After Nouriel Roubini (see my post, Karl Marx was right (partly), 16 August 2011), more mainstream economists have started to refer to Marx in an explanation of what happened to capitalism before, during and after the Great Recession. Most of the new references have been accompanied by criticisms that generally dismiss Marx’s theories and laws as being irrelevant and/or wrong.
However, George Magnus, senior economic advisor to UBS, the large Swiss investment bank, has been favourably inclined to what he considers is a Marxist explanation of capitalist crisis. In a report to clients (The convulsions of political economy, 16 August 2011), Magnus kicks off by quoting Marx’s Preface to a contribution to the critique of political economy, written in 1859. According Magnus, Marx shows how, under capitalism, economic growth comes into conflict with the needs of private property. Magnus interprets this quote as showing how the financial crash and the Great Recession have delivered huge shocks to the capitalist system – in particular, a lack of confidence that capitalism works, that mainstream economics understands it and knows what to do – and a growing ideological battle.
Magnus says that “traditional economic analysis leads to traditional economic policy prescriptions, which are useless and inappropriate”. In a follow-up letter to the Financial Times, Magnus went on to say that the reason for Marx’s relevance today is precisely because “we are in a once-in-a-generation crisis of capitalism, triggered by the financial bust … Marx analysed and explained insightfully how and why capitalism would succumb to recurrent crises, and especially big ones after a credit bust.”
Magnus goes on: “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’.”
According to Magnus, 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. As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”
These are strong words of approval for Marx’s analysis, even though yet again, like other mainstream economists, Magnus sees Marx’s theory of crisis as one due to extreme inequality of income and the weak purchasing power of workers. The issue of profitability is absent from his interpretation of Marx. Magnus’ policy solutions, of course, fall well short of what Marx would have said. Magnus does not call for the replacement of this production for private profit system with one based on democratic planning for social needs. Of course not. Instead he looks, as he says, to follow Keynes in order to find “how capitalism could sidestep Marx’s crises and controversial endgame.” Magnus reckons we need to replace the delusions of mainstream economics with ‘political economy’ i.e. economics based on being aware of the social forces behind the economy (presumably meaning classes and vested interests). In addressing “a very Marxist crisis of capitalism”, he wants economic policy targeting job creation, income formation and economic growth. He comes up with the usual ragbag of Keynesian prescriptions, ranging from debt forgiveness for mortgage holders, tax cuts for business and inflation targeting driven by central banks printing money.
We get much the same policies being proposed by that longstanding Keynesian economist and writer for the Financial Times, Sam Brittan (Mistaken Marxist moments, FT, 26 August 2011). Brittan notes the new interest in Marx after the crisis. He dismisses the idea that the current crisis is ‘very Marxist’ , although he makes no attempt to explain the causes of the Great Recession himself. He quickly dismisses Marx’s theory of value as “too scholastic by half” before telling his readers that Marx’s ‘ethical case’ against capitalism is also wrong. The case against capitalism for Brittan (assuming he is against it) is not “the existence of a return on capital” (i.e. the existence of profit) but that “capital ownership is so highly concentrated”. Brittan seems to be implying that if capitalist companies were small businesses, it would not be ‘immoral’ and there would be no reason to reject the private profit system. Well, capitalism is not structured like that now (if it ever was) and there is no possibility that large corporations can be broken up into small units that can ‘compete’. This is the height of utopianism, something Brittan accuses Marx of.
Brittan attempts to explain Marx’s crisis theory. Basically, “the system produces an ever expanding flow of goods and services which an impoverished proletarianised population could not afford to buy”. Thus he delivers yet again the underconsumptionist view of Marx’s crisis theory. That and ‘excessive inequality’ seems to be the interpretation of Marx that all these mainstream economic gurus want to make. This is no coincidence. If you reckon that the lack of workers’ purchasing power is the cause of crisis, then you can pose an easy reform solution for capitalism, namely more spending by government or the printing of money by central banks. Indeed, why not just bump up everybody’s wages?
This is another indication that not only is the underconsumption explanation of capitalist crisis wrong, its reformist remedy is equally ineffective in ‘saving’ capitalism. For example, Brittan proposes mainstream stimulus measures as a way out. “If the only thing that is wrong with capitalism is insufficient mass purchasing power, then surely the remedy is the helicopter drop of money envisaged by Milton Friedman”. So we do not need a “political revolution” as Marx advocated, but just an ‘intellectual one’ of ideas to persuade economists to support policies of stimulus rather than what Brittan calls “a balanced budget fetish’ of austerity. But the lack of workers consumer power is not ‘the only thing wrong’ with capitalism. The unresolvable contradiction for capitalism lies in its inability to meet social need because of the limits of capital to reproduce itself and expand indefinitely, in other words, its inability to create enough profit.
Yet another mainstream economist has ventured to comment on Marxist economics. Bradford de Long is a leading Keynesian economist with a big blog following (http://delong.typepad.com/sdj/). With time on his hands at the Californian Democratic Convention, he decided to (reread) Marx’s Theories of Surplus Value, or at least Chapter 17. De Long notes that Marx refutes Say’s law that supply creates its own demand and thus capital can reproduce itself in a balanced and equilibrium manner. De Long is upset that Marx does not credit John Stuart Mill with this observation (although Marx came to this conclusion about the possibility of crisis in the monetary means of exchange well before JS Mill). De Long then notes that Marx reckons that crisis comes about because consumption falls as a share of output while investment keeps on rising. So here we go again with an underconsumption interpretation.
De Long dismisses Marx because his theory of value is wrong and because of Marx’s theory “that a boom can only continue if it keeps accelerating”. Where he gets the latter idea from Marx, I fail to see. De Long cannot understand why Marx does not support Keynesian-type policies of stimulus as a result. He suggests that Marx must really be an Austerian who opposes all credit.
Where do we start here? Marx did not reckon all credit was bad. He made the point that it was necessary to the expansion of capitalist production, particularly with fixed asset investment. But because credit can escape from the law of value for a while, much of credit could become fictitious, i.e promoting an illusory growth in profits and income that would eventually be exposed in the slump. As De Long suggests, it could become ‘fake liquidity’.
I’m not sure it’s worth saying any more about these mainstream accounts of Marx. What it does show that mainstream economics is so baffled by the current crisis, that some of them have been forced to look at Marx for help. But there is an ignorance of Marxist ideas and, above all, an ideological desire to dismiss them as soon as they are raised. These mainstream commentators on Marx emphasise his ethical or moral objections to capitalism. That’s because they don’t want to admit that there is anything in the capitalist mode of production that is faulty as a mechanism for meeting human needs. But it is just that criticism that Marx makes, as well as the ‘moral’ one.
Let’s finish with this thought. Marx’s critique of capitalism was less on whether it was fair or unjust, or generated inequality, even if it did all those things. It was a scientific critique, arguing that it could no longer take human society forward because it was a system that would reach its sell-by date. Capitalism wasted human labour through poverty, war and economic slumps. Just consider that for the American economy now. In this crisis, the US economy will have experienced an investment shortfall of at least $4 trillion. Until that investment shortfall is made up, the missing capital will serve to depress the level of real GDP in the US by two full percentage points. On top of this, the cut in government spending has slowed America’s pace of investment in human capital and infrastructure, adding a third of a percentage point to the downward shift in the country’s long-term growth trajectory. The US economy has been pushed an extra 10% below its potential. As a result, the loss of resources is now a permanent 3% lower than it might have been and that gap will grow to 7% by 2035 and 11% by 2055.
Americans lost 8m jobs in the Great Recession. So far, only 1.8m have been restored. In 1958, 85% of working age American men were in work. Today, less than 64% have jobs, and in case you think that is simply due to women entering the workforce, the share of all Americans, men and women, in work is now lower than it has been since the early 1980s.
It’s not only jobs. In its latest assessment of the US economy, the IMF looked in detail at the past ten US recessions. On nearly all the key measures – loss of output, employment, investment or growth in personal disposable income – the two downturns of the 21st century (2000-1 and 2008-9) have been the worst. Real average household income fell by 3.6% between 2001 and 2009 and real incomes have fallen again in 2011, as inflation has picked up but wages have remained flat. So the US has already suffered a “lost decade”, at least for American households.
It is the same thing in the UK. Martin Weale, a member of the UK’s Bank of England Monetary Policy Committee, reckons the length of the contraction in real GDP in the Great Recession from its peak to trough and back to peak looks like being the longest since the 1880s. Weale says that the longest slumps of the past century were those from June 1979 to June 1983 (under Margaret Thatcher) and from January 1930 to December 1933 (the Great Depression).
For this recession to be shorter than its longest predecessor, it must end not later than April 2012. But UK national output is still close to 4% below its starting point, with eight months to go. Even if growth now jumped to a 4% annual rate, it would take another year for it to end. If growth were to be 1.5% a year (more likely), the duration of peak to trough to peak would have taken 72 months, some 50% longer than its longest predecessor in a century. Moreover, while the 1920-24 recession was the steepest, followed by the Great Depression, when GDP fell 7.1%, the Great Recession is nearly as bad with a drop of 6.5%. Most important, the cumulative loss of GDP is likely to be worse this time even than in the 1930s. The total loss then was 17.7% of GDP against 14.5% now so far. It is likely to hit near 20% this time.
These figures are the real backing for the Marxist critique of capitalism.