By Sell on News, a macro equities analyst. Cross posted from MacroBusiness
It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.
In particular, it highlights the imbalance between capital and labour, a perennial obsession of the Marxists, of course:
The full cash value of today’s product can therefore be realised only with the assistance of money advanced against commodity values yet to be produced. ‘The surplus value created at one point requires the creation of surplus value at another point,’ as Marx put it in the Grundrisse. How are these points, separated in space and time, to be linked? In a word, through the credit system, which involves ‘the creation of what Marx calls “fictitious capital” – money that is thrown into circulation as capital without any material basis in commodities or productive activity’. Money values backed by tomorrow’s as yet unproduced goods and services, to be exchanged against those already produced today: this is credit or bank money, an anticipation of future value without which the creation of present value stalls. Realisation (or the transformation of surplus value into its money equivalent, as profit) thus depends on the ‘fictitious’.
There has certainly been an excess of “fictitious” capital created over the last two decades, far more than Marx, or anyone else, could have anticipated. Money made out of the money made out of money. $600 trillion of derivatives. High frequency trading insanity with trades reduced to micro-seconds. As Adam Curtis observes in his excellent documentary “All Watched Over by Machines of Loving Grace”, the heart of the insanity has been the belief that systems run by machines are inherently more stable than systems with humans at the centre. This has greatly skewed the system towards the egregious self interests of capital, as against labour. Curtis lays much of this greed at the feet of Ayn Rand and Alan Greenspan.
Now before I get a knock on the door from grey suited men asking me “Are you, or have you ever been, a member of the Communist Party?” I should explain that I regard Marxism as wicked, directly responsible for some of the worst horrors of the twentieth century. I have many other objections to it, which I will come to later. There is, however, a difference between Marxism and what Marx wrote. And there is a difference between Marx’s critique of capitalism, which has some prescience and relevance, and Marx’s political prescriptions and revolutionary impulses, which were riddled with contradictions and, in practice, wholly pernicious.
The value of applying what Marx wrote is an identification of an imbalance between capital and labour:
So, as The Limits to Capital implies without quite stating, the special allure and danger of an elaborate credit system lie in its relationship to class society. If more capital has been accumulated than can be realised as a profit through exchange, owing perhaps to ‘the poverty and restricted consumption of the masses’ that Marx at one point declared ‘the ultimate reason for all real crises’, this condition can be temporarily concealed, and its consequences postponed, by the confection of fictitious values in excess of any real values on the verge of production. In this way, growth and profitability in the financial system can substitute for the impaired growth and profitability of the class-ridden system of actual production. By adding over-financialisation, as it were, to his model of overaccumulation, Harvey means to show how an initial contradiction between production and realisation later ‘becomes, via the agency of the credit system, an outright antagonism’ between the financial system of fictitious values and its monetary base, founded on commodity values. This antagonism then ‘forms the rock on which accumulation ultimately founders’. In social terms, this will take the form of a contest between creditors and debtors over who is to suffer more devaluation.
This is basically what is wrong in the developed world. There needs to be a balance between wages and investment returns for the system to function well. Henry Ford paid his workers well not because he was a generous man, but because then they could buy Fords. Globalisation has, of course, undone this compact, and although it has led to some productivity improvements, it is also having the effect of gutting the middle classes in the developed world. In Europe it is seen in the shape of unemployment, in America, the same as well as in the shape of rising poverty and the evaporation of the middle class.
Now, one does not have to be a Marxist to arrive at these conclusions. But Marxism (as opposed to what Marx wrote) resulted in the demonisation of markets, a perfectly normal human activity that goes back 3,000 years, give or take a century. In response, capitalism (whatever that is exactly) felt the need to overstate the value of markets, producing the kind of market worship we now see. Each position is absurd. Marxism has largely collapsed from its own contradictions. Capitalism is on the way to doing the same because when market worship is applied to financial systems, it produces the kind of endless regresses we are now seeing.
Kunkel does point out that some more mainstream analysts have noticed the problem:
Paul Krugman, discussing Roubini’s book in the New York Review of Books, agreed with him that what Ben Bernanke called the ‘global savings glut’ lay at the heart of the crisis, behind the proximate follies of deregulation, mortgage-securitisation, excessive leverage and so on. Originating in the current account surpluses of net-exporting countries such as Germany, Japan and China, this great tide of money flooded markets in the US and Western Europe, and floated property and asset values unsustainably. Why was so much capital so badly misallocated? In the LRB of 22 April 2010, Joseph Stiglitz observed that the savings glut ‘could equally well be described as an “investment dearth”’, reflecting a scarcity of attractive investment opportunities. Stiglitz suggests that global warming mitigation or poverty reduction offers new ‘opportunities for investments with high social returns’.
The neo-Keynesians’ ‘savings glut’ can readily be seen as a case of what a more radical tradition calls overaccumulated capital. But it is the broader and more systematic Marxist perspective that ultimately and properly contains Keynesianism within it, and a crude Marxist catechism may be in order. Where does an excess of savings come from? From unpaid labour – for example, that of Chinese or German workers. And why would such funds inflate asset bubbles rather than create useful investment? Because capital pursues not ‘high social returns’, but high private returns. And why should these have proved difficult to achieve, except by financial shell-games? Keynesians complain of an insufficiency of aggregate demand, restraining investment. The Marxist will simply add that this bespeaks inadequate wages, in the index of a class struggle going the way of owners rather than workers.
One of Marx’s advantages is that his notion of labour value at least puts humans at the centre of a human system. Which is better than putting “Machines of Loving Grace” at the centre of the system, which is the habit in much neoclassical thinking. But of course investors are human as well. And removing markets, as was done in the Soviet and Chinese horrors, is to remove basic humanity.
One key is to re-establish the interests of labour, probably in some collective form. That is the message of the Occupy Wall Street movement. For some reason, greed for executives and investment bankers, is simply pursuit of the right “incentives”, whereas comparatively modest wage claims is a tyrannous lurch into socialism, to be resisted at all costs. It is hard not to see this as some kind of contemporary class war; certainly it is disgusting hypocrisy. And it is destroying the middle classes in developed economies, which will have dangerous political consequences.
What is becoming clear is that new limits have to be placed on capitalism and some aspects of markets:
The classical economists long ago foresaw that an economy defined by constant expansion would one day give way to what John Stuart Mill called the ‘stationary state’. The idea has gained a new currency in Marxist writing of recent years, and in its contemporary version tends to locate the limits to growth in the depletion of natural resources or in the exhaustion of productivity gains as the share of manufacturing in the world economy shrinks and that of services expands. Of course, peak oil or soil exhaustion might easily coincide with faltering productivity. Harvey doesn’t spell out why growth must have a stop, and the outlines of an ecologically stable and politically democratic future socialism remain as blurry in his later work as they do almost everywhere else. At the moment Marxism seems better prepared to interpret the world than to change it. But the first achievement is at least due wider recognition, which with the next crisis, or subsequent spasm of the present one, it may begin to receive.
I do not agree with Kunkel that Marxism may come into its own. To me, it is just the flip side of the same appalling coin. Marxism has its roots in German idealism (Hegel) which I think we safely blame for fascism as well. Its horrors were no accident.
Both Marxism and capitalist theory are deeply materialistic; which inevitably rules out the human (matter cannot explain humanness, it is just matter). So no surprise that each propose some kind of tide of history argument as being inevitable (deregulation and “free” markets in the case of capitalism).
Both are quasi scientific, and so at once intellectually hollow and subject to the kind of scientific materialism that easily leads to letting machines rule over people. Both use unfalsifiable arguments; typically circular arguments in the case of capitalist economic theory, and dialectics in the case of Marxism that result in contradictions like the claim that there is only the bourgeois and proletariat (a claim that defeats itself as soon as anything changes, given that there are only two possibilities).
A nice matching set of intellectual barbarisms, in other words. Maybe in the current crisis conditions, we might start to get some intellectual grown ups emerging. At the very least, there needs to be close attention given to the balance of labour and capital, and limits must be set on fictitious capital. Another enemy is tiredness, intellectual exhaustion, as GK Chesterton observed:
Man does not necessarily begin with despotism because he is barbarous, but very often finds his way to despotism because he is civilised. He finds it because he is experienced; or, what is often much the same thing, because he is exhausted.
I was talking to a finance academic recently who said it was virtually impossible to get anything published academically that questioned the assumptions of the system; only mathematical analyses based on the the accepted assumptions ever see the light of day. A similar monochrome uniformity is evident in the economics mainstream. It is intellectual despotism, and it arises out of exhaustion.