anwar shaikh, adam smith (lecture 02 – 09/07)

different questions of equilibrium ('turbulent regulation'), looking at industrial production index

1. growth is the normal state

2. growth is exponential (linear on a log scale)

3. growth is turbulent, too. the line is fluctuating

neoclassical economics does real violence to this graph and the trends it depicts.

then looking at US real investment index, which appears only more turbulent. “investment is more volatile than output” (based on looking further ahead, making a guess re: further prospects for profit—not simply prospects re: demand, as Keynesians would argue)

then looking at US real GNP per capita—the system has grown roughly ten fold in these terms. which is a feature, clearly, of productivity growth.

all this is built into the classical vision of political economy.

(for neoclassicals, growth occurs on a 'balanced growth model' – the premise is a static framework, in which growth enters as an 'addition' to the story)

fluctuations around an anticipated trend are called the 'business cycle'

looking at a business cycle graph—the first major depression was in the 1840s, setting the context for the revolutions of 1848; you also have a boom with the mexican war, and (dampened) boom with the civil war, WWI.

using the graph to draw the distinction between 'recurrence' and 'steady cycle' – booms give way to busts, and busts give way to booms. there is an already-discussed phenomenon of overshooting equilibrium, and then falling behind it, etc., etc.

(for neoclassicals, the mismatch between producer expectations and consumer preferences is assumed away, via perfect knowledge. the most sophisticated math cannot show stability—it can only make the assumption that equilibrium exists, and even then this entails its own assumptions. a lousy answer to a lousy question.)

- - - - - - - - -

how did the classical economists try to understand capitalism, given that they did not suffer from these sanitizing assumptions? they saw fluctuations and growth—this was Smith's premises.

not sanitizing, but analyzing.

Smith begins by arguing that “wealth of nations comes from labor which they apply to production.” (Chp 1, p. 1). annual labor is the fund which provides the nation with necessities and conveniences.

(for neoclassicals, its capital and labor—but, for classicals, capital is 'past labor'. labor is the active element. this is the sense in which Smith makes this claim).

Smith then goes on to say that not all labor is 'production labor' (“productive labor” is the term Smith uses—we will use 'production' vs. 'non-production' to remove the connotations of 'productive' vs. 'non-productive'). Smith mentions lords/king/army all as 'non-production' activities, not because they're worthless/'bad' but because it's defined on the basis of its 'effects.' in short, not defined on the basis of worth or even social necessity, but on the basis of its producing effects.

implication of this, of course, relates to social reproduction. production labor produces a certain amount—part of this goes to its own reproduction, and the remainder is a surplus product. this surplus product not only has to support re-investment, but has to support the king, the judiciary, the educational system, the army, the police, etc. the spending on non-productive activities can inhibit the growth of the economy (the means of violence, etc.--on this point of view, military activities may pump up demand, but they're also parasitic in this sense)

(for modern economics, anything supported by the market qualifies as productive. a Japanese minister made a claim about 'unproductive labor' and security in the USA)

given that production labor is the fund for new wealth, it's obvious that if you could increase the productivity of labor, you'd get more with the same labor. for Smith, the central factor in increasing productivity is the division of labor ('greatest source of increase in productivity')

comes, of course, from the natural propensity to 'truck, barter, etc.' this is 'mythic anthropology', and neo-classical economics will pick up on this part of Smith, in particular. (remember--one of the most elaborate form of the division of labor is a caste system; not driven by a caste system, but by social hierarchy. or gender, which also is not a choice; socially imposed. the idea that the division of labor may make you more productive is fine, but it should not excuse the mythic anthropology here).

in short: the social division of labor as voluntary choices made by free and equal human beings.

the division of labor leads to divisions in abilities—not due to inheritance, but due to training. Smith is clear that these are not natural traits, but socially given. (this is an important counter-point to conservative mythologies re: Smith)

also, the division of labor is limited by the extent of the market. how much can you increase the division of labor? well, if there's a limit to how many pins you can sell, so there's no point to try and make production more efficient. Smith is not very clear whether this is the pin market, or the aggregate market.

money, for Smith, arises from the division of labor—to facilitate the exchanges to which it gives rise. that special commodity which gets picked in the course of the development of exchange to facilitate the transactions (different times/places pick different commodities—furs were quite common, salt, tobacco, etc.).

value—Smith says that we want to distinguish between two different definitions. one is 'value-in-use'--the utility of some particular object. the other is 'value-in-exchange'--the quantity of other goods you can get for your particular object.

the former is about its usefulness, the latter concerns its exchange ratio

the world 'utility' for Smith does not mean what it means for 'neo-classicals.' today it means 'subjective satisfaction.' no way to compare across people—a psychological reaction to a commodity, or a thing. for Smith it simply means 'usefulness'--Smith says that air, for example, has great utility. doesn't want to confuse it with 'desirability.'

'value-in-exchange' is mediated by money, of course. if exchange rates are mediated by money, then you have 'price.' Smith's concern is to explain the laws of money price.

on the surface, the market price seems to be the issue. but classical economists thought that was trivial—we're looking for a central regulating mechanism. underneath the demand and supply is there a regular center of gravity to which price is attracted.

for Smith, that regulative principle is the amount of labor expended in the production of that commodity. next time we will pick this argument up.

anwar shaikh, why classical political economy (lecture 01 - 08/30)

classical economists asked this question: how can we have patterns of recurrence? how can g. depressions recur?

the surprising answer, though, is that capitalism does not work through individuals' intentions. it runs 'behind their backs.'

the market possesses powerful internal structural patterns that emerge from the centrality of the 'profit motive'

what happened in the 1930's?

the system broke because the profit motive led it to that outcome.

the key point is that the classical tradition sees the system in these terms, in terms of a pattern (boom + bust)

classical economists do not mean the same thing as the modern orthodox economists by 'equilibrium'. they see boombs past it, and busts below it--whereas the orthodoxy is content to understand the economy at equilibrium.

neo-classical position--the idea is that equilibrium is a state of rest ("attained and held state"). a gravitational attractor. you're entitled to view equilibrium as a pretty good approximator of reality (analogy to a pendulum)

classical position--the equilibrium point is itself not fixed, and the system can itself move around it. we want to talk about equilibrium points, then, but as 'turbulent regulation.' order in and through disorder. the pattern occurs through overshooting and undershooting.

- - - - - -

what is it specifically about classical economists that distinguishes them from neo-classicals?

neo-classicals

1. self-interest as the primary human motive--rational economic man makes all decisions.
   
2. utility maximization--not just as a principle for understanding firm-level decisions, but also as a principle of behavior
3. firms are price-takers, they all take a common price. competition forces firms to produce at a common price (a competitive economy)
4. profits, wages, and technology is all equal between firms. everything is studied at equilibrium.
   
5. full employment is a stable and regular outcome. if there's unemployment, wages will be bid down, and workers will be hired (unemployment is a feature of government intervention, distortions, etc.) [remember, neo-classicals aren't worried about demand]

keynes and post-keynes

arose in a post-depression context. central argument is that economy can get stuck in a state of persistent unemployment, if there's a lack of demand. unemployment, in other words, is a feasible equilibrium state.

in this context you need the state. the state becomes an important complement to the market. to 'push' it up to a full employment state of existence, which can be a 'higher-level' equilibrium

classical

the inventors of modern economics, and in search of a deeper answer to these questions. unemployment, for example, can be sustained easily, if there aren't profits to be made.

you can't re-open factories if private profit is the dominant law, even if it's socially desirable.

a better understanding of the world we live in is offered by the classicals.

key features of classical political economy

1. economic acts are embedded in a social context. not abstract agents/firms, but embedded (this opens up possibility of thinking about race, gender, etc.)
2. focus is on industrial capitalism (not merchang capitalism, etc.)
3. emphasis is on the 'laws of motion'--patterns produced by capitalism. system is always 'changing and moving'
4. emphasis is also on competition, which has its own hierarchies and forms (amongst workers, between nations. the dominant form is between firms)
5. order in and through disorder
6. expansion and growth are inherent. the system is always moving.
   
7. incentive to mechanize is inherent in the system
8. conflict between private aims/incentives and social goals.
   
9. the state now appears in a very different light, as compared to both the neo-classical and keynesian models. classical economists are more likely to see the State as a State of the 'system.' a conflict between the profit motive and State intervention.
   

the main point--the purpose of the course is not to study dead economists, but about an alternative vision of the system we (today) inhabit.