Howard J. Sherman

Comparison of Marxism and Institutionalism

It is our view that Marxism and institutionalism have much in common-and that it is useful in the United States to stress the common ground among all critical economists. We also recognize that there are different viewpoints within each of these paradigms. There are liberal and radical institutionalists, but there are also official and independent, critical Marxists. By official Marxism, we mean that version of Marx that was held by the Soviet Union and all of the Communist parties during the Stalin era (1928-1953). We recognize that liberal institutionalists and official Marxists have little or nothing in common, but we believe that modern, radical institutionalists and modern, critical (nonofficial) Marxists have much in common. It should be stressed that the dichotomy mentioned within each school is a drastic oversimplification. In reality, there is a wide spectrum of views within each school. We use a dichotomy only to highlight certain differences within each school.

A Marxist Theory of the Business Cycle

Marxists of different views have debated several different theories of the business cycle. This article attempts to combine several different approaches, relying on those elements of each that appear to accord best with the empirical data. The facts of income distribution over the cycle show that the profit share rises in the first half of expansion, but declines long before the peak. Short-run productivity is limited by a fall in capacity utilization before the peak (which is related to the slower increase in demand than of output). So the rate of profit is reduced by declines in both capacity utilization and in the profit share.

Comparing Economic Systems

Some comparative economists have discussed that there is a tendency in each economic system to make a gradual transition toward the other. This proposition is known as convergence. It is observable in the real world that there is no pure market or pure planned economies. Most are mixed to one degree or another. It is apparent that pressures develop in planned economies to make more use of the market mechanism and, conversely, pressures develop in market economies to make greater use of planning. However, these pressures seem to advance at some times and retreat at others. Even if they advance more than they retreat, it is unclear how far they can proceed without challenging the basic premises of the existing system. It is also impossible to develop a satisfactory test of the convergence theory. It develops a more dynamic perspective—approaching a countrys economic system as having its own internal logic and made up of political, social, cultural, and economic characteristics. The systems that have tended to be more economically successful have managed to evolve economic and other institutions that are consistent with one another and with economic growth. Although economies can certainly learn from one anothers policies, institutions, and experiences, simple transplants are fraught with difficulties.

Changes in the Character of the U.S. Business Cycle

The internal dynamics of the United States business cycle have changed from the period of the mild fluctuations of the 1950s and 1960s to thedepressed and crisis-ridden 1970s and 1980s. The article notes changes in the behavior of consumer demand, investment, the rate of exploitation, profit rates, consumer debt, interest rates, and business debt. One finding is that problems of demand and realization were less important in the earlier period than in the later period. Also, the earlier period shows many more series leading the cycle and turning rather slowly, whereas these key series often turned sharply at the peaks and troughs in the severe downturns of the 1970s and 1980s.

Institutions and the Business Cycle

Feudal European political-economic institutions included a self-sufficient manor with very little market exchange, barter rather than money, and production motivated only by the need of the manor rather than a profit. All of these institutions meant that a business cycle was impossible, though there were many other problems. Capitalist institutions include production only for market exchange, a monetary economy, and production motivated only by profit. All of these institutions make possible the business cycle-since a contraction may occur if there is insufficient monetary demand to buy the supply at a price including a profit. Evolution does not stop with the beginnings of capitalism but continues through each new stage of capitalism. There have been three economic periods since 1914 (excluding the first and second world wars). First, the business cycles of the 1920s and 1930s were a period whose data reflect the dominance of the Great Depression (analyzed in Mitchell 1951, with Mitchells approach discussed in Sherman 2001). Second, the 1950s and 1960s were a period of long-run expansion, whereas the 1970s and 1980s were a period of long-run stagnation and slow growth. The periods of long-run expansion and stagnation have been described by Robert Brenner (1998) and Wallace Peterson (1994). The changes in the economy and the changes in the business cycle from the 1950s1960s to the 1970s1980s were analyzed by Howard Sherman in 1986 and 1991, with data ending in the trough of 1982. Arthur Burns and Wesley Mitchell (1946) defined business cycles as a phenomenon of capitalist institutions. The main focus of this article is to explain how the institutions of capitalism influence the cycle, a hypothesis that was implicit in both Mitchell

Cyclical Behavior of the Labor Share

For 1970-1982, the wage/profit ratio is strongly counter-cyclical; its movements are determined mainly by output demanded (or capacity utilization) and only secondarily by unemployment with a long time lag. These data weakened the case for the reserve army theory and strengthen the case for theories of deficient demand (but data for 1950-1970 lean more the other way).

Contemporary Radical Economics

Sherman examines the origins of contemporary radical economics and reviews sympathetically a number of specific radical applications ranging from labor segmentation theory to economic development and comparative systems.

Evolutionary Economics from a Radical Perspective

David Hamiltons book, Evolutionary Economics: A Study of Change in Economic Thought, (1999) is a masterpiece of elegant writing and brilliant insights. I learned much when I read it several decades ago and perhaps even more from the present reading. Most of the book clarifies the main differences between institutionalism and classicism (Hamiltons term for both classical and neoclassical economics). In the first place, classicism is reductionist, concentrating on only one aspect of society, namely the psychology of consumerism-and even that psychology is so abstract in its assumptions that it cannot be empirically tested. Institutionalism sees the whole society as a unified set of relationships and processes, so it is called holistic rather than reductionist. Secondly, classicism focuses on equilibrium with and the adjustment to equilibrium, as if there were eternal laws of equilibrium. Institutionalism focuses on the process of change of history in an evolutionary approach in the tradition of Darwin. Third, classicism explains everything based on the psychology of individuals, as if they could be seen in isolation from society, while social laws derive from individuals. Institutionalism argues that individuals are always part of society, so one must begin with the actual institutions, which embody relationships between groups. Hamiltons theme is that both classicists and institutionalists do look at change, but they examine it quite differently. Classicism is Newtonian, so it examines the laws of change after an outside disturbance toward a situation of equilibrium. Institutionalists are Darwinian, so they examine the process of evolution. The process of evolution is explained by internal dynamics, as is biological evolution. That is very different from change solely due to external shocks, such as the physics of one billiard ball hitting another. Newtons was a machine universe run by natural law. Classical and neoclassical price theory is Newtonian. The switch from the labor theory to the utility theory

Cyclical Behavior of Government Fiscal Policy

As everyone knows, total spending by U.S. federal, state, and local governments has risen enormously-from 7.7 percent of GNP in 1902 to 34.1 percent in 1970.1 From 1949 to 1980, however, almost all the increase has been in state and local spending, which rose from 7.6 percent of GNP in the 1949-1954 period to 14.2 percent of GNP in the 1975-1980 period.2 Furthermore, it must be emphasized that by far the largest single component of federal spending is military spending-which the most careful estimate puts at 13.2 percent of GNP for the entire period from 1949 to 1971.3 Aside from these well-known facts, most fiscal theories advocate or predict certain patterns of fiscal behavior over the business cycle. The different theories, however, frequently contradict each other as to what actual fiscal behavior is assumed. Therefore, an institutionalist analysis can contribute a great deal by beginning not with theoretical assumptions, but with a historical description of what government fiscal behavior actually is under capitalism over the course of the business cycle. All data is in real, quarterly terms, covering the six trough-to-trough

Radical Economists in the 21st Century

Radical economists have made powerful contributions to the fields of financial regulation and financial crisis; the environment; racial and gender discrimination; inequality; labor; monopoly; imperialism and underdevelopment; history of thought; methodology; and many more. Due to severe space limitations, however, this essay is limited to my own areas of economic crises and historical methodology, with citations only to my work.