>What book does Shaikh develop this idea in?
I don't know if he's published this material. I saw him give a talk based on the research at the New School a couple of years ago. He and his grad students had done the work on lots of countries/currencies, and he had lots of very impressive charts to prove his point, with the market exchange rates bouncing around the relative productivity line.
Shaikh applies similar reasoning to his analysis of the stock market. In that case, the "fundamental" is what he calls the marginal profit on new investment, which he says explains the stock market. (If investment grows by $50 billion, and profits by $5 billion, the marginal profit on new investment is 10%.) I have two problems with this. One is that while the exchange rate - if you take it to be the macro price of a country's goods on world markets - is determined by competitive forces in markets for traded goods. There's a mechanism to explain the correlation. With the stock market, there's no such mechanism; no one except Anwar has ever observed a marginal rate of profit on new investment. I think what he's capturing is the business cycle effect. That short-term determination of stock prices is what he set out to refute: he doesn't want to believe there's anything irrational about capitalist processes, and the short-term, sentiment-driven picture of financial markets that Keynesians from Maynard himself down to Robert Shiller <http://www.econ.yale.edu/~shiller/> have drawn disturbs him immensely. But I think he's provided inadvertent confirmation of this analysis: the stock market is driven by the present, recent past, and likely immediate future - and is most definitly not a dispassionate discounter of long-term performance.
Doug