Harvard Business Review Blog Asks: "Was Marx Right?"

Another day, and another socialist fundamentalist confusing our crony-capitalist, half socialist and half fascist society with a free-market, capitalist economy goes to Marx to find the salute. This is just a few days after an investment banker at UBS was turning to Marx for solutions to the current crisis.

This time, it's Harvard Business Review Blog's to raise the question: Was Marx Right? Here's a blog post from someone who introduces himself as a free-market capitalist and who is trying to understand whether Marx's diagnoses were right — unfortunately, the points he makes show a complete lack of understanding of what Free Market stands for, and what capitalism is. And consequently, most of the ills of our society, which are attributed to the socialistic governments which lead us (inflation, fiat currency, partial reserve banking, central planning of everything from healthcare to insurance to interest rates) are seen as result of the free market.

Finally, I think I'll stick to my point of just saying: each country gets the politicians and the society they deserve. And it's particularly the case. The fact most people are happy to eat at McDonald's, to shop at Wal-Mart and to work for Wal-Mart is perfectly in symbioses with my theory of Dark Ages 2.0.

The fact that people prefer to watch X-Factor or Loft-Story or any other useless TV show instead of educating themselves and trying to rise as a society is the result.

And people being completely uneducated and living in nanny-states, looking for the government to provide food, labor, protection and — it is the case in Europe, holidays as a human right — is the reason why there are still so many looking at theories which have failed the test of reality many times already, after having been discredited in theory and yet, they are happy to repeat over and over again the same mistakes.

Enough for the rant, here are some quotes which really depressed me to the core.

I mean: "Was there maybe a tiny mote of insight or two hidden in Marx's diagnoses of the maladies of industrial age capitalism?" 

Let's take Marx's big critiques of industrial age capitalism, one by one [...] 

Immiseration. Marx claimed that capitalism would immiserate workers: he meant that labor would be "exploited" — not just in a purely ethical sense, but in a narrower economic one: that real wages would fall, and working conditions would deteriorate. How was Marx doing on this score? I'd say middlingly: wages in many advanced economies — notably, the most purely capitalist in a financialized sense — have failed to keep pace with productivity; not for years, but for decades. (America's median wage has been stagnant for roughly 40 years.) In macro terms, labor's share of income has plummeted, while the lion's share of growth has accrued to those at the very top. 

Crisis. As workers were paid less and less, capitalism would be prone to chronic, perpetual crises of overproduction — for they wouldn't have the means to purchase or invest in enough goods to keep the economy humming. As Marx put it, there was likely to be "poverty in the midst of plenty." How's Marx doing on this score? Not bad, I'd say: the last three decades have in fact been characterized by global crises of what you might crudely call overproduction (think: too little demand chasing too many disposable widgets, resulting in a massive global debt crisis, as vanishing middle classes took on more and more debt to compensate for stagnant real wages). 

Stagnation. Here's Marx's most controversial — and most curious — prediction. That as economies stagnated, real rates of profit would fall. How does this one hold up? On first glance, it seems to have been totally discredited: corporate profits have broken through the roof and into the stratosphere. But think about it again, in economic terms: Marx's prediction concerned "real profit," not just the mystery-meat numbers served up by beancounters, and chewed over with gusto by "analysts." When seen in those terms, Marx might be said to have been onto something: though corporations book nominal profits, I'd suggest a significant component of that "profit" is artificial, earned by transferring value, rather than creating it (just ask mega-banks, Big Energy, or Big Food). I've termed this "thin value" and Michael Porter has described it as a failure to create "shared value." Replace "declining real profit" with "shrinking real value" and it's analogous to what Tyler Cowen and I have called a Great Stagnation (though our casus belli for it differs significantly from Marx's). 

Alienation. As workers were divorced from the output of their labor, Marx claimed, their sense of self-determination dwindled, alienating them from a sense of meaning, purpose, and fulfillment. How's Marx doing on this score? I'd say quite well: even the most self-proclaimed humane modern workplaces, for all their creature comforts, are bastions of bone-crushing tedium and soul-sucking mediocrity, filled with dreary meetings, dismal tasks, and pointless objectives that are well, just a little bit alienating. If sweating over the font in a PowerPoint deck for the mega-leveraged buyout of a line of designer diapers is the portrait of modern "work," then call me — and I'd bet most of you — alienated: disengaged, demoralized, unmotivated, uninspired, and about as fulfilled as a stoic Zen Master forced to watch an endless loop of Cowboys and Aliens. 

False consciousness. According to Marx, one of the most pernicious aspects of industrial age capitalism was that the proles wouldn't even know they were being exploited — and might even celebrate the very factors behind their exploitation, in a kind of ideological Stockholm Syndrome that concealed and misrepresented the relations of power between classes. How's Marx doing on this score? You tell me. I'll merely point out: America's largest private employer is Walmart. America's second largest employer is McDonald's.  

Commodity fetishism. A fetishized object is one which is more than a symbol: it's believed to have actually the power the symbol represents (like an idol, or a totem with magical properties). Marx claimed that under industrial age capitalism's rules, commodities became revered talismans, worshipped through transactional exchanges, imbued with mystical powers that give them inherent value — and obscuring the value of and in the very people who've worked labored over them in the first place. It's one of Marx's most subtle and nuanced concepts. Does it hold water? Again, I'll merely pointing to societies in furious pursuit of more, bigger, faster, cheaper, nastier, now, whether it's the retail temples of America's mega-malls, or London rioters stealing, not bread, but video games.

Portugal Lenders Bailout Approved — 78 billion €

Arrogance, incompetence and greed from the Portuguese government, people — who have been on a borrowing binge since WWII mortgaged the future of their children and grand children — and the international banks — which lent all that money to insolvent entities — have now led to a third bailout in the EU. But don't get it wrong, as it was the case for Ireland and Greece, this is not the bailout of the Portuguese government or people, it's the bailout of the lenders, and it's a scheme to transform the people into debt slaves.

Hopefully, these spending will just accelerate the fall of the dominos that are most of the sovereign economies. The few countries which have a decent balance sheet — such as Germany — are diluting their credit quality to bailout out the profligate economies which have no reason and no political will to reduce spending and borrowing.

There is no way that debt is going to be paid, so sooner or later, default will arrive. It would be a catastrophe for the stupid and incompetent lenders, but it would be a tremendous liberating force for the people, the economy as a whole, and would help set up a sounder safer system, since lenders will understand that lending is a risky business. Hopefully, the IMF will go insolvent as well in the process, and we'll get rid of this dangerous and useless post-Bretton Woods system.

That's how the economy works. The basic laws of economics are part of the laws of nature. If you don't like it, if you think it's unfair, get used to it. It's as if you complain about gravity being unfair. You cannot do anything about it, can you? So why do you think greedy and ignorant politicians can save you from the natural laws of economics?

May 16 (Bloomberg) -- European finance ministers endorsed a 78 billion-euro ($110.8 billion) bailout for Portugal as they stepped up pressure on Greece to do more to win improved aid terms.

Portugal followed Greece and Ireland in seeking emergency loans from the European Union and International Monetary Fund, bringing to 256 billion euros the aid provided to stamp out the sovereign debt crisis.
[...]
The European finance chiefs were also set to approve the nomination of Bank of Italy Governor Mario Draghi to be the next president of the European Central Bank.

Greek bonds fell after the euro area’s economic powerhouses put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high-deficit countries on the continent’s periphery.

Finance ministers said the IMF’s role as the contributor of a third of the bailout money for Greece, Ireland and Portugal won’t be hampered by Strauss-Kahn’s May 14 arrest on sexual- assault charges in New York.
[...]
Greece, which received a 110 billion-euro loan package last year, is preparing a new economic-recovery program, including 76 billion euros of asset sales and spending cuts, to persuade European governments and the IMF to release the next 12 billion- euro portion in June.
[...]
Default is “just a nightmare,” ECB council member Christian Noyer said in Tokyo today. “It’s the absolutely wrong solution. It would be a catastrophe.”

Greece’s chances of escaping a restructuring hinge on the public mood in Germany, which crafted the euro’s low-deficit rules and, as Europe’s largest economy, is the biggest guarantor of the unprecedented loan packages.

Forty-one percent of Germans oppose further financial aid for Greece, with 48 percent in favor, according to an Emnid survey published in Bild am Sonntag yesterday. Some 58 percent voiced “very low” or “quite low” trust in the 12-year-old euro, up from 54 percent in December.

Frédéric Bastiat as a minarchist and forerunner of the Austrian School of thought

I've just finished reading Frédéric Bastiat's The State and The Law, and I must admit that I'm very impressed.

His work is available for free from many sources, here's the link to his page on the Online Library of Liberty where you can find his books in various PDF format and both English and French.

While reading his book, I've discovered that France was falling into Socialism way before the Second World War, and that many of the traits of the current issues were already seeded at that time, and fought against by Bastiat.

Here are a few notes of interests, from Wikipedia:

[...]
Bastiat was the author of many works on economics and political economy, generally characterized by their clear organization, forceful argumentation, and acerbic wit. Among his better known works is Economic Sophisms, which contains many strongly-worded attacks on statist policies
[...]
Bastiat's most famous work, however, is undoubtedly The Law, originally published as a pamphlet in 1850. It defines, through development, a just system of laws and then demonstrates how such law facilitates a free society.
[...]
Bastiat's work is not well known in France, and is rarely found in the French language, as the author is better known in the United States. 

France is a socialist country and it seems like it has been so since Bastiat's time. Although it's sad and depressing, it's no wonder nobody knows about him in France.

Bastiat asserted that the only purpose of government is to defend the right of an individual to life, liberty, and property. From this definition, Bastiat concluded that the law cannot defend life, liberty and property if it promotes socialist policies inherently opposed to these very things. In this way, he says, the law is perverted and turned against the thing it is supposed to defend.

So Bastiat was a libertarian and a minarchist.

[...]
Because of his stress on the role of consumer demand in initiating economic progress, Bastiat has been described by Mark Thornton, Thomas DiLorenzo, and other economists as a forerunner of the Austrian School.
[...]
One of Bastiat's most important contributions to the field of economics was his admonition to the effect that good economic decisions can only be made by taking into account the "full picture." That is, economic truths should be arrived at by observing not only the immediate consequences – that is, benefits or liabilities – of an economic decision, but also by examining the long-term consequences. Additionally, one must examine the decision's effect not only on a single group of people (say candlemakers) or a single industry (say candles), but on all people and all industries in the society as a whole. As Bastiat famously put it, an economist must take into account both "What is Seen and What is Not Seen."

Bastiat's "rule" was later expounded and developed by Henry Hazlitt in his work Economics in One Lesson, in which Hazlitt borrowed Bastiat's trenchant "Broken Window Fallacy" and went on to demonstrate how it applies to a wide variety of economic falsehoods.

Frédéric Bastiat, you were born on the 30th June 1801 and passed away on the 24th December 1850, before even turning 50. Your views are still considered today, during the Dark-Ages 2.0, as avant-gardiste. You will not be forgotten.

Are we headed for Dark Ages 2.0?

It's almost a common sense law and a market rule: economists and policy makers are the most ignorant people when it comes to economics and policies — and understanding markets.

Among the least ignorants, I can name a few Keynesian Bouffons who saw the problem coming, but who are still advocating deficit spending and government intervention to ensure that people keep on borrowing and spending — trying to put us back on the exact same track that lead us to jump of the cliff, because that path is unsustainable. These are the Nouriel Roubini, Joseph Stiglitz, and today, I am sad to add Gary Shilling: the first Keynesian Bouffon to understand that we are in a full fledged deflation. Here you can find two video clips of his interview on TechTicker and here (They don't seem to be embeddable).

The interview is very interesting because it exposes the deflationary environment very clearly, but then draws all the wrong conclusions of the Keynesian bouffons. Gary Shillings thesis is:

• Deflation's Coming, Says Gary Shilling, And It's Going To Clobber The Stock Market
• Obama and Bernanke didn't understand the depth of the problem, and should do more

Joseph Sigtliz goes on with the same opinion that Obama should do more — like every Keynesian Bouffon, the stimulus failed because it was too small — and will contribute to dig us deeper into the whole:

Aug. 6 (Bloomberg) -- Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. economy faces an “anemic recovery” and the government will need to enact another round of “better designed” stimulus measures.

The Obama administration took “a big gamble and it doesn’t look like it’s paying off,” Stiglitz told Bloomberg TV in an interview in Sydney yesterday. “The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labor force, let alone to find jobs for the 15 million Americans who would like a job and can’t get one.”

And also Shiller, another one of those academics who saw the real estate and Internet bubble, but who is now turning to his god, FDR for a solution (see Op-Ed in the NYTimes) and he goes on and on about how great stimulus is, and concludes that we should more and more:

What Would Roosevelt Do?
ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.

Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.

And finally, this amazing clip from CNBC's Squawk Box featuring David Rosenberg — one of the few economists working in the financial industry who makes sense:



Basically, Rosenberg's point is that we're deflating, that the markets are highly overvalued and that it doesn't make sense to compare the current depression with the past few post-war recessions, because all of them were occurring during a credit inflation.

Opposing his view, you have another duo of crazy market cheerleaders, worshipping Bernanke and talking about GDP numbers.

Nobody believes in a double-dip recession, although they don't even know what they're talking about.

So what's my point given the title of this post? With so much destructive ideologies, Keynesianism, wars, poverty expanding, religious threats, aren't we headed for a second Dark Ages period?

From Wikipedia:

"Dark Ages" is a term referring to the perceived period of both cultural and economic deterioration as well as disruption that took place in Western Europe following the decline of the Roman Empire. The word is derived from Latin saeculum obscurum (dark age), a phrase first recorded in 1602

My point is that I've been digging during the week-end in old stuff. When I mean old, I mean really really old: the XVIII and XIX centuries. The period called the Enlightenment. The Frederic Bastiats, Alexis de Tocqueville, Thomas Jeffersons of those days.

Are we headed for a new Dark Ages period? My conclusion is that we already are in the 2nd Dark Ages, and we'll get out of it only once Keynes is dead and fallen into oblivion, and that we are back in a free society, with a sound currency.