 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 Mariam 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. 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 Masquillel textbook. In my class I teach a 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 Masquillel and divided into parts that actually talk about observable phenomena, down-resoping demand curves and so on in 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 will 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 go and as we go, if there's something I'm saying that's not clear to you, please ask me. 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, I don't know what that is, is to show that you can construct an alternative 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. 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. It is too heavy. This is the book. It's a library copy. You're encouraged to buy it. It's only $35.00, but as opposed to downloading it from Russia. And it's called capitalism, competition, conflict and crisis. And a 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 so-called rational expectations. All of those come from a particular theoretical framework that was invented in the late 19th century, largely in reaction to the reality of conflict in capitalism. And that's the thing that people don't remember. You go to Jevons and he's saying, well, the world is full of conflict. We're going to have a constructive framework which shows that everybody's cooperating in capitalism provides the best. This is very important. Not only if you live in the center of the world, but if you live in 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 Africa. It's 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 is to try and show you its structure. But I'm not interested in that here. I do that in the book a lot. I'm interested in showing you have an alternative and then the distance between what you're already familiar with. Everybody's had micro and macro, right? So you're well indoctrinated. 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. Masculine 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? No, I'm going to deal with the same observable 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, determination of wages and profit rates, technical change, relative prices, interest rates, bond and 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 12 pages because it does require development because the task I set in the book is to show that this alternate framework can address the same phenomena as neoclassical economics and post-engine 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 of 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 there already in Smith and from Smith onward. Now the theoretical roots of the framework that I propose can be found in what I want to call the four greats to appropriate a favorite Chinese phrasing, Smith, Ricardo, Marx and Keynes. And you have to ask, what is the common element binding these? And I would argue the common element binding these is 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 than the neoclassical framework which came in the late 19th 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 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 the framework and 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 imperfections you don't get Darwin. You have to start differently. And to emphasize that point, I asked Miriam to put on the book webpage which is called realecon.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 E-Denomics, which is up there. I'm sorry, I wonder what category is in Miriam? I've got another supplemental material. So take a look at it because the point of that is to show you an almost exact parallel between the biblical 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 of the world. That is not how Smith starts. That is not how Ricardo starts. That is not how Mark starts and it's certainly not how Cain starts. Each one of them struggles with trying to understand the reality. I'm not arguing that you can add them together. I'm saying that these are the founts of understanding and wisdom. I teach history of economic thought. My mentor was Robert Halberner 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 they are now in my opinion. It's very clear and I'm going to try and show you their breath 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 neoclassic economics. Go back and read Jevins for instance and you'll see his struggle to construct that. We thought he was not talking about capitalism but about a future socialism, an ideal system. He didn't think this applied to capitalism. Well I actually thought that the only way to make capitalism look like that was to have the state intervene. Now why would it need to be intervened if it was already perfect? So that's the kind of understanding you need to arrive at. For instance, Smith and Ricardo disagree on international trade and I discuss this at length in chapter 11 of the book where I developed the theory of international trade on the foundations that I'm going to talk about here and Smith has an argument that essentially trade is based on whichever has got lower costs. Ricardo replaces that with something called comparative costs. If you've taken trade theory you know that argument says that having higher or lower costs 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 on the theory of money which I developed at some length here 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 going to 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. 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 going to go back into that framework and I'm going to have to pull you out of it so when you're falling into it I'll 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. Now for that same reason post-Kangin economics is trapped in this attempt to analyze the real but from this foundation and so it is and I'm going to argue most of my best friends are post-Kangins but I'm going to argue that they are trapped they're 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 as you may or may not know the man who 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 question is 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 it was perfect and they used a trick people know what that trick was, what it's called anybody remember? talk to the physics, pardon? something like that what they did is the circle has a center now if the planet is a center there is an orbit of the circle around the center then you 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 disturbs is 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 dialectics and sociology and then when they come down to demand and supply we go okay utility maximizing with 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 rates very fundamental in the classical tradition all of them talk about some conflict between wages and profits fundamental conflict and it determines socially you can see that even Keynes talks about that technical change, where does it come from? in orthodox economics kind of drops from the sky but technical change is one of the things that all the orthodox all the class economists say capitalism indents not as 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 especially ahead of the reaper, the grim reaper which is what competition is for them relative prices we know that Ricardo and Smith talk about relative prices but that's really Ricardo's invention a wonderful beginning in chapter one of Ricardo where 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 are equal unit labor costs and unit labor time ratios are the same and he's dealing with an abstract competitive framework but really direct and indirect unit labor costs 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 economists yet that argument was taken up by one of the most famous mathematicians in the United States, Jacob Schwartz at the Quran Center at NYU and he wrote a little book on that and he did a little experiment it's such a simple experiment he said, if relative prices are inflexible in the Ricardian sense then 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 at the 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 7% to 10% 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 I'm not sure I'm going to show you too I think I skipped that in these lectures but it's in the book anyway 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 you can test empirically there's a theory of bond prices, equity prices you can answer the problem that Schiller got a Nobel Prize for misanswering Schiller 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 over a long time so he plots this there's a long term interest rate and the fluctuations don't match in fact he adjusts the interest rate so it goes through the center but he says he has unexplained volatility now that's unexplained from his point of view because it's unexplained from efficient market theory for which someone else got a Nobel Prize also so Schiller then says that is due to irrational exuberance bingo, Nobel right there the trouble is that's the wrong answer in my opinion and I show you in the book that the profit rate on new investment and the profit rate of return on stock market go exactly together except for particular periods that we know there are bubbles and when there are 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 Schiller's problem disappears but we have an explanation of the stock market I'm not interested in attacking Schiller I'm interested in showing that we have an explanation and there it dissolves Schiller's problem because he's coming from new 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 says 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 and before that they used to accuse Japan and before that they used to accuse Germany go back and read the history of the accusation that the other side is winning because they're cheating nobody ever says the US is keeping his exchange rate too high because we're good guys we would never do that so it's got to be the other side but the fact of the matter is that implies that it's 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, the US has a deficit Japan has a surplus, the US has a deficit Germany has a surplus, the US has 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 cost of production and determining real exchange rates after you think about it are just relative prices expressed in international terms so if you think about it that way change the angle then the problem falls into place and of course in the book I show that that works empirically I mean everything in the book every theory is developed from a classical foundation compared to neoclassical and post-cange in theory but that is only a second order comparison the main comparisons with the data if you agree with post-cange in 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 going to come to them at the end unemployment growth what causes growth well there are two causes everybody Keynes and Marx will say 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 neoclassical theory says that in a somewhat rounded about way but then the question is what about the impact of purchasing power debt credit all of that kind of stuff well both sides have something to say about that I'm going to show you can deal with it concretely and you can explain how debt can puff off a system which 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 going to 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 real wages fall the demand for labor will rise and the supply of labor 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 are on the left you say ah Keynes said no unemployment can be there and persist and what you need to do is pump up the system to get rid of unemployment I'm going to 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 wages which is what happens when you pump up unemployment right wages start to rise well 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 country is closed they can import labor from those people who are not in the labor pool the higher wage is incentives to come in they can import women black people all the people have been pushed out before Keynes suddenly said 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 a variable border you can bring them in from other parts of the world the US has founded on the importation of labor from all across the world at least the European world Asia and Africa but I'm speaking here only of capitalist workers but the US has a long history of that so 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 labor it's an export of capital or I'll bring them here but there's another part to it the mechanization of the labor process depends on the cost of labor labor is very cheap it doesn't pay to invent machinery to displace labor it pays less anyway it may still pay but it pays less if labor becomes more incentive expensive the incentive to displace labor gets bigger any business will tell you this but it's also something we can show empirically so that means that the pool of available labor 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 if you read Marx at all this is exactly the argument that Marx advances in the argument called the reserve army of labor he says that if the system gets pumped up unemployment then it goes down employment goes up the labor market becomes tight wages start to rise at some point this will inhibit accumulation profitability will fall and this will give an incentive to slow down the pickup of labor growth falls you don't pick labor up so fast and also to displace labor will be a bigger incentive because now you have greater incentive to have machinery more incentive 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 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 is take the mathematics they would apply to the observation that in a pond let's say a 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 if 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 and the prey start 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 notion that there is a fixed there is a average that comes about well Goodwin did that showing that the same equations can describe what does that imply it implies that you cycle around an unemployment rate unemployment rate which is not zero now 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 and of this relation and the next part is inflation every economist has to explain inflation now that you don't have to explain inflation when I went to graduate school that was the thing 1970's everybody was going well 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 the 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 hot shot graduate student and young professor in the 1970's was trying to make their mark explaining that it was actually explained by Friedman explained from the point of even your classical theory and Friedman did a wonderful thing he cut the Gordian knot he said what what unemployment I don't know what you're talking about 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 they're 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 with full employment every time you pump it up you get inflation solution I want to argue that that's wrong of course but you then have to explain where inflation comes from and in the book I try to show you that there's another theory of inflation that goes all the way back to Ricardo's corn corn model von Neumann's theory of growth 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 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 it begins to come back down it comes back down not to some equilibrium but well under and then it repeats and grows so that turbulent cycle is what Condrate was trying to talk about with long waves and I'm going to show you that you can see the long waves if you approach them from a slight actually from the way he approached them but in a way unfortunately 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 crisis come after the peak so I did a simple calculation I took the last 100 years basically and looked at how far off the peak when there were big crisis and big crisis come roughly every 30, 40 years every 40 years and that was roughly 8 to 9 years so I said the peak is 2000 and the crisis should come 2008, 2009 well it came 2007, 2008 it came essentially in the beginning of 2008 and that's a very simple device it's 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 think about it there's a new government Trump is different from Obama Obama was different from Bush every government in every country governments 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 are 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 that's 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 comes from the wages and interest and payments that business makes that's a great bulk of the source of demand and supply they don't hire you because you look interesting or clever they hire you because they think you make money from you they can make a profit and that is the motivation for both demand and supply so that's an 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 the framework that depends on understanding reality capitalist reality one is obvious economic acts are embedded in a social context you pick up Smith and what's the word you hear first 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 the different layers of people 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 you're kind of used to that but for being a non-white Pakistani born I'm actually an atheist but that's not the the people who react are 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 also 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 who've been living together where suddenly the tribal part was invoked and if you think it was only then just look around the world today every politician is invoking the tribal thing Trump is doing that Obama tried not to do that but Bush did that 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 a 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 completely false claim that science should be portrayed in terms of rationality and as Bertram Russell points out people know Bertram 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 no 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 tripped from you in courses 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 a quote from Adam Smith people talk about Adam Smith they talk about self-interest read Adam Smith first like with 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 as 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 code of morals we should be able to rid ourselves of the many pseudo-moral principles which have hag-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've exalted some of the most distasteful of human qualities into the position of highest virtues we shall dare to assess the money motive at its true value the lump of money as a possession will be recognized for what it is a somewhat disgusting morbidity morbidity one of those semi-criminal semi-pathological propensities which one hands over with a shutter to the specialist 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 that neoclassical economics is market worship exercise because it presents capitalism this ideal perfect thing and everything is measured by its 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 Carr, historian the market does not care if you've done bad things it only cares, it cares when you get caught and Piketty the price system neither knows limits nor 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 the manufacture are no longer suffice there upon steam and machinery revolutionize industrial production modern industry established the world market which has given an immense development of commerce to navigation to communication by land this development in its turn reacted on the extension of industry and in proportion as industry commerce and navigation railway is always extended this is an appreciation by Marx and Engels of the power of capitalism they say that this is a 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 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 hot shot and keep in mind that Engels was 27 when he wrote this and Marx was 29 when they finished this and so when we get pretensions keep 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 all of that we're still playing with that one thing that they said from the beginning is capitalism is 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 movement as patterns driven by movement not laws of equilibrium not of laws of statics but 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 the 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 macro level it's important it's astonishing that people forget this Keynes doesn't by the way but too many textbooks make seem demand is something independent of supply how could that be supply creates in the first instance a demand for labor because you can't produce something unless you hire people so that's the income of workers it also has to pay profits, rents and interest to owners of capital so that's the income of property owners the sum of those two incomes is personal income and not a 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 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 payments of property incomes which leads to consumption demand but also creates investment demand now this is not something mysterious in Keynes nor is it mysterious in the classical tradition these two come from the profit motive it doesn't follow that they add up it 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 and the answer is they don't add up and that is the first lesson that the adding up comes about by the discrepancy that is to say the fact that they don't add up creates a reaction in the market a signal in the market and the market responds 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 you need something like stochastic differential equations at the 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 a balance because that misses the whole issue Keynes has 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 guess about the future and every individual person who's employed is buying things on the basis of their guess 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 balance but turbulence imbalance with one type of imbalance being replaced by another overshooting, undershooting around a moving center of gravity which is created itself by all of these processes we can formalize that, we can actually track that and I'm going to try to show you 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 and 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 how it gives rise to growth Kondratiev talks about this, I'm going to 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 point of making profit is to take a sum of money M converted to commodities people raw materials plant and equipment so that you can produce goods which is a bigger sum of commodities than when you started with and you sell those for more money M prime, so you start with M you want to end up with M prime how do you know you're successful if your ending is bigger than your beginning but if it's not, you're not successful if you just get the same amount you waste it all the time and effort in fact if you 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 success is expansion but if every cell is expanding then it expands not just against markets of each other but expands across the globe and the history of capitalism is 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 what subsidies from the state of course is expensive but if we go there it belongs to us we're going to 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 a surprising thing that people again forget if you read Adam Smith what Adam Smith tells you comes from the incentive structure of capitalism he gives you this example imagine that all of you are producing pins that's a famous pin factory example and you're producing 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 of 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 and you put ahead on the other end you have to do all of these and maybe it 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 a fourth to put ahead and that way I can be more efficient what does that mean more efficient I can produce many more pins at a lower cost so I can make a profit but the detraction of it is that each one of you loses sight of the overall process you're no longer skilled labor you become partially skilled labor or even unskilled labor doing a simple operation again and again now think of the operation of just putting ahead on a pin what do you do you become something you can do and because you're working for someone else now the length and intensity of the working day gets expanded too because a capitalist can make more money again fifteen sixteen hours sixteen is abstract sixteen hours of labor occur in California on the farms it occurs in New Jersey on the farms it occurs in China, it occurs in Asia it occurs in Africa now but it's also the history of capitalism they started that way too go to Manchester and look at the history of the working class movement museum amazing museum and it shows you that but that's the kind of thing that you do the limit but now you're working sixteen hours a day you're doing the same operation what is that operation it's 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 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 a 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 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 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 Purdue the chickens were forced to live their whole life in a box they couldn't move they couldn't literally not move their limbs atrophied why? because then they would spend all their time laying eggs and in order to stimulate it they would give them hormones and they're literally sitting in their own shit and everyone around them so you 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 force to produce eggs Purdue chickens became the biggest chicken producer in the world because it made chickens more cheaply that way it made eggs more cheaply but also the chickens were then used and then killed they were very buttery soft because they never literally couldn't move a muscle it was a kind of torture the movements that arose in the 90's 80's and 90's against that you know free range chickens arose from this but in this film this happens to a chicken farm where a big industrial company wants to take over the chicken farm so they mechanize and since it's an animation 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 workers resist and workers always resist 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 structures 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 and investment now it's on a big surprise everybody says this Smith, Ricardo, Marx, classical theory if the rate of return investment here is 10% and it's 15% there then even people here making money making profit will put some of their profits over there because they can get a higher rate of return people making 15% 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 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 there's new technologies different things so that you get instead a fluctuation around the common sense 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 patterns of profit rates, wages and some things that we observe today we see that equality certainly when you bring in people who are cheaper then it drives wages down where they come if their supply is big enough which is why every working class has resisted immigration at some point because it threatens their wage structure and they 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 trust workers 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're basically stupid people and they can't get themselves to organize, they just sort of sit around and enjoy the rents but you can't trust capitalist he says because capitalist, well their profit rate falls and 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 Disney version of Adam Smith that is in textbooks? This is Smith, this is what he says don't trust that class that's the 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 okay I know it does all these bad things environment and so on but why can't the state just come in and tell capitalist 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 the 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 is also capable by the way of inhibiting the interests of workers that happens in the power struggle over which way the state turns in the 1980s in 1960s and 70s it was called the golden age of labor because unions were relatively strong there were institutional structures in place so that wages 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 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 to fight for unions better off letting lower wages so whether that we like that or not that is something that needs to be explained as a pattern finally I've mentioned briefly that part of what I'm saying here is that you have to treat neoclassical economics as an ideological construction by ideological I mean not that the people are doing it necessarily that but it was constructed in the 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 the 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 not the closet door will be locked from the inside by yourself and you come out you have no clue what to do because you've been inside too long so if you're going to be subversive do it now it gets harder and harder as you get later older that's just a fact and it's not so bad some of us have been doing it 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 a 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 Lyon TF input output system with prices of production kind of SRAFA 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 that 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 some of his children died of diseases from this insufficient insulation against the cold and food but he took time out to study mathematics and he wrote a book on mathematics he got so annoyed at the idea of differential calculus being based on the infinitesimal so he wrote a book you should look it up it's there 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 business cycle theory and yes you can do that you can use linear but better non-linear 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 homepage I've written, published is on my homepage illegally by the way but anyway it's there and you can see that I've used mathematics one of my founded useful but I'm not a slave of mathematics mathematics is a tool 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 and I can try to fit into it by abstracting from all its real properties so it fits the mathematics of a mathematical economist and by the way an econometrician also mostly so when neoclassical economics says oh the great virtue of neoclassicalness mathematical that's bullshit that other schools of thought are just as mathematical even they need to be but it's not the same mathematics and then some things economists will tell you well we're sort of like physics don't say that with a physicist in the room because they'll just laugh you out of the room this is from Doreen Farmer well known physicist and mathematician at the institute in Santa Fe the institute for complexity and he says although it is 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 economics is not at all like physics the difference is in the scientific method of the two fields orthodox theoretical economics the top-down approach in which hypotheses and mathematical rigor come first and empirical 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 to truly make empirical verification the ultimate arbiter of theories this would 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 quantum mechanics in different forms maybe David Bohm's philosophy and but in orthodox physics pretty much is the dominant singular field which everybody works in what he doesn't know is that that's not true economics economics has a dominant field but it has schools what I'm calling classical Keynesian economics a classical Keynesian 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 you have 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-Keynesian economics and I'm going to stop ask for questions and before I move to looking at the actual empirical patterns I may or may not get to the consumer theory thing but if I don't get to today I'll start with it tomorrow economics begins really with Kalecki Kalecki 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 a neoclassical 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 what does that mean in practice I'm selling paper right so I'm selling paper and I decide to sell it for two dollars a sheet two cents a sheet two dollars a ream 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 $1.80 everybody knows that it's 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 effective transportation cost protect you should that cost become reduced subway system is built and now you can go there and buy them all in bulk somewhere Costco, well you're gone if you can't match Costco you're gone that is real competition Koleski misunderstands that and thinks of it as monopoly because he looks at neoclassical theory neoclassical theory says competition means all prices are exactly like if they're not it's lack of competition it's stake about the level of concretion now I'm going to argue that you can explain what Koleski sees from competition itself and that's going to come later but we also know that Keynes theory of effective demand was not based on Koleski in economics imperfect competition was based rather on what he called atomistic competition so the problem is we'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 neoclassical 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 what I'm calling real competition Keynes doesn't have any exposure to classical tradition in that sense in fact what Keynes calls the classical tradition is what I would call the neoclassical tradition Marshal Pagoo because they took that name over and said we're the classicals but in fact Smith, Ricardo, Marx were in entirely different brands so to speak a different philosophy of that argument so I think I'm going to argue that those people who think rightfully that if you're faced with neoclassical economics imperfect 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 neoclassical economists do that too Krugman does that 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 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 from 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 it 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 going to try to make for a huge number of topics now, I want to stop I have till 6 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 this familiar I can speed up I just don't know is this the right pace, for instance how many people have had macro okay so you know post-Keynesian economics you know Keynes and all that and I'm going to 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 with Marx I forgot to mention this Marx didn't publish there's a real problem, if you're going to be 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 but he was also actively involved in political struggle and it took a lot of his time and energy Engels supported him Engels' father was the owner of Mills Engels moved to Manchester so that he could get the money to support Marx I mean talk about sacrifice Engels 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 volumes six books not volumes, 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 he didn't publish volume two Engels had to do it after Marx died from a mess of papers in his study and in Marx's horrible handwriting nobody could read volume three was even less finished, even less guidance so Engels put together whatever he could and volume four was literally became just what Marx notes that Marx had taken on other economists we call that theories of surplus value so those four volumes is book one book two was going to be on wages book three was going to be on rent book four was going to be cycles or something like that it's going to end up with book six on the world market he didn't write any of those books so you can't just go to Marx and say always Marx 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 Engels had to extract and if you 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 of notes and posters 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 okay one more point sorry, I skip one point I'll come back to it, it doesn't matter so let me stop here any questions about this is just foundations I'm going to try and show you from micro to macro there's a coherent path you'll never use a word utility maximizing or anything of that sort there are principles of all evolutionary principles but not those questions? comments? yes so maybe I'm going but I think he has to do with foundations you know so you mentioned that competition is the regulatory mechanism in capitalism how does rent fit into this framework I mean when you start seeing like you see today that rents have become a larger and larger part of the profit share how and rents are not too subject to competition per se all means how does that fit into this overall? well first of all, rents are subject to competition 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 landlords 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 ok so a very important point best reproducible conditions that land was the best reproducible condition Ricardo says at some time in the past so then little by little we expanded on that land and that land's price natural price was the one that regulated the price of corn but when that land got used up we had to go to worse 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 worse 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 the land and so Ricardo says that is an excess profit first of all but then he says well 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's 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 the first point that Ricardo makes the second point Ricardo makes is that this argument of competition only applies to those things that can be reproduced 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 rent but Ricardo also says in chapter 1 of Ricardo he 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 of 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 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 bust looks kind of familiar so did some research and it was a Rodin it had been sitting there the whole time nobody knew it was a Rodin so its price was $60 when it was sitting there and suddenly its price is $60 million now that jump comes because a real Rodin is not reproducible though anybody can buy a 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 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'm sorry I'm going to come to that I'm going to explain how to identify when you have a monopoly but the notion of monopoly is different in real competition than it is in perfect competition and that's the difference of how competition works to anticipate that in perfect competition every firm is infinitesimal is atomic so if you have fewer than an infinite number of firms that means the market is not perfect if you have firms that have any scale the market is not perfect so imperfections have to do with the number of firms we measure that by the concentration ratio or the scale of firms we measure that by the scale of investment 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 also explain what you don't find and 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 creates profits but my argument is something different than it just creates rent because the rents are actually subject to competition they get the people who make these profits 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 that they are safe they fight for it and they tell you it's a vicious jungle out there in that fight but there is a question there how are financial profits made one answer in the Marxist tradition 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, interests, dividend payments and all that and that appears as incomes for some people but if those people are themselves or the sources of that the recipients of the income are firms then some of that is profits so sharing out some of your profits as payments shows up as profits for the others you can do a national account measures of that, I do that in the book but there's another kind of profit which doesn't come from there and the only person that I know who mentions that, two people James Stewart and Marx and Marx mentions it in the first chapter of the first volume of theories of surplus value go to the 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 profit and production we recognize production function, you go in labor and outcomes out would subtract the wages and you have profit or any other surplus product the length of the working day if it's 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 and Marx says Stewart is right that there's another type of profit now if you think about that for a moment it's got to be right industrial capitalism comes in the 17th century but merchant capital is 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 profit by creating shops and building things they created the profit by going one place trading something and coming back 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 some place and you move things from one place to another and in the difference you 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 merchant capital depends very heavily on protecting its information its roots and fighting other people privateers are part of merchant 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 people or hired by England let's say to be part of the navy because they were then steel that's because merchant profit has no automatic determination unlike say the profit rate which we're 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 merchant capital you have the aphorism buy cheap and sell dear and how dear what you can get away whereas 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 interested in that I'll give you one more example of how you can create profit without creating a surplus product or surplus value as I mentioned in the book so you go and you buy a laptop and when you buy it you pay its price and you pay for the surplus value in it they get the profit from it so you pay the profit also so they made the profit they sold you the laptop and they record that profit their inventory goes down by a thousand dollars their profit goes up by two hundred dollars and your profit goes down by a thousand dollars but you get the laptop is 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 a balance sheet of course not going to announce it their balance sheet has just gone 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 worth laptop and says I can give it to you for four hundred dollars so that person just gained four hundred for a thousand dollar worth laptop the shop owner then sells it for a thousand and makes six hundred 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 so it's a thousand balanced no net gain from this transfer but notice the merchant's gain is counted as a profit whereas your loss is countered as a personal loss the gain of the thief is countered as a personal gain so the source of that other type of profit is a transfer for what Marx calls circuit of capital and circuit of revenue to the circuit of capital and you can easily show just keeping track of national income counts that you can create profits by such transfers no finance capital can do this in 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 they sell shares let's suppose they sell shares suddenly they're worth a billion dollars where does 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 the income go down by a billion dollars this person's income goes up by a billion dollars that's no profit unless you count some kind of profit in the transaction or you count profit as the gain here and the loss there is zero but one is a change in personal income the other is a gain 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 Marxists who say the 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 does 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 I'm looking at macroeconomic theories now we know they're trending we don't necessarily have a very good explanation for why they're trending so different theories will have different explanations of the trend maybe different theories will therefore imply their unit root or not unit root it happens to be very convenient because then we can make some assumptions about it but 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 Keynes now if this was some kind of constant then the growth rate can be written as a 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 the 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's as far as we get the rest of it is hard to so econometrics are something you should take as a useful tool provided it fits your theoretical framework and recognize its deficiencies which is that you make a lot of assumptions in order to figure out the identification problem that comes with all the econometrics so I'm not saying that you shouldn't study math I think you should make more seriously by understanding the assumptions that go into it yes for the periphery because I'm thinking that it is not true that growth always happens in the periphery so the other thing I think is really it's really around the world so in a sense like it seems like other authors that have thought about the problem that could be also in a classical tradition are not between the ones that I think very good question the answer in the book I give 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 Vickery 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 it was taking me a long time but the purpose of that was to have a foundation that can explain development and at the end of the book I talk about how to proceed in that direction my first task however was to show how capitalism works in the center because that's the thing that we're supposed to take for granted 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 believe that for a moment and so you have to have your own foundation now here are some implications let me tell you we were just talking about the Eccleschool prebish single hypothesis thesis which is very big in Latin America and the idea was that prebish 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 to worse land so the price of agricultural goods would rise faster than 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 market of fertility raising this price so the terms of trade should move in favor of agricultural products he looks at it and finds the opposite and so he says there must be monopoly because according to the laws of orthodox economics he's moving 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 how Jun Chang talks about in his book Kicking Away the Ladder how every developed country restricted competitions to develop locally its industry and they said so openly at the time they said the British are talking about free trade and competition we're not that stupid, we're not going to 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 our own industrial structure and when we become competitive then we'll talk about that the US went through that Europe went through that Germany went through that Switzerland all of them the other thing is they stole all the patents Charles Dickens complains when he comes to the United States he didn't make much money because the US just copied his book and printed it they didn't give him any of it they stole his book, well Americans were like that they stole a lot of things so that made it very successful as a country in the world order after World War II it comes about now that countries can't do that patent protection we're giving the message that you should stay 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 developer gives you it's a lie and the countries who know that's a lie were the ones who succeeded and Hajun Chang mentions this South Korea Samson's wonderful book called South Korea The Next Giant she talks about how South Korea industrialized itself lowered its cost Germany did the same thing before that by the way China is doing that now Asia is 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 that doesn't always give you an advantage but as productivity is always improving on both sides that advantage cannot be expanded by people 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 how real competition operates virtually the last few pages of the book chapter 17 I'll talk about this issue I saw some hands over here yes talk about when you gave the example I could see that in accounting there is a profit that is generated some of these things but in real it should be produced somewhere the money is coming so in the course of alienation the profit is generated and it's in accounting let me explain that because they're just to clarify let's assume that you produce a laptop and you sold it to me and you made a profit you made a profit of $400 or $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 from the transfer this time you get it for whatever the thief is going to sell it to you and that second profit even though it's the same laptop and even the same seller is a profit on transfer and it's not new production at all that's not just a paper it has a value on that money? I mean think about that for a moment you pay me I'm a worker I go and buy your work I buy the laptop then you hire someone to steal it from me and then you pay they pay out of you wages 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 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 but you get a second profit this is by the way not an abstract problem there are shops in Queens that basically make their living by stealing parts from cars and reselling them it's a good business we get caught but it's a good 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 the old profit source I mean imagine that the laptop was in another country then we understand oh it's merchant and transfer and all that but if it's in the same country even in the same town it's still the same principle yes I have a question about real competition is this dynamic in the sense that when you look at the data over the data do you see different modernities of that in the sense that different places of installation of new techniques machines or creation of them or in terms of the degree of price competition well I'm going to show you the data so you can ask me the question and I'll look at the data and I want to get to that because I was going to end at 6 I'm not going to even get close but let me start that because I've been talking abstractly about the principles but a method is of no use unless it can actually talk about the law of gravity so now we want to look at how gravity operates so let me switch to that and I may run a few minutes over but I do want to get through it very much okay I sorry I'm trying to remember where I put it so hang on 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 I'm going to 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 Cain said or Mark said or whatever I do do that but that's not the objective investigation the objective investigation is the system itself and so I need to look at that and so I judge the argument by its logical consistency and all that but not so to speak by its biblical consistency if Mark said it okay it's worth paying attention to but it could be wrong and same thing for Cain's or whatever and you can go to reallycon.org maintained by Mariam 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 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 patterns the book as I said is a thousand pages 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 1860 to 2010 and the thing I see when I see it is that capitalism grows it's a growing system so to talk about a static steady-state solution is absurd because you're already misrepresenting the system secondly the growth is turbulent it's 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 so it grows it gets richer in the absolute sense secondly this is investment real investment and the thing you notice that real investment is even more turbulent than GDP a point that Cain's all the time real 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 a year from now when you're making investment you're buying something that's last 10-15 years so it's naturally subject to moods 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 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 distributes it unequally and all that but that's a point this is from a very wonderful book called Turning Points in Business Cycles by Leonard Ayers and what this comes from a company a bank that kept track of business cycles so why should a bank care about business cycles because a bank lends you money and they want to know when it's going to come back and if you're 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 cycles I want to just point out something in the book which you should get the 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 two young post-docs were 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 Engels was actually organizing an army of workers was trying to overthrow the German government Marx was doing revolutionary propaganda in Paris Mexican War this is a U.S. graph so it's good for U.S. the U.S. called this the U.S. Mexican called this the U.S. War because the U.S. invaded Mexico and took its territory but the Americans call it the Mexican War Civil War not so great for either side so that's just in one time period from 1831 to 1867 or 62 rather then another time period again up and down, up and down, up and down Great Depression Great Depression 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 1903 to 1939 fluctuation these fluctuations are characteristic they're not even, they're not sine waves they're like arrhythmia and a heart they're there but sometimes a heart stops, heart attack here you have World War II World War I rather and then you get the tremendous depression from World War I it's not so bad in the U.S. as in Europe it's devastating Cain this is appalled by the poverty and misery trying to figure out how capitalism doesn't bounce back as all the orthodox economists were telling his teachers were telling him don't worry, it's just a shock, it'll come back in the meantime things are getting worse and worse movements were rising, revolutionary movements were rising so Cain's a struggling with this issue and then comes the 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 I don't know if I have a thing here to push does that work? 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 will have jobs continue their jobs because they've got contracts 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 productivity slows down because many businesses collapse so this looks like some kind of gain for labor but that's very important when you look at data to understand what determines it don't read it mechanically think about what it's doing here this makes sense if you think about if you go break it down money wages, prices output for worker employment then suddenly you say oh that's pretty obvious it's not a gain it's a loss but then in the recovery period real wages keep growing in fact here you can see they're growing faster than productivity so this is called in the US 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 attacks on the working class attacks on the state on the welfare state and that has a dramatic effect it causes real wages essentially stagnate or grow very slowly while productivity is accelerated and of course here profitability is accelerated 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 to 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 if you come from the classical tradition they all say that Smith also, I mean Keynes also that social determination I don't have the reason to talk about marginal productivity theory or some absurdity like that you can see clearly what happened I was there I just left I certainly see what was happening here this is a ratio of wages to productivity I'm going to skip that this is unemployment here you have unemployment the earliest I can get data for unemployment 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 was not very bad in the US compared to Europe in Europe it was really devastating people were thinking capitalism is doomed it's never going to recover but you see how high the unemployment is about 18% then comes a big rise in the Great Depression of 1929 unemployment rises to 25% what's the definition of employment who's counted as employed what's the official definition of employment in the BLS how much do you have to work to be counted as employed so on the BLS website you get laid up pardon one hour one hour in the last two weeks is enough to count you as being employed so this 25% unemployment includes all those people who worked an hour now there are other measures of unemployment we don't have them that far back but it's a good exercise to think how if you adjusted for people who couldn't get job people who are desperate and be true by the way it's true in many places in 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 the two weeks measures again when you look at data you are responsible for understanding how it's collected because it's always collected with some guide or theoretical basis in mind but the important point here is the next depression which is actually what is called the great stagflation the unemployment rate only went up to 10% 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 trying to pump up the system to keep unemployment from going up here which would have been devastating 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 so-called great recession called the first global great recession the first great depression of the 21st century which is here and again the unemployment rate went up to about 10% the official rate the actual rate is much worse so you should look it up the BLS has other measures called B6, B4, B5, B6 and they go up to about double of this almost double now again you see that Keynesian policy has had an important impact all states now feel themselves responsible for not letting unemployment go run away why? because the government 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 that's a theoretical question why not? why can't they make it disappear this is a nice graph this is Kondratiev's data the same data that he uses not necessarily 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 Kondratiev called long waves to 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 that doesn't mean we understand what we're doing and he did understand what he's doing there's a big difference but this is secular inflation 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 ups and downs yes and they called it inflation if it went to 103 or 110% and then came back down but now we're talking going from 100 to maybe up to 1000 this is what 11 and 12 and 13 1414 that's inflation and that has a big impact on the way economy functions 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's waves disappeared here is a Kondratiev wave Kondratiev wave Kondratiev wave and then no Kondratiev wave Kondratiev wave capitalism has changed this is a very common thing among Marx especially anytime 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 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 10 years so it's a good thing to do but there's no Kondratiev pattern well if you read Kondratiev's 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 he has a fold out graph probably took him a year to make because it's done by hand 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 in British pounds relative to some base here so this is a local currency in the back of the book he says well 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 Kondratiev wave down and then in the post-war period Kondratiev wave down Kondratiev wave down more Kondratiev says that crises come on the downturns well first Kondratiev wave on the down economic crisis of 1825 well established empirically in the business cycle literature second Kondratiev wave up here and then down economic crisis of 1847 third up then down is a long economic crisis of 1873 then up and on the down the Great Depression of 1929 then up and then the great stagflation of the Johnson post-war Vietnam era and then up and then around here I began to ask my students well where do you think the next one is going to be and I'll show you how we calculated that came down 2008 bingo on schedule now it raises an interesting question why? clearly governments change, cultures change iPhones change, it 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 cellular level not at the top yes the top modifies it can have inflation at the top, it can unemployment adjust it but the incentive for profitability is not I know I'm running over I don't know if I can do 10 minutes more or should I just pick it up from 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 talking about capitalism as I said all the data is in the book and this is from the BEA 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 the 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 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 it's a question someone asked about profit rates these are the profit rates of industrial manufacturing in the United States I don't think of the same sort but this is just illustrative because you can calculate this yourself from the BEA website the average profit rates of different manufacturing sectors and they're all listed in the BEA and you can see that the average profit rates sort of have a similar pattern but they're not equalized you know here's one that comes down the purple line the blue line is the average the red one industry kind of stays above the average most of the time here's one of another industry that stays below the average most of the time so if you're talking about 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 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 of 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 the profit rate on new investment that's what Keynes calls the marginal efficiency of investment I invented this myself but I saw that 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 the 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 is 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 plot it as deviations from the blue line which is the average but this is what is meant by equalization of profit rates turbulent, constant in cycling so they never come to equilibrium but if they go above they're brought down if they go down they're brought up and Max actually refers to this and lean years which is characteristic of every industry's profit rate they are fat years where they're above and 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 entry entry of new plant and equipment entry of new businesses, well established and that brings the profit rate down because you increase the supply relative to demand and you bring the price down that's the whole point you keep doing it until it doesn't pay anymore two more I think I'm going to skip the Phillips curve 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 Leontief into showing using the Leontief 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 or integrated unit labor cost and the other is the ratio of directly 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 the Ricardian prices or Marxian competitive prices versus vertically integrated labor time there's no profit here in wages just 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 when you look at 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 going to skip the theory of inflation and all that other stuff 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 to 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 we're going to have some pizza