Karl Marx was wrong about socialism, but he wasn’t always wrong about capitalism. That’s the warning from Nouriel Roubini, the NYU economics professor known on Wall Street as “Dr. Doom” — but hailed as a prophet nonetheless — for having warned that an economy expanding on giddy optimism, asset bubbles and Ponzi scheme paper was headed for a crash, and for doing so at a time when the Washington–Wall Street–media consensus was that the fundamentals of the economy were sound.
But having danced on the grave of the Soviet economic system, which finally imploded in 1990, a U.S. corporate, political and media elite weaned on the shibboleths of free-market capitalism wasn’t about to embrace the jeremiads of a bearded 19th century German sage in whose name Lenin and then Stalin built their planned-economic nightmare.
Still, Marx knew a thing or two about capitalism that its boosters prefer to ignore, Roubini argues, and it’s time to face up to some harsh realities.
“Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proved wrong),” writes Roubini. “Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality, and reduces final demand.”
Anger at poverty, unemployment and despair is driving popular protest across the industrialized world, he notes, and “even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.”
Marx, to put it more simply than he himself ever did, saw capitalism’s market logic as producing recurring, ever more dangerous crises, precisely because of its tendency to channel most of the wealth produced in society into the pockets of a wealthy elite — and seeking to increase profits by cutting costs, i.e., the wage bill — leaving growing numbers of people no longer able to afford what was being produced, forcing a slowdown and contraction of the economy.
That sounds suspiciously like what we’re seeing in the U.S. and other Western economies now — an economic crisis rooted in low and diminishing demand. Even though the financial crisis was averted, the economy has remained effectively stagnant at best, as depressed U.S. demand creates a vicious cycle in which corporations see no point in expanding production (and creating new jobs) if consumers can’t afford to spend money and unemployment and poverty expands, further depressing demand.
The “greed is good” mantra may drive Wall Street, but greed can be bad for the wider capitalist economy. The depressed demand in the U.S. economy, for example, may be a product of decades of growing economic inequality. While real household incomes of working people have either remained largely static or fallen since the late 1970s, the rich have, to put it mildly, gotten a lot richer: incomes of the richest 1% have grown by more than 176% in the same period. Today 1 in 4 dollars earned in the U.S. accrues to just 1 in 100 Americans — or by a different measure, half of the income earned in the U.S. goes to just 1 in 5 Americans.
American society, of course, has never had a moral problem with inequality in principle, and there’s a widely held — if naive — assumption that anyone who works hard and shows drive and ingenuity can become rich in the U.S. Perhaps, but for every Horatio Alger story, there are tens of thousands born on the wrong side of the tracks who are destined to die there. But the problem posed by inequality now is a structural rather than simply moral because of its impact on depressing demand in the economy.
Housing bubbles and cheap credit may have compensated for many years, with the robust consumer-driven economy essentially based on American households living beyond their means, their government borrowing money from China for them to spend on American brand-name products manufactured by low-wage Chinese workers. But when the subprime-mortgage bubble ruptured in 2008, it was no longer possible to defer the consequences of a massive long-term redistribution of wealth to the rich.
Marx was wrong, of course, in his prognosis that such crises would spark capitalism’s collapse. Capitalist societies, including the U.S., have found, through their political systems, the means to avert collapse and its potentially dangerous political consequences by redistributing some of society’s wealth to poorer sections of the population, spending money to build infrastructure and provide basic health care and education to a population that would otherwise struggle to afford those things. Capitalist societies also ensure that working people earn enough to maintain viable consuming households by creating a welfare support system that allows people to survive unemployment and continue consuming to provide a domestic market, and so on.
“To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods,” writes Roubini. “That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.”
“The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.
“Over time, advanced economies will need to invest in human capital, skills, and social safety nets to increase productivity and enable workers to compete, be flexible, and thrive in a globalized economy. The alternative is — like in the 1930s — unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”
In other words, capitalism can be saved from the excesses that Marx warned would be its downfall, but only through the sort of state intervention that has become almost as politically unfashionable as Karl Marx himself.