The Forces of History

Sorting through my old books yesterday, I picked up my copy of Das Kapital, and had a quick browse through it for old times’ sake because I found the following passage on the BBC website:

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the state will have to take the road which will lead eventually to communism.

How’s that for a prediction of the Credit Crunch?


The words were written in London by Karl Marx in 1867 and appears in the first volume of his mammoth book Das Kapital; the second and third volumes were edited by his friend Engels and published after Marx’s death. In case you didn’t know, Karl Marx is buried in London, in Highgate cemetery. His memorial, a very popular tourist attraction, is shown on the left.

Of course the word “communism” now has irredeemable connotations of totalitarian excess, stemming not only from Stalin’s Russia but other attempts to impose communist rule around the world. In the United States of America in particular, communism is now a dirty word that right-wingers use to describe any aspect of government interference in economic affairs. As a matter of fact, American politics is so far to the right that even the word “liberal” is a term of abuse in some quarters.

While not in any way wanting to defend the various tyrannies that emerged as distorted manifestations of some of the ideas in his book, I think Marx’s analysis of the way capitalist economies work remains as valid today as it was in the 19th Century. It may be a little dated now, and class relationships are undoubtedly more complex now than the simple model he proposed to describe industrialised economies, but I think Marx is to political economy what Newton was to physics: much of his work has been superceded, but basically it’s right.

Ask me if I’m a Marxist and I’ll say that’s like asking a physicist if they are a Newtonian…

Marx argued that increasingly severe crises would inevitably punctuate the cycle of growth and recession owing to the inherent instability of the system. In the long term the capitalist class tends to invest more in new technologies rather than in labour. Marx believed that the source of all profit was the “surplus value” generated by waged labour, who also buy the goods that are created. As economies grow, the rate at which this profit accrues inevitably falls, leading to recession. The laws governing this behaviour are just as unavoidable as the laws of physics, Marx argued.

Reading the news today about the recent G20 summit, it struck me as quite surprising how many people seem to think that a bit of tinkering with market regulation is going to bring the world rapidly out of this current recession.

I don’t share this optimism at all. It seems to me that the global financial system is completely broken in the way that the quotation describes. The recent economic growth that western economies have enjoyed has virtually all been founded on credit tied to ridiculous over-valuations of the value of property. It is no surprise that the stock markets have been in free fall for over a year: the proper value of our economy is much much lower than we’ve all been deluding ourselves into thinking. I would say that the last ten years of growth has been completely fictitious in a well-defined sense, and the markets will probably bottom out at the value they had about a decade ago. The problem is that in these circumstances many debts will go bad, salaries are all way too high for the labour market to sustain, unemployment rises catastrophically, and the only way out is to print money leading to wholesale inflation and the consequent devaluation of the economy. The British Treasury has only recently grasped the scale of the issue and started a modest bit of “quantitative easing“. I think there’s going to be a lot of this over the next year or two.

I don’t believe that stimulus measures will work, since the resources of governments are dwarfed by the levels of bad debt, nor do I believe that pensioners and taxpayers should pay for the excesses of the prodigal banking sector. I can’t predict what will happen over the next few years, but I think we’re heading for a depression as deep as the 1930s and, unless something drastic is done, all the social unrest and political instability during and after the Great Depression will accompany this one too.

And it seems to me that the only way out of it is for the full-scale nationalisation (or even internationalisation) of the banking system so that money can be directed towards where it is needed rather than into the pockets of a few unscrupulous bastards.

But that would lead to communism, and communism is a dirty word…

20 Responses to “The Forces of History”

  1. Anton Garrett Says:

    Adam Smith was the Newton of economics, although the analogy is a bit strained because economics is one of what the 18th century’s thinkers would call “moral sciences” rather than “natural sciences” (such as physics). Smith stressed that market forces worked for the good, but only when there was an adequate level of morality among the population. He was missing the concept of marginal utility but he would have regarded as folly the over-quantification of economics. Unlike in physics, the variables that can be quantified in economics are ‘slaved’ (ie, influenced by, but do not themselves influence) certain non-quantitative variables such as confidence, boardroom decisions etc.

    Personally I believe in an unregulated market in material goods but regulated markets in labour, land and money. That will be too left for some and too right for others. Why do I like this model? Because I am a Christian and that is the model prescribed in the ‘Law of Moses’ by which God intended ancient Israel to be run.

    As for Marx, my favourite quote of his was made about a political event occurring in the Brithish Empire: “It’s possible that I shall make an ass of myself. But in that case one can always get out of it with a little dialectic. I have, of course, so worded my proposition as to be right either way.” (from p. 152, Vol. 40, of the Collected Works, Lawrence and Wishart).

    Anton

  2. telescoper Says:

    Anton,

    Marx’s work on economics was partly based on the ideas of Adam Smith, and also John Stuart Mill, but seen through the eyes of someone brought up on Hegel. My point about the comparison with Newton was more to do with the use of the word Newtonian. You hear the word Marxist still, but it is usually meant as a pejorative term; you don’t often hear the word Smithist.

    Peter

  3. Anton Garrett Says:

    PS The present financial crisis is one of the few genuine cases of “we are [nearly] all guilty”. Financiers pressed politicians to be allowed to print more unbacked money (denote this by U) than backed money (B), to lend to people. Politicians went along with it. The people took the money, to finance lifestyles beyond their means and far beyond the essentials of life. To blame only supply side or demand side for this crisis is therefore too simplistic. Moreover, with the gearing ratio U/B near to 10, the money simply does not exist to bail out the system even if politicians levied tax at 100%. This crisis has been caused by the decision to let one bank (Lehmann Bros) go to the wall, and there are many larger banks in similar trouble. Unless there is an implausible rally in confidence then to keep the cashpoints from closing and people starving within weeks the only alternative I see is to stuff those cashpoints with money printed the night before. This leads to hyperinflation, 1920s Germany style. Anybody with a mortgage might find they are paying rent to the government in a de facto nationalisation. We might be at the end of an era in history.

    Anton

  4. telescoper Says:

    I also don’t think current system can be put back on track so that we can go on as before, which seems to be basically what the politicians are saying. In that sense I think we are at the end of an era, but it’s not possible to predict what might follow. I am worried, though, that modern western societies are poorly equipped to cope with severe economic hardship. I am worried, not for myself but for the generation being born into this mess. I hope I turn out to be wrong.

  5. Anton Garrett Says:

    The politicians are definitely NOT saying that – at least the full depth of it – because with such a high gearing ratio the financial system is literally based on a confidence trick, so that politicians (and financiers) don’t want to talk down public confidence.

    There is an uneasy tension between finance and politics and it is not clear to me that the present crisis has tipped the balance of power toward politicians. I don’t find either camp very lovable.

    From here I can see several possible futures, none very happy for the world (and all probably wrong, given how contingent history is).

    Anton

  6. Bryn Jones Says:

    This seems to be a case of the expression of innermost political views, so as a social liberal, I’ll give mine.

    The credit crunch and the recession is the natural consequence of lightly regulated free markets, a regime began by the Thatcher-Reagan economic reforms of the 1980s. These were motivated by a belief that unrestrained free markets always choose the best outcomes.

    This left companies able to choose the policies to maximise their own commercial advantage over their competitors. And because they needed to fight for their own competitive advantage over their competitors, it led to risky behaviour. In a British banking context, the Bradford and Bingley had to borrow money on international markets to lend to house purchasers at large multiples of borrowers’ annual income because Northern Rock was doing so; Halifax Bank of Scotland had to do so because the Rock and B&B were doing so. Failure by a bank to do this would leave their competitors free to expand to take a larger share of the market.

    The belief in the unlimited wisdom of unrestricted markets spread across society. People stopped talking about houses and homes in favour of “property”. Beliefs spread that house prices would always increase, leading to the expectation of cheap profits in an ever expanding money supply.

    Governments and central banks accepted this nonsense. They failed to realise that house price increases of 10% per annum were unsustainable. Out of wishful thinking they failed to raise interest rates to levels that would keep house prices steady, in the belief that uncontrolled house price inflation was different to general inflation and did not matter. They failed to legislative to restrict mortgage lending to small multiples of borrowers’ annual incomes. Opposition parties in general failed to criticise this nonsense, and people whose house prices were increasing at 10% per year chose not to criticise.

    Free markets are powerful and can produce considerable wealth. But they are also prone to instability and can produce great social inequalities. It is the duty of governments to intervene to ensure stability and to ensure social justice through a variety of methods (including progressive taxation, social protection, health provision, education, social housing, equal rights, equal opportunities and equal access to services).

    Many people thought that the period of boom would go on for ever: they massively overestimated how good things were and how long they would continue. It is possible that we may now overestimate how long the downturn may last. Let us hope that the bottom will be reached within the next year and that the recession will be a sudden, severe correction. Attempting to inflate economies may actually postpone the necessary correction and delay the recovery. House prices have to fall. Currencies of the worst affected countries have to fall in value.

    Fundamentally, the current economic disaster has been caused by an overconfidence in unrestrained free markets. Some careful, appropriate, intervention is always needed from governments and central banks to damp out irresponsible behaviour in order to achieve long-term stability. In a British context, Thatcherite policies, continued and extended by New Labour, failed to do this, inevitably producing the current mess.

    As a socialist, you may find an explanation of the current financial crisis and a guide to the way forward in a work of Karl Marx from 1867. However, as a social liberal, I find more relevance in a work of Steve Bell from 2008:
    http://www.guardian.co.uk/business/cartoon/2008/oct/14/bank-bail-out-thatcher

    • telescoper Says:

      The trouble with that cartoon is that it looks very much like a recycling bin…

      ..that just means we’ll get her back again!

  7. Marco Bruni Says:

    I agree in many respects with Peter’s view. I like the suggestion that Marx is to economy what Newton is to physics, in the very precise sense that Peter mean and says, i.e. that Newton’s physics is basically OK in many physical circumstances. I wish however that contemporary economy would be more quantitative, more elaborate than probably is. E.g., the statement above that in economy quantitative variables are “slaved” by other variables that are not themselves influenced describes the limitations of current modeling, not the intrinsic way the modeled system is. It is indeed totally obvious that at least some of those non-quantitative variables ARE influenced by the status of the quantitative ones. In mathematical terms, the modeling assumes too many constraints, to many quantities that should be variables are instead parameters, too many non-linear (feedback) effects are neglected. Going back to Marx and Newton, in other words, my question is: where are the Bohrs and the Einsteins? If I take Peter Marx-Newton comparison as a correct working hypothesis, and I do think it is basically right, I then feel like we have now made in economy (through the current economic crisis) the equivalent of the Michelson-Morley experiment, we have seen that the classical theory of the black-body would lead to divergences, but we don’t yet have the new economy equivalent to the quantum and relativistic revolutions. As for Marxists and communists, I have a great deal of respects for those that lived in countries where they never took full power, where they then so positively influenced the evolution of those countries, my Italy is the obvious example, without ruining everything through power used on the basis of dogmatism (and of course, because communists and Marxists are not exempt from the corruption that is inevitable and unrestained in an uncontrolled political system). Only, I wish that today they would stop thinking of Marx as a prophet, then spitting in many groups (smaller and smaller, and therefore politically negligible) who’s main occupation becomes to accuse the others. Of what? Of not properly interpreting the dogmas, of course! In this respect, I also have a quote, by Nobel physicist Steven Weinberg, who in a debate about science and religion said that scientists can’t have prophets, at most they have heroes. Think ahead, Comrades!

  8. Anton Garrett Says:

    Some people might say that Keynes is the Einstein to Marx or Adam Smith’s Newton. As I understand it – which is not very well – then shorn of ideological discussion Keynesian economics is a one-parameter generalisation of classical economics. But I do not think that economics is as intrinsically quantitative as physics.

    The view that communism is a dirty word seems to be pretty unanimous among those who have lived under it. I have a great deal of sympathy with the grievances that communism was intended to remedy, but I believe that it failed to do so. One reason is that revolutions are always led by the most violent extremists in a movement, who then rule as such.

    Anton

  9. telescoper Says:

    Anton,

    Keynes’ first book was A Treatise on Probability.

    There is, first of all, the distinction between that part of our belief which is rational and that part which is not. If a man believes something for a reason which is preposterous or for no reason at all, and what he believes turns out to be true for some reason not known to him, he cannot be said to believe it rationally, although he believes it and it is in fact true. On the other hand, a man may rationally believe a proposition to be probable, when it is in fact false. -from Chapter II: Probability in Relation to the Theory of Knowledge” His fame as an economist aside, John Maynard Keynes may be best remembered for saying, “In the long run, we are all dead.” That phrase may well be the most succinct expression of the theory of probability every uttered. For a longer explanation of the premise that underlies much of modern mathematics and science, Keynes’s A Treatise on Probability is essential reading. First published in 1920, this is the foundational work of probability theory, which helped establish the author’s enormous influence on modern economic and even political theories. Exploring aspects of randomness and chance, inductive reasoning and logical statistics, this is a work that belongs in the library of any interested in numbers and their application in the real world.

    Have you read it? It’s heavy going but very interesting.

  10. Anton Garrett Says:

    I’ve familiarised myself with Keynes’ book and ideas on probability, rather than read it cover to cover. He took the view that probability was how strongly one proposition is implied upon assuming the truth of another, which I regard as dead right. (RT Cox subsequently showed that this quantity has to obey the two laws of probability.) But Keynes hamstrung himself by denying the notion of “universal comparability” – that it made sense to say that, p(A|B) could be less than, equal to or greater than p(C|D) if the propositions A,B,C,D had no referents in common.

    A word to anybody reading this who denies that probability is a numerical measure of how strongly one proposition is implied to be true if you suppose another is true, according to the known relations among the referents of those propositions. you should feel free to use the word ‘probability’ to denote whatever you choose; I do not wish to argue about it. Strength of implication, though, is what you actually *need* in handling any problem involving uncertainty, so that I will solve the problem using my approach. Will you solve it using yours (especially if it involves one-off events rather than repeated trials)?

    Note also that there is no room in this view for the incorrect notion of “unconditional probability”, which has confused many. The concept of implication required two propositions. Now let’s be really radical and rewrite the textbooks without using the equally confusing word “random”…

    Anton

  11. Anton Garrett Says:

    Dear Bryn

    Re your comment above about free markets: Free markets in what? I am not necessarily disagreeing, but I would like you to be specific about whatyou think should be regulated and what not. You can see in my first comment which markets I believe should be free and which not.

    Anton

  12. Bryn Jones Says:

    My comments about free markets here were directly mostly at the financial sector and housing markets, which have produced much of the current mess. I would have liked government action years ago to damp down the cheap credit, hyping of house sales and runaway house price inflation.

    Although I have been saying this for years, it seems that this criticism is now becoming standard, but that is too late to help us.

  13. Anton Garrett Says:

    Bryn: I agree that both of these need to be regulated. I think there is another reason for house price inflation, on top of willingness of banks to raise the multiple of salary which they are willing to lend for mortgages, and low interest rates. Over the last 30 years the cost of entry-level housing has shifted from being geared to one income (traditionally the husband’s) to two incomes. This has had bad effects on couples who want to have one parent at home looking after young children. I don;’t know what the solution is, although government social engineering generally makes things worse rather than better.
    Anton

  14. Bryn Jones Says:

    Yes, that is a very good point. Both partners within a family have had to work to afford to buy houses over the past two or three decades.

    I have previously wondered what might have happened had house prices not increased so greatly. It is possible that many people would have chosen to work less, because they would not have needed so much income to pay for their homes. One or both partners may have chosen to take part-time employment in cases where in reality both took full-time jobs. Or one partner might have chosen to stay at home in the old pattern to look after their family.

    The massive increase in house prices has soaked up a lot of money. Had it not happened, that money would have been spent elsewhere in the economy (provided that people had not chosen to work very much less). Some of that money might have boosted other areas of the economy, having a positive effect. On the other hand, it might have been spent buying more consumer goods from abroad, increasing the trade deficits of Western countries even more. Spending money across the economy might have boosted general inflation: one effect of the house price boom over recent years may have been the suppression of general inflation through channelling money into houses instead.

    Things would certainly have been different without the house price inflation. Exactly how is a little difficult to estimate.

  15. What we see here, is the flaw in capitalist.

    It wholly dends on generating wealth. Wealth is a relative term which ultimately depends on somebody else becoming poor. In today’s case, the poverty did lie with the banks, however since they’ve been bailed out, it is now the government’s povert which is passed onto all.

  16. Anton Garrett Says:

    Huw: What do you mean by ‘capitalism’ in which you see a flaw? If you mean the unbacked printing of money then I agree with you. If you mean free markets in material goods then I disagree. Incidentally the banks are far from being ‘bailed out’ – there isn’t enough money in government coffers to do it, and there wouldn’t be even if tax rose to 100% (which it sometimes feels like).
    Anton

  17. telescoper Says:

    Marx’s critique of capitalism wasn’t so much about markets as applied to goods and commodities, but about the rise of the market in labour. His thesis was that economic growth involves the systematic exploitation of those who have to sell their labour. This, he ergued, enriches the capitalist classes at the expense of the workers but is inherently unstable.

    But whether you agree with the Marxist theory of surplus value or not, it is not really tenable to say that people can get rich only by making other people poor. Money (let alone Capital) is not a conserved quantity; there is growth. That’s another basic dissimilarity between physics and economics. In physics we have conservation laws!

    It’s perhaps also worth saying that when Marx wrote Das Kapital in Victorian London, the part of the economy that we now call the public sector was really very small. There was no welfare state or health service and the Metropolitan police was only set up in 1829. The contribution of the public sector to the GDP of the UK in 1850 was about 5%. Nowadays it is more like 35 to 40%….

  18. Anthony Williams Says:

    One small problem with your post. There is no such quote in Volume I of Capital (or in any other of Marx’s works) because he never wrote any such thing.

    That supposed Marx quote is a hoax that’s been making the rounds on the Internet and has been repeatedly debunked. See:

    The Atlantic
    http://meganmcardle.theatlantic.com/archives/2009/01/faux_marx.php

    International Herald Tribune
    http://www.iht.com/articles/2009/02/25/business/col26.1-437515.php

    Some tip-offs: there was no such thing as consumer technology in the 19th century. Mortgages were not widely available to the working class until the 20th century, so there were very few working class home owners. In addition, the path to socialism implied in this quote is more akin to Fabianism than to anything Marx said about the likely transition from capitalism to socialism.

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