Give Karl Marx a Chance to Save the World Economy: George Magnus
(George Magnus is senior economic adviser at UBS and author of “Uprising: Will Emerging Markets Shape or Shake the World Economy?” The opinions expressed are his own.)
August 28, 2011, 8:22 PM EDT
By George Magnus
Aug. 29 (Bloomberg) -- Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.
The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher’s analysis of capitalism had a lot of flaws, but today’s global economy bears some uncanny resemblances to the conditions he foresaw.
Consider, for example, Marx’s prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in “Das Kapital,” companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.”
The process he describes is visible throughout the developed world, particularly in the U.S. Companies’ efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant.
U.S. income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.
Over-Production Paradox
Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.
This problem, too, is evident in today’s developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively.
As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”
Addressing the Crisis
So how do we address this crisis? To put Marx’s spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn’t temporary, and it certainly won’t be cured by the ideological passion for government austerity.
Here are five major planks of a strategy whose time, sadly, has not yet come.
First, we have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don’t face an imminent debt crisis -- including the U.S., Germany and the U.K. -- must make employment creation the litmus test of policy. In the U.S., the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start.
Lighten the Burden
Second, to lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.
Third, to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.
Fourth, to ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalization of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility -- a sine qua non to solve the bond market crisis at least.
Build Defenses
Fifth, to build defenses against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens.
We can’t know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn’t acceptable, either. It could turn the U.S. into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that’s another subject.
--Editors: Mark Whitehouse, Brenda Batten
COMMENTS
Retired university teacher living almost nonstop in Asia since 1985. Have lived in Bangkok since mid-1994. Prior to that, lived in mainland China (Tianjin and Beijing) 1985-88 and Macau 1990-94m when it still belonged to Portugal. Spent 1988-90 back in the U.S.
Mr. Magnus analysis is excellent, at least in my admittedly UNexpert eyes. That makes it all the more a shame that the title he chose (or someone chose for the piece) is misleading. Surely Businessweek's editors know that at a time when a substantial number of Americans are viscerally angry at President Obama for being (they wrongly conclude) a socialist/marxist/communist, a title asking them to give MARX, of all people, a chance is bound to backfire and lead them to refuse to read any further, as they will incorrectly though quite understandably assume that the article is a call to arms to steer the U.S. right into the maw of marxism.
Jafxyz
It is amazing how it now comes as a surprise that the scientific aspects of Marx's work is now manifesting itself. Here's an amusing parallel. Once before Isaac Newton came along, ballistics experts thought that when you shoot a canon ball, it goes first along a straight line, and when its energy is depleted, falls straight down to the ground. Then Isaac Newton explained why the true path is a parabola consistent with the new found laws of gravitation and momentum. Now imagine a new race of ballistics experts who have means to boost the path of the canon ball into a guided missile, still trying to achieve the path that they originally predicted before Isaac Newton. That's how I see the decades of regulation that attempted to make Capitalism refute the predictions of Karl Marx. Unfortunately the greedy ones worked hard to defeat those regulations, and so Capitalism is back in its natural scientific path. Voila! we now rediscover Karl Marx all over again. If we ever figure out how to redesign Capitalism to avoid more catastrophes, we should do something to curb the excess of the greedy amongst us. I am also surprised that among the remedies suggested by the author, nothing is mentioned about employee
September 14, 2011, 11:07 PM EDT
Marx to Market
The economic crisis has made the philosopher’s ideas relevant again, but the world shouldn’t forget what Marx got wrong
By Peter Coy
Society generally moves on from its mistakes. Doctors no longer drain blood from patients. Aviators don’t try to fly by strapping wings to their arms. Nobody still thinks that slavery is a good idea. Karl Marx, though, appears to be an exception to the rule of live and learn. Marx’s most famous predictions failed; there has been no dictatorship of the proletariat, nor has the state withered away. His followers included some of the 20th century’s worst mass murderers: Lenin, Stalin, Mao, Pol Pot. Yet the gloomy, combative philosopher seems to find adherents in each new generation of tyrants and dreamers.
You might even say the Bearded One has rarely looked better. The current global financial crisis has given rise to a new contingent of unlikely admirers. In 2009 the Vatican’s official newspaper, L’Osservatore Romano, published an article praising Marx’s diagnosis of income inequality, which is quite an endorsement considering that Marx declared religion to be “the opium of the people.” In Shanghai, the turbo-capitalist hub of Communist-in-name-alone China, audiences flocked to a 2010 musical based on Capital, Marx’s most famous work. In Japan, Capital is now out in a manga version. Brazilians elected a former Marxist guerrilla, Dilma Rousseff, as President last year.
The vogue for Marx should be expected at a time when European banks stand on the precipice of collapse and poverty levels in the U.S. have reached levels not seen in nearly two decades. Politicians know they can score points with their constituents by kicking job-creating capitalists like mangy curs.
Here’s the surprising thing, though: You don’t have to sleep in a Che Guevara T-shirt or throw rocks at McDonald’s to acknowledge that Marx’s thought is worth studying, grappling with, and possibly even applying to our current challenges. Many of the great capitalist thinkers did so, after all. Joseph Schumpeter, the guru of “creative destruction” who is a hero to many free-marketeers, devoted the first four chapters of his 1942 book, Capitalism, Socialism and Democracy, to explorations of Marx the Prophet, Marx the Sociologist, Marx the Economist, and Marx the Teacher. He went on to say Marx was wrong, but he couldn’t ignore the man.
As misguided as Marx was about many things, and as pernicious as his influence was in places like the U.S.S.R. and China, there are pieces of his (voluminous) writings that are shockingly perceptive. One of Marx’s most important contentions was that capitalism was inherently unstable. One only has to look at the headlines out of Europe—which is haunted by the specter of a possible Greek default, a banking disaster, and the collapse of the single-currency euro zone—to see that he was right. Marx diagnosed capitalism’s instability at a time when his contemporaries and predecessors, such as Adam Smith and John Stuart Mill, were mostly enthralled by its ability to serve human wants.
Marx has gotten an attentive reading recently from the likes of New York University economist Nouriel Roubini and George Magnus, the London-based senior economic adviser to UBS Investment Bank. Magnus’s employer, Switzerland-based UBS, is a pillar of the financial establishment, with offices in more than 50 countries and over $2 trillion in assets. Yet in an Aug. 28 essay for Bloomberg View, Magnus wrote that “today’s global economy bears some uncanny resemblances” to what Marx foresaw. (Personal opinion only, he noted.)
Consider the particulars. As Magnus notes, Marx predicted that companies would need fewer workers as they improved productivity, creating an “industrial reserve army” of the unemployed whose existence would keep downward pressure on wages for the employed. It’s hard to argue with that these days, given that the U.S. unemployment rate is still more than 9 percent. On Sept. 13 the U.S. Census Bureau released data showing that median income fell from 1973 through 2010 for full-time, year-round male workers aged 15 and up, adjusted for inflation. The condition of blue-collar workers in the U.S. is still a far cry from the subsistence wage and “accumulation of misery” that Marx conjured. But it’s not morning in America, either.
Marx loved to bash French economist Jean-Baptiste Say, who argued that general gluts cannot exist because the market will always match supply and demand. Marx argued that overproduction was in fact endemic to capitalism because the proletariat isn’t paid enough to buy the stuff that the capitalists produce. Again, that theory has lately been hard to dispute. The only way blue-collar Americans managed to maintain consumption in the last decade was by overborrowing. When the housing market collapsed, many were left with crippling debt. The resulting default nightmare is still playing itself out.
Admirers of Marx view all this with a rueful I-told-you-so. The radical geographer David Harvey, 75, has taught Marx’s Capital for 40 years at schools including Oxford University, Johns Hopkins University, and now the City University of New York Graduate Center. Harvey’s office, a block from the Empire State Building, is decorated with a silk-screen portrait of Marx, glowering from a bookcase. Harvey believes, as Marx did, that capitalists tend to sow the seeds of their own destruction. Unbridled capitalism tends toward wild excess, so complete deregulation is actually disastrous for it in the long run, the professor argues. “The Republican Party is en route to destroy capitalism,” Harvey says in a pleasant tone, “and they may do a better job of it than the working class could.”
But wait. What Marx and his acolytes underappreciated was capitalism’s power to heal itself. It may have been his fatal intellectual mistake. The Communist Manifesto said that when the workers’ revolution came, it would bring free public education for children and the abolition of “children’s factory labor in its present form.” And yet, as it turned out, the world didn’t require a proletarian revolution for those social reforms to occur; all it took was enlightened capitalism.
Doctrinaire Marxists love to say that the economic “base” determines and controls the sociopolitical “superstructure,” but the reverse can be true as well. Political leaders have corrected capitalism’s excesses again and again, as in President Teddy Roosevelt’s trustbusting campaign, President Franklin Roosevelt’s New Deal, and President Lyndon Johnson’s Great Society.
Now, once again, unbridled capitalism is threatening to undermine itself. The world’s biggest banks, financially weak but politically powerful, are putting the screws on borrowers in an attempt to rescue their own balance sheets. Likewise, creditor nations such as China and Germany are attempting to shift the pain of rebalancing onto debtor nations, even though squeezing them too hard threatens to cause an economic and financial disaster.
It’s time for another burst of enlightenment. In years past, Britain’s John Maynard Keynes and America’s Hyman P. Minsky (author of Stabilizing an Unstable Economy) did capitalism a service by diagnosing its tendency toward crisis and advising on ways to make things better. The sooner policymakers today “recognize we’re facing a once-in-a-lifetime crisis of capitalism,” as Magnus writes, “the better equipped they will be to manage a way out of it.” Grasping the ways in which Marx was right is the first step toward making sure that his predictions of capitalism’s downfall remain wrong.
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