use of protective tariffs,
industrial policies, and neo-mercantlist capital controls to accelerate their development than
their free-trade opponents.
32I remember when in high school I learned that mercantilists believed that gold and silver
were the only forms of wealth. Fortunately, Adam Smith came along and explained what every 76
child knows, that wealth consists of things that are really useful, not bars or coin made of gold
and silver stored in bank vaults doing absolutely nothing.
capitalistically backward countries to make the transition to capitalistically
developed countries.

In contrast, capitalistically backward countries that have chosen to follow the

advice of “economic orthodoxy”—or in reality have been forced to follow this
advice—by tearing down their tariffs walls and making their currencies
“convertible,” thus allowing money and money capital to flow freely in and out of
the country, have remained capitalistically backward and even retrogressed.

Today, as regards the level of capitalist development, the countries of the world
can be divided into three categories. First are the old imperialist capitalist
countries that are past—often well past—their industrial peak. Britain, the former
workshop of the world, is the leading example of an imperialist country that
once dominated global industrial production. Its industrial production has
largely collapsed, leaving ruined lives and despair in its wake. But the list of
countries past their industrial peak also include the United States, the countries
of West Europe, with the partial exception of Germany, and increasingly Japan.

The second category are countries that have retained many of the features of
oppressed countries but in the last few decades have experienced rapid spurts of
capitalist development through a combination of protective tariffs, industrial
policies, and neo-mercantilist capital controls.33 These countries include but are
not limited to China, though there are now signs that the period of the rapid
development of Chinese capitalism is now past its peak; India; and South Korea,
where rapid capitalist development also seems to have peaked.

A third category is comprised of the severely oppressed countries that have a very
low level of capitalist development and are not catching up with the advanced
capitalist countries but on the contrary are falling further behind. This category
includes many countries that retain numerous pre-capitalist features and have
never experienced more than a very limited and stunted capitalist development.
One way or another, the majority of countries on the planet fall into this category.

Included in this category are the countries that had been building socialist
economies before 1989 but then suffered political and social counterrevolutions
that brought a return to capitalist property relations accompanied by massive

33A sudden large outflow of money capital from a capitalist nation invariably leads to a massive
contraction of the home market, crippling its industry and causing massive unemployment.

77
declines in industrial and agricultural production. These countries also have failed
to achieve much in the way of capitalist development.

This raises an important question about countries like Britain and the United States
that have experienced decades of industrial decline. Could a combination of a
return to protective tariffs and other trade restrictions, industrial polices and
perhaps even neo-mercantilist capital controls give capitalism in these countries
a second “industrial youth”? The new U.S. president, Donald Trump, and other
economic nationalists of both the right and left give an affirmative answer to this
question.

What would be—and we may soon have a real-world experiment if Trump and the
other economic nationalists in his administration succeed in implementing them—
the consequences of policies designed to encourage re-industrialization of the
capital-rich but industrially decaying imperialist countries? This will be a question
that I will examine at the end of my extended reviews of Shaikh’s “Capitalism”
and John Smith’s “Imperialism.”

The capitalist nation-state as an economic category

The nation as an organizational unit of human society has its origin in pre-history.
It began as a group of tribes that have a real or mythical common ancestor. In its
origins, the nation is the the ultimate extended family. With the transition to class
society, the nation was transformed into a group of people living in a common
territory. In antiquity, however, this did not take the form of a large common
territory inhabited almost exclusively of people who shared a common nationality
as is the case with the modern bourgeois nation-state. Rather, it constituted
people living in a city state. Well-known examples are Athens, Rome and
Jerusalem.

Some of these city-states, such as Rome, for example, conquered territories

comparable in size to a large modern nation-state. But these states were empires
where people from the ruling city-state oppressed peoples of other nationalities.
For example, the people who lived in the Roman Empire, unlike the citizens of a
modern capitalist nation-state, did not speak a common language or share in
Roman citizenship34

34Latin, the language of Rome, was widely used as the official language only in the western
part of the empire while Greek continued to be used as the official language in the east.
Numerous other languages were spoken by peoples who lived under Roman rule. This is in
contrast to the situation of modern bourgeois nation-states. For example, the standard Italian 78
Here I am not dealing with the various non-capitalist forms of the nation but only
with capitalist nation-states. What are characteristics of a modern capitalist
nation-state?

First, a capitalist nation-state occupies a large contiguous territory that is far

larger than the area occupied by city-states—though not necessarily empires—of
antiquity. In addition, unlike ancient empires the people of a capitalist nation-state
share a common nationality. They speak a common language, which facilitates
the exchange of commodities—carrying on business. Within the capitalist nation-
state, there is a common currency and a lack of internal trade barriers. It must be
large enough both in territory and population so that the home market can support
capitalist industry.

A sense inherited in part from the earlier pre-capitalist forms of the nation and
preserved among the citizens of a capitalist nation-state is that we are a “common
people”—a kind of extended family.35 A sense that “we are all in this together” is
cultivated. Patriotism or “love of country” is defined as the highest virtue while
treason to “country”—the capitalist nation-state—is seen as the greatest of crimes.

Not all modern capitalist states are pure nation-states. Great Britain arose as a
mini-empire that consisted of four nations—England, Wales, Scotland and
Ireland. Originally, these nations had four separate languages. However, the
English nation oppressed the other three and gradually imposed its language on
all of them.

This did not prevent Ireland developing a strong national movement in opposition
to English oppression and eventually breaking away. Speaking for the Bolsheviks,
J.V. Stalin in his famous 1913 work “Marxism and the National Question”
expressed the view that Wales, Scotland and England had become a single British
nation while Ireland with its strong nationalist movement was a separate nation.

However, the current strong movement for an independent Scotland, now

invigorated by the Brexit vote, casts some doubt on Stalin’s 1913 assertion that
Scotland and England along with Wales had in fact merged into a single British
nation. Though this seemed to be true in 1913, the demise of the English empire
and overall weakening of British imperialism have led to today’s resurgence of
national feeling in Scotland and growing resistance to English domination. Like all

used in modern Italy is understood by all Italians, standard German throughout Germany,
English in the United States, Russian throughout Russia, and so on.
35 In the United States, George Washington is sometimes referred to as the “Father of the

Country,” and he together with other early U.S. leaders are called the “Founding Fathers,” as
though they were the actual ancestors along the paternal line of all current U.S. citizens. 79
things, a sense of nationality among people living in a certain territory isn’t
something fixed for all time but is subject to development, decline and even
reversal as circumstances change.

The world market and the capitalist nation-state as economic categories

In principle, the rise of the world market, beginning with the discoveries of gold
and silver—money material—in the 16th century, could in theory have led to the
emergence of one political entity—a true world capitalist state to match the
emerging world market. However, conditions that prevailed during that time, and
even today, did not allow such an optimum development—at least not on this
planet.

Under the concrete historical circumstances prevailing back then, the world
market splintered into various national “home markets.” These home markets to
varying degrees walled themselves off by protective tariffs and mercantilist
policies that aimed at maximizing the quantity of money—gold and silver—in the
home market so that it would constitute as large a percentage of the world market
as possible, while at the same time assuring the dominant position of local
capitalist industry within the home market.

The capitalist nation-state as an engine of economic development

In this way, the development of capitalism was greatly accelerated within the
territories of the most powerful emerging capitalist nation-states but greatly
retarded elsewhere. From the beginning, the capitalist nation-state was, like all
states, an organization of force and violence. During the mercantilist era, the
capitalist nation-states used force to separate the direct producers—mostly
peasants—from their means of production, thus forming the proletariat that
gave birth to capitalist production. Marx stressed the central role that violence
played in the birth of the capitalist mode of production, debunking bourgeois
falsified history to the contrary.

Force also played no small role in the formation of the capitalist home markets.
For example, tough laws were passed that greatly restricted the ability of
individuals to take gold and silver coins out of the country, while stiff protective
tariffs, government trade monopolies, and other trade restrictions were
implemented to ensure national industry had as much of a monopoly of the home
market as possible. Wars were often fought among emerging capitalist states with
the aim of further expanding the home market while contracting the home markets
of rivals.

80
The difference between political and military competition between
capitalist nation-states and economic competition between capitalists

Shaikh points out that “orthodox economists” treat competition between

capitalists located in different capitalist countries as though it is competition
between capitalist nation-states. This is a very important point. Economic
competition between capitalist nation-states is always in the final analysis
economic competition between the capitalist enterprises that happen to be located
in the different nation-states.

In the study of competition, however, it is extremely important to distinguish

between the political and military—war-making—competition between capitalist
nation-states and economic competition between capitalists. An example of
confusing these two types of competition is N.I. Bukharin’s concept, strongly
colored by World War I, of capitalist nation-states in the age of imperialism as
state-capitalist trusts.

Within an economic trust, all enterprises that belong to the trust are controlled by
a single capital, which eliminates economic competition within the trust. However,
even in the imperialist epoch competition between capitalist enterprises continues
within each individual capitalist nation-state. On the other hand, the political and
military competition that occurs between capitalist states, whose “highest” form
is a shooting war, is by no means identical to economic competition among
capitalist enterprises.

Economic competition—the main subject of Shaikh’s “Capitalism”—is inherent in

all commodity production. Capitalism is defined as the highest form of commodity
production where labor power has become a commodity. Economic competition in
a capitalist economy occurs on many different levels.

There is the competition between individual capitalist enterprises. These range

from individually owned enterprises—in this case the competition between
individual enterprises is also competition between individual capitalists—as well as
competition between the collective capitalists known as corporations. Even if
individually owned capitalist enterprises disappeared—which is the historical
trend—and only corporations existed, there would still be competition between
individual capitalists on the stock exchange, where all traders aim to relieve their
fellow traders of a portion—or all—of their capital.

In capitalist society, we have competition between buyers and sellers and between
buyers and between sellers. And as every trade unionist knows, even in a fully
capitalist society made up only of capitalists and wage workers, competition

81
between buyers and sellers and between buyers and between sellers is not limited
to competition among capitalists. We also have economic competition between
workers for jobs. Indeed, anybody who has ever applied for a job has engaged in
this type of competition. Trade unions aim at eliminating economic competition
between the sellers of the commodity labor power among union members. And
these days, we shouldn’t forget that the whole racist phenomena of “white”
workers voting for far-right politicians in the U.S. and Europe is ultimately rooted
in the economic competition between owners of the commodity labor power for
jobs.

Competition between nation-states

Capitalist nation-states, which are above all organizations of force and violence,
do not primarily function as commodity owners. Competition between capitalist
nation-states therefore involves a form that is different than the competition
among the owners of commodities. This is true despite that fact that the non-
economic competition between different capitalist nations is ultimately driven by
economic competition between groups of capitalists that control the various
nation-states for markets, raw materials, money material and, not least, cheap
labor power.

The main function of the capitalist state, like all other types of state that preceded
it, is holding down by force the oppressed class that produces the surplus product,
which under capitalism takes the form of surplus value. A secondary function of
the modern capitalist state is to regulate the competition among individual
capitalists by keeping it within the channels of economic competition. That is, the
capitalist state acts to prevent individual capitalists from using violence against
their competitors. In order to achieve this, the state must keep the most powerful
means of destruction in its hands and out of the hands of the individual capitalists
and their direct agents.

In order to accomplish this task, states set down certain rules of the game of
competition that all capitalists operating in its territory must obey. Very important
in this regard is the enforcement of contracts. Suppose capitalist Y refuses to pay
a debt to X, claiming that the alleged debt is not a valid contract. Instead of hiring
a thug that makes Y an offer that cannot be refused, X sues Y in court. Let’s
assume the court decides in X’s favor. Faced with the overwhelming force of the
state power, capitalist Y pays capitalist X. If, however, the court decides in favor
Y, it is now X who is faced with the overwhelming state power. X has no alternative
but to write off the debt and move on.

82
No matter what the decision of the court, the potential for violent conflict between
X and Y is avoided. If the state did not play this role, the risk of doing business
would be high indeed. It would not only be the capital of contending capitalists
but their very lives that would be at risk. In that case, individuals who now function
as capitalists would in many cases prefer to hoard gold coins rather than invest
profits in their various enterprises and carry out expanded capitalist reproduction.

There is one case where the state does not play the role of enforcing contracts
and regulating competition among the competing capitalists. That is the case
of capitalists who are engaged in illegal activities. These illegal business activities
are called “organized crime” or “the rackets.” Remember, however, that what is a
legal or illegal branch of activity can change over time.

I will use organized crime in 20th-century New York City as an example, since
much of this history is well documented. I spent my young adulthood in late 20th-
century New York City. In those days, it was a rare day that the newspapers did
not report the finding of a body of a slain “mobster” in the trunk of an automobile
or dug out of an empty lot. Mobsters are actually aspiring capitalists engaged in
their own process of primitive capital accumulation who are forced by various
circumstances to operate outside the protection of the law. The aim of each
mobster is to accumulate enough capital through illegal means that will later
enable them or at least their children to “leave the life” and enter into legal or
“legitimate” branches of business.

Back in the 1920s, the outlawing of the production and sale of alcoholic beverages
in the U.S.—known as Prohibition—suddenly opened vast opportunities for young
aspiring would-be capitalists from the lower classes. A certain number of young
candidate members of the capitalist class were willing to take exceptional personal
risks in order to become full-fledged members of the capitalist class. In the 1920s,
unlike before—or since—thanks to Prohibition they could enter into very profitable
but at the time illegal business dealings—the production and sale of alcoholic
beverages.

These young capitalists—and would-be capitalists—who engaged in illegal

businesses were called by the newspapers owned by “legitimate” capitalists “the
mob.” Without the protective functions of the state that limited the competition
that raged among them to economic competition, the young booze capitalists of
the Prohibition era engaged in widespread “armed struggle”—mob wars—as they
battled for territory— markets—for the illegal commodity they dealt in—booze.

83
Eventually, one of these “mobsters,” Charles “Lucky” Luciano and his boyhood
friend Meyer Lanksy36 organized a “commission” that established certain rules of
the game and attempted to end the mob wars so that the “mobsters” could
concentrate on business.

The commission, just like a proper state, had an enforcement arm that acted as
an internal “mob” police force. This “mob police” was dubbed “Murder
Incorporated” by the sensationalist New York press, which loved to cover “the
mob” and its wars. If the commission decided it was necessary, “Murder
Incorporated” would carry out a “hit” on—murder—individual mobsters who
violated the “laws” established by the commission. Unlike a “real” capitalist state,
there was no practical way for the commission to imprison offenders beyond short-
term kidnappings, so liberal use had to be made of the death penalty.37

36 The “mob” was generally made up of people who were not the descendants of the English settlers,
who make up the core of the “American” nationality. Instead, they were often first-generation European
immigrants who were not—or not yet—considered real “English” Americans. These included Irish
immigrants—the original “mob”—Italians, made famous by the “Godfather” novel and movies and the
later “Sopranos” TV series, and east European Jewish immigrants. Luciano was an Italian immigrant
while his close friend Lanksy was an east European Jewish immigrant. Eventually, Luciano was
deported to Italy, where he died in 1962.

In later life, Lansky became notorious for his ownership of Cuban casinos, hotels and night clubs that
catered to wealthy U.S. tourists while the overwhelming majority of the Cuban people lived in deep
poverty. Cuban dictator Fulgencio Batista was a close associate of Lanksy and protected the U.S.
mobster’s Cuban investments. Lansky lost much of the fortune he had accumulated as a mobster when
the Cuban Revolution closed down his casinos and expropriated his empire of night clubs and hotels.

Not surprisingly, Lansky was no fan of the Cuban Revolution, which he denounced as “Communist” as
soon as his friend Batista fled Cuba. Late in life, he attempted to find refuge in Israel but was refused
entrance at the insistence of the U.S. government. He eventually died in the U.S. in 1983.
84
There were also a few African-American mobsters in 20th-century New York, but their activity was
confined to Harlem. Mirroring the racist structure of U.S society in general, these mobsters played a
role subordinate to the mobsters of Irish, Italian and Jewish origin.

37 This analogy is not the whole story, because the “mob” also made use of the official police. Even in
the late 20th century, different mob families often controlled or had friendly relations with the police
that operated in their territories. Naturally, the men in blue expected to be paid for the services they
rendered their mob employers.

In addition, the New York mob wielded great influence within New York City’s Democratic Tammany
Hall political machine, which dominated the city’s politics
through most of the 19th and 20th centuries. The mob, therefore, not only created its own parallel state
structures but also enjoyed influence within the official state structures. But as long as their political
The U.S. world empire has since 1945 worked on exactly the same principles the
New York “mob” employed in the days of Luciano and Lansky. Each individual
capitalist nation-state is analogous to an individual crime “family” or gang. The
families or gangs “organized” as individual street-level criminals can be compared
to capitalist nation states. The street-level criminals can be compared to individual
capitalists and corporations. The “commission” can be compared to the World
Trade Organization and the Security Council of the United Nations, while NATO
and various UN “peacekeeping operations” can be compared to “Murder
Incorporated.”

The big difference between the 1930s-era Murder Incorporated and NATO and UN
“peacekeeping operations” today is one of scale. The residents of “mob-ridden”
1930s New York City never had to worry about not waking up in the morning
because some mob war had led to the detonation of a nuclear bomb overhead that
transformed the city and every living creature in it into lifeless radioactive nuclear
ash during the night.

Competition between capitalists in the same country versus international

competition between different countries

We therefore have to distinguish between economic competition between the

capitalists and the political and military competition among different capitalist

influence was not enough to get their “rackets” legalized, there was always the chance that competition
between the various mobsters would break out into open warfare in the streets, which happened quite
often.

An example of mob “rackets” being legalized is provided by the city of Las Vegas, Nevada. The small
Nevada town was converted into “sin city” by Luciano and Lansky’s boyhood friend, the professional
hit man Benjamin “Bugsy” Siegel. According to biographers, Siegel had tried to go “legitimate” in the
late 1920s but was frustrated by the large stock market losses he suffered as a result of the “crash of
’29.” Instead, he became a leading figure in “Murder Incorporated” during the 1930s before moving to
the West Coast.

After World War II, Siegel founded the Pink Flamingo hotel in Las Vegas, becoming in effect the
founder of modern Las Vegas. However, Siegel, though a talented hit man, proved to be an inept
businessman. As a result, he couldn’t repay his debts to his mobster bankers. According to some mob
historians, a “commission” meeting that included both Lanksy and Luciano held in Havana, Cuba, in 85
1946 authorized a “hit” on Siegel. In any event, in 1947 Siegel was “hit”—murdered—while he was
staying at the Beverly Hills mansion of his mistress—he was cheating on his wife—Virgina Hill.

Today, the gambling “racket” is perfectly legal in Las Vegas, and the city is thriving. The capitalists
who operate the hotels and the gambling “racket” in Las Vegas are perfectly legal “legitimate
businessmen” these days. If any of them were to face bankruptcy and be unable pay their debts, they
would at worst face foreclosure not murder.
states that represent different “families” or “gangs” of competing capitalists. In
his “Capitalism,” Shaikh is interested in economic competition between industrial
capitalists and not political and military competition among various capitalist
nation-states. He correctly criticizes bourgeois economics for forgetting that
economic competition is always in the final analysis competition between different
individual capitalist enterprises, with each capitalist motivated by the need to
maximize the rate of profit on his or her capital.

The question that Shaikh is interested in is whether the economic competition

between capitalists located in different nations is governed by the same laws that
govern competition between capitalists located in the same country—as Adam
Smith thought—or whether the laws that govern economic competition between
capitalists located in different nations are fundamentally different, as David
Ricardo and most modern bourgeois economics believe. Shaikh comes down firmly
on the side of Smith.

Adam Smith believed that economic competition between capitalists located in the
same country and capitalists located in different countries is governed by what
Shaikh calls absolute advantage. Absolute advantage is determined by a
combination of the conditions of production—which ultimately comes down to the
quantity of labor (individual value) that an industrial capitalist requires to produce
a commodity of a given use value of a given quality and the price the capitalist
must pay for the commodity labor power—wages.

According to the theory of comparative advantage, first advanced by David

Ricardo and supported by the majority of economists today, a different economic
law prevails in international trade, called comparative advantage. According to
comparative advantage, capitalists of a nation that can produce commodities of a
given use value and given quality at higher cost prices in the absence of
international trade will still win the battle of competition in the branches of
production where in the absence of international trade the differences between
their cost prices and the cost prices of the capitalists of the more favored nations
is least. (For a more detailed explanation, see here.)

Comparative advantage depends on the quantity theory of money

The supporters of comparative advantage—if they are consistent—hold that this

happy result comes about because of the alleged determination of the general
price level, including wages, by the ratio of the quantity of money within a given
country and quantity of commodities. It is this alleged economic law—the quantity
theory of money—that transforms the law of absolute advantage into comparative
advantage. Keynes, who was a very intelligent man, late in life came to reject the

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quantity theory of money. Shaikh points out in “Capitalism” that Keynes also
rejected the law of comparative advantage. Indeed, in his “General Theory”
Keynes criticized free trade and openly defended the mercantilists, who had long
been subjected to ridicule by official British economic orthodoxy.

The element of truth in the theory of comparative advantage

There is an important element of truth in the theory of comparative advantage.

The law of comparative advantage would operate if the global economy functioned
like a factory that employs workers of different skills and whose manager is
instructed by the factory owner to employ all the factory’s workers—nobody can
be fired because of their low level of skill. Within this constraint, the manager is
then instructed to maximize the productivity of the workers and thus the physical
output of the factory. Unfortunately, for the claims of comparative advantage, the
world capitalist economy does not operate on the principles of such a factory.38

As mentioned above, the claim that comparative advantage governs international

trade in a capitalist country depends in the final analysis on the truth of the
quantity theory of money. Without the quantity theory of money, there is no
mechanism that can transform absolute advantage into comparative advantage.

Quantity theory of money

The quantity theory of money holds that virtually the entire money supply of a
nation is fully absorbed into circulation as currency and circulates at the maximum
velocity that the given development of the banking system within the nation
allows.

Ricardo argued that it would be irrational for an individual capitalist to ever hoard
money, since a capitalist gets rich by employing capital in an active business—
producing and appropriating surplus value—as opposed to hoarding it in the form
of money. Hoarding money at best preserves the value of capital.39 But under
capitalist production, the whole point is to expand the value of one’s capital.

38 Ricardian comparative advantage, though it paints a false theory of the operations

of capitalist world trade, will certainly be taken into account in the future when general plans
are drawn up for the world socialist economy. The theory of comparative advantage is therefore
an example of a tendency—noted by Marx—of bourgeois economists assuming that the
capitalist economy is actually a socialist economy. This is done, whether consciously or
unconsciously, to cover up the contradictions of the capitalist system.
87
39 In Ricardo’s time, virtually all active capitalists were men.
Therefore, Ricardo reasoned, capitalists gets rid of any money they get hold of as
soon as possible. As for workers, they are forced to spend the money they receive
in wages as soon as possible, otherwise they would starve. Following Ricardo’s
reasoning, competition—or starvation in the case of workers—will quickly
eliminate any persons that attempt to hoard money.

Therefore, Ricardo believed that we can be pretty sure that all the money in a
country is drawn into circulation. Making these assumptions, the quantity theory
of money claims if you double the quantity of money within a nation, without
changing the quantity of commodities in circulation, the level of nominal prices
including the price of labor (power)—wages—will double, but nothing else will
change. If you halve the quantity of money without changing the quantity of
commodities in circulation, nominal prices including wages will fall by 50 percent,
but nothing else will change.40 The claim associated with the quantity of theory of
money that changes in the quantity of money only effects changes in nominal
prices and wages but has no effect on real wealth is called by the economists “the
neutrality of money.”

Closely associated with the quantity theory of money among modern economists
is the claim that there can be no general overproduction of commodities because
the price mechanism, which is allegedly very sensitive to any lack or excess in
effective demand, will guarantee that prices will always gravitate to a level where
supply and demand equalizes.

The law of absolute advantage

On average—not in individual cases—dead labor, labor already objectified in

means of production, is fully paid for. This is not the case with living labor,
however. The industrial capitalists pay for only a fraction of living labor—namely
the amount they pay for the labor power of the workers and not the actual labor
the workers perform for the capitalists. If the workers’ do not perform additional
unpaid labor that produces surplus value, their labor power has no use value for
the capitalists. This is why even under ideal conditions trade unions cannot
eliminate capitalist exploitation as long as they operate within the capitalist
system, as opposed to acting as levers to overthrow the system.

40Ricardo assumed that all this would occur quickly without major friction. Modern champions
of the quantity theory of money such as the late Milton Friedman, who in spite of mountains
of evidence to the contrary still defend the theory, claim it is true only in the “long run” though,
they say, there can considerable frictions in the short run. Among these “frictions,” according
to Friedman, was the 1930s Great Depression. 88
The industrial capitalists who win the battle of competition as a rule are therefore
those who can produce a commodity of a given use value and quality at the lowest
cost-price. The cost price consists of the price of labor power—wages—plus the
cost of those elements of circulating constant capital—raw and auxiliary
materials— plus the quantity of fixed capital that are used up, but not the total
quantity of fixed capital that must be set in motion to produce a unit of a given
commodity.

How Ricardo used the quantity theory of money to transform absolute

advantage into comparative advantage

Suppose that the world monetary system consists of circulating full-weight gold
coins. To further simplify, let’s also assume that the wages of labor—the value of
labor (power)—are equal in all countries. Therefore, Ricardo assumed that the
countries where the industrial capitalists who produce commodities with the least
quantity of labor—the lowest (national) value—will have an initial advantage and
will run trade surpluses while countries that produce commodities at the highest
national values will be at an initial disadvantage and will run trade deficits.

The countries that run trade surpluses, according to Ricardo’s assumptions, will
experience an inflow of gold coins, which will result in a rise in their money
supplies. As their money supplies increase, according to Ricardo’s assumptions,
general price levels rise, which will include a rise in the price of labor (power)—
wages. Countries that are disadvantaged will experiences trade deficits, which will
cause gold coins to flow abroad. As their money supplies decline, so will their
prices and wages. These flows of gold coins will continue until a distribution of
gold coins—money—is achieved where trade is balanced among all nations
engaged in international trade. Thanks to the quantity theory of money, absolute
advantage has been transformed into comparative advantage.

As Britain achieved an overwhelming absolute advantage due to the industrial

revolution, Ricardian comparative advantage and its associated free-trade
doctrine that the government should play as little role as possible in foreign trade
banished mercantilism from “official” British political economy.

The ‘currency school’

In Ricardo’s time41, banknotes convertible into gold were increasingly replacing

actual gold in circulation. After the death of Ricardo in 1823, the “currency school,”

41Under the Bank Restriction Act of 1797-1821, the convertibility of the Bank of England’s notes into
gold was suspended, making these notes in effect paper money, much like the Bank of England’s notes
89
which based its ideas on Ricardo’s teachings on the quantity theory of money and
comparative advantage, arose. The currency school insisted that the Bank of
England—which was increasingly monopolizing42 the issue of banknotes—should
behave exactly like the quantity of gold coin would in a pure gold coin system.
This meant that when gold flowed into its vaults, the Bank of England should
increase the quantity of its notes, and when gold flowed out it should contract its
note circulation. The currency school was victorious with the passage of the Bank
Act of 1844, which obliged the Bank of England to carry out its monetary policy
according to the currency school’s teaching.

The “currency men” as they were called—there were no currency women,

apparently—claimed that the severe gold drains that accompanied the crises of
1825 and 1837 would not be repeated once their proposed reform was carried
out. The reason they gave was that Britain’s trade would be almost perfectly
balanced at all times because what is now called comparative advantage would
operate perfectly. Therefore, the currency school claimed, the severe gold drains
of 1825 and 1837 and the accompanying financial and economic crises would not
recur.

Why it didn’t work

In Volume III of “Capital,” Marx compared actual price movements with

fluctuations in the quantity of gold in the Bank of England’s vaults. The figures
show that commodity prices were actually quite insensitive to fluctuations in the
quantity of gold in the vaults. Instead, it was interest rates that were very sensitive
to the fluctuations of the quantity of gold in the vaults and resulting changes in
the quantity of banknotes in circulation.

A drop in the Bank of England’s gold reserve always raised the rate of interest,
while an increase in the gold reserve always led to a drop in the rate of interest.
When the Bank of England experienced a gold drain, the rise in interest rates on
the London money market would draw “hot money” in search of a higher rate of

are today. However, the convertibility into gold of the Bank of England’s notes was restored beginning
in 1821, and this convertibility formed the foundation of the classic international gold standard that
dominated the world monetary system from the 1870s down to the outbreak of World War I in August
1914.

42 Since the banknotes issued by commercial banks other than the Bank of England were more and more
backed by Bank of England notes rather than gold directly, the Bank of England in the final analysis
exercised decisive influence on the total quantity of banknotes in circulation even before the note- 90
issuing authority of the commercial banks began to be phased out under the 1844 Bank Act.
interest from abroad. Instead of British prices and wages dropping, thus correcting
the British trade deficit—like the currency school expected—Britain borrowed
money from abroad and went increasingly into debt. This continued until the
arrival of a global crises of overproduction contracted global credit. Then, Britain’s
balance of trade was adjusted by forcing Britain to export more of its crisis-
shrunken total production while importing less. The working class and poor in
general paid the price through mass unemployment.

The Bank Act of 1844, however, did have this virtue: It put the theory of
comparative advantage to the test. The results were in within a few years. During
the crisis of 1847, the gold drain was so severe that the Bank Act had to be
suspended. The “experiment” was repeated during the crises of 1857 and 1866,
with the same results. However, British economists, instead of dumping Ricardo’s
theory that comparative advantage ruled capitalist world trade, preferred to dump
the really scientific part of Ricardo’s work such his theory of labor value. It was
left to Marx to develop this part of the Ricardian theory.

As Shaikh shows with concrete figures in “Capitalism,” the theory of Ricardian

comparative advantage continues to fail the test of practice, but with few
exceptions the economists cling to the theory. Anybody who has any doubt about
this should read Shaikh’s book. Instead of giving up on comparative advantage,
today’s economists prefer to salvage the failed theory by appealing to “imperfect
competition” or the failure of the capitalist nations to follow the proper monetary
or free-trade polices.

Comparative advantage in the age of paper money

When the Bretton Woods gold-dollar exchange international monetary

system unraveled at the end of the 1960s and beginning of the 1970s, various
proposals were floated among the bourgeois economists on what should replace
that system. Among the would-be reformers of the international monetary system
was Professor Milton Friedman, then a professor of economics at the University of
Chicago.

The future Nobel Prize winner was a strong supporter of both comparative
advantage and the quantity theory of money. In this at least, he was consistent.
Friedman proposed that instead of trying to fix exchange rates as had been the
practice under both the classical international gold standard and the post-World
War II dollar-gold exchange system, there should be a “free float.” Friedman
explained that exchange rates are the price of one currency in terms of another.
As a consistent marginalist economist, he believed that governments and central
banks should play no role in determining prices, including exchange rates.

91
Friedman claimed that the dollar-gold exchange standard had prevented
comparative advantage from operating properly in the post-World War II period
because it prevented currency rates from reaching levels that would actually
balance international trade and thus allow the law of comparative advantage to
operate with maximum efficiency. He advanced a series of proposals for a new
international monetary system based on these principles that would finally allow
competitive advantage to come into its own.

Friedman believed that “supporting” the price of gold at $35 an ounce was the
same as agricultural price supports that he opposed on the same marginalist
grounds that any government interference with price formation leads to economic
“inefficiency.” Since gold coins had ceased to circulate, Friedman believed gold
was no longer money. Gold was simply just another commodity, and not a very
important one at that.

Therefore, under Friedman’s proposed international monetary system,

governments and central banks would no longer play any role in determining the
currency price of gold or exchange rates. This would eliminate the need for
government treasuries or central banks to maintain reserves of either gold or
foreign currencies. Under Friedman’s proposed reform, governments and central
banks would sell off their entire reserves of both gold and foreign currencies.

How the ‘free-float’ system would transform absolute advantage into

comparative advantage, according to Friedman

According to Friedman, a reserve-less free-float system would automatically

balance world trade and prevent balance of payments crises, much like the 19th-
century “currency men” claimed that their policies would.

Suppose country X is running a deficit with country Y. Friedman and like-minded

economists argued that under a free float, country X’s currency will decline in
value against currency Y. This will make X’s commodities cheaper in terms of
country Y’s currency. Since country X’s currency will be able to buy less of country
Y’s currency, the price of imports from country Y will rise in terms of country X’s
currency. This will cause consumers in country X to shift away from higher-priced
country Y commodities to now cheaper commodities of country X. At the same
time, consumers in country Y will notice that commodities produced in country X
are now cheaper than locally produced commodities of the same use value and
quality. They will start buying more commodities produced in country X and less
in their own country.

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As a result, country X’s exports to country Y will rise, while country X’s imports
from country Y will drop. Country X’s currency will continue to depreciate against
country Y’s currency until trade is balanced between the two countries. At this
point, the rate of exchange between country X and country Y will have reached a
new equilibrium.

The result will be that any trade imbalances between X and Y will be quickly
corrected, transforming absolute advantage into comparative advantage. In this
way, according to Friedman, the exchange rates that would emerge between
currencies will be exactly such that will exactly balance international trade, and
the law of comparative advantage will finally come into its own. Another victory
for the free market!

Friedman’s reform proposals were dubbed a “clean float” as opposed to the dollar-
centered “dirty float” that actually replaced the Bretton Woods System. Contrary
to Friedman’s recommendations, governments and central banks continued to
hold reserves of gold and foreign currencies and continued to intervene in currency
and gold markets through buying and selling of foreign currencies and gold,
though currency exchange rates and currency prices of gold were no longer fixed
within narrow bands of fluctuation as they were under classic international gold
standard or the Bretton Woods gold-dollar exchange standard.

Friedman’s theory like Ricardo’s depended on the quantity theory of money to

transform absolute advantage into comparative advantage in international trade.
And happily, Friedman like Ricardo was a champion of the quantity theory of
money. Friedman therefore assumed that the change in the exchange rate
between one paper currency and another will have no effect on the overall
domestic price level. Any rise—in the event of a devaluation—or fall in the event
of revaluation—in the price of imported items would be offset elsewhere. The
reason that Friedman believed that this would be true was his belief that domestic
prices including wages will change in a given nation only in response to changes
in the quantity of money, the level of commodity production and exchange being
given.

Unlike the case of the currency school, whose proposals were actually adopted as
policy and put to the test, where they failed miserably, Friedman’s reforms have
never been put into effect. So we have to do a thought experiment to see what
would happen if a reserve-less Friedmanite clean-float international monetary
system was actually implemented.

Suppose a paper currency is devalued against foreign currencies due to balance

of trade deficits—not inflationary over-issue by the monetary authorities.

93
Everything else remaining unchanged, the price of gold in terms of the devalued
currency will also rise. According to Milton Friedman, this will make no difference
whatsoever, and in this respect almost all modern economists, including many
Marxists, would agree.

However, according to the Marxist theory of value the change in the quantity of
gold represented by a given currency should affect prices expressed in gold-
devalued currency. The price of non-money commodities in terms of the money
commodity is not arbitrary but ruled by the relative values between them.

Here I assume gold bullion is the money commodity. But the argument works
perfectly well if another commodity serves as the money commodity. It is a basic
law of commodity production that a commodity must emerge as the money
commodity. Gold is therefore not the money commodity because governments
have established it as such. Rather, governments must treat gold—for example
hold it as a reserve—because it is the money commodity. As a marginalist, all this
was far beyond Friedman’s economic understanding. However, as long as
capitalism exists no economic reform, including Friedman’s proposed reforms of
the world monetary system, can repeal this basic economic law.

Therefore, if a currency is devalued against the money commodity due to a

negative balance of trade, prices expressed in terms of the devalued currency will
start to rise. The domestic money market will tighten as higher interest rates draw
more money into circulation. Indeed, Shaikh notes that the English economist
Thomas Tooke (1774-1858) noted this important law back in the 19th century.
The rise in interest rates will attract “hot money” from abroad causing the country
to go into debt. In this respect, the devaluation of the currency due to a deficit in
the balance of trade and payments will have an effect on interest rates similar to
a gold drain under the classic gold standard.

The inflow of “hot money” into the devaluing country—assume the monetary
authorities in the devaluing country do not increase the quantity of paper money—
which if they are following Friedman recommendations, they will not do—will then
halt or reverse any further devaluation of the currency but at the price for the
devaluing country that it will now be in debt. This is, as documented by Shaikh,
exactly what is observed in the real world. Countries that devalue their currencies
go increasingly into debt with countries that do not devalue their currencies.

The opposite will occur in a country that experiences a rising currency. If the
currency is revalued, commodity prices calculated in terms of the revalued
currency will tend to fall, with commodity production again assumed as given. The
velocity of circulation of the revalued currency will drop and interest rates in the

94
revaluing currency will fall. The lower interest rates will cause a flow of “hot
money” out of the revaluing country in search of the highest possible interest
rates. The outflow of “hot money” will halt or reverse the revaluation of the
currency—assuming the monetary authorities of the revaluing do not contract the
currency, which would be in accord with Friedman’s recommendations—but now
the country will be a creditor to the countries it is running a trade surplus with.
The result will be that instead of trade being brought into balance, international
debts will pile up.

The only thing that will eventually achieve balance more or less will be a
general crisis of overproduction that destroys international credit allowing a re-
balancing of international trade according to the law of absolute—not
comparative—advantage at the price of mass unemployment. Again, it is the
workers and the oppressed who will bear the brunt of the burden. There will be
no other way out as long as we retain the capitalist mode of production. The
alternative is the world socialist revolution, but here we are going far beyond
anything Professor Friedman would have recommended!

Currency devaluation and the wages of labor

There is one extremely important difference between competition on the home

market and on the world market. For purposes of simplification, when Marx
illustrated economic laws that govern capitalism he assumed that industrial
capitalists pay workers the full value of their labor power. He also assumed that
either the industrial capitalists were operating within the same nation, or the entire
capitalist world was a single nation where labor powers of identical skill had the
same value—and wages. While this assumption is approximately true within a
given capitalist nation—leaving aside the effects of racism and sexism—it is not
even approximately true when competing capitalists are located in different
nations where the value of labor power is very different.

Marx explained that the value of labor power consists of two elements. One is the
biologically determined wage below which the work force will not be able to
reproduce itself. A second portion is determined by the history of and class
struggle within a given nation.

If the wage falls below the minimal biological level, the working class will start to
die out, resulting in a shortage of labor power that will again raise wages.
Therefore wages cannot fall below this level—at least not for very long. If the wage
falls below the level of the historically determined value of labor power, workers
will tend to drop out of the labor market—the participation rate of the population
will start to drop—or go on strike until the resulting shortage of labor power forces

95
wages to return to something like the historically determined value of labor power
in the given country.

The capitalists are forced by the pressure of competition among themselves to

drive wages down toward the biologically determined minimal value of labor
power. The workers always attempt to first defend the historically determined
value of labor power and under favorable circumstances increase it. These are the
economic laws that govern the purely economic—trade union—aspect of class
struggle.

Capitalists located in a nation where the value of labor power is drastically lower
than it is in another country may be able employ far more labor power than in a
nation where the value of labor power is higher and still have lower labor costs.
Even if the productivity of the disadvantaged workers is well below the global
average—which means that an hour of labor of these workers will represent less
than an hour of average labor on the world market—the capitalists of the
disadvantaged nation can still win the battle of competition if, thanks to their lower
labor costs, they enjoy a lower cost price.

Cost price is a function of both the productivity of labor and the price of labor
power. This is an important difference between the laws that govern the
competition between capitalists within a given nation and between capitalists
located in different countries. Within a given capitalist nation-state, we can
assume at least as a first approximation that competing capitalists have to pay
the same price for labor power.

However, internationally we cannot make this assumption even as a first

approximation. Within a given capitalist nation-state, we can assume that the
capitalists who produce at the lowest individual value will win the battle of
competition. We cannot make this assumption on the world market. Instead, the
battle of competition will be won by the capitalists who pay the least for labor—
both dead and living—and produce at the lowest cost price.

What is true, however, is that as “globalization” proceeds and the world market
acts increasingly as a single market, the national values of commodities, including
the value of the commodity labor power, will tend to converge. As far as labor
power is concerned, the countries where the national value of labor power is lowest
will increasingly determine the value of labor power on the world market. This is
the well-known “race to the bottom” that has in recent decades increasingly
dominated the labor market across the globe.

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As long as the national value of labor power in the countries where it is cheapest
does not govern the value of labor power in the world market as a whole, the
capitalists that produce surplus value with the “cheap labor” power will, everything
else remaining equal, be able to undersell the capitalists that produce with higher
valued labor power. The results will be, all else remaining equal, that the
commodities produced with “cheap labor” will have lower prices. This tends to lead
to the illusion that, contrary to Marx, wages govern prices.

However, as the low value of labor power in the countries where labor is “cheap”
comes to dominate the international value of labor power, the growing use of
“cheap labor” arising from the growing transfer of industrial production from the
imperialist countries to the oppressed countries will no longer be low prices for
consumers in the imperialist countries but rather high profits for the capitalists—
just as Marx—and Ricardo—would predict. I will return to this crucial point in the
course of my extended review of Shaikh and Smith.

A weakness in Shaikh’s presentation

Capitalist economists use “unit labor costs” for purposes of analyzing the effects
of different wages paid by capitalists for comparable labor powers. Assuming
wages are equal, the higher the productivity of labor the lower will be unit labor
costs needed to produce a given commodity. But the lower the wage, assuming
productivity is equal, the lower unit labor costs also will be. So capitalists might
enjoy lower unit labor costs than rivals simply because they pay far lower wages
even if they employ far more workers.

It would, however, be far more accurate to say that the capitalists who win the
battle of competition are the capitalists who have the lowest cost price. Like all
other prices, cost prices—a term Shaikh does not use—are measured in terms of
money. Here Shaikh becomes confused. On the world market, there is more than
one currency. U.S. capitalists pay workers in U.S. dollars, British capitalist pay
workers in pounds, German capitalists in terms of euros, Chinese capitalists in
terms of yuan, and Japanese capitalists in terms of yen, and so on.

Shaikh solves this problem by comparing real wages—wages measured in terms

of the use value of commodities that workers must buy to reproduce their labor
power. This assumption worked well enough in Ricardo’s early “corn models,”
where Ricardo assumed corn was the only commodity—an assumption the great
English classical economist later dropped in favor of measuring the value of
commodities in terms of the labor socially necessary to produce them—Ricardian
labor value. In this way, Ricardo was able to construct far more realistic models
of the economy. He therefore avoided the problem of attempting to compare

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qualitatively different use values quantitatively. This problem of comparing
different qualities in quantitative terms is captured by the saying, “you can’t
compare apples and oranges.”

So-called “neo-Ricardian” economists who have greatly influenced Shaikh—not

always to his benefit—have retreated from labor value to the method of Ricardo’s
early corn models. They often begin, “Assume an extremely simple economy that
produces one wage good … ,” or something to that effect. This solves the problem
of comparing apples to oranges through what Marx called a “violent abstraction.”

In a real economy, especially at the level of the world economy, the real wages of
workers in different countries cannot be rigorously compared to one another. The
reason is that in the real world “wage goods” consist of somewhat different
commodities with different use values. For example, workers located in a tropical
country do not need to spend money on heating in winter. Even workers in the
same country will have different individual tastes and needs and will choose
somewhat different baskets of wage goods.

Ricardo, despite the fact that he wasn’t entirely successful in developing a logically
air-tight theory of value based on human labor, took a giant step forward when
he replaced his early corn models with models based on labor value. Shaikh has
done much to defend Marx’s theory of value against neo-Ricardian-inspired
criticisms based on the so-called “transformation problem.” [link to posts which
deal with this] Claiming alleged difficulties of Marx’s theory of value involving the
transformation problem and perhaps the pressure of working in an academic
environment where criticizing Marx will do more to advance your career than
defending him, neo-Ricardians prefer the Ricardo of the early corn models than
the later Ricardo of labor value models.

Unfortunately, however, we can see a little neo-Ricardian influence in Shaikh. It

seems that Shaikh has not grasped fully Marx’s theory of value and how it
advances beyond Ricardo’s theory of value. He nowhere seems to have dealt with
Marx’s concept—not found in Ricardo—that value must take the form of exchange
value, where the value of one commodity must be measured in terms of the use
value of another. This is a weak side that runs through Shaikh’s work in general
and “Capitalism” in particular. In the coming months, this will become increasingly
clear as I examine the weak side of Shaikh’s “Capitalism.”

How to correctly compare wages in different countries

The correct solution to comparing wages paid in different currencies used to buy
packets of wage goods with different use values is found in Marx’s concept of gold

98
as “world money.” If you calculate money wages not in terms of local currencies
but in terms of weights of the money commodity gold, the problem of comparing
real wages that are not qualitatively the same completely disappears. Gold as the
world market commodity par excellence has the same value—represents the same
quantity of abstract human labor in all countries at any given moment in time—
leaving aside extraordinary conditions such as the value of gold in California at
the height of the 1849 gold rush.

Like for all commodities, the value of labor power must take the form of exchange
value. In practice, this means that the value of labor power must be measured in
the use value of the money commodity gold. As a commodity, labor power like all
other commodities must represent a certain quantity of a qualitatively identical
“social substance,” abstract human labor. But this social substance must take the
form of a physical substance such as gold bullion measured in terms of weight.
The value of gold like all other commodities is measured in terms of the quantity
of a social substance—abstract human labor. However, the abstract human labor
that constitutes the social substance of the value of gold differs in one sense from
abstract human labor embodied in non-money commodities—it is directly social.
Therefore, money can be defined as human labor in the abstract that is directly
social and that is embodied in the use value of the money commodity.

Cost price, which is preferable to “unit labor costs,” is measured in terms of

weights of gold bullion in all countries. This makes both wages and cost prices
qualitatively identical and thus quantitatively comparable in all countries at any
given point of time. The supreme aim of every industrial capitalist is therefore to
produce a given commodity of a given use value at the lowest possible cost price.
The industrial capitalist can achieve this either by increasing productivity of labor
or paying the lowest possible wage. In the real world, the industrial capitalists,
especially those engaged in world trade, employ a combination of both methods.

When a currency is devalued against other currencies, assuming that the gold
value of the other currencies is unchanged, the immediate effect is that the wages
of workers in the devaluing currency in terms of world money—gold—are cut.
Therefore, everything else remaining unchanged, the capitalists of the devaluing
country have gained an advantaged. Marx showed in “Value, Price and Profit” that
a general rise or fall in wages has no effect on the general level of prices. But here
Marx is assuming the wage rise or fall in general. If particular capitalists were to
succeed in cutting the wages they pay their workers, they would indeed be able
to undersell their competitors. But within a country, if individual capitalists cut
wages below “the going rate,” their workers will quit their jobs and sell their labor

99
power to other capitalists offering a higher wage. It is far more difficult43 for
workers to do this on the international level, however.

Internal devaluations

Indeed, in criticizing the euro system, capitalist economists have coined the new
term “internal devaluation.” Since both Germany and Greece use the same
currency, Greece cannot cut the wages of Greek workers by devaluing the Greek
drachma like they could in the days before the euro. However, they engage in an
“internal devaluation” by cutting the wages of Greek workers in terms of euros—
in other words, by engaging in old-fashioned wage cutting. Of course, if you have
two capitalists who produce under otherwise identical conditions of production—
individual value—but one pays less for labor power than another, the capitalists
who pay less have a lower cost price and can undercut the capitalists who pay
more. The new term “internal devaluation” lays bare the dirty little secret of
currency devaluations as a form of disguised wage cutting.

Next month, I will examine Shaikh’s theories of rate of profit on bank capital and
the rate of interest.

_______

43This brings us straight to the question of immigration and the rise of right-wing demagogues
such as Donald Trump and his European counterparts. I will explore the immigration question
when I review John Smith’s work later this year.
100
 Three Books on Marxist Political Economy
(Pt 5)
Shaikh’s wrong theory of interest rates

“The interest rate is the price of finance,” Shaikh writes at the beginning of Chapter
10, “Competition, Finance, and Interest Rates.” Shaikh treats the rate of interest
as fluctuating around the price of production of the “provision of finance.” Late in
Chapter 10, Shaikh indicates he was confused on this subject in the 1970s and
the early 1980s but brought to his current views by the Sraffrian-neo-Ricardian
Italian economist Carlo Panico. Is this the correct approach to ascertaining what
actually determines the rate(s) of interest? I believe it is not.

Do interest rates really fluctuate around a “price” of the provision of finance the
way market prices fluctuate around prices of production? Strictly speaking, price
is the value of one commodity measured in terms of the use value of the
commodity that serves as the universal equivalent—money. According to this
definition, interest rates are not prices at all.

It is true that we often use price in a looser sense. For example, we talk about the
prices of securities that are in reality legal documents that entitle their owners to
flows of income. Another example is the price of unimproved land whose owners
hold titles to flows of ground rent. It would be absurd to talk about the price of
production of unimproved land if only because unimproved land is a form of wealth
produced by nature and not by human labor.

Some other ‘non-price’ prices

Another example of a price that is not a real price is the dollar “price” of gold. This
very important economic variable is not really a price at all but instead measures
the amount of gold that a dollar represents at any moment. Other examples of
“non-price” prices are the “price” of one currency in terms of another—exchange
rates—and the price of politicians.

None of these are prices in the strict sense. There is no harm in referring to prices
in the looser sense if we know that is what we are doing. But it can be harmful if
we confuse the term “price” in the looser everyday sense with true commodity
prices. Only in the looser everyday sense can we speak of interest as the “price”
of the provision of finance.

101
Examples of prices in the true sense are: market prices—the prices you pay at the
grocery store, for example; cost price—the price that a capitalist has to pay to
carry out production of commodities that contain surplus value; direct prices—the
prices of commodities that are directly proportional to values; prices of production;
and the price of labor power—wages.

Let’s take a close look at the category of “price of production,” which is largely
ignored by most recent Marxist writers but plays a crucial role not only in his
“Capitalism” but throughout Shaikh’s work. First, price of production is indeed a
price. We compare a commodity with a certain sum of money—weight of gold
bullion, assuming gold bullion acts as money material. In a pure capitalist
economy, every commodity except labor power and the commodity that serves as
money has a price of production.

The money commodity measures the value of all other commodities in terms of
its own use value but does not itself have a price and therefore cannot have a
price of production.44 Labor power, even in a pure capitalist economy, does not
have a price of production because it is not produced and sold by industrial
capitalists but by workers. Unlike industrial capitalists, workers sell their labor
power for subsistence and not to realize a profit on invested capital. Therefore,
the two “special commodities” of capitalism, the money commodity and the
commodity labor power (which alone produces surplus value, the supreme aim of
capitalist economy), do not have prices of production.

Equalization of the rate of profit

The most important discovery of Marx was to explain the origin and nature of
surplus value. Marx was the first economist who treated surplus value as an
economic category separate and apart from the terms widely used to refer to
various fractions of surplus value. Once the surplus value embodied in
commodities is realized in terms of the use value of the money commodity, surplus
value takes the form of profit and ground rent. Profit is further divided into two
sub-fractions, interest and the profit of enterprise.

Earlier writers, including pre-Marxist representatives of the working class called

“Ricardian socialists,” often referred to surplus value as “interest.” When they used

44 The “neo-Ricardian” economists think they have disproved Marx’s law of value because
they fail to take into account the fact that not all commodities have prices of production. The
price of labor power—wages—can be seen as the sum of the prices of production that the
workers pay for the commodities necessary to reproduce their labor power. That still leaves
one commodity out of the calculations, the one that serves as money. 102
“interest,” they actually meant not only the part of the surplus value that is
interest but also the parts that are profit of enterprise and ground rent.

It didn’t take a man of genius like Marx to understand that surplus value is
produced by unpaid labor. Anyone who has ever actually produced surplus value
intuitively understands this. What it did take a Marx to achieve was to reconcile
the assumption that equal quantities of human labor embodied in commodities
exchange with equal quantities of labor, on one hand, with the production of
surplus value—income from property—through unpaid labor, on the other. Marx
did this by distinguishing between (abstract) labor—the substance of value when
embodied in commodities—and the value of the commodity labor power.45

From direct prices to prices of production

In explaining how surplus value arises out of the exchange of equal quantities of
labor, Marx assumed that commodities sell at their values, or in our preferred
terminology, their direct prices. These, like all other types of prices, measured in
terms of quantities of the money commodity measured in terms of its use value,
are necessary for the analysis of surplus value and are thus an extremely powerful
analytical tool. However, direct prices46 are only approximately equal to what
Adam Smith called natural prices, the average prices that market prices fluctuate
around in response to the ebbs and flows of effective demand.

In reality, prices of production diverge from direct prices. If commodities sold at

their direct prices, capitals with higher than average organic composition of capital
or longer than average turnover periods would make lower than average rates of
profit in equal periods of time—for example, a year—while capitals with lower than
average organic compositions or higher turnover periods would make greater than
average profits. This, however, violates the nature of competition. Competition
forces capitalists to move their capital toward sectors that realize greater than

45Marx attributes the discovery of the distinction between labor and labor power to the British
materialist philosopher Thomas Hobbes (1588-1679). However, Hobbes’ crucial distinction
was not taken up by the classical economists, so it fell to Marx to use Hobbes’ distinction
between labor and labor power to finally uncover the secret of surplus value.
46 Shaikh has calculated that about 80 percent of changes in the production price of
commodities are explained by changes in the quantity of labor necessary to produce them,
leaving only about 20 percent to the different organic compositions of capital and periods of
turnover. So the theory that commodity prices are determined by the quantity of labor socially 103
necessary to produce the commodities is approximately true under any realistic assumptions.
In their rush to refute Marx, neo-Ricardian economists have lost sight of the forest of the law
of (labor) value for the tree of the transformation problem.
average rates of profit and away from sectors that yield below average rates of
profit.

Marx used the term “price of production” only as it applies to the owners of
productive capital. He did not apply it to capitalists who own only commodity and
money capital. The latter capitalists are called merchant capitalists. However, the
law of the equalization of the rate of profit applies to merchant capitalists just as
it applies to industrial capitalists.

When I refer to merchant capitalists, I am referring to merchant capital in the

pure sense. Capitalists who transport and store commodities are carrying out
productive-of-surplus value activities and are to that extent industrial, not
merchant, capitalists. The pure merchant capitalist only deals in change in titles
of ownership and nothing else. Though merchants will sell their commodities to
the final consumer—or perhaps other merchants—that will yield the average rate
of profit, no actual productionof commodities that contain surplus value is
involved. So the term “price of production” is out of place here.

Commercial bank capital

What about the profit earned by the commercial banker?47 Is the banker subject
like both the industrial and merchant capitalists to the equalization of profit? Now,
we already know that the (average) rate of interest is by necessity—outside of
exceptional periods—lower than the rate of profit. If the rate of interest rose on a
permanent basis to the rate of profit, there would be no incentive for a capitalist
to assume the extra risk of carrying out an industrial enterprise. The motive to
actually produce surplus value would cease.

If interest rates do for a while rise to or above the average rate of profit, the
industrial capitalists would gradually convert themselves into money capitalists,
which would then once again lower the rate of interest to below the average rate

47 For simplicity sake,I deal here only with commercial banking. However, investment banking
works on the same principle. While the commercial banker makes profits—net of
administrative expenses—by pocketing the difference between the interest the commercial
bank charges borrowers and the interest rates that it pays on deposits, the investment banker
takes advantage of the difference between the interest rate paid by the company whose
securities the investment bank underwrites and the lower interest that those who purchase the
securities from the investment bank receive. 104
of profit.48 So there can be no equalization of the rate of interest and the rate of
profit.

Does this mean that banks make less than the average rate of profit on their
capital? No. The banker is not simply a lender but also a borrower. The profit of
banking capital arises from the difference between the interest rates bankers pay
on deposits—money lent to the bank—and the rate of interest banks charge on
loans.

For simplification purposes, I follow Marx’s assumption that the (commercial)

banker does business only with industrial and commercial capitalists. Indeed,
through the middle of the 20th century, workers and middle-class people kept
money at and borrowed from savings banks, savings and loans, and credit unions
rather than commercial banks. So in Marx’s time and well into the last century,
the assumption that commercial banks do business only with industrial and
commercial capitalists or very rich money capitalists was reasonable. Even today,
it can be assumed that once the interest rate for the banker on loans to large
industrial and commercial capitalists is established, rates of interest on consumer
loans will be scaled up from that rate according to the perceived extra risk.

For example, a working-class consumer is far more likely to default than the Apple
Corporation, whose cash balance has at times exceeded the cash on hand at the
U.S. Treasury. Somewhere in the middle between the high-risk consumer and
Apple will be average-size industrial or commercial capitalists, who will have to
pay a higher rate of interest than Apple or other so-called “prime borrowers” but
considerably lower than a working-class consumer will have to pay on an auto
loan. So the “base” or “prime” interest rate that banks charge on loans—or
discounts—will be determined by the same economic forces that were at work in
Marx’s time.

Commercial bankers appear as the middlemen of the money market just as

merchant capitalists appear as the middlemen of the commodity markets.
Moneyed individuals and enterprises that have monetary balances they don’t have
to immediately spend on purchases of commodities or for payments coming due

48This is exactly what happened at the end of the 20th and beginning of the 21st centuries. Due
to the currency crisis that involved the huge devaluation of the U.S. dollar and its satellite
currencies in the 1970s, the rate of interest reached unprecedented levels that for awhile
exceeded the rate of profit. Traditional industrial companies began to convert themselves into
money-lending institutions as part of the process called financialization. As a result, huge
amounts of money loan capital appeared on the market, which eventually drove interest rates 105
to record low levels.
can in theory loan their surplus funds directly to industrial or commercial
capitalists.

In practice, however, moneyed individuals are in a poor position to know what

industrial enterprises and commercial enterprises are good bets to pay back loans
with interest and which are likely candidates for bankruptcy. Bankers, on the other
hand, specialize in determining which industrial or commercial capitalists are good
credit risks and which are not. Bankers are sometimes wrong—as is revealed in
every crisis—but are still far better equipped to make educated guesses about
credit risk than the average moneyed man or women on the street.

Because of the above, the average moneyed persons in the street are prepared to
share some of their interest income with bankers. What determines the interest
rates an average money person in the street demands—or rather is forced to
accept—is a question that will be examined shortly. For now, let’s assume it is
given.

Just like the merchant capitalists purchase commodities cheaply in order to sell
dear, the banker borrows cheaply in order to lend dear. The banker’s profit is
therefore the difference between the rate the banker as borrower pays on deposits
and the rate the banker as lender charges as lender. In addition, the banker has
certain costs that arise from running a banking business, much as the merchant
capitalist has.

A capitalist company engaged in the banking business must rent or purchase

buildings, hire (purchase the labor power of) lending officers, accountants and
tellers—though far less nowadays due to automated teller machines and other
computerized devices. A modern commercial bank is unthinkable without
automated teller machines, computers that must be purchased by the capitalists
engaged in the banking business. However, the most important factor in the
banks’ profit by far remains the difference at which the banks borrow—interest
paid on deposits—and the interest received by the banks on loans—called in the
business “the spread.”

Banking capital is subject to equalization of the rate of profit

Individual capitalists—these can include corporations—who are not satisfied with

the rate of interest, do not want to depend on risky speculation, and want to retain
control of their own capital have a choice of being industrial capitalists, merchant
capitalists, or banking capitalists. Since their only concern as capitalists is to make
at least the average rate of profit on their capital, it is a matter of indifference to
them whether they function as industrial, merchant or banking capitalists.

106
If the bankers’ rate of profit is significantly less than the rate of profit of the
industrial or commercial capitalists, a portion of the capitalists engaged in the
banking business will close down their banks and open up industrial or merchant
enterprises instead. This will reduce the number of banks, which will enable the
remaining bankers to get away with paying lower interest rates on deposits and
charging higher interest rates on loans to industrial and commercial borrowers.
This will continue until the rate of profit on the bankers’ capital rises to or above
the average rate of profit.49

Similarly, if bankers get a yield on their invested capital that is greater than the
return on industrial or commercial capital, a portion of the capitalists acting as
industrial and merchant capitalists will shut down their enterprises and enter the
banking business. The increased number of banks leads to a situation where the
banks have to offer a higher rate of interest to their depositors and charge a lower
rate of interest on loans. This will continue until the rate of return on banker capital
falls to or below the average rate.

Shaikh is therefore correct when he holds that banking capital participates in the
equalization of the rate of profit just as productive and merchant capital does. It
appears that just like industrial capitalists sell commodities on average at the price
of production, and merchant capitalists sell commodities at prices that on average
yield them the average rate of profit, the banking capitalists lend money at interest
rates that seem (to them) pretty much like the price of production. However, as
Marxists we are not primarily interested in how things appear to the capitalists but
what are the underlying economic relationships often hidden from the capitalists
and their bought-and-paid-for economists.

Here we come to a peculiar fact. The owners of bank capital—the banks’

stockholders, not the depositors, share a part of the interest income with their
depositors—creditors. If we look at the total capital on a social scale, the interest
income earned by depositors and the profits earned by bank stockholders fall
under the “interest” fraction of the total surplus value. Yet, the bank’s profits on
its capital appears to be divided into interest that accrues to the bank’s creditors—
depositors—insomuch as the bank works with borrowed money but to the bank’s
owners insomuch as it works with the stockholders’ capital. Another portion of the

49 The financial press refers to areas where competition among the banks has driven the rate of
profit on bank capital below the average rate of profit as being “over banked.” When I refer to
the bankers’ capital, I mean not the capital of the depositors but the capital that is owned by
the bank’s stockholders. This is calculated by subtracting the value of deposits and other
liabilities owned by the bankers from the total assets. The difference is the capital, or the
stockholder equity. It is the return on the stockholders’ capital that is subject to the equalization 107
of the rate of profit.
profit yield on the bank’s capital appears as the profit of enterprise. This is another
example that things are not always as they appear under the capitalist mode of
production.

But what determines the rate of interest that bankers must pay on the money
capital their creditors lend to them—what Shaikh calls the base interest rate? Or
for that matter, what determines the portion of the profit that falls to interest—
the sum of the base interest rate plus administrative expenses plus the interest
the bankers get on their loans—the total interest.

Adam Smith and David Ricardo assumed that there was a fixed division between
the portion, to use Marx’s terminology, of the profit (surplus value minus rent)
that goes to profit of enterprise and the portion that goes to interest. Smith and
Ricardo generally assumed a fifty-fifty division, and Shaikh is sympathetic to this
view. But Marx rejected it. Shaikh is a little embarrassed to find that he is at odds
with Marx on this question. Shaikh claims that Marx was inconsistent and that
much of what is written on interest rates in Volume III of “Capital” was actually
written by Frederich Engels. Better to disagree with Engels than with Marx.

But at the end of the day, what interests us here isn’t what Engels believed or
even what Marx believed but what is true. Shaikh and Panico put forward the
notion that the primary interest rate is equivalent to the price of production of the
provision of finance. As far as I know, this view is held by only Shaikh and Panico.
No other economist whether Marx, Keynes, or Roy Harrod (1900-1978), an English
economist who was a contemporary of and biographer of Keynes and who Shaikh
admires, supports such a notion.

Imagine if you can that you are a wealthy capitalist. One day you go to the branch
office of one of the large commercial banks and open up an account. You are
engaged in the “provision of finance.” But is this really economically speaking the
same thing as creating an industrial or commercial enterprise? If you create an
industrial enterprise—and since I assume you are a wealthy capitalist, this is within
your power—you must buy or rent a factory building, purchase raw and auxiliary
materials, and purchase the labor power of industrial workers with the aim of
producing surplus value that you hope you will realize when you actually sell the
commodities. You also have to worry about selling commodities at prices that will
enable you to realize at least the average rate of profit if you are a merchant
capitalist. This is not a concern if you are merely opening up a bank account.

For that reason, you will not even consider creating a new industrial business
unless you have what you believe will earn a considerably greater return on your
invested capital than you will by collecting interest on a commercial bank account.

108
Therefore, the interest you collect as a bank depositor will as a rule be below what
you would earn if you create a new industrial or merchant business—or invest in—
not merely lend to—an existing industrial or commercial enterprise.

In the case where you take an “equity stake” in a business, you are entitled to
both interest and the profit of enterprise. In the case where you merely loan
money to a business, you are entitled only to the interest. And if you loan money
indirectly to businesses through the commercial banking system, you have to
share a part of the interest with the commercial bank. But what exactly determines
the difference between the rate of interest and the rate profit?

Loan and money capital

Both real capital and money capital can be loaned out. But money capital is much
more likely to be loaned out than real capital. It’s hard to imagine going down to
your local commercial bank branch and opening an account by depositing a drill
press, a lathe or an industrial robot.

Experience over centuries has demonstrated that, contrary to the quantity theory
of money, fluctuations in the quantity of money have little effect on prices. Indeed,
a shortage of money will only affect prices if it leads to a contraction of the market
resulting in not all commodities on the market finding buyers at existing prices.

Similarly, an increase in the quantity of money will only affect prices if it leads to
a major expansion in the market beyond the ability of the industrial capitalists to
quickly meet the increase in demand at existing prices. If industrial capitalists can
meet the increased demand at existing prices, an expansion of the market will
lead to an increase in production and employment but not to a rise in prices. The
rate(s) of interest, in contrast, are extremely sensitive to fluctuations in the
quantity of money, with virtually no time lags.

Monetary reserve fund and currency

In any given nation as well as on a world scale, the total money supply is divided
into currency and a reserve fund. In the modern monetary system, the reserve
fund is made up of layers. The uppermost layer is taken up by bank reserves—
both vault cash and the deposits of the banks at the central bank (called central
bank money)—in terms of the local (non-U. S. dollar currency) in countries that
have local currencies other than the U.S. dollar. In addition, central banks
maintain a reserve of U.S. dollars—and sometimes of euros outside of the
eurozone—in the form of short-term government securities that can quickly be
converted into actual currency on the open money market.

109
Finally, the U.S. government maintains a reserve of gold bullion at Fort Knox and
a few other depositories, which backs the U.S. dollar. Another part of the reserve
fund that backs the U.S. dollar is the gold owned by foreign governments or central
banks that the U.S. government holds “for safekeeping” in the vaults of the
Federal Reserve Bank of New York. This “public sector” gold is also available to be
mobilized in a centralized way against a run on the U.S. dollar into gold.

Another part of the reserve fund is owned by private hoarders. In the event of a
run from the U.S. dollar into gold, private hoarders will attempt to further increase
their gold hoards making the crisis even worse, while central banks would be
expected to dump, or at least threaten to dump, a portion of their holdings of gold
on the market in a bid to break the crisis.

If the centralized public gold hoard did not exist, the full weight of breaking a run
into gold would be borne by a rise in the rate of interest. In this case, a higher
rate of interest would be necessary to break the crisis than is the case where the
government or central bank maintains a gold hoard. This would worsen—perhaps
very considerably—the recession/depression that would follow a run from the
dollar into gold. This is why Milton Friedman’s proposal that the U.S. government
and other governments and central banks sell off all their gold was rejected.

The private-sector gold hoard is also layered. The first layer consists of gold coins
and bars owned by private “investors”/hoarders. Beyond gold bars and coins in
private hands, there is jewelery made of gold and physically convertible into
bullion. Historically, this has been the main form of hoarding wealth in India and
China and in pre-capitalist societies in general.

In addition, we have gold knickknacks and gold plate as a way to hoard wealth.
In addition to gold’s undeniable artistic value, gold jewelery, other objects made
of gold, and gold plating is a way of flaunting wealth as well as hoarding it. U.S.
President Donald Trump’s New York City residence atop Trump Tower makes
liberal use of gold for these purposes.

Finally, gold has use values other than storing and flaunting wealth. The most well
known non-monetary use for gold is filling cavities in teeth and in electronics. 50
These are entirely non-monetary use values of gold. However, during periods of
exceptional demand for gold, old electronic circuit boards are “mined for gold,”
and at the peak of the 2011 surge in demand for gold there were reports that
some people may even have yanked the gold out of their teeth in order to convert

50The high value of gold, which makes it a good money commodity, is a hindrance for gold’s
use in other fields such electronics. Driven by competition to constantly lower their cost prices,
industrial capitalists replace gold with cheaper metals whenever they can.
110
it into gold bullion. There are also the grisly stories of the Nazis mining the teeth
of Nazi death camp victims and depositing it in the Reich bank.

Therefore, any gold that can potentially be physically melted down into bullion
forms a secondary monetary reserve fund that can be mobilized to back currencies
under exceptional circumstances.

The growth of the quantity of gold in the reserve fund

The global gold monetary reserve fund grows continuously over time as more gold
is mined and refined. A certain amount of this gold in the past was lost through
the wearing down of gold coins in circulation. After 1914, gold coins were
withdrawn from circulation in Europe, and in 1933 they were withdrawn from
circulation in the United States as well. Though gold is still used as currency in
illegal trade—though the $100 U.S. bill seems to be the preferred currency in this
area—gold still remains the coin of last resort. In the event of a global currency
collapse, for example, gold would again be forced back into circulation. That being
said, compared to the pre-1914 situation very little gold is lost today through wear
and tear of gold coinage.51

A certain amount of monetary gold can be lost to the reserve fund if it is

transferred to non-monetary uses—though as we saw above, a portion of this gold
can be converted back to monetary use, so it becomes part of the secondary
monetary reserve fund. In addition, gold on ships that are sunk is no longer
available to the gold reserve fund unless and until it is recovered. And from time
to time, stories appear in the media about rumored lost “Nazi gold” hidden away
in mountain caves or at the bottom of mountain lakes.

Finally, there may be gold in the circuit boards on spacecraft. If there is gold in
the circuitry in any of the NASA probes now exploring Mars, it is out of the
monetary reserve fund until and if the spacecraft or at least its circuit boards are
recovered, returned to earth and “mined” for gold. Finally, there may be gold in
circuit boards of NASA space probes that are leaving the solar system completely.
Any gold in these spacecraft is probably gone from the monetary reserve fund for
good.

It can be assumed that the amount of gold that “leaks away” either temporarily
or permanently every year is far less than the amount of new gold that is annually
mined and refined. Over time, the quantity of gold in the various reserve monetary

51 This shows that gold coins are not the ideal circulating media. Using gold directly as currency
both reduces the size of the reserve fund and shrinks the quantity of gold through the wear and
tear and “clipping” of the gold coinage.
111
funds never shrinks but grows. But the rate at which this reserve fund grows
relative to overall commodity production does vary.

For example, during periods of recession the quantity of commodities for sale
throughout the world market can actually decline while the quantity of gold that
is available to the various layers of the reserve fund grows through boom and
recession alike. This is why no recession lasts indefinitely but inevitably gives way
to a new upswing in the industrial cycle—as long as capitalism is not overthrown.
Therefore, no individual recession no matter how severe will automatically lead to
the end of capitalism.

Changes in the ratio of the gold reserve fund and currency

The simplest monetary-currency system would consist of a reserve fund of gold

bullion and circulating full-weight gold coins. Suppose food prices rose due to a
harvest failure that would cause food prices to rise more than enough to
compensate for the decline of food commodities in terms of use values in
circulation. An additional quantity of gold coins would be necessary to circulate
commodities, because food commodities would come with higher price tags adding
up to a greater mass of gold bullion than before.

Where would the additional gold coins come from? In the absence of additional
domestic production of gold or an inflow from abroad, the coins would have to
come from the reserve fund. The “money supply,” defined as currency in
circulation—not the reserve fund—would expand while the gold reserve hoard
would shrink. The shrinkage of the reserve gold hoard would lead to a rise in the
rate(s) of interest.

Suppose the opposite happened. An extraordinarily bountiful harvest causes food

prices to plunge more than compensating for the greater quantity of food
commodities in circulation in terms of their use values. All else remaining
unchanged, less currency would be needed to circulate commodities than before.
Some portion of the circulating gold coins would fall out of circulation and become
part of the reserve fund. The gold hoard would expand causing the money market
to ease. This would be expressed in a fall in interest rates.

While the actual monetary system, as we saw above, is considerably more

complex, it works on the same principle as the simple monetary system described.
All else remaining equal, rising commodity prices cause the money market to
tighten leading to a rise in interest rates, while falling prices cause the money
market to “ease” leading to lower interest rates.

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The monetary reserve fund and the modern credit system

In imperialist countries with the most developed banking systems, such as the
United States, the amount of cash that circulates even for petty transactions such
as fast-food meals has declined drastically in recent years. Instead, debit and
credit cards—most recently even smart phones—are used to make purchases.

Debit cards make use of existing bank—credit—money. Cash in the form of central
bank money52—which can be converted to actual legal tender cash on the demand
of the commercial banks—is used to settle transactions among the banks that do
not offset each other. The more debit cards are used in a given period of time, the
faster the velocity of central bank money will be for the purposes of settling these
payments. This will mean a greater quantity of central bank money will be
necessary to settle payments among the commercial banks in a given period of
time.

When this happens, commercial banks that owe money will be obliged to borrow
money from other commercial banks at what is called the “federal funds” rate in
the U.S. or at central bank discount windows. All other things remaining equal,
since a given quantity of central bank money will have to used as means of
payment if the use of debit cards as means of purchases rises in term of the sum
of the prices of the total number of commodities purchased, there will be a
shrinkage in the quantity of central bank money relative to the demand for it as a
means of purchase. The opposite is the case if the quantity of debit card
purchases—measured in terms of the sum of the prices of the commodities
purchased—declines relative to the total sum of their prices.

In the case of credit cards, new commercial bank credit money is created.
Assuming bank reserves remain unchanged, the ratio between the total quantity
of credit money relative to total commercial bank reserves rises. Therefore,
assuming the quantity of commercial bank reserves remains unchanged,
increased use of credit cards in a given period means a shrinkage of the quantity

52Commercial banks maintain accounts at the central banks. The central bank becomes the
bankers’ bank. They can use these accounts just like non-banking companies and individuals
use their accounts at commercial banks. The commercial banks have two forms of cash on
hand. One is vault cash, made up of legal tender cash that they use to redeem bank
withdrawals—which is relatively much smaller than it used to be due to the use of debit, credit,
and other electronic forms of payment. The other is their accounts at the central bank, which
can be converted into legal tender cash whenever the commercial banks and indirectly their 113
customers demand cash.
of bank reserves relative to the total amount of credit money created by the
commercial banks, which will put upward pressure on interest rates.

‘Gibson’s paradox’

Marginalist theory claims that there is a natural rate of interest reflecting the
“scarcity of capital.” According to marginalists, commodities have prices because
they are scarce and capital has a “price” in the form of interest because capital,
like commodities, is also “scarce.” In addition, nominal interest rates will also
include, the economists claim, an expected rate of change in prices.

If the natural rate of interest, according to this view, is 2 percent but the expected
rate of inflation is 3 percent, the market rate of interest will be 5 percent. If prices,
however, are falling or are expected to fall at a rate of 1 percent, the market rate
of interest will be 1 percent.

Shaikh explains that the English economist A.H. Gibson, however, in the early
1920s rediscovered what Thomas Tooke53 had already known in the 19th century.
Peaks that Tooke observed in interest rates coincided with peaks in prices, and
troughs in interest rates coincided with troughs in prices.

This contradicts the marginalist theory of the natural rate of interest, which
predicts that price peaks with the prospect of lower prices should see the lowest
interest rates while price troughs with the prospect of higher prices should see the
highest interest rates. Keynes dubbed the conflict between marginalist theory and
the reality as “Gibson’s paradox.” However, this is a paradox only in terms of
marginalist theory.

In the days of Tooke, and to some extent Gibson, things were simpler than they
are now, since currency units represented fixed quantities of gold and not variable
quantities like they do today. Under the gold standard, price peaks coincided with
peaks in the industrial cycle, while price troughs coincided with troughs in the
industrial cycle. At the cyclical peak, the imaginary mass of gold represented by
the prices of commodities was highest relative to the mass of actual gold in the
vaults of the Bank of England as well gold in England held by private commercial
banks and individuals.

53 Thomas Tooke (1774-1858) was the leader of the Banking School, which opposed
the Currency School. Tooke believed correctly that it was rising prices that increased the
quantity of (convertible into gold) banknotes in circulation as opposed to the claim of the
Currency School that it was an increased quantity of banknotes that caused prices to rise. Marx
greatly admired Tooke’s work. 114
This was true because the price tags attached to commodities were at their cyclical
peaks and the mass of actual commodities in circulation measured in terms of
their various use values were always at record levels at cyclical peaks. The credit
system was stretched to the limit because credit money and credit increasingly
replaced cash—gold coin—as a means of settling payments and making purchases.
In full accord with the theory of interest rates developed here, interest rates were
at their highest level of the industrial cycle.

At the price troughs, the opposite conditions prevail. Recession reduces the size
of the commodities in terms of their individual use values while cutting their price
tags. Not surprisingly, the ratio of actual gold in the bank vaults plus any other
gold held in Britain was much higher than average relative to the imaginary gold
represented by the total mass of (non-money) commodities for sale than at other
times. Not surprisingly the rate of interest was at its lowest point.

Gibson’s paradox reflects false bourgeois economic theories, but in reality there is
no paradox. Gibson’s so-called paradox is just another example of bourgeois
economic theory put to the test of reality and failing.

Both what I will call the Shaikh-Panico theory of determination of interest rates
and the theory I develop here can explain Gibson’s so-called paradox. Gibson’s
paradox shows that the bourgeois theories of value, capital, interest rates are
wrong. But this so-called paradox does not enable us to determine whether the
Shaikh-Panico theory or the theory developed here is the correct one.

Putting the Shaikh-Panico theory of interest rates to the test

During the 19th century, the Bank of England increasingly monopolized Britain’s
monetary gold supply, which formed the lowest layer of Britain’s monetary reserve
fund. Bank of England banknotes formed the reserves of commercial banks. But
ultimately, the ability of the Bank of England to issue banknotes depended on the
size of its gold reserve.

Over time, gold mining and refining caused the Bank of England gold reserves to
grow. But they did not grow in a straight line. If the balance of payments turned
against Britain—which it often did—the Bank would suffer a “drain.” Britain’s gold
reserve—the monetary reserve fund within Britain—would drop not simply
relatively but absolutely. Here we have an empirical test between the two theories
of interest.

If the rate of interest is the price of money that ultimately fluctuates around the
price of the provision of finance—akin to a price of production—then interest rates

115
and prices should always move in the same direction. However, if the rate of
interest is determined by the balance of forces between the owners of loan money
capital and real capital, it would be quite possible for the rate of interest and the
price level to move in opposite directions.

In Volume III of “Capital,” Marx collected data on this. What do we see? According
to Marx’s tables, between March 1, 1834, and March 1, 1835, the Bank of
England’s gold reserves dropped from 9,104,000 pounds-sterling to 6,274,000.54
Britain’s monetary reserve fund therefore dropped absolutely during this period.
The prices of seven major items rose, seven major items fell, and one major item
remained unchanged. Therefore, commodity prices remained roughly unchanged.

Shaikh-Panico theory fails

If interest rates follow prices, as they should according to the Shaikh-Panico

theory, interest rates should have remained unchanged. If interest rates,
however, reflect changes in the reserve fund, the decline of gold reserves should
have led to a rise in interest rates despite the general price level remaining more
or less unchanged. According to Marx’s table, the market rate of discount rose in
that period from 2.75 to 3.75 percent. This is in accord with theory of interest
rates developed here but contradicts the Shaikh-Panico theory that would predict
that interest rates should have remained unchanged.

Let’s see what happened the following year that begins on March 1, 1835, and
ends on March 1, 1836. This period provides an even stronger test of our two
competing theories. During this year, prices showed a strong upward movement.
The prices of 11 major items rose, only three declined, and one remained
unchanged.

The Shaikh-Panico theory predicts that interest rates should have risen during that
year because of rising British commodity prices. But the Bank of England reserve
fund also rose during this year from 6,724,000 to 7,918,000 pounds sterling. The
absolute rise of the monetary reserve fund as measured by the total quantity of
gold in the vaults of the Bank of England indicated that the absolute rise in
monetary reserves could have actually lowered the rate of interest in this period
according to our theory. However, according to the Shaikh-Panico theory of

54Since Britain was on a gold coin standard in the 1830s, each pound-sterling represented a
definite quantity of gold. More specifically, the pound-sterling was defined as equal to the
quantity of gold contained in a gold Sovereign, which was 7.988052 g (0.2817702 oz). So if
you want to do the math, you can calculate the exact weight of the gold held in the vaults of
the Bank of England using the unit of weight of your choice. 116
interest rates, rising commodity prices should have increased the “price of
provision of finance,” meaning higher interest rates. What actually happened?

According to Marx’s table, the market rate of discount fell from 3.75 to 3.25
percent, in direct opposition to the predictions of the Shaikh-Panico theory but in
full accord with the theory developed here.

How the reserve fund and the total quantity of commodities is compared

The size of the reserve fund has to be measured relative to money in terms of
currency units, which ultimately represent definite weights of gold bullion. Under
any form of gold standard, these units are stable, while under “paper money”
standards such as those that prevail today, they are variable. But at any given
moment in time, the currency units represent definite quantities of gold bullion.
This is why the “dollar price of gold” is so closely watched today, despite the claims
of most economists that this variable has no particular significance!

We can imagine the wealth of the nation being split between two very unequal
piles. In the smaller pile, we have the monetary reserve fund that is measured in
some unit of weight of gold bullion. In the other pile, we have an immense mass
of commodities of many different use values that are qualitatively different and
therefore quantitatively incomparable, not only with gold bullion of the reserve
fund but with each other. However, all the commodities come with price tags
attached to them, and these price tags are ultimately denominated in terms of
gold bullion, though in this case the gold bullion is imaginary—called by Marx
“money of account.”

If we add up the price tags, we can convert the mass of commodities of disparate
use values into an imaginary mass of gold bullion of specific weight. The heavier
the mass of imaginary gold represented by the commodity pile is relative to the
weight of the real gold in the monetary reserve fund the more “stretched out” the
credit system will be and the higher the rate of interest will be. The smaller the
mass of imaginary gold represented by the commodity mass—or rather by their
attached price tags—the lower the rate of interest will be.

In addition to commodities, we have fictitious commodities like corporate stocks—

capitalized dividend flows that contain a strong speculative element based on
expected increases in the flow of dividends—and land prices based on expected
increases in the flow of ground rents, which express themselves as rising real
estate prices. These contrast with the flow of income due to the owners of
government and corporate bonds. Leaving aside possible bankruptcy in the case

117
of corporate bonds, the value of these flows is precisely known—in terms of legal
tender currency units—in advance.

A rise in the prices of these assets puts upward pressure on the rate of interest
because the currency has to circulate not only real commodities but fictitious
commodities as well. If you follow financial markets for any period of time, you
will quickly notice that a day when stock market prices and primary commodity
prices rise decisively will with few exceptions see a rise in the interest rates on
government securities. Similarly, a strong downward movement in stock market
prices, especially if it is combined with a fall in most primary commodity prices,
will see a rise in government bond prices—falling interest rates on government
securities and in the money market in general.

Other factors determine the rate(s) of interest

Another factor affecting the rate of interest is the percentage of gold reserves—
both in government and central bank hands and in private hands—that is offered
for sale in exchange for currency in a given period of time. Over the long haul,
this can be seen as more or less unchanged, so the evolution of interest rates will
be driven by the increase in the quantity of commodities in circulation on one side
versus the increase in the quantity of gold in the various layers of the reserve
fund, governed in the last analysis by the level of global gold production, minus
the amount of gold that disappears from the various monetary reserve funds.

If the quantity of gold grows faster than the quantity of commodities, interest
rates will tend to fall; and if the quantity of commodities grows faster than the
quantity of gold bullion, interest rates will be expected to rise. Keeping in mind
that in the long run the rate of interest cannot equal or exceed the rate of profit,
the extent to which the quantity of (non)monetary commodities can grow relative
to the quantity of gold is limited by that proviso.

If the rate of increase of gold production lags behind the rate of increase in the
production of commodities—which occurs during the boom phase of every
industrial cycle—at some point gold will be perceived as growing, relatively
speaking, increasingly “scarce,” which leads to a smaller percentage of the total
gold in a given period of time being offered for sale into currency. Quantity
becomes quality here and an economic boom is transformed into a crisis.

If the quantity of gold is growing at a faster rate than the growth of the total
quantity of commodities, a greater percentage of gold will be offered for sale into

118
currency in a given period of time, which helps transform a recession into a
recovery.

Finally, under paper money systems the total percentage of the total gold reserve
that will be offered for sale into currency in a given period of time will be affected
by the perceived likelihood55 of the currency either appreciating or depreciating
against gold. If there is fear or belief “in the market” that the currency will soon
depreciate, the amount of gold offered for sale at existing currency prices of gold
will fall, which will end in a sharp rise in the rate of interest. On the other hand, if
the currency is expected to appreciate—for example, as the result of a “Volcker
shock” such as occurred in 1979-1982—the amount of gold offered for sale will
increase, leading to a fall in the rate of interest.

Next month I will examine Shaikh’s grave errors on the theory of money, which
are the source not only of Shaikh’s mistakes on the theory of the determination
of interest rates but in other matters as well, not least the nature of cyclical
crises.

_______

55Even under the gold standard, there is always the possibility that the currency will be taken
“off gold,” since a gold standard is a policy that can be changed. Everything else remaining
equal, the more “solid” the gold standard is perceived to be the lower the interest rate will be.
119
 Three Books on Marxist Political Economy
(Pt 6)
Shaikh’s theory of money

Shaikh deals with money in two chapters—one near the beginning of “Capitalism”
and one near the end. The first is Chapter 5, “Exchange, Money, and Price.” The
other is Chapter 15, “Modern Money and Inflation.” In this post, I will concentrate
on Shaikh’s presentation in Chapter 5. In Chapter 15, Shaikh deals with what he
terms “modern money.” I will deal with his presentation in this chapter when I
deal with Shaikh’s theory of inflation crises that is developed in the last part of
“Capitalism.”

In Chapter 5, Shaikh lists three functions of money—considerably fewer than Marx

does. The three functions, according to Shaikh, are (1) money as a medium of
pricing, (2) money as a medium of circulation, and (3) money as a medium of
safety. Shaikh deals with money’s function as a means of payment under its role
as a means of circulation. The problem with doing this is that money’s role as a
means of payment is by no means identical to its role as a means of circulation
and should have been dealt with separately.

Anybody who has studied seriously the first three chapters of “Capital” Volume I
will be struck by how radically improvised Shaikh’s presentation here is compared
to that of Marx. It is in the first three chapters of “Capital” that Marx develops his
theory of value, exchange value as the necessary form of value, and money as
the highest form of exchange value. He does this before he deals with capital.
Indeed, Marx had to, since the commodity and its independent value form, money,
is absolutely vital to Marx’s whole analysis of capital.

Marx versus classical economics

Marx’s exposition of the nature of value, exchange value and money are not found
in the classical economists, neither Adam Smith nor Ricardo nor any other classical
economist as defined by Marx56, still less the “neo-Ricardian” school, which Shaikh
lumps into a continuing classical school together with Marx.

56 Marx coined the term “classical economists,” who he contrasted with the vulgar economists.
According to Marx, the classical school began with the early French economist Boisguillebert (1646-
1714) and English economist William Petty (1623-1687). Classical economics ends with the French
Jean Charles Léonard de Sismondi (1773-1842) and the English economist David Ricardo (1772-1823).
120
The fact that Shaikh fails to fully repeat or equal Marx’s exposition of value and its
forms is in and of itself not a criticism of Shaikh. Beside the fact that it is a hard
task to equal Marx’s exposition on value and its forms, Marx has already done this
for us. Merely repeating Marx’s exposition does not advance us a single step. At
most, it merely prevents us from slipping backwards.

According to Marx, the classical economists differed from the vulgar economists in that they went
below the surface and saw the capitalist economy as a system where producers are engaged in a complex
division of labor and exchange of the products of their labors. In contrast, the vulgar economists
confined themselves to describing appearances of the capitalist economy. For example, they described
the setting of prices and the equalization of the rates of profit through competition.

As used by Marx, what unites all the economists is that they see capitalism as the final or absolute form
of human society. In the early 19th century, an opposition developed to the economists called the
“socialists.” The socialists, in contrast to the economists, envisioned a society beyond capitalism and
attempted to design various forms of society that they believed should replace capitalism. A subset of
the socialists were the communists—for example, the Englishman Robert Owen, who proposed the
abolition of private property in the means of production.

According to Marx, by the 1830s onward, the further development of the classical school became
impossible. This was due to the growing struggle between the capitalist ruling class on one side and the
working class on the other. Beyond this date, the main task of the economists was to concentrate on
covering up the real origin of surplus value in the unpaid labor of the working class. This was the death
of political economy as a science. At best, bourgeois economists—Thomas Tooke would be an
example—could carry out valuable empirical or statistical studies.

Marx viewed himself, therefore, not as an economist but a socialist, more specifically a communist. He
differed from the earlier socialists, who he called utopian socialists insomuch as they attempted to
design an ideal society to replace capitalism. Instead, basing himself on the work of the classical
economists and going beyond them, Marx showed that the very development of capitalism itself was
making a transition to a higher form of society not only possible but absolutely necessary—a viewpoint 121
Marx called “scientific socialism.”

Keynes borrowed the term “classical economists” from Marx and like Marx he was a keen student of
the history of economic thought. But Keynes changed the meaning of “classical economists.” He
included not only the classical economists defined by Marx but also the founders of the marginalist
school including his own teacher Alfred Marshal. In Marx’s sense of the term, marginalism with its
ever more elaborate mathematical scaffolding is simply the ultimate form of vulgar economics. So
Keynes’s definition of “classical economists” is radically different than Marx’s in terms of social
content.

Shaikh uses “classical economists” in a third way. His definition includes the economists Marx
called classical economists, Marx himself—who would have strongly objected to be considered
an “economist” at all—post-Marxist Marxists, and the modern neo-Ricardian school, whose
outstanding figure is the Italian-British economist Piero Sraffa (1898-1983). Unlike Marx, who
saw classical economics ending in the 1830s due to the growing struggle between the capitalist
class and the working class, Shaikh sees classical economics as a school in economics that
continues until today. While both Marx, and in a quite different way Keynes, viewed
themselves as going beyond what they considered to be “classical economics,” Shaikh views
himself as working within a continuing classical school of economics.
Where would biology and physics be today if biologists and physicists merely
repeated Darwin and Einstein? Still, taking all this into account, one is struck by
how improvised Shaikh’s presentation of value, exchange value and money is
compared with other sections of Shaikh’s work.57

The most important conclusion Marx draws from his exposition of value and its
forms is that value cannot, due to the very nature of commodity production, be
measured directly in terms of hours of abstract human labor, which forms the
(social) substance of value. Instead, value musttake the form of exchange value,
where the value of one commodity—called by Marx the relative form—must be
measured in terms of the use value of another—called by Marx the equivalent
form of value. The social substance of value in one commodity must be put in the
form of the physical substance of another.

The developed form of value that prevails under capitalism—the highest form of
commodity production—is the money form, where one commodity in terms of its
use value measures the value of all other commodities.58

Let’s examine how Shaikh’s exposition of money in Chapter 5 of “Capitalism”

relates to Marx’s presentation in the first three chapters of “Capital”
and elsewhere. Shaikh’s number one function for money is that money serves as
a “medium of pricing.” This lumps together Marx’s money as a measure of value—
the most important function—with money’s secondary role as a standard of price.
“We must specify the medium and a unit,” Shaikh writes. The “medium”
corresponds to Marx’s money as a measure of value and the unit corresponds to
Marx’s money as a standard of price. We will see that Shaikh has failed to grasp

57 Lenin famously remarked somewhere after studying Hegel’s “Logic” that nobody had
understood Marx! For example, if the three most “Hegelian” chapters of “Capital” were indeed
widely mastered, the so-called transformation problem used by generations of Marx critics to
“refute Marx’s labor theory of value” would have been declared fully solveddecades ago.

58Besides the obvious role a correct theory of money plays in crisis theory, the theory of money plays
an important role in explaining why comparative advantage as opposed to absolute advantage cannot
prevail in international trade under the capitalist mode of production. Marx’s theory of value and money
explain that we live in a “mercantilist” world, in which among other things wars are inevitable among
capitalist nations.

Shaikh has done excellent work on comparative advantage, and I am very much in debt to him 122
for my own arguments. But his arguments would be much clearer if he had fully understood
Marx’s theory of value and exchange value. Unfortunately, he doesn’t. So the first three
chapters of “Capital” involves a lot more than simple “Hegelizing” on Marx’s part but are
necessary to understand very real “practical” economic problems such as the laws that govern
world trade under capitalism and ultimately political conflicts and wars that inevitably flow out
of them.
Marx’s conclusion. Shaikh simply does not understand that the medium that
measures the value of a commodity must be and not simply can be the use
value of another commodity.

Shaikh is of course aware, like virtually all economists and historians of money,
that historically money was a commodity. And he gives examples and even
provides pictures of some of the various commodities besides silver and gold that
have served as money. Pictures of various money commodities are indeed the
only pictures in a book that consists otherwise only of text and mathematical
expressions.

Money’s role as a standard of price

“Over time,” Shaikh explains, “a coin containing 1 oz. of silver may come to be
designated by the money name ‘penny.'” This is an example of money’s role as a
standard of price. An ounce of silver bullion is designated a “penny. … ” Instead
of pricing commodities in term of ounces of silver, we can quote the price in terms
of pennies. In earlier times, the penny was more like today’s U.S. 10- or 20-dollar
bills in terms of value and purchasing power than the virtually valueless pennies
issued by the U.S. mint today.

Money’s role as a standard of price works best when the standard remains fixed.
In the above example, this is the case when the “price” of an ounce of silver bullion
in terms of pennies is not allowed to deviate significantly from one penny per
ounce. To the extent the market price of silver bullion rises above one penny per
ounce, the silver penny has become depreciated. If the market price of silver
bullion were to rise to two pennies per ounce, the penny would have lost half its
silver value.

Assuming silver pennies are minted into one-ounce coins by the government
mint—which may or may not be the case—we say that the mint price of an ounce
of silver is one penny. The depreciation of a penny could only occur if the bulk of
silver pennies in circulation came to physically contain less than an ounce of silver
bullion and the silver penny was issued in excessive quantities relative to the silver
bullion monetary reserve fund.

Money’s role as a means of payment not the same as money’s role as a

means of circulation

As the economy booms, commodities are increasingly purchased with credit, while
payments of debts created by these purchases is increasingly done by borrowing
even more money. But with the “unexpected”—as indeed it is to capitalists and

123
their hired economists, who are drunk on prosperity—arrival of a crisis, cash
payment is now demanded. Only hard cash—money—is now wealth! The sudden
assertion of money’s role as a means of payment means a breakdown of the
circulation of commodities. Money’s role as a means of payment is therefore quite
different than money’s role as a means of circulation.

As we saw in 2008 when money’s role as a means of payment suddenly asserted

itself, tens of millions of workers lost their jobs and homes as society was shaken
to its foundation. In the 1930s, the assertion of money’s role as a means of
payment led to among other things the rise of Adolf Hitler. The aftermath of the
2008 crisis has among other things led to Donald Trump coming to power in the
U.S. This shows why Shaikh should have listed money’s role as a means of
payment as a major function of money here instead of lumping it in with its role
as a means of circulation.

The sudden demand for monetary tokens as a means of payment allows

central banks during periods of crisis to issue additional tokens even in the
absence of any increase in the metallic monetary reserve fund without an
immediate depreciation of the tokens and associated inflationary rise in
commodity prices in terms of these tokens.

The reason why the U.S. Federal Reserve System’s “quantitative easing” program
has not yet led to a wave of runaway inflation is that the U.S. dollar functions as
the main international means of payment—the dollar system. Therefore, instead
of a surge in the dollar price of commodities, we saw a sharp decline in the velocity
of circulation of the U.S. dollar.

However, if the Federal Reserve System does not make good its promise to “shrink
its balance sheet”—that is, destroy some of the huge amount of extra dollar tokens
that it created during “quantitative easing,” commodity prices in terms of the U.S.
dollar will rise sharply in the coming years.

Shaikh’s third function, ‘money as a medium of safety,’ and his ‘golden

prices’

Shaikh’s “money as a medium of safety” coincides more or less with Marx’s

category of money as a means of hoarding and accumulation. However, Shaikh’s
reduction of this function of money and accumulation to a mere medium of safety
shows how Shaikh radically improvises Marx’s theory of value and money.

Marx explained that the miser of old hoarding gold coins anticipates the modern
capitalist. Unlike members of old pre-capitalist ruling classes who accumulated

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use values only for immediate or future consumption, the miser like the King Midas
of legend cannot “consume” gold coins. Instead, the miser aims to accumulate
wealth as such in its most abstract form without consuming it. Here we have
accumulation for the sake of accumulation and the production of gold or silver for
the sake of production. The miser is therefore the ancestor of the modern
capitalist.

From miser to modern capitalist

Today’s capitalists accumulate capital in various forms: labor power (growth of

the number of employed productive-of-surplus-value workers on a global scale);
raw materials; auxiliary materials such as the electrical power consumed in a given
period of time; factory buildings, factory machinery and inventories of finished
commodities; and gold bullion—money material. Yes, a certain amount of the total
social capital must still be accumulated in the form of gold bullion.

Once capitalist production becomes established, the quantities of all these forms
of wealth measured in terms of their use values show a rising curve interrupted
only by crises and major wars. Indeed, herein lies the historical justification of the
capitalist mode of production.

Leaving aside crises and wars, the ever-growing mass of wealth, accompanied by
an ever-rising productivity of labor, prepares the way for a higher form of society
without classes, which Marx and Engels called communism. Therefore, with the
industrial capitalists, in contrast to the miser, we have production for the sake of
production not only of money material but of all elements of wealth that can be
increased by the application, directly or indirectly, of human labor.

However, unlike the wealth of the miser, the wealth accumulated by the capitalists
consists of an ever-increasing diversity of use values. Wealth grows not only
quantitatively but qualitatively. Every type of use value has its appropriate unit of
measure. The only way that the total wealth consisting of ever-greater numbers
of use values can be measured quantitatively is by reducing it to a common
substance. This brings us to another function of money that Shaikh should have
dealt with separately—money’s role as a money of account.

If we reduce in our minds all the types of commodities that constitute the total
wealth of capitalists to a single use value—money material—we thereby gain the
ability to measure the total wealth of capitalist society in quantitative terms.
Instead of attempting to measure the quantity of the use values of commodities,
we simply add up the numbers on their price tags—or the prices at which they are
actually sold.

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As Andrew Kilman correctly points out, notwithstanding the fact that he makes
the same basic mistake on money that Shaikh does, “neo-Ricardian” economists
attempt to calculate wealth in what Kilman calls “physical” terms. Last month, we
saw that Shaikh made this typical neo-Ricardian mistake when in his analysis of
exchange rates he attempted to compare global “real wages” that consist to some
extent of different types and not only different quantities of use values.

For example, workers in Bangladesh don’t need to purchase heavy coats and hats
for winter, while workers in Siberia most certainly do. How then can we
quantitatively compare the wages of Bangladesh workers with Siberian workers?
We can do this only in terms of a universal world money—gold bullion—but not in
terms of their real wages.

In the final part of this extended review of Shaikh’s “Capitalism,” we will see that
Shaikh makes the typical neo-Ricardian mistake of calculating in terms of use
values—or in “physical terms,” as Kilman puts it—when he should have been
calculating in monetary terms.

Why not calculate wealth directly in terms of value

We can, of course, calculate wealth—or rather value—directly in terms of abstract

human labor using some unit of time such as hours. This way of measuring value
is useful theoretically for many purposes. This is especially true for grasping the
nature of surplus value, where it indeed is absolutely necessary. But capitalist
society cannot do this, because social production is carried out privately by
industrial capitalists for their own account. Therefore, industrial capitalists have
no way of knowing whether the labor that has actually been expended meets a
social need or is simply wasted except by selling their commodities at prices that
at least equal their prices of production. Therefore, capitalist society is forced to
calculate wealth in terms of the use values of the special commodity that functions
as the universal equivalent—money.

Capitalist society must still accumulate ever greater amounts of money

material

As we saw above, the miser accumulates wealth only in the form of money
material—silver or gold. However, no matter how advanced capitalism becomes,
and with it the ever-increasing types of use values that capitalism produces,
capitalism must still accumulate a certain, even if relatively small, portion of its
wealth in good old-fashioned gold bullion. The ever-increasing amount of
accumulated gold bullion makes possible the growing markets that capitalism
needs if it is to continue.

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But under normal conditions, gold bullion—typically stored in the form of gold
bars—appears as the most absurd form of wealth.59 Who cares if the newly
produced gold bars are accumulated by some “gold bug” investors or in the vaults
of the Russian central bank? However, during crises an “irrational demand”
develops for wealth in this particular form. Now it seems that wealth is only gold
bullion, and in the scramble for gold a lot of wealth in far more useful forms is
destroyed. Indeed, this wealth must be destroyed if capitalism is to emerge from
the crisis.

A brief review of Marx’s theory of money

Because the theory of money presented by Shaikh in “Capitalism” is so

inadequate, we have to briefly review Marx’s basic theory of money. As commodity
production develops, a special commodity that serves as the universal equivalent
emerges in whose use value the values of all othercommodities are measured.
The value of all commodities is measured in terms of some unit of the use value
of the universal commodity—the money commodity. Marx emphasizes that before
a material use value like gold bullion can function as the universal measure of
value of commodities in terms of its own use value, it must first of all be
a commodity in its own right. Under capitalism—fully developed commodity
production—the money commodity must be produced by industrial capitalists
whose only aim, as with all other capitalists, is to maximize their profit.

It is quite impossible to carry around a quantum of pure value—abstract human

labor—in your pocket, or for that matter store it at Fort Knox or in the vault
underneath the Federal Reserve Bank of New York. But it is possible to carry in
your pocket gold coins that represent independent exchange value. To be sure, all
commodities also represent embodied abstract human labor. But only the money
commodity represents embodied human labor that is directly social. In my
country, there is an old labor song, “Solidarity Forever,” sung to the tune of “John
Brown’s Body,”60 which goes in some versions, “In our hands is placed a power
greater than their hoarded gold.”

59I remember back in 1968 when I was a very young person who knew almost nothing about
economics observing the alarm that the huge demand for gold that was quickly exhausting the
supply of gold bars stored in Fort Knox was causing in the media. How could the depletion of
bars of metal sitting in a vault that played no role in the actual production of wealth be a
problem at all?. If it was oil or food that was being exhausted, the cause of the alarm would
have been self-evident, but gold bars that were merely gathering dust somewhere? It was a
good question and finally many decades later helped lead to this blog.
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60John Brown was a radical white abolitionist who attempted to organize a slave rebellion and was
hanged by the pro-slavery government of what was then the state of Virginia. The song “John Brown’s
There is a profound economic truth in the lyrics of this grand old labor song. Under
capitalism, only the labor that goes into the production of gold is directly social.
But when the associated producers of the world have become the conscious
masters of production, the labor embodied in all products will be directly social
labor. Only then will the power of money and capital be banished forever!

The money commodity—from here on, I assume the money commodity is gold
bullion—can be replaced in circulation by representatives or tokens. Token money
dates back at least 2,500 years to Lydia, which is now part of Turkey, and
possibility earlier in China. It arose through the coinage of precious metals. The
minter basically certified that a certain amount of precious metal measured in
terms of some unit of weight that was presented to the mint indeed had the weight
and fineness of metal that it claimed to have.

Even full-weight gold coins, however, become representatives of gold bullion in

circulation. For example, if a gold coin turns over 10 times a year, it will represent
during a year 10 times as much gold as it physically contains. If it turns over 300
times in a year, it will represent 300 times as much bullion as it physically contains
in the course of the year.

As long as the monetary tokens remain sufficiently scarce—relative to the metallic

reserve fund—no matter how light or “clipped” they become in circulation, they
can continue to circulate without losing their bullion value. Only if they are over-
issued relative to the metallic reserve fund will they become depreciated. The
degree of depreciation of a gold coin in circulation is measured by how much the
market price of gold bullion in terms of the coin rises above the mint price.

It doesn’t matter what material the monetary token are made off

Monetary tokens do not have to retain any precious metal at all. Indeed, the
monetary system works best when the currency contains no monetary metal,
because the maximum amount of metal is then freed up to go into the reserve

Body” was sung by Union soldiers as they marched into battle against the pro-slavery rebels. A watered
down version of the stirring anti-slavery hymn was adopted by the Union government in the form of
the “Battle Hymn of the Republic.”

Today, in this form it is used by the U.S. military as a nationalist song to whip up chauvinism
and blind obedience to being sent off to fight in wars against oppressed peoples abroad.
However, the International Workers of the World adopted the same hymn but with words
describing the struggle of wage workers against wage slavery under the title “Solidarity 128
Forever.” Later generations of Unionists expanded the song, though eventually the AFL-CIO
removed the most radical verses in their version that clearly foresee the overthrow of capitalism
by the wage workers.
fund. In addition, the problems associated with coins becoming “light” in
circulation or “clipped” are avoided. In the days when gold coins circulated, the
government had to be careful to withdraw “light coins” from circulation.

From token money to modern fiat money

After the invention of paper—first in China—token money began to made not only
of base metals but of paper. The difference between monetary tokens made of
paper and tokens made of base metals is that it became possible to increase the
quantity of the monetary tokens far more rapidly than before. This made possible
for the first time runaway inflation, with prices in terms of the monetary tokens
increasing at rates of five or more digits per year, which were impossible before.

Monetary policy had to be developed to avoid these disasters. Therefore, with the
coming of paper money, governments made taxes payable in terms of paper
money. Later, states went further and made state-issued paper money “legal
tender” for all debts public and private. Paper money subject to such “forced
circulation” is sometimes called “fiat money.” Therefore, token money made of
non-money material such as paper—as opposed to coins made of actual money
material—can act as a representative of actual money material in circulation only
where the authority of the state that issues them reigns supreme.

Today, under the U.S. world empire, the authority of the U.S. state extends around
the globe, which allows the U.S. dollar to act as a worldwide paper—token—
currency even where the dollar is not officially legal tender. We will know that the
U.S. world empire, whose end has been prematurely announced many times for
those who wish it be gone, has truly ended when the U.S. paper dollar has ceased
to be the world currency.

A third form of money, which is often wrongly confused with token money,
emerges only with emergence of the modern credit system. This is called credit
money. Credit money is a promissory note payable in some other form of money,
either gold or state-issued legal-tender—fiat—paper money by one person to a
second person. The second person can transfer the note to a third person and the
third person can transfer it to fourth person, and so on. In the language of
commercial law, this is called “negotiability.”

Credit money is therefore not a token, as Shaikh mistakenly calls it, but rather a
legal contract in which one person promises to pay another person and that can
be transferred to a third person. As a general rule, credit money is created by
banks that make loans in the form of imaginary deposits. Today, the form of credit
money that makes up the great bulk of the currency in advanced capitalist

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countries is the checkable bank deposits that can be transferred to another person
either by old-fashioned checks or by electronic means.

The laws that govern credit money are quite different from the laws that govern
token money. For example, if token paper fiat money is over-issued, the result is
the depreciation of all the pieces of paper money—the price of gold bullion in terms
of the paper money rises—and sooner or later the prices of all or at least most
commodities in terms of the paper money rise as well. However, if too much credit
money is issued relative to the money that the credit money is payable in on the
demand of the bearer, the result is a run on the banks, a freezing up of credit,
and a fall of prices in terms of the currency that backs up the credit money.

Faced with a threatened collapse of the commercial banking system due to an

over-issue of credit money by the commercial banking system, today’s
governments will convert a looming deflationary crisis into an inflationary crisis by
greatly expanding the legal-tender—fiat—money that backs up the credit money
created by the commercial banking system. This maneuver ends in the
depreciation of the fiat money, which leads to inflation.

From simple circulation to capital

The formula for the simple circulation of commodities is C—M—C. The two C’s
represent different use values of identical exchange value. Here the aim is not to
accumulate wealth but to exchange one form of wealth in terms of use value for
wealth of a different use value—for example, a pair of shoes for five shirts.

Quite different is the general formula of capital M—C—M’. Here, we have two M’s
and one C. In the formula for simple circulation, use values predominate and
exchange value appears merely has a means to an end. In the general formula
for capital, in contrast, the aim is to increase wealth as such, as opposed to
acquiring some use value for either productive or unproductive consumption. In
common language, it is to “make money,” though only the industrial capitalists
who make the money commodity are literally making money (material).

We cannot grasp the nature of capital without understanding the nature of both
the commodity relationship of production and the money relationship of capital,
neither of which are by themselves capital. If we don’t understand the nature of
commodities and money, we will sooner or later make grave errors when we get
to analyzing capital and capitalist production.

The formula M—C—M’ is the general formula for capital as well as the particular
formula for merchant capital, but it is not the specific formula for capitalist

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production. This formula is M—C…P…C’—M’. Profit, or rather profit plus ground
rent, is surplus value realized in money form. It is the difference between M’ at
the end and M at the beginning. Profit, like prices, must be measured in terms of
the use value of the money commodity. The same is true of the fractions that the
total realized surplus value is divided into—profit and rent. It is also true of the
sub-fractions that profit is divided into—profit of enterprise and interest.

Money wages (not real wages) are also measured in terms of money. Secondary
incomes such has the salaries of non-productive of surplus value workers, tax
revenues, and so on that exist under the capitalist mode of production must also
be measured in terms of the use value of the money commodity. Money is also
used to measure the price of politicians for services rendered.

Recently, former President Barack Obama received considerable criticism from

Bernie Sanders and many others for accepting a fee of $400,000 to address a Wall
Street bank on the subject of health care. So the speeches of former U.S.
presidents are measured in terms of the money commodity. With the dollar price
of gold around $1,200 per troy ounce, we can divide $400,000 by $1,200 to obtain
333.33 troy ounces of gold. So it seems that the former president, or rather the
price of his speech, tips the scale at 333.33 troy ounces of gold bullion as far as
the Wall Street bankers are concerned.

So again, the price of politicians—and their speeches—is measured in terms of the

use value of the money commodity. Those progressives engaged in the unenviable
task of trying to return the U.S. Democratic Party to its purely imagined past as a
party of the working class are only too well aware of this function of money!

Some insights of Shaikh

Despite his grave errors, Shaikh being Shaikh provides interesting insights that
put him head and shoulders above almost all other contemporary Marxists even
in this the weakest part of his work. Shaikh noticed in analyzing “long waves” of
periods of accelerated growth followed by periods of slower growth that before
1940 slow-growth periods were accompanied by falling commodity prices while
periods of accelerated growth were accompanied by rising commodity prices. But
after 1940, prices rose virtually without interruption. After 1940, with a few trifling
exceptions, he observed only changes in the rate of price increases not necessarily
associated with periods of slower and faster rates of growth.

Here Shaikh comes to the brink of the correct solution to the problem of “modern
money.” He notes that if you calculate prices in gold as opposed to paper
currencies that patterns of rising prices accompanying periods of accelerated

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growth and falling prices accompanying periods of slower growth reappear.
Throughout this blog, I have borrowed from Shaikh the term “direct prices,”
meaning prices where the values of the commodity being measured and the
quantity of gold doing the measuring are identical.

Shaikh’s terminology is preferable to that of Marx because Marx assumed that his
readers had the same understanding of value and forms of value that he had
acquired but only after many years of intense mental labor. However, as the case
of Shaikh himself shows, that assumption has proven up to today to be generally
unjustified, though this will hopefully change as the 21st century progresses.

Direct prices remind us—if not necessarily Shaikh—that prices refer to different
quantities of the money commodity—weights of gold bullion—while value refers to
a certain quantity of abstract human labor measured in terms of time.

Shaikh has invented another term that I may use in the future—”golden price.”
The concept of “golden price” enables us to further clarify the difference between
money’s role as a measure of value—its basic function—from its secondary role as
a standard of price.

From golden price to price

Gold bullion as a material use value is measured in terms of some unit of weight
such as grams, troy ounces, metric tons, and so forth. Golden prices, to use
Shaikh’s terminology, therefore are expressed in terms of a standard system of
weights and measures. For example, we may use traditional “English” units or
metric units. Historically, prices are first expressed in terms of units of the money
commodity using the appropriate unit of measurement for the use value of the
commodity that serves as universal equivalent. The name of some monetary units
still preserve their origins in standard units of weights and measures.

The most well-known example is the British pound sterling. At one time, a British
pound was defined as an actual pound of silver bullion. But as was the case with
the British currency, names became divorced from their origins as specific weights
of precious metal. By the 19th century, the British pound came to represent not a
pound of sterling silver but the gold bullion contained in a British sovereign, a gold
coin still minted by the British government containing 0.2354 ounces (7.322
grams) of gold. This quantity of gold still legally defines the “gold pound.”

The difference between the market price of gold expressed in paper pounds and
the mint price of gold measured in terms of sovereigns—gold pounds—measures
the dramatic depreciation of the British pound sterling since August 1914. Before

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1914, as a creditor of the Bank of England if you had a five-pound note—the
smallest denomination issued by the Bank of England—you could go down to the
nearest Bank of England branch and cash in your banknote for five full-weight gold
sovereigns. These sovereigns could easily be melted down into bullion and often
were in international trade to be re-coined into, for example, gold dollar coins—
which also had a fixed weight of gold bullion. The gold dollars could also be melted
down and re-coined back into sovereigns or into some other gold coin of a specific
weight.

Shaikh’s “golden prices” are expressed in standard units of weights and measures.
We can use “golden prices” if we want to, but standard units of weights are poorly
designed to function as prices. Imagine quoting the price of your morning cup of
coffee in grams, not to speak of ounces, of gold. For this reason, a special measure
(weights of gold or whatever precious metal served as the money commodity)
grew up that was better suited for providing a convenient system of pricing. Since
it was not very convenient to express commodity prices in terms of grams, troy
ounces, metric tons, English pounds, and so forth of gold, pounds, dollars, marks,
francs and so on came to be used in their place.

These currency units are designed to be easily divided into fractions that represent
tiny amounts of gold bullion that would be extremely clumsy to express in
standard units of weight. Examples in the U.S. are the familiar penny (1/100 of a
dollar), nickel (1/20th of a dollar), quarter (a quarter of a dollar), and half dollar.
For example, a typical commodity price expressed in dollars might be $39.99 for
a pair of shoes.

Shaikh’s concept of “golden prices” therefore enables us to specifically define mint

prices as well as “official” prices of gold. The mint—or under gold bullion standards
the government-defined price of bullion–is therefore nothing else but the rate of
conversion between the standard system of weights and measure and the special
unit of weights and measures that is used for purposes of pricing.

The system of weights and measures that is used for pricing is also used for profits,
rents, interest rates, profits of enterprise, and the total wage bill. We can measure
total corporate profits in a given year in terms of metric tons of gold if we want
to, but it is more convenient to measure them in pounds, dollars, marks, francs,
and so on. We also use this special measure of weights to measure honor, the
price of politicians, and so on.

The same is true of the most important variable in the capitalist economy, the rate
of profit. The rate of profit is a ratio that divides total profit by the total advanced
capital. This division cannot be carried out unless both profit and capital are

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defined in terms of the same physical substance. In making this calculation, we
cannot use the use values that constitute surplus value and divide it by the use
values that constitute capital. The use values are qualitatively different and
therefore quantitatively incomparable.

We can, however, use a common social substance that is qualitatively identical—

value, abstract human labor measured in terms of time. This is not only useful but
indeed necessary, for example in analyzing the long-term tendency of the (falling)
rate of profit, where, as I have explained elsewhere, we assume that all value is
realized. We can divide one quantity of abstract human labor—surplus labor
(value) that is performed without payment by the working class—with another
quantity of abstract human labor, capital. But the capitalists cannot do this if only
because they are engaged in private production for their own account and
therefore have no way to determine whether the labor that has been expended is
socially necessary or not.

So instead they must use exchange value, or in its developed form it must take
the form of monetary value that every person is familiar with. And money
ultimately must be a commodity whose use value is measured in terms of its
appropriate unit of measure. In the case of the precious metals such as gold, this
is some unit of weight.

When we calculate the rate of profit, we do not divide the actual use values of the
commodities that make up surplus value by the use values of the commodities
that make up capital. Rather, we divide the gold represented by the prices of the
commodities that represent surplus value were actually sold at by the monetary
value of commodities that make up capital. Therefore, the rate of profit is
measured by dividing one quantity of gold bullion measured in terms of some unit
of weight—profit—divided by another mass of gold bullion measured by the same
unit of measure.

In calculating the rate of profit, we divide one imaginary quantity of gold bullion
representing realized surplus value by another imaginary quantity of gold bullion
representing capital. If we don’t grasp this, though we might understand that the
rate of profit is the crucial variable that regulates the capitalist system, what the
rate of profit actually is slips through our fingers.

This is self evident as long as the gold standard lasts. But what about after the gold
standard? Here Shaikh becomes confused and makes his big mistake.

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Shaikh’s big mistake on the theory of money

Shaikh writes: “Second, Marx’s published writings are explicitly restricted to the
analysis of monetary systems in which a money commodity (say gold) is the
effective medium of pricing.” But, he asks, “What happens when a money
commodity no longer serves as direct or indirect medium of pricing?” This is where
Shaikh makes a radically wrong turn that will have grave consequences for much
of the rest of his analysis in “Capitalism.” The correct answer to Shaikh’s question
is that what he is asking is impossible and his question is therefore meaningless.
It would be like asking how we can explain the orbits of the planets of the solar
system once gravity ceases to operate.

Shaikh fails to understand this, and it is at this point that his analysis starts to go
rapidly downhill. “And,” Shaikh claims, “[Marx’s] elliptical references to those
forms of state-issued paper money which do not obey the laws of commodity
money remain mysterious to this day.” Shakih does not provide a single quote to
support his contention that Marx ever made references to a form of money that
does not depend on “commodity money.” The only mystery here is exactly what
passages Shaikh is referring to.

In a footnote, Shaikh comes close to admitting that these “mysterious passages”

are non-existent: “Most authors conclude that even Marx’s theory of fiat money is
functionally tied to a money commodity. … ” But let’s take up Shaikh’s analysis
before he makes his great blunder.

Shaikh observes that the vast increase in the rate of growth and quantity of money
material following the gold discoveries in California in 1848 and Australia in 1851
did not raise prices nearly as much as the quantity theory of money would have
predicted. This theory is based on the assumption that the natural state of the
capitalist economy is “full employment,” at least of the physical means of
production if not of labor power. This was Ricardo’s position. Later on, the
neoclassical marginalists added the full employment of the workers (“labor”) as
well. The quantity theory of money, therefore, rests on the claim that the limits of
capitalist production are the physical limits of production in general. In this way,
capitalist production is made to appear as the absolute final form of production
never to be superseded.

The supporters of the quantity theory of money from Ricardo to Milton Friedman
have assumed that industrial output can only be increased gradually through the
creation of new means of production—and growth of the working class
population—since the existing means of production—including labor (power), the
neoclassicals add—are already fully employed.

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A sudden increase in the quantity of money or in the rate of the growth of the
quantity of money, such as occurred 1848-1851, will cause monetarily effective
demand at current prices to increase faster than the production of commodities
can increase. The quantity theory of money theorists reason that any increase in
growth of demand at current prices beyond the very limited ability of production
to increase in the short run means that the industrial capitalists will not be able to
meet demand at existing prices. The gap between the supply of commodities
including labor (power) and the demand for commodities at current prices will be
corrected by a rise in prices and wages. This is all perfectly consistent with Say’s
so-called law.

The gold discoveries of 1848-1851, therefore, put the quantity theory of money
to a test. What happened? Referring to the great historian of prices, Thomas
Tooke, Shaikh writes: Tooke finds “that in the wake of discovery of gold in
California in the late 1840’s, the global price level rose much less than the global
quantity of money, contrary to the what the Quantity Theory of Money predicted.
One reason for this is that output of commodities increased substantially.”

These facts not only blow up the quantity theory of money but show that a lack of
demand was holding down the growth of industrial output before the gold
discoveries of 1848-1851. The industrial capitalists in the pre-1848 period were
physically capable of developing industrial production at a much faster rate than
they were doing but could not as capitalists do so because when they did markets
became flooded. Not all the commodities could be sold at the existing prices so
that profit measured in terms of money—weights of gold bullion—disappeared.
And production that is not profitable will not be carried out, at least for very long,
under the capitalist mode of production. The result for the workers is increased
unemployment and poverty.

However, when the gold discoveries of 1848 and 1851 accelerated the growth of
the market, the limits for that demand—a specific limitation put on production by
capitalist relations of production—was partially removed. The result as observed
by Thomas Tooke was that the rate of growth in production was considerably
accelerated. Whole new industries arose not only in Britain but in other developing
capitalist countries of the epoch, including France, the German lands, and the
United States.

The consequent increased demand for labor power reduced poverty among the
workers by allowing wages, not only money wages measured in terms of gold
bullion but real wages measured in terms of the use values of the commodities
that workers consumed, to rise. These developments dashed hopes of an early
socialist revolution Marx and Engels had entertained in their youth.

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Instead, the years immediately following the publication of the “Communist
Manifesto” turned out not to be the opening of the socialist revolution but a period
of greatly accelerated capitalist development. Therefore, far from being “neutral”
as far as the production of real wealth—measured in terms of use values—is
concerned, affecting only the nominal level of prices and wages as supporters of
the quantity of theory of money claim, an increase (or a slowdown) in the rate of
growth of the quantity of money can dramatically affect the rate of economic
growth and can indeed completely change political prospects.

Shaikh’s fall to earth

What would be the consequences if “pure fiat money” were actually possible?
Wouldn’t it allow the state to eliminate capitalist crises of overproduction? Shaikh
answers this question in the affirmative. He writes, “The beauty of fiat money and
the modern credit system is that they fuel a growth in aggregate demand for
commodities far in excess of any possible growth in the potential supply.”

Here Shaikh, who often soars above the crowd of Marxist—and other—economists,
falls to earth. We are back to the world of Say’s Law, where under capitalism
supply creates its own demand and the limits of production are the physical ability
to produce. As Marx somewhere remarked of Ricardo in a similar context, this is
quite unworthy of Shaikh!

Next: Shaikh’s theory of profit, money, demand and crises.

_______

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 Three Books on Marxist Political Economy
(Pt 7)
“The real net rate of profit,” Shaikh writes, “is the central driver of accumulation,
the material foundation around which the ‘animal spirits’ of capitalists frisk, with
injections of net new purchasing power taking on a major role in the era of fiat
money.” This sentence sums both the strengths and the basic flaw in Shaikh’s
theory of crises, and without too much exaggeration the whole of his “Capitalism.”

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

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

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

Surplus product, surplus value and profit

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

Under capitalism, simple and expanded reproduction in physical terms, is merely

a by-product of the simple and expanded reproduction of capital. To think
otherwise is to overlook what distinguishes capitalist production from socialist

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production. Capitalist production is the accumulation of wealth in the form of
capital—accumulated value—through the production and transformation of
surplus value into additional capital. Therefore, it is surplus value—and the form
that surplus value must take—net monetary profit61 —if capitalist (re)production
is to proceed that constitutes the “material and social foundation” that gives rise
to the frisky “animal spirits” of capitalism.

As I stated last month, capitalist production is unlike previous modes of

production, which produced surplus product for the consumption of a ruling class
of non-workers. Capitalist production is production for the sake of production. But
it is production for the sake of production of wealth in the specific form of capital.
In order to expand their capital to the maximum extent possible—a necessity
imposed on individual capitalists and capitalist corporations by competition—
capitalists must maximize profit. As far as the capitalists are concerned, that profit
must be measured in terms of money—the form of value—and not in terms of the
use values of the commodities that are sold for the purpose of realizing a profit.
If I may paraphrase Milton Friedman, profit is always and everywhere
a monetary phenomenon.62

Marx defined the general formula of capital as M—C—M’. It is the difference

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

Starting in “Capital” Volume I, Marx had to lay the foundation of his analysis by
analyzing the nature of commodities, value, and the various forms of value, which
ends with an analysis of monetary value as the fully developed form of exchange

61 Actually, the term monetary profit—or monetary net profit—is a redundancy because there
is no such thing as non-monetary profit. The term real profit or real net profit is a contradiction
in terms.
62 Friedman when polemicizing during the 1970s against Keynesian economists, who claimed
that the high rate of inflation was caused by rising money wages or one-time shocks like the
rise in the price of oil, famously stressed that inflation is “always and everywhere a monetary 139
phenomena.” The inflation, Friedman explained, was caused by the Federal Reserve System
and other central banks printing too much paper money or its bookkeeping equivalent.
value, before he could analyze capital, the main subject of his work. Only after he
had completed this task was he able to begin his analysis of capital proper.

The general formula of capital is established in Chapter 4 of Volume I. Again, this

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

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

The general formula for capitalist production is M—C..P..C’—M’. This is actually a

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

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

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

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with. Only then have they made a profit—the only point, as far as the capitalists
are concerned, of the operation in the first place.

Neo-Ricardianism versus Marxism

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

Why profit is everywhere and always a monetary phenomenon

Ricardo attempted to demonstrate the essence that underlines the surface

phenomenon of profit. Ricardo’s corn models were not original. He followed in the
footsteps of the French physiocrats—a school of classical political economy that
flourished in 18th-century France. It was the physiocrats who first attempted to
analyze the essence that underlines monetary rent63. They found it in the
production of seed grain that is used to produce an additional quantity of grain.
The physiocrats, as their name suggests, were the original “physicalists,” to use
Andrew Kilman’s terminology in his criticism of neo-Ricardianism.

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

The physiocrats were misled in large measure because of the immature conditions
in which they worked. They confused the physical biological process of the simple
reproduction and expanded reproduction of grainwith the social process of the

63Another mistake the physiocrats made was to fail to treat surplus value as a specific category.
Instead, they used the name of a fraction of the surplus value—in their case rent—and then
used rent to describe the entire surplus value. Later economists made the same basic mistake
but instead of rent they used other names that also describe fractions of the total surplus value.
For example, surplus value was often described as “profit” or “interest.” No bourgeois
economist or socialist critique of the economists used a term to describe surplus value as a 141
whole before Marx used the German word Mehrwert, translated into English as surplus value.
simple and expanded reproduction of capital. This led them to the false view that
non-agricultural industrial production was “sterile”—did not produce surplus value.

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

Smith was led by his theory of labor value to draw the conclusion that profit arose
not from the expanded reproduction of seed grain but from the unpaid labor
performed by wage workers. “The value,” Smith wrote in his “Wealth of Nations,”
“which the workmen add to the materials, therefore, resolves itself in this case
into two parts, of which the one pays their wages, the other the profits64 of their
employer upon the whole stock of materials and wages which he advanced.”
(Quoted from the chapter on Adam Smith in Marx’s “Theories of surplus value”)

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

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

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

64 Here Adam Smith, who lived in the far more mature conditions that were already coming
into being in Britain during the industrial revolution, called surplus value profit rather than rent.
But again, he failed to use a specific term to describe the surplus value as a whole.
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Ricardo, however, plunged ahead and applied the law of labor value to capitalist
production despite the transformation problem, which he was well aware of.
Ricardo realized that capitalist production was a process of the exchange of the
products of labor. His mathematical mind would not permit the eclecticism that
characterized Adam Smith’s approach to value. However, Ricardo was not able to
solve the transformation problem. As a result, Ricardo’s work was riddled with
contradictions that his opponents, eager to dismantle his “system,” pointed out.

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

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

Contradictions of the Ricardian theory of value

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

The other contradiction of Ricardian economics was the transformation problem,

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

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Ricardo, like Smith, was well aware of the difference between market prices
determined by supply and demand and natural prices that form the axis around
which market prices fluctuate. The transformation problem involves the
relationship between the prices of production and the relative quantities of labor
that are necessary to produce commodities under the prevailing conditions of
production. The contradiction arose because Ricardo, like Smith, defined the value
of a commodity as its natural price—price of production.65

Ricardo following Adam Smith believed that constant capital could in the final
analysis be reduced to wages. According to Smith—and Ricardo—all capital if you
go back far enough in the final analysis consists of commodities that make up the
real wages of workers. However, Smith and Ricardo observed that capital had very
different durabilities.66 Some capital in the process of its turnover takes the form
of fixed capital—buildings and machinery that exist for many years or even
decades. If commodities that were produced with larger than average amounts of
fixed capital—Marx would say constant capital—were sold at prices proportional to
their labor values, such capitals would realize a lower rate of profit than capitals

65Ricardo also failed to distinguish between concrete labor, which produces use values, and
abstract labor, which produces value. As a result, the road to developing a correct theory of
money and price was blocked. Ricardo was therefore unable to solve the transformation
problem.

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

Shaikh is impressed by Adam Smith’s reduction of constant capital to wage goods in the “final
analysis,” because he sees it as an ancestor to today’s input-output tables. Marx, in contrast, complained
that Adam Smith went from “pillar to post.” It is indeed a fine theory that treats capital as consisting in
the final analysis of the means of subsistence of the workers. Smith’s analysis that all capital consists
“in the final analysis” of wage goods were accepted by all economists between Smith and Marx. This
prevented classical political economy from developing the distinction between constant and variable 144
capital, distinguishing between the rate of surplus value and the rate of profit that forms the foundation
on Marx’s concepts of the composition and the organic composition of capital and the tendency of the
rate of profit to fall.

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

As a result, the prices of production are only approximately proportional to their

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

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

The end of classical political economy

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

How Marx solved the contradictions of Ricardian value theory

These two contradictions of the Ricardian theory of value were solved by Marx.
Marx used the distinction between labor and labor power—first noted by British

145
philosopher Thomas Hobbes but ignored by the classical economists—to reconcile
surplus value based on unpaid labor first established by Adam Smith before he
surrendered to the transformation problem—with the “exchange of equal
quantities of labor.” With Marx’s epoch-making theory of surplus value, socialism
became a science. On this basis, the Second and Third internationals were built.

Marx’s other great discovery, the distinction between value and exchange value
(the form of value) has been less well understood in the Marxist movement, or
rather with few exceptions, as the example of even a Marxist economist of the
stature of Shaikh shows, has not really been understood at all.67 As a result, “Marx
critics” have been able to keep alive the transformation problem handed down
from classical political economy and use it to sow doubt in the correctness of the
Marxist theory of value and therefore exploitation and surplus value.

I remember in my own youth attempting to make sense of neo-Ricardian

economist Ian Steedman’s book “Marx After Sraffa.” The book is full of
mathematical formulas that Steedman claimed rigorously disproved Marx’s law of
labor value. Steedman concluded that Marxists should abandon the labor theory
of value and surplus value. Marx, according to Steedman, had to work with the
labor theory of value inherited from Ricardo. But now, according to Steedman, we
have the far superior work of Sraffa that definitely replaces both Ricardo and Marx

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

For example, the various attempts by Soviet economists to use “the levers of money commodity
relations” to improve the workings of the Soviet planned economy—so strongly criticized by Che
Guevara—eventually led to the disastrous perestroika economic reforms of the late 1980s. These
“reforms” destroyed the Soviet economy and the Soviet state itself. Of course, as historical materialists
we should understand that more than bad theories were at work that led to the fall of Second and Third
Internationals, the Soviet Union and the socialist countries of eastern Europe. There were very real
material interests involved, which ultimately reflected the class struggle between the basic classes of
society—the capitalist class and the working class—that led to these disastrous outcomes. 146

But incorrect theories played a role in disarming the working class vanguard, thereby
beheading the working class as whole. The next international will have to be built on the lessons
of the collapse of the Second and Third Internationals and the destruction—as well as the
achievements of—the Soviet Union and other socialist countries. A firm understanding of what
“value” is and is not and the relationship between the forms of value as well as the difference
between capitalist and socialist production will therefore have to be built into the foundation
of the next workers’ international.
as far as value theory is concerned. However, if Steedman is right, socialism is no
longer a science, since Marx’s theory of surplus value is now refuted.

Shaikh and neo-Ricardianism

Anwar Shaikh, who originally trained as an engineer before he switched to

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

However, there is weak side of Shaikh that reflects this neo-Ricardian influence.
Throughout his work, he exhibits a tendency to slip into a “physicalism” that arises
from his failure to fully grasp the difference between Ricardo’s and Marx’s theories
of value. In value theory, Shaikh is in many ways more of a Ricardian—not neo-
Ricardian68—than a Marxist. This is weakness widely shared by today’s Marxists.

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

We can speak about surplus value and a fraction of surplus value, and we can
speak about ground rent, profit including interest, and profit of enterprise that

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

From the neo-Ricardian viewpoint, Ricardo was right when he developed his corn models and should
have stuck with that approach rather than develop his concept of labor value, which only involved him
in the contradictions of the transformation problem. However, from the Marxist point of view, Ricardo’s
development of a far more consistent theory of labor value than found in his predecessors was his
greatest achievement. Both Marxism and neo-Ricardianism pay tribute to Ricardo, but they are based
147
on quite different parts of the Ricardian legacy.

Shaikh is a strong adherent of the labor value approach. In terms of value theory, Shaikh is
most certainly not a neo-Ricardian. However, his failure to understand the forms of value and
consequently the impossibility of “pure fiat money” under capitalism means that he does
not fullyunderstand the advances that Marx made that took him far beyond Ricardo. Shaikh
remains stuck, at least to some extent, at a “Ricardian” level when it comes to value theory.
represent the division of surplus value among the landowners, the money
capitalists, commercial capitalists and industrial capitalists. Or we can refer to the
surplus product—the use values of the commodities that are consumed, whether
in personal consumption or productive consumption, by those who consume
surplus value. But surplus product is not the same as profit as an economic
category.

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

Therefore, I will concentrate on this particular economic episode, just as Shaikh

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

Shaikh and the two camps in crisis theory

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

Many members of the not-enough-surplus value camp keep both factors in mind.
As falling unemployment makes labor power increasingly scarce, the price of labor
power—wages—rises. The capitalists respond to rising wages and falling rates of
surplus value by replacing “expensive” labor power with relatively cheaper
machines. The rate of profit comes under pressure from both a falling rate of

148
surplus value and a rising organic composition of capital. Sooner or later, members
of this camp emphasize, the falling rate of profit ends in a crisis since capitalist
production is only production for profit. No—or not enough—surplus value, no
profit, no profit no production.

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

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

In expanded reproduction—and this is often a point of confusion—it is true that a

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

Instead, the wages of newly hired workers—or extra wages earned through
expanded hours of work—allow the capitalists to realize the new variable capital—
or more precisely, the necessary value that replaces the variable capital that the
industrial capitalists have expended, and notsurplus value at all. If wages drop
below the value of labor power—which happens often enough in the real world—
the capitalists might indeed have difficulty selling the means of consumption that
constitute the real wages of the workers.

It is possible that increased consumption by the capitalists or their hangers-on

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

149
So the problem of realizing the value of commodities involves in reality not only
the question of realizing surplus value but the entire value of the commodity. That
includes (1) the value that replaces the value of variable capital consumed in the
process of production, (2) the constant capital that transfers pre-existing value to
the commodities, and (3) the surplus value that is added to the finished product.

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

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

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

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

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

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

The bourgeois counterpart of this argument is found in so-called “supply-side

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

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

Trump claims that these “pro-business,” “supply-side” policies will boost the rate
of growth of the U.S. GDP to over 3 percent and restore the U.S.’s lost industrial
glory. This argument was popular among the supporters of Ronald Reagan,
considered the most right-wing recent U.S. president before Trump. Whether
Trump’s “supply-side” programs will in fact lead to a revival of U.S. industry will
be dealt with in my review of John Smith’s “Imperialism.”69

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

A difference between the U.S. Democrats and right-wing Republican ideologues is that while both 151
parties like to propose regressive tax cuts to “stimulate the economy,” the Democrats use Keynesian
arguments while Republicans like to use “supply-side economics.”

The Democrats will claim that the regressive tax cuts will stimulate demand and thus “trickle down” to
the middle class, the workers and the poor. Republicans prefer to argue that regressive tax cuts will by
However, unlike many other supporters of the not-enough-surplus value camp—
and here the superiority of his analysis shows itself—Shaikh, does not deny that
an expansion of the market independent of an increase in the rate of surplus value
can accelerate economic growth. He sees demand as at least partially independent
of the rate of surplus value and the rate of profit. The market can, Shaikh
realizes, expand independentlyof the general level of investment and then react
in a secondary movement on the level of investment.

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

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

But as we saw over the last few months, Shaikh also believes “pure fiat money”
that does not represent the value of a money commodity is possible under the
capitalist system. Can the increased issue of such “pure fiat money” by the

increasing after-tax profits stimulate investment, which in turn will further increase employment. In this
way, the effects will “trickle down” to the middle class, the workers and the poor.

The Democrats are considered “progressive,” however, because they base their arguments on Keynes,
who many Republican economists consider to have been a dangerous “socialist” whose ideas undermine
the “free enterprise” system. To be fair to him, President Trump has recently used some Keynesian
arguments. For example, he claims that his proposed $200 billion public works program—the details
of which are still vague—will through the “multiplier effect” lead to a trillion dollars in combined public
and private investment. He also explained in a recent interview with The Economist that his programs
will “prime the pump,” a Keynesian term preferred by Democrats rather than a supply-side argument
preferred by Republican economists.
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Perhaps the tendency of the U.S. president to use some “progressive Keynesian” terminology
rather than the “conservative terminology” proffered by most Republicans reflects Trump’s
past as a Democrat. Though the arguments of the Democrats and Republicans in support of
“trickle-down” policies are indeed somewhat different—and Shaikh’s analysis is actually
closer to the Republican analysis—the results are the same.
monetary authorities create additional demand—expand the market—much as the
gold discoveries of 1848-51 did? Shaikh answers this question in the affirmative.

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

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

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

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

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

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

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

A consequence of Shaikh’s analysis is that capitalism underwent a considerable

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

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

If he were consistent, Shaikh should acknowledge that, according to his theory,

crises before 1940 perhaps were, as Marx and Engels described them, crises of
the generalized overproduction of commodities. But since 1940, thanks to
“modern pure fiat money” replacing gold bullion as the medium of pricing, Say’s
law has come into effect. As a result, since 1940 crises of generalized
overproduction no longer occur, since capitalist governments and their central

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banks can create as much demand as they like. Under the post-1940 conditions,
it is now impossible for the industrial capitalists to produce more commodities than
the market can absorb at profitable prices. These are the conclusions that
inevitably follow if Shaikh’s claim is correct that since 1940 we have been living in
age of “pure fiat money”.

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

Shaikh’s theory of recurrent ‘great depressions’

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

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

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

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

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

A feature of his analysis is Shaikh’s tendency to weave between a value and a

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

Fluctuations in the rate of interest

An important role is played, according to Shaikh, in capitalism’s constant

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

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

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while long waves of prosperity were marked by rising price levels and interest
rates.

According to Shaikh’s interpretation of “Gibson’s Paradox” and my old post on

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

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

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

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

Logically, if we follow Shaikh, this should establish a limit on how high prices can
rise in absolute terms in the age of “pure fiat money.” If Shaikh is right, sooner

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or later the post-1940 rise in prices should end—and it hard to explain why this
rise in prices did not end decades ago.

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

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

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

While basic economic laws can be modified by certain circumstances, an economic

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

Is there a natural rate of unemployment?

The theory that there is a natural rate of unemployment holds that, just like
market prices fluctuate around natural prices—prices of production in classical and
Marxist economic theory, the rate of unemployment fluctuates around a “natural
rate of unemployment.” Any attempt by the government to lower the
unemployment below this natural rate through increasing demand—deficit

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spending and increasing the issue of “pure fiat money”—will only, according to
this theory, temporarily reduce unemployment. After a lag, the rate of
unemployment will return to its natural rate but inflation will accelerate. Using this
argument, Milton Friedman opposed “Keynesian” government policies aimed at
stimulating demand as a way to combat unemployment.

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

Therefore, supporters of the natural rate of unemployment theory—which include

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

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

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

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

Shaikh’s explanation of the 1970s stagflation

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

Therefore, according to Shaikh, it was not a shortage of demand—markets—but

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

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

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

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

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

One is struck by how much Shaikh is in agreement not with “progressive”

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

However, like other members of the not-enough-surplus value camp of crisis,

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

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

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

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

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

_______

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 Three Books on Marxist Political Economy
(Pt 8)
Engels wrote in “Socialism Utopian and Scientific”: “We have seen that the ever-
increasing perfectibility of modern machinery is, by the anarchy of social
production, turned into a compulsory law that forces the individual industrial
capitalist always to improve his machinery, always to increase its productive force.
The bare possibility of extending the field of production is transformed for him into
a similarly compulsory law. The enormous expansive force of modern industry,
compared with which that of gases is mere child’s play, appears to us now as
a necessity for expansion, both qualitative and quantitative, that laughs at all
resistance. Such resistance is offered by consumption, by sales, by the markets
for the products of modern industry. But the capacity for extension, extensive and
intensive, of the markets is primarily governed by quite different laws that work
much less energetically. The extension of the markets cannot keep pace with the
extension of production. The collision becomes inevitable, and as this cannot
produce any real solution so long as it does not break in pieces the capitalist mode
of production, the collisions become periodic. Capitalist production has begotten
another ‘vicious circle.’”

This famous quote was written when Marx was still alive. It passed his muster.
Indeed, throughout their long partnership, the founders of scientific socialism
described cyclical capitalist crises as crises of the general relative overproduction
of commodities. However, most modern Marxist economists reject this idea.
Among them is Anwar Shaikh.

Shaikh, in contrast to Marx and Engels, believes that the limit “modern
industry” runs into is not the market but the supply of labor power. Marx and
Engels believed that securing an adequate quantity of “free labor power” was
crucial to the establishment of the capitalist mode of production. This was the big
problem early capitalists faced, which was solved by separating the producers,
often through force and violence, from their means of production. But once
capitalism was firmly established, it has been the limit imposed by the limited
ability of the market to grow relative to production that capitalism regularly runs
up against.

Shaikh’s theory of the ‘natural rate of unemployment’

When the rate of unemployment falls below what Shaikh calls the “natural rate of
unemployment,” the rate of surplus value—in real terms, surplus product—

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declines.70 As capitalist industry shifts to producing more means of consumption
for the workers previously employed, according to Shaikh, the production of
means of production and means of subsistence previously used to expand the
scale of production falls. This causes economic growth to slow.

In addition, the capitalists react to rising real wages by accelerating the

replacement of living labor by machinery. The result is that not only does the fund,
defined in physical terms, used to expand the scale of production shrink, but there
is a shift within this fund from the production of means of subsistence used to hire
additional workers to machinery. The number of new jobs created cannot keep up
with growth in the (working class) population.

The rising rate of unemployment—relative to the natural rate—causes the rate of

unemployment to rise towards and then above the natural rate. The fund used to
expand production, defined in physical terms, will again rise as industry is freed
up from producing means of subsistence for workers already employed and back
toward producing means of subsistence to hire additional workers, or expand the
hours of workers already employed, as well as produce additional machinery that
will be used to expand the scale of production. The rate of economic growth rises.

70 Though Shaikh tends to mix them up, the categories of surplus value, profit and surplus product are
actually different categories that have different units of measure. Surplus value is the unpaid labor that
the working class has to perform for the capitalist class. Surplus value consists of a homogeneous social
substance—abstract human labor—which is measured in terms of some unit of time. Profit is the form
that surplus value must assume under the capitalist mode of production. It is broadly defined as the
realized surplus value—the sum total of profit and rent—and more narrowly defined as the total sum of
realized surplus value minus rent.

Profit must be measured in terms of a homogeneous physical substance. This substance is the use value
of the money commodity measured by a unit of measure appropriate to that particular use value. Since
gold bullion is the money commodity, profit is measured by some unit of weight.

Finally, we come to the surplus social product. The surplus product is not homogeneous but is made up
of heterogeneous physical substances (goods and services), each with its appropriate unit of measure. 164
It consists of use values that are used as means of subsistence and luxury consumption by the capitalist
class and other non-workers, a reserve or insurance fund, and the means of production and subsistence
used to expand the scale of production in physical terms.

In order for capitalist expanded reproduction to continue, surplus value must be produced and realized
as profit measured in terms of the use value of the money commodity. In addition to profit, surplus
product must also consist of use values produced in correct proportions used to expand production in
physical terms.
With labor power once again relatively cheap compared to new machinery, the
capitalists will slow the rate at which they replace living labor with
machinery. Unemployment starts to fall due to the combined effects of accelerated
economic growth and a slower rate of growth of labor productivity. Eventually,
unemployment again falls below the natural rate of unemployment and the cycle
repeats.

Over time, in a turbulent movement, unemployment fluctuates around the axis of

the natural rate of unemployment, just like market prices fluctuate around the
prices of production. At quasi-regular intervals, capitalism fluctuates between
“long waves of prosperity” characterized by unemployment below the natural rate
of unemployment, and “great depressions” with unemployment holding above the
natural rate. Shaikh considers the “Long Depression” of 1873-1896, the 1929-
1940 “Great Depression,” the stagflation of the 1970s and early 1980s, and the
period beginning with the onset of the Great Recession in 2007, which he expects
to end around 2018, to be examples of “great depressions” in the history of
capitalist production.

Though I do not accept Shakih’s view that there is a natural rate of unemployment
akin to the natural prices of classical political economy and the prices of production
of Marx, there are important insights within this analysis. When the productivity
of labor grows more rapidly than is usually the case under capitalism, the rate
unemployment will tend to rise. The result will be that the rate of surplus value
rises putting downward pressure on wages defined in terms of value, as well as
money wages and real wages. Labor power becomes in terms of values and prices
both absolutely and relatively cheaper compared to machinery.

The cheapening of labor power will increase the demand for labor power,
causing unemployment to fall. Therefore, under the capitalist mode of production
the rate of growth of the productivity of labor, which tends to express itself as an
increase in the organic composition of capital, is not merely a function of the
growing power of technology provided by the progress of science and engineering.
The rate of growth in the productivity of labor and the organic composition of
capital is actually regulated by the rate of surplus value. All other things remaining
equal, a high rate of surplus value means a slowdown in the rate of the growth of
productivity while a low rate of surplus value will increase the rate of growth of
labor productivity.

Capitalist economists claim they are mystified by the slowdown in the rate of
growth of the productivity of labor during the 1970s “stagflation” and again since
the Great Recession. But there should be no mystery here even for economists
trained in the various marginalist schools of economics. The 1970s saw a drop in

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real wages and in terms of value. The economic crises and inflation of this period
increased the rate of surplus value, thereby slowing the increase in the growth of
labor productivity.

Modern capitalist economists often point out that the key to the economic and
ultimately the social progress of society is the increase in the productivity of labor.
In this respect, they are in agreement with Marx. Indeed, a key tenet of historical
materialism is that the succession of differing modes of production is ultimately
determined by their ability to increase the productivity of labor. Therefore, rising
labor productivity is the key to human progress.

However, if the economists were really interested in increasing the rate of growth
of labor productivity and with it human progress in general, they would advocate
passing laws that strengthen the workers in their everyday struggles with the
capitalists over the rate of surplus value.

They should favor all laws that favor unionization and oppose all laws designed to
strengthen the hands of the employers. In the United States, the economics
profession should launch a struggle for the repeal of the Taft-Hartley law. This
would wipe “right to work for less” laws, which have been spreading from state to
state, off the books. The economics profession should be virtually united not only
in the purely negative struggle against the Republican-Trump attempt to “repeal
Obamacare” but in a positive struggle for the introduction of a single-payer health
insurance system on a federal level. Adopting this system would finally bring the
U.S. up to world standards by recognizing health care as a right and not a
commodity that can only be purchased by those who have sufficient money.

In the United States, a federal-level single-payer system would deprive the bosses
of one their most important weapons in their daily struggle to increase the rate of
surplus value by ending their ability to terminate the access to health care
of workers and their families. Such a measure by making labor power relatively
more expensive to the capitalists relative to machinery would give the capitalists
a real incentive to economize on the use of labor power. For the same reason, the
economics profession should also be in the vanguard of the $15-an-hour minimum
wage at both state and federal levels.

These measures would give a massive boost to the rate of growth of labor
productivity of U.S. capitalist industry. But with relatively few exceptions, the
economics profession is dominated by the paid and bought representatives of
capital and therefore do not support any of the above measures. These economists
are not really interested in increasing the rate of growth of the productivity of
human labor and of human progress in general. Instead, they only support policies

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that increase the rate of profit that accrues to the owners of capital, even though
such policies depress the rate of growth of labor productivity.

However, as important as Shaikh’s observations about the relationship between

the rate of exploitation of living labor and the rate of growth of productivity is,
they do not in and of themselves constitute an adequate theory of cyclical
capitalist crises. Instead, they help to explain the role that the periodic capitalist
crises play in maintaining the system of capitalist wage slavery over the long run.

In “Capitalism,” influenced by the Russian economist Nikolai Kondratiev (1892-

1938) and Belgium Marxist economist Ernest Mandel (1923-1995), Shaikh
concentrates on “long cycles”—called by Mandel “long waves”—that span a
number of industrial cycles.

Shaikh has little to say about the shorter term crises—or recessions—that occur
during both “long waves of prosperity” and “great depressions.” Perhaps he
believes the shorter-term recessions and booms are a consequence of the
“turbulent movement” through which the rate of unemployment fluctuates around
the “natural rate of unemployment.” However, the logic of Shaikh’s analysis
implies that cyclical recessions and booms are caused by the same factors that
cause “great depressions” and “long waves of prosperity.” A “great depression” in
Shaikh’s sense of the term is simply a series of recessions that are either more
severe or longer than recessions during “long waves of prosperity.”

Are recessions caused by a lack of markets or a lack of labor power?

The question whether cyclical recessions are caused by a lack of markets or a lack
of labor power has again come to the fore in practical politics due to the advanced
age of the current industrial cycle. This cycle, which began in 2007 when the Great
Recession began, is now almost 10 years old. During this industrial cycle, Donald
Trump—and similar right-wing demagogues in other imperialist countries71—have
been able to gain a certain following among the white working class by promising
through economic nationalism to bring back good-paying industrial jobs. If an
ordinary recession occurs over the next three or four years, even if it is much
milder than the Great Recession, Trump’s promise will be all the more exposed as

71 In an encouraging development, it seems that thanks to the embarrassing performance of

Trump in office, combined with the strong opposition Trump has faced in the streets of the
U.S., the far right in Europe is now losing momentum. This is shown by the unexpectedly
strong performance of the Labor Party under the left-wing leadership of Jeremy Corbyn in the
recent British election, combined with the wiping out of the racist anti-immigrant right-wing
United Kingdom Independence Party and the weaker than expected performance of the 167
National Front in the recent French election.
the empty rhetoric that it is. Such a recession will help clarify things even in the
eyes of the most backward sectors of the U.S. white working class who voted for
him. This makes it all the more important for Marxists to have a correct crisis
theory.

The bosses’ press has recently claimed for the first time since the Great Recession
that the U.S. economy is at “full employment” and is facing a “labor shortage.” If
this indeed is true, industrial capitalists are having growing difficulty converting
M—money capital—into labor power, or real variable capital. If we believe the
capitalist media, capitalist expanded reproduction is threatening to break down at
M—LP.

If such a shortage of labor power is actually developing in the U.S. and throughout
the capitalist world, the competition for scarce labor power at current wages
should be forcing the bosses to raise wages as competition among them for labor
power increases while competition for the increasingly plentiful supply of jobs
among the sellers of labor should be decreasing.

These claims raise two question: First, is the U.S. and world capitalism really
facing a “labor shortage,”72 and second, could the workers help stave off the
threatening recession by practicing wage restraint? We saw last month that
Shaikh’s theory of alternating long waves of prosperity and great depressions
holds that if workers are willing to, or are forced to, accept lower real wages, the
natural rate, and in the long run the actual rate, of unemployment will fall.

Is the U.S. experiencing a labor shortage today?

If the U.S. economy has reached “full employment,” we would see a growing
competition among bosses for labor power. This would put the sellers of labor
power—the workers—in the driver’s seat. The symptom would be a rapid rise in
money wages throughout the country. On July 5, the Washington Post published
an article by Ana Swanson describing the discussions within the leadership of the
U.S. Federal Reserve System. While the Fed is officially predicting that the growth
rate of the U.S. economy is about to accelerate, Swanson reported that some Fed
leaders have “pointed to other measures of the economy that appeared less
encouraging—including stubbornly low wage growth” [emphasis added—SW]. The

72 When the imperialist countries face a “tightening” of the labor market, they respond by
relaxing, whether officially or unofficially, the controls on immigration. On the other hand,
they crack down on immigration during periods of high unemployment. They cracked down
especially hard on immigrants during the period of high unemployment that followed the Great
Recession, earning Barack Obama the title “deporter in chief.” 168
labor market doesn’t lie. There is no sign of the alleged “full employment” or labor
shortage in the U.S. economy.

Continued “low wage growth” has not prevented the corporate media from
publishing an increasing number of articles to buttress their claim the U.S. is facing
the prospect of a serious labor shortage. Various corporate organs have run
interviews with various bosses claiming that their operations are being hindered
by a lack of “labor.” But when you read carefully, the complaints usually involve
shortages of skilled labor and then only in certain industries and areas of the
economy, such as computer engineers in Silicon Valley.

Such periodic shortages of skilled labor, which appear in the late stages of the
industrial cycle, are absolutely necessary for capitalism. If there weren’t periodic
shortages of skilled (complex) labor, the wages of skilled workers would fall to the
level of unskilled (simple) labor power. The supply of skilled labor power would
progressively dry up. To take an extreme example, how many young people would
spend at great monetary expense years studying computer science and
engineering if the high-tech firms paid their engineers wages that were no higher
than those offered by the local MacDonalds.

The same argument holds for wages of more traditional “blue collar” skilled
workers like carpenters, machinists, plumbers, and welders. The demand for
skilled labor creates the supply of skilled labor out of the raw material of unskilled,
simple labor. A shortage of skilled labor, therefore, is not the same thing as a
general shortage of labor.

Faced with a shortage of skilled labor power—but not a general shortage of

unskilled—simple—labor power, capitalists react in two ways: They can replace
the skilled jobs—where technically possible—with machines and unskilled labor,
or they can train some of the unskilled workers to do skilled work.

Traditionally, many workers in the auto industry began their careers as unskilled
workers on the line where youthful strength and endurance is what is needed.
After a number of years “on the line,” many auto workers would get the
opportunity to learn a skilled trade where training and experience are needed as
opposed to brute strength and endurance. They would then spend the later part
of their careers as unionized auto workers performing these highly skilled but
physically far less demanding and better-paying jobs. Here we see that unskilled
labor is indeed the raw material out of which skilled labor is created.

There is also a shortage of another type of labor, which has been affecting some
U.S. industrial capitalists, especially capitalist farmers and to some extent building

169
contractors. U.S. capitalist farmers depend heavily on seasonal labor at harvest
time. This is extremely hard labor, which often has to be performed in searing
heat, and few native-born U.S. workers can keep up the pace the bosses have
come to expect. Instead, capitalist farmers depend on workers from “south of
border,” who are more accustomed to this very hard labor from an early age and
have on average a far lower standard of living than U.S.-born workers.

However, beginning with Obama’s deportation campaign but now intensified by

the racist Trump administration, many capitalist farmers have complained about
labor shortages. The way to overcome this particular “labor shortage” is a
thorough repudiation of Obama’s deportation campaign and Trump’s racism
beginning with the scrapping of Trump’s plans to build a border wall on the U.S.-
Mexico border. No recession is needed for this purpose.

Other industrial capitalists have claimed that they have many “positions” available
that they cannot fill because young Americans lack “good work habits” and are
“incapable of following instructions.” No doubt, years of mass unemployment
where young people have either faced total idleness or been forced into illegal
work like selling drugs or at best sporadic employment at low wages have
undermined “good works habits” among the young—and not so young.

If this is really as big a problem—for the capitalists—as the bosses claim, they
should in their own profit interest be demanding the immediate firing of Trump’s
anti-public education, pro-private school Secretary of Education Betsy DeVos and
the general repudiation and immediate halting of the Trump administration’s
campaign against public education. Public schools were established in the first
place to prepare children for their future roles as surplus-value producers.

Why is the Federal Reserve System raising interest rates?

But if the U.S. economy, not to speak of the world economy, is nowhere near “full
employment,” how is the Fed justifying its move to raise interest rates, which
historical experience shows virtually always ends with a recession? Despite all the
evidence to the contrary—including the failure of wage increases to accelerate—
the Fed leaders have joined the chorus of the media and many professional
economists claiming that the U.S. economy is “at or near full employment.” Unless
we take action now, the Fed leaders claim, “we”—the capitalists—will experience
serious labor shortages that will lead to inflationary increases in money wages.
Taking a cue from Keynes, the Fed chiefs claim that higher money wages will set
off a general inflation of prices.

170
If this happens, the Fed leaders claim, they will then have no choice but to rapidly
raise interest rates to head off disaster. The Fed is justifying its interest-rate-
hiking policy by appealing to the so-called Phillips curve, named after New Zealand
economist William Phillips (1914-1975).

The Phillips curve is based on Keynes’s claim that it is the level of money wages
that determine the general price level. Phillips started with the correct observation
that when unemployment falls below a certain level, money wages rise. He then
shifted to the false claim that money wages determine the prices of
commodities . Fed chief Janet Yellen and other supporters of the Phillips curve
73

draw the conclusion that once unemployment falls too low—called “over-
employment” by the economists—the resulting “wage-price spiral” gets out of
control forcing the central bank to raise interest rates rapidly, which triggers a
recession.

In order to prevent such a “wage-price spiral,” Yellen and other Fed officials are
now claiming they have no choice but to raise interest rates. But, they explain,
since an inflationary wage-price spiral has not yet developed, they can raise
interest rates “gradually” and therefore avoid a recession for many years to come.

But what would happen if Yellen explained the real reason the Fed has to tighten
money now? Once again, they would have to explain that capitalist industry on a
world scale—not necessarily in the U.S.—is overproducing, not relative to human
needs but relative to the ability of the world market to expand. Yellen and
Company could explain that this ridiculous problem could be solved by recognizing
the social nature of production and abolish the private ownership of industry,
which is the real cause of our periodic recessions and resulting mass
unemployment. But our government and the Federal Reserve System, which is
part of the government, is a class government that represents not the great

73 In order for all commodities to sell at their production prices, inputs must also sell at their production
prices. Left out the analysis here is the question of ground rent in the gold industry as well as the
different degrees of risk in different branches of industry. If the risk is higher than average in a particular
branch, the capitalists will demand an extra profit. If it is lower, they will settle for a somewhat lower
rate of profit.

However, none of these complications affects the essence of the matter. The essence is that
under given conditions of production, golden prices of commodities are not arbitrary but
fluctuate around a definite axis. Forces, mostly economic but also wars and revolutions, can 171
for awhile drive prices far above or below their golden prices of production. However, when
this happens powerful economic forces are unleashed that pull them back toward this axis.
Shaikh understands this, which is indeed the central theme of “Capitalism.” But his brilliant
analysis falls apart at the end when he accepts “pure fiat money.” Then his concept of price
dissolves into relative exchange rates of commodities, and his whole analysis goes to pieces.
majority of the people but the private owners of the means of production, who
live off the unpaid labor of the non-owners of the means of production, who must
sell their labor power to the employers.

So the best we—the Fed—can do is to recognize the need to raise interest rates
now before industrial overproduction gets completely out of control. If we wait too
long, we will simply be adding to the misery caused by adding a collapsing
currency to the inevitable crisis of overproduction as happened in the 1970s. Then
we would have both inflation and mass unemployment. If we take that course
under current economic and political conditions, the whole dollar system will likely
collapse bringing to an end the U.S. world empire, which has prevented a new war
among the imperialist countries for the last 70 years.

No, they—the Fed—cannot give the real reasons why they are raising interest
rates. Far better to prattle about the Phillips curve and labor shortages. In this
way, they hope to dupe the people into continuing to tolerate capitalist rule and
to a certain extent even fool themselves into thinking what they learned in their
university studies is true after all. Capitalism, they learned, is really the best of all
possible economic systems, both just and efficient.74

Shaikh rejects the Phillips curve

Shaikh rejects the Phillips curve and for very good reasons. Basing himself on the
law of labor value, he realizes that money wages do not determine prices. In this,
he follows the argument first developed by David Ricardo and later taken up by
Karl Marx that thoroughly debunked this false notion.

Shaikh, however, unfortunately does accept the claim that periodic shortages
of labor power develop that cause real wages to rise to the point at which
expanded reproduction—economic growth—is disrupted. Again, Shaikh
recognizes, in contrast with Phillips and Keynes, that rising money wages do not
lead to inflation. Only if the government misdiagnoses a “great depression”
actually caused by high real—not money—wages as one caused by a lack of
demand and then uses “pure fiat money” to boost demand beyond the ability of
the economy to physically increase production will inflation result.

However, Shaikh agrees with Phillips that a lack of labor power and not the conflict
between private ownership and socialized production makes periodic crises

74 Ideology is not only used by the ruling class and its functionaries like Yellen to fool the
oppressed class but also to a certain extent to fool themselves. Perhaps the most complicated
form of ideology is economics. The whole mystification of economic crises and their real
causes is a textbook example of ideology in action.
172
inevitable under advanced capitalism. The correct theory of crises shows that it is
the capitalist class as a class that is responsible for crises and not some subset of
the capitalist class such as the Federal Reserve System, the politicians, the Wall
Street bankers, George Soros, Goldman-Sachs, Jewish bankers, the Republican
Party, the Clinton administration that deregulated the banks, the Bush
administration, the Arab “oil sheiks,” etc, etc. All these people and entities do
share responsibility for crises insomuch as they are part of the capitalist class and
supporters of capitalism. And the actions of individual politicians and central
bankers can worsen a capitalist crisis. Also, individual capitalists do sometimes
benefit from crises, though others are ruined.

But a correct theory of crisis underlines the fact that the periodic return of
capitalist crises and the social, political crises and wars that these crises lead to
are caused by the capitalist class as a whole and not a few bad players. Grasping
this—and it not that easy—is the difference between the various shades
of populism—as well as pseudo-populism including its worst variant, fascism—and
Marxist class consciousness.

In contrast, Shaikh’s theory of crisis implies that “moderation” by the trade unions
can lower the natural rate of unemployment and either postpone or reduce the
intensity of crises. It gives a certain amount of support to the claims of capitalist
economists that it is trade unions that cause crises and not the capitalist class.
Shaikh’s incorrect crisis theory, then, is a blunt tool, to say the least, in the
struggle to end capitalist class rule.

So, in this simplified model, the market prices of all commodities that have prices
of production are equal to their prices of production. In addition, capital invested
in the industry that produces the money commodity will also realize equal profits
in equal periods of time. However, the exchange value of the money commodity
is the extended form of value—or, in plain language, the list of prices read
backwards.

I do, however, believe with Shaikh that “great depressions,” including the Long
Depression of 1873-1896 and those of the 1830s and 1840s as well as the
“stagflationary” 1970s and the Great Recession of 2007-2009 and its aftermath,
have common causes, though each episode has unique features as well.

The unique feature of the Great Depression was its severity as measured by levels
of unemployment in various capitalist nations, especially in the United States and
Germany, the decline in world trade and industrial production, as well as the
extraordinary political consequences that it produced.

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Shaikh’s theory cannot explain why this particular “great depression” was so much
worse than the other “great depressions” that have marked the history of
capitalism since the middle of the 19th century. For this reason, I use capital
letters for the 1930s Great Depression and lower-case letters for the other
episodes called by Shaikh “great depressions.”

Prices of production

My work and Shaikh’s have in common a great emphasis on prices of production,

which are largely ignored by most other present-day Marxists. In one sense, the
theory of crises developed in this blog could be called a “price of production” theory
of capitalist development and crises. Like Shaikh, I put the constant search for
individual profit, where the average rate of profit forms the lower boundary, at
the center of the analysis. Can the extraordinary severity of the Great Depression
be explained through the “price of production approach”? I believe it can. But first
we need a precise definition of a situation where the market prices of commodities
equal their prices of production.

First, I will assume as Marx often did a pure capitalist society where every person
is either a capitalist or a worker. I will also assume that capitalist production has
completely conquered all branches of production. Under these assumptions, all
commodities have prices of production prices with two exceptions. The first is the
money commodity, which due to its role as the commodity that in terms of its own
use value measures the values and serves as the standard of price of all
commodities. Therefore, the money commodity does not have a price of
production. The other is the commodity labor power. It does not have a price of
production because it is not produced by industrial capitalists. However, the
commodities workers consume to reproduce their labor power do have prices of
production.

In the history of capitalism, there has never been a single day where such a
situation existed. However, in an extremely turbulent motion, market prices
dominated by economic forces but also influenced by wars and revolutions are
either rising toward or falling back from their prices of production. As a general
rule, the more prices rise above or fall below their prices of production the more
violent the movement in the opposite direction will be. This is true not only of
individual commodity prices but of the sum total of commodity prices as well. In
addition, the values of commodities, including the commodity that serves as
money, and the relationship between the money commodity and other
commodities are changing constantly. In the real world, market prices are
fluctuating around prices of production that are themselves constantly in flux.

174
It is through these turbulent movements that the law of value rules real-world
capitalism. We are very far indeed from a Walrasian world of “perfect competition,”
or as Shaikh points out in “Capitalism,” the theories of “imperfect competition”
that are constructed on top of “Walrasian” perfect competition.

Was the Great Depression caused by real wages that wiped out profits?

I decided this month to examine the causes of the Great Depression of the 1930s
and postpone to next month the “great depression,” in Shaikh’s sense of the word,
of the 1970s and early 1980s that combined inflation with high unemployment.
Here, I want to explain how Shaikh’s theory of “great depressions” fails to explain
the Great Depression of the 1930s. By examining this failure, we will better
understand why he also fails to explain the “stagflation” of the 1970s and early
1980s.

Rate of profit below zero

While the rate and mass of profit show declines even during mild recessions,
Shaikh notes that in the U.S. during the super-crisis of 1929-1933 the rate of
profit dropped below zero. For a number of years, U.S. businesses ran at a net
loss. Was the profit collapse caused by real wages being so high that net profits
in real terms75—to use Shaikh’s incorrect language—actually fell below zero? In
1929 just before the crisis, the mass of profits was at all-time highs and the net
rate of profit was certainly positive. Indeed, during the 1920s boom, unions were
extremely weak—arguably uniquely so for a period of capitalist prosperity.

During that era, most U.S. workers lacked union protection. The more than
adequate—from the standpoint of the capitalists—rate of profit and net profit was
reflected in the booming stock market of those days. These profits were not being
threatened by a resurgent union movement or soaring real wages created by a
“labor shortage.” Indeed, the U.S. government had recently passed stiff anti-
immigration laws, which would have been relaxed or repealed if the U.S. had been
facing a serious labor shortage. This situation did not prevent the fall of the rate
of profit and net rate of profit to below zero. But the profit collapse occurred
only afterunemployment rose to record levels. Unions, already weak in 1929, were
weakened further as unemployment soared to all-time records.

75Here Shaikh’s incorrect theory of money bites him hard. There is no such thing as real profit or real
net profit. Profit must always be defined in terms of money.

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What really caused the collapse in the rate of profit and the net rate of profit
between the spring-summer of 1929, which saw the peak of the industrial cycle,
and the winter of 1932-1933, the bottom of the industrial cycle, was a sudden
collapse in the realization of the value of commodities in terms of money. In those
days, the U.S. dollar was defined in terms of gold, and dollar bills were redeemable
for full-weight dollar gold coins at one of the 12 Federal Reserve Banks or the U.S.
Treasury. The only difference between dollar prices and golden prices was that the
dollar was defined as 1/20.67 troy ounce of gold, while golden prices were
measured in terms of standard units of troy ounces, grams, metric tons, and so
on. Therefore, changes in dollar prices and golden prices were identical in both
directions and in percentage terms. This remained true until March 1933,
when Roosevelt suspended the convertibility of dollars into gold and began to
devalue the dollar.

During the super-crisis, which quietly began in June 1929 when industrial
production peaked and ended dramatically in March 1933 as Roosevelt took
measures to halt a run on the banks, markets were so glutted that commodities
could not be sold at prices anywhere near their prices of production, or in many
case even at their break-even prices. Unlike in 1920-1921 when industry ran out
of commodities before the market prices had fallen all the way back to their prices
of production, the period of plunging prices lasted for three and a half years. This
was followed by Roosevelt’s 40 percent devaluation of the U.S. dollar against gold,
which lowered golden prices even more.

Unlike in 1920-1921, there was more than enough overproduction during the
1920s to allow the market prices of most commodities to fall below their prices of
production. This is shown by the fact that world gold production soon reached
record levels and then kept rising to far above post-World War I levels.

The profound Depression conditions that lingered through the 1930s also meant
that huge amounts of money fell out of circulation, forming massive hoards of idle
money capital, including in the U.S. banking system. This meant that the market
for commodities at prevailing market prices had for a considerable period of time
the ability to expand at a rate far greater than the growth in the quantity of gold
in existence. While the gold shortage of the 1920s forecast the coming of the
Depression, the “gold glut” of the 1930s forecast the coming of the post-World
War II boom.

This and not Keynesian demand management policies is what led to the sudden
major expansion of the market that was to dominate world capitalism for the first
several decades after World War II. The effect was similar to the discovery of

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cheap new gold mines, though the preceding Great Depression was necessary in
the absence of such a cheapening of gold in order to achieve this “happy result.”

One page 727 of “Capitalism,” Shaikh has an interesting graph of the movement
of the golden prices of commodities prices between the years 1780 and 2010. It
shows that the so far absolutely unique events that include the Great Depression
did not begin with the Great Depression at all but with World War I. Using the
mathematical method of Deviations from Cubic Time Trends, we see peaks and
troughs in “golden prices.” The peak that preceded the peak of 1920 occurred in
1873—the year that the “long depression” of the late 19th century began. This
peak measured just over 20 on the graph’s scale.

However, golden prices peak at over 100 in 1920, the highest in the entire period
between 1780 and 2010. This implies that something very unusual
happened around the year 1920 in the relationship between prices of production
and market prices and that it can be analyzed mathematically. The unprecedented
commodity glut of the early 1930s was actually caused by a combination of the
normal cyclical forces that I have analyzed throughout this blog—which would
have produced a normal crisis but not a super-crisis—combined with an
abnormally low level of gold production that began in the 1910s and continued
until the outbreak of the super-crisis.76

76 The analysis of production prices and market prices also explains the unusual severity of the 2007-
2009 Great Recession, though the causes were quite different than those that led to the Great Depression
of the 1930s. The special cause was the depletion of the gold mines of South Africa, which for a century
had been the world’s chief source of newly mined and refined gold. For a hundred years, mining
technology had enabled gold from the South African mines to be recovered from deeper and deeper
levels, but at end of the 20th century, this technology finally began to meet its match. As a result, the
output of the South African mines declined steeply, and from 2001 on, world gold output began to
decline.

As a result of the depletion of South African gold mines, the value of gold rose sharply relative to the
value of most other commodities. The result was that the values of commodities were now expressed
in lower golden prices of production of almost every commodity. The ability of the world market to
expand at the prevailing market prices reflected the higher golden prices of production that preceded
the depletion of the South African mines. A major downward shift in golden market prices towards the 177
now lower golden market prices of production became inevitable. Under today’s paper money dollar
system, this took the form of the Great Recession, accompanied by a major devaluation of the U.S.
dollar and its satellite currencies, while U.S. dollar prices remained largely unchanged. In this way, the
golden prices of commodities fell to reflect their now lower golden prices of production.

The fall in the golden prices of commodities made the development of gold mines profitable that would
not have been sufficiently profitable for the capitalists at the market golden prices that prevailed before
the Great Recession. As a result, gold production has again risen to record levels, which has restored
the ability of the market to expand at a pace sufficient to end the Great Recession and allow the current
weak upswing to unfold without, as of this writing, a new global recession. While purely economic—
The fact that the market prices of most commodities were above their prices of
production is shown by the fact that throughout the 1920s gold production
remained well below the levels that prevailed on the eve of World War I. This
means the rate of growth of the world gold hoard, which in the long run governs
the ability of the market to expand at prevailing market prices, was far below the
level that prevailed before World War I. This situation was corrected by the super-
crisis itself.

A note on some economic and political history

Even on the eve of World War I, gold production had leveled out. This means the
slowdown in the rate of growth of the world’s gold hoard had occurred even before
“the guns of August” had slowed the rate even more sharply. One reason was that
the gold mines discovered in Alaska and Canada were being depleted, which again
raised the value of gold relative to most other commodities. This caused the prices
of production that measure the value of commodities to fall. The second reason
was that the market prices of commodities had risen. Indeed, between 1896 and
1913 when all major currencies were on the gold standard, market prices in terms
of these currencies rose at a rate of about 3 percent a year. Since under the gold
standard the movements of nominal currency prices and golden prices were
identical, golden prices rose by the same amount. This was perhaps the fastest
“peacetime” golden inflation in history.

Indeed, the great economic problem of the era attracting the attention of Marxists
was not unemployment and depression, which was to dominate the attentions of
the next generation. Rather, it was the high and rising cost of living. A lively debate
raged among the economists of the Second International concerning to what
extent the “high cost of living” was caused by the growing power of monopoly and
to what extent it was caused by the devaluation of gold against commodities.

cyclical—forces make a new global recession inevitable in the next few years, a new cheapening of
gold relative to commodities would again sooner or later accelerate the pace of capitalist development
for a certain period of time as a result of an increased ability of the market to grow. Even in this case,
for the reasons we have examined throughout this blog, the market would still expand more slowly than
the ability of the industrial capitalist to increase production, so periodic recessions with their resulting
mass unemployment would continue. In addition the uneven development among the countries would
in the long run intensify which would lead sooner or later to new political conflicts and wars. This is
exactly what happened between 1896 and 1913!

The depletion of new mines that were started following the Great Recession or a major war— 178
assuming it doesn’t end in socialist revolution or the destruction of modern civilization—
leading to a “golden inflation” that could again raise the market golden prices of commodities
far above their golden prices of production, would set the stage for a much deeper economic
crisis.
During the 1890s, the devaluation of gold raised the golden prices of production.
The result was that market prices of commodities were in the 1890s well below
their prices of production. The resulting sharp deviation of golden market prices,
which were far too low relative to golden prices of production, was corrected by
one of the most powerful economic booms—or technically, series of booms—in the
history of capitalism. One of the consequences of the great boom with its “golden
inflation” was that the uneven development between Britain, which had up to then
been the most powerful industrial country in the world, against rapidly rising
Germany and the USA was greatly intensified.

This set the stage for World War I. By the eve of the “Great War,” the combination
of the depletion of the new gold mines combined with the “great golden inflation”
itself meant that market prices were again rising above their now once again
falling prices of production.

In 1913-1914, a worldwide recession broke out that engulfed the economies of all
the major capitalist countries. It seemed that a “great depression,” to use Shaikh’s
terminology, was beginning that would drive market prices back below their prices
of production. But before a “great depression” could develop, the war economy
came and with it a far greater rate of golden inflation than that of 1896-1913.

It is important to realize that this radical inflation, which approximately doubled

the prices of commodities during the four years of World War I, was a “golden
inflation” and not an inflation caused by the depreciation of paper money against
gold. Many paper currencies during the Great War were indeed devalued against
gold as well, and these countries suffered additional inflation in terms of their
paper currencies that were proportional to the degree that their currencies were
devalued.

However, even the most fanatical “gold bugs” are forced to admit that during the
“Great War” gold was a poor hedge against inflation. Even gold cannot buy
commodities that are not produced. Because the wartime “golden inflation” was
built on top of the great golden inflation of 1896-1913, the greatest gap was
created between market prices and the prices of production that has so far been
seen in the entire history of capitalism.

Why didn’t the Great Depression begin immediately after the war? There was still
one missing ingredient. The war economy associated with the war, unlike
peacetime expanded capitalist production, bred shortages, not gluts. Capitalist
crises that breed depressions require commodity gluts, not shortages. The
deflationary policies of the U.S. Federal Reserve Board and the Bank of England

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in 1920-1921 dramatically lowered prices in terms of the non-depreciated U.S.
dollar and even to a lesser extent the only moderately depreciated British pound.

By contrast, in the weaker capitalist countries, governments and central banks

dared not follow deflationary policies. Instead, they sharply devalued their
currencies. Instead of a sharp drop in prices in terms of their currencies, these
countries experienced a sharp rise in prices in terms of their local currencies.
However, in all capitalist countries, whether their currencies were devalued or not,
the golden prices of commodities experienced in 1920-21 sharp declines. This
greatly eased but did not eliminate the huge gap between market prices and
prices of production of commodities.

Why did the deflation of 1920-1921 fail to lower market prices back to or below
their prices of production? The reason was that industry ran out of inventory—
commodity capital—before market prices could fall all the way back to, let alone
below, their prices of production. This set the stage for the disaster that was to
follow at the end of the first post-World War I industrial cycle.

Though gold production recovered in the face of the massive golden deflation of
1920-1921, it remained well below the peaks of 1914. As a result, the rate of
increase in the world’s gold supply, which governs the ability of the market to
grow in the long run, was well below the pre-World War I levels. To produce the
Great Depression, all that was now necessary was a normal peacetime industrial
cycle that would provide the necessary overproduction. Up until 1929, the
resulting global “money squeeze” was made good by an inflation of credit money
and credit. Inevitably, the expansion of credit money and credit on a completely
inadequate “gold monetary base” ended in a crash of unprecedented proportions.

Once the crisis hit, sales (which collapsed the rate of turnover of variable capital)
and market prices dropped so rapidly that profit and net profits became negative.
During this period, industrial capitalists were able to realize only a part of the
constant capital they were using up in the process of production, while the value
of the commodities whose use values represented the real wages of the workers
was only partially realized as a result the sharp fall in the purchasing power of
workers. When capitalists subtracted the value of the capital and surplus value
that was frozen in unsold commodities, the profits of the capitalists—which,
remember, always have to be reckoned in money and not in “real” terms or
directly in values—taken as a whole turned negative.

As a result, the total income of the capitalist class fell below zero for a few years—
though the wealthy capitalists didn’t suffer very much because they were able to

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“live off their capital” very well for a number of years. Many smaller capitalists,
however, went under losing their entire capital.

Real wages and profits during the Great Depression

The income of workers who own no capital, however, can only fall to zero. Indeed,
if the incomes of these workers fall to zero they die, since unlike the capitalists
they have no reserve to live off of. In practice, capitalist society has always had
to find some way to keep unemployed workers alive during crises and depressions
if only through soup kitchens and church charities. And of course, not all workers
even during the Great Depression were laid off. Indeed, those workers who were
able to work the same number of hours—like certain government employees—
even saw their real salaries rise even as their money salaries fell but less than the
cost of living.

However, most workers saw reduced hours of work. Overtime disappeared, and
many workers were put on short time or faced longer periods of unemployment
during “slack seasons.” Hourly real wages—though not money wages—actually
increased but most workers—facing either partial or total unemployment—were
working fewer hours. So their overall wage incomes in money, and to a lesser
extent in real terms as well, declined considerably.

However, if you only looked at the higher real wages calculated on a per-hour
basis and the negative profits, you would draw the conclusion that real wages had
suddenly risen causing profits—including net profits—to be wiped out. This indeed
is how (bourgeois) economists of the time saw things. The learned economists
insisted that the only way to escape the crisis of mass unemployment was to lower
wages to whatever extent was necessary to restore profits! So-called orthodox
economists and Austrian school economists such as Ludwig Von Mises, Frederick
Von Hayek and Lionel Robbins demanded that wages be cut to whatever extent
necessary to restore “full employment.”

John Maynard Keynes differed from the orthodox and “Austrian” economists by
distinguishing between money wages and real wages. Keynes agreed with Von
Mises, Von Hayek, and Robbins that the mass unemployment of the early 1930s
was caused by wages that were “too high.” But Keynes claimed it was real wages,
not money wages, that were too high. Basing himself on the false claim that
money wages determine commodity prices, Keynes argued that cutting money
wages would cause prices to decline, leaving real wages unchanged.

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Keynes drew the conclusion that the only way to restore “full employment” was
through inflationary policies that included abandoning the gold standard and
devaluing the currency. These policies would leave money wages more or less
unchanged but would slash real wages. The fall in real hourly wages would then,
according to Keynes, restore full employment.

Contracted capitalist reproduction during the Great Depression

At least in the United States, production of capital goods fell so sharply that not
enough of these means of production were produced to maintain even simple
capitalist reproduction let alone expanded capitalist reproduction. Not only did the
level of production fall by more than half but the ability of U.S. industry to produce
was eroding as well, since used-up means of production were not being replaced.

The part of the surplus product calculated in physical terms used to replace the
existing means of production fell sharply, while production of means of production
to expand production was zero. Therefore, if you only looked at the economy
physically, as Shaikh, shifting from economist to engineer, tends to do when he
runs into difficulties, you would observe that the real wages of the workers
remained positive while real profits, or more accurately the surplus product, was
below zero. You then could draw the false conclusion that the U.S. economy had
collapsed because real wages had suddenly risen so much that the rate of surplus
product—and all the more, the net rate of surplus product—had suddenly fallen
below zero. But here you would be confusing cause with effect.

A difference between Marx and Shaikh is that Marx liked to calculate in value
terms, while Shaikh often calculates in physical terms. The rate of surplus
value remained positive and increased during the super-crisis, but capitalists were
not able to realize anything close to the full value of their commodities in money
terms. Therefore, in money terms, the rate of profit—and net profit—was indeed
negative. As a result, the process of expanded reproduction in physical—or
engineering—terms collapsed. Under the capitalist mode of production, if there is
no profit—which must be measured in monetary, not in physical/engineering
terms—production in physical/engineering terms comes to a halt.

Another problem arises if we try to apply Shaikh’s analysis of the “great

depressions” to the Great Depression of the 1930s. How do we explain the
recovery? With regard to the “great depression” of the 1970s and early 1980s,
you can point to Reagan and Thatcher’s anti-labor offensives that lowered the
“natural rate” of unemployment. The problem is that this analysis doesn’t work
for the Depression and post-Depression eras.

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In the United States, the Depression saw the rise of the Congress of Industrial
Organizations, and the A F of L unions were also greatly strengthened. For the
first time in U.S. history, the bulk of workers in basic industry now had union
protection. The Roosevelt administration and the bosses were forced to make
concessions to unions, which included Social Security—however inadequate—and
unemployment insurance.77

After World War II, concessions unprecedented in the history of capitalism were
also granted to the workers of Western Europ78. Unions were greatly
strengthened, Social Security systems expanded, and single-payer health care
systems implemented. This enabled real wages to rise sharply. According to
Shaikh’s theory, these concessions wrested from capital by the workers should
have raised the natural rate of unemployment considerably. The mass
unemployment of the Depression should have continued and in time grown even
worse. But the opposite happened! It turned out that “ordinary workers,”
unschooled in economic theory, were correct against the learned economists who
warned that pressing for higher wages—and higher social wages—would only bring
back Depression or even worse levels of unemployment.

‘Modern monetary theory’

Periodically, readers write in asking why I reject all variants of the theory of “pure
fiat money” and insist that “modern money” represents gold in circulation. What
is my evidence for this view, which is rejected by almost all professional
economists including Marxists like Anwar Shaikh? Long before I launched this
blog—and before blogs even existed—I got the same arguments when I raised this
question verbally.

This is, of course, a good question. I deal with this question throughout this blog,
but fortunately Shaikh’s work has enabled me to explore the question to a whole
new level. For readers who want to dig deeper, there is really no alternative but
to go back to the first three chapters of Marx’s “Capital” Volume I, where Marx
deals with the whole question of value and the forms of value like nobody else

77 Unfortunately, this did not include single-payer health care. Originally, Roosevelt’s proposed

social security included what we now call single payer, but the American Medical Association
objected and it was dropped—shades of Obama taking “the public option” off the table in 2009-
2010!
78 During the Cold War, the “threat of communism” forced the capitalists and their
governments to make unprecedented concessions to the working class in order to block the
growth of communist influence in the working class. The U.S. was obliged to give up on formal 183
segregation in the U.S. South—called “Jim Crow”—partly because “the Communists” were
using Jim Crow “in their propaganda to discredit Western-style democracy.”
ever before or since has done. It is not easy reading, but once you really grasp it,
which in my case took many decades of study and thought—you will realize why
“pure fiat money” is simply impossible under capitalist production.

The reason I think that Shaikh rejects the idea that crises are crises of the
generalized overproduction of commodities is his belief that “modern money” is
not based on a particular money commodity but on commodities in general. I think
he has simply followed the consensus here and not given it much thought. In
“Capitalism,” Shaikh comes right up to the brink of the correct solutions of so
many problems including crises. He explains how the surge in gold production that
followed the 1848 and 1851 gold discoveries in California and Australia led to a
huge acceleration in the growth of industrialization. Why can’t the reverse happen?
But at the very last moment, he gets cold feet, surrenders to the consensus and
accepts the possibility of “pure fiat money.” At that point, his analysis begins to
go down hill rapidly.

MELT and Say’s law

Once you accept “pure fiat money,” you inevitably arrive at Say’s law. Shaikh’s
acceptance of “pure fiat money” is tacked on to the main body of his work
and stands in opposition to his real work. However, the concept of “pure fiat
money” is better developed by the so-called MELT theory of value, money and
price.

MELT stands for the “monetary equivalent of labor time.” The MELT theorists have
accepted labor value but do not understand the necessary relationship between
value and the form of value. In other words, currency does not represent the
money commodity in circulation but the value of all commodities. MELT means
that the total of commodity prices by definition always equals the sum total of
value. There is no special money commodity, because all commodities are equally
money.

While Shaikh doesn’t use the term MELT, his acceptance of “pure fiat money” is
similar. What the MELT theory of money, value and price really comes down to is
that all commodities are money—or in some versions become money once the
gold standard is abandoned—so in effect no commodities are money. Once you
accept MELT—and this is what Shaikh does, whether he realizes it or not when he
accepts pure fiat money—you inevitably arrive at Say’s law. Why is this so?

The French economist Jean Baptiste Say (1767-1832), who was what Marx called
a vulgar economist and is usually credited with “discovering” Say’s law, though
some economic historians give that dubious honor to the English economist James

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Mill (1773-1836). James Mill, who was the father of the far better known John
Stuart Mill (1806-1873), also supported this “law.”

In the early 19th century, the leading economists of the period carried out a great
debate on whether a general glut—a general overproduction of commodities—was
possible. In one camp were the French economists Sismondi—considered by Marx
to be, along with Ricardo, the last of the classical economists—and Malthus, better
known for his population theory79 and held in low regard, to say the least, by
Marx, who held that a “general glut” was possible.

In the other camp was James Mill, Say and Ricardo. The argument of those who
claimed that a general glut of commodities was impossible—Mill, Say and
Ricardo—went like this. In the final analysis, commodities are purchased by means
of other commodities. In effect, this means that all commodities are equally
money, so there is no special money commodity. Therefore, if we were suddenly
to double commodity production, there would be no general glut of commodities
because by doubling commodities we would also be doubling the means to
purchase the commodities.

Say’s law leads to the view that the total quantity of money will always be just
enough to purchase the total quantity of commodities in circulation—the quantity
theory of money. Shaikh rejects the quantity theory of money in “Capitalism,” but
his acceptance of “pure fiat money” implies it. This is an unresolved contradiction
in Shaikh’s work. According to Say’s law it is possible and to some extent inevitable
for some commodities to be overproduced relative to other commodities. But a
general glut—overproduction of commodities—is impossible. You can have an
overproduction of shirt buttons relative to shirts or shirts to shirt buttons, but you
can’t overproduce shirts relative to buttons and buttons relative to shirts at the
same time. Therefore, the conclusion was drawn by Mill, Say and Ricardo that a
general gut of commodities is not possible.

Marx answered Says law by explaining that you can have a general overproduction
of commodities relative to the money commodity. Strictly speaking, there is no

79 Malthus’s principle of populations holds that any increase in the means of subsistence will quickly
call for a corresponding increase in the population. Therefore, no matter how much the productive forces
grow in the future, the great majority will still live in extreme poverty because the human population
will only be checked by starvation.

Today, this principle of population is—or rather should be—totally discredited as the rate of
population growth has slowed dramatically and is at present mostly negative in the rich 185
countries. Only in poor countries is the human population still growing, the exact opposite of
what the Malthusian population principle would have predicted.
general overproduction of all commodities if you include the money commodity,
but rather general overproduction of all commodities relative to one special money
commodity. This explains why “general gluts” are possible. If you were to suddenly
double the production of non-money commodities but left the production of the
money commodity unchanged, you would soon have one hell of a glut of non-
money commodities relative to the money commodity.

As soon as a separate money commodity emerges—which occurs long before the

emergence of capitalism—a general overproduction becomes theoretically
possible. Fully understanding Marx-Ricardo’s theory of value is not enough here—
you need to understand that value must take the form of exchange value where
the value of one commodity is measured in the use value of another commodity.
You further need to understand that the developed form of exchange value is
monetary value, in which the values of all commodities with the exception of the
money commodity are measured in terms of the use value of the money
commodity.

A necessary consequence of this is that all incomes—wages, rent and profit (both
interest and the profit of enterprise)—must also be measured in terms of the use
value of the money commodity. All this forms the foundation of any correct crisis
theory. As we saw, Shaikh stumbled badly on this very point when he writes about
real net profit as the driving force of capitalism. At this point, Shaikh’s up to then
masterly analysis begins to MELT away.

Crises that occur at periodic intervals only become inevitable once capitalism has
developed the productive forces to such a degree that production can be rapidly
increased at a pace totally impossible in former epochs, including under early
capitalism. Money is both the measure of value, the standard of price and a means
of circulation. During a capitalist boom, demand for commodities at a certain point
exceeds the demand for commodities at current prices. Rising prices—as well as
the rising scale of production—means that a greater quantity of money is
necessary to circulate commodities. However, the counterpart of the rising prices
of commodities—and rising rate and mass of profit realized by the capitalists who
are producing them—is that the production of the commodity that serves as
money becomes both absolutely and relatively less profitable. The polarity
between commodities and money is then expressed in the sphere of profits both
absolutely and relatively.

Inevitably, once this happens capital in search of the highest available rate of
profit will move out of the increasingly unprofitable money commodity industry
and flow into other branches of production. Production of gold declines just as the
production of other commodities is increasing. The result is an overproduction of

186
all—or at least most—commodities relative to the money commodity. Sooner or
later, this situation is resolved by a crisis of overproduction that causes a
temporary reduction of commodity production—except for the money commodity,
which increases—and a fall in the golden prices of commodities to below their
golden prices of production. Most recently, this was illustrated by the Great
Recession of 2007-2009, which led to a big decline of non-money commodity
production but greatly stimulated the production of gold, which allowed gold
production to return once again to record levels.

Therefore, if we abstract the turbulent fluctuations of real (as Shaikh calls it)
competition, gold and non-money commodities are produced in the proportions
that allow capitalists to carry out expanded reproduction, just as they do in Volume
II of “Capital.” However, if we take account of the turbulent fluctuations that are
a necessary consequence of real competition, the necessary proportionality
between the production of the money commodity and all other commodities is
satisfied in the long run only by being constantly violated in the short run. Hence,
the fluctuations of the industrial cycle between boom and crisis.

_______

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 Three Books on Marxist Political Economy
(Pt 9)
Last month, we saw that Shaikh’s view of “modern money” as “pure fiat money”
is essentially the same as the “MELT” theory of money. MELT stands for the
monetary expression of labor time.

The MELT theory of value, money and price recognizes that embodied labor is the
essence of value. To that extent, MELT is in agreement with both Ricardian and
Marxist theories of value. However, advocates of MELT do not understand that
value must have a value form where the value of a commodity is measured by
the use value of another commodity.

Supporters of MELT claim that since the end of the gold standard capitalism has
operated without a money commodity. Accordingly, prices
of individual commodities can be above or below their values relative to the mass
of commodities as a whole. However, by definition the prices of commodities taken
as a whole can never be above or below their value.

Instead of the autocracy of gold, MELT value theory sees a democratic republic of
commodities where, as far as the functions of money are concerned, one
commodity is just as good as another. Under MELT’s democracy of commodities,
all commodities are money and therefore no individual commodity is money.

MELT and ‘Say’s law’

Once we accept this argument, we inevitably arrive at Says law. If you double the
quantity of commodities, and if all commodities are equally money so that none
are money, you double the purchasing power available to purchase commodities.

Marx’s law of value holds that the value of a commodity—defined as X-amount of

abstract human labor, where X stands for some unit of time—must be measured
by commodity Y representing some unit of the use value of Y. Marx called X the
relative form and Y the equivalent form. In the beginning, when exchanges of the
products of labor were only occasional, all commodities served as both relatives
and equivalents. This might be called the primitive democracy of commodities.

However, as the exchange of commodities developed, this primitive democracy

gave way to autocracy. A few and eventually a single commodity became the

188
universal equivalent of all other commodities.80 From this point onward, all other
commodities played the role of the relative form. A general overproduction of all
commodities relative to the commodity serving as universal equivalent became a
theoretical possibility.

It seems that the commodity that plays the universal equivalent has a magical
power that is somehow bound up with its physical substance. In reality, this
seemingly magical power arises from the social relations of production that we call
commodity production. Money is therefore defined as abstract human labor that
is directly social embodied in the commodity that serves as money. Some
commodities can play this role more conveniently than others. To paraphrase
Marx, gold is not by nature money but money is by nature gold.

Gold won the monetary crown, because, first, it represented a great amount of
value—abstract human labor measured by time—in a physically small amount—
weight—of gold; second, it was durable and did not tarnish, since it did not react
with other chemical elements; third, due to it scarcity81 it has throughout the
history of commodity production up until the present held its value; and fourth, it
was soft and therefore could be easily coined, fashioned into bars, and melted
down.

Other commodities that have served as money, some of which are illustrated in
Shaikh’s “Capitalism,” lacked one or more of these attributes, so over time lost
the “monetary crown” to gold. Silver, gold’s greatest “rival” for the monetary
crown, has since the late 19th century fallen sharply against gold and other
commodities in terms of value. Also, unlike gold, silver tarnishes.

All incomes—rents, profits and net profits, interest, and money wages—must also
be measured in terms of the use value of the money commodity. Like prices, they
too must be “golden.” However, when workers consume their wages, they are

80 In ancient republics and monarchies, executive power was divided between two consuls, as
was the case in the Roman Republic, or two kings, as was the case in Sparta. This is reminiscent
of the situation that prevailed through most of the history of commodity production, where both
gold and silver functioned as money commodities. However, just as all modern republics and
monarchies are centered on a single chief executive—whether king, president or prime
minister—so the modern monetary system is centered on a single money commodity—gold
bullion.
81 Gold does not have a high value because it is scarce in the Earth’s crust like bourgeois 189
economists believe. Instead, because of its scarcity a large amount of labor on average produces
only small amounts of refined gold bullion. Therefore, throughout the history of production up
to the present, a small amount of gold bullion has represented a large amount of abstract human
labor compared to most other commodities.
more interested in the use values of the items they buy and consume than
monetary value.

Capitalists are also interested in the use values of the items of personal
consumption their profits enable them to buy. However, when they engage in
personal consumption, they are not acting as capitalists. When they act as
capitalists—that is, transform profits into capital—it is profits as money—the use
value of the money commodity, but not any other use value—that counts. This
function of capitalists consists of adding the part of their profit they do not use for
personal consumption to their existing capital. Both the profit and the capital must
consist of the same social substance—value—and both must be measured in terms
of the use value of the commodity that serves as money.

This reality is reflected in everyday language—even if it escapes the learned

economists. For example, capitalist families refer to their capital as “the money,”
even though only a small part of their capital exists in the form of actual money.
Similarly, capitalists refer to the profits they realize as the “money they make.”
Making money is the end all and be all of capitalism. Making anything else—
whether bread, cars, Gulf Streams, expensive wine, cheap wine, socks, shirts, and
so on is, under the capitalist mode of production, always merely a means to an
end. And the end is “making money.”

Not money in the literal sense of gold bullion—except in the case of the gold
bullion-making capitalists—but money in the sense of commodities that are
convertible in the market into actual money—gold bullion—and therefore can be
measured in terms of gold bullion through their golden prices. Commodities not
purchased for personal consumption are absolutely useless to a capitalist if they
are inconvertible into money. One of the beauties of the full Marxist theory of
value—and its great superiority over other theories of labor-based value such as
the Ricardian and MELT theories—is that it explains why people in capitalist society
are, and must always be, obsessed with money.

Since the MELT theory of value includes by its very nature, whether or not its
supporters realize it, Say’s law, the MELT theorists have to explain cyclical
capitalist crises by something other than a periodic general relative overproduction
of commodities. The most popular explanation is to appeal directly to the tendency
of the rate of profit to fall, which Marx did call the most important law of political
economy. Because the natural tendency of profit rates is downward, capital is
obliged by hell or high water to resist it. Therefore, the law of the tendency of the
rate of profit to fall retains its full importance as the most important law of political
economy, even during historical periods when the rate of profit does not fall or
even rises.

190
Among the consequences of this is that periodically the rate of profit falls and
capital is obliged to extend the scale of production, which leads to crises of
overproduction. These periodic commodity gluts then become powerful means by
which capital resists the fall in the rate of profit. As a result of periodic relative
overproduction of commodities and capital, the absolute overproduction of
capital is avoided as the reserve industrial army of the unemployed is reinforced.

Rising rates of surplus value that accompany the crises cause capital to slow the
rate of increase in the organic composition of capital and therefore slow the fall in
the rate of profit. In addition, crises enforce the periodic devaluation of constant
capital in the sphere of prices—which is what counts for the capitalists—which
further counteracts the fall in the rate of profit.

Shaikh and MELT

On one point, some MELT theorists are actually superior to Shaikh. These theorists
point out that in calculating profits one has to start with the level of prices that
prevail at the time the industrial capitalists advance their capital—that is, at M—
C. If prices fall between M—C and C’—M’, it is the prices that prevail when the
capitalists advance their capital that count.

On this point, Shaikh the engineer eclipses Shaikh the economist. He observes
that if there is a drop in prices during the process of production, though the drop
in prices may cause the capitalist to lose money, the capitalist might still be able
in physical terms to carry out expanded reproduction because the cost in terms of
money is now lower.

What this overlooks is that the capitalists are not interested in expanding the scale
of production in engineering terms. Instead, they are interested in making money.
If the capitalists fail to expand M when they carry out a cycle of production, they
will have been better advised to hold on to M until conditions once again become
favorable for its expansion.

Assume that there are two capitalists, A and B. Both start with 100 of some unit
of money. Due to a sharp fall in prices, capitalist A has lost money and now has
only 75 units. But this capitalist has expanded his or her means of production in
real terms. Capitalist B has held on to his or her money during the cycle of
production and still has 100. He or she hasn’t made any money but hasn’t lost
money either.

Now assume that prices stop falling and it is possible once again to carry on
production profitably in terms of money. Capitalist B has 100 and therefore can

191
now purchase 100 worth of means of production and labor power, while capitalist
A can only purchase—or already possesses—75 worth. Now capitalist B, armed
with the larger means of production, will be well positioned to drive Capitalist A
out of the market and perhaps even buy A’s own means of production at a discount
and hire A’s “own” workers. Capitalist enterprises can fail when they are short of
M—money—even if they still have plenty of C—means of production.

But Shaikh is more consistent than the MELT theorists. He realizes that under the
democratic republic of commodities that he believes replaced the autocracy of gold
around the year 1940, commodities cannot really have prices at all. Instead, we
merely have rates of exchange between the different commodities, just like we
had at the dawn of exchange when every commodity functioned simultaneously
as the relative and equivalent forms of value.

However, this situation that prevailed when the exchange of products was the
exception cannot possibly prevail in highly advanced post-1940 capitalism. If it
did, every commodity would have N minus one prices, where N stands for the total
number of commodities.

Shaikh the engineer sees capitalist production as a system of physical production

driven by the rate of real net profit. In this engineering view, capitalists are
seeking to accumulate wealth in the form of use values, not exchange values. This
wealth must be measured in the terms of all the many use values that are
produced, each use value with the unit of measure appropriate to it. Here Shaikh’s
“capitalists” are seeking to accumulate wealth as use values and not capital.
Whatever such persons are—they might be the leaders of a socialist economy—
but they are notcapitalists.

Capitalist production is mostly not about the accumulation of value in the physical
form of money material—I say mostly because a small but definite part of the
wealth capitalists accumulate does have to be accumulated in the form of money.
Instead, capitalist accumulation is about the accumulation of wealth in the form
of commodities that are convertible on the market into the money commodity. It
is in this sense that capitalists are interested in “making money” and only money.

Since the Great Depression, many economists—most importantly John Maynard

Keynes, but Milton Friedman as well—have realized that general gluts are possible,
marginalist theory notwithstanding. The pure quantity theory of money, which
assumes that prices and wages adjust instantaneously to any changes in the
quantity of money relative to the quantity of commodities, actually agrees with
Shaikh’s view that it is current prices and not prices at the time capital is advanced
that count.

192
This is why the pure quantity theory of money holds that money is neutral. Shaikh
himself rejects this view in the scientific parts of his “Capitalism” and his work in
general—for example where he clearly realizes that an increase in the quantity of
money can by expanding the market accelerate economic growth in a capitalist
economy.

Milton Friedman, in contrast, in his attempt to save the quantity theory of money
from Keynesian criticisms, introduced the concept of lags into his version of the
quantity theory of money. In Friedman’s modified quantity theory of money, prices
and wages do not adjust immediately but with lags to changes in (the rate of
growth of) the quantity of money. Therefore, in practice, the otherwise “amazingly
stable” capitalist economy experiences booms and contractions—general gluts.

Friedman continued to defend “the neutrality of money” but only in the long run.
In the short run, Friedman was forced to concede, fluctuations in the rate of
growth of the quantity of money was anything but neutral—after all, according to
Friedman, the Great Depression itself was caused by a fluctuation in the quantity
of money. Like Keynes, Friedman wanted to eliminate the role of gold from the
monetary system—establish pure fiat money—because he believed that this would
enable the monetary authorities to ensure a stable rate of increase of the money
supply.82

Decline and fall of the gold standard

John Maynard Keynes “hated” gold. He believed the rules of the gold standard
artificially limited production and led to otherwise avoidable economic crises. The
so-called marginalist revolution, which began around 1870, coincided with the rise
of the classic international gold standard. Before that date, many capitalist nations
had silver rather than gold standards. However, by the turn of the 20th century
all the capitalistically developed nations, and some not so developed such as
Russia, had adopted gold standards. Only nations that were extremely
underdeveloped capitalistically, like China and Mexico, retained silver standards
or had fiat money systems. However, the heyday of the international gold
standard was destined to be short lived. It began to break apart in 1914.

During its brief heyday, marginalist economists had a hard time explaining why
the gold standard was useful for capitalism—or indeed why gold had any special
role at all under capitalism. Marginalist theory claims that objects of utility have
economic value because they are scarce. Since commodities are characterized by

82The Austrian school criticizes Friedman because he advocated strict centralized planning
when it came to the “quantity of money” while fanatically opposing centralized planning in the
sphere of production. This is indeed a contradiction in Friedman’s work.
193
their scarcity, how can they ever be overproduced? Say’s law is therefore built
into the very foundations of marginalism, along with the quantity theory of money
and the view that commodities are all equally “money” and so none are money.

Neither the classical economists who understood labor value but never analyzed
the form of value, still less the marginalist economists, who rejected any concept
of labor value at all, could explain what appeared to be the supernatural power
gold holds over the capitalist economy.

To the extent the marginalists supported the gold standard at all, they simply saw
it as a legal defense against the age-old tendency of governments to create “too
much” money, leading to inflation. The argument goes that inflation gives
government the power to confiscate a portion of the wealth of capitalists through
an inflation tax that can be imposed by the government through the monetary
authority without a vote for or against it in parliament. The despotic ability of
government to use currency devaluations to appropriate wealth was viewed by
liberal marginalists as undermining the right and security of private property.

Marginalist opposition to the gold standard was based on the fact that the
economy was held hostage to the quantity of gold that the for-profit gold mining
and refining industry produced. Sometimes these industries produced “too little
gold” to support prevailing prices leading to deflationary depressions. Other times,
they produced “too much” gold leading to golden inflations.

Some marginalists believed that it would be better to eliminate the role of gold in
the monetary system and run the risks involved in having the government or the
central bank determine the money supply instead, despite the dangers to liberal
principles. The small minority of economists today who support a return to the
gold standard—almost all far-right “libertarians”—make this argument.

At the turn of the 20th century, the gold standard was considered one of the pillars
of the “liberal world order.” However, as economic crises—which were not
supposed to happen at all according to marginalist theory—continued to
periodically return, finally culminating with the Great Depression of the 1930s,
support for the gold standard declined in policymaking circles. In retreat, economic
liberalism blamed instability of gold production for the instability of the otherwise
stable capitalist system. This was the essence of Milton Friedman’s teachings.

Keynes caught the trend, though he was moving away from economic liberalism.
He now acknowledged that capitalist investment could be quite unstable. From the
1920s on, Keynes strongly believed that whatever the “anti-inflationary” benefits
of the gold standard were, the purely artificial legal barriers to pumping up

194
“effective demand” and lowering real wages in order to ensure “near to full
employment” had become a danger to the continued existence of the capitalist
system.83 The view that the gold standard was responsible for crises and
unemployment quickly became the ruling orthodoxy that prevails today.

Keynes realized that a shortage of money relative to commodities could occur and
that general gluts were possible. However, these general gluts—crises—occurred
because bad policies arbitrarily tied the quantity of money to the quantity of gold.
If the monetary authorities instead tied the quantity of money to the quantity of
commodities as a whole—and if governments were willing to step in with extra
deficit-financed spending when private investment lagged—the whole problem of
“general gluts” would in Keynes’s view disappear and capitalism would be saved.

Accepting the claim, advanced by Keynes, Friedman and their followers among
professional economists, that general gluts can be avoided under capitalism has
considerable implications when it comes to analyzing not only crises but real
competition in general, the subject of Shaikh’s “Capitalism.” Competition will have
quite a different character and outcomes where the market can be glutted only
for particular commodities—backed by shortages of other commodities—and,
alternatively, a situation where general gluts of commodities are not only possible
but inevitable at quasi-periodic intervals.

The year 1940

While many supports of MELT would date the birth of pure fiat money to the end
of the dollar-gold exchange standard in August 1971, Shaikh believes that it
replaced gold as the “medium of price” around the year 1940. Why 1940 and not
1944, with the Bretton Woods agreement, or 1971, when the U.S. Treasury finally
defaulted on its promise to redeem every $35 for one ounce of gold at the request
of foreign governments and central banks?

Shaikh rests his case for 1940 on the fact that before 1940 world commodity
prices, whether quoted in British pounds or U.S. dollars, fell as much as they
increased. The history of prices in terms of dollars or pounds before 1940 reveals
a wiggly graph but shows little long-term tendency. Shaikh realizes that in the
pre-1940 period British pounds and U.S. dollars were only pseudonyms for
particular weights of gold bullion.

83The Russian Revolution, the “threat of communism,” and the 1926 British General Strike
played no small role in the evolution of Keynes away from the economic liberalism he had
supported in his youth.
195
Gold, therefore, served as the “medium of price” before 1940. But after 1940,
prices rise without interruption, whether quoted in U.S. dollars or other currencies
linked to the U.S. dollar through the Bretton Woods system, or later through the
unofficial dollar system. Shaikh therefore draws the conclusion that pure fiat
money had displaced gold from its role as the “medium of price” as the World War
II war economy engulfed the world.

But why was this any different than August 1914, when the World War I war
economy engulfed the world but gold according to Shaikh retained its role as the
medium of pricing? Shaikh would argue that the sharp fall in prices in terms of
pounds and dollars that occurred in 1920-21 and 1929-33 indicates that gold
retained its role as the “medium of price” in this period. But after 1940, prices in
terms of dollars and other currencies linked to it rise virtually without interruption,
though the rate of increase varies.

In reality, the behavior of prices quoted in U.S. dollars and its satellite currencies
can be fully explained with Marx’s concept of token money, where monetary
tokens represent gold bullion in circulation. The U.S. dollar was already devalued
against gold by about 40 percent between 1933 and 1934. Though the dollar
prices of commodities changed very little during the remainder of the Depression-
ridden 1930s, one would expect, assuming that “golden prices” (prices in gold
terms) remained within their historic ranges, that dollar prices would rise well
above their historic levels during the economic upswing that followed World War
II. Roosevelt’s devaluation of the dollar fully explains why the high dollar prices of
the World War I era were temporary while the elevated prices in dollar terms after
World War II were permanent. Therefore, higher U.S. dollar prices after World
War II was exactly what Marx’s theory of credit and token84 money would predict.

What was new in the 1940s was not the rise of pure fiat money—that is forever
impossible under the capitalist mode of production—but the rise of the U.S. world
empire. Just like the competition among different capitals where the capitalist
ability to produce more commodities exceeds the ability of the market to absorb
them at current prices leads to the centralization of capital, intense political and
military competition among the imperialist powers—whose highest form is war—
leads to the centralization of political and military power. The U.S. world empire
did not eliminate the nation-state, nor did it repeal the law of uneven development
among capitalist nations. However, it did permit the U.S. dollar, even after it

84The U.S. dollar remained credit money as far as foreign governments and central banks were
concerned, because it remained convertible at a rate of a troy ounce of gold bullion for every
$35 presented to the U.S. Treasury by foreign governments and central banks. However, for
U.S. citizens the dollar was an inconvertible token money after Roosevelt assumed office on
March 4, 1933. 196
completely lost its role as international credit money in 1971, to become a token
currency that could escape the limits of the U.S. nation-state and circulate
internationally.

Thanks to the U.S. world empire, the dollar reigns supreme. The prices of globally
traded commodities are quoted in dollars and international debt is consequently
denominated in U.S. dollars. What would happen if Saudi Arabia and the other oil
monarchies started to quote oil not in terms of U.S. dollars but weights of gold?
Overwhelming military force, probably through NATO, would be applied to
overthrow them. Indeed, the attempt of the Libyan government to establish a
“gold dinar” as an alternative to the U.S. dollar in Africa was one of the reasons
for the U.S.-NATO attack that overthrew it.

On Jan. 12, 2016, then-President Barack Obama observed that the U.S. spends
more on “defense” than the next eight countries combined. President Trump and
congressional Republicans and Democrats are moving to further increase U.S.
military spending. Therefore, Marx’s observation that a token currency can only
circulate within the sphere where the state power that issues it reigns supreme
applies very much to the U.S. dollar’s evolution in the post-1945 world, where no
country—especially no capitalist country—has come anywhere close to equaling
the U.S. militarily.

Between 1945 and 1971, the U.S. dollar was on the international level still a form
of credit money insomuch as it was convertible into gold at a fixed rate. Beginning
in 1971, its overwhelming military power enabled the U.S. to convert the dollar
into a token currency with an internationally forced circulation—the force
consisting of the overwhelming military power of the U.S.

Therefore the dollar on an international scale follows the same laws that purely
national unconvertible paper currencies followed in Marx’s time. Behind dollar
prices—and prices in terms of its local satellites—there continue to lurk golden
prices, both market prices and prices of production. The U.S. dollar, like all
unconvertible paper currencies before it, is merely a pseudonym for a variable, as
opposed to a fixed, weight of gold.

Under a gold standard, and in earlier times a silver standard, currencies performed
their role as a standard of price well because they were mere pseudonyms for a
fixed weight of precious metal. Under the dollar standard, the U.S. dollar performs
its role as a standard of price—though poorly—because it has some stability
against gold. It is far more stable than bitcoins, for example. However, the U.S.
dollar performed its function as a standard of price much better when it
represented a fixed amount of gold.

197
This is why the dollar price of gold—despite the claims of economists that gold has
virtually no importance—is followed so closely by the financial world. If the dollar
price of gold moves too rapidly either downward or upward, the U.S. Federal
Reserve System will take action to stabilize its price by either moving to lower
interest rates if the dollar price of gold falls sharply, or raise interest rates if the
dollar price of gold rises sharply.

Indeed, the inability of the Federal Reserve to ignore changes in the price of gold
has caused some to speak of the current international monetary system as Bretton
Woods II. Like Bretton Woods I and the classical international gold standard
before, it continues to be, in the final analysis, based on commodity—gold—
money. It cannot be otherwise as long as capitalism continues to exist. Indeed,
along with the rate of interest on U.S. government bonds, the dollar price of gold
constitutes the financial pulse of the U.S. world empire.

Almost half a century has elapsed since the gold-dollar exchange standard gave
way to the dollar standard. It is now possible to establish how the industrial cycle
manifests itself under the new system. Remember, the dollar system means that
all internationally traded commodities are priced in dollars, and other countries
back their domestic currencies with U.S. dollars.85 The Federal Reserve, which
issues dollars, is obliged to maintain some stability of the dollar gold price but
makes no attempt to fix the price.

This system effectively makes the U.S. Federal Reserve System the world central
bank, because it creates the reserves that back up the currencies of all other
nations. A shortage of dollars will therefore undermine the currencies of other
nations, and if severe enough, signals a global money crunch and subsequent
global slump. On the other hand, an inflationary over-issue and subsequent
devaluation of the U.S. dollar means the devaluation of the reserve that other
central banks use to back their currencies. Again the value of those currencies is
undermined. The result is then a period of global inflation that ends in a global
slump.

85 This is the essence of the present-day international monetary system, though a bit of an
oversimplification. Countries keep their reserves mostly in short-term dollar-denominated U.S.
Treasury notes. However, the Treasury notes of European governments denominated in euros,
and to a considerably lesser extent the treasury notes of other countries denominated in their
local currencies, are convertible into their local currencies. The IMF SDRs (Special Drawing
Rights) are also used as reserves. SDRs are a market basket of major currencies held by central
banks and treasuries are convertible into actual currency at the IMF. And virtually all central 198
banks and treasuries continue to hold a certain amount of gold. But these facts only modify but
don’t change the essence of the dollar system.
The world economy—global trade, industrial production and employment—will
avoid crisis only so long as the Federal Reserve issues dollars in the quantities
that avoid both a global dollar shortage and a sharp depreciation of the dollar as
measured by the dollar price of gold. The catch is that the Federal Reserve can
only do this during the expansionary phases of the global industrial cycle. As a
result, the Federal Reserve—or any other global central bank that in the future
might replace it—cannot avoid periodic global economic crises as long as the world
economy retains its capitalist character.86

Below is a description of an “ideal” industrial cycle under the dollar standard. Real
cycles will be a little more complicated. However, the sharper the cycle the more
the phases of the cycle are clearly defined. The cycle that ended in 2008 comes
very close to the ideal cycle.

An ‘ideal’ industrial cycle under the dollar standard

Global overproduction is defined as the total quantity of commodities other than

gold, measured in terms of their prevailing golden prices, increasing faster than
the supply of gold bullion, measured in some unit of weight. The symptom of this
situation is a rising trend in the rate of interest. In the course of the industrial
cycle, the U.S. Federal Reserve System must accommodate this rise in interest
rates if it is to avoid a sharp devaluation of the U.S. dollar. The rise in interest
rates is followed, sooner or later, by a global economic crisis.

Therefore, under the dollar system, just as was the case under various forms of
the gold standard, the Federal Reserve—or any other central bank—is powerless
to prevent an economic crisis once the global overproduction of commodities has
reached the critical point.

The expansionary phase of each industrial cycle lasts as long as the rise in interest
rates—which must remain lower than the rate of profit—is gradual. But as the
expansion continues, growing overproduction of commodities reaches a point
where the rise in interest rates needed to prevent a sharp drop of the U.S. dollar
against gold is no longer compatible with continued economic growth. This is the
critical point of the cycle that immediately precedes the crisis.

86Even if there were a single capitalist state with a central bank that issued a token currency
declared legal tender for all debts public and private anywhere in the world—or the solar
system—the currency issued by such a central bank would still represent the money commodity
in circulation and the central bank would still be unable to eliminate periodic crises of
overproduction. 199
If the Federal Reserve attempts to keep the expansion going beyond this critical
point by issuing additional token dollars in a bid to check the rise in the rate of
interest, the result will be a sharp rise in the dollar price of gold followed quickly
by an accelerating global inflation that will forcibly raise the rate of interest leading
to a global economic slump.

Beyond the critical point of the industrial cycle

Once the crisis/recession breaks out in full force—assuming the dollar system has
survived, which it has up to now—the role of the U.S. dollar as the global means
of payment comes to the fore. At this point, the dollar price of stocks, primary
commodities and gold will register sharp drops. As a result, the Fed gains the
power to create dollar currency in much greater amounts than it normally
can without the dollar price of gold rising. The reason is that payments for
outstanding debts is demanded in dollars so that many capitalists have to dump
on the market any other assets they have including gold in order to obtain the
needed dollars.

Therefore, once the crisis breaks out, interest rates can fall sharply without
provoking a rise in the dollar price of gold. This was clearly illustrated during the
last quarter of 2008, which marked the sharpest crisis that has occurred so far
under the dollar system. As the Fed increased the growth of the dollar monetary
base at annualized rates in the four digits and interest rates plunged, the dollar
price of gold actually fell. Had the Fed increased its issue of dollar liquidity at those
rates under normal circumstances—or even a few weeks earlier when the
industrial cycle was still in its critical phase—the U.S. dollar price of gold would
have skyrocketed with all the consequences.

During the crisis proper—which reached it most intense phase during the fourth
quarter of 2008—world trade, industrial production and investment fell at a faster
rate than during the super-crisis of 1929-33, though the crisis this time was
considerably shorter. The sharp drop in global economic activity showed that
overproduction had been halted.

While global industrial production declined, the production of gold bullion not only
did not decline but was greatly stimulated as the relative profitably of producing
gold compared to non-money commodities increased. This reversed the decline in
global gold production that had begun in 2001 and soon once again reached record
levels. While on the eve of the crash of 2008, the capitalist economy was producing
“too little” gold and too many other commodities, now it was producing “too much”
gold and not enough other commodities. The crisis (of the general relative

200
overproduction of commodities) was therefore resolving itself and in due course a
new—if weak—economic expansion began.

Since global capitalist economic crises are crises of overproduction, their

resolution can only occur through a period of underproduction of commodities
relative to the production of the money commodity. These events have nothing to
do with the Phillips curve nor are they caused by the rate of unemployment falling
below some natural rate.

However, one the effects of this crisis—and of capitalist overproduction crises in

general—was a sharp rise in unemployment. In this way, the crisis of 2008
prevented what for the capitalists would be a far more serious economic crisis
from developing—a crisis of the absolute overproduction of capital. Such a crisis
would be more serious because the very conditions enabling surplus value to be
produced—not just realized—would have been destroyed.

Now, after nine years of economic expansion, the overproduction of commodities

against gold has begun and a new critical point in the world industrial cycle is
approaching. The Fed is being forced to allow interest rates to rise, which will in
the near future lead to another global slump. Once the critical point is reached, if
the Federal Reserve resists a further rise in interest rates to “keep the expansion
going,” there will be a new sharp increase in the dollar price of gold with all the
economic and political consequences.

In the event of a new dollar/gold crisis, an even sharper spurt in interest rates will
occur that will only sharpen the next global slump. The presidency of Donald
Trump by bringing into question the political stability of the United States—one of
the conditions that enable the U.S. dollar to serve as the world currency—is simply
the cream on this cake that Janet Yellen and her colleagues at the Federal Reserve
will have to eat one way or another as the current world industrial expansion
approaches and then reaches its critical point.

The birth of the dollar system

Since the 1970s, central bankers and policymakers have learned the basic laws
and limitations that govern the dollar system the hard way. This explains why
during the last critical point in the industrial cycle—the one that occurred between
August 2007 and August 2008—the Federal Reserve, contrary to widespread
expectations on Wall Street, did notquickly expand the U.S. monetary base.
Instead, the Fed created new emergency credit and discount facilities but worked
with the existing monetary base. These attempts failed, and in September 2008
as the global capitalist economy entered the crisis proper the Fed was able to

201
launch its unprecedented quantitative easing—printing money—policy without
destroying the dollar system, in order to save what could be saved.

It was during the 1970s that the Federal Reserve, admittedly in a pragmatic and
empirical way, learned what happens under a fiat token money system when the
central bank and government attempts to continue “expansionary monetary and
fiscal policies” once the critical point of the industrial cycle is reached. They learned
that, contrary to widespread hopes in the 1960s, replacing the gold standard with
paper money does not enable capitalist governments and central banks to expand
demand up to the physical ability to produce and thus abolish periodic crises of
general overproduction.

Policymakers learn that ‘demand management’ cannot prevent periodic

crises of overproduction

By the late 1960s, conditions were fast ripening for the first major economic crisis
since the Great Depression—as opposed to lesser recessions such as the one that
broke out in 1957. As a result of global overproduction, the gold liquidity that
resulted from the extreme under-production of the Depression was finally
absorbed. At the same time, the steady rise of golden prices since the end of the
Depression meant that gold production was becoming increasingly unprofitable,
both relatively to other capitalist industries and absolutely.

This showed that once again the golden prices of most commodities had risen
above their prices of production. This combined with the political situation that
emerged in the post-Depression world made the collapse of the dollar-gold
exchange standard, which had grown up since the end of World War I and had
been formalized at the Bretton Woods conference of 1944, inevitable.

The Bretton Woods system would have collapsed sooner if it hadn’t been for the
apartheid system in South Africa, which from the late 19th to late 20th century
was the leading gold producer. Apartheid effectively prevented the unionization of
African gold miners. As a result, the value of African miners’ labor power was held
down. This enabled golden prices to rise somewhat above their prices of
production before the falling absolute and relative profits in the gold mining and
refining industries began to reduce the level of gold bullion production.

But the criminal policy of apartheid supported by the United States—though

increasingly shamefacedly due to the effects of the Civil Rights and Black liberation
movements—could only postpone the inevitable. Beginning in the middle 1960s,
the industrial cycle boom combined with extra demand added by the deficit-
financed Vietnam War raised golden prices of commodities above their prices of

202
production. As a result, the rate of increase of global gold production slowed to a
crawl. After 1970, the profit squeeze in gold mining and refining led to actual
recession followed by stagnation in the gold mining and refining industries, which
lasted through the decade of the 1970s.

Under the rules of the Bretton Woods system, the U.S. was obliged to maintain
the dollar gold price at $35 an ounce. During the 1960s, in order to prolong the
life of the Bretton Woods System the U.S. Treasury and foreign central banks
created a gold pool, which was eventually obliged to dump huge amounts of gold
on the market to prevent the dollar price of gold from rising above $35.

The “straw” that finally broke the back of the Bretton Woods System was the Tet
Offensive of the Vietnamese resistance in January 1968 and the Johnson
administration decision to further increase the number of U.S. ground troops in
Vietnam. The gold pool soon suffered a massive “gold drain.”

The classic gold drains of the 19th century observed by Marx saw gold flow from
the banking system of one country to the banking system of another. For example,
gold might flow from the vaults of the Bank of England into the vaults of the U.S.
commercial banking system, or vice versa. But under the centralized Bretton
Woods system, the gold drain of 1968 saw a massive drain out of the U.S. Treasury
and foreign central banks into the hands of private gold hoarders/speculators
betting on a rise in the dollar price of gold.

Behind this gold drain was the fact that the industrial cycle of the 1960s had
reached its critical point. In theory, at this point the Bretton Woods system could
still have been saved. But that would have required the Federal Reserve to raise
interest rates beyond their already high levels—relative to the rate of profit—that
would then have triggered a crisis allowing both dollar as well as golden prices to
fall once again below the prices of production.

Such a policy would have created a global dollar shortage. As a result, the other
countries that “backed” their currencies by the U.S. dollar would have been obliged
to limit the issuance of their currencies. If they didn’t, the currencies would have
fallen against the U.S. dollar, which would not only have broken the rules of the
Bretton Woods System but would have put their capitalists—who had assets
denominated in local currencies but had debts denominated in dollars—in a tight
spot.

If the Federal Reserve System had acted to save the Bretton Woods System,
interest rates would have briefly spiked and deep recession and mass
unemployment would have spread around the capitalist world as world trade and

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employment fell. But as Thomas Tooke would have predicted, the deep
deflationary world recession would have caused interest rates to drop sharply as
well.

However, as the role of the U.S. dollar as a means of payment asserted itself, the
Federal Reserve would be able to once again increase its issue of dollars within
the framework of the rules of the Bretton Woods System. Private gold hoarders
would have responded to the brief interest rate spike by selling their gold back to
the U.S. Treasury to take advantage of the high interest rates and to meet the
demands of their creditors for payment in U.S. dollars. The U.S. Treasury’s gold
hoard at Fort Knox and other depositors would have been rebuilt, once again
putting the Bretton Woods System on a solid foundation.

With the fall in dollar as well golden prices, the cost price of producing gold in
dollar terms would have fallen while the dollar “selling price” could then have been
retained at $35 an ounce. The result would have been a sharp rise in the rate of
profit in the gold mining and refining industries.

Capital, always on the lookout for the highest possible rate of profit, would have
flowed back toward the gold mining and refining industries resulting in a rise in
global gold production. The rate of increase in the growth of the world supply of
gold bullion would have once again increased while the amount of currency
measured in terms of gold necessary to circulate commodities would have been
lessened considerably as a result of the fall in the golden—as well as dollar—prices
of commodities. After a few years of deep depression and massive cyclical
unemployment, a new economic upswing financed by the massive hoard of idle
money accumulated during the depression would have ensued.

(We will examine this alternative outcome to the crisis more closely next month.)

However, defending the Bretton Woods gold-dollar exchange system in this way
was never seriously considered. Avoiding a major depression was considered the
top priority in light of the “struggle against communism,” which included the
struggle against socialist countries with full-employment planned economies. In
return for allowing capitalism to have another chance after the disasters of the
1914 through 1945, the capitalists had, after all, promised the working class and
masses of people “near to full employment” through Keynesian “demand
management” policies.

This promise was incompatible with the measures necessary to save the Bretton
Woods system. Therefore, policymakers raised on Keynesian “macro-economics”
considered the final elimination of the role of gold in the international monetary

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system not only possible but an urgent necessity. To these macro-economists, the
crisis in the international monetary system in the late 1960s was a sign that the
time had arrived to complete the task of eliminating gold from the international
monetary system.

As the Bretton Woods System entered its death agony, the term “demonetization
of gold” often appeared in the financial media. Instead of being “backed by gold,”
the U.S. dollar would be backed by the ever-increasing quantity of commodities
that U.S. industry and capitalist industry throughout the world was churning out.
Gold would be finally ousted officially from the monetary throne—the economists
claimed that it had already been ousted in practice.

The “democratic republic of commodities” in which all commodities would be

money and therefore none would be the money commodity would end gold’s
tyrannical rule over the world of commodities forever. As a result, Say’s law would
finally come into its own, banishing general gluts permanently.

The 1960s represented the flood tide of Keynesian economics in both policymaking
and academic circles. If there was one time in the history of modern capitalism
when the academic and political mainstream believed that they had finally beaten
the “business cycle” once and for all, it was then. Even many Marxists seemed
willing to accept these claims, especially but not only the Monthly Review school.

Now that his “metallic majesty” had been overthrown, the government and central
bank would always see to it that “effective demand” was sufficient to buy the vast
and ever-growing quantity of commodities capitalist industry was churning out.
The remaining disagreement among economists and policymakers involved the
relative importance of fiscal versus monetary policy. Right-wingers like Milton
Friedman argued that seeing to it that there was a steady expansion of money
supply was enough and that fiscal stimulation was both unnecessary and harmful.
Friedman claimed, contrary to Keynes, that capitalism and capitalist investment—
monetary shocks aside—was remarkably stable.87

87 Keynes considered capitalist investment—the process by which capitalists transform profits into new
capital—to be inherently unstable and subject to sharp fluctuations. He therefore believed that
government spending at times would have to be used to offset declines in capitalist investment in order
to maintain effective demand and “full employment.”
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Friedman, in contrast, claimed that as long as the rate of growth in the “money supply” is stable, private
investment will increase at a steady and predictable rate. Progressives, therefore, find Keynesian
economics to their liking because the government spending that Keynes believed would be necessary
The great monetary experiment begins

Many economists guided by the marginalist theory of value believed that the dollar
price of gold would drop. They reasoned that as gold became “de-monetized” the
demand for gold would drop because gold’s main use value was its role as money.
But the opposite occurred. The result was that the U.S. dollar’s function as a
standard of price was seriously impaired. As long as the dollar price of gold was
stable, golden prices and prices quoted in dollars were simply different ways of
expressing the same thing. But as the dollar fluctuated—mostly downward but
occasionally upward—in value against gold, golden prices and dollar prices
increasingly diverged. As the 1970s progressed, prices in terms of dollars rose
sharply, while golden prices plunged.

Far more important than the divergence between dollar and golden prices was the
divergence between profits measured in paper dollars and profits, or rather the
lack thereof measured in terms of gold—golden profits. The capitalists still
calculated profits in terms of U.S. dollars, and to a lesser extent the stronger
satellite currencies. The dollar retained its function as the chief means of payment
on the world market. But every businessperson knew that nominal profits were,
once inflation was taken into account, less than “real” profits—profits calculated
in terms of commodities. Expanded reproduction could go on, though at a reduced
pace, as long as “real profits”—or real net profits measured in terms of the use
values of commodities—remained positive.

This is what Shaikh sees. However, an increasing number of capitalists noticed

that merely hoarding gold bullion yielded a higher dollar profit than almost any
other investment. The only rivals—leaving aside production in gold mining and
refining—to gold hoarding in terms of “profitability” were “collectibles,” which are
by definition unreproducible.

This showed that, calculated in terms of gold bullion as opposed to dollar terms or
“real terms,” the rate of profit was sharply negative. As this continued—with some
fluctuations—the demand for gold became ever more frantic as capitalists piled

to stabilize overall spending in the economy can in principle be used to help the middle and working
classes and the poor.

However, government spending can also be used for military purposes—called military
Keynesianism—as the Monthly Review school emphasizes. Friedman, since he saw only the
rate of growth of the money supply as a source of instability in capitalism, did not believe that
government spending was necessary to stabilize overall spending and demand in the economy.
Therefore, according to him, it was only the rate of growth of the “money supply” that had to 206
be centrally planned by a “monetary authority.” This fitted in with his overall opposition to
government social programs that help the middle and above all working classes.
into this now extremely “profitable” investment—simply purchasing gold bullion
and watching its dollar price rise ever higher.

As a consequence, the dollar fell in terms of its gold value at a faster rate than
the Federal Reserve System was creating new dollars and the commercial banks
were creating new dollar-denominated credit money on the basis of their dollar-
denominated reserves, whose purchasing power was being undermined by
the accelerating inflation.

The dollar prices of primary commodities spiraled upward and dollar price
increases spread from the wholesale to the retail level. As old Thomas Tooke would
have expected, the U.S. dollar rate of interest began to rise above the already
high level of the late 1960s, and repeated credit crunches sent sales of homes and
autos and other consumer durables slumping.

As long as “inflation expectations” remained high, capitalists also tended to flee

to “brick and mortar.” Industrial capitalists transformed their dollar-denominated
money capital into real capital before it lost even more purchasing power. The
tendency was for the consumer goods industries—especially credit-dependent
consumer durables like automobiles and housing—to slump while “Department I”
industries kept booming.

This condition acquired the name “stagflation.” However, precisely because of the
divergence in demand between the production of the means of production and
personal consumption, any attempt by the Federal Reserve to halt the depreciation
of the U.S. dollar against gold quickly turned “stagflation” into deep recession.
This is what occurred in 1974-75 as soon as the Federal Reserve raised interest
rates to slow the pace of inflation in 1973-74 but then quickly retreated in the face
of the sudden recession.

Faced with the unexpected inflation and the resulting credit squeezes that
triggered the 1974-75 recession, Keynesian economists hoped that the problems
of inflation and the rise in dollar-denominated interest rates would simply go away.
They tried to explain away the high rate of inflation through a series of one-offs
in particular markets. For example, Keynesians claimed that soaring oil prices
were caused by political factors such as the Israeli-Egyptian war of 1973 and the
brief Arab oil embargo that followed. At the same time, a die-off of anchovies off
the coast of South America caused the price of that commodity to rise sharply.

Above all, Keynesians argued that the “strength of the unions”—which were a lot
stronger in those days—was driving up commodity prices in a so-called wage-price

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spiral. Keynesian economists therefore called for “wage-price controls” that would
stop the rise in money wages that were supposedly causing the inflation.

Nixon did impose wage-price controls, which were mostly wage controls, between
1971 and 1973 as the Bretton Woods System collapsed. Keynesian economists
praised the Republican president for his “bold move,” but Milton Friedman
denounced his fellow Republican’s “socialist policies.”

Though the wage-price controls did accelerate the developing decline in real
wages—and slowed the rate of growth in labor productivity—inflation continued
on its merry way. In reality, the inflation was actually a price-wage spiral not the
other way around. The economic situation was a mess, but Keynesian economists
argued that it was better than the alternative deep recession/depression
necessary to stop inflation the old-fashioned way.

The monetary crisis of 1979-80

During most of the 1970s, the official U.S. dollar rate of inflation was in the high
single digits. In Britain, where the British pound was falling against the U.S. dollar,
the inflation rate rose into the double digits. As far as President Carter was
concerned, the economic situation was bad but perhaps not intolerable. As the
AFL-CIO unions went along with demands for wage moderation, the rate of
inflation according to Keynesian theory would eventually decline. In the meantime,
Carter’s policy amounted to “muddling through.”

But things came to a head in 1979. During the year, signs multiplied that a new
recession was developing only four years after the deep recession of 1974-75 had
bottomed out. The reigning Keynesian orthodoxy, which dominated among
Carter’s economic advisors, held that when recession threatened, as it was in
1979, the central bank should issue a sufficient quantity of new currency to
prevent interest rates from rising and if possible even lower them. In the past,
this had often been impossible due the role of gold in the international monetary
system. But since 1971, gold was no longer supposed to be an obstacle to
Keynesian anti-recessionary polices. Avoiding a 1980 recession was particularly
important to President Carter, who was up for re-election in November of that
year.

In 1979, a high rate of inflation relative to the rate of growth of the monetary
base was pushing up interest rates. The high interest rates were once again biting
into demand for automobiles and housing and if unchecked would soon lead to a
worldwide recession. The capital goods industries were still booming only because
the industrial capitalists, lacking confidence in the dollar and fearing that inflation

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would accelerate, wanted to buy equipment and open new factories before the
prices in terms of dollars rose even more.

In retrospect, we can see that in 1979 the U.S. and global capitalist economy had
once again entered the “critical stage”–only four years after the last recession had
bottomed out. At this point, Carter’s economic team was divided on what to do.
One possibility was to ignore the fact that the industrial cycle was in the “critical
stage” and continue with Keynesian expansionary policies.

Investors–fearing that Carter’s Keynesian advisors would indeed triumph–as

Keynesian policymakers had been triumphing since the 1960s–panicked. Between
August 1979 and January 1980, the dollar price of gold rose from under $300 to
$875 at one point. The U.S. dollar had lost more than half its gold value in just
five months! Supposedly this had no particular importance because gold was now
“just another commodity.”

In reality, as the dollar price of gold doubled, dollar inflation accelerated. But the
dollar monetary base had come nowhere close to doubling. It only increased about
4 percent—fast by historic standards but hardly enough to support a more than
doubling of dollar commodity prices in a few months. But despite the fact that gold
was, according to the Keynesian economists and Milton Friedman, “just another
commodity and had no particular importance,” businesses attempted to raise
dollar prices as much as the market would allow to compensate for the dramatic
fall of the dollar’s gold value over the five-month period between August 1979 and
January 1980.

Business people were becoming ever more conscious of the relationship between
the dollar price of gold, the dollar prices of primary commodities, their dollar cost
prices, and prices in general. When gold rose sharply, businesses learned that
their cost prices would soon increase and that they had do everything they could–
such as holding commodities off the market–to drive up their dollar prices in order
to preserve their dollar profits. With prices now rising much faster than the
monetary base–in terms of purchasing power–the reserves of the commercial
banks were shrinking. Old Thomas Tooke would not have been surprised as
soaring dollar prices led to a sharply higher dollar interest rates. The hope that
“stagflation” might be a stable condition that could be lived with was turning out
to be wishful thinking.

At this point, the Fed and Carter’s policymakers had essentially two choices. One,
they could have followed the advice of the more “radical” Keynesians and more
than doubled the monetary base. This is what they were to do in 2008. But
conditions were very different in the fourth quarter of 1979 compared to those

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prevailing in the fourth quarter of 2008. In 1979, there was a flight from the U.S.
dollar–and paper currencies in general–into gold. The industrial cycle was still in
the critical phase that immediately precedes the actual crisis. This is the phase
where under the dollar system the demand for gold is strongest while the demand
for the U.S. dollar is weakest.

In contrast, in the fourth quarter of 2008 the Fed waited until the industrial cycle
had passed the “critical phase” and had entered the crisis proper when under the
dollar system the demand for U.S. dollars as a means of payment rises while the
demand for gold falls. In the fourth quarter of 2008, as sales of commodities
abruptly fell and commodities piled up unsold on shelves and in warehouses,
panic-stricken money lenders demanded payment of debts that were
overwhelmingly payable in U.S. dollars. As a result of the scramble for dollars as
a means of payment, the dollar price of gold fell. The U.S. dollar was king as never
before.

In the fourth quarter of 1979 and the beginning of 1980, on the other hand, it was
the demand for gold and not U.S. dollars that was soaring. At that time, far from
demanding U.S. dollars the capitalists were attempting to get rid of them as fast
they could and increasingly flee into gold.

If the Fed had actually doubled the U.S. monetary base in order to stave off a
1980 recession, the already extreme demand for gold–not U.S. dollars–would
have increased even faster as more and more capitalists would have joined the
gold bandwagon. The dollar price of gold would have soared while the rate of
increase in dollar commodity prices would have accelerated. Double- and triple-
digit inflation and beyond would have resulted as the dollar prices of commodities
raced upward against the soaring dollar price of gold. The world capitalist
economy would have faced its first global–as opposed to national–runaway
inflation.

If the Federal Reserve had actually allowed this to occur, the paper dollar system,
then only eight years old, would have failed, bringing down the U.S. world empire,
at least financially, and forcing the international monetary system “back on gold”
in some form. The Soviet Union and eastern European socialist allies with their
full-employment planned economies still existed. World history would have taken
a different turn, though we can only speculate exactly what would have happened.
We should keep in mind that the transfer of political power to the working class
without which the transformation of capitalism into socialism cannot occur is never
automatic no matter how deep the crisis of capitalism.

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Not surprisingly, the Fed, by then under the leadership of Democrat Paul Volcker,
rejected this course and allowed interest rates to soar. The U.S. and global
capitalist economies passed the critical phase and entered the crisis/recession
phase in which the problem of overproduction began to be resolved.

There were a few more twists in the story. The “premature” recovery that the Fed
had forced in 1975 collapsed causing the official U.S. rate of unemployment to rise
back to double digits for the first time since the Great Depression. But this was
the price that had to be paid in order to save the dollar system and with it the
U.S. world empire.

Volcker shock a mistake?

To this day, many well-meaning “post-Keynesian” economists, and indeed many

Marxists, claim that the Volcker shock was a mistake. Because of Volcker’s
mistake, the world experienced a completely unnecessary recession and resulting
mass unemployment. If you mean by this that the refusal of the U.S. world empire
to commit financial suicide was a mistake, it was a mistake. If the U.S. world
empire had disappeared in the 1980s, the world would be a very different and
perhaps much happier place–though that would have depended on the course of
the class struggle, so here we enter into the speculative field of alternative history.

But within the framework of saving the U.S. empire, which was Volcker’s job
description–not the happiness of the world–there really was
noalternative. The only positive alternative, a world socialist revolution, was
hardly a policy option for Volcker. It is no accident that Volcker is today one of the
most respected elder statesman in U.S. ruling-class circles. This would hardly have
been the case if as a result of a “mistake” he put the U.S. and global capitalist
economies through years of unnecessary grueling recession.

The rate of profit and the monetary crisis of 1979-80

But the real secret of the monetary crisis of 1979-80, and the Volcker shock that
resolved it, involves the measurement of the rate of profit. The high inflation of
the 1970s kept profits strongly positive in U.S. dollar terms. It was recognized
that due to the rapid fall in the purchasing power of the U.S. dollar in real terms–
the use values of commodities, including the machinery and means of
subsistence that are necessary to expand production–profits were considerably
less in those day than the nominal profits implied. This is what Shaikh sees.

But we have seen that the whole logic of capitalism demands that profits including
net profits must be measured in terms of the use value of the money

211
commodity and not the use value of commodities in general. Profits that are
positive in “real terms” but not in gold terms just don’t cut it. During the period
between 1970 and 1979–with a few fluctuations–the most “profitable” investment
was simply holding gold bullion.

Once we grasp the fact that profit must be measured in terms of the use value of
the money commodity, the rate of profit of hoarding gold bullion–leaving aside
storage costs–is by definition zero. If hoarding gold bullion was the most
“profitable” investment available–leaving aside the production of gold itself–this
means that there were no truly profitablefields of investment available. Capitalist
production cannot continue for very long on such a basis.

Whenever production becomes unprofitable in gold terms, an invisible hand guides

the capitalists back to the port of golden profitability. It is true that in dollar terms
and even in “real terms,” production remained profitable between 1970 and 1979–
unlike the early 1930s. But in terms of what really matters to capitalists–profits
measured in terms of the use value of the money commodity–production was
unprofitable between 1970 and 1979. Something had to give. And it did in the
form of the monetary crisis of 1979-80 and the Volcker shock, which restored the
profitability of capitalist production in the only terms that matter–in terms of gold
bullion. The only question left to answer is how this impressed itself on the minds
of the capitalists.

As we know, capital is ever flowing from less profitable to more profitable fields of
investment. During 1970-79, the most “profitable” field of investment as it
appeared to everyday businesspersons and the money capitalists was simply
hoarding gold and watching its dollar price soar. As they did this, the capitalists
were in effect ceasing to be capitalists and instead converting themselves into
misers. They didn’t know that they should be calculating their profits in terms of
gold rather than in dollars or in “real terms,” but their drive to maximize profit
was causing them to “invest” in gold in order to maximize what they thought were
profits. Their drive for individual profit—notwithstanding their lack of theoretical
understanding of what was really happening—was as though guided by “an
invisible hand” to “do the right thing.”

During this period of unprofitable production, they were increasingly holding on to

M until the possibility of carrying out M—C—M’ returned, which it inevitably did.
Indeed, by holding on to M—purchasing gold and throwing the whole global
monetary system into crisis by doing so—they were forcing a return to conditions
that would again allow M—C..P..C’—M’, where M and M’ represent quantities of
gold measured in some unit of weight.

212
What really happened during the monetary crisis of 1979-80 was that the
economic law that, under the capitalist mode of production, production has to be
profitable not just in “dollar terms” or in “real terms” but in terms of gold
bullion was violently asserting itself.

Within the marble walls of the Fed, Paul Volcker got the message. And his
successors have not forgotten it, though they dare not probe too far into the inner
secrets of capitalist production to explain it. Their class position prevents them
from doing this. That is the job of those who represent the working class—
Marxists.

How did Volcker resolve the monetary crisis? He did it by simply declining to
accelerate the rate of growth of the dollar monetary base. Interest rates
responded as Thomas Tooke would have expected by dramatically increasing. In
the 19th century, there was a saying on the English money market that 6 percent
would draw gold from the moon. It took a lot more than 6 percent—rates well into
double digits—but the money capitalists finally began to dump gold and instead
bought securities to take advantage of these sky-high interest rates. The
monetary crisis was broken, though the U.S. and world economy had to go through
several years of grueling recession as the industrial cycle left the “critical phase”
behind and entered into the crisis/recession phase proper.

Aftermath of the monetary crisis and the determination of the quantity of

money loan capital

In the early 1980s, Volcker couldn’t simply flood the commercial banks with dollar
reserves—essentially print fresh dollar bills (or the electronic equivalent)—as
Bernanke was able to do beginning in 2008. As a result of the failed great
experiment in “demand management” of the 1970s, confidence in the U.S. dollar
had been severely shaken and it could not be fully rebuilt overnight. A period of
exceptional high though now falling interest rates still lay ahead. Indeed, it would
take many years before interest rates were to return to normal levels. And unlike
the situation during the monetary crisis itself, these high interest rates were
positive in both “real terms” and more so in what really counted—in gold terms.

While Shaikh does not understand that profits have to be positive in terms of gold
bullion—his acceptance of pure fiat money bars the way for him here—he does
understand that the rate of profit has to exceed the rate of interest. If the rate of
interest equals or exceeds the rate of profit, capitalists will find it more “profitable”
to act as money capitalists M—M’ rather than as industrial capitalists M—C..P..C’—
M’. The problem is that if all the capitalists were to shift to M—M’—which they
eventually all would if interest rates remained permanently equal to or higher than

213
the rate of profit—no surplus value would be produced. But since interest is simply
a fraction of realized surplus value, this would be impossible.

Marx realized that in a situation where the rate of interest equaled or exceeded
the rate of profit, thereby leaving net profits zero or negative, a portion of the
industrial capitalists would convert themselves into money capitalists, which would
inevitably bring the rate of interest down to a point below the rate of profit once
again. In Marx’s time this happened at best only momentarily. But thanks to the
failed attempt to establish pure fiat money, this process actually unfolded in the
late 20th century.

During and after the Volcker shock, as interest rates rose above the rate of profit,
money capital was diverted from the circuit M—C..P..C’—M’—the circuit of
industrial capital—and M—C—M’—the circuit of merchant capital—into M—M’—the
circuit of money loan capital. The result was that once the U.S. dollar was
stabilized by the Volcker shock, the quantity of money loan capital exploded,
eventually leading to the very low interest rates that prevail today. This process
even acquired a name—financialization. Next month, we will examine the
consequences.

_______

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 Three Books on Marxist Political Economy
(Pt 10)
History of interest rates

A chart showing the history of interest rates over the last few centuries shows an
interesting pattern — low hills and valleys with a generally downward tendency.
During and immediately after World War I, interest rates form what looks like a
low mountain range. Then with the arrival of the Great Depression of the 1930s,
rates sink into a deep valley. Unlike during World War I, interest rates remain near
Depression lows during World War II but start to rise slowly with some wiggles
through the end of the 1960s.

But during the 1970s, interest rates suddenly spike upward, without precedent in
the history of capitalist production. It is as though after riding through gently
rolling country for several hundred years of capitalist history, you suddenly run
into the Himalaya mountain range. Then, beginning in the early 1980s, interest
rates start to fall into a deep valley, reaching all-time lows in the wake of the
2007-09 Great Recession. Clearly something dramatic occurred in the last half of
the 20th century.

As we saw last month, the events of the 1970s and early 1980s proved once and
for all that the laws governing the capitalist mode of production don’t allow the
capitalist state and its central bank to create monetarily effective demand out of
“thin air.” Regardless of the legal nature of the monetary system, a sufficient
amount of gold — the chief money during the era of capitalist production — must
exist if capitalist expanded reproduction is to proceed without crisis.

The threat of hyper-inflation and monetary collapse

A general overproduction of commodities relative to the money commodity sooner

or later leads to a situation where gold becomes scarce at the prevailing level of
“golden prices”88 of commodities. If the central bank — or other monetary
authority — persists in issuing additional monetary tokens in an attempt to expand
the market without the necessary gold backing, the currency price of gold will rise,
indicating the depreciation of the currency against “real” — that is, commodity —
money. This will whip demand for gold bullion into a frenzy.

88I borrow the term “golden price” from Shaikh. Golden price is measured in terms of gold
bullion, measured in terms of some standard measure of weight, as opposed to currency units.
215
The frenzied demand for gold will cause inflation of prices in terms of the currency
tokens to outrun the rate of growth of the quantity of tokens, measured in terms
of standard currency units such as U. S. dollars. That is, the quantity of currency
in real terms — its aggregate buying power — will contract. This creates a shortage
of loan money capital causing the rate of interest calculated in terms of standard
currency units to rise.

If the monetary authority attempts to resist the rise in interest rates in order to
“keep the expansion going” by accelerating the rate of growth of monetary tokens,
or their electronic equivalent, the currency price of gold will increase at an
accelerating rate. The “printing presses” then enter into a deadly race with
currency prices that if not halted will lead to a hyper-inflationary collapse of the
currency and the credit system built on top of it.

So far, hyper-inflations have involved currencies that have subordinate roles in

the international monetary system. They have not involved general crises of
overproduction but rather were tied to lost wars and revolutions and their
aftermaths. The international monetary system has never—up to this writing—
experienced a hyper-inflationary collapse. However, the current international
monetary system based on the U.S. paper dollar, which replaced the gold-dollar
exchange standard in the late 1960s and early 1970s, is not immune from such a
collapse.

Need for reserve fund of money capital

Let’s examine how the rate of interest evolves over a normal industrial cycle under
some form of gold or gold-exchange standard. Under typical capitalist conditions
— average prosperity — capitalists have a margin of surplus productive capacity
— potential constant capital — and a surplus population that is a source of
additional labor power — variable capital. These reserves can be brought into
motion in the event of a sudden expansion of the market such as occurs when
average prosperity gives way to an economic boom.

The need for reserves of potential constant and variable capital is well recognized
by Marxist economists. What is often ignored — though not by Marx89 — is that

89 Marx makes this clear in his analysis of reproduction, both simple and expanded, in Volume II of
“Capital.” However, in analyzing reproduction it became popular to abstract money. This is sometimes
done for purposes of simplification, which is permissible as long no attempt is made to explain crises
of the general relative overproduction of commodities omitting the role of money.

Once money is excluded, Say’s Law is implied. At most, such models are able to illustrate an 216
overproduction of commodities in Department II backed by an underproduction of commodities in
capitalism needs a reserve fund of potential money capital as well. If such a
reserve fund does not exist, an expansion of the market cannot occur.

As capitalist enterprises — whether in Department I or Department II — carry out

expanded reproduction, they need additional money capital. This money capital is
drawn from existing monetary reserves. As a rule, these reserves exist in the form
of “retained earnings” that are part of their bank balances or perhaps short-term
government securities that can be converted into cash on the money market.

It is possible that for a particular business its accumulated monetary reserves will
not be sufficient. In that case, they either have to find additional investors by
selling new stock or issuing new bonds or else borrow from the banks. For such
financing to be successful, there has to be a reserve of surplus money capital in
the hands of money capitalists.

These surplus hoards of money cannot in the final analysis be created arbitrarily
by the monetary authority or the banking system through making loans but rather
by the workers in the gold mining and refining industries. Only then will the
monetary authority be able to convert a sufficient quantity of government
securities into additional monetary tokens (or their electronic equivalent) that the
banks use to back the additional credit money they create through loans without
the currency depreciating and setting off a self-defeating inflationary spiral. In
other words, it is only through a growing global gold hoard that the global money
supply can be expanded in real—purchasing power—terms.

Centralization of gold hoards

Therefore, at the base of the monetary reserves that are centralized in the hands
of the banking system lies the global hoard of gold bullion. In early capitalism,
these gold (and in those days, silver) reserves were often in the hands of individual
merchant and industrial capitalists. But over time, gold reserves were increasingly
centralized.

First, the metallic hoard was centralized in the commercial banking system. Later,
the hoard was shifted to national banks that were thereby transformed into central

Department I or an overproduction of commodities in Department I relative to an underproduction of

commodities in Department II. This type of overproduction of some commodities backed up by
underproduction of other commodities is allowed by Say’s so-called “law.”

While simplification is one reason that money is often left out of reproduction models, another
is the widespread belief that “modern money” is created by the monetary authorities outside
the production of commodities. In that case, leaving out money is no longer a permissible 217
simplification but a fundamental economic error.
banks. By the time of Marx and Engels, the Bank of England had concentrated
most of Britain’s gold in its hands and evolved into the world’s most powerful
central bank.

In the U.S., early attempts to establish a national cum central bank modeled on
the Bank of England found expression in the First and Second Banks of the United
States. These institutions, whose centralizing influence tended to increase the
power of the federal government, were strongly opposed by the Southern-based
slave-holding interests and finally discontinued. As a result, the gold and silver
reserves were concentrated in commercial banks and to some extent the U.S.
Treasury, rather than a central bank.

The crisis of 1907 demonstrated that once the U.S. had emerged as a leading
industrial nation its lack of a central bank posed a severe threat to the stability of
the entire world capitalist economy. The result was, despite the opposition of
farmers and small business people, the creation of the Federal Reserve System,
which began operations in 1914.

The centralization of the U.S. gold hoard did not stop here. In 1933, the Roosevelt
administration obliged the 12 regional banks that make up the Federal Reserve
System to sell their gold reserves to the U.S. Treasury in exchange for gold
certificates. This shifted control of the huge U.S. gold hoard from the Federal
Reserve System to the White House.

Centralization versus decentralization of the world gold hoard

In principle, gold reserves don’t have to be centralized, whether by the commercial

banking system, the central bank, or the state treasury, to exercise their vital role
in the capitalist economy. Let’s assume that gold is entirely in the hands of private
hoarders. In this case, there will be no gold or gold-exchange standard but some
kind of paper money standard.

If our private hoarders believe that the currency price of gold will fall, they will be
sellers of gold at prevailing currency prices. The gold offered will drive down the
currency price of gold bullion. With currency gold prices falling — which would
usually be accompanied by falling primary commodity prices in terms of the
currency — the central bank can increase and even be forced to increase the
quantity of currency tokens it creates under pain of avoiding deflation.

This will be true even if gold has no legal role in the monetary system. The higher
the level of gold production is — all other things remaining equal — the more likely

218
this will be the situation and exactly what central bankers and capitalists desire,
whether or not they understand what is actually happening.

It then seems that the economy is expanding because the central banks are
following “expansionary policies” that allow governments to run larger deficits —
also expansionary — without fear that “private sector” borrowers will be crowded
out. Central bankers, politicians and economists all like to take personal credit for
such a favorable economic conjuncture even though they had nothing to do with
it.

Falling gold production

This is the situation that prevails when the golden market prices of commodities
fall below their golden prices of production. Soon, however, capitalist prosperity
causes demand to exceed supply at prevailing market prices, eventually causing
golden market prices to rise above the golden prices of production. This, in turn,
leads to falling levels of gold production owing to falling profitability in that
industry.

Gold hoarders and speculators now expect that the currency price of gold is likely
to rise. When this happens, gold hoarders reduce the amount of gold being offered
for sale at the prevailing currency price of gold. This drives the currency price of
gold upward, putting upward pressure on commodity prices in terms of
currency independently of any increase in the quantity of currency. The result is
rising interest rates and “tight money.”

The government in order to relieve the pressure on the private sector caused by
the developing money crunch is now under pressure to restrain its spending and
raise taxes to reduce the quantity of bonds and notes it issues in order to reduce
the upward pressure on interest rates. It therefore seems that “recessionary
policies” followed by the central bank and the government are responsible for the
recession that inevitably follows. In reality, it is the low level of gold production
caused by golden market prices that are “too high” relative to the prices of
production.

Therefore, far from smoothing out the “business cycle,” the central bank through
its monetary policy, and the government through its fiscal policy, are merely
following the cycle.90 The central bankers, politicians, and government are blamed
for the recession when in reality they have little control over the situation.

90This doesn’t mean that the faulty government and/or central bank policies and legislation
cannot sharpen the fluctuations of the industrial cycle. They certainly can. The art of so-called
219
But what happens if the government and central banks ignore the rising price of
gold, as they did in the 1970s? In response, private gold hoarders and speculators
withdraw gold from the market at current currency prices for gold bullion, thereby
increasing the currency price of gold. In other words, they respond to attempts to
artificially maintain the expansion by devaluing the currency. This, in turn, leads
first to higher inflation in terms of the devalued currency and then to higher
interest rates.

The inescapable conclusion: Any attempt to fight the rise in interest rates by the
monetary authority once the industrial cycle has reached its critical stage will only
result in higher, not lower, interest rates.

Why allowing a decentralized gold hoard is bad policy for the capitalist
class

The disadvantages of allowing the gold reserve of society to become decentralized

do not appear during prosperity. Rather, they appear in the crisis or rather during
the critical stage of the industrial cycle that immediately precedes the crisis
proper. If the supply of gold is centralized in the hands of the state — even without
a gold standard — when the demand for gold rises the government can fight the
approaching crisis in two main ways.

One, it can sell some of its gold reserve, increasing the quantity of gold on the
market at existing currency prices of gold and thereby stave off depreciation of
the currency. Or, two, it can raise the rate of interest by withdrawing from
circulation a certain quantity of its monetary tokens — or their electronic
equivalents. Finally, it can pursue a combination of both policies.

The central bank can thus moderate the developing crisis by providing the market
with the gold it craves while reducing the demand for gold by curbing the central
bank’s issuance of additional currency. The greater the size of the gold reserve
centralized in the state’s hands, the more ammunition both the government and
the central bank will have to fight the crisis.

A large centralized gold reserve is therefore the strongest weapon against crisis
that the capitalist state and its central bank can possess. Therefore, the greater
percentage of the world gold supply that is centralized in the hands of the state,
the more the government will be able to combat crises.

“stabilization policies” involves avoiding policies that actually increase the amplitude of
fluctuations of the industrial cycle.
220
Indeed, the very knowledge that the central bank or treasury possesses a large
reserve of gold that it can dump on the market greatly reduces the demand for
gold that will develop during the critical stage of the industrial cycle. Therefore,
the need for the central bank to tighten credit as the industrial cycle peaks is
minimized.

However, the more decentralized the gold hoard becomes the more the central
bank will have to push up interest rates — or allow them to rise — in order to
break the demand for gold during the critical stage of the industrial cycle. The
greater the decentralization of the gold hoard, the higher interest rates will have
to rise to break the demand for gold and the more the crisis will be intensified,
everything
else remaining equal.

The central bank will still be able to break the back of the demand for gold — and
the inflation this generates — if it raises interest rates — or allows them to rise —
high enough. But in this case, the rate of interest will have to rise much more than
it would with a centralized gold hoard.

‘Pure fiat global money’

Economists and policymakers in the 1960s believed they could and should
establish the U.S. dollar as a “pure fiat global money.” Trained in the marginalist
theory of value, they saw no reason why gold could not be demonetized. They
believed that if the government stopped treating gold as money, it would lose its
monetary character. Milton Friedman took this idea to its logical extreme,
advocating the complete sell-off of gold in the hands of government treasuries
and central banks.

Marginalist economists like Friedman believed that if this were done gold would
completely lose its main utility — use value — to serve as global money. As a
result, these economists predicted that the dollar price of gold would drop sharply.
But even if that didn’t happen, or the dollar price of gold even rose, it wouldn’t
matter because gold was “just another commodity,” and not a very important one
at that.

If Friedman’s suggestions had been fully carried out, the global gold hoard would
have become thoroughly decentralized. As a result, capitalist governments would
have been stripped of their most powerful weapon against crises. Private gold
hoarders, like all private individuals under capitalism, are obliged by the economic
laws that govern capitalism to “look out for number one.” They increasingly
demand gold to protect themselves from the consequences of a currency crisis.

221
This intensifies the currency crisis, whips inflation into a frenzy, and ultimately
leads to astronomical interest rates. The crisis proper that follows the critical stage
of the industrial cycle is greatly intensified.

The only advantage in Friedman’s proposal was that it would increase the chances
of an early downfall of capitalism. But that was hardly what Friedman wanted to
accomplish.

While the policymakers did not completely carry out Friedman’s suggestion, they
did allow the global hoard to become increasingly decentralized. Not only Friedman
but virtually all Keynesian economists — Friedman’s main rivals in the field of
bourgeois macroeconomics — also believed in the “demonetization” of gold.

Starting in August 1971, the U.S. Treasury stopped buying and selling gold at a
rate of $35 an ounce. The U.S. government also pressured other central banks to
stop buying gold even at “free market prices” in order to drive down — or at least
prevent a sharp rise — in the U.S. dollar gold price. Under these polices, as new
gold was mined the world gold hoard became increasingly less centralized, further
reducing the ability of capitalist governments to fight crises.

Interest rates in a classic industrial cycle

In a classic industrial cycle, where the gold standard is in effect, interest rates
reach their lowest point at or near the bottom of the industrial cycle. This reflects
the large amount of money that in the course of the recession has fallen out of
circulation and accumulated in idle hoards in the banking system. Low interest
rates are further encouraged by the cyclical rise in gold production. At the same
time, the contraction of real capital means there is less real — productive plus
commodity — capital measured in terms of their current prices. The contraction
of real capital occurs through a combination of lower prices and the physical
destruction of a portion of means of production no longer able to function as
capital, as well as the running down of inventories at more or less reduced prices.

As a result, the relationship of forces on the loan capital market shifts sharply in
favor of the owners of real capital and against the owners of loan money. The
supply and demand of loan money can only be equalized at increasingly low rates
of interest. Short-term interest rates drop more than long-term rates in the course
of the recession. This reflects the contraction of commodity capital and the
reduced need for credit to finance inventory.

The recovery begins in Department II — the department that produces items of

personal consumption — as these enterprises begin to rebuild their inventories.

222
Short-term interest rates now hit their lowest point of the cycle and begin to rise.
However, there is little capital investment until excess capacity in the enterprises
of Department II falls sufficiently to force them to expand their capacity. Only then
does the recovery spread to industrial machinery and factory construction
industries. Therefore, long-term interest rates remain at the low levels of the
depression longer than short-term rates.

During the first phase of the recovery, profits rise rapidly because rising sales
cause the turnover of (variable) capital to accelerate. The crisis has also improved
the conditions for the production of surplus value. Wage cuts that started during
the recession continue through the depression — defined as the early stages of
the recovery before industrial production reaches its previous peak. Therefore, not
only is the rate of profit rising but the net rate of profit — the profit of enterprise
— rises faster than the rate of profit as a whole because of the combination of
sharply rising rates of profit and continued low interest rates.

The rapidly rising net rate of profit — defined in terms of money material —
therefore brings back to life the “animal spirits” of the industrial capitalists.91 The
combination of a still very low rate of interest —especially long-term interest rates
— encourages the capitalist owners of money to become active industrial and
commercial capitalists entitled to profit of enterprise and not simply the continued
low rate of interest.

Since during most of the rising phase of the industrial cycle, there is a considerable
excess of the physical capacity to produce relative to the actual level of production,
commodity capital accumulates much faster than productive capital. As a result,
the yield curve — the relationship between long-term and short-term interest rates
— flattens and in the final stages of the industrial cycle may become inverted as
the quantity of unsold commodities rises just before the industrial cycle peaks.

As unsold commodities — inventories — increase, the business press claims that

inventories are “very low,” pointing to the falling ratio of sales to inventories. So
it doesn’t appear as though overproduction is occurring. However, the quantity of
unsold commodities measured in terms of their prices is growing faster than the
growth of the global gold hoard. This leads to a growing shortage of money and

91Remember that Shaikh correctly explains in “Capitalism” that net profits—total profit minus
interest—is what stimulates the “animal spirits” of the capitalists but then incorrectly defines
profits in “real terms”—the various use values that the industrial capitalists produce—rather
than in terms of the use value of the money commodity—gold bullion—and ultimately in terms
of the essence that lies behind the form of exchange value—value, abstract human labor. 223
eventually a credit crisis or credit squeeze. Therefore, the crisis at first appears as
a credit crisis rather than a crisis of overproduction.92

But when the credit crunch causes sales to suddenly contract, the underlying
overproduction is revealed as the inventory-to-sales ratio suddenly rises, causing
industrial production, world trade, and employment to fall. At this point, interest
rates start to fall, with short-term rates falling faster than long-term rates as
commodity capital—inventory—is liquidated.

This classical interest rate cycle points to another “service” that general crises of
overproduction perform in the interest of allowing capitalist expanded
reproduction to continue in the long run at the price of momentarily disrupting it.
As long as prosperity continues, the rate of interest will rise. Unless the overall
rate of profit rises indefinitely, which is excluded by the very nature of the
production of surplus value and the rising organic composition of capital, the net
rate of profit will fall even if the overall rate of profit does not fall—or even rises
but at a slower rate than the rate of interest.

If a timely—for capital—crisis does not reverse the rise in interest rates, it will be
only a matter of time before the rate of interest rises to the rate of profit—and
beyond—destroying the motive to actually produce surplus value. And surplus
value that is not produced can never be realized. Therefore, just like the crisis
lowers the demand for additional labor power before an absolute overproduction
of capital can develop, so crises by periodically lowering interest rates, keep the
rate of interest well below the average rate of profit, and the net rate of profit
positive in the long run.

The classic industrial cycle—which assumes a gold standard in some form—

therefore does not include a serious currency crisis. The rules of a gold—or gold-
exchange standard—prevent the monetary authority from attempting to resist 93
the rise in interest rates during the critical phase of the industrial cycle that
precedes the crisis proper by increasing the quantity of the currency. Therefore,
unlike the situation under the present dollar system, a sharp rise in the demand

92 This why, as Marx pointed out, that bourgeois economists have tended to look for problems
in the credit system for causes and cures for crises and advocate various reforms that they
believe will eliminate crises. Today, economists having tried virtually every possible reform
have largely given up and instead adopted the more modest aim of developing policies aimed
at avoiding another “super-crisis” of the 1929-33 type.
224
93 This is exactly why Keynes wanted to get rid of the gold standard.
for gold bullion during the critical stage of the industrial cycle can often be avoided
under a gold standard.

In last month’s post, we saw that the attempt by capitalist governments to

maintain the economic expansion beyond the critical point in the industrial cycle
led to the “great inflation” of the 1970s. More importantly, it destroyed the golden
rate of profit94 because it caused a negativeprofit in terms of gold bullion. The
law of value dictates that profits must be “golden” under the capitalist mode of
production. The collapse of golden profitability led straight to the dollar-gold crisis
of 1979-80, which finally forced the U.S. government to abandon “expansionary
polices” and initiate the “Volcker Shock” and the “neo-liberal” era that followed.

The Volcker Shock finally halted and partially reversed the depreciation against
gold of the U.S. dollar—and its satellite currencies—and even more importantly,
from the viewpoint of the capitalists, restored a positive rate of profit in terms of
gold bullion.

Aftermath of the stagflationary crisis

At the end of 1982, the global industrial cycle was at its low point. But unlike the
low point in classic industrial cycles, interest rates, though somewhat below their
high point, were still in double digits! As a result, while overall positive golden
rates of profit had been restored, the net rate of profit, thanks to the very high
interest rates, were still negative.

As a result, just as Marx predicted in “Capital” if this ever happened, a portion

of industrial capitalists converted themselves into money capitalists. For example,
the General Electric Company, long a leading U.S. industrial corporation—
mentioned in Lenin’s “Imperialism”—converted largely, though not completely,
into a financial—money lending—company.

As money capital was diverted from M—C..P..C’—M’ into M—M’ circuits, the result
was an explosion in the quantity of money loan capital, much greater than would
be expected in a classic industrial cycle. This process continued for a period of
decades, causing the rate of interest to fall to record low levels. As a result,
positive net profits—in terms of gold bullion—were restored.

Recently, General Electric moved to shed some of its financial business and shift
back to now more profitable industrial business. It is important to understand—as
Shaikh does not—that the fall in the rate(s) of interest was not the result of the

94 By “golden rate of profit,” I mean the rate of profit calculated in terms of gold measured in
standard units of weight as opposed to units of currency.
225
Federal Reserve System—or Alan Greenspan—somehow suspending the economic
laws that govern interest rates but was in full accord with them.

Let’s briefly review the mistake Shaikh makes on the determination of interest
rates.95 Shaikh realizes that interest is merely a portion of surplus value, and he
correctly emphasizes that the rate of interest must be below the rate of profit. But
he incorrectly believes that the interest rate fluctuates around a price of production
of finance akin to a price of production of commodities. This incorrect theory is
convenient when using neo-Ricardian input-output tables where rate(s) of interest
can be treated as both a price and cost.

Shaikh puts a great deal of emphasis on administrative costs of commercial

banking, seeing these costs as forming part of the cost price of the providence of
finance. And it is true that administrative costs in terms of U.S. dollars of banking
has increased with the rise in the dollar prices of commodities in general. But the
much higher dollar prices of virtually all commodities today compared to the pre-
inflation era of the 1960s has not led to higher interest rates. Instead, interest
rates today are lower than they were then.

For commercial banks—or rather commercial banking arms of today’s universal

banks—the rise in nominal dollar prices of paper, ink, computers, salaries of
banking personal, and so on is made up by a much greater quantity of money in
nominal dollar terms. However, in “golden terms,” the bankers’ administrative
costs are considerably lower, not higher, than they were before the great inflation
of the 1970s. This is the impact of the computer revolution on office work. These
days, banks hire far fewer tellers, for example, than they did in the 1960s.

Each dollar a commercial bank handles represents at any point in time a definite
quantity of gold bullion measured in some unit of weight. This gold bullion, in turn,
represents a definite quantity of abstract human labor—value—measured in some
unit of time. Therefore, the administrative costs that a commercial bank incurs,
like all costs96 under the capitalist mode of production, are ultimately reduced to
a definite quantity of abstract human labor measured in some unit of time.

95Shaikh’s theory of interest is borrowed from the Italian neo-Ricardian economist Carlo
Panico.

96 Environmentalists point out the damage to the environment—for example, global warming—
represents tremendous costs that cannot be reduced to cost measured in terms of value and its form
exchange value. This is quite true. The Hurricane Harvey disaster in Texas was made far more likely
by rising temperatures in the Gulf of Mexico, which is a consequences of global warming. As if to drive 226
home the point, a few days after Harvey’s floods began to recede, normally clement coastal California
was hit by a record-breaking heat wave that transformed the “golden state” into a baking oven. This
So measured by the quantity of abstract human labor that has to be spent, the
administrative costs of commercial banking have not increased but rather have
fallen relative to the pre-inflation era. From the banks’ point of view, each dollar
compared to the pre-inflation era represents a vastly smaller amount of money
capital in terms of both money material—gold bullion—and value.

In mathematical terms, the rate of interest, unlike a price, is a ratio of two

numbers. The numerator measures the mass of interest and is divided by a
denominator that measures the mass of capital.

In contrast, the value of a commodity with a given use value—an automobile, for
example—and its value form, or price, is not a ratio but a single number
that represents a definite quantity of money material—weight of gold bullion. If a
U.S. dollar represents a much smaller quantity of gold bullion, everything else
remaining equal, the dollar price of a car, chewing gum, pair of shoes, cup of
coffee, and so forth will be higher. Therefore, it is not surprising that the prices of
most items are much higher today in terms of devalued U.S. dollars than in the
1960s.

If, in the future, a new dollar crisis were to inflate the dollar price of gold bullion
a hundred times, once the crisis is over and the dollar is more or less stabilized
the higher nominal dollar administrative costs would also have no effect on future
interest rates, since both numerator and denominator in any interest rate
calculation would also be inflated a hundred times.

Therefore, there is no reason to invoke the alleged super-natural power of Alan

Greenspan—as Shaikh does in “Capitalism”—to explain the movements of interest
rates in the wake of the “stagflationary great depression” of the late 20th century.

‘Financialization’

“Financialization”—the abnormal expansion of the quantity of loan money capital

brought about by a period of abnormally high interest rates—involved by definition

was followed by formation of Hurricane Irma, the most powerful and destructive tropical cyclone ever
observed in the Atlantic basin.

Until the damage to the environment forces capitalists to consume human labor—whether
living (variable capital) or embodied in existing commodities (constant capital)—such costs
are not costs at all to the individual—and corporate—capitalist. This is why capitalism is such
an obstacle to dealing with the environmental crises that now confront our species—and all 227
other species on the planet.
an abnormal (relative to what would have occurred under a gold or gold-exchange
standard) inflation of credit.

This is in some ways reminiscent of the huge amount of debt created during and
after World War I. But the reasons for the abnormal inflation of credit in the two
eras were quite different.

In the World War I case, occurring when it did during the industrial cycle, the war
caused an unprecedented rise of golden market prices above the underlying
golden prices of production. This did not happen during World War II, which began
at the end of the 1930s Great Depression.

Despite its much greater destructive scope, the starting point of golden inflation 97
that occurred during World War II, the golden market prices of commodities were,
thanks to the Depression, well below their prices of production. The World War II-
era golden inflation only brought golden market prices more or less up to their
prices of production. Related to this was the fact that, in contrast to World War I,
on the eve of World War II the world was awash in idle cash backed up by the
ultimate form of hard cash—gold bullion. These conditions were the opposite of
those that prevailed on the eve of World War I.

As a result, the economic outcomes of the two post-war periods were radically
different. The high golden market prices of the post-World War I era relative to
the prices of production of commodities meant a world gold shortage, a low level
of production of new gold, and a strong trend toward price deflation. Therefore,
credit inflation was driven by the need to replace money backed by gold with credit
money and credit in order to circulate commodities.

This “solution” worked for a while until the cyclical crisis that began in 1929
brought the whole “house of cards” crashing down, transforming a cyclical crisis
into the super-crisis that bred the Great Depression. The super-crisis/Depression,
however, put the U.S. and ultimately the global capitalist economy back on a cash
basis, laying the foundation of the era of great capitalist prosperity that followed
World War II.

At no point since World War II has there been a golden price inflation comparable
to that of the World War I era. The Vietnam War did trigger the end of the great
postwar prosperity by, along with the cyclical boom of the 1960s, causing the
golden prices of commodities to rise above their prices of production. However,

97By “golden inflation,” I mean a general rise in the golden prices of commodities, as opposed
to a general rise in currency commodity prices caused by a fall in the value of the currency
against gold.
228
the gap between golden market prices and golden prices of production was far
less than during World War I.

Therefore, if the U.S. government and Federal Reserve System had followed the
policies necessary to save the Bretton Woods System, there is reason to think the
resulting classic deflationary depression, though severe, would not have been on
the scale of the super-crisis and resulting Great Depression of the 1930s. Nor have
any of the numerous wars since the Vietnam War—though they have had
disastrous consequences for those countries, peoples, and countless individuals
directly affected—been “big enough” to cause golden price inflation on a scale
anywhere near the inflation of even the Vietnam War era, let alone World War I.

The growth in debt that we now call “financialization” has made it virtually
impossible for the world capitalist economy to return to a “normal” rate of
economic growth. The reason is that the world capitalist economy has come to
depend on low rates of interest. Whenever the global economy accelerates, the
rise in the rate of interest on the swollen debt quickly slows it down.

A new “great inflation” won’t really get rid of this debt because while inflation
wipes out old debts it creates new ones as rising nominal prices force both
capitalists and consumers to borrow increasing amounts of devalued currency.
Inflation therefore creates new debts as it wipes out old ones.

Only old-fashioned deflation will wipe out the debt

It seems that only an old-fashioned debt deflation will wipe out this mountain of
debt. During a classic deflation, such as last occurred in the early 1930s, falling
prices and bankruptcies stop the creation of new debtfor a period of time while old
debts are either repaid or wiped out through bankruptcies. Once this happens, the
capitalist system, further helped by the lower price levels and a greater quantity
of hard cash due to increased gold production, shifts back from a credit system to
a “cash system.” Or, as the capitalist press puts it, the banking and financial
system is once again put on a “sound basis.”

Therefore, to restore the global capitalist economy to the degree of health that
would allow a return to normal economic growth for a period of decades there is
reason to think that a classic price and debt deflation will be necessary. However,
the scale of the necessary debt deflation implies a period of severe depression
accompanied by astronomical rates of unemployment and the political
consequences. Therefore, the reigning economic orthodoxy continues to hold that
policymakers must do everything they can to prevent this from happening.

229
There are good reasons—from the point of view of those trying to preserve the
capitalist system—for this “orthodoxy,” however wrong it may be in the purely
economic sense. The Great Recession did accomplish some of the hellish “work”
of classic debt deflation necessary to restore the world capitalist economy to
health. However, the low rate of overall growth during the current upswing—
accompanied by occasional recessions in many industries and countries—shows
that it was not nearly enough to restore the world capitalist economy to “health.”
But though the “Great Recession” was inadequate in this respect, it was “great”
enough to lead to the political crisis now gripping the U.S.—and therefore the
whole U.S. world empire—in the shape of the increasingly disastrous presidency
of Donald Trump.98

An economic crisis that would put capitalism back on a “sound footing” would
liquidate the debt—and more profoundly the cumulative overproduction of
commodities and productive capital—but would lead to a political crisis that is far
worse than the current one. Even as it is, the current political crisis is already not
only raising fascism from its grave but more importantly—alarmingly for the U.S.
ruling class—leading to a rapid growth of the U.S. left in reaction to Trump’s
“strong-man tactics,” his brazen racism, and the still modest growth of fascist
forces that he has encouraged.

A crisis on the scale necessary to restore capitalism to “health” for a few decades
points toward a worldwide workers’ revolution on one side and fascism and world
war on the other that would very likely end human civilization for good. No wonder
policymakers are doing all they can do prevent the one “solution” for the current
ills of world capitalism that would actually work—for a few decades, that is.99

Pending such an economic/political crisis, the abnormal level of debt has made
the capitalist system dependent on the maintenance of very low rates of interest.
Any significant rise in rates threatens to bring the whole house of cards crashing
down. This explains why the U.S. Federal Reserve System did not expand the
monetary base after the preliminary money-market freeze-up that broke out in
global credit markets in August 2007. A new dollar crisis would have raised interest
rates, which meant that as soon as the dollar was stabilized the whole credit
system would have imploded much more violently than it actually did in 2008.

98I am tempted to describe these events. But besides the fact that any attempt to do so would
considerably inflate this already too long post, events are unfolding at such speed that it is
simply impossible to keep up with them. I will therefore not attempt to do this in the current
post.
99 In the historical sense, this would therefore be no solution at all. 230
‘Globalization’

But there was another, even more important consequence of the rise of the rate
of interest above the rate of profit in the wake of the dollar crisis. The period of
extremely high but declining interest rates that followed the Volcker Shock led to
a massive destruction of heavy industry in the U.S., Great Britain and to a lesser
extent Western Europe. Then as interest rates fell, and positive net profits
returned, capital in the form of money and loan money capital was free to invest
in new areas. It chose to do this not in the old industrial areas of Britain, the
United States and Western Europe but in areas where the rate of profit was far
higher, leading to what has come to be known as “globalization.”

Two political changes that occurred during the 1980s and 1990s played a crucial
role in making this possible.

First, the counterrevolutionary destruction of the Soviet Union and its Eastern
European socialist allies meant that capitalists of the U.S., Britain and Western
Europe became much more confident that capital invested outside the imperialist
countries would be safe. Indeed, it even raised expectations among many
capitalist leaders—such as George W. Bush—that something like pre-World War II
colonialism could be restored. But this time it would be the U.S. empire rather
than the British empire that would be the chief jailers of the colonized peoples.
George W. Bush and his ilk believed, unlike leaders of the British empire of old,
who always faced rivals in the form of the French, Russian, German, and Japanese
empires and the still modest U.S. empire, the modern U.S. empire would tolerate
no rivals.

The second crucial development was the outcome of the great Chinese Revolution
of the 20th century. With the rise of Deng Xiaoping to power in 1978, the
revolution had finally run its course. Unlike in the Soviet Union, however, in China
while there was political reaction—epitomized by Deng’s “it is glorious to get rich”
slogan—there was no counterrevolution.

When the dust finally settled after decades of revolution, civil war,
counterrevolution, Japanese occupation, still more civil war, the liberation of 1949
when China “stood up,” and finally the Cultural Revolution, China emerged with a
strong central government independent of imperialism. The new government was
eager to attract foreign capital and willing to respect bourgeois private property
rights in order to achieve rapid economic development along capitalist lines—but
on its own terms.

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Handed down from the pre-revolutionary past, the new China possessed a gigantic
peasantry numbering in the hundreds of millions accustomed to a very low
standard of living and hard manual labor. This peasantry served as the source for
an industrial proletariat willing to put up with a much higher rate of surplus value
than the workers of North—and even Latin—America, Western Europe or modern
Japan.

Beyond China, capital is now looking towards areas where the value of the
commodity labor power is even lower. This includes Vietnam, which also went
through a great revolution in the last century; Cambodia; the Indian sub-
continent; and ultimately, Africa.

Marx’s critique of political economy shows that capital is interested not in

developing the productive forces as such but in appropriating surplus value in the
form of profit and converting it into new commodity money and productive capital
in order to appropriate still more surplus value so as to accumulate still more
capital. The colossal development of the productive forces that occurs is only a
“coincidental consequence” from the viewpoint of the capitalists. However, from
the viewpoint of the human species, this development of the productive forces is
capitalism’s most important consequence because it creates the material pre-
conditions for socialist society.

As a result of the convergence of historical forces described above, including the

failed attempt of capitalist governments and central banks to solve the problem
of periodic crises of general overproduction through issuance of paper money, in
a shockingly short period of time China emerged as the country with the highest
absolute level of industrial production—though not on a per capita basis.
Meanwhile, the imperialist countries of the U.S., Britain and Western Europe have
become increasingly de-industrialized as result of the operation of the same
economic laws.

In the U.S., manufacturing employment peaked in 1979—almost 40 years ago—

and not so coincidently the year the dollar-gold crisis that ended with the Volcker
Shock broke out. The 1979-80 currency crisis marks the failure in practice—
though Marx’s theory of value explains why this failure was predetermined—of the
attempt to use paper money as a means to solve the problem of periodic crises of
overproduction within the limits of capitalism.

Did imperialist policymakers make a mistake?

This raises an interesting question. Did the imperialist policymakers make a

mistake in allowing the Bretton Woods System to collapse? If U.S. policymakers

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of the late 1960s and early 1970s had somehow been able to understand Marx’s
economic theories, and drawn from them what could be drawn in the service of
reaction, could they have avoided a historic mistake?

Imagine that U.S. policymakers had followed policies that could have saved the
Bretton Woods System. This would have meant that a classic deflationary
crisis/depression would have broken out at the end of the 1960s or the beginning
of the 1970s. It would probably have been less severe than that of the 1930s.
Unlike in the 1920s, there had been nothing like the World War I golden inflation
that boosted market prices above the prices of production for such a prolonged
period. And though there was a cyclical credit inflation, financialization had not
occurred.

At the end of the 1960s, the economic situation was more like that on the eve of
World War I than it was like that following World War I. By the mid or late 1970s,
a new capitalist upswing would have begun and the capitalist system would have
been back on a “sound” cash basis with low rates of interest.

Perhaps the deflationary depression would have led to revolutions if the capitalist
governments and central banks had followed policies needed to save the Bretton
Woods dollar-gold exchange standard. Indeed, the workers’ organizations
included the Soviet state, the most powerful workers’ organization that up to this
writing has ever existed. But the leadership of these potentially powerful workers’
organizations—with some exceptions, such as that of revolutionary Cuba—was
uninspiring to say the least.

And it is a fact of history that the existing leaderships of the workers’ organizations
of those days did not accomplish socialist revolutions, despite what Shaikh calls
the stagflationary “great depression of the late 20th century.” Would they have
led successful revolutions if there had been a classic deflationary depression
instead? In any case, the existing leaderships of the mighty workers’ organizations
that existed in the 1960s and 1970s did not lead revolutions against the crisis-
ridden capitalism of the late 20th century. On the contrary, the late 20th-century
capitalist crisis was followed by a disastrous capitalist counterrevolution that
destroyed the Soviet state and greatly weakened virtually all other workers’
organization—whether state party or trade union—throughout the world.

Also, the capitalists would hardly have willingly shifted their industrial production
to China as long as Chairman Mao lived. And the Chinese leadership under
Chairman Mao would probably not have allowed them to do so, even if they had
wanted to. Chairman Mao lived until September 1976. Then the radical leftist

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faction called the “Gang of Four” by its enemies was overthrown within weeks of
Chairman Mao’s death by the “centrist” Hua Guofeng grouping.

However, the Hua leadership was less enthusiastic than the right-wing faction
around the veteran Chinese revolutionist Deng Xiaoping about opening China to
foreign capital. The definitive victory of the Deng faction, which was the political
pre-condition for the large-scale movement of foreign capital into China and the
resulting stunning economic revolution that has transformed that country and the
world, did not occur until 1978.

Loan money capital

The relatively long period of time when the rate of interest exceeded the rate of
profit meant that a much greater quantity of the world’s supply of money capital
took the form of highly fluid money loan capital than would have been the case in
a normal industrial cycle. Unlike productive capital—such as factories—which are
hard to move from one physical location to another, money capital can easily flow
from one continent to another.

Working in the same direction was the fact that the golden prices of commodities
due to the great currency crisis of 1979-80 had fallen much further below the
prices of production than would have been the case in a classic deflationary crisis.
This caused a greater increase in gold production than would have been the case
with classic deflation. The extra money capital that was created in the form of the
increased production of gold bullion combined with the period of high interest rates
caused a large portion of the industrial capitalists to convert themselves into
money capitalists. The huge quantity of loan money capital—finance capital—
created played a vital role in financing China’s astonishingly rapid industrialization.

Therefore, assuming that the classic depression had not led to socialist revolution,
the new wave of capitalist investment—expanded capitalist reproduction—that
would have followed and would have largely taken place in the United States and
Western Europe occurred in China and to a lesser extent in other countries of the
“global south” instead.

We shouldn’t exaggerate, however. Even if the Bretton Woods System had been
saved through a classic deflationary depression in the late 1960s and early 1970s,
the shift of industrial production away from the United States, Britain and Western
Europe towards China, India, and eventually Africa would have still been a historic
tendency as we will see when we review John Smith’s “Imperialism in the Twenty-
First Century.” I will examine these questions as treated in Smith’s book—the
other great book on Marxist economics published in 2016—beginning next month.

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Shaikh’s strengths and weaknesses

In “Capitalism,” Shaikh contrasts “real competition” to the monopoly price theory

built on top of the Walrasian theory of “perfect competition” that has largely
dominated left-wing and Marxist economics since the Depression of the 1930s.
Marx had intended to write a book on the world market, competition, and crises
but did not live to do so. Shaikh has therefore made a valuable contribution
towards completing Marx’s work.

However, Shaikh has gone only part of the way. He stumbles badly on value
theory—not understanding the necessity of the form of value—money—and
accepts the claim that “modern money” is pure fiat money that no longer
represents gold—or any other money commodity—in circulation. This causes him
to incorrectly believe that governments and central banks now have the power to
create as much monetarily effective demand as possible, not understanding that
the 1970s proved the opposite to be true.

It is true that when monetarily effective demand exceeds the engineering limits
of production, demand will exceed supply at current prices. The market will then
“correct” this situation through higher prices—inflation. This is the process that
drives “golden inflations.” But this is not what happened in the 1970s, when
“golden deflation” was hidden behind a paper money inflation.

In his crisis theory, Shaikh sees the cause of capitalist crises not in the inability of
the market to expand as fast as production under the capitalist mode of production
but rather in the limits on the quantity of labor power—workers. These ultimately
in Shaikh’s view create engineering limits to further increases in production.

During the 1970s, according to Shaikh, policymakers made the mistake of seeing
the “great depression” of that time as being caused by a lack of effective demand
rather than what in Shaikh’s view was an engineering jam-up of production caused
by the fact that the rate of unemployment had fallen below its natural rate.
Policymakers then made the mistake of using “pure fiat money” to create
additional demand that under the circumstances could only express itself in the
form of higher prices—inflation. Thus, as Shaikh’s crisis theory fails, he flees from
economics to industrial engineering.

However, Shaikh’s criticisms of post-Keynesian economics and the mixture of

Marx, Keynes and Kalecki that is the Monthly Review School retains its full validity.
All these schools, Shaikh explains, accept the marginalist Walrasian theory of
perfect competition as their starting point. Building on this false foundation, they

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then see “monopoly capitalism” as an “imperfect” version of Walrasian “perfect
competition.”

However, because Shaikh has not fully understood Marx’s theory of value, he is
unable to fully develop a modern Marxist theory of prices—whether competitive or
monopoly. More work will have to be done in this regard.

While Shaikh admits that monopoly prices do exist, he basically ignores them. Our
criticism of Shaikh, however, has revealed the real limits of monopoly pricing
ignored by the influential Baran and Sweezy theory of monopoly prices.

Let’s assume that the gold mining and refining industries are more monopolistic
than the economy as a whole. This will mean that, as far as golden prices are
concerned, monopoly will actually lower golden prices. If we then assume that the
“degree of monopoly” (to borrow a term from Kalecki) in the gold industry is equal
to the average in the economy as a whole, this will mean that monopoly will
have no influence on the generalgolden price level.

Even if we assume that the degree of monopoly is lower in the gold industry than
the economy as a whole, the ability of non-gold producing capitalists to use their
monopoly to raise golden prices above production prices will still be bound by the
need for the gold capitalists to make a profit. If golden prices were to rise to the
point that gold capitalists cannot make a profit, gold production will cease and the
inevitable money squeeze/crisis that follows will bring golden prices crashing
down. Therefore, the law of value imposes strict mathematical limits on how high
golden monopoly prices can rise above prices of production in any lasting way.

But the law of value imposes no such limitations on how far prices can rise in
terms of arbitrary currency units such as dollars, euros, yen, yuan, and so on. If
the U.S. dollar—or any other currency unit—represents a variable rather than a
fixed quantity of gold, the set of currency prices that express the given golden
prices of commodities is infinite. Therefore, the law of value puts no limit on how
far commodity prices can rise in terms of arbitrary currency units.

But rising prices in terms of depreciating currency is hardly unique to the

monopoly stage of capitalism or even unique to capitalism. Inflation caused by
currency depreciation against money metals is almost as old as coinage itself.

We should never confuse high (golden) prices caused by monopoly with high
currency prices caused by the depreciation of the currency units against the
money commodity. This is essentially what the Monthly Review School does.

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This brings us to what many would consider the weakest part of Shaikh
“Capitalism” and his work in general. That is Shaikh’s rejection of the theory of
monopoly capitalism-imperialism. Shaikh lumps Lenin’s 1916 pamphlet
“Imperialism” and Hilferdings “Finance Capital” in with Baran and Sweezy’s
“Monopoly Capitalism,” dismissing all three classic works as fatally flawed because
they are based on Walrasian “perfect competition.” Shaikh correctly states that
the tendency of profits to equalize does not disappear even when capital becomes
highly centralized. Super-profits inevitably attract equal or even more centralized
capitals, which leads to the collapse of the super-profits.

In the early 1960s, Belgian Marxist economist Ernest Mandel proposed that
monopoly capitalism has two rates of profit, one for the competitive sector and a
higher one for the monopoly sector. I think it is more accurate to say as Mandel
did in his later works that powerful monopolies can resist the equalization of the
rate of profit for a greater period of time than firms in the “competitive sector.”
But eventually monopoly profits will disappear.

When monopoly profits do disappear they give way to massive losses as new
competition emerges, especially from, but not only from, the international arena.
This is what happened to the once powerful U.S. steel monopoly and other U.S.
monopolistic basic industries that had such an iron grip on the world market during
the early and middle 20th century. The view that monopoly profits can last for
considerable periods of time but are not permanent is also found in “Imperialism”
by Lenin, who, unlike Baran and Sweezy, stressed that monopolies inevitably
decay.

The fact that monopoly prices and profits eventually disappear doesn’t mean that
monopoly and monopoly prices are unimportant and can be ignored, as Shaikh is
inclined to do. On the contrary, this process is very much a part of the “real
competition” that Shaikh seeks to analyze. Indeed, the outbreak of wars and
revolutions in no small measure reflects the rise and decay of monopolies as profits
equalize over periods extending over many decades.

What is incorrect is the claim advanced in Baran and Sweezy’s “Monopoly Capital”
that monopoly capitalists have learned to avoid price competition. Baran and
Sweezy, using the monopoly price theory developed on Walrasian foundations in
the 1930s, paint monopoly capitalism as an orderly and potentially stable system.
In Baran and Sweezy, in contrast to Lenin, where monopolies not only rise but
decay, monopolies are permanent and the system despite its tendency to
stagnation—which can however be corrected by government spending—is quite
stable.

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The actual history of prices during the period of monopoly capitalism—not to speak
of the entire history of wars and revolutions—gives no support to the Monthly
Review School at all. For example, Baran and Sweezy believe that the stage of
monopoly capital began as early as 1870 and certainly was in effect by 1900—
Lenin’s date. Lenin saw the period from the crisis of 1873—not 1870—to the turn
of the 20th century as the transitional period between capitalism based on “free
competition”—which Shaikh wrongly equates with Walrasian “perfect
competition”—and monopoly capitalism. By 1900, virtually the entire world was
divided between a handful of imperialist countries that exploited all other nations
of the Earth.

Let’s for the sake of argument accept 1900 as the date generally when monopoly
capitalism definitely replaced “competitive capitalism.” It happens that in the
period after 1900 the two most dramatic price declines seen in the entire history
of prices (in terms of currency as well gold) occur. These price deflations occurred
in 1920-21 and 1929-33, respectively. Perhaps the monopoly capitalists only
learned to avoid price competition after 1929-33. But in that case, the origins of
the monopoly stage of capitalism should be dated from 1929-33, much later than
Baran and Sweezy and Lenin, who didn’t even live to witness the 1929-33 price
deflation.

But dating the beginning of the monopoly stage of capitalism from 1933 won’t
save “Monopoly Capitalism” either, because it is only through periodic dollar
devaluations against gold that new drastic deflations in dollar prices have been
avoided up to now. Indeed, since 1920, golden prices have shown a strong
downward tendency, including dramatic declines during the 1970s and lesser
declines associated with the crisis of 2007-09.

Though the price theories advanced in “Monopoly Capital” are not tenable, either
in terms of theory or in the actual history of prices, this doesn’t mean that
increasing centralization of capital has no significance. Shaikh does observe in
“Capitalism” that when demand recovers, prices rise less in the branches of
production where capital is highly centralized than where it is more decentralized.
Therefore, Shaikh draws the conclusion that over time the centralization of capital
has little effect on prices.

However, as far as crisis theory is concerned, there is an important conclusion to

be drawn. The sectors of highly centralized capital will react to any fall in demand
at existing prices by slashing production rather than prices. One consequence, is
that sectors of industry where capital is less centralized will find that their costs
will drop only slightly during a crisis insomuch as their costs consist of inputs

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produced by the monopolistic sectors. This leads to a severe squeeze on the
profits—and bigger losses—in the “competitive” sectors during the crisis.

Centralized—monopoly—capital achieves a relative stabilization of prices in

sectors of industry in proportion to its “success” in making employment more
unstable. Workers employed in the monopoly sector are subject to higher levels
of unemployment during crises. It is precisely the growing centralization of capital
that drives capitalism forward “through its own economic agencies,” as Marx put
it, toward a socialist society.

Or as Engels explains in his description of the industrial cycle in his “Socialism

Utopian and Scientific,” the industrial cycle forms not a circle but a spiral. A circle
can go on forever, but a spiral in the real material world must end sooner or later.
This crucial insight with all its revolutionary conclusions that is so central to Marx
and Engels is missing in Shaikh’s “Capitalism.”

Shaikh defends Marx’s work from bourgeois critiques in many areas. He has
defended effectively the law of labor value from neo-Ricardian critiques based on
the “transformation problem.” Shaikh has also defended Marx’s law of the
tendency of the rate of profit to fall against relentless criticism from many
academic Marxists and semi-Marxists as well as the Monthly Review School.

In “Capitalism,” Shaikh also makes a valuable criticism of the so-called Okishio

theorem, which is often used against Marx’s law of the tendency of the rate of
profit to decline. The Okishio heorem holds that a capitalist will never adopt a
method of production that will actually lower the rate of profit. Therefore, the
theorem claims, only a rise in “real wages” can cause the rate of profit to fall.
Shaikh shows that the Okishio theorem assumes and is dependent upon the
presence of Walrasian perfect competition.

One of Shaikh’s most important contributions is his demonstration that the “law
of comparative advantage” does not and cannot operate within a capitalist
economy. Comparative advantage, which was first advocated by Ricardo, is often
used to prove that all countries regardless of their different levels of productivity
benefit equally from international trade. However, just as the Okishio theorem
depends on Walrasian perfect competition, the law of comparative advantage
depends on the quantity theory of money. Without the quantity theory of money,
there is no mechanism that can convert the law of absolute advantage, which
actually rules capitalism, into comparative advantage.

Today, comparative advantage is used by pro-imperialist economists to “prove”

underdeveloped—that is, oppressed—capitalist countries should follow free-trade

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policies that in practice are ruinous to their developmentbut benefit a handful of
oppressor countries.

Shaikh’s biggest mistake

There is one important area where Shaikh does not defend Marx from the Marx
critics, and that involves the theory of value. Shaikh defends the law of labor value
but has failed to grasp the importance and even understand Marx’s discovery that
value must have a value form where the value of a commodity is measured by the
use value of another commodity. This leads to Shaikh’s acceptance of the claim,
supported by virtually all present-day bourgeois economists, that modern money
is “pure fiat money” backed by commodities as a whole rather than by a special
money commodity.

When Shaikh attempts to analyze “modern money,” he stands closer to the MELT—
monetary expression of labor time—theory of labor-based value, price and money
than to the perfected labor-based theory of value put forward by Marx. Indeed,
Shaikh sinks lower than many MELT theorists when he holds that what concerns
the capitalists is the level of prices that prevail when a commodity is sold rather
than when capital is advanced. This later claim is straight out of the quantity
theory of money, which claims that changes in the quantity of money affect only
nominal prices and wages but otherwise have no real effects on the capitalist
economy.

Fortunately, Shaikh rejects the quantity theory of money in the scientific parts of
his work in general and “Capitalism” in particular—for example in his critique of
“comparative advantage.”

This leads Shaikh to his single biggest mistake, which is that the motive of
capitalist production is the real net profit—measured by the use values of the
commodities that are produced—rather than to maximize the accumulation of
capital by striving for the highest possible rate of profit. Shaikh completely fails to
grasp that profit—and its fractions such as interest and profit of enterprise—must
always be measured in terms of money material and not real terms. To be fair to
Shaikh, so do most other economists.

Shaikh’s analysis, so brilliant up to this point, disintegrates completely because it

effectively abstracts everything that is specifically capitalist in production. Why
does Shaikh end up committing “theoretical suicide” at this point rather than
bringing his work to the brilliant conclusion it seemed to be heading towards?

Struggle of ideas a key arena of the class struggle

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The late historic leader of the Cuban Revolution Fidel Castro, especially in his later
years, stressed the importance of the battle of ideas. But this battle does not occur
in a vacuum. It both reflects the class struggle and is one of the most important
theaters in which the class struggle is waged.

The class struggle has less direct effect on the development of natural sciences,
since the subjects that natural sciences deal with exist independent of us humans
and our relations among ourselves. However, the class struggle is central to the
development of the social sciences, which deal with social relations among us
humans. This is why, in my opinion, the concepts of “Marxist physics” or “Marxist
biology” make no sense, though Marx’s materialistic dialectics do have
implications for these and other natural sciences. Marx, however, was neither a
physicist nor a biologist.

But things are quite different in the social sciences, especially in the queen of
social sciences, the science that deals with relationships among humans engaged
in production. This is, of course, the science of political economy. Marx developed
what he called his critique of (mostly classical) political economy in complete
opposition to the bourgeois social and economic science of his day. That is why
Marx called his work not political economy but the critique of political economy.

In his youth, Marx had intended to become a university professor. But his early
revolutionary activity quickly barred this career path, both in his native Germany
and in other countries. Later generations of Marxists operated within the organized
workers’ movement, represented first by the Second and then the Third
Internationals. These later Marxists did not enjoy the freedom that Marx had, since
they were subjected to the complex politics of these Internationals. During the
political terror of the 1930s, Soviet economists, just like other Communist (Third
International) party members, were in danger of execution—and some were
executed.

But the economic thinkers of the Second and Third Internationals did enjoy
considerable independence from “official” bourgeois economics. Supported as they
were by the mass organizations of the workers, these economists were generally
able to carry out their work under more comfortable material conditions than the
19th-century London slum in which Marx had to perform much of his work.

Shaikh has lived and worked in an era dominated by the reaction—the back side
so to speak—of the Great Russian Revolution, whose one-hundredth anniversary
we celebrate this year (2017). In the United States, where Shaikh works and lives,
there has been no socialist organization that was either capable or willing to
support the great work that Shaikh has performed. This stands in contrast to the

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eras of the Second and Third Internationals. As a result, Shaikh has had to earn
his living as a professor of economics at the New School. And the New School
should be complemented for allowing a man of Shaikh’s stature to perform his
work.

This has enabled Shaikh to earn a living and live in relatively comfortable material
conditions—at least compared to that of Marx. And he has been free from the
kinds of political pressures that existed in the Second and Third Internationals.
But the price he has paid for this is that he is subjected to the pressure of “official”
economics. Under the “publish or perish” pressure that dominates the academy,
he has to show that he is a “real economist”—unlike the writers who produce
articles on basic Marxist economics that occasionally appear in the small
newspapers published by the small U.S. socialist organizations.

As a result, “Capitalism” is written in such a way that few political activists—even

those who specialize in economics—will be able to understand. Instead,
“Capitalism” is directed at Shaikh’s fellow economists, who won’t be able to
understand it either—though for quite different reasons.

It is also reflected by Shaikh’s definition of “the classical school” of economics, in

which he includes Marx, the neo-Ricardians, and his own work. This differs
radically from the definition of classical economics as defined by Marx.

In contrast to Shaikh, Marx saw classical economics as something already in the

past in his own day as a result of the growing intensity of the class struggle. In
contrast to Shaikh, he also put himself outside of all political economy, seeing it
as a “bourgeois science” that he was critiquing as an outsider serving the working
class.

Modern universities, though they support “free thought” up to a point, cannot but
help but be organs in the final analysis of the capitalist ruling class. As such, they
are the chief sponsors of “official economics,” which has done and continues to do
great harm to the working class and other exploited people. In recent decades,
unlike in the past, university economics departments have been willing to hire a
few Marxists, but they not surprisingly show a strong preference to those Marxists
who concentrate on criticizing aspects of Marx’s work—especially those who have
the effect of stripping away all its revolutionary implications.

Neo-Ricardian-inspired critiques of the law of labor value that invalidate Marx’s

theory of surplus value, and criticisms of the falling tendency of the rate of profit,
which imply that capitalism can last forever, are much appreciated. This is all the
more true since the great majority of bourgeois economists are trained only in

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neo-classical marginalism and are therefore so profoundly ignorant of Marx’s work
that they are incapable of criticizing it. Therefore, an economist or two who are
familiar enough with Marx’s work that they can critique its most revolutionary
conclusions are considered in many university departments a valuable addition to
a department otherwise consisting entirely of marginalists—most of whom are
allied with the right wing of bourgeois politics.

Almost all professional economists, whether of the right or left, “know” that gold
plays no important role in the modern monetary system, though strangely enough
operators in the financial markets who are obsessed with every movement of the
dollar price of gold have failed to get the message. And the economists also
“know”—especially “progressive economists” but not only them—that getting rid
of the role gold formerly played in the national and international monetary systems
is key to the capitalist state’s alleged “successes” in avoiding “depressions,” which
are now defined only as downturns on the scale of the 1930s or greater. Indeed,
any attempt to return to a gold standard under current circumstances would have
appalling consequences.

While upholding some version of the labor theory of value can be barely tolerated
in university economics departments, it generally can’t be Marx’s version but some
“MELT” or MELT-like version of labor value. The revelation of all the contradictions
of accepting Marx’s full theory of value is simply too revolutionary.

Shaikh’s work is all the more remarkable considering the political environment in
which he has been obliged to work. However, it cannot in its current form be
accepted as a finished product. It is more like a semi-finished product that is
almost there but needs a little more work—the most important of which was
fortunately done more than a century before the time of Shaikh by Marx himself.
Once Shaikh’s MELT-like theory of value is replaced by Marx’s full theory of value,
Shaikh’s work will come fully into its own. Correcting and completing Shaikh’s
work will be a key task for Marxist economists in the coming years, whose primary
job is to wage the now rapidly intensifying class struggle in the field of ideas.

Next month I will begin my review of Smith’s book.

_______

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 Three Books on Marxist Political Economy
(Pt 11)
John Smith’s ‘Imperialism in the Twenty-First Century’

The year 2016 marks the centenary of V.I. Lenin’s famous pamphlet “Imperialism,
the Highest Stage of Capitalism,” subtitled “A Popular Outline.” The pamphlet has
immensely influenced politics of the last century. This is largely but not only
because the author the following year became the leader of the first socialist
revolution as well as chief inspirer and de facto leader of the Third (Communist)
International—also known as the Comintern. If Lenin had not led the first socialist
revolution and/or had not lived to found the Third International, the pamphlet
would still have had considerable influence but of course not the influence it has
had.

A century after Lenin’s “Imperialism” appeared, Monthly Review Press published

“Imperialism in the Twenty-First Century,” by the British Marxist John Smith. As
the title indicates, this book aims to do for the Marxist analysis of imperialism in
our new century what Lenin’s “Imperialism” did for the last. Smith holds against
innumerable critics that Lenin’s basic thesis was not only correct for its own time
but also for our own, at least in broad outline.

But Smith’s book is more ambitious than that, and this is what attracted the
interest of this blog. Smith is not entirely satisfied with Lenin’s work, which in the
Third International, and the more loosely organized international Communist
movement that continued after the Third International was dissolved in 1943, was
often treated as virtually on a par with Marx’s “Capital.” Smith is dissatisfied with
Lenin’s classic pamphlet because, unlike Marx in “Capital,” Lenin does not directly
apply value theory. Value analysis is implicit rather than explicit as it is in
“Capital.”

Smith in his “Imperialism” attempts to accomplish two tasks. One, he attempts to

update Lenin’s “Imperialism.” More ambitiously, he attempts to “complete” Lenin’s
work, bringing it into line with Marx’s “Capital,” first published 150 years ago this
year. Smith explicitly puts value analysis at the center of his analysis of modern
imperialism.

The place of Lenin’s ‘Imperialism’ in history

To understand the place of Lenin’s pamphlet in the history of Marxist economic

thought, you have to keep in mind the circumstances in which it was written and

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why Lenin wrote it in the first place. The highly organized Lenin always had a
specific political purpose in mind when he decided to embark on a major writing
project.100 Lenin, who had been a leading figure in the Second International, wrote
his work as European capitalism was tearing itself to pieces during the “Great
War.”

The leaders of the Second International had for some years been aware that the
European powers were drifting towards a major war among themselves. Lenin was
therefore not surprised by the coming of the war. What did surprise him was the
collapse of the Second International, the international organization, founded in
1889, that all socialists in the world belonged to.101 When the war erupted in
Europe in the summer of 1914, most of its national sections supported their own

100 Lenin wrote “The Development of Capitalism in Russia,” published in 1898. It, along with
“Imperialism,” is considered Lenin’s major economic work. The former work, unlike the latter, was a
full-scale book, and was part of the struggle waged by the Russian Marxists against Russian populism—
later the Socialist Revolutionary Party.

The populists asserted that since there was no room on the world market for another major capitalist
country, it was mathematically excluded that capitalism could ever take hold in Russia. Lenin’s book
demonstrated that capitalism was indeed developing in Russia, including in Russian agriculture.
Therefore, the arguments of the populists about the impossibility of capitalism developing in Russia
were not only false in theory, they were being repudiated in practice.

Another example was Lenin’s work “Materialism and Empiriocriticism,” which was also a full-length
book. After the first Russian Revolution of 1905 was defeated, an era of reaction set in. Even among
the Bolsheviks, a mood of concessions toward philosophical idealism and religion, closely linked to
philosophical idealism, developed.

Lenin’s rather long work on philosophy at first glance seems remote from immediate political
concerns of the time. But Lenin considered the struggle to defeat the reactionary trends toward
philosophical idealism and religion to be a crucial political task.
245
101 The Second International was founded in 1889. For all practical purposes, it collapsed on August
4, 1914, when its leading section, the German Social Democratic Party, voted for war credits in the
German Reichstag. This represented the close of a whole epoch in the history of the workers’
movement, the likes of which was not to be seen again before the surrender of political power of the
Communist Party of the Soviet Union between 1985 and 1991. That ended the epoch in the history of
the workers’ movement dominated by the Russian Revolution of November (October in the old Russian
calendar) 1917—resulting in the marginalization and/or outright collapse of many if not most of the
parties closely associated with that revolution.

Beginning in 1923, the social democratic parties—made up of socialists who rejected the Third
International—operated as the Socialist and Labor International. Since 1951, this organization
has been known as the “Socialist International.” This organization is sometimes unofficially
referred to as the “Second International” but in reality is in no way comparable to the Second
International as it existed between 1889 and 1914, which was a highly progressive and
necessary stage in the development of the international workers’ movement.
countries against other countries, effectively bringing the Second International to
an end.

Most devastating to Lenin and all other socialists who remained true to the
struggle for a socialist society based on collective ownership of the means of
production by the associated producers was the position taken by the German
Social Democratic Party (SPD). In the epoch of the Second International, the SPD
was considered to be the leading Marxist party in the world—in terms of
organization, its influence over the working class, and its development of Marxist
theory.

German socialist Karl Kautsky, considered the leading Marxist theoretician both in
Germany and in the world, made the lame excuse that the International was
designed for peacetime, not wartime! What good is a revolutionary workers’
international that operates only in non-revolutionary, peaceful times?

Therefore, virtually everything that Lenin wrote in the years immediately following
the outbreak of the war was tied to the collapse of the Second International and
the struggle to build a new, Third, International, which would hopefully avoid the
contradictions and mistakes that had destroyed the Second International. The new
international, in Lenin’s view, would have to be based on the lessons of the Second
International’s failure at the decisive moment. At the center of Lenin’s analysis,
was the phenomenon Lenin and other leaders of the Second International had
come to call “imperialism.”

What was imperialism in terms of economics, and what political attitude should
the social democrats—as Marxists called themselves in those days—have taken
towards it?

As the war progressed, the political stability of every European nation was rapidly
undermined as the initial wave of chauvinism that had swept the European
working classes evaporated under the pressure of trench warfare.

Trench warfare is probably the best antidote for patriotism and chauvinism that
has ever, up to the present, been invented. Nowhere was this more true than in
Russia, which was seen as the weakest link in the imperialist chain. As we now
know, Russia was on the eve of what was to become the Great October Revolution,
whose one-hundredth anniversary (Nov. 7, 2017) we will be celebrating within the
next few weeks.

It wasn’t only Russia that was approaching revolution. Revolution was knocking
at the door of the Austro-Hungarian Empire, which was destined to vanish from

246
the maps of Europe. Perhaps most importantly, it was approaching in Germany,
then as now Europe’s most industrialized nation.

Therefore, when Lenin wrote “Imperialism” the Great War had put the overthrow
of capitalism in Europe and on a world scale on the agenda, not only in the
historical sense—which could be a period of many decades or even a century or
so—but more or less immediately. With socialist revolution approaching rapidly in
Europe, it would not be long in the event of the success of the European socialist
revolution before the United States, then the most industrially developed country
in the world, would also be drawn into the movement.

In Russia, the immediate tasks of the coming revolution were democratic, not
socialist—the replacement of the Czarist monarchy with a democratic republic, the
transfer of land from the semi-feudal aristocracy to the peasantry, the winning of
basic trade union rights and the eight-hour work day, and the liberation of the
numerous nations enslaved by Czarism. The victory of socialism in Western Europe
would soon put the transition to a socialist revolution on the agenda in Russia as
well.

Of course, there was always the possibility that the revolution would fall short and
that capitalism could then survive for a historical epoch after the war. Lenin
explained somewhere that there is no crisis that is absolutely hopeless for the
capitalist class. If capitalism is not overthrown by the workers in a revolutionary
crisis, the capitalists will always find a way to impose their own solution, which
could last for a more or less prolonged period, though not forever due to the basic
contradictions of the capitalist system. And so it was to be with the revolutionary
crisis provoked by World War I.

But like revolutionaries have to be, Lenin, as were Marx and Engels before him,
was a revolutionary optimist, both in terms of short-term revolutionary prospects
and the long-term future of the human race. However, Lenin’s pamphlet does
contain hints of the future that was in store for capitalism if the revolutionary wave
arising out of the trenches of the Great War fell short. This, unfortunately, was
the course history took leading to the world we face today. This is the subject of
Smith’s “Imperialism.”

The circumstances under which Lenin wrote “Imperialism” were radically different
than those that prevailed when Marx wrote “Capital.” Let’s briefly examine what
these differences were. At the very beginning of their joint political activity as

247
newly minted socialists—called communists102 in those days—Marx and Engels
believed that the overthrow of capitalism in Western Europe was near. The belief
of the two young German revolutionaries was based not only on the natural
optimism of youth but also the hunger and economic depression that had for many
years gripped the European continent.

Soon thereafter the revolutionary wave of 1848 broke out, seeming to confirm the
perspective of the young Marx and Engels. But then, contrary to the hopes of the
two friends, the revolutionary wave of 1848 subsided as quickly as it had arisen.
Marx and Engels attributed this to the industrial upswing that began in 1848, just

102 In the epoch of and immediately preceding the 1848 European revolutions, the term “socialist”
referred to all people who acknowledged that there was a major social problem in capitalist society and
proposed various solutions to it. For example, Bernie Sanders is a socialist in the 1848 sense.
Communism was a tendency within socialism that held that the collective ownership of the means of
production was the necessary solution to the underlying social problem—the exploitation of the
growing working class by an ever richer minority of capitalists.

Marx and Engels as well as the English utopian socialist Robert Owen were communists. If we use the
same terminology today, Bernie Sanders is a socialist because he realizes that something has to be done
about the consolidating of almost unimaginable wealth in the hands of a tiny handful of super-rich
capitalists while the majority of the world’s people are falling deeper into poverty. But since he sees
the solution as a West European-style welfare state and not the collective ownership of the means of
production by the associated producers, Sanders is not a communist.

By the time the Second International was founded in 1889, the word “communist” had died out. Instead,
Marxists preferred to call themselves social democrats, which sounded far more respectable than
“communist,” with all its extreme revolutionary connotations. Engels, who lived until 1895, reluctantly
went along with this new terminology. Expressing his unease, he pointed out that the aim of the Marxist
movement was not to achieve a democratic socialist state but rather abolition of all state power in a
society where the associated producers would collectively own the means of production—communism.
Perhaps he suspected the reluctance to use the word “communism” indicated a less than revolutionary 248
attitude among the Marxists of the time. They were attracted to Marxism as a science of society but
were lacking in revolutionary spirit.

In reality, the Second International was developing as a coalition between communists in the 1848
sense—and the post-1917 sense—and reformist socialists, who sought to reform capitalist society but
not overthrow it. The term “social democratic” as used at that time was broad enough to cover both.

However, in the light of the events of 1914 and of the Russian Revolution of 1917, Lenin
suggested that the Russian Social Democratic Labor Party (Bolsheviks) rename itself the
Communist Party, returning to the terminology that Marx and Engels had used in their youth.
Officially, the Bolsheviks were still named Social Democrats at the time of the October
Revolution of 1917, but the following year the party changed its name to Communist. Later in
1919, it was made a requirement for membership in the Third International that all national
sections use the name “Communist” and not “Social Democratic” or “Socialist” in their official
names.
as they had traced the outbreak of the revolution in France in February 1848 to
the London financial crash of October 1847.

However, it gradually became evident to Marx and Engels that this wave of
capitalist prosperity sweeping Europe was only partially cyclical. More
fundamentally, it reflected the dramatic expansion of the world market caused by
the gold discoveries made in California in 1848 and Australia in 1851.103 Though
they remained revolutionary optimists, Marx and Engels were also revolutionary
realists who never hesitated to come to terms with whatever reality they faced.

At first, Marx and Engels still believed that the revolution would break out anew
when the upswing in the industrial cycle that had begun in 1848 reached its
conclusion in the next inevitable cyclical crisis. Marx, therefore, decided that the
best thing he could do in the meantime was to work on his still developing critique
of bourgeois political economy. As part of this new perspective, Engels reluctantly
decided to join his father’s textile business in Manchester so he could make some
money and help the financially hard-pressed Marx to carry out his great work.

As it turned out, the next cyclical crisis that broke out in 1857, though initially
quite violent, was short-lived. A new vigorous economic upswingbegan within a
few months of the London crash of October 1857. Marx and Engels were forced to
acknowledge that the gold discoveries in California and Australia had led to a
“second 16th century,” opening up a prolonged period of prosperity and
accelerated capitalist development.

Marx was obliged to adjust to the slower than hoped for course of historical
development towards a socialist revolution. While the brevity of this crisis
indicated, contrary to Marx’s hopes, that a near-term socialist revolution was not
in the cards anywhere in the world, the new insights into the workings of the
capitalist system that Marx had gained during the crisis inspired him to return to
his economic work, which finally bore its initial fruit with the publication of Capital,
Volume I, in 1867.

The year that followed the brief crisis of 1857 was to be Marx’s annus mirabilis that
was to take him far beyond the limits of radical Ricardian economics, his starting

103 Marx referred to the 1848-51 gold discoveries as a new 16th century. The gold and silver
discoveries in the new world that ended the shortage of money metals of the 15th century
ushered in the birth of bourgeois society—capitalism. Marx hoped that the rapid acceleration
of the development of capitalism that had occurred in the wake of the gold discoveries of 1848
and 1851 would accelerate capitalism’s ultimate downfall. But the new perspective that Marx
and Engels adopted implied that capitalism would be around for many decades. The struggle 249
for a socialist revolution was now a long-term struggle and not a short-term prospect.
point. The fruits of this amazing year included Marx’s distinction between concrete
labor, which produces use value, and abstract labor, which produces value, and
the distinction between value and the form of value, where the value of one
commodity is measured by the use value of another, putting the theory of money
and price on a solid foundation.

Above all, he developed his revolutionary theory of surplus value, based on the
distinction between labor and labor power. With this discovery, socialism
completed its transition from the utopia it had been when Marx and Engels had
begun their political activity to a science. This was to be the most important
consequence of the crisis of 1857.

Smith’s “Imperialism” is written under quite different circumstances than either

Marx’s “Capital” or Lenin’s “Imperialism.” While socialist revolution does not
appear to be as close as it was during the Great War, today’s decaying capitalism—
especially in Europe and the United States—is a far cry from the rapidly expanding
capitalism of the 1850s and 1860s that confronted Marx when he wrote “Capital.”
And while the situation in Europe and the United States is still not revolutionary
in the immediate sense, the political stability of capitalist rule throughout the world
is rapidly eroding, and class struggle in its various manifestations including the
struggle of ideas is rapidly intensifying.

This was shown vividly by the surprise victory of the Brexit vote last yearin Great
Britain, and confirmed in a quite different way by the surprisingly strong
performance of the Labor Party under the left-wing Jeremy Corbyn104 that
occurred earlier this year.

Now, just as I am putting the final touches on this post, the German elections held
this past month (September 2017) have come in. The far-right nationalist
Alternative for Germany broke through gaining almost 13 percent of the vote,
making it the third largest party in the German parliament. The breakthrough of
these modern-day German nationalists—called Nazis by some—came at the
expense of the center-right Christian Democrats and their more right-wing sister

104British Labor Party leader Jeremy Coybyn, though a socialist in the sense the term was used
in the epoch of the 1848 revolutions, is not a communist. In this respect, he is far closer it
Bernie Sanders than he is to Lenin or Fidel Castro. The main difference between Sanders and
Corbyn in class terms is that Corbyn is a leader of a political party that was created by the
British trade unions, while Sanders remains a leader of a political party that was created by
slave owners and then transformed into a purely capitalist party after the defeat of the 250
Democratic Party-led slaveowners’ rebellion—the U.S. Civil War.
party partner, the Christian Social Union of Bavaria, and of the center-left Social
Democratic Party.

This forced the German Social Democrats to break their “Grand Coalition” with the
Christian Democrats. The Free Democratic Party also made gains by running on a
platform that rejected the merger of the German budget into a European Union
budget. Though less extreme than the Alternative for Germany, the Free
Democratic Party also reflects the rising Trump-like nationalist sentiments laced
with racism toward Middle Eastern immigrants.

On the other the hand, the Left Party—heirs to the old Socialist Unity Party that
ruled East Germany, which is itself a combination of the German Communist Party
and a fraction of the SPD willing to work with them—plus some left-wing members
of the SPD and the middle-class Green Party ran lackluster campaigns that did not
take rising anti-immigration racism head on and made only slight gains, with the
Left Party polling at just over 9 percent.

While German Chancellor Angela Merkel—described by some as leader of the “free

world” for the duration of Donald Trump’s stay in the White House—will be able
to remain in office, she is greatly weakened. Despite its formal victory, her party
suffered its worst results since the Federal Republic of Germany was created after
World War II by the NATO occupiers on the ruins of Nazi Germany. For their part,
the Social Democrats, fearing further losses and even collapse as a major party in
Germany if they remained in Merkel’s government, have been forced against their
will into the opposition.

Merkel is expected to form a coalition with the right-wing, quasi-nationalist, “pro-

business” Free Democratic Party and the relatively liberal—in the U.S. not
European sense of the word—“Green Party,” which is supposed to be concerned
about protecting the environment above all else. This is not a natural alignment.

The result is that Germany will now have a weak parliamentary government with
a strong extreme right nationalist party in the wings. The last time those
conditions existed in Germany was in the 1920s just before the rise to power of
Adolf Hitler. This does not mean that the rise of a new Hitler and Fourth Reich in
Germany is imminent. To say that would be to concede defeat before the battle
has even begun. But it does mean that in Germany the post-World War II political
stability is breaking up just as it is in other European countries and the United
States.

But what about the political trends in the United States, the center of the empire
that has dominated the world since 1945, and expanded further after the

251
counterrevolutionary events of 1989-91 in the Soviet Union and eastern Europe?
The U.S. presidential campaign was dominated not only by the election of the
ultra-rightist racist Trump but also, more significantly, by the campaign of Senator
Bernie Sanders for the Democratic presidential nomination that was ultimately
won by “corporate Democrat” Hillary Clinton.

Bernie Sanders is an unusual U.S. politician insomuch as he is a life-long socialist.

While this would not in itself be considered unusual in virtually any other country,
in the U.S. elected socialist politicians have always been rare. This has been
especially true since the end of World I and even more true since World War II.

Who is Bernard Sanders, known as Bernie Sanders? He is a self-described

socialist—though these days he emphasizes that he is a “democratic socialist” who
advocates a Western European-style welfare state and not collective ownership by
society of the means of production.

Sanders successfully broke the U.S. anti-socialist taboo in electoral politics by

getting elected as mayor of the small city of Burlington, Vermont. Vermont is a
largely rural state dominated by the beautiful Green Mountains. It has no large
cities. While Sanders’ election as a socialist mayor of Burlington might be
dismissed as a fluke, he then went on to be elected to the U.S. Congress and then
to the U.S. Senate.

Sanders is formally an independent but has caucused with the Democratic Party,
first as a congressman and then as a senator. During his presidential campaign,
he temporarily shifted his registration to Democrat but has since shifted it back to
“independent.” He is now seen as the leader of the left wing of the Democratic
Party.

Much to the disappointment of some of his young followers, Sanders has made
clear that he won’t join efforts to build a new working-class party—or even a
middle-class “peoples party” to the left of the Democratic Party. Instead, Sanders
aims to push the Democratic Party to the left, transforming it into a champion of
a Western European-style welfare state. While most of the old capitalist countries
have center-right, purely bourgeois parties, they also have center-left, pro-
capitalist social democratic parties that draw their support from the trade unions
and historically have grown out of the workers’ movement.

U.S. voters, in contrast, have the center-right, conservative Democratic Party and
the extreme right-wing Republican Party, as “realistic” alternatives. (For the
origins and evolution of U.S. political parties, see here.)

252
The increasingly besieged U.S. trade union movement supports the center-right
Democratic Party in an attempt to stave off the union-busting, far-right
Republicans. So do all non-white and non-Christian minorities as well as the LGBT
movement. However, the policy of relying on the Democrats to protect the trade
unions and stave off far-right racists and anti-gay bigots in the Republican Party
has not been working.

The Republicans, using gerrymandering and voter suppression combined with

appeals to the racism and homophobia infecting the white population, have
achieved a stranglehold on all three “branches” of the U.S. government—both
houses of Congress, the U.S. Supreme Court and other courts, and now the White
House. Polls show that the majority of American voters do not support the policies
of the extreme right Republican party but also distrust the right-of-center,
warmongering Democrats and would like to see a third alternative to the
Democratic-Republican political monopoly.

If Sanders and his supporters are successful, they will transform the center-right
Democratic Party into a center-left pro-labor party, somewhat like the present-
day center-left German Social Democratic Party. This would mean that the SPD,
which began as a revolutionary Marxist workers’ party, and the U.S. Democratic
Party, which began as a party of slave owners committed to defending and
extending African chattel slavery, would have evolved into identical “center-left”—
that is thoroughly bourgeois but labor-based—political parties. It would be difficult
to imagine two political parties more different in their origin.

Therefore, if Sanders succeeds, this will be a startling development indeed. It is

ironic that the Sanders-inspired campaign to transform the Democratic Party into
something like the German SPD is occurring just as the German Social Democratic
Party is in steep decline in its own country. When Sanders announced his
campaign for the Democratic presidential nomination, his campaign was largely
seen as a “propaganda campaign” that had no serious chance of winning. But to
the astonishment of the pundits, and quite likely himself, Sanders quickly emerged
as the conservative mainstream Hillary Clinton’s only serious challenger. All other
potential Democratic candidates quickly either withdrew from the race or never
entered it.

Sanders defeated Clinton in party primaries in many key industrial states including
West Virginia—center of the U.S. coal-mining industry—and completely
unexpectedly in Michigan—center of the U.S. auto industry and the once powerful
United Auto Workers Union. Both states went for Trump in the general election—
expected in West Virgina but surprisingly in Michigan, where Trump won a razor-
thin narrow victory—at least according to the official returns—over Clinton.

253
As the campaign progressed, Sanders, who advocated “single-payer” health care
and free education through the university level, quickly gained popularity,
especially but not only among young people. Sanders’ base was largely white—
showing that many white workers and other white working people were willing to
vote for a self-described socialist for the most powerful political office in the land.

In the course of the campaign as he and his program became better known,
Sanders gained increasing support among people of color as well—especially
young people of color. Today, Sanders, who was little known beyond Vermont
before last year’s election campaign, has become the most popular politician in
the United States. This in sharp contrast to the very unpopular President Donald
Trump and the perhaps even more unpopular Hillary Clinton.

It is widely believed that Sanders was the genuine winner in the struggle for the
Democratic Party nomination and was unjustly denied the nomination by the
“corporate Democrats” who completely dominated the party machinery and rigged
the primaries against Sanders. Indeed, the claim that Trump’s victory is due to
“Russia’s attack on our election” is based on the claim that the so-called Podesta
e-mails, which contained damning information on the Clinton campaign, were
obtained by Russian intelligence105 and then leaked to Wikileaks with the specific
aim of defeating Clinton and electing Trump.

105 It is really not of much interest to the U.S. and world working class whether or not Russian
intelligence played a role in making available the Podesta e-mails to Wikileaks. The Russian capitalists
are indeed class enemies of U.S. workers and all the world’s workers, above all the Russian workers.
However, it is the U.S. capitalists not the Russian capitalists who are the chief class enemies of the U.S.
workers and of the workers and people of all nations that are oppressed by the U.S. world empire. The
U.S. capitalists are vastly richer in terms of capital and more powerful than the Russian capitalists in
terms of military power.

It is pretty clear that the Russian capitalist government favored Trump in the recent U.S. election. Trump
signaled that he wanted better relations with Russia than advocated by the warmongering Hillary
Clinton. And the Russian government, encircled by the U.S. empire and its military wing NATO, hoped
that chauvinistic, racist, “America First” Trump would accelerate the breakup of the U.S. empire.
Trump’s election, Moscow calculated, would oblige Germany and the other European imperialist 254
powers to adopt a more independent stance toward the U.S. This would, the Kremlin hoped, lead to the
eventual breakup of NATO, greatly easing imperialist military pressure on Russia.

However, by associating themselves with the monstrous racist Trump—and similar racist
politicians in Western Europe—Russia’s capitalist government is squandering the political
good will that Soviet Russia and the Soviet Union won by championing the national liberation
movements of the oppressed countries, both politically and through extending material aid. The
only way Russia will repair the damage caused by Moscow’s current policies will be by
repudiating the counterrevolution that occurred under Gorbachev and Yeltsin and returning to
But Clinton supporters cannot deny the truth of the evidence, whether it came
from Russian intelligence or some other source such as a person working for the
Democratic National Committee disgusted by the Clinton campaign tactics. The e-
mails proved that the Democratic Party machine and then-Democratic Party
National Committee Chairperson Debbie Wasserman Schultz violated the party’s
own rules in order to ensure that conservative Clinton and not Sanders was the
Democratic nominee for president.

As a result of the Democratic National Committee success in getting Clinton

nominated, U.S. voters were given a choice between the conservative
warmongering Hillary Clinton and the extreme right-wing, racist Trump. Trump
was even able to pose as a “peace candidate”—for example, advocating better
relations with Russia and not calling for a “no-fly zone” in Syria. Polls show that if
Sanders, who also advocated a more cautious foreign policy than Clinton, had
been the Democratic nominee, he would have easily defeated Trump. Then,
instead of having a racist ultra-right demagogue as president, the U.S. would have
had its first socialist—though not in the sense of the socialism this blog stands
for—president!

If it were only a matter of his personal popularity, Sanders’ success would mean
little in the longer run—especially since Sanders is now in his mid 70s. At best,
this would mean that “socialism” was no longer a scare word in the U.S., which of
course would represent progress. But much more is involved. Polls consistently
show that more young U.S. people of all “races” prefer “socialism”—long a dirty
word in the United States—to “capitalism.” This is a new development in U.S.
history.

But these polls are not the only sign that U.S. politics are undergoing a sea change.
This is shown by the rapid growth of the Democratic Socialists of America. The
DSA is a historically social democratic formation that until now has acted as a
faction in the Democratic Party. While DSA has existed since the 1970s, it has
long been viewed as moribund. But since the Sanders campaign, the DSA has
grown from a few thousand members to tens of thousands of young people
including many trade unionists. Unlike DSA’s traditional members who are
hardened social democrats committed to working within the Democratic Party,
these young people are a leftward-moving mass whose ultimate political
destination is yet to be determined.

the road of the October Revolution, whose 100th anniversary will be celebrated by Russian
workers and workers and oppressed peoples of the world in a few weeks
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The DSA recently voted to withdraw from the so-called Socialist International,
which in the political sense is the “corporate descendant,” so to speak, of the old
Second International. More politically defined, though much smaller U.S. socialist
organizations such as the Party for Liberation and Socialism, which describes itself
as Marxist-Leninist, and Socialist Alternative, which describes itself as Trotskyist,
have experienced a wave of growth since the 2016 election and the massive series
of demonstrations against Trump and all he stands for by many sectors of U.S.
society—including most recently the National Football League, not traditionally
seen as a stronghold of left-wing radicalism.

A youth radicalization with a difference

The current youth radicalization is distinguished from other recent ones in that the
leftward-moving young people are specifically interested in “socialism,” as
opposed to “democracy,” as was the case in the 1960s, or anarchism more
recently. The “anti-globalization movement,” which briefly flourished in the period
between the Seattle anti-globalization demonstration of 1999 through the events
of September 11, 2001, and the Occupy Movement that began in 2011 in the wake
of the bail-out of Wall Street financiers by the Obama administration, was largely
dominated by various forms of anarchism.

Back in the 1960s, the main radical U.S. youth organization was called Students
for a Democratic Society—not students for a socialist society. This was not
accidental. Among many leftward-moving youth of the 1960s, awakened to
political life by first the Civil Rights Movement against Jim Crow legal segregation
and then the Vietnam War, “socialism” as opposed to “democracy” was one step
too far.

To find anything like the growth of interest in socialism today in the U.S., you have
to go back to the 1930s when the combination of the Depression and the successes
of the Soviet five-year plans caused hundreds of thousands of young people to
join the U.S. Communist Party or its Young Communist League youth arm. Most
who joined the CPUSA or YCL did not remain members for long.

Still, the Communist Party plus YCL approached a membership of 100,000 by the
end of the Depression, with membership in the party eventually peaking at around
75,000. Thousands of other young people joined the U.S. Socialist Party, the
Trotskyist movement, or other smaller socialist organizations. But even in the
1930s, it is doubtful that the majority of U.S. young people preferred socialism,
however defined, to capitalism.

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Before the 1930s, the last period in U.S. history when a socialist organization
attracted tens of thousands of young people was the heyday of the U.S. Socialist
Party led by Eugene Debs, which flourished from the turn of the 20th century to
World War I. The era of “Debsian socialism,” unlike today, was a time of rapid
growth of U.S. capitalist industry. The chief problem confronting U.S. socialists at
that time was not so much the lack of jobs and opportunities for young people but
how to unionize a rapidly growing industrial working class against the stubborn
resistance of the bosses and their agents in the Democratic and Republican
parties. This vital task was not to be accomplished until the rise of the Congress
of Industrial Organizations in the 1930s and 1940s.

Imperialism

Today’s newly minted socialists will soon enough run up against the questions that
confronted earlier generations of socialist youth, both in the United States and
around the world. They will also have to reckon with new questions raised by the
extreme stage of decay of U.S. capitalism, such as de-industrialization, that did
not confront earlier generations. In retrospect, however, the 1930s Depression,
when huge numbers of factories were shut down temporarily, was a preview of
the era of decline of American capitalism that was still to come.

In addition to the destruction of so much of U.S. industry and the consequent lack
of decent, good-paying jobs for young people, the problem of climate change—
highlighted by the recent hurricanes hitting the U.S. and the Caribbean,
devastating the U.S. colony of Puerto Rico, combined with the Trump
administration’s withdrawal from the Paris Climate Accords, has highlighted the
problem of human-caused global warming. Human-caused global warming was
also occurring in the 1930s and even during the time of Debs, but this fact and
the danger it represented was not yet generally recognized by scientists

The current surge in the U.S. socialist movement has centered around issues like
the struggle for single-payer health care, already won in all other rich and some
not-so-rich capitalist countries. It has also centered around repeated attempts of
the Republican Party leadership and Trump administration to deprive millions of
people of the health insurance they now have; the extreme racism of Trump and
his administration; attacks on women’s health and the right of abortion; attacks
on immigrants especially from Latin America; and Trump’s extreme
“Islamophobia”—all combined with the growth of the still small but already
dangerous U.S. fascist movement underlined by the recent events in
Charlottesville, Virginia.

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This last development would not be so alarming if it were not for the fact that the
fascists are getting back-handed encouragement from the president of the United
States. For example, Trump claims that both sides—the KKK and neo-Nazis and
anti-fascist demonstrators—were equally responsible for the violence and that
many “good people” marched with the fascists.

In reality, the counter-demonstrations were entirely peaceful while a woman

counter-demonstrator was deliberately run over and killed by a young Nazi. The
fundamental issue, however, is that despite the current cyclical “boom,” whose
arrival is announced through the current synchronized upswing now visible in most
industries and in all major national capitalist economies, the great majority of jobs
created in the U.S. are low-wage and part-time. If current long-term trends
continue, young people will have a lower standard of living than their parents had
for the first time in U.S. history. This is why there is mass sentiment in favor
of socialism once again in the U.S.

It is also worth noting that the current cyclical boom has not prevented the
growing political crisis—both in the U.S. and the other imperialist countries.
including Germany. Despite the sloppy, completely non-Marxist claims about the
“ever-deepening economic crisis” that appear in the newspapers and websites of
many small socialist groups, we are most certainly not in the crisis phase of the
industrial cycle. If we were, it could plausibly be argued that the political crisis
now gripping the “Western world” will fade as soon as the crisis is replaced by a
new cyclical upswing.

The assertion that we are in an economic boom may seem like a nonsensical
statement to many people—especially but not only young people who can’t get a
decent job or any job. But the difference between the “boom” and the “crisis” will
become clear enough as soon as the boom is replaced by a new cyclical crisis.
Remember, this outcome is not a matter of if but when. And if past experience is
any guide, the current changes in U.S. and world politics will only accelerate when
the next economic crisis arrives.

Already, today’s young U.S. socialists are running up against the question of
imperialism and imperialist war. What is the meaning of the word “imperialism”
used by many socialist old-timers, including in this blog? What position should
young people take on the wars now raging in Syria and Yemen and threatened
new wars targeting Iran, Venezuela and North Korea?

Should young socialists support wars against dictators and Islamic

fundamentalists?

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Many of Trump’s mainstream Democratic Party opponents and some socialist old-
timers argue that these countries are led by dictators supported by a fascist or
fascist-like Russia headed by its supposed dictator President Vladimir Putin. This
is combined with the claim that “fascist” or at least “authoritarian” Russia
succeeded in installing Trump in the White House with the hope Trump will install
a similar regime in the U.S., thereby spreading authoritarianism around the world.

The right-wing, corporate Democrats then paint themselves as leading a

resistance movement to the Putin-backed would-be Trump dictatorship. During
her second debate with Trump, Hillary Clinton charged that he was actually a Putin
puppet! Not that he was influenced by Putin, or being blackmailed by Putin, but
was his puppet!

Is there any truth to these claims? Is it possible that the Russians do have some
damning information on Trump—for example involving ties to the Russian mob or
maybe his sex life—and is using this information to blackmail him into seeking
better relations with Russia? And if the Russians are blackmailing Trump, is this a
bad or good thing? For example, could Russian blackmail of Trump possibly block
a nuclear attack against the Democratic People’s Republic of Korea?

However, despite claims by the Democratic Party leadership that Trump is under
the thumb of Putin, the war against Afghanistan that began under Republican
George W. Bush and carried on by his Democratic successor, Barack Obama,
continues. Trump had hinted he wanted to end the war but decided instead to
follow the advice of U.S. generals, which was to escalate the war.

Obama presided over a huge troop surge aimed at crushing the resistance in
Afghanistan and promised to end the war one way or another by the end of 2014.
After failing to crush the Afghanistan resistance, he then broke his promise. It was
then announced that the war would continue indefinitely.

Recently, Trump announced that he was re-escalating the Afghanistan war, and
thousands more U.S. troops are on the way. The U.S. has also engaged in open
warfare in Iraq and Syria in the name of a war against ISIS, or Islamic State. U.S.
firepower destroyed the Iraqi city of Mosul in the guise of “liberating” it. The Syrian
city of Raqqa, controlled by ISIS, is as I write being similarly destroyed and
“liberated.”

In Raqqa, the U.S. wants to overthrow the ISIS government—the Caliphate—while

at the same time making sure that the “dictatorial” Baathist government of
President Basher Assad does not reestablish its authority there. In addition, the

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U.S. is attacking the city and people of Raqqa as part of its broader aim of
establishing a puppet regime and dismembering Syria.

Some Syrian emigrants living in the U.S. and other countries support the claims
backed by both the U.S. media and some socialists that Assad is a terrible
dictator—one of the worst if not the worst in world history—who uses secret police
to suppress all opposition and practices torture on a large scale against political
prisoners. The Assad government is also charged by the Democrats, Republicans
and some U.S. socialists, as well as the mainstream media and some Internet
progressive media, with having used sarin nerve gas against Syrian civilians,
killing many children.

Other Syrian emigrants strongly deny these charges and support President Assad
as the democratically elected president of Syria, a view supported by many other
U.S. socialists. What are the newly minted U.S. socialists to make of these radically
conflicting claims about a country they know nothing about?

In Venezuela, where the government of President Nicolas Maduro—successor to

the popular Hugo Chávez government—is being attacked in the U.S. media for
building a dictatorship. The media, including sections of the progressive Internet
media, back an opposition that claims to be fighting to defend democracy in
Venezuela against Maduro. Some U.S. “progressives,” including supporters of
Bernie Sanders, back the “democratic” Venezuelan opposition.

However, the “democratic opposition” is also supported by President Donald

Trump. Why the racist reactionary Trump would support a democratic opposition
in any country is itself an interesting question. Recently, Trump went further and
hinted that he is not ruling out the use of military force against the Maduro
“dictatorship.”

President Maduro, however, enjoys the enthusiastic support of many U.S.

socialists who consider his government both democratic and socialist. Moreover,
Maduro clearly has the support of the vast majority of working class and poor
people in Venezuela.

In these cases, the U.S. attacks governments that claim to uphold democracy,
hold elections, and proclaim socialist goals. But occasionally, the U.S. clashes with
forces that oppose democracy, not to say socialism, in principle. This is the case
in Afghanistan, where the resistance is dominated by the Taliban, and recently in
the now destroyed city of Mosul and now in Raqqa, where the resistance is headed
by ISIS.

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Instead of democracy or rule by the people, the Taliban and ISIS agree with the
ancient Jewish historian Josephus, who lived shortly after the time attributed to
Christ, that God and not man—still less woman—should rule. But God can only
exercise his rule through his Earthly representatives the clergy that supports ISIS.
ISIS and the Taliban completely reject any form of feminist ideology, since God
put women under the command of men. God, according to the theologians of ISIS,
apparently also has little use for gay people. Therefore, ISIS in its role as the
direct representative of God on Earth executes gay people, throwing some off high
buildings.

In addition, ISIS has carried out terrorist attacks and encourages more terrorist
attacks against Christians, Jews, and secular “pagans” who happen to be in the
wrong place at the wrong time. ISIS points out that the armed forces of the
“infidels” in the West are attacking Islamic people in Iraq and Syria—which
happens to be true—so it is the duty of Muslims who live in Western countries to
attack Christians, Jews and secular pagans whenever they get the opportunity to
do so. ISIS’s idea of the “good society” is the seventh-century Arabia described in
the Koran, which among other things included slavery.

ISIS members following the commands in the Koran—or so they claim, since I
admit that I am not a Koranic scholar—have enslaved the women of a small
Kurdish tribe the Yazidis because ISIS charges that their religion worships Satan.
Many in the West, including some avowed socialists, have compared the ideology
of ISIS to the Nazis. But is ISIS really comparable to the Nazis? And if not, what
does distinguish ISIS and similar organizations from the infamous German fascist
party once led by Adolf Hitler?

A Russia-U.S. alliance against Islamic terrorism?

Steven Cohen, is a liberal historian of the Soviet Union and Russia and author of
a sympathetic biography of the Russian revolutionary, Marxist theoretician and
Soviet leader Nikolai Bukharin (1888-1938)—though Cohen’s biography is not free
of many anti-communist prejudices and misconceptions. Cohen argues that Russia
under President Putin and the U.S. under President Trump should form a broad
alliance against Islamic terrorism—the biggest threat, along with the threat of a
U.S.-Russian nuclear confrontation, that the world is facing today. This alliance,
according to Cohen, should be something like the alliance the U.S. and Britain
formed with the Soviet Union against Nazi Germany and fascism in general in
World War II.

Just like the Soviet-U.S. alliance saved the world from the nightmare of universal
fascist dictatorship, Cohen argues that a new alliance between the United States

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and Russia will save the world from the “fundamentalist-terrorist” faction within
Islam. What should be the attitude of socialists towards these types of arguments?

Earlier socialist generations faced similar questions. In the mid-1930s, the African
country of Ethiopia was under the rule of an absolute monarchy headed by Halie
Selassie (1892-1975). Under this monarchy, feudalism and even slavery still
flourished. There was not a hint democracy, even in principle. Ethiopia was
attacked by fascist Italy in 1935, which seized it as a colony. Italy was widely
denounced for its “fascist aggression” against Ethiopia by supporters of the British,
French and Belgian “democracies.” However, the very same “democracies”
happened to hold the rest of Africa as colonies.

Did these “democracies” really have any right to denounce fascist Italy for doing
on a smaller scale what they were doing on a much larger scale? Though Italy was
indeed then under the rule of the original fascist, Benito Mussolini, couldn’t it be
argued that Italian fascist capitalism was still better than the feudal-slave society
that existed in Ethiopia at that time. In Italy under Mussolini, there was neither
legal serfdom nor chattel slavery.

Some Italian socialists actually made these arguments. However, most socialists
of that time—whether supporters of the Socialist and Labor International (social
democratic successor to the Second International), or the Third or Communist
International, or were followers of the exiled Leon Trotsky, who was attempting
to form a Fourth International—agreed that Ethiopia should be supported against
Italy.

But even if it was wrong to support the attack on Ethiopia by fascist Italy, what
about the war waged by democratic Italy in its war against Libya in 1911 that
ended with Libya becoming a colony of Italy? “Democratic” Italy—even before
Mussolini’s rise to power in 1922—did nothing to establish democracy in Libya.
Nor in 1935 were “democratic” Britain, France and Belgian making any moves to
establish democracy in the parts of Africa they ruled.

And what about the war between Japan—which contrary to widespread belief was
not a fascist dictatorship in the 1930s but had a parliament and a constitutional
monarchy—and the corrupt dictatorial Chinese government of Chiang Kai-sheik?
Chiang’s regime used secret police, torture and murder and was notorious for its
corruption. Everything that Syrian President Assad is accused of doing Chiang was
guilty of in spades. In addition, in 1927 Chiang killed tens of thousands of workers
in Shanghai as his Nationalist Party troops entered the city they claimed to be
liberating. What position should socialists have taken in the war between

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constitutional parliamentary Japan and Chiang’s dictatorial brutal and corrupt
regime?

To complicate matters further, Japan was actually supporting an alternative

government to Chiang led by the former “left opposition” to Chiang within the
Nationalist Party. In addition, Japan claimed to be leader of a rising Asia against
the white racist, imperialist Western colonial powers?

Most socialist supporters of the Socialist and Labor International, the Third
Communist International, and a majority of Trotskyists, including Leon Trotsky
(1879-1940) himself, supported the struggle led by Chiang and his Nationalist
Party against Japan. The position held by most 1930s socialists was made a little
easier by the fact that Chiang claimed to be upholding the struggle for a unified
democratic China on the basis of Sun Yat-sen’s (1866-1925) “three principles of
the people,” which can be seen as a kind of Chinese socialism. The widespread
view in the West that Japan was at the time allied with Nazi Germany also helped
solidify socialist support for Chiang’s China against Japan.

But what about the Boxer Rebellion—still largely reviled in the West—which swept
China at the turn of the 20th century? In the late 1890s, the so-called Boxer
movement arose in China—actually called the “Militia United in Righteousness.”
Militia members were called Boxers in the West because they practiced martial
arts that reminded Westerners of the sport of boxing. The so-called Boxers
believed they were under the protection of the traditional Chinese gods who would
guarantee their victory over foreigners and the Chinese Christians, who were
viewed as traitors to China and its gods.

The beliefs of the Boxers show a strong resemblance to the beliefs of ISIS fighters
today. Just as the Boxers hated Christians as representatives or collaborators of
Western colonialism, ISIS today sees the “Crusaders”—Christians—in much the
same light. The ISIS fighters believe they alone are the people of God loyally
carrying out the will of God as revealed in God’s book the Koran. Since ISIS
believes that they and they alone are God’s true representatives on Earth, their
eventual victory over Christians, Jews, secular pagans and other enemies of God
is guaranteed.

In China, the “Righteous Militia”—the Boxers—launched attacks against Christian

missionaries and Chinese Christians, killing many of them, and then attacked the
foreign embassies—called legations in those days—in Beijing. These attacks by
the “fanatical” anti-Christian, anti-foreign Boxers put Western diplomats and their
families in grave danger.

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The dying Qing dynasty, then dominated by Empress Dowager Cixi, at first
opposed the Boxers but then decided to make common cause with them in a
desperate attempt to drive the colonial powers out of China. For this decision, the
Empress Dowager Cixi is even today demonized in the West as one of the most
evil persons who ever lived—along with Saddam Hussein, Colonel Qaddafi,
President Assad, and Korean leader Kim Jong-un.

The Boxer movement, in addition to upholding “fundamentalist” religious beliefs,

was allied to an autocratic monarchy representing a social and economic system
that was the negation of any conception of democracy, let alone socialism.

Coalition of the willing—1900 version

Though there was no United Nations at the time, an “eight-power coalition of the
willing,” to borrow a later term, formed to save the world from the Chinese
empress and her terroristic Boxers. The eight “coalition” countries were the United
Kingdom, then the chief colonial power in the world; Russia, whose government
was strongly committed to Christianity if not exactly to democracy106; France,
which after Britain held the most colonies; Germany, which was in the process of
replacing Great Britain as Europe’s leading industrial power; industrializing Japan,
which was beginning to acquire its own colonial empire; Italy; Austro-Hungary;
and last but not least the country replacing Britain as the leading industrial power
in the world, the democratic United States.107

The Boxers and the Chinese government were charged with murdering innocent
Chinese Christians and Western missionaries whose only crime was to bring the
gospel of Jesus Christ to the Chinese people in order to save their immortal souls.
China under Cixi and the Boxers was pictured as a country in the throes of

106The Russian Empire conquered and oppressed many nations both in Europe and Asia and
thus became known as the “prison house of nations.”

107 The United States had a less than ideal democratic record itself. In 1900, the system of legal
segregation of African Americans, known as Jim Crow, presided over by the misnamed Democratic
Party and tolerated by the Republican Party, was consolidating itself in the former slave states. Indeed,
many of the statues of Confederate “war heroes” being removed at last date from that time.

African American men were stripped of their right to vote in the Jim Crow states where most
of them lived—while women of all races were denied the right to vote in the United States as 264
was the cases in all the other “capitalist democracies.” The native people who had managed to
survive the genocide by the European settlers who founded the United States—the so-called
Indians—had been driven into reservations and denied citizenship and the right to vote, as well.
They were not to receive U.S. citizenship until 1924. This is not to mention that labor rights—
the right of workers to form trade unions—were largely absent then just as is the case today.
irrational xenophobia—hatred of foreigners—that could simply not be tolerated by
the civilized world at the turn of the 20th century.

The eight powers easily defeated the Chinese government of Cixi and the Boxers.
But the struggle against Western and Japanese colonizers that already had been
occurring under various banners since Britain’s infamous “Opium Wars” in the mid-
19th century continued until China, as Chairman Mao put it, finally “stood up” in
1949.

Struggles against imperialism by oppressed peoples are often fought under the
banner of democratic or even socialist ideas. This, for example, has been the case
in Cuba since the Batista dictatorship was overthrown in 1959. Many socialists
today are on the “same wavelength” as the Cuban government headed by
President Raul Castro and the Cuban Communist Party—though some democratic
socialists complain that Cuba is a dictatorship that allows only the Communist
Party to exist.

But the oppressed nations and peoples are not always led by people who speak
our language and share our aims. Sometimes, as we have seen, resistance to
imperialism is led by political forces such as absolute monarchies, slaveholders
and reactionary religious sects like the Taliban and ISIS that are the negation of
all that socialists believe in. What stand should we take when the “democratic
West” goes to war in the name of “democracy” against these types of forces?

While most socialists who were then organized under the banner of the Second
International opposed the imperialist war against the reactionary monarchy of
China and the Boxers as a colonialist war of aggression, the right wing of the
Second International began to argue that imperialism had a civilizing mission.
These socialists claimed that Western capitalism was bringing the benefits of
progressive capitalism and Western civilization to the “uncivilized nations.” If
these countries were ever to achieve socialism, didn’t they have to go through a
stage of capitalism in order to become civilized?

A majority of the leaders of the Second International, especially the main

theoretician of the German Social Democratic Party and the International as a
whole, Karl Kautsky (1854-1938), rejected these arguments. However, the openly
pro-imperialist, pro-colonial racist right-wing Social Democrats who supported the
“civilizing mission” of imperialism were tolerated as a legitimate current within
international socialism.

Later came the Great War, and the whole Second International was ripped apart
as various sections of the international supported their own imperialist

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governments against other imperialist governments. After this occurred but before
the Russian revolutions of 1917, Lenin and his supporters drew the conclusion that
the Third International they were trying to build would have to exclude such racist,
pro-imperialist, pro-colonial forces.

Finally, let’s examine the current crisis involving the Democratic People’s Republic
of Korea—North Korea—against the “international community.” The North Korean
government, which I have seen described variously as a government of the “far
right” but more often as “Stalinist,” a “hermit kingdom,” a “family dictatorship,”
or a “totalitarian dictatorship,” has acquired both atomic and hydrogen bombs.
The North Korean government now has or is rapidly acquiring the ability to deliver
nuclear weapons to targets around the world, including within the continental
United States.

North Korean leader Kim Jong-un is regularly ridiculed and demonized and
described as a “madman” in the media. How these commentators have become
so well informed about the Korean leader’s mental health is not explained. In this
respect, the demonization of Kim is much like that of President Assad, Saddam
Hussein, Colonel Qaddafi, and, in her day, the Empress Dowager Cixi.

North Korea, just like Iraq, Syria and Libya, is often described as a “renegade” or
“rogue” country, though exactly what they are renegades against is never
mentioned. The leaders of such “renegade countries,” from Empress Dowager Cixi
to Kim Jong-un, are described as “mad,” “crazy” or the worst “dictator” ever. In
contrast, Western leaders such as Winston Churchill, who was a racist, used poison
gas against Iraq, and to the end opposed the granting of independence to India,
are treated as “great” humanitarians and democrats.

The U.S. is now headed by President Trump, who has threatened to completely
destroy North Korea—not just its “regime” but its people. These threats are
justified in the name of preventing the Korean people from acquiring the kind of
weapons the U.S. alone has actually used.

It is relatively easy to dismiss Donald Trump as a racist warmonger and someone

widely believed to be suffering from serious mental disorders. No young socialist
will be inclined to take Trump’s arguments seriously. But what about the
arguments of China, whose government and ruling party—the Communist Party
of China—has never renounced Marxism-Leninism, and the government of Russia,
which denounced Marxism-Leninism, castigating North Korea for acquiring a
nuclear capacity?

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The governments of both Russia and China have voted with the U.S. in imposing
sanctions against North Korea aimed at forcing the Koreans to give up their
nuclear weapons. However, China and Russia have urged “moderation” on Trump
while continuing to vote for sanctions against North Korea. In contrast, neither
China or Russia has proposed sanctions against the U.S. in the United Nations
Security Council, though the U.S. has far more nuclear firepower than the Koreans
have any prospect of obtaining.

Both Chinese President Xi Jinping and Russian President Putin, in contrast to

Donald Trump, are widely seen as mentally stable and responsible leaders. Why
then do the governments of both Russia and China deny the government of North
Korea the right to establish a nuclear deterrent while they themselves maintain
nuclear deterrents capable of delivering nuclear bombs to the United States?

The leaders of the nuclear-armed “international community,” headed by the U.S.

nuclear superpower but also including the governments of Russia and China, have
what appears to be a weighty argument against “allowing” North Korea to acquire
these terrible weapons. They argue that if “we” allow North Korea to acquire a
nuclear capacity, how can we deny other countries the right to acquire them as
well? Instead of five fingers on the “nuclear button”—or eight if we count Israel,
India and Pakistan, which maintain nuclear forces capable of hitting neighboring
countries—we will have 10, then 20, and eventually a hundred or more hands on
the button.

Even if the leaders of North Korea are responsible people, the argument goes—
and those bourgeois “experts” who study the country seriously say they are—few
people are willing to vouch that this is true about the present occupant of the
White House. In any event, as more and more countries acquire nuclear weapons,
more and more fingers will be on “the button.”

Sooner or later—assuming the world survives Donald Trump, which is not

guaranteed— our luck will run out and some crazy leader somewhere will push
the button and civilization will end. On the other hand, if we strip North Korea of
its nuclear weapons and ICBMs and freeze the situation, we have only five fingers
on the button plus an additional three fingers—Israel, India and Pakistan—capable
of doing major damage to civilization. This situation is not good but it is better
odds than a hundred or more fingers capable of destroying civilization with a push
of a button.

Isn’t this logic sound? Or should socialists support the right of the Democratic
Peoples Republic of Korea and indeed all other countries that are threatened by
imperialist aggression to defend themselves against the real danger that the

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nuclear-armed United States presents to their very existence—not only to their
“regimes” but to their people? Or should we join the leaders of China and Russia
and demand in the interest of the survival of civilization that North Korea give up
its nuclear weapons?

At the end of the day, the answer different socialists and tendencies within the
socialist movement give to the above question depends on the viewpoint
presented in Lenin’s century-old pamphlet “Imperialism, the Highest Stage of
Capitalism.”

Smith’s ‘Imperialism in the 21st century’

Unlike Anwar Shaikh, who has been an economics professor at the New School for
most of his adult life, John Smith has been a political activist. According to the
blurb on Smith’s book, he received a PhD from the University of Sheffield only in
2010.

In contrast to Shaikh, Smith is writing a book for political activists who are
educated in Marxist economics. While you do not have to be a professional
economist to understand Smith’s book, it does help to have a basic knowledge of
both Marxist and marginalist economics, since Smith critiques marginalism
throughout this work. For persons with no background in either Marxist or
marginalist economics, this book will present challenges, though nothing on the
level of Shaikh’s “Capitalism.” For example, there are no mathematical equations,
functions, and variables represented by the Greek alphabet and cursive symbols.
If you are a fan of mathematics and mathematical symbols, you will be
disappointed by this book.

However, Smith’s politics may put off some readers. Since the decline and collapse
of the old British Communist Party, the British left has been dominated by small
Trotskyist groups. By “Trotskyist,” I mean groups that describe themselves as
Trotskyist. For purposes of this blog, this is the only definition of Trotskyism I will
employ.

It is well beyond the scope of this blog to attempt to answer the question of to
what extent any of these groups are actually in accord with the historical Leon
Trotsky’s views and theories. Nor am I interested in exploring the question of
Trotsky’s role in the Russian revolutionary movement, the October Revolution, or
the Soviet Communist Party, or in his political activities after he was expelled from
the USSR by the Soviet government in 1929.

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This is not say that these questions are not of interest to the current generation
of young socialists. Rather, it is to say that this blog will make no attempt to
answer them. Here our only interest in Trotsky is his contributions to economic
theory such as his writing about the so-called Kondratiev cycle.

Keeping our definition of “Trotskyism” in mind, which is similar to our definition of

Marxism for purposes of this blog, I think Smith can be called a “quasi-Trotskyist.”
Smith until relatively recently apparently belonged to or was at least in political
solidarity with a group that was allied with the U.S.—not the British108—Socialist
Workers Party.

Founded in 1938, the U.S. SWP was considered for many years to be the flagship
of the Fourth International, also founded in 1938 by Trotsky and his supporters as
the successor to the Third International. Trotsky held that the Third International
under the political domination of J.V. Stalin and the bureaucracy they held Stalin
represented had lost its revolutionary character. The Trotskyists charged that
instead of working for world revolution like they had done in its early years, under
Stalin the sections of the Third International now acted as “border guards” for the
Soviet Union.

Therefore, Trotsky and his followers drew the conclusion that a new, “Fourth
International,” had to be built. However, unlike the First, Second and Third

108The British and the U.S. Socialist Workers Parties, despite the similarity of names and origins in the
Trotskyist movement, have different political histories. The forerunners of both were supporters of the
Fourth International founded by Leon Trotsky in 1938. However, the founders of what was to become
the British Socialist Workers Party refused to support the Korean resistance to the U.S. invasion and
occupation of Korea that began in 1950. This resistance was led by the Korean Workers Party headed
by Kim Il-Sung, the grandfather of the current Korean leader Kim Jong-un.

The forerunners of the British Socialist Workers Party held that both “Russia,” as they called the multi-
national Soviet Union, and “North Korea” were “state capitalist.” Since the war against Korea was a
struggle between different groups of capitalists, the leaders of the British Socialist Workers Party
reasoned, the world’s workers should remain neutral.

The U.S. SWP, on the other hand, defended the view of Trotsky that the Soviet Union under Stalin (who
was still alive) was a degenerated workers’ state. They believed that Kim il-Sung and his Korean 269
Workers Party headed a deformed Korean workers’ state similar in its political and economic structure
to the Soviet Union under Stalin and Stalin’s successors.

The U.S. SWP supported the struggle of the Koreans headed by Kim il-Sung against the U.S.
on two grounds. One was that Kim il-Sung’s government represented a deformed workers’
state that had to be defended against capitalism, and two that Korea was a country oppressed
by imperialism and therefore had to be supported against imperialist attack. It is the traditions
of the U.S. SWP that are closer to those of the Monthly Review school and not those of the
British SWP that Smith identifies with.
Internationals, the Fourth International never gained much support in the
international workers’ movement and therefore does not represent an important
stage in the development of that movement. It can also be argued, and this my
personal opinion, that the Fourth International was never more than a political
sect—or collection of political sects—and was an “international” in name only.

The U.S. SWP was forced to disassociate formally from the Fourth International in
1940 due to passage of reactionary legislation in the U.S.—the Voorhees Act—like
the U.S. Communist Party was forced to dissociate itself from the Third
International. But the SWP remained in political solidarity with the Fourth
International for many decades.

However, in 1984 the SWP leadership criticized and rejected Trotsky’s theory of
“permanent revolution”—considered central to Trotskyism by virtually every self-
described Trotskyist—and stopped referring to itself as Trotskyist. In 1990, the
SWP went further and formally withdrew its political solidarity with a remaining
fragment of the Fourth International led by the United Secretariat.

In its place, the SWP created a new international organization whose British
section Smith belonged to for a time. However, despite its repudiation of
“permanent revolution,” the U.S. SWP still publishes Trotsky’s works and claims
to be in agreement with most of his political activity and other theoretical
writings—especially after he joined the Bolshevik Party in 1917.

All this would not be worth mentioning in this review except for the fact that Smith
quotes U.S. SWP leaders on the subject of imperialism and refers to the U.S. SWP
and its international affiliates as “the Communist Movement” with a capital “C”.
This is not the usual use of the term and is used in the sense Smith uses it only
by supporters of the U.S. SWP. The more usual use of the term is to refer to
parties formerly affiliated to the Third International and calling themselves the
Communist Party of [some country]—for example, the Communist Party of the
United States.

The Belgian Marxist economist Ernest Mandel, who though he was a central
political leader of the Fourth International from the 1960s to his death in 1995,
also had gained widespread recognition as a major Marxist economic thinker and
theorist that extended far beyond the Trotskyist or quasi-Trotskyist movements.
The U.S. SWP leaders, at least up to the present, have gained no such reputation.
Smith may be on his way to achieving such recognition.

Over the last several years, the U.S. SWP has adopted a series of positions that
are quite different from those traditionally associated with that party and other

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Trotskyist or quasi-Trotskyist groups. For example, the U.S. SWP, reversing its
past position of opposing the Zionist colonization of Palestine by Jewish settlers,
now strongly supports Israel’s right to exist and has demanded that the Palestinian
movement recognize Israel. Going further, it supports the right of Jews around
the world to “return” to Israel-Palestine, an idea central to Zionist ideology,
though the U.S. SWP now holds that Zionism no longer exists.

More recently, the U.S. SWP claims that the main threat to democratic rights in
the U.S. does not stem from the Trump administration at all but from a motley
coalition of liberals; the “petty-bourgeois” or “middle-class” left, defined as all
leftists who do not support the present political course of the U.S. SWP; the
Democratic Party; and “sections of the Republican Party” that are trying to repress
the rights of U.S. “conservatives.” By “conservatives,” the U.S. SWP means
“conservative” Republicans as defined in the mainstream media and the
“Caucasian” working-class supporters of President Trump. As used by the
mainstream U.S. media today, the term “conservative” refers to extreme right-
wingers who usually have racist views. Occasionally, the term “conservative” is
extended by the media to refer to outright fascists.

The U.S. SWP leaders claim that “anti-conservative forces” are trying to reverse
the “democratic election” of President Trump by Caucasian U.S. workers—though
they ignore the fact that Trump got almost three million fewer votes than Hillary
Clinton, according to official returns. While Trump’s installation as U.S. president
may have been in accord with the U.S. Constitution, it certainly was not in accord
with the elementary bourgeois-democratic norm that the candidate who receives
the most votes assumes office.

Smith does not support such views but rather the views that the U.S. SWP has
traditionally been associated with and are far more compatible with the views and
politics held by most members of the Monthly Review School. But when reading
the quotes of U.S. SWP leaders, I urge readers to take the quotes on their merits
only, regardless of your views on these leaders’ current political or past political
policies or the history of Trotskyist and quasi-Trotskyist movements in general.

Smith also repeats the analysis of the Chinese Revolution put forward by the U.S.
SWP, which is quite different from the analysis put forward by most Monthly
Review writers, who tend to be highly supportive of the policies followed by
Chairman Mao and the Chinese Communist Party in the course of the Chinese
Revolution. This will no doubt put off some of Smith’s potential readers. Again, it
would be a mistake to dismiss Smith’s economic arguments because of his political
views on the Chinese Revolution.

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However, on questions of economic theory, which is our real interest here, Smith
stands closer to this blog on some crucial questions than most academic Marxists,
including Anwar Shaikh, or for that matter most supporters of the Monthly Review
School. For example, Smith refers to “surplus value” and never the vaguely
defined “surplus” as most Monthly Review writers do. In contrast to most academic
Marxists, including Anwar Shaikh as well as the Monthly Review School, Smith
describes capitalist cyclical crises as crises of overproduction.

Here we see that Smith’s background as a political activist free of academic

pressures enables him to describe the periodic capitalist economic crisis in
language much closer to this blog and the positions of Marx and Engels as well as
the Marxists of the Second and Third Internationals.

The main question Smith takes up in his important book is a statement made by
Marx in “Capital” to the effect that workers in advanced England are more
exploited than the workers in more backward capitalist countries. Smith, in
contrast, associates himself with what he calls “dependency theory,” which has
long been supported by Monthly Review writers.

Smith contrasts himself to “Euro-Marxists,” or sometimes “orthodox”109 Marxists,”

who argue that once the greater skill and productivity of labor in the “advanced
countries”—often called “civilized countries” even by Marxists a century ago—of
the United States, Western Europe, and Japan are taken into account, workers in
these countries are more exploited than in the countries of the “global south”—
the oppressed countries.

The Euro-Marxists base the argument referred to above on Marx, and now I will
quote Marx’s statement in full from Volume I of “Capital”: “It will be found,
frequently, that the daily or weekly, &tc., wage in the first nation is higher than in
the second, whilst the relative price of labour, i.e., the price of labour as compared

109I don’t much like the way Smith uses the term “orthodox Marxist” here. Originally, the term was
used by those in the SPD and Second International who defended Marxism against Eduard Bernstein.
The orthodox Marxists, including Karl Kautsky, Rosa Luxemburg, and the young Russian Marxist V.I.
Lenin, polemicized against Bernstein, who led a revisionist criticism against “orthodox Marxism.”

I believe Smith is actually supporting the orthodox Marxist position on imperialism, though it
is true that the Monthly Review School, which Smith now appears to be loosely aligned with,
taken as a whole departs quite a bit from orthodox Marxism as defined by both the Second and 272
Third Internationals. However, by using the term surplus value rather than “the surplus” and
clearly describing the cyclical crises of capitalism as crises of overproduction, Smith is actually
defending orthodox Marxism against the heterodox Marxism that dominates academic
Marxism and the Monthly Review School.
both with surplus-value and with the value of the product, stands higher in the
second than in the first.”

In other words, although wages in terms of money—definite quantities of gold

bullion—and in terms of real wages and of value are higher in an advanced country
than in a capitalistically underdeveloped country, the rate of surplus value defined
as the ratio of unpaid to paid labor might well be higher in the capitalistically
developed country than in the underdeveloped country.

Therefore, the argument goes, workers in rich capitalist countries can be exploited
more than the workers in poor capitalist countries. Using this quote, the Euro or
“orthodox” Marxists—to use Smith’s language—conclude that workers in
imperialist countries such as the United States, Western Europe, and Japan are
more exploited than nations of the global south—for example, China, India and
Bangladesh. This is the view Smith argues against.

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 Three Books on Marxist Political Economy
(Pt 12)
John Smith’s ‘Imperialism in the Twenty-First Century’ (Pt 2)

John Smith’s “Imperialism” is aimed against what Smith calls the “Euro-Marxist”
or “orthodox Marxist” tendency. This tendency holds that workers in the U.S.,
Western Europe, and Japan are often more exploited than workers of the “global
South”—previously called the colonial and semi-colonial countries and later the
Third World110—despite the far higher level of real and money wages in the
countries of the “global North.”

Marxists who hold this view rest their case, at least in part, on the following quote
from Marx that appears in Chapter 17 of Volume I of “Capital”:

” … it will be found, frequently, that the daily or weekly, &tc., wage in the first
[more advanced—SW] nation is higher than in the second, whilst the relative price
of labour, i.e., the price of labour as compared both with surplus-value and with
the value of the product, stands higher in the second [less advanced—SW] than
in the first.”

Marx writing in the sixties of the 19th century is saying that English workers could
be more exploited than the wage workers of poorly developed capitalist countries.
To fully understand the debate around this question, including John Smith’s stand,
it is necessary to delve into value theory in general and the theory of surplus value
in particular. In doing this, we will explore many questions in regard to both the
nature of contemporary imperialism and value theory.

Value, equivalent exchange and the market

All human societies have to find a way of distributing the available human labor—
always measured in some unit of time—among the various branches of production
to meet the needs of their society. The distribution of labor is called the division
of labor.

The earliest societies took the form of small isolated communist communities that
knew neither classes, private property, the family, or the state. Within these
communities, division of labor was organized by tradition according to age and
sex. For example, grown men did the hunting of large game while women, assisted

110Since there is no longer a “Second World”—the socialist camp headed by the Soviet
Union—the term “Third World” has been largely replaced by “the global South.”
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by their children who had passed infancy, gathered fruits and vegetables and
hunted small prey. The job of raising the next generation fell to the female sex.

To the people who lived in these early communities, this division of labor seemed
both natural and eternal. Indeed, these early human societies and their productive
forces evolved at an incredibly slow pace over hundreds of thousands of years.

But at a certain stage of development, these communities begin to engage in the

exchange of products with other communist communities. A product of a given
use value that cost the community a certain quantity of labor began to be
exchanged for another product of a different use value that required an equivalent
quantity of labor to produce. And here lies the origin of the exchange of equivalent
quantities of labor and economic value. Over time, stimulated by growing
exchanges among the communist communities, the rate of growth of the
productivity of human labor quickened.

Rise of the family, private property, the division of society into classes,
and the state

At a certain stage of development, the exchange of the products of human labor

also began to develop within these communities.111 These exchanges led to the
dissolution of the old communist relations where the division of labor was
regulated by what appeared to be unchanging tradition. The division of labor now
came to be regulated by what eventually would be called “the market.”

However, it is only with the rise of capitalism that the market became all
embracing, regulating virtually every aspect of society. With the coming of
capitalist society, everything is bought and sold. Money becomes all-powerful.
Local markets merge into national markets, and national markets merge into the
world market. Today, we call this “globalization.” If you travel around the world,
a MacDonald’s can be found every few blocks whether you are in downtown or
suburban Los Angeles, New York, Beijing, Moscow, Berlin, Auckland or Sydney.

Yet no matter how all-embracing the world market becomes, its basic function
remains allocating the labor available among the various branches of production
in such a way that the basic needs of our now-global society are met.

111 The development of commodity exchange within communities coincides with the
emergence of private property and the replacement of the old communist communities with a
society divided into private property, classes, and the state. The remains of the old communist
community finally shrinks down in capitalist society to the nuclear family—the chief unit
through which private property is passed down from one generation to another. 275
Within this global market, each individual is expected to strive to achieve his or
her maximum advantage measured in terms of money. It is all against all with no
overall plan. The question becomes not why such a society must eventually break
down but rather how it can work at all.

As the world market began to develop in the wake of the gold and silver
discoveries of the 16th century, the science of political economy was born in order
to answer this question. Those Marx later called the classical political economists
explained how such a society functions. But they went further, claiming that the
struggle of all against all—called free, not perfect, competition—is the only way
any human society can function. It has always been this way, the economists
claimed, and so it always will be.

As capitalism developed further in the 18th century, economic liberalism was born.
The economic liberals held that to achieve the best possible results neither the
government nor anybody else should interfere with the free workings of the
market any more than was absolutely necessary.

Many of the post-classical “vulgar economists,” as Marx called them, took the
arguments of economic liberalism further. In the late 19th century, as Shaikh
explains in his “Capitalism,” the concept of free competition was replaced by the
notion of “perfect competition.” Increasingly complex mathematics were
developed that purport to demonstrate the truth of the assertion that the more
“perfect” competition is, the closer the outcomes will approach the optimum and
the better off everyone will be. However, only the initiated can understand the
complex mathematical demonstrations, which can only be mastered over years of
study.

Despite these mathematical demonstrations, the free exchange of the products of

human labor—commodities—for other products of labor containing equivalent
quantities of labor produces surprising consequences in practice that cannot be
explained by the economists’ models. Something is obviously wrong, not with the
mathematics but with the underlying assumptions of these models.

Two of these consequences are particularly dramatic. One is the periodic return of
global crises of general relative overproduction of commodities. The mathematical
equations that supposedly demonstrate how capitalism works cannot explain why
these crises occur.

If these models were correct, the crises would emerge quite naturally from the
mathematics. In natural science, whenever a theory that has been formalized by
mathematics is in glaring contradiction to the observed facts, the theory must be

276
abandoned. The same should be true in the social sciences such as economics.
The fact that modern bourgeois economic theory—marginalism—has not been
abandoned shows that modern economics, much like theology, is not a science
but an ideology whose job is not to explain reality but rather to conceal it.

The other result of the operations of the “free market” that modern economics
cannot—or rather does not want to—explain is that the owners of capital become
incredibly rich while the people who actually produce the wealth—the wage
workers—have to constantly struggle to merely tread water. For those of us who
have grown up in a capitalist society, we tend to take this fact for granted. That
is just how the world is and has always been.

But if society is at bottom based on the exchange of the products of equal

quantities of labor and there is no serf or slave labor112, how can these results

112Chattel slavery still exists in the dark corners of bourgeois society, but it is with one major exception
no longer legal in most capitalist countries. The exception is the forced labor of people convicted by
the capitalist courts of a crime. People who are convicted often perform forced labor for the state such
as making license plates. But they can also be forced to work for private capitalists and corporations.

An exception to the proviso that nobody is subjected to forced labor unless convicted of a crime is the
concentration camp system. In the legal sense, concentration camps are prisons that hold people not
convicted of a crime. They might be held for example for their “own protection” or due to a “national
emergency.” For example, the U.S. government during the Cold War had plans to intern leftists in
concentration camps in the event of a war with the Soviet Union, much as people of Japanese descent
were interned in concentration camps during World War II. Today, there is talk of interning Muslims
in what in effect would be concentration camps. The most notorious but not only instances were the
concentration camps of Nazi Germany, though concentration camps were actually invented by the
British during the Boer War.

In Nazi Germany, people were first subjected to forced labor for having the wrong political beliefs.
Within a little more than a month after Hitler was appointed chancellor on January 30, 1933, the first 277
concentration camps began to operate within Germany. The first German concentration camp prisoners
were German Communists. Later, especially after World War II broke out, this was extended to people
who belonged to the wrong “race,” mostly the so-called Jewish race but also the Roma people.

It should be pointed out that even today people in the U.S. who belong to the “wrong” race—above all
African-Americans but also Latinxs and other “people of color”—are far more likely to be convicted of
crimes and subject to legal prison forced labor than are white people. So in the U.S. today, even if more
shamefacedly than was the case in Nazi Germany, race plays an important role in the chance of any
particular individual being subject to prison forced labor.

However, even in the Nazi concentration camps, inmates, though they were forced to work for German
corporations, did not legally belong to them. This was not, however, necessarily to the advantage of the
concentration camp inmates nor is it necessarily to the advantage of prisoners who have been convicted
of crimes—whether they are guilty of the crimes is another subject—that are held in ordinary prisons
as opposed to concentration camps. The idea in Nazi Germany was that the forced labor of the
arise? Something is not quite right here. With the exception of prison labor,
nobody is legally forced to work for another person or group of persons against
their will. Why then do business owners and other owners of capital become so
much richer than anybody else? Don’t capitalists—defined as the owners of
capital— purchase all their commodities including workers’ capacity to labor just
like everything else at more or less its value? Doesn’t free competition enforce
this?

Yet the owners of capital can accumulate fortunes that swell from millions to tens
of millions to hundreds of millions and finally to billions. To find the answer to this
question we must turn to the work of Marx.

Concrete labor, abstract labor and value

As we have repeatably stressed throughout this blog, value is not concrete human
labor embodied in commodities measured in terms of some unit of time but rather
abstract labor measured in terms of some unit of time. This is not an easy concept
to grasp.

Rosa Luxemburg asserted somewhere that understanding abstract labor is the key
to understanding the nature of money—and I would hold by extension crises of

concentration camp prisoners would quickly lead to their deaths, thus hastening the much-desired—by
the Nazi authorities—biological extinction of the Jewish and Roma “races.”

Under chattel slavery, the slaves are a form of fixed capital, so their owners have an economic incentive
to keep them alive under pain of losing their investment. This is not the case with prison labor, where
the capitalists merely borrow the prison laborers. Therefore, from the capitalist point of view, prisoner
laborers still represent circulating and not fixed capital. Prison labor—whether in regular prisons or
concentration camps—is therefore a form of labor that combines the worst features of wage and chattel
slave labor.

One phenomena in the U.S. today that has the potential of reviving full-scale legal chattel slavery is the
growing use of private for-profit prisons. The government, either at the federal or local level, in effect
sells its slaves—people convicted by the capitalist courts of a crime—to these private for-profit prisons.
These people are then the legal slaves owned by private for-profit corporations for the period of their
sentences, which can be for life under U.S. law.
278
These private prisons are then free to loan out their legal slaves to other private capitalists for additional
profit. The only element of legal chattel slavery still missing here is that the private prisons cannot yet
sell their prisoners to other private prisons.

President Obama announced just before he left office that he was ending the policy of
“housing” federal prisoners in private prisons, which raised hopes that the private prison system
might soon be phased out. However, President Trump has reversed Obama’s policy in this
regard and as a result the stocks of the for-profit prison corporations have been doing
exceptionally well on the stock market.
overproduction. As we have seen in this blog, Marxists after Marx, taken as a
whole, have not done well at these tasks. I will now assert that to understand
imperialism fully in a truly scientific, as opposed to an impressionistic, way, we
have to begin with the difference between concrete and abstract labor. We will
see the truth of this assertion as our extended review of John Smith’s
“Imperialism” proceeds.

Before a quantity of labor can be compared with another quantity of labor, we

must first make the two different quantities of labor qualitatively identical. Only
then can different labors embodied in different commodities be quantitatively
compared.

Looked at concretely, the labor performed by different workers—or even the same
labor performed at different stages of workers’ lives, or even at different times of
the day—will inevitably differ qualitatively. In the morning—or at the beginning of
a shift—a worker will likely work faster and with fewer errors than will be the case
later in the day. If a worker has a cold or the flu, he or she will likely work slower
with more errors. Or the worker will work better when things are going well with
her or his life than when things are not.

Even greater differences in concrete labor are found in terms of different skills.
The labor of a ditch digger—the traditional representative of unskilled labor in
economics—is different than the labor of a jeweler—the traditional representative
of skilled labor. The labor of a carpenter—also an example of skilled labor—is
different than the labor of a jeweler. There isn’t one type of concrete labor but
many types.

Yet the labors performed by human beings do have something in common. What
is it? All such labors are examples of human labor. The very fact that we can use
the term human labor to describe all the diverse types of labor that occur in the
real world shows the truth of this.

When commodities are exchanged that are produced by different types of concrete
labor, what is being compared is human labor as such, stripped of all the particular
characteristics that cause one instance of concrete labor to differ from another.

How does this abstraction occur in the real world of commodity exchange? It
occurs through the exchange itself. When commodities are exchanged, all the
differences that exist in the concrete—actual—human labor that went into their
production are abstracted away. Once this happens, only human labor as such is
left.

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Gold bullion—money material—represents social wealth as such with all the
specific use values that represent real-world concrete wealth—food, clothes,
houses, automobiles, airplanes, computers, and so on—abstracted away leaving
in its place the undifferentiated glittering substance of the yellow metal. However,
social wealth as such—gold bullion—can always be converted into any desired
specific use value on the market through an act of exchange.

Just like we can compare different quantities of social wealth only when we
compare their prices—specific quantities of gold bullion that are qualitatively
identical—we have to reduce actual concrete human labor in the world to one
qualitatively identical social substance—abstract human labor. This is why it took
Marx, a German revolutionary who was a student of the great German philosopher
and logician GWF Hegel (1770-1831) to at last consciously understand in 1857—
not so long ago—a process that had been going on unconsciously for many
thousands of years.

Value is a relationship among human beings

Occasionally, it is suggested that the labor of non-human animals should be

considered productive of value and surplus value. Adam Smith, for example,
believed that the labor of what he called “laboring cattle” was productive labor.
Animal rights advocates who have some knowledge of Marxist theory are attracted
by this argument. Shouldn’t animals and their labor be respected? In my opinion,
they certainly should.

However, value is a relationship of production among humans and not between

human and non-human species. This is not just—at least in my opinion—because
under capitalism animals are often treated with incredible cruelty. But this doesn’t
change the fact that economic value is a relationship among humans engaged in
production and exchange—not humans and animals.

Labor versus labor power and the nature of surplus value

Once we explain value, we have to deal with surplus value, whose value form is
profit. Profit is the driving force of capitalist production. In order to explain surplus
value, Marx and anybody following his logic must first make a series of simplifying
assumptions. First, we must assume, using the power of abstraction, that all
human labor is qualitatively identical.

This also necessitates the assumption that all labor powers are qualitatively
identical. We must make this assumption because it is impossible for labor powers
that differ qualitatively from one another to perform qualitatively identical labor.

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And as we saw above, labor must be made qualitatively identical before different
labor embodied in different commodities can be compared quantitatively. Once we
make these assumptions, the term abstract human labor becomes redundant.
Now we simply have human labor.

Second, we must assume that all commodities sell at their values—direct prices—
and not at their prices of production. The nation and nation states are also
abstracted. The world is one big capitalist nation, and identical commodities sell
at exactly the same price everywhere. In this imaginary world of “pure capitalism,”
we have no imperialism, no racism and no sexual oppression. No nation or
nationality exploits other nations and nationalities.

As we saw last month, starting in 1857—the year of the global economic crisis
that sparked his interest in political economy anew—Marx began to make the
distinction between labor and labor power—the ability to work—which neither he
nor classical political economy had previously made. This is a vitally important
distinction, as we will soon see.

When workers are hired, the boss is not buying their labor but their ability to
perform labor. Everybody who has ever had a job and thinks about it for awhile
will understand this. The boss—more formally speaking, the industrial capitalist or
the agent of the industrial capitalist such as the shop foreman—then assigns a
task or a series of tasks to the worker. Isn’t this exactly what happens on the shop
floor or other work place?

Workers if they are to keep their jobs must perform the tasks assigned to them.
If they deviate from the instructions in any way, the shop foreman or other
supervisor lets them know. This shows that for the duration of the workday, their
labor power is no longer theirs but the bosses’. They are not chattel slaves and
can break their contract and reclaim their labor power at any time. But in that
case, they will be let go and will either have to find a new job or live without
wages. Only after the workers sell their labor power—actually for credit, since they
are not immediately paid—their latent ability to work is transformed under the
boss’s command into actual labor.

The economists’ argument

Now let’s shift from the workshop to the college classroom, the domain of the
professional economist. How will the transaction between the boss and the
workers selling their labor—as the economists say—be explained by an instructor
in an introductory college or maybe high school economics class. I say instructor
because a professor would not be assigned to teach an introductory class.

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However, in an advanced economics class taught by a full professor what the
instructor explains in the introductory class will form the foundation of the
argument.

Our instructor explains to his students that the workers sell their labor—the
instructor will not say labor power—to the employer. What will determine the price
that the boss will pay for the workers’ labor—also known as the workers’ wage?
The instructor will explain to his eager young students that the boss will pay the
workers for the full value that their labor produces. Not a penny more and not a
penny less. Nothing could be more fair. No exploitation here at all!

Let’s suppose the worker is paid a wage of $100 daily for performing eight hours
of labor. Notice our college or high school instructor—who here represents all of
modern (bourgeois) economics—and the post-1857 Marx agree on one thing: the
quantity of labor must be measured in terms of some unit of time, in this case
hours.

But how do we know, you might ask the instructor, that the commodity eight
hours of labor is actually worth exactly $100 in terms of its value and the value it
produces, instead of $75 or $125 or some other amount? The instructor will tell
you that competition on the market guarantees that the commodity labor sells at
least on average at its value, just like the market sees to it that all other
commodities, such shoes, dresses, pants, peanut butter, and so on, sell at their
values.

True, the instructor might grant that because of some disequilibrium in the market
the commodity labor might sell for $75 per eight-hour day but produce $100. In
that case, the instructor will concede that the worker is indeed exploited. As a
result of this exploitation, the boss will realize what the instructor calls an
“economic profit” of $25 on every eight hours of labor purchased from the worker.
That would be unjust, the instructor will concede.

But since our employer like everybody else in the economy behaves rationally in
the economic sense—that is, he aims to enrich himself in terms of money as much
as possible—he will take advantage of the situation and hire additional workers.
Soon the demand for labor will exceed the supply at a price of $75 for every eight
hours of labor. The workers, who also want to maximize the money they are
earning, will take advantage of the situation and demand a higher price—wage—
for their labor. This will continue until the wage rises to $100.

At that level, the employer’s windfall disappears and the supply and demand for
labor are equal. The workers are no longer exploited since they are paid exactly

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the amount of value that their labor creates, and the story ends happily—not
despite of but because of the operation of the free market.

Our instructor is a Republican—assuming we are in the USA. He will explain that

he is a Republican—and not a progressive—because his knowledge of scientific
economics tells him that the way to fight the exploitation of labor that may
occasionally arise is not through trade unions and collective bargaining but rather
through individual bargaining between the worker and the boss. Trade unions, the
instructor explains, are monopolies that only make the economy perform less
efficiently and in the long run hurt the workers.

If our students are progressives—Bernie Sanders supporters—they aren’t at all

happy that their economics instructor is a reactionary Republican. But can they
refute his arguments? Suppose another student who is, like the instructor, a
Republican and not a progressive raises his hand. That student asks, is it possible
that the workers might be paid a wage of $125 for each eight hours of labor they
sell to the employer when their labor actually created only $100 of value? In that
case, won’t the employers, who create all the jobs, be exploited by the workers?

Our Republican economics instructor explains that it is indeed possible that some
disequilibrium in the labor market, perhaps brought about by the trade unions and
minimum-wage laws, could lead to a situation where the workers are exploiting
the employers. For example, the employers might have to pay $125 in money to
purchase a day’s worth of labor from the workers but get only $100 worth of value
back in exchange. Now that wouldn’t be fair, would it? But as long as perfect
competition prevails, the free market will soon eliminate this exploitation by the
workers of the bosses.

Since the employer, just like the worker, is a perfectly rational person, the
employer will say that he can’t keep losing money like this. He will reduce his
purchases of labor and this might even cause some “involuntary” unemployment—
a recession will be on. But as soon as unemployment occurs, the supply of labor
at the price of $125 for every eight hours of labor will exceed demand. The workers
being economically rational just like the employer will realize that to demand a
$125 wage for every eight hours of labor they perform is unreasonable.

The supply of the commodity labor will now exceed demand at current prices—
wages. As a result, wages will start to fall. Once they return to a price of $100 for
every eight hours of labor performed, the employer will no longer be losing money
for every hour of labor he employs, and workers will no longer be unemployed.

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Thanks to the operation of the free market, our Republican instructor emphasizes,
the recession will soon end and full employment will be restored. Not only that but
now both the workers and the boss will be paid according to the value they actually
produce, not a penny less and not a penny more. Full employment and perfect
social justice march hand in hand thanks to the operation of the free market and
perfect competition.

These arguments the economist uses and the marginalist methods113 along with
the mathematics to drive the argument home seem quite compelling even if like
the progressive student we want to reject them. After all, the instructor who we
will now name—Mr. Economics—is a Republican who thinks that the only thing
wrong with present-day society is that “government” through minimum-wage laws
or other regulations, or the trade unions that bargain collectively and don’t allow
the workers to bargain individually, are preventing the economy from operating
in the “optimum” way.

As long as we don’t challenge the assumption that the workers are selling their
labor to the employer, we will have a hard time refuting Mr. Economics’ argument.

113 The economists who reject labor value—virtually all post-Ricardo economists—begin with the
assumption that all factors of production and not just labor produce value. The factors of production are
then grouped into three classes—land, which produces rent; capital, which produces interest; and labor,
which produces wages.

This “trinity theory,” as Marx called it, seems reasonable at first glance, since land, the wealth provided
by nature; the means of production produced by humans, such as factory machinery; and labor are all
needed to produce use values, or utilities as modern economists put it.

But how do we determine the “contribution” of each factor of production to the value of the final
product? In order to do this, the economists use what is called the “marginal method.”

Suppose, they say, we add an additional acre of land leaving everything else unchanged. We can then
see how much the value of the agricultural produce measured in terms of money will increase. Or we
add another unit of capital—for example, another machine. We can then measure the increase in the
value of the total product measured in terms of money. Or we can hire an additional worker and see 284
how much the money value of the product will have increased.

The economists hold that it is the marginal productivity—the production of value—of an additional unit
of an additional factor of production that determines the value it creates. They then explain that
assuming perfect competition prevails—no unions, no government regulation, and so on—each factor
of production will be compensated in proportion to its marginal productivity. The landlords get rent in
proportion to the marginal productivity of the land, the capitalists earn interest in proportion to the
marginal productivity of their capital, and the workers earn wages in proportion to the marginal
productivity of their labor.

As long this is true, the economists claim, no factor of production—the modern economists’
way of referring to social class—exploits another
However, as soon as we make the distinction between labor and labor power, Mr.
Economics’ argument starts to fall apart.

As we saw, the college instructor correctly measured the quantity of labor in some
unit of time—in this case hours. We must give him that much credit. But now what
do we find if we make the distinction between labor power—the capacity to labor—
and labor itself, something our college instructor does not do? Once we make the
distinction between labor power and labor, we realize that the commodity that is
being sold is not “labor” at all but labor power.

The three values of labor power

Like all commodities, labor power has three values: a use value, a value, and
an exchange value.

The second value of labor power is economic value, or simply value that represents
some quantity of human labor114. Unlike the case with use value, which has many
standards of measurement depending on the particular commodity that is being
measured—for example, bushels of wheat, barrels of oil, grams of gold, and so
on, value has only one standard of measurement. Without exception, the value of
all commodities is measured by the quantity of labor it takes to produce them.
Therefore, the standard of measurement is some unit of time—for example, hours
of labor.

Finally, there is the form of value named exchange value, which with the exception
of the money commodity is measured in terms of some quantity of money. In the
case of the money commodity itself, exchange value is the expanded form of price
lists read backwards—which include the price (wage) of labor power.115

114 Since at our current level of abstraction we are assuming that every unit of labor performed
is identical to every other such unit, it is redundant to make the distinction between concrete
and abstract labor here. However, since this distinction is crucial for John Smith’s analysis of
imperialism, the distinction will become important later.
115 Here we are assuming that every unit of labor power is identical to every other unit of labor
power. Later we will see that though this is not true in terms of use value, labor power can be
reduced through the power of abstraction to a single type of labor power that performs only
abstract labor. Once we do this, it becomes possible to compare the labor powers of workers
quantitatively. This is true because all the concrete types of labor power, however much they 285
differ from each other qualitatively, are still instances of human labor power. Again, grasping
this is crucial to understanding Smith’s “Imperialism,” so I will have much more to say on this
later. By assuming that every hour of labor power is identical to every other hour of labor
power, I have already made the abstraction.
Therefore, the measure of value is some unit of weight of precious metal
expressed in terms of currency names that are nothing but special units of
weight—our familiar dollars, euros, pounds, yuan, rubles and so forth. Therefore,
the exchange value of labor power is measured in terms of the quantity of currency
the worker receives for selling a given quantity of labor power—for example, $15
an hour.

Labor power is unique

Labor power as a commodity is unique in that the unit of measure of its use value
and its value is the same, some unit of time. This gives rise to endless confusion,
which the economists and other apologists for capitalism take full advantage of.

Let’s forget about the money measure of labor power, which is not of interest to
us here. Instead, look at the value of labor power versus the amount of labor that
workers actually perform at the command of the boss—industrial capitalist—or his
agent such as the shop foreman. In other words, we want to compare the value
of the workers’ labor power to the value the workers actually produce when they
perform their labor.

There is no reason why the quantity of labor that labor power as a commodity
represents and the quantity of labor that the workers perform should be the same.
In fact, we can be pretty sure that the quantity of labor represented by the labor
power of the workers will be considerably less than the quantity of labor the
workers will be commanded to perform under the penalty of losing their
employment.

Let’s return to our assumption that the boss makes the workers work for eight
hours at a wage of $100 a day. Workers cannot live—let alone raise their children—
without consuming commodities that function as means of subsistence. Let’s
assume in order to (re)produce—including raising the children who will one day
replace them in the labor market—the workers must each consume means of
subsistence representing four hours of labor.

When workers consume means of subsistence they purchase with their money
wage— which does not itself produce any value—the value contained in the means
of subsistence is transferred to their labor power and the developing labor power
of their children. Therefore, under our assumption, the value of the workers’ labor
power is four hours for each worker and its exchange value—money price—is
$100. Yet the workers are each obliged under pain of being fired to provide eight
hours of labor, or in money terms $200.

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The secret of capitalism revealed

But wait minute! Aren’t the workers being cheated here? They provide eight hours
of labor a day but are only paid for four hours! Isn’t this a violation of the law of
the exchange of equal quantities of labor, the basis of bourgeois freedom and
equality? Not at all! The workers’ labor power can be reproduced for only four
hours of labor a day. That is its “economic value.” In terms of exchange value,
this comes to $100 per worker under our assumptions. Remember, it is their labor
power—their ability to work—that the workers are selling to the boss, not their
labor. And under our assumptions, they get that amount in full by the boss. No
cheating here at all.

However, what is true is that the workers are only paid, under our assumption,
for four of the eight hours of labor they perform. Half the workday they work for
themselves, and half the workday they work free of charge. The workers can of
course refuse to work under these terms, since we are assuming a free capitalist
society and not a slave society. But if they do, they will have to live on air.

So as long as the workers do not own the means of production needed to perform
their labor but that instead is owned by another class—the capitalists—they if they
want to live and raise families have no choice but to perform unpaid labor for the
capitalist class.

This is the secret of capitalism that virtually all modern “economists” work night
and day to cover up. Now we understand why our economics instructor, Mr.
Economics, does not and dares not make the distinction between labor and labor
power. If he did, the dirty little secret of capitalism would be laid bare.

Surplus value and the use value of labor power

Marx called the value that the unpaid labor the workers create surplus value. The
ratio between the unpaid portion of the working day and the paid portion, both
measured in terms of time, is called the rate of surplus value, or sometimes the
rate of exploitation. When the value of a commodity is realized in money form,
the surplus value becomes profit. But how do we know that the value of eight
hours of labor power is less than the value produced by the labor each worker
actually performs?

We know that it is because the use value of the commodity labor power to the
capitalists is precisely that it produces surplus value. And as we have seen
throughout this blog, once the surplus value has been realized on the market in

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money form, that surplus value becomes profit. And profit is the only aim of
capitalist production. If there is no profit, there is no capitalist production.

Therefore, if ever the exchange value of labor power—the wage—rises so high that
the surplus value disappears, the use value of the commodity labor power will also
disappear. As a result, demand for labor power will drop to zero, because like all
people the boss won’t spend money on a commodity that has no use value.

Indeed, forced by the pressure of competition to earn the highest profit possible,
the capitalists are driven to pay the lowest possible wage they can get away with.
All other things remaining equal, the lower the wage and the higher the rate of
surplus value, the higher the rate of profit.

Therefore, the capitalists will do everything possible—whether as an individual or

as a class—to increase the rate of surplus value. To do this, they must drive wages
down to the lowest possible level. They can’t, however, drive wages down all the
way to zero because if they did labor power would not be (re)produced and surplus
value itself would disappear.

An illustration from contemporary politics of the capitalist drive to increase the

rate of surplus value is the U.S. Democratic and Republican opposition to single-
payer health care.

Since the election of Donald Trump and Republican majorities in both chambers
of the Congress, the Republicans have repeatedly tried and failed by razor-thin
margins to repeal the Affordable Care Act, often called “Obamacare.” The idea
behind the ACA was originally developed by the Republican Party and first
instituted on a statewide basis in Massachusetts under billionaire Republican then-
Governor Mitt Romney.

The Republican plan is seen as the “conservative”—as in neo-liberal—alternative

to single-payer health care, or health care as a right and not a commodity, which
exists in one form or another in virtually all other advanced—and some not so
advanced—capitalist countries. Some U.S. progressives have pointed out that it
would be more accurate to call the ACA Romneycare rather than Obamacare

Since the current Republican Congress and Trump assumed office last January,
Republican leaders in both chambers of the U.S. Congress, egged on by Trump,
have tried to “repeal and replace” Obamacare, as they prefer to call it. The
Republican leaders are not completely united on this, however. A minority believe
that the ACA should be kept basically intact as the “conservative” alternative to
single payer. Another minority wants to repeal the ACA entirely because it makes

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too many concessions to the “socialist” idea that access to health care should be
a human right and not a commodity.

The majority of the Republican leadership, including President Trump, believe that
the Affordable Care Act should be gutted though not repealed entirely, which will
result in tens of millions of people being thrown off their current health insurance.
These tens of millions of uninsured people will be added to the tens of millions of
people who don’t have health insurance under the current version of the ACA.

Progressives in the U.S., most notably Vermont Senator Bernie Sanders, strongly
oppose the drive of the majority of the Republican leadership and the Trump
administration to gut the ACA. All the Democratic Party members in both chambers
of Congress have opposed attempts by the Republicans and President Trump to
gut the act.

A minority of Democrat Congresspeople and senators, most famously Bernie

Sanders, but not the Democratic congressional leadership, advocate a single-
payer health care system, sometimes called in the U.S. Medicare for all.

Under single payer, when you have to go to the doctor you don’t have to worry
how the bill will be paid, because the doctor is not paid by the individual patient
but by the national health care system. As single-payer systems spread around
the world after World War II, health care came to be increasingly regarded as a
basic human right rather than a commodity.116

How do the progressives that support single payer—a position that all recent polls
show is supported by the majority of the U.S. population—including many rank-
and-file Republicans but no Republican leaders—explain the Republican Party
attempts to gut the ACA? More importantly, how do progressives explain the
Democratic Party leadership’s continued opposition to single-payer health care?

116 Single-payer systems in capitalist countries cover essential medical services. They don’t necessarily
cover everything such as plastic surgery for the sole purpose of improving one’s personal appearance—
for example, nose jobs. People are free to buy—and the wealthy often do—additional medical insurance
to cover these unnecessary procedures. Again, the details vary from country to country.

However, the medical procedures necessary to keep you alive are covered by the national health
plans under any decent single-payer system. It is important to understand that single payer does
not eliminate the profit motive from medicine and therefore does not equal socialist medicine. 289
Single payer is simply a reform within the capitalist system and can be won within capitalism.
What single payer does do is loosen the chains of wage slavery but by no means eliminates
them.
The progressives’ explanation

Let’s start with how the progressives explain the Republican Party proposals to
gut the Affordable Care Act. They explain correctly that the Republican “replace
and repeal” proposed bills—all of which so far have failed to pass—are really a
gigantic tax cut for the rich.

On the other hand, the Republican politicians are concerned about the impact of
their highly unpopular “repeal and replace” proposals on their re-election
prospects. Repeated polls show that U.S. voters overwhelmingly oppose all the
Republican bills to replace and repeal the ACA.

However, the progressives point out, the Republican politicians are dependent on
wealthy donors. These donors are of course capitalists—though the progressives
generally avoid that ugly term when referring to them.

To the right of the progressives, the “mainstream” center-right Democrats prefer

to explain the Trump-Republican drive to replace and repeal Obamacare as flowing
from an irrational obsession to destroy President Obama’s legacy. The implication
is that the Republican leaders—and especially Trump—are motivated by racism.
And there is no doubt an element of truth here, especially as regards Trump.

But neither of the above explanations for the Republican “repeal and replace”
efforts explains why the Democratic leadership is still resisting single payer—a
reform that polls show is highly popular and experience has shown can easily be
realized within the capitalist system. If the Democratic Party had instituted a
single-payer system when they had control of both houses between 2009 and
2011 and the legislation had been signed into law by then-President Obama, the
Democrats would certainly have been rewarded by many years of domination of
Congress and the White House—at least from the 2010 through the 2016
elections.

If the Democrats had instituted health care as a right rather than as a commodity,
the Republicans would have been left with two choices. One, they could have
advocated the “repeal and replacement” of the single-payer system and faced
extinction at the polls. Or two, they could have done what the right wing and far-
right parties of Europe have all done, however reluctantly, accept health care as
a right. From the viewpoint of beating the Republicans, passing single payer
between 2009 and 2011 would have been a smart move by the Democratic Party.

But the Democrats under President Obama’s leadership managed to blow the
golden opportunity provided to them by the disastrous presidency of George W.

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Bush and passed what turned out to be the highly unpopular, Republican-inspired
Affordable Care Act instead. President Obama not only made no attempt to pass
single payer, he failed to support even such a half-way step toward single payer
as a “public option.” It isn’t as if Obama never heard of single payer. As an Illinois
state senator just a few years earlier, he had supported it.

The Republicans for their part took full advantage of the Democratic Party’s failure
to implement single payer by running against their own unpopular health care act
they now dubbed “Obamacare.” As a result, the Republicans—also helped by
gerrymandering and voter suppression, and not least the appeals to the racism of
many white voters—soon regained control of Congress and made huge gains in
state and local elections.

This process finally led to the surprise victory of Donald Trump in the 2016
president elections, much to the private—and increasingly not so private—horror
of the Republican leadership, which had expected and largely desired the election
of the conservative Democratic candidate Hillary Clinton. The bottom line is that
if Obama and the Democratic leadership had implemented a single-payer health
care system in the U.S., making health care a right and not a commodity, not only
would many lives been saved but Donald Trump would almost certainly not be
president today.

Why did the Democrats follow this disastrous course? Progressives admit that it is
not only Republican politicians but Democratic politicians as well who are
dependent on “wealthy donors”—capitalists. Obviously, the insurance companies
that sell health insurance will lose this business if single payer is implemented and
many of these companies are donors to the Democratic candidates. Therefore, the
“corporate Democrats,” dependent on insurance companies and other wealth
donors for donations, were under tremendous pressure to oppose single payer.

Once, the progressive argue, we convince the Democrats to nominate people for
public office—including the House, the Senate and the presidency—who refuse
“corporate money,” they will be elected and will implement single payer at long
last.

Why medical-insurance-industrial complex supports the Affordable Care

Act

Some U.S. capitalists—not just progressives—are opposed to the repeal of or

gutting the Affordable Care Act. What I call the medical-insurance-industrial
complex support of the ACA is similar to the support of the military-industrial
complex for increased military spending, even when there is no case—from the

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viewpoint of the interests of U.S. imperialism—for it. The U.S. industrial capitalists
who are part of the military industrial complex are always for increased military
spending, because it increases the markets for the products they produce—nuclear
weapons, for example. This is the military-industrial complex that President
Eisenhower famously warned against.

The increased access to health care that the Affordable Care Act has brought about
means expanded markets for many private for-profit hospitals and drug
companies as well as medical doctors. The generous subsidies under the ACA that
are granted for private for-profit insurance companies are much appreciated by
the shareholders of those companies.

Many businessmen doctors are also happy with the expansion of their markets
that Obamacare has brought about. Their representative, the American Medical
Association, long known for its opposition to “socialized medicine”—health care as
a right rather than a commodity—has opposed the Republican proposals to gut
the ACA. However, some businessmen doctors—such as Trump’s former and now
disgraced Secretary of Health Dr. Tom Price—have opposed the ACA because they
fear that it might modestly limit the profits they can earn on their far-flung
capitalist medical enterprises.

While the specific profit interests of individual capitalists lead them to take
opposing positions on the Affordable Care Act, there is an important difference
within the capitalist class toward the specific demands of the medical-insurance-
industrial complex and the military-industrial-complex. The capitalists outside of
the military-industrial complex only mildly if at all oppose proposals to increase
military spending. However, the majority of U.S. capitalists outside of the medical-
insurance-industrial complex are very much in favor repealing and replacing the
ACA and are bitterly disappointed in the failure of the Republican Congress so far
to do so.

Elephant in the room progressives do not talk about—surplus value

Progressives as a general rule have a weak grasp of economic theory and often
have trouble answering the arguments of reactionary Republican leaders such as
U.S. House Speaker Paul Ryan. Ryan is educated in Austrian school and “modern”
neo-classical economics. The House Speaker is also a follower of the Soviet émigré
U.S. philosopher and novelist Ayn Rand (1905-1982).

The capitalist Rand family-owned pharmacy business in St. Petersburg Russia was
expropriated by the Soviet government after the October Revolution—whose
100th anniversary we are now celebrating. Embittered, the Rand family left the

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Soviet Union in 1926 and moved to the United States, where “private enterprise”
is respected.

In the U.S., Rand made a career as a fanatical defender of capitalism. Though her
defense of capitalism made in a series of “philosophical writings” and novels
reduced the arguments of the bourgeois economists to a caricature, her writings
and novels acquired a cult following among right-wing college students such as
the young Paul Ryan.

Once Ryan entered bourgeois politics as a right-wing Republican, he was forced

to disown Rand because her “Objectivist” philosophy is atheist. Almost all U.S.
bourgeois politicians—especially those who are right of center like Ryan—are
forced to pretend to be either pious Christians or pious Jews. In the case of Ryan,
it is pious Catholic. However, the policies that Ryan supports indicate that his
disowning of Ayn Rand and her viciously pro-capitalist but atheistic Objectivist
philosophy is far from sincere.

Like former U.S. Federal Reserve Board Chair Alan Greenspan, who was a close
associate of Rand, Ryan rages against entitlements such as Medicaid—government
health insurance for the poor that was expanded under the ACA—and Medicare—
government health insurance for people over age 65. Ryan wants to abolish both
these “entitlement” programs.

If Ryan had his way, seniors who can afford private health insurance—wealthy
capitalists—will be able to purchase it. Otherwise, the elderly can attempt to find
an employer who will offer some type of health insurance. This way seniors have
the opportunity to show that they can still enrich the capitalist class by producing
surplus value. Otherwise, when its time for them to go, its time to go. This is very
much in the spirit of Ayn Rand’s “philosophy.”

U.S. employer-centered health care system versus health care as a right

While the rest of the world moved toward single-payer systems after World War
II, the U.S. adopted the so-called employer-centered health care system. The idea
is that the boss provides health insurance as part of the wage. If you want health
insurance and are not rich, your only recourse is to hit the pavement and attempt
to find a boss that will buy your labor power at a price that includes health
insurance.

The beauty of this from the viewpoint of the capitalist class is that the maximum
number of people are forced into the labor market and competition among the
sellers of the commodity labor power is increased, causing the price of labor

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power—wages—to fall. The result is that the ratio of labor that the workers
perform for free for the bosses rises in proportion to the labor that the workers
perform for themselves.

The result is higher profits for the bosses and lower living standards for the
workers. This is the real reason why not only the Republican but the Democratic
leaderships are united in opposing the introduction of single payer or Medicare for
all, which would establish health care as a right and not a commodity.

This is true despite the fact single-payer systems lower the cost of medical
care, and to that extent cheapen the cost of the commodity labor power. For
example, the single payer trust fund that pays the medical bills for all individuals
that are covered by the single-payer plan is able to use its position as a
monopolistic buyer to hold down medical costs, whether they consist of drugs,
hospital care, or bills of doctor engaged in private practice.

For example, New Zealand, which has a single-payer system, spends about half
as much of its GDP on health care, with better outcomes, than the U.S. does.
Wouldn’t therefore the introduction of single payer be in the interest of the U.S.
capitalists as a whole?

However, despite the great superiority of the New Zealand and other single-payer
health care systems in terms of costs and results, in the U.S. the great majority
of the capitalist class outside of the medical-insurance-industrial complex are still
resisting introducing single payer. Instead, they prefer Republican proposals to
either abolish or gut the Affordable Care Act, or at best more or less favor retaining
the Affordable Health Care Act in its current form. Don’t the U.S. capitalists know
their own class and competitive economic interests?

The answer to the apparently economically irrational opposition to single payer by

the U.S. capitalists and their political representatives, whether Democrats or
Republicans, is this: It’s fine if the portion of the value of labor power represented
by medical care drops as long as there are still enough workers available healthy
enough to produce surplus value.

Therefore, the best solution, as far as the capitalists are concerned, to the high
cost of medical care is to make sure there are a sufficient quantity of young healthy
workers able to produce surplus value who need little or no medical care. This as
we will see as we proceed with this extended review of Smith’s book is one of the
key aims of U.S. foreign policy and the Pentagon budget necessary to enforce it.
The beauty for the capitalists with this approach is that when the current
generation of young workers gets old and sick, they can be allowed to die off as

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quickly as possible, since there will be plenty of healthy young workers to replace
them. Is this humane? Certainly not! Is it in the interest of capital? It certainly is,
assuming that the workers and their allies allow the capitalists to get away with
it.

Second, the capitalist are not only interested in economizing on the cost of labor
power represented by medical costs but on the costs of labor power overall. The
more desperate the overall conditions of the workers the more they will be willing
to work for lower wages and the cheaper will be the cost of labor power for the
capitalists.

To the extent that the workers allow the capitalists to get away these “health care”
policies, the higher will be the ratio of unpaid to paid labor and consequently the
higher the rate of profit on total capital advanced. That these are indeed the
calculations currently being made by the majority of U.S. capitalists is shown by
the fact that almost all sections of the capitalist class—and not only those with
special interests such as insurance companies and private for-profit hospitals,
whose interests might conflict with the capitalist class as a whole—are stubbornly
opposing single payer though they are divided on whether to retain or “repeal and
replace” the Affordable Care Act.

The link between the struggle for health care as a right and labor rights

What Marx’s theory of surplus value shows us is that there is an unbreakable link
between the struggle for labor rights in the U.S.—the right to form a trade union
and bargain collectively, which is effectively denied today to the overwhelming
majority of U.S. workers—and health care as a right and not a commodity.

Let’s assume that you get your health insurance through your boss. The health
plan is pretty good. But then your child is diagnosed with a curable childhood
cancer. Due to the progress of medical science, an increasing number of childhood
cancers that in the past would be fatal can now be cured. The treatments are
extremely expensive—relative to the money wage your boss is paying you—but
the treatment is covered by your employer-provided health plan.

But then there is a union organizing drive. You want to support it and are willing
to risk your wage and maybe even your life in order to gain union protection for
your fellow workers. But since health care in the U.S. is not a right but a
commodity—even under the Affordable Care Act—your boss has a powerful
weapon. He can not only take away your job and income—which you are willing
to risk—he can take away your child’s health care, condemning your child to
certain death. Do you have the right to sacrifice your child’s life for the union?

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The European working class was able to win health care as a right because it
organized itself into separate working-class parties, which were inspired by the
work of Marx. Generations of workers were educated by the working-class parties
in the theory of surplus value. Once the workers had grasped the real nature of
surplus value, they could see right through the arguments advanced against
health care as a right by the capitalist politicians, who in their time fought against
making health care a basic human right just like the U.S. politicians are doing
today. Even if the European workers haven’t so far won a socialist Europe, they
have forced the capitalist ruling class to concede health care as a right—at least
for now—if only to “fight communism” and “win the Cold War.”

As we have seen, winning of health care as a right not a commodity weakens the
capitalists in the labor market. They can still deprive the workers of the bulk of
their income, of course, but the bosses have at least lost the power to take away
the workers’ and their families’ (including their children’s) access to health care.

Therefore, the struggle for health care as a right and not a commodity is a
necessary part of the struggle for labor rights in the U.S. This is one reason why
in these days of Donald Trump it is crucial for the U.S. working class and its basic
organizations the trade unions to at long last form its own political party that will
represent not the interests of the capitalist exploiters but those who have to sell
their labor power to the capitalists in order to make a living.

Next month, the struggle over the value of labor power.

_______

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 Three Books on Marxist Political Economy
(Pt 13)
The value of labor power

The value of labor power is determined by the value of the means of subsistence
workers must consume to reproduce their labor power. This includes the
developing labor powers of their children, who in time will replace them on the
labor market. At the minimum, the means of subsistence must enable the workers
to live and raise their children in the biological sense.

Like all commodities, means of subsistence have three values. One is their use
values necessary for the reproduction of human labor power. Among these are
food, shelter and clothing. Second is the amount of (abstract) labor, measured in
some unit of time, necessary under the prevailing conditions of production to
produce the means of subsistence. Finally, the commodities that go into the value
of labor power have a value form or money price, called the wage.

Regardless of the epoch, there is always a quantity of the means of subsistence

below which human life cannot be sustained. As we saw last month, industrial
capitalists operating in southern India can pay a wage so low that their workers
will be unable to buy warm clothing and winter heating while still expecting them
to survive biologically. However, industrial capitalists operating in Siberia, Russia,
must pay a wage sufficient to allow their workers to purchase a winter coat and
pay for heating. Otherwise, the workers will perish.

Even if workers are barely able to survive biologically, they might still not be able
to produce children and raise the next generation of workers. So the biologically
determined minimum wage must in addition cover the costs of bearing and raising
children. These factors establish a level of wages below which the real wage cannot
fall for any extended period of time.

If wages were to fall below the level necessary to buy food, the working class
would be extinct within a few weeks, and so would the capitalist mode of
production. Without workers, surplus value cannot be produced, and without the
production of surplus value, there can be no profit, and without profit there can
be no capitalism.

If bosses paid the workers just enough to maintain the workers’ lives but not
enough to raise the next generation of workers, the number of available workers
would progressively decline, which would also lead to the extinction of the

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capitalist mode of production. This biologically determined minimum wage is the
level to which capital always attempts to depress the actual wage. In the absence
of counter-pressure from the side of the workers, the biologically minimum wage
will constitute the actual wage.117

Currency money wage versus golden money wage

The distinction is often made between money wages and real wages. As long as
the gold standard prevailed, wages defined in terms of both legal-tender currency
and golden wages were identical. Assuming a gold standard, the money wage
refers to the quantity of gold that the medium in which workers are paid in
exchange for a definite quantity labor power (measured in some unit of time)
represents. For example, $15 an hour118.

However, under the paper money systems that prevail today the movement of
money wages defined in gold bullion — money material — and in terms of currency
units — dollars, euros, yen, yuan, rupees, rubles, and so on — can move in
different directions. So under today’s U.S. dollar-centered international monetary
system, it is crucial to distinguish between golden wages (defined here as wages
measured directly in some unit of weight of gold) and wages paid in legal-tender
currency.

The recent crisis involving Greece and the European Union brought out the
importance of distinguishing between golden wages and currency wages. During
this crisis, many economists complained that under the euro system Greece can
no longer devalue its currency against the German currency like it could in the
past. Germany and Greece now have the same legal-tender currency, the euro.
At any point in time, the euro represents exactly the same quantity of gold,
whether in Greece or in Germany.

117An example is the continuing attempts by the U.S. Republican Party to eliminate health care
from the value of labor power, while the U.S. Democratic Party defends so-called
“Obamacare,” which leaves millions uninsured, as the only acceptable alternative to the
Republican proposals. Also, in parts of the U.S., wages of even educated workers are not
sufficient to cover the cost of shelter. Many Workers are literally forced to live in their cars.
But this is fine from the viewpoint of capital. For a capitalist, it is pointless to pay a wage
covering the cost of shelter and transportation — an automobile — when an automobile can do
double duty as a means of transportation and a means of shelter.
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118 During the gold standard, workers were rarely paid in gold coins, since the amount of bullion

the wages represented were far too low to make into gold coins. Instead, workers were
generally paid in token coins made of base metals. Unlike today, however, in the days of the
gold standard the amount of gold a token coin represented was stable.
During the crisis, certain economists advocated a so-called Grexit, or Greek exit
from the European Union and the eurozone.119 If this proposal had been carried
out, Greece would have reestablished the Greek national currency, called the
drachma. The drachma is named after the silver coins used as currency in ancient
Greece120.

With Greece running a balance of trade and payments deficit with the remaining
countries of the eurozone, the new drachma would have been expected to fall in
value against the euro. Assuming that the value of the euro remained more or
less unchanged against gold, the wages of Greek workers would have fallen as the
rate of exchange between the drachma and the euro dropped, whether measured
in euros, U.S. dollars or gold.

‘Internal devaluation’

The economists who supported Grexit also argued that under the current euro
system the only way Greek industry could be made competitive would be through
what they called an “internal devaluation.” What was this “internal devaluation”?
It is simply old-fashioned wage cutting where wages are cut in terms of the legal-
tender paper money used in Greece. In Greece under the euro system, the legal-
tender currency is the euro. So the secret of what the economists mean by
devaluation is out.

When bourgeois economists advocate “devaluation” of the currency, the

devaluation is only a means to an end. The end is the devaluation of the one
commodity the workers have to sell, the commodity labor power. Very often, trade
unions in countries facing balance-of-trade deficits complain that the currency is

119 Some Greeks saw the reestablishment of the Greek national currency as necessary in order
to defend Greek national sovereignty against the European Union, Germany and the United
States. However, many other Greeks suspected that the reestablishment of a steeply devalued
drachma would amount to a wage cut. This blog takes no position on whether or not Greece
should reestablish the drachma or remain in the eurozone. Under the principle of the right of
nations to self-determination, this is a decision for the Greek people alone to make. Here I am
merely using the debate over reestablishment of the Greek currency for purposes of
illustration.
120 According to Wikipedia, before the age of coined money: “The name drachma is derived
from the verb δράσσομαι (drássomai, ‘(I) grasp’). [n 3] It is believed that the same word with 299
the meaning of “handful” or “handle” is found in Linear B tablets of the Mycenean Pylos. [3][n
4] Initially, a drachma was a fistful (a ‘grasp’) of six oboloí or obeloí (metal sticks, literally
‘spits’) used as a form of currency as early as 1100 BC and being a form of ‘bullion.’…” The
quantity of these silver sticks that a human hand could grasp therefore represented a definite
weight of silver bullion. Here we see the origins of currency units as definite weights of silver
or gold bullion.
“overvalued” and should be devalued. But as we see, the whole point of devaluing
a currency is to devalue labor power. Is it really the job of the trade unions to
advocate the devaluation of their members’ labor power?

Measuring and comparing real wages

Unlike the capitalists, who are interested in accumulating capital measured in

terms of gold bullion, workers want to defend and if possible raise their standard
of living. The standard of living is the real wage of the workers, defined as the
quantity of use values of the commodities that workers can purchase with their
money wage.

While the value of labor power, the golden money wage, and the currency money
wage can be compared exactly — hours of labor for the value wage; grams or troy
ounces of gold for the golden wage; and dollars, euros, yen, yuan, rubles, rupees
and so on for the currency money wage — the same is not true of the real wage.

Only in neo-Ricardian corn models where it is assumed that workers are paid in
one commodity of a single use value and quality — corn — can real wages be
compared quantitatively with one another. This is true whether we compare the
real wages of workers in different countries at an identical moment in time or the
wages of workers in the same country in different epochs.

The difficulties in comparing real wages of workers is further increased by the fact
that different workers will select different baskets of use values as they spend
their money wages. This is partially a matter of personal taste. But it also reflects
the different needs and fashions of the sexes, the stage in the life cycle of a
particular worker, and not least the climate in which the particular worker happens
to live, as we saw in the case of southern Indian versus Siberian workers.

We encounter the same difficulty when comparing real wages over time. Today, a
smartphone is a necessity for many workers. Yet, a little more than a decade ago
smartphones did not exist. If we want to compare the real wages of a London
worker in the days of Marx and Engels — let’s say 1850, about the time Marx took
up residence in London and Engels in Manchester — with a London worker of the
year 2018, we have to remember that in 1850 not only were there no
smartphones, there were no phones of any kind. Nor were there radios, TVs,
electric fans, air conditioners, automobiles, airplanes, Internet access, personal
computers, tablet computers, and other devices. While the market basket of
commodities of London workers of 1850 and their counterparts in 2018 had to
include such basics as food, clothing and shelter, those items available on the
market in 1850 were hardly identical with those on the market in 2018.

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In contrast, we can make exact comparisons of golden wages in 1850 and 2018
in terms of gold bullion. A troy ounce of gold bullion in 1850 is identical with a troy
ounce of gold bullion in 2018. In principle, we can also make an exact comparison
in terms of the value of a London worker’s wage in 1850 and 2017-18. All we have
to do is compare the value — quantity of average human labor — represented by
the gold value of the media in which the workers were paid in 1850 compared with
the gold value of the media in which London workers are paid in 2017-18.

We can also compare wages in terms of, for example, pounds sterling (as the
legal-tender currency in Britain in both 1850 and 2017-18), though this is rather
pointless. The reason is that the British pound was repeatedly and drastically
devalued in the course of the 20th century. Still, apologists for capitalism will
sometimes give what appears to be shockingly low dollar or pound wages — like
a dollar a day for the wages in the year 1900, for example. They then triumphantly
compare those wages to today’s daily dollar wages — for example, $120121,

121 Apologists for capitalism like to explain that during the 1920s Henry Ford was among the first
industrial capitalists to pay workers $5 a day. In reality, Ford had to pay the workers $5 to maintain the
grueling pace of the assembly line, even before the workers were organized in unions. He wanted to
pay less than that — the least possible — but simply could not retain workers if he paid less than $5 a
day. This shows that in the 1920s the value of labor power employed on Ford’s assembly lines was $5
a day. How do these wages compare to the wages the auto bosses pay today for assembly line work? In
terms of currency, wages have risen greatly but in terms of gold — golden wages — not so much.

In terms of today’s dollar, a wage $5 per day is shockingly low. And indeed it would be. Who could
possibly live on $5 a day? And yet $5 was considered an extremely high wage in the 1920s. However,
what was the golden wage for auto workers in the 1920s compared to the golden wages of U.S. auto
workers today? At the time, the dollar price of gold bullion was, under the gold standard, maintained at
$20.67 an ounce by the U.S. Treasury and Federal Reserve System. Today, the price of gold bullion is
variable but recently — late 2017 — it has been around $1,250 an ounce.

In terms of golden wages, using today’s “golden dollar” as opposed to the 1920s “golden dollar,” this
comes to about $300 a day. The wages that Henry Ford was forced to pay therefore compares quite 301
favorably to the golden wages that U.S. auto companies are paying today. Wages for new hires now
can be as low as $16 an hour, or about $128 per day assuming an eight-hour work day. Even assuming
a wage of $30 an hour, that comes to $240 per day. It seems that golden wages were therefore not lower
in the 1920s but higher.

This, however, isn’t the whole story. The workday was generally longer in the 1920s than today, though
even today workers are forced during “boom” periods to work for 10 hours or longer, though they are
paid “overtime” for workdays exceeding eight hours, and of course the golden prices of commodities
are lower today. And today’s U.S. auto workers — at least those with UAW contracts — get retirement
and other benefits that were not available to auto workers in the 1920s.

In addition, there are commodities on the market that today’s auto workers would have trouble living
without that were not available to Henry Ford himself — then one of the world’s richest men — in the
1920s, let alone his workers. These include TVs, laptops and tablet computers, as well as smartphones.
pretending that a “dollar” or “pound” in 1850 somehow represents the same
amount of money in 1850 and 2018.

This is often done to emphasize how much capitalism has “improved” the lives of
the workers. This method of comparing wages in different epochs by using the
same official currency units is equivalent to comparing the wages of Japanese
workers and U.S. workers by quoting the wages of Japanese workers in yen and
U.S. workers in dollars without bothering to convert the respective wages into
units of the same currency.

The mythical currency of unchanging purchasing power

Bourgeois statisticians will sometimes compare the wages of workers in some

earlier epoch — the 1850s, for example — and the workers of today in terms of
pounds or dollars of “constant purchasing power.” However, if it were possible to
go back in a time machine to 1850s London or New York — even if you brought
with you all the gold that had been mined and refined since the beginning of the
human species minted into legal-tender British sovereigns (legal-tender gold
pounds), you would not be able to purchase a radio, TV, automobile, computer,
or smartphone or buy a plane ticket to New York. Commodities with these
particular use values would be found nowhere on the 1850s market.

Therefore, there is a huge amount of subjectivity when comparing real wages in

terms of dollars or pounds of constant purchasing power between different epochs.
Needless to say, the apologists for capitalism can take full advantage of these
subjective factors when they estimate wages paid in imaginary currencies of
“constant purchasing power” between different epochs.

What can be compared with mathematical exactitude is the rate of surplus value
in the 1850s and 2018. An hour of human labor as such — abstract human labor
— is an hour of human labor as such whether in 1850 or in 2018.

Since the rate of surplus value is simply the ratio of unpaid human labor that the
workers must perform for the bosses free of charge relative to the labor that the

Life expectancy is also far longer than it was in the 1920s due to progress in medicine and, not least
important, sanitation.

However, even taking this all into account, there seems little doubt that once the vast increase
in the productivity of labor since the 1920s is considered, the relative position of U.S.
autoworkers has deteriorated greatly compared to their 1920s forerunners. Today’s U.S, auto
workers are almost certainly working for a considerably greater portion of the working day for 302
the auto bosses, which include the descendants of Henry Ford, and a smaller part of the working
day for themselves.
bosses have — or rather promised — to pay for, comparison is perfectly possible
between different epochs — for example, London workers in 2018 compared to
London workers in 1850.

To do this, we don’t have to invent impossible currencies of constant purchasing

power across epochs. And it so happens that the rate of surplus value is a ratio
between two numbers that measure the real evolution of the relationship between
the two main social classes of modern society.

Time wages versus piecework

Wages take two main forms: time wages and piecework. In the case of time
wages, workers sell a certain quantity of labor power in exchange for a definite
sum of money — for example, $15 an hour. While time wages are presented as
the selling of a quantity of “labor” by the worker to the boss, piecework is
presented as the selling to the boss of a definite product of the worker’s labor —
the piece.

However, since the worker owns none of the means of production, raw materials,
the “piece” itself, or even the worker’s own labor power — that labor power is sold
before the worker performs any labor — the worker cannot really sell to the boss
a product that the boss, not the worker, already owns. Wherever feasible, the
industrial capitalists prefer piecework to time wages.

Piecework is feasible in garment shops and machine and sheet metal shops where
there are no assembly lines and the mode of production retains an individual
character.

Assembly line labor, on the other hand, is generally not conducive to piece work.
For example, on an auto assembly line no individual worker produces an individual
automobile. Instead, the emerging auto is a product of the collective labor of all
the workers on the line, not to speak of the labor that went into producing the raw
materials and machinery used.

If the workers are to exercise any control over the pace of work, they must do so
collectively through their union, assuming they have union protection. For
example, the union may have the right to halt the line if it is going so fast that the
workers suffer serious physical or mental damage as they attempt to keep up.

Anybody who has ever had any type of job, even office work, soon discovers that
the supervisor is always demanding that you work faster. If, for example, you ever
worked in a machine or sheet metal establishment, you soon discover that your

303
fellow workers are putting pressure on you to work slower. If you are working “too
fast,” your fellow workers tell you “to slow down.”

The workers in the shop know full well that if an individual worker works faster
than the other workers, all the workers will be pressured by the boss to work
faster. Needless to say, the industrial capitalist who owns the shop is not happy
with the workers’ attitude. He has, after all, purchased their labor power and wants
to get the greatest use value possible out of this purchased commodity. And
remember, the use value for the industrial capitalist who has purchased the
workers’ labor power is to extract as much surplus value — unpaid labor — as
possible.

You are working on my time — he means I own the labor power that you have
sold to me and I intend to make full use of it. That is why the bosses’ slogan — or
his agent the shop foreman’s demand — is always work faster.

The boss hopes that every hour of labor his workers perform will produce more
commodities than what the workers employed by other bosses in the same line of
work are producing. Your vampire-like boss is indeed out to suck as much “blood”
— labor — out of you as possible. What your fellow workers are telling you when
they say “slow down” is to save your strength and therefore their strength, even
though it means that the boss will extract less surplus value out of you and
therefore make a lower rate of profit. This is the class struggle at the most basic
level.

Piecework, the bosses’ weapon

The bosses if they possibly can will do everything possible to break up the natural
solidarity among the workers. The bosses’ greatest weapon is piecework. By
paying workers by the product — pieces they produce — instead of the time they
“are on the clock,” the desire of the workers to maximize their individual wage is
used to break up the workers’ natural solidarity. To “speed up” the workers
further, all the boss has to do is lower the price paid for each piece. This forces
the workers to work harder to earn the same wage in a given amount of time as
before. In this way, the workers’ shop floor “collective” is broken up into individual
workers competing with each other for who can produce the most “pieces” in a
given unit of time.

Therefore, wherever it is feasible, the bosses prefer piecework over time wages.
The trade unions, in contrast, strive to force the boss to accept time wages in
place of piecework wherever the balance of forces between the trade union and
the bosses allows it.

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The moral dimension of the value of labor power

In addition, the capitalists as a rule have to pay the workers an additional sum of
money that allows them to buy commodities beyond the bare biological minimum.
The struggle between the capitalists and the workers over wages is actually over
how great this moral addition to the wage will be. Over time, workers come to
consider this additional wage, though not absolutely necessary for their biological
survival, a necessary part of their accustomed standard of living that must be
defended against attempted inroads by the bosses.

As new types of commodities are invented and appear on the market, the workers
succeed, depending as always on the relationship between the sellers and buyers
of labor power and the degree of organization of the workers, in adding the
value of these commodities to the value of their labor power. In this way, the
workers, as Marx put it somewhere, are able to participate in the progress of
civilization.

If the bosses offer wages below the level that includes the moral addition to the
biologically necessary real wage, the workers will refuse to sell their labor power
to the bosses at the going wage. The bosses then complain about a “shortage of
labor” and “high turnover” forcing them to offer higher wages to attract and keep
“competent” workers.

These phenomena manifest themselves during the “boom” phase of the industrial
cycle, the phase of the cycle when workers are best positioned to win the full value
of their labor power. This is why it is important that workers use the favorable
stage of the industrial cycle — such as we are experiencing in late 2017 throughout
the capitalist world when these lines are being written — not only to defend the
“moral addition” to the value of their labor power but to increase it so they can
afford to purchase the new or improved commodities that are being made
available through the “progress of civilization.”

The size of this extra, “moral” dimension to the value of labor power in a given
country depends on the previous class struggles and the history and origins of the
country. A peasant country that is going through a process of rapid capitalist
industrialization will have as a rule a far lower “moral” addition to the purely
subsistence wage than countries that have been highly industrialized for a long
time, with a consequent history of workers’ parties and trade union struggles.
Let’s now examine the evolution of the value of labor power in countries with
different origins and histories.

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White colonies

White colonies refer to countries like the U.S., Canada and Australia that were
thinly populated when the European colonists first arrived. Israel also has many
of the features of a white colony. In these countries, European colonists succeeded
in either wiping out or driving into reservations the native populations. In what
was to become the United States, the labor shortage that European colonists faced
was alleviated by the importation of kidnapped Africans, who were turned into
chattel slaves.

In the U.S. South, where the climate made large-scale plantation agriculture
possible, slavery put down deep roots in the mode of production. But widespread
use of chattel slaves in production was not practical in the North, where the long,
severe winters were not compatible with plantation agriculture. Nevertheless,
legal slavery — for people not convicted of a crime — continued in the U.S. North
until the early 19th century. Unlike in the South, slavery in the North did not sink
deep roots in the mode of production. As a result of its origins as a white colony
and the heritage of chattel slavery, the political development of the U.S. working
class continues to be retarded to this day.122

The European colonists who were obliged to sell their labor power in colonial and
post-colonial America and the other white colonies faced a far more favorable
situation on the labor market than the workers of Britain and continental Europe.
Due to the still small size of the white colonial population in the white colonies,
the quantity of labor power being offered was limited, which favored the sellers of
the commodity labor power. Related to this was the fact that much of the land
stolen from the native peoples was either free for the whites or very cheap. This
enabled enterprising white workers to become independent farmers who owned
their own land and other means of production.

The formation of a hereditary proletariat was slowed down and a petite-bourgeois

consciousness fostered even among those who remained wage workers
throughout their lives. In the United States, Australia and Canada, there remained
for several centuries many possible ways of buying land cheap and then selling
later at a large profit as capitalism continued to develop. In the western United
States, these conditions persisted well into the 20th century.

For example, if in 1970 a young couple bought a house for several tens of
thousands of dollars in what was to become Silicon Valley and built up their equity

122By modern slavery I mean the slavery that developed from the 16th century onward, as
opposed to the widespread slavery that prevailed in ancient Greece and Rome.
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in the home — especially in the land included with it — it might be sold for a million
or more dollars today.

This sort of situation does not encourage the development of proletarian class
consciousness. There is undoubtedly a relationship between the disappearance of
cheap land and the current upsurge in the socialist movement in the U.S.

The existence of white colonies where the moral element added to the value of
labor power was relatively high and where cheap land was available to European
immigrants — with the potential of appreciating sharply in value123 — served as a
kind of safety valve for the European working-class population. European workers
could always immigrate to the United States where the “streets were paved with
gold.” If conditions got too bad in Europe — which they frequently did — workers
could always immigrate to America.

As a result, the growth of socialist class conscious among the European working
class was also retarded by the existence of the “white colonies” — just like the
growth of revolutionary ideas among Jewish workers in early 20th-century Europe
was hindered by the presence of the Zionist movement with its perspective of
colonizing Palestine with white European Jewish workers. The result of this
emigration was that the “moral element” added to the biological subsistence level
of wages was much higher in nations that originated as white colonies.

As industrial capitalism developed in the United States, American industrial

capitalists often found it profitable to use machinery manufactured in Britain that
was also utilized by the British industrial capitalists. The reason for this is that
industrial capitalists are not interested in minimizing the quantity of labor used to
produce a commodity of a given use value and quality. Instead, they strive to
minimize the quantity of labor they have to pay for while maximizing the quantity
of labor — surplus value — that they do not pay for.

On average, industrial capitalists have to pay the entire value of the commodities
that constitute the constant capital. The cost price — which is the actual “cost of
production” that industrial capitalists are always striving to reduce — is the sum
of the money price of the constant capital whose value is transferred to the

123 Strictly speaking, unimproved land has no value, since it is a product of nature and not
human labor. So the appreciating value of land really means growing super-profits that are
appropriated by owners of land in the form of ground rent and then capitalized as the “value”
of land when it is sold for a sum of money by the landowner to another person. This phenomena
is extremely important to the study of modern imperialism and will be examined in detail in
the course of this extended review of John Smith’s “Imperialism.” 307
commodity that the industrial capitalists produce plus the price of the labor power
that they must purchase before they can produce their commodities.

The cost price can be reduced by either reducing the quantity of labor power the
capitalists purchase, reducing the price they pay for a given quantity of labor
power, reducing the cost of constant capital they purchase, or reducing the
quantity of labor power that they must purchase by replacing workers with
machinery. The industrial capitalists will be obliged to increase the quantity of
constant capital that they use to produce a given commodity if the extra constant
capital the machine represents enables them to more than make up for the
increased cost by reducing their need for labor power.

Suppose the industrial capitalists in a former white colony — the United States,
for instance — where the price ( and value) of labor power is relatively high incur
a cost of $50 in constant capital and $50 in variable capital, the total cost price
coming to $100 to produce a given commodity with a given use value and quality.
Suppose a new more powerful machine is invented that if used by our industrial
capitalists will mean they will now incur a cost of $60 in constant capital rather
than the $50 they spent on constant capital before. However, the machine enables
them to reduce “labor costs” — the variable capital — by 30 percent. Instead of
spending $50 “on labor per commodity” as before, they now only have to spend
$35.

The sum of $60 and $35 adds up to a cost price of $95, a reduced “cost of
production” of $5 per unit. So under the pressure of competition, which obliges
them to reduce their “production costs” as much as possible, the industrial
capitalists are obliged to purchase the new method of production.

Suppose in another country — let’s assume Britain — the value of labor power is
half its value in the United States. Before the machine is invented, the cost price
of a British industrial capitalist producing the same type of commodity with the
same quality comes to $50 constant capital plus $25 spent on labor power, for a
cost price of $75. The British capitalists’ cost price is cheaper not because they
are producing the commodity with less labor but rather with less paid labor.

Indeed, the only way the capitalists in the United States can compete with our
British capitalists is by maintaining protective tariffs that artificially add to the
costs of the commodities produced in Britain but sold in the U.S.

The early U.S. industrial capitalists and their champions among the economists,
such as Henry Carey (1793-1879), were enemies of “free trade” and strong
supporters of protection. But what will happen if our British capitalists with much

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lower labor costs substitute the new machine that our U.S. capitalists have
adopted.

If they substitute the new machine for labor power, they will be able to reduce
their “labor costs” by 30 percent, just like is the case with their U.S. counterparts.
Instead of paying $25 for labor, now they will pay only $17.50. Their total cost
price will come to $60 constant capital plus $17.50 for labor, or $77.50. But notice
that the new machine that reduces the cost price for our “Yankee” capitalists
actually increases it for our British capitalists, from $75 to $77.50. Our British
industrial capitalists cannot afford to purchase the new machine because, unlike
their U.S. counterparts, the new machine raises their cost price making them less
competitive.

Suppose our industrious “Yankee” capitalists now invent a machine of their own.
Let’s assume that the constant capital portion of the cost price will rise to $70 but
it will reduce the variable capital portion by 90 percent, from $25 to $2.50. Once
the new machine is installed, the yanks’ cost price will be $70 + $2.50, which
comes to $72.50. Now that the “Yankees” are so far ahead of the British in terms
of technology, the British cannot keep up. The U.S. industrial capitalists can now
undersell the British with a cost price of $72.50 while the British industrial
capitalists with their old technology are stuck with a cost price of $75. It is now
the British who either have to raise their own protective tariffs or surrender the
market to the industrious yanks now underselling them.

This is exactly what happened in the course of the industrial competition between
Britain and much of Europe during the 19th and the first part of the 20th century.
The capitalists of the United States, spurred on by the higher moral element added
to the value of labor power due to the U.S.’s white colony origins, achieved a
productivity of labor that was superior to Great Britain’s and indeed any other
country in the world. Eventually, this enabled the U.S. to undersell its British and
other European rivals despite its “high labor costs.” What this means in terms of
value theory will be examined next month.

After 1945, the cost price of U.S. industry was so low relative to Europe that the
United States was able to shift increasingly to “free trade” and begin to dismantle
its historically high tariff walls. These conditions shaped an industrial working class
that was often very militant on economic questions but very divided along racial
lines and very conservative — especially the white workers — politically. As a
consequence, the U.S. was able to become the center of a world empire after 1945
while facing very little opposition from the organized working class.

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Countries based on irrigation agriculture

Now let’s examine a third type of country, the countries that originated not as
white colonies or out of tribal-feudal societies such as Britain, France and
Germany, but rather out of pre-capitalist empires based on irrigation
agriculture. 124
In pre-capitalist times, it was not the countries of Europe but India
and China based on irrigation agriculture that became the global centers of both
agricultural and non-agricultural — craft — production.

The overwhelmingly peasant populations of these countries was very large relative
to both European and other pre-capitalist countries. However, the exceptional
productivity of agriculture made it possible for a higher proportion of the
population to engage in non-agricultural production compared to other pre-
capitalist countries. This is what enabled India and China to become the global
centers of both agricultural and non-agricultural commodity production.

Columbus “discovered America” not because he and his financiers were interested
in exploration for its own sake but because they were looking for a new source of
gold — money material — for an increasingly money-starved western European
economy, as well as fresh sources of revenue for Spain’s royal treasury. The
western European economies were beginning to expand rapidly but were running
into a growing shortage of money material. But neither Columbus nor the Spanish
government of King Ferdinand and Queen Isabella knew that the Americas with
their huge quantities of gold and silver even existed.

Therefore, what Columbus and Ferdinand and Isabella were really searching for
was a faster and cheaper way of accessing the markets of Asia with their huge
gold and silver hoards. These hoards had been built up over centuries of trade,

124 This mode of production is sometimes called the “Asiatic mode of production,” as it was called by
Marx in some of his writings. The Asiatic mode of production is a controversial topic among Marxists,
largely because it has been used to contrast stagnant despotic “unchanging” Asia with the “progressive”
and dynamic West.

However, many Asians feel that the Asiatic mode of production concept dramatically underestimates
the accomplishments of their pre-capitalist societies, and is therefore “Euro-centric” and not free of
racist overtones. Because of this, I will avoid the term and simply refer to the central feature of
production in these societies that differentiated it from the history of production in Europe — the
widespread use of irrigation in agriculture. 310

In addition, the concept of the Asiatic mode of production was developed before the dramatic
industrialization and rise of modern Asia, especially in the years following the 1979-82
“Volcker shock,” which puts the earlier history of production and society in Asia in a somewhat
different light.
since India and China had been during and even before the European Middle Ages
the leading centers of global commodity production. Despite the huge
accumulation of money material — potential money capital — in these countries,
the lack of a proletariat separated from its means of production prevented a large-
scale development of capitalist production in either China or India.

Regardless of the nature of its pre-capitalist modes of production, the peasant

populations in all pre-capitalist countries are used to very low standards of living
and hard manual labor from childhood on. Once capitalism starts to develop in
such countries, their peasant populations are from the point of view of the
industrial capitalists ideal recruiting grounds for industrial proletarians. As a
general rule, the greater both absolutely and relatively the size of the peasantry
the higher will be the rate of surplus value once capitalism takes root.

A high rate of surplus value, as we have seen, enables the capitalists to hold back
the growth of the organic composition of capital — particularly relative to what
science and technology of a given epoch makes possible. This is in the interest of
capital as a whole because the lower organic composition of capital, all other things
remaining equal, the higher the rate of profit. This is very important for John
Smith’s book.

A new stage of development of imperialism

In the late 19th and early 20th centuries, we saw the most rapid capitalist
development in the United States, where the moral element added to the value of
labor power was relatively high because of that country’s origin as a white colony.
Today, however, we see the most rapid capitalist development in China, India,
Bangladesh and Vietnam, which had been global centers of production in pre-
capitalist times. It is therefore their heritage of irrigation agriculture with large
peasant populations that has enabled these countries since the “Volcker shock” of
1979-82 (initiating the trend of U.S. “de-industrialization”) to once again resume
their roles as centers of global commodity production that they enjoyed during the
European Middle Ages and even Roman times.

But with an important difference. Unlike the Middle Ages, production in modern
Asia is being carried out on a capitalist basis by a rapidly growing class of industrial
proletarians. However, for now, despite and in a sense because of the rapid
development of the productive forces in the Asian countries, these proletarians
are exploited more than ever by capital owned and still largely concentrated in the
hands of U.S. and European capitalists.

311
These new relationships — which we will see in coming months was foreseen as a
tendency in Lenin’s “Imperialism” — have been rapidly taking shape since the
“Volcker shock.” This new stage of imperialism, which is the subject of Smith’s
book, has enabled global capital to maintain a much higher rate of profit than
would have been the case if the Asian countries had not existed. The imperialist
countries have been able to extract vast quantities of surplus value from the
rapidly expanding industrial proletariat of the Asian countries, the lion’s share of
which is being pocketed by the capitalists of the United States, Western Europe
and Japan and their hangers on. John Smith stresses this point, which in my
opinion cannot be overemphasized.

Here we see the vampire-like nature of capitalism, where the existence of

countries where the value of labor power is very low — though it is now beginning
to rise due to the rapid growth in the demand for labor power — enables dead
labor in the form of imperialist capital to exploit living labor in order to extend its
“unnatural life.” The existence of vast pools of cheap exploitable labor power is
what is keeping capitalism alive into the 21th century.

However, imperialism cannot do this without handing the working classes of these
Asian countries the means of not only shaking off the exploitation of the imperialist
countries but also the means of settling accounts with their own capitalists as well.
This is the most important point of all.

Baran and Sweezy versus Marx on the value of labor power and the
production of surplus value

Baran and Sweezy rejected Marx’s view that a moral element is added to the
biologically defined value of labor power and put forward another theory in its
place. We know this, despite the fact that Baran and Sweezy avoided value theory
in “Monopoly Capital,” because Monthly Review published correspondence
between Baran and Sweezy when they were working on that book.

The two authors were attempting to reconcile the ideas that were to go into
”Monopoly Capital” with Marx’s theory of value and surplus value. Baran and
Sweezy, in contrast to Marx, defined the value of labor power in terms of what is
strictly biological necessity. Any additional value produced by the working class
they defined as “surplus value.” Marx, in contrast, defined surplus value as the
value that is appropriated by a class of non-workers.

While the difference between Baran and Sweezy and Marx may seem
terminological, it actually has important social and political implications. Marx’s
theory of value, wages and surplus value highlights the exploitative relationship

312
between the capitalist class and working class. Baran and Sweezy, in contrast,
neglected the relationship between these classes in their magnums opus. Any rise
in wages above the strict biological necessity needed for the working class to live
and produce the next generations, they saw as the working class itself
appropriating increasing quantities of surplus value.

Baran and Sweezy in their correspondence believed that in the early stages of
capitalism virtually all the surplus value went to the capitalists — or the landlords
— and their hangers on, but as capitalism developed, more and more of the
surplus value accrued to the working class. Whether this has anything to do with
the rejection of any special revolutionary role of the working class contained in
“Monopoly Capital” is an interesting question for the historians of later 20th-
century economic thought to explore.

Absolute surplus value

Suppose the workday is eight hours and the rate of surplus value is 100 percent.
The workers work half of each eight-hour working day for themselves and half for
the boss. Then, assuming all else is equal, the bosses succeed in extending the
workday to 10 hours. We assume that the workers are paid exactly the same as
before. The workers are now working four hours for themselves and six hours for
the bosses. The rate of surplus value is now 6/4 or 150 percent.

Now assume the bosses succeed in increasing the work day to 12 hours. The rate
of surplus value is now 12/4, or 300 percent, and then 16/4, or 400 percent. This
indeed was the historical tendency of capitalism into the early 19th century when
workdays were 16 hours and even 18 hours. Marx called this process the growth
of absolute surplus value.

But this process runs into limits. The laws of biology pretty much limit the average
workday to 16 hours, because the human organism needs six to eight hours of
sleep on average in each 24-hour day. In addition, by the early 19th century
industrial capitalists were running into growing organized resistance of the
industrial workers, who in Britain, the leading capitalist country of the time, were
increasingly organized in trade unions.

Movements arose in Britain and other countries where industrial capitalism was
taking root to limit the workday to, first, 14, then 12 hours a day, then to 10
hours, and near the end of the 19th century eight hours a day. This was and is
important not only economically but politically, because if the workday is more
than eight hours a day it is virtually impossible for workers to participate in politics.
This is why the struggle for a workday of eight hours is considered a basic

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democratic right and why workdays of more than eight hours represent not only
a form of super-exploitation but a violation of basic bourgeois democratic rights.

Relative surplus value

Assume as before the workday is eight hours with the workers working four hours
for themselves and four hours for the bosses. Let’s assume that the bosses
succeed in cheapening the value of the commodities that make up the workers’
real wage from four to two hours per day. The real wage is unchanged in terms of
use values but now represents only two hours of labor while before it represented
four hours.

The workday remains unchanged at eight hours. However, the workers now work
only two hours for themselves and six hours for the bosses. The rate of surplus
value rises to 6/2 or 300 percent. Suppose that the commodities that represent
the real wage of the workers is further cheapened so that the average market
basket of commodities workers require to reproduce their labor power and raise
the next generation now represents one hour of (average) labor. Again, we
assume everything else remains unchanged. The workers now work only one hour
for themselves and seven hours for the bosses. The rate of surplus value rises to
7/1, or 700 percent. Marx called the increased surplus value obtained by this
method relative surplus value.

The later stages of capitalism, from the early 19th century to the present, are
characterized by the growth of relative surplus value. It reflects the great
acceleration of the rate of growth in productivity that arises both from the
advances of science and technology but equally importantly from the struggle
between the capitalist class on one hand and the working class on the other.

The machinery that has made such a huge increase in labor productivity possible
since the early 19th century is in the hands of the bosses a powerful tool for
increasing relative surplus value. At the same time, it creates the basis of a society
of abundance and free time that will form the basis of a socialist society and
eventually a full-scale communist society, where people will receive according to
need and work according to ability.

Next month, I will examine wage labor and value, which is crucial in John Smith’s
“Imperialism.”

_______

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 Three Books on Marxist Political Economy
(Pt 14)
[Note: In this post when I refer to Smith I mean John Smith, not Adam Smith.]

Smith and value

Unlike Lenin’s “Imperialism: The Highest Stage of Capitalism” and Baran and
Sweezy’s “Monopoly Capital,” Smith in his “Imperialism” has set himself the task
of explaining the imperialist—monopolist—phase of capitalism in terms of Marx’s
theory of value and surplus value. Smith has set himself the extremely ambitious
task of unifying Marx’s “Capital” with Lenin’s 1916 pamphlet. In addition, he seeks
to update the Leninist theory of imperialism125 for the early 21st century. The
logical starting point of such an ambitious undertaking is the theory of value.

125 On the eve of World War I, there were essentially two theories of imperialism competing with one
another within the Second International. One theory viewed imperialism as arising from the scramble
for markets located in the capitalistically underdeveloped agrarian regions—what we now call “the
global south”—between the developed industrial countries. In order to secure access to these markets,
the developed industrial—imperialist—countries strove to annex the agrarian countries to their colonial
empires.

This theory of imperialism was developed to its highest point in Rosa Luxemburg’s “The Accumulation
of Capital,” first published in 1913. According to Luxemburg, surplus value cannot be realized in a pure
capitalist society made up only of workers who produce surplus value and the capitalists, landlords, and
their hangers-on. In order to realize surplus value, Luxemburg believed, industrial capitalists must sell
to non-capitalist, simple commodity producers, who in practice are mostly peasants.

Eventually, the conversion of the great majority of peasants of the global south into wage workers must
lead to the demise of capitalism both in the old capitalist countries of Europe and the United States and
the global south itself. Therefore, the imperialist drive of the highly industrialized countries of the
“global north” to colonize the countries of the global south represents an historically doomed attempt
315
of capitalism to stave off the inevitable economic collapse caused by the inability to realize surplus
value. This theory of imperialism can be found in a less developed form in the works of Karl Kautsky
and other Second International writers.

Lenin rejected Luxemburg’s claim that surplus value could not be realized in a pure capitalist society.
On the contrary, Lenin believed that surplus value could be fully realized in a pure capitalist society
made up only of industrial capitalists and their hangers-on and industrial workers producing surplus
value as long as the proportions of production—which would include the branch producing money
material—are correct. In contrast to Luxemburg, Lenin saw the centralization of capital leading to
monopoly as the defining feature of imperialism. Therefore, in Lenin’s view it is the growth of
monopoly that makes world socialist revolution inevitable.

Lenin’s theory of imperialism dominated the Third International (1919-1943) and the post-
Third International world Communist Movement (1943-1991) as well as the Trotskyist
John Smith, Keynes and left Keynesians on value

“The exchange-value of a commodity,” Smith writes on p. 58 of his “Imperialism,”

is determined not by the subjective desires of the buyers and sellers, as both
orthodox and heterodox economic theory maintains, but by how much effort it
took to make it.” Smith makes an important point here. Both orthodox economists
(the so-called neoclassical school and the Austrian school) and heterodox
economists (left Keynesians) support or at least do not challenge the marginalist
theory of value, which for more the century has dominated academic economic
orthodoxy.

The marginalist theory of value holds that value arises from the scarcity of useful
objects, which may be products of either human labor or nature, relative to
subjective human needs. Instead of beginning with production and labor, as both
the classical school and Marx did, marginalists begin with the subjective valuations
of the consumer.

Smith quotes Keynes (p. 59): “real exchange relations … bear some resemblance
to a pregnant observation by Karl Marx. … He pointed out that the nature of
production in the actual world is not, as economists seem often to suppose, a case
of C–M–C’, i.e. of exchanging commodity (or effort) for money in order to obtain
another commodity (or effort). This may be the standpoint of the private
consumer. But it is not the attitude of business, which is a case of M–C–M’, i.e. of
parting with money for commodity (or effort) in order to obtain more money.”

Here Keynes, who claimed that Marx’s work was useless, was forced to turn to
Marx in order to describe what capital actually is. Beginning in Ch. 4 of Volume I
of “Capital,” Marx explained that capital involves the use of money to make more
money, or M–C–M’. This, as Keynes correctly pointed out, is something quite
different than using money to simply purchase commodities, or C–M–C, which
represents not capital but rather the simple circulation of commodities. Marx
showed that it is perfectly possible to have commodities and
money without capital, but it is impossible to have capital in any form–let alone
capitalist production–without commodities and money.

Smith wants to show that Keynes was obliged to acknowledge in this one passage
if not elsewhere the truth of the classical and Marxist theory of value based on

movement and their present-day successors. Baran and Sweezy’s “Monopoly Capital” also put
monopoly at the center of their analysis and therefore are, broadly speaking, in the Leninist as
opposed to the Luxemburgist tradition. Not all Marxists today support the Leninist theory of
imperialism. One is Anwar Shaikh, who rejects the claim that there is a specifically
monopolistic/imperialist phase of capitalism. 316
labor, though Keynes used the term “effort” and not “labor.” Why did Keynes
substitute “effort” for “labor”? Even assuming that Keynes meant “labor” by
“effort,” he managed to overlook the fact that money also represents “effort”–that
is, labor–since money according to Marx, and this blog, must be a commodity.126

What exactly does Keynes mean by “effort”? For example, what unit of measure
should we use to determine the quantity of “effort”? Perhaps “effort,” as has
sometimes been suggested, is an expenditure of some unit of energy. Physicists
define energy as the ability to do work. But work in this context is obviously
something very different than human labor. In the above quote, Keynes uses
Marx–clumsily and partially incorrectly–to make the distinction between simple
circulation (C–M–C) and capital (M–C–M’). But he almost certainly substituted the
term “effort” for “labor” to avoid as much as possible the so-called labor theory of
value.

Keynes’s knowledge of bourgeois political economy like that of Marx was

immense127. If he could have found a bourgeois—especially marginalist—source
instead of Marx to “define production in the actual world” (by which Keynes meant
capital-using) he would surely have used it in preference to Marx.

In my opinion, Smith should not have borrowed Keynes’s deliberately vague

terminology—notice how Keynes uses Marx to define capital without actually using
the word “capital” but calls capital “the attitude of business,” as though capital
was some kind of subjective “attitude” rather than an objective social relation of
production.

Throughout his “Imperialism,” Smith refers to exchange value—which the mature

Marx, unlike the classical economists and the pre-1857 Marx, considered to be the
only form of value—when he should have simply used the word “value.” By failing
to make this distinction, Smith mixes up value—the quantity of (abstract) human
labor needed to produce a commodity under the prevailing conditions of

126 The theory that “modern money” in the final analysis must represent a commodity—gold
bullion—is of course hotly disputed by most—though not all—present-day Marxists. However,
this was the position of Marx and more importantly, as this blog has demonstrated, it is true in
reality. The development of capitalism over the last 40 years cannot be explained without the
assumption that “modern money” ultimately represents gold bullion in circulation.
127Unlike Marx, Keynes (1883-1946) did his work after the so-called marginalist revolution in
(bourgeois) economics. Indeed, his teacher Alfred Marshall was one of the key leaders (1842- 317
1924) of the marginalist revolution. So in this respect, Keynes’ knowledge of the history of
economic thought exceeded that of Marx. Yet he still couldn’t find any economist other than
Marx to describe capital as the process of using money to make still more money!
production with exchange value, the form of value in the market measured in
terms of the use value of another commodity.

The most familiar examples of exchange values are the money prices we are all
acquainted with in our daily lives. To review, value is always a quantity of
labor measured in terms of some unit of time, while price is ultimately a quantity
of money material such as gold bullion measured in some unit of weight.

As regular readers of this blog know, the distinction between value and the form
of value plays a central role in crisis theory. It also explains why a “metallic barrier”
—as Marx called it in Volume III of “Capital,” must arise regardless of the
monetary system in effect—gold standard, gold-exchange standard, or paper
money standard. It is the metallic barrier that brings to a screeching halt all
attempts by the capitalist state and central banks to eliminate crises by expanding
effective monetary demand once overproduction has reached a certain point in
the course of each industrial cycle.

Smith’s book is not about crisis theory, where the failure to distinguish between
value and exchange value—money price—as the form of value would be fatal, but
rather about 21st-century imperialism. Still, though Smith’s failure to distinguish
between value and exchange value is hardly surprising considering the general
state of Marxist economics today, it weakens his case. The inevitable periodic
crises of general overproduction play a crucial role in the centralization of capital
that leads to monopoly. In the Leninist tradition, monopoly is the essence of
imperialism.

Once capitalism reached a certain point of development—which had occurred by

the year 1825 when the first crisis of general overproduction broke out—the
industrial capitalists were able to increase industrial production at a faster pace
than the market for commodities could expand. I have devoted this blog to
analyzing why this is true.

When capitalist production approaches its full engineering capacity—what the

capitalist economists misleadingly call “full employment”128—the market is soon
flooded with commodities that cannot be sold at the prevailing level of prices. A
general economic crisis of overproduction has broken out. A portion of competing
capitalists must then be eliminated in order to restore profitable production. This
reduction in the number of independent competing capitals Marx called the
centralization of capital. This should not be confused with the related phenomena

128Even if machines, factory buildings, and farms are fully utilized, it does not mean that all
people willing and able to work will actually have jobs.
318
of the concentration of capital, which refers to the increasing size of individual
industrial enterprises.

Tendency toward centralization gains upper hand over tendency toward

decentralization in capitalist production

In the wake of each successive crisis, the market expands for awhile faster than
production. This enables new independent industrial capitalist enterprises to pop
up. The tendency for capital to become less centralized is especially evident in
new branches of industry. But over time, the development of overproduction in
each successive industrial cycle means that the tendency for the number of
independent competing capitals to diminish must gain the upper hand over the
tendency for the number of independent competing capitals to increase.

Therefore, as Lenin stressed, at a certain point the development of free

competition must lead to its opposite—monopoly. Capital is based on free—not
perfect—competition, which means that capital can exist only in the form of “many
capitals.” But its very laws mean that as capitalism develops, the number of
independent capitals must diminish.

This fact shows that the further development of capitalism must at some point
lead to a higher stage of society where private property in the means of production
will disappear. A society based on private ownership of the means of production
with its many capitals will be replaced by a society based on the collective
ownership of the means of production by the associated producers—communism.

Lenin saw monopoly capitalism, also called the imperialist stage of capitalism, as
the first stage of transition between capitalism with its many capitals and free
competition and communism based on the collective ownership of the means of
production without any capitals.

In his “Imperialism,” Lenin demonstrated how the crisis of 1873 played a key role
in kicking off the process that led to the transformation of industrial capitalism
into monopoly capitalism. Lenin showed that industrial capitalism based on free
competition reached its peak on the eve of the 1873 crisis. Within 30 years after
the outbreak of that crisis, capitalism had been transformed into the monopoly-
ridden imperialism that dominated the entire inhabited globe by the turn of the
20th century.

Therefore, in the Leninist tradition, crisis theory and the theory of imperialism
leading to the inevitable downfall of imperialism and a victorious socialist

319
revolution are interlocked. It is through crisis theory that we can best unify Marx’s
“Capital” with Lenin’s “Imperialism.”

Lenin versus Baran and Sweezy and Shaikh

In both Marx and Lenin, capitalism is not a static system that reproduces itself
endlessly. Despite the many differences, this is the way both Shaikh in his
“Capitalism” and Baran and Sweezy in their “Monopoly Capitalism” present the
capitalist system. In contrast, both Marx and Lenin saw capitalism as a dynamic
system driven by its own internal laws and the crises that through the
centralization of capital leads inevitably toward a higher form of society—
communism129.

Lenin strongly praised Rudolf Hilferding’s “Finance Capital,” first published in 1910,
because it was the first Marxist work on political economy that put monopoly at
the center of its analysis. But he noted that the book made a mistake on the theory
of money. This shows how seriously the soon-to-be leader of the Russian
Revolution took Marxist theory, even though he was writing a popular pamphlet
and not a work like “Capital.”

Labor theory of value versus the labor definition of value

Marxist and even classical value theory is not really a labor “theory” of value at all
but rather a labor definition of value. Last month, I explained that bourgeois
economists invent “currencies of constant purchasing power” when they attempt
to compare the purchasing power of wages in one epoch with the purchasing
power of wages in another. But as we go further back in time, this procedure

129 Marx and Lenin divided communism into two broad stages. In the lower stage—after a transitional
stage between capitalism and communism—private property in the means of production, including land,
and the division of society into classes has been replaced by the ownership by society—the associated
producers—in the means of production. However, people—all normal people beyond infancy are now
workers, so there is no class of workers—are paid, with some modifications, according to the quantity
of labor they perform. In “State and Revolution,” and other writings, Lenin sometimes called this lower
stage of communism “socialism.”

In the higher stage of communism, the productive forces will have reached such a high state of
development that people for the first time will be able to work according to their abilities and
will receive according to their needs. Monopoly capitalism marks the beginning of the 320
transition between capitalism based on free competition and the common ownership of the
means of production by the associated producers. However the transition from capitalism to
the lower phase of communism can only be completed if the working class wins political
power—called by Marx the dictatorship of the proletariat. Otherwise, modern society will, in
the words of Marx and Engels in “The Communist Manifesto” end in the common ruin of the
contending of classes, the capitalists and working class.
becomes ever more divorced from reality. It is quite a stretch to compare the
purchasing power of wages in the Roman Empire, for example, with the purchasing
power of wages in 2018 using currencies of constant purchasing power.

But all attempts to use currencies of constant purchasing power break down
completely when we study societies before the development of currency—coined
money—and even more when we study societies that did not use money as a
measure of value. Today’s university experts on early pre-class/pre-state societies
are called anthropologists, not economists. They “value” the products of early pre-
monetary societies in terms of the quantity of labor measured in some unit of time
that they believed were necessary for these societies to expend in order to produce
them. They do this because there is no other way the products produced by such
societies can be valued.

The classical economists and Marx, who upheld the so-called labor theory of value,
realized that the same principle underlies capitalist society even if it operates in a
far more complicated way. In modern capitalist society and earlier societies based
on commodity relations, the labor time necessary to produce a given product
cannot be measured directly but must instead take the form of exchange value,
or monetary value. Marx, after he thought about it for many years, came to
understand that exchange or monetary value was not the essence of value but
only the form of value. He then defined value as the quantity of labor socially
necessary to produce a commodity. On this foundation, Marx developed his theory
of commodities, money and prices, surplus value and profit. If we are to unite
Lenin’s “Imperialism” with Marx’s “Capital,” we have to build the theory of
imperialism on the same foundation.

Smith confuses the production period with the labor period

Smith writes, “If … it takes twice as long to produce a pair of trousers as a sack
of flour, then the equilibrium exchange-value of a pair of trousers would be two
sacks of flour.” (p. 58) In Smith’s example, a pair of trousers is the relative form
of value, while a sack of flour is the equivalent form of value, the embryo of the
money form. However, Smith makes a mistake when he says that it takes “twice
as long to produce a pair of trousers as a sack of flour.” He should have said: if it
takes twice as much labor to produce a pair of trousers than a sack of flour. By
leaving out the word “labor,” Smith confuses the quantity of labor, or labor period,
with the production period.

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The production period of fine wine and value

I live in a region known for the production of fine wines. Recently, I saw an
announcement of a wine-tasting event where the vineyard owner would explain
why fine wines are so much more expensive than the cheap stuff. What a nice
event to attend, assuming of course that there was a designated driver. Not only
would the vineyard owner—an industrial capitalist—try to explain a question that
was hotly debated among the economists back in the days of Ricardo, but there
would be the opportunity to get pleasantly buzzed.

The opponents of Ricardo’s labor-based theory of value claimed that the theory
couldn’t explain why “wine aged in old oak chests” is so much more expensive
than cheap wines. The production period includes a quantity of labor and a
quantity of time when the wine is aging.130

We know that in the case of the production of wine the labor and production
periods are quite different. Yet in terms of the labor definition of value, only the
labor period contributes to the value—as opposed to the price—of the wine.

If I had been able to attend the event, which unfortunately I was not, I would
have gotten the take of the vineyard owner on exactly why fine wine is so
expensive. I assume the explanation would have gone something like this: Fine
wine, unlike the cheap stuff, must be stored in wooden barrels and aged over
many years. In this way, the wine will very slowly absorb chemicals from the
wooden barrels that give fine wines their subtle tastes. It is the presence of these
subtle tastes that distinguish fine wine from cheap wine.

During this time, I imagine the vineyard owner would explain shifting from her
role as an expert on the use value of fine wine to her role as a practicing industrial
capitalist: My capital is tied up in the wine aging in oak chests. During this period,
I must accrue a profit that I will realize in terms of money once I sell the wine. If
I wasn’t compensated for the long period in which my capital is tied up, I could
not as a business person afford the opportunity cost I incur by producing fine wine,
samples of which you are enjoying today.

To clarify things for the non-businesspersons and non-economists in the audience,

she might ask: Would you lock up your money in the bank if you were not paid
interest on it? Of course you wouldn’t! This is why I and my fellow vineyard owners

130 The oak chests (barrels made of oak used for aging wine) are fixed capital and transfer over
the production period their value to the wine. However, the extra value added to the fine wine
in the making accounts for a small portion of the difference in price between ordinary wine and
fine wine.
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have to charge such a high price for fine wine compared to the cheap stuff we can
turn out in a short period of time.

Ricardo’s opponents claimed that the high price of fine wines that do not absorb
labor while it is aged shows that something other than the quantity of labor is
involved in determining the value of commodities. What this example really brings
out is the difference between value—the quantity of abstract human labor
necessary on average to produce a commodity under the prevailing conditions of
production—and exchange value, or price. Price being defined as the quantity of
money material necessary to purchase a given quantity of the commodity
measured in terms of the appropriate unit of measure for the use value of that
commodity. For example, $1999.99 per bottle of a fine wine.

Let’s assume a society organized as a communist community. This society will

know neither “value” nor “price.” But it has to carefully account for the expenditure
of its available labor among the various branches of production. This is because
the availability of labor—measured in units of time—is not unlimited. If our
communist community expends labor on, say, the production of fine wine, there
will be that much less labor available for the production of other needed products.

Our society’s accountants may find that, when it comes to expending labor on
wine, the production of fine wine aged in old oak chests131 does not require much
more labor than the production of ordinary wine. However, the accountants will
be aware that as the wine ages in old oak chests, no workers will have to tend it.
These workers will be available to perform other jobs including the production of
ordinary wine. Therefore, our communist society will be well aware that it is not
expending that much more labor on the production of fine wine versus ordinary
wine. But just like is the case under capitalism today, our communist society would
still have to wait longer for the fine wine than it would for ordinary wine.

Those economists—and they are legion—who think the example of fine wine aging
in old oak chests refutes the concept of labor value are confusing the labor period
with the production period. They are also confusing value with price.

Smith on constant and variable capital

Smith writes: “M–C is now the purchase not of commodities for resale, but of
‘factors of production’: labor-power, means of production, and raw materials. C—
C’ is the production process, in which living labor replaces C, its own value and
that of materials, etc., used up in production, and generates a surplus value (the

131 See note 130

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difference between C and C’). The time spent by living labor producing this surplus
value Marx called surplus labor. This surplus labor is the source and substance not
only of profit in all its forms, but of capital itself, which is nothing but accumulated
surplus labor.” (p. 59)

This as written is incorrect. First, the capitalist begins with M, not C, and ends with
M’ not C’. In addition, living labor does not replace the value of C, which stands
for constant capital. Instead, living labor helps transfervalue from the physical
form of the constant capital (machinery, factory buildings, and other forms of fixed
capital), as well as raw and auxiliary materials—circulating capital—into the final
product—commodity capital. Nor does living labor replace its own value. Living
labor cannot replace its own value because labor has no value any more than, as
Engels put it, heat has a temperature.

Rather, (abstract) human labor once it becomes embodied in commodities is

the social substance of value but has no value in itself. Presumably, Smith meant
to say labor power in the above passage, and the failure to add “power” could be
a simple typo. I admit I do this all the time. If this was the origin of Smith’s failure
to write labor power instead of labor, it would simply indicate rather sloppy editing
by Monthly Review Press. But if we assume this is the case, our difficulties with
the passage only increase. The reason is that, as worded, Smith makes no
distinction between the process by which constant capital transfers its value to the
final product and the value-creating process through which labor power replaces
its value.

For example, if the cotton used in producing cotton shirts increases in value
because of a harvest failure, everything else remaining equal, the value of the
shirts increases and in all probability the price of shirts will rise as well. But what
happens if the value of labor power increases because the workers—not only in
the production of cotton shirts but in general—succeed through trade union
organizing in increasing the moral component that is added to the value of labor
power? Unlike the case with the rise in the value of cotton, this will not cause an
increase in the value of the product, and in all probability it will not increase the
price of shirts.

This is true because labor power—not living labor—does not, in contrast to

constant capital, transfer its own value to the cotton shirt but rather replaces its
own value while also producing a surplus value. Unlike the case of cotton that
increased in value due to a harvest failure, the higher value of labor power means
that the workers work a greater portion of the working day for themselves and a
smaller portion for the capitalist and his hangers-on. All things remaining equal,

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this will lower the rate of surplus value and the rate of profit, but it will not raise
prices.

We could perhaps ignore the above passage as some combination of typos and
sloppy editing if it were not for the fact that, unlike Ricardo and Marx, Baran,
Sweezy, Kalacki, and more recently Monthly Review editor John Bellamy Foster all
insist that a general rise in wages causes a rise in prices. This is important because
it has ramifications for Smith’s claim that the low wages of workers of the global
south benefit the workers of the global north—the imperialist countries—
presumably because low wages mean low commodity prices that therefore raise
the living standards of workers in the global north. Bourgeois economists often
make these claims, explaining that low wages in China, Vietnam, India,
Bangladesh, and so on enable “us”—those of us living in the imperialist countries
of the global north—to enjoy cheap electronics, clothes, footwear, and so on.

But do low wages in the global south mean low commodity prices and therefore a
lower cost of living for workers in the global north, or do they rather mean a higher
rate of profit for increasingly globalized capital? I will explore this question in its
concrete complexities in the coming months.

Comparing the labor of workers with different skills

To compare any two things quantitatively, they must be qualitatively comparable.

How do I compare my hour of labor with your hour of labor? And how do we
compare an hour of labor with different degrees of skill applied to different areas
of production, for example an hour of labor digging a ditch compared to an hour
of labor making jewelry? Here I will follow the long tradition in economics of using
ditch-digging labor as the “lowest,” most unskilled type of labor imaginable,
though this is arguably unfair to people who perform this type of labor. I will make
“assembly labor” an example of “average labor” and a jeweler an example of
“skilled labor.”

These three types of labor are quite different, one from another, as examples of
concrete labor. Ditch digging requires physical strength, assembly requires the
ability to work fast in order to keep up with the line as well as a tolerance for
boring work, while making jewelry requires great skill that takes many years to
master. The labor of the assembler is therefore often used as a stand-in for human
labor that on average every normal human being can perform with minimal
training.

Attempts to define the value-creating ability of these quite different types of labor
based on the expenditure of energy have failed. The ditch digger expends far more

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calories of energy per unit of time than a jeweler, yet a jeweler creates far more
value in a given unit of time than the ditch digger.

To understand the difficulty, consider the following situation. If an industrial

capitalist sends 10 ditch diggers to an assembly line, he will probably get poor
results, since the ditch diggers lack the skill and training to do assembly well. The
industrial capitalist would end up with far fewer commodities than normal in a
given period of time and many would be defective. If he sent either ditch diggers
or assemblers to replace the jeweler, he would get no products at all. So the
differences between the concrete labor powers of the ditch digger, assembler and
jeweler are qualitative.

Although the labor of the ditch digger, assembler and jeweler greatly differ in
terms of quality, they do have one thing in common. They all belong to the logical
class “human labor.” It is the logical class human labor—human labor as such—
that, once embodied in a commodity, forms the social substance of value. Since
human labor as a social substance is produced by human labor power—the ability
to perform labor—we arrive at the logical class of simple human labor power. A
worker working with an average simple labor power for let’s say an eight-hour
working day will represent exactly the same quantity of value regardless of the
use value it produces as long as the commodity has a use value for some people.

The labor powers of the majority of real-life workers will therefore approximate—
but virtually never exactly equal—average simple labor power that in one hour by
the clock will produce one hour’s worth of value. Like a bell curve, there will also
be outliers. At one end there will be a few highly skilled workers such as jewelers
whose hour of concrete labor will count as many hours of abstract labor, while at
the other end a few workers’ hours of concrete labor will equal considerably less
than one hour of abstract labor.

The highly skilled concrete labor powers represent many simple labor powers.
These highly complex labor powers must always be offset by other concrete labor
powers that represent fractions of average simple labor power. Here the law of
averages prevails.

However, all concrete labor powers can be converted into complex (more than
one) or fractional (less than one) average, simple labor power. And one simple
labor power has the same value—remember, we are assuming a single unified
market where the law of one price prevails for all commodities including labor
power. This means that every average, simple labor will produce the same
quantity of value and surplus value in a given period of time.

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But how do we know that concrete types of human labor power that differ
qualitatively with one another can be reduced to a common quality—simple human
labor power? We know this because they are compared every day quantitatively
in terms of a common substance—money.

For example, assume an hour of the concrete skilled labor of a jeweler counts for
50 hours of abstract human labor. Then the wage of the jeweler will, assuming
that all prices are direct prices (the value of a sum of money material exactly
equals the value of the commodity whose value the money material is measuring)
will be 50 times the average money wage, while the wage of an assembler will
equal the average money wage. In contrast, the wage of a ditch digger might be
only 1/10th the average money wage.

Let W stand for the sum of money that is used by the industrial capitalists to
purchase one hour of labor power. We will assume that the ditch digger works
with 1/10th of an average labor power, the assembler works with exactly a whole
labor power, while the jeweler works with 50 labor powers. The ditch digger must
perform 10 hours of concrete labor to produce an hour’s worth of value; the
assembler has to work only an hour to produce an hour’s worth of value; and the
jeweler has to work only 1.2 minutes by the clock to produce an hour’s worth of
value.

Assuming that the rate of surplus value is 100 percent, the workers work half the
time for themselves and half the time for the boss. This means that the ditch
digger on average produces exactly the same amount of surplus value in 10 hours
of concrete labor that the assembler produces in an hour and the jeweler produces
in 1.2 minutes.

It is important to realize that the differences in value that different concrete labors
produce in equal periods of time does not arise due to the wage differentials.
Rather, the wage differentials arise because of the difference between the value-
creating powers of different concrete labor powers. We, therefore, have to
distinguish between the situation where the wage differentials represent very real
differences between the values of different concrete labor powers, on one hand,
and where wage differentials represent the inability of some workers to obtain the
full value of their labor powers due to sexism, racism, and other special
circumstances, on the other hand.

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Wrong views on how skilled labor produces more value than unskilled
labor

Here I will deal only with the mistaken views popular among Marxists and not with
the human capital theory of the “Austrian economists.” For a critique of that
theory, see here.

A popular, though in my view mistaken, theory for explaining the extra value-
creating ability of skilled labor is that skilled workers possess an extra tool in the
form of the skill. The supporters of this theory observe that skilled workers must
spend money acquiring the extra education or training to acquire their skills. Also
correctly in my opinion, the extra tool theory correctly holds that the cost of
education enters into the value of the labor power of skilled workers. It takes more
labor time for society to produce a skilled than an unskilled labor power. Therefore,
the value and price—wage—of skilled labor must at the very least cover these
educational expenses. Otherwise, nobody could afford to get the education to
become a skilled worker. Up to this point, the extra tool theory is correct. But then
we run into problems that, I believe, are ultimately fatal to the theory taken as a
whole.

I first encountered what I call the extra tool theory of skilled labor many years
ago in the work of Ernest Mandel. Mandel, if my memory is correct, attributed this
theory to Austrian Marxist leader and economist Otto Bauer. I at first accepted
this theory but over the years found elements in it in clear contradiction to what
Marx and Engels themselves wrote. Further thinking about this question gradually
convinced me that the extra tool theory of skilled labor is in basic contradiction to
Marxist value theory.

A tool, let’s say a screwdriver, is a form of constant, not variable, capital. Like
other forms of constant capital, the tool during its lifetime gradually passes its
value on to the commodities it helps produce. Therefore, unlike variable capital, it
is a form of fixed capital. More importantly, unlike variable capital (labor power
that has been sold to an industrial capitalist) constant capital produces no value
and therefore no surplus value. If the extra tool theory were correct, the labor
power of the skilled worker would be partially a form of constant capital. The “extra
tool,” or “skill,” of the skilled worker would, therefore, produce no surplus value
at all.

If the extra tool theory is correct, it would mean that the labor power of the skilled
worker, once purchased by the industrial capitalist, is a hybrid type of capital,
partially variable—value and surplus value-producing—capital and partially
constant capital that produces no value. The greater the skill—the longer the

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training period—of the worker, the more labor power of the skilled worker would
represent constant capital and the less it would represent variable capital. This
would mean that, assuming that commodities sell at their direct prices—not
production prices—the rate of profit on skilled labor will be lower than the rate of
profit on unskilled labor.

Another problem is the actual wage differentials between the wages of skilled and
unskilled workers is simply too great to be alone explained by the transfer of the
extra value added to the labor power of the skilled workers through training. Does
the value that teachers add to workers’ labor power over a seven-year
apprenticeship really explain the extra wage that skilled workers earn during their
working lifetimes?

The skilled workers indeed need a wage that can fully cover the cost of an
apprenticeship or college education, but they will then expect additionallifetime
wages beyond it. If the extra wages of a skilled worker only compensated the
worker for the costs of education, it simply wouldn’t be worth the effort and
expense to acquire the skill. Instead, it would make more sense for a young worker
to begin earning money immediately as an unskilled worker. If that were the case,
there would be very few skilled workers.

How the law of value regulates the distribution of workers among various
‘skilled’ occupations

As a rule, workers are attracted to skilled trades that require extra effort and
money to learn because they will ensure a higher wage income over their working
lives than simply working in a “regular” job that requires only average training.
This means that the labor power of skilled labor contains multiple simple labor
powers. Like complex numbers contain prime numbers—numbers divisible only by
themselves and one—skilled labor powers contain multiple simple labor powers.
This does not mean that wage differentials at any given point in time coincide with
the multiple of simple labor powers workers of different skills have to sell. This will
be true only on average over a considerable number of years.

Periodic gluts and shortages of particular types of labor powers occur constantly.
When a particular type of skilled labor—complex labor power—is in short supply
relative to demand, many young people will attempt to enter the “hot” field. This
will continue until the field becomes overcrowded and the wage falls below the
value of the complex—skilled—labor power.

For example, if a particular type of complex labor power represents four abstract
labor powers, perhaps at a given point of time three of these labor powers will be

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realized in the form of money wages. The field will then be seen to be overcrowded
and young people will shun the field. In time, like is the case with other
commodities, the glut of a particular type of complex labor power will be
transformed into a shortage.

The wages the capitalists will offer for the particular type of skilled labor power in
question will then rise above the value of the extra labor powers that this particular
type of skilled labor power represents. For example, though the value of the
complex labor power consists of four simple labor powers, the wage will rise to
five simple labor powers. The field is again perceived as “hot” and the cycle
repeats. Through this mechanism, the law of value sees to it that in the long run,
skilled labor powers are produced in the proportions the capitalist buyers of skilled
labor powers need and demand.

Shortages of skilled labor power at the top of the industrial cycle

This explains why there rarely is a shortage of unskilled labor power, even at the
top of the industrial cycle. However, shortages of skilled labor powers always
appear as the cyclical peak approaches. If a shortage of skilled labor powers failed
to appear even at the top of the industrial cycle, over time the wage of the skilled
labor power would fall to the average level. The supply of skilled labor powers
available on the labor market would progressively disappear.

From simple labor to average simple labor, the substance of value

In order to fully grasp the value-creating nature of human labor, we have to use
the method of abstraction. Here I will assume that we are dealing with a branch
of capitalist industry where the direct price equals the price of production. I will
assume that the branch uses only simple labor, or rather that we have already
reduced complex—and fractional—labor produced by complex and fractional labor
powers to simple labor. An hour of labor by the clock equals one hour of simple
labor.

However, we still run into the problem that not all simple labor is equally
productive. Some workers work faster than others, while some enterprises can
produce more commodities per hour of labor time because they use more powerful
machinery. In order to isolate the effects on the production of value and surplus
value of differences in labor productivity I will have to assume that the
commodities produced have exactly the same use values of the same qualities.
Once we do this, our commodities are now identical in every way except for the
quantity of labor that actually went into producing them.

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As far as the buyers of our commodities are concerned, there are no visible
differences whatsoever. We also assume that they are sold within the same
market, so the law of a single price prevails. Armed with these assumptions, we
can then carry out the reduction of simple labor to average simple labor and arrive
at the social substance of value.

The economic models, whether of Ricardo or Marx, assume stability. They

generally take a snapshot of the economy at one moment of time. But in reality,
the economy, as Shaikh emphasizes, is in a state of turbulent movement. How do
we make the logical transition from the assumption of stable economic relations
to the turbulent and constant change that characterizes the real world?

The divisions between skilled and unskilled labor that we examined above can be
assumed to show some stability over time. However, as Marx explained, the extent
to which the labor performed by workers in various occupations counts as complex
labor does change over time. But it is almost certainly true that throughout the
lifetime of the capitalist mode of production an hour of concrete labor of a jeweler
will represent more value than an hour of concrete labor of a ditch digger.

The same principle prevails in analyzing how the differential fertility of unimproved
land under capitalist production gives rise to differential ground rent. Marx was
well aware that the progress in agriculture can transform previously unfertile land
into fertile land, while the exhaustion of agricultural land can transform previously
fertile land into unfertile land. So the assumption of a stable relationship between
the fertility of different agricultural lands does not hold in reality. However, in
order to grasp the relationship between the fertility of different pieces of land, we
have to assume a certain stability in the differentials in fertility.

But how about the differential productivity between different simple labors? Can
we assume stability here, considering that the history of the capitalist mode of
production has been characterized by a constant growth in the productivity of
human labor?

Piece work

Let’s take the example of piece work. Piece work forces workers to work up to the
limits of their maximum physical ability. However, the physical abilities of
individual workers to work fast is not the same. The most productive workers—
those who produce more pieces per unit of time than average—work with more
average simple labors than the workers who work at the average pace. Their labor
powers therefore produce multiplied, or complex, labor. Under piece work, they

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get paid for their extra labor powers. They are not more exploited than the average
worker as long as they are paid for their additional average simple labor powers.

Inevitably, according to the law of averages, other workers will be working below
the average in terms of producing pieces. They will also be paid less by the clock
because they are producing fewer pieces than the average worker. But they might
still be paid for each hour of average simple labor power they expend. Piece work,
therefore, tends to lead to a situation where workers are paid for the average
simple labor power that their concrete labor power actually represents. What could
be fairer?

To the extent this is true, all workers will be equally exploited, though they will
produce different amounts of surplus value in a given period of time. That is, the
part of the work day they work unpaid for the boss compared to the time they
work for themselves will be equal among all the workers. However, piece work
intensifies competition among the individual workers. As a result, the rate of
surplus value will, all other things remaining equal, be higher under piece work
than it will under time wages, which is why the bosses prefer piece work over time
wages where possible.

The ability of workers to work fast if represented graphically will form a bell curve.
Most workers will be grouped near the top of the “bell,” but there will be some
outliers who can work phenomenally fast and others who work at a pace far below
average. However, since the ability of humans to work at a certain speed will not
change much over time, we are dealing with a stable situation.

Abandoning the assumption of stability

But to complete our analysis of value, we have to abandon our assumption of

stability and enter into the world of turbulent, real competition of Anwar Shaikh—
not the perfect competition and unchanging world of Leon Walras and the
neoclassical school that Walras’s work spawned. What we will examine below will
have great relevance not only for our analysis of imperialism but for crisis theory
as well.

First, we will assume that time wages prevail. All workers are paid the same wage
by the clock. We will assume an assembly line is used. This means that all workers
within a given industrial capitalist enterprise at a given point in time will have the
same productivity because the pace of work is determined not by outermost limits
of their physical ability of the individual workers, as is the case with piece work,
but by the speed of the assembly line. To hold their jobs, the individual workers
must, however, be able to “keep up with the line.”

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So in this case, despite their different individual abilities, the productivities of the
workers on the line will be identical. The boss unable to depend on the competition
between individual workers will attempt to “sweat” labor by speeding up the line.
The limit to this process will be reached when it becomes impossible to find enough
workers to keep the line going at the prevailing speed, or if the workers are
unionized, the resistance of the union. We assume that all industrial capitalists
have to pay the same wage to the assembly line workers because they are
operating in the same country and therefore must hire workers from the same
labor market.

The “law of one price” will, therefore, prevail, meaning that every industrial
capitalist must pay the same wage per unit of time—for example, $15 an hour. In
order to simplify132, we assume that there are two methods of production available
to the bosses. Method one is the traditional one that uses a lot of assembly line
workers. The other method, developed only recently, replaces many of the
assembly line workers with industrial robots. As a result, these industrial
capitalists will produce their product with less labor.

In the language of value, this will mean that while the commodities produced by
industrial capitalists using the two different methods of production will be identical
in terms of use value and quality, they will differ in terms of individual value. But
though the commodities produced by our industrial capitalists will have one of two
individual values they all have the same social value.

How do we calculate the social value? We do that by dividing the total number of
commodities of a given use value and quality produced in a given period time—
for example, ten thousand automobiles—by the total quantity of (simple) labor
used to produce them. We will assume for reasons of simplification that all new
plants use the cheaper “best practice,” while older plants using the more labor-
intensive traditional method will temporarily shut down and be renovated so they
too use the “best practice.”

As new plants are built—and built they will be—because capitalism is a process of
expanded reproduction, the social value of the commodities will fall from the
individual value of commodities produced by the traditional method toward the
lower individual value of commodities by the “best practice” method.

Suppose the market is booming. Demand for our commodities is so strong that
capitalists using “best practice” cannot meet the demand if the market price were

132We can make our two-method abstraction because it is contained within a far more complex
reality. By reducing the available methods of production to two and only two, we can analyze
the essence of the process that occurs in a far more complex way in the real world.
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to fall to their individual direct price. The capitalists can just meet the demand if
the commodities sell at the individual direct price of the commodities using the
traditional method. Therefore, the market price will be ruled by the individual
direct price based on using the traditional method of production.

The difference between the lower direct price of the capitalists using the new “best
practice” and the direct price of the capitalists using the traditional method
represents a super-profit made by the industrial capitalists who adopted the “best
practice.” They have installed a method of production that has slashed their cost
price, while their selling price remains unchanged. However, since the market
price, thanks to the market boom, continues to equal the higher direct prices of
the capitalists using the traditional method of production, the capitalists using the
traditional method will still make average profits. As the number of new plants
increase, the social value will continue to progressively drop towards the lower
individual value of the new plants using “best practice.” The gap between the
falling social direct price and the market price will continue to grow.

The workers in the plants using “best practice” will be working with extra average
simple labor powers and therefore will produce more surplus value. However, they
will not be paid for the extra labor powers. The workers in the plants working with
the traditional method will now be working with only fractional labor powers but
will receive wages in excess of the actual value of their now fractional labor power.
This is only possible, however, because the market price increasingly exceeds the
social direct price.

But unless there is a rent factor—such as a shortage of land, and we assume here
that there isn’t—the situation described above is extremely unstable and cannot
last. The reason is that crises of overproduction—both partial and general—are
inevitable for all the reasons we have explored throughout this blog.

During every boom, of course, there are always capitalist optimists who proclaim
that this time it is different. We are now in a “new era” and “old laws” do not
apply. But they are always wrong. Inevitably, the point will be reached that the
capitalists who are applying “best practice” will be able to fully meet demand at
their individual direct prices—and for a time they will able to flood the market to
the extent that they will not be able to sell their commodities except at prices
below their individual values.

After a “turbulent” movement of crisis, the market stabilizes. The market prices
will now coincide with the direct individual prices of the capitalists using the best-
practice method. There is no longer any room on the market for the capitalists
using the traditional method and they have to shut down their plants. The former

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“best practice” capitalists will now become the only “practice.” With the closing
down of the last plants using the traditional method, the individual value of the
commodities produced by plants using the former “best practice”—and now only
practice—will coincide with the new lower social value of the commodities.

This means that every worker in the industry—under our highly simplified
assumptions—will be producing in one hour of labor exactly one hour’s worth of
social value and exactly the same surplus value. All our capitalists will, therefore,
make the rate of profit, their profits being exactly proportional to the size of their
total capital in a given period of time.

This stable situation will last as long as there isn’t a new innovation that introduces
a new cheaper “best practice” that once again leads to the differentiation of the
social value of commodities into different individual values. As soon as this
happens, the situation will again become increasingly unstable until a new crisis
once again breaks out and brings a period of temporary stability once more. This
“Shaikhian” movement of “real competition” unfolds as new technological
innovations cheapen production and destroy the existing equilibrium between
social and individual values and social values and prices until a new crisis once
again restores the proper relationship between value and the form of value—price.

We have now arrived at average simple labor, the social substance of value.
Average simple labor is produced by average simple labor powersthat all concrete
labor powers can be reduced to. There is no longer any difference as regards the
quality of labor powers the labor they perform, nor their differing productivities.
Simple average labor powers produce the same value and the same surplus value
in equals periods of time.

Next: The world market, the nation-state, national value and global value.

_______

335
 Three Books on Marxist Political Economy
(Pt 15)
Reader Manuel Angeles commented: “In Cambridge (UK) in the 1970s, a whole
slew of them rejected marginalist theory. Joan Robinson, in fact, frequently
ridiculed it, in spite of Keynes´s chapter in the General Theory.”

Angeles refers to the so-called Cambridge Capital Controversy, which pitted

economists from Cambridge, Mass., led by Paul Samuelson against Cambridge
UK-based economists led by the Italian-British economist Piero Sraffa (1898-
1983). Paul Samuelson (1915-2009), who was considered perhaps the leading
(bourgeois) U.S. economist of his generation, defended marginalist theory.
Samuelson combined marginalism with a watered-down Keynesianism that he
called the “Grand Neoclassical Synthesis.”

Sraffa and his supporters clearly came out on top against the Samuelson-led
marginalists. Sraffa’s attack on marginalism is contained in his short book
“Production of Commodities by Means of Commodities,” where he exposed logical
and mathematical paradoxes in marginalist theory.133

133 Sraffa’s calculations showed that under certain circumstances in the face of rising wages the
capitalists, always obliged by competition to use the cheapest method of production, would shift from
a capital-intensive method of production back to a more labor-intensive one. This is called “double re-
switching.” In his “Capitalism,” Shaikh says that his research shows that this virtually never occurs in
practice. Still, it is a logical paradox that undermines the theory that the value of a “factor of production”
such as labor or capital is determined by the value of its marginal product, as marginalist theory holds.

Another problem raised by marginalism is the valuation of capital by the rate of interest. Marginalism
values real capital the same way the value of fictitious capital is capitalized—streams of revenue such
as interest payments on government bonds or rents from unimproved land divided by the rate of interest.
In this way, fictitious capitals are formed. The price of these fictitious capitals is therefore simply a
form of interest.

The marginalist assumes that the price of what they call capital goods—real capital—is simply a form 336
of interest like the price of unimproved land is a form of ground rent. But if the price of capital goods—
the value of capital—is at bottom the same thing as the rate of interest—which is indeed the slang
definition of the “value of capital”—the marginalist definition of the quantity of capital amounts to
saying that the rate of interest is determined by the rate of interest. Or, alternately, the value of a given
capital is determined by the value of that capital. This is an example of circular reasoning, a logical
fallacy.

Despite the fact that marginalist theory was rigorously disproved as a result of the Cambridge
Controversy, it is still taught in the universities. Such a situation would never be allowed in the
natural sciences.
But what value theory did Sraffa and his generally left Keynesian supporters
propose in place of marginalism? Nothing, really, beyond that, given free
competition, prices will tend toward levels where capitals of equal size earn equal
profits in equal periods of time. The Sraffians also claimed that, with a given level
of productivity of labor, wages and “interest rates”—by which is meant the rate of
profit—will vary inversely.134

Whatever he may have thought in private about the labor value schools of Ricardo
and Marx—Sraffa was a great admirer and scholar of Ricardo and was well
acquainted with Marxism having been a sympathizer of the Italian Communist
Party in his youth—”neo-Ricardian” followers of Sraffa’s work have often used it
against Marx’s labor value and surplus value theory. Once we accept the “neo-
Ricardian” “price of production school” in place of Marxist value theory, we are
forced to draw the conclusion that constant capital—machines and raw materials—
as well as land produce value and surplus value.

I had assumed that the Cambridge Capital Controversy of the 1960s was largely
forgotten and that today’s left-wing post-Keynesian and heterodox economists
accepted marginalism as valid in terms of microeconomics, which in practice they
largely ignore, concentrating instead on macroeconomic economic questions such
as the relationship between fiscal policy, monetary policy, inflation and
unemployment.

While this may be largely true, it is not universally true. I have since learned that
the left wing but definitely non-Marxist Australian/British economist Steve Keen
(1953- ), a leading contemporary leader of post-Keynesian economics and the
“modern monetary theory” school, supports the Sraffian critique of the
marginalist—scarcity—theory of value. Modern monetary theory holds that the
government and central banks can create money and monetarily effective demand
up to full employment, a view supported by many contemporary Marxists but not
by me, as regular readers of this blog know.

134 By interest rate, Sraffa means the rate of profit, which is actually the rate of interest plus the profit
of enterprise. Marx showed that with a given rate of surplus value the rate of profit will decline if the
organic composition—the ratio of constant to variable capital—rises. Therefore, the rate of surplus
value, or the rate of exploitation, is actually the rate of profit on variable capital alone.

The rate of profit, however, must be calculated on the total constant capital plus variable capital.
So it is not necessarily true that the rate of profit varies in lockstep with variations in the “real 337
wage” with a given productivity of labor. This is one of the reasons why an assumption of equal
rates of profit and the inverse variation of the real wage and the rate of profit cannot replace
the law of labor value when it comes to analyzing the real-world concrete capitalist economy
Another UK Cambridge economist, Joan Robinson (1903-1983), who knew
Keynes, who himself taught at UK Cambridge—supported Sraffa against
Samuelson during and after the 1960s Cambridge Capital Controversy, as reader
Angeles correctly observes. So Angeles is right to point out that the Cambridge
Capital Controversy and the work of Sraffa continues to influence some of today’s
more left wing economists looking for alternatives to today’s reigning neoclassical
marginalist economic orthodoxy.

In the future, I hope to do a full-scale critique of Keen’s work. For now, I will have
to quote Wikipedia. According to Wikipedia, Keen as a Sraffian believes that
constant capital creates value and surplus value: “For example, the total value of
sausages produced by a sausage machine over its useful life might be greater than
the value of the machine. Depreciation, he implies, was the weak point in Marx’s
social accounting system all along. Keen argues that all factors of production [the
famous trinity of labor, capital and land—SW] can add [emphasis added—SW]
value to outputs.”

Theories of surplus value

Keen—assuming Wikipedia correctly reflects his views—as well as like-minded

post-Keynesian, heterodox new monetary theory economists stand closer on this
crucial issue to marginalism than to Marx, John Smith, and this blog when it comes
to the theory of surplus value. Any theory of surplus value has to answer this
question: Where does “income from property” (including profit on capital, both
interest and profit of enterprise, plus rent on land, forces of production provided
by nature) come from?

There are essentially two theories of surplus value. One holds that the interest or
profit on capital is ultimately produced by capital goods, and that the rent on land
is produced by nature. The other holds that surplus value is produced by the
unpaid labor performed by the working class. The theory of surplus value is the
most important question in all economics and divides the various schools of
thought more than any other.

John Smith’s work on imperialism rests squarely on the view that surplus value
represents the unpaid labor performed by the working class. The question that
interests Smith is this: To what extent is global surplus value still produced
primarily within the imperialist countries themselves—the United States, Canada,
Australia, New Zealand, Western Europe, and Japan—or is it now mainly produced
within the oppressed countries of the “global south.”

338
Smith’s work centers on the shift of production of the bulk of surplus value from
the imperialist countries during the “neo-liberal period”—or as I would prefer to
put it since the “Volcker shock” of 1979-82—to the oppressed countries of the
global south. I believe, and here I agree with Smith, that imperialism entered a
new stage following the Volcker shock, where the bulk—though not all—of global
surplus value production has shifted to the oppressed nations.

Smith is combating what he sees as the tendency of what he calls the “euro-
Marxist” or “orthodox Marxist”135 tendency to deny this. The “euro-Marxists” hold
that when the higher productivity of labor in the countries of the “global north” is
taken into account workers of the United States, Western Europe, and Japan are
more, not less, exploited than the workers of the global south. This view implies
that the bulk of global surplus value is still produced in the imperialist countries.

In order explore the question of whether workers of the global north are exploited
more than those of the global south, and the related question of where the bulk
of surplus value is produced today, I have to explore many of the “dark corners”
of Marxist value theory. What is important here is whatever my criticisms or
differences with John Smith on the the finer points of the theory of value and
surplus value, they pale into insignificance in comparison to my differences with
the views of left Keynesians, post-Keynesian heterodox new monetary theory
supporters, and Sraffians of all types, who either hold that surplus value is
produced by capital goods and land or simply ignore the question of the nature
and origins of surplus value altogether.

135Smith in using this terminology seems to be under the influence of the Monthly Review School,
which is famous for mixing Marxism and Keynesianism. The supporters of the Monthly Review School
consider themselves Marxists but also realize they are not “orthodox Marxists.”

However, there seems no reason for Smith to honor with the title “orthodox Marxists” those Marxists
who defend the now outdated view that the bulk of surplus value is produced in the imperialist countries.
The problem with this terminology is that during the struggle against the revisionist school that arose
in the German Social Democratic Party and the Second International in the late 1890s, those who
defended Marxism, including Rosa Luxemburg and Lenin, were dubbed “orthodox Marxists” as
opposed to the “revisionists” who raised criticisms of various aspects of Marxist theory in order to strip
Marxism of its revolutionary essence. 339

Lenin and the Bolsheviks and the Third International called themselves “orthodox Marxists”
in the above sense. I see no reason why those who recognize that the bulk—though, of course,
not all—of the surplus value is produced increasingly in the oppressed countries today should
not be seen as the real heirs of the “orthodox Marxists” who carried out the fight against the
original revisionists.
More on the value of labor power

Since space did not allow me to deal with the question of the intensity of labor
last month, I will deal with it here before I proceed further.

In some branches of industry, the intensity of labor—or the wear and tear on labor
power, as Marx called it in Ch 17 of “Capital”—exceeds that in other branches of
industry. An example is the pace of labor on automobile assembly lines. Though
it doesn’t take any special training to work on an auto assembly line, the pace of
work can be so brutal the workers are obliged to work with extra labor powers. As
a result, even in the absence of trade unions the auto bosses are obliged to at
least partially pay for these extra labor powers.

The real reason Henry Ford was forced to pay a higher than average wage to his
assembly line workers is revealed by Tim Worstall writing in the March 4, 2012,
issue of Forbes—a business magazine proudly calling itself “the capitalist tool.”

The popular myth, Worstall writes, “was that [Henry Ford] realized that he should
pay his workers sufficiently large sums so that they could afford the products they
were making.” Worstall observes, however, that “Boeing would most certainly be
in trouble if they had to pay their workers sufficient to afford a new jetliner.” In
reality, even if all of Ford’s workers had spent their entire wages purchasing his
automobiles, it would allow Ford to only realize his investment in his variable
capital but not a single penny of the surplus value that his workers produced.

While individual capitalists can realize their surplus value—or a part of it—by
selling to the workers employed by other industrial capitalists, no individual
capitalist can make a penny of profit selling to their own workers. Likewise,
the capitalist class taken as a whole cannot make a penny of profit by selling to
the workers. When it sells to the workers as a class, the total social capital only
realizes the total variable capital—including the new variable capital created out
of yesterday’s surplus value.136

But there was a reason Henry Ford was obliged to pay relatively high wages to his
assembly line workers in the 1920s. By 1913, the pace of work on the assembly
line had become so brutal that workers were walking away from the job. The only
way Ford could hold on to workers was to offer higher pay. The “level of turnover”
had become, according to Worstall, so “hugely expensive: not just the downtime
of the production line but obviously also the training costs: even the search costs

136 This is balanced out socially by other industrial capitalists realizing their variable capital by
selling their commodities only to fellow capitalists. This includes “capital goods” only
purchased by other industrial capitalists and luxury commodities only purchased by capitalists.
340
to find them” that Ford had the choice of either offering relatively high wages or
closing down his assembly lines for sheer lack of workers. Only when Ford offered
to pay a price of assembly line labor power that reflected the extraordinary wear
and tear that this type of labor involved compared to most other forms of labor
did he solve his “labor turnover” problem.

However, when it comes to varying intensities of different types of labor, the law
of averages again prevails. If the pace of work Ford demanded in his assembly
line factories in the 1910s and 1920s—and today as well—ever becomes the
average intensity for value-forming labor—and this is the direction capital is
pressing towards, though it inevitably runs into many barriers, not least the
resistance of the workers—one hour of concrete labor on a Ford-like auto assembly
line would shrink to one hour of simple average labor. “If the intensity of labour
were to increase simultaneously and equally in every branch of industry,” Marx
explains in Ch 17 of “Capital,” “then the new and higher degree of intensity would
become the normal degree for the society, and would, therefore, cease to be taken
account of.”

Now we can return to the arguments of the “euro-Marxists” that Smith criticizes.

The argument of the ‘euro-Marxists’

Smith’s “Imperialism” is above all a polemic against the view that the workers in
the imperialist countries of the United States, Western Europe, and Japan plus a
few capitalist countries of white colonial origin—Canada, Australia and New
Zealand—are more exploited than the workers of the global south—the oppressed
countries of Asia, Africa and Latin America. The euro-Marxists like to use the
following rather obscure quote from Ch 22 of “Capital,” entitled “National
Differences of Wages.” “It will be found, frequently,” Marx writes, “that the daily
or weekly, etc., wage in the first [more advanced—SW] nation is higher than in
the second [less advanced—SW], whilst the relative price of labour, i.e., the price
of labour as compared both with surplus-value and with the value of the product,
stands higher in the second than in the first.”137

Marx wrote these words in the 1860s—before the crisis of 1873, which began the
transition to the stage of monopoly-capitalism/imperialism—when the workers of
Britain were more exploited than the workers of Russia and Germany. John Smith
writes, “First, what these disciples of Marx forget is that each of the nations used
by Marx for his comparisons—England, Germany, and Russia—were competing

137 Notice, Marx says “frequently,” not in every case.

341
imperialist nations, each of them busy acquiring colonial empires of their own.”
(p. 234) Here, I believe, Smith makes an error.

In reality, at the time Marx was writing Volume I of “Capital” only Britain had some
of the characteristics of purely capitalist imperialism. These were a global
industrial monopoly and a vast colonial empire. The Russian empire in the 1860s
was imperialist in the sense that it was a huge military-feudal empire that
oppressed many nations, but Russian capitalism was extremely underdeveloped
in the 1860s. Indeed, it was just getting around to abolishing serfdom—formally
abolished in 1861—as Marx was writing Volume I of “Capital.”

Germany in the 1860s was not colonizing other nations. German industrial
capitalism, though developing rapidly since the gold discoveries of 1848-51, was
still very underdeveloped compared to the industrial might of Great Britain. Unlike
Britain or Russia, Germany138—with exception of Prussia’s participation in the
partition of Poland—was not yet oppressing other nations. Germany in the 1860s
was not even a united nation-state but a collection of independent states. Indeed,
at the time “Capital” was being written, a still disunited Germany was in danger
of ending up an oppressed nation.

Because the productivity of labor of the British workers was much higher due to
the far greater use of modern—by the standards of the 1860s—machinery, an
hour of labor performed by a worker in Britain produced far more use value.
Therefore, on the world market an hour of British labor counted for more simple
average labor—and thus value—than an hour of labor performed by the workers
in Germany and Russia.

The same was true in terms of exchange value, the value of commodities
measured in money—gold bullion. Gold bullion—world money—had the same
value in Germany and Russia that it had in Britain. Therefore, the British workers
during the necessary—paid—part of the workday produced far more
commodities—for example, cotton textiles—in terms of use value, value and
exchange value than the workers of Russia or Germany did.

138 The two leading German states when Marx wrote Volume I of “Capital” were Prussia and
Austria. Under the leadership of Prussia, Bismarck fought a series of wars against Austria and
France. Austria was the center of an empire that indeed did oppress many—mostly Slavic—
nations and nationalities. However, Austria was not incorporated into the Bismarck-united
German Reich that emerged out of Prussia’s victories against Austria and France. Austria lost
its empire as a result of World War I but remained separate from Germany. It was united with
Germany only briefly during Hitler’s Third Reich, between 1938 and 1945. Since 1945, Austria 342
has again been separated from Germany proper.
However, what was true of the paid part of the workday—the necessary labor—
was also true of the unpaid part where the workers of all three countries worked
free of charge for the industrial capitalists and other surplus-value eaters.
Therefore, the ratio of unpaid labor—profits—to paid labor was higher in Britain
than in Germany or Russia. The workers of Britain were, therefore, more exploited
than the workers of Germany and Russia. There is little doubt that much more
surplus value was produced during the 1860s in Britain than was produced in
Russia or Germany.

The greater productivity of the British workers did not reflect a greater degree of
skill on the part of the British workers or any special merit of the British workers
compared to the Russian or German workers of the time. Rather, it arose from the
fact that the British workers worked with more powerful machines that greatly
increased the productivity of their labor.

However, this needs to be qualified as a consequence of the fact that an hour of

British labor counted for more than an hour of (abstract) labor on the world
market, whereas an hour of labor of German and Russian workers counted for less
than an hour of (abstract) labor. In other words, the value-producing power of the
workers of Germany, Russia, and indeed every other country was reduced to
various fractions of that of British workers—due to the pressure of Britain’s
monopoly of the world’s most powerful industrial means of production. So in a
deeper sense, British workers were sharing in the benefits of Britain’s monopoly
of the most advanced productive forces even though they were working a greater
part of the workday for their bosses than the Russian, or German workers were.

The result of this situation was the victory of opportunism within the British trade
union movement. This opportunism was shown by the support that most British
workers gave to Britain’s aggressive foreign policy and the fact that the British
trade unions had not yet formed a political party of their own. Instead, the trade
unions supported the bourgeois Liberal Party.

Smith, however, is so anxious to disprove the idea that workers in the global north
can in any sense be more exploited than workers of the global south that here he
overshoots. He claims that workers employed by capitalists who work with more
powerful machinery—a higher organic composition of capital—produce no more
value than workers who work with less-powerful machinery and thus have a lower
productivity of labor.

He supports this view with the following quote from Ernest Mandel, found in a
footnote in Smith’s Chapter 8, from Mandel’s “Late Capitalism,” generally
considered to be Mandel’s magnum opus. Mandel wrote: “When Marx states that

343
enterprises operating with below-average productivity obtain less than the
average profit … all this … means is that the value or surplus-value actually
produced by their workers is appropriated on the market by firms that function
better. It does not at all mean that they have created less value or surplus-value
than is indicated by the number of hours worked in them.” (Ernest Mandel, 1975,
“Late Capitalism,” London: NLB)

Smith finds this view expressed by Mandel in “Late Capitalism” and defended
elsewhere in Mandel’s work appealing—though elsewhere Smith groups Mandel
with the euro-Marxists—because it buttresses his view that workers of the
oppressed nations are more exploited than the workers of the imperialist nations
even if on average the former workers work in enterprises with a lower
productivity of labor. If this view is correct, these workers in the global south are
producing the same amount of value in a workday even if we make the dubious
assumption that the workday is equal in the global north and the global south.

I believe, however, that Smith here is a victim to some extent of Mandel’s

misunderstanding of Marx’s theory of value. Mandel in the above quote confused
the individual value of a commodity with its social value within a given market.
Here I define a given market as an area in which the “law of a single price” applies.
This might be a local market, a national market, or the world market depending
on the circumstances. In the course of the development of the capitalist mode of
production, the world market accounts for an increasing share of the world’s total
commodity production. This is what is meant by the term “globalization.”

Within a market in the sense defined above, commodities of identical use values
and qualities sold within a single market have identical social values but can have
very different individual values. Industrial capitalists can up to a certain point
remain competitive if their individual values are above the social value if they can
purchase labor power at a lower price. This situation will generally not arise —
though there are many exceptions139—within a nation because the “law of one

139 An example of such an exception is the lower value of labor power and wages in the U.S. South,
above all African American workers but also white workers in the U.S. South due to the heritage of
slavery, Jim Crow, and the resulting ultra-reactionary anti-labor political climate prevailing in that
region of the U.S. During the 1930s, the Congress of Industrial Organizations failed to organize the
workers, both African-American and white, in the U.S. South, in part because of its close alliance with
Roosevelt’s Democratic Party, which completely monopolized politics in that region. Roosevelt was
determined to keep the “Jim Crow” Democrats within the Democratic Party.
344
If the U.S. South had been organized, the gains of the Civil Rights movement of the 1960s
would have been combined with the gains the trade union movement in the 1930s. Among
other consequences would have been the equalization of the value of labor power in the North
price” more or less prevails within the national labor market, But it very often is
true on the world market where labor power has very different values in different
countries.

Mandel was confused by the fact that the quantity of labor used to produce a given
commodity by particular industrial capitalists contributes to the formation of the
average quantity of labor necessary to produce the given commodity. However,
this does not mean that an hour of labor used by individual industrial capitalists
that have a lower than average productivity of labor counts as an hour’s worth of
social value. If this were true, each commodity would have two social values at
the same time. One would be the quantity of labor that actually went into it, and
the second would be the average quantity of labor that is necessary to produce it
under the average conditions of production. It was exactly to avoid this logical
contradiction that Marx distinguished between individual values and social values.

Each individual commodity has both an individual value and a social value.
Assuming equal wages for simple average labor and the absence of rent factors
like scarce land, competition will prevent the difference between the individual
value of a commodity diverging too far from its social value, but they will virtually
never be identical. If we add an industrial capitalist who produces at a lower than
average productivity of labor, the social value necessarily rises.

When the quantity of labor in a given branch of industry exceeds the socially
necessary quantity, the single price for commodities of that type will fall, forcing
industrial capitalists producing with a lower-than-average productivity of labor out
of the market. The theory of value—the theorization of the objective law of value—
must therefore carefully distinguish between individual and social value. In a
world divided into different national markets, we must also be careful to
distinguish between national values and global values.

In reality,we don’t need Mandel’s mistakes in value theory to defend Smith’s

central point, which is that production of surplus value has increasingly shifted to
the oppressed countries, where the rate of surplus value is much higher since
the Volcker shock of 1979-82, which marks the beginning of a new phase of
imperialism.

A feature of this new phase that differs from the “old imperialism” is, as John
Smith shows, that the bulk of capital exports of the imperialist countries has

and South and the defeat of the uniquely reactionary brand of politics that has long
characterized the region. If that had happened, Donald Trump would almost certainly not be
president today, since Trump could not have won the 2016 presidential election without the
electoral college votes of the southern states.
345
shifted from other imperialist countries to the oppressed countries. In this new
phase, national oppression and exploitation of wage-labor by capital—production
of surplus value—are combined to a far greater extent than in the earlier phase of
imperialism analyzed by Lenin.

If the world market was “perfect,” the law of one price would hold throughout the
entire world market for every commodity including the commodity labor power.
The most important, though not the only, source of “imperfections”—differing
prices of commodities of identical use values and qualities—is the division of the
world market into many national markets. Each independent capitalist nation
strives to expand the share of the world market that falls to its own capitalist class
at the expense of other capitalist nations. However, the more capitalist industry
develops the more the elimination of “imperfections” of the world market becomes
an objective economic necessity, notwithstanding Donald Trump and his former
top strategist the self-described “economic nationalist” Steve Bannon.

The objective need for each capitalist nation-state to use every means available
to improve the competitive position of its capitalists relative to the capitalists of
other nation-states leads sooner or later to war, which in turn leads to expanding
geographic areas of the world market falling under the control of a few “strong”
capitalist states. These inter-capitalist wars—climaxing in World War II—have led
to the rise of the U.S.-centered world empire. This empire has played a crucial
role in preventing shooting wars among the “strong” capitalist states for more
than 70 years.

However, the U.S. world empire has not been able to eliminate the contradiction
between the need to “perfect” the world market by putting it under the control of
a single capitalist state and the continued division of the capitalist world into
national markets whose borders are policed by the various capitalist states. On
the contrary, the price of temporarily reducing the political and military
competition among the imperialist countries has been an increase in the economic
competition
among them.

As the national industrial economy of the United States declines, the U.S. ruling
class finds the financial burdens of holding the U.S. empire together increasingly
difficult to bear. This trend is shown by the attempts of successive U.S.
administrations to force its imperialist “allies” to spend more on their militaries
while keeping them under the command of NATO—that is, the U.S. military. Now,
these contradictions are being expressed through the incredibly racist-chauvinist
Trump presidency.

346
The globalization process does not, however, proceed along a straight line. After
World War I, there was a great upsurge in protectionism. However, the resurgent
economic nationalism and protectionism quickly led to World War II, ending up
with the rise of the U.S. world empire—a new leap forward in the globalization
process. President Trump and his associates are finding out the hard way that it
is not so easy to reverse this process and return to a world where economic
nationalism and protectionism ruled the roost.

The two special commodities of capitalism and globalization

The money metals, which today come down to gold bullion, have since the start
of the globalization process in the 16th century have had more or less the same
value across the globe. The money commodity does not have a price of any kind—
direct price, price of production, or market price. Instead, the exchange value of
the money commodity is what Marx called the expanded simple form of the
commodity—the price lists of all other commodities read backwards.

All countries make use of the money commodity, but not all countries produce it
within their borders. While the world capitalist economy cannot possibly exist
without the production of money material, an individual capitalist nation-state can
function perfectly well without the production of money material within its borders.
It simply means that the country in question must export (non-money)
commodities if it to have a viable monetary system—necessary if it is to have a
functioning capitalist economy.

The other “special commodity” of capitalism, (simple average) labor power is the
commodity that alone produces value and surplus value. This is the commodity
that interests John Smith. Like the money commodity, it is everywhere in demand.

Capitalist production by definition globally, nationally and locally is impossible

without adequate quantities of the commodity labor power. But unlike money—
gold bullion—the value and price of labor power varies greatly in the various
national markets. The lack of a common value and price—wage—for simple labor
is the most powerful weapon in the hands of the capitalists, which up to now has
all too often prevented international solidarity among the global working class.140

140Should we oppose immigration in an attempt to defend the value of labor power, or at least
the real wages of workers in the imperialist countries? If you look at things as a trade unionist,
the answer might be yes. In that case, your aim is to create the greatest possible shortage of
labor power on the market in order to shift the relationship of forces from the buyers of labor
power—the capitalists—to the sellers of labor power—the workers. But if your aim is to 347
transform global capitalism into socialism—a world socialist revolution—the answer must be
If it weren’t for the differing national values of labor power, capitalism would have
been overthrown many years ago. These differences in value are partially the
result of different histories of countries engaged in capitalist production—whether
they arose out of tribal-feudal societies like the countries of Europe and Japan,
started as colonial-settler states like the U.S., Canada, Australia, New Zealand,
and Israel, or based themselves on irrigation agriculture such as India, China and
others—as well as the specific history of the class struggle between the capitalist
class and the working class in each country. This is the question that most
interests John Smith.

Unequal exchange

In order to explain surplus value, Marx famously assumed that all exchanges were
equal. Marx assumed that every commodity, including average simple labor
power, sold at its value or direct price. But elsewhere Marx made clear that this is
virtually never the case in practice.

An equal exchange occurs when the two commodities being exchanged represent
the same quantity of abstract human labor. But we should always remember that
as a rule it is a sum of money, which is also a commodity—or a representative of
a commodity that can easily be converted into the money commodity at the central
bank or like today on the open market—that is being exchanged for a non-money
commodity. It is a great weakness among contemporary Marxists that they tend
to forget—or worse, specifically deny—this.

The simple circulation of commodities

When equal exchange prevails (C—M—C), two (non-money) commodities with

different use values represented by both C’s and the money commodity
represented by M are all identical in terms of value. C—M—C can be broken down
into C—M and M—C, a commodity is sold for money and money is used to purchase
a commodity. Unequal exchange can arise at either C—M or M—C. Whenever a
commodity is sold at a price below or above its direct price, an unequal exchange
has occurred.

Suppose commodity C is sold below its value. This will mean that the seller of C
gets a sum of money M that represents less value—abstract human labor—than
C. The seller transfered some value to the owner of M. The opposite can occur.

an unconditional no! The attitude toward immigration tends to be the dividing line between
reactionary economic nationalist forces that operate within the workers’ movement and the
revolutionary forces within that movement. More on this next month.
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The seller of C may sell the commodity above its value. In that case, the owner of
M loses value in the exchange to the seller of C.

The same thing can occur with M—C. The owner of M as a person with money is a
buyer of commodity C. If M and C have the same value, our person with money
neither gains nor loses when the commodity is purchased. This will be true on
average but virtually never is true in a particular transaction. In the real world, it
is unequal rather than equal exchange that prevails.

What will happen if there is trade between two nations? Each nation constitutes a
national market, and we can assume as a first approximation that the law of one
price prevails within each national market. We will also assume that world
money—gold bullion—has the same value in each national market. However, other
commodities within the two national markets will differ in terms of social value,
perhaps by considerable margins. Now suppose nation A has a higher productivity
of labor than nation B. This will mean that prices, which for purposes of
simplification we will assume correspond to national direct prices, will be lower in
nation A than in nation B.

Now suppose nation A sells a commodity that is worth a hundred hours of labor in
its national market to nation B where the commodity of identical use value and
quality is worth 110 hours of labor. If nation A exports—for purposes of
simplification we will ignore transportation costs—the commodity to B, it might
sell for a sum of money that represents 105 hours of labor.

This will be an unequal exchange, because the industrial capitalist in nation A will
have exchanged 100 hours of labor for 105 hours of labor in the form of money—
gold bullion. Though the capitalists of nation A are selling their commodity above
the national value of A and as a consequence realize a super-profit, they will still
be selling it below the national value of nation B. If this continues, the capitalists
of nation B affected will be driven from the market and nation B will lose a branch
of industry. It will experience the “development of underdevelopment.”

Concrete history

Before the development of steam-driven power, capitalist production in the form

of manufacture did not enjoy an overwhelming advantage in terms of productivity.
The individual values of commodities produced by manufacture—defined as
production by hand as opposed to machine—did enjoy the advantages of a much
more developed division of labor within the workshop. However, these advantages
were still limited compared to traditional craft production.

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On the international level, commodities have both national values and global
values. Even if the commodities produced by the early capitalist countries had a
lower national value compared to pre-capitalist countries, when the costs of
transportation were included the values of the manufactured commodities
produced in Europe were not necessarily dramatically lower than those produced
by traditional pre-capitalist handcraft.

The dominant enterprises in Europe were huge trading joint-stock companies—

the forerunner of modern corporations. For example, the East India Company,
founded in the 16th century, made its money by purchasing commodities from
Asia and selling them in Western Europe. This showed that Asia was holding its
own as the chief producer of commodities from the East India Company’s origins
through the 18th century.

The situation changed dramatically during the 19th century. According to

Wikipedia, the East India Company was largely dissolved in 1858 and ceased to
exist
in any form by 1874. Behind the demise of the once mighty East India Company
was the introduction of the steam engine into production within Britain that began
on a large scale during the late 18th century. The introduction of steam as the
motor force in factory production meant that the national values of commodities
produced in Britain were dramatically lowered relative to the national values of
similar commodities produced in China, India and elsewhere.

India, which was colonized first by the East India Company and then directly by
the British government, experienced economic devastation as cheap British
commodities destroyed native industry. This meant that huge hoards of India’s
gold and silver bullion accumulated over the centuries by India’s ruling classes
were sucked into the City of London.

China was never formally colonized. But through the so-called Opium Wars, the
Qing dynasty—the last to rule the Chinese Empire—was reduced to the status of
a semi-colony. China’s home market was flooded with British cheap commodities,
which effectively in the course of the 19th century “underdeveloped” China’s
ancient civilization. By the dawn of the 20th century, India and China, which had
dominated world commodity production for thousands of years, were transformed
into mere bit players as far as global commodity production was concerned. This
is perhaps the greatest single catastrophe in the entire history of humankind.

During the age of industrial capitalism—1760-1873—a new international division

of labor emerged. Britain, which had been a mere bit player when it came to global
commodity production before the rise of industrial capitalism, now became the

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monopolistic producer of industrialcommodities—the “workshop of the world.” In
addition, Britain produced within its borders the chief energy-containing
commodity coal. Coal played a crucial role in the emergence of Britain as the first
industrial capitalist country, because it was coal that made the use of steam power
economical.

However, outside of coal Britain rarely had the advantage when it came to
producing cheap commodities that depended on natural conditions of production.
For example, cotton was the most important raw material for Britain’s leading
industry—textiles. But Britain’s cool rainy climate makes the cultivation of the
cotton plant impossible. Here, countries with tropical and subtropical climates,
such as Egypt, India, and most notoriously the southern USA with its slave labor,
had the advantage. Fruits such as figs, dates, olives and citrus also require warm
tropical or subtropical climates not found in Britain. The northwestern United
States—now called the Midwest—and the Russian Empire, especially the Ukraine,
had climates that were better suited to the production of wheat than Britain did.
It was the U.S. not Britain that dominated the production of maize—Indian corn.

Early U.S. history was dominated by the struggle between the followers of Thomas
Jefferson—the ancestors of the later misnamed Democratic Party—who wanted
the U.S. to accommodate itself to the prevailing global division of labor, and
supporters of Alexander Hamilton—the ancestors of the later Republican Party.
The Jeffersonians were content with the U.S. remaining an agricultural country
selling cotton produced by the labor of enslaved Africans as well as grain produced
by the labor of family farmers to Britain. In exchange, the slave owners and small
white farmers would purchase cheap British manufactured commodities.

In contrast, the followers of Alexander Hamilton wanted to build up U.S. industry

through high tariffs, and government-run or subsidized public works and means
of transportation. Hamilton’s followers did not gain the upper hand in U.S. politics
until the U.S. Civil War (1861-1865), called the “slaveholders’ rebellion” by Marx
and Engels.

The Democrats argued that the proto-Republicans—called Federalists and then

Whigs—wanted to impose high taxes on farmers while forcing workers to purchase
high-priced and relatively low quality commodities produced by “inefficient”—
relative to their British counterparts—U.S. industrial capitalists. Worst of all, the
Democrats complained to white workers of the North that the proto-Republicans
wanted to limit slavery. This, the Democrats explained, would put the freed slaves
accustomed to extremely hard manual labor and a low standard of living into direct
competition with the white wage workers of the North.

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On this basis, the Democratic Party claimed that it was in the interests of the white
workers to maintain African slavery. This is how the United States that was to
become the industrial powerhouse of the 20th century fitted into the British-
dominated world of 19th-century industrial capitalism based on free competition.

Smith notes that the Russian Marxist economist and later prominent Soviet leader
N.I. Bukharin predicted rising raw material prices in his 1915 book “Imperialism
and World Economy.” Bukharin reasoned that “the development of agriculture
does not keep pace with the impetuous development of industry … [the] ever-
growing disproportion between industry and agriculture” leads to “the epoch of
dearth, of a general rise in the prices of agricultural products everywhere. … The
rise in the prices of raw materials in turn reveals itself directly in [a lowering of]
the rate of profit, for, other conditions being equal, the rate of profit rises and falls
in inverse ratio to the fluctuations in the prices of raw materials.” (p. 208)

Smith correctly observes that Bukharin confused a commodity “super-cycle” for a

long-range trend of capitalism in the age of monopoly capitalism/imperialism.

During the 1890s, the value of gold bullion experienced a major drop in its value
relative to most commodities due to a combination of the introduction of the
cyanide process for extracting gold from ore and the discoveries of new cheap
gold mines in northern Canada and Alaska. As a result, global prices of production
expressed in terms of gold bullion rose sharply.

Between 1896 and 1913, an era of extremely rapid economic growth set in, which
was the market’s way of raising the market prices of commodities to the higher
levels of prices of production. Bukharin made the mistake of assuming that the
rise of raw material prices relative to industrial commodities that occurred during
the exceptional economic conditions that prevailed between 1896 and 1913 was
a permanent feature of imperialism.

However, starting in 1920 primary commodities prices crashed, both absolutely

and relative to the prices of finished commodities produced in the imperialist
countries. Smith quotes economists Raul Pebisch and Hans Singer, writing at the
end of the Great Depression, drawing exactly the opposite conclusion that
Bukharin drew.

Smith writes: “Raúl Prebisch, an Argentinian economist, and Hans Singer, a

German Jewish economist who fled to the UK when Hitler came to power (and
who, in 1940, was interned by the UK government as an enemy alien), separately
devised what became known as the Prescribe-Singer hypothesis. This argued that
there is a long-run tendency for primary commodity exporters to suffer

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deteriorating terms of trade with manufactured goods-exporting rich nations, and
that this severely reduces or cancels altogether the benefits of comparative
advantage for primary commodity-exporting countries, perpetuating their
underdevelopment and widening the gap with developed countries. This much-
disputed but now well-established fact provides an unassailable empirical basis for
theories of unequal exchange, a core component of dependency theory.” (pp 207-
08)

Here we see an example of a phenomenon that I mentioned in my extended review

of Anwar Shaikh’s “Capitalism.” The more centralized capital is in a branch of
production the more it will react to a fall in demand at the prevailing level of
market prices with a cut in production as opposed to a cut in prices. This will mean
that the ratio of prices of raw materials producers (where on average capital is
less centralized) to prices of industrially produced finished commodities (where
capital is more centralized) will evolve in a favorable way for raw material
producers during periods of prosperity and unfavorably during periods of
crisis/depression. The global capitalist economy was dominated by prosperity
between 1896 and 1913 and by economic depression between 1920 and 1940.
Prebisch and Singer formulated their law at end of the Great Depression in 1940.

However, in the long run centralized capital is more successful in maintaining its
prices above prices of production as opposed to more decentralized capitals. This
is especially true in sectors, such as agriculture, where simple commodity
production plays a larger role. Family farmers and peasants are quite happy if they
can sell their commodities at c + v, where v is is the equivalent of a low wage.
As long as they can do this, they will tend to cling to their farms rather than
become wage slaves. Periods of depressed demand take a brutal toll on the price
of agricultural commodities.

Speaking to the United Nations General Assembly in 1979 at the beginning of the
Volcker shock, the leader of the Cuban Revolution, Fidel Castro, observed: “The
first fundamental objective in our struggle consists of reducing until we eliminate
the unequal exchange that prevails today and converts international trade into a
very useful vehicle for the plundering of our wealth. Today, one hour of labor in
the developed countries is exchanged for ten hours of labor in the underdeveloped
countries. The non-aligned countries demand … a permanent linkage between the
price we receive for our products and those paid for our imports … such a linkage
… constitutes an essential pivot for all future economic negotiations.” (p. 210)

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The evolution of the value of labor power

John Smith criticizes the view of the Egyptian economist Samir Amin (1931- ) that
labor power has the same value in all counties but is paid below its value in the
oppressed countries. In the days of industrial capitalism—the period between 1760
and 1873—the extra moral element added to the strictly biologically determined
value of labor power was determined by the particular national history of each
capitalist country. The value and price of labor power, therefore, had a national
value, not a global value.

In this phase of capitalist development compared to the post-1873 period, the

quantity of idle money capital potentially available for international loans was
still relatively low. As a result, the development of finance capital was limited. This
meant that this phase of capitalist development was dominated by the export of
commodities over the export of capital. This situation tended to preserve Britain’s
monopoly in large-scale industrial production.

This situation began to change with the transition to imperialism that began with
the crisis of 1873. The successive crises of overproduction that began in 1825 led
not only to an ever-greater centralization of capital but the emergence of huge
masses of idle money capital in the wake of each successive crisis. During the
industrial upsurge that follows each crisis/depression, the mountain of idle money
capital is utilized by the industrial capitalists to create new industrial enterprises,
which takes the place on an expanded scale of those that were wiped out by the
preceding crisis.

The Volcker shock crisis of 1979-82, which ended the 1970s period of stagflation,
was no exception to this rule. On the contrary.

However, the special nature of this crisis—caused by the failed attempt to head it
off by printing paper money—caused the rate of interest to rise above the rate of
profit for an unprecedented period of time. The result was that industrial capitalists
in the form of giant industrial corporations transformed themselves into money
capitalists. This resulted in a massive expansion of loan money capital known as
“financialization.”

The result was that a huge portion of the productive forces were destroyed in
imperialist countries where wages were relatively high. Then as the quantity of
loans expanded and interest rates once again fell below the rate profit, they were
replaced by new forces of production located in countries where wages were very
low.

354
These countries were largely located in Asia, which during most of their history
had economies based on irrigation agriculture. The heritage of this mode of
production was an overwhelmingly peasant population accustomed to hard manual
labor and very low standards of living compared to the European countries and
even more so compared to their “white colonies.”

This dramatic turn in world economic history has given rise to phenomena dubbed
by Morgan-Stanley economist Stephen Roach as global economic arbitrage.
Arbitrage is the process by which the law of a single price asserts itself within a
given market. John Smith quotes Roach: “Wage rates in China and India range
from 10% to 25% of those for comparable-quality workers in the U.S. and the
rest of the developed world. Consequently, offshore outsourcing that extracts
product from relatively low-wage workers in the developing world has become an
increasingly urgent survival tactic for companies in the developed economies.” (p.
189)

Global labor arbitrage is therefore just a banker’s way of referring to the law of
one price as applied to the commodity labor power. And the need to “extract
product from relatively low-wage workers” is just banker-speak for the need to
extract the maximum amount of surplus value—unpaid labor—from the
workers that produce the product.

If an industrial capitalist has to choose between purchasing a labor power of

essentially the same quality at $1.50 an hour versus $15.00 an hour, the law of a
single price will force our industrial capitalists to purchase it at $1.50. It is as
simple as that. In order to “extract product,” as Roach puts it, or to produce
commodities containing the highest possible amount of surplus value as Marx
would put it, the capitalists have to resort to an “urgent survival tactic” that forces
them to exploit the labor—the working class—of the “developing world” in
preference to the working class of the “developed world.”

In the post-Volcker shock world, the huge industrial corporate monopolies that
operate throughout the world are free to shop for the cheapest possible labor
power. When it comes to the production of commodities that can be produced in
one location and shipped anywhere in the world for sale and consumption, the law
of one price—the lowest possible wage—is increasingly coming into play. As a
result, the countries of Asia are now regaining their roles as centers of global
production that they lost during the rise of industrial capitalism.

However, “global labor arbitrage” does not operate in all sectors. For example,
though MacDonald’s is a huge corporation that operates throughout the globe, the
local MacDonald’s is still forced to hire workers who live within a few kilometers of

355
its place of business. The same is true in the warehousing industries, in retail
trade, and the service trades in general. In these cases, labor power still has a
national value and not a global value.

However, the capitalists in these lines of production can still “import” workers from
regions of the globe where the value of labor power is far cheaper than it is in
their “own” countries, and in this way drive down the price of labor power, though
not (at least not yet) all the way to its value in the oppressed countries.

Next, I will bring comrade Lenin into the discussion. Though he wrote
“Imperialism, the Highest Stage of Capitalism” more than 60 years before the
Volcker shock, let’s see what fresh light is thrown on Lenin’s venerable pamphlet
by the evolution of world imperialism in the post-Volcker shock world.

_______

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 Three Books on Marxist Political Economy
(Pt 16)
Lenin on the defining features of imperialism

V.I. Lenin in his famous from 1915 pamphlet “Imperialism the Highest Stage of
Capitalism” lists the following five features of what was then the new, imperialist
stage of capitalism.

(1) The concentration of production and capital has developed to such a high stage
that it has created monopolies which play a decisive role in economic life;

(2) The merging of bank capital with industrial capital, and the creation, on the
basis of this “finance capital,” of a financial oligarchy:

(3) The export of capital as distinguished from the export of commodities acquires
exceptional importance;

(4) The formation of international monopolist capitalist associations which share

the world among themselves;

(5) The territorial division of the whole world among the biggest capitalist powers
is completed.

How Lenin’s defining features of imperialism have held up a century later

Virtually all Marxist and indeed all serious students of economics accept feature
No. 1—the concentration of production and capital—as a fact of life of present-day
capitalism. Indeed, the concentration of capital and production is much higher
than it was on the eve of World War I, the period Lenin analyzed.

Feature no. 4—the formation of monopolist capitalist associations which share the
world among themselves—is accepted by Marxists and indeed many non-Marxists
as even more descriptive of today’s conditions, when all large corporations operate
on a multinational scale.

Feature no. 5—the territorial division of whole world among capitalist powers—
was completed around the turn of the 20th century and is a statement of historical
fact accepted by all.

The division of the world among the imperialist powers meant that further
expansion of the colonial empires and “spheres of influence” could not occur

357
without the various powers colliding. There was, however, on the eve of the “great
war” a school of thought that held that a major war between the imperialist states
was unlikely. This was based on the notion that economies had become so
intertwined that the capitalist ruling classes would oppose any move toward war.
Related to this, a view held that a major war among the imperialist powers was
unlikely because it would be financially ruinous.141 These arguments, answered by
the events of August 1914 and subsequently, are more than a historical curiosity,
since occasionally we still run into them today.

Thanks to the Russian Revolution of 1917, a major part of the globe was largely
withdrawn from the sphere of capitalist exploitation.142 However, since the 1990s,
as the result of the Russian bourgeois counterrevolution that restored capitalism
but not the czarist feudal military empire,combined with the powerful upsurge of
capitalist development in China and Vietnam, the world now looks more like that
on the eve of World War I than the situation that prevailed during most of the rest
of the 20th century.

However, the rest of the 20th century proved to be richer in world wars and
revolutions and counterrevolutions than any preceding century in recorded
history. As a result of these titanic developments, along with the inevitably uneven

141The U.S. was more than willing to finance Great Britain, France, and Russia in World War
I through the banking syndicate headed by the House of Morgan even before the U.S.
government entered the war. This helped make it possible for the war to drag on for more than
four years. On the eve of that war, market prices of most commodities were already above the
prices of production and the war doubled these already high prices once again. The result was
indeed disastrous, leading to the super-crisis of 1929-33 and the Great Depression.

142 During the 1920s—and later in the eastern European socialist countries—the Soviet and later east
European governments attempted to get capitalist corporations to invest in the Soviet Union and eastern
Europe in the form of concessions. These concessions involved the exploitation of the Soviet and
eastern European workers by foreign capital. To the extent foreign capital exploited workers in the
Soviet Union and eastern Europe, these investments remained very limited. In addition to concessions,
there were opportunities for global capital to exploit the Soviet Union and other socialist countries
through “unequal exchange” and interest on loans. However, compared to what existed in the period
analyzed by “Imperialism” and since 1989-91, the opportunities of capital to exploit the workers of the
countries of the former Soviet Union and later eastern Europe were extremely limited. 358

However while it was true that the results were indeed disastrous and financial and political prudence
would have strongly advised the “powers” not to engage in the folly of war, this didn’t prevent the war
from breaking out anyway. Imperialism cannot be counted on to act in rational way.

U.S. finance capital was also more than willing to finance World War II, which lasted even
longer than World War I. Thanks to the Depression, market prices were below the prices of
production and there was considerably more idle loan capital available to finance the Second
World War. Because of this, though WWII was far more destructive in terms of human lives
and physical destruction, it was far less ruinous economically.
nature of capitalist development, the division of the world among the imperialist
and other countries engaged in capitalist production has taken quite different
forms than those that prevailed on the eve of World War I.

More serious criticisms

Features 2 and 3 listed by Lenin have been subjected to criticism not only by
numerous bourgeois authors but by many Marxists. The first criticism revolves
around the role of the banks and Lenin’s claim that under monopoly capitalism
finance capital dominates capital as a whole.

Some Marxists have also suggested that Lenin exaggerated the importance of the
export of capital as opposed to the export of commodities. The last point is
extremely significant, because the export of industrial commodities during the era
of industrial capitalism based on free competition consolidated Britain’s monopoly
position of modern industrial production. However, the rising export of capital from
Britain from the 1860s on progressively undermined and then decisively ended
Britain’s industrial monopoly by the turn of the 20th century.

Lenin’s critics, including some Marxists, claim that the prominent German-Austrian
Marxist economist Rudolf Hilferding (1877-1941), who exercised the most
influence on Lenin’s “Imperialism,” greatly exaggerated the power of the leading
German banks over German industry in the years leading up to World War I.

A variant of this criticism recognized the considerable power that banks in

Germany as well as the U.S. and other imperialist countries had over industry at
the end of the 19th century and the early 20th century. However, these critics
say, the banks’ power proved to be a temporary phenomenon. By the end of World
War II, many Marxist, as well as bourgeois, economists claimed that the dominant
influence of banking over industry had largely disappeared.

As regards the situation in the U.S., it is often claimed that the passage of the
Glass-Steagall Act in 1933 as part of Roosevelt’s “New Deal,” which separated
investment and commercial banking, largely broke the power of the House of
Morgan143 and other banking combines over industry. Therefore, Hilferding and

143 The House of Morgan refers to the private banking partnership of J.P. Morgan and Company, whose
leading figure was J.P. Morgan senior (1837-1913). During the late 19th and early 20th century, the
Morgan bank acted as an intermediary between the British money capitalists eager to invest their money
in the U.S. and rapidly expanding U.S. industry hungry for additional capital. The British capitalist
359
investors in U.S. securities could not, of course, personally supervise the U.S. corporations their capital
was invested in, so they relied on the Morgan bank to exercise control of the U.S. enterprises to make
Lenin’s concept of finance capital to the extent it ever was valid ceased to be so
in the 1930s.

The role of the banks

The question of the role of banks during the monopoly/imperialist phase of

imperialism is an important question and deserves a closer look. Near the very
end of the final chapter of his “Imperialism,” entitled “The Place of Imperialism in
History,” Lenin quotes the German pro-imperialist economist Gerhart von Schulze-
Gaevernitz (1864-1943) as follows:

“Once the supreme management of the German banks has been entrusted to the
hands of a dozen persons, their activity is even today more significant for the
public good than that of the majority of the Ministers of State. … [Lenin adds, “The
‘interlocking’ of bankers, ministers, magnates of industry and rentiers is here
conveniently forgotten.”—SW] If we imagine the development of those tendencies
we have noted carried to their logical conclusion, we will have: the money capital
of the nation united in the banks; the banks themselves combined into cartels;
and the investment capital of the nation cast in the shape of securities. Then, the
forecast of that genius Saint-Simon will be fulfilled: ‘The present anarchy of
production, which corresponds to the fact that economic relations are developing
without uniform regulation, must make way for organization in production.
Production will no longer be directed by isolated manufacturers, independent of

sure they were operated in the most profitable way possible. The House of Morgan gained a reputation
for doing just that.

In 1903, Morgan organized a syndicate that merged Carnegie Steel with Federal Steel to form the U.S.
Steel Company, then the world’s largest. Morgan considered this his greatest achievement. U.S. Steel
still exists today, though it is now only the second largest steel company in the U.S. and the 24th largest
steel company in the world. This reflects the dramatic decline of U.S. industrial power since the days
of Morgan.

During the crisis of 1907, J.P. Morgan arranged the merger of Tennessee Coal, Iron and Railroad
Company with U.S. Steel, giving U.S. Steel control of mines that produced coal, a vital raw material
for steel production. At the height of the panic, Morgan “explained” to President Theodore Roosevelt
that if the merger was blocked by the U.S. government the entire U.S. economy would collapse.
Roosevelt capitulated to Morgan’s demand—after all, he didn’t want the U.S. economy to collapse any
more than President George W. Bush wanted it to collapse a century later in 2008. In order to prevent 360
the collapse and ensure the raw material supplies of U.S. Steel, Roosevelt signaled to his “boss” J.P.
Morgan that and he would allow the merger to go through. Morgan then “rescued” the U.S. economy.

Earlier, in 1895, President Grover Cleveland had faced a run on the U.S. Treasury’s gold
reserves. Cleveland agreed to have Mr. Morgan float a loan that saved the U.S. gold standard.
Just like Roosevelt had earlier, Cleveland also did the bidding of Mr. Morgan. Of course, the
rescue included hefty fees for Morgan’s efforts. J.P. Morgan was a great U.S. patriot, of course,
but he didn’t’ work for free. Even bankers have to make a living!
each other and ignorant of man’s economic needs; that will be done by a certain
public institution. A central committee of management, being able to survey the
large field of social economy from a more elevated point of view, will regulate it
for the benefit of the whole of society, will put the means of production into
suitable hands, and above all will take care that there be constant harmony
between production and consumption. Institutions already exist which have
assumed as part of their functions a certain organization of economic labour, the
banks.’ We are still a long way from the fulfillment of Saint-Simon’s forecast, but
we are on the way towards it: Marxism, different from what Marx imagined, but
different only in form.”

Lenin concludes: “A crushing ‘refutation’ of Marx indeed, which retreats a step

from Marx’s precise, scientific analysis to Saint-Simon’s guess-work, the guess-
work of a genius, but guess-work all the same.”

In the quote I reproduced, Schulze-Gaevenitz refers to French utopian socialist

Henri de Saint-Simon (1760-1825), who was perhaps the first thinker to foresee
that capitalist free competition ruled by the profit motive was not the final stage
in the evolution of human society, as the liberal economists claimed then and still
do. Saint Simon, like Marx, later believed that free competition was merely a
passing phase of human society destined to give way to a higher stage—a planned
economy where production would be ruled by human need and not private
profit.144 And Saint-Simon expected that the influence of the banking system with
its “universal bookkeeping” over industry, as Marx later put it, would play a crucial
role in the transition to a planned economy.

It is interesting to compare Saint-Simon’s attitude toward the banking system with

the program of “democratic socialist” Bernie Sanders, supported by many other

144 After the victory of “Perestroika,” the economists and other spokespeople for the capitalist ruling
class insisted that the failure of the first experiment in planned economies proved decisively that “free
market” capitalism was indeed the final stage in human evolution and history in the Hegelian sense and
had reached its end. That is, U.S.-style monopoly capitalism was the final stage of the evolution of
human society and would last as long as human society did. If the economies of the former countries of
the Soviet Union and eastern Europe had thrived under restored capitalism, and “bourgeois democracy”
was flourishing throughout the world, these claims would at least be worth discussing.

Instead, capitalism has up to now brought economic ruin to former Soviet nations and eastern
Europe while global capitalism has experienced considerable economic stagnation in many 361
countries and industries in addition to the violent crisis of 2007-09. Bourgeois democracy is
everywhere in crisis, not least of all in the United States under the vile corrupt, racist
administration of Donald Trump. As a result, socialist ideas that went into a deep eclipse
following the counterrevolutionary developments between 1985 and 1991 in the Soviet Union
and eastern Europe are now undergoing a major revival, including within the U.S. itself.
U.S. progressives, calling for “breaking up the banks.” Saint Simon, who wrote in
the early years of the 19th century, already foresaw the replacement of free
competition by a consciously planned economy. Nearly a century later, the pro-
imperialist German economist Schulze-Gaevernitz also looked forward to a
peaceful evolution of German imperialism into some sort of planned economy.

However, after another century has passed, Sanders and many other U.S.
progressives look backward with nostalgia to the return of the good old days of
small-scale private production regulated by “free competition.” This shows the
powerful influence populist ideology rooted in the vanished world of family
farming—on land stolen from Native Americans—and other small-scale private
enterprises still exercises on the U.S. left. In this sense, U.S progressives lag far
behind Saint Simon and even in a certain sense Schulze-Gaevenitz.

What the genius—this is what Lenin called him—Saint Simon could not yet foresee,
but what Marx was to prove scientifically, was that the growth of centralized
production reflected in an increasingly centralized banking system created the
material basis for the future planned economy and that a breakthrough to a
planned economy could not be achieved without the transfer of political power
from the exploiting capitalist class to the working class.

In his famous but much criticized work “Finance Capital,” first published in 1910,
Hilferding claimed that a handful of Berlin banks effectively controlled German
industry. As Hilferding saw it, the Berlin banks had therefore emerged not only as
the most powerful financial capitalists but also as the most powerful industrial
capitalists in Germany.

In light of the further political evolution of Hilferding, much of which occurred after
Lenin wrote “Imperialism,” it now seems as though Hilferding’s position
represented to some extent a retreat backward from the views of Marx to those
of Saint Simon and Schulze-Gavevenitz. Though considered a left radical within
the German SPD, Hilferding opposed the Bolshevik Revolution and supported the
Second International over the Third, Communist International (Comintern). On
two occasions, he served as minister of finance in the bourgeois liberal Wiemar
Republic.

However, it was to take the titanic events of World War I, the Russian Revolution
and then the aborted German revolution of 1918 to demonstrate that though
Hilferding was, much like Karl Kautsky, who made many important contributions
to Marxism, not a person of revolutionary temperament. Under the conditions of
world war and workers’ revolution, the non-revolutionary wing of the Social

362
Democracy, including Hilferding, was inevitably transformed into the
counterrevolutionary bourgeois liberal wing of the workers’ movement.

Non-revolutionary but left Social Democrats like Hilferding differed from the likes
of Schulze-Gavevenitz insomuch as they believed that the establishment of a
planned economy required a Social Democratic majority in the German Reichstag.
Once this was achieved, according to social democrats like Hilferding, it would be
possible to take control of the Reichstag functioning as the supreme organ of
democracy over the German government.

Once this was achieved, the rest would be easy, since the apparatus necessary
for a planned economy was already at hand. The banks would be socialized, and
since according to Hilferding they already ruled over German industry, a socialist
planned economy and society would be almost automatically realized. However,
instead of a peaceful transition to socialism that left Social Democrats such has
Hilferding had expected, there came the fascist dictatorship of Adolf Hitler. Still,
the sad story of Rudolf Hilferding does not end here.

After the establishment of fascist rule in Germany in 1933, Hilferding fled to

France, which was still an imperialist bourgeois democracy. But then, in 1940,
Germany conquered France. Germany occupied parts of France, including Paris,
but an “independent” French government under Marshal Henri Philippe Petain
(1856-1951) and the slimy politician Pierre Laval (1883-1945) was established in
southern France with Vichy as its capital. Hilferding found himself an “illegal
immigrant” in Vichy France.

Rudolf Hilferding, who in addition to being famous as the Marxist theorist who
wrote “Finance Capital” also faced a death sentence simply because he was
Jewish. He was expelled as an illegal immigrant from Vichy France and was handed
over to the German authorities in occupied Paris. Hilferding died of “unknown”
causes while in the custody of the Gestapo in 1941.

Let this be a warning! If we don’t defeat the vicious anti-immigrant campaign of

racist U.S. President Donald Trump and his European counterparts, we could all
share Hilferding’s fate.

Lenin’s analysis of finance capital was more subtle than Hilferding’s, stressing the
merger of industrial monopolies with the banking monopolies in the formation of
modern finance capital and the financial oligarchy. However, it is true that
Lenin did put great emphasis on the role of the banks in monopoly capitalism. And
Lenin gave no indication that he saw the leading role of the banks in the

363
monopoly/imperialist stage as a mere passing phase that more recent writers,
both bourgeois and Marxist, have claimed it was.

Among the numerous Marxist economists who claimed that the dominant role of
the banks was only a passing phase was the celebrated U.S. Marxist economist
Paul Sweezy (1910-2004). In “Monopoly Capital,” first published in 1966, Baran
(who unfortunately died in 1964 before the work was published) and Sweezy
expressed the view that the giant corporations were dominated by managers and
that the role of bankers, financiers and stockholders during the mature stage of
monopoly capitalism had waned to such an extent that it could effectively be
ignored.

To emphasize this change, Sweezy and Baran decided to title their book “Monopoly
Capital,” while Hilferding’s book published 56 years earlier was titled “Finance
Capital.” During the 1930s, Paul Sweezy evolved from a young bourgeois
economist—he briefly supported the Austrian school—into a Marxist economist.
Politically, however, Sweezy remained a left-wing New Dealer who hoped the
continuation of New Deal reforms would eventually lead to a socialist society in
the U.S. Left-wing New Dealers believed the Glass-Steagall law, though hardly
socialist, was a step toward breaking the power of bankers and therefore a move
toward a more democratic and—left-wing New Dealers like Sweezy hoped—a
socialist USA.

At first, Sweezy continued to stress the importance of interest groups defined as

powerful capitalist families controlling crucial sections of the U.S. economy. For
example, the Rockefeller interest group along with the interest group centered on
the J.P. Morgan bank were seen as the most powerful among leading capitalist
families. These included the family controlling the oil industry in the case of the
Rockefeller interest group and the family controlling the steel industry and many
railroads in the case of the Morgan interest group.

But by the time Sweezy and Baran wrote “Monopoly Capital,” Sweezy had become
convinced that without the commanding personalities such as John D. Rockefeller
Sr. and J.P. Morgan the elder the interest groups were largely leaderless and their
influence in the economy was fading away. Instead of being dominated by the
descendants of 19th-century “robber barons,” as the “interest group” theory held,
the corporate monopolies were now dominated by professional managers who had
emerged as the natural leaders of the capitalist class.

364
Sweezy, Galbraith and Burnham and the role of the managers

Sweezy’s views in “Monopoly Capital” were obviously influenced by his friend the
left bourgeois economist John Kenneth Galbraith (1908-2006), the father of
present-day economist James Galbraith. In his “The New Industrial State,”
published in 1967, Galbraith claimed that large U.S. corporations were dominated
by managers no longer interested in profit maximization and that stockholders
had become irrelevant. This now largely forgotten book enjoyed considerable
influence for awhile. On a personal note, this was the first book on economics that
I read, and for a brief time I was greatly influenced by it.

In “The New Industrial State,” Galbraith claimed that corporate managers were
pushing aside idle stockholders and were establishing a kind of quasi-planned
socialist economy no longer dominated by the profit motive. Galbraith’s views bear
some resemblance to those of Schulze-Gaevenitz. According to Galbraith, free
competition and the profit motive now only dominated the backward sectors of
economy where small enterprises and old-fashioned capitalist free competition still
prevailed.

Galbraith admitted that his “new industrial state” was greatly influenced by the
ideas of another writer—the U.S. philosopher James Burnham (1905-1987). In
1941, Burnham had published “The Managerial Revolution,” where he expressed
the idea that a new class of managers was replacing the capitalists as the ruling
class on a world scale.

Burnham was born, like Sweezy, into a wealthy capitalist family. Much like
Sweezy, Burnham had became radicalized by the Depression. While Sweezy was
a left New Dealer and a sympathizer—but never a member—of the U.S.
Communist Party and thus a supporter and admirer of the Soviet Union, Burnham
joined the U.S. Trotskyist movement.

The exiled Leon Trotsky (1879-1940)145 maintained that the Soviet Union under
Stalin’s leadership was a “degenerated workers’ state” that had to be defended
against capitalist attempts to overthrow it. Trotsky held that Stalin’s repressive
regime represented a caste—but not a class—of totalitarian bureaucrats. Trotsky
advocated a “political revolution” to overthrow the “bureaucratic caste,” which
would regenerate the Soviet workers’ state. But he stressed the revolution he

145 Leon Trotsky (1879-1940) was expelled from the Soviet Union for “counterrevolutionary
activities” in 1929 and spent his final years in Mexico, where he was assassinated by the Soviet
intelligence operative Ramon Mercader in August 1940. Trotsky’s arguments against James
Burnham and his supporters within the U.S. Trotskyist movement can be found in Trotsky’s
final book, “In Defense of Marxism.” 365
advocated would be a political not a social revolution because it would preserve—
not overthrow—state ownership of industry, the planned economy, and the state
monopoly of foreign trade.

Burnham, while he was a Trotskyist leader during the late 1930s, developed the
view that the Soviet Union under Stalin’s leadership was a state ruled neither by
the working class nor the capitalist class. Instead, Burnham held that the Soviet
Union was a new type of class society, which he later called a managerial society,
that was destined to supplant capitalism within a few years due to capitalism’s
inability to solve the problem of unemployment or further develop the productive
forces.146

Galbraith took a benign view of “managerial society,” believing that this emerging
new society represented a mix of the best features of democratic capitalism and
socialism. Along these lines, he expected that the U.S. and Soviet societies would
converge, with the U.S. becoming more socialist and the Soviet Union more
democratic.

Burnham, in contrast, saw the emerging managerial society as a totalitarian

nightmare that would suppress all personal freedom and would be far worse than
the democratic capitalist society it was replacing. When a brief war broke out
between Finland and the Soviet Union in 1939, Trotsky supported the Soviet Union
as a workers’ state against capitalist Finland. However, Burnham and some other

146 Burnham’s views were greatly influenced by the Italian ex-Communist Bruno Rizzi. In the late
1930s, Rizzi had concluded that monopoly capitalism was giving way to a new form of society that he
called bureaucratic collectivism—what Burmham later was to call “the managerial society.”

Rizzi believed that bureaucratic collectivism, by eliminating private property in the means of
production, was preparing the way for socialist society. He claimed that history was taking a kind of
detour through this new exploitative form of society on its way to socialism. Rizzi claimed that the
Soviet Union under Stalin’s leadership, Germany under Hitler, and Italy under Mussolini were all
examples of the emerging bureaucratic collectivist society that was destined to replace capitalism and
precede socialism. Under Stalin, private property in the means of production had already been abolished
as a result of the October Revolution. Under Hitler and Mussolini, Rizzi thought, though private
ownership still legally existed it was being rendered irrelevant and would soon be formally abolished. 366

As an example of the move away from private property in “bureaucratic collectivist” Germany,
Rizzi pointed to Hitler’s anti-Semitic “aryanization of industry” as the first steps toward the
formal abolition of private ownership. Rizzi was therefore arguing that fascism in general and
Hitler’s anti-semitism in particular were progressive steps through “bureaucratic collectivism”
toward socialism. The logic of such a position would be to support fascism in general and
Nazism in particular.
leaders of the U.S. Trotskyist movement supported Finland against the “Soviet
aggression.”

Shortly thereafter, the anti-Soviet wing of the U.S. Trotskyist movement, including
Burnham, broke with Trotsky and his U.S. supporters and formed a new U.S.
socialist group they called the Workers Party. The Workers Party was thoroughly
anti-Soviet and refused to defend the Soviet Union in any sense whatsoever. The
most important descendant of the Workers Party on the U.S. left today is the
International Socialist Organization (ISO).147

Burnham almost immediately left the Workers Party and repudiated socialism
altogether as a utopia. He then went on to write “The Managerial Revolution: What
Is Happening in the World.”148 In later years, Burnham supported Senator Joseph
McCarthy’s anti-communist witch hunt, joined the right wing of the Republican
Party, and became editor of William F. Buckley’s National Review, the organ of the
right-wing Republicans. There he advocated “preventive war” against the Soviet
Union. Shortly before his death, he received the Medal of Freedom from U.S.
President Ronald Reagan.

In “The Managerial Revolution,” Burnham considered Nazi Germany, along with

the Soviet Union, to be an example of the emerging managerial society. Not only
were the Soviet Union and Nazi Germany both one-party dictatorships that did not
tolerate any political opposition, they had both, unlike the “still capitalist” United
States, eliminated mass unemployment. Burnham claimed that the German
capitalists, though still the official owners of the means of production, were now

147The International Socialist Organization originated in a split from the now defunct International
Socialists during the 1970s. The International Socialists upheld the view they inherited from the old
Workers Party that the post-Lenin Soviet Union—but not Nazi Germany or Fascist Italy—was a
“bureaucratic collectivist” society. The Workers Party preferred Rizzi’s terminology to Burnham’s.

The ISO rejected “bureaucratic collectivism” and adopted the view that the Soviet Union was “state
capitalist.” Trotsky during his fight against Burnham pointed out that if capitalism was giving way to a
new form of exploiting society, this meant that Marx’s conclusion that capitalism was the last form of
exploitative society had been refuted.

If that were the case, Trotsky pointed out, all that was left was to develop a new “minimum
program” to defend the slaves of the “totalitarian bureaucratic collectivist” or “managerial 367
society.” To replace the term “bureaucratic collectivist” society or “managerial society” with
“state capitalism” was merely a terminological trick, which leaves the pessimistic conclusions
of Rizzi-Burnham fully intact.
148Burnham’s “Managerial Revolution” is the main influence behind George Orwell’s highly
pessimistic dystopian novel “1984.” Indeed, the character O’Brien, who interrogates the British
hero Winston Smith, seems to be based on Burnham himself.
powerless, and it would only be a matter of time before the Nazis made it official
and nationalized industry.

In the United States, Burnham conceded that the capitalists still ruled but viewed
the New Deal as representing a growing managerial influence that was destined
soon to sweep the capitalist class aside and replace it with a dictatorship of
totalitarian managers along German lines. During the 1930s, Burnham had
opposed the New Deal from the left, but in the years following the publication of
“The Managerial Revolution,” Burnham opposed the New Deal from the right as
an extremely reactionary Republican. Today, the once trendy Burnham is largely
forgotten and with good reason.

Sweezy clearly was influenced by the views of Burnham and Galbraith. However,
Sweezy differed from them by pointing out that the managers of the giant
corporations were themselves capitalists—not some sort of new class of managers
as Burnham and Galbraith claimed.149 Also unlike Burnham and Galbraith, Sweezy
upheld the view that the managers were very much driven by the profit motive.
Therefore, “managerial capitalism” was not a new society but simply mature
monopoly capitalism.

What Sweezy’s analysis tended to overlook, however, was that the managers were
not simply working for themselves but for stockholders, bondholders, and other
creditors including the banks. In other words, the managers are obliged to work,
by the very nature of capitalist society, for the “financial oligarchy”—the 1 percent
and especially the .001 percent—with the aim of joining the upper levels of the
financial oligarchy if they are not already full-fledged members—which they often
are.

The managers, Burnham notwithstanding, have no interest in expropriating the

capitalist class they seek to join—assuming they are not already members. The
“managers” of Germany, the United States, and other capitalist countries

149However, it is worth noting that Sweezy, who was a defender of the Soviet Union for much
of his life, under the influence of Maoism came to the view that the Soviet Union in the post-
Lenin period was a new form of exploitative “post-revolutionary” society. But he rejected the
claim of Mao that the Soviet Union was “state capitalist.” Sweezy was simply too good an
economist to accept that the Soviet economy was any kind of capitalist society. Therefore,
Sweezy came to the view that the Soviet Union was an exploitative “post-revolutionary
society” that was ruled neither by the workers nor the capitalists. So, sadly, Sweezy ended up
with a Burnham-like view of the nature of Soviet society in the end. John Bellamy Foster still
defends a Burnham-like position that the Soviet Union was some kind of new exploitative post- 368
revolutionary society unforeseen in Marxist theory. This accords well with the growing
pessimism about the future of the working class, socialism, and human society in general that
has marked the evolution of the whole Monthly Review tendency.
did not overthrow capitalism, as Burnham predicted they would. Some of the
“managers” in the Soviet Union joined the capitalists of the United States,
Germany, and other capitalist countries by overthrowing the Soviet Communist
Party in close alliance with world imperialism and mobsters operating in the illegal
“second economy” in order to restore private property. They emerged as today’s
Russian capitalist “oligarchs”—the Russian and other nations of the former Soviet
Union .001 percent.

These former Soviet managers, though divided along more nationalist and more
pro-imperialist lines, therefore represent a new section of the
global capitalist class. They are not a new class. Managerial society, whether in
Burnham’s nightmare version or Galbraith’s benign version, has proved a
phantom.

This is not to deny that managers do manage, or as Marx put it, perform the “labor
of superintendence.” The really big capitalists—the large stockholders—have
better things to do with their precious time than perform managerial labor. For
example, enjoying a game of golf on one of the golf courses owned by Donald
Trump, perhaps golfing with the U.S. president himself.

The real question is not whether or not the managers manage but in whose class
interest do they carry out their managerial labor? The very nature of the capitalist
economy obliges the managers to manage in the interest of the 1 percent and
even more in the interest of the .001 percent, the richest layer of the capitalist
class.

In his later years, Sweezy came to view the failure to analyze the role of banking
and finance—along with the failure to analyze the labor process—to be the main
weaknesses of “Monopoly Capital,” which he along with Baran had hoped to be
their magnum opus.150 Sweezy, like many great thinkers, was often his own
greatest critic.

Behind the failure of Sweezy (and Baran) to deal with money and money capital,
which in monopoly capital evolves into finance capital, lies a greater problem that
is hardly confined to them. That is the failure of modern Marxism as a whole to
understand money as the form of the value of the commodity, combined with the

150 By failing to analyze the labor process of monopoly capitalism, Baran and Sweezy in effect
failed to analyze the role of the working class as the producers of surplus value. And by failing
to analyze the stockholders and other rich money capitalists as appropriators of surplus value,
they failed to analyze the role of the class the managers work for. In other words, Baran and
Sweezy by allowing themselves to be influenced by the likes of Burnham and Galbraith
overlooked the two main classes of modern society. 369
belief that “modern money”—money since the end of the gold standard—does not
represent a special money commodity like gold, and as long as there are
commodities to buy, or idle labor and factory capacity, “the monetary authority”
can always if necessary create additional money to bring these idle resources into
motion.

Such a view blocks any understanding of periodic capitalist crises as crises of

overproduction—the term overproduction does not even appear in “Monopoly
Capital,” a book that attempts to analyze capitalist stagnation. It also makes it
impossible to properly understand the special power of money capital whose
developed form is finance capital.

John Smith also slips into the error of overlooking the role of money capital when
he uses the formula C—C’, leaving out the M’s as though they are a mere
technicality that can be disposed of. But C—C’ is not the formula for industrial
capital. This formula begins with M, not C, and ends with M’, not C’.

Marx pointed out that industrial capitalists insomuch as they are owners of money
are also money capitalists, or we could say financial capitalists. Industrial
capitalists who work only with their own capital are in effect their own financiers.
Without that initial M, no workers can be hired and no raw materials or auxiliary
materials can be purchased. Therefore, in the absence of capital in the form of
money the most important elements of capital are just potential capital. This
includes the labor power of the workers who actually produce the surplus value.
If there is not money to pay wages, the labor power of the workers is
just potential capital in the form of unemployed workers who produce not an atom
of surplus value.

The same analysis can be extended to the state power. Without money to
purchase the labor power of soldiers, police, and intelligence agents—spies—along
with the associated weaponry from police nightsticks to nuclear weapons, the state
power cannot be set into motion. As a result, finance capital rules supreme over
the state.

If finance capitalists lack confidence in the government of a particular capitalist

state, they react by dumping that state’s bonds and currency onto the market.
This inevitably throws the government into crisis and the government soon
collapses. Therefore, as long as the workers do not take power, capital led by
finance capital will inevitably rule, however varied these forms of rule are.
The only power potentially more powerful than the power of finance capital is the
organized power of the working class. If the workers do not rule, finance capital
will.

370
The evolution of U.S. finance capital since the time of Lenin

On the eve of World War I, two of the most powerful capitalist “interest groups”
in the U.S. were centered on the private banking house of J.P. Morgan and
Company and the Rockefeller Standard Oil monopoly and its associated banks.
Around these two were a series of lesser interest groups.

A century later, the Morgan and Rockefeller groups were merged, not into another
informal interest group but a single centralized corporation, the J.P. Morgan Chase
universal bank. Let’s examine some of the steps in the evolution of the interest
groups of a century ago into today’s gigantic banking companies.

In 1940, J.P. Morgan Company, then a private commercial bank—it was largely
barred from investment banking due to the Glass-Steagall Act—transitioned to
become a corporation in its own right. Later, in 1959, it merged with the
Guarantee Trust Company, a bank long considered to be in the “Morgan orbit” but
not officially part of the J.P. Morgan Bank proper. Then, in 2000, the Chase
Manhattan Bank, associated with the descendants of John D. Rockefeller Sr., itself
the result of an earlier merger of Bank of Manhattan and Chase National Bank,
merged with J.P. Morgan to form today’s J.P. Morgan-Chase universal bank.

With the Glass-Steagall Act repealed under the Clinton administration, J.P. Morgan
Chase is free to engage in any type of financial “service” it wishes, including but
not limited to investment and commercial banking. Nor has the growing
centralization of bank capital represented by J.P. Morgan Chase ended. It
swallowed up Washington Mutual savings bank, which failed during the 2008
panic.

Other banks absorbed by J.P. Morgan Chase in recent years include Great Western
Financial, H.F. Ahmanson, Dime Bancorp, First Chicago, Banc One, First
Commerce, Chemical Banking, and finally Bear Stearns, a powerful Wall Street
investment bank that like Washington Mutual avoided bankruptcy in 2008 only by
merging with J.P. Morgan Chase.

J.P. Morgan Chase’s lines of business are:

Asset allocation, asset management, bank underwriting, bond trading, brokerage

services, capital market services, commercial banking, commodity trading,
conglomeration services, consumer banking, consumer finance, corporate
banking, credit cards, credit default swap, credit derivative trading, custody
services, debt resolution, equities trading, financial analysis, finance and
insurance, financial market utilities, foreign currency exchange, foreign exchange

371
trading, futures and options trading, global banking, global wealth management,
hedge fund management, home finance, intermediation and advisory services,
investment banking, investment capital, investment management, investment
portfolios, money market trading, mortgages, mortgage loans, mortgage–backed
securities, mortgage underwriting, prime brokerage, private banking, private
equity, remittance, retail banking, retail brokerage, risk management, stock
portfolios, securities underwriting, stock trading, subprime mortgages, treasury
and security services, underwriting, venture capital, wealth management, wire
transfers

In 2017, J.P. Morgan Chase had total assets of $2.789 trillion and reported a
$24.441 billion net profit. It employed 252,539 employees around the world.

Today’s Citigroup can be traced back to the 19th-century City Bank, a New York
bank that played a crucial role in financing the trade in commodities produced by
slave labor in the southern U.S. Later, “The City” became known as the Standard
Oil Bank. When John D. Rockefeller fell out with his brother William, he withdrew
his money from City Bank. However, brother William was also a major stockholder
in Standard Oil, so the Standard Oil influence persisted in City Bank. William
Rockefeller and City Bank President John Stillman then controlled “The City.”

The William Rockefeller-James Stillman partnership worked out so well that their
families intermarried to form the Stillman-Rockefeller capitalist family. At the end
of the 20th century, National City Bank corporate descendant Citicorp had along
the way swallowed up the powerful First National Bank, where Paul Sweezy’s
father once worked.

At the end of the 20th century and in brazen violation of what was left of the New
Deal-era Glass-Steagall Act, City announced that it was merging with the huge
financial company Travelers Group, which combined insurance and investment
banking. But this was against the law. No problem. The Democratic President
Clinton duly obliged and signed into law the bill that repealed Glass-Steagall.
Shortly thereafter, the merger became perfectly legal. After that, Citicorp
absorbed European American Bank and Bannex, as well.

In 2017 Citigroup at total assets of $1.792 trillion dollars and report a net profit
of $14.91 billion. It lines of business include:

Credit cards
Retail banking
Commercial banking
Investment banking

372
Private banking
Financial analysis

In 2017, Citigroup employed 219,000 people worldwide.

During the 20th century, the Bank of America, which began as a small commercial
bank servicing Italian immigrants in San Jose, Calif.—the future capital of Silicon
Valley but then a small agricultural city whose biggest industry was fruit canning—
mushroomed into the largest commercial bank in the U.S. As the 2008 crisis
reached its climax, Merrill Lynch, the brokerage and investment bank famous for
being “bullish on America,” merged with Bank of America to avoid bankruptcy. In
addition to Merrill Lynch, Bank of America has swallowed up U.S. Trust, MBNA,
Continental Bank, Security Pacific Corp, NationsBank, Fleet Financial Group,
BancBoston Holdings, Bay Banks, Summit Bankcorp, UJP Financial, and
Countrywide Financial.

Its activites include:

Consumer banking, corporate banking, insurance, investment banking, mortgage

loans, private banking, private equity, wealth management, credit cards,

In 2017, Bank of America had 2.281 trillion in assets and net income of $18.232
billion in 2017. In that year, Bank of America employed 208,000 world wide.

Before the 2008 crisis, the once obscure North Carolina-based Wachoviaemerged
as one of the most successful U.S. banks. Unfortunately for Wachovia, the 2008
crisis blew up its “business model,” which specialized in home mortgages. In order
to avoid collapse, this large—and until then successful bank—merged with San
Francisco-based Wells Fargo.

Recently, Wells Fargo ran into difficulties when it was revealed that it had opened
dummy accounts for customers without them being informed. In addition to
swallowing up the failed Wachovia Bank, Wells Fargo has merged with First
Interstate Bancorp, Norwest Corp, South Trust, Central Fidelity National Bank,
CoreStates Financial, First Union, and the Money Store.

It businesses include asset management, brokerage services, commercial

banking, commodities, consumer banking, corporate banking, credit cards,
consumer finance, equities trading, finance and insurance, foreign currency
exchange, foreign exchange trading, futures and options trading, insurance,
investment banking, investment management, money market trading, mortgage
loans, prime brokerage, private banking, retail banking, retail brokerage, risk

373
management, treasury and security services, underwriting, and wealth
management.

Wells Fargo had of 2016 total assets of 1.930 trillion dollars in assets. However
do to its scandals it reported a net loss of $21.93 in 2016. Perhaps its troubles will
make it a target for merger into an even bigger bank when the next banking panic
strikes. As of 2016, Wells Fargo employed 268,800 world wide.

There are still two leading old line Wall Street investment banks. These include
Morgan Stanley and Goldman Sachs, which have begun on a relatively small scale
so far to become involved in commercial banking as well at its traditional
investment banking. Morgan Stanley, which was formed in the 1930s by partners
who left J.P. Morgan and Company, then largely confined by law to commercial
banking, to engage in investment banking. The other giant investment bank is
Goldman Sachs, the sole survivor of a group of Wall Street investment banks once
owned by partnerships made up of U.S. capitalist families of Jewish-German
origin.

Morgan Stanley is engaged in Investment banking, sales and trading,

commodities, prime brokerage, wealth management, and investment
management. It has total assets of $814.95 billion. In 2016, the bank employed
55,331 people world wide.

Goldman-Sachs business activities include:

Asset management
Commercial banking
Commodities
Investment banking
Investment management
Mutual funds
Prime brokerage

As of 2016, Goldman-Sachs had $860.1 billion in assets, had a net income of

$7.40 billion, and employed 34,400 people worldwide.

Another large Wall Street investment bank, Lehman Brothers, collapsed in

September 2008 after the U.S. government refused either to rescue it or arrange
a merger with another bank. Therefore, of the five leading Wall Street investment
banks that existed prior to 2008, only two—Morgan Stanley and Goldman Sachs—
survived the crisis as independent entities.

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In light of this truly monstrous centralization of bank capital, combined with the
phenomena of “financialization” of the economy in the wake of the 1979-82
“Volcker shock,” the criticism of Lenin’s “Imperialism” that it overestimated the
power of bank capital has been dying out. In 2006—even before the crisis of
2008—John Bellamy Foster, Paul Sweezy’s successor as editor of Monthly Review
and unofficial leader of the Monthly Review school, had introduced the term
“monopoly finance capital” to described the most powerful section of the capitalist
class and has emphasized the increasing power of the banks. The current Monthly
Review editor has thus continued the move begun by Sweezy himself away from
the “managerialism” of “Monopoly Capital.”

Passing conjunctures versus permanent change

We must be on guard against the natural human tendency to confuse what are
actually passing conjunctures with permanent changes in the capitalist economy.
An earlier example of confusing a temporary conjuncture with what amounted to
a passing quasi-cyclical phase was exhibited by N.I. Bukharin in his book
“Imperialism and World Economy.” Bukharin made the mistake of seeing the rise
in raw material prices relative to the prices of finished goods that prevailed during
the years leading up to World War I as a permanent feature of monopoly
capitalism/imperialism. But we shouldn’t be to hard on Bukharin. There are many
other examples.

In the 1930s, the Great Depression was seen as permanent by many Marxists and
some bourgeois economists. Indeed, the term “secular stagnation” was first
coined in the late 1930s to describe what was viewed as a permanent condition.

Later, in the 1950s and 1960s, prosperity was seen as permanent due to the
application of “Keynesian techniques” that allegedly had solved the problem of
chronically inadequate monetarily effective demand. Therefore, it was claimed,
instead of “permanent depression” we now had, thanks to Keynes, “permanent
prosperity.”

In the 1970s, the stagnation and high inflation of the decade was widely seen as
“permanent” due to the monopoly pricing power of the giant corporations, the
power of the trade unions to drive up money wages—which according to Keynesian
theory raises prices—combined with the alleged power of Arab oil sheiks and their
OPEC cartel to drive up oil prices.

Then, in the years following the Volcker shock, the combination of “moderate”
economic growth and inflation interrupted only by “mild recessions,” dubbed the
“Great Moderation,” was seen as permanent. There is little doubt that many of the

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features of the economic situation seen as “permanent” today will prove to be less
than permanent.

The “stable prices” and low interest rates, combined with low rates of economic
growth (secular stagnation), that have prevailed since the end of the Great
Recession are widely seen as permanent features of today’s capitalism. I think we
can be pretty sure they are not. Changes in prices (inflation and deflation), interest
rates, and varying rates of economic growth punctuated by crises/depressions will
be seen in the coming years just as they have been in the past.

We can also expect the role of individual countries within the world capitalist
economy to change due to the working of the law of uneven development, which
favors the accelerated development of a given capitalist country in one period but
works against it in the next. And not least, there will of course be the effects of
great political and social revolutions still to come.

However, other changes in monopoly capitalism are likely to prove permanent.

These changes, as opposed to those that are cyclical or transient, correspond to
the long-term evolution of capitalism analyzed by Marx and Lenin. Since the
Volcker shock ended the stagflation of the 1970s, the dependency of the
imperialist countries on the workers of the oppressed countries—those free of
colonial rule but still economically exploited and militarily threatened by the
imperialist countries—has qualitatively increased. This change is likely to prove
permanent—until it is overthrown by new revolutions that are sure to come—
because it corresponds to the basic need of capital to find the cheapest sources of
labor to exploit. Or to put it more precisely, it corresponds to the basic need to
increase the ratio of unpaid to paid labor—the rate of surplus value.

This growing dependence of the imperialist countries on the labor of the exploited
countries that John Smith and the Monthly Review school rightly emphasize,
combined with the counterrevolutionary destruction of the Soviet bloc triggered
by external imperialist pressure in the post-Volcker shock period—for example,
the Reagan-era U.S. military buildup—along with a long postponed change in the
Soviet leadership, has ushered in a new stage in the evolution of monopoly
capitalism/imperialism.

This stage is at least as momentous as was the post-World War II stage of

imperialism compared with the pre-World War II era. Indeed, I believe the current
stage of imperialism, where the bulk of surplus valueproduction has shifted from
the imperialist countries to the oppressed nations—not merely the production of
super-profits in the “global south”—is in my opinion the biggest single change in
capitalism since the imperialist era began. These changes are now combined with

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the effects of the chaotic Trump administration with its incredibly reckless financial
policies. I will look at the likely results of Trump’s financial policies and proposed
budget in a special post next month.

The decay of British capitalism in the late 19th and early 20th centuries

Finally, we get to Lenin’s point about the influence of the export of capital as
opposed to the export of commodities. Let’s see how this transformed capitalism
in Lenin’s time and in our own.

In the 1860s, the British textile industry was violently disrupted by a shortage of
cotton—its chief raw material—caused by the U.S. Civil War. As a result, the
industrial capitalists in what was then Britain’s most important industry were
unable to transform a portion of their money capital into real capital. Thus
frustrated, they were encouraged to export a portion of their capital they would
normally have invested at home. As a result, the export of British capital invested
abroad exploded, growing more than 400 percent between 1862 and 1872, which
includes the period of the cotton crisis. (Calculated from figures provided by a
table in this chapter of Lenin’s “Imperialism.”)

While the cotton crisis was short term, other changes occurring in the global
capitalist economy proved to be permanent. Among these was the growth of the
export of capital from Great Britain, though the longer-term rate did not match
the rate that prevailed during the cotton crisis.

The years that followed the cotton crisis but preceding the crisis of 1873 marked
the high point of what Lenin called the old organization of industry based on “free
competition.” By the eve of World War I, according to Lenin’s figures, British
capital invested abroad had risen from 3.6 billion francs in 1862, when the cotton
crisis struck, to between 75 billion and 100 billion francs in 1914. What were the
consequences for the British economy of this tremendous export of capital on the
British and world capitalist economy?

Lenin wrote: “The export of capital influences and greatly accelerates the
development of capitalism in those countries to which it is exported. While,
therefore, the export of capital may tend to a certain extent to arrest development
in the capital-exporting countries, it can only do so by expanding and deepening
the further development of capitalism throughout the world.”

Therefore, the growing export of capital should lead to at least a certain

retardation of the further development of capitalism in Britain and later other
nations exporting capital combined with the accelerated development of capitalism

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in the nations that Britain and later other imperialists countries have exported
capital to.

Now let’s see what happened.

Consequences

During the first phase of imperialism—the period analyzed by Lenin—the export

of British capital was mostly to “white colonies,” or former white colonies such as
the United States and Canada that retained many of the characteristics of white
colonies. A smaller portion of British export capital was invested in other European
countries, while only a minority of it was invested in the colonies of the “global
south.” The same pattern can be observed in the export of capital of France and
Germany.

The result was that the period of rapid growth of industrial capitalism based on
free competition in Britain had definitely passed its peak, and the decline of British
capitalism had begun. “ … in the last quarter of the nineteenth century,” Lenin
notes,“ this monopoly was already undermined; [other] countries, sheltering
themselves with ‘protective’ tariffs, developed into independent capitalist states.”
In the new century, these new independent capitalist states were to develop into
new imperialist states that challenged Britain’s economic, military, and political
domination.

As Britain increasingly invested its capital abroad as opposed to at home,

economic growth declined in Britain but accelerated in the countries importing
British capital. This was particularly true of the United States, which protected its
internal markets by imposing protective tariffs. Germany, newly unified by
Bismark’s wars, did the same. These developments brought to an end Britain’s
19th-century industrial monopoly that had dominated the era of industrial
capitalism proper.

The newly industrialized countries such as the United States—its unity confirmed
by the U.S. success in putting down the British-backed slaveholder rebellion—and
newly unified Germany had the advantage of new plant employing “best practice
techniques” and the economies of scale that the new level of industrial
development made possible. Britain, in contrast, was hindered by aging industrial
plant and the older more decentralized methods of production appropriate for the
early phase of industrial development.

As Britain’s relative industrial power declined, so did the the material basis of its
military power—based above all on naval power. The world order with Britain at

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its center that had held since the end of the previous world war—the anti-Jacobin
or Napoleonic wars in 1815—was progressively undermined. Once this process
had reached a certain point, all it took was for the shots fired in Sarajevo—itself a
relatively minor event—to bring the whole international order tumbling down.

While the bulk of the capital exported by the imperialist powers in the pre-Volcker
shock stage of imperialism was to other imperialist powers, a portion of the capital
exported was invested in the colonized and semi-colonial nations of the global
south. However, there was relatively little industrialization—which is not to say
there was none—of the global south countries. In part, this was because of the
extreme political instability of the colonized countries and lack of infrastructure.

Capitalists—everything remaining equal in terms of profit—prefer to invest their

capital at home where property rights are guaranteed by governments and
military forces they control. They are especially reluctant to invest large amounts
of capital in nations that are politically unstable, since the danger is too great that
they will lose their capital in the event these countries are seized by rival capitalist
states or, worst of all, in the event of revolution.

An important factor that slowed down the industrial development of the countries
of the colonized global south was that they became dumping grounds for
commodities produced in the imperialist states. As Lenin notes: “The capital-
exporting countries are nearly always able to obtain certain ‘advantages’, the
character of which throws light on the peculiarity of the epoch of finance capital
and monopoly.”

Therefore, during the pre-Volcker shock stage of imperialism, the industrialization

of the global south countries, including China, was largely though not completely
confined to the development of railroads, seaports, and the extraction industries.
However, Lenin was well aware—unlike many later Marxists—that imperialism had
unleashed tendencies that if it was not overthrown in good time by the working
classes of the imperialist countries would have dire consequences for these same
working classes.

First—and this is a crucial point—the super-profits squeezed out of the working

class—and also simple commodity producers, especially peasants—in the
colonized countries enabled the capitalists to realize super-profits above and
beyond the average rate of profit. In various ways—a point that will be examined
in greater detail in later posts—the capitalists were able to share some of these
super-profits with a portion of the working class of the imperialist countries. The
upper layer of the workers who share in the super-profits of imperialism formed
the base of the trade union and Social Democratic Party bureaucracies—and later

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the bourgeoisified bureaucracies of many of the Communist Parties that formed
the backbone of the opportunist wing of the working-class movement.

The collapse of the Social Democratic leaders, above all the vote for war credits
by members of the SPD fraction on August 4, 1914, in the German Reichstag
symbolized the disastrous consequences of the victory of opportunism. Lenin
realized that however much you denounced particular individuals like Karl
Kautsky, the betrayal occurring on such a large scale could not be attributed to
the weaknesses of particular individuals. Instead, real material interests ultimately
rooted in the relations between the classes are decisive.

What are the interests of the great mass of industrial workers working in basic
industry in the imperialist countries? Don’t they share, at least to some extent, in
the prosperity of the imperialist nations that the exploitation of the workers in the
global south has produced? What will be the consequences for the mass of
industrial workers, especially those working in basic industry, if they allow
themselves to be led by opportunist party and trade union leaders whose primary
base is the skilled workers of the labor aristocracy?

One result was already clear when Lenin wrote “Imperialism” in 1916. The
European industrial working classes were killing themselves by the millions in the
trenches in order to enrich their bosses. But what about the long-term economic
consequences for the industrial working classes? In 1916, Lenin hoped that the
European working classes would soon rise up and bring the further development
of imperialism, at least in Europe, to an end. Everything he did,including the
writing of “Imperialism,” was subordinated to this goal.

But Lenin was also a realist. He had no idea, nor could he, when the European and
global world revolution would bring imperialism and the capitalist system that
breeds it to an end. What would be the consequences for the European—and the
U.S.— industrial proletariat, which had grown rapidly in the decades leading up to
the war, if capitalism were to succeed in hanging on for a prolonged historical
period—like another century? Lenin deals with the question in Ch. 8 of
“Imperialism,” entitled “Parasitism and the Decay of Capitalism.”

In this chapter, Lenin produces a table that shows the growth of the population of
England and Wales compared to the growth of the working-class population
engaged in basic industrial production during the years between 1851 and 1901,
when the decline of British capitalism was just getting underway.

The table shows that the combined population of England and Wales during these
crucial years rose from 17.9 million to 32.5 million. But the number of workers

380
engaged in basic industry, which makes modern society possible, increased from
4.1 million to 4.9 million. This means that while the population of Wales and
England increased by 82 percent, the industrial working class in basic industry
increased by just under 20 percent. As a result, the percentage of the overall
population of Wales and England consisting of workers engaged in basic industry
fell from 23 to 15 percent.

On the other hand, the number of rentiers—persons living off interest and
dividends and taking no part in the actual management of industrial or other
businesses—had risen to a million people. So on one side, we see the growth in
rentiers and on the other the slowdown—and after the Volcker shock of 1979-82
the absolute decline—in the number of workers engaged in basic industrial
production. These were—and are—symptoms of the decay of British capitalism

Similar trends are observed in agriculture, which along with the products of basic
industry form the material foundation that separates life today from life in the
Middle Ages and all previous epochs. “An increasing proportion of land in England
is being taken out of cultivation and used for sport, for the diversion of the rich.”
As far as Scotland—the most aristocratic place for hunting and other sports—is
concerned, it is said that “it lives on its past and on Mr. Carnegie (the American
multimillionaire). On horse racing and fox hunting alone England annually spends
£14,000,000 (nearly 130 million rubles). The number of rentiers in England is
about one million.”

While Mr. Carnegie—a reference to the retired U.S. steel magnate Andrew
Carnegie (1835-1919)—is gone, the current U.S. president’s golf courses provide
entertainment for today’s idle rich.

Besides Rudolf Hilferding, the other big influence on Lenin’s “Imperialism,” was
the British bourgeois economist J.A. Hobson (1858-1940). Hobson was a
bourgeois critic of imperialism and influenced Keynes as well as Lenin. Hobson
was alarmed that Britain’s vast colonial empire was making British capitalism
dangerously dependent on “the natives.”

Lenin quotes Hobson: “Most of the fighting by which we have won our Indian
Empire has been done by natives; in India, as more recently in Egypt, great
standing armies are placed under British commanders; almost all the fighting
associated with our African dominions, except in the southern part, has been done
for us by natives.”

Don’t these words exactly describe U.S. operations—under both Obama and
Trump—in the “Middle East,” as the imperialists call it today? For example, in the

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recent “liberation”—that is, destruction—of the Iraqi city of Mosul and the Syrian
city of Raqqa, the U.S. used mostly Kurdish and to a lesser extent Arab soldiers
commanded by U.S. military commanders, while massive air bombardment was
provided by the U.S. Air Force. This way the number U.S. casualties was kept
close to zero. However, the downside is that the U.S. empire—like the British
empire in Hobson’s day—is becoming dangerously dependent on “the natives.”

But Hobson was above all an economist, and here he saw an even bigger danger.
He feared that the “partitioning of China” by the imperialist powers would end with
the shifting of industrial production to China. As it turned out, after decades of
war and revolutionary struggle the capitalist industrialization of China has taken
place under very different and—from imperialism’s point of view—far worse
circumstances.

Keeping this in mind, here is the quote from Hobson that Lenin provides:

“The greater part of Western Europe might then assume the appearance and
character already exhibited by tracts of country in the South of England, in the
Riviera and in the tourist-ridden or residential parts of Italy and Switzerland, little
clusters of wealthy aristocrats drawing dividends and pensions from the Far East,
with a somewhat larger group of professional retainers and tradesmen and a larger
body of personal servants and workers in the transport trade and in the final
stages of production of the more perishable goods; all the main arterial industries
would have disappeared, the staple foods and manufactures flowing in as tribute
from Asia and Africa. … We have foreshadowed the possibility of even a larger
alliance of Western states, a European federation of great powers which, so far
from forwarding the cause of world civilization, might introduce the gigantic peril
of a Western parasitism, a group of advanced industrial nations, whose upper
classes drew vast tribute from Asia and Africa, with which they supported great
tame masses of retainers, no longer engaged in the staple industries of agriculture
and manufacture, but kept in the performance of personal or minor industrial
services under the control of a new financial aristocracy. Let those who would
scout such a theory (it would be better to say: prospect) as undeserving of
consideration examine the economic and social condition of districts in Southern
England today which are already reduced to this condition, and reflect upon the
vast extension of such a system which might be rendered feasible by the
subjection of China to the economic control of similar groups of financiers,
investors, and political and business officials, draining the greatest potential
reservoir of profit the world has ever known, in order to consume it in Europe. The
situation is far too complex, the play of world forces far too incalculable, to render
this or any other single interpretation of the future very probable; but the
influences which govern the imperialism of Western Europe today are moving in

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this direction, and, unless counteracted or diverted, make towards some such
consummation.”

Lenin remarks: “The author is quite right: if the forces of imperialism had not been
counteracted they would have led precisely to what he has described. The
significance of a ‘United States of Europe’ in the present imperialist situation is
correctly appraised. He should have added, however, that, also within the
working-class movement, the opportunists, who are for the moment victorious in
most countries, are ‘working’ systematically and undeviatingly in this very
direction.”

What were the forces that “counteracted” imperialism Lenin mentions? One was,
of course, that the economic competition between the imperialist countries led to
political and military competition that ended in World War I, still raging when Lenin
wrote “Imperialism.” The second was the struggle of the Chinese nation against
imperialism, which after decades of war and revolution led to China “standing up,”
in the words of leader of the Chinese Revolution Mao-Zedong in 1949.

What a disaster that event has proven to be for imperialism! And finally, there
was the force that Lenin was counting on above all to “throttle imperialism”: the
socialist revolution in Europe—and ultimately the United States—which, however,
was to be frustrated over the following century.

To a large extent, Hobson’s dreary prospect—especially considering that it was

written in the year 1902!—has become a reality, above all in Britain but also in
Western Europe, the United States, and now increasingly Japan as well. One of
the consequences was the election of Donald Trump as U.S. president and the
growth of powerful Trump-like far-right parties in Europe.

Hobson provides a striking picture of the “post-industrial” era, where the economy
of the imperialist countries is dominated by “services” and finance but is
dangerously dependent on the industry and the workers of China and other
nations of the global south, whose largely non-white classes are being exploited
by the finance capital of the U.S., Europe and Japan.

Later this spring/summer, I will deal with two important questions: One that Lenin
raised in “Imperialism” in his polemic against Karl Kautsky was speculation that
imperialism would give way to a new stage of “super-imperialism,” where a united
“international finance capital” would exploit the world and nasty things like world
wars between the capitalist nations would no longer occur. The second, which is
taking on ever greater importance, is the role of immigration under imperialism.

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However, another urgent issue has intervened. That is the evolution of the current
industrial cycle, which began with the Great Recession and is now nearing its end,
as well as the Trump/Republican—and to a considerable extent Democratic as
well—reactionary and reckless financial policies. As I write these lines, Trump
had just announced an imposition of a protective tariff on steel and aluminum,
a move that threatens the whole consensus on which the U.S. empire is built.
I will take a break in my extended review of Smith’s “Imperialism” next month to
assess the current economic and political conjuncture in light of these
developments.

_______

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 Three Books on Marxist Political Economy
(Pt 17)
Apartheid planet and the new racism

John Smith in his “Imperialism in the 21st Century” sees imperialism as evolving
towards a form of global apartheid. Under the rule of the U.S. world empire, the
freedom of capital to move across national boundaries in its endless search for the
highest rate of profit has expanded. However, workers do not have freedom to
cross national borders in search of the highest wage.

Since World War II, the nation-state, the cradle of the capitalist mode of
production, has been in decline. One example of this decline is the limited
sovereignty of Germany and especially Japan since World War II. Even the
sovereignty of countries that were allies of the U.S. in World War II, Britain and
France, has been severely restricted within the NATO “alliance,” and in the case
of Britain within the “special relationship.”

The U.S. and its imperialist satellite states of Western Europe and Japan have
opposed every attempt to establish new strong independent nation-states –
though with mixed results – since World War II. In the pre-war era, the then-
politically divided imperialist countries sometimes gave limited support to
nationalist movements in their rivals’ colonies and semi-colonies. Since World War
II, the entire imperialist world has been united against national liberation
movements in the oppressed world.151

Taking the world economy as a whole, the productive forces have long outgrown
the nation-state. This was already shown by the outbreak of World War I more
than a hundred years ago. In recent years, the revolution in communications
represented by the rise of the Internet and the smartphone is increasingly
breaking down global, linguistic, and cultural boundaries.

151 Before World War II, imperialist nations sometimes offered a degree of support to nations
oppressed by rival imperialist powers. For example, the U.S. championed the cause of China
against Japan, while Japan supported enslaved India against Britain. Similarly, Nazi Germany
supported the Arab countries against Britain and the Zionists, who were colonizing Palestine
with British support even as the Holocaust was unfolding in Europe. In all these cases, the
support offered by imperialist nations to oppressed nations fighting for independence against
its imperialist rivals was treacherous and limited, but it existed. After World War II, this door 385
was closed as the imperialist countries under the domination of the United States formed a solid
united front, especially after the Suez crisis of 1956, against all national liberation movements.
But the nation-state has refused to peacefully fade away into the sunset as the
productive forces have outgrown it. In the period between the two world wars,
there emerged within the imperialist world a counter-tendency of resurgent
economic nationalism, which found expression in increased tariff and other trade
barriers. Economic nationalism was accompanied by growing political nationalism,
racist anti-immigrant movements, and racism within the imperialist countries.
These trends found their most extreme manifestation in Nazi Germany.

Today in the imperialist countries, we once again see a rise of economic and
political nationalism accompanied by anti-immigrant movements and growing
racism. This extremely dangerous tendency is currently represented by President
Donald Trump and his supporters in the U.S., where it is now in power; the new
government of Italy; the current government of Austria; the National Front in
France; the Alternative for Germany in Germany, where it is the official opposition
party; and their counterparts in other imperialist countries. Though they are not
imperialist countries, similar movements dominate governments of many of the
ex-socialist countries of eastern Europe such as Poland, Hungary and the Czech
Republic

Trump’s recent decision to move the U.S. Embassy in Israel to Jerusalem and
recognize Jerusalem as Israel’s “eternal” capital was accompanied by Israeli
massacres that have left more than a hundred Palestinians dead and thousands
wounded in Gaza. Trump’s move cannot be separated from the broader racist
trend that Trump personifies.152

152 Many people are puzzled how the Trump administration, which has been amazingly tolerant toward
anti-Semitism, and many of whose supporters are indeed extremely anti-Semitic, can at the same time
be the most pro-Israel administration ever. If they knew the real history of the Zionist movement’s
friendly relationship with anti-Semites, they would not be so surprised. Zionist ideology claims that
anti-Semitism is eternal among so-called Gentiles – a catchall term that describes all non-Jews – and
can never be eliminated. Therefore, Zionism makes no attempt to fight anti-Semitism but rather seeks
to work with open anti-Semites. And the anti-Semites have often returned the favor. For example, the
second most anti-Semitic government in Europe in the 1930s, the government of Poland, strongly
supported Zionism as a way to rid itself of its unwanted Jewish population.

And the Nazis themselves – the all-time champions of anti-Semitism – flirted with the Zionists
as part of Hitler’s program to expel Jews from Germany and later from German-dominated 386
Europe. The Hitler government only stopped supporting Zionism when it became clear that
there was no way to deport the unwanted European Jews to Palestine under wartime conditions.
During World War II, Palestine was controlled by Britain and not Germany, and Germany
never made any serious attempt to capture it. Only when it became clear that deporting the
European Jews to Palestine – or Madagascar, considered an alternative to Palestine by many
anti-Semites and Zionists alike – wasn’t possible did the Hitler government finally come out
against Zionism.
Israel itself is the product of an earlier wave of racism that accompanied the
economic and political nationalism of the period between World War I and World
II that ended with Nazi Germany’s attempt to physically exterminate the entire
European Jewish population. Zionist Israel, therefore, links the “old racism” with
the new.

Is a kind of global apartheid system emerging, as Smith suggests, that is replacing

the increasingly outmoded bourgeois nation-state? Today’s political and economic
trends suggest the answer could be yes if the coming period does not result in a
victory of the global working class.

Apartheid versus the classical bourgeois nation-state

To understand apartheid and its relationship to the classical bourgeois nation-

state, we have to examine the two chief apartheid states that emerged out of the
U.S. victory in World War II. These are South Africa, which gave the world the
term “apartheid” – which means apart or separate development – and the State
of Israel153, which is the U.S. – and earlier the British – sponsored “solution” to
the “Jewish question.”

In economic terms, the nation-state is a fraction of the world market that is

partially walled off by tariffs and other trade restrictions. It makes use of a
common currency, and has often restricted the outflow of money from the country.
In this way, the nation-state attempts to maximize monetarily effective demand
within its borders at the expense of other nation-states.

In contrast, within the nation-state, all barriers to the movement of money capital
as well as internal tariffs and other trade restrictions are abolished. The bourgeois
nation-state through the system of passports and visas regulates the movement

153 Notice the term “State of Israel,” not the Republic of Israel. The very name is a provocation because
before 1948 the “term” Israel was never used to describe a geographical area but rather for thousands
of years was used as a name for the Jewish people as a whole. Israel is not the ancient name for the
geographical entity historically called Palestine like many people are led to believe. By choosing the
name State of Israel (Jewish people), the Zionists were emphasizing the principle of Zionism that their
state does not even claim to represent its citizens but rather the Jewish people as a whole, whether or
not they are citizens or actually live or even want to live in Israel.

On the other hand, the State of Israel does not even pretend to represent its Arab citizens. 387
Second, since the name “Israel” has long been used both in religious and sometimes in secular
discourse as an alternative name for the Jewish people, opposition to or even criticism of
“Israel” can more easily be presented as “anti-Semitism.” Indeed, in the pre-1948 context,
denouncing the “crimes of Israel” – for example, the murder of Jesus Christ – would indeed
have been anti-Semitic.
of workers in and out of the nation-state. Within the nation-state, the freedom of
movement of the working class is guaranteed.

The bourgeois nation-state aims to ensure the largest share of the world market
and maximum access to raw materials and labor for its capitalists at the expense
of the capitalists of other countries. The relationship among bourgeois nation-
states is therefore at bottom antagonistic. This is why diplomacy that talks about
the “friendship” between nations is hypocritical. The nation-state makes use of
economic measures ranging from tariffs to economic “sanctions,” and political and
military measures up to and including war. The survival of the nation-state into
the nuclear age, therefore, endangers the continued existence of our – and many
other – species.

In contrast to pre-capitalist empires, which were typically ethnically and

linguistically diverse, the bourgeois nation-state attempts to achieve a common
sense of nationality within its borders. This means that persons who live within
the national boundaries speak a common language; have a common religion, or
at least a few closely related religions; share a common culture; and are educated
in common in the national myths.

To take the example of the U.S., there is the the myth of the “founding fathers” –
no founding mothers – who established democracy as the form of government of
the new nation. In reality, the U.S. founding fathers rejected the concept of
democracy as dangerous to private property, which at that time included private
property in kidnapped Africans. According to the founding-fathers myth, from its
very foundation the U.S. has been uniquely committed to democracy, opposed all
“dictators” – which according to the U.S. national myth is the opposite of
democracy – and has a unique mission to spread democracy around the world.

Since the bourgeois nation-state in an economic sense is a partially walled-off

portion of the world market with no internal trade barriers, a common language is
necessary in order to carry out trade. Trade itself is far more important than it
was in pre-capitalist empires, because all production of any significance under
capitalism takes the form of commodity production.

The language question and the bourgeois nation-state

During Britain’s rise as a nation-state, English grew out of a combination of the

German-like Anglo-Saxon language of early Germanic invaders and the French-
speaking Norman invaders, who in turn conquered the Anglo-Saxons during the
11th century. In the centuries that followed, English pushed aside the Celtic
languages of Wales, Scotland and even Ireland. Recently, Welsh nationalists have

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revived Welsh with some success. This development, combined with the rise of
the Scottish national independence movement, are signs of the decay of the British
nation-state.

In the U.S., successive immigrant groups have lost the languages they brought
with them in favor of American English. The descendants of enslaved Africans have
forgotten the languages their ancestors brought with them from Africa and
developed their own form of English, though with some differences in dialect from
standard “white” American English. By and large, Black English is understandable
to speakers of standard American English, though speakers of standard English
will miss some of its subtleness. Native Americans, too, have been forced to
“forget” their original languages, which developed over thousands of years in what
is now called North America and replaced them with American English.

During the formation of the bourgeois French nation-state, a standard French

dialect was developed that gradually replaced other dialects and languages
descended from Latin that were once spoken in post-Roman France. The same
process has occurred more recently in Italy, where local dialects and languages
are still in the process of giving way to standard Italian.

Bourgeois nation-states are generally characterized by a common religion – for

example, the Catholic religion in France, Italy, Ireland and Poland; the Orthodox
form of Christianity in Greece and Russia – or several closely related religions such
as the Catholic and Protestant forms of Christianity in Germany and the U.S.
Common language, culture and religion, combined with common origin myths that
establish the “mission” of the nation, give rise to a sense of nationality held in
common by the ruling capitalist class, the working class, and all intermediate
layers.

This sense of common nationality at first plays a progressive role in the

development of capitalist production. But as the further development of the
productive forces come into contradiction with the capitalist relations of
production, nationalism becomes a major barrier to the global unity of the working
class, which urgently needs to replace capitalism and its nation-states with a world
socialist society. Today’s movements to establish truly independent bourgeois
nation-states for oppressed nations is progressive, while nationalism of the
imperialist countries, which aims at crushing other nation-states, is thoroughly
reactionary.

As they develop, the strongest bourgeois nation-states establish their own multi-
national empires where one nation rules and other nations are oppressed. But
these modern empires are centered on a core nation that is itself organized as a

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bourgeois nation-state. In contrast, the Roman Empire, to take one example, was
centered on the city-state of Rome and not the bourgeois nation-state of Italy,
which did not come into existence until the 19th century.

Apartheid South Africa and the bourgeois nation-state

In South Africa under apartheid, there was no pretense that all South Africans
belonged to a common nationality. On the contrary! Only the white population,
defined in terms of race, was considered part of the South African nation. The
native Africans were denied any South African identity at all and were treated as
foreigners within their own country. So-called “colored” – people of mixed, African,
Asian and European ancestry – were also denied South African identity, because
they were only partially white, though they were somewhat privileged relative to
the people of “pure” African descent.

Supposedly, native Africans were to express their nationality in the so-called

Bantustans. However, the Bantustans were totally nonviable as national units,
since they were far too small to support independent capitalist development.

This monstrous system was enforced by a series of “passes” – similar to the

international system of passports and visas – which enabled Africans to work in
white South Africa proper with the permission of the apartheid authorities. This
permission was granted only to the extent their labor power was in demand by
white South Africans, whether for domestic service or the production of surplus
value. Africans were treated as “immigrants” in their own country with the further
proviso that they could never under any circumstances gain South African
nationality.

Under apartheid conditions, there was no chance that the various peoples of South
Africa would ever amalgamate either linguistically, religiously or culturally, not to
speak of “racially.” Indeed, apartheid aimed to prevent this from happening at all
costs. When their labor power was not in demand, African workers were expected
to return to their so-called homelands, the Bantustans, where they lived under
conditions of the greatest poverty.

Not surprisingly, apartheid authorities assigned the greater part of the area of
South Africa to the white population, allotting only a small portion to native
Africans, who formed approximately 80 percent of the population. With their every
movement controlled, and their democratic rights to organize into political parties
and trade unions suppressed, there was no chance African workers could sell their
labor power at a wage that corresponded to its value.

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In addition to full labor rights, the working class can only freely realize the value
of its labor power if there is no national oppression, no sexual oppression against
women, no racial oppression – the very opposite of the conditions that prevailed
in apartheid South Africa. John Smith sees imperialism, where the majority of the
industrial working class is located in the global south, as a kind of generalized
apartheid system, where workers are denied freedom of movement across
national frontiers but where capital increasingly has unrestrained movement
across the same frontiers. There is in my opinion, especially in the age of
globalization, much merit to this view.

Apartheid Israel

Israel has increasingly evolved into an apartheid state similar – though of course
not identical – to South African apartheid. Today, Israel for all practical purposes
rules all of historic Palestine. The Palestine that Israel rules over despite the
expulsion of the majority of the Arab population in 1948 – al Nakba – is now once
again more than 50 percent Arab. This is not – or rather is not yet – as
demographically lopsided as South Africa, where only about 20 percent of the
population is “white.”

But the Arab population is growing faster than the Israeli population. If this trend
continues, the imbalance between the Jewish “Israeli” population and the Arab
population will draw ever closer to the South African situation. Given enough time,
it will exceed it.

Liberals – both in the U.S. and other imperialist countries, and the ever-shrinking
number of liberals in Israel – argue that a separate Arab state must be established
if Israel is to avoid becoming an apartheid state. If such a state were to be
established, it would at most constitute about 13 percent of historic Palestine. But
even if an “independent” Arab state is established in 13 percent of Palestine – a
prospect that seems increasingly unlikely in these days of Trump and Netanyahu
– it would be a bantustan-like entity. The reality is that the apartheid horse
escaped from the Zionist barn long ago.

Indeed, the whole project to establish a “Jewish state” in an Arab country through
colonization made apartheid inevitable from the beginning. This fact was fully
realized by the most reactionary – that is, realistic – Zionists from the very
beginning of the Zionist movement. Therefore, even if the Jewish population of
Palestine were a nationally homogeneous people of “Israeli” nationality – which
they are not – Israel within the framework of Zionist ideology can never become
a normal bourgeois nation-state built on the foundation of a common nationality
– not when more than half its inhabitants are of Arab nationality!

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Like in South Africa, the apartheid system is maintained by a series of restrictions
of movement and a system of passes that regulates the movement of Arabs in
general and Arab workers in particular. Even the roads motorists use are organized
on strict apartheid principles. Palestinian Arabs, like Africans in South Africa under
apartheid, are treated as foreigners in their own country whether they have formal
citizenship like they do within Israel’s 1967 boundaries or do not as is the case in
Gaza and the West Bank, occupied by Israel in the 1967 war.

Israelis are discouraged from learning the Arabic language, which is spoken by all
the surrounding peoples, including all Arab Palestinians. With more than half the
people who live in the country speaking a different language, Israel fails the
linguistic test. The original Hebrew language died out around 500 BCE as a living
language and was used by Jews only for religious purposes after that. Hebrew was
artificially revived by the Zionists as part of the Zionist effort to prevent any
merging of the Jewish colonial population and the native Arabic-speakers.

The Zionists have gone out of the way to prevent the Israelis from being affected
by Arab culture in other ways, emphasizing that Israel is culturally and politically
a Western country and not “Middle Eastern” at all. This is a rather ironic – but
revealing – attitude for a movement that claims it is reviving the long-defunct
Jewish nation, which in its day often struggled against Greece and Rome, the
ancestors of Western civilization. In contrast, the ancient Palestinian Jewish state
was in many ways – not least in the sphere of religion – an ancestor of modern
Arab civilization.

One of the differences between classic South African apartheid and the Israeli
version is this: Since Palestine is a much smaller country than South Africa, it is
possible for Arab workers to return to their “Bantustans” at the end of the working
day. They, therefore, do not have to spend the night in Israeli territory proper like
was the case with African workers under South African apartheid.

Zionist ideology demands a “purely” Jewish state where all the capitalists and all
the workers share the same “Jewish” – or “Israeli” – nationality. In practice,
however, Israeli capitalists, under the pressure of capitalist competition (which
requires individual capitalists to strive for the maximum rate of profit and is far
more powerful than Zionist – or any other – ideology) are dependent on cheap
Arab labor just as the white South African capitalists were on African labor.

In order to reduce this “dangerous” dependency on Arab labor, the Israeli

government has encouraged non-Jewish workers from the global south to
temporarily move to Israel while denying them all possibility of gaining Israeli
citizenship on the grounds they are not Jewish.

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U.S. imperialism supports Israel above all in order to defeat Arab nationalism –
the move to create a bourgeois nation-state that would include the entire Arab
nation. The emergence of a true United Arab Republic that would unite all the
people of Arab nationality would give a powerful impulse to capitalist development
in the Arab world. Under a powerful United Arab Republic, Arab capitalists would
take markets away from the capitalists that now dominate the markets of the Arab
world and would be well positioned to expand their share of the world market
beyond the Arab nation.

Besides Israel, the anti-national forces in the Arab world include Saudi Arabia,
Kuwait and other oil monarchies. The majority of the working population of these
thinly populated desert kingdoms and emirates is made up of immigrants from
Pakistan and India. They like Israel – and South Africa under apartheid – are
therefore not emerging bourgeois nation-states.

The interests of the U.S. world empire – not simply the inclinations of the
temporary inhabitants of the Oval Office – require that the U.S. and its imperialist
satellites oppose the creation of new viable bourgeois nation-states by oppressed
peoples in order to prevent the rise of new capitalist competition. The prevention
of the emergence of a united Arab bourgeois nation-state is a key plank of U.S.
foreign policy that remains unchanged from administration to the administration.
The U.S. and its imperialist satellites are also opposed to the more modest
prospects of strong bourgeois nation-states emerging in Iraq, Syria, Egypt, Libya
or any other Arab country.

Unlike South Africa in its apartheid era, countries such as Syria, Iraq and Egypt
are not yet Bantustans. Therefore, the whole policy of U.S. imperialism is to break
up the Arab countries and the countries of the global south in order to reduce
them to Bantustan-like entities. The destruction of the emerging Iraqi nation-state
began with economic sanctions against Iraq after it briefly ousted the Kuwaiti oil
monarchy and moved to integrate it into Iraq in 1990. Then came the Gulf War of
1991 under Bush I, when the Kuwaiti oil monarchy was forcibly restored.

The drive to destroy the Iraqi nation-state continued under the Clinton
administration, with its tightening economic sanctions, forced unilateral
disarmament of Iraq, and “inspections,” combined with periodic and then constant
bombing under the pretext of enforcing the “no-fly zone.” Finally, under Bush II
came the outright invasion by U.S. and British forces.

Since the U.S. invaded and occupied Iraq in 2003, it has encouraged Kurdish
separatism in the north. The Kurdish tribes themselves are divided into two bitterly
hostile groups that function in effect as two separate Kurdish “countries,” both

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subordinated to U.S. imperialism. In the Arab part of Iraq, the U.S. has split Sunni
and Shiite Iraqis into separate neighborhoods and encouraged members of the
two religious communities to see each other as bitter enemies.

Through these policies, the U.S. has done everything possible to reverse the sense
of a common Iraqi nationality that was growing under the nationalist rule of the
Baath party. In order to achieve this, the U.S. forged alliances with reactionary
clerical elements among both the Shiite and Sunni sects of Islam and bought off
tribal leaders among the Kurds.

Then, under Obama, came the 2011 U.S.-NATO destruction of Libya, where slave
markets selling black African slaves have reappeared. A fine legacy for the first
African-American U.S. president! The U.S.-sponsored rebels in Syria – now
supplemented by increasingly open Israeli intervention – is another example of
the U.S. empire’s nation-destroying policies. The U.S. empire is attempting to split
Syria into a Sunni area in the east, a Kurdish state in the north, and an Alawite-
Christian state in the west.

Iraq and Syria, which have the potential to form bourgeois nation-states that could
encourage new capitalist development and thus create unwelcome competition for
U.S. capitalism, are being split into ever smaller and more Bantustan-like units.
Recently, the African country of Sudan was divided into North and South Sudan.

There is another example, not in Asia or Africa but in Europe itself. Yugoslavia, a
socialist country whose “independence” the U.S. championed against the Soviet
Union during the Cold War, was broken up into tiny “independent” states following
the counterrevolutions that swept the Soviet Union and eastern Europe in the
1980s and 1990s. As a result, the Balkans have been “balkanized” like never
before. Even the mineral-rich province of Kosovo, which Albanian nationalists
hoped would become part of Albania, was declared an “independent” state.

The U.S. world empire supports not only Israel and the oil monarchies against the
Arab nation, but the Saudi Arabian oil monarchy against Iran. Unlike Saudi Arabia
and other oil monarchies, Iran is a viable bourgeois nation based on the Iranian
nationality. This explains why U.S. imperialism shows such great hatred for Iran
despite the attempts of successive Iranian governments to improve their relations
with Washington. Iran has a common language – Farsi – and a common religion
in the Shiite form of Islam, common national traditions, vast oil resources, and a
considerable territory and population. In the words of Trump’s current secretary
of state, Mike Pompeo, the U.S. government is determined to “crush” it.

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Israel as an ‘oil monarchy’

In contrast, Saudi Arabia and other oil monarchies like Kuwait are not real
bourgeois nation-states, because they depend on the labor of workers from
Pakistan and India. The majority of the working class in the oil monarchies have
no possibility of ever acquiring the nationality of their rulers, just as was the case
with South Africa under apartheid and is the case with the Arab majority in
Palestine today. In this sense, the oil monarchies are also apartheid states, though
with the important difference that the working class of the oil monarchies do not
consider the states in which they are obliged to sell their labor power to be their
real homelands.

Interestingly, Israel as much as possible attempts to bring workers from the other
non-Arab nations of the global south to exploit as well. Therefore, Israel, though
it produces little or no oil, is taking on some of the characteristics of an “oil
monarchy” as well as an apartheid state.

Patrick Bond’s critique of John Smith

The Northern Ireland/South African Marxist Patrick Bond has published a highly
critical review of Smith’s “Imperialism in the 20th Century.” Bond attacks Smith’s
concept of a global apartheid system on the basis of the many differences between
South Africa’s apartheid and global imperialism. Of course, there are many
differences. There are also many differences in detail between Israeli apartheid
and the South African variant. But apartheid is still apartheid. Back in the day,
there were also many differences between Italian and German fascism, but both
were fascist regimes.

It is what South African – and Israeli – apartheid have in common and not the
differing details that is important. It is indeed true that the evolution of the U.S
empire as it tries to hold out against the struggles of the oppressed and the
internal economic forces tearing it apart is increasingly tending toward a global
version of apartheid. Is it any accident that the current president of the United
States, Donald Trump, is a racist who just called (May 16, 2018) “illegal” Latin
American immigrants “animals” – the same epithet that he recently used to
describe Syrian President Assad?154

154Trump and his supporters have since walked this back by claiming that the U.S. president
was only referring to members of the El Salvadorian gang MS-13. This itself is rather ironic
from Trump, with his well-documented ties to organized crime. More importantly, by
describing any group of human beings as “animals,” the door is open to remove all the 395
Patrick Bond writes: ” … but a rounded Marxist-feminist-ecological-race-conscious
critique of imperialism needs a stronger foundation. Smith’s problems begin with
the South Africa metaphor and extend to the unconvincing binary of oppressed
and oppressor nations [emphasis added – SW], whose main shortcoming is that
it underplays national ruling classes aspiring to shift from the former to the latter.”

This argument is particularly dangerous for those of us who live in the imperialist
countries. It opens the way for us to be “neutral” on the side of “our own”
imperialism in the case of conflict between the real imperialists and countries –
often led by bourgeois-nationalist forces – that are trying to gain independence
from the oppressing imperialist countries.

The U.S. world empire’s tendency toward full-scale global apartheid

Today, the U.S. “white nationalists” – the U.S. fascist movement – combines the
“classical” fascism of Mussolini and Hitler and the apartheid of South Africa and
Israel by openly advocating that the United States be divided between white areas,
Black areas, and Latinx areas, alongside the already Bantustan-like Native
American reservations. Under the proposed U.S. fascist apartheid system, Muslims
would be returned to their countries of origin – a fascist U.S. would be a Christian
not a Muslim country, after all – and U.S. Jews would be forced to emigrate to
Israel.

The U.S. fascist Richard Spencer – one of the chief organizers of the Charlottesville
“unite the right” demonstration, where the demonstrators chanted “Jews will not
replace us” – is extremely anti-Semitic. However, as the staunch anti-Semite and
racist that he is, he openly admires Israel as an “ethnic-racial state” whose
apartheid system is a model that Spencer hopes to duplicate in the U.S.

So-called sub-imperialism

Bond writes: “Another leading Marxist, Claudio Katz, has recently reminded us of
one such feature that deserves far more attention: Rau Mauro Marino’s 1960s-70s
theory of sub-imperialism, which fuses imperial and semi-peripheral agendas of
power and accumulation with internal processes of super-exploitation.” Bond
refers to countries like China that have experienced a considerable growth of
capitalist industrial production.

It is quite true that the capitalists of China, South Africa, India, and other countries
industrializing on a capitalist basis preside over a system of cruel super-

“animals,” including by physical extermination if necessary. In this way, the road to future
holocausts is prepared.
396
exploitation. Because of this undeniable fact, Bond following Katz and Marino
proposes to label them “sub-imperialist countries.”

The grave political dangers of the theory of sub-imperialism

Among the countries Bond considers “sub-imperialist” is Vietnam. If another war

were ever to come between Vietnam and the U.S., would Bond be neutral because
both the U.S. and Vietnam are imperialist, or at least in the case of Vietnam “sub-
imperialist”?

Bond and other supporters of the theory of sub-imperialism “forget” that

imperialism means the domination of “finance capital” as opposed to industrial
capital. In Lenin’s day, the centers of finance capital – the giant banks – and
monopolistic industrial capital – the huge factories – were located within the same
country. Today, the centers of finance capital in the sense of the corporate
headquarters of the big banks and the ownership of the great bulk of corporate
bonds, shares, and bank deposits – finance capital – are still located in the
imperialist countries, just as they were in the days of Lenin. But industrial
production – industrial capital – is increasingly located in the oppressed countries.
In reality, the “binary opposition,” as Bond puts it, between oppressor and
oppressed countries is far starker than it was in the days of Lenin.

The oppressed countries that Bond wants to label “sub-imperialist” are being
exploited by U.S. imperialist monopolies far more than they ever were when they
were “underdeveloped” countries. We now have a hierarchy of exploiters with the
industrial capitalists of the oppressed countries super-exploiting their workers by
paying them less than the value of their labor power but then handing over a huge
amount of the surplus value they extract from their super-exploited workers to
the capitalists and their hangers-on of the oppressor countries.

For example, China, a “global south” country, is described as either “sub-

imperialist” or just plain imperialist because of the breathtaking expansion of
industrial capital in that country since the “Volcker shock” at the end of the 1970s.
The proof that is often given that China is “imperialist,” or at least “sub-
imperialist,” is the growing export of capital from China to Africa. Didn’t Lenin
stress that the export of capital was an important feature of imperialism?

In reality, the largest investors in Africa are Britain and France followed by the
U.S., which is still in the process of catching up with these older colonial powers
in this regard.

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The consequences of paying workers less than the value of their labor
power on commodity prices

Marx, as Smith notes, did not in “Capital” deal at length with the consequences of
the purchase by the capitalists of the labor power of workers below their value –
though he did acknowledge that it is an important phenomenon – because Marx’s
method required him to assume in “Capital” that commodities including the
commodity labor power sell at their values – direct prices. This assumption was
necessary in order to show that surplus value – profit – does not arise from
cheating and swindling but can be explained under the assumption that equal
amounts of labor exchange with equal amounts of labor.

Only in Volume III of “Capital” does Marx modify this assumption somewhat,
replacing it with the assumption that all commodities with the exception of the
money commodity, which doesn’t have a price, and the commodity labor power,
which doesn’t have a price of production, sell at their prices of production. The
commodity labor power is not sold by the industrial capitalist but by wage workers
who possess no capital and have only their labor power to sell. From the viewpoint
of the industrial capitalists, labor power is a form of capital – indeed by far the
most important – once they have purchased it, but unsold labor power is not
capital.

Therefore, the workers do not sell their labor power at its price of production.
However, assuming that the rate of profit is equalized in all branches of
production, the workers purchase the commodities they have to consume to
reproduce their labor power at their prices of production.

What happens if the capitalists purchase labor power at a price below that which
will enable the workers to fully reproduce their labor power is a subject that lies
beyond the scope of “Capital.” Marx had planned to write a whole book on “wage
labor” where he presumably would have gone into this in depth, but as far as we
know he never found time to write this critical book. Here I want to examine what
will be the effect on prices if the capitalists purchase the labor power of workers
at a price – wage – below the value of their labor power.

For purposes of simplification, I will assume that direct prices and prices of
production are identical. In other words, I will assume that capital in all branches
of production has identical organic compositions and turnover periods, so direct

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prices and production prices are equal. Introducing different organic compositions
and turnover periods that cause prices of production to deviate from direct prices
does not affect the essence of this argument.155

Let’s assume the workers that produce apples due to some special circumstance
lose the ability to obtain the full value of their labor power. Remember, under our
assumptions the workers purchase with their money wages the commodities that
are necessary to fully reproduce their labor power. As we saw in earlier posts, the
value of labor power includes both a biologically determined minimum and an
additional moral element.

Assume that as a result of special circumstance capitalist farmers who grow apples
are able to buy the labor power of their workers below their direct price while
everything else remains unchanged. As a result, our apple capitalists will realize
a super-profit. These super-profits, assuming “free competition,” will not last very
long. Our apple capitalists’ fellow capitalists will notice sooner or later that capital
invested in the apple-producing industry is higher than the rate of profit in any
other branch of industry.

Therefore, additional capitalists will enter the apple-producing industry causing a

rise in the number of apples offered for sale on the market. The supply of apples
will now exceed the demand for apples at the prevailing prices. Competition
among the apple capitalists will see to it that prices of apples are lowered to a
level that will again equalize the rate of profit of the apple-producing industry to
the profit in every other industry. In this case, the equalization of the rate of profit
will be achieved by selling apples below their direct price. This phenomenon gives
rise to the illusion among the (bourgeois) economists that wages determine prices.

In this case, the consumer – the purchasers of apples regardless of the class they
happen to belong to – will benefit. The money – the quantity of gold the currency
they use represents – used to purchase apples will represent a smaller quantity
of abstract human labor than the apples they purchase. As a result of this unequal
exchange, value will be transferred from the sellers of apples to the buyers of the
apples.

155Introducing these kinds of simplifying assumptions is central to Marx’s method. It enabled

him to examine the central questions he was examining such as the origin and nature of surplus
value without dealing with secondary factors before the primary question was thoroughly
examined first. For example, Marx had to explain how surplus value can be produced when all
commodities are exchanged at their values before he went into equalization of the rate of profit
and transformation of values into prices of production, the transformation problem, and so on. 399
A portion of the value wage that is stolen by the apple capitalists from their
workers will thus be appropriated by the purchasers of apples. Insomuch as the
purchasers of the apples are workers, and assuming all other things remain equal,
the non-apple workers will appropriate a portion of the wages that have been
stolen from the apple workers. If the apples are produced in an oppressed country
while the buyers of apples are workers in an oppressor country, the latter workers
will in value terms be pocketing a portion of the stolen wages of the workers in
the oppressed country.

However, what happens if the fall in wages is not confined to the apple industry
but becomes general? For example, suppose an apartheid system is established
that enables the capitalists not only in the apple-growing business but in all
branches of capitalist production to pay their workers radically lower wages than
they did when a (bourgeois) democratic system prevailed.

The apple capitalists would just as before experience a rise in their rate of profit.
But so would all the other capitalists. In this case, there will be no flow of capital
from other industries into the apple industry. Instead, a general fall in wages
would mean that all capitalists would experience a higher rate of profit.

In the real world, things are far more complex than our two simplistic models.
However, the movement of industrial production from the imperialist countries to
the oppressed countries means that the situation is moving from one where low
prices prevail for a few commodities and closer to the situation where “cheap
labor” means a general rise in the rate of profit.

Therefore in the situation where 80 percent of the workers live in oppressed

countries, the benefit that workers in the imperialist countries gain from cheap
commodities produced by low-wage workers is fading fast. Instead, it is the
capitalists who are benefiting from rising profits, which is reflected – outside of
crisis periods – in soaring stock markets.

This is not to deny that capitalists are still sharing a portion of their surplus value
with a now shrinking portion of workers in the imperialist countries. For example,
workers in “capital-intensive” factories with a high organic composition of capital
located in the imperialist countries are paid wages that are still very high relative
to the starvation wages paid to workers in industries with a lower than average
organic composition of capital located in the oppressed nations of the global south.
From the viewpoint of the capitalists, the “cost of labor” in factories with a higher
than average organic composition of capital forms a much smaller part of the total
cost of production. Therefore, capital-intensive industries are more likely to
remain in the global north.

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As cheap commodity prices fade in importance as a way monopoly capitalists of
the global north share super-profits with the upper layer of the working class, the
private ownership of homes takes on increased importance. The evil is not the
private ownership of the houses but the private ownership of the land under the
houses. Many better-paid workers who have built up substantial equity in their
homes benefit from rising home prices – capitalized land rents. These land rents
are ultimately a portion of the super-profits being squeezed out of the super-
exploited workers of the global south. A portion of these super-profits – stolen
wages – are then shared with better-paid workers who have built up equity in
their homes – or rather in the land under the homes.

Recently in Silicon Valley, I attended a meeting of activists who had some

proposals to help the growing number of homeless people in “the valley.” The
current cyclical economic boom has driven up apartment rents so high that many
working-class people are being either forced to leave the valley or face
homelessness. One of the activists observed that even among immigrants,
homeowners were quite hostile to proposals to locate shelters for the homeless in
their neighborhoods. These homeowners are fearful that the proposed homeless
shelters would make their neighborhoods “less desirable” and push down property
values.

It is no accident that the capitalist U.S. Democratic Party has pushed the
“American Dream” of home ownership since New Deal days. However, programs
to encourage home ownership among workers divide workers between those who
rent and those who own their own homes. In this way, an upper layer of
homeowners is detached from the rest of the working class. On the other hand,
the Democrats always fail to pass laws that would encourage solidarity among
workers such as their long-abandoned promised to repeal the Taft-Hartley Law,
and more recently their failure to pass “card check”156, which would encourage
unionization.

156 The Taft-Hartley Law is an anti-union law passed by the GOP-Jim Crow Democratic coalition in
1947 in the U.S. Congress over President Truman’s veto. Among other things, it enabled U.S. states to
pass right-to-work laws that outlaw the union shop. Originally, these laws were passed in the Jim Crow
South, but gradually they have passed in other states, including Michigan, which was considered the
center of the CIO. For years, the Democrats promised to repeal the Taft-Hartley Law when they
controlled Congress and the White House but never did. Today, no Democratic or Republican politician
that I know of even suggests repealing this reactionary legislation.
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Though having long ago dropped their promise to repeal Taft-Hartley, the Democrats did
promise in 2008 to pass so-called card check, which would enable a union to be recognized if
a majority of the workers in an enterprise merely checked a card indicating that they desired
The importance of the law of the tendency of the rate of profit to fall

In terms of the long-term evolution of capitalism, the shift of industrial production

from the imperialist countries to the oppressed countries is a consequence of the
tendency of the rate of profit to fall and the measures that capital must take to
resist this fall. Capital is therefore driven to find ever-increasing amounts of cheap
labor to exploit.

Remember, cheap labor enables capital to resist the fall in the rate of profit in two
ways. First, all other things remaining equal, a higher rate of surplus value means
a higher rate of profit. But all things are not equal. The lower the value of labor
power the more likely the capitalists will select a “method of production” that uses
labor power – variable capital – rather than constant capital, therefore slowing
down the rise in the organic composition of capital, which all things remaining
equal lowers the rate of profit. Therefore, capital needs cheap labor like a person
needs oxygen to breathe.

Here we see the importance of the law of the tendency of the rate of profit to fall,
which Marx called the most important law in all political economy. Even if the rate
of profit doesn’t actually fall in a particular historical period, the law shows why
imperialists follow the policies that they do.

Bond’s one valid criticism of Smith

Bond quotes Smith as writing, “It is true that ultra-low wages in southern nations
are being used as a club against workers in imperialist nations, but it is
preposterous to suggest that the North-South gulf in wages and living standards
has been substantially eroded.”

While Smith is correct to say that the gap between the wages of the workers in
the imperialist countries and countries in the global south has not disappeared, he
ignores the devastating effects of “de-industrialization” that Hobson and then
Lenin warned against more than a hundred years ago. The disappearance of
unionized industrial jobs has condemned much of the current generation of young
workers – both white workers and workers of color, native and immigrant workers
alike – to low-paid, low-quality, often non-union jobs such as warehousing

union representation. If passed, this would indeed have made organizing unions a lot easier.
However, once elected, President Obama and the congressional Democrat majority that
emerged from the 2008 election failed to take any action to pass card check. This shows that
the U.S. Democratic Party is not a European-style Social Democratic or Labor Party that
though pro-capitalist and pro-imperialist is based in the unions. Instead, it is in the European
sense of the word a thoroughly right-of-center bourgeois party. 402
workers, retail clerks – these jobs are now rapidly disappearing due to the rise of
online shopping – fast-food workers, security guards, and janitors. These jobs are
often located in the very same office buildings where high-tech engineers write
the software that increasingly controls every aspect of our lives.

The radical weakening or complete disappearance of the once-powerful industrial

unions has also pulled the rug out from the labor-based parties of Western Europe
and Japan. The once powerful Italian Communist Party, which after the fall of
Mussolini had the majority of the Italian people behind it and continued to be a
powerful party for decades after that, has now completely disappeared. In
Germany, the oldest labor-based party in the world, the Social Democratic Party,
recently received its lowest vote, 20.5 percent of the total cast, in postwar German
history. The French Communist Party, which got around 25 percent in the early
years after World War II, now gets vote percentages in the single digits.

In a parallel development, the U.S. labor-liberal faction of the Democratic Party,

which bases itself on the unions, lost influence to Bill Clinton’s “New Democrats,”
who oriented away from industrial workers and tried to build a voting base among
conservative white-color professionals instead. Many remaining white industrial
workers – or would-be industrial workers – whose parents and grandparents voted
the Communist ticket in Western Europe after World War II have fallen victim to
the demagoguery of far-right racist parties like the National Front in France and
the League Party and Five Star Movement in Italy.

The collapse of the old workers’ parties is historical punishment for the failure of
these parties to carry out the socialist revolution when they were powerful and, in
the Italian case, had the majority not only of the working class but the nation as
a whole behind them.

Some final observations on Smith

Smith’s book is so rich that we could spend more months on it. But it is time to
move on. So I will make some final observations.

Smith’s last chapter, “All Roads Lead to Crisis,” is perhaps the weakest in the
book. It was obviously written after the rest of the book was written and seems
to have been added to the manuscript at the last minute just before publication.
It describes what was a developing partial global crisis of overproduction that hit
the energy industry in 2016. During this partial crisis – or “Kitchin recession” –
the rise of global industrial production was halted briefly while the global prices
for primary commodities fell sharply. In the U.S., capital spending fell slightly for
the first time since the 2007-09 crisis.

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However, after Smith’s book was published in 2017, the “minor recession” of 2016
gave way to a new boom, which has continued through the first half of 2018. This
boom has brought the strongest rise in capital spending in the capitalist world of
the current industrial cycle. This boom, combined with the Republican tax cut, is
now sharply pushing up interest rates indicating an approach of a new downturn
that has every prospect of being far worse than the minor recession of 2016.
However, no matter how deep the coming recession proves to be – even if it is
worse than the 1929-33 super-crisis – it won’t be the “final crisis” of capitalism.

There is no such thing as a final cyclical crisis of capitalism. Capitalism and cyclical
crises will continue until the working class overthrows the capitalist class, or world
civilization collapses due to nuclear war, climate change, or similar disaster leading
to the common ruin of the two contending classes of our era, the capitalist class
and the working class.

John Smith’s “Imperialism in the 21st Century,” despite some shortcomings, is

overall the most important book on post-1979 imperialism that has appeared so
far. I consider it must reading.

Next month, I will review “Modern Money Theory,” a book by the radical non-
Marxist L. Randel Wray. MMT is gaining support as a “third way” between
neoliberal capitalism and Marxist socialism and as such is gathering support
among progressives. Reviewing this book will enable us to examine many of the
points we have developed in this blog with a fresh perspective.

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