Roubini: Marx Was Right & Markets Aren't Working

♠ Posted by Emmanuel in ,, at 8/12/2011 04:02:00 PM

It appears that even Mr. Roubini Global Economics Monitor himself cannot but return to the scribblings of one of the central figures in classic political economy, Karl Marx. (Yes, neoclassical economics becomes tiresome after a while and lacks explanatory power for phenomena outside its narrow framework.) A few years ago, I wrote about why Marx was, wryly, a big fan of globalization and free trade. Insofar as it would help accelerate inequality that spurred the backlash of the workers of the world and hence communism, globalization was to him welcome. If not exactly using the term "globalization," his description of it is nearly indistinguishable from today's interconnected reality. Walking past the British Museum nearly every weekday in whose reading room (pictured below) Marx largely penned Das Kapital and witnessing the London riots, these things do weigh on my mind.

While visiting the Wall Street Journal, I came across the above interview in which Roubini alludes to Marx's well-known notion of capitalism's inherent contradictions. Roubini opines that the lack of confidence--animal spirits, if you will--of firms in the world economy's future prospects causes them to be cautious about both investment and hiring. However, while throttling back hiring and increasing the productivity of hired workers may increase profits, the knock-on effects for the wider economy are unfavourable. For, if many remain unemployed, their income and hence purchasing power is diminished. Consumer confidence is dented. In turn, aggregate demand is simply not there. (Skip to around 4:00 in the video.)

It is no big secret that the last few years have seen labour's share of income decline relative to that of capital in many developed nations and some developing ones (most notably China). The ratio of profits to wages keeps rising and this implies growing inequality between capital holders and the modern proletariat. As Roubini puts it succinctly: "My [firm's] labour costs are someone else's income and consumption."

Ominously, Roubini notes that riots in the Middle East and those here in England have a high likelihood of spreading Stateside. The US infamously boasts of the world's largest population of incarcerated individuals. With even higher inequality in the US than many Middle East nations and the UK, highly racialized divides in wealth and incarceration may represent an even bigger powder keg. Throwing so many folks in jail is a symptom of a dysfunctional society and not its cure. Come to London and I'll show you around.

To paraphrase The Doors, someone will come and light America's fire soon--and the results certainly won't be pretty. And when that happens, I suppose even more will say Marx was right all along.

UPDATE: For more on the Marxist thought underpinning Roubini's assertion, see my follow-up post.