Give Karl Marx a Chance to Save the World
By George Magnus
POLICY MAKERS STRUGGLING to understand the barrage of financial
panics, protests and other ills afflicting the world would do well to
study the works of a long-dead economist: Karl Marx. The sooner they
recognize we’re facing a once-in-a-lifetime crisis of capitalism, the
better equipped they will be to manage a way out of it.
The spirit of Marx, who is buried in a cemetery close to where I live
in north London, has risen from the grave amid the financial crisis
and subsequent economic slump. The wily philosopher’s analysis of
capitalism had a lot of flaws, but today’s global economy bears some
uncanny resemblances to the conditions he foresaw.
Consider, for example, Marx’s prediction of how the inherent conflict
between capital and labor would manifest itself. As he wrote in “Das
Kapital,” companies’ pursuit of profits and productivity would
naturally lead them to need fewer and fewer workers, creating an
“industrial reserve army” of the poor and unemployed: “Accumulation of
wealth at one pole is, therefore, at the same time accumulation of
The process he describes is visible throughout the developed world,
particularly in the U.S. Companies’ efforts to cut costs and avoid
hiring have boosted U.S. corporate profits as a share of total
economic output to the highest level in more than six decades, while
the unemployment rate stands at 9.1 percent and real wages are
U.S. income inequality, meanwhile, is by some measures close to its
highest level since the 1920s. Before 2008, the income disparity was
obscured by factors such as easy credit, which allowed poor households
to enjoy a more affluent lifestyle. Now the problem is coming home to
Marx also pointed out the paradox of over-production and
under-consumption: The more people are relegated to poverty, the less
they will be able to consume all the goods and services companies
produce. When one company cuts costs to boost earnings, it’s smart,
but when they all do, they undermine the income formation and
effective demand on which they rely for revenues and profits.
This problem, too, is evident in today’s developed world. We have a
substantial capacity to produce, but in the middle- and lower-income
cohorts, we find widespread financial insecurity and low consumption
rates. The result is visible in the U.S., where new housing
construction and automobile sales remain about 75% and 30% below their
2006 peaks, respectively.
As Marx put it in Kapital: “The ultimate reason for all real crises
always remains the poverty and restricted consumption of the masses.”
Addressing the Crisis
So how do we address this crisis? To put Marx’s spirit back in the
box, policy makers have to place jobs at the top of the economic
agenda, and consider other unorthodox measures. The crisis isn’t
temporary, and it certainly won’t be cured by the ideological passion
for government austerity.
Here are five major planks of a strategy whose time, sadly, has not yet come.
First, we have to sustain aggregate demand and income growth, or else
we could fall into a debt trap along with serious social consequences.
Governments that don’t face an imminent debt crisis -- including the
U.S., Germany and the U.K. -- must make employment creation the litmus
test of policy. In the U.S., the employment-to-population ratio is now
as low as in the 1980s. Measures of underemployment almost everywhere
are at record highs. Cutting employer payroll taxes and creating
fiscal incentives to encourage companies to hire people and invest
would do for a start.
Lighten the Burden
Second, to lighten the household debt burden, new steps should allow
eligible households to restructure mortgage debt, or swap some debt
forgiveness for future payments to lenders out of any home price
Third, to improve the functionality of the credit system,
well-capitalized and well-structured banks should be allowed some
temporary capital adequacy relief to try to get new credit flowing to
small companies, especially. Governments and central banks could
engage in direct spending on or indirect financing of national
investment or infrastructure programs.
Fourth, to ease the sovereign debt burden in the euro zone, European
creditors have to extend the lower interest rates and longer payment
terms recently proposed for Greece. If jointly guaranteed euro bonds
are a bridge too far, Germany has to champion an urgent
recapitalization of banks to help absorb inevitable losses through a
vastly enlarged European Financial Stability Facility -- a sine qua
non to solve the bond market crisis at least.
Fifth, to build defenses against the risk of falling into deflation
and stagnation, central banks should look beyond bond- buying
programs, and instead target a growth rate of nominal economic output.
This would allow a temporary period of moderately higher inflation
that could push inflation-adjusted interest rates well below zero and
facilitate a lowering of debt burdens.
We can’t know how these proposals might work out, or what their
unintended consequences might be. But the policy status quo isn’t
acceptable, either. It could turn the U.S. into a more unstable
version of Japan, and fracture the euro zone with unknowable political
consequences. By 2013, the crisis of Western capitalism could easily
spill over to China, but that’s another subject.
(George Magnus is senior economic adviser at UBS and author of
“Uprising: Will Emerging Markets Shape or Shake the World Economy?”
The opinions expressed are his own.)