Roubini, Marx, and Keynes

by Gary North

Recently by Gary North: Too Many Emergency Meetings in Europe

Nouriel Roubini, known as "Dr. Doom" – having replaced Henry Kaufman in this capacity – now says that Karl Marx was right, according to a recent article.

Roubini teaches 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 fellows.

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 of The Road to Financial Reformation: Warnings, Consequences, Reforms (2009), also known as Do As I Say or Wind Up as We Did.

Dr. Roubini 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 concern.

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.

"Karl Marx 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."

DR. MARX ON CAPITALISM'S CRISIS

That's what 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 difference.

[Note: 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.]

Therefore, 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.

Defenders of 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 were.

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 committed suicide.

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!

MR. KEYNES ON CAPITALISM'S CRISIS

John Maynard 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.

Nouriel Roubini is one of them.

Keynes 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.

Pyramid-building, 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)

Marx regarded 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.

1. Prices are the same: price-setting, collusion, oligopoly. Prosecute!
   
2. One company sets lower prices: cut-throat competition, aggressive pricing to bankrupt competitors. Prosecute!
   
3. One company raises prices: monopoly pricing, price gouging, consumer exploitation. Prosecute!

The Keynesian 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.

[Note: 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.]

If capitalist 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!

DR. 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,

Marx, among 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.

Companies, 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?"

Sonny, you 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.

Roubini 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.

Absent additional 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.

Without that 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?"

You appear to be hopelessly confused.

Further, 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 accurate.

The 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.

CONCLUSION

My suggestion: follow the money – the fiat money. Take a close look at Federal Reserve policy.

Audit the FED.

Then end it.

August 20, 2011

Gary 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.

Copyright © 2011 Gary North

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