Some comments on deLong’s analysis of Marx’s prediction.
Shanghai Daily (2/1/08)
Would Marx say rising tide today lifts all boats?
By: J. Bradford DeLong
A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income.
"Acceptable"? Marx wasn't much concerned with such moral terms (especially since his predecessors had been overly fond of moralistic phrasings), nor did he care about the distribution of income as much as the distribution of power.
Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner.
Ever since, mainstream economists (in the West) have earned their bread and butter patiently explaining why Marx was wrong.
That's why they're paid? Hmm... somehow I thought so all along.
Yes, the initial disequilibrium shock [!!!] of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high. But this was - or was supposed to be - transient.
The reason I inserted the exclamation points is because deLong seems to assume that “Western” economies were in equilibrium right before the industrial revolutions and that the equilibria were shocked by some sort of outside force. I would like to know the theory and, more importantly, the facts behind this view. Was it a theory developed by the late Walt Rostow in his "non-Communist Manifesto"?
The history of actual capitalist industrial revolutions suggests that "aggressiveness and enterprise" is a euphemism for theft. (The latter does not have to be a moralistic term: a lot of Marx's arguments are stated in terms of the bourgeoisie breaking their own laws, of their practice violating their own theory.)
The rest of deLong’s article isn’t about Marx as much as about his interpretation of Marx’s prediction of growing inequality (the absolute general law of capitalist accumulation).
A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class pushes the peasants' standards of living down to subsistence and takes the surplus as the rent on the land they control.
It seems that deLong believes that the extraction of rent has stopped, since most of the people in the “West” no longer live in agricultural societies. But oil producers (and to a lesser extent, other mining interests) still make tremendous profits from the scarcity rents that are a big chunk of the exorbitant prices of their product. (“Scarcity rents” are revenues received simply because the product is scarce, not because anyone has to devote resources to producing it.)
By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different. First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied.
It's true that skills of the craft workers who initially benefited from industrial revolution in England (and I presume the US) later found that their skills were rendered obsolete (as their bosses mechanized, de-skilled production, etc.) It's also true of engineers and other "knowledge workers," since they are in very much the same boat as the craft workers, i.e., dependent on the capitalist accumulation process and the capitalist effort to end dependence on any group of high-paid workers. (Computer programmers paid too much to allow you to receive abundant enough profits? I have a H1-B visa program for you...)
It's also true that the capitalist competitive effort to profit by any means necessary can cause over-accumulation: like fools, they rush in, over-investing in and over-producing machines and (especially) buildings. This eventually causes a crash, which obsoletes some capitalists. (Marx tells this story in volume I: it's called the "concentration and centralization of capital.")
The problem with deLong's story (or what he might call a "model") is that some of their crowd get out while the going is good. They convert their machines and buildings (or, more generally, corporate equity) into liquid cash before the markets crash. (Even if they aren't personally thieves themselves, they follow many a criminal's dream: steal a million and turn it into cash (without being caught) and then "go legit.") The ones that succeed can then hold a nice diversified portfolio of assets (hedged by holding lots of ultra-safe government bonds), which allows them to weather most storms.
On top of that, they can build on their initial advantages, taking their property income (a.k.a. surplus-value) and increasing the size of their nest-eggs, until they grow to the size of Roc eggs. They can regularly take some big risks with some of their portfolios (while sheltering the rest), get a high return, and accumulate even more of the safer assets.
Next, they can buy some politicians to help them grow their wealth and power and major-domos to help them spend their money.
This, of course, is why we see dynasties established and lasting for centuries. It's true that the scions get decadent and want to break the First Commandment ("thou shalt not dip into capital") or the Second ("thou shalt not put all thy eggs in one basket"). But that's why God invented trust funds with all sorts of rules.
As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.
I truly wish economists and other social researchers would drop the lame "game theory" metaphors. In any case, it says nothing about the accumulation of money wealth and money power.
Second, democratic politics balances the market.
Where does this "democratic politics" come from? does it fall from the sky? is it innate in the mind? No. They come from social practice, and from it alone. (Gee, I wonder if people reading the "Shanghai Daily" know who I plagiarized that from.)
In 19th century England, as in most other capitalist countries, democratic politics came from below, from movements such as the Chartists. That is, working people fought back -- and the moneyed rulers weren't interested in democracy. (In the US, the story is different, as Mike Davis points out, because many democratic rights were won without working-class struggle because a big chunk of the male population owned land in the early stages. Nonetheless, US workers had to fight pretty damn hard.)
And of course, the growing money potentates used their friends in the government (or hired scabs) to fight the working-class upsurge. They also developed ways to control democracy so that it wouldn't get out of hand, while (1) keeping working people quiet because it was "their government" and (2) making them alienated from politics because "their government" was corrupt (owned by -- guess who?)
Of course, it's wrong to over-generalize from the corrupt system of managed democracy we see in the U.S. The workers don't always lose. But they don't win if they rely on the "condescending masters" in the government to solve the problems. They need to organize to pressure the government if they want to get anything decent.
Government educates and invests.
And who pays for that? and what good is a public information if the government destroys its scarcity value by educating lots of people, creating your competition? it's great to be literate, numerate, etc., but it doesn't give you a leg up to compete with the moneyed powers. I doubt that education ever made anyone rich, able to join the capitalist class, to become independently wealthy, etc.
It also provides social insurance by taxing the prosperous and redistributing benefits to the less fortunate.
As Otto von Bismarck (who invented it) knew, social insurance is almost completely a matter of redistribution within the working class, not a redistribution from the rich. Like most insurance, it's needed. But we, not the rich, pay for it.
(Your employer contributes to unemployment insurance, it's true, but all economists (though maybe not deLong) know that that tax is passed on and is really paid by the employees. The wages are lowered to allow the employers to afford to write the checks for the tax.)
Economist Simon Kuznets proposed the existence of a sharp rise in inequality upon industrialization, followed by a decline to social-democratic levels.
As Doug Henwood has said, we've gone beyond the Kuznets curve. The latter’s curve has inequality up followed by inequality down. Even it this happened, we in the US are now in a new "inequality up" phase, since 1980 or so. This, it seems, explains what deLong says next.
But, over the past generation, confidence in the "Kuznets curve" has faded. Social-democratic governments have been on the defensive against those who claim that redistributing wealth exacts too high a cost on economic growth.
The problem with this statement is that the Kuznets curve was supposed to be the end of inequality. Except for a small minority, it says, we’ve been through the pain, the economy spreads the gain to everyone. But that ended. In the spirit of retro, we went back to the bad phase of the Kuznets curve.
The bigger problem is that the Kuznets curve is just a curve. It doesn’t really explain anything. All it does is describe the change in inequality over time that actually happened up to the point when Kuznets summarized it.
Instead of saying there’s a Kuznets curve, we should look at the political economy, the history. The end of growing inequality after the industrial revolution in the U.S. -- and the so-called "Golden Age" of the 1950s and 1960s -- came from four main sources (listed below). These made workers' struggles relatively easy for a change, as long they kept generally within channels, allowing them to gain a share of some of the productivity gains. By the way, this does contradict Marx's "prediction" of growing inequality. Instead, it tells us something we should have known: like many or most "predictions" in economics, it worked "all else equal." And not all else stays equal.
(1) the crash of 1929, which hit the rich folks especially hard.
(2) the social movements of the 1930s, which pushed F.D.R. to reform capitalism a bit in a way that helped promote equality.
(3) World War II, which not only involved an abundant demand for labor-power and relatively high wages (for those outside the armed forces) but also had “forced saving”: at the end of the war, a big chunk of the U.S. working class actually had significant savings accounts and/or holdings of government bonds, because the government had pressed them to buy bonds during the war and because of the limited available of commodities to buy.
(4) the political economy of the immediate post-World War II period, in which the “GI Bill” helped returning veterans get education and home-ownership. (This was a belated response to the class struggles after World War I, as when veterans marched on Washington to insist on a bonus.) Also, the U.S. was on the top of the world pile (in the capitalist sphere), with little or no competition from other capitalist powers plus immobile capital (compared to later), This meant that it was a good time for raising wages in step with productivity. Many capitalists even saw high wages as a source of demand, downplaying their role as costs. The arms economy -- the dominant part of the warfare/welfare state -- kept the system stable and demand humming.
In addition, international political competition with the Soviet Union encouraged the capitalist powers to respond to mass social-democratic demands. Especially in Europe, a welfare state grew.
By the way, the people that deLong refers to who claim to be defending "economic growth" are the neoliberals. In recent decades, they have been successful at feathering their own nests and those of their employers, encouraging growing inequality. They have encouraged the undermining and end of the temporary "Golden Age."
Neoliberals also totally define "growth" in market-driven terms (GDP). If you do that, you've lost the game (as it were).
The consequence has been a loss of morale among those of us who trusted market forces and social-democratic governments to prove Marx wrong about income distribution in the long run - and a search for new and different tools of economic management.
Increasingly, pillars of the establishment are sounding like shrill critics. Consider Martin Wolf, a columnist at The Financial Times.
Wolf recently excoriated the world's big banks as an industry with an extraordinary "talent for privatizing gains and socializing losses ... (and) get(ting) ... self-righteously angry when public officials ... fail to come at once to their rescue when they get into (well-deserved) trouble ... (T)he conflicts of interest created by large financial institutions are far harder to manage than in any other industry."
What’s happening, it seems, is that even folks who write in the Financial Times are upset about the hammerlock that financial capitalists have on government policy!
For Wolf, the solution is to require that such bankers receive their pay in installments over the decade after which they have done their work. But Wolf's solution is not enough, for the problem is not confined to high finance.
The problem is a broader failure of market competition to give rise to alternative providers and underbid the fortunes demanded for their work by our current generation of mercantile princes.
What? now deLong recognizes the existence of "mercantile princes"? and now his only response is totally ambiguous? Is he hoping that "democratic politics" is going to fall from the sky again? is he going to convince those mercantile princes to be nice for a change? If so, he has to be much less ambiguous. If he thinks that Marx turned out to be right on the question of growing inequality, he should say so.