Carried out by Pablo Pulgar Moya
Professor Anwar Shaikh is professor of Economics in the Graduate Faculty of Social and Political Science at The New School for Social Research in New York City, where he has taught since 1972. He is actually one of the most prominent heterodox economists in the world. In the conversation that follows, Pablo Pulgar Moya sits down with Anwar Shaikh in Santiago de Chile to discuss heterodox economy, politics, concept of profit and social contradictions of capitalism.
Pablo Pulgar Moya: Good afternoon, professor Shaikh. It is a pleasure for me, the possibility of this interview. First of all, I think it is worthwhile to start with your intellectual biography, if you can shortly tell us about your theoretical work and the last years, especially considering that your fantastic book Capitalism: Competition, Conflict, Prices which will soon appear in Spanish.
Anwar Shaikh: Good afternoon, Mr. Pulgar Moya. In Spanish, yes. I was born in Pakistan, my interest in development was natural so to speak. And my family travelled, so I lived in different countries including Malaysia, Canada, Kuwait and Nigeria for sometimes. And it’s very clear that there are big levels of differences in development. And eventually, though I started studying as an engineer, I eventually switched to, after my graduation, to economics. And the question that I came with is: how do you help development and how do you explain these differences? And I thought that economics was the way to go. But when I got there, to Columbia graduate school, I discovered that development people were supposed to take the standard theory and use it to explain development. And the standard theory made no sense to me. Utility maximizing, optimizing, rational expectations, perfect competition just didn’t seem to me explain or even represent the world.
So, I became involved in trying to consider some other foundations. And that lead me to read Joan Robinson and then Luigi Pasinetti, both Cambridge economists, and then from there, to go back to Marx and Smith and Ricardo. And as I did that I began to see that there was in this alternate tradition a way forward, one that began from a completely different beginning, which is how people actually behave, and from that one could derive all the basic tools of micro, and then talking about how economies behave, and having a macro story. But all the story had to be fit together and be consistent from one level to the other. And had to be consistent with empirical evidence and observations on capitalism. That took me a long time, a long, long time. It was a long time because I had to fill gaps. If you read Marx, there’s nothing about trade. If you read Ricardo, there’s nothing about class struggle, so you can’t just add them together. Sraffa has nothing about money. I had to develop a framework that it was internally consistent and could answer empirical questions about the modern world. And that took many years of research, and almost 20 years just to produce the book. I started writing in 1997 and it came out in 2016.
In the past conference, on Monday, you said you don’t build a new theory only by destroying the old theory, and you can’t just destroy the old theory by showing its mistakes. You must start always with a different foundation. Do you understand your own book as a new economic paradigm, as a new mode of systematizing, what capitalism is. What background was the most important for building your own model?
Anwar Shaikh: Well let me start with the paradigm question, is this a new paradigm? I think it is but it’s not mine. It is the one that in my opinion was implicit and perhaps buried in Smith, Ricardo, Marx, and Keynes. They studied different aspects of the economy. Smith believed that the market is a kind of a balancing mechanism, and Ricardo developed the theory of relative prices, and then Marx the theory class struggle and the surplus product, surplus value as the foundation of profit and so on. And Keynes introduced effective demand and macroeconomics. But to put these together in a way that’s coherent, in my opinion, is a new paradigm. And I was influenced, when I was younger, by Kuhn’s idea that new paradigms arise, from the accumulation of deficiencies of the old paradigm. But, of course, it doesn’t follow that the deficiencies will self-assemble themselves into a new paradigm. They signal that you need a new paradigm. And whatever comes from that is motivated, but it is not given, by the deficiencies. For instance, Einstein’s development of science of the physical world was certainly motivated by the rising problems in Newton’s framework. But it didn’t mean that the Theory of Relativity was produced by just altering Newtonian mechanics around the edges and all that. Einstein changed it fundamentally.
Pablo: In your Capitalism book, you remarked that the profit motive drives capitalism and drives its advances, but at the same time, also builds and leads to its worst crisis. Can you discuss some, for example, political implications that come from the theories that you present in your book?
Anwar Shaikh: Yes, one fundamental aspect of my book is that we have to understand how people and firms actually behave. You just have to look in the mirror to see how people behave, right? So, you know they don’t behave the way that the neoclassical story is told. But then the task remaining is to explain how to derive observed laws of demand from the actual behavior patterns of people. That’s one task. The other task is to show how the market creates supply. There the most important point is that production is driven by profitability and that the system balances through trial and error. In a firm, for example if you start a business, you don’t know who will come to your restaurant, you make a guess. And if you’re lucky, maybe in six months, a year, two years enough of a reputation comes up and you start making money. But before that you lose money. So, that kind of behavior means that a theory of the firm depends very much on expectations of profitability arising from the expectation of demand, because if people are coming but not paying, or they’re paying too little, it doesn’t matter that they’re coming, they have to pay enough to make a profit. And the second is that the balance between your supply, which in the case of the restaurant is all the meals you’re offering, and the demand, which is the customers, is never an immediate balance. If you don’t have enough customers, you cut back. If you have too many, you hire more people and make more food. So, this balancing process implies constant fluctuations. Your production, your supply food, also generates demand. Because when you hire more people, they demand more goods from their wage income. When you buy raw materials, the things you need for cooking, that is demand for inputs that affects the supply of materials. And your profits go into your income, or into the income of your creditors, landlords, etc. Maybe if things are going well, you decide to expand the business, i.e. invest in bigger facilities, etc. This is investment demand, motivated by longer term profit expectations. Thus both sides, supply and demand, reflect the profit motive in different ways. And there is no reason why these millions of individual supply and demand actions will balance. On the contrary, these things are always trying to seek a balance and always going off the balance. And that means that for me, a lot of turbulence, what I call turbulent regulation.
The point is that real competition is completely different from the fiction of perfect competition. Real competition is a war, and competitors use whatever means they can. By the way, for instance, if you know history, then you know some businesses seduce away the customers from other firms, spread lies and disinformation about other brand, and at the constantly advertise that they are better than others – even if they are not. All of these are tools of competition, the propaganda of its war. In real competition, firms set the prices. Orthodox economics says that perfectly competitive firms receive prices, take them as “given”, when in reality firms set prices and as they are need to, they change them.
The last point is that within real competition, in any given industry competition leads to firms to set roughly similar prices for a given quality, since that is what customers look for. But if the newer firms in some industry have higher profit rates than newer firms in another industry, then the capital moves from a low-profit industry to the high-profit industry. Which is another kind of turbulent process. It creates more supply when the profit rate is high, drives the price down, therefore makes the profit rate lower. In the industries in which the profit rate was relatively low, supply contracts relatively, and the price goes up. You never get exact equalization, but constant adjustments and fluctuation because everything you do causes effects somewhere else. And that means that that capitalism is constantly moving, constantly adjusting, never in balance. Yet these processes have moving centres of gravity. That in my opinion is the classical notion of competition.
Pablo Pulgar Moya: Your concept of profit as the key force, as driving force of capitalism. In this context, how important is this concept to explain the contradictions between, for example, the private aims and the social goals of the community?
Anwar Shaikh: So, this is exactly the question that is on our current agenda in regard to climate change. But it’s always been there. If you gave firms the choice, they will naturally try to have the lowest cost, in order to make the most profit. Because they cannot just charge any prices, other firms will force them towards some common price. So how do you get a low cost? One way is to push down the wages of the workers. Another is to push up the length of the working day, make them work harder and longer. In addition, firms can mechanize and lower unit labor costs. These are central to Marx’s ideas of absolute and relative surplus value. And of course firms will try to use natural resources in the cheapest way possible. And that means, in this whole process, that pollution is profitable. If you don’t prevent it, the firm is driven through competition and through the motive of profit to pollute the environment, to damage workers, to damage customers. We know that if we don’t have safety regulations, firms may put poisonous things into their products, not because they are bad, but because it will make their products cheaper and hence given them an advantage in competition. Obviously, this incentive for profit is not at all the same thing as a social goal. We know historically that cigarettes, forms of tabaco, were widely sold, and those companies knew perfectly well, years and years before they were caught, that this causes cancer. So, what did they do? They hid the information, because of course they would lose a lot of profit if people knew. And of course, governments were complicit everywhere.
In that sense, I believe that profit-making has a dynamic and rational component, not in the sense of perfect rationality, but there’s a rationale for pushing all these bad effects onto other people so you can get the benefit. And that for me, means that the interaction between firms and the environment, between firms and the way they pollute, or between firms and other people, is an internality. The claim that it an externality is an absurd proposition. Of course, it’s internal and not external, you don’t say a war is internal when you win and it’s external when you kill other people. It’s part of the war! It’s internal to the war. So, this separation is false. Also “efficiency” is not the efficiency of use of resources for social good, it is efficiency of use of resources for profit. And then it’s efficient to pollute, unless you’re stopped, because otherwise you would have higher costs. It’s efficient to have people with very low wages, because you make more profit. Unless they fight back. The history of labor and class struggles is part of the struggle against the capitalist notion of efficiency, about its logic of profit benefits and our notions of social benefits.
Pablo Pulgar Moya: The next question is, in the actual context, many economics departments in the world are dominated by the ideas of orthodox economics. On the other hand, heterodox economics survives in some universities and often outside universities and formal institutions. But after the crisis 2008, it appears that neoclassical economics was unable to explain the crisis itself. For you, recognized as one of the few economists who predicted the crisis in 2008, how did you read a possible situation that the crisis ends in a systematic collapse?
Anwar Shaikh: Well, first of all, heterodox economists, it’s true, are locked out of most economic departments, all across the world. But that doesn’t mean that there are no places for heterodox economists. If you go across Europe, there are several spaces still open. England for instance has several universities with heterodox economists, and so does Australia, Germany, France, Italy, and the Unites States, etc. And across the world, there are universities that still have heterodox spaces. The United States has at least three or four departments where there is a substantial number or even the majority of heterodox economists. In mine, the New School for Social Research, we are mostly heterodox economists, so that’s one example. We are, it’s true, outside, but we are not gone, we are not dead.
And we are growing since the crisis, precisely because people are asking, well why was the standard framework not able to explain the crisis and not able to anticipate it? Because in the orthodox economics framework, crises are outside of the system, because inside the system it is all perfect and calm, a ballet of consumers and firms dancing in perfect harmony. So, it’s only when something lands on the stage from outside this ballet, they say ‘Oh my God, what happened here?’ From the heterodox point of view, crises an inherent tendency. If the system builds up but over-extends, it comes down. People who observe capitalism always know this, the billionaire investment banker George Soros for instance says, if you overshoot you will undershoot.
But it is not just about crises. The difference between heterodox and orthodox economics has to do with how you represent capitalism itself, at the ground level. Orthodox economics says you make optimal choices. Gary Becker says you do that in in marriage, in choosing to have children, etc. I ask people, I ask people here at this conference, how many people chose their husband, or wife, partner or child by rational choice? And any one is going to raise their hand it is because they are insane. Nobody makes that kind of life decision, or even on what food to eat, in the manner claimed by orthodox economics. So, we already know that it doesn’t fit at the micro level, it doesn’t fit at the macro level.
Orthodox economics covers up that lack of fit with mathematics. People get intimidated with the math and they think, it must be rigorous. But anybody who knows math knows that math cannot be any more rigorous than the question that you are asking, right? And many times, math not appropriate at all So, there is no reason to worship math. It is merely a tool, to be utilized when appropriate to the structure and application of a particular framework. And often, it is less important than history, social observation, etc.
On crises, there is the question of whether they come from the outside or the inside. I believe that they mostly come from the inside. So, I began to study stories of inside crises, of course there are business cycles which are fairly regular, in the sense that they recur, not in the exact time periods but they happen again and again. They are like waves in the ocean. You’d be very silly to think that one wave will come, and no others will come, it’s an underlying dynamic. You also know that in the ocean there are much deeper movements, longer cycles. And that in the history of economics there is also something called long waves. Long waves are associated with Kondratieff, and all that seemed to work pretty well, until about the 1930’s or 1940’s. Yet after that they seem to have disappeared, it seemed that you never found them. Well, I went and read Kondratieff and I found something very interesting. His data that he presents on long waves is in terms of prices. But he presents it in the text of the book is in terms of nominal prices. In the back of the book, he has another series which has prices expressed in gold, because gold is sort of a universal commodity. Not because it’s the foundation of money, but because it represents a reference for money. So, I plotted that data. And lo and behold, everything that Kondratieff said was true in terms of prices relative to gold, including the present. And on that basis, I began to be interested in the fact that crises occur around the middle of the downturn of these long waves. You can see that for 1814, 1847, 1873, you can see it in 1929, you could see it in the 1980’s which was the so-called Great Stagflation. In the 1920 and 1962 wave peaks, a crises came approximately 8-9 years after a peak. I began to observe that around 1999-2000 the smoothed price curve had peaked again. On that approximate basis I estimated that if this pattern held, the next crisis would appear around 2008-2009. It came in in 2008 as we know. That was a rough calculation, but it’s not so bad if you think of movements of the ocean and waves. Waves are never exactly alike. You would be very foolish to think that last wave that came is the only wave or that the next one would have precisely the same interval. So, then the question arises, what drives such a recurrent process? Deeper underlying processes. And that’s part of another part of my research.
Pablo: That is the last question. Here, we Chileans have a traumatic experience with neoliberalism, as you well know. In the specialized literature Chile is presented as an experiment of Chicago Boys policies and shows enormous contradictions between social goals and private aims. How do you read the Chilean case as an example of polarization and deepening of these social contradictions of capitalism?
Anwar Shaikh: Let me start by saying that I believe that the Chicago Boys committed a crime against humanity, and that I have no doubt in saying that whatever their motivations, it was a criminal act and a violent act. Not because they the only ones involved, but because they were so eager to support it. I understand that from their point of view, and this is the orthodox theory, that the market works best if the State is least involved. They take that to justify dictatorship to preserve the market freedom. Though, in the United States, the State is involved in everything, as Trump points out. Tariffs and subsidies to agriculture, but then they tend to forget that. And the second thing is that if you approach it from that point of view, then the question is, what is the cost of this so-called adjustment, of the shock and awe that Jeffrey Sachs used to talk about? It seems to me that when people talk about how Chile has done so much better after that, no one takes into account the cost. Where in the welfare economics is the cost of the people who were killed, the people who were tortured, the people who were driven away, the children who were taken away? What if I said to a Chicago Boy, congratulations, just to let you know, your family has been kidnapped, they have been killed, their possessions money taken away, and that we invested their money in a business which is doing really well, so therefore the economy is now better off. You don’t measure the pain and misery and blood of the losers, but you measure the gain in terms of profit? They make it seem as if it had a good effect, but none of those same people would be willing to sacrifice their families for such a good effect. So, it’s hypocrisy in my opinion, of the deepest sort. And the people involved, whatever their motivations, committed a crime.
Pablo Pulgar Moya: Thank you, very much.
Anwar Shaikh: My pleasure.
Image taken from: http://socialresearchmatters.org/anwar-shaikh-and-an-economic-analysis-of-modern-capitalism/