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)

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” 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.

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 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” 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.

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.

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 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)

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 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.

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.

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 not equal 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 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)

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 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 of production 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 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 such cartel 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 managers (10) 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 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).

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 price competition 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 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 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 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 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 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, 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 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.”

To be continued.

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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 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 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. (back)

2 Marx 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 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. (back)

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. (back)

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.

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.

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. (back)

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 courses in college are amazed to discover that the profit-driven capitalist system, when it works best, generates no economic profit. (back)

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 causes economic growth, even under perfect competition. (back)

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. (back)

8 We will see later in this review-critique that even Shaikh eventually gets confused on this crucial point. (back)

9 Heterodox economics essentially stands somewhere between the bourgeois macroeconomics orthodoxy based on the work of Keynes and the Monthly Review school. (back)

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. (back)

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 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. (back)

12 Marx 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 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. (back)