Marx vs capitalism vs you

It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.

In particular, it highlights the imbalance between capital and labour, a perennial obsession of the Marxists, of course:

The full cash value of today’s product can therefore be realised only with the assistance of money advanced against commodity values yet to be produced. ‘The surplus value created at one point requires the creation of surplus value at another point,’ as Marx put it in the Grundrisse. How are these points, separated in space and time, to be linked? In a word, through the credit system, which involves ‘the creation of what Marx calls “fictitious capital” – money that is thrown into circulation as capital without any material basis in commodities or productive activity’. Money values backed by tomorrow’s as yet unproduced goods and services, to be exchanged against those already produced today: this is credit or bank money, an anticipation of future value without which the creation of present value stalls. Realisation (or the transformation of surplus value into its money equivalent, as profit) thus depends on the ‘fictitious’.

There has certainly been an excess of “fictitious” capital created over the last two decades, far more than Marx, or anyone else, could have anticipated. Money made out of the money made out of money. $600 trillion of derivatives. High frequency trading insanity with trades reduced to micro-seconds. As Adam Curtis observes in his excellent documentary “All Watched Over by Machines of Loving Grace”, the heart of the insanity has been the belief that systems run by machines are inherently more stable than systems with humans at the centre. This has greatly skewed the system towards the egregious self interests of capital, as against labour. Curtis lays much of this greed at the feet of Ayn Rand and Alan Greenspan.

Now before I get a knock on the door from grey suited men asking me “Are you, or have you ever been, a member of the Communist Party?” I should explain that I regard Marxism as wicked, directly responsible for some of the worst horrors of the twentieth century. I have many other objections to it, which I will come to later. There is, however, a difference between Marxism and what Marx wrote. And there is a difference between Marx’s critique of capitalism, which has some prescience and relevance, and Marx’s political prescriptions and revolutionary impulses, which were riddled with contradictions and, in practice, wholly pernicious.
The value of applying what Marx wrote is an identification of an imbalance between capital and labour:

So, as The Limits to Capital implies without quite stating, the special allure and danger of an elaborate credit system lie in its relationship to class society. If more capital has been accumulated than can be realised as a profit through exchange, owing perhaps to ‘the poverty and restricted consumption of the masses’ that Marx at one point declared ‘the ultimate reason for all real crises’, this condition can be temporarily concealed, and its consequences postponed, by the confection of fictitious values in excess of any real values on the verge of production. In this way, growth and profitability in the financial system can substitute for the impaired growth and profitability of the class-ridden system of actual production. By adding over-financialisation, as it were, to his model of overaccumulation, Harvey means to show how an initial contradiction between production and realisation later ‘becomes, via the agency of the credit system, an outright antagonism’ between the financial system of fictitious values and its monetary base, founded on commodity values. This antagonism then ‘forms the rock on which accumulation ultimately founders’. In social terms, this will take the form of a contest between creditors and debtors over who is to suffer more devaluation.

This is basically what is wrong in the developed world. There needs to be a balance between wages and investment returns for the system to function well. Henry Ford paid his workers well not because he was a generous man, but because then they could buy Fords. Globalisation has, of course, undone this compact, and although it has led to some productivity improvements, it is also having the effect of gutting the middle classes in the developed world. In Europe it is seen in the shape of unemployment, in America, the same as well as in the shape of rising poverty and the evaporation of the middle class.

Now, one does not have to be a Marxist to arrive at these conclusions. But Marxism (as opposed to what Marx wrote) resulted in the demonisation of markets, a perfectly normal human activity that goes back 3,000 years, give or take a century. In response, capitalism (whatever that is exactly) felt the need to overstate the value of markets, producing the kind of market worship we now see. Each position is absurd. Marxism has largely collapsed from its own contradictions. Capitalism is on the way to doing the same because when market worship is applied to financial systems, it produces the kind of endless regresses we are now seeing.

Kunkel does point out that some more mainstream analysts have noticed the problem:

Paul Krugman, discussing Roubini’s book in the New York Review of Books, agreed with him that what Ben Bernanke called the ‘global savings glut’ lay at the heart of the crisis, behind the proximate follies of deregulation, mortgage-securitisation, excessive leverage and so on. Originating in the current account surpluses of net-exporting countries such as Germany, Japan and China, this great tide of money flooded markets in the US and Western Europe, and floated property and asset values unsustainably. Why was so much capital so badly misallocated? In the LRB of 22 April 2010, Joseph Stiglitz observed that the savings glut ‘could equally well be described as an “investment dearth”’, reflecting a scarcity of attractive investment opportunities. Stiglitz suggests that global warming mitigation or poverty reduction offers new ‘opportunities for investments with high social returns’.

The neo-Keynesians’ ‘savings glut’ can readily be seen as a case of what a more radical tradition calls overaccumulated capital. But it is the broader and more systematic Marxist perspective that ultimately and properly contains Keynesianism within it, and a crude Marxist catechism may be in order. Where does an excess of savings come from? From unpaid labour – for example, that of Chinese or German workers. And why would such funds inflate asset bubbles rather than create useful investment? Because capital pursues not ‘high social returns’, but high private returns. And why should these have proved difficult to achieve, except by financial shell-games? Keynesians complain of an insufficiency of aggregate demand, restraining investment. The Marxist will simply add that this bespeaks inadequate wages, in the index of a class struggle going the way of owners rather than workers.

One of Marx’s advantages is that his notion of labour value at least puts humans at the centre of a human system. Which is better than putting “Machines of Loving Grace” at the centre of the system, which is the habit in much neoclassical thinking. But of course investors are human as well. And removing markets, as was done in the Soviet and Chinese horrors, is to remove basic humanity.

One key is to re-establish the interests of labour, probably in some collective form. That is the message of the Occupy Wall Street movement. For some reason, greed for executives and investment bankers, is simply pursuit of the right “incentives”, whereas comparatively modest wage claims is a tyrannous lurch into socialism, to be resisted at all costs. It is hard not to see this as some kind of contemporary class war; certainly it is disgusting hypocrisy. And it is destroying the middle classes in developed economies, which will have dangerous political consequences.

What is becoming clear is that new limits have to be placed on capitalism and some aspects of markets:

The classical economists long ago foresaw that an economy defined by constant expansion would one day give way to what John Stuart Mill called the ‘stationary state’. The idea has gained a new currency in Marxist writing of recent years, and in its contemporary version tends to locate the limits to growth in the depletion of natural resources or in the exhaustion of productivity gains as the share of manufacturing in the world economy shrinks and that of services expands. Of course, peak oil or soil exhaustion might easily coincide with faltering productivity. Harvey doesn’t spell out why growth must have a stop, and the outlines of an ecologically stable and politically democratic future socialism remain as blurry in his later work as they do almost everywhere else. At the moment Marxism seems better prepared to interpret the world than to change it. But the first achievement is at least due wider recognition, which with the next crisis, or subsequent spasm of the present one, it may begin to receive.

I do not agree with Kunkel that Marxism may come into its own. To me, it is just the flip side of the same appalling coin. Marxism has its roots in German idealism (Hegel) which I think we safely blame for fascism as well. Its horrors were no accident.

Both Marxism and capitalist theory are deeply materialistic; which inevitably rules out the human (matter cannot explain humanness, it is just matter). So no surprise that each propose some kind of tide of history argument as being inevitable (deregulation and “free” markets in the case of capitalism).

Both are quasi scientific, and so at once intellectually hollow and subject to the kind of scientific materialism that easily leads to letting machines rule over people. Both use unfalsifiable arguments; typically circular arguments in the case of capitalist economic theory, and dialectics in the case of Marxism that result in contradictions like the claim that there is only the bourgeois and proletariat (a claim that defeats itself as soon as anything changes, given that there are only two possibilities).

A nice matching set of intellectual barbarisms, in other words. Maybe in the current crisis conditions, we might start to get some intellectual grown ups emerging. At the very least, there needs to be close attention given to the balance of labour and capital, and limits must be set on fictitious capital. Another enemy is tiredness, intellectual exhaustion, as GK Chesterton observed:

Man does not necessarily begin with despotism because he is barbarous, but very often finds his way to despotism because he is civilised. He finds it because he is experienced; or, what is often much the same thing, because he is exhausted.

I was talking to a finance academic recently who said it was virtually impossible to get anything published academically that questioned the assumptions of the system; only mathematical analyses based on the the accepted assumptions ever see the light of day. A similar monochrome uniformity is evident in the economics mainstream. It is intellectual despotism, and it arises out of exhaustion.

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    • And pre-GFC a lot of people (including me, I must confess), would have regarded this increase in credit as merely households exercising their new-found economic ‘freedom’, without linking it to the stagnation in real household income….sigh

    • Whenever this subject comes up I post this link. One of the best presentations around on the Coming Collapse of the Middle Class. Well worth a look.

      “Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America’s credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class. Series: “UC Berkeley Graduate Council Lectures” [6/2007] [Public Affairs] [Business] [Show ID: 12620″

      Perhaps the neo-liberal model of globalisation has run its course – relentless pursuit of profit has served many corporations well and has served consumer well too, offshoring production to cheap labour ensuring the rapid development of emerging economies (China) and a plethora of a cheaper product for developed economy consumers, repressed wages in most areas of developed economies (necessary to compete on global level) eventually requiring dual incomes to service cost of living, increasing reliance on credit for day to day consumption and significant property speculation until the middle class were maxxed out. The dominoes start to teeter, then fall. Indebtedness, income stagnation (decline in real terms), subdued consumers, falling property values, businesses shedding staff and the downward spiral begins.

      Have neo-liberal economic principles ensure the end of neo-liberalism?

      • Fabulous Video. Thank you for sharing. Unfortunately, there are many similarities between with what is happening in the US, with what is happening here at home and many other countries around the world including emerging nations – they’ve caught up with this affliction faster than expected .All around the world, people are on the”Debt thread mill” and with real income falling, the duration of our debt enslavement can only be pro-longed.

        We are seeing one last push from the neo-liberals. The vested interests and their crony central bankers are racing to the bottom of the interest rate barrel in order to maintain the current credit bubble.

      • Excellent video, thanks. For what it’s worth, I think any system of human organisation will self-destruct over time, unless it is somehow monitored and renewed, given our inherent tendency to try and ‘game’ each other for maximum advantage.

      • great video by elizAabeth warren. Thank you.

        Margaret Thatcher has a lot to answer for with her aphorism that there is no such thing as society, only the individual.

        We need a safety net, especially for health, education and income protection. Anything else is just mean and a denial that life can deal some people very cruel hands.

        • Yes but every single person who has denied her aphorism concerning the problem with socialism (eventually you run out of other people’s money), has just as much to answer for. Indeed, Europe is answering for it right now.

          Safety nets are great, unfortunately you need money to pay for them (and cheap credit derived from a newly formed currency union does not count).

  1. The BurbWatcherMEMBER

    Nice post, SoN – I do like reading your stuff, as it is more down my alley (philosophical, bordering on Theological).

    In fact, truly, IMHO, one’s Theology/Worldview (whether it involves a deity or not, they are essentially structurally identical) determines the way one wields a notion – say, Capitalism or Socialism, or whatever.

    Hence, it is not the notion/system that is the problem – it is the application of the Worldview to the system (as the Worldview is “bigger”, more fundamental than the system of interest).

    So, the “failure of a system” is not, per se, the system’s fault necessarily, but the incompatibility of the system with the Worldview/Theology. That is, the system itself is, really, an arbitrary notion powered and driven by one’s Worldview.

    Too often, we blame the system – but if the Worldview is the core issue, and we each choose our own Worldview (either consciously or unconsciously), then who, really, is to “blame”?

    The answer is: Ourselves; our own choices; each on of us individually; big or small; rich or poor; powerful or weak.

    Hence, systems fail because we each wield them faultfully, in accordance with our chosen Worldview.

    And if the root of how we choose to wield the system is our Worldview, from which comes our Value System, then the failure of a system says more about our Worldview – and, hence, our choices – than it does about the system!

    That is, Worldview is at the core of a system’s success.

    My 2c

    /end philosophical/theological discussion 😉

    • Got to say I think you have got things completely arse about. A person’s world view is a model of reality they construct in their head to make sense of the world. Like all models, it falls far short of reality. This is why we should be humble and sparing in our criticism of those we disagree with; our model is certainly wrong, and quite likely just as wrong as theirs.

      “All models are wrong, but some models are useful.”

      • The BurbWatcherMEMBER

        Alex, thanks for you reply.

        We agree on what a Worldview is, roughly, it seems, but seem (implicitly, by your response) to disagree on its significance.

        My perspective on Worldview is that, like you said, it is someone’s “model of reality”, but that, being such, it is the springboard from which all other views on anything and everything arise from.

        Expressed otherwise, with one’s view of reality including what one believe’s about oneself, people, the world, the universe, all past and present, there is nothing so basic as one’s complete (even if only general) notion of what reality is and is not.

        This is truly the highest level of thought for people, and is held as the most very deep, and from it spring all other thoughts and beliefs about anything and everything. And, that, ultimately, all such of those most basic “Fundamentals” are chosen by the individual, whether wittingly or unwittingly.

        This is what I personally mean by “Worldview”.

        I hope that helps to make better sense of what I initially wrote.


        • I also find it interesting to try and catch the wide picture.
          We each have our own particular worldview. Added together we have a collective average worldview.
          Each worldview sits on a continuum.
          One’s evolutionary progress will determine where one is on that continuum.
          Any one individual may be far in advance of the collective average, or far behind.

          What is ‘important’ is sensed by one’s inner realm. A valuable ‘it’ is ‘imported’ so to speak and then sensed or known to oneself as of value.
          Have you ever wondered by the word ‘exportant’ does not exist? 🙂

  2. Firstly, Marx was wrong about the share of gains in productivity that would fall to “Labour” rather than to “Capital”.
    The best work I know on this, is “Sharing the Wealth Generated Between Work and Capital and Its Evolution”
    By Remy Prud’Homme.

    You need to Google Search it and then use “Google Translate” to change it from French into English. It is extremely enlightening.

    Secondly, you are right that Marxists and free marketers are both culture blind. Our irrational modern culture has a lot to do with the crisis we are in. 2 generations ago, this would never have happened. One problem is that “capitalism” is a victim of its own success – too many people now are just clever enough to make enough money to “invest”, but not wise enough to evaluate “too good to be true” investments.

    The free market has not failed, it just transmits human action into results. Interfering with the mechanism never works. Humans need to learn lessons the hard way and not repeat their errors. Bailouts are a massive moral hazard. In any case, the crisis is covered with the fingerprints of government interference, eg in mortgage subsidies, urban planning, central bank monetary looseness, etc etc. We really do not HAVE a “free market”.

    • Phil, I Googled this as you suggested, but couldn’t find the article. Even looked at Remy Prud’homme’s own website, but it wasn’t listed there either.

      Any chance of a more direct link?

      • It sure isn’t easy to get to…..!

        The only way I can find, is via a Google search:

        Go via “Translate this page”, under Prudhomme’s site
        “Accueil – Site de Rémy Prud’homme”

        This brings up his page in English. Go to the “Publications” page, and you will find the paper about halfway down. – Prud’homme, Remy. 2010. “The sharing of the wealth produced between labor and capital”. Comment. No. 128, Winter 2009-2010. Pp. 945-953

        Trying to post direct links to a Google-translated document is fraught with difficulty. Someone really should get this on the internet, in English, easily accessible.

  3. Marx (and Henry George) were partly right at the time they lived, about the land owning class capturing an unfair share of the gains in productivity and wealth creation. This is because rising incomes do capitalise into the cost of rents when urban land supply is unable to grow fast enough to stop the land owning interests cornering it. It is actually “automobility” and “sprawl” that created the conditions for housing affordability, the democratisation of urban land ownership, social mobility, and rapidly rising productivity (due to land being substituted for labour and capital as appropriate).

    We are going back on this now, with our “anti sprawl” policies. But this time the land owning constituency is numerous and those being gouged are a minority – the young. These anti sprawl policies are a necessary precondition for the finance industry to exploit the young with “creative lending”.

    Henry George was especially right to point out that “Labour” makes a big mistake to be in a constant state of war with its employers; when the mutual enemy of them both, is the finance sector and the land owning sector. One of the worst things we ever did, was introduce taxes on company profits before distribution as income to anybody. This provided a massive boost to the finance sector, as companies needed to borrow money to grow, having had their trading profit taken off them.

    Anti sprawl policies have also hugely benefited the finance sector and the land owning sector. These are also a prime reason for rising inequality. The London School of Economics has comprehensively proved this after 60 years of anti sprawl policies in Britain. Check out papers co-authored by Prof. Paul Cheshire.

    • “One of the worst things we ever did, was introduce taxes on company profits before distribution as income to anybody. This provided a massive boost to the finance sector, as companies needed to borrow money to grow, having had their trading profit taken off them.”

      Yes, the inevitable distortions courtesy of the law of unintended consequences.

      Payroll tax is the most hilarious. A tax on employment itself, no less.

    • ” One of the worst things we ever did, was introduce taxes on company profits before distribution as income to anybody. This provided a massive boost to the finance sector, as companies needed to borrow money to grow, having had their trading profit taken off them.”

      Aren’t taxes levied on profits *after* expenses ?

      • Company Taxes are levied on net profits, sorry if I used the wrong terms. My point is that they are taxed BEFORE they are either re-invested in the company or distributed as dividends or earnings to the owners of the company.

        This means that a proportion of the profits that every company needs to use to grow, they had to get via the finance sector, once governments introduced this tax. This is a classic illustration of “labour” dominated politics failing to recognise that both labour and its employers are hurt by policies that put the finance sector in a stronger position versus productive businesses. Company tax is the CLASSIC “spite tax”.

  4. Interesting attempt to explain our current economic predicament. Not so sure about this reasoning on credit. I have seen much more debt taken on by speculation (such as property) more than anything else. Where debt is driven by lack of sufficient income, such as payday lending, the sums are vastly smaller. In aggregate, there is far more mortgage debt than other forms of debt. How would you explain this with Marx’s ideas?

    Further, I would regard executive pay an aberration of capitalism. Believe it or not, CEOs are just hired labour. It is the divorce of capital from their owners via compulsory super that allowed this small class of specialized labour to abuse their position of power to reward themselves more than their due. AICD is nothing more than a labour union. I believe the DIY movement will reconnect capital with their owners and fix this flaw.

    Leaving aside a possible imbalance in the distribution between capital and labour, unemployment can be eliminated at once, if all labour, inclusive of CEOs, take a small pay cut and allow that income to employ those unemployed (assume they would like to work). Therefore unemployment is as much attributable to selfishness within labour as to the greed of capital. Who has been willing to confront this simple truth?

    Besides, capitalism had a natural cure called “recession”. In a recession, all players are more willing to accept their due share of losses, thus allowing the system to re-balance and move on. Now, through the abuse of the credit system, the postponement of many small self-healing corrections has resulted in a giant crisis.

    Time has arrived now for everyone to accept their now much bigger losses. There is no escape.

    • “It is the divorce of capital from their owners via compulsory super that allowed this small class of specialized labour to abuse their position of power to reward themselves more than their due.”

      You’re blaming super for excessive executive pay? How does that explain the US, where it’s 10x worse?

      • I am misunderstood. I am not blaming super, but the way super is managed. Hence I hope DIY can eventually reconnect owners with their capital.

        In the US, the mutual fund industry played the role of separating capital from their owners.

    • “Leaving aside a possible imbalance in the distribution between capital and labour, unemployment can be eliminated at once, if all labour, inclusive of CEOs, take a small pay cut and allow that income to employ those unemployed (assume they would like to work). Therefore unemployment is as much attributable to selfishness within labour as to the greed of capital. Who has been willing to confront this simple truth?”

      Simple truth?

      To suggest that capital and labour can be so easily distinguished is testament to the need for this conversation to evolve.

      Selfish labour = capitalist greed when we’re all working to pay out the loans for the shares we bought in order to not have to work anymore…

      …and if we all took a paycut at work, we’d probably just end up with a bigger return on our investments. Meanwhile, my unemployed neighbour is still out looking for a job.

  5. Nice post SoN. Fundamentally what makes people happy? Something to eat, something to do, something to make them feel valued and heard. Civilisation fared pretty well for 10,000+ years before either side of the Marxist/capitalist spectrum tried to impose a ‘system’. Interesting to compare the failure of communism 20 years ago with the current times and the ‘failure’ of capitalism. I absolutely, wholehartedly agree that things like HFT fall into that giant slop bucket of societal WTF.

    Our ‘systems’ need a re-think, along the lines of keeping things simple. Going down a complex route leads to all kinds of nonlinearities, hidden agendas and dis-motivators that end up kicking us all severely in the behind.

    • “Civilisation fared pretty well for 10,000+ years ”

      Sure, if you consider stratified societies with massive inequalities and borderline slavery where it wasn’t actual slavery as ‘faring pretty well’… For the average person, the industrial revolution made a huge difference to being able to break out of the “caste” into which they were born.

      Marxist or the capitalist schools of thought came about, to my mind, as a way to explain the evolution of economic relationships rather than seeking to impose a doctrine – what happened afterwards isn’t necessarily the fault of the progenitors of either model, but more the outcome of attempting to apply an imperfect model onto an imperfect populace. That is, to use the terms from the article above, trying to force-feed humans into a machine model that attempts to define outputs for given inputs.

      So while I don’t agree that cilivisation fared “pretty well” for 10,000 years, and I don’t think Maxism or the capitalist model changed the course so much as the broader industrial revolution, I do agree that the system needs a rethink – but I don’t think we can avoid complexities by trying a simple model/system that doesn’t acknowledge the fact that complexity exists and it must be addressed.

      • Fair enough comments Karan. I’m not suggesting we avoid complexities, I’m saying most of the time it’s us that put them there in the first place. Certainly the complexities of human nature can’t be engineered out of any system, I guess the issue is that all things we impose assume we understand how humans work, and we either don’t, or there is no magic system to deal with ourselves…

    • and this 1% provides the narrow range of opinions/frameworks/theories with which we deal with the economic world.

      They funded the think-tanks that helped get us into this mess.

    • Hey Karan,

      I had a look at the list of companies and most appear to be custodians. It would be fascinating to find out the underlying client(s) who are the ultimate beneficiaries.

      I enjoy your insights.

  6. I think the new work will come from integrating ‘green’ issues. Lots of work about how to value those ‘externalities’ which goes well beyond human labour.

  7. Great post!

    Where does an excess of savings come from? From unpaid labour – for example, that of Chinese or German workers. And why would such funds inflate asset bubbles rather than create useful investment? Because capital pursues not ‘high social returns’, but high private returns.

    Ahhh.. the paradox of grift?

  8. The “fictitious capital” is a product of socialism and not capitalism.

    Capitalism is not a system with central banks and fractional reserve. Under capitalism, banks that practice the fraudulent act of fractional reserve lending will be out of business and sound banking is the only model that can survive.

    Under capitalism, there are no bailouts, no TARP, no ETSF, no money printing, no central banks, no QE1, QE2, no Fannie Mae or Freddie Mac, no SEC or credit rating cartel etc etc.

    So as a proud supporter of capitalism, I do not see the current system as a free market.

    • So, you see the Wall Street and the government bail out of it as a socialist creation? Which of the two governments was socialist, George Bush’s or Obama’s, because they both bail out Wall Street?

      Do you understand how the competition on the free market works? It eliminates the weak competitors and slowly accumulate more capital in less companies. The cause is simple: everyone on the market dreams and works to establish monopoly, but all of us together we are against the monopoly. At the end the more powerful wins. That is how historically from maybe millions of companies, which were price takers today we ended with around 50 global corporations, which are price makers or 1% of the population owing 40% of the global wealth. This is capitalism and if you don’t support it, it is because you have an outdated view about the world.

      • Lori, I think you should ask yourself two questions: how many of those 50 global corporations were even in existence 100 years ago? And how many will be in existence in another 100 years? Once you have answered these questions, I think you might realize that monopolies tend to be extremely unstable and cannot last. Companies that get too big tend to succumb to their own organizational inertia. Smaller, more nimble competitors overtake them. They price themselves out of markets, or the market discovers cheaper substitutes. This is the essence of capitalism.

  9. With all due respect to the laureates and Mr Bernanke, while the proposition that “Chinese, Japanese or German” money funded the sub-prime bubble is superficially appealing, we know it is false. For a start, money has no nationality: it simply flows and exists only in the abstract. But beyond this, we also know that the flow of money is initiated with the creation of assets (loans) by banks. Simultaneously with the creation of a banking asset, a reciprocal bank liability (a deposit) will be created elsewhere in the (global) banking system. So the origins of the sub-prime bubble lay with the (incredibly over-levered) creation of (under-priced) credit within the US financial system.

    The causal chain is very simple. Credit created in the US financial system and offered to the household sector over a very prolonged period induced massively swollen consumption. At the same time, the public sector – really the public goods/socially-owned servant of the household sector – also swallowed up huge new liabilities.

    The industrial sector (located domestically but also externally, in the petro-economies, Asia and Europe) provided a route for the re-cycling of this newly-created cash-flow, but this could just as easily have occurred without the involvement of an external network. As it happens, the engagement of the globally-distributed industrial economy in the US-centred financial bubble simply ensured it would be even larger and more comprehensively propagated than might otherwise have been the case.

    We know that borrowing to fund consumption does no more than bring future consumption forward to the current period; and the corollary of this is that at some time, if such consumption-in-advance is large enough, then future consumption will have to be less than would otherwise be the case.

    And that is the situation we are now in. Consumption is stagnating, along with employment and incomes. Public finances are decaying while the financial sector is essentially on life-support in most industrial economies.

    The industrial sector and selected bankers have basically cleaned out the household and public sectors, who are now left with almost unsupportable debts that will afflict them for decades.

    If there is any lingering idea that “cheap savings” were the cause of the bubble, one only need look at the US banking system, where a veritable ocean of unused reserves lies, untapped and basically free, even though inflation in the US is running at about 4% pa. The issue is the inability to carry debt, rather than any shortage of deposits.

    I can recall Alan Greenspan expressing some bemusement at the very low long term interest rates available in the US during the bubble. It is actually unbelievable that the Chairman of the US Federal Reserve did not understand what was happening, and that he basically believed it was impossible for laissez-faire markets to gyrate out of control.

    That he could have been so lauded and so incompetent at the same time really says it all.

    • Regarding Marx, I really don’t see the point (other than to serve a polemical purpose) of grafting the idea of “crisis” (which I do understand) onto his labour theory of value (which I have never understood) and then combine it with the concepts of “fictitious” and “real” capital (which I think are probably just the same thing).

      He manages to make something very simple into something that is both impenetrable and preposterous at the same time.

    • Perceptive comments, briefly. Particularly re the transferring of future capacity to consume into the present via debt. There is, however, a reasonable argument that at least one of the factors leading to the debt was the decline of wages as a proportion of GDP.

      • Alex, classically, household income can be allocated two ways – to consumption or to saving. By this classification, today’s saving can be seen as the postponement of consumption. The converse also applies: if a household borrows in the current period to increase consumption, then the borrowings (with interest) will have to be repaid from future income – that is some future income will have to be reserved to pay for past consumption. In this sense, if incomes were static, households could never change their total cumulative consumption, only the period in which they consume.

        When households borrow, they are usually assuming their future income will rise so that paying for both “consumption-in-advance” as well as later/future consumption will both be affordable. If households did not think their future incomes would rise, they would be very much less likely to take on debts to fund “consumption-in-advance”. This reluctance to borrow is in force today. Households are uncertain about future incomes and have stopped increasing their borrowings to finance “consumption-in-advance”.

        If households form the view that income growth will become permanently curtailed (a high probability in the US and Europe), then their whole preparedness to consume/save will alter. This has the potential to become a powerful dis-inflationary force in consumer economies.

        The process of borrowing to fund consumption was facilitated for 25 years by the expansion of credit for housing. Spending on housing is essentially a form of both consumption-spending and saving. As the property market inflated (propelled by the relaxation of credit), households could see the opportunity for windfall gains to the “equity” – the savings – in their houses.

        As the property market rose, households could expect to increase their “consumption-in-advance”, funded by borrowings, and pay for it in one of two ways – either from future income growth, or by drawing from the increased equity in their houses. If they wished, anywhere in the cycle, households could sell their property and retire their debts before re-booting the process.

        As others have pointed out, this essentially means households were speculating with the savings embedded in their houses. At the same time, in this country, we have encouraged households to double-up their savings-in-houses by making the housing market a tax-shelter as well.

        In the US, where the ethic seems to be “consume-or-perish”, households really came to rely on being able to access the “savings” locked up their houses precisely because real incomes have stagnated. Real median per capita disposable incomes in the US have not budged since the 1980’s.

        And yet, Americans were able to seemingly have their cake and eat it by drawing on and speculating with the “equity” in their houses. We all know what happened – and what is continuing to unfold.

        There are other elements to this, too. First of all, the failure of real incomes to increase means that ALL of the productivity gains delivered by the digital revolution have been captured by business. This is astonishing, but it is true. In essence, all of the social and economic costs associated with technological change have been borne by the household sector and (its socially-owned quasi-subsidiary) the public sector, while all of the gains have accrued to the owners of the technologies.

        Secondly, the picture is actually worse than household incomes alone would suggest. The deterioration in public finances in the US in fact depicts real long-run (possibly permanent) declines in non-business income. The public sector – even in the US – is the custodian and provider of public goods. That is, most of its functions are performed on behalf of the household sector. The destruction of the public sector means the current and future supply of public goods and services – a form of income to the household sector – has been reduced in both real and absolute terms.

        As so many have observed, in the US and Europe this is manifesting now in increasingly highly concentrated of income and wealth and a corresponding widening and accentuation of poverty. That is to say, at the bottom, the proportion of people in poverty is increasing, and poverty itself is more acute. It is also becoming more enduring even among those who are employed.

        There are many who think this is a problem for the future of capitalism. I’m not sure agree. I think capitalism does not care about the prospects of working Americans or Europeans and does not need them. There are billions of others on the planet, and the giants of the S&P500 are on focused on making their profits from them. Already about half of the profits earned by S&P500 companies accrue outside the US and the proportion will surely only continue to grow. For many decades, these firms have held large parts of their non-US earnings in non-US jurisdictions, protecting them from tax and providing the capital required to fund non-US expansions. In an important sense, it is no longer applicable to think of many S&P500 firms as being US corporations. They exist in multiple jurisdictions and are unbound in many respects.

        China has been successfully brought in to the globalized industrial economy, providing a locus for profitable investment, a source of cheap, high-quality manufactures and a huge developing market. The adjacent economies of East and South East Asia are also integrated into this structure while South Asia, Africa and Latin America are also contributors to a globally distributed matrix of production and consumption.

        Adam Smith’s invisible hands are working 24/7 these days to remake the global economy and have moved on from the occidental property bubbles, circa 1985-1007.

        • Again, excellent summary. Thank you. One thing I find notable is that Germany is one of the few countries that has not participated in the debt binge, even though consumer spending has been static for about fifteen years. I suppose this to be partly due to an inherent inclination to save and partly due to their focus being on the reintegration of Germany. Low home ownership rates may have something to do with it as well.

  10. Great article. I am an entreprenuer,  not an itellectual, so I seek not to analyze but to provide solutions. So here is my go at it!

    Our constitution/s should read “everyone deserves the right to a roof, education, food, water, and health”. Extremely simple and everyone can understand it. Debating Marxism and Capitalism puts 99% of the population out of the arguement. Over itellectualising our subjects is our first problem. It is the intellectuals that got us into this mess, so looking to them to getting us out is crazy. Lesson 1, Make it simple!

    Politians focus on performing in 4 year cycles. I can imagine a future where politicians act more like board members, and ministries are corporatised. Each ministry has its own CEO that is not elected, and can focus on longer term issues but is still answerable to the “board”. Lesson 2 change incentives, provide a system that allows long term (10-15 year) solutions.

    Marxism and capitalism are of the same coin, they both approach society from an economic perspective. We need to approach society from a people perspective. What is best for all of us? So we need to seperate money from politics. Politians should not be in charge of allocating money. Lesson 3 Politicians need to represent the veiws of the majority of their constiuents not political agendas.

    Making it simple…..

    • Do you not think that “corpratised ministries” with a “CEO” are basically the same as Government Departments with Secretaries?

      I agree with you that proposing basically the existing structure does make it simple.

      • Currently a minister decides on strategy (targets) and execution (policy). That minister must also represent their constituents, the govt policy, with a goal of producing results in a 4 year term.

        My alternative is to have a CEO that decides on the policy execution. The strategy is determined by many politicians.

        Incentives are the BIG problem, leaders are given short term goals and performance targets. Change their incentives and you will see a new society.

        I.e. The Federal Minister for Small Business has never run a business in his life! Sen Nick Sherry is a career politian having made his way up the union ladder. How did he get in charge of small business??? No wonder we are screwed!

  11. darklydrawlMEMBER

    “All Watched Over by Machines of Loving Grace” was an excellent doco. Looking fwd to parts II and III over the next couple of weeks. SBS has shown numerous excellent docos and series on Economics over the past couple of years. Great stuff.

  12. Doc at the Radar Station

    Thanks for the excellent essay! You wrote: “As Adam Curtis observes in his excellent documentary “All Watched Over by Machines of Loving Grace”, the heart of the insanity has been the belief that systems run by machines are inherently more stable than systems with humans at the centre.”

    That documentary is quite good. I think his main point is best made in the 2nd program where they discuss “ecosystems”. He critiques the idea that in living systems there are stable patterns that can be discerned and shows that the natural world and social groups do *not* tend toward equilibrium and stability-that randomness rules instead. Rationalist ideas in general and Rand’s views in particular, are what he indirectly debunks in this documentary.

  13. Knowledge is a great power but the political propaganda is the greatest weapon for a mass brainwashing. When fear is reigning the minds, there is no true science…..

  14. Simply a fantastic post. I keep being troubled by the lack of discussion on wages here in the United States. Many in the media seem to purposely try and equate the OWS protests to banking reform, but looking at the crowds and their signs this is clearly about economic and political equity.

  15. All post in MB are fantastic, because they are honest and they are touching the truth about the global economy.

    Paw, be ready to live in a Chinese standards in the future. Any social benefits will be gradually faded (conservative budget restrictions for fighting the debt) and as long as there are 3 billions i n Asia waiting to be hired at the lowest wage with no social and health benefits at all, don’t expect the “patriotic national” capital to return home and to do good for the American people. Global economy means not only import of cheep Chinese goods, but also means global labor and human capital market, where the prices (wages) are bound to go down and to stay there for long.

  16. Alex, you are absolutely right. I simplified the process for some reason. I meant the monopoly of big concentrated and centralized capital. Any kind of monopoly tends to establish political monopoly, which we already can witness in USA. Ask yourself what the political choices the American have with two parties financed by the same financial capital – Wall Street. When you answer this question you will understand what I have meant. It is pretty clear that if we don’t have genuine political choice, we don’t have real democracy, do we?

    • Absolutely. The American political system is pretty much a disaster these days. There are quite a lot of different reasons for the current situation. It certainly hasn’t helped that so few Americans are actually sufficiently engaged in politics to vote. I would be almost certain that very few of the OWS protesters bothered. What is needed is for sensible people who are really concerned about the current situation to get involved in reforming the processes and structures of politics. I don’t think street protests are a valuable contribution.

      • Alex, I don’t have any idea what could be a valuable contribution neither. Do you have any suggestion where and how to find those sensible people? I doubt we may have similar problems later in our society too, that is why the question how and where to find the right people and how to change the political structure is a crucial one. The problem is that de facto the political system is already privately owned by the corporations although de jure we still can vote.

  17. After reading most (but not all) of this long article, I must say I’m not impressed.

    I don’t want to be mean to the author: I’ll give him credit for attempting to engage a Marxist view, however half-assed the attempt was (based as it was on a review of a book on Marx).

    Try reading The Communist Manifesto: although Marx’s views changed over time, it’s much easier to read.

    Your apologies and caveats on reading Marx are accepted: even though you speak of Marx and Marxism, you are still a good guy.

    So, gray-suited men, leave him alone.

  18. What are readers thoughts and philosophy on the role that population and immigration play in a system that is dependant on exponential growth??….