Wednesday, August 10, 2011
On and off the Marx
Marxism nowadays has been totally discredited and rejected by all save for a score of diehard revolutionaries who still believe in its view of how society and economy would eventually evolve. However, Marxism's real appeal to its staunch advocates doesn't lie in its economic or socio-political ideas since it's highly doubtful that they understand the complexity of Karl Marx's (1818-1883) Das Kapital. Instead Marxism's attraction to them is the class struggle that would lead to the triumph of the proletariat as idealised in a communist classless society. Such a society has hardly existed except in tribes living in unforgiving landscape, such as the Kalahari desert where equality is a necessary precondition for survival. As for the proletariat, once they gain power they take on the affectations of the bourgeoisie, dashing Marx's dream of his utopia.
Thus it is Marx's economic ideas, not his revolutionary ones, which are more momentous since they could actually plug the missing gaps in the present repository of economic knowledge. Several of his predictions proved prescient. Among them, the growth of a few huge business firms that would come to dominate commerce and industry at a time when the prevailing business forms were small-scale. The most notable of course is his reckoning that the collapse of capitalism was the logical outcome of a constant class struggle between the bourgeois and the proletariat.
How that collapse would come about is an interesting piece that should have been required reading for all economists. Marx foresaw that to maintain profits, a business must constantly innovate. To him, the direction of innovation was in labour-saving machinery. Nowadays we know that innovation can take many forms—new processes, new materials, new machinery and so on—but the bottom line is the same: more output for less input. As the capitalist enterprises invest in more machinery, fewer workers will be needed resulting in a higher number of unemployed. If we examine the evidence in the later half of the past three Kondratieff waves Marx has actually been vindicated.
Even now in the fourth Kondratieff wave, a stream of unrest is plaguing most economies as the ranks of the unemployed begin to swell. The proletariat has risen in protest against the status quo. The cause is the imbalance of wealth distribution which cannot be solved by increasing productivity but by upending the manner in which wealth is presently distributed.
Having presciently pointed where capitalism would lead to, Marx miserably failed in recognising how capitalism overcame that weakness. He thought that capitalism would eventually destroy itself. He couldn't see that a succession of new Kondratieff waves would be ushered in to creatively destroy the wealth accumulated in the productive investments of the previous wave. The investments would be destroyed not physically but through obsolescence as the new wave's investments would produce better and cheaper products. The benefits of the new wave were not only enjoyed by the bourgeoisie but also spilled over to the proletariat. Marx was in despair when he witnessed his proletariat transformed into bourgeois proletariat. Having spent so much time and effort in formulating his theory, most of it in the reading room of the British Museum, he couldn't bring himself to rewriting it even though his observation was contradicting it.
For example, the second wave introduced cheap steel to replace wrought iron. This enabled boiler steam pressure to be increased making engine more efficient. Ships also could be made lighter and rails could bear heavier loads. New communication modes utilising rail, telegraph and telephone superseded canals. The impact was enormous. In the US the grain producing areas moved from New York and Pennsylvania to the Midwest. Rail also enabled France and Germany to industrialise by unlocking their landlocked coal fields.
Marx could only predict the demise of capitalism but he could not come up with an alternative beyond that of the proletariat rule. His Labour Theory of Value appears laughable now given that labour input forms a very small part of the production cost. In Marx's days the work week was around 80 hours. The communist countries took Marx's labour theory seriously. Instead of letting demand and supply set the price of goods, they were using labour input as the price determinant. Their central planning and mispricing produced the wrong goods for the wrong market. In the end, the lack of a profit motive reduced the incentive to produce. The USSR in its final days had to rely on oil to sustain itself because in all other areas, the workers were pretending to produce. Communism's failure thus was a failure of supply.
If communism failed because of supply, its anti-thesis, capitalism surely would meet its fate because of failure of demand. In fact, the depression that characterises the end of a Kondratieff wave is the result of demand not keeping pace with supply. Fixing demand is many times harder than fixing supply since those willing to spend must first be given the means to spend. Remember that during this stage of the Kondratieff wave, there are many unemployed people whose demand for economic goods has vanished. In the last few years, credit has been liberally dished out to continue stoking demand. The result is a world awash in toxic debts that cannot be solved other than writing them off. Because of the prominence of the toxic debts, it's commonly believed that the current crisis is a credit crisis where in fact it is a secondary cause. The root cause is the imbalance in wealth distribution the solution to which requires a major paradigm shift 0f the fifth Kondratieff wave.
The only remaining way to sustain demand in the current Kondratieff wave is continual deficit spending by the government or for the wealthy to donate part of their riches to the poor. You've probably heard suggestions to fix the crisis by resolving the supply side so that goods can be made cheaper and more affordable to the public. This is the wrong approach because cheaper goods usually entail more automation. The benefits eventually flow back to a narrower band of rich owners of capital. The poor still have no income no matter how cheap the goods are. Whatever means must be resurrected to reinstate income to the poor even to the extent of erecting the economically inefficient tariff barrier.
Only the government is capable of doing so but with the government heavily swayed by the benefits of free trade and its budget undermined by the planned spending cuts, the government has been hobbled. That makes 'giving' the only option left. However Adam Smith's individual self-interest working collectively for the public good no longer applies here. Instead as the rich wind down their spending and generosity because of fear of future uncertainties, the rest are consigned to the depths of despair and misery. But no, when humans are in such wretched conditions, they fight back and everyone will be the loser. Adam Smith's The Wealth of Nations should now be aptly retitled The Woes of Nations.