Financial Times, August 16 2002. 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
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 naïve 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
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
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 percent
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-90s bubble was the willingness of foreign
investors to pour money into the US
Not that you should prepare for the death-knell
of capitalism just yet. I was in New
York
First, the US
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
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 durable 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 nose dive,
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
capitalismArgentinians 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
– men such 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
The
crisis of American capitalism is therefore more social than economic, more moral
than material. It is not that the US
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 indemanding 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
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.
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| Picture : i.telegraph.co.uk |
Niall
Ferguson is Professor of Political and Financial History at Oxford and Visiting
Professor at the Stern School of Business, New York University.