Full Marx
By Niall Ferguson
Published: August 16 2002 18:34 | Last
Updated: August 16 2002 18:34
Not many MBA courses
include readings from Marx's Capital. Not many CEOs could quote from
The Communist Manifesto. But there are times when it pays even the
most passionate believers in capitalism (and I count myself among
them) to heed the bearded Cassandra. Times like these: the worst bear
market since the Great Depression - although Marx himself would have
preferred to call it a "crisis of capitalism".
As a prophet, Marx was, of course, a
washout. He was also a class traitor, taking the side of the
proletariat when he himself was the quintessential 19th century
bourgeois. His socialist utopia turned out to be a corrupt tyranny,
which expropriated the wealth of the middle class only in order to
enrich a new class of apparatchiks.
Even so, Marx's insights into capitalism can still
illuminate. From his unlikely vantage point in the old British
Library Reading Room, inspired by an idiosyncratic mixture of
German idealism and British political economy, Marx got one thing
right. Behind the bubbles and busts of the capitalist system there is
a class struggle; and that class struggle is the key to modern
politics.
This may read like heresy, especially in the
pages of the Financial Times. But a little reflection on the current
crisis of capitalism will show otherwise. Not that today's class
struggle bears much relation to that of Marx's day. The present
conflict is not between grasping factory owners and the immiserated
working class. It is a conflict within the bourgeoisie - a class
which has grown hugely since Marx's day, in ways he never
anticipated, but which has divided even as it has expanded.
First, a crash course on Capital. Long, verbose,
abstruse, this ranks as one of the most unreadable books of all
time. Much of it is intended to demonstrate that labour is the source
of all value. Skip that. The bottom line is chapter 32, in part VIII
of volume one, where Marx argues that the history of capitalism is
the history of expropriation and the concentration of wealth - the
means of production - in the hands of an ever-decreasing minority.
For Marx, the defining characteristics of capitalism in
his own time included "the centralisation of capital", "the
expropriation of the mass of the people by a few usurpers" and
"the entanglement of all peoples in the net of the world-market, and
with this, the international character of the capitalistic regime".
In other words, widening inequality and globalisation.
These characteristics, however, were precisely what made
capitalism crisis-prone. Its periodic busts, he hoped, were the
preliminary tremors heralding a final and violent collapse.
Forget Marx's utopian prophesy that capitalism would be succeeded by
socialism, with all property redistributed according to the workers'
needs. The real point is that many of the defects he identified in
19th century capitalism are again evident today. In the last20
years, there has been a significant increase in inequality in the
pre-eminent capitalist economy, the United States. In 1981, the top 1
per cent of households owned a quarter of American wealth; by the
late 1990s, that single percentage owned more than 38 per cent,
higher than at any time since the 1920s.
At the same time, the world's commodity,
labour and capital markets have become significantly more integrated:
in particular, the vast scale of today's international capital flows
recalls the first age of globalisation in the late19th century.
As for the susceptibility of our own capitalism to
crisis, the figures speak for themselves. The Dow Jones index is down
26 per cent since its peak back in January 2000. Just a few months
before that peak, a couple of notorious bubble-blowers published a
book predicting that the Dow Jones would reach
36,000 in the foreseeable future. Far from
tripling your money, if you were naive
enough to follow their recommendation and
track the Dow from the day their book
came out, you would have made an average
inflation-adjusted annual return of
minus 11 per cent.
True, we are still a long way from a new
Great Depression: between 1929 and
1932 the Dow Jones fell by some 89 per
cent. Nor can it be said that the US is
going through a Japanese-style collapse:
between December 1989 and July 1992
the Nikkei 225 fell by just under 60 per cent.
Nevertheless, the fact is that at one point
last month the Standard & Poors Total
Return Index was more than 46 per cent
below its peak. And even after the
recent rally, the Nasdaq is still down 74
per cent from its peak.
We have yet to see what the macroeconomic
ramifications of this asset price
slump will be. The chairman of President
Bush's Council of Economic Advisers,
Glenn Hubbard, last month estimated that
the fall in American share prices could
reduce economic growth by up to 0.7 per
cent over the next year. Unemployment
in the US has already risen from 4 per cent
to just under 6 per cent. Retail sales
sagged in the first half of 2002.
Certainly, it is hard to believe that
American consumers will be able to carry on
saving at the amazingly low rates we have
seen since the mid-1980s. By 2000,
net private savings had fallen from a
long-run average of between 9 and 12 per
cent of net national product to less than 4
per cent. This was one of the hidden
motors of the 1997-2000 boom. But as
Americans contemplate losses on their
investments of between a quarter and
three-quarters, they are likely to start
saving again. And that can only mean a
decline in their hitherto prodigious
consumption.
The global implications of a slowdown in
the vast American economy are
alarming. The other key element of the
late-90sbubble was the willingness of
foreign investors to pour money into the
US, funding an enormous balance of
payments deficit. These foreign investors
are now staring at income statements
spattered with red ink. And they have more
to worry about than American
investors, because a slide in the dollar
exchange rate threatens to make those
losses even bigger. If the experience of
the 1980s is anything to go by, the dollar
could fall steeply as foreign investors
sell off. The resulting reduction of American
imports would further hurt the rest of the world.
Not that you should prepare for the
death-knell of capitalism just yet. I was in
New York during the very worst week of the
recent sell-off and came away with a
consoling list of reasons to stay cheerful.
First, the US stock market has simply
retraced its steps back to mid-1997, when
Alan Greenspan coined the phrase
"irrational exuberance". Everyone secretly
agreed with him, so no one is too surprised
that the subsequent bubble has
burst.
Second, compared with the last great bear
market of the 1970s, we are free from
the spectre of inflation. Annual consumer
price inflation in the US is barely 1 per
cent. The Fed's target interest rate is
down below 2 per cent, the lowest level for
40 years and a boon for borrowers, not
least those on flexible mortgages.
Third, the American financial sector is in
far better health than its Japanese
counterpart back in the 1980s. The balance
sheets of US banks carry fewer dud
assets and bad debts. Just to put his money
where his mouth was, a New
Yorker friend of mine told me over
breakfast - after one of the worst days in
recent stock market history - that he had
just invested tens of million dollars in
the shares of big American banks.
Above all, the Fed is not the Bank of
Japan. It wasn't until July 1991, more than
18 months after the Nikkei began to
nosedive, that the Japanese central bank
started to cut interest rates. By contrast,
the chairman of the Federal Reserve
started to cut rates back in October 2000,
and they have been going downwards
ever since.
So relax: the recession was last year, and
you barely felt it. Growth this year is
still on course for 3.5 per cent. This is
the kind of crisis of capitalism
Argentinians can only dream about.
Still, you don't need to believe in another
Great Depression to take a neo-Marxist
view of the current crisis. For there is no
question that the bubble economy of the
last decade has brought about a quite
astonishing transfer of wealth from one
class to another: not from the working
class to the bourgeoisie, but from one part
of the middle class to another. To be
precise, from the sucker class to the
CEOcracy.
The sucker class is a large one. More than
half of American households now own
shares; in 1987 the proportion was about a
quarter. Much of this expansion in
share ownership happened between 1997 and
2000. So a substantial fraction of
American households bought shares at or
close to the peak of the market. Their
portfolios are now worth significantly less
than their original investment.
The beneficiaries of the bubble are the
CEOcracy - mensuch as Andrew Fastow,
who was chief financial officer of Enron,
and Bernie Ebbers, the former chief
executive of WorldCom. But the CEOcracy
includes not just the chief executives
of collapsed companies, but the whole range
of insiders who knew enough to
cash in their shares and share options
before the bubble burst.
During his testimony before the Senate
Banking Committee last month, Alan
Greenspan provided a convenient list of the
other members of this class:
"lawyers, internal and external auditors,
corporate boards, Wall Street security
analysts, rating agencies, and large
institutional holders of stock".
With each fresh revelation of fraud and
fiddled accounts, the extent and nature of
this vast expropriation of the suckers by
the CEOs becomes more apparent. The
key devices were share options, which
simultaneously gave executives an
incentive to boost share prices by fair
means or foul and allowed them to
understate what was in effect remuneration
in the company accounts. Related to
this were the lax rules governing auditing
and accounting, which encouraged
firms like Andersen to cook the books in
return for the promise of future fat fees.
Nor should we forget the spurious
independence of non-executive directors.
Marx would also have appreciated the
intimate links between the CEOcracy and
the Bush administration. This truly is one
of those moments in history when the
nexus between economic interest and policy
is laid bare. Consider the case of
George Bush and the Harken Energy
Corporation, which sold a Hawaiian
subsidiary, Aloha Petroleum, to a group of
Harken insiders for $12m, all of which
it booked as income - despite the fact that
$10m was simply an unsecured IOU
from Harken to itself. Less than three
months after the Harken accounts were
published, George Bush sold 212,140 of his
shares in the company, netting a
tidy $849,000. If the full extent of
Harken's losses had been known, those shares
would certainly have been worth far less.
When quizzed about this last month, Bush
replied: "There was an honest
difference of opinion . . . Sometimes
things aren't exactly black-and-white when it
comes to accounting procedures."
True enough when your accountants are
Arthur Andersen. But as far as US
watchdog the Securities and Exchange
Commission was concerned, the deal
was all black.
In the words of Princeton economist Paul
Krugman: "The current crisis in
American capitalism . . . is about the way
the game has been rigged on behalf of
insiders." Back in the 1990s, "crony
capitalism" was the label smug Americans
stuck to the former tiger economies of
Asia. But if ever there was a crony
capitalist, it is the current US president.
The crisis of American capitalism is
therefore more social than economic, more
moral than material. It is not that the US
economy is about to collapse into a
1930s-style slump. Enough has been learnt
from the past to avoid repeating the
fiscal and monetary policy errors that
turned recession into depression (though
after the Bush administration's recent
decisions to raise steel tariffs and farm
subsidies, the same cannot be said for trade policy).
It is the social structure of American
capitalism that is in real need of attention.
You do not have to be a Marxist to see that
something is amiss. Indeed, it is
precisely those who believe most fervently
in capitalism who should be most
insistent in demanding a shake-up.
As Marx might have said, had he taken the
right side in the class war, the
bourgeoisie united will never be divided.
But right now the American middle class
is split unevenly between suckers and CEOs.
What's more, history suggests
that when the suckers strike back, they
usually demand regulations far stricter
than is good for capitalism itself.
After all, Marx himself was once an unlucky
day trader, whose dreams of making
a "killing on the Stock Exchange" in the
1860s came to nothing. And look at the
revenge on capitalism he took.
Niall Ferguson is Professor of Political
and Financial History at Oxford
and Visiting Professor at the Stern School
of Business, New York
University
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