On Marxist Interpretations of the Financial Crisis

Image from the Financial TimesI recently tweeted the RSA Animate of David Harvey's April lecture "The Crisis of Capitalism", the tagline of which is "Is it time to look beyond capitalism towards a new social order that would allow us to live within a system that could be just, responsible, and humane?"  As I noted in my tweet, I agree with Harvey's positive, specifically with his deconstruction of the various, often contradictory media analyses of the economic crisis and classification into five distinct genres, each with a degree of truth.  Here are Harvey's five genres of media narrative, with my commentary:

Harvey's Five Genres of Media Narrative

1.   Human Frailty - This narrative genre places blame on individuals like Wall Street bankers.  I think that interpretation is fair, and if greed and instincts to mastery are essential human characteristics, what should we do about it besides simply watch out?  How can we make sure the greediest among us are not the ones pulling all the switches?

2.  Institutional Failures - This genre's narrative says the regulators were asleep at the switch, insitutions must be reconfigured, and there must be a truly global effort to cooperate in correcting for the institutional failures that got us here.  This genre seems to place blame on the watchdogs who obviously knew about greedy bankers and should have done something before things got out of control.  I see it as the corellary to genre one, except instead of blaming the robbers, we blame the cops for not stopping them.

3.  Obsessed With a False Theory - This is the genre for competing otsogery, i.e. people read too much Hayek and not enough Keynes or Hyman Minsky.  Instead of harping on the efficiency of markets, people should have recognized the inherent instability offinancial markets.  My problem with this interpretation is that neither the theories of Hayek nor the theories of the market-steerers seemed to play much of a role at all in the crisis.  Dead economists can't be blamed for modern problems; least of all Hayek, who was very much against institutional control of the economy of any sort, and was really popular with only libertarians up until his post-crisis endorsement by Glenn Beck.  If anything the theoretical basis of this current crisis was all put together in the last twenty years. 

4.  Cultural Origins - This genre of journalistic narrative seems to be popular in the hard core of the European Union and Latin America specifically.  Basically the narrative here is that there's some sort of defect in the national character(s) of the Anglo-American countries, and in a sense there is some truth to that; for instance the obsession with home-ownership in the United States, which incidentally is the direct result of policies from the 1930s encouraging people to own their own homes, because the theory then was that people with mortgage debt didn't go on strike.* 

5.  Failure of Policy - Championed by Glenn Beck and the World Bank alike, this genre of criticism says there is too much regulation of the wrong sort.  Harvey doesn't really go into details on exactly how the regulation is apparently of the wrong sort, but I believe that this narrative is superior (if narratives can actually be superior to boring and difficult-to-grasp mathematical reality); although I'm certainly putting my intellectual reputation at risk here by siding with Beck..  

Harvey's Marxist Narrative

Obviously there is a lot of overlap between these five genres; within genres there is a lot of disagreement; and some interpretations remain relatively unclassified.  For instance, one could combine one and three or two and five.  Encouraging home-ownership is a policy that group five could, and has, criticized.  Among those who blame human frailty and greed are both Alan Greenspan and Matt Taibbi (Greenspan seems to be timidly moving the shadow from the role his institution played in seeding the crisis, while Taibbi's coverage of Goldman Sachs's role is the journalistic equivalent of a Plasmatics concert.)  People citing institutional failures might also cite those institutions's dependency on false theories. 

It's not a perfect framework by any means, but I like Harvey's cynicism, and looking at criticism as principally belonging to one of these generic narratives is helpful to clarify an economic situation that is an otherwise extremely complex puzzle: what the hell happened, and what do we do next with the economy?

For his narrative, David Harvey turns to the theories of Karl Marx.  Harvey describes a letter sent by the U.K.s leading economists to the Queen placing principal blame on "systemic risk" which Harvey interprets as Marx's "eternal contradictions of capital accumulation", holding that *the character of the current crisis is determined by the way we came out of the last one." 

According to Harvey, the problem in the 1970s was that labor had too much power in relation to capital, so labor was punished by offshoring, specifically by the exporting of labor to China.  By the mid-eighties capital had access to all the world's labor markets, and the power of manufacturing unions was effectively destroyed.  Accordingly, this time around the problem is excessive power of capital, in particular excessive power of finance capital, which arose because since the 1970s, wages have remained stagnant while consumption has increased.  This discrepancy has largely been built on consumer credit card and mortgage debt; essentially debt was created out of thin air to overcome the problem of effective demand and continue to drive growth.  (By the way, isn't that the same thing the anti-Fed people have been saying?  And here we have a reknowned academic making the very same contention using a completely different framework!) 

From this interpretation, Harvey extrapolates that capitalism never solves its crises, but moves them around geographically; from the U.S. to Greece, to the PIGS, to....  If capitalism puts up a limit or a barrier, capital simply moves around or over it. 

Here, however is where Harvey's Marxist analysis loses me.  Harvey describes the history of capitalism as the history of financial innovation, and I can't argue that this is not one element.  (Read Niall Ferguson's The Ascent of Money for a really detailed history of financial innovation.)  Harvey then describes how since 1990, financial profits have soared while manufacturing profits have declined, and blames U.K. policy for allowing the manufacturing sector to rot while greedy London CEOs and hedge fund managers rack in billions in personal bonuses, a practice which Harvey calls "obscene".  Harvey admits at the end that he has no solution, but calls for academics the world over to have an open and frank discussion to find one.

Marx and Capitalism

People forget that Marx was a major player in the history of capitalism, just as he was a major player in the history of those other unspeakable movements with which his name is often derogatorily associated.  I remember reading Marx as a student of the history of economic thought and being particularly taken by his concept of wage slavery, the idea that renting oneself to a master is no different than being a slave (minus the whole involuntary thing of course).  But Marx's belief in perpetual class struggle strikes me as unjustified and inconsistent with a large body of empirical evidence for the benevolent inequality offered by capitalism.

The best defense capitalism has when faced with Marxist criticism is its undeniable history of success.  It is because of the profit motive that I can humbly sit here writing this article on a machine of plastic and silicon, drive my car to the store, and choose between all manner of beverages which will satisfy my thirst for a small fraction of my hourly wage.  And, it is because of that same profit motive that the world's best financial minds flocked to the London of obscene banker bonuses.  As my preferences, the preferences of Lloyd Blankfein, and the preferences of the world's billions are coordinated with the relative scarcity of goods by the market, superior products are selected for and inferior products are eliminated.  In aggregate, we call this technological progress, and technological progress, more than Thatcherism, is what has really been killing labor.  All the good jobs go to the humans.

Harvey's analysis would carry more weight if it weren't willing to throw out the baby with the bathwater.  In pointing out financial overreach, Harvey indicts the whole capitalist system, and really we have nothing even on the same level as safety-net welfare capitalism, and, in many ways, things have never been better than they are now.  If some CEO somewhere racks in a 3 billion dollar bonus, while I remain unemployed, it's just a drop in the bucket compared with what could happen were we to embrace the eschatology of Marxism.

Nevertheless, in a world where Marx is a communist boogieman and we don't really get to hear much Marxist analysis of the financial crisis, Harvey's lecture is particularly fresh and poignant.  One area where Marxist analysis could be employed is in the role of corporations and oligopolies in our economy.  Only 7.5% of Americans are self-employed; small businesses face regulatory barriers to entry enforced by oligopolistic cartels in nearly every industry and especially in the most important ones like biomedical engineering, and so they cannot offer their perhaps superior products for judgment; health insurance has a far lower economic cost for those in corporate employment; too few workers hold stock in the companies they work for; corporate employees are typically salaried and so fail to account properly for unemployment risk; and our tax code currently targets the very wages that have been stagnating since the 1970s thereby strongly incentivizing consumption now over future consumption. 

Large concentrations of economic wealth and regulatory power mean that one error has a much larger impact than it would were our economy to be based on tangible imperfectly competitive markets instead of oligopolies.  Our solution to the economic crisis should be less about sacrificing bankers, renaming and reorganizing government agencies, smelting a new golden calf, blaming foreigners, or simple tinkering and more about distributing potential error, i.e. eliminating the "systemic risk" implicated by the U.K.'s leading economists.  But we should of course keep an eye out to make sure such a distributism is not the cause of our next economic crisis

Comments

[Joseph Cox]

Fascinating stuff. The best way to make capital less powerful relative to labor would be to improve the social safety net and increase marginal tax rates. I think its gonna have to happen, we'll just see when.

[Christopher Carr]

I think we could improve the social safety net by making it a lot easier and a lot more desirable to be self-employed, simultaneously simplifying the tax code, ending corporate welfare, taxing consumption to incentivize future consumption and investment, drastically reducing military spending, reforming healthcare in the direction of the market or in the direction of the state. (Both are superior to the current Big Pharma-directed cartel, but I would, of course, prefer the people who brought us the DMV not getting involved and instead defer to the myriad John Galts.), improve public transportation, etc. etc. etc., basically decentralizing economic and political power as much as we can in a consequentialist fashion without infringing on too many people's a priori rights, and I think we can do all of this, eliminate the deficit, and still cut taxes...I seem to be promising the moon here. Perhaps I should run for office!