What Happens When Economics Doesn’t Reflect the Real World?

Summary

Anwar Mohamed Shaikh critiques mainstream economic theory, particularly the concept of perfect competition, arguing that it is a fantasy that distorts real-world economics. He advocates for a more historically grounded approach, drawing from classical economists like Smith, Ricardo, Marx, and Keynes. Shaikh emphasizes the central role of profitability in capitalism, explaining how firms' competitive behavior is driven by the pursuit of profit. He also explores consumer behavior, investment dynamics, and the limitations of Keynesian policies. Ultimately, he calls for a new economic framework that integrates social and historical contexts rather than relying on detached mathematical models.

Takeaways

• 😀 Shaikh critiques neoclassical economics for idealizing perfect competition, arguing that it doesn't reflect the realities of capitalism.
• 😀 He proposes 'real competition' as a more accurate framework, where firms engage in constant conflict over market share, workers, and resources.
• 😀 Drawing from classical political economy, Shaikh integrates ideas from Smith, Ricardo, Marx, and Keynes to build a unified framework for understanding capitalism.
• 😀 Shaikh challenges the assumption of consumer rationality, instead suggesting that consumer behavior is influenced by emotions, culture, and social factors.
• 😀 He emphasizes that profitability is the core driver of economic dynamics, including investment decisions, capital mobility, and competition among firms.
• 😀 Shaikh rejects the idea of optimizing behavior, arguing that most people don't optimize but instead act within the constraints of their budget and external influences.
• 😀 He highlights the failure of Keynesian policies in the 1970s, explaining that pumping money into the economy can lead to inflation and rising unemployment if profitability is not considered.
• 😀 The relationship between wages and profitability is crucial for understanding economic growth. Rising wages without corresponding productivity can undermine profitability and slow down growth.
• 😀 Shaikh argues that economic policies must consider the interplay between profitability, investment, and wages to effectively stimulate growth.
• 😀 He points out that historical examples, such as Nazi Germany and World War II, show how state control over wages and prices can allow for economic expansion without inflation or falling profitability.

Q & A

What is Anwar Mohamed Shaikh's critique of mainstream economics?

Shaikh critiques mainstream neoclassical economics for its reliance on the concept of perfect competition, which he views as a fantasy. He argues that economics should be grounded in the realities of capitalism, which involve constant competition, profit-seeking behavior, and struggles over resources and labor costs, rather than idealized and oversimplified models.

How does Shaikh define 'real competition'?

Shaikh defines 'real competition' as the actual battles between firms, which are constantly trying to outdo each other in terms of profitability. This competition is not about perfect or imperfect competition, but rather about the ongoing conflicts firms face regarding labor, resources, and market share, with an underlying focus on profitability.

Why does Shaikh believe that the theory of perfect competition is problematic?

Shaikh believes that the theory of perfect competition is problematic because it is an unrealistic abstraction that doesn't reflect the real dynamics of capitalism. In reality, firms are not passive entities responding to consumer behavior; instead, they are actively engaged in battles with one another, and with external factors like costs and market share.

What role did Shaikh's background in engineering play in his economic views?

Shaikh's background in engineering, particularly his training as an aeronautical engineer, led him to value practical, real-world application over purely abstract theory. He stresses that, like in engineering, economic theory must be connected to real-world practices and should not rely solely on mathematical models or optimization.

How does Shaikh explain consumer behavior?

Shaikh explains consumer behavior as being shaped by emotions, culture, and external influences rather than purely rational decision-making. He draws on psychology, anthropology, and business literature to argue that consumers are influenced by complex factors, and their behavior cannot be reduced to simple optimization models.

What is the significance of the budget constraint in Shaikh's economic framework?

The budget constraint is a key component of Shaikh's framework because it highlights the practical limit on consumer spending, which influences aggregate behavior. Shaikh uses this constraint to explain consumer micro-behavior in a stable, stochastic way, where individual behavior is unpredictable, but aggregate behavior is more predictable.

How does Shaikh relate profitability to investment decisions?

Shaikh argues that firms make investment decisions based on profitability. They compare the rate of return in different industries and allocate capital accordingly. This principle drives the mobility of capital across industries and is central to understanding how investment and growth evolve over time.

What does Shaikh say about Keynesian policies and their effectiveness?

Shaikh argues that Keynesian policies, which involve stimulating the economy through deficit spending and printing money, can initially reduce unemployment and spur growth. However, if wages rise faster than productivity, the profit rate falls, undermining the stimulus and leading to inflation and rising unemployment, as seen in the 1970s.

How does Shaikh use historical examples to critique Keynesian economics?

Shaikh uses the examples of Nazi Germany and Roosevelt's World War II policies to illustrate how Keynesian-like policies can succeed when wages and prices are controlled. In these cases, deficits were used to stimulate the economy without causing inflation because wages and prices were frozen, maintaining profitability.

What is the link between profitability and the recurring patterns in capitalism, according to Shaikh?

Shaikh argues that despite the rapid evolution and mutation of capitalism, the core principle driving recurrent patterns in the system is profitability. Firms and capital continually shift from high-wage to low-wage areas, and from high-cost to low-cost sectors, as they seek to maximize profits. This underlying drive for profitability helps explain persistent patterns in capitalism.