Sunday, August 14, 2011

Was Karl Marx Right After All?

For sure Marx didn't get it right regarding socialist theory, but according to economist Nouriel Roubini, a/k/a "Dr. Doom," who predicted the 2008 financial crisis down to the last detail, Marx got it right when he criticized capitalism.

Marx argued that capitalism had a fundamental contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.

Companies, Roubini said in a Wall Street Journal interview, are motivated to minimize costs, to save and stockpile cash. Good on its face, but it leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.

In the current financial crisis, consumers, in addition to having less money to spend due to the above, are also motivated to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.

“Karl Marx had it right,” Roubini said, "At some point capitalism can self-destroy itself. That’s because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational . . . is a self-destructive process.”

We are not economists here, but there is plenty of evidence that Roubini has it right (which may mean Marx had it right, too.) Savings rates soared after the crisis, both corporate and individual, with corporate balance sheets ballooning with cash (not being paid as wages and not being spent to hire new employees). Employees, and former employees, were just surveyed and provided the worst consumer confidence number since 1980, leading one to wonder where the demand for products and services will come from, and if it doesn't come will lead companies to continue to hoard cash, not hire, and continue the cycle.

Interesting times, indeed.

(See: International Business Times, "Nouriel "Dr. Doom" Roubini: "Karl Marx Was Right" for Wall Street Journal interview summary.)



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