A. Shaikh Lecture 1/5: Foundations of Classical Keynesian Political Economy

thank you all for attending this and thank you to the UMass Economics Department for inviting me and for the students to organizing that invitation and also to the Helen Sheridan Memorial Fund for funding this and I want to give special thanks to Maria Majid who has been my mentor in terms of coming here managing my website and finding my way to the particular hall because I was wandering around so mariam has been very helpful and important to me [Applause] so I want to persuade you that it's possible to have an economic analysis which is capable of understanding short-term and long-term patterns of capitalism without any reliance on any of the standard tropes of neoclassical theory I'm going to go over those no utility maximizing no utility at all no perfect or imperfect competition no optimizing no production possibilities curve and I can happily talk about that but I want to first lay out for you how a structure like this can be constructed and also what it has to explain and if you if I forget remind me at the end I'm going to try to show you a deconstruction of the mass kollel textbook in my class I teach our course which is two semesters long so it's 28 lectures this is only five in that I asked the class in the first semester to take a standard textbook like masculine and divided into carts that actually talked about observable phenomena downward sloping demand curves and so on and the consumer theory as opposed to those which talk about the theoretical structure needed to explain them in a particular way and I'm going to show you this the decomposition of that textbook why because I want you to start thinking about what if you had to write a textbook that did not rely on Orthodox economics either as a point of critique which ties you to it after all or a point of departure that you take it and you kind of subjected to enhanced interrogation until it confesses to something that looks real I want you to think about not having to do that at all but in the consequence you must have a framework that can do the same things right obviously you can must answer the same questions because those questions are age-old so I want to show you that you can do that and I want to set that up now we have five lectures to and as we go if there's something I'm saying that not clear to you please ask me I can't I don't know you so I don't know what's obvious or not forgive me if I'm saying the obvious as I go along if there's something that you want to talk more about ask me and I'll postpone it until a point where all of these things come together so it's easier so it doesn't break the narrative flow okay so I'm going to try to start by first as I said the object is to know what that is is to show that you can construct an alternate curriculum for both micro and macro now in the first lecture I'm just going to try to outline how they're connected that's very important but obviously I won't get into the details until I go through all of the five lectures I'm going to end with the connection what I'm talking about today is only a fraction of what's in my book I forgot to bring the book I've anybody have a copy here can I just show thank you it's so heavy that I can't afford to walk around with it is too heavy this is the book it's a library copy you're encouraged to buy it it's only $35 so but as opposed to downloading it from Russia and it's called capitalism competition conflict and crises and the part of the book is to show you that these three elements are really defining of the system but they also help you to explain very concrete phenomena relative prices exchange rates interest rates we're going to get into that thank you so I want to show you can divide you can derive these basic propositions of economic analysis without reference to hyper rationality optimization perfect competition perfect information representative agents and sir our so-called rational expectations all of those come from a particular theoretical framework that was invented in the night late 19th century largely in reaction to the reality of conflict in capitalism and that's a thing that people don't remember you go to jebin's and he's saying well the world is full of conflict we're going to have a constructive framework which shows that everybody is cooperating and capitalism provides the best this is very important not only if you live in the in the center of the world but if you live in out of the capitalist world but if you live in the developing world because in the developing world you not only have to explain what's going on you import a theory which I would argue has never been adequate to anything not just not adequate to the developing world India and China and after it never been adequate to the developed world either it's a lie and you have to learn to see it and the only way I can do that to try and show you its structure but I'm not interested in that here I do that in a book a lot I'm interested sure you have an alternative and then the distance between what you're already familiar with everybody's had micro and macro right so your Wheldon doctrine ated everyone's had micro yeah okay so you know so I can remind you of it but I don't have to run you through all of that any standard Technic Maskull is one Varian is another and you can do the same exercise take a book and literally clip it how much of it is dealing with observable phenomena and how much of it is dealing with the ideological and theoretical framework designed to explain it in a particular way now I'm going to deal with the same observed phenomena but I'm going to have a different framework and I want to I will I do argue in the book that you can explain the laws of demand and supply the determination of wages and profit rates technical change relative prices interest rates about an equity prices exchange rates terms of trade balance of trade growth unemployment and so on now that kind of explanation also inflation unemployment long booms and the current crisis now that kind of explanation requires development and that's why the book is a thousand twelve pages because it does require development because a task I said in the book is to show that this alternate framework can address the same phenomena as neoclassical economics and post-keynesian economics can explain what they explain but in a different coherent framework and the coherence is very important I don't rely on imperfections what I rely on is the idea that the logic and structure of capitalism produces particular outcomes independently the intention of the individuals involved now there's a very important point I'll come back to it the idea of emergent properties but it's obviously they're already in Smith and from Smyth onward now the theoretical roots of the framework that I propose can be found in what I want to call the four grades to appropriate a favorite Chinese phrasing Smith Ricardo marks and Keynes and you have to ask what what is the common element binding these and I would argue the common element binding these as they develop their theoretical framework from examination of the real they asked what do we see what are its patterns and how can we understand them and that's very very different then the neoclassical framework which came in the late nineteenth century which developed its framework from examining an ideal perfect competition perfect capitalism and the ideal is very clearly ideological it's an attempt to portray capitalism in as some kind of ideal system and the trouble with that is that portrayal then faces the reality of capitalism and the reality doesn't work doesn't fit that so then you have to introduce so-called imperfections into this ideal framework to get the real results now already you're trapped you're trapped because you're starting from a false framework and you're trying to modify it locally so here's a framework can you create a local bulge to explain something here but then something over there needs another bulge in that and these imperfections do not add up to a general theory there is no such thing as a general theory of imperfection think about that for a moment you need the perfection to have a modification that you call a localized imperfection but you cannot derive from say Newton and some imperfections you don't get Einstein from the church and some infections you don't get Darwin you have to start differently and to emphasize that point I asked Miriam to put on the book web page which is called real econ org which is where the book material is all the data in the book this is not an IMF book so you can actually get the data directly and you can duplicate it and correct it as you please all the data is there and a little essay which I wrote called Eden aa mcc's which is up there I'm sorry wonder what categories in my name of gun on their supplemental material so take a look at it because the point of that is to show you an almost exact parallel between the biblical steer story of the creation of humanity Garden of Eden Adam and Eve and then the snake the snake is of course imperfection is literally imperfection and the snake is then used to explain the reality over the world that is not how Smith starts that is not how Ricardo starts that is not how Mark starts and is certainly not how Cain starts each one of them struggles were trying to understand the reality I'm not arguing that you can add them together I'm saying that these are the the fount of understanding and wisdom I teach history of economic thought my mentor was Robert Howell burner and I took over the course one of the courses he taught and I've taught that course for a long time and I teach history of economic thought for a very simple reason because people were smarter than than they are now in my opinion it's very clear and I'm gonna try and show you their breadth and their understanding of society and social change and human nature and social acculturation all of that you can find there and that disappears when you get the kind of biblical story which is new class economics go back and read Jevons for instance and you'll see his struggle to construct that or while rah who thought he was not talking about capitalism but about a future socialism an ideal system he didn't think this applied to capitalism while her actually thought that the only way to make capitalism look like that would have the state intervened now why would it need to be intervening if it was already perfect so that's the kind of understanding you need to arrive at for instance Smith and Ricardo disagree and international trade and I discussed this at length in a chapter 11 of the book where I developed the theory of international trade on the foundations and I'm going to talk about here and Smith has an argument that essentially trade is based by based on whichever it's got lower cost Ricardo replaces that or something called comparative cost if you've taken trade part of a trade theory you know that that argument says that having higher or lower cost doesn't matter because in free trade everybody gets equalized that's a death sentence for the developing world because it's just not true and what that ends up saying is you should specialize in something that you can produce in raw materials or cheap labor but don't go beyond that because after all comparative advantage says that belongs to the West that's a conclusion of the theory but it's also clearly a trap for the same reason Ricardo and Marx disagree in the theory of money which I develop at some develop lengthier so I'm not saying that you can just glom these together and create a kind of mush I'm saying that there are key arguments in here that are common to all of them and there are key differences which you have to assess and find your way through and the judgment of that has to be not only the logic of the argument but the object of investigation which is the reality itself we're not talking about how capitalism would behave if there was perfect competition we're asking about how competition does behave and so therefore I'm gonna use the word real competition to refer to competition never perfect competition I wish how many people have seen men in black you know the movie right so okay in that movie these guys have a little device to erase your memory of something unpleasant now if I had that device I could say microeconomics and then zap you and then you would be nice and clean and we could start again but I can't say that so every time I say something you're gonna go back into that framework and I'm gonna have to pull you out of it so when you're falling into it I will try and remind you that's not the argument I'm making that's the argument of the side that I'm trying to oppose and for that same reason post-keynesian economics is trapped in this attempt to analyze the real but from this foundation and so it is I and I'm going to argue my best friends or post-keynesian but I'm gonna argue that they are trapped there like good Catholics they believe in the original story but they know the world is not like that and then they struggle to make sense of it you don't need to do that to understand biology you start from Darwin you do not start from the church same thing for orbits Kepler's Kepler as you may or may not know the man who in found the orbits the elliptical orbits struggled as every astronomer did to explain why the data that they had accumulated over hundreds of years on movements of planets did not fit and the questions who did not fit what the church had said that orbits must be viewed as circles because Aristotle said the circle is a perfect figure and the church said God would not create an imperfect movement to the orbit so the job of astronomers was to explain how they could reconcile the data with the theoretical presumption that was perfect and they used a trick people know what that trick was what is called anybody remember talk to this is important well something like that what they did is if the circle has a center right now if the planet is the center that this is orbit a circle around the center then you would have to observe a circle but you don't observe that so what they started doing is adding little displacements from the center so now this peculiar thing this planet was not at the center of its orbit and that was a way to explain why it was fitting how the data can fit and Kepler struggles with this his whole life and then one day he sees the answer he's a brilliant mathematician by the way and he sees that the planets do have a law and it is in some sense perfect it's God's law as he sees it he was very religious but they're ellipses so he leaves behind the idea of perfection and an ellipse for him is not an imperfection it's the law of reality and today we know this to be true the standard way you begin in physics is to say well the mathematics of orbits is in elliptical orbit unless something else disturbance okay it's that point clear because I'm going to keep emphasizing this we do not need to ask how the perfect individual would behave we need to ask how the real individual behaves but we need to answer the same questions we can't just wander off into philosophy and dialectics and sociology and then when they come down to demand and supply we go okay utility maximizing but a little kink here no make up your mind be in Darwin or be in the church but you can't be in both that's important so I want to talk about the determination of wages and profit rights very fundamental in the classical tradition all of them talk about some conflict between wages and profits fundamental conflict and it determines socially and you can see that even our Keynes talks about that technical change where does it come from in Orthodox economics kind of drops from the sky but technical changes one of the things that all the Orthodox Archon all the classical economists say capitalism indents that is the first society to do technical change it's the first society to need to have technical change all the time and I'm going to try to explain why why firms must have technical change to stay ahead of the Reaper the Grim Reaper which is what competition is for them relative prices we know that Ricardo talked and Smith talked about relative prices but that's really Ricardo's invention the wonderful beginning in Chapter one of Ricardo he talks about the determination of relative price it gives a numerical example and then he makes a hypothesis he says look observing the real process it seems pretty clear to me that relative prices are dominated by direct and indirect unit labor costs labor times of the wages of equal unit labor costs in unit labour time ratios are the same and he's dealing with an abstract competitive framework but really direct and indirect unit labor cost and he gives an argument that says look the difference between them will be about 7% now that has been an object of derision from that time onward by neoclassic anima s' yet that argument was taken up by one of the most famous mathematicians in the United States Jakob Schwartz at the Courant Center at NYU and he little wrote a little book on that and he did a little experiment and here's a it's such a simple experiment he said if relative prices are inflexible in the Ricardian sense and we can judge the effect of distribution on them as opposed to the effect of the structure by looking at relative prices at the top of a business cycle and the bottom the difference is about 8 months 10 months 15 months whatever the top and bottom so the structure doesn't change very much but the distribution changes violently wages fall profits change and he found that the average variation of top and bottom was 7% in the 1960s now this is a long way after Ricardo 100 years so I show in the book that you can answer the same question by looking at input-output tables and lo and behold what do we find the average deviation is in the order of seven to ten percent in the United States this is something that we have to explain once we find it and I'm going to show you that it follows naturally when we get to watch it I'm not sure I'm going to show you I think I skip that in these lectures but it's in the book anyway abondon interest rates bond and equity prices the same principle what regulates all of these is competition and I'm going to show you that there is a theory of interest rates and competition we can test empirically there's a theory of bond prices equity prices it can answer the problem that Shiller got a Nobel Prize for Miss answering Shiller finds the rate of return on stock markets is very violent fluctuates a lot and he says well the theory says that the rate of return should be the long term interest rate this is efficient market hypothesis theory and that he takes to be the average of interest rates of a long time so he plots this there's a long term interest rate and these fluctuations don't match in fact he adjusting interest rate so it goes through the center but he says he has unexplained volatility now that's unexplained from his point because it's unexplained from efficient market theory for which someone else got a Nobel Prize also so Shiller then says that is due to irrational exuberance bingo Nobel right there trouble is that's the wrong answer in my opinion and I show you in the book that the profit rate on new investment in the proper rate and rate of return on stock market go exactly together except for particular periods that we know there are bubbles and when there bubbles they come back together so we don't have unexplained volatility in fact both series have the same mean and the same standard deviation and hence they have the same coefficient of variation Shoeless problem disappears but we have an explanation of the stock market it's not just a I'm not interested in attacking Shiller I'm interested in showing that we have an explanation and there it dissolves Sheila's problem because it's coming from your classical theory exchange rates almost everybody on the left likes to believe that the trouble with exchange rates is that someone else is cheating the US said so our China is so successful because they're cheating on their exchange rate they keep their exchange rate too low and then before that they used to accuse South Korea before that used to kill Japan before that used to kill Germany go back and read the history of the accusation that the other side is winning because they're cheating nobody ever says the u.s. is keeping its exchange rate too high because you know we're good guys we would never do that so it's got to be the other side but the fact of the matter that implies that is derived from a theory that says that exchange rates would automatically move to make trade balance but we look to see and china has a surplus the US has a deficit South Korea has a surplus u.s. as a deficit Japan has a surplus u.s. a deficit Germany of the surplus US a deficit so it's their fault that is the correct answer from the wrong theory and I want to show you that you can explain the deficits by a different hypothesis which is exactly located in the classical idea of costs of production and determining real exchange rates really exchange rates after you think about it are just relative prices expressed in international terms so if you think about it that way angle then the problem falls into place and of course in the book I show that that works it empirically I mean everything in the book every theory is developed from a classical foundation compared to neoclassical and post Keynesian theory but that is only a second-order comparison the main comparisons with the data if you agree with post Keynesian theory or not is secondary what is important is whether it explains long-term structural patterns and you see some of the patterns are hundreds of years so we're not just talking about something momentary and I'm gonna come to them at the end unemployment growth what causes growth well they're two causes everybody Keynes and Marx will say goes it comes from investment investment is dictated by profitability net of the interest rate I'm going to go through that so yes both sides agree that growth is driven by profitability even no classical theory says that in a somewhat roundabout way but then the question is what about the impact of purchasing power debt credit all of that kind of stuff well both sides are something to say about that I'm going to show you can deal with it concretely and you can explain how that can pop off system but you can also explain why that comes to a limit why for instance in the 1970s Keynesian policy failed so badly that in fact it was wiped out of academia and of policy terms also and neoclassical theory starting with Friedman and Phelps and then Lucas and many others who follow real business cycle theory took over they took over because of the failure of the left to explain the real phenomena and that failure I would argue comes from the lack of attention to the key role of profitability I'm gonna come back to that point also unemployment well if you are neoclassical unemployment is something that is eliminated by the system itself everybody knows that if there is unemployment real wages will fall or real wages fall the demand for labor will rise and the supply of labor or will fall so the two sides will meet again at some balance and you have full employment it's a nice clean simple story with the one deficiency that happens to be wrong almost every time now if you are left if you're on the Left you say Keynes said no unemployment can be there is and persist in what you need to do is pump up the system to get rid of unemployment I'm gonna explain why that does work and when it doesn't work but the key point is the assumption that if you get rid of unemployment the system will stay at full employment and that assumes a kind of passive nature to capitalism what happens to a firm when you raise the wages which is what happens when you pump up unemployment right wages start to rise but what happens they have lower profitability and that leads them to do several things one thing which is really simple is that they import labor even if the countries close they can import labor from those people who are not in the labor pool by offering them higher wages incentives to come in they can import people they can import women black people all the people have been pushed out before kinder suddenly say oh we have a place for you now that's one way that the barriers into the labor market become porous obviously you can import people across the border and the border is variable border you can bring them in from other parts of the world the US has found it on the importation of labor from all across the world at least the European world and then later Asia and Africa but I'm speaking here only of capitalist workers but the US has long history of that so they the idea that the supply of labor is independent of the wage and profitability incentive makes no sense any business will tell you if the wages go up either I'll move there which is a kind of importation of labour it's an export of capital or I'll bring them here it depends on the size of that increase but there's another part to it the mechanization of the labour process depends on the cost of labor labor is very cheap it doesn't pay to invent machinery to displace labour it pays less anyway it may still pay but it pays less if labour becomes more incentive expensive the incentive to displace labour gets bigger any business will tell you this but it's also was something we can show empirically so that means that the the pool of available labour is self replacing not to the same exact number but if the pool gets too small then factors come in that make the pool rise again now if you think about that have you read Marx at all this is exactly the argument that Marx advances in the argument called the reserve army of labour he I says that if the system gets pumped up unemployment goes down employment goes up the labor market becomes tight wages start to rise at some point and that's all he says at some point this will inhibit accumulation profitability will fall and this will give an incentive to slow down the pick up of labour if growth Falls you don't pick labour up so fast and also the displaced labour will be a bigger incentive because now you have greater incentive to have machinery so that displacement effect enhanced the placement effect and a reduced pickup effect cause the reserve army to rise again now this was formalized I don't want to make it seem that something is true because we formalized it and on the country most of the time we can't formalize any interesting argument but this is formalized in Goodwin's predator prey model and what Goodwin did was take the mathematics they've been applied to the observation that in a pond let's say closed reservoir of water if there are fish which are predator and prey then the ratio between the predator and prey cycles around some common number rather than simply being all one or the other why is that even though there are a lot of prey the Predators get to eat well they reproduce more so their supply expands and that means that the prey have a less chance of survival so the prey starts to diminish in number as that happens the Predators don't have as many prey to eat so the Predators themselves become smaller and their reproduction rate goes down and then the prey have more room and they go up and the famous equation allows for a cycling between these two things without any uh notion that there is a fixed there is a average that comes about well Goodwin did that showing that the same equations can describe the reserve army of labour what does that imply it implies that you cycle around an unemployment rate unemployment rate which is not zero know in the book I developed that empirically and I will get to it I'll show you the actual movement in the United States in the whole post-war period of this cycle end of this relation and the last part in the next part is inflation every economist has to explain inflation now you're young enough that you don't have to explain inflation when I went to graduate school that was the thing 1970s everybody is going but why is it happening I mean unemployment is going up Keynesian theory says if there's more people unemployed the labor market is and the economy is looser so you shouldn't get inflation you should just get a pump up of output and their unemployment should go down but whenever they did that they pumped up the economy unemployment went down and then it started to rise again and they couldn't explain it and they pumped it up some more and it went down and every time they pumped it up they got inflation so inflation got worse and worse and the unemployment actually came up and that's known in the literature as stagflation every hotshot graduate student and young professor in the 1970 was trying to make their mark explaining that was actually explained by Friedman explained from the point classical theory and Friedman did a wonderful thing he cut the Gordian knot he said what what an employment I don't know what you're talking but there's no unemployment everybody who's not working is choosing not to work because you're giving them welfare you're giving them all these alternatives just sitting around smoking dope they're not really working and so therefore the unemployment rate is zero they call this natural rate of unemployment caused by interventions in the labor market and that's why you get inflation because you with full employment every time you pump it up you get inflation brilliant solution I want to argue that that's wrong of course but you had then have to explain where inflation comes from and in the book I try to show you that there's another theory of inflation it goes all the way back to Ricardo's corn corn model Von Neumanns theory of growth that the limit to growth being profitability and you can explain then empirically as well as theoretically why inflation takes place in some circumstances why it doesn't in others so I don't think I'll be doing that in this lecture but you can take a look at chapter 15 in the book that does that and finally long booms one of the characteristic features I'm going to emphasize is that capitalism does not come to any balance except through imbalance it comes by overshooting maybe for a long period of time in these booms for 20-30 years and then as all the overshooting elements pile up he begins to come back down and comes back down not to some equilibrium but well under and then it repeats in grow so that turbulent cycle is what the Kondratieff was trying to talk about with long ways and I'm going to show you that you can see the long waves if you approach him from a slight actually from the way he approached them but in a way that fortunately he didn't graph and you can see those patterns and they could actually as I did in 2003 begin to anticipate the current crisis I taught this material for a long time and by 2003 you could see the peak but the trouble is when all the crises come after the peak so I did a simple calculation I took the last hundred years basically and looked at how far off the peak that when there were big crises and big crises come roughly every 30 40 years every 40 years and that was roughly 8 to 9 years and I said the peak is 2000 so the crisis should come 2008-2009 well I came 2007-2008 that came essentially in the beginning of 2008 that's a very simple device is not econometric but it's very sensible because it tells you that these recurrent patterns occur so that brings me to the key point how could it be that capitalism could have recurrent patterns I mean you know think about it there's a new government Trump is different from Obama Obama was different from Bush and so how can you have the same government in every country government's come and go so how could it be that capitalism has the same laws or not all but some of the same laws and the answer is that the laws I'm going to talk about first and those that derive from the thing that doesn't change I don't know if you think that from going from Obama to Trump capitalism became less or more interested in profits marginally so but both what's driving this is not what the state does the state has some impact and I'm going to talk about that but rather what motivates individual businesses because where you get your jobs come from businesses where the output comes comes from businesses where the demand for consumers come from the wages and interest and payments that business makes so that that's a great bulk of the source of demand and supply is from businesses and Britta's are driven by the profit motive they don't hire you because you look interesting or clever they hire you because I think you make money from you they can make a profit and that is the motivation for both demand and supply so that's a important point which I'm going to come back to also now what are the common elements that are extractable from these great economists who started by trying to understand whose framework is depend on understanding reality capitalist reality one is obvious economic acts are embedded in a social context you pick up Smith and what's a word you hear verse class and he talks about nature and culture and morals and Moral Sentiments he doesn't talk about gender but effectively talks about caste because of different layers of people and society and institutions so that has to be the starting point human beings are socially acculturated beings that's what we do people act for many reasons with complex and contradictory determinations and among those determinations is a tribal instinct now I was born Muslim after September 11th I got reactions on the street that I had not seen before I mean I got reactions for being non white so it kind of used to that but for being a non white Pakistani born I'm actually an atheist but that's not them the people who react they're not going to ask you that question and don't care and the reaction changed visibly and among people who are otherwise very friendly some people just became enraged now it's not enough to decry that you have to explain it and to explain it you have to understand that we're all so intrinsically tribal beings and that tribal connection can be invoked easily I was born in 1945 in Karachi which was a mixture of Hindus and Muslims and Christians my mother was a Christian and that bound by nationality and regionality and family structures exploded in partition where the two sides went against each other and millions of people died the same people have been living together where suddenly they're the tribal part was invoked and if you think was only then just look around the world today every politician is invoking the tribal saying Trump is doing that Obama tried not to do that but Bush did that and across Europe you can find it everywhere why because there are more non-white people in Europe and that tribal instinct is easily invoked complaining about it is not the way a science proceeds science has to understand how and why this happens it has to build it into your theory of micro behavior from the start if you can't do that then you're not talking about science you're talking about something else then there is a claim a completely false claim that action should be portrayed in terms of rationality and as Bertram Russell points out people know Bertrand Russell mathematician philosopher of great renown this ignores the ocean of human folly upon which the fragile bark bark is a boat of human region reason insecurely floats you know I know educated intelligent person other than an economist would possibly think otherwise and so you have to ask yourself how the hell did you end up with the lack of this information and because it's stripped from you in course is the way that if you join the army your feeling for other people is stripped from you that's a purpose of being a soldier after all self-interest is not a general rule or even a desirable one here's some a quote from Adam Smith people talk about Adam Smith the target self-interest read Adam Smith first don't get the comic book version of it read Smith all for ourselves and nothing for others seems in every age of the world to have been the vile Maxim of the Masters of mankind we don't think of Smith is saying that but if you read Smith you see this here's how about Keynes when the accumulation of wealth is no longer of high social importance there will be great changes in the morals we shall be able to rid ourselves of the many pseudo moral principles which have had ridden us for 200 years 200 years by the way is a time span of capitalism he's not talking about abstractly here by which we have exalted some of the most distasteful of human qualities into the position of highest virtues we shall dare to assess the money motive and it's true value the love of money is a possession we recognize for what it is are somewhat disgusting morbidity morbidity one of those semi criminal semi pathological propensity z' which one hands over with a shudder to the specialists in mental disease well I mean if they read you this when you are drawing utility curves perhaps you get some sense of what you're doing there but they don't tell you this and so it's up to you to ask this question then there's a question of the worship of the market there's no question than your classic economics is a market worship exercise because it present capitalism is this ideal perfect thing and everything is measured by the deviation from this abstract framework just as in the Garden of Eden you measure the real world from its deviation from the original garden this is a quote from car historian the market does not care if you've done bad things it only cares it cares when you get caught and Cathy the price system neither knows limits no morality that's a rational statement because it's a statement which takes into account the reality of system so we have to explain what capitalism does and also what it doesn't do here's something from the Communist Manifesto you don't think of someone like Marx talking about the virtues of capitalism markets keep ever growing the demand ever rising even manufacture and no longer subsides sufficed thereupon steam and machinery revolutionised industrial production modern industries established the world market which has given an immense development to commerce to navigation to communication by land this development in its turn reacted on the extension of industry and in proportion as industry commerce navigation railway is always extended now this is an appreciation by marks and angles of the power of capitalism they say that this is the system that's going to knock down everything in its path knock down everything older than it and so the only hope from their point of view of escaping its properties which they also delineate in great detail its destructive power properties is to go outside of capitalism my task here is to show you how capitalism works the good and the bad the development of technology the increase of wealth and also the development of environmental damage of inequality of poverty of disease all of those come from the same imperative and once you understand that they don't become internality externality that's a trick they are both part of the same guiding principle and that's a task to show how that's true by the way if you ever think you're a really hotshot graduate student keep in mind that angles was 27 when he wrote this and Marx is 29 when they finish this and so when we get pretensions it's just kind of keep him in mind what the standard is so to speak so what is this classical tradition classical Keynesian tradition I am not quite got a proper name for it one possible name is a classical Keynesian economics or classical Keynesian political economy which brings in this whole idea of politics and struggle and all of that we're still playing with that one thing that they said from the beginning is capitalism as a historical entity with new patterns and logic it has powerful patterns characteristic to it produced by market forces which they called laws of motion and laws of motion is a very good phrase because it's a movement patterns driven by movement not laws of equilibrium not of laws of statics laws of motion and again my task is to show you that capitalism exhibits such laws competition is the root of powerful gravitational forces the profit motive is the key motive that drives capitalism it drives competition because capital moves from one sector to another according to search for higher profits it regulates therefore relative prices interest rates exchange rates stock and bond prices etc etc but it regulates both supply and demand at the micro macro level it's important it's a astonishing that people forget this Keynes doesn't by the way but too many textbooks make seem demand is something independent of supply well how can that be supply creates in the first instance a demand for labour because you can't produce something unless you hire people so that's the the income of workers it also has to pay profits rent an interest to owners of capital so that's the income of property owners the sum of those two incomes is personal income and that of personal income comes consumption demand and the funding the finance for other kinds of things like investment but capitalism also creates investment demand because investment demand is based on the decision to expand production and that's based on profitability into the future so current profitability creates supply by giving you a decision to create current production which means employment and demand for raw materials and demand for and payments of property incomes which leads to consumed consumption demand but it also creates investment demand now this is not something mysterious in Cannes nor is it mysterious in the classical tradition these two come from the profit motive it doesn't follow that they Adam doesn't follow because all of these are done by individuals with their own dimensions of own expectations their own judgments about the present and the future and the time horizon so the problem becomes that all of these things are created at the micro level locally and the question is how do they add up in the answers they don't add up and that is the first lesson that the adding up comes about by the discrepancy there's to say the fact that they don't add up creates a reaction in the market a signal in the market and the market response that doesn't mean the market then moves towards equilibrium it creates more disturbances and then there's a perpetual process of fluctuation around some moving center of gravity if you're interested in the kind of mathematics you need for this whoo you need something like stochastic differential equations at the mean minimum because these equations deal with processes that react but also turbulence created within the processes themselves what you can't talk about is general equilibrium as a kind of point of balance because that misses the whole issue kane says the engine which drives enterprises profit and people forget this point that it's central to Keynes now if it's true that every individual firm is creating its output on the basis of its guests about the future and every individual person who's employed is buying things on the basis of their guests about their future employment all those guesses don't add up and that discrepancy is exactly what needs to be understood analytically and that means that you get what is I would argue the real meaning of the term invisible hand and Smith which is not balanced but turbulence imbalance with one kind of imbalance being replaced by another band overshooting under shooting over shooting under shooting around a moving center of gravity which is created itself by all of these processes now we can formalize that we can actually track that and I'm going to try to show you how it what it looks like next point growth is an intrinsic feature of the system it's so bizarre that when you study economics micro and macro you start with a static system let's assume we're talking about static no let's not assume that because that assumption makes no sense what makes sense is to understand how growth takes place and what motivates the two sides of demand and supply and I would give rise to growth Kondratiev talks about this I'm gonna skip some of these quotes but notice that if expansion is rooted in the profit motive and this is a very beautiful argument in Marx Marx says look the whole point of making profit is to take us up some of money em converted to commodities people raw materials plant and equipment so that you can produce goods which is a bigger sum of commodities and when you started with and you sell those for more money and Prime so you start with them you want to end up with M Prime how do you know you're successful if your ending is bigger than your beginning because that's profit if you're not if it's not you're not successful if you just get the same amount you wasted all the time and effort in fact if you did don't get more than if you just put your money in the bank at an interest rate then you wasted your time and effort so the successes is expansion but if every cell is expanding then it expands not just against market of each other but expands across the globe and the history of capitalism is X exactly that expansion that has to be understood as driven at the cellular level not by some decisions made by capitalists to go abroad capital goes where there's profit and the world is a potential location and by the way not just the world already major capitalists are planning to expand into space Elon Musk and others are talking about mining the moon who knows what we'll find in the moon let's go there and find out we get subsidies from the state of course is expensive but if we go there belongs to us we're gonna be mining the Antarctic again because it's potentially profitable so what drives it is this profit motive globalization is therefore inherent but so is machinery now this is surprising thing that people again forget if you read Adam Smith what Adam Smith tells you is that machinery comes from the incentive structure of capitalism gives you this example he says imagine that all of you were pretty kingpins that's a famous pin factory example right you put using pins yourself then each one of you has to have your own little furnace each one of you has to draw out that liquid metal each one you has to have a strip where it can cool then you have to wait for it to cool then you cut it up then you sharpen one end you put a head on the other end right so you have to do all of these and maybe you takes days to make a bunch of pins he says the catalyst comes along and says hey I can make this much more efficient in terms of profitability by assigning some of you to be the furnace others to do the wire third to sharpen and afford to put ahead and that way I can be more efficient what does that be more efficient I can produce many more pins at a lower cost so I can make a profit I can sell them at a lower price but the detraction of it is that each one of you loses sight of the overall process you're no longer skilled laborer you become partially skilled laborer or even unskilled laborer doing a simple operation again again now think of the operation of just putting a head on a pin what do you do it becomes something you can do and because you're working for someone else now the length and intensity the working day gets expanded too because the capitalist can make more money if they can make your work eight ten fifteen sixteen hours 16 is abstract sixteen hours of labor occur in in California on the farms it occurs in New Jersey on the farms occurs in China it occurs in Asia there's an Africa now but it's also the history of capitalism they started that way to go to Manchester and look at the history of an working-class movement Museum amazing Museum and it shows you that but that's the kind of thing that that workers started with sixteen hours because the system drives you to the limit but now you're working 16 hours a day you're doing the same operation what is that operation is just hitting a pin and some Engineer comes along maybe even some worker and says hey that's just simple lever if I got a lever and I put a pin here to rotate it and I got some power to do that then I can do those pins now once I do that the steam engine some kind of people turning a wheel but then I'm doing it like that and everybody has had to speed up to meet that demand so then you need either more people doing pins or better yet some way of speeding up the cutting and the sharpening and you get the development of machinery from the incentive to reduce cost not from the great virtue of English capitalists with their moral superiority and greater intelligence or anything it comes from capitalism and everywhere the capitalism goes people invent ways of doing it better if they're going to be successful capitalism drives that and this is the in fact Darwinian part of the capitalism because if you don't do it then you get eliminated yourself and this by the way is not driven by the reaction or militants' of workers though that can increase mechanization is driven by the existence of workers I I very much like animation film called chicken run now chicken run is a very clever film but the backdrop of that is that in the actual production of chickens never eat anything made by Perdue the chickens were forced to live their whole life in a box they couldn't move they could literally not move their limbs atrophied why because then they would spend all their time laying eggs and in order to stimulate that they were given hormones but if they're sitting there they're literally sitting in their own and everyone around them so we have to give them antibiotics because they're all crammed together it's not like they have these things apart they're all little prisons for chickens force-fed forced to produce eggs Perdue chickens became the biggest chicken producer in the world because it made chickens more cheaply that way made eggs more cheaply but also the chickens were then used and developed fattened up with growth hormones and then killed they were very buttery soft because I never literally couldn't move a muscle it was a kind of torture movements that arose in the 90s 80s and 90s against that you know free-range chickens arose from this but in this film this happens to a chicken farm where big industrial company wants to take over the chicken farm so they mechanize and since it's an animation the chickens organize and have a little revolution and overthrow this company now the point is that this is the reaction to the imperative of capitalism yes if workers resist and workers always risen because they're active subjects that makes it more difficult but it doesn't come from that chickens have been mechanized agriculture is mechanized plants are mechanized and gene structure is altered because it's cheaper another film of mine that I like of that sort is the attack of the killer tomatoes you should look it up it's a good film which is about the same kind of reaction to capitalist incentive structures now from this point of view we need to think about a couple of other things at the aggregate and individual level what motivates investment is a rate of return on investment now it's not a big surprise everybody says is it's me it's Ricardo Marx neoclassical theory if the rate of return on investment here is 10 percent and it's 15 percent there then even people here making money making profit will put some of their profits over there because it can get a higher rate of return people making 15 percent will put some of their own profits where they are because they're making a higher rate of return that'll increase the supply relative to demand so that the price will come down and the profit rate will come down and here the supply will fall below the growth of demand at some point and the price will come up and therefore the profit rates will move towards equality but it doesn't follow they become equal because in fact they will overshoot they change the conditions when they do that because it's new technology is different things so that you get instead a fluctuation around the common center of gravity now that idea of turbulent equalization turns out to be fundamental to the classical tradition because you can show by formalizing it I mentioned sarcastic differential equations that you can explain the actual power profit rates wages and some things that we observe today we see the Equality certainly when you bring in people who are cheaper then that drives wages down where they come if their supply is big enough which is why every working class has resisted integration at some point because it threatens their wage structure and you know that and they're not wrong by the way they're right that's a key point so that's something that we have to understand this is a quote from Adam Smith about how the only classes you can you can trust workers and their because when the nation becomes richer wages tend to be higher you can trust landlords more or less because he says for two reasons once their rents go up and because they basically stupid people and they don't they can't get themselves to organize they just sit around and enjoy the rent but you can't trust capitalist success because capitalists will their profit rate Falls a society gets developed and it's in their interest to prevent competition all the time so they always organize and they're persuading politicians because they're in the business of making intelligent judgments in their self-interest and therefore they're the class you cannot trust do they tell you about that when you read about Adam Smith is that in the in the Disney version of Adam Smith that is in textbooks this is Smith this is what he says don't trust that class that's a one class you can't trust now one more point here the state and institutions are potential regulators of capitalism so it seems like you can say well ok I know it does all these bad things environment and so on but why can't the state just come in and tell capitalists you can't do that and that presupposes that the state is some kind of alien entity that came from outer space who the hell is a state look in the Bush White House there's not a person there was not a military person or a capitalist financial or other capitalist and that has always been the case except that they don't always occupy the position directly they just put in people who are favorable to them you think Obama was different look at his cabinet so the idea that the state is somehow capable of going against the interests of capital is a mistake it is capable of inhibiting these interests and it's also capable the way of inhibiting the interests of workers that happens in the power struggle over which way the state turns in the 1980's the the in 1960s and 70s that was called Golden Age of Labor because unions were relatively strong there were institutional structures in place so that wages were kept up with productivity even went past productivity but by the 1980s the reaction of the capitalist class to that very thing led to the election of Reagan in England in the US and Thatcher in England and they were by the way popular with the working class because by the 80s you had inflation and unemployment and these guys said we can give you jobs how are we going to give you jobs by making the system more efficient what does that mean they didn't tell them but it meant cutting wages keeping them below productivity so that the wage share declined and guess what they gave them jobs the growth of employment rose in that period they actually gave them jobs making workers cheaper was actually good for capital what a big surprise and they were able to persuade workers that it was in their interest not fight for unions that they were better off letting lower wages now whether that we like that or not that is something that needs to be explained as a pattern finally I mentioned briefly that part of what I'm saying here is that you have to treat in your classic economics as an ideological construction by ideological I mean not that the people are doing it necessarily that but it was constructed in the in a way to portray capitalism in a perfect way and yes you're going to spend way too much of your life in this portrayal but you have to think every once in a while why am i doing this and answer is well then I can get a job and I'll pretend that I'm in favor of this and someday I'll come out of the closet and you will the closet door will be locked from the inside by yourself and you'll come out you have no clue what to do because you've been inside too long so if you're gonna be subversive do it now because it gets harder and harder as you get later older that's just a fact and it's not so bad some efforts have been doing a long time and we seem no more unhappy than anyone else so I want to mention here that it's not about mathematics I don't know how many people know if you read Ricardo he has essentially simultaneous equation system to determine prices I mean I do a little spreadsheet for my courses in which you can do the calculation but I do the algebra it's a simple leontyev input/output system with prices of production kind of Rafa system actually but it's in Ricardo he doesn't he does it numerically but that's a trivial thing anybody looking at it could formalize it Marx actually was so interested in the mathematical representation of the patterns that he was seeing that he took time out I don't know when he had time he didn't have any money he literally couldn't eat sometimes I'm his children died of diseases from this insufficient insulation against the cold and food but he took time out to read studying mathematics and he wrote a book on mathematics he got so annoyed at the idea of differential calculus being based on the into test mode so he wrote a book you should look it up it's their Marx's book on mathematics but why was he studying mathematics because he believed that you could find some laws in calculus or something else it wasn't very clear because calculus was being invented then explaining what he called the ups and downs what we call the business cycle theory and yes you can do that you can use linear but better nonlinear mathematics to do that so it's not mathematics that's the issue it's the vision to which mathematics is applied if you look at my work on my home page everything I've written published is on my home page illegally by the way but anyway it's there and you can see that I've used Maddox whenever I found it useful but I'm not a slave of mathematics mathematics is a tool and when I need mathematics is when I have a question that I think can be answered by mathematics not the other way around I have a mathematics and I look around for a question that I can try to fit into it by abstracting from all its real properties so it fits a exact what you will do it if you become a mathematical economist and by the way than the condom attrition also mostly so when neoclassic economics says oh the great virtue of neoclassical is mathematical that's that other schools are father just as mathematical if they need to be but it's not the same mathematics and then sometimes economist will tell you why we're sort of like physics don't say that with the physicists in the room because they'll just laugh you out of the room this is from Doyle farmer who is a very well-known physicist and mathematician at the Institute in Santa Fe the Institute for complexity and he says although this often said that economics is too much like physics because you know our side keeps saying oh there's too much math and all that to a physicist con economics is not at all like physics the difference is in the scientific method of the two fields Orthodox theoretical economics uses a top-down approach in which hypotheses and mathematical rigor come first an empirical control confirmation comes second physics in contrast embraces the bottom-up experimental method philosophy of Newton in which hypotheses are inferred from phenomena and afterwards rendered general by induction if economics were truly make empirical verification the ultimate arbiter of theories is to force it to open up to alternative approaches now farmer is a physicist so he doesn't know that there's any other economics except the orthodoxy because in physics physics that is good comes up to the top at least from his point of view and there isn't any other physics there's no secret physics hanging around in physics there's maybe string theory in quantum mechanics and different forms and maybe David Baum's philosophy and but if they're in Orthodox physics pretty much is the dominant sin which everybody works in what he doesn't know is that that's not true of economics economics has a dominant field but it has schools what I'm calling classical Keynesian economics are Katz classical painting political economy has post-keynesian economics and as a physicist he doesn't know about that because he doesn't hear about it but you have to make your choice and the way to do that is not to ignore the other side but to keep your mind open to the key point where these are constructed differently so you have to ask yourself what's the justification for that construction I want to say just briefly something on post Kings economics that I'm gonna stop asked four questions and before I move to looking at the actual empirical patterns I may may not get to the consumer Theory thing but if I don't get to today I'll start with it tomorrow post-keynesian economics begins really with Colette's key Komatsu key was not really an economist he was an engineer and he looked at some patterns and he found that they did not fit with what he thought was economic theory which is in your classical theory he found that prices were rigid that prices varied among firms so they didn't sell everything at the same so he came up with a simple algebraic explanation of the variation of prices among firms of the same product and he did that by saying that they have two degrees of monopoly power or they're two degrees of influence one is their degree to be safe from competition of others that's one kind of monopoly power and the other is they have to pay attention to what their competitors are doing well what does that mean in practice I am selling paper right so I'm selling paper and I decide to sell it for two dollars a sheet to two census sheet two dollars a ream right well I look around and if there's nobody in my neighborhood and all my customers are from that neighborhood then I can get away with it even if there's a neighborhood far away that sells it for a dollar eighty everyone he knows that is not worth going there and taking the time and money to do that so you have a certain insulation but that's competition that's transportation cost that's not monopoly power it's just the fact that transportation costs protect you should that costs become reduced subway system is built and now you can go there and buy them all in bulk somewhere Costco well but that you're gone if you can't match Costco you're gone and that is real competition cholesky misunderstands that and thinks of it as monopoly because he looks at me Oh classical theory new classical see he says competition means all prices are exactly like if they're not it's lack of competition so that's a mistake about the level of concretions I'm gonna argue that you can explain what cholesky sees from competition itself and that's gonna come later but we also know that Keynes theory of effective demand was not based on Collette's kyun economics imperfect competition was base rather than what he called atavistic competition so the problem is Cain says I've invented a new theory and oh by the way I don't have a micro foundation for it but I don't like that you know classical theory and I certainly don't like imperfect competition so I don't like perfect or imperfect competition and it's well-known that Keynes doesn't have a micro foundation but when he talks about competition he talks about it in exactly the manner when I'm calling real competition Keynes doesn't have any exposure to the classical tradition in that sense in fact what Keynes calls the classical tradition is what I would call the neoclassical tradition Marshall the GU because they took that name over and said we're the classical's but in fact Smith Ricardo Marx were an entirely different brand so to speak a different philosophy of that argument so I I think I'm gonna argue that those people who think and rightfully that if you're faced with neoclassical economics perfect competition perfect knowledge rational expectation hyper rationality then the only sensible thing is to go to post-keynesian economics which is imperfect competition imperfect information asymmetries and then actually most progressive neoclassic economists do that to cudeman does that you're gonna hear him I don't know what he's talking about on Thursday but he's famous for talking about trade in terms of these imperfections starting from the neoclassical framework Stiglitz does the same thing very progressive on the world scale but he starts from the neoclassical framework and both of them say that is how you have to start you have to start from the church and then you can talk about which bishops are little crazy a little weird but that's another story you have to start on the church I'm arguing that you have to follow Kepler's path you have to understand that you are wasting your time trying to explain why an elliptical orbit doesn't fit with a circular you have to say what is the law of the orbit and when you do that then you see that there has a law a wonderful law a simple law and that law makes sense and you don't have to treat it as an imperfection or a deviation but rather as a realization of the law so that's the argument I'm gonna try to make for a huge number of topics now I want to stop I have till 6:00 ask you if you have questions comments are you offended by any of this you can say because I need feedback about how much is its familiar I can speed up I just don't know is this the right pace for instance how many people had macro okay so you know post-keynesian economics you know Keynes and all that and I'm gonna make an argument which is very fundamental that Keynes and Marx had the same argument about effective demand but Marx there's always a problem in Marx and I forgot to mention this Marx didn't publish as a real problem if you're going to be the founder of a whole new conceptual framework it helps to publish this stuff and he didn't if you know Marx's history he was desperately poor he couldn't get a job in academia so he didn't have the space and time he had to write articles and but he's also actively involved in political struggle and I took a lot of his time and energy angles supported him angles actually went to work for his father angles father was an owner of Mills angle moved to Manchester so that he could get the money to support Marx I mean talk about sacrifice angles was a brilliant brilliant man but he literally sacrificed that time and energy of his so that he could have the money to support Marx and Marx was involved in many many things but Marx's project was six volume six books not volume six books first one was called on capital and on capital was divided in Marx's plan into four volumes and of those four volumes Marx published one which we call Volume one of capital it in published volume two angles had to do it after Marx died from a mass of papers in his study and in Marx's horrible handwriting nobody could read and volume three was even less finished even less guidance so angles put together whatever he could and volume four would literally became just what Marx and notes that Marx had taken on other economists would call that theories and surplus value so those four volumes is book 1 book 2 is going to be on wages book 3 was going to be unread book 4 was gonna be cycles or something like that it's going to end up with book 6 on the world market he didn't write any of those books so you can't just go to Marx and say always mark says about effective demand he doesn't say in fact he does say some things but they are buried in a mess of notes that angles have to extract and if you've ever seen what the study of a writer looks like you know it's pretty hard to make the sense of where the novel is going to be from all these messes and notes and post-its and all that it does come out when they write it but if they don't write it it's not so easy to see that's what I mean when I say these arguments can be extracted you have to see the logic the logic guides you and looking at the real world helps you confront that ok whoa whoops one more point yeah sorry I skip one point now come back to this matter okay so let me stop here any questions about this is just foundations I'm gonna try and show you from micro to macro there's a coherent path and I will never use the word utility maximizing or anything of that sort there principles are go evolutionary principles but not those questions comments yes so you mentioned that competition how does rent fit into this framework I mean when you start seeing like well first of all rents are subject to competition okay it depends on your theory of competition so that's why I use the word real competition as opposed to perfect competition Ricardo was the first person to argue that rents are determined by the laws of competition and this is how he did it and we can extend that to finance I do that in the book but let's start with a simple case Ricardo says we observe that landlord gets rent so why does that set of landlords get rent and this set not and he says because competition expands production on the best reproducible conditions okay so a very important point best reproducible conditions that land was the best reproducible condition Ricardo sets at some time in the past so then little by little we expanded on that land and that was lands price natural price was the one that regulated the price of corn but when that land got used up we had to go to a worse land and that worst land becomes a regulating condition as soon as that happens that land and the worst land are selling at the same price but the worst land has a higher cost that's why it's cursed therefore you're selling at a higher price of production both of them but there's an excess profit being made here because you cannot make the land you cannot reproduce land and so Ricardo says that is an excess profit first of all but then he says well if the excess profit comes from the land then the owner of the land who might be the capitalist but might be a landlord can say hey wait a minute the only reason you have this excess profit is not because you're using that machinery this guy is using that machinery too and look his profits are lower it's because you have access to land so I can charge you rent and the upper limit to that rent is where all of that excess profit belongs to the owner of the resource the owner of a non reproducible resource that's first point in Ricardo makes the second point Ricardo makes is that this argument of competition only applies to those things that can be reproduced or in this case corn can be reproduced but the land not so the rent of land comes from the non reproducible conditions but the conditions that regulate the price of corn are the ones that you can reproduce and I call that the regulating conditions and that gives you an explanation of red but Ricardo also says it's a chapter one of Ricardo says let me tell you first of all that the theory of competition cannot apply to things that can't be made again for instance a rare painting a rare painting has no cost of production now because it can't be reproduced so the price of a rare painting depends only on the wealth of the people bidding for it only on the wealth for the people I just read that recently in Madison New Jersey they had a local government building a local public building and a small place and they had a bust there you know like everybody does a little bust there of some person and they hired an intern to archive the stuff in there and the intern thought that does looks kind of so did some research Bizzaro damn they've been sitting there the whole time nobody knew was a Rodin so its price was $60 when we was sitting there and suddenly its prices 60 million dollars now that jump comes because a real Rodin is not reproducible though anybody can buy plaster likeness a very good one so it's not the face of it it's the quality of it being not reproducible that makes it so there's a kind of rent which comes from the lack of reproducible supply that Ricardo says paintings wines all of that stuff that's from there now if however something is what he calls freely reproducible that is it can be expanded then the cost becomes a regulator and the cost is then tied to competition now people say well what about monopoly I mean I'm going to come to that I'm going to explain how to identify when you have monopoly but the notion of monopoly is different in real competition than it is in perfect competition and that's a difference of what how competition works and to anticipate that in perfect competition every firm is infinitesimal it's atomic right so if you have fewer than an infinite number of firms that means a market is not perfect if you have firms that have any scale the market is not perfect so imperfections have to do with this number of firms we measured that by the concentration ratio or the scale of firms you measure that by the scale of investment and and the argument is that these would be associated with higher profits but in fact there is no evidence for this and in fact you can do the opposite and show that you can explain correlations with concentration ratios scale that you do find and they also explain what you don't find from an alternate theory competition now I'm asserting that I haven't developed it but the point is that this would not have been a mystery to Ricardo it's a mystery because we were literally zapped by this laser gun and we forgot the past and the only thing we remember is the present I would like to zap you the other way now the Third Point finance finance eight prophets but my argument is something different than it just creates rents because the rents are actually subject to competition financial firms are all the time fighting each other they get the people who make these profits they get they hire them away for what reason to make profits for them and many times they go bankrupt which is something we forget about they don't have a monopoly on the profits in that sense of they're safe they fight for it and they tell you it's a vicious jungle out there in that fight but there's a question there how a financial profits made one answer in the Marxist tradition is that they come from surplus value which is shared out and there's some truth to that firms get a surplus what is called gross operating surplus in the national income accounts and that's shared as rents interest dividend payments and all that and that appears as incomes for some people but it's if those people are themselves or the the sources of that the recipients of the income are firms than some of that is profits or sharing out some of your profits as payments shows up as profits for the other so you can track that you can do a national account measures of that I do that in the book but there's another kind of profit which it doesn't come from there and the only person that I know which mentions that to people James Stewart and Marx and Marx mentions it in the first chapter of the first volume of theories of surplus-value go there library and look it up the first thing he says is James Stewart says there are two sources of profit profit on alienation which is profit on transfer and another source of profit which is profit on production now profit and production we recognize you know production function you go in labor and out comes output subtract the wages and you have profit or any other surplus product the length of the working-day with beyond a certain length then you get a surplus product so that's the kind of profit that Marx and Smith and Ricardo identify the surplus product profit but mark says Stuart is right that there's another type of profit now you think about that for a moment it's got to be right industrial capitalism comes in the 17th century but merchants capita thousands of years old there is no culture across the globe that didn't have traders and they got profit but they didn't create the profit by creating shops and building things they created the profit by going one place trading something and coming back and getting money from it so how do you do that that's a very important thing to explain and that is profit on alienation and the only way you can do that is to buy the thing cheaper then you're going to finally sell it and that difference subject to transportation costs and risks and all of that is the source of your profit but that's a different source that means that you have a sink someplace and you move things from one place to another and in the difference you keep something keep something for yourself and that profit has a limit which is zero because if you really have competition then other people can do the same thing so merchants capital depends very heavily on protecting its information its roots but and fighting other people you know privateers were part of merchants capital when you're shipping things from one country to another the other country would hire its own Admirals to be pirates famous pirates were actually of people or hired by England let's say to be part of the Navy because they were then steel that's because merchants profit has no automatic determination unlike say the profit rate which are going to talk about the normal profit rate it comes about from the competition and competition can wipe it out or at least bring it down to the level of a minimal profit and that's why in merchants capital you have the aphorism buy cheap and sell deer and how dear what you can get away with in capitalism you have buy at the normal price and sell at the normal price and that difference actually is very important and the classical economists are interest in that give you one more example of how you can create profit without creating a surplus product or surplus value and I do this I mentioned in the book so you go and you buy a laptop and when you buy it you pay its price and you pray for the surplus value in it you get they get the profit from it so you pay the profit also right so they made the profit they sold you the laptop and they record that profit they their inventory goes down by a thousand dollars their profit goes up by two hundred dollars and your income go your wealth goes down by a thousand dollars but you get a laptop that clear so it's a transfer and there's profit created from the production process itself now you go to the library and somebody steals your laptop they now have acquired a thousand dollars worth and you've lost a thousand dollars so in your accounts if you're consistent you have to list in your balance of payments account and balance sheet a loss of a thousand they of course not gonna announce it their balance sheet adjusted up by a thousand but there's no profit involved in that they just took your laptop and they have it but suppose the person took your laptop goes and sells it to a sort of shady entrepreneur so the person takes a thousand-dollar laptop and says I can give it to you for $400 so that person just gained four hundred for $1,000 worth laptop the shop owner then sells it for a thousand and makes 600 so now nothing has happened all the time the laptop has just moved from one person to another every account is balanced you have a loss of a thousand the thief has a gain of four hundred the merchant has a gain of six hundred sorts a thousand balanced no net gain from this transfer but notice the merchants gain is counted as a profit whereas your loss is counted as a personal loss the gain of the thief is counted as a personal gain so the source of that other type of profit is a transfer for what Marx calls circuit of capital to circular and circuit of revenue to the circuit of capital and you can easily show just keeping track of national income accounts that you can create profits by such transfers now finance capital can do this an enormous way some 23 year old kid has got a company which they own they decide to sell it they sell it to another company or the sell shares let's suppose they sell shares right suddenly they're worth a billion dollars where's that money come from but somebody has to give them their money that person's income the sum of all the owners of the stocks income go down by billion dollars this person's income goes up by a billion dollars that's the profit unless you count some kind of profit in the in the transaction or you count profit as the gain here and the loss there again they add up to zero that one is a change in personal income the others again in capitalist income so profit is in the final instance a gain in the circuit of capital and it's possible then to explain many phenomena that way and I show in the book how to do that that implies that what I'm arguing contradicts the Marxist who say that profit must come from surplus value it's not true empirically it's not true in Marx either but that's not important point it's not true logically okay that's a small answer to a big question so when I get there perhaps I can expand on that is that okay yeah other questions yes well I have to say that econometrics is useful if it fits your question it's a common question you know I'm looking at macroeconomics series now we know they're trending we don't necessarily have a very good explanation for why they're trended so different theories will have their vaccinations to the trend maybe different theories from therefore imply their unit rule or not unit rule did happen to be very convenient because then we can make some assumptions about it but me there's no reason why there should be the case and it might be that they're not here's an example if you have growth theory if you have a growth rate let's say that the growth rate of capital is a function of expected profit net of the interest rate this is actually the argument in Marx and it's pretty close to the argument in Cannes now if this was some kind of constant then the growth rate can be written as the change in the log of capital is some kind of constant right and maybe some function of time I don't know it depends on other factors here and you basically got a unit root process that's a simplest representation of the starting point that is absolutely fundamental in the classical tradition is that everything grows so yes maybe unit root but most likely not it's just that that's as far as we get the rest of it is hard to so econometrics is something you should take as a useful tool provided it fits your theoretical framework and recognize its deficiencies which is had to make a lot of assumptions in order to figure out the identification problem that comes with all econometrics so I'm not saying that you shouldn't study math I'm thinking should Mac more seriously by understanding the assumptions that go into it yes good question the answer in the book idea is partly related to my own personal path I come from Pakistan I went to graduate school thinking that I would actually be able to explain why development was not taking place my teachers were Gary Becker Nobel Prize in micro bill Vickrey Nobel Prize in micro Ned Phelps Nobel Prize in macro and they had no clue the theoretical framework that they presented didn't make any sense to me either as a good starting point or an ideal that you want to go and so I had this problem how do I do development economics if the framework was not even adequate to the center and I think it was never adequate to the center so I chose to work on an alternate framework that's taking me a long time but the purpose of that was to have a foundation that can explain development and in the end of the book I talk about how to proceed in that direction my first task however was to show what how capitalism works in the center because that's the thing that we're supposed to take for granted you know in you come from the third world you're automatically inferior intellectually and socially and you have to take what they tell you and apply that model I never believed that for a moment and so you have to have your own foundation now they have some implications let me tell you we were just talking about this in the school about the ecla school Prebys single hypothesis which is very big in Latin America always been historically and the idea was that Prevage looked at the pattern of development and he found that the terms of trade in the developing world fell now he said well if Ricardo was right then as countries developed you would move from good land to worse land the worst land so the price of agricultural goods would rise faster the price of industrial goods both of them would have technical change lowering that price but the one difference is agriculture has a lack of fertility or the diminishing Martin fertility raising his price so the terms of trade should move in favor of agricultural products he looks at it finds the opposite and so he says it must be monopolies because according to the laws of Orthodox economics which prove it that way my argument is that you can actually explain that pattern in a different way from the theory of real competition and you don't get a contradiction at all and therefore you then have to explain why real competition works that way and why it disadvantages countries that don't have a developed structure and the answer is given already we know that we know we know ha-joon Chang talks about in his book kicking away the ladder how every developed country restricted competition so it could develop locally its industry and they said so openly at the time they said the British are talking about free trade in competition we're not that's stupid we're not gonna fall for that in fact he cites an American president who says well we will talk about competition when we are the best on the world scale but for now we're going to restrict it build up her own industrial structure and when we become competitive then we'll talk about that the u.s. went through that Europe went through that Germany went through that France went that and he'd cites Switzerland all of them the other thing is they stole all the patents you you know Charles Dickens complains only comes to the United States he didn't make much money because he was just copied his book and printed it then give him any of it you know they stole his book well Americans who are like that they stole a lot of things so that made it very successful as a country in the world order after World War two it comes about now that countries can't do that patent protection we're given the message that you should stay in with what you are good at and not get into industry not get into import substitution because that's not good and you should just use what the developed world gives you it's a lie and the countries who know that's a lie were the ones who succeeded in hi John Chiang mentions this South Korea read Alice empson's wonderful book called South Korea the next giant she talks about how South Korea industrialised itself the lordís cause Germany did the same thing before that by the way China's doing that now Asia's doing that so that is the answer the same laws of competition apply which is that those industries that can cut their cost have a higher chance of survival on the world market but that doesn't mean you can cut your costs just like that lower wages give you an advantage but as productivity is always improving on both sides that advantage cannot be expanded by keep lowering wages because you've already got them at the bottom so you have to industrialize and that means that you have to reject the argument that industrialization for the developing world is a mistake whereas it was perfectly good for the developed world that's not so simple because you have to talk about her real competition operates and at the end of the book virtually the last few pages of the book chapter 17 I talked about this issue I saw some hands over here yes let me explain that because they're just clarifying let's assume that you produce a laptop right and you sold it to me and you made a profit you made a profit of $400 of $200 on the laptop now someone steals it to me from me comes and gives it back to you and you sell it again but this time your profit doesn't come from any production comes in the fat transfer this time you get it for whatever the thief is going to sell it to you so that second profit even though it's the same laptop and even the same seller is a profit on transfer and is not new production at all money yeah I mean they can think about that from love it you pay me I'm a worker right I go and buy of your work i buy the laptop then you hire someone to steal it from me you sell it to another worker the you pay they pay out of your wages maybe you're already creating the money there's a different issue where the sum of aggregate money comes from but this is a local problem another worker says Oh a laptop for $800 I'll take it so you make a profit on it because you didn't pay much for it to the thief then you get a second proper recycling this is by the way not an abstract problem there are shops in Queens that basically make their living by stealing parts for cars and reselling them don't it's if it misses we get it caught but it's a business so it's a source of profit and my point is that we haven't dealt with that theoretically we need to understand that it's it's the old profit source I mean imagine that the laptop was in another country then we understand oh it's merchants and transfer and all that but if it's in the same country even in the same town it's still the same principle other questions yes since that day that we see different what modalities of that the sense that different pieces of this revision of techniques machines or creations of the person well I'm going to show you the data so you can ask me the question that I look at the data and I want to get to that because I'm gonna end it six I'm not gonna even get close but let me start that because iíve been talking abstract about the principles but the method is of no use unless it can actually talk about the law of gravity right so now we know I can look at how gravity operates so let me switch to that and I will may run a few minutes over but I do want to get through it okay I no this is not what I wanted sorry I I'm trying to remember where I put it so hang on let me go let me go there I want to show you some pictures of what capitalism looks like because I want you to understand that this is what needs to be explained structural economic patterns okay okay I'm gonna go quickly if it's not clear please this is just to tell you what I'm trying to do which is that I'm not investigating what Keynes said or Mark said or walrus said or whatever I do do that but that's not the objective investigation the object of an investigation is a system itself and so I need to look at that and so I I judge cap the argument by its logical consistency and all that but not so to speak by the biblical consistency if Mark said it okay it's worth paying attention to but it could be wrong and same thing for Keynes or whatever and this is the structure of my book you can go to really contour maintained by Miriam and you can see the data of the book you can see reviews of the book and study groups and all of that stuff on that I urge you to participate in that so I want to talk about long-term patterns and I'm going to show you a small subset of many long-term patents the book as I said is a thousand pages so a lot of data in it but let's start with the pattern that is characteristic of capitalism this is the industrial production index of the United States beginning in 1862 2010 and the thing I see when I see it is that capitalism grows it's a growing system so to talk about a statics steady-state solution is absurd because you're already misrepresenting the system secondly the growth is turbulent it is not a smooth balanced path this big turbulence here is something we call the Great Depression and so looking at capitalism you should get your head into saying I'm talking about something that operates in a particular way right so it grows it gets richer in the absolute sense secondly this is investment real investment and you thing you notice that real investment is even more turbulent than GDP a point that Keynes makes all the time we an investment is based on expectations of a longer-term future when you produce you're trying to figure out what your demand is when your product gets ready maybe your from now when you're making investment you're buying something that's last 10 15 years so it's naturally subject to mood swings and all of that so you see the greater turbulence of investment thirdly this is GDP per capita GNP per capita and that's a very important point capitalism makes the average person richer where it's successful this is in the top in the US right we can have countries where it doesn't work but where it's successful this is the selling point of capitalism it produces wealth for the average person No distributed unequally and all that but that's a point this is from a very wonderful book called turning point in business cycles by Leonard Ayers which is probably in your library what this comes from a company of a bank that kept track of business cycles and why should a bank here buy business cycles because a bank lends you money and they want to know when it's going to come back and if you are on the top of the thing going down they want to know this so they spend a lot of time and energy keeping track of where the economy is going and this is their measure of business cycle that won't just point out something in the book which you should get every business cycle has a name but the names are so dense on the graph that I couldn't do that so I skipped them all but I like some of the names this name is the Great Depression the Great Depression of the 1840s were too young postdocs who are trying to overthrow capitalism one in Paris and the other in Germany Marx and Engels so this is their period they were in the streets because this Great Depression was so devastating and they were trying to overthrow the system because of the devastating impact angles was actually Organa organized an army of workers was trying to throw the German government Marx is doing the revolutionary propaganda in Paris Mexican War this is a u.s. graph so it's good for us the u.s. called us the us-mexican called is the u.s. war because the u.s. invaded Mexico and took his territory but the Americans call it we call it the Mexican war Civil War not so great for either side but generally better from the north in the south so that's just in one time period from 1831 to 1867 62 rather then another time period again up and down up and down up and down great depression great depression this is called in the business cycle literature the long depression of 1873 to 93 then fluctuation fluctuation fluctuate all the way to early 1900s next period 18 1903 to 1939 fluctuation now you notice that these fluctuations are characteristic they're not even they're not sine waves they're like ooh arrhythmia and a heart they're there but sometimes the heart stops heart attack here you have World War to World War 1 rather and then you get the tremendous depression from World War 1 it's not so bad in the US as in Europe it's devastating Keynes is appalled by the poverty and misery it's trying to figure out how come capitalism doesn't bounce back as all that Orthodox economists were telling his teachers are telling him don't worry it's just a shock it'll come back and meantime things were getting worse and worse movement to a rising revolutionary movements were rising so gains is struggling with this issue and then comes a Great Depression this is one we normally call the Great Depression this is 1929 to 1939 and then that Great Depression Hitler solves the problem of unemployment within one year massive unemployment here's another graph very important this is the wages of workers which is the blue line and productivity and what you see if I have a thing here to push does that work yeah what you see here is that wages and productivity rise together they don't rise at the same rate I'll come back to that but they rise together and then in the Great Depression wages rise faster than productivity kind of a shock what does that mean you're unemployed your wages are rising faster and the answer is very simple in the Great Depression money wages essentially stagnate because people have jobs continue their jobs because they've got contracts but prices collapse because prices collapse real wages rise for those people who have jobs even though most people many people don't have jobs so that's the and productivity slows down because many businesses collapse so this looks like some kind of game for labor but it's very important when you look at data to understand what determines it don't read in mechanically think about what it's doing here this st. makes sense if you think about if you go break it down money wages prices output per worker employment then suddenly you say oh that's pretty obvious it's not a game it's a loss but then in the recovery period real wages keep growing in fact here you could see they're growing faster than productivity so this is called in the u.s. the Golden Age of Labor real wages are growing and they're growing faster than productivity but then comes the reaction of Reagan the whole movement the neoliberal movement that's a tax on the working class a tax on the state on the welfare state and that has a dramatic effect it causes real wages essentially stagnate or grow very slowly where productivity is accelerated and of course here productivity of profitability is accelerating from a Marxist point of view this is a tremendous increase in the rate of surplus-value rate of exploitation wages are brought to a halt their growth and productivity accelerates - the gap between the two and that tells you that the relation of real wages to productivity is socially determined now that's not a surprise you come from the classical tradition they all say that I would Smith also I mean Keynes also that social determination I don't have any reason to talk about marginal productivity theory of or some absurdity like that you can see clearly what happened I was there I was just leaving I just left graduate school and I could certainly see what was happening here this is the ratio of we have wages to productivity I'm going to skip that this is unemployment yeah you have unemployment the earliest I can get data for employment is 1890 so here you see this big rise in unemployment which comes at the end of the Great Depression of 1873 to 93 which by the way it was not very bad in the u.s. compared to europe in europe was really devastating and lasted for 20 years and people were thinking capitalism is doomed is never going to recover but you see how high the unemployment is it's about 18% then comes the big rise in the Great Depression of the 1929 unemployment it rises to 25% what's the definition of employment who's counted is employed what's the official definition of employment in the BLS how much do you have to work to be counted is employed so in the BLS website you can lay it up fine one hour one hour in the last two weeks is enough to count you as being employed so this twenty five percent unemployment includes all those people who worked an hour now there are other measures of unemployment they don't have them that far back but it's a good exercise to think how if you adjust it for people who couldn't get job people who are desperate and be true by the way is true in many poor parts of this country white and black people teenagers can't get jobs and if you look over the rest of the world the unemployment rate is much higher in reality than this official estimated one hour a week one hour in two weeks measure two again when you look at data you are responsible for understanding how its collected because it's always collected with some guide or theoretical basis in mind so but the important point here is that in the next depression which is actually what is called a great stagflation the unemployment rate only went up to ten percent the official unemployment rate that's called u3 the unemployment rate and that tells you that unemployment can be moderated by social institutional factors we know what was happening there the state was Punk trying to pump up the system to keep unemployment from going up here which would have been devastating I mean people already in the streets anti-war movement anti-vietnam movement this is the Great Society pumping up of the economy and it kept the unemployment rate from going above 10% but it didn't keep it from rising it suppressed it and that tells you another thing that unemployment is also socially influenced by social factors it doesn't eliminate it but it is mediated by social factors and then comes the great was so-called Great Recession which I call the first global great recession and the first great depression of the 21st century which is here and again the unemployment rate went up to about 10 percent the official rate you know the actual rate is much worse so you should look it up the BLS has other measures called be sick before b5 b6 and they go up to about double of this almost symbol now again you see that Keynesian policy has had an important impact all states now feel themselves responsible for not letting get unemployment jail run away why because the government just gets kicked out of power and that's a good thing that they feel responsible on the other hand it doesn't mean they can make it disappear and that's a theoretical question why not why can't they make it disappear this is a nice graph this is Kondratiev data and the same data that he use is not necessarily taken from him but actually this is taken from him this is the price index in England the dark line and the price index in the US the light line from 1780 to 1940 now here's something really amazing the index is 100 in 1780 it's 100 in 1938 there was no secular inflation inflation did not exist as a phenomena as a phenomenon until the post-war period there were waves and these are the waves that kondratyev called long waves if you should show you smooth the data it's really simple you press HP filter bingo it's smooth it would take him months to do that we can do it but doesn't mean we understand what we were doing and he didn't understand what he was doing was a big difference but this is secular inflation the damn prices never come down so now you have a theoretical question why is there inflation in the post-war period and none before and my chapter 15 is trying to explain why but the important thing is to understand inflation is not normal capitalism didn't have inflation had ROPS and downs yes and they called it inflation if it went to 103 110 percent and then came back down but not we're talking going from 100 all the way up to a thousand this is what 11 and 1200 1300 1400 that's inflation and that has a big impact on the way economy Frank so you need a theory for what's new in this period if you take the same prices that I just did one thing you notice is that Kondratiev waves disappeared here is a Kondratieff wave kondratyev wave Kondratiev wave and then no Kondratiev wave so one answer is Kondratieff wave capitalism has changed its this is a very common thing among Marx especially any time they find something they don't understand they say capitalism has changed rather than saying well I don't know what the hell is going on so you invent a new phase of capitalism it's great because then you'll give your name to the new phase of capitalism until people discover that you don't know what you're talking about and then in the meantime you've already got ten years so it's a good thing to do but there's no contrasty of pattern well if you read Kondratiev x' book take it out of the library it's a great book to read by the way it's a wonderful book in the back of the book in the book he has a fold out graph probably took him a year to make that by hand right all the calculations are done by hand and he has this data but in the back of the book he has another set of data because each one of these is in terms of the local currency the US indexes in dollars the UK indexes in the UK in in British pounds relative to some base here so this is a local currency in the back of the book he says well what we should use international currency what's international currency gold so if you took gold and you put that there then something remarkable happens the same patterns that I just showed you become Kondratiev wave down karate if wave down Kondratiev waved down and then in the post-war period where supposedly no Kondratiev wave is this contractive wave down Kondratiev wave down more Kondratiev sells and crises come on the downturns well first Kondratiev wave on the down economic crisis of 1825 well is established empirically in the business cycle literature second Kondratiev wave the up here and then down economic crisis of 1847 third up then down is a long economic crisis of 1873 man up and on the down the Great Depression 1929 then up and then the great stagflation of the Johnson post-war Vietnam era and then up and then up around here I began to ask my students where do you think the next one's gonna be and I'll show you how we calculated that came down 2008 bingo on schedule on schedule that raises an interesting question why a clearly governments change cultures change iPhone's change didn't exist then but everything changes so how come the system has these patterns and the answer is from the classical tradition that profitability is still the driving factor that the deep genetic signature of this system takes place at the at the cellular level not at the top yes the top modifies it can have inflation adjusted at the top can unemployment adjusted but the incentive for profitability is not I know I'm running over I don't know if you I can I do ten minutes more should I just pick it up from the next time can you handle a few minutes more okay let me try just say this is the profit rate the all-important variable if you're going to talk about capitalism as I said all the data is in the book and this is from the BBE a bureau of economic analysis profit rate corporate profit rate beginning in 47 you see it going down this is the great Vietnam War pumping so it pumps up profits and then as a pumping dies it goes down it hits the crisis of the stagflation in this period and then you get the Reagan era where the profit rate gets stabilized why does it do that because wages as you saw were flattened out and productivity Rises so the profit ratio Rises profit share Rises and that causes a falling profit rate to be converted to a stable profit rate and that's done through political and social policy by the way political struggle class struggle properly speaking now as a question someone asks about profit rates these are the profit rates Industrial of manufacturing in the United States I have lots of other data in the book of the same sort but this is just illustrative because you can calculate this yourself from the b b:a website the average profit rates of different manufacturing sectors and they're all listed in the BA and you can see that the average profit rates sort of have a similar pattern but they're not equalized the you know here's one that comes down the the the the purple line the blue line is the average so here's a property of one industry kind of stands above the average most of the time here's one of another industry that stays below the average most a time so if you're talking a profit rate equalization you'd expect them to cycle around each other and they don't so therefore it seems that there isn't competition in that sense but when you ask what competition means it is not the profit rates of all capitals but the profit rate of new capitals if there's a lower profit rate on investment here and a higher profit rate and investment there then competition will equalize those but it won't make the profit rate of an old machine over here equal to the profit rate on an old machine over here that's a separate matter they are what they are and their profit rates will be above if they're lucky or below if they're not but they're not going to be directly related so what we need to look at is a profit rate on new investment that's what Keynes calls a marginal efficiency of investment and Kaldor suggests I invented this myself but I saw the Kaldor also said that is that you can measure it by roughly taking the change in profit over the change in the capital stock or the change in profit over investment that's kind of rate of return on investment if you do that you get this picture same industries same data same time period I've just changed the measure the measure here being the rate of return on investment not the rate of return on average capital and you see there's tremendous cycling in the book I take one industry at a time and plot it because that takes time but you can see that in the book I plotted far as deviations from the blue from the blue line which is the average but this is what is meant by equalization of profit rates and constantly cycling so they never come to equilibrium but if they go above they're brought down if they go down they've brought up and Marx actually refers to this as the cycle of fat and lean years which is characteristic of every industry's profit rate there are fat yours where they're above in the lean years where they're below and the cycle competition makes them why if you have a high profit rate here you're going to be attracting capital either because you put more of your money in you're making more money you can turn it into bigger profits or others will come in and in the book I cite all kinds of business studies about just exactly what happens when you have my profit rate the answer is entry entry of new plant and equipment entry new businesses well established and that brings a profit right down because you increase the supply relative to demand and you bring the price down that's a whole point you keep doing it until it's not doesn't pay anymore ok tomorrow I think yeah I'm gonna skip the Phillips curve so Ricardo says that relative prices are determined by two things the structure of production and distribution between profits and wages and he shows a formal analytical model that you can do that and you can actually turn that model using leon TF into showing through using the Leon TF inverse you can break the price of any commodity into two things only one is the ratio of direct and indirect labor time which I call total labor time integrated labor time and the are integrated unit labor costs and the other is a ratio of vertically integrated profits to wages I'm not going to talk too much about that now but it's a simple algebraic thing you can do and Smith does it verbally that shows you the difference between algebra and genius Smith does it verbally but we can duplicate it algebraically and that tells you that you'd expect the direct and indirect labor time to be the dominant term well this is a measure of the relative prices of competitive prices Ricardian prices or marks in competitive prices wrothian versus vertically-integrated labor time there's no profit here in wages just just the labor time and you can see this is a 45-degree line it's not a regression line it's the line where the two are equal algebraically and you can see this tremendous equality and this is in the United States in 1972 in put out the data it's available to you the point is the average deviation is about what Ricardo said and yet nobody bothered to look they just said this is absurd it doesn't fit in your classical theory it can't be true the trouble is it is true and it fits naturally and easily from Orthodox theory so I'm gonna skip the theory of inflation and all that other stuff because we'll come back to it I hope that gives you a sense that the issues involved are not issues of the history of economic thought these are the issues of scientific analysis you need to have a framework that they explain what we see and I want to show you that there's a simple framework that explains all of these patterns from the same basic few elements competition wages and class struggle and whatever okay thank you I believe we're gonna have some pizza you

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Published: Mon Nov 06 2017