Anwar Shaikh’s Capitalism: A new foundation for economic theory?

July 30, 2016

What follows is a short review of Anwar Shaikh’s (2016) Capitalism. Competition, Conflict, Crisis. Oxford: Oxford University Press, 979 p. Shaikh’s book attempts to provide a radical alternative framework for understanding modern economies, covering systematically the main topics of both orthodox and post-Keynesian heterodox economic theory. Given the ambition and scope of the book, my review is limited to describing and assessing Shaikh’s undertaking as a whole, bearing in mind the mutual dependency of parts and whole, and the related hermeneutic circle. A text can only be understood through its parts and against our horizons of understanding, which should stand open to fusion and change in the process. It goes without saying that I have learnt a lot by reading Shaikh’s magnum opus.


As the title of his book indicates, Shaikh’s ambition is to analyse and understand capitalism as a particular system. Capitalism is driven by a powerful profit motive that regulates both supply and demand. In capitalism many forces together generate recurring patterns transcending historical and regional particularities; the profit motive being the most powerful of these forces.

The intensity of competition in capitalism is independent of the number of firms in any given market. Real competition is turbulent and antagonistic, because profit-seeking is expansionary and sets firms against each other. Especially for the challengers of a momentarily established order, competition is war and technological development is about building arms for the battles to come. Some succeed, some merely survive, and others fail all together. Again and again market competition turns out Darwinist.

Shaikh’s understanding of competition is indicative of his general approach. Instead of relying on idealized conceptions and models – such as the model of “perfect competition” in neoclassical economics – the point is to learn about real processes of a specific historical socio-economic system, capitalism. Consider consumer behaviour. There is no need to assume utility maximizing or optimizing behaviour, or any other part of neoclassical metaphysics, in order to explain the tendency of consumers to respond negatively to price rises and positively to price decrease, given normal goods. People’s incomes are constrained and that suffices for the general tendency to arise. Yet a tendency does not dictate individual responses. Nor is the overall outcome of price changes necessarily regular because other processes and mechanisms can intervene.

Classical concerns and new accounts of long waves

A major aspect of Shaikh’s path-breaking project is his partial return to the classical tradition of Adam Smith (real Smith rather than the ideologicized image of him), David Ricardo and Karl Marx. The classical tradition forms the basis of a number of Shaikh’s theoretical ideas, which are in turn grounded on systematic empirical evidence. Thus Shaikh maintains for instance that labour costs largely determine long-run relative prices. This empirically grounded claim comes close to the classical labour theory of value. Shaikh also frames the historical story of his book as a whole in terms of classical concern about the nature of world-historical developments. On the one hand the “economic history of the developed capitalist world appears to be one of almost constant progress”. Standards of living rise, health, well-being and welfare improve. On the other hand, “everywhere there seems to be a characteristic unevenness: across localities, regions, and nations; and across time, the form of booms, busts, and breakdowns” (p.3). Order emerges from turbulent disorder. Unevenness and disorder evolve from apparently even and orderly circumstances. Constant crises, and recoveries from them, are part of the overall process.

A key question for Shaikh is: how is it that the capitalist system, whose institutions, regulations and political structures have changed so significantly over the course of its evolution, remains capable of exhibiting certain recurrent economic patterns? I have been puzzled by the same question for nearly two decades, since the Asian crisis of 1997-98, and since I first read Charles Kindleberger, Hyman Minsky and George Soros. There appears to be a generic tendency in capitalist market economy towards financialization, which then gives rise to a recurring pattern of booms and busts. A bit later I found a way of connecting this problematic to the literature on the long waves of economic developments, especially via Pekka Korpinen’s excellent but underrated PhD-thesis Crises and Long Cycles from 1981 (underrated in part because it is inaccessible to non-Finnish speakers).

Similarly, Shaikh argues that “the history of capitalism over the centuries reveals recurring patterns of long booms and busts” (p.726). In figure 16.1. he displays what he calls the “US and UK golden waves”, or long waves of national price levels measured in terms of gold. This figure would seem to indicate an upward wave from 1980 to 2007, which goes against my interpretation – partly (and critically) drawn from Immanuel Wallerstein and others – that there was no upward turning point in the early 1980s. This ambiguity is symptomatic to the difficulty of reading macrohistory, of telling plausible stories about world history.

In absolute and global terms, the period from the early 1970s to 2016 has been a period of enormous economic growth. The world population has doubled and its per capita income has grown by a factor somewhere between 2.0-3.0 (the World Bank world GDP per capita in current US$ figure indicates a much higher rate of growth, whereas in my estimation, in real welfare increasing terms the true factor is probably significantly less than two). During this period the average per capita growth rate in current US$ has gradually but quite steadily declined from 3% pa to 1% pa, and in the OECD world, even more drastically to close to zero. What Shaikh depicts in his figure 16.1. are price-level deviations from a fitted cubic trend, where price-levels are measured in terms of gold (the price of which varies for all kinds of reasons, not least in response to turbulence in the financial markets). It takes many a step of theory-laden interpretations to arrive from this to a conclusion, voiced with certainty, that there was an upward long wave in the world economy in 1983-2007, rather than just changes in the price of gold. In contrast to – and in terms of – what exactly was there an upward “wave” in economic developments in 1983-2007? The demi-regularities we can, at times, identify are not only contrastive but also metaphorical.

Does politics really matter in capitalism?

At its best, Shaikh’s Capitalism displays economic realities as socio-historical and at least potentially political. The struggle between capital and labour is a case in point. Shaikh criticizes both the neoclassical orthodoxy and post-Keynesian heterodoxy: “A striking implication of both orthodox and heterodox approaches is that workers have no say in their own standard of living” (p.42). In these theories, the overall wage-level is strictly determined by labour productivity, (theoretically construed) requirements of full employment, and/or monopoly markups. Neoclassical economists assume further that individual wages are closely related to person’s marginal productivity, whereas many post-Keynesians have little to say about the role and position of individuals in labour markets. Against these theories – but in some ways concurring with Keynes himself – Shaikh stresses that labour bargaining and struggles matter and are dependent on socio-historic conditions and institutions. One of Shaikh’s chief points is that both the amount of available labour and technical change (investments) respond to the effects of labour struggles on the real wage and wage share.

Consequently, Shaikh’s explores connections between labour strength and other variables such as employment, business savings, investments and inflation. Ultimately the emerging picture is not only fairly complex but also much more deterministic than what one would expect on the basis of Shaikh’s criticism of neoclassical and post-Keynesian theories. For instance, an acceleration in aggregate demand – perhaps due to deliberate policy by a Keynesian state – would decrease unemployment and increase the wage share, but the effects of extra demand injection might well be just temporary (although possibly affecting the process of accumulation); while “the gravitation of actual capacity utilization around its normal rate implies that the actual rate of profit gravitates around its normal rate” (p.672).

Shaikh continues by pointing out that Verdoorn’s Law may generate a virtuous circle between output and productivity growth for a while, but almost instantly he takes up the classical idea according to which the subsequent fall in profitability will eventually undermine the effects of increased demand. Moreover, no matter what policy is chosen and what the rate of accumulation is, there will always be involuntary unemployment (Marx’s “reserve army” of labour). In the end Shaikh’s normal rate of unemployment does not sound drastically different from the neoclassical “natural” rate of unemployment, or NAIRU (non-accelerating inflation rate of unemployment), in spite of his explanations to the contrary (pp.721-3).

Shaikh’s partial return to the ideas of classical political economy can be read in at least two different ways. In the first reading, Shaikh is a radical Marxian thinker who argues that capitalism is a system in which certain laws prevail. The balance of power between labour and capital and economic policy co-determine many important outcomes, but as long as the system remains capitalist, the degrees of freedom for agency are rather limited. Struggles can achieve at best only small improvements and the space for state policy is constrained in all kinds of ways. The main idea would be to change the system as a whole, with all its deep structures. In the second reading, Shaikh is a post-Marxian thinker who has reached a pessimist conclusion. This is indeed historical capitalism with its laws, but there is no alternative. We have to live in capitalism and accept its limits and constraints as long as we can see into the future. Hereby a theoretical understanding about how the system works becomes disempowering. In the limit (to use ironically a mathematical metaphor), the post-Marxian position may even approach the neoclassical position in its policy advice.

I am not saying or implying that there are no major differences between Shaikh and the orthodoxy. At all levels there are numerous deep-seated and far-reaching differences between the two. Yet, there are also theoretical points of convergence. For instance, Shaikh criticizes the Chartalist theory of money from a fairly orthodox position:

“But we know that states arise after money, are never neutral and rarely benevolent and that taxes are resisted at every stage (Mehrling 2000, 402) – not just in America and Southern Nigeria in response to their colonial states but also within every nation in response to its own state.” (p.687)

This argument confuses the historical origins of money and its creation in the modern world by emerging sovereign states within the international system. The historical origins of money are closely tied to the origins of writing and mathematics in storing and book-keeping, as organized by proto-states and early empires. In this process emerged also our reflective consciousness, especially through the development of metaphorical thinking. There is no space to develop this argument here. Nor is it my purpose to defend the exaggerated claims of Modern Monetary Theory as they stand (although the powers of money-creation are important). The point is simply to give another example of how Shaikh’s contentions undermine ideas about possible alternative policies developed by post-Keynesian theorists; and how, at least at times, a tacit, even if only partial, convergence emerges between Shaikh and the neoclassical orthodoxy.

On the methodology of Shaikh’s Capitalism: a critical realist view

Key controversies in economic theory consists of endless debates about whether A causes B or B causes A; or whether A, or B, or both, are “endogenous” (determined within the specified mathematical model) or “exogenous” (determined outside the model). For instance, is money endogenous or exogenous; do savings determine investments or investments savings? For the sorts of mathematical methods that economists continually assume to be generally applicable, including Shaikh, the world must consist of deterministic or stochastic closed systems.

A closed system is one in which an event regularity occurs: whenever A, then B, under conditions {x, y, z}. But economic theorists do not agree whether A causes B or vice versa, or about how to define A and B. Standard econometric techniques too presuppose stable frequencies (and precise measurability), and thus closed systems. Econometrics is about attempting to determine probabilistic event conjunctions. A practical problem for these studies is that the estimated relationships tend to break down soon. A deeper problem is that the tendency to endogenize ever more variables leaves less and less space for agency, freedom, history or politics. It is thus not surprising that there is nothing in Shaikh’s Capitalism about real alternatives; about democracy, emancipation, learning, overcoming alienation, or socialism; or about sustainability. Post-Keynesian alternatives are repeatedly downplayed.

Thus the methodological assumptions of Shaikh’s Capitalism serve to undermine its ethico-political intentions. The same assumptions also leave his magnificent edifice on rather shaky grounds. In open systems there are only few if any event regularities (and even those few are liable to change). In some ways Shaikh tries to be a scientific realist, seeing causal forces and mechanisms capable of generating tendencies that may or may not result in particular outcomes in open systems. Moreover, these forces and mechanisms can and frequently do change.

To reiterate, I am also in agreement with Shaikh about the importance of the question concerning recurring patterns. This is a real issue that must be taken into account by any serious theory of political economy. Shaikh also acknowledges that institutions, regulations and political structures change and that those changes can make a difference. The forces, mechanisms and tendencies that we are studying in political economy are dependent on institutions, regulations, political structures – and not only on them, but also on historically constituted forms of subjectivity and agency.

There is also a lot to be learnt from Shaikh’s sophisticated and pluralistic discussions on economic theory and, to a point, from his historical discussions. Throughout the book, however, Shaikh resorts to forms of mathematical modelling and econometric estimation that are only applicable to closed systems. He wants to cover the main topics of both neoclassical and post-Keynesian economics, endogenizing ever more variables into his metamodel, or theoretical system as a whole (except capital-labour struggles that he holds back as exogenous). In doing so his politico-economic thinking becomes increasingly deterministic. His project would benefit from rethinking social ontology and causation in open systems.

Conclusions: what is capitalism?

What is curious about Shaikh’s Capitalism is that it does not define, or even characterize in any systematic fashion, its central concept. It is well known that Marx did not use the term ‘capitalism’, although he theorised capital, talked about capitalists (as a social class), and analysed the capitalist mode of production.

The term ‘capitalism’ became increasingly common in the late 19th century as a critical term, describing a society or social system characterised by the dominance of capitalists and their ideas. Werner Sombert’s 1902 book Modern Capitalism established this meaning of the term. Joseph Schumpeter later insisted upon distinguishing between entrepreneurs and capitalists, in his 1942 classic Capitalism, Socialism and Democracy, in which he anticipated capitalism’s gradual decline.

In passages where Shaikh discusses long-term economic developments from a global perspective, his data covers time from the 1600s onwards. Mostly Shaikh is focussing on the era of modern economic growth that started in Britain in the 1820s, after the Napoleonic wars and following the Industrial Revolution. Quite methodically, however, Shaikh avoids mentioning social and political theorists that have made a lasting impact on our understanding of the nature and rise of capitalist market society.

One of the most important and perceptive of these theorists has been Karl Polanyi. In The Great Transformation (1944), Polanyi argued that the Economic Man and self-adjusting markets are neither natural nor universal. Rather, they are relatively recent socio-historical constructs. The rise of (i) the calculative gain-orientation, (ii) the modern market economy, and (iii) the modern liberal state are essentially connected. Prior to the great transformation in modern Europe, markets existed as an auxiliary avenue for the exchange of goods that were otherwise not obtainable. The market society was born out of the changes that emerged first in Britain.

What is more, following the great transformation and related Industrial Revolution in the early 19th century – in Polanyi’s memorable formulation – “the old world was swept away in one indomitable surge toward a planetary economy”. Therefore Polanyi placed the rules governing the world economy at the centre of his analytical framework. This framework is capable of illuminating also the causes of our current turmoil and disorder. In the 2010s, it is again becoming increasingly evident that the utopian liberal vision of self-regulating markets leads not to peace but to intensified conflict. From a Polanyian viewpoint the world seems to be heading towards even more dangerous circumstances in the near future.

Shaikh is critical of neoliberal globalization, and argues against the Ricardian theory of free trade in terms of his theory of real competition, which implies that success comes with absolute cost advantage at the level of firms and may result in systematic and persistent imbalances in the world economy (ch 11). And yet, in spite of these kinds of insightful observations, Shaikh seems committed, at least for the most part, to methodological nationalism, typically assuming in his models and empirical analysis that the nation state is the container of relevant processes. He also seems committed to reproducing the standard disciplinary inside/outside dichotomy of economics. These tenets are closely linked to his de facto reliance on closed-systems methodology.

Shaik’s Capitalism is a book I will be returning to time and time again. It is a rich source of elaborate discussions on economic theory and a useful handbook covering a very wide and ambitious variety of topics, most of which I have not even touched in this review. My overall conclusion is nonetheless that Capitalism does not provide a new foundation for economic theory. That would require problematizing and reconstructing the methodology and ontology of political economy at a deeper level.

Heikki Patomäki