Thomas Piketty and Karl Marx: Two Totally Different Visions of Capital

By Eric Toussaint

Republished from CADTM (Committee for the Abolition of Illegitimate Debt).

In his book Capital in the Twenty-First Century,(1) Thomas Piketty has gathered his data meticulously and provided a useful analysis of the unequal distribution of wealth and income, yet some of his definitions are somewhat confusing and even questionable. Consider, for instance, his definition of capital: “In all civilisations, capital has served two great economic functions: on the one hand to provide dwellings (that is to say, to produce “housing services,” the value of which is measured in terms of the rental value of the dwellings: this is the value of well-being of having a roof over one’s head as opposed to being outside); and, on the other hand, as a factor of production for producing other goods and services.” He continues: “Historically, the early forms of capitalistic accumulation seem to concern tools (from flint, etc.), agricultural infrastructure (fences, irrigation, draining, etc.), and rudimentary dwellings, before evolving into more sophisticated forms, such as industrial and professional capital and increasingly elaborate dwellings.(2) Piketty proposes a scenario that suggests capital has been present from the origins of humanity and that revenue from a savings account held by a limited-income retired person is the same as revenue derived from capital.

Capital according to Thomas Piketty

This major confusion is present in the heart of his analysis he develops in Capital in the Twenty-First Century. For Piketty, an apartment worth €80,000 or €2,000 on a savings account(3) may be defined as capital, in the same way as a factory or commercial premises worth €125 million. The ordinary citizen who owns an apartment, has some reserves in a savings account and a life insurance policy worth, say, €10,000 will readily agree with Piketty’s definition, which corresponds with those found in standard economic textbooks and repeated by their bank manager. However, they are wrong, because capital in our capitalist society is much more complex than these simple definitions. Capital is a social relationship that enables a minority (the richest 1%), to get richer by exploiting the labour of others (see below).

Yet when Piketty talks of a progressive tax on capital, he makes no distinction between the kind of “wealth” represented by a €1,000 savings account and the fortune of a Jeff Bezos, a Bill Gates or an Elon Musk.

The same confusion is to be found in his analysis of income: Piketty considers that the income from renting out an €80,000 apartment is a capital gain of the same kind as the income Mark Zuckerberg, the boss of Facebook, derives from his empire.

As far as wages are concerned, Piketty considers that all income declared as wages is wages, whether this means the €3 million salary package of the CEO of a banking group (an amount that is in fact revenue from capital and not a wage or salary(4)) or the €30,000 salary of a bank employee.

Capital according to Karl Marx

We should question the meaning Piketty gives to words like “capital” and define revenue from capital and revenue from labour differently. Piketty presents capital as something that exists in all civilisations and that has necessarily always existed. In this he is in tune with the political economy of the 18th and early 19th century, as found in the writings of Adam Smith in particular, before Karl Marx threw light on what Capital (and wages) really are and developed his critique of the political economy of his time.

Karl Marx has ironical comments on contemporary writers who, like Piketty does, considered the first silex tools to be the original form of capital or just capital: “By a wonderful feat of logical acumen, Colonel Torrens has discovered, in this stone of the savage the origin of capital. “In the first stone which he [the savage] flings at the wild animal he pursues, in the first stick that he seizes to strike down the fruit which hangs above his reach, we see the appropriation of one article for the purpose of aiding in the acquisition of another, and thus discover the origin of capital.” (R. Torrens: “An Essay on the Production of Wealth” &c., pp. 70-71.)»(5)

In his Capital, he states: “We know that the means of production and subsistence, while they remain the property of the immediate producer, are not capital. They become capital only under circumstances in which they serve at the same time as means of exploitation and subjection of the labourer.”(6) Marx explains that an artisan who owns his/her own tools and works for her/himself does not own capital and does not receive a wage. During the centuries that preceded the victory of the capitalist class over the old order, the overwhelming majority of producers worked for themselves, both in towns and in the country. Artisans organised into corporations and peasant families made up the majority of producers, who owned their tools of production, and in the countryside the majority of peasant families owned land, and in addition could make use of communal lands to feed their livestock or glean firewood. Between the end of the 15th century and the end of the 18th century in Western Europe, the developing capitalist class needed the support of the State to dispossess this mass of producers of their tools and/or their land(7) and force them to submit to becoming wage-workers in order to survive. The capitalist class needed to take organised action in order to impoverish and dispossess the working classes and thus force them to accept being wage-workers. That process did not take place all by itself. Karl Marx analyzes the methods that enabled the primitive accumulation of capital in a detailed and rigorous way. In Volume One of Capital, he reviews all the methods used to dispossess producers of the means of production, and thus of their means of subsistence.(8)

Marx draws an anecdote from a book by Edward Gibbon Wakefield (20 March 1796–16 May 1862) to illustrate the idea: “Mr. Peel, he moans, took with him from England to Swan River, West Australia, means of subsistence and of production to the amount of £50,000. Mr. Peel had the foresight to bring with him, besides, 300 persons of the working class, men, women, and children. Once arrived at his destination, ’Mr. Peel was left without a servant to make his bed or fetch him water from the river.’”(9) Marx comments ironically: “Unhappy Mr. Peel who provided for everything except the export of English modes of production to Swan River!” This is because in Australia at the time there was a profusion of land available and the workers were able to find a patch of land on which to set themselves up. Marx, through his comment regarding this fiasco experienced by the capitalist Peel, wants to show that as long as producers have access to the means of subsistence–in this case land—, they are not forced to submit to serving a capitalist.(10)

Marx concludes

So long, therefore, as the labourer can accumulate for himself–and this he can do so long as he remains possessor of his means of production–capitalist accumulation and the capitalistic mode of production are impossible. The class of wage labourers, essential to these, is wanting.“(…)”the expropriation of the mass of the people from the soil forms the basis of the capitalist mode of production.

He adds:

the capitalist mode of production and accumulation, and therefore capitalist private property, have for their fundamental condition the annihilation of self-earned private property; in other words, the expropriation of the labourer.

Karl Marx writes:

property in money, means of subsistence, machines, and other means of production, does not as yet stamp a man as a capitalist if there be wanting the correlative–the wage-worker, the other man who is compelled to sell himself of his own free will.

We should also point out that Marx, in the same section of Capital dedicated to primitive accumulation, vehemently denounced the extermination or forcible subjugation of the indigenous peoples of North America and the other regions that fell victim to colonial domination and the primitive accumulation of capital:

The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalized the rosy dawn of the era of capitalist production.

Consequences of Thomas Piketty’s definition of capital

To return to Piketty, the definition of capital he gives introduces complete confusion. Let’s look at his definition again:“In all civilisations, capital has served two great economic functions: on the one hand to provide dwellings (…) and, on the other hand, as a factor of production for producing other goods and services.”So, for Piketty, Capital has existed in all civilisations; he goes all the way back to prehistory when he writes:“Historically, the early forms of capitalistic accumulation(11)seem to concern tools (from flint, etc.) (…) and rudimentary dwellings, before evolving into more sophisticated forms, such as industrial and professional capital and increasingly elaborate dwellings.“For Piketty, a prehistoric flint tool, a cave, and a computer assembly plant are all capital. If we believe him, “capitalistic” [sic] accumulation goes back as far as the first assembly of a few pieces of flint that had been chipped and shaped. That definition throws no light on the historic specificity of capital, its genesis, how it is reproduced and accumulated, to which class it belongs, or the social and property relations to which it corresponds. The list of examples of capital Thomas Piketty gives resembles a supermarket catalogue; in a way it’s an inventory like the one in Jacques Prévert’s poem”Inventory“… with only the raccoons missing.(12)

Speaking of capitalist accumulation today, Piketty limits the discussion almost exclusively to the role of inheritance and fiscal policies that are favourable to capitalists; but in reality these factors, though they play a tangible role in transmitting and strengthening capital, are not what create it. Historically, for the capital held by the capitalist to begin a process of enormous accumulation, it was necessary to forcibly dispossess producers of their tools and their means of subsistence and exploit their labour power. The accumulation of capital as it continues today requires the continuing exploitation of working people and of Nature. Capital plays no useful role for society; on the contrary, continuing the accumulation of capital and the activities that generate it is literally deadly. Piketty’s failure to acknowledge that leads him to make a statement such as this:

If capital plays a useful role in the production process it is natural that it earns a return.(13)

Piketty’s confusion is undoubtedly the result of his fundamental convictions:

I am not interested in denouncing inequalities or capitalism as such (…) social inequalities are not a problem in themselves if they may be justified, that is to say for the common good. (…)(14)

My critique of Piketty’s definitions in no way minimises the interest of the monumental portrait his research has drawn of the wealth and income inequalities that have developed over the last two centuries. And, putting aside undeniable fundamental disagreements regarding the notion of capital, it is important, if anti-neoliberal fiscal reform is to be achieved, that we endeavour to bring together a broad spectrum of movements and individuals ranging from Thomas Piketty to movements of the anticapitalist Left. And if it is also possible to come together to demand cancellation of the public debts held by the European Central Bank (for a total amount of over 2,500 billion euros), it must be done. I do not regret having co-signed the call for the cancellation of sovereign debts held by the ECB(15) in February 2021 along with Thomas Piketty. But like the other members of the CADTM who signed that text, I consider that more must be done–beginning, for example, with levying a large Covid tax on wealthy individuals and major corporations. The CADTM feels that cancellation of public debts must be accompanied by a series of anticapitalist measures, and it is not certain that Thomas Piketty would support all of them.

Thanks to Anne-Sophie Bouvy, Christine Pagnoulle, Brigitte Ponet, Claude Quémar and Patrick Saurin for their readings.

Translated by Snake Arbusto

Footnotes

1. Thomas Piketty, Capital in the Twenty-first Century, trans. Arthur Goldhammer, Cambridge (MA): Harvard University Press, 2013

2. Thomas Piketty, Capital in the Twenty-first Century, p. 337.

3. Note that according to Piketty, the amounts held in France in savings accounts, check-book accounts, etc. account for only 5% of (private) assets! p. .

4. It’s very convenient for capitalists to include the very high revenues of a corporation’s executives, which also include dividends and stock options, in calculating total payroll.

5. Source: Note 9 to Capital, Book One: The process of production of capital. Part VII, Part III: The Production of absolute surplus-value, Chapter 7: The Labour-Process and the Process of Producing Surplus-Value, available on the Internet: www.marxists.org. Also available in audiobook form, see next note. In the German original and the French translation, Marx jokingly adds a note of wild etymology, suggesting that stock as a reference to capital derives from the German word for stick.

6. Karl Marx, Capital–Book One: The process of production of capital. Part VIII: Primitive accumulation. Chapter Thirty-Three: The Modern Theory of Colonisation. The text from which the excerpts quoted in this article is available on the Internet: www.marxists.org ; it is available in audiobook form at www.marxists.org

7. Confiscation of land by capitalists began in England in the 15th century with what is known as the “Enclosure Movement,” which consisted in ending the traditional right of use of the land and the commons via the Enclosure Acts and turning them over as private property to wealthy aristocrats and bourgeois. Read Chapter 27 of Volume 1 of Marx’s Capital: Expropriation of the Agricultural Population From the Land: www.marxists.org, available as audio – www.archive.org

8. The section of Capital in which Marx details the various sources of primitive accumulation of capital is Book One: The Process of Production of Capital –Part VIII: Primitive Accumulation (First English edition of 1887, translated: Samuel Moore and Edward Aveling, edited by Frederick Engels). There is an audiobook version of Part Eight (see link in earlier note).

9. E. G. Wakefield: England and America, vol. Il, p. 33. Cited by Karl Marx.

10. Writing of the specific situation of North American and Australia in the early 19th century, Marx explains that the possibility for colonists from Europe to become owners of land or begin working for themselves enables “The wage-worker of to-day [to become] to-morrow an independent peasant, or artisan, working for himself.” In North America, Australia and other regions colonised by Europe, the situation gradually changed over the course of the 19th century and the early 20th century, and the great mass of independent producers whose ancestors had emigrated from Europe were also dispossessed of their means of production.

11. Author’s bold.

12. Excerpt from the poem ”Inventaire“ (”Inventory”) by Jacques Prévert (published 1946):
    “A stone
    two houses
    three ruins
    four gravediggers
    a garden
    flowers
    a raccoon (…)” coonytanuki.tumblr.com

13. Thomas Piketty, Capital in the Twenty-first Century, p. 674

14. Idem, p. 62

15. See the French version : www.cadtm.org The French version has been published by Le Monde, La Libre Belgique and RTBF

Firm Level Price Determination: A Comparison of Theories (Perfect Competition, Imperfect Competition, and the Theory of Real Competition)

By Ezra Pugh

“The best of all monopoly profits is a peaceful life,” (John Hicks, 1935).

“The division of labor within society brings into contact independent producers of commodities, who acknowledge no authority other than that of competition…the ‘war of all against all,’”      (Karl Marx, 1867)

George Stigler defines the term competition as “the absence of monopoly power in a market,” (Stigler 1957, 14). This could seem a curiously narrow definition to the businessperson or the worker. But this notion has been ubiquitous in the teaching of economics for decades. It originates, of course, from the Neo-Classical theory of perfect competition. Abstraction is necessary to any theoretical investigation. Assumptions must be made for the purpose of conducting analysis. But in flattening the meaning of a term like competition in such a way, is there a risk that some essential insights may be lost?

Perfect Competition

Perfect competition is the foundational parable of orthodox economics. A perfectly competitive market is an abstract ideal with a number of specific attributes:

•          There is a very large number of firms, such that no single firm can affect the overall market for its product.

•          There is a very large number of buyers for the industry’s product.

•          Each firm produces exactly the same undifferentiated product.

•          Firms, and their consumers, have perfect knowledge of all relevant economic information related to their industry and its product.

•          Firms have unrestricted power of entry and exit in their industry.

•          Firms are entitled to a ‘normal rate’ of profit, which is included in its operations costs.

• ·         Marginal costs drop at first then eventually increase with each unit sold. As a result, average cost is also upward sloping.

From its perspective, a firm in perfect competition is just a speck, dwarfed by the size of the market it competes in. The market can absorb whatever the firm can produce, provided it is sold at market price. The firm’s perceived demand curve is horizontal, or perfectly elastic. As a result, the demand curve is identical to its supply curve. The overall demand curve of the market, however, is downward sloping.

The firm must accept the prevailing market selling price for its good. If it sets its price above the prevailing price, even by an iota, the firm will lose all of its sales to the myriad other sellers. If it sets its price below, it will not be able to make enough profit to survive. A firm in a perfectly competitive market is therefore known as a price-taker, as it is powerless in the face of market pressures. Consequently, “a perfectly competitive firm has only one major decision to make—namely, what quantity to produce,” (Greenlaw 2018, 189).

Being rational, the firm’s motivating goal is to generate profit. Its profit (r), is defined as total revenue (TR) minus total cost (TC). Total revenue is made up on the products price (P) multiplied by the quantity produced (Q) minus the average cost per unit (AC) multiplied by the quantity produced. This can be written as:

To maximize its profit, the firm must continue producing more output up until the point its marginal revenue equals its marginal cost – the point where an additional unit of output contributes no more profit. Marginal revenue (MR) and marginal cost (MC) are defined thus:

Because the market price the firm experiences does not change based on its output, the firm’s marginal revenue is a constant. Each additional unit sold adds the same value, which is equal to the price of the product. If marginal revenue is equal to price, and profit maximization occurs when marginal revenue equals marginal cost, the firm should produce up until the point where its marginal costs equals the price of its product.

The firm’s average cost is its total cost divided by quantity produced, and is assumed to initially fall then eventually be upward sloping. Because innumerable sellers all sell the same good, in the long run (which generally does not have a specific definition), all ‘economic’ profits—those which are above the assumed ‘normal’ profits—are eventually eroded completely away. If positive economic profits existed, more firms would enter the market, increasing supply and lowering price. If economic profits are negative, firms would leave the market, causing the opposite effect. As a result, in the long run perfect competition causes sellers to produce their goods at the lowest point on their average cost curve.

“When profit-maximizing firms in perfectly competitive markets combine with utility-maximizing consumers, something remarkable happens,” we are told, “the resulting quantities of outputs of goods and services demonstrate both productive and allocative efficiency,” (Greenlaw 2018, 206). Productive efficiency is attained because in the long run, firms produce at their absolute lowest cost. Allocative efficiency is achieved because the resulting goods’ price is equal to its marginal cost—precisely the value of the ‘social cost’ of producing it.

Imperfect Competition and Monopoly

But of course, this state of affairs does not resemble the world in which we live. This utopian optimality, we are told, is distorted and mutated by the anti-competitive behavior of firms and government. Due to that meddling, we live in a world of imperfect competition—monopoly, monopolistic competition, and oligopoly. Paradise lost. In monopoly, a firm is the lone provider of a good, in monopolistic competition many firms produce differentiated products, and in oligopoly a small cabal of firms control the marketplace and exert price pressure.

The culprit which creates each of these distorted market types is barriers to entry. Whether natural or legal, barriers to entry prevent firms who would otherwise enter a market from entering. The few firms which are active in the market have control of too large a slice. As a result, they can affect the market price based on how many units they produce. Instead of a horizontal perceived demand curve, the firms in imperfect competition face a downward sloping demand curve.

To maximize its profit, the imperfectly competitive firm still produces at the level where MR = MC. But because of its outsized effect on the market, P no longer equals MR. With each unit produced, the increased supply exerts downward pressure on the price, which effects the price of all other units produced by the same amount. If such a firm produces too much, it can hurt its own bottom line. Because it supplies as much as it wants and not what consumers want, a true monopoly will have perpetual positive economic profits at a level which depends on the elasticity of the product’s demand schedule. Monopolistic competition, however, will in the long run result in a total erosion of economic profit as firms enter the market, all producing at a point on the AC curve, albeit not at its minimum point. As a result, none of these markets is productively or allocatively efficient. The amount of goods produced is below what consumers would have wanted under perfectly competitive conditions, they are more expensive than they are socially worth, and firms inefficiently do not produce at their minimum average cost. Customers are robbed of potential utility. Such markets are sadly the norm, because, we are told, “firms have proved to be highly creative in inventing business practices that discourage competition,” (Greenlaw 2018, 220). This is a great state of affairs for the firms, however, because “once barriers are erected, once a barrier to entry is in place, a monopoly that does not need to fear competition can just produce the same old products in the same old way,” (Greenlaw 2018, 229). Managers can kick back and watch the profits roll in.

Historical Overview

Sketched out above is the dominant parable in economic thought and teaching. Interestingly, almost none of this resembles the real world. How did we get here? An outline is sketched below.

Adam Smith is generally credited with establishing economic thought, or Political Economy, as a distinct field of study. His work An Inquiry into the Nature and Causes of the Wealth of Nations (1776) is regarded as the first modern work of economics. A key figure in the Scottish Enlightenment, Smith was interested in observing economic phenomena, describing them, and discovering the hidden patterns within. David Ricardo furthered and built on Smith’s ideas, advancing theories on rent, trade, and value. Over the course of the three volumes of Capital (1867), Karl Marx extended this theoretical framework even further with sharpened historical and class analysis, building a signature value theory in the process. Along with others, these thinkers are referred to as the Classical economists.

But in the 1870’s there occurred what is known as the Marginalist Revolution. The Long Depression (1873-96) caused a crisis of confidence in the capitalist world. Interestingly, it was during this period that the most utopian theoretical depictions of capitalism were popularized. W.S. Jevons (1871), Carl Menger (1871), and Leon Walras (1874) independently and almost simultaneously developed this new theoretical paradigm. They perceived fundamental flaws in the theoretical framework and methodologies of the Classical economists and sought to “pick up the fragments of a shattered science and to start anew,” (Jevons 1879/1965, Preface lii). The Classicals believed that the ultimate source of an item’s value was the amount of labor embodied in it and that market prices were connected to costs—prices of production. The Marginalists vehemently disagreed. “Value,” wrote Jevons, “depends entirely upon utility” (Jevons 1871/1965, 1). Echoing this sentiment, Menger wrote “there is no necessary and direct connection between the value of a good and whether, or in what quantities, labour and other goods of higher order were applied to its production” (Menger 1871/2007, 146). Value then stemmed from a buyers utility gained from a good; that utility being an index of the good’s scarcity.

Jevons and Walras both used advanced mathematics to express their ideas. Adopting algebra and calculus, they could express complex ideas with greater accuracy than was possible previously. "Why should we persist in using everyday language to explain things in the cumbersome and incorrect way, as Ricardo has often done,” wrote Walras, “when these things can be stated far more succinctly, precisely, and clearly in the language of mathematics?" (Heilbroner 1997, 226). Walras pioneered what is known as general equilibrium theory—the notion that a complex balance of supply and demand can exist in and between markets.

It is during this period that supply and demand curves and the modern theory of perfect competition are introduced. In order to make their highly abstract models functional and defined, economists had to make assumptions that did not necessarily fit with, and often outright contradicted economic reality. "The pure theory of economics, it must precede applied economics,” wrote Walras, “and this pure theory of economics is a science which resembles the physic-mathematical sciences in every respect," (Heilbroner, 224). Actual people and actual societies faded from the picture in favor of platonic ideals. This fundamental methodological shift opened up many new avenues of exploration for economists, but the descriptive and predictive usefulness of the new models was not necessarily clear. Perfect competition became the theoretical jumping off point for all ‘rigorous’ analysis, and Marshall (1890) systematized the theoretical structure into what would recognize as modern Neo-classical economics. Dobb notes, "at the purely formal level, there can be little doubt that the new context and methods, with their mathematical analogy if not mathematical form, resulted in enhanced precision and rigor of analysis…the cutting knives of economic discussion became sharper -- whether they were used to cut so deeply is another matter" (Dobb 1973, 176).

In the 1920s, unease with the dominance of perfect competition was growing. Sraffa (1925) aimed a potentially devastating critique at the then-dominant Marshallian partial equilibrium theory, demonstrating that the theoretical structure was not capable of dealing with non-constant returns (increasing or decreasing costs) adequately (Mongiovi 1996). The next year, Sraffa (1926) suggested a solution might be found using the lesser utilized monopoly theory as a starting point. Even in competitive markets, monopolistic tendencies could easily be observed because 1.) firms can exert some control over their own prices, and 2.) they frequently experience increasing returns (decreasing costs). Sraffa argued that these circumstances are not the exception, “rather they are normal and persistent features of the economic landscape, with 'permanent and even cumulative' consequences for market equilibria. When these influences are operative, each firm is to be viewed as having its own distinct market; prices are set so as to maximise profits on the supposition that the relevant demand curve is not perfectly elastic,” (Mongiovi 1996, 214). Building on these ideas, Robinson (1933) and Chamberlain (1933) independently, but simultaneously, developed the theory of imperfect competition that is taught today. Eventually abandoning Marshallian theory altogether, Sraffa’s publication of Production of Commodities by Means of Commodities (1960) is credited with establishing a distinctive Sraffian or Neo-Ricardian school.

Real Competition

In Capitalism: Competition, Conflict, Crises (2016), Anwar Shaikh erects a theoretical framework independent of perfect and imperfect competition. Formalizing insights developed by the Classical economists, a theory is built which is both analytically sound and corresponds to observed economic phenomena. The theory of real competition, as it is called, “is as different from so-called perfect competition as war is from ballet,” (Shaikh 2016, Ch. 7.I.). The classical economists stressed themes that were either diminished or omitted completely by Neo-classical economists, including conflict, class, and temporality. In Capital, Volume 1, Karl Marx writes that the economic realm is bellum omnium contra omnes, ‘war of all against all,’ (Marx 1867/1990, 477). All evidence of this is lost in the parables of perfect and imperfect competition. But in Capitalism, the theory of real competition “pits seller against seller, seller against buyer, and buyer against buyer. It pits capital against capital, capital against labor, and labor against labor,” (Shaikh 2016, Ch. 7.I.). Abstracting away from the essentiality of conflict to capitalist production and distribution makes Neo-Classical analysis not only unrealistic, but totally misleading.

But even on pure theoretical grounds there are issues with the theory of perfect competition. For one, there is a fundamental contradiction within the assumptions. Firms are assumed to have perfect knowledge of the market in which they are competing, yet their perceived demand curve is assumed to be flat. These two assumptions cannot hold at the same time. “If firms are assumed to be sensible in their expectations, then the theory of perfect competition collapses. More generally, even mildly informed firms would have to recognize that they face downward sloping demand curves under competitive conditions,” (Shaikh 2016, Ch. 8.I). If a firm in a perfectly competitive market has perfect knowledge, it would quite easily deduce that the market signals it is receiving are being received by every other firm, and those firms will react in a predictable manner. As a result, the firm would know that it does not face a flat, perfectly elastic demand curve, and would act in exactly the same manner as a monopolistic firm, with just the same results.

Another problematic assumption within the orthodox framework is that firms are entitled to a normal rate of profit, which is included within its cost structure. The action of competition completely erodes excess profits away but leaves normal profits intact. This, of course, is wildly unrealistic because “no capital is assured of any profit at all, let alone the “normal” rate of profit. Indeed, all capitals face losses at some point, and a certain number drown in red ink in every given interval. It is therefore completely illegitimate to count “normal profit” as part of operating costs,” (Shaikh 2016, Ch. 7.I.). The prospect of making a loss is the dark cloud that hangs over every business manager, driving them unceasingly into conflict with agents both inside and outside the firm. Abstracting away from this motive force fundamentally misdiagnoses the motivations of economic agents.

In the theory of perfect competition, a firm’s only decision is how much to produce. Likewise, in imperfect competition, pricing and quantity decisions are mechanically connected. But in the works of the Classicals and in the theory of real competition, firms are active price setting, cost cutting entities. Neo-Classical theory stresses that firms will flock to higher profit rates at a given price. But once firms have the power to set their own price, the picture becomes more complicated. In their endless search for higher rates of return, firms cut prices to attract more buyers and increase market-share. In the process, “the advantage in this perpetual jousting for market share goes to the firms with the lowest cost,” (Shaikh 2016, 7.II.). If firms have the power to cut their own prices, they have the power to starve out other firms—even ones that are potentially more profitable at initial prices. Neo-Classical theory stresses that firms will adopt whatever method yields the highest profit at a given price, but “when costs differ, there is always a set of prices at which the lower cost firm has the higher profit rate. This does not mean that [it] has to drive the price down to that level. It has only to get the message across to its competitor that the future has arrived,” (Shaikh 2016, 7.VII.). This is demonstrated in Table 1 below. Pricing wars, which are extremely common occurrences in the real economy, highlight the conflictual nature of economic relations—"these are the operative principles of warfare: attackers try to impose greater losses on the other side. We will see that such behavior is the norm in the business world. It follows that the highest profit that is sustainable in the face of price-cutting behavior is generally different from the price-passive profit assumed in theories of perfect and imperfect competition,” (Shaikh 2016, 7.II.). Only the theory of real competition deals with this common behavior adequately.

Conclusion

Contrary to Hicks’ assertion, a peaceful life is not included in a firm’s profit—no matter their degree of monopoly. There is perpetual conflict generated both inside and outside of the firm that must always be contended with. For real firms, “price is their weapon, advertising their propaganda, the local Chamber of Commerce their house of worship, and profit their supreme deity,” (Shaikh 2016, 7.II.). Abstraction is a necessary tool for analysis. But the specific method of abstraction used in the theories of perfect and imperfect competition does not serve to elucidate truths that would be otherwise unattainable. Neo-Classical economics was formulated during a crisis of capitalism to create a utopian vision in order to justify capitalist social relations. Capitalist relations have been shown to be the most powerful and productive in history, but that does not justify obscuring their fundamentally destructive and chaotic elements. Competition is not merely the absence of monopoly power—it is the struggle of all against all.

References

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