The great guru of the financial collapse, economist Nouriel Roubini, who is famously acclaimed as having forecast the crisis of 2008-9 (see my paper, The causes of the Great Recession), has now pronounced that Karl Marx was ‘partly right’ after all about capitalism (http://www.economonitor.com/nouriel/2011/08/15/is-capitalism-doomed/).
Roubini put it this way. “Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong).
I don’t think Marx would have agreed that this was his theory of capitalist crisis at all. It seems closer to the view of many followers of Keynes or those who have adopted a theory based on the crisis of ‘neo-liberalism’ (see my post, Gerard Dumenil and crisis of neoliberalism, 3 March 2011). Marx did not think capitalism was subject to slumps and financial collapses because income and wealth was distributed “from labour to capital”. Income and wealth inequality are clearly products of a production system based on capital, where the owners of the means of production can often dictate the distribution of wealth and income through control of taxation, the printing of money and above all the ownership of the means of production in an economy. But inequality existed before capitalism in other modes of society and there have been periods of sustained economic growth under capitalism that were achieved not because inequalities were reduced. Inequalities rose from the early 1980s to now in the major economies because capitalist production began to suffer increased problems, forcing the capitalist elite to squeeze the majority more. The core of capitalist production is that it is production for profit. If profitability can be sustained, capitalism will grow (albeit unequally and unevenly). Capitalism goes into crisis because it cannot sustain profit rates for the owners of capital. When profitability in the major capitalist economies reached a low in the late 1970s, the strategists of capital adopted policies designed to raise profitability that led to greater inequalities. It was not inequality that led to the crises of the 1970s, but vice versa.
And is Roubini really saying that if there was a shift in the share of national income from ‘capital to labour’ that the crisis would have been avoided? If so, he is suggesting that the answer to a crisis in a system of production for profit is to lower profits! For more on this issue, see the excellent paper by Guglielmo Carchedi, Behind and beyond the crisis (http://gesd.free.fr/carchedib.pdf) and of course, various chapters in my book, The Great Recession (http://gesd.free.fr/mrob2009.pdf).
When profitability falls to the point that the mass of profits for companies are in jeopardy, then investment stops, employment falls and spending contracts. Roubini tells us that the crisis has happened because “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand”. It’s a vicious circle. Yes, but the firms did not start cutting jobs in the beginning because there was ‘not enough final demand’; they did so because profitability fell so much that it threatened the solvency of the weakest companies, which started making losses. They stopped production and investment and the loss of their demand for other companies’ products intensified the reduction in profitability for the rest. Thus overall final demand (starting with investment demand) began to plummet. The data for the US and UK economic recessions clearly show that it was a collapse in investment, not a drop in consumption that triggered the slump. So it was that part of ‘final demand’ that was subject to profitability.
This is the nature of the process of the slump. Final demand falls because profits fall, driving down profits further. During the slump, businesses slash back on costs , laying off labour and closing down plant. The stronger companies buy out the weak at cheap prices, laying the basis for higher profitability for those that survive. Eventually profitability picks up, even at lower level of demand and production, and then investment begins to recover. The Great Recession did not end because governments came to the rescue, although government spending may have helped ameliorate the impact of the recession – at the expense of increasing the burden of debt on the capitalist economy that makes it more difficult to recover. The GR came to an end because profitability started to rise and enabled companies to build up cash and begin reinvesting (see my post, Profit and investment in an economic recovery, 29 December 2010). The current recovery, however, is one of the weakest seen since the second world war, because households and small businesses are still weighed down with debt from the credit boom before 2007 and now must pay higher taxes with stagnant wages, while governments are overloaded with debt that they are trying to reduce. So consumer spending growth remains weak.
Roubini tells us that Marx’s alternative of socialism has proved to be wrong. Roubini does not say why, but probably we would get the usual mantra that the failure of the Soviet Union shows this. But what does Roubini offer as the way out?
He says that “to enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.” He is right that both ‘models’ are broken, although how we can say Anglo-Saxon model avoids government deficits, when we have 8-10% of GDP deficits in the US and the UK; or that the European model avoids deregulation and privatisation, when these were just as prevalent there before the crisis. Be that as it may, Roubini’s prescription that we must get market-oriented economies to operate as they should and can, is utopian as it defies the experience of history. Presumably ‘market-oriented’ economies should operate to provide sustained economic growth, reasonable equality in incomes and wealth, good pensions, healthcare, education and other social needs. Since when have ‘market-oriented’ economies ever done that even in the developed capitalist economies, let alone across the globe?
Roubini argues that market economies will work better if “the right balance” is found between markets and the public sector. But he does not make it very clear what he means by this. He wants more investment on infrastructure and that is certainly badly needed. Remember the report of the American Society of Civil Engineers on the state of the US national infrastructure (see the details in my post, Criminality – pure and simple, 10 August 2011). But is this infrastructure spending to be done by capitalist companies for a profit or by state-owned operations as a public service. If the latter, how is it to be paid for?
Roubini says we need more “progressive taxation”. But is this because it is fairer or is it the way to find funds for the state to invest? Maybe it is both. And as billionaire investor, Warren Buffett has pointed out in a revealing NYT article this week (http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html), America’s super-rich continue to pay way less tax as a share of their income and wealth than the average American. But does Roubini really believe that taxing the rich more will be enough to provide the funds for national investment and, more important, the control of investment so that it can be directed towards the needs of the whole country and not just towards ‘profitable investment’. Roubini does not recognise the contradiction there between profit and social need.
Even his ‘short-term’ solutions are contradictory. He says that market economy needs “more short-term fiscal stimulus with medium- and long-term fiscal discipline”. So stimulate now and then make everybody pay back the handouts to business through taxation later. He wants “a reduction of the debt burden for insolvent households and other distressed economic agents”, but does not tell us how that can be done if these agents cannot repay it themselves. Somebody has to pay if households and other agents cannot – will it be the lenders (the banks) or the taxpayers (government)? Would we have to bail out the banks again, still leaving them privately-owned or not? Apparently, we would because they would need to be ‘regulated’.
And anyway, how are we to avoid another big slump or financial crisis, something Roubini recognises is inherent in the “self-destructive nature of capitalism”? Apparently, all we need is “stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.” So send in the regulators who so dismally failed last time to spot the financial bubble and warn about the crash. But this time also ‘break up oligopolistic trusts”. So do not abolish the market economy, but break it up into smaller bits. Not only is this the height of unrealism but also flies in the face of very trend of capitalism towards the concentration of capital. To break up modern capitalist entities poses the question of their survival as profitable enterprises.
Roubini ends his piece with this profound observation: “Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. The alternative is – like in the 1930s – unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”
Yes, but how can this better world be achieved while it is dominated by a market-oriented system that only invests in human capital and skills if it is profitable? Is not that where Marx was right? The dismal alternative that Roubini poses is the most likely result if the capitalist system of production remains in place.