Marxism Revisited

Published in The Express Tribune, September 7th,  2015.

Ever since its origins in industrialising England, the capitalist economic system has always been subject to crises. There are countless theories as to the causes, consequences, and possible remedies for these. Karl Marx was among the earliest and most famous critics of capitalism. He argued that the source of the wealth produced by capitalism was the labour of the workers. The capitalists use their power to make profits by exploiting workers, depriving them of their due shares of profits. Capitalismrequires growth to prosper, and this could only come by increasing exploitation. Crises would marxoccur when workers would be oppressed beyond their limits. Eventually, these crises would destroy capitalism as the workers revolted against this unfair system.

Of course, these ideas are anathema to capitalists. During my own studies of economics in universities, a shallow caricature of Marxist economics was presented, only to be ridiculed and dismissed. Much later, I learned to my great surprise, that Marxist ideas are strongly supported by empirical evidence as well as standard capitalist economic theories. Capitalist theory argues that in free markets with perfect competition, both capital and labour earn according to their productivity, so that there is no exploitation. Textbooks pass silently over the fact that huge and increasing concentration of capital in a small number of hands makes free markets and perfect competition impossible. Textbooks also close their eyes to the reality of unemployment rates (currently at an amazingly high 23 per cent in the USA, if we include discouraged workers). Instead, neoclassical theories tell us that all workers will automatically find work in a dynamic free market economy, and blame unemployment on clumsy government interventions.

The Great Depression of 1929 was amazingly close to a vindication of Marxist theory. Historians date the start of capitalism in the USA to the end of the Civil War in the 1860s, which eliminated slavery and the semi-feudal agricultural economy of the South. This created an economic expansion led by the industrialised states of the North. The first crisis in this nascent capitalist economy was caused by wealthy European investors who invested heavily in railroads in the USA, leading to rapid growth. The huge potential of the American economy led to a mania, with rapidly increasing investment and stock prices, followed by a panic, leading to a financial crash in 1873. Repeated crises and recessions in 1893, 1900, 1902, 1907 and 1911 led to the creation of the Federal Reserve in 1914; the hope was that a central bank would be able to prevent banking crises in the future. In fact, provision of this safety valve for capitalist investors led to such massive over-investment, that the subsequent crash of 1929 created the greatest depression ever seen globally.

The stock market crash of 1929 set off a worldwide chain of bankruptcies and defaults. Factories and businesses closed, workers plunged into poverty in millions, houses and farms were repossessed, and crops which could not be sold were dumped into the sea. By late 1932, 11,000 of the United States’ 25,000 banks had collapsed, manufacturing output had fallen to half of its 1929 level, and some 30 per cent of workers searched in vain throughout the country for jobs to support their families. Farmers unable to sell their produce, unable to repay their bank loans were evicted and with their families joined the human flood of misery. John Steinbeck’s moving novel, The Grapes of Wrath, provides a vivid depiction of the era.

The global crisis of capitalism led to a surge in the popularity of communist ideas throughout the globe, especially among the working classes. Hardcore capitalists like Friedrich Hayek continued to insist that government interference with markets would only make things worse. However, communist revolutions in Europe and the USA were narrowly averted because politicians ignored free market economists, and provided the relief necessary to make life bearable for the workers.

Repeated cycles of expansions followed by crises is among the central insights of Marxist economics. Current neoclassical economists hold that stable equilibrium is rapidly achieved by free market economies and provide no explanation for the observed boom-bust cycles. The power of capitalist ideology is such that neoclassical theories easily proven false continue to be taught in universities, while serious theories, which provide much more accurate explanations of contemporary economic realities, continue to be ignored.

  1. Joseph Feredoes said:

    Dear Asad,
    Although your assessment is very correct, the conclusions are a bit simplistic. I also studied Marxism in Hungary, in the sixties, when Hungary was engaged in building a socialist country. The result is well known. The Marxism solution was far too idealistic, may I say naive. I suggest a slightly different approach to solving the seemingly antagonistic position of socialism versus capitalism.
    First of all, we must admit that both systems have advantages. Socialism is – at least in theory – more humane, more caring and suits better for the large majority. (Unfortunately socialist countries in the past turned the theoretical socialism into a single-party dictatorship). On the other hand, capitalism is closer to human nature, when individuals can achieve status accordingly to their capacity (of course, today’s capitalism is more about the rule of large corporations). Under current political systems (called democracy) exercised in capitalist countries – especially where free market is prevailing – the profit of large corporations takes precedence over anything else (I could cite countless examples you are in aware of too).
    The answer?
    Mix the two. Keep advantages of both system and discard the less desirable aspects.
    Curb the power of large corporations. Concentrate on needs of the society, not on the needs of profit. The democratic system should also be revised, especially in the light of the large power of social media. Bring up a stupid idea (opposing, say, anti-vaccination or iodine in drinking water) and democracy can result in disaster (see the return of polio and so on). Well, this is not an easy solution, but the present system is absolutely incapable of solving basic problems (unemployment). We need a few really clever people to work out a new system (what the fathers of the USA did in the eighteen century), which would integrate socialism and capitalism.

  2. There is a Marxist analysis of Capitalism, which is that profits come from exploitation, which leads to repeated crises. Then there is Marxist vision of what might happen afterwards — this has an element of utopian thinking. I am concerned here only with the analysis of capitalist business cycles, and find the marxist explanation of business cycles is better than any that i studied at Stanford Economics Dept.

  3. Joseph Feredoes said:

    well, I understand your point…what about my suggestion? Mix the two. Utopian? Maybe…may not

  4. rieville said:

    Thanks for this interesting post.

    The most important advance on (neo) Marxist – and also an updating of Joseph Schumpeter- is Immanuel Wallerstein and his school of World Systems Analysis.

  5. Would a suitable mix of capitalism and communism produce better results? I dont think so, because I see the root of the problem as the GREAT TRANSFORMATION of Karl Polanyi. Both capitalism and communism are post Great Transformation, that is both accept pursuit of wealth as the unquestioned economic goal.  Setting this target automatically ensures failure, and the only way to get to a humane society is to reverse the great transformation by considering human lives as more valuable than money. This means renouncing the goal of pursuit of wealth, and making our common object enrichment of human lives — usually this would involve disengaging them from the struggle to produce more and more, and creating a desire for simple lives, so  that instead of producing and consuming, we spend time on higher pursuits like social, intellectual, spiritual and physical development.

    • Joseph Feredoes said:

      You are absolutely right – but you make the same mistake what Marx made, namely he forgot about human nature. Are you serious when you say that human life is more valuable than money? Just take a quick look around the word and you will be in trouble saying this. I should mention another problem, which will cause social havoc in a few decades. Automation. Most of current jobs will be automated, sooner or later, but well within our time horizon. What to do when unemployment reaches 40-60-80 %? Blue and white collar jobs are disappearing very rapidly. There will be no disposable income for people without work. The solution is already circulated: the state will pay a certain amount (sufficient to live decently) to everybody (just outvoted in Switzerland). Then people can engage in social, intellectual, spiritual and physical development, as you mentioned (sounds very much like the old socialist idea).
      But in the meantime – something like a bridging solution – I am convinced that moving away from the current free market system must be completed gradually – like mixing the two systems step by step as I said before. This way unemployment could be handled much more humanely than now and this NEW TRANSFORMATION can be achieved with less pain. This process may take a century or two, especially in some areas of the world. The current migration wave does not promise much good… countries in the forefront of the above transformation must manage the millions who would like to join to them, perhaps with force…
      And I have to mention religious aspects of conflicts. When 6th century ideas exists in parallel with 22nd century ideas the above transformation scenario may face additional resistance…
      I suppose there is plenty of food for thought.

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