War Marx Right? While Marx’s prediction of our political future was finally discredited with the fall of communism, is his view of our economic future being validated?

Was Marx Right?

INTRODUCTION

In the golden, post-war years of Western economic growth, the comfortable living standard of the working class and the economy’s overall stability made the best case for the value of capitalism and the fraudulence of Marx’s critical view of it. But in more recent years many of the forces that Marx said would lead to capitalism’s demise – the concentration and globalization of wealth, the permanence of unemployment, the lowering of wages – have become real, and troubling, once again.

The fall of communism discredited Marx’s political vision. But, as observers havewondered before, is his view of our economic future being validated?

 

A Return to a World Marx Would Have Known

Doug Henwood is editor of Left Business Observer, host of a weekly radio show originating on KPFA, Berkeley, and is author of several books, including “Wall Street: How It Works and For Whom” and “After the New Economy.”

UPDATED MARCH 30, 2014, 7:02 PM

I don’t see how you can understand our current unhappy economic state without some sort of Marx-inspired analysis.

Here we are, almost five years into an officially designated recovery from the worst downturn in 80 years, and average household incomes are more than 8 percent below where they were when the Great Recession began, and employment still650,000 short of its pre-recession high.

For years, excessive consumer borrowing muted the effects of stagnant wages. But low demand is stifling the economy, with no end in sight.

Though elites are prospering, for millions of Americans, it’s as if the recession never ended.

How can this all be explained? The best way to start is by going back to the 1970s. Corporate profitability — which, as every Marxist schoolchild knows, is the motor of the system — had fallen sharply off its mid-1960s highs. Stock and bond markets were performing miserably. Inflation seemed to be rising without limit. After three decades of seemingly endless prosperity, workers had developed a terrible attitude problem, slacking off and, quaintly, even going out on strike. It’s no accident that Johnny Paycheck scored a No. 1 country hit with “Take This Job and Shove It” in 1977 — utterly impossible to imagine today.

This is where Marx begins to come in. At the root of these problems was a breakdown in class relations: workers no longer feared the boss. A crackdown was in order.

And it came, hard. In October 1979, the Federal Reserve began driving interest rates toward 20 percent, to kill inflation and restrict borrowing, creating the deepest recession since the 1930s. (It was a record we only broke in 2008/2009). A little over a year later, Ronald Reagan came into office, fired the striking air-traffic controllers, setting the stage for decades of union busting to follow. Five years after Johnny Paycheck’s hit, workers were desperate to hold and/or get jobs. No more attitude problem.

The “cure” worked for about 30 years. Corporate profits skyrocketed and financial markets thrived. The underlying mechanism, as Marx would explain it, is simple: workers produce more in value than they are paid, and the difference is the root of profit. If worker productivity rises while pay remains stagnant or declines, profits increase. This is precisely what has happened over the last 30 years. According to the Bureau of Labor Statistics, productivity rose 93 percent between 1980 and 2013, while pay rose 38 percent (all inflation-adjusted).

The 1 percent got ever-richer and more powerful. But there was a problem: a system dependent on high levels of mass consumption has a hard time coping with the stagnation or decline in mass incomes.The development of a mass consumer market after Marx died, with the eager participation of a growing middle class, caused a lot of people to say his analysis was obsolete. But now, with the hollowing out of the middle class and the erosion of mass purchasing power, the whole 20th century model of mass consumption is starting to look obsolete.

Borrowing sustained the mass consumption model for a few decades. Non-rich households borrowed to buy cars, buy food, pay medical bills, buy ever-more-expensive houses, and so on. Conveniently, rich households had plenty of spare cash to lend them.

That model broke apart in 2008 and has not — and cannot — be revived. Without the juice provided by spirited borrowing, demand remains constricted and growth rates, low. (See also: Europe.)

Raising the incomes of the bottom 90 percent of the population through higher wages and public spending initiatives — stifled since Reagan starting putting the squeeze on them — could change that. But the stockholding class has resisted that, and they have a lot of political power.

And an extraordinarily lopsided economy is the result. We didn’t expect that the 21st century would bring about a return of the 19th century’s vast disparities, but it’s looking like that’s just what’s happened.

Responsible Politics Can Cure Capitalism’s Ills

Michael R. Strain is a resident scholar at the American Enterprise Institute.

UPDATED MARCH 30, 2014, 8:08 PM

Charles Dickens was at the height of his fame in 1849 when Karl Marx moved to London. London itself was one of Dickens’s best developed characters — its filth and its poverty and its disease, byproducts of industrialization. As Marx trudged to and from his workspace at the British Museum every day, he witnessed a city that might make even the most ardent capitalist question whether wages could rise above the subsistence level.

Marxism and laissez-faire both exaggerate the role of the economy. Society needs a safety net to soften the rough edges of free enterprise.

Though it is not hard to see why Marx believed that the free enterprise system required the exploitation of workers, it is hard to see why anyone would believe that today. In 1970, 26.8 percent of the world’s population lived on less than one dollar per day. In 2006, only 5.4 percent did — an 80 percent drop in this extreme poverty measure in less than four decades.

What economic system was responsible for this accomplishment? It wasn’t “from each according to his ability, to each according to his needs.” It was free enterprise. Far from exploiting workers, free enterprise liberated them from deep poverty.

Marx was a brilliant thinker and writer, but economists who have meticulously studied his writings easily find its flaws.
An obvious one is central to his theory, that the value of an object is determined by the labor required to produce it. This is obviously false: I could spend hundreds of hours writing a song; Bruce Springsteen could write one in 15 minutes worth far more than mine. Q.E.D.

But as devastatingly wrong as Marx was about the most important questions he tried to tackle (see also: “Union, Soviet”), Marx was right about quite a bit. There is an inherent instability in capitalism — cycles of boom and bust lead to human misery. Capitalism does create income and wealth inequality.

Our tough times now heighten our sensitivity to asymmetries, making Marx’s observations particularly poignant. Wages are stagnant, while corporate profits are high. Millions knock on doors looking for jobs with no success, while the economy’s superstars take home seven-figure salaries. Political candidates debate the marginal tax rate on the highest earners while ignoring the unemployed.

But these problems don’t mean capitalism will inevitably unravel, as Marx thought.

First, many of today’s problems are temporary results of the Great Recession. And on a deeper level, Marx erred significantly in believing that social relations and social institutions are founded upon economics. We are not slaves to changes in the way goods and services are produced and exchanged.

Likewise, the flipside of communism is mistaken: The economy is not a holy, untouchable, object.

In fact, both Marxism and pure laissez-faire elevate the economy above its proper station, ignoring the ability (Marxism) and the duty (laissez-faire) of culture, and through it politics, to soften the rough edges of the free enterprise system.

The social safety net for the truly needy is the example of how culture and politics can correct the excesses of the free enterprise system. We let the free enterprise system create wealth and give people the freedom to pursue their dreams and to flourish, while letting culture direct the fruits of the market to proper social ends. Finding the right balance is the hard work of responsible politics.

At the close of the Constitutional Convention, Benjamin Franklin walked out of Independence Hall and into the streets of Philadelphia. A lady saw him, and asked, “Well, Doctor, what have we got — a republic or a monarchy?” “A republic,” Franklin replied, “if you can keep it.”

Was Karl Marx right that capitalism contains within it the seeds of its own destruction? Only if we can’t keep it.

Foreseeing the Dangers but Not the Response

Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”

UPDATED MARCH 30, 2014, 7:00 PM

It’s important to remember that Marx was a journalist as well as a theorist, and, in contrast with most modern economists, started from empirical observation. Like Adam Smith, he decried the tendency of businessmen to collude to suppress wages, but his study of sweatshop conditions in industrializing Europe led him to take his conclusions much further.

The economy has left millions in despair, but if even a remnant of the middle class still identifies with the established order, major change is unlikely.

The core of Marx’s analysis is that businessmen would eventually cannibalize their markets through overproduction, which would lead to declining profitability over time. Others, like Joseph Schumpeter, saw periodic crises of capitalism as inevitable, but Schumpeter argued that this upheaval was a matter of “creative destruction,” which his followers believe sets the stage for phoenix-like revivals.

By contrast, Marx believed that overproduction would lead to pressure on wages, which would prove to be ultimately self-defeating, since the drive to lower pay levels to restore and increase profit levels would wreck markets for goods and services. That’s very much in keeping with the dynamic in advanced economies today.

Marx’s forecast has proven correct by this weak recovery. U.S. companies’ profits account for the highest share of gross domestic product in the post-war era, while workers have gotten the lowest cut of G.D.P. growth ever recorded.

The relentless pursuit of lower labor costs by large corporations, which historically paid the highest wages, has helped push pay levels down, which in turn has resulted in weak demand and short job tenures. To the extent jobs have been created since the crisis, they’ve been concentrated at the bottom of the pay spectrum

Marx believed that industrial workers’ degraded conditions would set the stage for the violent overthrow of the system. That has not come to pass. The communist revolutions that did occur, in China and Russia, took place before major industrialization in those countries.

Marx failed to anticipate how the immense growth of commercial enterprises would create the need for a large range of managers, from shop supervisors and office managers to top executives, as well as technocratic experts such as accountants, lawyers, computer programmers and consultants. And while the Great Depression raised fears of radical revolt, the rise of large unions and Rooseveltian social safety nets served as a bulwark against the Red Menace. The well-paid union workers and the growing numbers of white collar employees created a new American middle class.

For more than a generation after World War II, corporations shared the benefits of productivity gains with workers, supporting demand, growth and social cohesion.

This willingness to reinvest in growth by keeping the middle class healthy is now seen in Corporate America as quaint altruism. Thomas Piketty, in his new book, “Capital in the Twenty-First Century,” makes clear that the experience of postwar America (and the rest of the developed world) was a historical anomaly. The more persistent trend, he found, was a rise in inequality when the rate of return on capital — the major source of income for the wealthiest — exceeded the economy’s overall growth rate.

A threat Marx downplayed has accelerated the concentration of wealth among the very richest. As Michael Hudson has noted, Marx recognized the destructive potential of financial capitalism, but thought it was inconceivable that it would become dominant. He believed the industrialists would succeed in keeping the bankers in check. They have not.

As income disparity has widened enormously and class mobility has eroded, Marx’s idea of class warfare seems particularly apt. But as long as there is a sufficiently large remnant of the American middle class, still socialized to identify with the established order, no matter how beleaguered they are, it’s hard to see how any organized, large scale uprising could occur.

Problems Are in Sectors, Not the System

Tyler Cowen is a professor of economics at George Mason University. He is the author, most recently, of “An Economist Gets Lunch” and blogs at Marginal Revolution, which covers economic affairs.

UPDATED MARCH 30, 2014, 7:02 PM

Marx was a very perceptive thinker and he had a good understanding of the volatile — and productive — tendencies in the capitalism in his time. He also had someforesight about the problems of our contemporary world, but he got a lot wrong too.

Much of the trouble is due to low productivity in health and education, which raise the cost of living, along with high housing costs in many areas.

There is in fact a problem with stagnant wages in today’s developed economies. But in the United States for instance much of the problem lies in our low productivity health and education sectors, which raise the cost of living for everybody, plus the high cost of renting or buying in desirable urban areas and in good school districts.

Better and cheaper services are equivalent to a boost in real wages and income, so solving these problems would go a long way toward improving living standards. It also would make income inequality less objectionable, because the real issue should be low living standards at the bottom of the scale, not the gains at the top.

The problems are very often rooted in our imperfect institutions, such as lack of accountability in our schools, and a health care system which combines the worst properties of public and private sector incentives, leading to more expensive service and lower quality and access. Less zoning and more high-density construction would ease the housing budgets of many lower-income Americans.

Does Marx provide a very good guide to understanding all of those problems? Mostly not. Neoclassical microeconomics explains why some of our services are low quality and high cost, namely too much third party payment through insurance companies, too much regulation of the wrong kinds, and the difficulties consumers face in judging quality. “Public choice” analysis, which analyzes how special interests turn government away from pursuing the general welfare, was quite familiar to Marx and that is to his credit. Yet many of today’s economic problems stem from vested interests in the education sector, or from homeowners who do not want to allow more building in their neighborhoods, rather than from rapacious capitalists.

How much in fact can we blame the special interest group of “capitalists” as a class? To cite one example, companies which make and sell medical devices and equipment really have been a force behind excess subsidy and thus the inflation of health care costs. Still, this kind of insight was familiar to Adam Smith and the classical economists and Marx’s often simplistic class analysis is not always illuminating.

Marx pointed out, again perceptively, that capitalism might be subject to a declining rate of profit, and indeed the rate of productivity growth generally has been lower since the 1970s. But why? I would cite energy price shocks, greater investments in environmental goods (which may well be optimal), political dysfunction, the difficulty of topping the amazing achievements of the early 20^th century, a bit of cultural complacency, and a generally greater aversion to risk, failure and also the new NIMBY “not in my backward” mentality. Most of Marx’s analytical constructs are convoluted, replete with contradictions, and in any case not ideally suited toward analyzing those problems.

We should always be willing to learn from the past, and I do count Marx, for all his flaws, among the great economists. But we should not forget that he was in fact wrong about most things, not just about the totally impractical nature of his communist alternative.

Blind to the System’s Ingenuity and Ability to Reinvent

Brad DeLong is a professor of economics at University of California, Berkeley, and blogs at Grasping Reality With Both Hands.

UPDATED MARCH 30, 2014, 7:03 PM

I have long thought that Marx’s fixation on the labor theory of value made his technical economic analyses of little worth. Marx was dead certain for ontological reasons that exchange-value was created by human socially-necessary labor time and by that alone, and that after its creation exchange-value could be transferred and redistributed but never enlarged or diminished. Thus he vanished into the swamp, the dark waters closed over his head, and was never seen again.

Rising real material living standards for the working class can occur along with a rising rate of exploitation and a smaller labor share.

And I have long thought that Marx’s confusion about nominal and real magnitudes, about shares and absolutes, fueled his extraordinary misapprehension that he was watching not the birth-pangs but the death-throes of capitalism. Because of this confusion, Marx could not fully grok that rising real material living standards for the working class might well go along with a rising rate of exploitation and a smaller labor share. Thus he takes a demonstration that labor’s share of income might fall and without noticing turns it into a claim that the working class will starve.

The greater division of labour enables one labourer to accomplish the work of five, 10, or 20. How could a mass of workers thrown out of one branch of industry by machinery find refuge in another branch, unless they were to be paid more poorly? Thus the forest of outstretched arms begging for work grows ever thicker, while the arms themselves grow ever thinner.

Moreover as Suresh Naidu pointed to me, there is a third huge mistake for this time: Marx thought increased investment and capital accumulation diminished the value of labor to employers, and thus diminished the bargaining power of workers — when actually it increased it.

But although this third belief was wrong for his day, is it wrong for ours and for our future? We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. Each improvement in machines made each human cybernetic control element more valuable as well.

But there is no iron law requiring that technologies of power application and matter manipulation must always advance more rapidly than technologies of governance and control. What happens when our machines take over (3) and leave humans seeking employment with only (4) and (5)? How many and at what wage can we employ people in the social arts of personal services and as inventors and creators?

Karl Marx in his day could not believe the volume of production could possibly expand enough to re-employ those who lost their jobs as handloom weavers as well-paid machine-minders or carpet-sellers. He was wrong.

The optimistic view is that our collective ingenuity will create so many things for people to do that are so attractive to the rich that they will pay through the nose for them and so recreate a middle-class society.

The pessimistic view is that some pieces of (3) will be (a) mind-numbingly boring while (b) stubbornly impervious to artificial intelligence, while (4) will remain limited and for the most part poorly paid. In that case, our future is one of human beings chained to desks and screens acting as numbed-mind cogs for Amazon Mechanical Turk, forever.