[OPE-L:7523] Fwd: Full Marx from FT

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Mon Aug 19 2002 - 22:22:33 EDT

                           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 
                          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

                           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

                           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

                           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

This archive was generated by hypermail 2b30 : Sat Aug 24 2002 - 00:00:03 EDT