Happy 200th Birthday, Karl Marx!

Most Marxists and anti-Marxists alike probably fail to realise that the highest praise for capitalism is to be found in Marx and Engels, Manifesto of the Communist Party (1848), that readily recognised that the capitalist system promoted urbanisation, industrialisation, technical progress, economic growth and prosperity on an unprecedented scale:  

“The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment (of) such productive forces . . . The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation.”

At the same time Marx viewed capitalism as a form of systematic labour exploitation. Primitive societies were not exploitative because they exchanged goods roughly embodying the same amount of labour. Slavery was less exploitative than it seemed, for slaves’ consumption allowed them to recover some of their own labour that looked entirely unpaid. Feudalism was openly exploitative, for the amount of work performed by labourers for themselves and for their feudal masters was clearly stipulated and visible; whereas capitalism does not look exploitative at all, since all labour is paid for, but workers perform more work than is embodied in their means of consumption and a surplus of unpaid labour is appropriated by capitalists.

 

Marx neglects altogether entrepreneurship, uncertainty and risk and their rewards: on that basis a positive share of profits is sufficient to infer exploitation, without the unnecessary detour of his labour theory of value.

The replacement and growth of fixed capital would be necessary in any mode of production (including socialism, Pareto 1890): exploitation should be restricted at most to capitalists’ consumption. But Marx regarded all profits, consumed or re-invested, as equally exploitative as originating in “primitive accumulation” ultimately rooted in theft, robbery, war, conquest and other forms of violence.

Inequality of wealth and incomes was recognised as a defining feature of capitalism. Its redeeming feature was the financing of investment and growth: “Accumulate, accumulate! This is Moses and the Prophets” (Capital, Vol,I, ch.24).

Marx modelled intersectoral flows and equilibrium conditions for a stationary and a growing economy in his schemes of simple and enlarged reproduction (with two vertically integrated sectors producing consumption and investment goods respectively). However he exaggerated the instability of a capitalist system by assuming that profits necessarily would have to be reinvested in the same sector in which they originated, while in any capitalist economy re-investment is never subject to such an arbitrary restriction (Lange 1970 amplified unreasonably this presumed instability of the system maintaining this undue sectoral restriction in a multi-sector model).

Marx regarded capitalism as a totally chaotic and anarchic system, naturally generating unemployed labour and under-utilisation of other resources, as well as costly fluctuations and economic crises. However he neglected automatic processes of economic adjustment, operating imperfectly, often either too fast or too slowly, but typical of the operation of markets in a capitalist system.

These automatic processes are: in the short-term, for a given level of production, the Walrasian adjustment of prices to any positive or negative excess demand; in the medium-term, when production levels can vary, the Marshallian adjustment of enterprise output to price relatively to its marginal cost; as well as the transmission to other sectors of the inputs requirements corresponding to their output change (activating what Goodwin 1949 calls “the multiplier as matrix”). In the longer term, when productive capacity can vary, there is a gradual adjustment of the actual capital stock to the level desired by enterprises in consideration of the demand level they experience - an upwards adjustment via investment in new capital or downwards through the non-replacement of excess capital. These adjustment processes are rooted in the maximisation of profit on the part of enterprises operating in a system of markets, whose owners appropriate profit to their own advantage. And we need to stress that these adjustment mechanisms auto-regulate production, prices, intersectoral transactions and productive capacity but naturally they do not regulate themselves as institutions (in a process that would amount to “autopoiesis”); thus their creation, regulation and guarantee remain fundamental functions of the state even in a fully de-centralised market economy.

Goodwin (1947, 1951a and 1953) likens the adjustment mechanisms operated by markets to homeostatic mechanisms, such as for instance a thermostat, that records the actual temperature, compares it to a pre-fixed desired temperature and automatically activates heating or cooling systems in order to reduce the difference between actual and desired temperatures (see also Leijonhuvfud 1970).

This kind of logic is less cogent and much more controversial in the case of financial markets. Financial intermediation creates value by modifying the size, time horizon and riskiness of assets demand and supply, but their continuous operation is associated to phenomena of both euphoria and panic. Financial markets contribute to economic growth at the cost of a greater vulnerability and potential instability. Keynes believed that financial investment should be indissoluble like marriage (or better, we should say that investment divorce should be equally costly and traumatic). Derivative products, whose value depends on the value of underlying assets, which they amplify and multiply, can contribute to the increase of total risk instead of its distribution among a large number of agents. This is why Buiter (2009) proposed to reserve derivatives transactions to agents who could justify them on the basis of an underlying insurable interest.

The alternative to markets seen as automatic thermostats is the manual regulation of temperature or of equivalent processes; manual control – in economic terms – corresponds to central planning. The desirability of self-regulating market mechanisms with respect to central planning depends on the speed of reaction of the system, on its tendency to reduce or to amplify the possible divergence between objectives and reality, from the stability or otherwise of such processes. There can be circumstances in which manual control (planning) is preferable to the automatic control (markets). My favourite example, which I used to inflict on my students, is taken from Star Wars: when Luke Skywalker is trying to strike at the heart of the Empire with a single shot, he disactivates the automatic aiming mechanism and choses to do it manually. But he is justified by exceptional circumstances: there is only one target, which he can either hit or miss without intermediate degrees of success, and ... the Force is with him.

The automatic adjustment processes discussed here, built into a market system, in spite of their imperfections have made the capitalist system more flexible, at the same time exposing it to the risk of possible episodes of much greater unemployment, instability and stagnation than would have been the case otherwise.

One of Marx’s main contributions to political economy is an evolutionary theory (“Darwinist”, according to Engels in his Speech on Karl Marx’s Tomb) of modes of production, understood in the modern sense of economic systems, as institutional setups that regulate the production and exchange of economic goods.

For Marx labour acting over nature leads to the development of production forces (natural resources, accumulation of physical and human capital, the state of technical knowledge). This development leads to the emergence of contradictions between the productive potential of society and the prevailing production relations (e.g. rules about ownership, production organisation, etcetera). Production relations then are modified as a result, in such a way as to eliminate such contradictions, realising the “law of the necessary correspondence of production relations to the character of productive forces” (Lange, 1963, ch. 2).

Further contradictions arise between the economic basis (or production relations) and the superstructure of society, understood as the social relations and social consciousness (religion, ideology, culture, etc.; Lange gives the example of the support to capitalism implicit in the protestant ethic), which contribute to the legitimation of the existing mode of production. Conflicts and contradictions between the various elements of the system and their resolution guide its evolution, according to the “Law of the necessary correspondence of the superstructure with the economic basis”. Productive forces and production relations define a mode of production, though at any time a mode of production coexists with residuals of former modes and embrios of the superstructure of future societies (Lange, 1963).

In his original approach to the evolution of economic systems, in any case, Marx made three major errors: he believed that: 1) there would be a final point of arrival for such an evolutionary course, i.e. full communism (with prevailing free goods, distribution according to needs, no state, and abundance of economic goods) without classes and therefore non-antagonistic, under which there would no longer be conflicts and contradictions; 2) there would be a linear progression of economic systems, from primitive societies to slavery to feudalism to capitalism (with a possible diversion represented by the Asiatic mode of production), followed by socialism and full communism; 3) that system evolution would be dominated by an extreme form of dialectical materialism, or economic determinism, with an exclusive role for economic factors. On the contrary we know today that full communism has always remained an objective never realised; that in the 1990s socialism was re-transformed back into capitalism, and moreover into an extreme form of hyper-liberal capitalism; and that economic factors are only a part, though important, of the multiple causes of system transformations.

One prediction that Marx did get right was the progressive relative immiserisation of the proletariat: while in absolute terms economic progress has raised living standards immensely and reduced poverty beyond the most optimistic expectations, in relative terms especially in this century the share of income and wealth of the rich has been increasing at unprecedented rates to record levels. According to Oxfam (2016) in 2015 the 62 richest individuals had increased their wealth by 44% with respect to 2010, matching the same total wealth of the poorest 50% of the world population, which on the contrary impoverished itself by 41% in the same period (in 2010 it took the 388 richest individuals to match the wealth of the poorest  50%).  Since 2008, the wealth of the richest 1% has been growing at an average of 6% a year – much faster than the 3% growth in the wealth of the remaining 99% of global population: should that trend continue, by 2030 the top 1% would hold two/thirds of world wealth, $305tn – up from $140tn today (The Guardian, 13/4/2018).

Reports of the death of both Marx and God have been grossly exaggerated.

Vladimir Popov: EU – Nationalism and Inequalities

I am grateful to Vladimir Popov of TsEMI, the Central Economics and Mathematics Institute of the Russian Academy of Sciences, Moscow, for contributing this guest post to our Blog as an extended comment on my previous post on Seismic Faults in the European Union.

Vladimir Popov on: EU – Nationalism and Inequalities

             “Imagine there's no countries ... And the world will be one.

             It may happen, if the current rise in inequalities is reversed.

Mario Nuti predicts new difficulties for the EU and believes Lenin was right, when stated that United States of Europe are either impossible or reactionary (post of January 8, 2017).  He may well be right, as he has been so many times, but I wish he wasn’t.

In the EU for the first time in history member countries voluntarily decided to eliminate borders – a dream of many since ancient times. It was by the way also one of the staples of the communist ideology – nations eventually, after the full victory of communism, will merge, borders will disappear, a brotherhood of men will share the whole world.  As the best poet of Soviet era Vladimir Mayakovsky put it,

“For we want this world to be a common earth

Without Latvias and without Russias”.

Many of those born and raised in the USSR cherish this dream and admire the EU that seemed to have been able to achieve this goal without coercion and violence. It would be most regretful, if EU project will not succeed.

This is the moral argument in favor of the EU that does not prove, of course, that Mario is wrong. Many inevitable trends may be undesirable for large groups of people. Below, however, are some “hard core, material” arguments, why current centrifugal forces in the EU and the world may be only a temporary phenomenon.

Nationalism and inequalities

Conservative politicians all over the world have recently spoken against globalization. As former French Prime Minister Dominique De Villepin put it recently, ”globalization, on the one hand, promotes cooperation, on the other hand, brought new mutual exclusion, isolation and radicalization”. And Donald Trump wants “Americanism, not globalism”.

It would be wrong, however, to blame globalization for all the disasters and misfortunes, from non-growing real incomes to the rise of nationalism. History does not repeat itself, but it rhymes. Those who blame globalization today for economic and social misfortunes are similar to the luddites of the XIX century that believed that the use of machines leads to the rising unemployment and falling wages. 

There are cases when globalization works leading to rising incomes of the masses. Theoretically greater international flows of goods, ideas and technology, capital and labor should increase productivity, but in reality this happens only if these flows are carefully managed (Popov, 2014, Chapter 5)..

Why in some countries greater economic interaction with the world was accompanied in recent several decades by rising income and its relatively even distribution (China and other East Asian countries), whereas in other countries modest growth of income coupled with rising inequalities left large masses of  population worse off (many Western countries, including the US, Eastern Europe and former Soviet Union)? The answer is that policy matters a great deal and many good policies that allow gaining from globalization are often non-orthodox and counterintuitive (Polterovich, Popov, 2005). If globalization is accompanied by the increase in income and wealth inequalities within countries, so that gains from globalization are appropriated by the few better off, whereas the masses get nothing or very little, it is only too easy for the interested political forces to blame globalization for the negative developments.

The central argument of this post is that the reversal of the previous trend towards the decline in income inequalities in the last three decades in most countries created favorable grounds for the rise of nationalist and anti-globalization feelings (Popov, 2016). Lindert and Williamson (2016) claim that income inequalities breed populism and attribute the rise of inequalities to globalization (especially in the two periods of American history – Gilded Age of the late 1800 and recent three decades since the 1980s). My argument is that income inequalities indeed contribute to the rise of populism and nationalism, but that globalization does not necessarily lead to the rise in inequalities.

Trends in nationalism are explained, among other factors, by both between the countries and within the countries inequalities. If the gains from globalization are distributed evenly, the public is willing to embrace it, but if the gains are appropriated by few, it is easy for nationalist political forces to turn the public against globalization.

Hence, there are several globalization models, depending on the trend in inter and intra- country inequalities in recent three decades:

·        Great gains from globalization for the country as a whole and relatively small rise in within the country inequalities (Japan, China, SEA, Scandinavian countries, the Netherlands);

·       Small gains from globalization for the country as a whole, but decline in domestic inequalities (some LA countries, including Brazil);

·       Large gains from globalization for the country as a whole, but increase in domestic inequalities (Britain and some continental European countries);

·       Small gains from globalization for the country as a whole and increase in domestic inequalities (US, Russia in the 1990s).

The worst conditions for the rise of nationalism would be in the first group of countries, the best – in the last, fourth group, with the 2^nd and 3^rd group falling in between.

The rise of nationalism in recent decades in the EU and many other countries seems to be associated with the increase in within the country income inequalities. In some countries income inequalities did not increase and nationalist and anti-globalist feelings are more related to the slowdown of growth and other reasons, but in most countries there was an increase in income and wealth inequalities since the 1980s – a reversal of the trend of over 50 years that created a fertile ground for rise of nationalism (Popov, 2016).

Recent trends in income inequalities in EU

The fall of the Berlin Wall, collapse of the USSR and the conversion of Eastern Europe and former Soviet republics to capitalism, added additional push to the growing income inequalities trend due to both – the disappearance of “socialist counterbalance” for the Western capitalism and the rise in inequalities in the transition countries of Eastern Europe and former Soviet Union themselves (Jomo, Popov, 2016).

In most European countries income inequalities increased since the beginning of the 1980s – the reversal of the trend that predominated since early 20^th century (fig. 1). This increase in inequalities may be the single most important reason for the rise of nationalism. In Eastern Europe there was a transformational recession of the 1990s associated with the transition to the market economy – output fell by 20-50% in the course of 2-5 years (Popov, 2000), which certainly contributed to the rise of nationalism. But in Western Europe there was no major recession (except for Greece). Even though economic growth was not very strong, it was  rather stable, recessions of 1993 (per capita GDP fell by 0.4%), 2009 (-4,7%) and 2012-13 (-0.4%) were overcome and average incomes, unlike in the US,  by 2016 were way higher than in the 1980s. However, the progressing unevenness in income distribution undermined real incomes and social status of large groups of European population making them an easy target for the nationalist politicians.

Britain may be the case in point. The rise in nationalism is often explained by unfairness and humiliation experienced by the whole nation (for instance, Germany after the First World War or developing countries where costs of globalization are often higher than benefits).  In Britain, however, the recent rise of nationalism did coincide with the relatively successful economic development and with the improvement of its economic positions versus the major competitors. Britain was falling behind continental Western Europe in terms of its per capita income and this trend was reversed only a decade after Britain entered the EU (fig. 2).

However. only a minority of the population benefited from the acceleration of economic growth since the early 1980s – income inequalities increased (fig. 1) and so did wealth inequalities (fig. 3).

From the point of view of economic efficiency and future growth, Brexit is bad for the EU and especially bad for Britain. But the majority of British voters apparently blamed economic difficulties not on policies that allowed inequalities to increase, but on the European integration and globalization.

Future

There may be at least two scenarios for the EU and the world. First, if the rise of income inequalities would continue, social tensions in some countries will become unbearable and will produce a social turmoil and anti-globalisation, nationalist sentiments. And the rise of nationalism may lead to conflicts, if not wars, between countries, with the collapse of the international trade and capital flows, like in the 1930s. Then the world may once again get into the familiar 20^th century historical track and there may be a pause in or even the reversal of globalization, like during the Great Depression, when the outburst of protectionism led to the decline of the international trade and capital movements. This is the worst scenario: the world degrading into social and national conflicts.

Second, countries that carry out successful policies of limiting inequalities would become more competitive, driving other countries “out of anti-globalisation business”. Even small countries, if they are successful, may create a counterbalance through the demonstration effect to the tendency of unconstrained capitalism to cut welfare programs and increase inequalities. These countries may regulate the functioning of the market mechanisms through direct interventions and high progressive taxation to reduce bubbles and windfall profits. Besides, the crucial way of lowering inequalities is public and collective property, so it could be expected that state enterprises, non-profit institutions, labour managed enterprises and coops, operating not for profits, but for public good would become more common. Such a more optimistic scenario implies that social upheavals within countries and national conflicts between countries could be largely avoided. EU in this case would have a bright future.

References

Facundo Alvaredo, Anthony B Atkinson, and Salvatore Morelli (2016). Top wealth shares in the UK over more than a century, Working Papers Department of Economics Ca’ Foscari University of Venice No. 01 /WP/20.

Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez (2012). ‘The World Top Incomes Database’, http://www.wid.world/#Introduction

Jomo, K.S., V. Popov (2016). Income Inequalities in Perspective. Develoipment, No. 2, 2016.

Lindert, P. and Jeffrey Williamson (2016). Unequal Gains: American Growth and Inequality since 1700. Princeton University Press, 2016.

Maddison project (2013). http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

Polterovich, V., Popov, V. (2005). Appropriate Economic Policies at Different Stages of Development. NES, 2005 - http://www.nes.ru/english/research/pdf/2005/PopovPolterovich.pdf.

Popov, V. (2000). Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession) – Comparative Economic Studies, Vol. 42, No. 1, Spring 2000, pp. 1-57 (http://www.nes.ru/%7Evpopov/documents/TR-REC-full.pdf);

Popov, V. (2014). Mixed Fortunes: An Economic History of China, Russia and the West. Oxford University Press, April 2014.

Popov, V. (2016). Is Globalisation Coming to an End Due to Increase of Income Inequalities? -  MPRA paper №73094 , August 2016.

World Wealth and Income Database. http://www.wid.world/#Database:

Mario Nuti’s reply:

I agree with Vladimir that a world without borders would be very attractive, as a realisation of both human freedom and economic efficiency. However it is no accident that it was part of communist utopia only after the expected universal diffusion of communism. For a world without borders involves - as I pointed out in my previous post - global communism in access to national social capital (however defined, whether as physical infrastructure, social cohesion and trust, or welfare state institutions and provisions). This is neither feasible nor desirable nor sustainable in a world where private ownership is globally prevailing and fully protected. I take it that Vladimir would not support unrestricted full communism – in the sense of abolition of both private and national social property – on a global scale or even in a single country or just in the European Union. I regard Vladimir’s unconditional endorsement of the Schengen Area abolition of internal borders (and neglect of external ones) not as a cogent argument in favour of a world without borders but merely as evidence of his generous nature.

I particularly like Vladimir’s characterisation of the relationship between globalisation and inequality, with his four country cases: (a) large gains, small rise of inequality; (b) small gains, inequality decline; (c) large gains, [significant] rise of inequality; (d) small gains, inequality increase. The first case would make people approve of globalisation; the last case would be associated with strongly nationalistic, anti-globalisation feelings and policies; while the two intermediate cases also would be somewhat nationalistic and anti-globalist but to a lesser extent. And at the global level, I would add even more positively and forcefully than Vladimir, globalisation has halved the incidence of poverty in the last twenty years – lifting hundreds of millions of Chinese from starvation to obesity – and achieved the reduction of inequality among the citizens of the world.  

However, globalisation, including migrations, does not lead to “gains … appropriated by the few better off, whereas the masses get nothing or very little benefit”, as Vladimir conjectures. It does yield net benefits, as I readily recognised, but it actually makes a non-negligible number of people worse off. In theory we can imagine a redistribution of gross gains to gross losers so as to make everybody better off - which is how Vladimir would be able to achieve a win-win situation. But such Paretian redistribution is not possible, because it would have to be international and/or regressive. International redistribution is presently impossible for lack of political globalisation, i.e. global governance by institutions capable of global taxation and expenditure. Regressive redistribution from gainers who tend to be poorer to losers who tend to be richer would be undesirable, as I trust Vladimir would agree.  

And even if everybody gained from globalisation, inequality in the distribution of gains would legitimise some opposition to unrestricted, raw globalisation. Vladimir’s comparison with the Luddites is very apt, but with opposite implications with respect to the one he draws: technical progress in the early 19^th century (and today’s automation) also yields net benefits but makes some people worse off, just like globalisation and migrations, therefore justifying – unless there was compensatory income redistribution from gainers to losers – resistance and even forceful opposition by the losers.

The dividing line between populism and democracy is very thin. It is no accident that today we talk of right wing and left wing populism. "The accusation of populism can easily become an instrument to maintain and extend the power of oligarchies, and their influence on public life and decisions, reducing any protest attempt from below to irrationality or intellectual or moral laziness.  Anti-populism therefore can become a weapon in the hands of the élite, a weapon that jeopardizes the essence of democratic coexistence. While populism, if properly articulated, may be useful to democracy" (my translation from Lorenzo Del Savio e Matteo Mameli, "Il populismo è democratico: Machiavelli e gli appetiti delle élite" 2014), whose conclusions are based on a recent debate on Machiavelli's theses in his Discorsi sopra la prima deca di Tito Livio. http://ilrasoiodioccam-micromega.blogautore.espresso.repubblica.it/files/2014/02/machiavelli-populismo.pdf.  Though growing support for populist parties is also due to non-economic factors, such as the feeling of marginalisation, of a falling standing in society, of having lost control over one’s condition, determined by the establishment élite; there are also cultural, ethnic and religious diversities coming into play. When these factors determine electoral choice there is no reason to dismiss the results as expression of populism instead of an integral part and parcel of a democratic system.

Vladimir offers two alternative visions of the future. A pessimistic scenario involves rising inequalities and anti-globalist policies, the rise of nationalisms with possible commercial or even hot conflicts, a pause or even reversal of globalisation. An optimistic vision, favoured by Vladimir, involves the containment of inequality, the restoration of the welfare state funded by progressive taxation, the build-up of public and collective enterprises (including self-managed non-profit cooperatives). “The EU in this case would have a bright future” – he writes. Unfortunately there are other fault lines in the EU today, which I tried to spell out in my post and are left unscathed by Vladimir’s reflections, which do not alter my fundamental pessimism.