Is Capitalism really Doomed? It certainly seems to be the ‘cliché’ of our times. However, I recently read an article by ‘Dr. Doom’ (aka Nouriel Roubini) that makes me reassess the notion that perhaps capitalism has reached its sale by date.
In an interview with The Wall Street Journal he said…‘Karl Marx had it right’. WOW…Karl Marx right? No way!! For a true believer, like myself, in laissez-faire economics (the core principle of capitalism) this is a real shock. Now…you might just dismiss ‘Dr. Doom’ statement as preposterous…after all someone with that nickname can’t be taken too seriously right? Wrong!
For those who are not familiar with this gentleman he’s the one who in September 2006, with markets everywhere still on the rise, told at a seminar at the IMF (International Monetary Fund) Headquarters that the US consumer was just about to ‘burn out’ and that this would mean a US recession followed by a global ‘hard landing’. The IMF’s in-house monthly newsletter (IMF Survey) covered Roubini’s talk more as a curiosity on the last page under the headline ‘Meet Dr. Doom’…and the name stuck.
His simple and pragmatic argument was I quote…‘when supply increases, prices fall: that’s been the trend for 110 years, since 1890. But since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this. It means there was a speculative bubble. And now that bubble is bursting.’…unquote.
We all know how it all ended…‘credit crunch’, bank bailouts, or simply put the worst financial crisis since the Great Depression of the 1930s. So…when ‘Dr. Doom’ (who by the way believes in free markets and capitalism) talks now people listen…I certainly do!
What was Marx’s View of Capitalism?
Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system. He felt that capitalism created two competing classes of people. One, was the bourgeoisie who owned and controlled the means of production and hired wage laborers. The other was the proletariat, who were common workers who owned nothing but the right to sell their own labor.
Capitalism's very nature would ensure that eventually, these classes would struggle against one another to the point where the class of workers would get large enough and oppressed enough that it would overthrow the bourgeoisie, seize the means of production from it and end the economic system known as capitalism. The system of socialism would be ushered in and gradually evolve into pure communism.
Although, the corporate world and the relationship between employers and employees, through legislation and even new concepts like ‘social responsibility’, is now very different from the days of The Industrial Revolution in the United Kingdom when Marx was making his observations…there are nevertheless some disturbing similarities in issues currently affecting the world economy.
The social uprisings in Egypt, which was later expanded in a wider sense to several Arab world countries (with Syria and Libia as I write still fighting for regime change), in Greece, Spain and even recently in the United Kingdom, are all economic in origin primarily unemployment, but also due to the rising cost of living.
The issue is that there is excess capacity in industries, and companies not hiring because there is not enough final demand…but the paradox is that if you’re not hiring workers, there is not enough labour income, which in turns leads to not being enough consumer confidence, which in turns means that there is not enough consumption and therefore not enough final demand.
In the last 3 years this has worsen because there was a massive ‘redistribution of income’ from labour to capital and from wages to profits…which means inequality of income and wealth has increased. This redistribution of income and wealth makes the problem of excessive lack of aggregate demand even worse!
And…this is ‘Dr. Doom’s point…that Karl Marx was right in saying that at some point capitalism can self-destroy itself because it can’t keep on shifting income from labour to capital without not having an excess capacity and a lack of aggregate demand…and that’s what is happening.
The advocates of laissez faire economics have faith in the ability of markets to ‘self-regulate’ (‘the invisible hand’ as defined by the 18th century Scottish economist Adam Smith) as the belief is that human beings are naturally motivated by self-interest and, when they are not interfered with in their economic activities, a balanced system of production and exchange based on mutual benefit emerges.
The problem at the moment is that markets are not workings as what it’s an individual rational decision (after all every firm wants to survive and thrive) of reducing labour costs more and more misses the point that someone’s labour costs are someone else’s labour income and consumption!...that’s what makes the current situation self-destructive!
So…Marx Was Right Then? Capitalism R.I.P.?
There is no other economic model that proved more adept at creating wealth, develop technology and improve living standards for its citizens that capitalism. However, the main criticism always is the unfair distribution of wealth and power.
A report released in April this year by GlobeScan, an international opinion research consultancy, suggests that the number of Americans who believe in the strength of the free market economy dropped markedly last year. In fact, according to the survey results, both Brazil and China, on a percentage basis, ranked higher than the U.S. in overall support for free market capitalism.
The report, based on 12,884 interviews in 25 countries, asked participants to agree or disagree with the statement that the ‘free market economy is the best system on which to base the future of the world.’
GlobeScan found Americans strongly agreeing or somewhat agreeing dropped to 59 percent from 74 percent, a 15 percent dip from the year prior and the second largest year-over-year drop of any country besides Turkey. An even more dramatic drop (32 percent drop) occurred among those in the U.S. with annual incomes below $20,000, of which only 44 percent agreed that the free market was the ideal system.
If citizens of the nation that epitomises capitalism are disenchanted with it…it’s time to take notice!!
The reality is quite simple and it’s an old story: Capitalism is unstable. Capitalism means growth, but also instability. The system is dynamic and inherently prone to crashes that cause great damage along the way.
It is an economic system that can be ruthlessly productive. But is also one of wheels within wheels – internal contradictions Marx called them – that can, and regularly do, spin out of control. Marx saw these contradictions as opportunities; he figured that capitalism's self-destruction would lead to a better world.
John Maynard Keynes, a British economist who liked to speculate in foreign currency over his morning tea and toast, saw them as problems that could destroy a world he rather liked.
Keynes believed that the free market capitalism was inherently unstable and that it needed to be reformulated both to fight off Marxism and the Great Depression. The welfare state designed in the post-1945 period was in his view the way to save capitalism from itself!
Banks would be regulated to keep financiers from scamming the economy into the ground. Labour unions would be encouraged, in order to give workers a stake in the status quo and inoculate them against radical politics.
The rich would agree to government tax-and-spend policies, knowing that – in the end – it's always better to feed the poor than have them slit your throat.
It was a giant, unspoken bargain – forced by the Depression of the `30s, tempered by war and hammered into shape under the threat of Communism. For about 90 years, we have been trying to regulate the system to stabilise it while still preserving its energy. We are at the start of another set of these efforts…
Towards A New Paradigm…Enter Social Capitalism!
Social capitalism, as a theory or political or philosophical stance, challenges the idea that the goals of socialism and the existing system of capitalism are inherently antagonistic.
The essence of social capitalism is that markets work best and output is maximised through sound social management of macroeconomics.
The world has been grouping towards a new economic doctrine, something that combines the animal energies of capitalist entrepreneurship with the distributive justice of socialism.
Typically capitalism as a business model revolves around exploitation of the workers and the market squeezing profits from an underpaid workforce and over charging the consumer.
Social capitalism is not hostile to free markets or the private ownership of property. Instead, social capitalism recognises the unique success of capitalism, particularly under appropriate social supervision. Social capitalism thus seeks to create a balanced approach to business and the role of the state—with a view to optimising the business environment for maximum sustainable economic growth.
On a micro level social capitalism suggests that best business practices should cater to the needs of consumers, including the needs of workers as the bedrock of consumption.
The exploitation of ever cheaper pools of labor with no regard to maintaining consumption results in market failure…as observed by Marx and explained previously here. Social capitalism proposes that a strong social support network for the poor enhances capital output.
By decreasing poverty, capital market participation is enlarged. Social capitalism also proposes that government regulation, and even sponsorship of markets, can lead to superior economic outcomes, as evidenced in government sponsorship for example broad internet access or provision of computer for rural schools in developing countries.
Given the vast diversities in global culture and socio-economic development, we are likely to see a lot of experimentation before social-capitalism can be defined more precisely. One thing is certain though…its inevitability.
Caveat emport!
‘Despite a voluminous and often fervent literature on ‘income distribution’ the cold fact is that most income is not distributed…it’s earned’
‘The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries’
