March 2014

Is Marx still relevant

Written by Sean McElwee

The 19th-century thinker identified exploitation and questioned the automatic self-regulation of a capitalist economy. And, says Marx biographer Jonathan Sperber, there's more

The Guardian, Thursday 16 May 2013 12.00 BST

Is Karl Marx still relevant? He lived in the 19th century, an era very different from our own, if also one in which many of the features of today's society were beginning to take shape. A consideration of the relevance of Marx's ideas in the early 21st century might start with separating their outdated elements from those capable of development in the present.

Among the former are concepts such as the labour theory of value, or the tendency of the rate of profit to fall, both deriving from the economic theories of Adam Smith and David Ricardo, and pertaining to a now very outdated version of capitalism, characterised by low rates of productivity increase and a large agricultural sector, under pressure from population growth. Marx's idea of human history as the inevitable progression of modes of production, from the "Asiatic mode" in the distant past to a communist future, seems like a relic of positivist theories of stages of history, more befitting the age of Herbert Spencer and Auguste Comte than the historical experiences of the 20th century.

And the ideas capable of development? Three come to mind.

One is the idea that intellectual conceptions and the political movements embodying them are closely tied to social structures and collective economic interests. Marx referred to the latter as the "base" and the former as the "superstructure"; one does not have to agree with this metaphor or with the priority it implies to see that it is a fruitful conception. He first developed this line of analysis to explain different forms of royalism in France during the 1840s, but contemporary politics, with its clash of strongly different political visions all too evidently tied to economic interests or to social groups can be understood in this way as well. The recent US presidential elections, with their rhetoric of the "1%" and the "47%" (the proportion of the population Mitt Romney claimed didn't pay taxes) are a good example, as is the debate about austerity politics in the UK and in the EU, phrased in terms of government debt, although really about which social groups will bear the costs of economic restructuring.

Second, ostensibly free and voluntary market exchanges contain within themselves elements of domination and exploitation. At the beginning of the age of industrialisation in Britain, these elements were very evident: starving handloom weavers and factory operatives toiling for 14 hours a day in stiflingly hot, dust-ridden textile mills. Today, such elements are subtler in more affluent countries – although they remain quite apparent in, say, Bangladesh – but in view of the results of three decades of public policy exalting market exchanges, and ignoring their negative consequences, we might want to take Marx's insight more seriously. He saw the remedy to the situation in violent revolution, followed by decades of civil and international warfare, leading to a utopian realm in which distinctions between individuals and society, and between society and the state, had been dissolved. Efforts to implement this vision in the 20th century, admittedly under circumstances quite different from those Marx envisaged, in the USSR, China or Cambodia, worked out very badly, at times genocidally so. More modest remedies include strong trade unions, generous social welfare programmes and effective regulation of the financial sector – although, in today's world, it sometimes seems as if these solutions are as utopian as Marx's.

Finally, the understanding that a capitalist market economy was not an automatically self-regulating system; rather, it periodically entered periods of self-generated breakdown. Marx called these periods "crises"; today, we use a gentler term, "recessions". The most recent of these, beginning in 2007-08, deserves the older sobriquet, in view of its severity, persistence and global impact. In Das Kapital, Marx offers a number of explanations for the recurrence of these crises. The most interesting comes from his time as a business and financial correspondent for the New York Tribune in the 1850s, then the world's largest newspaper. In discussing the crisis of 1857, generally regarded as the first worldwide recession, Marx focused on the policies of Crédit Mobilier, the world's first investment bank. He noted, appalled, that the bank's statutes allowed it to borrow up to 10 times its capital. It then used the funds to purchase shares or fund IPOs of French railroad and industrial corporations, greatly increasing output. But when no purchasers were found for the expanded production, the bank discovered that the stocks it had bought had fallen in value, making it difficult to repay its loans. Replace Crédit Mobilier with Lehman Brothers or the Anglo Irish Bank, and French railroad and industrial firms with Nevada or Irish real estate, and we have a fair picture of a major cause of the recent financial unpleasantness.

This is not to imply that Marx was the only thinker to question the automatic self-regulation of a capitalist economy, or even the most prescient. He was part of a dissenting economic tradition that begins with Sismondi and continues with some detours, through John Maynard Keynes and Hyman Minsky, to Joseph Stiglitz and Paul Krugman. For specific policy suggestions, the more recent figures might be more helpful. But Marx's insights of the 19th century still offer interesting ways to think about the 21st.

Jonathan Sperber's Karl Marx is published by Norton

"Marx's thinking about capitalism during the 1850's was influenced by the growth of a new kind of financial institution, the Credit Mobilier, the world's first corporate bank, whose capital was raised through the sale of stock shares rather than coming from the bankers own assets. It was a daring innovation of the Pereire brothers. Most financiers of the day were deeply suspicious of this new kind of finance, seeing it as an elaborate form of fraud. At times Marx was inclined to agree, "Swindle" became a favourite term of his to describe the bank.

In other moments, Marx found the bank's operations legitimate, a good example of capitalism hurtling towards crisis. This was the opinion that came to the fore in 1857. The bank invested primarily in industrial and railroad corporations, either underwriting initial public offerings or purchasing the stock of existing firms listed on the Paris Bourse. What intrigued Marx about these financial operations was, as we would say today, the bank's leverage. Its statutes allowed it to borrow up to ten times the value of its capital. Almost giddily fascinated, Marx believed this borrowing set the stage for crisis. The banks leveraged investments greatly increased the productive capacity of French industry, beyond the markets ability to purchase all its products. In addition the bank invested its borrowed funds in stock shares that could drastically fall in value during an economic crisis brought on by the very over production the leveraged investments had created, leaving it unable to meet the demands of its creditors.

The empirical basis for this interpretation of excessive leverage as the origin of an economic crisis came from the experiences of Marx and Engels in bourgeois occupations. It was not so much the philosophical ideas of Hegel or the economic theories of Ricardo that informed their insights as it was their work as business columnist and cotton wholesaler, respectively.

The second element of Marx's take on the 1857 recession also stemmed from his work as a journalist, namely his analysis of the international propagation of the crisis following the balance of payments. The crisis would spread from creditor countries to their debtors, as the former would call in their loans. The debtors would have to call in loans from their debtors in turn, or their central banks would have to raise interest rates to keep money in the country. When the bank of England raised the discount rate to 9%, Marx became especially excited, seeing the move as evidence that the crisis had reached the heart of world capitalism and a new revolution could not be far off. Although he looked primarily at trade and credit relations between European countris, as well as the United States, his analysis did contain a global note. Marx analysed the persistent balance of payments deficit European countries ran with China, which led to silver leaving Britain and the Continent, driving up the price of silver relative to gold. The rise in silver prices affected the exchange rates of the major European currencies, which had different ratios of gold to silver in their backing, and helped to shape the spread of economic crisis via the balance of payments" by Jonathon Sperber from his book Karl Marx.

The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Because of the interconnectedness of the world economy by the time of the 1850s, the financial crisis that began in late 1857 was the first world-wide economic crisis. In Britain, the Palmerston government circumvented the requirements of the Peel Banking Act of 1844, which required gold and silver reserves to back up the amount of money in circulation. This circumvention set off the Panic in Britain. The sinking of the SS Central America contributed to the panic of 1857, as New York banks were awaiting a much needed shipment of gold; not recovering financially until after the civil war. Beginning in September 1857, the financial downturn did not last long; however, a proper recovery was not seen until the American Civil War. After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread as business began to fail, the railroad industry experienced financial declines and hundreds of workers were laid off. Since the years immediately preceding the Panic of 1857 were prosperous, many banks, merchants, and farmers had seized the opportunity to take risks with their investments and as soon as market prices began to fall, they quickly began to experience the effects of financial panic."