After 15 years of work economist Anwar Shaikh finished writing Capitalism: Competition, Conflict and Crisis. It provides economics based on “actual observations” instead of the “idealized world” of mainstream economists. He hopes it will create the “foundation for an alternate curriculum”.
Why did you write this book?
When I first entered economics it was with a wish to understand how the world works. I am from Pakistan, I grew up in a part of the world where disparity in wealth was enormous and growth was slow. My father was a diplomat who was posted in many countries so growing up I observed a diversity of peoples, cultures and economies. In Kuwait I observed how they had more money than they could count, and still many were poor and working under very difficult conditions. So I thought that economics would help me explain this. But when I got to economics I realized that the orthodoxy was not dealing with the world that I was interested in, it was dealing with a world of fantasy.
So you had to build up your own economic theory?
Neoclassical economics [the dominant approach in the field today] deals with a world of perfection and rationality. The neoclassical tradition will start with some highly idealized assumptions, and then use these assumptions as building blocks for their theory. A lot of the economic research focuses on changing particular assumptions to make the model more applicable to the reality. But is this not to start [at] the complete wrong end?
‟When I got to economics I realized that the orthodoxy was not dealing with the world that I was interested in, it was dealing with a world of fantasy.I wanted to go back to my original question, how does the capitalism work? But instead of starting with some idealized world, I started with actual observations, and tried to derive a coherent model. But it has taken time; I have been working [on] this for 35 years and spent 15 years writing this book.
Did you have to start from scratch?
No, I did not. There was a lot to build on from the classical economists Adam Smith David Ricardo, and Karl Marx. I have also continued some of the work of John Maynard Keynes, Joan Robinson, Luigi Pasinetti, Piero Sraffa and Geoffrey Harcourt. The classical tradition began by observing actual patterns and outcomes. The idea is to start from the bottom up, from the actual world that we observe around us, and then build abstractions from there.
In your book you show how it is unnecessary, and also wrong, to construct economic models on the basis of “perfect competition.” Why do you think that so many of the neoclassical models have this as central assumption?
That is a quite interesting thing. The classical political economists like Smith, Ricardo and Marx all describe, with a lot of detail, what I call “real competition.” Relations between capital and labor, between big and small capital, and between nations, were all conflictual within the classical framework. The neoclassical economists wanted to show that the system was harmonious, and beneficial for all. So they constructed a framework where these conflicts were all abolished. They presented capitalism as an ideal, harmonious system. Which it is not, of course. But it provides a powerful ideological foundation, or justification, of capitalism.
What are some of the policy implications of the theories presented in your book?
Let me start at the micro level. Competition works. It disciplines individual firms, industries and nations. But it also produces outcomes that are not desirable, especially for those who lose. The first lesson in the book is that we have to understand what these outcomes are, that they represent the natural consequences of capitalist mechanisms. And then if we don’t like these outcomes, the policy question is how do we deal with them? Free trade in orthodox theory supposedly makes everybody better off, both individuals and nations. Because of the assumption of full employment, if a company or industry is outsourced, workers don’t suffer any disadvantage, because they just move to another job. Of course in practice orthodox economists will admit that there are some discrepancies to this theory, but basically they believe that everyone will end up happier.On the other hand, in the classical tradition free trade is a war, because competition is a war. And in every war there are winners and losers, and the losers can be permanently damaged. My point is to show that both sides of this story, the advantages and the costs, are natural consequences because they are intrinsic [to] competition. At the macro level we need to look at the recurring patterns in capitalism, and understand the booms and busts. The strong mechanisms of profit-seeking behavior [both] drive the economy forward, and also throw it into deep crisis.
You were one of the heterodox economists who predicted the economic crisis. What was it about your method that made you see what was coming, while the neoclassicals did not?
First of all, I wasn’t that precise. In my lectures I argued that the crisis would hit around 2008-2009, but as we know it crashed already in 2007-2008. The problem for the neoclassicals was that they had already concluded that there are no such things as cycles. The market was already perfect. Crises and business cycles happen because of random shocks, not from something intrinsic in the model. Many heterodox economists on the other hand will have models where crises are a natural, and recurrent part of our current economic system….
I know that you mostly want to talk about the theories in your book. But I really want to hear a bit more about how it is to be in a heterodox economic environment, and how you are met by the neoclassicals.
Of course. Well, when I was in graduate school there was more communication between different viewpoints. People like Paul Samuelson, and many of the other big figures of the time, would all have read the original Keynes and Marx. At Cambridge you could talk to Maurice Dobb on one hand, and then Piero Sraffa and Nicholas Kaldor on the other. They all were educated in the European sense, they had this broad education, and a broad theoretical spectrum.That spectrum narrowed. The Chicago School and MIT started taking over the profession. This happened especially with the advent of the theory of rational expectations. Suddenly everything that was legitimate had to be cast in their terms, otherwise it was not economics… If you did not build your theories on the same fundamentals as the neoclassical economists, you were simply not counted as a real economist.And the only way the spectrum for heterodox economists ever grew was when capitalism, unimpressed by economic theory, would exert itself like an earthquake. Then these spaces would open up for a while. Maybe we have such a possibility right now?
Do you have any advice for young economists entering into the heterodox field?
Don’t spend your time complaining about neoclassical economics. That’s a trap. Pretty much everything has been [said]. It’s not enough to be in opposition. I think attention to method is important, but you really have to have vision, a plan. Suppose you were flown in from Mars and you have to analyze capitalism. How would you approach how the system works? You would read what others say, but may also need to start building your theory from a different foundation.
Vir: Socialist Economist