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Why Karl Marx was right

By Lee Sustar

September 13, 2011 -- Socialist Worker (USA) -- Economist Nouriel Roubini, whose predictions of the financial crash of 2008 earned him the nickname "Dr Doom", has referred his patients to a specialist in capitalist crisis: Dr Karl Marx.

In an interview with the Wall Street Journal, Roubini said:

Karl Marx had it right. At some point, capitalism can destroy itself. You cannot keep on shifting income from labor to capital without having an excess capacity and a lack of aggregate demand. That's what has happened. We thought that markets worked. They're not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else's income and consumption. That's why it's a self-destructive process.

For several hours on August 12, the Journal website ran the video of the interview as a top story, under the headline, "Roubini: Marx was Right".

Considering that the first edition of Marx's three-volume masterwork Capital appeared in 1867, Roubini's revelation isn't exactly news to socialist opponents of capitalism. But given the intractable nature of the current crisis--a deep global recession, a weak recovery in the traditional core of the system in the US and Europe, and now the possibility of a lurch into a second recession--mainstream, or bourgeois, economics has been exposed as ideologically driven and incapable of offering solutions.

Stimulus spending, championed by liberal followers of the economist John Maynard Keynes, was in full swing two years ago. It staved off total economic collapse after the financial crash, but failed to produce a sustained boom and led to big government budget deficits.

That opened the door to the free-market champions of the so-called Austrian economic school of Friedrich von Hayek, who argued that slashing spending was key to an economic revival--only to see such measures choke off growth in Europe and, more recently, the US.

But in August, stockmarkets gyrated worldwide amid a worsening European debt crisis, a near-stall in US economic growth and a slowdown even in China, home of the world's most dynamic big economy. Suddenly, the ideological crisis that accompanied the 2008 crash was palpable once more as the world system appeared on the brink of a new recession.

Roubin, a professor at New York University, made his name--and quite a bit of money, by telling the unvarnished truth to big capital before the Wall Street meltdown hit. He's done so once again, this time referring to Marx for an explanation.

In his interview with the Wall Street Journal, Roubini argued that the US economy is flagging because business is hoarding cash--more than US$2 trillion by one estimate--rather than investing it in factories, new equipment and hiring workers. As he put it:

If you're not hiring workers, there's not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we've actually had a worsening, because we've had a massive redistribution of income from labor to capital, from wages to profits.

That shift has taken place not during the crisis, but during the recovery, as economist David Rosenberg pointed out earlier this year when he noted that the "labor share of national income has fallen to its lower level in modern history", 57.5 per cent in the first quarter of 2011, compared to 59.8 per cent when the recovery began. While that might seem like a small change, given the $14.66 trillion size of the US economy, it's huge.

In alluding to this trend, Roubini is apparently referring to Marx's observation about a central contradiction of capitalism. "The consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class", Marx wrote in Capital volume 3. "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

It's wrong to assume, Marx contended, that capitalists limit their investments during a crisis because "the absolute consuming power of society" has reached its limit. On the contrary, the unemployed want jobs and workers desire a higher standard of living as the slump wears on.

But during crises, capitalism can't deliver, even when business has plenty of capital to invest. That's because capitalists won't put their money into building factories and offices and hiring workers--as Roubini pointed out--unless they have a reasonable chance of making a profit. Otherwise, they sit on their money.

"The capital already invested is then, indeed, idle in large quantities", Marx explained. "Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition."

The result, Marx wrote, was both a "superabundance of productive capital" and "paralysed consumption"--a fairly accurate description of recent trends in the US economy.

Why do such capitalist crises come about?

The bigger questions are these: Why do such capitalist crises come about at all? And why are some downturns in the economy mild recessions, while others generate protracted crises, like the Great Depression of the 1930s or the "depression-with-a-small-d" that's gripped the world economy since late 2007?

Marx wasn't the first to observe what today's mainstream economists call the "business cycle"--the economic slumps that take place every few years. His contribution was to delve into the reasons for that pattern. He concluded that the internal contradictions of capitalism doomed the system to periodic, highly destructive crises.

The root of these crises is in the unplanned and competitive nature of capitalist production. For the capitalist, what matters isn't meeting social needs, but obtaining the maximum profit. If obtaining profit is possible from producing a life-saving medical device like a heart pacemaker, that's fine. But if more money can be made by producing junk food or nuclear weapons, greater investment flows into those industries instead.

Meanwhile, competition puts capitalists under constant pressure. They have to make sure that workers produce goods in as little time as possible--at what Marx called the "socially necessary labour time" required to produce a particular commodity. Otherwise, more efficient capitalists will drive them out of business. Thus capitalists are constantly compelled to invest in labour-saving machinery to cut production costs.

That is the secret of capitalist profitability. For example, new technologies may allow workers to produce enough to cover the costs of their wages in, say, just three hours, instead of the four needed previously. The result is an increase in labour time spent working just for the capitalist--increasing what Marx called "surplus value", which is the source of profits.

But a portion of surplus value must also be reinvested in the production process. Refusing to do so is not an option for capitalists--who live by the rule of eat or be eaten. To the capitalist, Marx wrote in Capital volume 1, the motto is:

Accumulate, accumulate! That is Moses and the prophets!... save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation's sake, production for production's sake: by this formula classical economy [the original bourgeois economics] expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth.

The drive to accumulate is blind and chaotic. As Roubini recognised, "markets aren't working" because what is rational for an individual person or corporation--the maximization of profit by pushing down labour costs--can be irrational for the system as a whole.

During the upswing of the business cycle, the problems are largely hidden. As long as profits are high and credit is available, companies can borrow to invest in new production and hire new workers. Pundits proclaim that recessions are a thing of the past.

But even as production expands, profits are squeezed as new entrants flood the market. Companies go bust, which hits their banks hard. The banks, in turn, raise interest rates or simply refuse to lend, which triggers further bankruptcies. Factory closings and mass layoffs ensure--and, in the modern era, job cuts hit the public sector as tax revenues decline.

In the section of Capital volume 3 quoted above, Marx described how the crisis can seem to erupt out of nowhere. Thanks to the extension of credit, he wrote:

[E]very individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund and being dependent upon his actual returns. On the other hand, the whole process becomes so complicated, partly by simply manipulating bills of exchange [i.e., cheques and promises of future payment], partly by commodity transactions for the sole purpose of manufacturing bills of exchange, that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash.

Marx's description of how credit could delay, but then exacerbate, a crash applies to the financial debacle of 2008, which involved no small amount of the kind of manipulation and swindling Marx saw in his day. Set aside the toxic alphabet soup of today's financial assets--CDS, CDO and MBS--and Marx's analysis of the role of bankers sounds familiar: "the entire vast extension of the credit system, and all credit in general, is exploited by them as their private capital."

The development of credit, in turn, helps expand capitalist production beyond the capacity of the market to absorb new commodities: "[B]anking and credit ... become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle."

But Marx also stressed that the credit crunch is actually a symptom of problems in the underlying productive economy. He wrote in Capital volume 2, "[W]hat appears as a crisis on the money-market is in reality an expression of abnormal conditions in the very process of production and reproduction."

Debates

There are longstanding debates among Marxist economic theorists about just how capitalist crises play out in general and their manifestation in different historical periods.

Marx identified a long-term tendency in the rate of profit to fall--the result of the constant pressure to invest in technology to replace workers, who are the source of surplus value. But capitalists have been able to counteract the falling rate of profit in various ways--for example, by destroying unprofitable capital through highly disruptive means, ranging from bankruptcies to wars like the Second World War, which ultimately was the most important reason the system finally overcame the Great Depression and was launched into a post-war boom.

In the 1970s, severe slumps returned to the world system as a revived Europe and Japan, along with several newly industrialised countries, emerged as more effective competitors to the US. But the restructuring of uncompetitive industries, free-market policies and corporate globalisation opened the way to a new boom in the 1990s, when the US declared that its "miracle economy" was the model for the world.

Ultimately, however, the economic expansion of the 1990s set the stage for a new crisis--one that Marx would have recognised. In the Communist Manifesto, written in 1847, years before he undertook a systematic study of the system, Marx and co-author Frederick Engels noted that capitalism's drive to expand led to crises of overproduction--of too many goods to be sold at a profit:

In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity--the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce...

And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

That passage still has the ring of truth. It was capitalist overproduction on a world scale in the 1990s that set the stage for the 1997 East Asian financial crisis and the recession of 2001. But by dropping interest rates to rock bottom, the Federal Reserve was able to postpone the real day of reckoning for the US for nearly a decade. Cheap credit and the housing bubble kept US consumers spending and the number of Asian factories growing, even if the number of manufacturing jobs in the US continued to decline during the 2002-2007 expansion.

As we now know, banks were happy to make the loans for mortgages and then pass them along to Wall Street, which bundled them into securities that later turned toxic. When even a limited number of sub-prime loans started to go bad, a credit squeeze quickly destroyed investment banks Bear Stearns and Lehman Brothers. Nouriel Roubini, who had been warning about all this for years, was suddenly a business celebrity--and even Karl Marx made the financial press.

The bad debts of that era of casino capitalism continue to weigh down the world economy. Yesterday's toxic assets held by private banks have morphed into today's government budget deficits, thanks to the no-questions-asked, multitrillion-dollar bailouts in the US and Europe.

And the global crisis of overproduction is still unresolved. In the US, the capacity utilisation rate for total industry was 77.5 per cent in July, some 2.2 percentage points above the rate a year earlier, but 2.9 percentage points below the average for the period between 1972 and 2010. That's unmistakable evidence of a depressed economy--and it's what Roubini was talking about when he cited "excess capacity" and mentioned Marx.

With mainstream economists fresh out of ideas about how to overcome the crisis, perhaps it shouldn't be surprising that Marx made news even in Rupert Murdoch's Wall Street Journal. But don't hold your breath waiting for a follow-up headline: "Capitalism Isn't Working: Socialism is the Alternative." That part is up to us.

Comments

Capitalist class worried about Marx's popularity.

http://weknowwhatsup.blogspot.com/2011/09/capitalist-class-worried-about...

The capitalist class is getting a bit nervous. Too many compliments are being paid to Marx’s economic analysis of capitalism by their paid theoretical gurus. Nouriel Roubini, one of their top theoreticians because he (outside of Marxist economists) foresaw the financial collapse has praised Marx. George Magnus a senior economic adviser to UBS Investment Bank has praised Marx’s foresight and even the Vatican’s official newspaper published an article praising Marx’s writings on income equality.

On top of this, since the onset of the present crisis, Marx’s writings have become ever more popular, especially his analysis of capitalist production laid out in the three volumes of Das Kapital. In this period of severe crisis when the confidence of the capitalist class has been badly shaken and they are looking for answers. Looking for them in Marx’s playbook is to be discouraged.

Peter Coy, the economics editor of Bloomberg Business Week Magazine, attempts to do this in the September 19th issue of Business Week and fails miserably (http://www.businessweek.com/magazine/marx-to-market-09142011.html?chan=m...). Coy’s childish attempt to refute Marx reveals the complete theoretical bankruptcy of the capitalist class in this period.

Coy starts off by trying to discredit Marx noting that Aviators don’t try to fly by “strapping wings to their arms”, as “Society generally moves on from its mistakes” but Marx seems to be an exception to this “live and learn” rule. Having set the tone he moves on to Marx’s mistakes which, I may add, I am eager to read. Marx’s most famous prediction failed Coy says, the workers have never held state power (he uses the term dictatorship of the proletariat) which is not quite true as the Russian revolution was the conquest of state power by the workers and peasants of that country before it was lost with the rise of Stalinism and the subsequent execution of the leaders of that revolution. The Stalinist state was a monstrous machine which also proves Marx wrong in that the state never “withered away” but grew. Marx himself would have been executed by Stalin.

Then Coy attacks Marx through his followers, who were some of the 20th century’s worst “mass murderers”. He starts with Lenin, who was a Marxist but Coy gives no examples of mass murder on Lenin’s part. He cites Mao who was not a Marxist, certainly not in practice. The next Marx follower is Pol Pot and what he has to do with Marxism heavens knows; and lastly Stalin, who may have had Lenin poisoned, murdered all the Marxists in the leadership of the Russian revolution and sent hundreds of thousands more to the gulag and had already abandoned any pretense to Marxist ideas or way of looking at the world except in name only. Coy's point here is to scare us, not educate us which shows how weak his position is. He wants us to associate Marx with dictatorship and the denial of basic democratic rights that Marx, and those who agree with him have fought for throughout recent history against fierce resistance from people like the economic editor of Business Week and the magazine's billionaire owner.

After this, what can only be described as infantile attempt to refute Marx, Coy is forced by objective reality to get to the nuts and bolts of the issue. As off as Marx was about the USSR and China (regimes that would have executed Marx) “there are pieces of his (voluminous) writings that are shockingly perceptive.” Coy uses the term “voluminous” here in order to imply that anyone would be right on a few things if they wrote that much. He is attempting to put Marx in the category of a science fiction writer. Coy would ingratiate himself to the point of disgust were he writing a piece about any one of the famed and failed capitalist economists. Coy goes on to point out that Marx was also right about the instability of capitalism-----even Coy can’t get away with discrediting that argument, especially in the present climate. He praises Marx for challenging his contemporaries and predecessors like Adam Smith and John Stuart Mill who were lauding capitalism for its ability to provide human society with what we need. He can’t escape that one either as he lives in the richest and most powerful capitalist economy in the history of humanity and it can’t even provide its citizenry with health care, housing, an education or the security that a full belly and a roof over the heads brings; except for the two million it has in prison perhaps.

No matter; what else was Marx right about according to this great intellectual representative of US and world capitalism? Marx predicted companies would need fewer workers due to the improvement in Labor productivity and this would keep an “industrial reserve army “ of the unemployed that places downward pressure on wages and that can always be used against workers when they withhold Labor power or simply to keep us in a state of perpetual fear on the job. “It’s hard to argue with that these days,” Coy writes. And he gives old Marx a half compliment when he says that blue-collar workers in the US are a “far cry” from Marx’s subsistence wage and “accumulation of misery” but it’s not “morning in America either.” Coy forgets that capitalism is a global system and in that regard it has far surpassed Marx’s accumulation of misery” stage as millions upon millions do not even receive a “subsistence wage” including a huge section of US society.

Coy also agrees that objective reality proves Marx right on another crucial aspect of his analysis of capitalist production and that is its that overproduction is “endemic” to a capitalist economy because the workers aren’t paid enough to “buy the stuff that the capitalists’ produce”. “Again, that theory has lately been hard to dispute” Coy adds, seemingly unaware that it is not a “lately” phenomenon but an ongoing problem that reaches peaks that bring the system to a grinding halt and to the edge of the abyss as it did in 2007. Marx explained that this problem is temporarily overcome by credit which allows the system to go beyond its limits and Coy agrees, “The only way blue-collar (a substitute for workers) Americans managed to maintain consumption in the last decade was by overborrowing” The result was “crippling debt” he adds and “The resulting default nightmare is still playing itself out.”

Coy leaves a lot out of course. He doesn’t explain why workers are paid less than the value of what we produce explaining the Labor theory of value and how this surplus value on the form of commodities is the product of unpaid Labor and created through the Labor process itself. He may not even realize this himself and if he does, he certainly wouldn’t share it. Marx’s views on this are covered extensively in the first volume of Capital and are not that hard to comprehend. It is very much central to his explanation of how wealth is created and workers exploited in a capitalist economy. I’m sure Coy would rather keep this explanation brief as he’s having a hard enough time trying without much success to discredit Marx’s analysis.

He saves his best shot for last. “But wait.” He says emphatically. What Marx “underappreciated” was “capitalism’s power to heal itself”. This was a “fatal intellectual mistake” mistake Coy argues, or tries to argue and points to all the great advances made under capitalism, “free public education” for example and the abolition of child labor in factories. Again, that has not been abolished and in fact is rising in some areas of the world and capitalism is incapable of education, or even feeding the worlds people and is, as we are witnessing here in the US, ending public education as we know it putting it out of reach for million of workers and our families.

It’s political leaders have “corrected capitalism’s excesses again and again” Coy explains. And gives the Roosevelt’s New Deal as one example. But the New Deal never saved capitalism, a world war did. Roosevelt’s reforms never prevented the deeper crisis of 1937 a scenario that will likely be repeated in the present period. It took the destruction of three centuries of the development of the productive forces of a huge section of the advanced capitalist world and the deaths of some 50 million people for capitalism to “heal itself”. Capitalism can regenerate itself, yes. Capitalism, if not overthrown, will emerge from this crisis as it has others, but in a different way, it will not be the same as before it entered it.

The only permanent thing about capitalism is insecurity, misery poverty war and crisis. There would have been another world war by now were it not for the presence of nuclear weapons.

It is important for us as workers to understand that the reason the capitalist class is writing about Marx at all and particularly when it is to discredit him, it is because his analysis of capitalist production is accurate, it corresponds with objective reality. Marx pointing out that social production and private ownership are at the root of the problem and that after capitalism socialized production it is necessary to collectivize ownership of the means by which we produce social needs gave us an alternative to this insanity. Marx simply figured out the way the world of production and maintenance of human life works.

A statement by Engels on what drives human history is one that perked my interest when I first read it:

“The materialist conception of history starts from the proposition that the production of the means to support human life and, next to production, the exchange of things produced, is the basis of all social structure; that in every society that has appeared in history, the manner in which wealth is distributed and society divided into classes or orders is dependent upon what is produced, how it is produced, and how the products are exchanged. From this point of view, the final causes of all social changes and political revolutions are to be sought, not in men's brains, not in men's better insights into eternal truth and justice, but in changes in the modes of production and exchange.”

Marxism is not a dogma; it is a way of looking at the world, of understanding the material world around us and how we got this far. We can influence the future and control our own destiny but we have to have a plan. It is important for workers to explore Marx’s works and discuss them. The part on the commodity, the Labor theory of value, the Labor process and the eight-hour day for example are all so relevant to pour daily lives. Marx made philosophy concrete. As he said, “Philosophers have only interpreted the world---the point is to change it”.

Peter Coy, as a major theoretician of the capitalist class cannot possibly accept Marx’s view of the world and warns his class colleagues that "It's time for another burst of enlightenment". He is afraid that some of his colleagues might be drawn to Marx's ideas; and it is not ruled out that faced with catastrophe in the future, a section of the capitalist intelligentsia and some capitalists themselves will come over to the workers’ point of view. But no class commits social suicide; capitalism will destroy life on this planet as we know it in it’s dying days. It is up to workers to build a future based on cooperation, collective ownership and solidarity.

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