Monday, 15 August 2011

Will capitalism eat itself?

The liberal economic commentariat may have choked on its cornflakes this morning, when Professor Nouriel Roubini said "Karl Marx said it right, at some point capitalism can destroy itself because you cannot keep on shifting income from labour to capital" (see video below).

The shift from labour to capital has been a long term process, acute in the US and increasing in the UK too where, as PCS points out, the value of wages has declined from nearly 65% of GDP in the mid-1970s to 55% today. Over the same period, the rate of corporate profit has increased from 13% to 21%.

Roubini also seemingly dismissed the Keynesian solutions used in the 1930s as 'kicking the can down the road', the debt is now too great.

So is Roubini becoming a Marxist and was Marx right? Certainly there is the risk - as Roubini says - that capitalism might self-destruct. It does seem that there is no way out, because of the inherent contradictions of capitalism playing themselves out in this crisis:

1) Governments that impose austerity measures are reducing demand, squashing any chances of recovery.
As Roubini says, "If you are not hiring workers there is not enough labour income, there is not enough consumer confidence, there is not enough consumption, there is not enough final demand. We had a massive reditribution of income from labour to capital from wages to profits, ineqaulity of income and wealth has increased."

2) Governments could invest in the economy to create jobs. But in the short term and on the necessary scale that would mean borrowing in the money markets, and the markets have shown their propensity to punish any government not slashing budgets - see Greece, Spain, and Italy - and perhaps even the US following the S&P downgrade. One could counterpose increasing taxes on the wealthiest and clamping down on tax avoidance and evasion - but that takes time, and no western government is even preparing for that eventuality.

So if governments can't save their way out of recession or spend their way out, could capitalism self-destruct?

Certainly some defaults are likely - Iceland effectively defaulted in 2010 and Argentina in 2001. There has been talk of Greece leaving the euro and effectively defaulting. But that would damage the euro - and bond markets would inevitably up the risk factors on any country with a large deficit (Spain, Italy, Portugal - and potentially the US and the UK). This would make it more expensive to borrow, and rule 2) out while requiring more cuts under 1).

Now you might argue that the Argentinian and Icelandic defaults did not cause contagion, but a eurozone country would be a very different proposition, as would a major global economy like the UK, let alone the world's largest economy, the US.

So the only way out seems to be to take on the markets (e.g. shutting down stock markets, nationalising the finance sector, and taking currencies out of international money markets. The only risk for any country trying this route might be US invasion - but can they afford it?

I'll write more on how this could be done soon.

1 comment:

  1. "So if governments can't save their way out of recession or spend their way out"

    Then governments can FIGHT their way out and they will.