Roubini, Marx, and Keynes
by Gary North: Too
Many Emergency Meetings in Europe
known as "Dr. Doom" having replaced Henry Kaufman in this
capacity now says that Karl Marx was right, according to
at New York University's Stern School of Business. Kaufman earned
a Ph.D. at the Stern School of Business. They are both very stern
I can hardly
blame Kaufman for being stern. He ended his career at Lehman Brothers
as the chairman of the Finance and Risk Committee. He is the author
Road to Financial Reformation: Warnings, Consequences, Reforms
(2009), also known as Do As I Say or Wind Up as We Did.
is from Persia, which is the Establishment's term for Iran: "way
back when and someday soon, we hope."
We learn on
Wikipedia that "during the administration of President Bill Clinton,
he was a senior economist for the Council of Economic Advisers,
later moving to the United States Treasury Department as a senior
adviser to Timothy Geithner, who is now Treasury Secretary." Anyone
who worked for Geithner must know the man's abilities. I can hardly
blame Roubini for worrying about impending doom. I have the same
On the other
hand, the reasons for my concern are different from Roubini's. According
to a recent article, Roubini thinks Marx had things accurate.
had it right," Roubini said in an interview with wsj.com. "At
some point capitalism can self-destroy itself. That's because
you can not keep on shifting income from labor to capital without
not having an excess capacity and a lack of aggregate demand.
We thought that markets work. They are not working. What's individually
rational...is a self-destructive process."
MARX ON CAPITALISM'S CRISIS
Dr. Marx taught, too. He called this process the exploitation of
labor. He argued that employers capitalists extract
value from laborers because employers pay them less than they are
worth. Capitalists pay laborers only survival wages, and then pocket
the phrase "pocket the difference" is the very heart of the endless
debates among all schools of economic opinion. Why? Because nobody
keeps the money in his pocket for long. He does something with it.
So, to understand economics, follow the money: into pockets and
out of pockets.]
Marx concluded, the way to get rich is to set up a business in India
and China, where there are enormous pools of labor to be exploited.
Oops, sorry; that's not what Marx taught. He said that the way to
get rich was to imitate his partner, Frederick Engels, who ran a
factory in Manchester. Well, he did not actually admit that his
partner was a capitalist exploiter, but he knew how the man made
enough money to put him on the dole for 30 years. So, Marx argued,
the way to get rich is to set up a business in a growing economy
a capitalist economy where there are fewer laborers
than in Asia, and who live far better than Asians did in 1850. Exploit
richer workers that's the ticket to wealth!
But how did
those English wage-earners get richer than Asians? Marx never offered
a consistent explanation.
the free market, then as now, have argued that workers got richer,
1820-1850, because there was more capital investment per worker.
Capitalists competed against each other to buy the services of workers.
Real wages were going up in 1850 higher than at any time
in man's history.
Marx knew that
real wages were rising. He said only that relative wages were falling.
Proletarian workers were getting richer at a slower rate than capitalists
He taught that
increased capital investment is what causes the increasing relative
misery of the proletariat though not Asian-level misery.
English-level misery. "Buy a pint at the pub" misery. "Fish and
chips" misery. Increased capital investment would therefore doom
capitalism. Capitalists would bankrupt each other in their quest
for profit, despite their extraction of surplus value from millions
of exploited workers. He was sure of it. He repeated this warning
for three decades. Engels repeated it after Marx died. All Marxists
repeated it, right up until December 31, 1991, when the Soviet Union
Wages in the
West kept rising after 1820. Workers got richer. By the time of
Marx's death in 1883, it was clear to everyone in the West that
the typical Western worker lived a life that the middle-class man
of 1800 could not have dreamed of. This process has never stopped.
If you want
a summary of Marx's theory of exploitation, I wrote one back in
1968. It's in my book, "Marx's Religion of Revolution." You can
read it here,
beginning on page 120.
What was wrong
with Marx's theory? First, there was not much surplus labor to exploit.
Employers kept bidding up the price (wages) of any visible exploited
labor in their quest for profit. (Greedy bastards!) Second, labor
was not the only productive asset to provide economic value, contrary
to the labor theory of value. In this fundamental sense, the labor
theory of value was wrong, and Marx was the last famous economist
to defend it. By the time he died, the labor theory of value had
been dead for a decade. It was finally interred in the grave with
Marx. It was about time. As Martha said of her brother Lazaurus'
corpse, "It stinketh." Unlike Lazarus, there has been no resurrection
of the labor theory of value. But the Keynesians have tried. How
they have tried!
KEYNES ON CAPITALISM'S CRISIS
Keynes earned a bachelor's degree in mathematics in 1905. He decided
not to go to graduate school. He went off to become a civil servant
in a deadly dull job with the London bureaucracy supervising India
where all those poor Asians lived.
His old economics
professor at Cambridge, Alfred Marshall, felt sorry for the lad.
He was about to retire, so he went to his colleague, A. C. Pigou,
and persuaded him to hire young Johnny to teach economics. Back
then, a Ph.D. was optional. If you had someone greasing your career's
skids, even a bachelor's degree in the field was optional. To make
the grease even slicker, Marshall suggested that Pigou pay the young
man's salary. He agreed. Then they both went to Keynes' father,
also an economist at Cambridge, and asked him to pony up an equal
amount. John, Sr. agreed. So, they offered young Johnny a job in
1908. He accepted.
The world would
never be the same. A self-taught, parentally funded economist would
eventually re-shape the thinking of generations of economists.
is one of them.
in his General Theory (1936) resurrected a variant of Marx's
exploitation theory. He argued that capitalists were unwilling to
invest enough money to supply jobs to workers. These workers were
unemployed. Marx had a phrase for them: the reserve army of the
unemployed. Unlike Marx, Keynes did not want a bloody revolution.
So, he proposed what a lot of other obscure non-economists had proposed
in Marx's day: government spending. That would get the unemployed
workers back on payrolls, either private or governmental.
The words "shovel
ready" came later, but the concept was there in 1936. Keynes wrote
the following gems: 100% rhinestones.
earthquakes, even wars may serve to increase wealth, if the education
of our statesmen on the principles of the classical economics stands
in the way of anything better. (p. 129)
If the Treasury
were to fill old bottles with banknotes, bury them at suitable
depths in disused coalmines which are then filled up to the surface
with town rubbish, and leave it to private enterprise on well-tried
principles of laissez-faire to dig the notes up again . . . there
need be no more unemployment and with the help of the repercussions,
the real income of the community, and its capital wealth also,
would probably become a good deal greater than it actually is.
It would, indeed, be more sensible to build houses and the like;
but if there are political and practical difficulties in the way
of this, the above would be better than nothing. (p. 129)
"To dig holes
in the ground," paid for out of savings, will increase, not only
employment, but the real national dividend of useful goods and
services. (p. 220)
as exploited the employed workers on business payrolls. Keynes regarded
as exploited the unemployed workers who could be hired if businessmen
were not so hesitant to invest.
"Wait a minute,"
you may be thinking. "If capitalism exploits employed workers, but
it also exploits unemployed workers, then capitalists are guilty
of exploitation, no matter what they do."
Go to the head
of the class.
This line of
reasoning parallels the Keynesian theory capitalist of pricing.
are the same: price-setting, collusion, oligopoly. Prosecute!
- One company
sets lower prices: cut-throat competition, aggressive pricing
to bankrupt competitors. Prosecute!
- One company
raises prices: monopoly pricing, price gouging, consumer exploitation.
concludes that capitalism needs regulation by the government. It
also needs governments to run large deficits. Governments must borrow
money from capitalists in order to fund shovel-ready projects that
would otherwise lose money. Governments must borrow the money and
fund the projects, because capitalists would not lend to private
companies launching the same projects.
Here is the
Keynesian argument. Sometimes, capitalists refuse to lend money,
thereby cutting the number of jobs, thereby cutting consumer spending.
we return to the question of the pocketed money. Capitalists leave
their money in the bank. What does the bank do with the money? This
question, Keynesians do not ask. Austrian economists ask it, which
is why they are not hired by governments or the Stern Business School.]
non-savers decide to stop saving and instead spend this money, this
increases consumer demand, but not enough, for some reason. (We
are never told why.) So, capitalism falls into permanent crisis.
"Wait a minute,"
you may be thinking. "If capitalists cause an economic crisis when
they save, hoarding paper money in mattresses (which rich men do
not do), but they also cause a crisis when they refuse to save this
money and spend it instead, then they are to blame for the crisis,
no matter what they do."
Go to the head
of the class.
If you get
really good at this, you can earn a degree from the Stern School
of Business. It will cost you $37,000
a year after taxes, plus textbooks, plus room and board in New
York City, but you can do it if you try. Keep the economy growing!
Stop the exploitation of workers!
ROUBINI ON CAPITALISM'S CRISIS
We now come
to Dr. Doom 2, or Stern Man 2, depending on how you look at him.
According to the reporter, who took notes furiously,
other theories, argued that capitalism had an internal contradiction
that would cyclically lead to crises, and that, at minimum, would
place pressure on the economic system.
Roubini said, are motivated to minimize costs, to save and stockpile
cash, but this leads to less money in the hands of employees,
which means they have less money to spend and flow back to companies.
Now, in the
current financial crisis, consumers, in addition to having less
money to spend due to the above, are also motivated to minimize
costs, to save and stockpile cash, magnifying the effect of less
money flowing back to companies.
Have you got
this? (1) Capitalism has an internal contradiction. (2) Businesses
that save money hurt the economy, because workers cannot spend this
money. (3) Consumers then minimize costs, thereby spending less
on things produced by businesses. Result: a crisis.
"Wait a minute,"
you may be thinking. "If everyone is saving all this money, where
are they saving it? I mean, if they put it in banks or money market
funds, the bankers lend it out, and someone spends it."
You are skating
on thin ice, my friend.
"Wait a minute,"
you may be thinking. "If the money in the banks is going to the
Federal Reserve as excess reserves, then the bankers are the problem."
You had better
not go down that route, my friend.
"Wait a minute,"
you may be thinking. "If the system is heading for a crisis, shouldn't
Congress be investigating the relationship between Federal Reserve
policy, bank balance sheets, and de-leveraging? Isn't the root of
the problem Federal Reserve policy?"
are beginning to sound like Ron Paul. And you know what happens
to people who sound like Ron Paul. They do not get hired by the
Stern School of Business.
added absent organic, strong GDP growth which can increase
wages and consumer spending what's needed is large fiscal
stimulus, agreeing with another high-profile economist, Nobel Prize-winner
Paul Krugman, that, in the case of the United States, the $786 billion
fiscal stimulus approved by Congress in 2009 was too small to create
the aggregate demand necessary to advance the U.S. economic recovery
to a self-sustaining expansion.
fiscal stimulus, or unexpected strong GDP growth, the only solution
is a universal debt restructuring for banks, homes (essentially
households/families), and governments, Roubini said. However,
no such universal restructuring has occurred, Roubini said.
additional fiscal stimulus, that lack of restructuring has led
to "zombie houses, zombie banks, and zombie governments," he said.
So, if we do
not want to experience the day of the living dead, we had better
stop all this talk about deficit reduction. Deficits do matter
if they are large enough. They make us wealthy.
"Wait a minute,"
you may be thinking. "If these deficits are financed by capitalists,
then the money handed over to the Treasury would either have been
invested in the private sector or else spent on consumption. So,
how does government spending save the system from a collapse?"
to be hopelessly confused.
the view from here argues that while no one should expect an 'imminent
collapse' of capitalism, or even a collapse of the American version,
corporate capitalism capitalism and free markets are much
too nimble and capable of adapting for that to say that the
current economic order is not experiencing a crisis would not be
underlying message is clear. There is still hope, Therefore, it
is not too late to enroll at the Stern School of Business if you
have $37,000 a year plus textbooks, room, and board.
follow the money the fiat money. Take a close look at Federal
Audit the FED.
Then end it.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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