Sunday, August 14, 2011

Karl Marx was right

So says Nuriel Roubini, the guy who called the 2008 crash.

[Businesses are] not adding workers because there’s not enough final demand, but there’s a paradox, a Catch-22. If you’re not hiring workers, there’s not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we’ve actually had a worsening because we’ve had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.

Karl Marx had it right. At some point, Capitalism can destroy itself. You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.


Don Geddis said...

Roubini is absolutely right that the current economy has a problem of inadequate aggregate demand.

He (and Marx) are completely wrong that this is a necessary consequence of capitalism. It's more a specific error on the part of the US Fed in the last three years.

(Surely the Great Depression in the 1930's was an even worse case than the current economy; yet capitalism seemed to basically recover for the next 80 years.)

Ron said...

> capitalism seemed to basically recover for the next 80 years

It's certainly possible to recover from situations like this. But a pre-requisite for recovery is a societal decision-making process that is not completely decoupled from reality, and that requires some mechanism to counteract the concentration of wealth and power that is the natural tendency of unfettered capitalism. In the 1930s that force was FDR, WW2, and the New Deal. Today it is...?

Whether the current situation ultimately turns out to be worse than the 30's remains to be seen. The problem is not (yet) the current state, it's the trajectory.

Anonymous said...

Anonymous said...

psst- USA doesn't have a capitalist system.

Dennis Gorelik said...

US government is spending like mad, economy is stagnant, and you conclude that Marx was right about the need of spending?

Don Geddis said...

Dennis: "US government is spending like mad"

But what's important is that overall US spending has dropped more steeply than at any time since the Great Depression in the '30s. You say that the government is "spending like mad", but the reality is that revenues have plunged (so the deficit is large), not that spending has skyrocketed.

(Federal) government spending is up slightly, but not nearly enough to make up for the huge spending shortfalls from state and local governments, businesses, and consumers.

After decades of steady annual growth, nominal GDP plunged steeply in the last couple of years. And that is the root cause of this extended recession.

(And by the way: more government spending/deficits, while it would be better than the current situation, is not the ideal fix. Much better would be for the Fed to increase the money supply, so that everyone's income and spending rose uniformly.)

patrickdlogan said...

Read what Marx wrote about France keeping an artificial deficit for the benefit of the financial aristocracy. Agree or disagree with Marx, in whole or in part. No matter, he was an observant commentator, and has something to say for the current state.